Chairman’s Statement

Year end to 31st December 2012

I am delighted to report that for 2012 the Trust has posted a positive total return of almost 7%.  This positive outcome reflected the improvement in investment activity in 2012 which saw investment transactions recovering to pre – 2008 levels of over €600 million.  This improvement in investment sentiment was triggered by the favourable Budget measures introduced by the Government in December 2011.  As I anticipated in my statement last year, these measures combined with the substantial downward price adjustments of the past five years, helped to stabilise the market, restore confidence and stimulate investment.

This much improved market environment and increased investment activity has helped to slow considerably the slide in capital values.  As a result the capital value of the Trust’s portfolio fell by - 2.7% in 2012 (-10.1% in 2011) compared with -6.3% for the IPD benchmark.  However, the strong income performance of the Trust’s portfolio more than offset the fall in capital values, so much so that the Trust posted a total return for the year of +6.9%, again outperforming the total IPD benchmark of +3.1%.  Our distributions for calendar 2012 will total €39.2 million or €53.41 per unit, an increase of 0.3% over 2011. 

The Trust’s outperformance against the IPD benchmark reflected a number of factors, primarily our weighting in favour of modern offices located in Dublin’s central business district and our active management of the portfolio.  The successful re-letting by the Trust of refurbished office properties totalling 5,000 square metres at No. 2 Hume Street and 1 & 2 Shelbourne Buildings, combined with the ongoing portfolio lease re-structuring programme, greatly contributed to the outperformance of the Trust’s office portfolio.  Our office portfolio is now substantially characterised by modern larger scale buildings which outperformed the equivalent IPD subset by +5.3% in 2012.  As part of our strategic growth objectives for the portfolio, we will continue to hold an overweight position in the Dublin office sector. 

Allied to the consistency of our income returns, a further strength of the Trust is its longer term investment performance returns.  In this regard, I am pleased to report that for the second consecutive year the Trust’s medium and longer term performance against the IPD benchmark continues to improve.  For the three years ended 31 December 2012, our annualised performance was +1.6% compared with -0.6% for IPD, an outperformance of +2.2% per annum which ranked the Trust in first place in this survey.  As mentioned in previous statements, it is one of our objectives to sustain this level of performance as it is an invaluable plank in our strategy to market the Trust to new investors and promote diversification of our investor base.

I continue to focus on the fact that rental income is the key driver of performance in current market conditions and 2012 was no exception.  It is an occupiers’ market and our objective is to retain our tenant base, to minimise voids and to maximise our income recovery.  I am pleased to report to unitholders that our performance in this area of our operations in 2012 was particularly strong, notwithstanding the weak economic and banking environment which has severely impacted the retail and industrial sectors of the market.  Rental income of €41.6 million was billed to tenants in 2012 and all but €532,000 was collected.  We are continuing to work with tenants who are experiencing trading difficulties or who are approaching lease break points. 

The Trust’s management team has worked hard on active management initiatives within the portfolio, successfully reducing the vacancy rate from 6.7% at end 2011 to 4.58% at end 2012.  We engaged in 12 lettings over the full year with notable highlights being the pre-letting of 3,000 square metres at 1 & 2 Shelbourne Buildings in Dublin 4 to IBM and Mediolanum respectively.  The Trust has engaged in a greater level of refurbishment projects than heretofore and this shift into more added value investment has so far yielded greater tenant retention and new occupiers in the prime office sectors on which we are focused. 

A core investment philosophy of the Trust is to provide investors with a consistent income return.  Our distributions for the calendar year 2012 will total €39.2 million or €53.41 per unit.  This represents a net income yield of 9.14% based on the net asset value of a unit at 31 December 2012, compared with a distribution of €53.23 per unit and a yield of 8.83% for 2011, an increase of +0.3%.  While this modest increase in our payout is welcome, this level of distribution is not sustainable in the short to medium term against the background of falling rental values over the past five years.

With regard to the Trust’s review of its business model, we have continued to work with our advisors to develop a new legal structure to meet the Trust’s revised business strategy.  This structure would be regulated by the Central Bank of Ireland.  During the past twelve months the EU Alternative Investment Fund Managers Directive (AIFMD) has become central to our deliberations.  This EU Directive will become law in all member States from the end of June 2013 and will obligate exempt funds such as IPUT to conform to EU and Irish regulatory requirements.  We will be working with our advisors and the Central Bank with a view to bringing a formal proposal to unitholders on a regulated structure that will allow the Trust comply with the AIFMD regulatory requirements by the end of the Summer 2013.  I should also refer to the latest Government initiative to include provisions in the Finance Bill 2013 for the establishment of Real Estate Investment Trusts (REIT’s).  We welcome this Government initiative and view it as another tool that could attract greater volumes of equity capital into the Irish market over the medium to longer term.
Last year I mentioned that we had acquired the property portfolio of the ESB Pension Fund in exchange for units in the Trust.  I am pleased to say that the merging of this portfolio into the Trust has been executed seamlessly and the consequent active management initiatives have added value for all unitholders.  Since the year end we have contracted to acquire for cash consideration the property portfolio of the Irish Airlines Superannuation Scheme and the A&L Goodbody building at 25/28 North Wall Quay, Dublin 1. These transactions bring the total value of properties acquired by the Trust to approximately €180 million and will enable us to benefit from strong income returns and to exploit added value opportunities.

Cash management in the context of redemption requests has been another major challenge for the Trust.  Over the course of 2012 we have supported a robust secondary trade in our units by introducing new investors to those unitholders wishing to reduce or divest completely their holdings in the Trust.  Some 15% of the Trust’s units in issue have been traded via this secondary market and the redemption queue has been extinguished.  Indeed, we are cautiously optimistic that the Trust will be in a position to further expand its investor base in early 2013 and to issue new units to reputable domestic and international institutional investors of scale.  There are substantial international investors looking to commit long term capital to the Trust in 2013 but they can only do so if the Trust’s structure is changed to a regulated investment fund. 

Looking to 2013, I believe we will have a positive and relatively stable environment to operate in thanks to the Government’s initiatives announced in the Budget of 2012 and our solid fiscal performance in meeting our bailout terms.  These factors have lifted our international profile and led to overseas investors targeting prime properties, particularly Dublin offices.  In this regard, the Trust’s portfolio is well positioned given the acquisitions and disposals contracted since year end which have seen our office weighting increase to over 63%.  Letting activity in this sector is being supported by the improved business sentiment towards Ireland and the further success of the IDA in attracting inward investment. The retail and industrial sectors will continue to be challenged given the prevailing headwinds of lower domestic demand, the prospect of further budgetary cuts and changing retail trends.  In overall terms, we anticipate improving total returns over the next few years as we continue to reposition our portfolio, which is well placed to benefit from the improved prospects anticipated for the prime Dublin office market.

Clearly the excellent outcome which we have reported for calendar 2012 could not have been achieved without imagination, hard work and efficient execution.  We are fortunate that we have a strong professional fund management team ably led by our Chief Executive, Niall Gaffney.  This team was augmented during the year by the appointment of Mr. Pat McGinley as Head of Finance.  We are indebted to them for the determined and resourceful manner with which they have met the challenges in 2012 in their pursuit of the Trust’s strategy and objectives.  Both on your and my own behalf I should like to thank them for their dedication and to wish them similar success in 2013. 
Finally, I am indebted to my colleagues on the Committee of Management for their support and advice both at Committee level and through their involvement in the Trust’s sub-committees.  During the year Mr. Pat McGorrian retired from the Committee and I should like to acknowledge his contribution to the affairs of the Trust over many years.  I welcome Ms. Marie Collins and Mr. Jim Foley to the Committee and look forward to working with them for the benefit of our unitholders. 

Finally, I am indebted to my colleagues on the Committee of Management for their support and advice both at Committee level and through their involvement in the Trust’s sub-committees.  During the year Mr. Pat McGorrian retired from the Committee and I should like to acknowledge his contribution to the affairs of the Trust over many years.  I welcome Ms. Marie Collins and Mr. Jim Foley to the Committee and look forward to working with them for the benefit of our unitholders. 

Frank Close