Annual Financial Statements 2021
Federated Hermes Property Unit Trust 25 March 2021
www.fhput.co.uk 2 Federated Hermes Property Unit Trust
Contents Annual Financial Statements 2021 3 INTRODUCTION TRUST MANAGER’S REPORT GOVERNANCE
Introduction Financial Statements 37 Key Features and Statement of Principles 4 Audited Consolidated Financial Statements 38 Financial Highlights 5 Valuers’ Report to the Trust Manager 52 Chairman’s Report 6 Independent Auditors’ Report to the Unitholders 55 FINANCIAL STATEMENTS Trust Manager’s Report 7 Independent Auditors’ Disclaimer Letter 57 Strategic Overview 8 Investor Information 58 Portfolio Activity 10 Information about the Trust 59 Trust Manager’s Report 14 Notice of Annual General Meeting 61 Direct Property Portfolio 24 Distribution Analysis and Expense Ratios 62 Responsible Property Investment Strategy 29 Unit Holder Information 63
Governance 31 Alternative Investment Fund Managers Directive – Remuneration disclosure 64 Responsibilities and Governance 32 Alternative Investment Fund Managers Directive –
Appointments Committee 34 Risk profile and risk management systems disclosure 66 INVESTOR INFORMATION Trust Management Team 35 Further Information 68 Advisors 36 4 Federated Hermes Property Unit Trust
Key Features and Statement of Principles
The Trust is an unauthorised, tax exempt To ensure alignment between open-ended property unit trust and an the Trust Manager and returns to Alternative Investment Fund (“AIF”) as Unit Holders, the Trust Manager defined in the UK Alternative Investment receives a base fee which is Fund Managers Regulations 2013 (SI augmented with a performance 2013/1773). It was created in 1967 in the fee for outperformance against UK to enable Unit Holders to participate the Trust’s benchmark. mutually in a professionally managed scheme investing in real property Statement of Principles without prejudicing their tax exempt Federated Hermes Property Unit Trust operates under status whilst also freeing them from the following core principles: the burden of management. A The Trust observes high standards of integrity and fair dealing at all times, in accordance with the The objective of the Trust is to achieve investment obligations set out in the Trust Deed for the benefit returns consistent with a diversified and actively of Unit Holders. managed UK property portfolio. A The Trust maintains an open dialogue with Unit Holders. As part of this it provides Unit Holders with Key Features timely information enabling them to make informed The Trust is a balanced property unit trust which owns a decisions about the Trust. diversified portfolio of real estate investments on behalf A The Trust seeks to enhance the capital and income of underlying Unit Holders. Its key features are as follows: potential of its assets in a manner consistent with its A Performance objective – To outperform the risk objectives and investment policy. benchmark by 50 basis points per annum on a A The Trust will manage its assets taking into three‑year rolling basis. consideration the relevant environmental and A Investment philosophy – A core/satellite approach to socioeconomic risks and opportunities which portfolio construction. This reflects a core portfolio contribute to the potential of an investment to deliver of property investments expected broadly to match long‑term investment performance for Unit Holders. property market returns, but with prospects for A The Trust actively engages with its occupiers to enhanced returns through exposure to higher risk/ develop long term relationships in order to maximise return investments in the satellite component. portfolio value for its Unit Holders. A Fees – To ensure alignment between the Trust A The Trust complies with The Association of Real Manager and returns to Unit Holders, the Trust Estate Funds’ Code of Practice and with relevant Manager receives a base fee which is augmented with codes or standards in force that apply to the Trust. a performance fee for outperformance against the A The Trust is committed on a sound commercial basis Trust’s benchmark. Fees payable to the Trust Manager to embedding the principles of responsible property are capped. investment in all of its real estate investment and A The Appointments Committee is wholly independent asset management practices. of the Trust Manager and is responsible for the appointment and removal of the Trust Manager, the Further information about the Trust including its Trustee, the independent auditors, each subject to Strategy and Objectives and Constraints is available ratification by Unit Holders, and the independent in the General Information Memorandum at valuers, and the remuneration of both the Trust www.fhput.co.uk Manager and Trustee. Further information on the Appointments Committee A The Trust Manager is the legal operator of the Trust. and Trust Manager is set out on page 34. Annual Financial Statements 2021 5
Financial Highlights INTRODUCTION Year to 25 March 2021
The Trust continues to deliver outperformance Net asset value per unit
over three, five and ten TRUST MANAGER’S REPORT year periods. £6.53 (2020: £6.71)
Unit holders’ funds Distribution per unit
£1,280m 25.5 pence (2020: £1,427 million) (2020: 21.1 pence) GOVERNANCE
Total return to unit holders Relative performance for the year* 1.1% -1.3% (2020: 1.8%) (2020: +1.6%)
*Relative performance is calculated geometrically. FINANCIAL STATEMENTS
Unit holder performance – total returns for the period (% p.a.) As at 25 March 2021 10
8 8.4
6.8 6
5.5
4 4.6 INVESTOR INFORMATION
3.3 2 2.5 2.7
1.1 0 One Year Three Years Five Years Ten Years FHPUT MSCI/AREF UK Other Balanced Property Fund Index
Source: MSCI/AREF UK Quarterly Property Fund Index. 6 Federated Hermes Property Unit Trust
Chairman’s Report
The last year has been dominated by the David Nicol impact of the COVID-19 pandemic and the Chairman, government response to it. Appointments Committee
Performance year has increased from 21.1 pence to 25.5 pence. This is The Trust has continued to provide long-term influenced by one-off items during the outperformance to its unit holders, delivering 8.4% year, which included the catch up distribution for lease return over ten years, against the MSCI/AREF Other incentives, which we described in December, as well as Balance Property Fund Index of 6.8% representing an a significant surrender premium received. outperformance of 1.5%. Over five years, the Trust also delivered an outperformance of 0.9%. Disappointingly The Trust Deed and the Appointments the Trust has underperformed by 1.3% over the last year. This was due to the increased market uncertainty and Committee volatility that affected property valuations and rent On 19 January 2021, a new Trust Deed was completed, as collections over the period. We are pleased to see that approved at the EGM on 26 November 2020 which the last quarter has returned to outperformance with included the ability for the Trust Manager to temporarily 2.5% delivered against a benchmark of 2.2%. suspend primary market trades when valuations are subject to a material uncertainty clause and the change of name to COVID-19 impact Federated Hermes Property Unit Trust. As I reported in the Interim Report, Paul Clark will be standing down from the During the last year the Trust deferred redemptions in Committee on 14 July 2021 at the AGM and I would like to the best interests of all unit holders to mitigate an thank him for his extensive contribution over the last six adverse effect on the cash flow of the fund, particularly years. We are delighted to welcome Charles Maudsley to whilst material uncertainty clause was included in the the FHPUT Committee and the Appointments Committee. valuations provided by the external valuers. This allowed His biography is included on page 34 and we are certain the Trust to manage liquidity effectively and all that his extensive Real Estate experience will be an redemptions were paid out in full at the start of this year. excellent addition to the Committee. Most significantly, the Trust was able to manage this process without being forced to sell assets which had Outlook not reached the end of their business plan. The outlook appears much more positive now than when This proactive approach enabled the Trust to acquire a I last wrote to you in December 2020. The speed and property in December 2020 for £45.0 million, which is success of the UK’s vaccination programme seems to well placed to deliver future performance. support the plans to release us from lockdown nationally In total, £106.2 million has been paid out in redemptions and we wait to see how the rest of the world progresses. during the year. The secondary market has also The Trust’s fundamentally strong portfolio of assets, the remained active during the year with £47.4 million of significant pipeline of potential added value initiatives and transactions over the period. The price at which units are a continued focus on ESG-related factors should benefit selling on the secondary market has improved its future performance prospects. The Trust Manager will significantly recently with the most recent transactions at continue to drive accretive transactional activity, exploring NAV minus 0.26%. mis-priced purchase and disposal opportunities that the The backdrop of the pandemic has had an impact on market uncertainty may have created. rental collection and the Trust has inevitably seen David Nicol challenges in this area. The Trust Manager continues to try Chairman to support tenants where possible and has made provision 15 June 2021 for bad debts where appropriate. The distribution for the
Unit holder performance – total returns for the period (% p.a.) Years ending 25 March 2016 to 25 March 2021 15
13.1 12 11.6 11.0 10.5 9
7.1 6 6.5 5.7 4.6 3 2.5 1.8 0.1 0 1.1 2016 2017 2018 2019 2020 2021 FHPUT MSCI/AREF UK Other Balanced Property Fund Index Source: MSCI/AREF UK Quarterly Property Fund Index. INTRODUCTION TRUST MANAGER’S REPORT GOVERNANCE FINANCIAL STATEMENTS INVESTOR INFORMATION 7 Annual Financial Statements 2021 Statements Financial Annual
Manager’s Manager’s Report Trust Trust 8 Federated Hermes Property Unit Trust
Strategic Overview
Performance Objective approach and a top down understanding of the wider macroeconomic position. The The Trust’s performance Trust continues to invest in UK real estate objective is to outperform the for the long term, with a focus on benchmark by at least 50 basis proactive management to drive sustainable returns. Acquisitions and points per annum on a rolling disposals are carefully planned to three-year basis, but with an maximise opportunities and to minimise risk. Asset management activities include Dermot Kiernan emphasis on long-term change of use, refurbishments and the re- Fund Director sustainable returns. gearing of leases to secure and enhance During the 12-month period the Trust the portfolio’s rental income, the principal delivered a total return of 1.1% compared component of long-term performance. to the MSCI AREF Other Balanced The Manager has historically recognised benchmark of 2.5%. Despite the COVID- the importance of integrating Responsible 19 related challenges of increased market Property Investment/ESG factors as part of volatility and associated valuation its overall portfolio strategy. uncertainty, the Manager continued to focus on delivering positive longer-term The Trust’s property valuations carried performance to investors. Over the year a statement of Material Valuation the Trust’s income return remained Uncertainty for part of the reporting resilient thanks to continuous tenant period, reflecting the significant economic engagement alongside accretive and social impact from COVID-19 on the investment activity. The Trust continues to UK’s commercial real estate market. outperform the benchmark by more than Investment management activity remained 50 basis points on a three year basis (3.3% focused on selling assets that had reached versus 2.7%) and is top quartile over five business plan completion alongside and 10 year periods. It remained the top identifying attractive, mis-priced performing fund over the 10-year period. investments. On the asset management side, the pandemic’s impact has forced many tenants to temporarily close their Portfolio activity businesses. The Manager has engaged responsibly with tenants on rent collection The Trust Manager’s investment over the period, supporting those tenants strategy remains to actively in genuine financial difficulty. manage a balanced, well-let, geographically diverse portfolio with a resilient income profile and capital growth potential.
The portfolio is managed through an established investment process which combines a pragmatic bottom-up
The Manager has engaged responsibly with tenants on Round Foundry & rent collection over the period, Marshalls Mill, Leeds supporting those tenants in genuine financial difficulty. Annual Financial Statements 2021 9 INTRODUCTION The Trust continues to outperform the benchmark by more than 50 basis points on a three year basis (3.3% versus 2.7%).
Portfolio positioning Our investment process adopts top-down portfolio risk management and bottom-up property selection to target The Manager aims to continue delivering assets that are highly competitive in their local markets strong long-term performance for unit and have sustainable income streams. Our strategy draws holders while managing an appropriate on understanding how occupiers assess real estate and TRUST MANAGER’S REPORT the needs of wider stakeholders, which enable us to risk profile. actively manage buildings that anticipate and respond to market demands. We have a clear understanding of the The Trust’s investment strategy is primarily ‘core’ with drivers of future performance, including an in-depth additional ‘Added Value’ and ‘Special Situation’ holdings understanding of how occupiers assess real estate and to drive alpha, in a core/satellite approach to portfolio of the evolving regulatory framework. construction. The weighting of the portfolio to these risk profiles may be altered in the short term, depending on Federated Hermes has set a target to achieve net zero market conditions. The Trust Manager does not place by 2035 for its managed real estate portfolios, 15 years restrictions or target allocations for different UK regions. ahead of the Paris Agreement. This reflects a belief in the Within the context of its balanced strategy, FHPUT’s importance of ESG investing for better holistic outcomes structural positions are monitored against benchmark, and for the delivery of long-term returns. This aspiration but the primary focus of the strategy is stock selection was developed as a part of the Better Building and active asset management rather than matching Partnership (BBP) Climate Change Commitment to benchmark sector weightings. deliver net zero portfolios by 2050. This includes 23 of GOVERNANCE the UK’s leading commercial real estate owners. The Trust continues to maintain a prudent balance of risk and return within its portfolio, which has benefited from Specifically, for the FHPUT portfolio, the aim is to the recent accretive sales and purchase activity by develop an ambitious but realistic net zero strategy to enhancing the income profile and reducing potential protect and enhance its longer term performance and capital expenditure. Currently the Manager remains risk mitigation. The Manager believes that an overly comfortable with a relatively low exposure to assets within pragmatic and cautious approach risks ‘stranding’ the ‘Special Situations’ and ‘Added Value’ risk/return existing assets at diminished values if, as we expect, categories, 6% and 20% respectively as at 25 March 2021. market pricing starts to reset as the impact from regulations, as well as changes in investor and occupier demand, become more widely appreciated. This has Responsible Property Investment and FINANCIAL STATEMENTS ESG Investing been also driving the decision making of the recent transactional activity noted later in the report. At the core of Federated Hermes’ philosophy is a commitment to responsible investment in relation to environmental, social and governance We have a clear factors. In Real Estate this is reflected in our principles of Responsible Property understanding of Investing (RPI) which are fully embedded the drivers of future in our investment process.
performance, including an INVESTOR INFORMATION in-depth understanding of how occupiers assess real estate and of the evolving regulatory framework.
Maybird Shopping Park, Stratford-Upon-Avon 10 Federated Hermes Property Unit Trust
Portfolio Activity
Acquisition – B&Q, St Lawrence Retail Park, Hull Road, York In July 2020, the Manager completed the purchase of a retail warehouse investment for £16.1 million (8.66% NIY). This investment comprises a prime retail warehouse, built in 2000, well located on a very prominent site on the ‘gateway’ to York city centre. The site totals 9.6 acres comprising a 102,360 sq. ft. GIA retail warehouse with a low site coverage of 25%. The unit is let to B&Q with 4.6 years unexpired. The large site offers redevelopment options through residential change of use. Alternatively, the store could be split, which would be subject to potentially securing a pre-let of the remaining space.
Acquisition – M2 City Link, Anthony’s Way, Rochester In September 2020, the Manager completed an acquisition to forward fund a prime South East industrial estate within the Medway City Estate in Rochester for £23.9 million, reflecting a blended Image low funding yield of 5.55%. Upon acquisition of the freehold resolution 57dpi interest of the site for £6.5 million, the Manager simultaneously entered into a Development Funding Agreement (DFA) with the developer who will procure and manage the development process on behalf of the Trust. The M2 City Link is situated in a highly prominent location in Medway City Estate, an established commercial centre in north Kent which forms the eastern end of the Thames Gateway, a strategic Government Priority Regeneration Area. The proposed development site totals 7.5 acres and will provide 8 units of industrial, logistics and trade counter use.
Acquisition – Templars Shopping Park, Oxford Purchased off-market for a price £45.0 million, reflecting a net initial yield of 7.3%, an equivalent yield of 6.75% and a capital value of £325 psf. The investment comprises a prime retail warehouse park, well located on a very prominent site near Oxford city centre. The site totals 8.87 acres comprising 14 units totalling 138,588 sq. ft. and 467 car parking spaces. The recent investor sentiment towards retail has been almost universally poor (with the exception of long let supermarkets) and pricing has thus tended to be indiscriminately negative. This asset presented an opportunity to purchase at attractive pricing given its strong fundamentals of very tight supply and good tenant demand. The scheme is anchored by an attractive line up of tenants which are convenience/ neighbourhood led and in a location that should benefit from significant residential regeneration schemes in the future. Annual Financial Statements 2021 11 INTRODUCTION
Disposal – Camden Works – The Rotunda, London NW1 In April 2020 the Manager completed the disposal of the office investment for £42.6m reflecting a net initial yield of 4.4%. As part of the asset management strategy, the investment reached business plan completion and was considered to carry some degree TRUST MANAGER’S REPORT of risk in terms of future potential growth, alongside the portfolio Net Zero carbon aspirations.
Disposal – Public House portfolio Portobello House in Ladbroke Grove was sold in
August 2020 for £2.9 million, reflecting net initial yield GOVERNANCE of 2.55%. The transaction price was agreed before the start of the COVID-19 outbreak and reflects a significant premium to valuation. Image low resolution 57dpi FINANCIAL STATEMENTS
Disposal – Black Horse Tower, Cockfosters In October 2020 the Trust completed the sale of the office investment in Cockfosters for £34.0 million at a good premium to valuation (45% since November 2019). The Trust unconditionally exchanged contracts in February 2020 and benefitted from the rental income between exchange and completion. In
September 2020 the Manager negotiated a significant INVESTOR INFORMATION surrender premium from Lloyds Bank which contributed to the income distribution to investors. 12 Federated Hermes Property Unit Trust
Disposal – Carlson Court, Putney A vacant office building where the Trust determined there was significant income risk and capital requirements for the future. It was sold for £23.0 million which was a 10% premium to the pre-sale valuation (at the end of September 2020). This reflected the view Image low that, for some sectors, there is currently a disconnect resolution 57dpi between the surplus of capital in the investment market and the underlying occupational market. The Trust is also cognisant of the increasing environmental legislation risk that would be inherent in undertaking a major refurbishment on this type of asset, which is expected to heighten in the coming years.
Disposal – The Summit Centre, Heathrow A multi let industrial estate acquired in 2014 for £37.5 million. Since purchase, the asset has been intensively managed to enhance its quality and functionality, which resulted in a significant number of new lettings. It sold for £37.5 million (4.0% NIY), almost 8% ahead of the pre-sale valuation (end of September 2020). The disposal capitalised on a very strong industrial investment market, whilst avoiding current tenant covenant risk and, to a lesser extent, a possible Compulsory Purchase Order impact if the airport’s expansion plans were ever realised.
Disposal – Belleknowes Industrial Estate, Inverkeithing, Scotland Sold in December 2020 for £10.5 million (5.95% NIY). The estate previously experienced high levels of voids in some of the larger units. A series of lettings completed in 2020 took the asset to being almost fully Image low let. This investment carried significant challenges for its resolution 57dpi continued occupation, together with environmental risks related to potential flooding. The disposal presented an opportunity to capture a premium price at a time of strong investor demand and limited stock for this type of investments. Annual Financial Statements 2021 13 INTRODUCTION TRUST MANAGER’S REPORT GOVERNANCE
Disposal – The Anchorage, Reading In February 2021 the Manager completed the sale of the office building for £9.8m (6.8% NIY). The asset was holding various risks that were affecting its value in the long term: secondary asset with short term exposure to potential new vacancies likely to suffer from the inferior position of the property compared to new Grade A office stock in close proximity to Reading FINANCIAL STATEMENTS station. To align with FHPUT’s carbon reduction aspirations, an increased and significant capital cost was also required. INVESTOR INFORMATION 14 Federated Hermes Property Unit Trust
Trust Manager’s Report
I am pleased to present the Trust pricing of some prime industrial sub sectors in the run Manager’s Report for the 12-month up to the year-end: ‘last mile’ logistics units and large distribution warehouses let on long leases to strong period to 25 March 2021. The entire covenants. Prime London offices also appeared to have period of this financial year proved been resilient. The retail and leisure sectors continued to to be challenging given the face challenges, but the trends were showing significant unprecedented circumstances that polarisation within the retail sub-sectors. The affected the UK economy and supermarkets recorded strong yield compression on long-let stock. Retail warehousing started to show some commercial property market. return of positive investor sentiment and increased transactional activity. Over the past 12 months the general market conditions have been uncertain but providing relatively positive In terms of investment activity, prevailing market pricing outcomes compared to the initial forecasts. The UK presented an opportunity to capitalise on a perceived economy proved to be resilient. Indicators of business disconnect between the investment market (currently confidence and consumer spending provided mixed driven by a significant weight of pent-up capital) and signals after the sharp fall earlier in the year. the varying levels of occupational demand within the different sectors. The Trust raised cash from sales of Most recently the government’s roadmap to gradually assets where performance had already been maximised lift the lockdown, the rapid rollout of the vaccines and under their respective business plans and at pricing in the extended support schemes, provided more excess of pre-disposal valuations. Given this, the Trust confidence for a recovery and return to a ‘new’ normal. was able to lift the deferral position and paid In the UK commercial property market, many funds redemptions at the end of 2020. remained suspended for much of this reporting period On the asset management side, the Manager continued with material valuation uncertainty clauses only lifted to engage responsibly and proactively with tenants, towards the end of 2020. Given this, the challenges which resulted in relatively positive rental collection reflected in property valuations and funds performance rates. The focus remained on progressing asset due the increased short-term volatility will take some management activities and projects in the pipeline. time to provide a clear overview of the current situation. Some of these were inevitably impacted and delayed The recent market trends recorded an increased by the effect of the pandemic but this leaves the bifurcation within the sectors with a ‘flight to quality’ property portfolio with some significant potential towards very prime assets and well-let income opportunities. investments. One major factor was the apparent re-
FHPUT valuation summary As at 25 March 2021
Reversionary Valuation Net Income Initial Yield Net ERV Yield Directly Held Properties (£m) (£m) (%) (£m) (%) Unit Shops 56.9 3.2 5.3 3.6 5.9 Supermarkets 43.8 2.2 4.8 2.1 4.4 Shopping Centres 16.0 1.3 7.7 2.0 11.8 Retail Warehouses 159.0 11.5 6.8 11.7 6.9 Offices 394.8 18.3 4.4 24.8 5.9 Industrials 439.2 17.2 3.7 21.2 4.5 Leisure/Other 151.5 4.3 2.7 6.8 4.2 Sub Total 1,261.2 58.0 4.3 72.2 5.4
Net Asset Indirect Investments Value (£m) Cash/(Debt) 66.3/(48.0) Total 1,279.5 Annual Financial Statements 2021 15 INTRODUCTION
During the 12-month period to 25 March 2021, there Redemptions and Secondary Trading – In April have been a number of important activities which are £ 2020, the Trust deferred redemptions to mitigate noted below, with further detail on each provided later any adverse effect on the cash flow of the fund, on in this report. particularly while the market was still suppressed and while valuations included a statement of Performance – The Trust recorded an annual total material valuation uncertainty. The situation return of 1.1% compared to the MSCI/AREF Other regarding the Global Pandemic remained Property Fund Index of 2.5%. Despite the short- complex, everchanging and kept under constant TRUST MANAGER’S REPORT term challenges and increased market volatility review. Towards the end of the calendar year, which will take some time to unfold in a clear given the successful planned sales, the Manager outcome, the Manager continues to deliver positive lifted the deferral on redemptions and paid down longer-term performance to investors. The Trust has redeeming investors leaving sufficient capital top quartile returns over 5 and 10-year periods cash in the Fund to allow the efficient compared to funds within its benchmark. Over the management of the portfolio. At the end of 10-year period the Trust also remains the top December 2020, the Trust paid out redemptions performer in the wider UK All Balanced benchmark of £104.7 million. Although the market suffered sample (£30.0Bn as at end of March 2021). extraordinary circumstances, the Trust recorded positive trends in the secondary market with £47.4 Fund growth – The Pandemic affected the million of units being matched from units made markets, redemptions and the planned investment available from the redemption notices. management activity. During the period the Trust’s NAV decreased by £147.0 million, from £1,427 Transactional activity – In terms of transactions,
million in March 2020 to £1,280 million in March the market environment presented an opportunity GOVERNANCE 2021. As at 25th March 2021, the Trust held 72 direct to capitalise on a perceived disconnect between properties, one joint venture and no indirect assets. the investment and occupational markets, driven The Trust was holding cash (for investment) of £66.3 by a significant weight of pent up capital targeting million (5.0% of GAV) compared to the benchmark the real estate sector. During the period the cash position of 7.0%. Manager completed around £160.8 million of investment disposals and £85.0 million of Debt facility – The Trust has a revolving debt acquisitions. The activity has been focused on the facility for £75.0 million. In Q4 2020 the Trust utilised disposal of seven assets that reached business £48.0 million of the debt facility to facilitate the plan completion, carried environmental risks, and purchase of attractively priced asset pending the held limited potential for future growth. The receipt of cash from further identified disposals
Manager took the opportunity to capture good FINANCIAL STATEMENTS where we have maximised performance. The low premiums contributing towards the objective of cost of the debt facility and the stabilisation in maintaining a healthy cash position to progress valuations should enhance the short term returns asset management projects in the pipeline and to on the new purchase. The strategy of the Trust to meet investors outflows. The Trust also remained hold either no, or very low levels of debt remains focused on identifying new acquisitions to drive unchanged. future performance by capitalising on mispricing Property Valuations – The initial response opportunities where there is strong potential to to COVID-19 meant that valuers faced an add value. Given this, the Manager completed the unprecedented set of circumstances on which purchase of a multi let retail park in Oxford for to base a judgement. Therefore, all valuations £45.0 million by utilising the available revolving reported a Material Valuation Uncertainty Clause debt facility. The Manager also completed the (MVUC). In September 2020, the RICS Leadership acquisition of a B&Q retail warehouse in York INVESTOR INFORMATION Forum agreed that the MVUCs were no longer (£16.1 million) and a forward funding development recommended for inclusion within any valuation of a prime industrial estate in Rochester (£23.9 reports of UK properties, except for some leisure million in total to be funded over the course of 12- and hospitality assets that are valued based on month period). trading potential. The Trust had no assets in this category. As at 25 March 2021 none of the property valuations were subject to the MVUC. 16 Federated Hermes Property Unit Trust
Trust Manager’s Report
Asset management – During the 12-month Trust was awarded three Green Stars in the £ period there have been several key asset Global Real Estate Sustainability Benchmark in management initiatives which added value to recognition of the Trust’s ongoing application of the portfolio: new lettings, lease re-gears and responsible property investment activities within refurbishment projects. The Industrial sector the context of delivering good commercial dominated lettings and lease re-gearing activity returns to unit holders. FHPUT ranked 10th out across the portfolio. Industrial rental levels of 59 funds in the UK Diversified/Core Peer continued to be agreed at or above ERV. Few Group by GRESB. lettings and renewals were agreed in the office and retails sectors. Continued close tenant engagement assisted in achieving positive FHPUT Performance Attribution rent collection rates, despite the challenging We have identified the principal drivers and detractors circumstances. Rent collection rates for each of performance within the Trust’s investment portfolio quarterly period stood at approximately around over the 12-month period covered in this report. In the 85% of the total demanded and discussions chart below we illustrate the relative performance of continued with tenants still in arrears. At 25 March each sub-sector – this analysis is relative to the Trust’s 2021, the Trust’s void rate stood at 10% following property portfolio return. the recent investment management activity. This is compared to the UK MSCI Other Balanced PFI Within the FHPUT property portfolio, at sub-sector level, vacancy rate of 9.3% for the same period. the Trust’s Industrial sector delivered the strongest contribution to portfolio return by increasing the overall Responsible Property Investment – During the return by 3.6%. This was followed by the supermarket period several initiatives have been progressed sector which increased the overall return by 0.2%. Both as part of the ongoing ESG implementation sectors recorded good contributions due to a resilient strategy. Some of them such as CAPP, Fitwell occupier market and strong yield compression backed and BREEAM schemes, contributed to deliver up by rental growth. During the same period the Trust’s efficiency certifications as part of the overall ESG unit shops and Rest of UK offices reduced returns by strategy approach. However, there are plans to -1.0% and -0.9% respectively. This reflected the ongoing expand these programmes to identify synergies investor concern over the broader retail sector affected and aligning them to the ongoing work on the by structural changes and tenants restructuring. The Rest Net Zero pathway, Climate Resilience and Social of UK Offices sector remained impacted by ongoing Value implementation. In December 2020 the uncertainty affecting investment and occupier markets.
Attribution of FHPUT sub-sector returns relative to Trust portfolio performance Year to 25 March 2021 (%) 4.0
3.5 3.6 3.0
2.5
2.0
1.5
1.0
0.5 0.2 0.0 0.0 -0.4 -0.1 -0.6 -0.5 -0.8 -0.9 -1.0 -1.0 Industrial Supermarkets West End City Shopping Other Retail Rest of Unit Shops Of ces Of ces Centres Warehouses UK Of ces
Attribution data is relative to the Trust’s property return and is not relative to the benchmark. Source: Hermes Real Estate Investment Management. Annual Financial Statements 2021 17 INTRODUCTION
At a property level, the investments that delivered the Investment Strategy Overview strongest contribution to portfolio return were the In terms of the areas of strategic focus across the industrial assets in West Horndon and Heathrow (Polar principal real estate sectors: Park) reflecting positive investor sentiment and good progress from the investment management activity. 1. Retail Warehouses proved to be an appealing The assets that delivered the greatest reduction to the investment sector for mispriced opportunities. There Trust’s portfolio return were the retail warehouse has been a lot of stock in the market as some funds investment in Stratford upon Avon (Maybird), and the seek to reduce their overweight retail positions. The TRUST MANAGER’S REPORT office building in Hammersmith (Hythe House). They focus has been on schemes anchored by secure big both reflected weak occupational demand as well as box retailers and supermarkets, with limited deteriorating investor sentiment, with the latter competition and continued retailer demand (to specifically being impacted by the refurbishment compliment on-line) with alternative use residual land activity on vacant units held during the year. value. The recent purchases reflected the characteristics here mentioned.
Portfolio Value and Debt 2. The office sector is experiencing a period of elevated As shown on page 14, the Valuation Summary shows uncertainty given the structural shift towards home that the Trust’s overall direct property portfolio was working and the coming impact from net zero carbon valued at £1,261.2 million as at 25 March 2021. There regulations. This is a sector that the Manager has were 72 direct properties in the portfolio, one joint been monitoring closely and it envisages the venture and no indirect assets. potential to going forward. The Manager completed three office disposals during the year.
The Trust drew down £48 million out of its £75 million GOVERNANCE facility to facilitate an investment transaction. As at end 3. Industrial – over the last few years the Trust has been of March 2021 the drawdown balance was £48.0m and a net seller of established assets (Charlton Gate accounted for 3.8% of NAV. Industrial Park and Elstree Industrial Park in 2019; Summit Centre, Heathrow and Belleknowes, Inverkeithing in 2020) at low yields to capitalise on Sector Weightings strong investor appetite. Fair value in the industrial The Trust’s investment allocations to each sector sector is more likely to be found in schemes with an compared to the benchmark are shown on page 21. element of distress (void), a need to refurbish or at an As at end of March 2021 the overall sector exposure early stage of development (e.g. the recent forward remained broadly aligned to the benchmark following funding in Rochester). the recent acquisitions and planned disposals in the FINANCIAL STATEMENTS property portfolio. The Manager remains comfortable 4. Alternatives – in the current market situation, the with this exposure: the assets are well located and many Manager believes it is likely to achieve better value benefit from change of use potential. creating this product by structuring deals/income streams from within the existing portfolio rather than As at 25 March 2021 the Trust held a slightly higher buying into the sector. Opportunities exist at Great exposure in the overall retail sector compared to its George Street in Westminster (Office /Hotel/ peer group benchmark. This was mainly driven by the Aparthotel/Residential options), Reading increased exposure in the retail warehouse sub-sector Metropolitan adjacent to Reading train station (12.0% vs 10.9%) following the recent transactional (Residential) and Horndon Industrial Estate activity in York and Oxford. The office sector remained (Residential). The Manager is also undertaking broadly in line with the benchmark with specifically research into potential investments in land or natural Central London office above the peer group (13.5% capital with a focus on carbon sequestration. We vs 11.5%). The investment exposure is composed of foresee this as a sector with both early mover INVESTOR INFORMATION relevant buildings in prime areas holding alternative use advantage and as a component of the fund’s planning potentials. The regional office (South East and emerging net zero carbon strategy. Rest of UK) and industrial sector were slightly below benchmark exposure following the recent accretive disposals in the portfolio. The alternative (other/leisure sector) remained broadly in line with the benchmark with hotels sub-sector valuations being affected by the COVID-19 pandemic during the period. 18 Federated Hermes Property Unit Trust
Trust Manager’s Report
Transactions A Peterwood Park, Beddington Farm Road, Croydon The focus has been on disposal of investments that had – In November 2020 the Manager completed two reached business plan completion or offered the lease renewals with the tenant Vodafone Limited opportunity to crystalize returns and prudently invest occupying two units in the estate for a total of cash for new stock. Furthermore, the current market 35,000 sq. ft. The renewals in the two units were environment presented an opportunity to capitalise on a agreed respectively for a 5-year term and a 10-year perceived disconnect between the investment and reversionary lease, securing a total rental income of occupational markets, driven by a significant weight of £392,500 per annum after incentives. pent up capital targeting the real estate sector. A Fairway Trading Estate, Heathrow – In November 2020, the Manager completed a lease renewal with the tenant, Fara Foundation, occupying a 13,240 sq. ft Investment Management unit on the estate. The letting completed for a 5-year During the 12-month period the Manager continued to term at £188,413 (£14.25 per sq. ft.) per annum after progress asset management activities with several incentives. The rent agreed was at a premium to the lettings and renewals completed in the portfolio. The market rent and was the highest rent on the estate. Industrial sector dominated lettings and lease re-gearing The industrial estate remains fully let. activity across the portfolio. Industrial rental levels continued to be agreed at or above ERV. Few lettings and renewals were agreed in the office and retail sectors. The most significant activity is detailed below.
Industrial Sector A Horndon Industrial Estate, Essex – In Q3 2020 the Manager managed to complete both lettings and renewals in the estate. The main lettings were completed with Den Marketing Ltd that renewed both leases for a 3-year term totalling rental income of £115,285 per annum. This equates to £5 per sq. ft. on the 20,000 sq. ft. unit and £2.5 per sq. ft. on the 6,000 sq. ft unit. A number of leases extensions completed for Steel Team Ltd and Evolution Interiors at £287,000 pa (£5 psf) and £120,000 pa (£7.50 psf) respectively. The Manager continued to focus on the long-term redevelopment strategy focused on the freehold investment to work up for a residential masterplan. A Thomas Road, Limehouse, London – In Q1 2021 the Manager completed the letting of 3 long term vacant units in the estate accounting for around 13,900 sq. ft of space. The new lease completed with Cherryz Ltd for a 3 year term at £236,115 per annum (£17 per sq. ft.) after incentives. There is a mutual break option at 1.5 year. The letting reduced materially the void rate in the estate. A Park Avenue Industrial Estate, Luton – Recently the Manager completed the lettings of 2 vacant site/ unit in the estate: 6 year lease to F&R Cawley Ltd at £76,300 per annum (£2 per sq. ft.) after incentives to take over a 35,500 sq. ft site; a new letting of a small newly refurbished unit for a 5 year term at £10.27 per sq. ft. The industrial estate is now fully let. Annual Financial Statements 2021 19
Trust Manager’s Report INTRODUCTION
FHPUT capital growth by sub-sector (excludes purchases and sales) Year to 25 March 2021
All Property -2.6
Industrial 9.1
Central London Of ces -2.7 TRUST MANAGER’S REPORT
Other -5.6
RUK Of ces -8.5
Retail Warehouses -11.8
Retail Units -12.1
Shopping Centres -26.2
-30% -25% -20% -15% -10% -5% 0% 5% 10%
Source: MSCI Real Estate. Note: Standing Investments Only: Capital growth excludes contributions from assets purchased or sold during the year.
Office sector A Boundary House, London, EC1 – The property GOVERNANCE A Round Foundry & Marshalls Mill, Leeds – During remains fully let and a number of floors have seen the period business activity in the estate slowed down rent uplifts following reviews settled in 2020. The due to COVID-19 outbreak but the Manager still Manager agreed the rent review with the tenant managed to complete some lettings in the estate. Stone King LLP, who occupy three floors in the The largest letting was completed with Sy4 Security building totalling 11,560 sq. ft. The 5-year rent review Limited for a 2-year lease at £118,900 per annum (£23 has been agreed in line with the ERV at a blended per sq. ft.) after incentives. The Manager continued rent of £58.32 equating to a total rental income of to remain in close contact with the tenants in distress £674,272 per annum. to find potential deferral solutions. During the period A Rent Collections – Since the start of the pandemic, works continued on the site-wide improvements to the Manager continued to engage with tenants to hard and soft landscaping and signage across the find potential solutions for those facing cashflow estate as part of the continuous work around the issues due to lockdown measures. Since March FINANCIAL STATEMENTS tenants’ community and “place-making” strategy. 2020, quarterly collections recorded trends ranging A Plantation Wharf, Battersea, London – Last year from 83% to 85% of the total rent demanded. The the Manager refurbished around 5,500 sq. ft. of previous quarters collections recorded trends to office floors at Reef House in Battersea into high around 85% of the total rent demanded. Relative to quality grade A space with ground floor break out initial expectations, there were positive outcomes area. This is to attract new occupiers and provide thanks to continuous engagement and support given serviced areas to the local existing community as to tenants. Sector analysis shows good resilience part of the masterplan and ‘place-making’. The in office and industrial. Retail and leisure sectors refurbishment followed the Federated Hermes continue to be challenged, but in these cases the Responsible Development and Refurbishment Guide fund weightings fund are low. The Manager remains where specific works and selected materials were in close contact with tenants to devise potential
used. During the first quarter of 2021 lettings were solutions in distress situations. A supportive approach INVESTOR INFORMATION completed with a new tenant to take over two units in continues to be adopted, which has also been the building (25% of the lettable space in the overall reflected in the latest collection figures. building) at a 5 year term for £54,440 per annum (£40 per sq. ft.). The Manager also agreed terms with another tenant to take over one unit in the building at a similar term of 5 year and £40 per sq. ft. 20 Federated Hermes Property Unit Trust
Investment Management Activity
Belleknowes Industrial Estate, Inverkeithing Guinness Road Trading Estate, Manchester During the period the Manager completed lettings of During the year the Manager completed various lettings two vacant units in the estate accounting for 11,200 sq. and renewals in the estate that helped to improve the ft. The lettings were completed with Bella and Duke Ltd rental tone and reach a fully let position. An existing for a 10-year term at £42,500 per annum and Amey LG tenant, KFB Enterprises Ltd, took over two vacant units in Ltd for a 3-year term at £20,900 per annum after the estate (9,900 sq. ft. each) for 5-year term leases at incentives. The Manager also completed the letting of a £61,500 and £64,753 (£6.5 per sq. ft) per annum. In Q4 3,500 sq. ft unit to Whale Thankers Limited for a 10-year 2020 the Manager completed a new lease with Worldwide period with break at year 5. The recent lettings reduced Confectionary Limited occupying a 14,500 sq. ft unit on the vacancy rate in the estate and provided new rental the estate for a 10-year term at £94,254 per annum after evidence which helped to dispose the asset at a incentives (£6.50 per sq. ft.). In the same period, the considerable premium to valuation in December. Manager also completed a lease renewal with an existing tenant (Bailey Instruments Ltd) for a 5-year term at £48,950 per annum after incentives (£6.25 per sq. ft.). In Q1 2021 the Manager also agreed a lease with a new tenant to take over the last void unit (6,800 sq. ft) in the estate for a 10-year lease at £7.25 per sq. ft.
27 Soho Square, London Maybird Shopping Park, Stratford-Upon-Avon During the year the Manager agreed with the existing Although the asset has been affected by structural tenant John Ayling & Associates Ltd, occupying a 4,300 sq. changes affecting the broader retail sector, during ft in the building, a reversionary 10-year lease renewal at the period the Manager completed new lettings with £393,680 per annum (£80 psf) after incentives. With the Superdrug, Poundland and a turnover reversionary onset of COVID-19 in the UK and subsequent lockdown, lease renewal with Sports Direct. Importantly the this presented an opportunity to test the building activity provided new rental evidence in a challenging efficiencies to deliver potential energy savings across the environment and helped to reduce the vacancy rate in the portfolio. One of the most efficient buildings estate. This included a 5% turnover deal which was demonstrating that it can deliver the highest energy agreed with Sports Direct for a 18 months reversionary savings in the portfolio was the office in Soho Square in lease outside the act. A lease was agreed with Superdrug London. The technology enabled the onsite team to react for the new letting of a vacant 5,000 sq. ft unit for 10-year quickly and deliver 11% of energy savings within one period at £137,940 per annum (£27.50 per sq. ft.) after month in March 2020. Most of the sites shut down key incentives. In January 2021 the Manager completed the equipment where possible to save energy. Some sites letting of the 10,700 sq. ft. vacant unit in the park with were initially slow to respond but this was rectified through Poundland for a 5 year term with no breaks. The new an effective engagement. The coverage of Automated lease will secure rental income of £230,000 per annum Meter Readings in the portfolio is currently low (35%) but after incentives (£21.50 per sq. ft.). this provided key learnings to understand the potential to deliver future energy savings across the portfolio. Annual Financial Statements 2021 21 INTRODUCTION
Tenant Administrations and CVAs office use during the pandemic along with the As part of the strategy for monitoring the tenant risk prospect of reduced office demand in the longer term. within the portfolio, the portfolio rental income under The Manager is continuing explore opportunities to known tenancy administrations or CVAs was estimated enhance value through asset management activity. The TRUST MANAGER’S REPORT to be 1.6% of the total portfolio ERV as at end of March top 3 vacant units are listed here below: 2021. The most recent company administrations and A 8-10, Great George Street, London (office) – CVAs in the property portfolio were mainly from the During the period the Manager obtained some retail/high street sector, aware that in the coming strategic voids in the building as part of the asset months there could be more facing financial distress repositioning plan. The existing ‘block date’ for the in the sector. building is at the end of 2021 (that is, when all the tenants’ leases will have expired). The Manager also The outlook is still challenging, and the lifting of the received a lease surrender premium of £0.6m from Government’s moratorium would be significant to a tenant. The property holds residential and hotel uncover future potential issues. Whilst the measure was planning consent. The estimated rental value of the designed to protect the vulnerable companies in vacant units is £1.6 million per annum and it currently financial distress, it has led to large commercial tenants accounts for 2.3% of the total vacancy rate. withholding rent payments allowing potential company A restructures with unintended consequences. Hythe House, Hammersmith (office) – During 2020 the Manager completed the plan to refurbish the
three office floors once they became vacant. These GOVERNANCE Yields, Voids, Lease profiles and Risk office units are now being marketed. They have an Return Approach estimated rental value of £1.1 million per annum and At 25 March 2021 the net initial yield on the Trust’s they account for 1.5% of the total vacancy rate. direct portfolio was 4.3% and the reversionary yield A Plantation Wharf, York Place, Battersea (office) – was 5.4%. The vacancy rate in the property portfolio Short term lettings in the estate and main masterplan was at 10.0% of total ERV, with the top three on the site progressed during the period. The properties accounting for approximately 4.9%. These Manager completed the office refurbishment of Reef are part of a business plan cycle where refurbishments House. The Manager has been undertaking some or possible asset repositioning are being advanced. placemaking works and a rolling refurbishment of Most of the vacancy remains within the industrial Spice Court. The estimated rental value of the vacant sector, where demand is reasonable, and the South building is £0.8 million per annum and it currently FINANCIAL STATEMENTS East Office sector, which is suffering from reduced accounts for 1.1% of the total vacancy rate.
Sector weighting (%) – gross value basis As at 25 March 2021 35 33.1 33.7 30
25
20 INVESTOR INFORMATION 15
12.0 10 10.9 10.8 11.4 11.3 8.1 8.3 8.9 7.6 7.6 7.3 7.0 5 6.0 5.2 5.0 1.2 0.7 3.9 0 Unit Shops/ Shopping Retail City West End South East Rest of UK Industrial Leisure/ Cash Supermarkets Centres Warehouses Of ces Of ces Of ces Of ces Other FHPUT MSCI/AREF UK Other Balanced Property Fund Index
Source: MSCI/AREF UK Quarterly Property Funds Indices. 22 Federated Hermes Property Unit Trust
Trust Manager’s Report
As at 25 March 2021, the Trust had an average Eastern compared with 65% in the Trust’s benchmark. unexpired lease term of 6.0 years (adopting MSCI The Manager remains comfortable with this bias, methodology: in the lease expiry calculation, breaks are however, as illustrated by the purchase of the B&Q assumed to be executed) compared to the benchmark asset in York, there are opportunities to buy into other of 6.9 years. The percentage of the FHPUT property UK regions, particularly in key affluent cities or where portfolio rent linked to leases expiring (or breaking) in asset characteristics warrant investment. The Trust less than 5 years was 64.5% compared to the 59.7% of continues to maintain a good balance of risk and return the benchmark, although some of them linked to active within its portfolio. The Manager remains comfortable management activity/business plan/asset repositioning. with a relatively low exposure to assets within the Nevertheless, the Trust’s portfolio continues to have a ‘Special Situations’ and ‘Added Value’ risk/return strategic higher exposure to assets in London, South category. At 25 March 2021 the Trust held 6% of its East and Eastern regions where economic growth, portfolio in special situation investments with an property performance and liquidity is expected to be increased tilt towards the ‘Core’ and ‘Added Value’ stronger than the rest of the UK in the short to strategies sitting respectively at 74% and 20% of the medium-term. The Trust currently holds 80% of assets portfolio. by capital value in London and the South East and
Core/Satellite approach to deliver optimum risk/return
Actual Weighting Target to 25 March outperformance Strategy & Medium Term Target Weighting 2021 vs benchmark
Income returns to underpin Core Strategies – 65% distribution yield 74.2% 0.5%
Exploit value enhancing Added Value – 25% opportunities 20.2% 1.0%
Higher risk Higher return Special Situation Strategies – 10% Non-core sectors 5.6% 2.0% Specialist assets
Target outperformance per annum over a three year rolling period. Annual Financial Statements 2021 23 INTRODUCTION
Outlook Since we last reported, the UK economy and commercial diversification. As we have reported previously, one property market have proved to be more resilient than known factor is that the pandemic accelerated some many initial forecasts. The UK economy avoided existing trends such as flexible working and e-commerce. recession and business confidence has been improving The focus remains on enhancing the Trust’s income following positive outcomes from the vaccination profile, adding value from the strong pipeline of added programme and a gradual lifting of lockdown restrictions. value initiatives, accretive purchases & sales and TRUST MANAGER’S REPORT Whilst the long-term social, economic and political risks continued integration of a responsible investing/ESG associated with the current pandemic are still unknown, approach to provide good long-term outperformance to there are signs that the impact to occupier and investor investors. Despite the challenges of the last year, the confidence in certain property market segments is Manager continues to believe that a thorough starting to ease. understanding of the property fundamentals that drive the occupational markets and a clear focus on investment The Manager believes that the portfolio is well excellence is essential to achieving sustainable long-term positioned against the future uncertain macroeconomic risk-adjusted returns. outlook given its relatively defensive strategy and good GOVERNANCE FINANCIAL STATEMENTS INVESTOR INFORMATION
8-10, Great George Street, London 24 Federated Hermes Property Unit Trust
Direct Property Portfolio
The Trust has a portfolio bias to London and the South East with 80% of investment held in these regions. This is expected to be beneficial for the future performance of the Trust. A full list of properties and locations can be found in the Property Listing on pages 25-28.
2.1% 8.5% 2.3%
6.7%
Percentage of portfolio value by 19.2% region 61.2%
North 8.5% Central London 19.2% Industrials 2.8% Industrials – Offices 5.7% Offices 14.2% Shopping Centres – Shopping Centres – Unit Shops/Supermarkets – Unit Shops/Supermarkets – Retail Warehouses _ Retail Warehouses – Leisure/Other _ Leisure/Other 5.0%
North East 2.1% South East (excl. London) 61.2% Industrials – Industrials 30.6% Offices – Offices 9.4% Shopping Centres – Shopping Centres 1.3% Unit Shops/Supermarkets – Unit Shops/Supermarkets 7.5% Retail Warehouses 2.1% Retail Warehouses 5.8% Leisure/Other – Leisure/Other 6.6%
West 6.7% South West 2.3% n Industrials Industrials 1.6% Industrials – n Offices Offices – Offices 2.0% n Shopping Centres Shopping Centres – Shopping Centres – n Unit Shops/Supermarkets Unit Shops/Supermarkets 0.4% Unit Shops/Supermarkets – n Retail Warehouses Retail Warehouses 4.7% Retail Warehouses – n Leisure/Other Leisure/Other – Leisure/Other 0.3% Annual Financial Statements 2021 25
Property Portfolio INTRODUCTION
Sector Property Principal Tenants £30 million & over
Industrial Horndon Industrial Park, West Horndon CM13 3XL Routebuy Limited Multi-let industrial park offering quick access to central London The Steel Team Ltd X-pand International Freight Ltd
Polar Park, Bath Road, Heathrow Circle Express Ltd TRUST MANAGER’S REPORT Leasehold multi-let industrial estate Air Menzies International Ltd DHL Global Match UK Ltd Reading Metropolitan, 80 Caversham Road, Reading Vacant site – development Property occupying a five acre site situated immediately to the north of opportunity Reading station – development opportunity Office 27 Soho Square, London W1D 3QR Barclays Bank plc Freehold property comprising 32,000 sq. ft. of office accommodation Muse Development Limited Meet in Place 8-10 Great George Street, London SW1P 3AE Hamilton Lane (UK) Ltd Freehold multi-let West End office building comprising 53,000 sq. ft. Policy Exchange Ltd The Liberal Democrats (Trustees) Ltd Boundary House, 91/93 Charterhouse St, London EC1 Stone King LLP Freehold office property in Clerkenwell. The property comprises 32,700 sq. ft. Innisfree Ltd
over basement, ground and six upper floors, used as office space on upper HiBob (UK) Limited GOVERNANCE floors and retail units on the ground floor including Gaucho Grill Hythe House, Hammersmith Hyperoptic Ltd Freehold, multi-let modern office building over 56,280 sq. ft. located in Elizabeth Finn Care Hammersmith Siemens PLC Round Foundry & Marshalls Mill, Water Lane, Holbeck Urban Village, Elmwood Design Ltd Leeds LS11 Leeds City Council Former mill and foundry buildings dating from 1791 and 1795, converted True North Productions Ltd to offices, restaurant and residential in 1990’s. Multi-let, mixed use freehold property comprising 155,811 sq. ft. Other Broken Wharf House, High Timber Street, London EC4 Edyn Ltd (SACO) Serviced apartment investment conversion located on the north bank of FINANCIAL STATEMENTS the Thames Retail Maybird Shopping Park, Stratford-upon-Avon Boots UK Ltd Freehold retail warehouse park of 232,000 sq. ft. with open A1 Matalan Retail Ltd planning consent Asda Stores Ltd Sainsbury’s, Maxwell Road, Beaconsfield Sainsbury’s Supermarkets Ltd Foodstore with a long lease Templars Shopping Park, Cowley, Oxford Sainsbury’s Supermarkets Ltd Prime retail warehouse park, well located on a very prominent site 2.5 miles Asda Stores Ltd east of Oxford city centre. The site totals 8.87 acres comprising 14 units Matalan Retail Ltd totalling 138,588 sq ft GIA and 467 car parking spaces £10 – £30 million INVESTOR INFORMATION Industrial 1/15 Thomas Road, Limehouse, London E14 7BN Plumbase Ltd Multi-let Greater London industrial estate with good short to medium-term Wolseley (UK) Ltd rental prospects Centrus Industrial Estate, Mead Lane, Hertford Paragon Customer Alternative Freehold multi-let industrial estate which includes a range of modern industrial Power Valves International Limited units in Hertford’s well established central business location 26 Federated Hermes Property Unit Trust
Sector Property Principal Tenants Eagle Park Warrington, Eagle Park Drive, Warrington, WA2 8JA Master Removers Group Ltd Freehold multi-let industrial estate Relay Technical Transport Ltd Primeline Logistics Ltd Erdington Industrial Park, Chester Road, Erdington, Birmingham, B24 0RD FGF Limited Freehold multi-let industrial estate Birmingham City Council Jaguar Land Rover Ltd Fairway Trading Estate, Green Lane, Heathrow Xpo Transport Solutions UK Ltd Freehold multi-let industrial estate Steelo Ltd Fara Foundation Guinness Road Trading Estate, Manchester KBF Enterprises Ltd Substantial multi-let industrial estate comprising 22 units, totalling 235,000 Jex Process Services Limited sq.ft. providing a good range of small to medium size units MW Insulation Limited LGC Complex, Newmarket Road, Fordham CB7 5WW LGC Bioresearch Ltd Freehold industrial and office estate located to the south of Fordham in an area which has established itself as an industrial and distribution hub Mitcham Road, Croydon Selco Trade Centres Limited A modern industrial estate of approximately 88,000 sq. ft. comprising five units Benchmarx Kitchens and Joinery Ltd City Plumbing Supplies Holdings Ltd Nexus Park, Hambridge Road, Newbury RG14 5TR Power and Energy International Freehold multi-let industrial estate Ltd Ward Thomas Removals Ltd Haiken Ltd Park Avenue Industrial Estate, Park Avenue, Sundon Park, Luton LU3 3BP Special Wear UK Ltd Freehold multi-let industrial estate Carpet Accessory Trims Ltd Academy Foodservice Ltd Peterwood Park, Beddington Farm Road, Croydon Day Lewis Plc A modern freehold industrial estate of five units, ranging in size from 9,000- Energis Communications Ltd 23,000 sq. ft. Day Lewis Medical Limited Westgate Industrial Estate, Bedfont Bridgestone Aircraft Tired (UK) Ltd Two refurbished industrial units, close to Heathrow airport, comprising over ByBox Field Support Ltd 40,000 sq.ft. Coln Industrial Estate Old Bath Road Gibbs Transport Ltd Freehold multi-let industrial estate Mark 3 International Ltd Jump Giants Heathrow Ltd Office 1/7 Sekforde Street, London EC1R 0BE Future Cities Catapult Ltd 25,000 sq.ft. freehold office building which is currently occupied as serviced offices, situated in Clerkenwell. Purchased in August 2011 31 Great George Street, Bristol BS1 5QD University of Bristol Well configured office building located in Clifton Jones Lang LaSalle Limited Citygate Court, Manchester Barclays Bank plc Freehold 47,000 sq.ft. city centre office investment. Occupied as offices with The Secretary of State ground floor banking hall, purchased in September 2011 for Communities & Local Government Annual Financial Statements 2021 27 INTRODUCTION
Sector Property Principal Tenants Commercial Point, 69-81 Commercial Road, Southampton Old Mutual Wealth Business 67,000 sq. ft. freehold office building Services Limited SSE Services Plc Park View House, Victoria Road South, Chelmsford Royal & Sun Alliance Insurance Freehold office investment located in an established South East location
Plantation Wharf, York Place, Battersea Stent Tek Ltd TRUST MANAGER’S REPORT Mixed-use leasehold office building located on a prime riverside site Elite fine wines Ltd in Battersea Horizon Building, Honey Lane, Hurley, Maidenhead SL6 6RJ Zetes Limited Freehold multi-let office building Pfizer Limited Leo Laboratories Limited One City Place, off Queens Road, Chester CH1 3BQ Sykes Cottages Ltd Leasehold multi-let office building Baker Tilly Management Ltd Black and Veatch Ltd Other Block E Greenwich, 48-55 Greenwich High Road, Greenwich SE10 8JL Pure Gym Ltd A recently completed development of serviced apartments, a gym and vacant StayCity Greenwich Ltd retail unit with a total floor area of 53,570 sq. ft. Premier Inn, Greenwich Premier Inn Hotels Ltd Freehold hotel property let on a long lease and situated close to Greenwich Reefmark Ltd rail and DLR stations
Retail 51-53 Church Street, Caversham Waitrose Ltd GOVERNANCE Food anchored retail asset in the South East let off low rents. Opportunities Iceland Frozen Foods Plc for extension and repositioning Christopher Place, St Albans Fitness First Clubs Ltd 85,000 sq.ft. freehold shopping centre situated in an affluent part of the Hobbs Limited South East Hurricane Way, Clifton Moor, York B & Q PLC Freehold retail warehouse constructed in 1992 with garden centre totalling approximately 51,900 sq.ft. The Broadway, Wimbledon, London SW19 JD Sports Fashion Plc Freehold, constructed in 2000, retail terrace of six units over ground, first and DSG Retail Ltd
second floors together with a public house to the rear. Approximate area FINANCIAL STATEMENTS 49,600 sq. ft. 71-89 North End Road, Croydon Vision Express (UK) Ltd Parade of freehold unit shops (24,000 sq. ft.) in a prime position between the EE Ltd principal entrances to the Whitgift and Centrale shopping centres Luxury Leisure B&Q, Hull Road, York B&Q Plc Purpose-built B&Q warehouse providing a total of 102,360 sq. ft GIA Under £10 million
Office 18/20, St John Street, London EC1M 4AY Freehold office building which adjoins another FHPUT holding, Boundary House – under refurbishment
Wellington Gate, Church Road, Tunbridge Wells Coutts & Co INVESTOR INFORMATION Refurbished freehold office accommodation over seven floors, totalling Atkins 28,000 sq. ft. EPG Communications Ltd Other Enterprise Portfolio 1 Enterprise Inns 1 15 pubs across London Enterprise Portfolio 2 Enterprise Inns 2 9 pubs across SE/SW 28 Federated Hermes Property Unit Trust
Sector Property Principal Tenants Retail 12 Brighton Road, Redhill Halfords Limited Small freehold retail warehouse constructed in 1993 totalling 31,400 sq. ft. Pets At Home Ltd 5/9 & 10 Church Street, Cardiff Pho Trading Ltd Five freehold restaurant units recently refurbished and located on a The Botanist pedestrianised street in the city centre of Cardiff Mowgli Street Food Ltd Homelands, Chelmsford (Tower Hill LP) B&Q PLC Freehold retail warehouse scheme of circa 100,000 sq. ft, jointly owned in a limited partnership with BT Pension Scheme St Albans Retail Park II, St Albans (Tower Hill LP) CDS (Superstores International Freehold retail warehouse scheme of 60,000 sq. ft. let to CDS trading as Limited) The Range. Jointly owned in a limited partnership with BT Pension Scheme St Albans Retail Park I, St Albans (Tower Hill Retail LP) Matalan Retail Ltd Freehold retail warehouse scheme of 62,560 sq.ft., let to a variety of tenants Halfords Limited jointly owned in a limited partnership with BT Pension Scheme Pets At Home Ltd M2 City Link, Anthony’s Way, Rochester, ME2 4DW M2 City Link Development Forward funding development – prime industrial estate comprising 3 logistics units and 5 trade counter/industrial units totalling 132,425 sq. ft GIA Annual Financial Statements 2021 29
Responsible Property INTRODUCTION Investment Strategy
ESG – Responsible Property Investment 1. Carbon Reduction and Management Implementation 2. Climate Resilience Net Zero Strategy and Pathway – Federated Hermes Net Zero Pathway was published in December 2020 with 3. Circular Economy TRUST MANAGER’S REPORT a target date of 2035 for all managed assets in the UK. Over the next fifteen years Federated Hermes propose 4. Wellbeing to align the Real Estate portfolio with Net Zero 5. Functional Adaptability aspirations set out in the pathway, with the focus on delivery against four specific pillars of activity: 6. Development Accreditation
1. Decarbonisation – Remove fossil fuels, increase 7. Technology energy efficiency, use green tariffs and reduce embodied carbon in new development and major 8. Biodiversity refurbishments. Support improvements in local infrastructure, emphasising best practice innovation 9. Socio Economic such as EV charging and on-site renewable energy Through our Responsible Property Investment principles creation where practical; and programme, we aim to capture all of the 2. Deliver Energy Efficiency – Reduce Energy Use environmental improvements and opportunities in the Intensity (EUI) by 66% against 2018 baseline for the investment lifecycle of an asset. Future maintenance GOVERNANCE RE portfolio by 2035; and management requirements are an important aspect of design that can have a positive or adverse effect on 3. Stakeholder Engagement – Work with occupiers, future investment value. The development and suppliers and other stakeholders to transition to net refurbishment phases are therefore crucial stages in zero alignment; an asset’s lifecycle where such opportunities can and should be realised. 4. Offset – Use credible, permanent carbon removal schemes for residual carbon utilising schemes such as Smart Optimisation in Buildings – Technology will play natural capital solutions for carbon sequestration to a vital role in implementing Federated Hermes Net Zero address embodied carbon. Pathway. A number of technology solutions have been explored to ensure operation efficiency is maximised. FINANCIAL STATEMENTS The pathway covers carbon and other Green House Gas The CAPP (Collaborative Asset Performance (GHG) emissions from development, construction and Programme) has been implemented in both London operation of our real estate assets. It takes into account assets 8-10 Great George Street and 27 Soho Square, both embodied carbon from new development and continued to deliver performance savings. The CAPP refurbishment and operational carbon across the asset Light scheme at Horizon Hurley moved towards a plan to lifecycle. Federated Hermes will work with clients, implement a programme of energy efficiency measures industry stakeholders, property managers and tenants and innovations which will help align the asset to a New to help deliver this pathway. Zero status, although these are currently on hold as a result of the current pandemic situation. Overall, the Development and Refurbishment Briefs – To ensure CAPP scheme across the Fund delivered a demonstrable key requirements of the Net Zero Pathway and wider amount in energy cost savings for occupiers. ESG considerations are embedded into our portfolio, Federated Hermes have developed ‘Design Innovation
BREEAM In Use – Following the successful pilot INVESTOR INFORMATION Standards’ for new developments and updated the scheme and subsequent wider roll out back in 2019, the existing ‘Responsible Property Management Standards’ Fund now has 11 certified properties within the Fund, for all refurbishment works within existing portfolio. resulting in a 12.7% coverage by number of assets in The standards will seek to embed sustainable design FHPUT under the scheme. In 2020, West Horndon and commitments aligned with the SDGs and use the Childerditch Industrial Estates achieved a ‘Very Good’ following core pillars: rating under the BUI scheme – it is the first industrial 30 Federated Hermes Property Unit Trust
estate within Federated Hermes Portfolio to achieve a BUI certification. A further 2 properties are being proposed for inclusion this year, accepting that there may be obstructions to the schemes completion as a result of COVID-19 limitation. These are:
A Church Street, Cardiff A 18-20 St John’s Street, London
Action Plans for the completed buildings are being rolled out and activities undertaken as appropriate, in line with the latest COVID-19 guidelines.
Flood Resilience Planning – Over the last few years the Manager has been working to implement a robust flood resilience planning in addition to standard risk assessment and planning. Although the programme of flood resilience has commenced, it has been delayed by COVID-19 restrictions on travel, and will be rolled out across the portfolio during the course of 2021. INTRODUCTION TRUST MANAGER’S REPORT GOVERNANCE FINANCIAL STATEMENTS INVESTOR INFORMATION 31
Annual Financial Statements 2021 Statements Financial Annual
Responsibilities and Governance 32 Federated Hermes Property Unit Trust
Responsibilities and Governance
Appointments Committee The Appointments Committee approve the financial statements at The Appointments Committee is the end of each annual accounting appointed to act on behalf of Unit period before consideration by the Holders – it is responsible for the Unit Holders at the Trust’s Annual appointment and removal of the Trust General Meeting. Manager, the Trustee, the independent
auditors, each subject to ratification by A discussing and agreeing the scope of the audit and Unit Holders, and the independent reviewing the auditors’ response to changes in the valuers, and the remuneration of both regulatory requirements; the Trust Manager and Trustee. A reviewing the unaudited interim financial statements and annual financial statements prior to submission The Appointments Committee is also required by the to the Appointments Committee including advice on Trust Deed to approve the financial statements of the whether they are fair, balanced and understandable; Trust at the end of each annual accounting period – such financial statements are considered by the Unit Holders A discussing issues and management recommendations annually at the Trust’s Annual General Meeting. The that arise with the external auditors; Appointments Committee has taken all reasonable steps A agreeing any non-audit services; and to ensure compliance with its responsibilities. A considering major findings from any controls reports New members of the Appointments Committee are produced by external or internal auditors. appointed by The Trust Manager in writing and During this financial year, the Audit Committee’s approved by Unit Holders at the Trust’s Annual General actions included: Meeting; at least one third of the members are considered for re-election each year. The Appointments A Discussing and agreeing the scope of the audit with Committee met four times during the period. PricewaterhouseCoopers LLP; A Reviewing the annual financial statements prior Charles Maudsley was appointed to the Appointments to submission to the Appointments Committee, Committee and the FHPUT Committee on 18 May 2021. including advice on whether they are fair, balanced He will also join the Audit Committee and the Asset Plan and understandable; Committee. Paul Clark will retire from the Appointments Committee and the FHPUT Committee on 14 July 2021. A Discussing issues and management recommendations that arose with the external The Appointments Committee is supported by the auditors; following two Committees: A Considering the results of controls reports produced by the Manager; and Audit Committee A Considering additional disclosures required in the The Audit Committee’s principal responsibilities include: financial statements as a result of COVID-19. A monitoring and reviewing the auditors’ independence As a result of this activity the Audit Committee were and objectivity and the effectiveness of the audit able to conclude that the unaudited interim financial process, and considering the appointment of the statements and annual financial statements were fair, auditors; balanced and understandable.
The Trust Manager manages In accordance with best practice, the Audit Committee reviews the audit quality and independence on an and administers the Trust in annual basis. The Audit Committee considered the accordance with the Trust independence, objectivity and effectiveness of the Deed and has responsibility Trust’s auditors and concluded that these have been for all portfolio and risk satisfactorily demonstrated for the year ended management matters. 25 March 2021. Annual Financial Statements 2021 33 INTRODUCTION
The members of the Audit Committee are Andrew Trustee McIntyre, who acts as Chairman, Sue Clayton and The role of the Trustee includes: Francis Davies. A ensuring that the Trust is managed by the Trust Manager in accordance with the Trust Deed and that Nominations Committee proper accounting records have been maintained; The Nominations Committee meets as and when A safeguarding the property of the Trust and the required and considers the appointment of new rights attaching thereto by way of segregation and TRUST MANAGER’S REPORT members. It is chaired by the Chairman of the identification of assets; and Appointments Committee and its members are Sue Clayton and Andrew McIntyre. A taking all reasonable steps to ensure the investment and borrowing powers are complied with.
Trust Manager Governance The Trust Manager is required to manage and administer the Trust in accordance with the Trust Deed The Appointments Committee and the Trust Manager and has responsibility for all portfolio and risk are committed to a high standard of corporate management matters. It is responsible for the approval governance in the operation of the Trust. of amounts to be distributed and for the issuance of financial statements subject to approval by the Regulation and Legislation Appointments Committee. The Trust Manager is responsible for dealing with its regulator, the Financial Conduct Authority, in an open In June 2013, the Trust Manager formed the FHPUT GOVERNANCE Committee through which it considers certain matters and co-operative manner. The Trust Manager will inform on behalf of Unit Holders including investment the regulator promptly of anything concerning the Trust constraints. It comprises only the members of the which might reasonably be expected to be disclosed. Appointments Committee and met five times during The Trust Manager is also responsible for ensuring that the period. all applicable legislation and regulations including but The FHPUT Committee is supported by the Asset Plan not limited to the Alternative Investment Fund Managers Committee. The Asset Plan Committee’s duties include Directive and the Bribery Act 2010 are complied with by the detailed review of the investment process and of the the Trust. It is required to maintain adequate procedures strategic property plans for each individual asset within that ensure compliance with such legislation and it the Trust’s portfolio. Its membership consists of Paul monitors that such procedures are adhered to. Clark (Chairman) and Sue Clayton. The Asset Plan FINANCIAL STATEMENTS Committee met formally and informally on various Conflicts of Interest occasions during the period. The Appointments Committee and the Trust Manager The Trust Manager is responsible for maintaining will seek to avoid any conflict of interest arising. Should a accounting records and the preparation of the financial conflict arise, they have a duty to ensure fair treatment of statements in accordance with the applicable framework all Unit Holders. and for being satisfied that they give a true and fair view. The Trust Manager is also responsible for such internal control as they determine is necessary to enable the The Appointments Committee preparation of financial statements that are free from and the Trust Manager are material misstatement, whether due to fraud or error. committed to a high standard In preparing the financial statements, the Trust Manager of corporate governance in the INVESTOR INFORMATION is responsible for assessing the Trust’s ability to continue operation of the Trust. as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the Trust Manager either intends to liquidate the Trust or to cease operations, or has no realistic alternative but to do so. 34 Federated Hermes Property Unit Trust
Appointments Committee
David Nicol BA (Hons) CA – Chairman (Appointed 16 July 2012) David is a Chartered Accountant and is Chairman and a Non-Executive Director of Multrees Investor Services Limited and an independent member of the Board for both Julius Baer Group Limited and Bank Julius Baer & Co Limited. David was Chief Executive of Brewin Dolphin plc from 2013 until mid-2020. He worked for Morgan Stanley from 1984 until 2010 taking various senior operational roles. He was chair of Morgan Stanley Pension Trustee Limited and non-executive chair of the audit committee of Morgan Stanley International until the end of 2011. Paul Clark BA (Hons), MPhil (Appointed 3 December 2014) Paul is currently the Senior Investment Director for European real estate investment at Australian Super. He was Chief Investment Officer at the Crown Estate until 2020, previously Director of Investment and Asset Management since 2007, prior to that he ran the Church Commissioners global real estate investment portfolio. He also sits on various industry bodies including the Board of Pathways to Property.
Sue Clayton BSc FRICS (Appointed 9 December 2014) Sue was an Executive Director at CBRE, the global property advisers, where she has specialised in UK investment markets for over 25 years until her retirement in 2020. Sue is a Non-Executive Director of SEGRO Plc and of Helical Plc where she chairs the Valuation Committee and sits on the Audit and Remuneration Committees. She is Chair of the Barwood Property 2017 Fund and a Trustee of the Reading Real Estate Foundation.
Andrew McIntyre MA, ACA (Appointed 7 June 2017) Andrew is a non-executive director of C. Hoare & Co and Ecclesiastical Insurance Group plc and a board member of Lloyds Bank Corporate Markets plc. Andrew was previously a board member and chairman of Southern Housing Group Limited. He was a partner at Ernst & Young for 28 years. He also served on the firm’s board and was a trustee of the firm’s pension schemes. Andrew is a trustee of the Centre for Economic Policy Research and a member of the Financial Reporting Council Review Panel.
Frances Davies MA, MPhil (Appointed 18 February 2019) Frances has more than 30 years’ experience across various roles within the asset management and investment banking industries. Since 2007 she has been a partner of Opus Corporate Finance and she currently holds non-executive roles on the JP Morgan Smaller Companies Investment Trust Board, Aviva’s With-Profits Committee, the Aegon Investments Ltd Board and, the Board of HICL plc.
Charles Maudsley FRICS Charles is a Chartered Surveyor and is Strategic Advisor to Bridgepoint LLP and Founder of Alma Real Estate Consultancy. From 2010-19 Charles was a Main Board Director at British Land plc with day to day responsibility for the Retail, Leisure and Residential portfolios. Prior to this Charles was Co Head of Europe for LaSalle Investment Management and also sat on the Global Board of the Investment Management business. This followed a role as UK head of Real Estate for AXA REIM. Charles started his career at DTZ where he ultimately held a position as Director in the Investment team.
Appointments Committee Fees The Appointments Committee is remunerated in respect of each accounting period an amount that will not exceed 0.05% of the gross asset value of the Trust. The Chairman is paid £40,000 per annum and other members of the Appointments Committee are each paid £27,500 per annum. The members of the Appointments Committee are paid out of the assets of the Trust and receive no additional remuneration for their appointment on the FHPUT Committee. Annual Financial Statements 2021 35
Trust Management Team INTRODUCTION
Dermot Kiernan Dermot has over 35 years extensive experience in the UK property sector. He joined Federated Hermes in October 2020 from M&G Real Estate, where he managed three UK focused property funds. Prior to this Dermot worked for LaSalle Investment Management, principally on UK pension fund mandates, a publicly listed property company and, initially, in the public sector. Dermot is a member of the Royal Institution of Chartered Surveyors and has a BSc in Estate Management from Southbank University. He is also a holder of the Investment Management Certificate TRUST MANAGER’S REPORT and a member of the Investment Property Forum.
Russell Black Russell joined the International business of Federated Hermes in March 2002 and was appointed Fund Manager for Federated Hermes Property Unit Trust in November 2019 having acted as Interim Fund Manager for most part of 2019. He was previously lead Asset Manager for Federated Hermes Property Unit Trust and prior to that an Investment Manager responsible for both the direct and indirect Retail Warehouse portfolio across Federated Hermes funds. Prior to joining Federated Hermes, Russell worked at Donaldsons Surveyors in London and Leeds. Russell has a BSc (Hons) in Estate Management from the University of Ulster and is a Member of the Royal Institute of Chartered Surveyors. GOVERNANCE
Kirsty Wilman Kirsty Wilman is Executive Director – Business Management for Private Markets, responsible for coordinating all legal, compliance, finance and operational support for the Real Estate portfolio. She was previously Head of Operations for Private Markets and before that, Finance Director for Real Estate. Prior to joining Federated Hermes Real Estate, Kirsty was at Ernst and Young in Audit and Assurance working with Real Estate and Entrepreneurial clients. She qualified as a Chartered Accountant in 2005.
Clive Selman FINANCIAL STATEMENTS Clive joined the International business of Federated Hermes in June 2012 and is responsible for promoting our diverse fund range to the UK discretionary and wholesale market, including global financial institutions. Clive previously worked at Man Investments, where he was responsible for distributing their hedge fund portfolios to a UK and European audience. Clive holds a BA (Hons) in Business Studies and German from the University of Sheffield. INVESTOR INFORMATION 36 Federated Hermes Property Unit Trust
Advisors
Trustee and Depositary Independent Valuers NatWest Trustee and Depositary Services Limited Knight Frank LLP 250 Bishopsgate, London EC2M 4AA 55 Baker Street, London W1U 8AN Registered in England no. 11194605
Trustee enquiries should be made to: Banker NatWest Trustee and Depositary Services Limited The Royal Bank of Scotland plc 250 Bishopsgate, London EC2M 4AA Financial Institutions Corporate Service Team Aldgate Union, 10 Whitechapel High Street London E1 8DX Authorised and regulated by the Financial Conduct Authority. Trust Legal Advisors Real Estate Investment Manager Bryan Cave Leighton Paisner LLP Adelaide House, London Bridge, London EC4R 9HA Hermes Real Estate Investment Management Limited 150 Cheapside, London EC2V 6ET Independent Auditors Trust Manager PricewaterhouseCoopers LLP 7 More London Riverside, London SE1 2RT Hermes Alternative Investment Management Limited 150 Cheapside, London EC2V 6ET Managing Agents Authorised and regulated by the Financial Conduct Jones Lang LaSalle Authority. The Trust Manager delegates certain property 40 Bank Street Canary Wharf, London E14 5EG activities to Hermes Real Estate Investment Management Limited (the Real Estate Investment Manager). Workman & Partners Rivergate House, 70 Redcliff Street, Bristol BS1 6AL Annual Report and Financial Statements 2021 37
Financial Statements 38 Federated Hermes Property Unit Trust
Consolidated Statement of Total Return For the year ended 25 March 2021
2021 2020 Notes £’000 £’000
Net loss on investments 2 (40,045) (20,811)
Rental income 70,082 62,605
Service charge income 8,322 15,146
Property expenses 3 (24,811) (32,184)
Net property income 53,593 45,567
Management expenses 4 (2,701) (2,702)
Net operating income before interest, finance costs and taxation 50,892 42,865
Share of results of investment in joint venture 1,655 1,192
Interest income 5 51 529
Interest expense and similar charges 6 (333) (111)
Net income before tax 52,265 44,475
Taxation 7 – –
Net income after taxation 52,265 44,475
Total return for the year before distribution 12,220 23,664
Finance costs – distributions to unit holders 8 (53,168) (47,138)
Change in unit holders' funds attributable to unit holders (40,948) (23,474)
All activities derive from continuing operations. Annual Report and Financial Statements 2021 39
Consolidated INTRODUCTION Balance Sheet As at 25 March 2021
2021 2020 Notes £’000 £’000 TRUST MANAGER’S REPORT Fixed assets Property investments 9 1,223,040 1,333,858 Investment in joint venture 10 21,914 23,812 1,244,954 1,357,670 Current assets Debtors 11 45,951 31,690 Cash and deposits 80,646 83,116 Total current assets 126,597 114,806 Current liabilities Creditors 12 (31,077) (33,517) Amounts payable to unit holders 8 (12,520) (11,990) GOVERNANCE Total current liabilities (43,597) (45,507) Net current assets 83,000 69,299 Non current liabilities Bank borrowings 13 (47,824) 289 Net assets 1,280,130 1,427,258 Represented by: Capital of unit holders Units in issue 14 623,690 729,870 FINANCIAL STATEMENTS Less: Capital expenses (50,002) (49,099) 573,688 680,771 Net realised profits on sales of property 474,995 398,952 Unrealised profit 231,447 347,535 Unit holders' funds 1,280,130 1,427,258 Capital employed 1,280,130 1,427,258
These financial statements were approved by the Appointments Committee on 3 June 2021 and signed on its behalf by: INVESTOR INFORMATION
David Nicol
Andrew McIntyre 40 Federated Hermes Property Unit Trust
Consolidated Statement of Changes in Net Assets Attributable to Unit Holders For the year ended 25 March 2021
Net realised profits Units in Capital on sale of Unrealised Revenue issue expenses property profit reserve Net assets £’000 £’000 £’000 £’000 £’000 £’000 At 26 March 2019 889,757 (46,436) 342,363 424,935 – 1,610,619 Profit for the year – – – – 23,664 23,664 Transfer to capital reserve – – 56,589 (77,400) 20,811 – Capital expenses – (2,663) – – 2,663 – Units issued (159,887) – – – – (159,887) Distributions to unit holders – – – – (47,138) (47,138) At 25 March 2020 729,870 (49,099) 398,952 347,535 – 1,427,258
At 26 March 2020 729,870 (49,099) 398,952 347,535 – 1,427,258 Profit for the period – – – – 12,220 12,220 Transfer to capital reserve – – 76,043 (116,088) 40,045 – Capital expenses – (903) – – 903 – Units redeemed (106,180) – – – – (106,180) Distributions to unit holders – – – – (53,168) (53,168) At 25 March 2021 623,690 (50,002) 474,995 231,447 – 1,280,130 Annual Report and Financial Statements 2021 41
Consolidated Cash INTRODUCTION Flow Statement For the year ended 25 March 2021
2021 2020 Notes £’000 £’000 TRUST MANAGER’S REPORT Net cash inflow from operating activities 16 36,635 28,672
Capital expenditure
Property acquisitions and capital additions (88,623) (23,425)
Capital expenses (357) (397)
Proceeds from sales of investments 160,818 129,074
71,838 105,252
Returns on investments and servicing of finance
Interest receivable 5 51 529
Distributions paid 8 (52,638) (48,476) GOVERNANCE
(52,587) (47,947)
Financing
Long term bank borrowing 47,824 –
Units issued in the year 14 – 6,563
Units redeemed in the year 14 (106,180) (166,450)
(58,356) (159,887)
Decrease in cash and deposits (2,470) (73,910) FINANCIAL STATEMENTS
Reconciliation of net cash flow to movement in net funds
Decrease in available cash during the year (2,470) (73,910)
Decrease in net funds during the year (2,470) (73,910)
Opening cash and deposits attributable to unit holders 83,116 157,026
Closing cash and deposits attributable to unit holders 80,646 83,116 INVESTOR INFORMATION 42 Federated Hermes Property Unit Trust
Notes to the financial statements For the year ended 25 March 2021
1. Accounting policies Basis of Accounting The financial statements have been prepared on a going concern basis in accordance with the historical cost convention as modified by the revaluation of investments and in accordance with applicable UK generally accepted accounting principles and the Trust Deed.
The outbreak of COVID-19, declared by the World Health Organisation as a “Global Pandemic” on 11 March 2020, has and continues to impact many aspects of daily life and the global economy – with some real estate markets having experienced lower levels of transactional activity and liquidity. Travel, movement and operational restrictions have been implemented by many countries. In some cases, “lockdowns” have been applied to varying degrees and to reflect further “waves” of COVID-19; although these may imply a new stage of the crisis, they are not unprecedented in the same way as the initial impact.
The Trust Manager has considered the inherent risks to the Trust’s business model, including the impact of COVID-19, and analysed how those risks might affect the Trust’s financial resources or ability to continue operations over the going concern period. The Trust Manager has prepared a cash flow model including various assumptions, which supports the going concern basis. The conclusion of these considerations is that the Trust has sufficient resources to meet its obligations as they fall due and the Trust Manager is satisfied that at the time of approving the financial statements, it is appropriate to adopt the going concern basis in preparing the financial statements.
Statement of Compliance The financial statements have been prepared in compliance with United Kingdom Accounting Standards, including Financial Reporting Standard 102, ‘‘The Financial Reporting Standard applicable in the United Kingdom and the Republic of Ireland’’ (‘‘FRS 102’’).
Basis of Consolidation The Trust holds certain property investments through joint ventures. Such investments are accounted for using the equity method, with the investment property in the joint venture measured at fair value. Investments held through subsidiary undertakings are fully consolidated in the financial statements.
Statement of Total Return The Trust has no recognised gains and losses other than those included in the results above and therefore no separate statement of total gains and losses has been presented.
Investment Property Investment properties are initially recognised at cost and subsequently measured at fair value. The freehold and leasehold investment properties are valued on a monthly basis by the Trust’s independent valuers, Knight Frank LLP, on the basis of Market Value in accordance with RICS Appraisal and Valuation Standards. Any surplus or deficit arising on revaluation is included in Unrealised Profit in Unit holders’ funds.
Investments in Joint Ventures
Investments in joint ventures are initially recognised at the transaction price and are subsequently adjusted to reflect the share of the profit or loss, other comprehensive income and equity of the associate. Any surplus or deficit arising is included in Unrealised Profit in Unit holders’ funds. Annual Report and Financial Statements 2021 43 INTRODUCTION
1. Accounting policies (continued) Income and Expenditure Rental income, service charge income, interest and expenditure are accounted for on an accruals basis. Rental income is recognised on a straight-line basis over the term of the lease even if payments are not made as such. Incentives paid to enter into an operating lease are debited to the profit and loss account, to reduce the rental income, on a straight- line basis over the period of the lease. The Trust has taken advantage of the exemption in respect of lease incentives
on leases in existence on the date of transition to FRS 102 (26 March 2014) and continues to debit such lease TRUST MANAGER’S REPORT incentives to rental income over the period to the first review date on which the rent is adjusted to market rates. Lease incentives are recorded within debtors and a corresponding reduction is made to property valuations.
Valuation fees and performance fees payable to the Real Estate Investment Manager are treated as capital expenses. They are reported within property expenses in the Consolidated Statement of Total Return but are not taken into account in determining the Trust’s distributable income, instead being taken to the Capital expenses reserve. The effect of this treatment is to increase income distributions and reduce the Trust’s Net Assets by the value of such expenses each year. Transaction costs are capitalised and reported as part of the net gain or loss on investments in the Consolidated Statement of Total Return.
Other than the interest receivable and interest payable and similar charges balances, there are no items of income, expense, gain or loss arising from the Trust’s financial instruments.
Distributions
It is the policy of the Trust to distribute all income net of expenses to the unit holders on a quarterly basis. In GOVERNANCE accordance with FRS 102, distributions have been classified as finance costs.
Purchases and Sales of Investment Property Property purchases are accounted for on exchange of unconditional contracts, otherwise on completion. Sales are accounted for on completion.
Cash and Deposits Cash and deposits includes cash at bank, cash in hand and overnight deposits.
Debtors FINANCIAL STATEMENTS Trade and other receivables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method. A provision for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when they are specifically identified.
Creditors Trade and other payables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using the effective interest method.
Bank Borrowings Interest bearing bank loans are recorded at proceeds received, net of direct issue costs. Finance charges, including direct issue costs, are recognised on an accrual basis. Issue costs are amortised over the period to the date of expiry of the facility agreement. INVESTOR INFORMATION
Significant Accounting Estimates The Trust’s key source of estimation relates to the valuation of the property portfolio where external valuations are obtained from the Trust’s independent valuers. Estimates are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. There is no assurance that the estimates will reflect the actual sales price even where a sale occurs shortly after the valuation date. 44 Federated Hermes Property Unit Trust
2. Net loss on investments The net loss during the year comprises:
2021 2020 £’000 £’000 Proceeds from sales of investments 160,818 129,073 Original cost of investments sold (84,775) (72,484) Profit realised on investments sold 76,043 56,589 Revaluation loss recognised in earlier periods (67,671) (47,373) Gain for the year on investments sold 8,372 9,216 Net unrealised loss on revaluation of property investments (46,519) (29,059) Net unrealised loss on revaluation of investment in joint venture (1,898) (968) Net loss on investments (40,045) (20,811)
3. Property expenses
2021 2020 Notes £’000 £’000 Trust Manager fees Base fee 15 4,044 4,533 Performance fee 15 546 2,266 Service charge expenses 13,335 21,905 Other expenses 6,529 3,083 Valuation fees 357 397 24,811 32,184
Performance fees and valuation fees of £903,000 (2020: £2,663,000) are treated as capital items and added back to income for distribution purposes. Trust Manager base fees represent the portion of base fees payable to the Trust Manager for the management of the portfolio and are calculated at 0.30% per annum of the net asset value.
Other expenses includes a specific bad debt provision of £3,752,000 for rental income and service charge not collected from tenants since the beginning of the COVID-19 pandemic (2020: £nil). Annual Report and Financial Statements 2021 45 INTRODUCTION
4. Management expenses
2021 2020 Notes £’000 £’000 Appointments Committee fees 162 166 Trustee fees 185 170
Trust Manager fees 15 1,348 1,511 TRUST MANAGER’S REPORT Professional and other fees 902 775 Audit fees 104 80 2,701 2,702
Trust Manager base fees represent the portion of base fees payable to the Trust Manager for the management of the Trust and are calculated as 0.10% per annum of the net asset value.
The Trustee is entitled to receive a fee based on the Trust’s net asset value, which is calculated and paid quarterly in arrears. The Trustee’s fee entitlement is 0.030% per annum on the first £100 million, 0.015% per annum on the next £200 million and 0.010% per annum of the Trust’s net asset value over £300 million. The terms of this fee arrangement are subject to review on an annual basis by the Appointments Committee.
Audit fees relate to the financial statement audit of the Trust and its wholly owned subsidiary. No non-audit fees were paid to the Trust’s auditors (2020: nil). GOVERNANCE
5. Interest receivable
2021 2020 £’000 £’000 Interest on cash and deposits 51 521 Other interest receivable – 8 51 529
6. Interest expense and similar charges FINANCIAL STATEMENTS
2021 2020 £’000 £’000 Interest expense 221 – Amortisation of loan issue costs 112 111 333 111 INVESTOR INFORMATION 46 Federated Hermes Property Unit Trust
7. Taxation
Factors affecting tax charge
2021 2020 £’000 £’000 Net income and gains on investment before taxation 12,220 23,664 Income tax at standard rate of 20.00% (2020: 20.00%) 2,444 4,733 Exemption from tax on capital gains 8,009 4,162 Permanent differences of disallowable expenses (10,453) (8,895) Income tax charge – –
On 26 August 2014, the Trust was approved as an exempt Unauthorised Unit Trust by HMRC, so it is not required to withhold tax from unit holders on distributions.
8. Reconciliation of distribution to net income
2021 2020 £’000 £’000 Interim distributions – June quarter 9,020 12,054 – September quarter 18,015 12,308 – December quarter 13,613 10,786 Final distribution payable 12,520 11,990 53,168 47,138 Net income after taxation for the year 52,265 44,475 Expenses transferred to capital 903 2,663 Distributions 53,168 47,138
Expenses transferred to capital are the performance fee payable to the Trust Manager and the fees for the valuation of the property portfolio as detailed in Note 3.
9. Property Investments
Lease Property Freehold Leasehold Incentives Investments £’000 £’000 £’000 £’000 Valuation At 26 March 2020 1,245,234 100,091 (11,468) 1,333,858 Additions at cost 88,363 (216) – 88,147 Proceeds from sale of investments (160,818) – – (160,818) Profit on disposals 8,372 – – 8,372 Revaluation loss (44,208) 1,921 (4,232) (46,519) Valuation at 25 March 2021 1,136,943 101,796 (15,700) 1,223,040 Historical cost at 25 March 2021 904,279 71,347 – 975,626 Annual Report and Financial Statements 2021 47 INTRODUCTION
9. Property Investments (continued)
Lease Property Freehold Leasehold Incentives Investments £’000 £’000 £’000 £’000 Valuation At 26 March 2019 1,325,775 143,925 (9,505) 1,460,195 TRUST MANAGER’S REPORT Additions at cost 21,823 756 – 22,579 Proceeds from sale of investments (83,544) (45,529) – (129,073) Profit on disposals 6,584 2,632 – 9,216 Revaluation loss (25,404) (1,693) (1,962) (29,059) Valuation at 25 March 2020 1,245,234 100,091 (11,467) 1,333,858 Historical cost at 25 March 2020 889,796 68,205 – 968,001
The Trust’s investment properties at 25 March 2021 were valued by Knight Frank LLP, qualified valuers, on a market basis at £1,238,740.000. The valuations were carried out in accordance with the current edition of RICS Valuation – Global Standards, issued by the Royal Institution of Chartered Surveyors (the ”Red Book”) which incorporates the International Valuation Standards. Knight Frank LLP have recent experience in the location and class of the investment property being valued. The method of determining fair value was a combination of the comparable method of valuation and the residual method of value. GOVERNANCE The amount recognised in the profit and loss account for the period for rental income from investment property is £70,082,000 (March 2020: £62,605,000). Direct operating expenses (including repairs and maintenance) arising from investment property are £24,811,000 (March 2020: £32,184,000). No contingent rents have been recognised in the year or prior year.
Property valuations reconcile to the independent valuers’ report as follows:
2021 2020 £’000 £’000 Directly held properties valued by Knight Frank LLP 1,238,740 1,345,325
Lease incentives (15,700) (11,467) FINANCIAL STATEMENTS Total property investments 1,223,040 1,333,858
The table below shows the results of the Trust Manager’s evaluation of the sensitivity of the property portfolio valuation to changes in unobservable inputs to a reasonable alternative:
As at 25 March 2021 Change in fair value Fair value Unobservable +25bps +50bps £’000 input £’000 £’000 Property investments 1,261,190 Equivalent yield (56,190) (107,850) INVESTOR INFORMATION 48 Federated Hermes Property Unit Trust
10. Principal subsidiary and joint venture
Share of Limited Country of Partnership registration Subsidiary Capital Hill Partnership 100.00% UK Joint Venture Tower Hill Retail Limited Partnership 50.00% UK 2021 2020 £’000 £’000 Investment in joint venture 21,914 23,812
11. Debtors
2021 2020 £’000 £’000 Rental income 20,247 11,339 Prepayments and accrued income – due within one year 15,747 11,716 Other debtors 9,957 8,635 45,951 31,690
12. Creditors
2021 2020 £’000 £’000 Amounts falling due within one year Deferred income 12,653 14,374 VAT 3,211 1,609 Other creditors and accruals 15,213 17,534 31,077 33,517 Annual Report and Financial Statements 2021 49 INTRODUCTION
13. Bank borrowings
2021 2020 £’000 £’000 Bank loan 48,000 – Less: unamortised loan costs (176) (289)
47,824 (289) TRUST MANAGER’S REPORT
On 17 October 2017, the Trust entered into a £75 million loan facility with Wells Fargo Bank International (WFBI), which expires on 16 October 2022. This loan is secured on certain of the Trust’s properties and interest is payable at a rate of London Interbank Offered Rate (LIBOR) plus a margin of between 1.25% and 1.35% depending on fund leverage. A commitment fee is also payable at a rate of 0.5% per annum when no loan is outstanding, and 40% of the applicable margin per annum when any loan is outstanding.
On 5 November 2018, following a realignment of their European loan booking strategy, the loan facility was transferred from WFBI to an affiliate, Wells Fargo Bank National Association, London Branch (WFBNA), with no impact to the Trust’s existing loan facility agreement.
As at 25 March 2021, the Trust had an outstanding balance on the loan facility of £48,000,000 which was utilised to purchase the Templars Shopping Park in Oxford (March 2020: £nil). The maturity date of the loan is 16 October 2022.
14. Units in issue GOVERNANCE
Numbers of Units Value 000 £’000 At 26 March 2020 212,792 729,870 Redeemed in the year (16,696) (106,180) At 25 March 2021 196,096 623,690 Numbers of Units Value
000 £’000 FINANCIAL STATEMENTS At 26 March 2019 236,690 889,757 Issued in the period 913 6,563 Redeemed in the year (24,810) (166,450) At 25 March 2020 212,793 729,870 INVESTOR INFORMATION 50 Federated Hermes Property Unit Trust
15. Related party disclosures
During the year under review there were transactions with the following related parties: The fees payable to Hermes Alternative Investment Management Limited, the Trust Manager, for the year, including irrecoverable VAT, were:
2021 2020 Notes £’000 £’000 Trust Manager base fee – property expenses 3 4,044 4,533 Trust Manager base fee – management expenses 4 1,348 1,511 5,392 6,044 Trust Manager performance fee – property expenses 3 546 2,266
2021 2020 £’000 £’000 The amounts payable at the end of the year were: Trust Manager base fee – property expenses 961 1,071 Trust Manager base fee – management expenses 320 357 Trust Manager – other – 98 1,281 1,526
Trust Manager performance fee – property expenses 1,150 604
The Trust Manager is entitled to receive a base fee of 0.40% per annum of the net asset value of the Trust, subject to a minimum fee of £1,300,000 per annum. In addition, the Trust Manager may receive performance related fees for Real Estate Related Services if the performance of the Trust exceeds the average weighted total return of the agreed benchmark, being the average return on the IPD UK Other Balanced Property Fund Index Weighted Average Returns, on a three year rolling average basis. The amount of the fee is calculated as 17.5% of the out-performance generated. Total fees are capped at 0.80% of the net asset value of the Trust per annum.
The Trust Manager delegates certain property activities to Hermes Real Estate Investment Management Limited (the Real Estate Investment Manager). Trust Manager base fee – property expenses and Trust Manager performance fee – property expenses listed above are payable by the Trust Manager to the Real Estate Investment Manager.
BT Pension Scheme The BT Pension Scheme is a shareholder in the parent of the Trust Manager. The BT Pension Scheme co-invests with the Trust in the Tower Hill Retail Limited Partnership. Annual Report and Financial Statements 2021 51 INTRODUCTION
16. Reconciliation of net income to net cash inflow
2021 2020 Notes £’000 £’000 Net income before taxation 52,265 44,475 Interest receivable 5 (51) (529)
Share of results of investment in joint venture (1,655) (1,192) TRUST MANAGER’S REPORT Expenses transferred to capital 3 357 397 Increase in debtors (12,606) (7,456) Decrease in creditors (1,675) (7,023) Net cash inflow from operating activities 36,635 28,672
17. Commitments
2021 2020 £’000 £’000 Committed property investment activity 17,783 9,220
This relates to capital commitments in respect of approved capital expenditure on properties within the Trust’s portfolio, driven by £12.1 million to fund the acquisition of Medway Rochester, £1.0 million commitment to the new GOVERNANCE B&Q letting at Maybird Shopping Park and £0.8m commitment to refresh the mall and car park at Christopher Place.
18. Future Minimum Operating Lease Rentals The Trust had the following future minimum lease rental income receivable under non-cancellable operating leases for each of the following periods:
2021 2020 £’000 £’000 Not later than one year 55,352 53,998 FINANCIAL STATEMENTS Later than one year and not later than five years 160,484 174,888 Later than five years 163,858 180,927 379,694 409,813
19. Events After the Balance Sheet Date No events after the balance sheet date. INVESTOR INFORMATION 52 Federated Hermes Property Unit Trust
Valuers’ Report to the Trust Manager
In accordance with our appointment dated 13 May 2011, Market Value is defined in the Red Book as: we have prepared the following short Valuation Report. “The estimated amount for which an asset or liability We are instructed as Independent Valuers to provide should exchange on the valuation date between a the Trust Manager with our opinion of the Market Value willing buyer and a willing seller in an arm’s length of all freehold and leasehold properties, held by transaction after proper marketing and where the Federated Hermes Property Unit Trust, for financial parties had each acted knowledgeably, prudently reporting purposes. and without compulsion.”
We are of the opinion that the aggregate of the Market In our opinion there is no material difference in the Values of the freehold and leasehold properties as at Market Values now reported and the “Fair Values” of 25 March 2021 is £1,261,190,000 (One Billion, Two the properties, derived in accordance with the RICS Hundred and Sixty One Million, One Hundred and Valuation – Professional Standards VPS4 (7.1) Fair Ninety Thousand Pounds). Value and VPGA1 Valuations for Inclusion in Financial The outbreak of COVID-19, declared by the World Statements which adopt the definition of Fair Value Health Organisation as a “Global Pandemic” on used by the International Accounting Standards Board: 11 March 2020, has and continues to impact many “The price that would be received to sell an asset, or aspects of daily life and the global economy – with some paid to transfer a liability, in an orderly transaction real estate markets having experienced lower levels of between market participants at the measurement date.” transactional activity and liquidity. Travel, movement and operational restrictions have been implemented by As agreed with Federated Hermes Alternative many countries. In some cases, “lockdowns” have been Investment Management Limited, our valuations are applied to varying degrees and to reflect further based on information provided by them, upon which we “waves” of COVID-19; although these may imply a new have relied and which has not been verified by us. Our stage of the crisis, they are not unprecedented in the assumptions (as defined in the RICS Red Book) relating same way as the initial impact. to this information are set out below. The pandemic and the measures taken to tackle COVID- The valuer’s opinion of Market Value was primarily 19 continue to affect economies and real estate markets derived using recent comparable market transactions globally. Nevertheless, as at the valuation date property on arm’s length terms, where available, and appropriate markets are mostly functioning again, with transaction valuation techniques (the Investment Method). volumes and other relevant evidence at levels where an adequate quantum of market evidence exists upon We have assumed there to be good and marketable which to base opinions of value. Accordingly, and for the titles to the properties. The properties have been valued avoidance of doubt, our valuation is not reported as individually, not as part of a portfolio. We have made being subject to ‘material valuation uncertainty’ as oral enquiries of the appropriate planning authorities defined by VPS 3 and VPGA 10 of the RICS Valuation – and have taken into account, insofar as we are aware, Global Standards. unusual outgoings, planning proposals and onerous For the avoidance of doubt this explanatory note has restrictions or local authority intentions which affect the been included to ensure transparency and to provide properties. No allowance has been made in our further insight as to the market context under which the valuation for expenses of realisation or for taxation which valuation opinion was prepared. In recognition of the may arise in the event of development or disposals and potential for market conditions to move rapidly in our valuations are expressed exclusive of any VAT that response to changes in the control or future spread may become chargeable. Our valuations reflect usual of COVID-19 we highlight the importance of the deductions in respect of purchaser’s costs and, in valuation date. particular, full liability for UK Stamp Duty as applicable at the valuation date. We confirm that the valuation has been undertaken by us as qualified valuers in accordance with the current We have been provided with copies of headleases and edition of RICS Valuation – Global Standards, which leases in some instances. In respect of recent purchases incorporate the International Valuation Standards. we have been provided with copies of the Trust’s References to the “Red Book” refer to either or both of solicitors’ reports on title. The portfolio is valued by us these documents, as applicable. As required by the Red on a monthly basis for unit pricing purposes and the Book, some key matters relating to this instruction are properties are reinspected on a regular basis. set out below. Annual Report and Financial Statements 2021 53 INTRODUCTION
Our valuations are based on measurements which have Consequently, the valuation has been undertaken in the been provided by Federated Hermes Real Estate context of an evolving regulatory environment, with Investment Management Ltd and which were carried out higher levels of due diligence being undertaken, in in accordance with the RICS Code of Measuring Practice. respect of fire safety issues during acquisition and
In some cases the areas are provided following rent project construction, amongst market participants. TRUST MANAGER’S REPORT review or letting. We have assumed, except where we have been The adoption of IPMS (International Property informed to the contrary, there to be no adverse ground Measurement Standards), for the office sector, became or soil conditions or environmental contamination which mandatory with effect from 1st January 2016 for all RICS would affect the present or future use of the properties members replacing NIA (Net Internal Area) as set out and that the load bearing qualities of the site of each under the current Code of Measurement Practice (Sixth property are sufficient to support the buildings Edition). It has been agreed with you that until the new constructed or to be constructed thereon. definition of measurement has been adopted by the leasing market, rental analysis for the office sector will Save as otherwise disclosed, it has been assumed for the continue to be shown on a net internal area basis. As or purpose of valuation that the relevant interests in the when buildings are re-measured, we will present our properties are free of mortgage, charge or other debt analysis on a dual basis, namely IPMS and NIA. We have security and no deduction has been made for such not carried out structural surveys on the portfolio and charge or debt. are unable to report that the properties are free of any GOVERNANCE Our valuations assume that the properties would, in all structural fault, rot, infestation or defect of any other respects, be insurable against all usual risks including nature, including inherent weakness due to the use in terrorism, flooding and rising water table at normal, construction of materials now suspect. No tests were commercially acceptable premiums. Those properties carried out on any of the technical services. previously held within the Tower Hill Retail Limited The aftermath of the Grenfell Fire on 14 June 2017 has Partnership are reported at 50% interest directly resulted in a wholesale review of the regime relating to within FHPUT. fire safety. This is in addition to the public inquiry that We set out below the respective total valuations for the has been established to investigate the circumstances of directly held properties and Tower Hill Retail Limited the fire (and which is planned to continue in the first half Partnership properties, allocated by tenure.
of 2020). FINANCIAL STATEMENTS Directly Held Freehold Leasehold Total The Independent Review of Building Regulations and Properties:- £ £ £ Fire Safety led by Dame Judith Hackitt was published in Federated £1,136,915,000 £101,825.000 £1,238,740,000 May 2018. One of the key recommendations of the Hermes Hackitt Review was for a new Building Regulations Property Unit regime for residential buildings of 10 storeys (30m) or Trust Held as Investments: higher. The Government has not yet stated which measures recommended in the Hackitt Review will be Tower Hill £22,450,000 – £22,450,000 Retail Limited implemented or the timing of any such regulatory Partnership changes. However, it announced that Building Held as Regulations would be amended from 21 December 2018 Investments: to ban the use of combustible materials on the external Total £1,159,365,000 £101,825,000 £1,261,190,000
walls of new buildings over 18m containing flats, as well INVESTOR INFORMATION as, inter alia, buildings such as new hospitals, residential The valuer, on behalf of Knight Frank LLP, with the care homes and student accommodation. The ban also responsibility for this report is Hazel E Morris, MRICS, affects existing buildings undergoing major works or RICS Registered Valuer. Parts of the valuation have been undergoing a change of use. undertaken by additional valuers as listed on our file. We confirm that the valuer and additional valuers collectively Although this review is focused on fire safety of tall meet the requirements of RICS Valuation – Professional residential buildings, many property occupiers and Standards VPS 3 having sufficient current knowledge of owners across all property sectors have become far the particular market and the skills and understanding to more aware of fire safety issues since the Grenfell Fire. undertake the valuation competently. 54 Federated Hermes Property Unit Trust
We confirm that Knight Frank LLP meets the requirements of the Trust in the role of Independent Valuer having been appointed in 1996. The signatory of this report has been responsible for this instruction since June 2014. We further confirm that in relation to Knight Frank LLP’s preceding financial year the proportion of the total fees paid by the Trust to the total fee income of Knight Frank LLP was less than 5%. We recognise and support the RICS rules of conduct and have procedures for identifying conflicts of interest. We are providing an objective and unbiased valuation.
In accordance with our standard practice, we must state that this Valuation Report is for the use only of the party to whom it is addressed and no responsibility is accepted to any third party for the whole or any part of its contents.
If our opinion of value is disclosed to persons other than the addressees of this Report, the basis of valuation should be stated. Neither the whole nor any part of this Valuation Report nor any reference thereto may be included in any published document, circular or statement nor published in any way whatsoever whether in hard copy or electronically (including on any web-site) without our prior written approval of the form and context in which it may appear.
Yours faithfully
Hazel E Morris MRICS RICS Registered Valuer For and on behalf of Knight Frank LLP Annual Report and Financial Statements 2021 55
Independent auditors’ INTRODUCTION report to the Unitholders of Federated Hermes Property Unit Trust Report on the audit of the Conclusions relating to going concern TRUST MANAGER’S REPORT financial statements Based on the work we have performed, we have not identified any material uncertainties relating to events or Opinion conditions that, individually or collectively, may cast In our opinion, the financial statements of Federated significant doubt on the Trust’s ability to continue as a Hermes Property Unit Trust (the “Trust”): going concern for a period of at least twelve months from the date on which the financial statements are A give a true and fair view of the financial position of authorised for issue. the Trust as at 25 March 2021 and of the net revenue and the net capital losses of its scheme property for In auditing the financial statements, we have concluded the year then ended; and that the Trust Manager’s use of the going concern basis A have been properly prepared in accordance with of accounting in the preparation of the financial United Kingdom Generally Accepted Accounting statements is appropriate. Practice (United Kingdom Accounting Standards, However, because not all future events or conditions can comprising FRS 102 “The Financial Reporting GOVERNANCE Standard applicable in the UK and Republic of be predicted, this conclusion is not a guarantee as to the Ireland”, and applicable law), and the Trust Deed. Trust’s ability to continue as a going concern.
We have audited the financial statements, included Our responsibilities and the responsibilities of the Trust within the Annual Financial Statements (the “Annual Manager with respect to going concern are described in Report”), which comprise: the consolidated balance the relevant sections of this report. sheet as at 25 March 2021; the consolidated statement of total return, the consolidated statement of changes in Reporting on other information net assets attributable to unit holders and the The other information comprises all of the information in consolidated cash flow statement for the year then the Annual Report other than the financial statements ended; and the notes to the financial statements, which and our auditors’ report thereon. The Trust Manager is FINANCIAL STATEMENTS include a description of the significant accounting responsible for the other information. Our opinion on policies. the financial statements does not cover the other information and, accordingly, we do not express an audit Basis for opinion opinion or, except to the extent otherwise explicitly We conducted our audit in accordance with International stated in this report, any form of assurance thereon. Standards on Auditing (UK) (“ISAs (UK)”) and applicable In connection with our audit of the financial statements, law. Our responsibilities under ISAs (UK) are further our responsibility is to read the other information and, in described in the Auditors’ responsibilities for the audit doing so, consider whether the other information is of the financial statements section of our report. We materially inconsistent with the financial statements or believe that the audit evidence we have obtained is our knowledge obtained in the audit, or otherwise sufficient and appropriate to provide a basis for our appears to be materially misstated. If we identify an opinion. apparent material inconsistency or material INVESTOR INFORMATION misstatement, we are required to perform procedures to Independence conclude whether there is a material misstatement of the We remained independent of the Trust in accordance financial statements or a material misstatement of the with the ethical requirements that are relevant to our other information. If, based on the work we have audit of the financial statements in the UK, which performed, we conclude that there is a material includes the FRC’s Ethical Standard and we have fulfilled misstatement of this other information, we are required our other ethical responsibilities in accordance with to report that fact. We have nothing to report based on these requirements. these responsibilities. 56 Federated Hermes Property Unit Trust
Responsibilities for the financial statements and and determined that the principal risks were related to the audit posting inappropriate journal entries to revenue and management bias in accounting estimates and Responsibilities of the Manager for the financial judgemental areas of the financial statements such as statements the valuation of property investments. Audit procedures As explained more fully in the Responsibilities and performed included: Governance statement, the Trust Manager is responsible for the preparation of the financial statements in A Discussions with the Trust Manager, including accordance with the applicable framework and for being consideration of known or suspected instances of satisfied that they give a true and fair view. The Trust non-compliance with laws and regulation and fraud; Manager is also responsible for such internal control as A Reviewing relevant meeting minutes; they determine is necessary to enable the preparation of financial statements that are free from material A Identifying and testing journal entries, specifically any misstatement, whether due to fraud or error. journals posted as part of the financial year end close process; and In preparing the financial statements, the Trust Manager A Designing audit procedures to incorporate is responsible for assessing the Trust’s ability to continue unpredictability around the nature, timing or extent of as a going concern, disclosing as applicable, matters our testing; and related to going concern and using the going concern basis of accounting unless the Trust Manager either A Challenging assumptions and judgements made by intends to liquidate the Trust or to cease operations, or management in their significant accounting estimates, has no realistic alternative but to do so. in particular in relation to the valuation of property investments including involving our valuations experts Auditors’ responsibilities for the audit of the in the audit of this area. financial statements Our objectives are to obtain reasonable assurance about There are inherent limitations in the audit procedures whether the financial statements as a whole are free described above. We are less likely to become aware of from material misstatement, whether due to fraud or instances of non-compliance with laws and regulations error, and to issue an auditors’ report that includes our that are not closely related to events and transactions opinion. Reasonable assurance is a high level of reflected in the financial statements. Also, the risk of not assurance, but is not a guarantee that an audit detecting a material misstatement due to fraud is higher conducted in accordance with ISAs (UK) will always than the risk of not detecting one resulting from error, as detect a material misstatement when it exists. fraud may involve deliberate concealment by, for Misstatements can arise from fraud or error and are example, forgery or intentional misrepresentations, or considered material if, individually or in the aggregate, through collusion. they could reasonably be expected to influence the A further description of our responsibilities for the audit economic decisions of users taken on the basis of these of the financial statements is located on the Financial financial statements. Reporting Council’s website at: www.frc.org.uk/ Irregularities, including fraud, are instances of non- auditorsresponsibilities. This description forms part of compliance with laws and regulations. We design our auditors’ report. procedures in line with our responsibilities, outlined Use of this report above, to detect material misstatements in respect of This report, including the opinion, has been prepared irregularities, including fraud. The extent to which our for and only for the unitholders of the Trust as a body in procedures are capable of detecting irregularities, accordance with the Trust Deed and for no other including fraud, is detailed below. purpose. We do not, in giving this opinion, accept or Based on our understanding of the Trust, we identified assume responsibility for any other purpose or to any that the principal risks of non-compliance with laws and other person to whom this report is shown or into whose regulations related to breaches of UK regulatory hands it may come save where expressly agreed by our principles, such as those governed by Financial Conduct prior consent in writing. Authority, and we considered the extent to which non- compliance might have a material effect on the financial statements. We also considered those laws and regulations that have a direct impact on the financial statements. We evaluated management’s incentives and PricewaterhouseCoopers LLP opportunities for fraudulent manipulation of the financial Chartered Accountants, London statements (including the risk of override of controls), 16 June 2021 Annual Report and Financial Statements 2021 57
Independent Auditors’ INTRODUCTION Disclaimer Letter
PRIVATE AND CONFIDENTIAL Where disclosure of the Report or information contained in the Report is required by law or regulation, The Appointments Committee the recipient should i) ensure that a copy of this letter is
Federated Hermes Property Unit Trust disclosed with such information so that the other party TRUST MANAGER’S REPORT 150 Cheapside receiving the information is on written notice of the London terms on which the recipient itself had access to it; and EC2V 6ET ii) where legally permissible inform us promptly of the specific requirement to disclose and before making Dear Sirs any disclosure. Request for access to our report dated 16 June 2021 Notwithstanding our consent to the release of the Report You have asked us to agree to you providing to potential to the recipient, the Report remains addressed to you and customers (the “recipient”) a copy of our report dated it is a matter for you to decide whether the release of the 16 June 2021 (the “Report”), prepared in connection Report is appropriate in the circumstances. with the audit of your financial statements for the year In consideration for PricewaterhouseCoopers LLP ended 25 March 2021. consenting to you providing the Report to the recipient, To ensure that the recipient has a clear understanding you agree that you will not hold PricewaterhouseCoopers of the terms under which the Report is being LLP responsible for the consequences of us doing so; GOVERNANCE provided to them, a copy of this letter should accordingly PricewaterhouseCoopers LLP, its members, accompany the Report. partners, staff and agents shall have no liability to you, whether in contract or in tort (including without limitation We confirm that we give our consent to you doing so on negligence or breach of statutory duty) or in any way the clear understanding that the Report was addressed whatsoever, for any loss, damage, cost or expense to you and was prepared on your instructions as set out suffered by you as a result of the provision of the Report in our agreement dated 19 March 2021 and therefore to the recipient. Without conferring any greater rights the Report will not address or reflect the interests or than you would otherwise have at law, we accept that this circumstances of the recipient or any other third party. does not exclude any liability we may have for death or Furthermore, we accept no duty or responsibility and personal injury or for the consequences of our own fraud.
deny any liability to the recipient or to any other third FINANCIAL STATEMENTS party or otherwise, whether or not the Report influences This letter shall be governed and construed in the decision or action of the recipient or any other party. accordance with the laws of England. The Courts of England and Wales will have exclusive jurisdiction to If our report is given to the recipient, it should be made settle any claim, dispute or difference which may arise clear that receipt of the Report should not be a out of or in connection with this letter. substitute for enquiries the recipient should undertake for its own purposes and any independent advice it Yours faithfully, should obtain. You should also point out to the recipient that it will be bound by a duty of confidentiality to PricewaterhouseCoopers LLP, as well as to you, and that in respect of any Personal Data in the Report, they are required to comply with the General Data Protection PricewaterhouseCoopers LLP
Regulation. Consequently, the Report, and information INVESTOR INFORMATION obtained from it, must not be made available or copied, in whole or in part to any other person without our prior written permission which we may, at our discretion, grant, withhold or grant subject to conditions (including conditions as to legal responsibility or absence thereof).
PricewaterhouseCoopers LLP, 7 More London Riverside, London, SE1 2RT T: +44 (0) 2075 835 000, F: +44 (0) 2072 127 500, www.pwc.co.uk
PricewaterhouseCoopers LLP is a limited liability partnership registered in England with registered number OC303525. The registered office of PricewaterhouseCoopers LLP is 1 Embankment Place, London WC2N 6RH. PricewaterhouseCoopers LLP is authorised and regulated by the Financial Conduct Authority for designated investment business. 58 Federated Hermes Property Unit Trust
Investor Information 59
Information about the Trust INTRODUCTION
Investment Strategy and Objectives A The Trust can enter into derivatives transactions The investments of the Trust consist primarily of freehold which reference property or property return indices. and leasehold land and buildings. It is the policy of the The Trust cannot extend its derivatives exposure Trust Manager to spread these investments over a wide beyond 15% of the value of the Trust’s Gross Assets. range of properties, so as to maintain a balanced Derivatives transactions would be used to hedge investment portfolio with capital growth potential and or increase the Trust’s exposure to property when it beneficial yield. Properties may also be acquired, could be better achieved by the use of derivatives developed or otherwise dealt with jointly alongside than by conventional investment transactions. TRUST MANAGER’S REPORT other investors, particularly where these provide Unit The Trust can also enter into ancillary derivatives Holders with exposure to property assets of a type or transactions such as interest rate swaps. size that would not be appropriate for the Trust’s portfolio if they were to be held directly. Investment Constraints The Trust Manager follows policies and practices The Trust Manager may invest in property and property designed to enhance property returns whilst minimising related investments, the latter to include shares, units, risk. These are summarised as follows: bonds or debentures or other interests in any company A The portfolio of properties held by the Trust will be or collective investment scheme whose principal business diversified between sectors dependent upon the is property investment or development. The Trust potential returns from each sector. The Trust may Manager may also enter into Derivative Transactions also invest in non-core sectors of the property market where such investments derive their value from Property which display beneficial performance characteristics. or are based on a property return index. The aggregate of any such Derivative Transactions entered into must not A The Trust may invest alongside other investors in GOVERNANCE exceed 15% of the value of the Trust’s Deposited pooled investments where these provide exposure to Property in accordance with the terms of the Trust Deed. assets of a size, type or location that are expected to provide enhanced returns. The amount of exposure to The Trust Manager sets constraints on the proportions jointly held assets is carefully controlled in accordance that may be invested in indirect vehicles, developments with the Trust’s investment restrictions. and joint vehicles. These are monitored regularly by the FHPUT Committee, and the Real Estate Investment A Properties will be acquired where the characteristics Manager must comply with these constraints in the of the investment itself indicate outperformance investment management of the Trust but subject to through a combination of above average rental FHPUT Committee discretion. A summary of the growth prospects and advantageous movements in investment constraints is set out below:
capitalisation yield. FINANCIAL STATEMENTS A Co-investment – Not more than 10% of gross asset A Properties acquired will mainly be let to tenants of value to be held in investments alongside other a good financial covenant where risk of default is investors. considered to be low, although this will be balanced A Debt – No more than 30% of gross asset value. There with acquisition of investments which offer the are also constraints on the level of gearing set out in potential of future value enhancement as a result of the Trust Deed. active management. A Development – Exposure to be no more than 10% of A There will be a continuing programme of upgrading gross asset value. existing properties to improve rental growth A Cash (including deferred considerations) – Usually no prospects and capital values wherever appropriate by more than 10% of gross asset value, or subject to a refurbishment, redevelopment or lease restructuring. waiting list for new investors to be implemented from
A Before developments are undertaken, either directly time-to-time. INVESTOR INFORMATION or in association with third parties, a careful review of A Maximum relative property size – 10% of gross the risk to reward ratio of the potential development asset value. will take place to ensure an acceptable balance A Approval is required for any purchase of leasehold for that project and for the Trust as a whole, and interests with an unexpired term of less than 50 years, that development will be compliant with the Trust’s non-standard sectors and for the purchase of listed or investment restrictions. indirect investments. 60 Federated Hermes Property Unit Trust
A The aggregate value of any Derivative Transactions Further information about the Trust entered into must not exceed 15% of gross asset including its Units Dealings is available value. Any derivative transactions will be approved by the FHPUT Committee. inthe General Information Memorandum at www.fhput.co.uk Membership The Trust Deed restricts the holding of Units to Exempt Funds. An “Exempt Fund” is defined in the Trust Deed to mean any person (including a body of persons or body corporate), trust, fund or unincorporated association that is wholly exempt (otherwise than by reason of residence) from capital gains tax or corporation tax on capital gains in the United Kingdom or which may hold Units in the Trust without prejudicing the total exemption of the Trust from tax on capital gains under Section 100(2) of the Taxation of Chargeable Gains Act 1992 including, as the context may require, any person or persons in whom the assets comprised in any such trust, fund or unincorporated association are from time to time vested or the persons having the conduct or administration thereof. 61
Notice of Annual INTRODUCTION General Meeting
Notice is hereby given that the Annual General To be effective, forms of proxy must be sent by email, Meeting of the unitholders of Federated Hermes headed ‘FHPUT AGM’, to [email protected] Property Unit Trust will be held at 150 Cheapside, or deposited at the office of the Trust Manager – London, EC2V 6ET on Wednesday 14 July 2021 at Federated Hermes Property Unit Trust, Hermes
11.00am for the following purposes: Alternative Investment Management Limited, 150 TRUST MANAGER’S REPORT Cheapside, London EC2V 6ET, by 9am (and no later than 1 To receive the Reports of the Trust Manager and noon) on Tuesday, 13 July 2021. Auditors and the Financial Statements for the year ended 25 March 2021. A unitholder that is a corporation may also authorise 2 To re-elect members of the Appointments Committee: a person to be its representative at the AGM, however, as mentioned above, we would encourage unitholders 2.1 Sue Clayton retires, and being eligible, offers to instead appoint a proxy. If you wish to appoint a herself for re-election. corporate representative, you must provide their name, 2.2 Frances Davies retires, and being eligible, offers position and the authority granting them permission to herself for re-election. act as your representative by email, headed ‘FHPUT AGM’, to [email protected] by 9am (and 3 To elect Charles Maudsley as a member of the no later than noon) on Tuesday, 13 July 2021. A template Appointments Committee. corporate representative appointment letter can 4 To re-appoint PricewaterhouseCoopers LLP therefore be provided if required. A completed
as auditors of the Trust, to hold office until the corporate representative appointment letter will also GOVERNANCE conclusion of the next annual general meeting be required to be brought to the meeting in order for at which Financial Statements are laid before the a corporate representative to attend and vote. However, unitholders and that their remuneration be fixed by as previously mentioned we would encourage the Appointments Committee. unitholders to instead appoint a proxy.
Paul Clark does not wish to offer himself for re-election We understand that the AGM is valued as an opportunity and shall retire at the conclusion of the AGM. for unitholders to voice their opinions and to engage with the Manager and the Appointments Committee and Please note that as a result of the ongoing global therefore, we encourage unitholders to submit questions pandemic, the format of the AGM will remain in line with in advance of the AGM so that these can still be that of the 2020 AGM, to ensure that the meeting is held addressed. To ensure that your questions are included, in keeping with the latest government guidance to FINANCIAL STATEMENTS questions should be sent by email, headed ‘FHPUT tackle the spread of the virus and in particular the social AGM’ to [email protected] by Monday, distancing restrictions, whilst continuing to engage with 12 July 2021. In addition, in order to ensure that the AGM unitholders in the most appropriate way. remains open to unitholders, you will be able to dial into Whilst under the current restrictions unitholders are the AGM in order to listen to proceedings and ask any entitled to attend and vote at the AGM in person or via a additional questions. Dial in details will be circulated to corporate representative, we feel it prudent to encourage all unitholders via the Trust’s website https://www. unitholders to appoint either the Chairman or Katherine hermes-investment.com/uki/capabilities/private-markets/ Thompson, Company Secretary - Hermes Fund Managers real-estate/hermes-property-unit-trust/. Limited, as proxy to attend and vote in their place. We will continue to monitor any changes to government A proxy card is enclosed. As the quorum required for guidance over the coming weeks and will adapt our AGM the passing of the Resolutions, without adjournment, arrangements accordingly. Any updates to the AGM INVESTOR INFORMATION is unitholders present in person or by proxy representing arrangements will be communicated to you by the Trust not less than one tenth in number of unitholders (being Manager via the Trust’s website https://www.hermes- not less than two), you are particularly asked to appoint investment.com/uki/capabilities/private-markets/real-estate/ either the Chairman or Katherine Thompson as your hermes-property-unit-trust/. Unitholders are advised to proxy and to complete and return the proxy card. check the Trust’s website for the most up to date position. 62 Federated Hermes Property Unit Trust
Distribution Analysis and Expense Ratios
Quarter to Quarter to Quarter to Quarter to 24 Jun 29 Sep 25 Dec 25 Mar 2020 2019 2019 2020 Total Quarterly distribution £000 £000 £000 £000 £000 Net distribution 9,020 18,015 13,613 12,520 53,168
Quarter to Quarter to Quarter to Quarter to 24 Jun 29 Sep 25 Dec 25 Mar 2020 2020 2020 2021 Total Distribution per unit pence pence pence pence pence Net distribution 4.243 8.474 6.404 6.385 25.506 Date paid 15 Aug 20 15 Nov 20 15 Feb 21 15 May 21
The gross yield on net asset value at 25 March 2021 was 3.91%. The yield on offer at 25 March 2021 was 3.68%.
Net distribution per unit Yield on offer price at opening of year As at 25 March As at 25 March 30p 4.0%
3.5% 3.7 25p 3.6 3.6 25.5 3.4 24.4 24.1 3.0% 3.2 22.7 20p 22.5 2.9 21.1 2.5% 15p 2.0% 1.5% 10p 1.0% 5p 0.5% 0p 0.0% 2016 2017 2018 2019 2020 2021 2016 2017 2018 2019 2020 2021
Source: Hermes Real Estate Investment Management. Source: Hermes Real Estate Investment Management. Net income is distributed quarterly on 15 February, 15 May, 15 August and 15 November for the periods ended 25 December, 25 March, 24 June and 29 September respectively, or the business day prior to those dates. Income accrues monthly to unit holders to each registration date (usually 26th of each month). Distributions are made net of income tax and management expenses. The Trust Manager has no ability to defer/suspend contributions.
Quarter ending 25 March 2021 Quarter ending 25 March 2020 % of average % of average Total expense ratios £’000 NAV £’000 NAV Fund Management Fees 5,392 0.40% 6,044 0.40% Fund Operating Expenses 1,710 0.13% 1,588 0.11% Total Expense Ratio 7,102 0.53% 7,632 0.51% Property Expense Ratio 7,707 0.57% 9,683 0.64% Real Estate Expense Ratio 14,809 1.10% 17,315 1.15% Transaction Costs 6,372 0.47% 1,501 0.10% Performance Fees 546 0.04% 2,266 0.15%
The Trust’s portfolio turnover ratio was 9.26% (25 March 2020: -2.91%). The total expense ratios are calculated in accordance with AREF principles, which are available from www.aref.org.uk. Fund management fees include fees paid to the Trust Manager. Total fees payable to the Real Estate Investment Manager in a calendar year are capped at 0.80% of the December net asset value as described in note 14. Property expenses include service charge shortfalls and other property expenses. Fund operating expenses represent management expenses and valuation fees. These figures do not agree to note 3 and 4 of the financial statements because all expenses are included for the properties held in Joint Ventures for the purpose of calculating the TER. The performance fees as a percentage of average net asset value for the year can exceed 0.40% because they are calculated, and the fee cap is applied based on a net asset value at the end of a calendar year as described in note 15 to the financial statements whereas the Trust’s year end is 25 March. All the costs above are borne from the Fund and paid from income, with the exception of performance fees which is paid from capital. The Trust retains no commission and service charge rebates. The total expense ratios have been calculated consistently with prior years. 63
Unit Holder Information INTRODUCTION
Net Asset Value Per Unit Distribution Per Unit £8 30p £7 25p £6.81 £6.71 25.5 £6 £6.58 £6.53 24.4 24.1 £6.11 22.7 22.5 £5.97 20p £5 21.1 £4 15p £3 10p TRUST MANAGER’S REPORT £2 5p £1 3.8 3.9 3.6 3.3 3.2 3.9 £0 0p 2016 2017 2018 2019 2020 2021 2016 2017 2018 2019 2020 2021 Distribution, pence per unit (gross of tax, net of expenses) Gross yield on closing NAV (%) During the year 23,896,993 units were redeemed.
Bid Offer Price Variation (£) NAV and total number of units as at 25 March (million) £8 2000
£7 7.23 6.97 7.21 7.02 6.62 1,611 £6 6.34 6.48 6.51 6.33 1500 1,556 6.04 6.07 5.90 1,398 1,427 £5 1,326 1,280 £4 1000 GOVERNANCE £3 £2 500 £1 223 236 237 0.0 229 212 196 £0 0 2016 2017 2018 2019 2020 2021 2016 2017 2018 2019 2020 2021 Highest issue price Lowest cancellation price NAV No. of units The fund’s bid and offer prices and the NAV have been determined in accordance with AREF’s Fund Pricing Recommendations (August 2014). The fund is priced at the ‘Standard NAV’ for all investors.
The proportion of total number of units in issue Unit Prices
Number Offer Bid FINANCIAL STATEMENTS of Total Month (£) (£) unit Holding March 21 6.930 6.441 holders (%) February 21 6.848 6.365 < 3% 89 58.39% January 21 6.832 6.348 3% – 10% 6 30.70% December 20 6.803 6.356 10% – 20% 1 10.91% November 20 6.804 6.357 > 20% 0 0.0% October 20 6.792 6.339 Total 96 100% September 20 6.796 6.331 August 20 6.841 6.378 INVESTOR INFORMATION Number July 20 6.865 6.4 of Total unit Holding June 20 6.881 6.421 holders (%) May 20 6.941 6.478 Internal investors 0 0.0% April 20 7.022 6.553 External investors 96 100.0% Total 96 100.0% Largest investor 1 10.9% Ownership held by top 5 investors 5 34.4% 64 Federated Hermes Property Unit Trust
Alternative Investment Fund Managers Directive (AIFMD) – Remuneration disclosure
Hermes Alternative Investment Management Limited The table below provides an overview of the following: (“HAIML”), manager of Federated Hermes Property Unit Trust (“FHPUT”), is authorised by the FCA as an AIFM A Aggregate total remuneration paid by Hermes to all and appointed as such, with effect from 22 June 2014. employees that support HAIML; and A Aggregate total remuneration paid by Hermes to all Requirements for compliance with the AIFMD in the UK are HAIML AIFM Remuneration Code Staff. set out in the FCA Investment Funds sourcebook (FUND). Rule FUND 3.2.2 in this sourcebook requires certain Please further note that due to the roles of AIFM staff, information to be provided to prospective investors. this remuneration is in respect of the provision of services to other companies in Hermes as well as other The FCA’s general guidance on the AIFM Remuneration funds of HAIML. The remuneration figures have been Code (SYSC 19B) was published in January 2014. Under prorated against the AIFM’s AUM relative to Hermes’. the Code, the Remuneration Committee of Hermes ‘Fixed remuneration’ includes 2020 Leavers. Fund Managers Limited in its oversight of HAIML must make relevant remuneration disclosures no later than six Total months following the end of the financial year, splitting Remuneration Headcount (£’000s) remuneration into fixed and variable remuneration and breaking down remuneration for the category of AIFM Hermes employees that Code Staff which is defined as all staff whose also cover HAIML 416 2,031 professional activities have a material impact on the risk of which profiles of the AIFM or of the Alternative Investment Fixed remuneration 1,278 Funds (“AIFs”) the AIFM manages. Variable remuneration 753 Code Staff in HAIML are defined as the directors, Hermes Code Staff members of the management board, employees employees that also performing a significant influence function and other cover HAIML 28 704 senior managers and head of control functions. of which Hermes Remuneration Committee approves the list of Senior Management 6 247 AIFM Code Staff annually. In addition, AIFM Code Staff are Other Code Staff 22 457 notified of their status and the implications of this annually.
Approach to Remuneration AIFM activities FHPUT is managed by HAIML, which is a subsidiary of The following table provides an overview of the size and Hermes Investment Management (“Hermes”). composition of the funds managed by HAIML, including FHPUT. This shows the total number of funds managed, The Remuneration Committee of Hermes has established the split between, and proportions of AIF, UCITS and a Remuneration Philosophy/Policy and its purpose is to other funds. ensure that the remuneration of employees is consistent with and promotes sound and effective risk management Number AUM (GBP) and does not encourage risk-taking which is inconsistent of As at % of Funds 31 Dec 2020 AUM with the risk profiles, rules or instruments of incorporation across Hermes and the AIFM. HAIML 2 1,486,835,577 100 of which This approach applies to HAIML and the AIFs it manages. Alternative investment funds 2 1,486,835,577 100 Employee remuneration disclosure UCITS funds The total amount of remuneration paid by HAIML to its Other funds 0 – – staff is zero, as all AIFM staff are employed by Hermes. 65 INTRODUCTION
Glossary AIFM Remuneration Code Staff Total remuneration will be reported for all AIFM Remuneration Code Staff as at the AIF’s financial year- end. Broadly speaking, AIFM Remuneration Code Staff are those employees who are considered could have a
material impact on the risk profile of HAIML or any of the TRUST MANAGER’S REPORT AIFs it manages (including FHPUT).
AuM Assets under management are measured at fair market value on the relevant cut-off date. The latest available valuations are reported in the Annual Report & Accounts.
Other Code Staff AIFM Remuneration Code Staff that are not considered Senior Management, per the definition below.
Other funds Those funds that are not classified either as alternative investment funds or UCITS funds. GOVERNANCE
Senior Management AIFM Remuneration Code Staff who are members of the AIFM’s board.
Total Remuneration Total remuneration reported will be the sum of salary, cash bonus, any deferred annual bonus, the fair value of any long term incentive awards, plus the estimated value of any pension and benefits in kind, awarded in respect FINANCIAL STATEMENTS of performance in the reportable financial year, i.e. 1 January 2020 – 31 December 2020. INVESTOR INFORMATION 66 Federated Hermes Property Unit Trust
Alternative Investment Fund Managers Directive (AIFMD) – Risk profile and risk management systems disclosure
Hermes Alternative Investment Management Limited also make it more difficult for the Trust to accurately (“HAIML”), manager of Federated Hermes Property Unit value its investments or to sell investments on a timely Trust (“FHPUT”), is authorised by the FCA as an AIFM basis. These developments may also adversely affect and appointed as such, with effect from 22 June 2014. the broader economy, which in turn may adversely affect the ability of tenants to make rental and other Requirements for compliance with the AIFMD in the UK payment when due. Such developments could, in are set out in the FCA Investment Funds sourcebook turn, reduce the value of assets owned by the Trust (FUND). Rules FUND 3.2.5R and FUND 3.2.6R in this and adversely affect the Net Asset Value of the Trust. sourcebook requires certain information to be provided A to prospective investors. Contractor risk – Investment properties and developments are operated and maintained by external parties under contractual relationships. Poor The current risk profile of the AIF performance or insufficient business management The Trust is a property unit trust that invests in real may lead these third parties to cease trading which property in the UK. Real estate investments involve a may negatively affect related investments. high degree of risk that can result in substantial losses. A Regulatory and political risk – The UK Government The Trust’s investment performance may be volatile, and or its regulatory agencies may take actions that affect investors could potentially lose all amounts invested. the way in which the Trust or its investments are regulated. This could limit or preclude the Manager’s The Manager has procedures in place to mitigate these ability to achieve the Trust’s investment strategy and risks, as documented below, however all prospective objectives. Investors must rely on their own examination of the legal, taxation, financial and other consequences of an A Due diligence may not reveal all material risks investment in the Trust including the merits of investing related to an investment – Before the Trust and the risks involved. makes an investment, the Manager will conduct due diligence on the investment to the extent that An investment in the Trust will involve significant risk for the Manager determines in its discretion to be a number of reasons including, but not limited to, the reasonable and appropriate based on the facts and following: circumstances applicable to the investment. External consultants, surveyors, legal advisers and other A Future and past performance – The performance professionals may be involved in the due diligence of the Trust’s prior investments is not necessarily process to varying degrees depending on the type indicative of the Trust’s future results. While the of investment. Nevertheless, when conducting due Manager intends for the Trust to make investments diligence, the Manager and the Trust will only be that have estimated returns commensurate with the able to rely on resources available to them, including risks undertaken, there can be no assurances that any information provided by the seller of the investment targeted internal rate of return will be achieved. On and, in some cases, third party investigations. any given investment, loss of principal is possible. Accordingly, there can be no assurance that the due A Manager’s personnel – There can be no assurance diligence process carried out with respect to any that the employees of the Manager will continue investment will reveal or highlight all relevant facts to provide services to the Manager throughout the that may be necessary or helpful in evaluating such Trust’s life. The loss of key personnel could have a investment. There can also be no assurance that such material adverse effect on the Trust. an investigation will result in an investment being successful. A Market risk – The property market in the UK is susceptible to instability which could adversely affect the value of the Trust’s investments. Volatility may 67 INTRODUCTION
The risk management systems employed by the AIFM to manage those risks The Manager has numerous controls in place to mitigate the risks identified above, these include the following: A Investment team – The Manager’s investment team conducts detailed analysis and reviews of investment
opportunities and prepares financial models to TRUST MANAGER’S REPORT support the recommendation of investments. The team has significant investment experience with the Fund Manager having over 20 years’ experience in the industry. A Investment process – The risks are mitigated through the application of a consistent and well established investment process. A Investment Committee – The Manager has a formally constituted investment committee which considers and if sought fit, approves all investments. Key investment information, material risks and their mitigants are presented to the Investment Committee at formal interactions during the investment process
and are covered in investment papers as well as GOVERNANCE verbal reports. Upon receipt of a final investment recommendation, the Investment Committee will decide on whether to proceed with or decline the opportunity, or conduct further due diligence. This decision is documented in the Investment Committee minutes, copies of which are retained. A FHPUT Committee – In June 2013, the Manager formed the FHPUT Committee which approves investment strategy and sets and monitors a framework of investment constraints within which the Trust Manager must act. These constraints are FINANCIAL STATEMENTS designed to protect investors’ interests by limiting exposure to various risks. A Diversification – The Manager maintains a balanced investment portfolio diversified between sectors, spreading risks over a wide range of properties. A External legal counsel – The legal documentation pertaining to the execution of transactions is reviewed, negotiated and finalised by external legal counsel in consultation with the Investment Team. A Leverage – The Trust has a maximum leverage limit
of 130%. INVESTOR INFORMATION 68 Federated Hermes Property Unit Trust
Further Information
For more information about the Trust go to www.fhput.co.uk or contact [email protected].