Custodian REIT plc (CREI) Custodian REIT plc : Final Results
17-Jun-2022 / 07:00 GMT/BST Dissemination of a Regulatory
Announcement that contains inside information according to
REGULATION (EU) No 596/2014 (MAR), transmitted by EQS Group. The
issuer is solely responsible for the content of this
announcement.
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17 June 2022
Custodian REIT plc
("Custodian REIT" or "the Company")
Final Results
Custodian REIT (LSE: CREI), the UK commercial real estate
investment company, today reports its final results for the year
ended 31 March 2022.
Property strategy
Custodian REIT offers investors the opportunity to access a
diversified portfolio of UK commercial real estate providing an
attractive level of income and the potential for capital growth,
becoming the REIT of choice for private and institutional investors
seeking high and stable dividends from well-diversified UK real
estate. The Company's portfolio is focused on smaller lots,
principally targeting properties of less than GBP10m at
acquisition, which offers:
-- An enhanced yield on acquisition - with no need to sacrifice
quality of property/location/tenant forincome and with a greater
share of value in 'bricks and mortar';
-- Greater diversification - spreading risk across more assets,
locations and tenants and offering morestable cash flows; and
-- A higher income component of total return - driving
out-performance with forecastable and predictablereturns. Financial
highlights and performance summary
2022 2021 Comments
Returns
Increased due to stabilisation of rent collection following the COVID-19
EPRA[1] earnings per share[2] 5.9p 5.6p pandemic, with a GBP0.3m decrease in the doubtful debt provision during the
year (2021: GBP2.7m increase)
Basic and diluted earnings per 28.5p 0.9p
share[3]
Profit before tax (GBPm) 122.3 3.7
Dividends per share[4] 5.25p 5.0p Target dividend per share for the year ended 31 March 2022 of not less
than 5.5p
Dividend cover[5] 110.3% 112.7% In line with the Company's policy of paying fully covered dividends
NAV total return per share[6] 28.4% 0.9% 5.8% dividends paid (2021: 4.8%) and a 22.6% capital increase (2021: 3.9%
capital decrease)
Share price total return[7] 17.0% 2.3% Share price increased from 91.8p to 101.8p during the year
Capital values
NAV and EPRA NTA[8] (GBPm) 527.6 409.9
Increased due to GBP94.0m of valuation increases, GBP5.4m profit on disposals
NAV per share and NTA per 119.7p 97.6p and the acquisition of DRUM REIT for GBP19.1m of new shares
share
Net gearing[9] 19.1% 24.9%
Costs
Ongoing charges ratio[10] 1.94% 2.48%
("OCR")
OCR excluding direct property Increases in ESG compliance and marketing costs, partially offset by NAV
expenses[11] 1.20% 1.12% increasing above GBP500m which resulted in a marginal reduction in the rate
of management fees
Environmental
Weighted average energy
performance certificate C (61) C (63) Continued improvements in the environmental performance of the portfolio
("EPC") rating[12]
Commenting on the final results, David Hunter, Chairman of
Custodian REIT, said:
"The year to 31 March 2022 has been a period of significant
recovery for the Company's net asset value and share price after
the extreme challenges presented by the global pandemic.
"The recovery in NAV has been testament to the strength of the
UK commercial property, allied to Custodian REIT's focus on smaller
regional property and the close management of the portfolio to
maximise occupancy, rent collection, cash flow and earnings.
"Rent collection is back at pre-pandemic levels and tenants have
honoured their deferred rent agreements allowing the Board to
increase fully covered quarterly dividends to at least 5.5p in the
forthcoming financial year.
"Although the impact of inflation and political uncertainty
could lead to an economic downturn, we believe Custodian REIT's
portfolio, diversified by sector, geography and tenants, with low
gearing will remain resilient in the face of any economic
headwinds."
Alternative performance measures
The Company reports alternative performance measures ("APMs") to
assist stakeholders in assessing performance alongside the
Company's results on a statutory basis, set out above. APMs are
among the key performance indicators used by the Board to assess
the Company's performance and are used by research analysts
covering the Company. Certain other APMs may not be directly
comparable with other companies' adjusted measures, and APMs are
not intended to be a substitute for, or superior to, any IFRS
measures of performance. Supporting calculations for APMs and
reconciliations between APMs and their IFRS equivalents are set out
in Note 21. Further information
Further information regarding the Company can be found at the
Company's website www.custodianreit.com or please contact:
Custodian Capital Limited
Richard Shepherd-Cross / Ed Moore / Ian Mattioli MBE Tel: +44 (0)116 240 8740
www.custodiancapital.com
Numis Securities Limited
Hugh Jonathan / Nathan Brown Tel: +44 (0)20 7260 1000
www.numiscorp.com
Camarco
Ed Gascoigne-Pees Tel: +44 (0)20 3757 4989
www.camarco.co.uk
Property highlights
2022
GBPm Comments
Portfolio value 665.2
Property valuation increases
[13]:
-- From asset
management initiatives 13.4 Detailed in the Asset management report
-- Acquisition of 7.3 The acquisition of DRUM REIT was completed at a discount to NAV
DRUM REIT
-- General
valuation increases 73.3 Primarily due to hardening yields in the industrial and logistics sector
94.0
-- A portfolio of 10 office, retail and industrial assets through the
corporate acquisition of DRUM Income Plus REIT plc ("DRUM REIT") - GBP41.7m
Property acquisitions[14] 63.5 -- Industrial units in York, Knowsley, Dundee and Nottingham - GBP11.1m
-- Offices in central Manchester - GBP6.2m
-- A retail warehouse in Cromer - GBP4.5m
Capital expenditure 3.5 Includes GBP1.2m completion of the redevelopment of an industrial site in West
Bromwich
-- A portfolio of seven industrial assets for GBP32.6m, GBP5.1m ahead of
valuation when the terms of sale were agreed
-- Two car showrooms in Stockport and Stafford for GBP13.9m, GBP2.6m ahead
Profit on disposal[15] 5.4 of valuation when the terms of sale were agreed
-- A retail warehouse in Galashiels for GBP4.5m, GBP1.8m ahead of valuation
-- Five smaller units in the retail and other sectors for GBP3.5m at
valuation
Net cash deployment since the -- Grangemouth acquisition - GBP7.5m
year end 5.6 -- Winchester acquisition - GBP3.7m
-- Derby disposal - (GBP5.6m) Business model and strategy
Investment Policy
The Company's investment policy[16] is summarised below:
-- To invest in a diverse portfolio of UK commercial real
estate, principally characterised by individualproperty values of
less than GBP10m[17] at acquisition.
-- The property portfolio should be diversified by sector,
location, tenant and lease term, with a maximumweighting to any one
property sector or geographic region of 50%.
-- To acquire modern buildings or those considered fit for
purpose by occupiers, focussing on areas with:
-- High residual values;
-- Strong local economies; and
-- An imbalance between supply and demand.
-- No one tenant or property should account for more than 10% of
the rent roll at the time of purchase,except for:
-- Governmental bodies or departments; or
-- Single tenants rated by Dun & Bradstreet as having a
credit risk score higher than two[18], whereexposure may not exceed
5% of the rent roll.
-- The Company will not undertake speculative development except
for the refurbishment[19] of existingholdings, but may invest in
forward funding agreements where the Company may acquire pre-let
development land andconstruct investment property with the
intention of owning the completed development.
-- The Company may use gearing provided that the maximum LTV
shall not exceed 35%, with a medium-term netgearing target of 25%
LTV.
The Board reviews the Company's investment objectives at least
annually to ensure they remain appropriate to the market in which
the Company operates and in the best interests of shareholders.
Richard Shepherd-Cross, Investment Manager, commented: "Our
smaller-lot specialism has consistently delivered significantly
higher yields without exposing shareholders to additional risk".
Growth strategy
The Board is committed to seeking further growth in the Company
to increase the liquidity of its shares and reduce ongoing charges.
Our growth strategy involves:
-- Organic growth through share issuance at a premium to
NAV;
-- Broadening the Company's shareholder base, particularly
through further penetration into onlineplatforms;
-- Becoming the natural choice for private clients and wealth
managers seeking to invest in UK real estate;
-- Taking market share from failing open-ended funds;
-- Strategic property portfolio acquisitions and corporate
consolidation.
In all situations, the Board ensures that property fundamentals
are central to all decisions.
Acquisition of DRUM Income Plus REIT plc
In November 2021 the Company acquired DRUM Income Plus REIT plc
("DRUM REIT") at a 28% discount to its net asset value, resulting
in a GBP7.3m valuation gain post-acquisition. Since acquisition
DRUM REIT has traded well, enhancing the Company's EPRA earnings
per share and maintaining its 'red-book' valuation at GBP49m. Since
the year end new lettings have been secured at certain sites which
should further enhance total returns in the coming periods.
David Hunter, Chairman of Custodian REIT plc, commented:
"Shareholders are seeking the consolidation of smaller REITs as
larger funds typically offer lower operating costs with better
liquidity. This acquisition demonstrated that the Company and its
Investment Manager are capable of delivering accretive corporate
acquisitions which benefit both existing and incoming
shareholders."
Diverse portfolio
Annual passing
rent % portfolio
income
(GBPm)
Top ten tenants Asset locations
Menzies Distribution Aberdeen, Edinburgh, Glasgow, Ipswich, Norwich, Dundee, 1.5 3.4%
Swansea, York
B&M Retail Swindon, Ashton-under-Lyne, Plymouth, Carlisle 1.3 2.7%
B&Q Banbury, Weymouth 1.1 2.4%
Wickes Building Supplies Winnersh, Burton upon Trent 0.8 1.8%
First Title (t/a Enact Leeds 0.6 1.4%
Conveyancing)
Sainsbury's Torpoint, Gosforth 0.6 1.4%
Regus (Maidstone West West Malling 0.6 1.4%
Malling)
H&M Winsford 0.6 1.4%
Next Eurocentral, Evesham 0.6 1.2%
VW Group Derby, Shrewsbury 0.5 1.2%
Weighting
31 Mar 2022
Weighting by income Location
31 Mar 2022
Sector West Midlands 18%
North-West 19%
Industrial 38% South-East 14%
Retail warehouse 21% East Midlands 13%
Office 17% Scotland 10%
Other 13% North-East 12%
High street retail 11% South-West 9%
Wales 1% Our environmental, social and governance ("ESG")
objectives
-- Improving the energy performance of our buildings - investing
in carbon reducing technology,infrastructure and onsite renewables
and ensuring redevelopments are completed to high environmental
standards.
-- Reducing energy usage and emissions - liaising closely with
our tenants to gather and analyse data on theenvironmental
performance of our properties to identify areas for
improvement.
-- Achieving social outcomes and supporting local communities -
engaging constructively with tenants andlocal government to ensure
we support the wider community through local economic and
environmental plans andstrategies and playing our part in providing
the real estate fabric of the economy, giving employers safe places
ofbusiness that promote tenant well-being.
-- Understanding environmental risks and opportunities -
allowing the Board to maintain appropriategovernance structures to
ensure the Investment Manager is appropriately mitigating risks and
maximisingopportunities
-- Complying with all requirements and reporting in line with
best practice where appropriate - exposing theCompany to public
scrutiny and communicating our targets, activities and initiatives
to stakeholders Investment Manager
Custodian Capital Limited ("the Investment Manager") is
appointed under an investment management agreement ("IMA") to
provide property management and administrative services to the
Company. Richard Shepherd-Cross is Managing Director of the
Investment Manager. Richard has over 25 years' experience in
commercial property, qualifying as a Chartered Surveyor in 1996 and
until 2008 worked for JLL, latterly running its national portfolio
investment team.
Richard established Custodian Capital Limited as the Property
Fund Management subsidiary of Mattioli Woods plc and in 2014 was
instrumental in the launch of Custodian REIT plc from Mattioli
Woods' syndicated property portfolio and its 1,200 investors.
Following the successful IPO of the Company, Richard has overseen
the growth of the Company to its current property portfolio of over
GBP650m.
Richard is supported by the Investment Manager's other key
personnel: Ed Moore - Finance Director, Alex Nix - Assistant
Investment Manager and Tom Donnachie - Portfolio Manager, along
with a team of six other surveyors and four accountants.
Chairman's statement
The year to 31 March 2022 has been a period of significant
recovery for the Company's NAV and share price after the extreme
challenges presented by the global pandemic. NAV total return for
the year was 28.4%, up from 0.9% in the previous financial year due
primarily to valuation increases of GBP94.0m during the year. Rent
collection is back at pre-pandemic levels and tenants have honoured
their deferred rent agreements which has taken recurring (EPRA)
earnings to 5.9p per share.
Acknowledging the importance of income for shareholders I was
delighted the Board was able to increase quarterly dividends during
the year which took the total dividend declared for the year to
5.25p per share. This dividend was one of the highest fully covered
dividends amongst its peer group of listed property investment
companies[20] for the year ended 31 March 2022 and, in line with
the Company's policy, was 110% covered by EPRA earnings.
The Company is targeting a dividend per share of at least 5.5p
per share for the year ending 31 March 2023.
Strategy for future growth
Custodian REIT supportively acknowledges the market desire for
consolidation in the REIT sector, but inertia and entrenched
interests can make delivering consolidation much harder than it
should be. Despite these challenges we were delighted to announce
the all-share acquisition of Drum Income Plus REIT in November
2021. Alignment of property strategy and a shared focus on income
returns made a compelling rationale for the benefit of shareholders
old and new.
The proposed closure of two large open-ended property funds by
Aviva and Aegon and the anticipated sale of the entire GBP940m
Janus Henderson UK property fund portfolio has marked a watershed
for open-ended property funds offering theoretical daily dealing to
retail investors. With universal recognition that the open-ended
model has failed investors we see diversified property investment
companies as the natural choice for retail investors and wealth
managers seeking income from commercial property.
Shareholder income is derived from earnings and Custodian REIT
operates with one of the highest earnings yields of its peer group
giving it the greatest capacity to pay sustainable, fully covered
dividends, which will make up the largest part of total return to
shareholders. Based on most recently reported EPRA earnings
Custodian REIT delivered an earnings yield[21], as at 31 March 2022
of 5.9%, versus a peer group average of 4.1%.
Net asset value
The NAV of the Company at 31 March 2022 was GBP527.6m,
approximately 119.7p per share, an increase of 22.1p (22.6%) since
31 March 2021:
Pence per share GBPm
NAV at 31 March 2021 97.6 409.9
Issue of equity[22] (0.2) 19.6
Valuation movements relating to:
- Acquiring DRUM REIT at a discount to NAV 1.7 7.3
- Asset management activity 3.0 13.4
- General valuation increases 16.7 73.3
Valuation increase before acquisition costs 21.4 94.0
Impact of asset acquisition costs (0.5) (2.3)
Valuation increase including acquisition costs 20.9 91.7
Profit on disposal of investment property 1.2 5.4
Net valuation movement 22.1 97.1
Revenue 8.9 39.9
Expenses and net finance costs (3.2) (14.7)
Dividends paid[23] (5.5) (24.2)
NAV at 31 March 2022 119.7 527.6
The net valuation increase of GBP94.0m saw significant increases
in the industrial and logistics and retail warehouse sectors,
comprising in aggregate 68% of the portfolio by value, which
together have been the principal drivers of NAV growth through the
year. Also of note has been the return to modest growth in the
latter part of the year in our High Street portfolio, perhaps
marking an inflection point in investor demand. Property valuation
commentary is detailed in the Investment Manager's report.
Custodian REIT's investment strategy has stood the Company in
good stead again this year. For the year to March 2022, NAV total
return of 28.4% has outstripped total share price return of 17.0%,
which the Board regards as vindication of the quality of the
portfolio and dividend capacity that might support future share
price growth.
During May and June 2022 all of the serving Non-Executive
Directors acquired shares in the Company, reflecting the Board's
view that the Company's current share price does not sufficiently
reflect the true value of its net assets.
The market
Thematic investment continues to dominate fund raising and is
polarising property investment demand and pricing. The weight of
capital chasing the industrial and logistics sector and more
recently retail warehousing has led to some significant yield
compression[24] and has boosted capital value returns for investors
in logistics specialists. While this yield compression has led to
NAV growth for existing investors, the counterbalance is that
income yields are being materially squeezed. Custodian REIT's
regional smaller property specialism, targeting the marginal income
advantage from smaller lots which offer a higher rental yield for
the same level of property and tenant risk, has never been of
greater relative importance than in current market conditions.
With logistics property yields now by some distance at
historical lows, investors are acutely sensitive to any hint of
slowdown from operators such as Amazon. At a time of rising
interest rates we simply do not believe that yield compression
driven growth will continue in logistics property over the next two
years. Without further yield compression, investors are relying on
continuing high levels of rental growth to deliver returns, which
again points to the fortunes of the operators. A reversal of
returns from logistics property will quickly highlight the risks
inherent in a single sector property strategy, and we believe would
generate a re-focus on diversified strategies where managers can
exploit mispricing in sub-sectors of the office and retail markets,
while still enjoying rental growth from industrial, logistics and
retail warehousing. Property investment strategy
The Company targets smaller regional properties, typically below
the value level sought by larger investment funds, which results in
higher yields and more robust vacant possession values with better
mitigation against binary tenant and geographical risk compared to
investing in larger lots.
Since 2016 the Company's upper target lot-size has been GBP10m
but capital values have seen significant price inflation since
then, particularly in the industrial and logistics sector. The
Board therefore recommends that shareholders approve an increase in
the upper target lot-size from GBP10m to GBP15m at the Company's
next Annual General Meeting ("AGM") on 31 August 2022. While even
GBP15m remains below the general level of institutional demand,
assets larger than GBP10m will only be acquired where we can still
achieve a beneficial yield margin relative to larger lots and the
proposed change will offer the Investment Manager the flexibility
to consider a wider range of opportunities that fit the Company's
investment policy.
The Board will also propose broadening its investment policy's
definition of refurbishment to include the redevelopment of
existing holdings, to a maximum 10% of the Company's gross assets,
at the Company's forthcoming AGM to provide flexibility to maximise
shareholder returns from existing assets.
Borrowings
Since the year end the Company has arranged a GBP25m tranche of
10 year debt with Aviva Real Estate Investors ("Aviva") at a fixed
rate of interest of 4.10% per annum to refinance a GBP25m variable
rate revolving credit facility with Royal Bank of Scotland ("RBS"),
acquired via the DRUM REIT acquisition. This refinancing will
mitigate interest rate risk and refinancing risk for shareholders
and increase the proportion of the Company's agreed debt facilities
that are at fixed rates of interest from 61% to 74%. The
refinancing maintains the significant accretive margin between the
Company's 3.2% weighted average cost of debt post-refinancing and
property portfolio net initial yield of 5.7%.
Investment Manager
The performance of the Investment Manager is reviewed each year
by the Management Engagement Committee ("MEC"). During the year the
fees paid to the Investment Manager were GBP4.4m (2021: GBP3.8m) in
respect of annual management, administrative and transaction fees.
Further details of fees payable to the Investment Manager are set
out in Note 18.
The Board is pleased with the performance of the Investment
Manager, particularly completing the corporate acquisition of DRUM
REIT and its continued successful asset management initiatives,
detailed in the Investment Manager's report and Asset management
report respectively, which contributed significantly to increases
in net asset value, portfolio value and income. The Board is
satisfied that the Investment Manager's performance remains aligned
with the Company's purpose, values and strategy.
Board succession
After eight years of service, Matthew Thorne has indicated his
intention to retire as Non-Executive Director of the Company at the
AGM on 31 August 2022, in line with its succession plan. The Board
would like to thank Matthew for his significant contribution to the
development of the Company since his appointment on IPO in
2014.
Responding to Matthew's expected departure we are delighted to
welcome Malcolm Cooper who joined the Board on 6 June 2022 and will
offer a range of skills including the financial expertise to take
on the role of Chair of the Audit and Risk Committee and maintain
the Board's property and governance experience. We look forward to
the contribution Malcolm will make.
The Board is conscious of stakeholder focus on diversity and
recognises the value and importance of diversity in the boardroom.
No Directors are from a minority ethnic background but the
Company's Board contains two women which satisfied the gender
diversity recommendations of the Hampton-Alexander Review for at
least 33% female representation on FTSE350 company boards at the
year end. As a constituent of the FTSESmallCap Index Custodian REIT
is not bound by this recommendation. The Board supports the overall
recommendations of the Hampton-Alexander and Parker Reviews for
appropriate gender and ethnic diversity although it is not seen to
be in the interests of the Company and its shareholders to set
prescriptive diversity targets for the Board at this point.
The recruitment process involved the use of external consultants
and focused on key skills a new Director would bring including
financial experience as well as diversity of experience, background
and approach as well as the traditional facets of gender, ethnicity
and age.
Environmental, social and governance
The Board recognises that its decisions have an impact on the
environment, people and communities. The Board also believes that
the Company's property strategy and ESG aspirations create a
compelling rationale to make environmentally beneficial
improvements to its property portfolio and incorporate ESG best
practice into everything the Company does.
On 1 April 2021 the Board constituted an ESG Committee to: set
and amend where necessary the Company's environmental key
performance indicators ("KPIs") and monitor its performance against
them; ensure it complies with its environmental reporting
requirements and best practice; assess the engagement with the
Company's environmental consultants and assess the level of social
outcomes being achieved for its stakeholders and the communities in
which it operates.
The Company's ESG policy outlines our approach to managing ESG
impacts and provides the framework for setting and reviewing
environmental and social objectives to ensure we are continuously
improving our performance and setting a leadership direction.
As a result, the Board has committed to:
-- Understanding environmental risks and opportunities;
-- Improving the energy performance of our buildings;
-- Reducing energy usage and emissions;
-- Achieving social outcomes and supporting local communities;
and
-- Complying with all requirements and reporting in line with
best practice where appropriate.
Progress towards these commitments during the year, details of
the Company's environmental policy and performance against its
targets are contained within the ESG Committee report within the
Strategic report.
The Board is determined to ensure the Company's pathway towards
net zero carbon fits with stakeholder expectations and the
Company's property strategy. We see the careful implementation of a
practical carbon reduction strategy as a crucial next step in the
Company's ESG journey and during the course of the year ending 31
March 2023 we will engage advisors to assist the Investment Manager
in developing a detailed plan to achieve this.
Cladding
Custodian REIT's portfolio has no exposure to 'high risk' assets
which are typically either high-rise buildings (those over 18m
tall) which use cladding in their construction or those used for
multiple residential occupation. However, during the year the Board
instigated a detailed review of the Company's cladding risks and
obligations involving the Investment Manager and the Company's
solicitors. This review has resulted in the Investment Manager
implementing a more extensive cladding policy, moving beyond the
mandatory fire risk assessment requirements for properties where
the composition of cladding material is unknown and considering
core-drilling and replacing, where necessary, cladding not
compliant with Loss Prevention Certification Board guidelines.
Company name
To better reflect the Company's focus on income and to
facilitate retail investors more easily accessing the Company's
shares via online platforms, the Board will propose changing the
Company's name from Custodian REIT plc to Custodian Property Income
REIT plc at the 31 August 2022 AGM.
Outlook
The Company enjoys the support of a wide range of shareholders
with the majority classified as private client or discretionary
wealth management investors. The Company's investment and dividend
strategy and diversified portfolio are well suited to investors
looking for a close proxy to direct real estate investment but in a
managed and liquid structure. Capital flows out of the failing
open-ended property fund model and investors moving from a yield
compression fuelled capital growth strategy to a long-term, secured
income strategy will find their interests aligned with Custodian
REIT.
Inflation is a clear and present risk in the market today.
Traditionally investors have looked to real estate as a hedge
against the negative impact of inflation on investment returns as
over the longer term historically property values and rents
increase in an inflationary environment. Following a period of
growth, the challenge for real estate companies is to own
properties with further rental growth potential whose valuation
will most closely keep pace with rising prices; Custodian REIT's
approach to this challenge is expanded upon in the Investment
Manager's report.
The impact of inflation, particularly in energy and food prices,
on consumer spending, supply chain constraints and the uncertainty
caused by the war in Ukraine and the aftermath of the COVID-19
pandemic could lead to an economic downturn but we believe
Custodian REIT's portfolio, diversified by sector, geography and
tenants, with low gearing will remain resilient in the face of any
economic headwinds.
Income is likely to form the greater component of total return
over the next phase of the property market and we believe that
Custodian REIT's strong income yielding portfolio, supported by
higher-than-peer group EPRA earnings per share, will underpin
shareholder returns.
David Hunter
Chairman
16 June 2022
Investment Manager's report
The UK property market
Market sentiment remains strongly positive for the industrial
and logistics sector. Positivity has emerged, post COVID-19
lockdowns, for central London and major regional city offices and
the retail warehouse sector has challenged the general retail
malaise. As we have reported over the last six months there is a
nascent recovery in sentiment towards high street retail, but only
in prime pitches and in leading retail centres. So, with the
exception of secondary retail, business park offices and secondary
leisure schemes, market demand is driving value increases across
the board which has led directly to seven consecutive quarters of
NAV growth for Custodian REIT.
Sector by sector the Custodian REIT portfolio has followed the
wider market trends during the year with, like for like, the
industrial and logistics valuation increasing by 26.4%, retail
warehousing increasing 16.4% and high street, although decreasing
by 4.8% in the year, bottoming out and showing a 7.3% increase over
the last six months. The office portfolio showed a slight
like-for-like increase in value of 1.9% reflecting the 50%
weighting to business park offices, which have been a slight drag
on performance. Prime regional city centre offices have fared
better post COVID-19 lockdowns. The current strategy is to weight
our office allocation away from business parks and towards strong
city centres, as recent acquisitions in Manchester and Oxford have
demonstrated, where we are witnessing the strongest occupier and
investor demand and we believe the office portfolio is set fair to
see growth.
There is rightly a keen focus on inflation at present and
whether real estate investment can offer a degree of inflation
hedging. In short, the answer must be 'yes' as rents should grow
over time, but with typically five-yearly rent reviews and average
unexpired lease terms of circa five years, investors should not
expect a straight-line relationship between rents and inflation.
Much focus is currently on RPI and CPI linked rent reviews,
generally capped at up to 4% per annum, which of course provide
shorter-term comfort but can have the effect of creating bond like
investment characteristics with a greater emphasis placed on tenant
covenant than the property fundamentals. At some point in a
property's life cycle rents will always be re-based to open market
values. An over-reliance on index linked rent reviews can lead to
disparity between investment values and underlying property values.
Over the long term we do not feel indexed rent reviews are a worthy
substitute for owning good real estate where we back open market
rent reviews to deliver rental growth. For long-term investors,
such as Custodian REIT, the aim is to provide inflation protection
from the bricks and mortar, not from the contractual terms of the
leases. The table below shows how Custodian REIT's portfolio rental
growth performance has played its part in mitigating the negative
impacts of inflation on costs and interest rates. Notably, in the
last six months all sectors have shown rental growth:
Like-for-like rental value change
12 months to 31 March 2022 6 months to 31 March 2022
Sector
Industrial +10.7% +4.9%
Retail warehouse -1.7% +0.3%
Office +2.7% +1.1%
Other -2.9% +1.9%
High street retail -5.3% +2.0%
Whole portfolio +3.8% +2.9%
Across the industrial and logistics portfolio, notwithstanding
the rental growth to date, the average rent stands at only GBP6.17
per sq ft for let properties (GBP5.27 including vacancies) with an
estimated rental value of GBP7.05 per sq ft (GBP6.20 including
vacancies), suggesting a latent rental uplift of c.14%.
Furthermore, both passing rents and estimated rental values are
some way below the rent required to bring forward new development,
indicating further growth potential.
Retail warehousing and high street retail rents appear to have
bottomed out and we are seeing some recent demand led rental growth
in these sectors. Importantly retail rents are growing from a low
base, following a period of rental decline making them affordable
for tenants. By way of example, the average retail warehouse rent
across the portfolio stands at circa GBP14.30 per sq ft (GBP13.58
including vacancies), broadly in line with current estimated rental
values and much lower than average market levels.
In select locations, notably prime regional city centres, we are
seeing office rents increasing. This is by no means applicable to
all regional offices but is focused on high quality, flexible
office space with strong environmental credentials. The recent
acquisition of 60 Fountain Street in Manchester is an example of
how Custodian REIT is taking advantage of the opportunity to
reposition property to meet the expected demands of tenants, post
pandemic, and to pick up the higher rents attributable to
refurbished space.
The greater driver of inflation appears to be cost-push rather
than demand-pull as the economy struggles with supply chain
constraints, energy price increases, labour shortages and the
aftermath of pandemic restrictions. These factors all mitigate
against widespread, low cost, speculative development which would
otherwise help resolve the demand/supply imbalance that is
promoting rental growth.
We believe Custodian REIT's portfolio is particularly well
positioned to see rental growth as it is focused on smaller
regional properties:
In the industrial and logistics sector, which accounts for 49%
of the portfolio by value, smaller properties are more expensive to
develop, pro-rata, so require higher rents to justify development.
Rents will continue to grow until they balance out inflation in
build costs.
The retail warehouse portfolio is almost exclusively focused on
DIY, homewares, discounters and food, all let off affordable rents.
This occupier profile is best matched with current market demand
and so well placed to pick up rental growth.
We have reorganised our high street retail portfolio over the
last two years, exiting most of the secondary retail locations. We
have let three vacant high street properties during the year and
have terms agreed or are seeing active demand for the very limited
remaining vacant space we have in the high street portfolio from
both retail and leisure occupiers. Low vacancy rates in prime
locations and occupier demand should be supportive of future rental
growth.
In the office portfolio we have identified, or are progressing,
a number of refurbishment opportunities with a keen eye on
environmental improvements. Owners of smaller regional offices are
often not sufficiently well resourced to create high quality small
suite offices that are a match for the larger floorplates. However,
we believe that occupier demand will be focused on higher quality
space to support businesses in attracting their employees back into
the office. We believe that by positioning our office portfolio to
meet occupier demand we will reduce vacancy and drive rental
growth.
Prevailing investment approach
Based on our assessment of the current market, our strategy of a
regionally focused diversified portfolio, set out below, has proven
resilient and we expect to continue to reinvest the proceeds from
selective disposals.
-- Maintain weighting to industrial and logistics - assets in
this sector still have latent rental growth,but yields are 'topping
out' and there have been recent significant share price decreases
in the large distributionshed sector over fears of decreasing
demand for new space;
-- Retail warehousing let off low rents which should recover
from 2021 levels;
-- Selective regional offices with a focus on strong city centre
locations instead of out-of-town businessparks;
-- Drive thru' expansion involving acquisition and development
where rental growth is anticipated;
-- Selective high street retail assets in the country's
strongest locations where rents have stabilised andthere is
potential for growth; and
-- Refurbishment of existing property, maximising all
opportunities to invest in the quality of our assetsand support our
ESG goals.
Sectoral view
Industrial and logistics
The industrial and logistics sector has been flooded with
capital, much of it overseas private equity, which has been a big
driver of price inflation. The fundamental occupational dynamics
for smaller industrial and logistics assets continue to support
rental growth: increased demand from the logistics sector servicing
'E-tailing' and the onshoring of the national supply chain; lack of
supply of modern, fit-for-purpose units and build cost inflation
which is setting higher threshold rents to fund development. All of
this has led to valuation growth which has been strongly positive
for Custodian REIT. Vacancy rates are very low, against long-term
averages, supporting cash flow and opportunities to invest at
prices that are fully supported by vacant possession values still
exist amongst smaller regional properties. Recently there have been
indications that occupational demand for large distribution sheds
may be decreasing, with Amazon suggesting it potentially has
over-capacity, but the favourable dynamics of smaller lot-sizes
which have seen less recent speculative development and are less
reliant on the large retailers should make the Company's portfolio
defensive.
In summary:
-- Occupational demand is robust; supply is tight
-- Vacancy rate below the long-term average
-- Latent rental growth potential
-- Investment demand at record levels with pricing to match
-- Target sector for well-priced opportunities
High street retail
The high street retail sector is starting to find its feet after
a difficult four years. The pandemic cleared out the last of the
'lame ducks' on the high street, so most retailers who are still
trading appear robust and want to be in physical stores. In prime
locations rents appear to be bottoming out, or even seeing a slight
re-bound. Lower rents are supporting occupier demand and reducing
vacancy rates and void periods, in prime locations, which is
providing a degree of confidence to investors not seen for some
time. The Company's high street retail portfolio is, by and large,
concentrated on retailers of essentials such as groceries,
pharmaceuticals, banking and discount items rather than luxury or
fashion items. This focus on 'need' versus 'want' retailers should
prove more defensive as consumer spending capacity decreases in the
current inflationary environment.
In summary:
-- Over-supply - rents have suffered but are bottoming out
Retail warehouse
Out-of-town retail has seen a quick turnaround in investor
demand over the last 24 months, most particularly in the last 12
months. The combination of convenience, lower costs per square foot
and the complementary offer to online retail has kept these assets
trading strongly most notably amongst DIY, discounters, homewares
and food retailers, which should prove defensive if consumer
spending levels decrease. As the second largest sector in the
Custodian REIT portfolio, the recovery in market sentiment towards
out-of-town retail has been positive and vacancy rates remain
low.
In summary:
-- Units let off low rents
-- Lower costs of occupation
-- Complementary to online
Offices
The office sector is likely to be forever changed following the
mass working from home experiment of the pandemic despite the
government's current drive to encourage a return to the office and
the uncertainty a potential economic downturn brings. In truth, the
change that this has brought about has been an acceleration of a
trend that was already embedded. Prime, regional city centres
appear to be showing demand from occupiers and investors alike and
have outperformed business park offices. A clear trend that has
emerged is the need for landlords to provide a greater level of
service and flexibility to office tenants, the so called
'hotelisation' of offices.
The 'hotelisation' of offices
We expect a 'hotelisation' of office buildings to be necessary
to entice employees away from their home office while driving rents
higher.
The COVID-19 pandemic led many to call the demise of the office
and valuations plummeted as employees set up work at kitchen tables
across the country, but we do not believe that offices will become
redundant and in 'the eye of the pandemic' Custodian REIT acquired
offices in Manchester and Oxford and is using the former as a trial
run for the next phase of office investing: 'the hotelisation of
offices'.
The Company is not quite breaking new ground but we are at the
vanguard of other landlords with akin to a concierge service for
office occupants, giving flexibility and services that are not
typical in standard 25-year leases. While the concept is yet to be
proven we know that tenants want more from their landlords than
just a lease.
From conversations we are having with occupants and being
occupants ourselves as a business, we know that there is nothing
tenants hate more than looking at offices and being shown floor
after floor of empty space with grey carpets. They don't want to
take a five-year lease, have to fit the space out and install a
broadband connection; they don't have interest in it, they don't
have time, or the resources to do it. On top of those costs,
tenants then pay dilapidation costs to the landlord when they leave
and must return the building to the state it was in when they took
it.
What you are asking tenants to do is fit out an office, then
strip it out, and put it all in a skip and that is not good for
their ESG credentials.
Instead, we plan to offer tenants a 'turnkey' office with all
facilities, fit out, and services managed by the Investment
Manager. Occupants want a space they can walk into and most
businesses need the same thing; a large meeting room, a small
meeting room, a breakout area, a kitchen, a comfortable reception,
desks with an internet connection as most people work from laptops,
and there will be an element of hotdesking. Companies expect a
flexible workspace where they will have three days a week heavy
use.
Overall, we are seeking to invest in making the offices 'nicer
than being at home' so people actually want to work there.
We are trialling the concept with the building in Manchester,
and this includes converting the top floor into a covered roof
terrace with a coffee lounge, additional meeting rooms for tenants
to use and a yoga studio. Having spoken to tenants, we are
confident they will pay more for a space that they can just walk
into and start operating from. Most say they are willing to pay
more to take all the hassle away and this will minimise vacancies
and drive the rents higher, but we will be selective over
appropriate locations for this format and will ensure upgrades are
properly costed to ensure estimated costs are supported by expected
rental and valuation increases.
This is just consumer behaviour playing out. People don't buy
cars anymore, they lease them with a service plan because that
takes the problem away. You lease your phone and when the battery
starts to die, you trade it in for a new one.
People are demanding a higher level of service but they do not
want the same level of responsibility and ownership as 20 years
ago.
Other
Our key sub-sector for growth within the alternative sector is
drive-through where we have grown our holding to eight assets
through acquisition, development or conversion of existing
restaurant sites, with a further conversion and acquisition in the
pipeline. We believe these assets offer significant rental growth
potential and the conversions carried out during the year were
subject to fierce occupier competition from established operators
and, in particular, new entrants into the UK market from North
America.
Weighting Weighting
by income by income
31 Mar 2022 31 Mar 2021
Sub-sector of 'Other' sector assets
Motor trade 24% 35%
Gym 20% 18%
Pub and restaurant 18% 16%
Drive-through 14% 7%
Trade counter 8% 7%
Leisure 8% 9%
Other 8% 8%
Total of 'Other' sector 100% 100%
ESG
The sustainability credentials of both the building and the
location will be evermore important for occupiers and investors. As
Investment Manager we are absolutely committed to the Company's
challenging goals in relation to ESG and believe the real estate
sector should be a leader in this field.
ESG has become an imperative for many investors. Commercial real
estate is a significant contributor to national emissions so we
believe an emphasis on how we can improve the "E" (Environmental)
is particularly relevant for real estate. In this regard we are
striving to beat the Company's target to improve the Energy
Performance Certificates ("EPC") of the portfolio. During the year
the Company has updated EPCs at 20 units across 15 properties
covering 358k sq ft for properties where existing EPCs had expired
or where works had been completed. For updated EPCs, there was an
aggregate decrease in rating of 34 energy performance asset rating
points.
Energy performance and emissions are important considerations
across all redevelopments and refurbishments in the portfolio as is
the importance of "S" (Social) in creating an engaging, appropriate
and sustainable (in all senses of the word) built environment. We
believe that ESG improvements are an opportunity for shareholders
to benefit from the enhanced rents, valuations and 'lettablilty' of
the portfolio which should deliver valuation improvements over and
above the cost of the investment. Investing in real estate that
meets the ESG requirements of occupiers and legislation should lead
to shorter periods of vacancy, higher rents and enhanced values.
Remembering the "G" (Governance) we have policies, embedded in our
strategy, to keep Custodian REIT on target to meet the required
standards but we remain focused on delivering returns at the same
time. The targets the Company has set itself are set out in the ESG
Committee report.
Property portfolio balance
The property portfolio is split between the main commercial
property sectors in line with the Company's objective to maintain a
suitably balanced investment portfolio. The Company has a
relatively low exposure to office and high street retail combined
with a relatively high exposure to industrial and to alternative
sectors, often referred to as 'other' in property market analysis.
The current sector weightings are:
Valuation Weighting Valuation Weighting
by income by income Valuation Valuation movement
31 March [25] 31 March movement before including
2022 2021 31 March acquisition costs acquisition costs
31 March GBPm Weighting by Weighting by
GBPm GBPm 2021 GBPm value 31 value 31
2022 March 2022 March 2021
Sector
Industrial 325.1 38% 270.2 41% 69.1 67.5 49% 49%
Retail 125.4 21% 99.7 21% 17.0 16.7 19% 18%
warehouse
Office 88.1 17% 54.8 12% 0.1 (0.3) 13% 10%
Other[26] 76.9 13% 84.4 16% 4.7 4.7 12% 15%
High street 49.7 11% 42.8 10% (4.2) (4.2) 7% 8%
retail
Gain on
acquisition N/a N/a N/a N/a 7.3 7.3 N/a N/a
of DRUM REIT
Total 665.2 100% 551.9 100% 94.0 91.7 100% 100%
For details of all properties in the portfolio please see
custodianreit.com/property/portfolio.
Acquisitions
The Company invested GBP63.5m in the following asset
acquisitions during the year:
-- A 20k sq ft office building on Fountain Street, Manchester
for GBP6.25m. The property comprises basementparking and six floors
let to Leyton UK, Meridian Healthcomms, Venditan and Fourthline
with an aggregate annualrent of GBP407k, reflecting a net initial
yield[27] ("NIY") of 6.1%;
-- A 46k sq ft retail warehouse in Cromer for GBP4.5m occupied
by Homebase with an annual passing rent ofGBP300k, reflecting a NIY
of 6.3%;
-- A 49k sq ft industrial asset in Knowsley, Liverpool for
GBP4.325m. The asset comprises six units occupiedby Engineering
Solutions and Automations, Portakabin, Green Thumb, Central
Electrical Armature and Med Imaging withan aggregate annual passing
rent of GBP260k, reflecting a NIY of 5.6%;
-- A 29k sq ft industrial unit in York for GBP3.0m occupied by
Menzies Distribution with an annual passingrent of GBP186k,
reflecting a NIY of 5.9%;
-- A 30k sq ft industrial unit in Dundee for GBP1.9m occupied by
Menzies Distribution with an annual passingrent of GBP118k,
reflecting a NIY of 5.9%; and
-- A 24k sq ft industrial unit in Nottingham for GBP1.875m
occupied by Hickling & Squires printers with anannual passing
rent of GBP130k, reflecting a NIY of 6.53%.
On 3 November 2021 the Company acquired 100% of the ordinary
share capital of DRUM Income Plus REIT plc. Consideration for the
acquisition of 20,247,040 new ordinary shares in the Company was
calculated on an 'adjusted NAV-for-NAV basis', with each company's
30 June 2021 NAV being adjusted for respective acquisition costs
with DRUM REIT's property portfolio valuation adjusted to the
agreed purchase price of GBP43.5m (31 March 2022 valuation:
GBP49.0m).
DRUM REIT's property portfolio at 31 March 2022 is summarised
below:
-- 10 regional properties comprising five offices, three retail
parks, one shopping centre and oneindustrial estate in aggregate
covering approximately 330k sq ft
-- 79 tenants, the largest of which is Skills Development
Scotland with annual rent of GBP0.4m (c.13% of DRUMREIT's rent
roll)
-- EPRA occupancy rate of 80.1%, providing some short-term asset
management opportunities
-- WAULT[28] of 3.3 years
-- Contractual annual rent roll of GBP3.3m with an estimated
rental value ("ERV") of GBP4.5m
-- Portfolio valuation of GBP49.0m
-- Reversionary yield[29] ("RY") of 8.6%
DRUM REIT's portfolio represents an excellent fit with Custodian
REIT's investment policy, targeting smaller regional property with
a strong income focus. The purchase price reflected a sufficient
discount to DRUM REIT's NAV to be accretive to existing Custodian
REIT shareholders and to provide DRUM REIT shareholders with an
increase in like for like share price, as well as delivering them a
growing dividend from a much larger specialist in the smaller
regional property sector with much improved liquidity.
Details of each property within DRUM REIT's portfolio are:
Location: Gosforth, Newcastle Location: Central Glasgow
Sector: Retail (shopping centre) Sector: Office
Tenants: Sainsbury's, multiple small local retailers Tenant: Skills Development Scotland
RY: 8.1% RY: 6.8%
Agreed purchase price: GBP8.975m Agreed purchase price: GBP7.087m
Location: Cheadle, Greater Manchester Location: Edinburgh Business Park
Sector: Office Sector: Office
Tenants: Agilent Technologies, Micron Europe Tenant: Multiple
RY: 9.3% RY: 10.0%
Agreed purchase price: GBP5.036m Agreed purchase price: GBP4.593m
Location: Central Manchester Location: Southport
Sector: Office Sector: Retail warehouse
Tenants: Multiple Tenant: Multiple
RY: 12.4% RY: 9.0%
Agreed purchase price: GBP4.503m Agreed purchase price: GBP3.963m
Location: Dunfermline Location: Gloucester
Sector: Retail warehouse Sector: Retail warehouse
Tenants: Multiple Tenant: Farmfoods
RY: 9.8% RY: 8.3%
Agreed purchase price: GBP3.687m Agreed purchase price: GBP2.396m
Location: Aberdeen airport Location: Gateshead
Sector: Industrial Sector: Office
Tenants: Multiple Tenants: Worldpay, Datawright
RY: 11.8% RY: 17.0%
Agreed purchase: GBP1.66m Agreed purchase: GBP1.6m
Since the year end the Company has acquired:
-- A 87k sq ft industrial facility in Grangemouth for GBP7.5m
occupied by Thornbridge Sawmills with an annualpassing rent of
GBP388k, reflecting a NIY of 5.5%; and
-- A 5k sq ft retail asset in Winchester for GBP3.65m occupied
by Nationwide Building Society and Hobbs withan aggregate annual
passing rent of GBP249k, reflecting a NIY of 6.4%.
Disposals
Owning the right properties at the right time is a key element
of effective property portfolio management, which necessarily
involves periodically selling properties to balance the property
portfolio. Identifying opportunities to dispose of assets which the
market overrates, have a special purchaser or that no longer fit
within the Company's investment strategy is important and through
the year sales proceeds of GBP54.4m were GBP9.6m ahead of valuation
when the disposals were agreed (or GBP5.4m above final quarterly
valuations prior to sale).
Taking advantage of the strength and depth of demand in the
industrial/logistics sector and the increasing demand from owner
occupiers, we were delighted to conclude some opportunistic sales
during the year. We concluded the portfolio sale of seven
industrial units which we felt did not meet our medium-term
aspirations for rental growth or might require a level of capital
expenditure that we would not recover in the valuation. As part of
the sale, we agreed a delayed completion which enabled us to
partially reinvest the expected proceeds in advance of completion,
which has helped to reduce cash drag.
We also sold, to owner occupiers/special purchasers, a B&Q
retail warehouse in Galashiels and two car show rooms, in Stockport
and Stafford as detailed in the complete list for the year
below:
-- A portfolio of seven industrial properties located in
Gateshead, Stockton-on-Tees, Warrington, Stone,Christchurch,
Aberdeen and Bedford for GBP32.6m, GBP5.1m (19%) above the
properties' valuation when terms of the salewere agreed and GBP2.9m
above the last valuation. The properties were acquired either in
the seed portfolio at IPOor within subsequent portfolio
acquisitions and have an aggregate current passing rent of GBP2.0m
reflecting a NIY onsale price of 5.9%;
-- A 42k sq ft car showroom in Stockport for GBP9.0m, GBP1.4m
(18%) ahead of valuation when terms of the salewere agreed and
GBP0.4m above the last valuation;
-- A 23k sq ft car showroom in Stafford for GBP4.9m, GBP1.15m
(31%) ahead of valuation when terms of the salewere agreed and
GBP0.9m above the last valuation;
-- A 31k sq ft retail warehouse in Galashiels occupied by
B&Q for GBP4.5m to a special purchaser, GBP1.8m (67%)ahead of
valuation;
-- High street retail units in Norwich, Nottingham, Kings Lynn
and Cheltenham at valuation for an aggregateGBP2.9m; and
-- A vacant children's day nursery in Basingstoke for GBP0.6m,
GBP0.1m ahead of the last published valuation.
Since the year end the Company has sold a 25k sq ft car showroom
occupied by Audi for GBP5.6m.
Outlook
The recovery in NAV during the year has been testament to the
strength of the UK commercial property, allied to Custodian REIT's
focus on smaller regional property and the close management of the
portfolio to maximise occupancy, rent collection, cash flow and
earnings.
The absolute focus on income is central to the management style
and strategy of Custodian REIT. This approach is likely to be
validated as yield compression slows and shareholder returns are
reliant on earnings and dividends. Rent collection has normalised
and Custodian REIT has latent rental growth which will justify
current valuations.
While thematic investment has been the overwhelming focus of
investment over the last 12 months, we believe the diversified
strategy, if applied with discretion and clear aims, will be able
to capitalise on market mispricing for recovering sectors and offer
shareholders a balanced and attractive risk adjusted return.
Richard Shepherd-Cross
for and on behalf of Custodian Capital Limited
Investment Manager
16 June 2022
Asset management report
Asset management strategy
Our asset management strategy is summarised as follows: 1.
Generating strong and predictable levels of cash flow by:
-- In-house management and rent collection - maintaining direct
relationships with tenants and identifyingearly any issues to they
can promptly be addressed
-- Minimising vacancies - proactively discussing renewals and
regears and pre-empting exits to ensuremarketing has commenced in
advance of expiry 2. Enhancing asset value through:
-- Refurbishment - ensuring tenants perform maintenance
obligations within lease contracts and working withtenants to
actively refurbish and improve assets
-- Improving energy performance - encouraging tenants to reduce
carbon emissions and usage and investing inassets to enhance ESG
credentials and future-proof rents 3. Maximising opportunities of
differing cycles in different sectors:
-- Adjusting allocations - focusing on areas with the best
medium-term rental growth prospects andmitigating risk by
maintaining a diversified portfolio
-- Opportunistic sales and acquisitions - taking advantage of
off-market acquisition opportunities and onlyselling assets ahead
of valuation or that no longer fit within the Company's investment
strategy
Our continued focus on asset management during the year
including rent reviews, new lettings, lease extensions and the
retention of tenants beyond their contractual break clauses
resulted in a GBP13.4m valuation increase in the year.
Property portfolio summary
2022 2021
Property portfolio value GBP665.2m GBP551.9m
Separate tenancies 339 265
EPRA occupancy rate 89.8% 91.6%
Assets 160 159
WAULT 4.7 years 5.0 years
NIY 5.7% 6.6%
Weighted average EPC rating C (61) C (63)
Key asset management initiatives completed during the year
include:
-- A 10 year lease with a fifth year tenant break option with DS
Smith Packaging on a vacant industrial unitin Redditch with an
annual rent of GBP401k, increasing valuation by GBP3.5m;
-- A 10 year lease with a fifth year tenant break option with
Harbour International Freight on an industrialunit in Manchester
with an annual rent of GBP316k, increasing valuation by
GBP2.1m;
-- A 10 year lease with a fifth year tenant break option with
PDS Group on a newly refurbished vacantindustrial unit in West
Bromwich with an annual rent of GBP395k, increasing valuation by
GBP2.0m;
-- Exchanging agreements for lease for 15 year leases with Tim
Hortons on former Pizza Hut restaurants inLeicester and Watford,
which are to be converted to drive-through restaurants following
Pizza Hut's companyvoluntary arrangement ("CVA") with aggregate
annual rent of GBP275k, increasing valuations by GBP1.9m;
-- A five year lease with a third year break option to Green
Retreats at a vacant industrial unit inFarnborough at an annual
rent of GBP185k, increasing valuation by GBP0.9m;
-- A 10 year lease renewal with a fifth year tenant break option
with MTS Logistics on an industrial unit inBardon with a stepped
annual rent of GBP175k, rising to GBP205k, increasing valuation by
GBP0.8m;
-- A five year lease without break to Galliford Try on a vacant
office suite in Leicester with an annualrent of GBP165k, increasing
valuation by GBP0.5m;
-- A 10 year lease renewal with a fifth year break option with
BSS Group at an industrial unit in Bristol,increasing the annual
passing rent from GBP250k to GBP255k with an open market rent
review in year five, increasingvaluation by GBP0.3m;
-- A 15 year lease without break with Pure Gym on a vacant
retail warehouse unit in Grantham with an annualrent of GBP90k,
increasing valuation by GBP0.3m;
-- A five year lease with a fourth year tenant break option with
Carbide Properties (t/a TungstenProperties) on a vacant office
suite in Leicester with an annual rent of GBP78k, increasing
valuation by GBP0.2m;
-- A five year lease renewal with a third year tenant break
option with The Works on a retail unit in BurySt Edmunds with an
annual rent of GBP85k, increasing valuation by GBP0.2m;
-- A 10 year lease of the vacant ground floor and a five year
extension of the first floor with Dehns at theCompany's recently
acquired offices in Oxford with an aggregate annual passing rent of
GBP271k, increasing valuationby GBP0.2m;
-- A 10 year lease with a fifth year tenant break option with
Livingstone Brown on a vacant office suite inGlasgow with an annual
rent of GBP56k, increasing valuation by GBP0.2m;
-- A five year lease renewal with a third year break option with
DHL at an industrial unit in Aberdeen,maintaining passing rent at
GBP208k and increasing valuation by GBP0.1m;
-- A 10 year lease with third and fifth year tenant break
options with Ramsdens Financial on a vacant retailunit in Glasgow
with an annual rent of GBP55k, increasing valuation by GBP0.1m;
-- A 10 year lease with fifth and seventh year tenant break
options with Industrial Control Distributors onan industrial unit
in Kettering with an annual rent of GBP25k, increasing valuation by
GBP0.1m;
-- A 15 year lease without break with Loungers on a retail unit
in Shrewsbury, with an annual rent of GBP90k,with no impact on
valuation;
-- A 15 year lease renewal with a tenth year tenant break option
with Smyths Toys on a retail warehouse unitin Gloucester with an
annual rent of GBP130k, with no impact on valuation;
-- A 10 year lease with a fifth year tenant break option with
Diamonds of Chester Camelot on a vacant retailunit in Chester, with
an annual rent of GBP35k, with no impact on valuation;
-- A five year lease without break with Midon on an industrial
unit in Knowsley, with an annual rent ofGBP37k, with no impact on
valuation;
-- A five year lease with a third year tenant break option with
Clogau on a vacant retail unit in Shrewsburywith an annual rent of
GBP50k, with no impact on valuation;
-- A six month lease extension with Saint Gobain on an
industrial unit in Milton Keynes, with passing rentincreasing from
GBP265k to a 'premium rent' of GBP441k, with no impact on
valuation;
-- A short-term four month licence with Royal Mail on a vacant
industrial unit in Redditch for a licence feeof GBP135k, with no
impact on valuation;
-- A 10 year lease renewal with a fifth year break option with
MP Bio Science at an industrial unit inHilton, increasing passing
rent from GBP28k to GBP36k, resulting in an aggregate valuation
uplift of GBP0.1m;
-- A 10 year lease to SpaMedica at a vacant office building in
Leicester with annual rent of GBP87k and openmarket rent review in
year five, with no impact on valuation;
-- A lease with Just for Pets on a vacant retail warehouse unit
in Evesham for a term of 10 years with abreak in year six, at an
annual rent of GBP95k, with no impact on valuation;
-- A five year lease renewal with Quantem Consulting at an
office building in Birmingham, increasing theannual passing rent
from GBP30k to GBP39k, with no impact on valuation;
-- A 10 year lease extension with a break option in year five
with Subway at a retail unit in Birmingham,maintaining the annual
passing rent of GBP14k, with no impact on valuation;
-- A five year lease renewal with a third year tenant break
option with Superdrug on a retail unit inWeston-super-Mare with an
annual rent of GBP60k, with no impact on valuation;
-- A five year lease renewal without break with Holland and
Barrett on a retail unit in Shrewsbury with anannual rent of
GBP60k, with no impact on valuation;
-- A three year lease with Saima Rani Salon on a vacant retail
unit in Shrewsbury, with an annual rent ofGBP15k, with no impact on
valuation;
-- A five year lease without break to Realty Law on a vacant
office suite in Birmingham with an annual rentof GBP28k, with no
impact on valuation; and
-- A five year lease renewal with a third year break option to
Done Brothers (t/a Betfred) at a retail unitin Cheltenham with an
annual rent of GBP25k, with no impact on valuation.
These positive asset management outcomes have been partially
offset by the impact of the Administrations of JTF Wholesale
(GBP586k of annual rent) and Rapid Vehicle Repair (GBP71k of annual
rent) which have resulted in an aggregate 1.8% decrease in the
annual rent roll.
Letting activity is strong across most sectors. We have a strong
pipeline of potential new tenants and since the year end have
completed:
-- A five year lease extension with CDS (t/a The Range) moving
lease expiry out to 2036, which involvedexpanding the external
demise by 2k sq ft to accommodate a larger garden centre with an
additional GBP10k per annumof rent payable on the new space;
-- A 10-year lease on a vacant industrial unit in Avonmouth to
Nationwide Platforms with passing rent ofGBP300k;
-- A 10-year lease renewal with Heywood Williams (t/a Window
Ware) with the agreed annual rent of GBP289kreflecting GBP8 per sq
ft;
-- A new 10-year lease with Bunzl on an industrial unit in
Castleford at an increased rent of GBP164k, an GBP18kuplift from
the previous passing rent;
-- A 10-year lease renewal with B&Q in Banbury with a
passing rent of GBP400k, reflecting GBP11.50 per sq ft;and
-- An agreement for a 10-year lease with Costa Coffee on a high
street unit in Colchester with annual rentof GBP65k.
Occupancy has been negatively impacted by the acquisition of
DRUM REIT but we expect levels across the portfolio, including DRUM
REIT assets, to continue to recover over the next 6-12 months as we
complete more new lettings, unless there were to be further
significant tenant failures.
Property portfolio risk
We have managed the property portfolio's income expiry profile
through successful asset management activities with 57% of
aggregate income expiring within five years from 31 March 2022
(2021: 53%). Short-term income at risk is a relatively low
proportion of the property portfolio's income, with 38% expiring in
the next three years (2021: 31%) and our experience suggests that
even in the current uncertain climate, the majority of tenants do
not exit at break or expiry.
31 March 31 March
2022 2021
Aggregate income expiry
0-1 years 15% 11%
1-3 years 23% 20%
3-5 years 19% 22%
5-10 years 31% 34%
10+ years 12% 13%
100% 100%
Outlook
Looking forward, we maintain a positive outlook with many of the
asset management initiatives currently under way expected to come
to fruition over the next 6-12 months which should see new tenants
secured, leases extended and new investment into existing assets
improving their environmental credentials and realising their full
potential.
Alex Nix
Assistant Investment Manager
for and on behalf of Custodian Capital Limited
Investment Manager
16 June 2022
ESG Committee report
The ESG Committee ("the Committee") was constituted on 1 April
2021. Its key responsibilities are:
-- To set the Company's environmental KPIs, monitor performance
against those KPIs and ensure the InvestmentManager is managing its
property portfolio in line with the ESG policy;
-- To ensure the Company complies with its external reporting
requirements on ESG matters including theGlobal Real Estate
Sustainability Benchmark ("GRESB"), EPRA and Streamlined Energy and
Carbon Report ("SECR") andadopts sector best practice where
appropriate;
-- To assess, at least annually, the fees and scope of
engagement of the Company's environmentalconsultants; and
-- To assess whether the Company is obtaining a suitable level
of social outcomes for its tenants, otherstakeholders and the
communities in which it operates.
The Company is committed to delivering its strategic objectives
in an ethical and responsible manner and meeting its corporate
responsibilities towards society, human rights and the environment.
The Board acknowledges its responsibility to society is broader
than simply generating financial returns for shareholders. The
Company's approach to ESG matters addresses the importance of these
issues in the day-to-day running of the business, as detailed
below.
ESG approach
Environmental - we want our properties to minimise their impact
on the local and wider environment. The Investment Manager
carefully considers the environmental performance of our
properties, both before we acquire them, as well as during our
period of ownership. Sites are visited on a regular basis by the
Investment Manager and any obvious environmental issues are
reported.
Social - Custodian REIT strives to manage and develop buildings
which are safe, comfortable and high-quality spaces. As such, our
aim is that the safety and well-being of occupants of our buildings
is maximised.
Governance - high standards of corporate governance and
disclosure are essential to ensuring the effective operation of the
Company and instilling confidence amongst our stakeholders. We aim
to continually improve our levels of governance and disclosure to
achieve industry best practice.
The Committee encourages the Investment Manager to act
responsibly in the areas it can influence as a landlord, for
example by working with tenants to improve the environmental
performance of the Company's properties and minimise their impact
on climate change. The Committee believes that following this
strategy will ultimately be to the benefit of shareholders through
enhanced rent and asset values.
The Company's environmental policy commits the Company to:
-- Improving the energy performance of our buildings - investing
in carbon reducing technology,infrastructure and onsite renewables
and ensuring redevelopments is completed to high environmental
standards.
-- Reducing energy usage and emissions - liaising closely with
our tenants to gather and analyse data on theenvironmental
performance of our properties to identify areas for
improvement.
-- Achieving social outcomes and supporting local communities -
engaging constructively with tenants andlocal government to ensure
we support the wider community through local economic and
environmental plans andstrategies and playing our part in providing
the real estate fabric of the economy, giving employers safe places
ofbusiness that promote tenant well-being.
-- Understanding environmental risks and opportunities -
allowing the Board to maintain appropriategovernance structures to
ensure the Investment Manager is appropriately mitigating risks and
maximisingopportunities
-- Reporting in line with best practice and complying with all
requirements - exposing the Company to publicscrutiny and
communicating our targets, activities and initiatives to
stakeholders
Cladding
Custodian REIT's portfolio currently has no exposure to 'high
risk' assets which are typically either high-rise buildings
(characteristically those over 18m tall) which use cladding in
their construction or those used for multiple residential
occupation. Custodian REIT does have exposure properties where
cladding material has been used in their construction, and where
the composition of the material is unknown. During the year the
Board instigated a detailed review of the Company's cladding risks
and obligations involving the Investment Manager and the Company's
solicitors. This review has resulted in the Investment Manager
implementing a more extensive cladding policy, moving beyond the
mandatory fire risk assessment requirements for properties where
the composition of cladding material is unknown and actively
core-drilling and replacing, where necessary, cladding not
compliant with Loss Prevention Certification Board guidelines. This
improved policy demonstrates that the Company's commitment to
community safety significantly exceeds the minimum required in
discharging its duty as a 'Responsible Person'[30]. A summary of
the revised policy is set out below:
-- 'High risk' buildings will not be acquired without a
comprehensive rationale to decrease risk onacquisition, and require
specific approval by the Board;
-- All tenants provide the Investment Manager their Fire Risk
Assessment ("FRA") which is reviewed toensure;? It has been
undertaken by a reputable fire risk assessor; ? The tenant confirms
in writing that recommendations and remediations are being actioned
to mitigatethe overall risk profile; and ? The local fire authority
is contacted as required.
-- Following a desktop review of each building within the
portfolio, including approaches to local buildingcontrol, to
ascertain the composition of any cladding used in construction, the
Investment Manager will arrange toundertake core drill samples of
cladding where considered appropriate with priority given to
buildings identifiedas 'Code 1' under LPCB guidelines which
includes those with cladding recommended for immediate sampling
orproperties open to the public use.
-- Where non LPCB compliant cladding is identified the
Investment Manager will:? Notify building insurers, the Local Fire
Authority and the tenants in occupation; ? Insist that tenants
undertake an updated FRA based on the cladding composition; ?
Review the FRA and ensure the tenant is complying with any
recommended actions.
-- Going forwards the Investment Manager will:? Hold quarterly
fire risk review meetings to specifically review progress to date
and implement anyoutstanding actions ? Maintain a live cladding
log, detailing the progress to date in implementing and
maintainingcompliance with the cladding policy; ? Maintain an
approved list of suitable Fire Risk Assessors which can be provided
to tenants if they donot have any of their own fire consultants; ?
Engage with its legal advisors to seek to make lease clause
obligations around Fire Risk moreexplicit and comprehensive in all
new leases.
Environmental key performance indicators
During the prior financial year the Company set environmental
targets measured by key performance indicators ("KPIs") which
provide a strategic way to assess its success towards achieving its
environmental objectives and ensure the Investment Manager has
embedded key ESG principles. These environmental KPIs cover our
main areas of environmental impact including energy efficiency,
greenhouse gas emissions, water, waste and tenant engagement.
These environmental KPIs also directly support climate risk
mitigation and capture some ESG opportunities from the transition
to a low-carbon economy. As we progress our climate-related risk
identification and management, we aim to identify and implement
further climate-related metrics that can more clearly define the
impact of climate-related risks and opportunities on our business.
ESG reporting frameworks, including GRESB, require businesses to
disclose the KPIs which contribute towards benchmark scoring and
potentially influence investor decisions.
The Company's environmental KPIs in place during the year, and
comments relating to our performance against each one, are set out
below:
Boundary KPI Progress during the year
The like-for-like data collected from tenants indicates a 44%
reduction against the 2019 baseline. However, because this
percentage is based on a relatively small sample population, the
Reduce total portfolio Scope 1 and 2 Board believes that although this indicates a positive
emissions by 30% by 2025 performance by the Company's tenants, the population is
insufficient to conclude that this objective has been met and in
the year ending 31 March 2023 the Investment Manager will
continue to make efforts to improve tenant response rates.
There are no longer any 'G' rated assets and the one remaining
'F' is being improved.
Whole
portfolio All 'D' EPC ratings to be removed or During the year the Company has updated EPCs at 20 units across
improved by 2027, all 'E' EPC ratings 15 properties covering 358k sq ft.
to be removed or improved by 2025 and
all 'F' and 'G' EPC ratings to be The Company is currently reviewing and undertaking new
removed or improved by 31 March 2022 assessments of any EPCs that are older than five years below a
'C' rating. A 'C' rating is expected to become the minimum
standard under the Minimum Energy Efficiency Standard ("MEES") in
2027.
Reduce Scope 1 and 2 energy consumption The like-for-like data collected from tenants indicates a 54%
of the property portfolio by 15% reduction against the 2019 baseline, but subject to uncertainty
against a 2019 baseline by 2025 due to a small sample population as explained above.
Switch all landlord-controlled sites to Currently at 94% and we expect to achieve 100% by 2023.
100% renewable electricity by 2025
Switch all landlord-controlled sites to 12 properties have moved during the year and we remain on track
green gas by 2025 to achieve this target by 2025.
Install EV charging points across 100%
of the Company's retail warehouse We have EV chargers operating at seven of our 11 retail warehouse
assets by 2025 and investigate onsite sites with installation at the remainder currently underway.
Landlord renewables on one asset by 2025
controlled
Zero waste to landfill from landlord-controlled waste was
achieved during 2021. 2% of tenants' waste has been sent to
Zero waste to landfill from landfill during the year due to a one-off capital project
landlord-controlled waste by 2022 undertaken.
Reduce landlord-controlled water Landlord water consumption has reduced by 18% since the prior
consumption by 50% by 2025 year.
Engage with occupiers during lease Green clauses to include renewable electricity as standard within
negotiations to incorporate all new leases.
sustainability clauses into new leases
Tenant
Engage with tenants on quarterly basis Tenant engagement is part of the Investment Manager's remit,
on ESG issues which it has complied with during the year, as it collects all
rent and directly manages each property in the portfolio.
Achieve EPRA Gold Standard for the year Achieved.
ended 31 March 2021
Report to TCFD by 2021 Selected elements of the TCFD reporting framework have been
Development followed.
Investment Committee reports for any new property acquisition/
Incorporate ESG factors into all refurbishment now include dedicated ESG rationale detailing
investment due diligence undertaken improvements to be made alongside relevant expected capital
expenditure.
To help the assessment of progress against KPIs a central data
management system, hosted by the Company's environment consultants,
has been established to provide a robust data collation and
validation process. This data management system is being used to
identify tenant engagement and asset optimisation opportunities and
facilitates the communication of environmental performance data to
various stakeholders.
Due to the success of the Investment Manager in meeting certain
of the environmental targets during the year and the Board's
ambition to strengthen the Company's environmental credentials, the
Board has set the following revised targets to be reported against
in the financial year ending 31 March 2023:
Area Target Change from previous targets
Increase EV charging capacity to the following
by 2025[31]:
-- 4,200 kW/h[32] across retail
warehouse and other sector assets; and New
-- 980 kW/h[33] across office and
industrial assets
Install onsite renewable electricity generation
at 75% of redevelopments and major
refurbishments New
Physical building
improvements (whole
portfolio boundary)
Install smart meters across 25% of the New
portfolio by floor area
All 'D' EPC ratings to be removed or improved
by 2027 and all 'E' EPC ratings to be removed
or improved by 2025 Retained
All redevelopments to achieve Building Research
Establishment Environmental Assessment Method
("BREEAM") Excellent rating New
For landlord controlled areas in the like for
like portfolio, on a 2019 baseline, achieve:
-- Reduction in Scope 1 and 2
emissions of 30% by 2025
-- Reduction in energy consumption
of 15% by 2025 Retained
-- Less than 5% waste to landfill by
Landlord controlled 2022
usage (landlord -- Reduction in water consumption by
controlled 50% by 2025
boundary)
Switch all landlord-controlled sites to 100%
renewable electricity by 2023 Retained but timetable accelerated
Switch all landlord controlled sites to green Retained but timetable accelerated
gas by 2023.
Use TCFD recommendations and reporting
framework to disclose our approach to climate
related governance, strategy, risk management Amended to omit elements of TCFD as the Company is
and opportunities exempt from mandatory TCFD reporting
Incorporate ESG factors into all investment due
diligence undertaken Retained
Risk management and
reporting
Achieve an annual improvement in GRESB score
between 2021 and 2025 New
Continue to report in line with EPRA
sustainability Best Practice Recommendations to Retained
achieve a 'gold' standard
For the non-landlord controlled like-for-like
portfolio, on a 2019 baseline, achieve:
Amended to separate landlord controlled and tenant
-- Reduction in Scope 1 and 2 controlled emissions, with lower targets for tenant
emissions of 20% by 2025 performance where the Company does not have direct
-- Reduction in energy consumption control
of 10% by 2025
Tenant engagement
(tenant boundary) Engage with tenants on a quarterly basis on ESG
issues Retained
Engage with occupiers during lease negotiations
to incorporate sustainability clauses into new
leases Retained
Utilise 25% of vacant high street retail space
for short-term not-for-profit lettings New
Install changing facilities and secure cycle
parking at all appropriate assets New
Social outcomes
Ensure properties comply with the Company's
cladding policy within three months of
acquisition New
Consider biodiversity and habitat strategy
during all redevelopments New
Investment decisions
Investment decisions will play a key role in achieving the
Company's environmental KPIs. The Company undertakes an
environmental assessment on vacated assets and during the
acquisition due diligence process, rating assets or tenants against
a number of ESG factors which form part of the Investment Committee
decision making process. This process also helps the Investment
Manager evaluate the potential environmental risks and
opportunities associated with an asset and the impact on the
achievement of the KPIs.
The Company's procurement policy for property services includes
an assessment of new suppliers on their specification and use of
sustainable and energy efficient materials, systems, equipment,
onsite operating practices and performance evaluation/incentives
put in place for direct external suppliers and/or service providers
to employ sustainable processes in day-to-day work.
ESG policy
To achieve the Company's environmental objectives and targets,
the Investment Manager seeks to achieve the following:
Environment
-- Ensure operations are in place to commit to the minimisation
of pollution and comply with all relevantenvironmental
legislation;
-- Gather and analyse data on our environmental performance
across our business and portfolio; and
-- Set long-term targets of environmental performance for our
properties and monitor achievements as acommitment to continuous
improvement.
Climate change adaptation & resilience
-- Through our risk management process, identify climate-related
risks, both physical and financial;
-- Perform environmental risk assessments of our property
portfolio on an on-going basis;
-- Design mitigation and management strategies for climate and
environmental risks and resilience tocatastrophe/disaster; and
-- Improve our reputation on environmental issues by
incorporating resilience to climate-related transitionand physical
risk disclosures
Energy consumption & management
-- Comply with all applicable, relevant energy-related
legislation and other requirements and adopt bestpractice beyond
the mandatory minimum where appropriate;
-- Seek to reduce energy usage across properties we control;
-- Monitor energy consumption across properties we control, and
tenant consumption, where possible;
-- Seek engagement with tenants to make meaningful reductions to
their emissions and pollution;
-- Procure renewable energy across properties we control;
-- Review our energy objectives and targets on an annual
basis;
-- Promote energy efficiency and management to our tenants;
and
-- Where possible, build in green lease clauses[34] into our
tenant leases.
Building materials
-- When we have the opportunity to develop new property or
refurbish current assets, we commit to reviewingbuilding materials
which have a lower environmental impact and to select these
materials, if appropriate; and
-- Select greener building materials, in line with our vision to
increase the sustainability certificationsof our property
portfolio.
Greenhouse gas ("GHG") emissions and management
-- Quantify our Scope 1 and 2 (landlord controlled) emissions on
an annual basis in line with our reportingrequirements;
-- Gather tenant energy consumption data, where possible, to
quantify our leased assets emissions;
-- Comply with and make representations to industry-standard ESG
frameworks including both the EPRA AnnualSustainability Report and
the GRESB;
-- Continue to expand our carbon reporting in line with industry
expectations and relevant legislation; and
-- Reduce our greenhouse gas emissions through various energy
reduction initiatives including virtualconferencing meetings to
reduce travel.
Further information on our GHG emissions is set out within our
SECR disclosures in the Directors' report.
Waste management
-- Monitor waste levels across our properties and monitor tenant
consumption, where possible;
-- Implement landfill diversion waste streams such as recycling
in our properties, where possible; and
-- Promote waste management to our tenants.
Water consumption and management
-- Monitor water consumption across our properties and monitor
tenant consumption, where possible;
-- Identify and implement water reduction technologies and
opportunities within our property portfolio,where possible; and
-- Promote water management to our tenants.
On-site carbon-reducing technology
-- Install electric vehicle charging points across the portfolio
where demand is sufficient;
-- Install smart meters where tenants are amenable and in all
vacant properties once re-let; and
-- Investigate other carbon-reducing technology during
significant refurbishments.
Biodiversity
-- In the circumstances where we are developing new assets, the
biodiversity of the development area will beconsidered and
maintained to the highest level possible. We will promote
sustainable practices by reducing thedirect pressure on
biodiversity and habitat by selecting more sustainable
materials.
Asset level safety, health and well-being
We wish to manage and develop buildings which are safe,
comfortable and high-quality spaces. As such, our aim is that the
safety and well-being of the occupants of our buildings is
maximised. We will implement a property portfolio approach to
well-being which encourages engagement with tenants, promotes
carbon reducing behaviours, ensures maximum building safety and
optimises the comfort and quality of occupancy.
Stakeholder engagement
We engage regularly with the following internal and external
stakeholders on environmental and social matters:
-- Board - the Board meets at least quarterly and receives a
report from the ESG Committee on performanceand progress towards
our objectives;
-- Investment Manager - the Investment Manager has an ESG
working group which meets fortnightly. Propertyteam staff roles and
responsibilities include ESG which is embedded across the work it
carries out on behalf of theCompany;
-- Managing agents - we receive quarterly reports on our asset
performance and engage directly on propertyportfolio
optimisation;
-- Tenants - we seek to engage with tenants on a quarterly basis
both to understand consumption trends anddata and understand where
we can upgrade and optimise buildings for tenant well-being and
environmental impactreductions;
-- Local communities and charities- we work closely with local
communities and charities in particularutilising un-let space for
the benefit of the local community
-- Suppliers and business partners - we operate a procurement
policy which seeks to ensure sustainableproducts and business
practices are adopted by our suppliers.
To monitor energy consumption across the property portfolio, as
well as identify opportunities to make energy reductions, the
Company has engaged with Carbon Intelligence to provide strategic
advice on the process. This collaboration promotes the ethos of
investing responsibly and has ensured statutory compliance with the
Energy Savings Opportunity Scheme (ESOS) Regulations 2014 and The
Companies (Director's report) and Limited Liability Partnerships
(Energy and Carbon Report) Regulations 2018, and has facilitated
inclusion of EPRA Sustainability Best Practice Recommendations in
the Annual Report.
Case study - Redditch
The Company expects to receive planning permission in June 2022
to redevelop an existing 59,000 sq ft industrial building
constructed in the 1980's into a brand new 60,000 sq ft
industrial/distribution facility.
The new development will be built with exceptional ESG
compliance and will be certified BREEAM 'Excellent' as well as
having an Energy Performance rating 'A'.
In order to achieve this the specification will include: a
carbon neutral base build, electric vehicle charging points, solar
photovoltaic panels to the south facing roof elevations, LED
lighting to warehouse and offices, cycle storage and shower
facilities and bat roost to cater for local biodiversity.
The expected cost of the redevelopment is GBP5.8m and will
generate an estimated rental value in the region of GBP500k pa.
Given the occupation demand in this locality, we are confident the
property will be pre-let prior to completion of the
construction.
Case study - EV chargers
Our latest round of electric vehicle ("EV") charger
installations has resulted in the Company partnering with Pod
Point, one of the largest national charging networks, to install EV
charging points at our remaining retail warehousing sites and
commencing the rollout across appropriate industrial and office
sites.
At each retail warehousing site Pod Point identifies the optimum
number of chargers to:
-- Minimise the 'payback' period on the upfront capital
expenditure, targeting 4-6 years, which enhancesshort-term earnings
and minimises obsolescence risk;
-- Maximise overall investment return over a ten year investment
horizon; and
-- Maximise the total available charging capacity to help
achieve the Company's ESG targets.
Installing EV chargers for public use also enhances properties'
occupier appeal by increasing both customer footfall and dwell
time.
Office and industrial tenants now expect EV charging as a
feature on-site when looking for properties based on their
requirements for their EV/hybrid fleet or staff use. Pod Point
provides advice on the required load management system,
groundworks, and infrastructure to suit tenants' requirements which
are typically willing to pay a rental premium which allows the
Company to at least re-coup its capital expenditure whilst meeting
our ESG targets and future-proofing the asset.
We currently have 14 properties in the pipeline for installation
with a total of 14 rapid (75kW) chargers at retail warehousing
sites and a further 23 fast (7kW) chargers at office and industrial
locations.
With many towns in the UK introducing clean air zones where a
congestion fee is charged for driving through certain areas and the
Government banning production of all new petrol or diesel vehicles
from 2030, we expect to receive further demand and income for these
chargers in the coming years.
Case study - charitable lettings
During the year the Company has allowed the following charitable
lettings at some of its vacant retail space, rent free, which has
saved the Company vacant rates and helped the communities in which
it operates:
Rent (rateable Annual
Location value) rates Previous Charitable use
tenant
GBP000 GBP000
Grafton Gate, Milton 325 166 Staples Willen Hospice - clearance outlet
Keynes
Eastern Avenue, 186 95 Staples Furniture Recycling Project - storage
Gloucester
Trinity Square, 114 58 Laura Ashley We are the Minories - art gallery and creative
Colchester community space
Long Wyre Street, 75 38 Poundland One Colchester - community hub
Colchester
EPC ratings
During the year the Company has updated EPCs at 20 units across
15 properties covering 358k sq ft for properties where existing
EPCs had expired or where works had been completed. For updated
EPCs, there was an aggregate decrease in rating of 34 'energy
performance asset rating points[35]
The Investment Manager is currently reviewing and undertaking
new assessments of any EPCs that are older than five years and
below a 'C' rating. A 'C' rating is expected to become the minimum
standard under the Minimum Energy Efficiency Standard ("MEES") in
2027.
The Company has the following ESG initiatives planned in the
coming financial year:
-- The tenant at a 100k sq ft industrial unit in Winsford is
vacating in June 2022 and an extensiverefurbishment is expected to
be undertaken including installing solar panels to the roof, LED
lighting throughout,air source heats pumps to heat the office space
and EV charging. These works are expected to increase the EPC
ofthis site from a 'C' to a 'B'.
-- During the year we purchased a 19k sq ft of office on
Fountain Street in Manchester with the intention ofundertaking a
comprehensive refurbishment of the site which will include
installing solar panels, LED lighting,bike racks, shower facilities
with lockers and EV charging. Recycled furniture will also be
incorporated into thecat B fitout and roof terrace with a
consequential improvement on EPC rating.
The Company's weighted average EPC score by rating is shown
below:
EPC rating 2022 2021
A 3% 1%
B 21% 15%
C 49% 43%
D 20% 30%
E 7% 11%
F - 1%
The majority 'E' rated assets are within the office sector,
including a number of assets from the DRUM REIT acquisition, and
appropriate investment is planned to make the necessary
improvements in these assets.
Climate-related risks and opportunities
Climate change poses a number of physical risks to our property
portfolio, for example those caused by the increased frequency and
severity of extreme weather events. The Committee also recognises
there are a number of transition-related risks, including economic,
technology or regulatory challenges related to moving to a greener
economy which it needs to consider. But climate change also
provides opportunities to invest in alternative asset classes or to
provide tenants with additional services.
Governance
The Board is ultimately responsible to stakeholders for the
Company's activities and for oversight of our climate-related risks
and opportunities. Specifically, the ESG Committee is the
Board-level governance body responsible for reviewing our
identified climate-related risks alongside our ESG strategy.
The Investment Manager maintains the Company's risk management
framework and risk register, which means our ESG objectives are
embedded into the way the Company conducts and manages the business
and the property portfolio day to day.
Risk management
During the year the Committee has revisited its climate-related
risks and opportunities to determine continued relevancy and impact
on the Company. With the external consultant, the Committee
assessed the completeness and effectiveness of current controls and
processes in place to mitigate and manage risks and opportunities.
The Committee deemed all mitigation controls in place to be
effective however a number of continuous improvement areas were
determined which are highlighted in the table below as next steps
which will be addressed and actioned via the ESG Committee. The
Company's ESG targets also support continuous monitoring of
progress against the ESG strategy, capturing of opportunities and
the mitigation of climate risks. These targets are reported against
on a quarterly basis to the Committee by the Investment Manager and
the Company's environmental consultants.
Climate-related What this means for Custodian Management and mitigation of risk Next steps
risk/opportunity REIT
Physical risks
-- Begin to establish
which assets are likely to be
most at risk of potential
-- Annual property extreme weather damage
inspections enabling the -- Update flood risk
Investment Manager to identify for existing assets and
any damage or areas of understand how this may change
improvements to ensure in the future
-- Extreme weather increased property resilience -- With identified
events causing damage to against potential storms assets at risk, develop a
Asset damage infrastructure or assets, management plan to build
from storms and making assets unusable by -- Building maintenance property resilience such as
flooding and tenants, making insurance (where in the Company's through fitout, asset upgrades
associated c cover harder or more control) ensures properties are or plan to divest, as
hanging expensive for tenants to maintained to prevent increased appropriate
insurance arrange and impacting levels of potential damage from -- Ensure backup power
products, future lettability through storms and floods is available in all building
pricing and lower occupational demand -- Buildings insurance types where this is
availability coverage minimises the Custodian's responsibility
-- Historical impact financial impact of the damage
of floods or increasing caused by storms -- Review maintenance
flood risk impacting the -- Environmental reports and fitout guidelines to
Long-term long term attractiveness of are carried out for all include guidance on upgrades
properties due to tenants acquisitions including flood to storms such as securing of
avoiding rentals with flood risk assessment, albeit flood external equipment, roof
risk risk is measured on likelihood specifications etc.
of river/sea/surface water -- Review environmental
flooding based on current reports procured at
scenarios/historical data acquisition to determine
rather than future climate whether future climate
change projection of flood risk can
be included
-- Monitor any tenant
concerns around temperature
Global The Company's tenant engagement through tenant engagement
temperature programme provides Custodian with programme
increases Certain assets will be more up to date insights into changing -- Continue ongoing
reducing the significantly impacted by tenant preferences, current monitoring of energy
appeal of less rising temperatures, such as challenges or feedback on building consumption, particularly of
energy-efficient glass offices, requiring more performance and provides an glass properties, to determine
assets energy for cooling and being opportunity for the Investment whether the risk trend is
less attractive to tenants Manager to further understand accelerating and consider the
solutions to continue to meet need for upgrade plans such as
tenants' preferences over time facades, insultation etc. to
Long-term reduce the property exposure
to external temperature rises
Insufficient
electricity
supply to
maintain tenant
operations due Due to rising demand for energy Ensure power upgrades are
to inadequate such as from cooling utilising renewable energy
infrastructure requirements and EV chargers, Upgrading power supplies where sources, where contracts are under
current infrastructure might be availability permits Custodian's control, in line with
unable to meet the energy Custodian's emissions and energy
demand targets
Medium -
long-term
Transition
risks
-- Capital expenditure considered
necessary to maintain each asset within the
portfolio to a suitable standard to secure new
lettings at expected rental levels is forecast
and factored into cashflow projections to
ensure resources are available.
-- EPCs are maintained for the whole
portfolio, with higher scoring assets under -- Improve
Reduced review to ensure improvements are carried out acquisition due diligence
attractiveness as soon as practical as well as monitoring the processes to more accurately
of the renewal dates and tracking score improvements. assess forecast investment
portfolio due Changing tenant This control provides Custodian oversight and to upgrade the asset over
to changing preferences to transparency of the assets improvement over its life in line with
tenant occupy less energy time and provides the basis of an improvement compliance and tenant
preferences and carbon intensive plan with key assets to target and directly requirements
buildings as well as relates to one of our ESG KPIs -- Improve coverage
requirements under -- Asset due diligence is performed at of the tenant engagement
MEES acquisition stage for all new assets. The programme and broaden its
Short - Investment Manager considers the long term remit to better capture
medium-term suitability of the asset including ESG tenants' concerns and
requirements against our ESG strategy and sustainability plans
calculates the forecast investment to upgrade
the asset over its life in line with
compliance and tenant requirements
-- Custodian's tenant engagement
programme provides live insights into the
changing tenant preferences to stay abreast of
changing trends to maintain lettability of
portfolio and levels of occupation
-- Continue to engage
proactively with investors and
the Company's wider stakeholder
group on ESG matters
-- External -- Continued Director
environmental consultants are training to build knowledge
engaged to advise on the around Net Zero and climate
Investor Increased stakeholder scrutiny Company's ESG initiatives and issues to ensure ongoing
divestment or over Custodian REIT's ESG compare to requirements, best effective governance and guidance
activism due ambitions and climate action and practice and peer-group
to changing awareness of the impact of the performance. -- Consider future pricing
ESG built environment, including -- Shareholder of GHG emissions and emissions
expectations carbon emissions from expectations are established offsets and future enhanced
refurbishment and construction, by the Company's brokers and emissions reporting obligations.
leading to reduced confidence, distribution agents and Climate change could affect the
shareholder activism or directly during meetings with input costs to produce
Short-term divestment. investors. Significant traditional development related
changes in expectations or materials or building services.
potential activism would be Utilising more innovative low
communicated. carbon materials could also to
mitigate some of the potential
this risk might impose.
All investments are scrutinised by
Unsuccessful If technology that has been the Investment Manager's
investment in invested in is not properly Investment Committee. Investment
new researched, developed or Committee reports include a
technology implemented, or becomes obsolete dedicated ESG rationale. Carbon
or no longer industry best reducing technology is a key part
practise, it may not bring the of the carbon-reduction strategy
return that was forecast but is not invested in
Medium-term speculatively and only established
products are considered.
Opportunities
-- Continue to encourage
investment in the Investment
Manager's staff development for
them to remain abreast of
Exposure to new low-carbon building solutions and
asset classes other competitive offerings through
for potential industry bodies, associations and
investment Investment opportunities All investments are scrutinised memberships
through exposure to new asset by the Investment Manager's -- At Board Strategy days,
classes Investment Committee include a more prominent segment
focused on ESG and future strategy
Short - involving ESG Committee
medium-term recommendations and the Company's
environmental consultants,
including how the Company might
expand low-carbon services and
review new investment classes
-- ESG Credentials
Shifting tenant are currently part of the
preferences may marketing/prospectus of an
create new The effects of climate change asset - which ensures
demand for new on tenant preferences may bring tenants are aware of
or existing the opportunity to diversify Custodian REIT's ESG
products/ business activities such as credentials to attract ESG
services low-carbon alternative assets conscious tenants
or development or expansion of -- Tenant engagement
low emissions services programme - provides
insights into the changing
Short - tenant preferences
medium-term
-- Establishment of
an ESG Committee of the
Increased Board and publication of
demand for Increased demand for shares revised, stretching ESG Continue to improve communication with
shares due to from investors preferring to targets stakeholders regarding ESG initiatives
ESG credentials specifically invest in -- Annual external through quarterly stock market
companies with strong ESG reporting on progress reporting, Annual and Interim Reports
credentials against ESG targets and shareholder meetings and webinars
Short-term -- Investor feedback
is captured regularly
To account for the long-term nature of climate change three time
horizons were used within the assessment:
-- Short-term (0-3 years);
-- Medium-term (3-12 years); and
-- Long-term (12-20 years).
This period differs from the longer-term viability assessment of
three years, as the outputs of our climate-related materiality
assessment will be reviewed and built upon over time in order to
effectively embed identified risks into our risk management
framework.
Net zero[36] carbon pathway
Starting the journey towards net zero carbon is a crucial next
step in our ESG strategy and making this journey fit with
stakeholder goals and the Company's property strategy is one of the
key challenges facing the Company and the real estate sector.
Developing a net zero carbon pathway, and choosing the right level
of consultancy to support the Investment Manager in achieving this,
is squarely on the Committee's agenda for the forthcoming year.
Outlook
The Company will work towards achieving its refined ESG targets
over the course of the next financial year, improving our
understanding of the specific impacts of climate change on the
Company, seeking to influence tenant behaviour to improve
environmental outcomes and assessing our strategy towards creating
a Net Zero pathway.
Approval
This report was approved by the Committee and signed on its
behalf by:
Hazel Adam
Chair of the ESG Committee
16 June 2022
Financial review
The Company has enjoyed its strongest year of total return as
the market continued its recovery from the impact of the COVID-19
pandemic, with a profit before tax of GBP122.3m (2021: GBP3.7m) and
EPRA earnings per share of 5.9p (2021: 5.6p). The Company's rent
collection level has stabilised to pre-pandemic levels which has
supported the Board increasing dividends per share declared for the
year to 5.25p (2021: 5.0p), 110% covered by EPRA earnings.
A summary of the Company's financial performance for the year is
shown below:
Year ended 31 Mar 2022 Year ended 31 Mar 2021
Financial summary GBP000
GBP000
Revenue 39,891 39,578
Expenses and net finance costs (14,639) (15,904)
EPRA profits 25,252 23,674
Net profit/(loss) on investment property 97,073 (19,925)
Profit before tax 122,325 3,749
EPRA EPS (p) 5.9 5.6
Dividend cover 110.3% 112.7%
OCR excluding direct property costs 1.20% 1.12%
Borrowings
Net gearing 19.1% 24.9%
Weighted average debt maturity 5.7 years 7.4 years
Weighted average cost of agreed debt 3.0% 3.0%
The Company's rent roll has increased by 4.7% from GBP38,692k at
31 March 2021 to GBP40,493k at 31 March 2022, which resulted in
IFRS revenue increasing from GBP39,578k to GBP39,891k.
This increase in contractual rent was due primarily to net
property acquisitions, but importantly also from aggregate rental
growth across the portfolio and the positive impact of asset
management activity in increasing like-for-like occupancy through
net new lettings, which demonstrate the robust nature of the
Company's diverse property portfolio.
EPRA earnings per share increased to 5.9p (2021: 5.6p) due
primarily to the stabilisation of rent collection rates, with a
GBP0.3m decrease in the doubtful debt provision during the year
comparing to a GBP2.7m increase in the prior financial year;
partially offset by the timing of acquisitions and disposals and
increased professional fees from more regear and new letting
activity.
Dividends
The Board acknowledges the importance of income for shareholders
and during the year its objective was to pay dividends on a
sustainable basis at a rate fully covered by net rental receipts
which does not inhibit the flexibility of the Company's investment
strategy.
The Company paid dividends totalling 5.625p per share during the
year (GBP24.2m) comprising fourth and fifth interim dividends
relating to the year ended 31 March 2021 of 1.25p and 0.5p per
share respectively, and quarterly interim dividends of 1.25p, 1.25p
and 1.375p per share relating to the year ended 31 March 2022.
The Company paid a fourth quarterly interim dividend of 1.375p
per share for the quarter ended 31 March 2022 on 31 May 2022
totalling GBP6.1m. Dividends relating to the year ended 31 March
2022 of 5.25p (2021: 5.0p) were 110% covered by net recurring
income of GBP25.3m, as calculated in Note 21.
Cost control
The Company's tiered management fee structure, detailed in Note
18, meant that marginal investment management and administration
fees decreased during the year as NAV increased to above the
GBP500m hurdle. However, the Company has continued to invest in its
environmental and governance structures and has also increased its
marketing budget which has resulted in the OCR (excluding direct
property costs) increasing from 1.12% for the year to 1.20%.
Although governance related expenditure is likely to continue to
increase we believe the economies of scale provided by the
Company's relatively fixed cost base and fee structure will mean
that further growth will allow ongoing charges to be kept
proportionately low.
Key performance indicators
The Board reviews the Company's quarterly performance against a
number of key financial and non-financial measures:
-- EPS and EPRA EPS - reflect the Company's ability to generate
recurring earnings from the propertyportfolio which underpin
dividends;
-- Dividends per share and dividend cover - to provide an
attractive, sustainable level of income toshareholders, fully
covered from net rental income. The Board reviews target dividends
in conjunction withdetailed financial forecasts to ensure that
target dividends are being met and are sustainable;
-- NAV per share total return - reflects both the NAV growth of
the Company and dividends payable toshareholders. The Board regards
this as the best overall measure of value delivered to
shareholders. The Boardassesses NAV per share total return over
various time periods and compares the Company's returns to those of
itspeer group of listed, closed-ended property investment
funds;
-- NAV per share, share price and market capitalisation -
reflect various measures of shareholder value at apoint in
time;
-- Share price total return - reflects the movement in share
price and dividends payable to shareholders;
-- Target dividend per share - an expectation of the Company's
ability to deliver an income stream toshareholders for the
forthcoming year;
-- Net gearing - measures the Company's borrowings as a
proportion of its investment property, balancing theadditional
returns available from utilising debt with the need to effectively
manage risk;
-- OCR - measures the annual running costs of the Company and
indicates the Board's ability to operate theCompany efficiently,
keeping costs low to maximise earnings from which to pay fully
covered dividends; and
-- EPRA vacancy rate - the Board reviews the level of property
voids within the Company's property portfolioon a quarterly basis
and compares this to its peer group average.
-- Weighted average EPC rating - measures the overall
environmental performance of the Company's propertyportfolio
The Board considers the key performance measures over various
time periods and against similar funds. A record of these measures
is disclosed in the Financial highlights and performance summary,
the Chairman's statement and the Investment Manager's report.
EPRA performance measures
EPRA Best Practice Recommendations have been disclosed to
facilitate comparison with the Company's peers through consistent
reporting of key real estate specific performance measures.
2022 2021
EPRA EPS (p) 5.9 5.6
EPRA Net Tangible Assets ("NTA") per share (p) 123.1 97.6
EPRA NIY 5.0% 6.0%
EPRA 'topped up' NIY 5.5% 6.4%
EPRA vacancy rate 10.2% 8.4%
EPRA cost ratio (including direct vacancy costs) 22.9% 26.1%
EPRA cost ratio (excluding direct vacancy costs) 19.0% 23.9%
EPRA capital expenditure (GBPm) 69.0 14.5
EPRA like-for-like rental growth (GBPm) 35.3 38.3
-- EPRA EPS - a key measure of the Company's underlying
operating results and an indication of the extent towhich current
dividend payments are supported by earnings
-- EPRA NAV per share metrics - make adjustments to the NAV per
the IFRS financial statements to providestakeholders with the most
relevant information on the fair value of the assets and
liabilities of a real estateinvestment company, under different
scenarios. EPRA Net Tangible Assets - assumes that entities buy and
sellassets, thereby crystallising certain levels of unavoidable
deferred tax
-- EPRA NIY and 'topped up' NIY - alternative measures of
property portfolio valuation based on cash passingrents at the
reporting date and once lease incentive periods have expired, net
of ongoing property costs
-- EPRA cost ratios - alternative measures of ongoing charges
based on expenses, excluding operatingexpenses of rental property
recharged to tenants, but including increases in the doubtful debt
provision, comparedto gross rental income
-- EPRA capital expenditure - capital expenditure incurred on
the Company's property portfolio during theyear
-- EPRA like-for-like rental growth - a measure of rental growth
of the property portfolio by sector,excluding acquisitions and
disposals
-- EPRA Sustainability Best Practice Recommendations -
environmental performance measures focusing onemissions and
resource consumption which create transparency to potential
investors by enabling a comparisonagainst peers and set a direction
towards improving the integration of ESG into the management of the
Company'sproperty portfolio.
Debt financing
The Company operates with a conservative level of net gearing,
with target borrowings over the medium-term of 25% of the aggregate
market value of all properties at the time of drawdown. The
Company's net gearing decreased from 24.9% LTV last year to 19.1%
at the year end primarily due to GBP94.0m of valuation
increases.
Since the year end the Company has arranged a GBP25m tranche of
10 year debt with Aviva at a fixed rate of interest of 4.10% per
annum to refinance a GBP25m variable rate revolving credit facility
with RBS, acquired via the DRUM REIT acquisition. Following the
refinancing the Company had the following facilities available:
-- A GBP50m revolving credit facility ("RCF") with Lloyds Bank
plc ("Lloyds") with interest of between 1.5%and 1.8% above
SONIA[37], determined by reference to the prevailing LTV ratio of a
discrete security pool ofassets, and expiring on 17 September
2024;
-- A GBP20m term loan facility with Scottish Widows Limited
("SWIP") repayable in August 2025, with fixedannual interest of
3.935%;
-- A GBP45m term loan facility with SWIP repayable in June 2028,
with fixed annual interest of 2.987%; and
-- A GBP75m term loan facility with Aviva comprising:
-- A GBP35m tranche repayable on 6 April 2032, with fixed annual
interest of 3.02%;
-- A GBP15m tranche repayable on 3 November 2032 with fixed
annual interest of 3.26%; and
-- A GBP25m tranche repayable on 3 November 2032 with fixed
annual interest of 4.10%.
Each facility has a discrete security pool, comprising a number
of the Company's individual properties, over which the relevant
lender has security and the following covenants:
-- The maximum LTV of each discrete security pool is between 45%
and 50%, with an overarching covenant onthe Company's property
portfolio of a maximum 35% LTV; and
-- Historical interest cover, requiring net rental receipts from
each discrete security pool, over thepreceding three months, to
exceed 250% of the facility's quarterly interest liability.
At the year end the Company had GBP207.2m (31% of the property
portfolio) of unencumbered assets which could be charged to the
security pools to enhance the LTV on the individual loans. During
the year the Company charged unencumbered properties valued at
GBP30.3m to certain facilities as substitutions for charged
properties sold during the year. Since the year end GBP53.5m of
unencumbered property has been charged to the new GBP25m tranche of
debt with Aviva with charges over GBP49.0m of property secured on
the GBP25m RCF with RBS released on that facility's subsequent
cancellation.
The weighted average cost ("WAC") of the Company's agreed debt
facilities at 31 March 2022 was 3.0% (2021: 3.0%), with a weighted
average maturity ("WAM") of 5.2 years (2021: 7.4 years). At 31
March 2022 the Company had GBPnil drawn under its Lloyds RCF and
GBP22.8m drawn under its RBS RCF, meaning 84% (2021: 82%) of the
Company's drawn debt facilities, and 61% (2021: 70%) of its agreed
debt facilities, were at fixed rates.
On completion of the new tranche of Aviva debt and repayment and
cancellation of the GBP25m RCF with RBS, the Company's WAC of its
agreed debt facilities increases to 3.2% with 74% at a fixed rate
of interest and a WAM of 6.3 years.
This high proportion of fixed rate debt significantly mitigates
long-term interest rate risk for the Company and provides
shareholders with a beneficial margin between the fixed cost of
debt and income returns from the property portfolio.
LIBOR, the London Inter Bank Offer Rate interest rate benchmark
used for setting the interest rate charged on the Company's RCF
facilities was discontinued during the year and has been replaced
by SONIA. The transition has not had a material impact on the
interest rates on the RCFs.
Outlook
The Company's business model has remained resilient during the
year and we have further mitigated against interest rate rises by
refinancing GBP25m of variable rate debt at a fixed rate. We have a
scalable cost structure and flexible capital structure to be on the
front foot when opportunities present themselves to raise new
equity and exploit acquisition opportunities.
Ed Moore
Finance Director
for and on behalf of Custodian Capital Limited
Investment Manager
16 June 2022
Property portfolio
Industrial
Tenant Location % portfolio income
Menzies Distribution Various 3.4%
H&M Winsford 1.4%
Teleperformance Ashby 1.2%
ATL Transport Burton 1.1%
Restore Salford 1.0%
Saint Gobain Building Distribution Milton Keynes 1.0%
DS Smith Packaging Redditch 0.9%
Daher Aerospace Hilton 0.9%
Silgan Closures Doncaster 0.9%
PDS Group Holdings West Bromwich 0.9%
Next Eurocentral 0.8%
Life Technologies Warrington 0.8%
Massmould Milton Keynes 0.8%
ICT Express Tamworth 0.8%
Royal Mail Coventry/Kilmarnock 0.8%
Yesss (B) Electrical Normanton 0.7%
Turpin Distribution Biggleswade 0.7%
Harbour International Freight Manchester 0.7%
HellermannTyton Cannock 0.7%
Yodel Bellshill 0.7%
Multi-Colour Daventry England Daventry 0.6%
Zentia Profiles Gateshead - Team Valley 0.6%
Sherwin Williams Plymouth 0.6%
DX Network Service Nuneaton 0.6%
BSS Group Bristol 0.5%
Heywood Williams Components Bedford 0.5%
Ichor Systems Hamilton 0.5%
Morrison Utility Services Stevenage 0.5%
Brenntag UK Cambuslang 0.5%
A Share & Sons (t/a SCS) Livingston 0.5%
Sytner Oldbury 0.5%
MTS Logistics Coalville 0.4%
Procurri Europe Warrington 0.4%
Semcon Warwick 0.4%
Green Retreats Farnborough 0.4%
VP Packaging Kettering 0.4%
West Midlands Ambulance Service NHS Trust Erdington 0.4%
Warburton Langley Mill 0.4%
Northern Commercials Irlam 0.4%
Synergy Health Sheffield Parkway 0.3%
Bunzl Castleford 0.3%
Powder Systems Liverpool, Speke 0.3%
Tricel Composites Leeds 0.3%
Arkote Sheffield 0.3%
Hickling and Squires Nottingham 0.3%
Sealed Air Kettering 0.3%
North Warwickshire Borough Council Atherstone 0.3%
DHL International Liverpool, Speke 0.3%
PHS Group Huntingdon 0.2%
Synertec Warrington 0.2%
DHL Global Forwarding Glasgow Airport 0.2%
Acorn Web Offset Normanton 0.2%
ITM Power Sheffield 0.2%
Rapid Vehicle Repairs Kettering 0.2%
Med Imaging Knowsley 0.2%
MP Bio Science Hilton 0.1%
Central Electrical Armature Winding Knowsley 0.1%
Equinox Aromas Kettering 0.1%
Engineering Solutions & Automation Services Knowsley 0.1%
Portakabin Knowsley 0.1%
Jangala Softplay Hilton 0.1%
Midon Knowsley 0.1%
Precision Pumping and Metering Aberdeen 0.1%
RTV - Worldnet Shipping Aberdeen 0.1%
Shakespeare Pharma Hilton 0.1%
Grampian Geotechnical (Scotland) Aberdeen 0.1%
Razor Oiltools Aberdeen 0.1%
Industrial Control Distributors Kettering 0.1%
Other smaller tenants 0.1%
VACANT 3.7%
38.5%
Retail Warehouse
B&M Various 2.7%
B&Q Banbury/Weymouth 2.4%
Wickes Burton/Southport/Winnersh 1.8%
HHGL (t/a Homebase) Cromer/Leighton Buzzard 1.4%
Matalan Leicester 1.1%
Magnet Gloucester/Leicester/Plymouth 1.0%
Halfords Carlisle/Sheldon/Weymouth 0.8%
Oak FurnitureLand Group Carlisle/Plymouth 0.5%
Poundstretcher* Grantham/Southport 0.5%
A Share & Sons (t/a SCS) Plymouth 0.5%
M&S Evesham 0.5%
CDS (t/a The Range) Burton 0.5%
Sainsbury's Torpoint 0.5%
Dreams* Sheldon/Southport 0.5%
Pets at Home Sheldon/Winnersh 0.4%
Boots Evesham 0.4%
Argos Evesham 0.4%
Next Evesham 0.4%
TJ Morris (t/a Homebargains) Portishead 0.3%
Smyths Toys Gloucester 0.3%
Iceland Foods Carlisle 0.3%
Sofology Southport 0.2%
Poundland Carlisle 0.2%
Just For Pets Evesham 0.2%
Pure Gym Grantham 0.2%
SportsDirect.com Weymouth 0.2%
Farmfoods Gloucester 0.2%
Majestic Wine Portishead 0.1%
Parts Alliance Group Southport 0.1%
InstaVolt Various 0.1%
Other smaller tenants 0.1%
VACANT 2.3%
21.1%
*Tenants in occupation paying GBPnil rent through CVAs where ERV
has been used to calculate % portfolio income.
Office
First Title (t/a Enact) Leeds 1.4%
Regus (Maidstone West Malling) West Malling 1.4%
The Skills Development Scotland Co Glasgow 0.9%
National Grid Castle Donnington 0.7%
Wienerberger Cheadle 0.7%
Agilent Technologies Cheadle 0.7%
Home Office Sheffield 0.6%
Dehns Oxford 0.6%
Edwards Geldards Derby 0.6%
Countryside Properties Leicester 0.4%
Lyons Davidson Solihull 0.4%
Nucana Edinburgh 0.4%
Galliford Try Construction Leicester 0.4%
Regus (Leicester Grove Park) Leicester 0.3%
Worldpay Gateshead 0.3%
Systra Birmingham 0.3%
Oxentia Oxford 0.3%
Cognizant Technology Solutions Glasgow 0.2%
Spa Medica Leicester 0.2%
Health & Safety Executive Sheffield 0.2%
NatWest Oxford 0.2%
Carbide Properties Leicester 0.2%
Charles Stanley Oxford 0.2%
Erskine Murray Leicester 0.2%
Meridian Healthcomms Manchester Fountain Street 0.2%
Nucana Biomed Edinburgh 0.2%
Datawright Computer Services Gateshead 0.2%
Tony Gee and Partners Manchester Arthur House 0.1%
IJ Tours Manchester Arthur House 0.1%
Venditan Manchester Fountain Street 0.1%
Livingstone Brown Glasgow 0.1%
Copeland Wedge Associates Birmingham 0.1%
KWB Property Management Birmingham 0.1%
Fourthline Manchester Fountain Street 0.1%
Bell Cornwall Associates Birmingham 0.1%
UK Speeder Consulting Manchester Arthur House 0.1%
Smith Institute Oxford 0.1%
Quantem Consulting Birmingham 0.1%
Coulters Legal LLP Edinburgh 0.1%
GoFor Finance Edinburgh 0.1%
Bradley & Cuthbertson LLP Birmingham 0.1%
Safe Deposits Glasgow 0.1%
Reality Law Birmingham 0.1%
Other smaller tenants 0.3%
VACANT 2.3%
16.6%
Other
VW Group Derby/Shrewsbury 1.2%
TH UK & Ireland (t/a Tim Hortons) Leicester/Perth/Watford 0.8%
MKM Buildings Supplies Castleford/Lincoln 0.7%
Nuffield Health Stoke 0.7%
Total Fitness Lincoln 0.6%
Co-Operative Gillingham 0.6%
Bannatyne Fitness Perth 0.6%
Pendragon Property Holdings York 0.5%
Liverpool Community Health NHS Trust Liverpool 0.4%
Parkwood Health & Fitness Salisbury 0.4%
Listers Group Loughborough 0.4%
Mecca Bingo Crewe 0.3%
Chokdee Bath 0.3%
TJ Vickers & Sons Shrewsbury 0.3%
Stonegate Pub Co High Wycombe 0.3%
Starbucks Maypole 0.3%
Kbeverage (t/a Starbucks) Nottingham 0.3%
Mecca Bingo (sublet to Odeon Cinemas) Crewe 0.2%
The Gym Group Carlisle 0.2%
AGO Hotels Portishead 0.2%
Iguanas Torquay 0.2%
Bistrot Pierre Torquay 0.2%
Ask Italian Restaurant Shrewsbury 0.2%
McDonalds Plymouth 0.2%
JD Wetherspoons Portishead 0.2%
Scotco Eastern (t/a KFC) Perth 0.2%
Wedgmoor Crewe 0.2%
Loungers Torquay 0.1%
The Universal Church of the Kingdom of God Stratford 0.1%
1 Oak (t/a Starbucks) Burton 0.1%
Knutsford Day Nursery Knutsford 0.1%
F1 Autocentres Crewe 0.1%
Ashbourne Day Nurseries Chesham 0.1%
Sam's Club (t/a House of the Rising Sun) Shrewsbury 0.1%
Edmundson Electrical Crewe 0.1%
Other smaller tenants 0.1%
VACANT 1.0%
12.6%
Retail
Superdrug Southsea/Weston-super-Mare/Worcester 1.1%
Sainsbury's Gosforth 0.9%
Specsavers Cardiff 0.5%
Sportswift Cardiff/Gosforth/Portsmouth 0.5%
The Works Bury St Edmunds/Portsmouth 0.4%
URBN UK Southampton 0.4%
Reiss Guildford 0.4%
Phase Eight Edinburgh 0.3%
Poundland Portsmouth 0.3%
Nationwide Building Society Shrewsbury 0.2%
Portsmouth City Council Southsea 0.2%
Foxtons Stratford 0.2%
Wilko Retail Taunton 0.2%
Loungers Shrewsbury 0.2%
Signet Trading (t/a Ernest Jones) Chester 0.2%
Savers Health & Beauty Bury St Edmunds/Newcastle 0.2%
Tesco Birmingham 0.2%
Boots Gosforth 0.2%
Holland & Barrett Shrewsbury 0.2%
Kruidvat Real Estate (t/a Savers) Colchester 0.1%
Crepeaffaire St Albans 0.1%
Lush Colchester 0.1%
H Samuel Colchester 0.1%
Der Touristik Chester 0.1%
WH Smith Gosforth 0.1%
Barrhead Travel Dunfermline 0.1%
British Red Cross Society Dunfermline 0.1%
Lloyds Bank Gosforth 0.1%
Ramsdens Financials Glasgow 0.1%
Clogau Gold Shrewsbury 0.1%
Felldale Retail (t/a Lakeland) Chester 0.1%
Your Phone Care Portsmouth 0.1%
Ciel (Concessions) (t/a Chesca) Chester 0.1%
Aslan Jewellery Chester 0.1%
Virgin Money Gosforth 0.1%
Greggs Birmingham/Dunfermline 0.1%
Brook Taverner Cirencester 0.1%
Leeds Building Society Colchester 0.1%
Subway Birmingham/Dunfermline 0.1%
Diamonds of Chester Camelot Chester 0.1%
CHAS Trading Dunfermline 0.1%
Lloyds Pharmacy Dunfermline 0.1%
Indigo Sun Retail Dunfermline 0.1%
Johnson Cleaners Dunfermline 0.1%
Viva Italia Dunfermline 0.1%
The Danish Wardrobe (t/a Noa Noa) Cirencester 0.1%
Coral Birmingham 0.1%
Costa Gosforth 0.1%
Cancer Research UK Gosforth 0.1%
RMS Estate Agents Gosforth 0.1%
Other smaller tenants 0.5%
VACANT 0.9%
11.3%
Principal risks and uncertainties
The Board has overall responsibility for reviewing the
effectiveness of the system of risk management and internal control
which is operated by the Investment Manager. The Company's risk
management process is designed to identify, evaluate and mitigate
the significant risks the Company faces. At least annually, the
Board undertakes a risk review, with the assistance of the Audit
and Risk Committee, to assess the effectiveness of the Investment
Manager's risk management and internal control systems. During this
review, no significant failings or weaknesses were identified in
respect of risk management, internal control and related financial
and business reporting.
The Company holds a portfolio of high quality property let to
institutional grade tenants and is primarily financed by fixed rate
debt. It does not undertake speculative development.
There are a number of potential risks and uncertainties which
could have a material impact on the Company's performance over the
forthcoming financial year and could cause actual results to differ
materially from expected and historical results. The Directors have
assessed the risks facing the Company, including risks that would
threaten the business model, future performance, solvency or
liquidity. The table below outlines the principal risks identified,
but does not purport to be exhaustive as there may be additional
risks that materialise over time that the Company has not yet
identified or has deemed not likely to have a potentially material
adverse effect on the business.
Risk Assessment Mitigating factors
-- Diverse property portfolio
Loss of revenue covering all key sectors and
geographical areas
-- Tenant default due to a -- The Company has 339
cessation or curtailment of trade individual tenancies with the largest
-- An increasing number of tenants tenant accounting for 3.8% of the
exercising contractual breaks or not rent roll
renewing at lease expiry -- Investment policy limits
-- Enforced reduction in the Company's rent roll to no more
contractual rents through a CVA or than 10% from a single tenant and 50%
legislative changes due to the COVID-19 Likelihood: Moderate from a single sector
pandemic -- Primarily institutional
-- Property environmental grade tenants
performance insufficient to attract -- Focused on established
tenants Impact: High business locations for investment
-- Decreases in ERVs resulting in
decreases in passing rent to secure -- Active management of lease
long-term occupancy expiry profile considered in forming
-- Expiries or breaks concentrated Overall change in risk from acquisition decisions
in a specific year last year: Decreased - reduced -- Building specifications
-- Unable to re-let void units impact of the COVID-19 pandemic typically not tailored to one user
-- Low UK economic growth -- Strong tenant relationships
impacting the commercial property market
-- Significant focus on
asset-by-asset ESG performance and
pro-actively investing in
environmental performance to maintain
or improve rental levels
Decreases in property portfolio valuation
-- Decreases in sector-specific
ERVs
-- Loss of contractual revenue -- Active property portfolio
diversification between office,
-- Tenants exercising contractual industrial (distribution,
breaks or not renewing at lease expiry manufacturing and warehousing),
Likelihood: Moderate retail warehousing, high street
-- Market pricing affecting value retail and other
-- Investment policy limits
-- Change in demand for space the Company's property portfolio to
Impact: Moderate no more than 50% in any specific
-- Property environmental sector or geographical region
performance insufficient to attract -- Smaller lot-size business
tenants model limits exposure to individual
-- Properties concentrated in a Overall change in risk from asset values
specific geographical location or sector last year: Decreased - reduced -- High quality assets in good
impact of the COVID-19 pandemic locations should remain popular with
-- Reduced property market and stabilisation of the retail investors
sentiment and investor demand sector valuations -- Significant focus on
-- Lack of transactional evidence asset-by-asset ESG performance and
pro-actively investing in
environmental performance to maintain
or improve demand
-- The Company has three
lenders
Financial -- Target net gearing of 25%
Likelihood: Moderate LTV on property portfolio
-- Reduced availability or -- 84% of drawn debt
increased cost of arranging or servicing facilities at the year end at a fixed
debt rate of interest
-- Breach of borrowing covenants Impact: High -- Additional fixed-rate debt
agree post year-end
-- Significant increases in -- Significant unencumbered
interest rates properties available to cure any
-- Refinancing risk from acquiring Overall change in risk from potential breaches of LTV covenants
GBP25m of debt due to expire in 2022 last year: Increased due to
upward pressure in interest -- Ongoing monitoring and
rates management of the forecast liquidity
and covenant position
Likelihood: Low
-- Ongoing review of
Operational performance by independent Board of
Directors
-- Inadequate performance, -- Outsourced internal audit
controls or systems operated by the Impact: High function reporting directly to the
Investment Manager Audit and Risk Committee
-- External depositary with
responsibility for safeguarding
assets and performing cash monitoring
Overall change in risk from
last year: No change
-- Strong compliance culture
Likelihood: Moderate
Regulatory and legal -- External professional
advisers are engaged to review and
-- Adverse impact of new or advise upon control environment,
revised legislation or regulations, or by ensure regulatory compliance and
changes in the interpretation or advise on the impact of changes due
enforcement of existing government Impact: High to the COVID-19 pandemic
policy, laws and regulations -- Business model and culture
-- Non-compliance with the REIT embraces FCA principles
regime[38] or changes to the Company's -- REIT regime compliance is
tax status considered by the Board in assessing
the Company's financial position and
Overall change in risk from setting dividends and by the
last year: No change Investment Manager in making
operational decisions
-- Investment Manager staff
are all capable of working from home
for an extended period
-- Data is regularly backed up
Likelihood: Moderate and replicated and the Investment
Business interruption Manager's IT systems are protected by
anti-virus software and firewalls
-- Cyber-attack results in the that are regularly updated
Investment Manager being unable to use Impact: High -- Fire protection and access/
its IT systems and/or losing data security procedures are in place at
-- Terrorism or pandemics all of the Company's managed
interrupt the Company's operations properties
through impact on either the Investment Overall change in risk from -- Comprehensive property
Manager or the Company's assets or last year: No change damage and business interruption
tenants insurance is held, including three
years' lost rent and terrorism
-- At least annually, a fire
risk assessment and health and safety
inspection is performed for each
property in the Company's managed
portfolio
-- The Company has engaged
specialist environmental consultants
ESG to advise the Board on compliance
with requirements and adopting best
-- Failure to appropriately manage Likelihood: Moderate practice where possible
the environmental performance of the -- The Company has a published
property portfolio, resulting in it not ESG which seeks to improve energy
meeting the required standards of efficiency and reduce emissions
environmental legislation and making Impact: Moderate
properties unlettable or unsellable -- In April 2021 the Company
constituted an ESG Committee to
-- ESG policies and targets being ensure compliance with environmental
insufficient to meet the required Overall change in risk from requirements, the ESG policy and
standards of stakeholders last year: Increased due to environmental KPIs, detailed in the
-- Non-compliance with increasing best practice ESG Committee report
environmental reporting requirements requirements -- At a property level an
environmental assessment is
undertaken which influences decisions
regarding acquisitions,
refurbishments and asset management
initiatives
Likelihood: Low
Acquisitions -- Comprehensive due diligence
is undertaken in conjunction with
-- Unidentified liabilities professional advisers and the
associated with the acquisition of new Impact: Moderate provision of insured warranties and
properties (whether acquired directly or indemnities are sought from vendors
via a corporate structure) where appropriate
-- Acquired companies' trade
Overall change in risk from and assets are hive-up into Custodian
last year: Increased due to the REIT plc and the acquired entities
acquisition of DRUM REIT liquidated
Emerging risks
The following emerging risks have been identified:
-- Inflation - the recovery in global demand following the
COVID-19 pandemic and the ongoing war in Ukrainehave contributed to
global supply chain issues, inflation and the risk of agricultural
shortages. These impact theCompany in terms of the cost and
availability of materials and labour in carrying out
redevelopments,refurbishments and maintenance, their effect on
increasing interest rates and indirectly through their impact onthe
UK economy in terms of growth and consumer spending and the
consequential impact on occupational demand forreal estate.
-- COVID-19 - the COVID-19 pandemic impacted the Company in
previous financial years and there remains aprincipal risk around
potential new variants and the associated impact on the global
economy.
The Board believes the Company is well placed to weather the
longer-term impact of these risks because the Company has:
-- A diverse portfolio by sector and location with an
institutional grade tenant base;
-- Low gearing with 84% of drawn debt facilities at the year end
at a fixed rate of interest; and
-- A stable investment portfolio and does not undertake
speculative development.
No other emerging risks have been added to the Company's Risk
Register during the year.
Going concern and longer-term viability
In accordance with Provision 31 of the UK Corporate Governance
Code 2018 issued by the Financial Reporting Council ("the Code"),
the Directors have assessed the prospects of the Company over a
period longer than 12 months. The Board resolved to conduct this
review for a period of three years, because:
-- The Company's forecasts cover a three-year period; and
-- The Board believes a three-year horizon maintains a
reasonable level of accuracy regarding projectedrental income and
costs, allowing robust sensitivity analysis to be conducted.
The Directors have assessed the following factors in assessing
the Company's status as a going concern and its longer-term
viability, including events up to the date of authorisation of the
financial statements:
-- A decrease in revenue through losses of contractual rent or
tenant default;
-- Diminished demand for leasing the Company's assets going
forwards resulting in rental decreases or anincrease in void
units;
-- Contractual obligations due or anticipated within one
year;
-- Potential liquidity and working capital shortfalls;
-- Access to funding and compliance with banking covenants;
and
-- Ongoing compliance with regulatory requirements including the
REIT regime.
The Directors note that the Company has performed strongly
during the year with rent collection rates back a pre-pandemic
levels and industrial valuations and rents in particular improving
over the last 12 months.
Results of the assessment
Based on prudent assumptions within the Company's forecasts
regarding losses of contractual rent, tenant default, void rates
and property valuation movements, the Directors expect that over
the three-year period of their assessment:
-- The Company has surplus cash to continue in operation and
meet its liabilities as they fall due;
-- Borrowing covenants are complied with; and
-- REIT tests are complied with.
Sensitivities
These assessments are subject to sensitivity analysis, which
involves flexing a number of key assumptions and judgements
included in the financial projections:
-- A decrease in revenue through losses of contractual rent or
tenant default;
-- Length of potential void period following lease break or
expiry;
-- Acquisition NIY, disposals, anticipated capital expenditure
and the timing of deployment of cash;
-- Interest rate changes; and
-- Property portfolio valuation movements.
This sensitivity analysis also evaluates the potential impact of
the principal risks and uncertainties should they occur which,
together with the steps taken to mitigate them, are highlighted
above and in the Audit and Risk Committee report. The Board seeks
to ensure that risks are mitigated appropriately and managed within
its risk appetite all times.
Sensitivity analysis considered the following areas:
Covenant compliance
The Company operates the loan facilities summarised in Note 15.
At 31 March 2022 the Company had significant headroom on lender
covenants at a portfolio level with:
-- Company net gearing of 19.1% compared to a maximum LTV
covenant of 35% and GBP207.2m (31% of the propertyportfolio)
unencumbered by the Company's borrowings; and
-- Had 207% minimum headroom on interest cover covenants for the
quarter ended 31 March 2022.
Reverse stress testing has been undertaken to understand what
circumstances would result in potential breaches of financial
covenants. While the assumptions applied in these scenarios are
possible, they do not represent the Board's view of the likely
outturn, but the results help inform the Directors' assessment of
the viability of the Company. The testing indicated that:
-- The rate of loss or deferral of contractual rent on the
borrowing facility with least headroom would needto deteriorate by
45% from the levels included in the Company's prudent forecasts to
breach interest covercovenants; or
-- At a portfolio level property valuations would have to
decrease by 41% from the 31 March 2022 position torisk breaching
the overall 35% LTV covenant.
The Board notes that the February 2022 IPF Forecasts for UK
Commercial Property Investment survey suggests an average 2.5%
increase in rents during 2022 with capital value increases of 4.1%.
The Board believes that the valuation of the Company's property
portfolio will prove resilient due to its higher weighting to
industrial assets and overall diverse and high-quality asset and
tenant base comprising 160 assets and over 300 typically
'institutional grade' tenants across all commercial sectors.
Liquidity
At 31 March 2022 the Company had:
-- GBP11.6m of cash-in-hand and GBP52.2m undrawn RCF, with gross
borrowings of GBP137.8m resulting in low netgearing, with no
short-term refinancing risk (on refinancing the RBS RCF in June
2022) and a weighted average debtfacility maturity of six years;
and
-- An annual contractual rent roll of GBP40.5m, with interest
costs on drawn loan facilities of only c. GBP4.6mper annum.
The Company's forecast model projects it will have sufficient
cash and undrawn facilities to settle its target dividends and its
expense and interest liabilities for a period of at least 12
months.
As detailed in Note 15, the Company's Lloyds RCF expires in
September 2024. The Board anticipates lender support in agreeing
subsequent facilities, and would seek to refinance the RCF with
another lender or dispose of sufficient properties to repay it in
September 2024 in the unlikely event of lender support being
withdrawn.
Impact of emerging risks
The Board believes it too early to understand fully the
longer-term impact of the COVID-19 pandemic, Brexit and the war in
Ukraine but the Board believes the Company is well placed to
weather any shorter-term impacts due to the reasons set out in the
Principal risks and uncertainties section.
Section 172 statement and stakeholder relationships
The Directors consider that in conducting the business of the
Company over the course of the year they have complied with Section
172(1) of the Companies Act 2006 ("the Act") by fulfilling their
duty to promote the success of the Company and act in the way they
consider, in good faith, would be most likely to promote the
success of the Company for the benefit of its members as a
whole.
Issues, factors and stakeholders
The Board has direct engagement with the Company's shareholders
and seeks a rounded and balanced understanding of the broader
impact of its decisions through regular engagement with its
stakeholder groups (detailed below) to understand their views,
typically through feedback from the Investment Manager and the
Company's broker, which is regularly communicated to the Board via
quarterly meetings. Stakeholder engagement also ensures the Board
is kept aware of any significant changes in the market, including
the identification of emerging trends and risks, which in turn can
be factored into its strategy discussions.
Management of the Company's day-to-day operations has been
delegated to the Investment Manager, Custodian Capital Limited, and
the Company has no employees. This externally managed structure
allows the Board and the Investment Manager to have due regard to
the impact of decisions on the following matters specified in
Section 172 (1) of the Act:
Section 172(1) factor
Approach taken
The business model and strategy of the Company is set out within the Strategic Report. Any
deviation from or amendment to that strategy is subject to Board and, if necessary,
shareholder approval. The Company's Management Engagement Committee ensures that the
Investment Manager is operating within the scope of the Company's investment objectives.
At least annually, the Board considers a budget for the delivery of its strategic objectives
based on a three year forecast model. The Investment Manager reports non-financial and
financial key performance indicators to the Board, set out in detail in the Business model and
strategy section of the Strategic report, at least quarterly which are used to assess the
outcome of decisions made.
Likely consequences of The Board's commitment to keeping in mind the long-term consequences of its decisions
any decision in the underlies its focus on risk, including risks to the long-term success of the business. This
long-term approach resulted in the change to dividend policy during the year to preserve cash resources
by broadly paying dividends from net rental income, in response to the political and market
uncertainty caused by the COVID 19 pandemic.
The investment strategy of the Company is focused on medium to long-term returns and
minimising the Company's impact on communities and the environment and as such the long-term
is firmly within the sights of the Board when all material decisions are made.
The board gains an understanding of the views of the Company's key stakeholders from the
Investment Manager, broker and Management Engagement Committee, and considers those
stakeholders' interests and views in board discussions and long-term decision-making.
The Company has no employees as a result of its external management structure, but the
Directors have regard to the interests of the individuals responsible for delivery of the
property management and administration services to the Company to the extent that they are
The interests of the able to.
Company's employees
The Company's Nominations Committee is responsible for applying the diversity policy set out
in the Nominations Committee Report to Board recruitment.
Business relationships with suppliers, tenants and other counterparties are managed by the
Investment Manager. Suppliers and other counterparties are typically professional firms such
as lenders, property agents and other property professionals, accounting firms and legal firms
and tenants with which the Investment Manager often has a longstanding relationship. Where
material counterparties are new to the business, checks, including anti money laundering
checks where appropriate, are conducted prior to transacting any business to ensure that no
The need to foster the reputational or legal issues would arise from engaging with that counterparty. The Company
Company's business also periodically reviews the compliance of all material counterparties with relevant laws and
relationships with regulations such as the Modern Slavery Act 2015. The Company pays suppliers in accordance
suppliers, customers and with pre-agreed terms. The Management Engagement Committee engages directly with the
others Company's key service providers providing a direct line of communication for receiving
feedback and resolving issues.
Because the Investment Manager directly invoices most tenants and collects rent without using
managing agents, it has open lines of communication with tenants and can understand and
resolve any issues promptly.
The Board recognises the importance of supporting local communities where the Company's assets
are located and seeks to invest in properties which will be fit for future purpose and which
align with ESG targets. The Company also seeks to benefit local communities by creating
social value through employment, viewing its properties as a key part of the fabric of the
local economy.
The impact of the
Company's operations on
the community and the
environment The Board takes overall responsibility for the Company's impact on the community and the
environment and its ESG policies are set out in the ESG report.
The Company's approach to preventing bribery, money laundering, slavery and human trafficking
is disclosed in the Governance report.
The desirability of the The Board believes that the ability of the Company to conduct its investment business and
Company maintaining a finance its activities depends in part on the reputation of the Board and Investment Manager's
reputation for high team. The risk of falling short of the high standards expected and thereby risking its
standards of business business reputation is included in the Board's review of the Company's risk register, which is
conduct conducted periodically. The principal risks and uncertainties facing the business are set out
in that section of the Strategic report. The Company's requirements for a high standard of
conduct and business ethics are set out in the Governance report.
The Company's shareholders are a very important stakeholder group. The Board oversees the
Investment Manager's formal investor relations programme which involves the Investment Manager
engaging routinely with the Company's shareholders. The programme is managed by the Company's
broker and the Board receives prompt feedback from both the Investment Manager and broker on
the outcomes of meetings and presentations. The Board and Investment Manager aim to be open
with shareholders and available to them, subject to compliance with relevant securities laws.
The Chairman of the Company and other Non-Executive Directors make themselves available for
The need to act fairly meetings as appropriate and attend the Company's AGM.
as between members of
the Company
The investor relations programme is designed to promote formal engagement with investors and
is typically conducted after each half-yearly results announcement. The Investment Manager
also engages with existing investors who may request meetings and with potential new investors
on an ad hoc basis throughout the year, including where prompted by Company announcements.
Shareholder presentations are made available on the Company's website. The Company has a
single class of share in issue with all members of the Company having equal rights.
Methods used by the Board
The main methods used by the Directors to perform their duties
include:
-- Board Strategy Days held at least annually to review all
aspects of the Company's business model andstrategy and assess the
long-term sustainable success of the Company and its impact on key
stakeholders;
-- The Management Engagement Committee engages with the
Company's key service providers and reports on theirperformance to
the Board. The responsibilities of the Management Engagement
Committee are detailed in theManagement Engagement Committee
report;
-- The Board is ultimately responsible for the Company's ESG
activities set out in the ESG Committee report,which it believes
are a key part of benefitting the local communities where the
Company's assets are located;
-- The Board's risk management procedures set out in the
Governance report identify the potentialconsequences of decisions
in the short, medium and long-term so that mitigation plans can be
put in place toprevent, reduce or eliminate risks to the Company
and wider stakeholders;
-- The Board sets the Company's purpose, values and strategy,
detailed in the Business model and strategysection of the Strategic
report, and the Investment Manager ensures they align with its
culture;
-- The Board carries out direct shareholder engagement via the
AGM and Directors attend shareholder meetingson an ad hoc
basis;
-- External assurance is received through internal and external
audits and reports from brokers andadvisers; and
-- Specific training for existing Directors and induction for
new Directors as set out in the Governancereport.
Principal decisions in the year
The Board has delegated operational functions to the Investment
Manager and other key service providers. In particular,
responsibility for management of the Company's property portfolio
has been delegated to the Investment Manager. The Board retains
responsibility for reviewing the engagement of the Investment
Manager and exercising overall control of the Company, reserving
certain key matters as set out in the Governance report.
The principal non-routine decisions taken by the Board during
the year were:
-- Completing the corporate acquisition of DRUM REIT as detailed
in the Investment Manager's report;
-- Appointing Savills as one of the Company's independent
valuers from 30 June 2021 replacing Lambert SmithHampton;
-- Extending the term of the RCF as detailed in Note 15;
-- Finalising the Company's policy on cladding explained further
in the ESG Committee report;
-- Appointing new Directors as detailed in the Chairman's
statement; and
-- Constituting an ESG Committee as detailed in the ESG
Committee report.
Due to the nature of these decisions, a variety of stakeholders
had to be factored into the Board's discussions. Each decision was
announced at the time, so that all stakeholders were aware of the
decisions.
Stakeholders
The Board recognises the importance of stakeholder engagement to
deliver its strategic objectives and believes its stakeholders are
vital to the continued success of the Company. The Board is mindful
of stakeholder interests and keeps these at the forefront of
business and strategic decisions. Regular engagement with
stakeholders is fundamental to understanding their views. The below
section highlights how the Company engages with its key
stakeholders, why they are important and the impact they have on
the Company and therefore its long-term success, which the Board
believes helps demonstrate the successful discharge of its duties
under s172(1) of the Act.
Stakeholder Stakeholder interests Stakeholder engagement
-- Regular
dialogue through rent
collection process
-- High quality
assets -- Review
-- Profitability published data, such as
Tenants accounts, trading
-- Efficient updates and analysts'
The Investment Manager understands the businesses occupying operations reports
the Company's assets and seeks to create long-term -- Knowledgeable and -- Ensured
partnerships and understand their needs to deliver fit for committed landlord buildings comply with
purpose real estate and develop asset management -- Flexibility to the necessary safety
opportunities to underpin long-term sustainable income adapt to the changing UK regulations and
growth and maximise occupier satisfaction commercial landscape insurance
-- Most tenants
-- Buildings with contacted to request
strong environmental environmental
credentials performance data
-- Occupancy has
remained at over 90%
during the year
-- Long-term -- Board and
viability of the Company Committee meetings
The Investment Manager and its employees -- Long-term -- Face-to-face
relationship with the and video-conference
As an externally managed fund the Company's key service Company meetings with the
provider is the Investment Manager and its employees are a -- Well-being of the Chairman and other
key stakeholder. The Investment Manager's culture aligns Investment Manager's Board Directors
with that of the Company and its long-standing reputation employees -- Monthly and
of operating in the smaller lot-size market is key when -- Being able to quarterly KPI reporting
representing the Company attract and retain to the Board
high-calibre staff -- Board
-- Maintaining a evaluation, including
positive and transparent feedback from key
relationship with the Board Investment Manager
personnel
-- Informal
meetings and calls
-- Collaborative and -- Board and
Suppliers transparent working Committee meetings
relationships
A collaborative relationship with our suppliers, including -- Responsive -- One-to-one
those to whom key services are outsourced, ensures that we communication meetings
receive high quality services to help deliver strategic and -- Being able to -- Annual review
investment objectives deliver service level of key service
agreements providers for the
Management Engagement
Committee
-- Annual and
half year presentations
-- Sustainable -- AGM
growth -- Market
Shareholders -- Attractive level announcements and
of income returns corporate website
Building a strong investor base through clear and -- Strong Corporate
transparent communication is vital to building a successful Governance and -- Regular
and sustainable business and generating long-term growth environmental credentials investor feedback
received from the
-- Transparent Company's broker
reporting framework
-- On-going
dialogue with analysts
-- Stable cash flows
-- Stronger
covenants
Lenders -- Being able to
meet interest payments
Our lenders play an important role in our business. The -- Regular
Investment Manager maintains close and supportive -- Maintaining covenant reporting
relationships with this group of long-term stakeholders, agreed gearing ratios
characterised by openness, transparency and mutual -- Regular
understanding -- Regular financial catch-up calls
reporting
-- Proactive
notification of issues or
changes
-- Openness and
transparency
-- Proactive
compliance with new
Government, local authorities and communities legislation
-- Proactive -- Engagement
As a responsible corporate citizen the Company is committed engagement with local authorities
to engaging constructively with central and local -- Support for local where we operate
government and ensuring we support the wider community economic and environmental
plans and strategies -- Two way
dialogue with
-- Playing its part regulators and HMRC
in providing the real
estate fabric of the
economy, giving employers a
place of business
Approval of Strategic report
The Strategic report, (incorporating the Business model and
strategy, Chairman's statement, Investment Manager's report, Asset
management report, ESG Committee report, Financial report, Property
portfolio, Principal risks and uncertainties and Section 172
statement and stakeholder relationships) was approved by the Board
of Directors and signed on its behalf by:
David Hunter
Chairman
16 June 2022
Board of Directors and Investment Manager personnel
The Board currently comprises seven non-executive directors. A
short biography of each director is set out below:
David Hunter - Independent Chairman, age 68
David is a professional non-executive director and strategic
adviser focused principally on UK and international real estate. He
chairs the Company and its Nominations Committee and is on the
boards of both listed and unlisted companies in the UK and
overseas, as well as holding corporate advisory roles. He qualified
as a chartered surveyor in 1978 and has over 25 years' experience
as a fund manager, including as Managing Director of Aberdeen Asset
Management's property fund business. David is a former President of
the British Property Federation and was actively involved in the
introduction of REITs to the UK. He is also Honorary Swedish Consul
to Glasgow and an Honorary Professor of real estate at Heriot-Watt
University.
David is Non-Executive Chair of Capital & Regional plc
("C&R"). The Board perceives no material conflicts of interest
between Custodian REIT and the activities of C&R due to their
divergent property strategies.
David's other roles are not considered to impact his ability to
allocate sufficient time to the Company to discharge his
responsibilities effectively.
Elizabeth McMeikan - Senior Independent Director, age 60
Elizabeth joined the Board as Senior Independent Director
("SID") on 1 April 2021. Her substantive executive career was with
Tesco plc where she was a Stores Board Director before embarking on
a non-executive career in 2005.
Elizabeth is currently SID and Remuneration Committee Chair at
The Unite Group Plc, the UK's largest owner, manager and developer
of purpose-built student accommodation and Non-Executive Director
and ESG Committee Chair of Dalata Hotel Group plc, the largest
hotel group in the Republic of Ireland. Her other Board roles
include Non-Executive Director and Remuneration Committee Chair at
McBride plc, Europe's leading manufacturer of cleaning and hygiene
products, and Non-Executive Director of Fresca Group Limited, a
fruit and vegetable import/export company.
Previously she was SID of JD Wetherspoon plc, SID and
Remuneration Committee Chair of Flybe plc and Chair of Moat Homes
Limited.
Elizabeth's other roles are not considered to impact her ability
to allocate sufficient time to the Company to discharge her
responsibilities effectively.
Matthew Thorne FCA - Independent Director, age 69
Matthew chairs the Company's Audit and Risk Committee. Matthew
qualified as a chartered accountant in 1978 with Price Waterhouse.
He was an independent non-executive director for nine years of
Bankers Investment Trust plc, retiring in 2018 having chaired the
Audit Committee. Since May 2007 Matthew has been an adviser to
Consensus Business Group (led by Vincent Tchenguiz). Matthew was
also Audit Committee chair and the finance member of the Advisory
Board and Advisory Panel of Greenwich Hospital, the Naval Charity,
until January 2020. Matthew's previous executive roles have
included Group Finance Director of McCarthy & Stone plc from
1993 to 2007, Finance Director of Ricardo plc from 1991 to 1992 and
Investment Director of Beazer plc from 1983 to 1991.
Matthew is expected to retire from the Board at the AGM on 31
August 2022.
Hazel Adam - Independent Director, age 53
Hazel was an investment analyst with Scottish Life until 1996
and then joined Standard Life Investments. As a fund manager she
specialised in UK and then Emerging Market equities. In 2005 Hazel
joined Goldman Sachs International as an executive director on the
new markets equity sales desk before moving to HSBC in 2012,
holding a similar equity sales role until 2016.
Hazel is an independent non-executive director of Aberdeen Latin
American Income Fund Limited and holds the CFA Level 4 certificate
in ESG Investing and the Financial Times Non-Executive Directors
Diploma.
Hazel's other role is not considered to impact her ability to
allocate sufficient time to the Company to discharge her
responsibilities effectively.
Chris Ireland FRICS - Independent Director, age 64
Chris was appointed as an Independent Director on 1 April 2021.
Chris joined international property consultancy King Sturge in 1979
as a graduate and has worked his whole career across the UK
investment property market. He ran the investment teams at King
Sturge before becoming Joint Managing Partner and subsequently
Joint Senior Partner prior to its merger with JLL in 2011.
Chris was appointed as Chief Executive Officer of JLL UK in 2016
and became its Chair in April 2021. He will continue to play an
active role in the capital markets business and is committed to
leading the property sector on sustainability and supporting the
debate around the climate emergency.
Chris is a former Chair of the Investment Property Forum and is
a Non-Executive Director of Le Masurier, a Jersey based family
trust with assets across the UK, Germany and Jersey. Chris is also
a keen supporter of the UK homelessness charity Crisis.
Chris' other roles are not considered to impact his ability to
allocate sufficient time to the Company to discharge his
responsibilities effectively.
Malcolm Cooper FCCA FCT - Independent Director, age 63
Malcolm was appointed to the Board on 6 June 2022.
He is a qualified accountant and an experienced FTSE 250 company
Audit Committee Chair with an extensive background in corporate
finance and a wide experience in infrastructure and property.
Malcolm worked with Arthur Andersen and British Gas/BG
Group/Lattice before spending 15 years with National Grid with
roles including Managing Director of National Grid Property and
Global Tax and Treasury Director, and culminated in the successful
sale of a majority stake in National Grid's gas distribution
business, now known as Cadent Gas.
Malcolm is currently a Non-Executive Director of Morgan Sindall
Group plc, a FTSE 250 UK construction and regeneration business,
Chairing its Audit and Responsible Business Committees. He is also
Senior Independent Director of MORhomes plc, Non-Executive Director
and Audit Committee Chair at Southern Water Services Limited and
Non-Executive Director and Audit and Risk Committee Chair at Local
Pensions Partnership Investment.
Malcolm was previously Senior Independent Director and Audit
Committee chair at CLS Holdings plc, a Non-Executive Director of St
William Homes LLP, President of the Association of Corporate
Treasurers and a member of the Financial Conduct Authority's
Listing Authority Advisory Panel.
Malcolm's other roles are not considered to impact his ability
to allocate sufficient time to the Company to discharge his
responsibilities effectively.
Ian Mattioli MBE - Director, age 59
Ian is CEO of Mattioli Woods plc ("Mattioli Woods") with over 35
years' experience in financial services, wealth management and
property businesses and is the founder director of Custodian REIT.
Together with Bob Woods, Ian founded Mattioli Woods, the AIM-listed
wealth management and employee benefits business which is the
parent company of the Investment Manager. Mattioli Woods now has
over GBP15bn of assets under management, administration and advice.
Ian is responsible for the vision and operational management of
Mattioli Woods and instigated the development of its investment
proposition, including the syndicated property initiative that
developed into the seed portfolio for the launch of Custodian REIT.
His personal achievements include winning the London Stock Exchange
AIM Entrepreneur of the Year award and CEO of the year in the 2018
City of London wealth management awards.
Ian was awarded an MBE in the Queen's 2017 New Year's Honours
list for his services to business and the community in
Leicestershire and was appointed High Sheriff of Leicestershire in
March 2021, an independent non-political Royal appointment for a
single year. Ian is also Non-Executive Chair of K3 Capital Group
plc, which is listed on AIM and specialises in business transfer,
business brokerage and corporate finance across the UK.
Ian's other roles are not considered to impact his ability to
allocate sufficient time to the Company to discharge his
responsibilities effectively.
Investment Manager personnel
Short biographies of the Investment Manager's key personnel and
senior members of its property team are set out below:
Richard Shepherd-Cross MRICS - Managing Director
Richard qualified as a Chartered Surveyor in 1996 and until 2008
worked for JLL, latterly running its national portfolio investment
team.
Since joining Mattioli Woods in 2009, Richard established
Custodian Capital as the Property Fund Management subsidiary to
Mattioli Woods and in 2014 was instrumental in the establishment of
Custodian REIT plc from Mattioli Woods' syndicated property
portfolio and its 1,200 investors. Following the successful IPO of
the Company, Richard has overseen the growth of the Company to its
current property portfolio of over GBP0.6bn. Richard and his family
own 371,381 shares in the Company.
Ed Moore FCA - Finance Director
Ed qualified as a Chartered Accountant in 2003 with Grant
Thornton, specialising in audit, financial reporting and internal
controls across its Midlands practice. He is Finance Director of
Custodian Capital with responsibility for all day-to-day financial
aspects of its operations. Ed is also a member of the Custodian
Capital Investment Committee.
Since IPO in 2014 Ed has overseen the Company raising over
GBP300m of new equity, arranging or refinancing seven loan
facilities and completing four corporate acquisitions, including
leading on the acquisition of DRUM REIT. Ed's key responsibilities
for Custodian REIT are accurate external and internal financial
reporting, ongoing regulatory compliance and maintaining a robust
control environment. Ed is Company Secretary of Custodian REIT and
is a member of the Investment Manager's Investment Committee. Ed is
also responsible for the Investment Manager's environmental
initiatives, attending Custodian REIT ESG Committee meetings and
co-leading the Investment Manger's ESG working group.
Ian Mattioli MBE - Founder and Chair
Ian's biography is set out above.
Alex Nix MRICS - Assistant Investment Manager
Alex graduated from Nottingham Trent University with a degree in
Real Estate Management before joining Lambert Smith Hampton, where
he spent eight years and qualified as a Chartered Surveyor in
2006.
Alex is Assistant Investment Manager to Custodian REIT having
joined Custodian Capital in 2012. Alex heads the Company's property
management and asset management initiatives, assists in sourcing
and executing new investments and is a member of the Investment
Manager's Investment Committee.
Tom Donnachie MRICS - Portfolio Manager
Tom graduated from Durham University with a degree in Geography
before obtaining an MSc in Real Estate Management from Sheffield
Hallam University. Tom worked in London for three years where he
qualified as a Chartered Surveyor with Workman LLP before returning
to the Midlands first with Lambert Smith Hampton and then CBRE.
Tom joined Custodian Capital in 2015 as Portfolio Manager with a
primary function to maintain and enhance the existing property
portfolio and assist in the selection and due diligence process
regarding new acquisitions. Tom co-leads the Investment Manager's
environmental working group and attends Custodian REIT ESG
Committee meetings.
Javed Sattar MRICS - Portfolio Manager
Javed joined Custodian Capital in 2011 after graduating from
Birmingham City University with a degree in Estate Management
Practice. Whilst working as a trainee surveyor on Custodian REIT's
property portfolio for Custodian Capital he completed a PGDip in
Surveying via The College of Estate Management and qualified as a
Chartered Surveyor in 2017.
Javed operates as Portfolio Manager managing properties
predominantly located in the North-West of England.
Consolidated statements of comprehensive income
For the year ended 31 March 2022
Group Company
Year Year Year Year
ended ended ended ended
31 March 31 March 31 March 31 March
2022 2021 2022 2021
Note GBP000 GBP000 GBP000 GBP000
Revenue 4 39,891 39,578 38,490 39,578
Investment management (3,854) (3,331) (3,782) (3,331)
Operating expenses of rental property
-- rechargeable to tenants (852) (914) (852) (914)
-- directly incurred (3,422) (5,559) (3,174) (5,559)
Professional fees (617) (489) (579) (489)
Directors' fees (291) (218) (291) (218)
Administrative expenses (776) (551) (774) (551)
Expenses (9,812) (11,062) (9,452) (11,062)
Operating profit before financing and revaluation of investment property
30,079 28,516 29,038 28,516
Unrealised profits/(losses) on revaluation of investment property:
-- relating to property revaluations 10 93,977 (19,611) 86,656 (19,611)
-- relating to costs of acquisition 10 (2,273) (707) (2,273) (707)
Valuation increase/(decrease) 91,704 (20,318) 84,383 (20,318)
Profit on disposal of investment property 5,369 393 5,369 393
Net profit/(loss) on investment property 97,073 (19,925) 89,752 (19,925)
Operating profit before financing 127,152 8,591 118,790 8,591
Finance income 6 - 61 - 61
Finance costs 7 (4,827) (4,903) (4,615) (4,903)
Net finance costs (4,827) (4,842) (4,615) (4,842)
Profit before tax 122,325 3,749 114,175 3,749
Income tax expense 8 - - - -
Profit for the year and total comprehensive income for the year, net of
tax 122,325
3,749 114,175 3,749
Attributable to:
Owners of the Company 122,325 3,749 114,175 3,749
Earnings per ordinary share:
Basic and diluted (p) 3 28.5 0.9
EPRA (p) 3 5.9 5.6
The profit for the year arises from continuing operations.
Consolidated and Company statements of financial position
As at 31 March 2022
Registered number: 08863271
Group Company
31 March
31 March 2022 31 March 2022 31 March 2021
2021
Note GBP000 GBP000 GBP000
GBP000
Non-current assets
Investment property 10 665,186 551,922 616,211 551,922
Investments 11 - - 22,538 3,405
Total non-current assets 665,186 551,922 638,749 555,327
Current assets
Trade and other receivables 12 5,201 6,001 3,365 6,001
Cash and cash equivalents 14 11,624 3,920 9,217 3,920
Total current assets 16,825 9,921 12,582 9,921
Total assets 682,011 561,843 651,331 565,248
Equity
Issued capital 16 4,409 4,201 4,409 4,201
Share premium 16 250,970 250,469 250,970 250,469
Merger reserve 16 18,931 - 18,931 -
Retained earnings 16 253,330 155,196 245,180 155,196
Total equity attributable to equity holders of the Company
527,640 409,866 519,490 409,866
Non-current liabilities
Borrowings 15 113,883 138,604 113,883 138,604
Other payables 570 572 570 572
Total non-current liabilities 114,453 139,176 114,453 139,176
Current liabilities
Borrowings 15 22,727 - - -
Trade and other payables 13 9,783 6,185 10,985 9,590
Deferred income 7,408 6,616 6,403 6,616
Total current liabilities 39,918 12,801 17,388 16,206
Total liabilities 154,371 151,977 131,841 155,382
Total equity and liabilities 682,011 561,843 651,331 565,248
These consolidated and Company financial statements of Custodian
REIT plc were approved and authorised for issue by the Board of
Directors on 16 June 2022 and are signed on its behalf by:
David Hunter
Chairman
Consolidated and Company statements of cash flows
For the year ended 31 March 2022
Group Company
Year Year Year Year
ended ended
ended ended
31 March 31 March
31 March 31 March
2022 2022
2021 2021
Note GBP000 GBP000 GBP000 GBP000
Operating activities
Profit for the year 122,325 3,749 114,175 3,749
Net finance costs 4,827 4,842 4,615 4,842
Valuation (increase)/decrease of investment property 10 (91,704) 20,318 (84,383) 20,318
Impact of rent free 10 (1,112) (1,932) (1,157) (1,932)
Amortisation of right-of-use asset 7 7 7 7
Profit on disposal of investment property (5,369) (393) (5,369) (393)
Cash flows from operating activities before changes in working capital and
provisions
28,974 26,591 27,888 26,591
(Increase)/decrease in trade and other receivables 1,923 (704) 2,636 (704)
(Decrease)/increase in trade and other payables and deferred income 1,702 (2,065) 1,180 (2,065)
Cash generated from operations 32,599 23,822 31,704 23,822
Interest and other finance charges (4,463) (4,556) (4,279) (4,556)
Net cash flows from operating activities 28,136 19,266 27,425 19,266
Investing activities
Purchase of investment property (21,529) (11,443) (21,529) (11,443)
Capital expenditure and development (3,515) (2,308) (3,510) (2,308)
Acquisition costs (2,272) (707) (2,272) (707)
Disposal of investment property 54,403 4,422 54,403 4,422
Costs of disposal of investment property (479) (69) (479) (69)
Interest and finance income received 6 - 61 - 61
Net cash used in investing activities 26,608 (10,044) 26,613 (10,044)
Financing activities
Proceeds from the issue of share capital 16 558 - 558 -
Costs of share issue (51) - (51) -
Repayment of borrowings and origination costs 15 (25,057) (10,066) (25,057) (10,066)
Dividends paid 9 (24,191) (20,635) (24,191) (20,635)
Net cash from financing activities (48,741) (30,701) (48,741) (30,701)
Net increase/(decrease) in cash and cash equivalents 6,003 (21,479) 5,297 (21,479)
Cash acquired through the acquisition of DRUM REIT 1,701 - - -
Cash and cash equivalents at start of the year 3,920 25,399 3,920 25,399
Cash and cash equivalents at end of the year 11,624 3,920 9,217 3,920
Consolidated statement of changes in equity
For the year ended 31 March 2022
Issued Merger Share Retained Total
reserve
capital premium earnings equity
GBP000
Note GBP000 GBP000 GBP000 GBP000
As at 31 March 2020 4,201 - 250,469 172,082 426,752
Profit for the year - - - 3,749 3,749
Total comprehensive income for year - - - 3,749 3,749
Transactions with owners of the Company, recognised directly in
equity
Dividends 9 - - - (20,635) (20,635)
Issue of share capital 16 - - - - -
As at 31 March 2021 4,201 - 250,469 155,196 409,866
Profit for the year - - - 122,325 122,325
Total comprehensive income for year - - - 122,325 122,325
Transactions with owners of the Company, recognised directly in
equity
Dividends 9 - - - (24,191) (24,191)
Issue of share capital 16 208 18,931 501 - 19,640
As at 31 March 2022 4,409 18,931 250,970 253,330 527,640
Company statement of changes in equity
For the year ended 31 March 2022
Issued Merger Share Retained Total
reserve
capital premium earnings equity
GBP000
Note GBP000 GBP000 GBP000 GBP000
As at 31 March 2020 4,201 - 250,469 172,082 426,752
Profit for the year - - - 3,749 3,749
Total comprehensive income for year - - - 3,749 3,749
Transactions with owners of the Company, recognised directly in
equity
Dividends 9 - - - (20,635) (20,635)
Issue of share capital 16 - - - - -
As at 31 March 2021 4,201 - 250,469 155,196 409,866
Profit for the year - - - 114,175 114,175
Total comprehensive income for year - - - 114,175 114,175
Transactions with owners of the Company, recognised directly in
equity
Dividends 9 - - - (24,191) (24,191)
Issue of share capital 16 208 18,931 501 - 19,640
As at 31 March 2022 4,409 18,931 250,970 245,180 519,490 Notes to the financial statements for the year ended 31 March 2022 1. Corporate information
The Company is a public limited company incorporated and
domiciled in England and Wales, whose shares are publicly traded on
the London Stock Exchange plc's main market for listed securities.
The consolidated financial statements have been prepared on a
historical cost basis, except for the revaluation of investment
property, and are presented in pounds sterling with all values
rounded to the nearest thousand pounds (GBP000), except when
otherwise indicated. The consolidated financial statements were
authorised for issue in accordance with a resolution of the
Directors on 16 June 2022. 2. Basis of preparation and accounting
policies ? Basis of preparation
The consolidated financial statements and the separate financial
statements of the parent company have been prepared in accordance
with international accounting standards in conformity with the
requirements of the Companies Act 2006 and International Financial
Reporting Standards adopted by the UK. The financial statements
have also been prepared in accordance with International Financial
Reporting Standards as issued by the IASB.
Certain statements in this report are forward looking
statements. By their nature, forward looking statements involve a
number of risks, uncertainties or assumptions that could cause
actual results or events to differ materially from those expressed
or implied by those statements. Forward looking statements
regarding past trends or activities should not be taken as
representation that such trends or activities will continue in the
future. Accordingly, undue reliance should not be placed on forward
looking statements. ? Basis of consolidation
The consolidated financial statements consolidate those of the
parent company and its subsidiaries. The parent controls a
subsidiary if it is exposed, or has rights, to variable returns
from its involvement with the subsidiary and has the ability to
affect those returns through its power over the subsidiary.
Custodian Real Estate Limited has a reporting date in line with the
Company. Other subsidiaries have September or December accounting
reference dates which have not been amended since their acquisition
as those companies are expected to be liquidated during the next
financial year. All transactions and balances between group
companies are eliminated on consolidation, including unrealised
gains and losses on transactions between group companies. Where
unrealised losses on intra-group asset sales are reversed on
consolidation, the underlying asset is also tested for impairment
from a group perspective. Amounts reported in the financial
statements of the subsidiary are adjusted where necessary to ensure
consistency with the accounting policies adopted by the Group.
Profit or loss and other comprehensive income of subsidiaries
acquired or disposed of during the year are recognised from the
effective date of acquisition, or up to the effective date of
disposal, as applicable. ? Business combinations
Where property is acquired, via corporate acquisitions or
otherwise, the substance of the assets and activities of the
acquired entity are considered in determining whether the
acquisition represents a business combination or an asset purchase
under IFRS 3 - Business Combinations. Where such acquisitions are
not judged to be a business combination the cost to acquire the
corporate entity is allocated between the identifiable assets and
liabilities of the entity based on their relative fair values at
the acquisition date. Accordingly, no goodwill or additional
deferred taxation arises. Otherwise, acquisitions are accounted for
as business combinations using the acquisition method. ?
Application of new and revised International Financial Reporting
Standards
During the year the Company adopted the following new standards
with no impact on reported financial performance or position:
-- IFRS 17 - 'Insurance Contracts'
IFRS 17 became effective for periods commencing on or after 1
January 2021. IFRS 17 establishes the principles for the
recognition, measurement, presentation and disclosure of insurance
contracts and supersedes IFRS 4 Insurance Contracts.
At the date of authorisation of these financial statements,
there were no new and revised IFRSs which have not been applied in
these financial statements were in issue but not yet effective. ?
Significant accounting policies
The principal accounting policies adopted by the Group and
Company and applied to these financial statements are set out
below.
Going concern
The Directors believe the Company is well placed to manage its
business risks successfully and the Company's projections show that
it should be able to operate within the level of its current
financing arrangements for at least the next 12 months, set out in
more detail in the Directors' report and Principal risks and
uncertainties section of the Strategic report. Accordingly, the
Directors continue to adopt the going concern basis for the
preparation of the financial statements.
Income recognition
Contractual revenues are allocated to each performance
obligation of a contract and revenue is recognised on a basis
consistent with the transfer of control of goods or services.
Revenue is measured at the fair value of the consideration
received, excluding discounts, rebates, VAT and other sales taxes
or duties.
Rental income from operating leases on properties owned by the
Company is accounted for on a straight-line basis over the term of
the lease. Rental income excludes service charges and other costs
directly recoverable from tenants.
Lease incentives are recognised on a straight-line basis over
the lease term.
Revenue and profits on the sale of properties are recognised on
the completion of contracts. The amount of profit recognised is the
difference between the sale proceeds and the carrying amount.
Finance income relates to bank interest receivable and amounts
receivable on ongoing development funding contracts.
Taxation
The Group operates as a REIT and hence profits and gains from
the property rental business are normally expected to be exempt
from corporation tax. The tax expense represents the sum of the tax
currently payable and deferred tax relating to the residual
(non-property rental) business. The tax currently payable is based
on taxable profit for the year. Taxable profit differs from net
profit as reported in the statement of comprehensive income because
it excludes items of income and expense that are taxable or
deductible in other years and it further excludes items that are
never taxable or deductible. The Company's liability for current
tax is calculated using tax rates that have been enacted or
substantively enacted by the reporting date.
Investment property
Investment property is held to earn rentals and/or for capital
appreciation and is initially recognised at cost including direct
transaction costs. Investment property is subsequently valued
externally on a market basis at the reporting date and recorded at
valuation. Any surplus or deficit arising on revaluing investment
property is recognised in profit or loss in the year in which it
arises. Dilapidations receipts are held in the statement of
financial position and offset against subsequent associated
expenditure. Any ultimate gains or shortfalls are measured by
reference to previously published valuations and recognised in
profit or loss, offset against any directly corresponding movement
in fair value of the investment properties to which they
relate.
Group undertakings
Investments are included in the Company only statement of
financial position at cost less any provision for impairment.
Non-listed equity investments
Non-listed equity investments are classified at fair value
through profit and loss and are subsequently measured using level 3
inputs, meaning valuation techniques for which the lowest level
input that is significant to the fair value measurement is
unobservable.
Financial assets
The Company's financial assets include cash and cash equivalents
and trade and other receivables. Interest resulting from holding
financial assets is recognised in profit or loss on an accruals
basis.
Loans and receivables are measured subsequent to initial
recognition at amortised cost using the effective interest method,
less provision for impairment. Provision for impairment of trade
and other receivables is made when objective evidence is received
that the Company will not be able to collect all amounts due to it
in accordance with the original terms of the receivable. The amount
of the impairment is determined as the difference between the
asset's carrying amount and the present value of estimated future
cash flows, discounted at the effective rate computed at initial
recognition. Any change in value through impairment or reversal of
impairment is recognised in profit or loss.
A financial asset is de-recognised only where the contractual
rights to the cash flows from the asset expire or the financial
asset is transferred and that transfer qualifies for
de-recognition. A financial asset is transferred if the contractual
rights to receive the cash flows of the asset have been transferred
or the Company retains the contractual rights to receive the cash
flows of the asset but assumes a contractual obligation to pay the
cash flows to one or more recipients. A financial asset that is
transferred qualifies for de-recognition if the Company transfers
substantially all the risks and rewards of ownership of the
asset.
Cash and cash equivalents
Cash and cash equivalents include cash in hand and on-demand
deposits, and other short-term highly liquid investments that are
readily convertible into a known amount of cash and are subject to
an insignificant risk of changes in value.
Financial liabilities and equity
Financial liabilities and equity instruments are classified
according to the substance of the contractual arrangements entered
into. An equity instrument is any contract that evidences a
residual interest in the assets of the Company after deducting all
of its liabilities. Equity instruments issued by the Company are
recorded at the proceeds received, net of direct issue costs.
Share capital represents the nominal value of equity shares
issued. Share premium represents the excess over nominal value of
the fair value of the consideration received for equity shares, net
of direct issue costs.
Retained earnings include all current and prior year results as
disclosed in profit or loss. Retained earnings include realised and
unrealised profits. Profits are considered unrealised where they
arise from movements in the fair value of investment properties
that are considered to be temporary rather than permanent.
Bank borrowings
Interest-bearing bank loans and overdrafts are recorded at the
fair value of proceeds received, net of direct issue costs. Finance
charges, including premiums payable on settlements or redemption
and direct issue costs, are accounted for on an accruals basis in
profit or loss using the effective interest rate method and are
added to the carrying amount of the instrument to the extent that
they are not settled in the period in which they arise.
Trade payables
Trade payables are initially measured at fair value and are
subsequently measured at amortised cost, using the effective
interest rate method.
Leases
Where an investment property is held under a leasehold interest,
the headlease is initially recognised as an asset at cost plus the
present value of minimum ground rent payments. The corresponding
rental liability to the head leaseholder is included in the balance
sheet as a liability. Lease payments are apportioned between the
finance charge and the reduction of the outstanding liability so as
to produce a constant periodic rate of interest on the remaining
lease liability.
Segmental reporting
An operating segment is a distinguishable component of the
Company that engages in business activities from which it may earn
revenues and incur expenses, whose operating results are regularly
reviewed by the Company's chief operating decision maker (the
Board) to make decisions about the allocation of resources and
assessment of performance and about which discrete financial
information is available. As the chief operating decision maker
reviews financial information for, and makes decisions about the
Company's investment properties as a portfolio, the Directors have
identified a single operating segment, that of investment in
commercial properties.
Key sources of judgements and estimation uncertainty
The preparation of the financial statements requires the Company
to make estimates and assumptions that affect the reported amount
of revenues, expenses, assets and liabilities and the disclosure of
contingent liabilities. If in the future such estimates and
assumptions, which are based on the Directors' best judgement at
the date of preparation of the financial statements, deviate from
actual circumstances, the original estimates and assumptions will
be modified as appropriate in the period in which the circumstances
change.
Judgements
The areas where a higher degree of judgement or complexity
arises are discussed below:
-- Valuation of investment property - Investment property is
valued at the reporting date at fair value. Where an investment
property is being redeveloped the property continues to be treated
as an investment property. Surpluses and deficits attributable to
the Company arising from revaluation are recognised in profit or
loss. Valuation surpluses reflected in retained earnings are not
distributable until realised on sale. In making itsjudgement over
the valuation of properties, the Company considers valuations
performed by the independent valuersin determining the fair value
of its investment properties. The valuers make reference to market
evidence oftransaction prices for similar properties. The
valuations are based upon assumptions including future
rentalincome, anticipated maintenance costs and appropriate
discount rates.
Estimates
Areas where accounting estimates are significant to the
financial statements are:
-- Doubtful debt provisioning - the approach to providing for
'expected credit losses' is detailed in Note12 and uses estimates
within a matrix of how much the credit risk of trade receivables
has increased since initialrecognition based on a number of days
overdue, taking into account qualitative and quantitative
supportableinformation. Each individual property rental receivable
is reviewed to assess whether there is a probability ofdefault and
expected credit loss given the Investment Manager's knowledge of
the specific tenant over and above theprovision calculated from the
matrix. 3. Earnings per ordinary share
Basic EPS amounts are calculated by dividing net profit for the
year attributable to ordinary equity holders of the Company by the
weighted average number of ordinary shares outstanding during the
year.
Diluted EPS amounts are calculated by dividing the net profit
attributable to ordinary equity holders of the Company by the
weighted average number of ordinary shares outstanding during the
year plus the weighted average number of ordinary shares that would
be issued on the conversion of all the dilutive potential ordinary
shares into ordinary shares. There are no dilutive instruments in
issue. Any shares issued after the year end are disclosed in Note
20.
The Company is a FTSE EPRA/NAREIT index series constituent and
EPRA performance measures have been disclosed to facilitate
comparability with the Company's peers through consistent reporting
of key performance measures. EPRA has issued recommended bases for
the calculation of EPS which the Directors consider are better
indicators of performance.
Year Year
ended ended
31 March 31 March
2022 2021
Group
Net profit and diluted net profit attributable to equity holders of the Company (GBP000)
122,325 3,749
Net (profit)/loss on investment property (GBP000) (97,073) 19,925
EPRA net profit attributable to equity holders of the Company (GBP000) 25,252 23,674
Weighted average number of ordinary shares:
Issued ordinary shares at start of the year (thousands) 420,053 420,053
Effect of shares issued during the year (thousands) 8,649 -
Basic and diluted weighted average number of shares (thousands) 428,702 420,053
Basic and diluted EPS (p) 28.5 0.9
EPRA EPS (p) 5.9 5.6 4. Revenue
Group Company
Year Year Year Year
ended ended ended ended
31 March 31 March 31 March 31 March
2022 2021 2022 2021
GBP000 GBP000 GBP000 GBP000
Gross rental income from investment property 39,039 38,664 37,638 38,664
Income from recharges to tenants 852 914 852 914
39,891 39,578 38,490 39,578 5. Operating profit
Operating profit is stated after (crediting)/charging:
Group Company
Year Year Year Year
ended ended ended ended
31 March 31 31 March 31
March March
2022 2022
2021 2021
GBP000 GBP000
GBP000 GBP000
Profit on disposal of investment property (5,369) (393) (5,369) (393)
Investment property valuation (increase)/decrease (91,704) 20,318 (91,704) 20,318
Fees payable to the Company's auditor and its associates for the audit of the Company's
annual financial statements
138 106 138 106
Fees payable to the Company's auditor and its associates for other services 25 20 25 20
Administrative fee payable to the Investment Manager 459 416 459 416
Directly incurred operating expenses of vacant rental property 1,826 822 1,611 822
Directly incurred operating expenses of let rental property 1,444 1,142 1,418 1,142
Movement in doubtful debt provision, write offs due to tenant business failure and rent
concessions
7 3,591 (26) 3,591
Amortisation of right-of-use asset 7 7 7 7
Fees payable to the Company's auditor, Deloitte LLP, are further
detailed in the Audit and Risk Committee report. 6. Finance
income
Group Company
Year Year Year Year
ended ended
ended ended
31 March 31 March
31 March 31 March
2022 2022
2021 2021
GBP000 GBP000
GBP000 GBP000
Bank interest - 28 - 28
Finance income - 33 - 33
- 61 - 61 7. Finance costs
Group Company
Year Year
ended Year ended ended Year ended
31 March 31 March 31 March 31 March
2022 2021 2022 2021
GBP000 GBP000 GBP000 GBP000
Amortisation of arrangement fees on debt facilities 364 347 337 347
Other finance costs 307 287 302 287
Bank interest 4,156 4,269 3,976 4,269
4,827 4,903 4,615 4,903 8. Income tax
The tax charge assessed for the year is lower than the standard
rate of corporation tax in the UK during the year of 19.0%. The
differences are explained below:
Group Company
Year Year
ended Year ended ended Year ended
31 March 31 March 31 March 31 March
2022 2021 2022 2021
GBP000 GBP000 GBP000 GBP000
Profit before income tax 122,325 3,749 114,175 3,749
Tax charge on profit at a standard rate of 19.0% (2021: 19.0%) 23,242 712 21,693 712
Effects of:
REIT tax exempt rental profits and gains (23,242) (712) (21,693) (712)
Income tax expense - - - -
Effective income tax rate 0.0% 0.0% 0.0% 0.0%
The Company operates as a REIT and hence profits and gains from
the property investment business are normally exempt from
corporation tax. 9. Dividends
Year Year
ended ended
31 March 31 March
2022 2021
GBP000 GBP000
Group and Company
Interim dividends paid on ordinary shares relating to the quarter ended:
Prior year
- 31 March 2021: 1.25p (2020: 1.6625p) 5,257 6,983
- 31 March 2021: 0.5p (2020: nil) 2,102 -
Current year
- 30 June 2021: 1.25p (2020: 0.95p) 5,257 3,990
- 30 September 2021: 1.25p (2020: 1.05p) 5,511 4,411
- 31 December 2021: 1.375p (2020: 1.25p) 6,062 5,251
24,191 20,635
The Company paid a fourth interim dividend relating to the
quarter ended 31 March 2022 of 1.375p per ordinary share (totalling
GBP6.1m) on 31 May 2022 to shareholders on the register at the
close of business on 13 May 2022 which has not been included as
liabilities in these financial statements. 10. Investment
property
Group Company
GBP000 GBP000
At 31 March 2020 559,817 559,817
Impact of lease incentives 1,932 1,932
Additions 12,150 12,150
Amortisation of right-of-use asset (7) (7)
Capital expenditure and development 2,308 2,308
Disposals (3,960) (3,960)
Valuation decrease before acquisition costs (19,611) (19,611)
Acquisition costs (707) (707)
Valuation decrease including acquisition costs (20,318) (20,318)
At 31 March 2021 551,922 551,922
Impact of lease incentives 1,112 1,158
Additions 65,495 23,801
Amortisation of right-of-use asset (7) (7)
Capital expenditure and development 3,515 3,510
Disposals (48,555) (48,555)
Valuation increase before acquisition costs 93,977 86,655
Acquisition costs (2,273) (2,273)
Valuation increase including acquisition costs 91,704 84,382
At 31 March 2022 665,186 616,211
GBP458.0m (2021: GBP391.9m) of investment property was charged
as security against the Company's borrowings at the year end.
GBP0.6m (2021: GBP0.6m) of investment property comprises
right-of-use assets.
The carrying value of investment property at 31 March 2022
comprises GBP557.8m freehold (2021: GBP444.1m) and GBP107.4m
leasehold property (2021: GBP107.8m).
Investment property is stated at the Directors' estimate of its
31 March 2022 fair value. Savills (UK) Limited ("Savills") and
Knight Frank LLP ("KF"), professionally qualified independent
valuers, each valued approximately half of the property portfolio
as at 31 March 2022 in accordance with the Appraisal and Valuation
Standards published by the Royal Institution of Chartered Surveyors
("RICS"). Savills and KF have recent experience in the relevant
locations and categories of the property being valued.
Investment property has been valued using the investment method
which involves applying a yield to rental income streams. Inputs
include yield, current rent and ERV. For the year end valuation,
the equivalent yields used ranged from 4.3% to 12.3%. Valuation
reports are based on both information provided by the Company e.g.
current rents and lease terms, which are derived from the Company's
financial and property management systems and are subject to the
Company's overall control environment, and assumptions applied by
the valuers e.g. ERVs and yields. These assumptions are based on
market observation and the valuers' professional judgement. In
estimating the fair value of each property, the highest and best
use of the properties is their current use.
All other factors being equal, a higher equivalent yield would
lead to a decrease in the valuation of investment property, and an
increase in the current or estimated future rental stream would
have the effect of increasing capital value, and vice versa.
However, there are interrelationships between unobservable inputs
which are partially determined by market conditions, which could
impact on these changes. 11. Investments
Shares in subsidiaries
Company
31 31
Country of Principal Ordinary March March
registration and activity shares held 2022 2021
Company incorporation
number GBP000 GBP000
Name
Custodian Real Estate Limited 08882372 England and Wales Non-trading 100% - -
Custodian Real Estate BL Limited Non-trading -
09270501 England and Wales in liquidation 100% - -
Custodian Real Estate (Beaumont Leys)
Limited* 04364589 England and Wales Non-trading - 100% 4 4
in liquidation
Custodian Real Estate (Leicester) Limited* Non-trading -
04312180 England and Wales in liquidation 100% 497 497
Custodian Real Estate (JMP4) Limited 11187952 England and Wales Non-trading - 100% 2,904 2,904
in liquidation
Custodian Real Estate (DROP Holdings) Property
Limited (formerly DRUM Income Plus REIT 9511797 England and Wales investment 100% 19,133 -
plc)
Custodian Real Estate (DROP) Limited 9515513 England and Wales Property 100% - -
(formerly DRUM Income Plus Limited)* investment
22,538 3,405
* Held indirectly
The Company's non-trading UK subsidiaries have claimed the audit
exemption available under Section 479A of the Companies Act 2006.
The Company's registered office is also the registered office of
each UK subsidiary.
Custodian Real Estate (JMP4) Limited was dissolved on 18 April
2022.
DRUM REIT acquisition
The acquisition of DRUM REIT during the year has been accounted
for as an asset acquisition. Consideration of GBP19.1m comprised
the issue of 20,247,040 shares at their market value of 94.5p. This
consideration was allocated between the fair value of the acquired
assets and liabilities of DRUM REIT comprising GBP0.15m of working
capital, GBP22.7m of net borrowings and GBP41.65m of investment
property.
Non-listed equity investments
Group and
Company
31 March 31 March
Country of registration and Principal Ordinary shares 2022 2021
incorporation activity held
Company GBP000 GBP000
number
Name
AGO Hotels 12747566 England and Wales Operator of 4.5% - -
Limited hotels
- -
The Company was allotted 4.5% of the ordinary share capital of
AGO Hotels Limited on 31 January 2021 as part of a new letting of
its hotel asset in Portishead. 12. Trade and other receivables
Group Company
31 March 31 March 31 March 31 March
2022 2021 2022 2021
GBP000 GBP000 GBP000 GBP000
Falling due in less than one year:
Trade receivables 3,094 4,192 2,642 4,192
Other receivables 1,960 1,706 576 1,706
Prepayments and accrued income 147 103 147 103
5,201 6,001 3,365 6,001
The Company regularly monitors the effectiveness of the criteria
used to identify whether there has been a significant increase in
credit risk and revises them as appropriate to ensure that the
criteria are capable of identifying significant increases in credit
risk before amounts become past due.
The Company considers the following as constituting an event of
default for internal credit risk management purposes as historical
experience indicates that financial assets that meet either of the
following criteria are generally not recoverable:
-- When there is a breach of financial covenants by the debtor;
or
-- Available information indicates the debtor is unlikely to pay
its creditors.
Such balances are provided for in full. For remaining balances
the Company has applied an expected credit loss ("ECL") matrix
based on its experience of collecting rent arrears. The ECL matrix
fully provides for receivable balances more than 180 days past due
and partially provides against receivable balances between 60 and
180 days past due.
Group Company
31 March 31 March 31 March 31 March
2022 2021 2022 2021
GBP000 GBP000 GBP000 GBP000
Expected credit loss provision
Opening balance 3,030 341 3,030 341
(Decrease)/increase in provision relating to trade receivables that are (291) 2,689 (291) 2,689
credit-impaired
Closing balance 2,739 3,030 2,739 3,030
The decrease in provision during the year is due to the
collection of previously provided for debts.
Tenant rent deposits of GBP1.1m (2021: GBP0.9m) are held as
collateral against certain trade receivable balances. 13. Trade and
other payables
Group Company
31 March 31 March
31 March 2022 31 March 2022
2021 2021
GBP000 GBP000
GBP000 GBP000
Falling due in less than one year:
Trade and other payables 3,960 1,730 1,973 1,730
Social security and other taxes 456 882 366 882
Accruals 4,226 2,665 4,100 2,665
Rental deposits 1,141 908 1,141 908
Amounts due to subsidiary undertakings - - 3,405 3,405
9,783 6,185 10,985 9,590
The Directors consider that the carrying amount of trade and
other payables approximates to their fair value. Trade payables and
accruals principally comprise amounts outstanding for trade
purchases and ongoing costs. For most suppliers interest is charged
if payment is not made within the required terms. Thereafter,
interest is chargeable on the outstanding balances at various
rates. The Company has financial risk management policies in place
to ensure that all payables are paid within the credit
timescale.
Amounts payable to subsidiary undertakings are due on demand.
14. Cash and cash equivalents
Group Company
31 March 31 March 31 March 31 March
2022 2021 2022 2021
GBP000 GBP000 GBP000 GBP000
Cash and cash equivalents 11,624 3,920 9,217 3,920
Group and Company cash and cash equivalents at 31 March 2022
include GBP1.7m (2021: GBP2.6m) of restricted cash comprising:
GBP1.1m (2021: GBP0.9m) rental deposits held on behalf of tenants,
GBP0.3m (2021: GBPnil) exchange deposits on pipeline acquisitions,
GBP0.3m (2021: GBP0.2m) retentions held in respect of development
fundings and GBPnil (2021: GBP1.5m) interest prepayments. 15.
Borrowings
Group Company
Costs incurred in the Costs incurred in the
arrangement of bank arrangement of bank
borrowings borrowings
Bank GBP000 Total Bank GBP000 Total
borrowings borrowings
GBP000 GBP000 GBP000 GBP000
Falling due within one
year:
At 31 March 2021 - - - - - -
Borrowings arising from
the acquisition of DRUM 22,760 (60) 22,700 - - -
REIT
Amortisation of - 27 27 - - -
arrangement fees
At 31 March 2022 22,760 (33) 22,727 - - -
Falling due in more than
one year:
At 31 March 2021 140,000 (1,396) 138,604 140,000 (1,396) 138,604
Net repayment of (25,000) - (25,000) (25,000) - (25,000)
borrowings
Arrangement fees - (57) (57) - (57) (57)
incurred
Amortisation of -- 336 336 - 336 336
arrangement fees
At 31 March 2022 115,000 (1,117) 113,883 115,000 (1,117) 113,883
Total borrowings:
At 31 March 2022 137,760 (1,150) 136,610 115,000 (1,117) 113,883
During the year the Company and Lloyds agreed to extend the term
of the RCF by one year to expire in 2024.
At the year end the Company has the following facilities
available:
-- A GBP20m RCF with Lloyds with interest of between 1.5% and
1.8% above three-month LIBOR and is repayable on17 September 2024.
The RCF limit was increased to GBP50m with Lloyds' consent since
the year end;
-- A GBP25m RCF with RBS with interest of 1.75% above SONIA,
expiring on 30 September 2022;
-- A GBP20m term loan with Scottish Widows plc with interest
fixed at 3.935% and is repayable on 13 August 2025;
-- A GBP45m term loan with Scottish Widows plc with interest
fixed at 2.987% and is repayable on 5 June 2028;and
-- A GBP50m term loan with Aviva comprising:
-- GBP35m Tranche 1 repayable on 6 April 2032 attracting fixed
annual interest of 3.02%; and
-- GBP15m Tranche 2 repayable on 3 November 2032 attracting
fixed annual interest of 3.26%.
Each facility has a discrete security pool, comprising a number
of the Company's individual properties, over which the relevant
lender has security and covenants:
-- The maximum LTV of the discrete security pool is between 45%
and 50%, with an overarching covenant on theCompany's property
portfolio of a maximum 35% LTV; and
-- Historical interest cover, requiring net rental receipts from
each discrete security pool, over thepreceding three months, to
exceed 250% of the facility's quarterly interest liability.
The Company's debt facilities contain market-standard
cross-guarantees such that a default on an individual facility will
result in all facilities falling into default.
Since the year end the Company has arranged a GBP25m tranche of
10 year debt with Aviva at a fixed rate of interest of 4.10% per
annum to refinance the GBP25m variable rate revolving credit
facility with RBS. 16. Share capital
Group and Company
Ordinary shares
of 1p
Issued share capital GBP000
At 1 April 2020 420,053,344 4,201
Issue of share capital - -
At 31 March 2021 420,053,344 4,201
Issue of share capital 20,797,054 208
At 31 March 2022 440,850,398 4,409
During the year, the Company raised GBP19.7m (before costs and
expenses) through the placing of 20,797,054 new ordinary
shares.
Rights, preferences and restrictions on shares
All ordinary shares carry equal rights and no privileges are
attached to any shares in the Company. All the shares are freely
transferable, except as otherwise provided by law. The holders of
ordinary shares are entitled to receive dividends as declared from
time to time and are entitled to one vote per share at meetings of
the Company. All shares rank equally with regard to the Company's
residual assets.
At the AGM of the Company held on 25 August 2021, the Board was
given authority to issue up to 140,201,115 shares, pursuant to
section 551 of the Companies Act 2006 ("the Authority"). The
Authority is intended to satisfy market demand for the ordinary
shares and raise further monies for investment in accordance with
the Company's investment policy. 20,797,054 ordinary shares have
been issued under the Authority since 25 August 2021, leaving an
unissued balance of 119,404,061 at 31 March 2022. The Authority
expires on the earlier of 15 months from 25 August 2021 and the
subsequent AGM, due to take place on 31 August 2022.
In addition, the Company was granted authority to make market
purchases of up to 42,060,344 ordinary shares under section 701 of
the Companies Act 2006. No market purchases of ordinary shares have
been made.
Company Group Group and Company
Retained earnings
Retained earnings Share premium account GBP000 Merger reserve
GBP000
Other reserves GBP000 GBP000
At 1 April 2020 172,082 172,082 250,469 -
Shares issued during the year - - - -
Costs of share issue - - - -
Profit for the year 3,749 3,749 - -
Dividends paid (20,635) (20,635) - -
At 31 March 2021 155,196 155,196 250,469 -
Shares issued during the year - - 552 18,931
Costs of share issue - - (51) -
Profit for the year 114,175 122,325 - -
Dividends paid (24,191) (24,191) - -
At 31 March 2022 245,180 253,330 250,970 18,931
The nature and purpose of each reserve within equity are:
-- Share premium - Amounts subscribed for share capital in
excess of nominal value less any associated issuecosts that have
been capitalised.
-- Retained earnings - All other net gains and losses and
transactions with owners (e.g. dividends) notrecognised
elsewhere.
-- Merger reserve - A non-statutory reserve that is credited
instead of a company's share premium account incircumstances where
merger relief under section 612 of the Companies Act 2006 is
obtained. 17. Commitments and contingencies
Company as lessor
Operating leases, in which the Company is the lessor, relate to
investment property owned by the Company with lease terms of
between 0 to 15 years. The aggregated future minimum rentals
receivable under all non-cancellable operating leases are:
Group Company
31 March 31 March 31 March 31 March
2022 2021 2022 2021
GBP000 GBP000 GBP000 GBP000
Not later than one year 36,512 36,191 33,565 36,191
Year 2 32,830 31,771 30,332 31,771
Year 3 27,986 27,987 25,819 27,987
Year 4 23,367 23,875 21,975 23,875
Year 5 19,764 19,300 18,546 19,300
Later than five years 67,843 72,428 62,418 72,428
208,302 211,552 192,655 211,552
The following table presents amounts reported in revenue:
Group Company
31 31 31 31
March March March March
2022 2021 2022 2021
GBP000 GBP000 GBP000 GBP000
Lease income on operating leases 38,884 38,621 37,483 38,621
Therein lease income relating to variable lease payments that do not depend on an 155 152 155 152
index or rate
39,039 38,773 37,638 38,773 18. Related party transactions
Save for transactions described below, the Company is not a
party to, nor had any interest in, any other related party
transaction during the year.
Transactions with directors
Each of the directors is engaged under a letter of appointment
with the Company and does not have a service contract with the
Company. Under the terms of their appointment, each director is
required to retire by rotation and seek re-election at least every
three years. Each director's appointment under their respective
letter of appointment is terminable immediately by either party
(the Company or the director) giving written notice and no
compensation or benefits are payable upon termination of office as
a director of the Company becoming effective.
Ian Mattioli is Chief Executive of Mattioli Woods, the parent
company of the Investment Manager, and is a director of the
Investment Manager. As a result, Ian Mattioli is not independent.
The Company Secretary, Ed Moore, is also a director of the
Investment Manager.
Investment Management Agreement
The Investment Manager is engaged as AIFM under an IMA with
responsibility for the management of the Company's assets, subject
to the overall supervision of the Directors. The Investment Manager
manages the Company's investments in accordance with the policies
laid down by the Board and the investment restrictions referred to
in the IMA. The Investment Manager also provides day-to-day
administration of the Company and acts as secretary to the Company,
including maintenance of accounting records and preparing the
annual and interim financial statements of the Company.
On 22 June 2020 the terms of the IMA were varied to secure the
appointment of the Investment Manager for a further three years,
with a further year's notice, and to introduce further fee hurdles
such that annual management fees payable to the Investment Manager
under the IMA are now:
-- 0.9% of the NAV of the Company as at the relevant quarter day
which is less than or equal to GBP200mdivided by 4;
-- 0.75% of the NAV of the Company as at the relevant quarter
day which is in excess of GBP200m but belowGBP500m divided by
4;
-- 0.65% of the NAV of the Company as at the relevant quarter
day which is in excess of GBP500m but belowGBP750m divided by 4;
plus
-- 0.55% of the NAV of the Company as at the relevant quarter
day which is in excess of GBP750m divided by 4.
Administrative fees payable to the Investment Manager under the
IMA are now:
-- 0.125% of the NAV of the Company as at the relevant quarter
day which is less than or equal to GBP200mdivided by 4;
-- 0.08% of the NAV of the Company as at the relevant quarter
day which is in excess of GBP200m but belowGBP500m divided by
4;
-- 0.05% of the NAV of the Company as at the relevant quarter
day which is in excess of GBP500m but belowGBP750m divided by 4;
plus
-- 0.03% of the NAV of the Company as at the relevant quarter
day which is in excess of GBP750m divided by 4.
The IMA is terminable by either party by giving not less than 12
months' prior written notice to the other, which notice may only be
given after the expiry of the Initial three year term. The IMA may
also be terminated on the occurrence of an insolvency event in
relation to either party, if the Investment Manager is fraudulent,
grossly negligent or commits a material breach which, if capable of
remedy, is not remedied within three months, or on a force majeure
event continuing for more than 90 days.
The Investment Manager receives a marketing fee of 0.25% (2021:
0.25%) of the aggregate gross proceeds from any issue of new shares
in consideration of the marketing services it provides to the
Company.
During the year the Investment Manager charged the Company
GBP4.41m (2021: GBP3.75m) comprising GBP3.86m (2021: GBP3.33m) in
respect of annual management fees, GBP0.46m (2021: GBP0.42m) in
respect of administrative fees, GBPnil (2021: GBPnil) in respect of
marketing fees and a transaction fee of GBP0.09m relating to work
carried out on the acquisition of DRUM REIT.
Mattioli Woods arranges insurance on behalf of the Company's
tenants through an insurance broker and the Investment Manager is
paid a commission by the Company's tenants for administering the
policy. 19. Financial risk management
Capital risk management
The Company manages its capital to ensure it can continue as a
going concern while maximising the return to stakeholders through
the optimisation of the debt and equity balance within the
parameters of its investment policy. The capital structure of the
Company consists of debt, which includes the borrowings disclosed
below, cash and cash equivalents and equity attributable to equity
holders of the parent, comprising issued ordinary share capital,
share premium and retained earnings.
Net gearing ratio
The Board reviews the capital structure of the Company on a
regular basis. As part of this review, the Board considers the cost
of capital and the risks associated with each class of capital. The
Company has a target net gearing ratio of 25% determined as the
proportion of debt (net of unrestricted cash) to investment
property. The net gearing ratio at the year-end was 19.1% (2021:
24.9%).
Externally imposed capital requirements
The Company is not subject to externally imposed capital
requirements, although there are restrictions on the level of
interest that can be paid due to conditions imposed on REITs.
Financial risk management
The Company seeks to minimise the effects of interest rate risk,
credit risk, liquidity risk and cash flow risk by using fixed and
floating rate debt instruments with varying maturity profiles, at
low levels of net gearing.
Interest rate risk management
The Company's activities expose it primarily to the financial
risks of increases in interest rates, as it borrows funds at
floating interest rates. The risk is managed by maintaining:
-- An appropriate balance between fixed and floating rate
borrowings;
-- A low level of net gearing; and
-- The RCF whose flexibility allows the Company to manage the
risk of changes in interest rates.
The Board periodically considers the availability and cost of
hedging instruments to assess whether their use is appropriate and
also considers the maturity profile of the Company's
borrowings.
Interest rate sensitivity analysis
Interest rate risk arises on interest payable on the RCFs only,
as interest on all other debt facilities is payable on a fixed rate
basis. At 31 March 2022, the RBS RCF was drawn at GBP22.8m.
Assuming this amount was outstanding for the whole year and based
on the exposure to interest rates at the reporting date, if
three-month LIBOR/SONIA had been 0.5% higher/lower and all other
variables were constant, the Company's profit for the year ended 31
March 2022 would decrease/increase by GBP0.1m due to its variable
rate borrowings.
Market risk management
The Company manages its exposure to market risk by holding a
portfolio of investment property diversified by sector, location
and tenant.
Market risk sensitivity
Market risk arises on the valuation of the Company's property
portfolio in complying with its bank loan covenants (Note 15). The
Company would breach its overall borrowing covenant if the
valuation of its property portfolio fell by 45% (2021: 29%).
Credit risk management
Credit risk refers to the risk that a counterparty will default
on its contractual obligations resulting in a financial loss to the
Company. The Company's credit risk is primarily attributable to its
trade receivables and cash balances. The amounts included in the
statement of financial position are net of allowances for bad and
doubtful debts. An allowance for impairment is made where a debtor
is in breach of its financial covenants, available information
indicates a debtor can't pay or where balances are significantly
past due.
The Company has adopted a policy of only dealing with
creditworthy counterparties as a means of mitigating the risk of
financial loss from defaults. The maximum credit risk on financial
assets at 31 March 2022 was GBP3.1m (2021: GBP4.2m).
The Company has no significant concentration of credit risk,
with exposure spread over a large number of tenants covering a wide
variety of business types. Further detail on the Company's credit
risk management process is included within the Strategic
report.
Liquidity risk management
Ultimate responsibility for liquidity risk management rests with
the Board, which has built an appropriate liquidity risk management
framework for the management of the Company's short, medium and
long-term funding and liquidity management requirements. The
Company manages liquidity risk by maintaining adequate reserves,
banking facilities and reserve borrowing facilities by continuously
monitoring forecast and actual cash flows and matching the maturity
profile of financial assets and liabilities.
The following tables detail the Company's contractual maturity
for its financial liabilities. The table has been drawn up based on
undiscounted cash flows of financial liabilities based on the
earliest date on which the Company can be required to pay. The
table includes both interest and principal cash flows.
31 March
31 March 31 March 2022 2022
Weighted average effective interest 2022 3 months - 1 31 March
Group rate % 0-3 months year 2022 5 years +
1-5 years
GBP000 GBP000 GBP000
GBP000
Trade and other N/a 9,783 - 151 420
payables
Borrowings:
Variable rate 2.491 100 299 16,585 -
Variable rate 2.441 139 139 - -
Fixed rate 3.935 197 590 2,656 -
Fixed rate 2.987 336 1,008 5,377 47,939
Fixed rate 3.020 264 793 4,228 41,362
Fixed rate 3.260 122 367 1,956 18,227
10,941 3,196 30,953 107,948
31 March 31 March 2022 31 March
Weighted average effective interest 2022 3 months - 1 31 March 2022
Company rate % 0-3 months year 2022 5 years +
1-5 years
GBP000 GBP000 GBP000
GBP000
Trade and other N/a 10,985 - 151 420
payables
Borrowings:
Variable rate 2.491 100 299 16,585
Fixed rate 3.935 197 590 2,656 -
Fixed rate 2.987 336 1,008 5,377 47,939
Fixed rate 3.020 264 793 4,228 41,362
Fixed rate 3.260 122 367 1,956 18,227
12,004 3,057 30,953 107,949
31 March 31 March 2021 31 March 2021
Weighted average effective interest 2021 3 months - 1 31 March
Group rate % 0-3 months year 2021 5 years +
1-5 years
GBP000 GBP000 GBP000
GBP000
Trade and other N/a 6,185 - 151 421
payables
Borrowings:
Variable rate 1.888 118 354 25,692 --
Fixed rate 3.935 197 590 2,656 --
Fixed rate 2.987 336 1,008 5,377 47,939
Fixed rate 3.020 264 793 4,228 41,362
Fixed rate 3.260 122 367 1,956 18,227
7,222 3,112 40,060 107,949
31 March 31 March 2021 31 March 2021
Weighted average effective interest 2021 3 months - 1 31 March 5 years +
Company rate % 0-3 months year 2021
1-5 years GBP000
GBP000 GBP000
GBP000
Trade and other N/a 9,590 - 151 421
payables
Borrowings:
Variable rate 1.888 118 354 25,692 -
Fixed rate 3.935 197 590 2,656 --
Fixed rate 2.987 336 1,008 5,377 47,939
Fixed rate 3.020 264 793 4,228 41,362
Fixed rate 3.260 122 367 1,956 18,227
10,627 3,112 40,060 107,949
Fair values
The fair values of financial assets and liabilities are not
materially different from their carrying values in the financial
statements. The fair value hierarchy levels are as follows:
-- Level 1 - quoted prices (unadjusted) in active markets for
identical assets and liabilities;
-- Level 2 - inputs other than quoted prices included within
level 1 that are observable for the asset orliability, either
directly (i.e. as prices) or indirectly (i.e. derived from prices);
and
-- Level 3 - inputs for the assets or liabilities that are not
based on observable market data (unobservableinputs).
There have been no transfers between Levels 1, 2 and 3 during
the year. The main methods and assumptions used in estimating the
fair values of financial instruments and investment property are
detailed below.
Investment property - level 3
Fair value is based on valuations provided by an independent
firm of chartered surveyors and registered appraisers, which uses
the inputs set out in Note 10. These values were determined after
having taken into consideration recent market transactions for
similar properties in similar locations to the investment
properties held by the Company. The fair value hierarchy of
investment property is level 3. At 31 March 2021, the fair value of
the Company's investment properties was GBP665.2m (2021:
GBP551.9m).
Interest bearing loans and borrowings - level 3
As at 31 March 2022 the value of the Company's loans with
Lloyds, RBS, SWIP and Aviva all held at amortised cost was
GBP137.8m (2021: GBP140.0m). The difference between the carrying
value of Company's loans and their fair value is detailed in Note
21.
Trade and other receivables/payables - level 3
The carrying amount of all receivables and payables deemed to be
due within one year are considered to reflect their fair value.
Impact of the COVID-19 pandemic
As set out in the Principal risks and uncertainties section of
the Strategic report, the Board believes it too early to understand
fully the longer-term impact of the COVID-19 pandemic, but the
Board believes the Company is well placed to weather any short-term
impact due to the reasons set out in the Strategic report.
The Board does therefore not consider it necessary or possible
to carry out sensitivity analysis on its valuation or cashflow
assumptions. 20. Events after the reporting date
Property transactions
Since the year end the Company has acquired:
-- A 87k sq ft industrial facility in Grangemouth for GBP7.5m
occupied by Thornbridge Sawmills with an annualpassing rent of
GBP388k, reflecting a NIY of 5.5%; and
-- A 5k sq ft retail asset in Winchester for GBP3.65m occupied
by Nationwide Building Society and Hobbs withan aggregate annual
passing rent of GBP249k, reflecting a NIY of 6.4%.
Since the year end the Company has sold a 25k sq ft car showroom
occupied by Audi for GBP5.6m.
Borrowings
Since the year end the Company has arranged a GBP25m tranche of
10 year debt with Aviva at a fixed rate of interest of 4.10% per
annum to refinance a GBP25m variable rate revolving credit facility
with RBS. 21. Alternative performance measures
NAV per share total return
A measure of performance taking into account both capital
returns and dividends by assuming dividends declared are reinvested
at NAV at the time the shares are quoted ex-dividend, shown as a
percentage change from the start of the year.
Year ended Year ended
31 March 31 March
2022 2021
Group
Net assets (GBP000) 527,640 409,866
Shares in issue at 31 March (thousands) 440,850 420,053
NAV per share at the start of the year (p) 97.6 101.6
Dividends per share paid during the year (p) 5.625 4.9125
NAV per share at the end of the year (p) 119.7 97.6
NAV per share total return 28.4% 0.9%
Share price total return
A measure of performance taking into account both share price
returns and dividends by assuming dividends declared are reinvested
at the ex-dividend share price, shown as a percentage change from
the start of the year.
Year ended Year ended
31 March 31 March
2022 2021
Group
Share price at the start of the year (p) 91.8 99.0
Dividends per share paid during the year (p) 5.625 4.9125
Share price at the end of the year (p) 101.8 91.8
Share price total return 17.0% (2.3%)
Dividend cover
The extent to which dividends relating to the year are supported
by recurring net income.
Year ended Year ended
31 March 31 March
2022 2021
GBP000 GBP000
Group
Dividends paid relating to the year 16,830 13,652
Dividends approved relating to the year 6,062 7,354
22,892 21,006
Profit after tax 122,325 3,749
One-off costs - -
Net (profit)/loss on investment property (97,073) 19,925
25,252 23,674
Dividend cover 110.3% 112.7%
Net gearing
Gross borrowings less cash (excluding rent deposits), divided by
property portfolio value.
Year ended Year ended
31 March 31 March
2022 2021
GBP000 GBP000
Group
Gross borrowings 137,760 140,000
Cash (11,624) (3,920)
Cash held on behalf of tenants 1,141 1,179
Net borrowings 127,277 137,259
Investment property 665,186 551,922
Net gearing 19.1% 24.9%
Ongoing charges
A measure of the regular, recurring costs of running an
investment company expressed as a percentage of average NAV.
Year ended Year ended
31 March 31 March
2022 2021
Group GBP000 GBP000
Average quarterly NAV during the year 462,501 408,703
Expenses 9,812 11,062
Operating expenses of rental property rechargeable to tenants (852) (914)
8,960 10,148
Operating expenses of rental property directly incurred (3,422) (5,559)
One-off costs - -
5,538 4,589
OCR 1.94% 2.48%
OCR excluding direct property expenses 1.20% 1.12%
EPRA performance measures
EPRA promotes, develops and represents the European public real
estate sector, providing leadership in matters of common interest
by publishing research and encouraging discussion of issues
impacting the property industry, both within the membership and
with a wide range of stakeholders, including the EU institutions,
governmental and regulatory bodies and business partners. The Board
supports EPRA's drive to bring parity to the comparability and
quality of information provided in this report to investors and
other key stakeholders.
EPRA earnings per share
A measure of the Company's operating results excluding gains or
losses on investment property, giving a better indication than
basic EPS of the extent to which dividends paid in the year are
supported by recurring net income.
Year ended Year ended
31 March 31 March
2022 2021
GBP000 GBP000
Group
Profit for the year after taxation 122,325 3,749
Net (profit)/loss on investment property (97,073) 19,925
EPRA earnings 25,252 23,674
Weighted average number of shares in issue (thousands) 428,702 420,053
EPRA earnings per share (p) 5.9 5.6
EPRA NAV per share metrics
EPRA NAV metrics make adjustments to the IFRS NAV to provide
stakeholders with the most relevant
information on the fair value of the assets and liabilities of a
real estate investment company, under different scenarios.
EPRA Net Reinstatement Value ("NRV")
NRV assumes the Company never sells its assets and aims to
represent the value required to rebuild the entity.
31 March 31 March
2022 2021
Group GBP000 GBP000
IFRS NAV 527,640 409,865
Fair value of financial instruments - -
Deferred tax - -
EPRA NRV 527,640 409,865
Weighted average number of shares in issue (thousands) 428,702 420,053
EPRA NRV per share (p) 123.1 97.6
EPRA Net Tangible Assets ("NTA")
Assumes that the Company buys and sells assets for short-term
capital gains, thereby crystallising certain deferred tax
balances.
31 March 31 March
2022 2021
Group GBP000 GBP000
IFRS NAV 527,640 409,865
Fair value of financial instruments - -
Deferred tax - -
Intangibles - -
EPRA NTA 527,640 409,865
Weighted average number of shares in issue (thousands) 428,702 420,053
EPRA NTA per share (p) 123.1 97.6
EPRA Net Disposal Value ("NDV")
Represents the shareholders' value under a disposal scenario,
where deferred tax, financial instruments and certain other
adjustments are calculated to the full extent of their liability,
net of any resulting tax.
31 March 31 March
2022 2021
Group GBP000 GBP000
IFRS NAV 527,640 409,865
Fair value of fixed rate debt - (9,468)
Deferred tax - -
EPRA NDV 400,397
Weighted average number of shares in issue (thousands) 428,702 420,053
EPRA NDV per share (p) 123.1 95.3
The fair value of the liability of Company's interest-bearing
loans included in the balance sheet at amortised cost has been
calculated based on prevailing swap rates, and excludes 'break'
costs chargeable should the Company settle loans ahead of their
contractual expiry. At 31 March 2022 all of the Company's fixed
rate debt instruments were 'in the money' so no fair value
adjustment has been made in calculating EPRA NDV.
EPRA NIY and EPRA 'topped-up' NIY
EPRA NIY represents annualised rental income based on cash rents
passing at the balance sheet date, less non-recoverable property
operating expenses, divided by the gross property valuation. The
EPRA 'topped-up' NIY is calculated by making an adjustment to the
EPRA NIY in respect of the expiration of rent free periods (or
other unexpired lease incentives such as discounted rent periods
and stepped rents).
31 March 31 March
2022 2021
Group GBP000 GBP000
Investment property 665,186 551,922
Allowance for estimated purchasers' costs[39] 43,237 35,875
Gross-up property portfolio valuation 708,423 587,797
Annualised cash passing rental income 37,367 36,314
Property outgoings (1,719) (1,004)
Annualised net rents 35,648 35,310
Impact of expiry of current lease incentives 3,126 2,378
38,773 37,688
EPRA NIY 5.0% 6.0%
EPRA 'topped-up' NIY 5.5% 6.4%
EPRA vacancy rate
EPRA vacancy rate is the ERV of vacant space as a percentage of
the ERV of the whole property portfolio.
31 March 31 March
2022 2021
Group GBP000 GBP000
Annualised potential rental value of vacant premises 4,643 3,562
Annualised potential rental value for the property portfolio 45,580 42,554
EPRA vacancy rate 10.2% 8.4%
EPRA cost ratios
EPRA cost ratios reflect overheads and operating costs as a
percentage of gross rental income.
Year ended Year ended
31 March 31 March
2022 2021
GBP000 GBP000
Group
Directly incurred operating expenses and administrative fees 8,960 10,147
Ground rent costs (37) (37)
EPRA costs (including direct vacancy costs) 8,923 10,110
Property void costs (1,525) (888)
EPRA costs (excluding direct vacancy costs) 7,398 9,222
Gross rental income 39,039 38,698
Ground rent costs (37) (37)
Rental income net of ground rent costs 39,002 38,661
EPRA cost ratio (including direct vacancy costs) 22.9% 26.1%
EPRA cost ratio (excluding direct vacancy costs) 19.0% 23.9%
EPRA capital expenditure
Capital expenditure incurred on the Company's property portfolio
during the year.
31 March 31 March
2022 2021
Group GBP000 GBP000
Acquisitions 65,495 12,150
Development - 691
Like-for-like portfolio 3,515 1,617
Total capital expenditure 69,010 14,458
EPRA like-for-like rental growth
Like-for-like rental growth of the property portfolio by
sector.
31 March 2022
Retail warehouse
Industrial Retail Other Office Total
GBP000
Group GBP000 GBP000 GBP000 GBP000 GBP000
Like-for-like rent 14,637 7,887 3,167 5,397 4,168 35,256
Acquired properties 218 182 538 - 1,074 2,012
Sold properties 976 100 149 546 - 1,771
15,831 8,169 3,854 5,943 5,242 39,039
31 March 2021
Retail warehouse
Industrial Retail Other Office Total
GBP000
Group GBP000 GBP000 GBP000 GBP000 GBP000
Like-for-like rent 16,143 8,641 3,653 6,355 3,500 38,292
Acquired properties 38 - - 26 127 191
Sold properties 18 - 163 - - 181
16,199 8,641 3,816 6,381 3,627 38,664
Distribution of the Annual Report and accounts to members
The financial information set out above does not constitute the
Company's statutory accounts for the years ended 31 March 2022 or
2021, but is derived from those accounts. Statutory accounts for
2021 have been delivered to the Registrar of Companies and those
for 2022 will be delivered following the Company's AGM. The auditor
has reported on the 2022 accounts: their report was unqualified,
did not draw attention to any matters by way of emphasis and did
not contain statements under s498(2) or (3) of the Companies Act
2006. The Annual Report and accounts will be posted to shareholders
in due course, and will be available on our website
(custodianreit.com) and for inspection by the public at the
Company's registered office address: 1 New Walk Place, Leicester
LE1 6RU during normal business hours on any weekday. Further copies
will be available on request.
- Ends -
-----------------------------------------------------------------------------------------------------------------------
^[1] The European Public Real Estate Association ("EPRA"). ^[2]
Profit after tax excluding net gains or losses on investment
property divided by weighted average number of shares in issue.
^[3] Profit after tax divided by weighted average number of shares
in issue. ^[4] Dividends paid and approved for the year. ^[5]
Profit after tax, excluding net gains or losses on investment
property, divided by dividends paid and approved for the year. ^[6]
Net Asset Value ("NAV") movement including dividends paid during
the year on shares in issue at 31 March 2021. ^[7] Share price
movement including dividends paid during the year. ^[8] EPRA net
tangible assets ("NTA") does not differ from the Company's IFRS NAV
or EPRA NAV. ^[9] Gross borrowings less cash (excluding rent
deposits) divided by property portfolio value. ^[10] Expenses
(excluding operating expenses of rental property recharged to
tenants) divided by average quarterly NAV. ^[11] Expenses
(excluding operating expenses of rental property) divided by
average quarterly NAV. ^[12] For properties in Scotland, English
equivalent EPC ratings have been obtained. ^[13] Before acquisition
costs of GBP2.3m. ^[14] Before rent top-ups of GBP0.3m. ^[15] Net
of disposal costs of GBP0.5m. ^[16] A full version of the Company's
Investment Policy is available at
custodianreit.com/wp-content/uploads/2021/02/
CREIT-Investment-policy.pdf. ^[17] The Board proposes increasing
this upper lot-size limit to GBP15m at the Company's forthcoming
AGM. ^[18] A risk score of two represents "lower than average
risk". ^[19] The Board proposes broadening the definition of
refurbishment to include the redevelopment of existing holdings, to
a maximum 10% of the Company's gross assets, at the Company's
forthcoming AGM. ^[20] Source: Numis Securities Limited. ^[21] EPRA
earnings per share divided by average share price. ^[22] Comprising
the tap issue of 550,000 shares on 7 May 2021 at 101.5p per share,
a 6% premium to NAV, and the issue of 20,247,040 shares as
consideration for the acquisition of DRUM REIT on 3 November 2021
at their market value of 94.5p. ^[23] Dividends totalling 5.625p
per share (1.75p relating to the prior year and 3.875p relating to
the year) were paid on shares in issue throughout the year. ^[24]
An increase in the valuation of a property due to an excess of
demand over supply. ^[25] Current passing rent plus ERV of vacant
properties. ^[26] Includes car showrooms, petrol filling stations,
children's day nurseries, restaurants, health and fitness units,
hotels and healthcare centres. ^[27] Passing rent divided by
purchase price plus assumed purchasers' costs. ^[28] Weighted
average unexpired lease term to first break or expiry. ^[29] ERV of
portfolio divided by property valuation plus purchaser's costs.
^[30] As defined by the LPCB Loss Prevention Standards. ^[31]
Excluding assets with no car parking facilities. ^[32] Equating to
56 75kW 'Rapid' Chargers. ^[33] Equating to 140 7kW 'Fast'
Chargers. ^[34] A 'green lease' incorporates clauses where the
owner and occupier undertake specific responsibilities/obligations
regarding the sustainable operation/occupation of a property, for
example: energy efficiency measures, waste reduction/ management
and water efficiency. ^[35] One EPC letter represents 25 energy
performance asset rating points. ^[36] As defined by the Committee
on Climate Change. ^[37] The sterling overnight index average
("SONIA") which has replaced LIBOR as the UK's main interest rate
benchmark. ^[38] As defined by the Corporation Tax Act 2010. ^[39]
Assumed at 6.5% of investment property valuation.
-----------------------------------------------------------------------------------------------------------------------
ISIN: GB00BJFLFT45
Category Code: MSCM
TIDM: CREI
LEI Code: 2138001BOD1J5XK1CX76
Sequence No.: 168905
EQS News ID: 1377669
End of Announcement EQS News Service
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