Caledonian Trust : Unaudited interim results

Information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 ("MAR") which forms part of Domestic UK Law pursuant to the European Union (Withdrawal) Act 2018.

31 March 2021

Caledonian Trust plc

("Caledonian Trust", the "Company" or the "Group")

Unaudited interim results for the six months ended 31 December 2020

Caledonian Trust plc, the Edinburgh-based property investment holding and development company, announces its unaudited interim results for the six months 31 December 2020.

Enquiries:
Caledonian Trust plc
Douglas Lowe, Chairman and Chief Executive Officer	Tel: [phone]
Mike Baynham, Finance Director	Tel: [phone]
Allenby Capital Limited
(Nominated Adviser and Broker)
Nick Athanas	Tel: [phone]
Alex Brearley

Introduction

The Group made a pre-tax loss of £327,000 in the six months to 31 December 2020 compared with a pre-tax loss of £196,000 for the same period last year. The loss per share for the six months to 31 December 2020 was 2.77p and the NAV per share as at 31 December 2020 was 201.7p compared with a loss per share of 1.66p and a NAV per share of 202.01p last year. The Group's emphasis will continue to be to secure, improve and realise the development value in our property portfolio.

Review of Activities

I provided a comprehensive review of activities in my statement accompanying our audited results for the year ended 30 June 2020, released in December 2020.

The Group's property investment business continues - but is changing as a result of the conditional sale of St. Margaret's House ("St Margaret's"), our investment property held for development. However, the rate of change has slowed due to the extended time taken, partially due to Covid-19 restrictions earlier last year, to gain planning consent for the Reserved Matters application lodged by the purchaser, Drum Property Group ("Drum"), on 24 September 2019, but which consent was only issued on 14 August 2020. The sale is now conditional solely on Drum securing a pre-let of the student housing element of the development, which under the missives in relation to the proposed disposal of St. Margaret's is required to be achieved by 30 June 2021. The effect of the current uncertainty caused by Covid-19 to teaching and travel on University entrance rolls and their rental receipts from student accommodation has resulted in the widespread postponement of procurement of further student accommodation, which we currently believe is likely to result in a further delay in realising the sale of St. Margaret's. We expect to have better understanding regarding the timing of the proposed disposal of St. Margaret's by 30 June 2021. We continue to hold a high yielding retail parade, a high yielding retail / industrial property, our North Castle Street offices and four central Edinburgh garage investments.

As announced on 16 December 2020, we concluded unconditional missives for the sale of Ardpatrick Estate for £2.7m in cash with completion originally on 24 March 2021 but, by mutual agreement, completion has been delayed until late April 2021.

We completed the construction of the five new house units in the listed former farm steading on our site at Brunstane and commenced marketing in July 2020 following the lifting of Covid-19 restrictions. The sales of all five properties have now completed, two prior to 31 December 2020 and the other three in the past month, all at prices in excess of their home report valuations, which itself was in excess of our budgeted figures, for a combined consideration of £2.66m or £360/ft2.

We have recently issued tender documentation for the construction of the next phase of five new houses over 8,650ft2 to form the east most courtyard of the farm steading area with a view to commencing construction of this next phase in early summer 2021. The application for consent for 12 new houses in addition to the large farmhouse in the Stackyard field to the east of the steading continues through the planning process and it is expected that consent for this phase will be granted in the next few months.

Investment in all other development sites has been delayed, primarily because of current, very restrictive, credit conditions. The increased demand for family homes within commutable distance of Edinburgh has resulted in making many of these sites more attractive. Major road improvements locally are bringing more of these sites within acceptable commuting times. We will extend our development programme to such sites whenever conditions permit.

As announced on 14 July 2020, Leafrealm Limited, a company controlled by me, provided an additional loan of £115,000 to the Company, all of which has been drawn down.

Economic Prospects

Economic prospects currently relate less to that discipline than to the disciplines of epidemiology, molecular biology and statistics. The intrinsic danger of the Covid-19 plague is starkly illustrated in economic terms. A "safe" investment that doubled every eight years would represent a compound yield of 9.03%. In investment terms, such a return represents an outstanding opportunity, but in epidemiological terms such a compound increase is catastrophic, as it represents the rate at which the severity of the disease compounds with age. A 0.5% chance of serious illness at the age of 30 increases to about 32% by the age of 72.

Covid-19, caused by the Coronavirus SARS-CoV-2, could have devastated the economy as other plagues have through the centuries. Indeed, it has already caused a UK recession of 10%, the largest since the Great Frost in 1709. That cold spell persisted for three months, lasting into the late Spring and was followed by flooding from the eventual thaw, ruining crops and causing famine, disease and death, resulting in a 23% fall in GDP.

Another virus caused the Spanish flu in 1918 - 1922, which claimed about 50m lives. The death toll from subsequent coronavirus diseases was less than 1,000 from SARS and MERS. Death tolls from other virus epidemics include 10,000 from Ebola, 200,000 from Swine flu but over 1m from Russian flu 1889, Asian flu 1952 and Hong Kong flu 1968. Covid-19's toll is already over 2.6m.

Other plagues caused by other pathogens have caused greater economic damage. The Plague, the black death, the bacterial curse of the Western world for nearly 200 years, killed 10% of the Roman Mediterranean population in AD 165-180, while the later Justinian plague killed 55% of those in the Western European Roman empire in the sixth century. Its manifestation in Europe as the "Black Death" in the 14th century killed about 40% of that population. The highest death toll from a plague occurred in the "New World" where over several centuries the imported smallpox virus, Variola major, killed 93% of the indigenous population.

Until recently, the devastation caused by such pandemics was considered historic. Indeed, in 1962 the Nobel prize winner, Professor Sir Frank Burnet declared the virtual elimination of "infectious diseases". And so it then appeared. In the 19th century improvements to water and sewage systems, rodent control and better nutrition controlled infectious diseases. Subsequently antibiotics and vaccines cured bacterial diseases and pre-empted viral diseases. Sir Frank's complacency was confirmed by the ephemeral nature of subsequent plagues such as SARS, MERS, Ebola and various "flus" that proved short-lived. Even the spread of the HIV virus, killing over 31m people, did not set aside such complacency, as it was deemed controllable by social behaviour and, latterly, by drugs. Sir Frank Burnet was proved wrong by the long-term and continuing changes in human behaviour, chiefly those of closer contact with different ecologies, higher population densities and more rapid and extensive travel. Such conditions allow

diseases to transmit easily, spread quickly and disseminate widely. Between 1940 and 2004, 335 new infectious diseases were noted in humans, of which 60% leaped from animals, mostly wildlife.

Smallpox has a long pedigree, having been found in Egyptian mummies, but its origin is unknown. It was not widely distributed, being absent in the New World where 93% died on its introduction, so indicating it was not endemic in humans, but arising in a specified geographic area. "New" virus diseases frequently have animal origins - SARS from horseshoe bats, MERS from camels via bats and SARS-CoV-2 from bats, HIV from other primates, certain influenzas from avian flu and measles from the rinderpest virus in farmed cattle. Many of these transmissions seem likely to have occurred as a result of close contact with animals, probably associated with farming and animal domestication. Farming, commencing in about 10,000BC in the fertile crescent of the Middle East, was necessarily associated with settled close communities whose increased economic output permitted such higher denser populations. As many virus diseases "jumping" in uncertain ways between species are then transmitted by air, and have very short half-lives outside the host, these denser settled populations facilitated the subsequent spread and the transmission of the "jumped" diseases.

In early farming communities the spread of any such "new" disease would have been limited by the separation between communities and by the infrequency of communication between them, even over short distances. It is reasonable to postulate that many "new" diseases ran their course confined to a local community where at times they may all have perished, so eliminating the disease or, possibly, the few survivors gained immunity and so did not develop it and then transmit it. Such conditions, restricting the spread of disease, are self-evidently diametrically opposed to those prevailing today in the Western world.

Treatments to prevent disease caused by viruses have, until the recent success of the HIV virucides, been via vaccines, a name originating from Vacchus, a cow, originally used as a source of live but attenuated virus to create immunity. Vaccines have been developed against 24 major virus diseases, including Rubella, Measles, Diptheria208 and Smallpox, effective to over 90% and against influenza but effective only to about 40%. Historically, these vaccines took many years from the isolation of the virus to the licencing of the vaccine - nine years for measles and as long as 20 years for polio. An exceptional feat of scientific endeavour and skill combined with administrative efficiency, including 24 hour working, has produced a vaccine in a year - and not just one vaccine but several all based on four different methods of introducing SARS-CoV-2's specific spike proteins into the body, so triggering a response from the body's immune system and preparing its defence systems to counter any subsequent real attack. The astonishingly rapid development of vaccines is a tribute to the discoveries over many years of the biological sciences: as the comedian, Eddie Cantor says: it takes 20 years to be an overnight success.

One method involving inactivated whole virus is being produced by Valneva in its Scottish plant. The virus' genetic material is destroyed, but the protein on the spikes of the virus, allowing access to the host cell, is recognised by the host and triggers the host's defensive system, boosting immunity to subsequent infections. This method is currently used for flu and some other vaccines, and is now being used by Sinovac and Sinopharm in China and Bharat Biotech in India for their Covid-19 vaccines. A second established vaccine system uses an Adenovirus into which a gene from SARS-CoV-2 which codes for the SARS-CoV-2 spike protein has been introduced. This imported gene instructs the host cell to make the spike protein characteristic of SARS-CoV-2 and its production activates the host's antigen system and other defence mechanisms. This method is used in both the Oxford / AstraZeneca and the Janssen vaccines.

Two other "new" vaccines systems have been developed. The genetic material of SARS-CoV-2 is mRNA, not DNA. In one new system the mRNA (messenger ribonucleic acid) strand is produced chemically, i.e., synthesised and not, unlike other vaccines, produced biologically by growing "natural" live cultures. "Chemical" synthesis has the great advantage of allowing the mRNA to be altered easily to give different results as may be necessary, for example, to combat future variants of the SARS-CoV-

2. mRNA, including the virus gene that encodes for the spike protein, is synthesised but the whole virus genome is not synthesised. This synthetic mRNA harnesses the host cells to produce the spike proteins which activate the immune system, but as the genetic material is incomplete the virus is not reproduced. The technique is used by BioNTech / Pfizer and Moderna, both of whose vaccines are approved.

The other new system developed by Novavax and GlaxoSmithKline, and Sanofi Pasteur directly introduces the virus' spike protein, fortified by an activating adjuvant, into the body stimulating the body's immune system to attack the spike protein and so confer immunity. These systems are currently in combined phase 1 and 2 clinical trials. Like the Pfizer system, this system is synthetic and so facilities modification at short notice and can be scaled up quickly, allowing vaccines for any "variant" of the Covid-19 virus to be easily produced and quickly manufactured on a large scale.

Certainly, speed has been of the essence. The Covid-19 virus has a high reproduction rate and a high mortality rate amongst older people even after intensive treatment. For women mortality is 5% at 75, rising to 10% at 85, and for men about 10% at 75 rising to 20% at 85. For both sexes mortality below 50 is less than 1%.

There are 6.5m people over 75 in the UK and unchecked it seems likely at least 10% or 650,000 would die, even if hospitalised. Without such hospitalisation, due to the hospital facilities being overwhelmed, at least 1m would probably die. In such circumstances it is difficult to imagine anything other than a major economic breakdown. The "lockdown" and safety procedures have saved hundreds of thousands of lives but at great economic cost. It is difficult to envisage that such economic cost could be supported for more than 18 months without itself causing an economic breakdown. The UK's great achievement has been the development, delivery and deployment of effective vaccines that will permit the removal of current restrictions without, in the worst case, unacceptable resultant rises in disease and death. Truly, the economy has been rescued.

The questions now are how quickly will economic output be restored to its former health and will output grow at a rate at least equivalent to that prevailing pre-pandemic? And, if so, how and when can a higher growth rate be achieved? The present recession bears no relationship to the only larger recession, the Great Frost in 1709, which was caused by freak weather conditions ruining an agricultural economy. But equally the present recession bears little resemblance to recessions over the last 100 years. These previous recessions were generally consequent to long periods of expansion and inflation, at times following wars or, unusually, a supply driven production failure, such as the oil induced recession of the 1970s, all these cycles lasting only a few years. Rare exemptions to the recessions caused by reactions to inflationary cycles have been those caused by financial crashes such as the Great Depression, starting in 1929, and the recent Great Recession, starting in 2008, whose effects lasted considerably longer and were much more damaging to the economy.

In contrast the current recession is the result of a policy induced severe curtailment of economic activity. An interesting anomaly of this recession is that, whereas normally the discretionary expenditure in the manufacturing sector is more affected, in this recession the service sector is more affected because person-to-person interaction is so severely limited. Thus, the Covid-19 recession, while much deeper than an inflation or financially induced crisis, when policy is reversed, is expected to last less than two years.

Just as the cause of the Covid recession is singular so will be the recovery. Andy Haldane, the Bank's chief economist, described the UK economy as a "coiled spring" awaiting to jump up when the Covid restrictions are lifted. The energy stored in the "spring" is represented by the increase in the average UK Household Savings, which are usually about 6% of total disposable income, but which increased to 25.5% in Q2 2020 and to 16.5% in Q3. There is a widespread agreement of the reaction to the lifting of restrictions. Pubs, restaurants and services, especially personal services, will boom; increased house moves - mortgage approvals at the end of 2020 were at the highest since 2007 - will increase associated spending, particularly on home improvements; and "difficulties" in holidaying abroad will increase staycations. The surge in spending will be modulated by two important factors. Firstly, several habits will have been altered by recent experience and may not revert to the same pattern of eating out, drinking in pubs and going on leisure shopping trips. However, I suspect such influences will be concentrated on those in the older age brackets where greater Covid "fear" may persist. Secondly, unemployment may rise steeply when the current and recently extended Government support measures expire.

Unemployment averaged 4% in 2019 but rose to 5.1% in 2020 Q1 and to 5.5% in 2021 Q1 and is expected, in the Bank's February forecast, to peak at 7.7% in mid-2021 before falling back to 6.6% in Q4 2021, 5.4% in 2022 and 5.0% in 2023. The OBR, writing after the budget, and the further continuation of the Coronavirus Job Retention Scheme (CJRS), is more optimistic than the Bank's pre-

budget February forecast, expecting unemployment to peak at the much lower figure of 6.5% falling over 2 years to 5.5%. Even at the higher unemployment levels that the Bank expects, it forecasts that GDP, after falling 10% in 2020, will rise 5% in 2021, 7¼% in 2022 and 1¼ % in 2023, when it will be 2¼% larger than before the pandemic. In November they forecast a slightly earlier recovery, but one resulting in an economy in 2023 only 1¼ % higher than the pre-pandemic level.

The Bank's forecast for 2021 takes account of a drop in GDP in Q1 2021 before the subsequent "spring" back, starting in Q2. Thus, if the end Q1 2021 figure is compared with the forecast end Q1 2022 figure, the annual growth is an astonishing 14.2% over that 12 months. Truly, the recovery forecast is exceptional, as indeed was the actual fall in early 2020 at a rate of around 20% per annum. The Bank's central forecast is for GDP to return to the 2019 Q4 level in 2022 Q1 when it estimates that it is 67% likely that GDP will be between 93% and 103% of the 2019 Q4 level.

The OBR forecast is slightly more cautious than the Bank with lower 2021 growth of 4.0%, delaying the recovery to the 2019 level to the end of 2022 when it is expected to be just 0.5% higher than in 2019. HMT, NIESR, IMF, PWC and EY forecasts are also slightly more conservative than the Bank's forecast to differing degrees, although the difference among all these forecasts is most unlikely to be statistically significant. Thus, a quite remarkable "spring back" is generally forecast after which the OBR expects growth to stabilise at 1.7% in the three years to Q4 2025 (The Banks's forecast period does not extend beyond end 2023).

The "spring back" does not recover the "lost growth" of this economic cycle, and with a future forecast growth of 1.7%, below the 1.87% average of the ten years to 2019 before the effects of the pandemic lockdowns, this "lost growth" is not forecast to be recovered in years subsequent to the "spring back". It is, as the cartoon character, Billy Bunter, "The Owl of the Fourth Remove", complained, "a meal lost is lost forever". The lost growth of GDP has been the result of the non-recoverable damage to the economy caused by the huge shrinkage in output, 20% at one time causing permanent economic "scarring". Scarring causes a loss in GDP equivalent to the output forecast in future years before the Covid shock and the output now expected after the Covid shock in these same future years. Thus, unlike most inflation cycles, there is no compensatory post-recession high growth rate that allows a "catch- up".

Scarring is one of three economic factors already adversely affecting the growth of the UK economy, in addition to Brexit and low increases, by historic standards, in productivity. For the Scottish economy there is a further burden, the expectation of Scexit, Scottish Independence, and the accompanying economic cost of such a political choice.

The expected scarring effect is evident by comparing the OBR's estimates of future real GDP for 2025 made in March 2020 and in March 2021 - that estimate is now a little over 3% lower than it was in March 2020. Recently, the UK Government has said that scarring would be less than the 1980s recession where over a long period extensive areas of heavy industry closed, assets scrapped as the economy shifted further towards a service based economy and resultant unemployment was higher. In this recession a quick recovery is expected as jobs have been very extensively protected and financial and monetary support has been unprecedented, the scarring is likely to be less than the 3% of GDP originally feared.

Brexit imposes a second long-term reduction in output whose effect cannot be ascertained by comparison of GDP output expectations used for "scarring" as Brexit's probable outcome has been a conditioning factor in OBR and Bank forecasts for some years. Of the UK / EU agreement the OBR says:

"Overall, the TCA goes beyond a typical FTA with regards to tariffs on goods, by not introducing tariffs on the agriculture sector, but that has a relatively small aggregate economic impact. While some extra commitments have been achieved with respect to non-tariff barriers to goods trade, many of these are similar to other FTAs. The introduction of non-tariff barriers in services, which accounted for 42 per cent of the UK's exports to the EU in 2019, is far more significant. It is this channel that accounts for much of the long-term reduction in [UK] productivity".