HERMES PROPERTY UNIT TRUST INTERIM FINANCIAL STATEMENTS FOR THE PERIOD ENDED 29 SEPTEMBER

Transcription

1 HERMES PROPERTY UNIT TRUST INTERIM FINANCIAL STATEMENTS FOR THE PERIOD ENDED 29 SEPTEMBER

2 Contents Introduction Key Features and Statement of Principles 1 Financial Highlights 2 Chairman s Report 3 Trust Manager s Report Strategic Overview 4 Trust Manager s Report 7 Property Portfolio 15 Responsible Property Investment Strategy 17 Governance Responsibilities and Governance 18 Appointments Committee & Advisors 20 Financial Statements Unaudited Financial Statements 21 Valuers Report to the Trust Manager 33 Investor Information Information about the Trust 35 Distribution Analysis and Expense Ratios 37 Unit Holder Information 38 Property Listing 39 Further Information 40

3 Key Features and Statement of Principles Interim Report The Trust is an unauthorised, tax exempt open-ended property unit trust and an Alternative Investment Fund ( AIF ) as defined in the UK Alternative Investment Fund Managers Regulations 2013 (SI 2013/1773). It was created in 1967 to enable Unit Holders to participate mutually in a professionally managed scheme investing in real property without prejudicing their tax exempt status whilst also freeing them from the burden of management. The objective of the Trust is to achieve investment returns consistent with a diversified and actively managed UK property portfolio. Key Features The Trust is a balanced property unit trust which owns a diversified portfolio of real estate investments on behalf of underlying Unit Holders. Its key features are as follows: Performance objective To outperform the benchmark by 50 basis points per annum on a three year rolling basis. Investment philosophy A core/satellite approach to portfolio construction. This reflects a core portfolio of property investments expected broadly to match property market returns, but with prospects for enhanced returns through exposure to higher risk/ return investments in the satellite component. Fees To ensure alignment between the Trust Manager and returns to Unit Holders, the Trust Manager receives a base fee which is augmented with a performance fee for outperformance against the Trust s benchmark. Fees payable to the Trust Manager are capped, as detailed on page 31 in note 15 of the Financial Statements. The Appointments Committee is wholly independent of the Trust Manager and is responsible for the appointment, removal and remuneration of both the Trust Manager, the Trustee and the independent auditors, each subject to ratification by Unit Holders, and the independent valuers. Statement of Principles Hermes Property Unit Trust operates under the following core principles: The Trust observes high standards of integrity and fair dealing at all times, in accordance with the obligations set out in the Trust Deed for the benefit of Unit Holders. The Trust maintains an open dialogue with Unit Holders. As part of this it provides Unit Holders with timely information enabling them to make informed decisions about the Trust. The Trust seeks to enhance the capital and income potential of its assets in a manner consistent with its risk objectives and investment policy. The Trust will manage its assets taking into consideration the relevant environmental and socioeconomic risks and opportunities which contribute to the potential of an investment to deliver long term investment performance for Unit Holders. The Trust actively engages with its occupiers to develop long term relationships in order to maximise portfolio value for its Unit Holders. The Trust complies with The Association of Real Estate Funds Code of Practice and with relevant codes or standards in force that apply to the Trust. The Trust is committed on a sound commercial basis to embedding the principles of responsible property investment in all of its real estate investment and asset management practices. Further information about the Trust including its Strategy and Objectives and Constraints is available in the General Information Memorandum at and on pages 35 and 36. Further information on the Appointments Committee and Trust Manager is set out on page 20. INTRODUCTION The Trust Manager is the legal operator of the Trust.

4 2 Hermes Property Unit Trust Financial Highlights at 29 September 2018 Over a 10 year period the Trust is the top performing fund in its peer group Unit holders funds 1,607 million (September 2017: 1,463 million) Total return to unit holders 5.2% for the six months ended September 2018 (September 2017: 5.4%) Net asset value per unit 6.80 (September 2017: 6.33) Distribution per unit pence for the six months ended September 2018 (September 2017: pence) Unit holder performance total returns for the period (% p.a.) As at 29 September % 12% 9% 6% 3% % 6 Months One Year Three Years Five Years Ten Years HPUT AREF/IPD UK Other Balanced Property Funds Weighted Average Returns Source: AREF/IPD UK Quarterly Property Funds Indices.

5 Chairman s Report Interim Report INTRODUCTION David Nicol Chairman, Appointments Committee Performance I am pleased to report that during the six month period ended 29 September 2018 the Trust delivered a total return of 5.2% compared to its benchmark, AREF/IPD Other Balanced Property Fund Index, of 4.0%. The Trust has maintained its excellent long term performance and is in the top quartile over one, three, five and ten years and remains the top performing fund both in its benchmark and also within the wider group of All Balanced UK Funds over a ten year period. The distribution for the six month period has decreased by 0.82 pence compared to the previous six month period to pence, largely due to an increased level of strategic voids in the portfolio giving flexibility around future opportunities. Further details of the asset management activities which have contributed to the performance of the Trust are included in the Trust Manager s report. During the six month period, the Trust acquired four properties totalling 64.8 million, two of which adjoin existing holdings, and completed on the sale of a further two properties for 41.5 million. Appointments Committee The Committee are in the process of recruiting a new member of the committee after the retirement of Caroline Burton at the AGM. Updates will be provided to unit holders in due course. Details of the Appointments Committee are included on page 20. Investors and financing arrangements Interest from new investors remains strong, and the Trust Manager continues to operate a waiting list in order to manage investor demand and protect performance for existing unit holders. During the period 0.6 million new units were created for 3.9 million. There was considerable activity in the secondary market with 59.3 million being transacted at an average of 3.5% over net asset value by both new and existing investors demonstrating the strength of interest in the Trust. Hermes Investment Management The acquisition of 60% of Hermes Investment Management by Federated Investors, Inc. completed on 2 July The BT Pension Scheme has retained a 29.5% share and Hermes management hold an aggregate 10.5% interest. The Appointments Committee received assurance before the transfer completed from the Trust Manager that there would be no changes to the investment philosophy and running of HPUT and is satisfied that this is the case. Trustee As previously reported, NatWest plc is transferring Trustee and Depositary services to a new entity wholly owned within the same group called NatWest Trustee and Depositary Services Limited. This change of Trustee was approved at the AGM on 11 July 2018 and took effect for the Trust from 15 October There are no changes in the team or services provided and, as expected no operational impact has resulted. Outlook The portfolio remains well placed to continue to deliver good returns for investors in the current competitive market conditions. The Trust Manager has identified a number of asset management opportunities with which to drive performance and seeks to continue to invest cautiously whilst also considering any attractive opportunities for the disposal of existing assets. David Nicol Chairman 19 November 2018

6 4 Hermes Property Unit Trust Trust Manager s Report Strategic Overview 1. Performance 2. Portfolio Activity Aim The Trust aims to outperform the benchmark by at least 50 basis points per annum on a rolling three year basis but with an emphasis on long term sustainable returns. The Trust Manager continues to focus on asset management to maximise the long term value of assets; including change of use, extension and refurbishments and regearing of leases to maximise income from existing tenants. Acquisitions and disposals are carefully planned to maximise opportunities and to minimise risk. Activity During the six month period ended September 2018 the Trust has delivered total returns of 5.2% compared to the benchmark AREF/IPD Other Balanced Property Fund Index of 4.0%. The Trust continues to deliver top quartile returns over the 1, 3, 5 and 10 year periods to its investors and is the top performing fund in its benchmark over 10 years. The distribution has decreased from to pence per unit for the period, in part due to an increased level of strategic voids in the portfolio. A number of investment transactions were completed during the six month period, with the Trust continuing to be a net investor. There were four acquisitions and two disposals, with net activity totaling 23.3 million. Included in this, is the deferred consideration of million received by the Trust in August. Outlook The UK economy has continued to grow and PMI data points to further expansion. Whilst there is fragility in certain property sectors, there is good rental and capital growth in others. With property having a significant income advantage over many other types of investment, combined with good interest from international investors in certain property types, the outlook should be reasonably robust. The Trust is focusing on significant ongoing asset management activities to protect and enhance the Trust returns and seeking investment opportunities that will unlock value through prudent asset management initiatives. Risks & Opportunities The portfolio has been positioned to withstand these uncertainties with potential growth from asset management activities rather than reliance on market movements. The terms of the UK's exit from the EU have yet to be agreed and this uncertainty is likely to weaken occupier and investment market confidence in the coming months. The Trust s transactional activity over the period has been modest, with acquisitions of good quality investments in South East locations. Asset management activity has improved the rental potential of the portfolio.

7 Interim Report Portfolio Attributes 4. Responsible Property Investment (RPI) The Trust Manager aims to position the portfolio to continue to deliver strong long term performance for unit holders whilst maintaining a low risk profile. Activity during the period has continued to be focussed on positioning the portfolio for the future. The Trust continues to have a deliberate underweight exposure to the retail sub-sectors which include Unit Shops, Shopping Centres and Retail Warehouses, a strategic decision which reduces the Trust s exposure to the structural shifts seen within the retail sector especially the impact of the internet on the type and size of modern occupier requirements. The Trust Manager integrates responsible property investment into its investment and asset management processes, it has defined targets and tools to deliver and monitor their implementation. The Trust has been awarded a 4 star rating under GRESB for the last four years. There is a comprehensive responsibility programme, which incorporates refurbishments, property management and occupier and community engagement. TRUST MANAGER S REPORT The Trust s portfolio is considered to be well positioned for the future given where the concentration of growth and opportunity is expected. A number of asset management activities are expected to improve the income yield and void rate over the next year as tactical voids decrease through lettings or property disposals. There has been both an increase in the importance of RPI to investors and an increase legislation with the Minimum Energy Efficiency Standards (MEES) which has led to a demand for deeper integration of RPI in real estate management. Sustainability in commercial property is now expected to contribute towards investment outperformance in the medium term. Although investing across the UK, the Trust's portfolio is tilted towards London and the South East of England where economic growth is anticipated to be stronger and more sustainable. The Trust Manager is continuing to assess the developing regulations and ensuring compliance with these as well as engaging actively to ensure the regulatory framework favours investments in cost effective sustainability opportunities.

8 6 Hermes Property Unit Trust Broken Wharf House, London In May 2018 planning permission was granted for a change of use of the office building to serviced apartments. The Trust Manager had previously agreed the terms of a lease with SACO (serviced apartment operator) which was subject to achieving planning permission for the change of use. Under the terms of the lease, the tenant is responsible for undertaking the physical works of conversion at the property and this will be monitored and funded by the Trust. The estimated cost will be 17 million to create a fully fitted serviced apartment scheme of 113 units. On completion of the works and a short rent free period, the lease to SACO will provide a base rent of 2 million per annum to the Trust (this is subject to RPI increases) together with a turnover rent equivalent to 42.5% of EBITDA. The Trust reserves an option to convert the lease to a management agreement after five years. The lease was completed in September and the works commenced in October 2018.

9 Trust Manager s Report Interim Report Chris Mathew Fund Director I am delighted to hereby present the Trust Manager s Report for the six months to 29 September The Trust has delivered a positive total return to unit holders of 5.2% over the six month period outperforming the AREF IPD Other Balanced Property Fund Index of 4.0%. The Trust has continued to deliver top quartile returns to unit holders over 1, 3, 5 and 10 year periods. As reported in March 2018, I am pleased to report that the Trust remains the top performing fund both in its benchmark and also within the wider group of All Balanced UK Funds over a 10 year period. Although total returns have been relatively strong during the period of this report there has been a significant divergence in the performance of the various types of property in which the Trust invests. The performance of the Trust s industrial investments, which represent almost one third of the portfolio, was very encouraging and increased the Trust s overall return by 1.9%. However, the market environment for retail investments, which represent just under 20% of the Trust s portfolio, has been very challenging indeed and in aggregate these assets reduced the overall return by 1.6%. Although the Trust is underweight in its exposure to retail investments, it has not been immune from the corporate restructurings and tenant failures that have been a characteristic of the retail sectors in recent times. I have made specific reference to the impact of this in the asset management section of this report. The pace of investment during the period has been relatively modest as the Manager has continued to invest prudently in buoyant market conditions. The Manager has operated a Waiting List to regulate the issuance of new units during the period, both to ensure levels of cash held in the portfolio remained low and the Trust fully invested, but also to enable the disposal of existing investments to maximise the performance potential of the portfolio. During the six months to 29th September 2018, there have been a number of important activities which are noted below with further detail on each provided later on in this report. Asset Management during the period there were a number of notable activities within the portfolio and these have added to the Trust s capital return whilst reducing risk and securing future rental income for unit holders. Due to some of this planned activity the void rate in the property portfolio over the period was 8.0% of estimated rental value as at 29 September 2018 compared with the benchmark of 7.2% at the same date. TRUST MANAGER S REPORT HPUT Valuation Summary As at 29 September 2018 Directly Held Properties Valuation ( m) Net Income ( m) Initial Yield (%) Net ERV ( m) Reversionary Yield (%) Unit Shops Supermarkets Shopping Centres Retail Warehouses Offices Industrials Leisure/Other Sub Total 1, Note: Valuations are stated before adjustments for tenant incentives of 10.2 million as shown in note 9 on page 29.

10 8 Hermes Property Unit Trust Trust Manager s Report continued Transactional activity the Manager made 93.3 million of acquisitions and disposals during the period with net investment of 33.1 million. Included within the purchases was a small high street shop in Croydon, thus completing the assembly of a larger site for future development. Subscriptions - over the period 3.9 million of new units were created and 59.3 million of units were matched on the secondary market. All secondary market transactions were at premiums to prevailing NAVs per unit which provides a good indication of investor confidence in the Trust. Responsible Property Investment In September 2018 the Trust was awarded four Green Stars in the Global Real Estate Sustainability Benchmark in recognition of the Trust s ongoing emphasis on sustainability. HPUT Performance Attribution We have estimated the major drivers of overall portfolio performance within the Trust s property investment portfolio for the six months to September The chart below shows relative return performance at sub-sector level within the Trust s portfolio. This attribution analysis is relative to the Trust s property portfolio return and not to the benchmark. Attribution of HPUT sub-sector returns relative to Trust portfolio performance Six Months to 29 September 2018* 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% 1.91 Industrial 0.65 Other Supermarkets Unit Shops City Offices West End Offices Shopping Centres Rest of UK Offices Retail Warehouses At sub-sector level, the Trust s Industrial sector delivered the strongest contribution to portfolio return by increasing the overall return by 1.9% and followed by Other sector with an increased overall return contribution of 0.7%. During the same period the Trust s retail warehouses and Rest of UK offices sectors reduced returns by -1.0% and -0.4% respectively. At property level, the investments that delivered the strongest contribution to portfolio return were the Trust s industrial investments, Charlton Gate in South East London and Reading Metropolitan in Reading: both increased in value as a consequence of positive investor sentiment for industrial assets. The assets that most reduced the Trust s portfolio return during the quarter were the Maybird Shopping Park in Stratford-upon-Avon and the Trust s Shopping Centre investment in St Albans. Investor sentiment for retail investments is poor and both properties have been impacted by tenant restructuring with tenants affected including New Look, Carluccio and Prezzo. Portfolio Structure As at September 2018 Unit Shops/ Supermarkets Shopping Centres Retail Warehouses City Offices West End Offices South East Offices Rest of UK Offices Industrial Leisure/Other Cash HPUT Benchmark * Weighted contribution relative to fund return Source: Hermes Real Estate Investment Management, September 2018.

11 Trust Manager s Report continued Interim Report Portfolio Value and Debt As shown on page 7, the Valuation Summary shows that the Trust s overall property portfolio was valued at 1,564.3 million as at 29 September There were 85 direct properties in the portfolio as at this date. The Trust continued to hold one joint venture which represented 1.6% of the total portfolio value, and no indirect assets. The Trust held 41.5 million of cash for investment which represented 2.6% of the Trust s overall portfolio which is slightly lower than the benchmark (4.1%). As at end of September 2018 the Trust had no gearing and continued to hold an undrawn debt facility of 75 million. Sector Weightings The Trust s structure weightings compared to the benchmark are shown in the chart on page 8. The Trust s exposure to Central London Offices has reduced significantly over the past 12 months. In the last Interim Report (September 2017) the Trust held 20.8% of its assets in these sub-sectors, but this had reduced to 13.1% at 29th September The Annual Financial Statements noted the sale of 2 Cavendish Square, and Broken Wharf House has been reclassified given its change of use to serviced apartments. Although the Trust continues to be overweight in Central London Offices, the Manager remains comfortable with this exposure given the good performance potential of the investments it holds. The Trust s exposure to offices outside Central London represented 21.5% of the portfolio compared with the benchmark at 17.2%. This has increased a little in recent months with the purchase of the office in Hurley in May. The Trust remains with a deliberate underweight exposure to the retail sub-sectors, including Unit Shops, Shopping Centres and Retail Warehouses, compared with its benchmark. Through acquisitions and capital growth, the Trust has increased its exposure in the Industrial sector: at 30.5% of the portfolio this was marginally above the benchmark weighting of 28.4% at end September The Trust's alternative sector, which invests in leisure, hotels and other assets, currently represents 12.7% of the portfolio compared with the 10.6% of the benchmark. The increased position has been mainly attributed to the change of use of the City of London office building Broken Wharf House into serviced apartments, noted later in the report. Transactions Over the period the Trust completed the purchases of an office building in Maidenhead (May), an industrial estate in Newbury (July) and completed the site assembly of the site in North End Croydon (number 73) for a total amount of circa 63 million. At the same time contracts were exchanged for the sale of the Training and Conference centre in Yarnfield ( 16 million) and the Trust received payment of a deferred consideration, together with an overage payment following the sale of the Porter Building, Slough: this amounted to 14.1 million, of which 3.4 million was overage. Purchases Horizon, Hurley, Maidenhead - In May 2018 the Trust purchased a Freehold multi-let office building in Hurley for 28 million ( 339 per sq. ft.), reflecting a net initial yield of 6.0%, an equivalent yield of 6.25% and a reversionary yield of 7.0%. The building is set in 11 acres and there is likely to be the opportunity for alternative uses in the longer term, subject to planning. The property is fully let to 5 tenants on 6 leases producing a total rental income of 1,786,018 per annum, reflecting an average passing rent of per sq. ft. 73 North End, Croydon - For the purposes of site assembly, in April 2018 the Trust purchased a freehold retail premises with basement and upper floor accommodation for 7.65 million. The property adjoins the existing HPUT assets, 71 North End and North End in the centre of Croydon. With this transaction, the Trust has gained control of an unbroken terrace of seven properties which have a significant redevelopment potential, subject to planning. Nexus Park, Newbury - In July 2018 the Trust purchased a multi-let industrial estate located in a strong South Eastern industrial market for 27.5 million, reflecting an initial yield of 4.85% (including rental guarantees), an equivalent yield of 4.80%, and a capital value per sq. ft. of 145. There is a strong occupier interest for the four newly developed, but vacant, industrial units which are subject to 12 month rental guarantees. The principal tenant is SPX which occupies 109,739 sq. ft. on a lease expiring in 2026 (tenant break in 2021). Sales Yarnfield Park Training & Conference Centre, Yarnfield - In September 2018 the Trust exchanged for the sale of the property, with completion in December 2018 for 16.0 million reflecting a net initial yield of 6.3% and a premium to valuation as at end of August 2018 of 9.5% (purchased in June 2015 for 9.5 million). The deferred completion will provide the Trust with additional rental income. TRUST MANAGER S REPORT

12 10 Hermes Property Unit Trust Portfolio Activity Acquisition Horizon, Hurley, Maidenhead In May 2018, the Trust purchased a freehold multi-let office building in Hurley for 28 million, or 339 per sq. ft. The office building provides a total of 82,656 sq. ft. Grade A office accommodation and the property is fully let to 5 tenants across 6 leases producing a total rental income of 1,786,018 per annum. Acquisition Nexus Park, Newbury In July 2018 the Trust purchased of a freehold multi-let industrial estate in Newbury for 27.5 million. There is strong occupier interest for the four newly developed, but vacant, industrial units which are subject to 12 month rental guarantees. The principal tenant is SPX which occupies 109,739 sq. ft.

13 Trust Manager s Report continued Interim Report The Porter Building, Slough (Deferred Consideration, capital repayment with overage) In 2012 the Trust purchased the office building for 8.9 million and subsequently sold a long lease to a developer to build a new office building, which completed in late HPUT continued to own the freehold interest in the property, with an element of the sale price deferred, but secured by the lease. In August 2018 the building was sold and the Trust s deferred consideration of million was received. Additionally, the Trust has received an overage payment of 3.8 million, of which 0.4 million was received in October Asset Management Over the past 6 months, there have been a number of good outcomes from asset management activity which have helped to drive returns for the Trust. Asset management includes all activities connected with maintaining and improving the rental income from a property investment, but also the refurbishment, extension and repositioning of assets. The most significant of these are set out below: Lettings Erdington Industrial Estate, Birmingham: In May 2018 the Manager secured a number of important lettings in three vacant units of the estate covering a total area of 72,000 sq. ft. An agreement for lease was exchanged with FGF Ltd for units on a 10 year term to July The passing rent on the 57,000 sq. ft. units was agreed at 326,000 per annum after tenant incentives. The letting of unit 23 was completed with Zeus Juice Ltd for a 5 year term to May 2023 and this will generate rental income to the Trust of 84,000 per annum after tenant incentives. Industrial Investments: The Trust has secured a number of new lettings and lease renewals during Q3 which will improve the income return of the portfolio. At Eagle Park, Warrington a vacant unit of 14,000 sq. ft. was let to Penlaw & Co for 10 year term with a break at the 5th year. The passing rent, after tenant incentives, was agreed at 94,830 per annum. At Guinness Road Trading Estate, Manchester, a lease was renewed with an existing tenant on 21,000 sq. ft.: KBF Enterprises have renewed for a term of five years with a passing rent of 105,000 per annum. At West Horndon Industrial Estate, 140,000 sq. ft. of vacant warehousing have been let on a 5 year term and they will generate an aggregated annual income of 525,000 per annum for the portfolio after tenants incentives. Projects Broken Wharf House, London - In May 2018 planning permission was granted for a change of use of the office building to build 113 serviced apartments. The Manager has agreed a lease with SACO for the tenant to refurbish and operate the completed development. The cost of the refurbishment project is expected to be just over 17 million and this will create a fully fitted serviced apartment scheme with completion expected in the summer of This will be accretive to the Trust s total return, it will rejuvenate a prominent building on the River Thames and this will secure rental income for the Trust following completion of the project. Given the change in use, this investment has been reclassified from City of London offices to Leisure / Other Church Street, Cardiff - Over the last few months the Manager has been working on a refurbishment project involving the Trust s vacant retail investment in Cardiff City Centre. The units have been pre-let to operators in the restaurant/retail sector who will occupy the units at completion of the works. Once complete the investment will generate a rental income for the Trust of 512,000 per annum after tenants incentives and this investment will dramatically improve what was a relatively tired asset. The Trust will fund the capital works up to 4 million and the project is expected to complete in March TRUST MANAGER S REPORT

14 12 Hermes Property Unit Trust Asset Management Erdington Industrial Estate, Birmingham In May 2018 the Trust Manager secured lettings in three vacant units of the estate. An agreement for lease was exchanged with FGF Ltd for units 10 and 11 on a 10 year term to July 2028, with passing rent on the 57,000 sq. ft. units agreed at 326,000 per annum after tenant incentives. Additionally, the letting of unit 23 was completed with Zeus Juice Ltd for a 5 year term to May 2023 with passing rent agreed at 84,000 per annum after tenant incentives. Guinness Road Trading Estate, Trafford Park, Manchester In September 2018 the Trust Manager completed a lease renewal with the current tenant KBF Enterprises currently occupying a 21,000 sq. ft. unit in the distribution warehouse. The terms of the renewal were based on a 5 year term outside the L&T act until September 2023 with passing rent agreed at 105,575 per annum with no tenant incentives.

15 Trust Manager s Report continued Interim Report Tenant Administrations I noted in the introduction to this report that the Trust s portfolio has been impacted by the challenging market environment that has led to the failure and restructuring of a number of tenants, especially within the retail sector. Measured at 29 September 2018, these had impacted the Trust s total annual rental income by 1.4%, with the most significant single impact being the administration of Homebase which was a tenant of the Trust in St Albans. While having good quality assets in strong locations does help to reduce the risk of tenant failures, the Manager expects the retail sector to be challenged for some time to come, and will continue to work to mitigate the impact of this on the Trust. Income and Voids At 29th September 2018 the net initial yield on the Trust s direct portfolio was 4.1% and the reversionary yield was 5.0%. The void rate in the direct property portfolio at 29th September 2018 stood at 8.0% of ERV, with some units held strategically vacant to capture the upside potential to secure long term income and unlock future growth. The IPD Peer Group Benchmark void as at end of September 2018 was 7.2%. Lease Expiry Profile As at 29 September Years 5-10 Years Years Years 20+ Years Average % 10% 20% 30% 40% 50% TRUST MANAGER S REPORT The Trust s lease expiry profile shows that as at 29 September 2018, the Trust had an average unexpired lease term of 8.3 years (adopting IPD assumptions) compared to the benchmark which was marginally lower at 8.2 years.

16 14 Hermes Property Unit Trust Trust Manager s Report continued Outlook The positive total returns for the period, mask the polarization in the underlying performance of property sub-sectors and stock. We expect the general trend of weakness in retail and solidity in commercial, to continue. The Manager is exploring the disposal of a number of its industrial investments given the strength of this part of the market. The Trust s portfolio has been strategically positioned both to control risk and enable opportunities for growth in the following ways: Core / satellite approach - the Trust continues to have an appropriate balance of risk and return within its portfolio. As at end of September 2018, the Manager is comfortable to continue with a major exposure to assets within the Core risk strategy (69.6%). Added Value and Opportunistic Strategies were at 28.4% and 2% respectively of the portfolio NAV. Geographical weightings - the Trust s strategy remains focused for a higher exposure to assets in London and the South East of England. This is where economic growth and property performance is expected to be stronger than the rest of the UK in the medium-term. The Trust has 77% of capital value investments located in London and the South East compared with 56% in the Trust s benchmark. The Manager will continue to review assets across the UK in order to seek out attractive investment opportunities. Income profile - the Trust s income remains secured against a well diversified portfolio of properties which are generally let to good tenant covenants on relatively long lease terms. As at 29 September 2018, the Trust had a distribution yield in line with the benchmark average of 3.5%. Core/Satellite approach to deliver optimum risk/return Strategy & Medium Term Target Weighting September 18 GAV Target Outperformance Core Strategies 65% Income returns to underpin distribution yield 70% +0.5% Exploit value enhancing Added Value 25% opportunities 28% +1% Higher risk Opportunistic Strategies 10% Higher return Non-core sectors 2% +2% Specialist assets As at 29 September 2018.

17 Property Portfolio Interim Report The Trust has a portfolio bias to London and the South East with 77% 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 39 and 40. Percentage of portfolio value by region 10.3% 0.8% 3.3% 8.6% 16.5% 60.5% Industrials Offices Shopping Centres Unit Shops/Supermarkets Retail Warehouses Leisure/Other TRUST MANAGER S REPORT North 10.3% Industrials 2.6% Offices 5.3% Shopping Centres Unit Shops/Supermarkets Retail Warehouses Leisure/Other 2.4% North East 0.8% Industrials Offices Shopping Centres Unit Shops/Supermarkets Retail Warehouses 0.8% Leisure/Other West 8.6% Industrials 1.2% Offices Shopping Centres Unit Shops/Supermarkets 0.2% Retail Warehouses 6.2% Leisure/Other 1.0% Central London 16.5% Industrials Offices 13.4% Shopping Centres Unit Shops/Supermarkets Retail Warehouses Leisure/Other 3.1% South East (excl. London) 60.5% Industrials 27.5% Offices 15.0% Shopping Centres 2.0% Unit Shops/Supermarkets 7.4% Retail Warehouses 2.3% Leisure/Other 6.3% South West 3.3% Industrials Offices 1.7% Shopping Centres Unit Shops/Supermarkets 1.3% Retail Warehouses Leisure/Other 0.3%

18 16 Hermes Property Unit Trust Property Portfolio continued Distribution of the Trust's property holdings in the London area. This highlights 60 of the Trust's 85 assets which represent 67.6% of total property portfolio by value. M25 Industrials Offices Shopping Centres Unit Shops/Supermarkets Retail Warehouses Leisure/Other

19 Responsible Property Investment Strategy Interim Report Responsible Property Investment has always been a key theme across the investment and asset management processes at Hermes. Shifts in politics alongside scarcity of resources and climate change have driven this to become increasingly important for other investors too and as a result markets are increasingly pricing in sustainability risks accurately in the value of real estate. As a result, we have continued this focus and sought to pursue a deeper environmental and social integration. Throughout 2016 we integrated responsibility processes throughout our investment and asset management processes including development, property management, and occupier and community engagement. The key focus for this year has been climate and resource efficiency and health and well-being of tenants. Case study: Focus on Occupiers Health and Well-being An average person spends around 80% of their time indoors, either in homes, offices, retail or industrial sites so improving the health and well-being of indoor environments is an important factor in the health and well-being of those people. The RESET Core and Shell programme aims to better understand the impacts of indoor air quality in our sites and provides a certification based on the constant monitoring of volatile organic compounds, particulates, and carbon dioxide. This enables us to make healthier office areas which enables improved occupier productivity. By certifying to this standard, Hermes is demonstrating its commitment to maintaining high standards of air quality within the buildings. TRUST MANAGER S REPORT Understanding occupier comfort comes from the occupiers themselves and the well-being engagement programme begins with a Perception Survey. This survey is aligned with the World Green Building Council s Better Places for People Office Framework and British Heart Foundation. The survey includes a number of sustainability questions and uses the latest research in health and well-being in buildings. Two well-being programmes have been piloted to occupiers in focus on improving air quality and the comfort of building occupants. These are the Collaborative Asset Performance Programme + (CAPP+) and the RESET Core and Shell Certification. The well-being engagement programme implemented at Camden Works and 8-10 Great George Street seeks to identify specific comfort and well-being issues on site, and use building controls or simple engagement and education to help improve the quality fo the building and the occupier experience. The programme also provides the opportunity to incorporate broader sustainability issues, which will feed into other RPI projects.

20 18 Hermes Property Unit Trust Responsibilities and Governance Appointments Committee The Appointments Committee is appointed to act on behalf of Unit Holders it is responsible for the appointment and removal of the Trust Manager, the Trustee, the independent auditors, each subject to ratification by Unit Holders, and the independent valuers, and the remuneration of both the Trust Manager and Trustee. The Appointments Committee is also required by the Trust Deed to approve the financial statements of the Trust at the end of each annual accounting period such financial statements are considered by the Unit Holders annually at the Trust s Annual General Meeting. The Appointments Committee has taken all reasonable steps to ensure compliance with its responsibilities. New members of the Appointments Committee are appointed by Unit Holders at the Trust s Annual General Meeting; at least one third of the members are considered for re-election each year. The Appointments Committee met twice during the period. The Appointments Committee is supported by the following two Committees: Audit Committee The Audit Committee s principal responsibilities include: monitoring and reviewing the auditors independence, objectivity and effectiveness of the audit process, and considering the appointment of the auditors; discussing and agreeing the scope of the audit and reviewing the auditors response to changes in the regulatory requirements; reviewing the interim and annual financial statements prior to submission to the Appointments Committee including advice on whether they are fair, balanced and understandable; discussing issues and management recommendations that arise with the external auditors; agreeing any non-audit services; and considering major findings from any controls reports produced by external or internal auditors. During this financial year, the Audit Committee: Reviewed the annual financial statements prior to submission to the Appointments Committee, including advice on whether they were fair, balanced and understandable; Discussed issues and management recommendations that arose with the external auditors; and Considered major findings from controls reports produced by external auditors. As a result of this activity the Audit Committee were able to conclude that the interim and annual financial statements were fair, balanced and understandable. In accordance with best practice, the Audit Committee reviews the audit quality and independence on an annual basis. The Audit Committee currently consists of Andrew McIntyre as Chairman and Sue Clayton. It is intended that the incoming member of the Appointments Committee will also be a member of the Audit Committee. Nominations Committee The Nominations Committee meets as and when required and considers the appointment of new members. It is chaired by the Chairman of the Appointments Committee and its members are Sue Clayton and Andrew McIntyre. Trust Manager The Trust Manager is required to manage and administer the Trust in accordance with the Trust Deed and has responsibility for all portfolio and risk management matters. It is responsible for the approval of amounts to be distributed and for the issuance of financial statements subject to approval by the Appointments Committee. In June 2013, the Trust Manager formed the HPUT Committee through which it considers certain matters on behalf of Unit Holders including investment constraints. It comprises only the members of the Appointments Committee and met three times during the period. The HPUT Committee is supported by the Asset Plan Committee. The Asset Plan Committee s duties include the detailed review of the investment process and of the strategic property plans for each individual asset within the Trust s portfolio. Its membership consists of Paul Clark (Chairman) and Sue Clayton. The Asset Plan Committee met formally and informally on various occasions during the period. Trustee The role of the Trustee includes:

21 Interim Report Responsibilities and Governance continued ensuring that the Trust is managed by the Trust Manager in accordance with the Trust Deed and that proper accounting records have been maintained; safeguarding the property of the Trust and the rights attaching thereto by way of segregation and identification of assets; and taking all reasonable steps to ensure the investment and borrowing powers are complied with. Governance The Appointments Committee and the Trust Manager are committed to a high standard of corporate governance in the operation of the Trust. Regulation and Legislation The Trust Manager is responsible for dealing with its regulator, the Financial Conduct Authority, in an open and co-operative manner. The Trust Manager will inform the regulator promptly of anything concerning the Trust which might reasonably be expected to be disclosed. The Trust Manager is also responsible for ensuring that all applicable legislation and regulations including but not limited to the Bribery Act 2010 are complied with by the Trust. It is required to maintain adequate procedures that ensure compliance with such legislation and it monitors that such procedures are adhered to. GOVERNANCE Conflicts of Interest The Appointments Committee and the Trust Manager will seek to avoid any conflict of interest arising. Should a conflict arise, they have a duty to ensure fair treatment of all Unit Holders.

22 20 Hermes Property Unit Trust Appointments Committee and Advisors Appointments Committee David Nicol BA (Hons), CA (Chairman) Sue Clayton BSc (Hons), FRICS Paul Clark BA (Hons), MPhil Andrew McIntyre MA, ACA Caroline Burton MA (Retired 11 July 2018) The Appointments Committee is responsible for the appointment of the following advisors: Trustee and Depositary From 15 October 2018 NatWest Trustee and Depositary Services Limited 250 Bishopsgate London EC2M 4AA Registered in England no Up to 14 October 2018 National Westminster Bank plc 35 Bishopsgate London EC2M 3UR Registered in England no Trustee enquiries should be made to: NatWest Trustee and Depositary Services Limited 250 Bishopsgate London EC2M 4AA Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Real Estate Investment Manager Hermes Real Estate Investment Management Limited 150 Cheapside London EC2V 6ET Trust Manager Hermes Alternative Investment Management Limited 150 Cheapside London EC2V 6ET Authorised and regulated by the Financial Conduct Authority. The Trust Manager delegates certain property activities to Hermes Real Estate Investment Management Limited (the Real Estate Investment Manager). Independent Valuers Knight Frank LLP 55 Baker Street London W1U 8AN Banker The Royal Bank of Scotland plc Financial Institutions Corporate Service Team Aldgate Union 10 Whitechapel High Street London E1 8DX Trust Legal Advisors Bryan Cave Leighton Paisner LLP Adelaide House London Bridge London EC4R 9HA Independent Auditors PricewaterhouseCoopers LLP 7 More London Riverside London SE1 2RT Managing Agents Jones Lang LaSalle 40 Bank Street Canary Wharf London E14 5EG Workman & Partners Rivergate House 70 Redcliff Street Bristol BS1 6AL

23 Unaudited Financial Statements For the period ended 29 September 2018 Interim Report Consolidated Statement of Total Return Note Unaudited 29 Sep 2018 Unaudited 29 Sep 2017 Audited Year to 25 Mar 2018 Net gain on investments 2 50,202 53, ,394 Rental income receivable 33,754 33,674 67,967 Service charge income 5,045 4,099 9,212 Ground rent (43) (159) (313) Property expenses 3 (15,497) (12,761) (26,451) Net property income 23,259 24,853 50,415 Management expenses 4 (1,362) (987) (2,207) Net operating income before interest, finance costs and taxation 21,897 23,866 48,208 Share of results of investment in joint venture 1, ,007 Interest receivable Interest payable and similar charges 6 (58) (49) Net income before tax 23,173 25,160 50,808 Taxation 7 Net income after taxation 23,173 25,160 50,808 Total return for the period before distribution 73,375 78, ,202 FINANCIAL STATEMENTS Finance costs distributions to unit holders 8 (26,141) (27,409) (55,992) Change in unit holders' funds attributable to unit holders 47,234 50, ,210

24 22 Hermes Property Unit Trust Unaudited Financial Statements As at 29 September 2018 Consolidated Balance Sheet Note Unaudited 29 Sep 2018 Unaudited 29 Sep 2017 Audited 25 Mar 2018 Fixed assets Property investments 9 1,527,897 1,339,645 1,440,343 Investment in joint venture 10 26,368 27,984 28,488 Total fixed assets 1,554,265 1,367,629 1,468,831 Current assets Debtors 11 26,400 39,262 39,594 Cash and deposits 74, ,750 96,558 Total current assets 101, , ,152 Current liabilities Creditors 12 (36,642) (33,727) (35,461) Amounts payable to unit holders (12,808) (14,018) (14,511) Total current liabilities (49,450) (47,745) (49,972) Net current assets attributable to unit holders 51,942 95,267 86,180 Creditors: amounts falling due after more than one year Bank borrowings Net assets 1,606,663 1,462,896 1,555,524 Represented by: Capital of unit holders Units in issue , , ,994 Less: Capital expenses (45,256) (39,353) (42,288) 840, , ,706 Net realised profits on sales of property 318, , ,478 Unrealised profit 447, , ,340 Unit holders' funds 1,606,663 1,462,896 1,555,524 Capital employed 1,606,663 1,462,896 1,555,524 These financial statements were approved by the Appointments Committee on 19 November 2018 and signed on its behalf by: David Nicol Andrew McIntyre

25 Unaudited Financial Statements For the period ended 29 September 2018 Interim Report Consolidated Statement of changes in net assets attributable to unit holders Units in issue 000 Capital Expenses 000 Net Realised Profits on Sale of Property 000 Unrealised Profit 000 Revenue reserve 000 Net assets 000 At 26 March 2017 (Audited) 835,032 (37,104) 291, ,311 1,397,592 Profit for the period 167, ,202 Other comprehensive income Total comprehensive income for the period 167, ,202 Transfer to capital reserve 2, ,029 (116,394) (222) Capital expenses (5,184) (18) 5,184 (18) Units issued 46,962 46,962 Distributions to unit holders (55,992) (55,992) At 25 March 2018 (Audited) 881,994 (42,288) 293, ,340 1,555,524 Units in issue 000 Capital Expenses 000 Net Realised Profits on Sale of Property 000 Unrealised Profit 000 Revenue reserve 000 Net assets 000 At 26 March 2018 (Audited) 881,994 (42,288) 293, ,340 1,555,524 Profit for the period (8) 8 73,375 73,375 Other comprehensive income Total comprehensive income for the period (8) 8 73,375 73,375 Transfer to capital reserve 25,325 24,877 (50,202) Capital expenses (2,968) 2,968 Units issued 3,905 3,905 Distributions to unit holders (26,141) (26,141) At 29 September 2018 (Unaudited) 885,899 (45,256) 318, ,225 1,606,663 FINANCIAL STATEMENTS

26 24 Hermes Property Unit Trust Unaudited Financial Statements For the period ended 29 September 2018 Consolidated Cash Flow Statement Note Unaudited 29 Sep 2018 Unaudited 29 Sep 2017 Audited 25 Mar 2018 Net cash inflow from operating activities 16 36,176 26,959 52,337 Capital expenditure Property acquisitions and capital additions (76,416) (7,378) (60,700) Capital expenses (212) (183) (379) Disposal of properties 41,491 (12) 15,049 (35,137) (7,573) (46,030) Returns on investments and servicing of finance Interest received Dividends received from joint venture 1, ,007 Distributions paid (27,844) (26,081) (54,171) (26,510) (24,787) (51,522) Financing New units issued 3,905 14,340 46,962 3,905 14,340 46,962 (Decrease)/increase in cash (21,566) 8,939 1,747 Reconciliation of net cash flow to movement in net funds (Decrease)/increase in available cash during the period (21,566) 8,939 1,747 (Decrease)/increase in net funds during the period (21,566) 8,939 1,747 Opening cash and deposits attributable to unit holders 96,558 94,811 94,811 Closing cash and deposits attributable to unit holders 74, ,750 96,558