TIDMCREI
RNS Number : 3605A
Custodian REIT PLC
07 June 2016
7 June 2016
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 2016.
Financial highlights and performance summary
-- NAV total return(1) of 6.2% (2015: 7.0%)
-- NAV per share up 0.2% to 101.5p (2015: 101.3p)
-- Dividends per share(2) up 19.0% to 6.25p (2015: 5.25p)
-- Profit after tax up 28.7% to GBP11.2m (2015: GBP8.7m)
-- Portfolio value of GBP319.0m (2015: GBP207.3m)
-- GBP109.8m invested in 29 acquisitions and on-going developments
-- Average portfolio net initial yield ("NIY") 6.9% (2015: 7.2%)
-- Weighted average unexpired lease term 6.7 years (2015: 7.2 years)
-- Occupancy rate(3) 96.8% (2015: 99.2%)
-- GBP77.7m(4) of new equity raised at average premium of 3.45% to NAV
-- Completion of a new GBP45.0m, 12 year, fixed rate loan following the year end
Year ended Period
31 March ended % change
2016 31 March
2015
------------------------------- ----------- ---------- -----------
Return
NAV total return 6.2% 7.0%
Share price total return(5) 3.5% 13.3%
Dividend cover(6) 100.8% 103.6%
Dividends per share (p) 6.25 5.25 +19.0%
EPRA earnings per share(7)
(p) 6.8 5.6 +21.4%
Capital values
NAV (GBPm) 255.1 180.0 +41.7%
NAV per share (p) 101.5 101.3 +0.2%
Share price (p) 107.25 109.5 -2.1%
Portfolio value (GBPm) 319.0 207.3 +53.9%
Premium to NAV per share 5.7% 8.1%
Net gearing(8) 19.1% 11.4%
Costs
Ongoing charges ratio(9)
("OCR") 1.6% 1.7%
OCR excluding direct property
expenses(10) 1.3% 1.4%
1 Net Asset Value ("NAV") movement including dividends paid.
2 Dividends paid and approved for the year ended 31 March
2016.
3 Estimated rental value ("ERV") of vacant space divided by the
portfolio passing rent plus ERV of vacant space.
4 Before costs and expenses of GBP1.6m..
5 Share price movement including dividends paid.
6 Profit after tax, excluding net gains on investment properties
and exceptional items, divided by dividends paid and proposed for
the year ended 31 March 2016
7 Earnings per share ("EPS") excluding gains on investment
properties. Basic EPS for the year is 5.5p (2015: 6.0p)
8 Gross borrowings less unrestricted cash, divided by portfolio
value.
9 Expenses (excluding exceptional costs and operating expenses
of rental property rechargeable to tenants) divided by average
quarterly NAV.
10 Expenses (excluding exceptional costs and operating expenses
of rental property) divided by average quarterly NAV.
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 / Nathan Tel: +44 (0)116 240
Imlach / Ian Mattioli 8740
www.custodiancapital.com
Numis Securities Limited
Hugh Jonathan / Nathan Brown Tel: +44 (0)20 7260
1000
www.numiscorp.com
Camarco
Hazel Stevenson Tel: +44 (0)20 3757
4989
www.camarco.co.uk
Analyst call
There will be an analyst call to discuss the results with
Richard Shepherd-Cross, Managing Director of Custodian Capital
Limited, the Company's discretionary investment manager, at 9:30am
today.
Those analysts wishing to attend are asked to contact Hazel
Stevenson at Camarco on +44 (0) 20 3757 4989 or at
hazel.stevenson@camarco.co.uk.
Chairman's statement
I am pleased to report strong performance by the Company for the
year ended 31 March 2016, with profit after tax up 28.7% and EPRA
EPS up 21.4% on the prior year. During the year we invested a total
of GBP109.8m on the completion of 29 acquisitions and achieving
practical completion on two pre-let developments, funded by
GBP77.7m raised from the issue of new shares and a new GBP20m term
loan. We plan to seek further growth to realise the economies of
scale offered by the Company's relatively fixed cost base, while
adhering to the Company's investment policy and maintaining the
quality of both properties and income.
The Company pays one of the highest fully covered dividends
amongst its peer group of listed property investment companies(11)
. Despite the fund's rapid growth, we have sought to minimise the
impact of 'cash drag' following the issue of new shares by taking
advantage of the flexibility offered by the Company's GBP35m
revolving credit facility ("RCF"). I am delighted that the
flexibility of the RCF, coupled with proactive asset management of
the portfolio and the rapid deployment of cash as it has been
raised, has allowed us to increase the target(12) dividend for the
year ending 31 March 2017 by 1.6% to 6.35p per share.
In December 2015, the Company raised GBP44.25m of new equity to
fund the acquisition of the GBP55.1m Indigo Portfolio, as detailed
in the Investment Manager's report. This was our largest
acquisition to date and marked a step-change in the scale of the
business, taking the Company's NAV above the GBP200m hurdle where
the Annual Management Charge falls from 0.9% to 0.75%, reducing the
OCR (excluding direct property expenses) from 1.4% to 1.3%.
Since the year end, we have been delighted to announce the
successful completion of another placing on 13 May 2016, raising a
further GBP20.98m to pursue a pipeline of attractive investment
opportunities, followed by the completion of a new GBP45m, 12 year,
fixed rate loan on 6 June 2016.
11 Source: Numis Securities Limited
12 This is a target only and not a profit forecast. There can be
no assurance that the target can or will be met and it should not
be taken as an indication of the Company's expected or actual
future results. Accordingly, shareholders or potential investors in
the Company should not place any reliance on this target in
deciding whether or not to invest in the Company or assume that the
Company will make any distributions at all and should decide for
themselves whether or not the target dividend yield is reasonable
or achievable.
Target lot size
We continue to target smaller lot size properties in strong,
regional markets where there is less competition from
'institutional' buyers. The successful deployment of new monies on
the acquisition of high quality assets at an average NIY of 6.72%
during the year highlights the success of this strategy.
The Company has historically targeted lot sizes below GBP7.5m
and has benefitted from a significant NIY advantage as a result.
However, it is increasingly clear that the market sets the small
versus large threshold at GBP10m-15m and hence the Board recommends
that shareholders approve an increase in the maximum target lot
size to GBP10m at the Company's next Annual General Meeting ("AGM")
on 26 July 2016. This increased lot size will only be applied where
we can still achieve a beneficial yield margin relative to larger
lots and will offer the Investment Manager the flexibility to
consider portfolio opportunities that are a strong fit with the
Company's investment policy, save for the lot size of one or two
assets.
Market
In 2014 and particularly in 2015, excessive investment demand,
both domestic and overseas, was focused on London, the South-East
and the dominant regional cities. This imbalance of demand over
supply resulted in price inflation, which delivered NAV growth to
many funds as a result of the exceptional yield compression felt
strongly in prime markets, while smaller lot size regional
properties were less affected. This enhanced yield advantage
supports the Company's attractive level of dividend payout.
Investment in commercial property was reported to be down 30% in
the first quarter of 2016, with circa GBP170m of net redemptions
recorded from open-ended funds and many listed property funds
moving to trade at a discount to NAV. Market sentiment has not been
helped by uncertainty over the EU referendum and, while it is
unclear whether property investment activity will pick up
post-referendum, there appears to be a less compelling argument for
investing for capital growth, with a shift in emphasis to
sustainable income and income growth.
The current market dynamics fit with Custodian REIT's investment
strategy and the Company's discretionary investment manager,
Custodian Capital Limited ("CCL" or "the Manager"), anticipates
more muted capital growth in 2016, with some market 'hotspots'
potentially witnessing a decline in values as investment demand
weakens and redemptions from the open-ended funds lead to increased
supply.
I believe smaller lot size regional property remains good value,
with an increasing supply of opportunities coming from
institutional vendors and a strong occupational market set to drive
rental growth. By exploiting these opportunities we intend to
enhance income returns to shareholders and offer more stable total
returns in an uncertain environment.
Net asset value
The Company delivered NAV total return of 6.2% for the year,
which was a period of significant new investment where the initial
costs (primarily stamp duty) of acquiring 29 new properties diluted
NAV total return by circa 2.5%.
Pence
per share GBPm
----------------------------------- ----------- -------
NAV at 1 April 2015 101.3 180.0
Issue of equity (net of costs) 0.6 76.1
----------------------------------- ----------- -------
101.9 256.1
----------------------------------- ----------- -------
Valuation movements relating to:
- Asset management activity 1.7 2.9
- Changes to stamp duty land tax
("SDLT") (0.5) (0.8)
- Other valuation movements 0.5 0.9
Valuation uplift 1.7 3.0
Profit on disposal of investment
property 0.0 0.1
Impact of acquisition costs (2.6) (5.8)
Net loss on investment properties (0.9) (2.7)
----------------------------------- ----------- -------
Income 9.5 19.0
Expenses and net finance costs (2.9) (5.1)
Dividends paid (6.1) (12.2)
NAV at 31 March 2016 101.5 255.1
----------------------------------- ----------- -------
In addition to new acquisitions, activity during the year also
focused on pro-active asset management, which generated GBP2.9m of
the GBP3.0m valuation uplift. During the remainder of 2016 we
intend to continue our asset management activities and complete the
current acquisition pipeline with the deployment of existing debt
facilities expected to increase gearing towards our target level of
25% loan to value.
On 1 April 2016 the headline rate of SDLT for commercial
property increased from 4% to 5%, with relief for smaller
properties via a new SDLT-free band up to GBP0.15m and a 2% band
from GBP0.15m to GBP0.25m, replacing the previous flat rate. The
increase in headline rate impacts transactions above GBP1.05m on a
sliding scale as lot-size increases. The Company's focus on smaller
lot-size properties, with an average lot size of GBP2.9m, partially
insulated it against the impact of the SDLT changes, which resulted
in a 0.25% valuation decrease.
Share price
The Company has traded at a consistent premium to NAV throughout
the year with low volatility offering shareholders stable returns.
This contrasts with many of the other listed property investment
companies which have moved to trading at a discount in Q1 2016.
Some commentators predict that recent valuation gains driven by
investor demand for large lots and South-East properties will begin
to reverse, despite forecast rental growth from occupational
demand. I believe Custodian REIT's stable premium to NAV has been a
function of both the attractive income yield offered by our
progressive dividend policy and the Company's committed shareholder
base.
Placing of new ordinary shares
The Company raised GBP77.7m of new equity during the year,
placing 42.5m new shares in November 2015 at a price of 104.2p per
share with a further 31.2m new shares issued at a 5% premium to
dividend adjusted NAV via an ongoing programme of tap issuance.
Since the year end, the Company has issued a further 27.6m new
shares at an average premium of 5% to dividend adjusted NAV. All
these share issues have been accretive to NAV and sustained
investor demand for the Company's shares is testament to the
success of our strategy to date.
Borrowings
Year end gross borrowings of GBP66.0m represent 19.1% loan to
value. The Board's strategy is to:
-- Ensure debt facilities keep pace with portfolio growth,
targeting gearing of 25% loan to value;
-- Facilitate expansion of the portfolio to take advantage of expected rental growth; and
-- Reduce risk to shareholders by:
- Taking advantage of the prevailing low interest rates to
secure fixed rate borrowing; and
- Managing the weighted average maturity ("WAM") of the
Company's debt facilities.
In pursuit of these objectives, during the year the Company:
-- Agreed a new GBP20m, 10 year loan at a fixed interest rate of
3.935% per annum with Scottish Widows Limited ("SWIP"), repayable
in August 2025;
-- Increased the limit of the RCF facility from GBP25m to GBP35m
and extended its expiry date from March 2019 to November 2020;
and
-- Agreed a new GBP45m term loan facility ("the New Loan") with
SWIP, repayable 12 years from drawdown at a fixed rate of interest.
The New Loan completed and was drawn down on 6 June 2016 at an
all-in-rate of 2.987% with GBP20m of these proceeds used to repay
the Company's GBP20m variable rate term loan with Lloyds Bank
plc.
The weighted average cost of debt at 31 March 2016 was 3.13%
with a WAM of 5.2 years. Completion of the New Loan and repayment
of the existing GBP20m term loan increased the WAM to 11.0 years,
with 65% of the Company's debt facilities now at a fixed rate of
interest.
Investment Manager
The performance and fees payable to the Investment Manager are
reviewed each year by the Management Engagement Committee. The
Board is pleased with the progress and performance of the
Investment Manager, particularly the timely deployment of new
monies, while at the same time securing the earnings required to
pay fully covered dividends in line with target.
Dividends
The Company has paid four interim dividends during the year,
totalling 6.25p per share. In the absence of unforeseen
circumstances, the Board believes the Company is well placed to
meet its target of paying further quarterly dividends, fully
covered by income, to achieve an annual dividend of 6.35p per share
for the current financial year.
Income is a major component of the Company's total return and
the Board is committed to growing the dividend sensibly, at a rate
which remains fully covered by net rental income but does not
inhibit the flexibility of the Company's investment strategy. To
provide greater flexibility over future dividend policy, in August
2015 the Company's share premium account of GBP181.5m was cancelled
and transferred to distributable reserves.
Governance
The Company is committed to the principles of good corporate
governance for which the Board is accountable to shareholders.
Non-audit fees paid to the Company's auditor, Deloitte LLP, during
the year of GBP0.6m were significantly higher than the statutory
audit fees of GBP0.1m. This was due to Deloitte Real Estate acting
for the Company on the acquisition of the Indigo Portfolio, in line
with normal market practice when a property firm brings a new
opportunity to a prospective buyer. The Audit Committee reviewed
the proposed appointment and following careful consideration,
resolved that the independence of Deloitte LLP's statutory audit
would not be impaired by the engagement and the appointment of
Deloitte Real Estate was approved. Subsequently, Deloitte LLP has
announced its intention to sell parts of Deloitte Real Estate,
which we expect to reduce any potential conflicts of interest that
might arise with its auditing division in the future.
Outlook
While the investment market appears to have become more
competitive, in large part this is being matched by a strengthening
occupational market. This, combined with a dearth of modern vacant
space, is leading to rental growth in most office and industrial
markets with reducing vacancy rates on the High Street driving a
return to rental growth in many retail centres.
I anticipate occupational demand, combined with a limited supply
of new development, will drive further rental growth across
regional markets, supporting the delivery of both sustainable
income returns and capital value growth to our shareholders over
the long-term.
David Hunter
Chairman
6 June 2016
Investment Manager's report
Reporting on the UK property market is often focused on London,
not least because it makes up a significant proportion of the total
commercial property investment market. However, it is important to
look through the headlines to understand what is really driving
returns from this very varied asset class.
It appears the start of 2016 marked a watershed in recent
attitudes to UK commercial property. In January many mainstream
listed property companies saw a dramatic fall in their share price,
many property investment companies saw their shares fall to a
discount to NAV and the open-ended property funds witnessed
significant net outflows of capital after three years of positive
net inflows.
This shift in attitude might be due in part to the uncertainty
of 'Brexit' or the perceived end of a cycle, but questioning
whether or not it is appropriate to call time on commercial
property investment is too simplistic. Property is a diverse asset
class and its investment performance is driven by myriad different
dynamics. Furthermore, it might be considered hasty to ignore a
high yielding asset class in a largely low return environment, or
to conform to a short-term change in sentiment when assessing an
asset class that performs well over the long-term.
UK commercial property returns in 2015 were skewed by
significant cash inflows chasing a capital growth story that was
particularly focused on the prime and central London markets. The
capital growth witnessed was largely a result of a self-fulfilling
prophecy, in so far as the pressure on fund managers to invest the
capital that swung into property in itself caused price inflation,
which delivered the lion's share of total return. However, this
phenomenon was always going to be short-term and recent out-flows
of capital have shown this to be the case.
Meanwhile, the real commercial property story of the last two
years has been the return to health of the occupational market. In
office and industrial markets a lack of supply following seven
years of minimal speculative development is pushing vacancy rates
to all-time lows and driving rental growth. Low vacancy rates,
which are also a feature of the retail warehouse sector, enhance
cash flows from investment portfolios and support dividend cover.
We believe the key determinants of return and the sustainability of
returns in 2016 are likely to be income and income growth, both of
which are driven by the occupational market dynamics described
above, rather than flows of capital into the investment market. As
a result, I expect rental growth to offer Custodian REIT the
potential for further dividend growth and sustainable capital
growth over time.
The occupational market story is particularly resonant in
smaller lot size regional property. As the majority of fund
managers set a minimum target lot size for individual assets of
GBP10m-15m, market pricing of smaller lots has been more stable,
having not experienced the excess demand pressure seen in the
broader investment market. Accordingly, returns have been more
closely linked to the underlying occupational market performance,
and across the Custodian REIT portfolio, we are witnessing rental
growth and low vacancy rates, with the portfolio moving from a
position of over-rent to one of reversionary potential over the
last two years.
Activity
We were delighted to complete GBP66.7m of acquisitions in the
last quarter of the financial year, bringing total investment in
the 12 months to GBP109.8m. The most significant transaction during
the year was in January 2016 when the Company completed the
GBP55.1m off-market acquisition of nine of the 11 properties in the
Indigo Portfolio following a GBP44.25m equity issue. The Indigo
Portfolio was described as the 'target portfolio' in the Company's
November 2015 prospectus. The nine properties acquired had a
passing rent of GBP3.68m reflecting a NIY of 6.32%, with an
expected reversionary yield of 6.89%. Between exchange and
completion the Company sub-sold the remaining two properties in the
Indigo Portfolio, comprising an industrial unit in Kingston upon
Thames and three shops with offices above in Richmond at prices of
GBP5.8m and GBP8.6m respectively, reflecting a blended NIY of less
than 5%.
This acquisition maintained the quality of property that we
demand and demonstrated our ability to secure exclusive
opportunities and deploy cash ahead of expected timeframes. Despite
incurring significant acquisition costs during the year, NAV has
increased and the portfolio profile has strengthened in terms of
diversification of tenant, sector and lease break/expiry. In
addition, the portfolio's rental growth potential has been enhanced
as a result of these acquisitions.
Investment objective
The Company's key objective is to provide shareholders with an
attractive level of income by maintaining the high level of
dividend, fully covered by earnings, with a conservative level of
gearing. I am delighted we have achieved this, with earnings
providing 101% cover to the proposed total dividend for the year of
6.25p per share, with a gearing ratio of 19.1% at the year end. As
a result of the fund's growth and consequential reduction in OCR,
the Board has increased the target(13) dividend for the new
financial year to 6.35p per share.
We continue to pursue a pipeline of new investment opportunities
with the aim of deploying the Company's undrawn debt facilities up
to the conservative gearing target of 25% loan to value. At the
current cost of debt we believe this strategy can improve dividend
cover as gearing increases towards the target level.
We expect to see redemptions from the open-ended funds create an
increased pipeline of suitable opportunities and believe this will
enhance our ability to acquire additional properties that meet the
Company's investment criteria and improve the portfolio mix.
We remain committed to a strategy focused on regional property
and expect to see long-term total return out-performance for
regional UK property assets of less than GBP10m versus London and
the South East. We believe the reason for the historic total return
out-performance of regional property is a result of higher yields.
As income return is the majority component of the Company's total
return, the compound effect of higher recurring income is to
deliver superior long-term performance. Total return on property in
London and the South East has out-performed over the last three
years due to the significant yield compression that has been driven
by extraordinary flows of capital into this market. We are
confident that the return of rental growth, coupled with
sustainable valuations, will maintain regional property's long-term
out-performance credentials.
Portfolio balance
The portfolio is split between the main commercial property
sectors, in line with the Company's objective to maintain a
suitably balanced investment portfolio, but with a relatively low
exposure to office and 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 Weighting
31 March Valuation Valuation by income by income
2016 movement movement 31 March 31 March
Sector GBPm GBPm % 2016 2015
------------ ---------- ---------- ------------ ----------- -----------
Industrial 123.2 4.0 3.4 39% 40%
Retail 91.4 (1.4) (1.5) 28% 27%
Other(14) 59.8 0.6 1.0 18% 17%
Office 44.0 (0.2) (0.5) 15% 16%
Total 318.4 3.0 1.0 100% 100%
------------ ---------- ---------- ------------ ----------- -----------
The industrial and 'other' sectors have historically generated
the highest total return for sub-GBP10m properties. I believe the
fund's current weightings towards those sectors positions the
Company to deliver competitive long-term total returns.
The 'other' sector has proved to be an out-performer over the
long-term. While outside the core sectors of office, retail and
industrial, the 'other' sector offers diversification of income
without adding to portfolio risk, containing assets that are
considered mainstream, but which typically have not been owned by
institutional investors.
Office rents are growing strongly and supply is constrained by a
lack of development and the extensive conversion of secondary
offices to residential, making returns very attractive. We were
pleased to increase exposure to the office sector through the
recent Indigo Portfolio acquisition. However, the Company's
relatively low exposure to the office sector is a long-term
strategic decision rather than a short-term comment on the state of
the office market. We are conscious that obsolescence can be a real
cost of office ownership, which can hit cash flow and is at odds
with the Company's relatively high target dividend.
Similar to the office market, lack of supply and very limited
speculative development is driving rental growth in the industrial
sector as demand exceeds supply. As industrial property is less
exposed to obsolescence this sector remains a very good fit with
the Company's strategy.
In both regional office and industrial markets passing rents
are, in many cases, 20% below the levels of rent required to make
new development viable. This low level of rent limits supply and
leads to rental growth as the need for new space forces tenants to
accept higher rents.
Retail is split between high street and out-of-town retail
(retail warehousing). On the high street strong comparison retail
pitches in dominant regional towns continue to show very low
vacancy rates and offer stable long-term cash flow, with the
opportunity for rental growth. We are also witnessing rental growth
in some smaller market towns where rents over-corrected in the
downturn. It would be wrong to deduce from the failure of BHS and
Austin Reed that high street retailing is dead and buried. Both of
these retailers had structural problems, some of which will be much
debated in the press, but it is important to remember that shopping
remains the nation's favourite pastime. Our high streets are
constantly evolving and remain an essential element of
multi-channel retailing.
Retail warehousing is witnessing close to record low vacancy
rates as a restrictive planning policy and lack of development
combine with retailers' requirements to offer large format stores,
free parking and 'click and collect' to consumers.
For details of all properties in the portfolio please see
www.custodianreit.com/property/portfolio.php.
(13) This is a target only and not a profit forecast. There can
be no assurance that the target can or will be met and it should
not be taken as an indication of the Company's expected or actual
future results. Accordingly, shareholders or potential investors in
the Company should not place any reliance on this target in
deciding whether or not to invest in the Company or assume that the
Company will make any distributions at all and should decide for
themselves whether or not the target dividend yield is reasonable
or achievable.
(14) Includes car showrooms, petrol filling stations, children's
day nurseries, restaurants and hotels.
Asset management
During the year we focused on proactively managing the portfolio
to enhance income and maintain the weighted average unexpired lease
term ("WAULT"). At 31 March 2016 the portfolio's WAULT was 6.7
years (2015: 7.2 years), ahead of the Company's objective of
maintaining a WAULT of over five years to the first lease break or
lease expiry across the portfolio.
Successful asset management strategies including rent reviews,
new lettings, lease extensions and the retention of tenants beyond
their contractual break clauses have helped to minimise the natural
decrease in WAULT and offset the impact on valuations of
acquisition costs and the recent increase in SDLT.
Key asset management initiatives include:
-- Extending Pizza Hut UK Limited's lease at Triangle Retail
Park, Leicester with expiry moving from June 2018 to June 2033,
subject to a tenant-only break option in June 2028, and rent
increasing from GBP82,250 per annum to GBP104,512 per annum from
June 2018.
-- Extending leases at the 40 St. David Street and Cardinal
House offices in Leeds, occupied by Enact Direct Legal Solutions
(the Company's largest tenant by income representing 2.7% of the
rent roll) by five years to expire in December 2023. Both leases
have also been assigned to First Title Limited, Enact Direct Legal
Solutions' UK parent company, significantly strengthening the
covenant.
-- Completion of a comprehensive refurbishment of the Tilbrook
44 distribution unit in Milton Keynes for GBP750,000 (net of early
exit premium and dilapidations), acquired in January 2015 in the
knowledge of the tenant having served notice to exit. Exit rent has
grown from GBP250,000 to an expected GBP275,000 with exit yield
hardening from circa 7.25% to 6.75%, giving an expected GBP675,000
valuation impact once let.
We are in active discussions with more than 20 tenants across
the portfolio regarding various asset management initiatives,
including new lettings, lease renewals, lease extensions, rent
reviews, lease surrenders, refurbishment, development or a
combination of the above.
Portfolio risk
We have managed the portfolio's income expiry profile through
successful asset management activities and by acquiring long
leases, such that the WAULT of 6.7 years is ahead of target, with
only 48% of income expiring within five years at 31 March 2016.
Short term income at risk is a relatively low proportion of the
portfolio's income, with only 29% expiring in the next three years
(9% within one year).
31 March 31 March
Income expiry 2016 2015
----------------- --------- ---------
0-1 years 9% 6%
1-3 years 20% 15%
3-5 years 19% 20%
5-10 years 29% 35%
10+ years 23% 24%
Total 100% 100%
-------------------- --------- ---------
The portfolio's exposure to risk is reduced by 23% of income
benefitting from either fixed or indexed rent reviews and there is
increasingly strong evidence of open market rental growth across
all sectors.
Outlook and pipeline
Over the remainder of this financial year we intend to continue
our asset management activities and complete on the current
acquisition pipeline, with the aim of deploying debt facilities to
increase gearing towards the target level of 25%. We expect recent
asset management initiatives to improve the WAULT of the portfolio,
with tenants keen to agree lease extensions or to waive their
options to break, enhancing the rent roll as increases are agreed
at review or renewal. We also have a strong committed pipeline
including pre-let development funding projects totaling GBP3.4m
which, once complete, will further improve the portfolio's
WAULT.
The smaller lot-size, regional market has not yet seen the price
inflation which has been a feature of London and large lot-sizes,
so it is still possible to acquire properties with strong
investment credentials. We are keen to capitalise on the strength
of the occupational market and are seeing a robust stream of
opportunities consistent with our investment strategy. We are
actively considering GBP25m - GBP50m of opportunities that maintain
a threshold level of quality in building, location and tenant and
expect this pipeline to improve if redemptions from the open-ended
funds lead to an increasing flow of sales.
Custodian REIT has an investment strategy targeting income with
low gearing in a well-diversified regional portfolio. We believe it
is still possible to identify 'value' in the market, despite recent
price inflation, by targeting properties where provable rental
growth will underpin long term capital growth. I am confident this
strategy can deliver enhanced income cover to the Company's target
dividend in the years ahead and provide the stable long term
returns demanded by our shareholders.
Richard Shepherd-Cross
for and on behalf of Custodian Capital Limited
Investment Manager
6 June 2016
Portfolio
31 March 31 March
2016 2015
-------------------- ---------- ----------
Portfolio value GBP319.0m GBP207.3m
Separate tenancies 228 135
Occupancy rate 96.8% 99.2%
Assets 113 85
WAULT 6.7 years 7.2 years
Net initial yield 6.9% 7.2%
Principal risks and uncertainties
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 carried out a robust assessment of the
principal risks facing the company, including those that would
threaten the business model, future performance, solvency or
liquidity. The table below outlines the risk factors 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 type Risks Mitigating factors
------------ ------------------------------------------------------------ -----------------------------------------------------------------
Investment
portfolio * Tenant default. * Investment policy limits the Company's rent roll to
no more than 10% to a single tenant, and no more than
50% in any particular sector or geographical region.
* Change in demand for space.
* Focused on established business locations for
* Market pricing affecting value. investment.
* Excess concentration in geographical location or * Active portfolio diversification between office,
sector. industrial (distribution, manufacturing and
warehousing), retail and other.
* Lease expiries concentrated in a specific year.
* Active management of lease expiry profile and
acknowledging in forming acquisition decisions.
* Decrease in occupancy.
* Building specifications not tailored to one user.
------------------------------------------------------------ -----------------------------------------------------------------
Financial
* Reduced availability or increased cost of debt. * Target gearing of 25% loan-to-value ("LTV") on
property portfolio.
* Breach of borrowing covenants.
* Existing facilities sufficient for spending
commitments and agreed until 2020.
* On-going monitoring and management of the forecast
liquidity and covenant position.
------------------------------------------------------------ -----------------------------------------------------------------
Operational
* Inadequate performance, controls or systems operated * Ongoing review of performance by independent Board of
by the Investment Manager. Directors.
------------------------------------------------------------ -----------------------------------------------------------------
Regulatory
* Adverse impact of new or revised legislation or * Strong compliance culture.
regulations or by changes in the interpretation or
enforcement of existing laws and regulations.
* External professional advisers are engaged to review
and advise upon control environment and ensure
* Non-compliance with the REIT regime(15) . regulatory compliance.
* Business model and culture embraces FCA principles.
* REIT regime compliance is considered by the Board in
assessing the Company's financial position and by the
Manager in making operational decisions.
------------------------------------------------------------ -----------------------------------------------------------------
While the outcome of the EU referendum on 23 June 2016 is
uncertain, the Board does not consider its outcome as being likely
to have a material impact on the Company's performance.
(15) As defined by the Corporation Tax Act 2010
Long term viability statement
In accordance with provision C2.2 of the UK Corporate Governance
Code issued by the Financial Reporting Council in 2012 ("the
Code"), the Directors have assessed the prospects of the Company
over a period longer than the 12 months required by the 'Going
Concern' provision. The Board resolved to conduct this review for a
period of three years, because:
-- The Company's strategic review covers a three-year period; and
-- The Board believes a three-year horizon maintains a
reasonable level of accuracy regarding projected rental income and
costs, allowing robust sensitivity analysis to be conducted.
The Board's three-year strategic review considered the Company's
profit, cash flows, dividend cover, REIT regime compliance,
borrowing covenant compliance and other key financial ratios over
the period. These metrics are subject to sensitivity analysis,
which involves flexing a number of key assumptions underlying the
projections, including:
-- Tenant default;
-- Length of potential void period following lease break or expiry;
-- Acquisition NIY and the timing of deployment of cash;
-- Interest rate changes; and
-- Property portfolio valuation movements.
This analysis also evaluates the potential impact of the
principal risks actually occurring.
Current debt and associated covenants are summarised in Note 16,
with no covenant breaches during the year. The Company's dividend
policy is set out in Business Model and Strategy. The principal
risks faced by the Company, together with the steps taken to
mitigate them, are highlighted above, and in the Audit Committee
report. The Board seeks to ensure that risks are kept to a minimum
at all times.
Based on the results of this analysis, the Directors expect that
the Company will be able to continue in operation and meet its
liabilities as they fall due over the three year period of their
assessment.
Business model and strategy
Investment objective and policy
The Company seeks to provide shareholders with an attractive
level of income together with the potential for capital growth from
investing in a diversified portfolio of commercial real estate
properties in the UK. Since Admission, the Company has targeted
individual properties with a value of less than GBP7.5m at
acquisition, benefitting from a significant NIY advantage as a
result. However, it is increasingly clear that the market sets the
threshold for smaller lot sizes at GBP10m and hence the Board
recommends that shareholders approve an increase in the maximum
target lot size to GBP10m at the Company's next AGM(16) .
The portfolio should not exceed a maximum weighting to any one
property sector, or to any geographic region, of greater than 50%,
with the Company's investment objectives being:
-- To hold a portfolio of UK commercial property, diversified by
sector, location, tenant and lease term;
-- To focus on areas with high residual values, strong local
economies and an imbalance between supply and demand. Within these
locations, the objective is to acquire modern buildings or those
that are considered fit for purpose by occupiers.
-- To have no one tenant or property accounting for more than
10% of the total rent roll of the portfolio at the time of
purchase, except:
a) In the case of a single tenant which is a governmental body
or department, where no limit shall apply; or
b) In the case of a single tenant rated by Dun & Bradstreet
("D&B") as having a credit risk score higher than two(17) ,
where the exposure to such single tenant may not exceed 5% of the
total rent roll (a risk score of two represents "lower than average
risk").
-- To maintain an average unexpired lease term to first break of
over five years across the portfolio secured against low risk
tenants and to minimise rental voids;
-- Not to undertake speculative development (that is,
development of property which has not been leased or pre-leased),
save for refurbishment of existing holdings, but may (provided that
it shall not exceed 20% of the gross assets of the Company) invest
in forward funding agreements or forward commitments (these being
arrangements by which the Company may acquire pre-development land
under a structure designed to provide the Company with investment
rather than development risk) of pre-let developments, where the
Company intends to own the completed development; and
-- To target borrowings of up to 25% of the aggregate market
value of all the properties of the Company at the time of
borrowing.
16 The Company's 2016 AGM is being held at the offices of
Canaccord Genuity Limited, 88 Wood Street, London, EC2V 7QR at
11a.m on 26 July 2016.
17 Previously D&B ICC Client Services credit rating of less
than 60 ("normal, limited risk potential, normal terms"), which is
no longer published by D&B.
Key performance indicators
The Board meets quarterly and at each meeting reviews
performance against a number of key measures:
-- Dividends per share and dividend yield - A key objective is
to provide an attractive, sustainable level of income to
shareholders. The Board reviews dividends per share and dividend
yield in conjunction with detailed financial forecasts to ensure
that target dividends are being met and are sustainable;
-- Property voids - The Board reviews the level of property
voids within the Company's portfolio on a quarterly basis and
compares this to the market average, as measured by the IPD. The
Board seeks to ensure that the Investment Manager is giving proper
consideration to replacing the Company's income;
-- Rent arrears - The Board assesses rent collection by
reviewing the percentage of rents past due at each quarter end;
-- NAV total return - The NAV total return reflects both the NAV
growth of the Company and dividends paid to shareholders. The Board
regards this as the best overall measure of value delivered to
shareholders. The Board assesses NAV total return over various time
periods and compares the Company's returns to those of its peer
group of listed, closed-ended property investment funds; and
-- Premium or discount of the share price to NAV - The Board
closely monitors the premium or discount of the share price to the
NAV and believes a key driver of this is the Company's long term
investment performance. However, there can be short term volatility
in the premium or discount and the Board therefore seeks limited
authority at each AGM to issue shares with a view to trying to
limit this volatility.
The Board considers the performance measures over various time
periods and against similar funds. A record of these measures are
disclosed in the Financial highlights and performance summary, the
Chairman's statement and the Investment Manager's report.
Finance
The Company operates with a conservative level of gearing, with
expected borrowings over the medium term of up to 25% of the
aggregate market value of all properties at the time of
drawdown.
Debt
The Company operates the following facilities:
-- A GBP35m RCF with Lloyds Bank plc expiring in November 2020,
attracting annual interest of 2.45% above three-month LIBOR on
advances drawn down under the agreement from time to time;
-- A GBP20m term loan facility with SWIP repayable in August
2025, attracting fixed annual interest of 3.935%; and
-- A GBP45m term loan facility with Scottish Widows Limited
repayable in June 2028, attracting fixed annual interest of
2.987%.
The Company's borrowing facilities all require minimum interest
cover of 250% of the net rental income of the security pool. The
maximum LTV of the Company combining the value of all property
interests (including the properties secured against the facilities)
must be no more than 35%.
On 6 June 2016 a GBP20m term loan with Lloyds Bank repayable in
2019, attracting annual interest of 1.95% above three-month LIBOR
was repaid in full, incurring no early repayment charges.
Equity
On 5 November 2015 the Board announced a placing, open offer and
offer for subscription in conjunction with a twelve month placing
programme for the issue of up to 100m new ordinary shares in the
Company.
On 30 November 2015 the Company raised GBP44.25m (before costs
and expenses) through a placing of 42,466,411 new ordinary shares
under the placing, open offer and offer for subscription. In
addition, the Company raised GBP33.5m (before costs and expenses)
through the tap issuance of 31,170,000 new ordinary shares.
Following the year end, the Company issued a further 27.6m of
new ordinary shares under the placing programme raising GBP29.0m
(before costs and expenses).
Dividends
Three quarterly interim dividends totalling 4.5875p per share
have been paid in respect of the year. The Board has approved a
fourth interim dividend relating to the quarter ended 31 March 2016
of 1.6625p per share, payable on 30 June 2016, achieving the target
dividend(1313) of 6.25p per share for the year ended 31 March 2016,
which is fully covered by net rental income.
In the absence of unforeseen circumstances, the Board intends to
pay further quarterly dividends to achieve a target dividend(18) of
6.35p per share for the year ending 31 March 2017. The Board plans
to increase future dividends in a sustainable way, at a rate which
is fully covered by net rental income and does not inhibit the
flexibility of the Company's investment strategy.
18 This is a target only and not a profit forecast. There can be
no assurance that the target can or will be met and it should not
be taken as an indication of the Company's expected or actual
future results. Accordingly, shareholders or potential investors in
the Company should not place any reliance on this target in
deciding whether or not to invest in the Company or assume that the
Company will make any distributions at all and should decide for
themselves whether or not the target dividend yield is reasonable
or achievable.
Employees
The Company has four non-executive directors and no employees.
Non-executive directors are paid fixed salaries and participate in
the performance of the Company through their shareholdings. The
Board is conscious of the increased focus on diversity in the
boardroom and acknowledges the importance of diversity, while
noting that changes to the composition of the Board should not be
forced. All non-executive directors are white males. The Board
believes that for any future appointment the best person for the
role should be selected, while recognising the benefits of
diversity when considering a particular appointment.
Corporate social responsibility
The Company is committed to delivering its strategic objectives
in an ethical and responsible manner. The Company's environmental
and social policies address the importance of these issues in the
day-to-day running of the business, as detailed below.
Environmental policy
The four key elements of the Company's environmental policy
are:
-- An independent environmental report is required for all
potential acquisitions, which considers, amongst other matters, the
historical and current usage of the site and the extent of any
contamination present;
-- An ongoing examination of existing and new tenants' business
activities is carried out to prevent pollution risks occurring. The
Company monitors all incoming tenants through its insurance
programme to identify potential risks, and high-risk business
activities are avoided. As part of the active management of the
portfolio, any change in tenant business practices considered to be
an environmental hazard is reported and suitably dealt with;
-- Sites are visited periodically and any obvious environmental
issues are reported to the Board; and
-- All leases prepared after the adoption of the policy commit
occupiers to observe any environmental regulations. Any problems
are referred to the Board.
Development activity
During the year the Company carried out two industrial
developments at sites in Warwick and Cannock. The respective
developers are sensitive to both ecological and sustainability
considerations and each development has complied with environmental
standards. The development at Cannock has been designed to achieve
a "very good" BREEAM rating and an EPC grade "A". The development
at Warwick has been fitted with solar photovoltaic panels
generating over 10% of the new building's energy requirements from
a renewable energy source. Developments built to this environmental
specification ensure the creation of an improved, stable
environment and reduce heating and energy costs.
Social policy
The activities of the Company are carried out in a responsible
manner, taking into account the social impact.
Greenhouse gas emissions
Under the Companies Act 2006 (Strategic and Directors' Reports)
Regulations 2013, the Company is required to report greenhouse gas
emissions for each financial year as follows:
Year Period
ended ended
31 March 31 March
Sources of greenhouse gas emissions 2016 2015
tCO(2) e(19) tCO(2)
e
--------------------------------------- ------------- ----------
Scope 1
Gas, refrigerants and fuel - -
Scope 2
Landlord controlled electricity 554.7 66.6
Intensity measure
Emissions per GBP1m of rent 24.1 4.2
--------------------------------------- ------------- ----------
The operational control method has been used to reflect
influence over energy consumption, with the increase in landlord
controlled electricity due to the acquisition of several multi-let
properties during the year. Tenants' usage or emissions are not
included as the Company does not have control over those items.
Emissions from vacant space have been included.
(19) Tonnes of carbon dioxide equivalent.
Approval of Strategic Report
The Strategic Report, (incorporating the Chairman's statement,
Investment Manager's report, Portfolio, Principal risks and
uncertainties and Business model and strategy) was approved by the
Board of Directors and signed on its behalf by:
David Hunter
Director
6 June 2016
Consolidated and Company statements of comprehensive income
For the year ended 31 March 2016
Period
Year ended ended
31 March 31 March
2016 2015
Group and Company Note GBP000 GBP000
----------------------------------------- ----- ----------- ----------
Revenue 4 19,012 11,570
Investment management fee (2,200) (1,542)
Operating expenses of rental
property
* rechargeable to tenants (451) (342)
* directly incurred (572) (373)
Professional fees (356) (494)
Directors' fees (172) (190)
Administrative expenses (100) (101)
Expenses (3,851) (3,042)
Operating profit before
financing and revaluation
of investment properties 15,161 8,528
Analysed as:
Operating profit before
exceptional items 15,161 8,747
Exceptional costs of Admission 6 - (219)
15,161 8,528
----------------------------------------- ----- ----------- ----------
Profit on disposal of investment
properties 56 269
Unrealised gains/(losses)
on revaluation of investment
properties:
- relating to property
revaluations 11 3,031 6,083
* relating to costs of acquisition 11 (5,768) (5,844)
----------------------------------------- ----- ----------- ----------
Net (losses)/gains on investment
properties (2,681) 508
Operating profit before
financing 12,480 9,036
----------------------------------------- ----- ----------- ----------
Finance income 7 221 84
Finance costs 8 (1,494) (373)
----------------------------------------- ----- ----------- ----------
Net finance costs (1,273) (289)
----------------------------------------- ----- ----------- ----------
Profit before tax 11,207 8,747
Income tax expense 9 - (2)
Profit for the year and
total comprehensive income
for the year, net of tax 11,207 8,745
Attributable to:
Owners of the Company 11,207 8,745
Earnings per ordinary share:
Basic and diluted (pence
per share) 3 5.5 6.0
EPRA (pence per share) 3 6.9 6.3
The profit for the year arises from the Company's continuing
operations.
Consolidated and Company statements of financial position
As at 31 March 2016
Registered number: 8863271
Group Company
31 March 31 March 31 March 31 March
2016 2015 2016 2015
Note GBP000 GBP000 GBP000 GBP000
------------------------------- ----- ---------- --------- ---------- ---------
Non-current assets
Investment properties 11 319,966 207,287 319,966 207,287
Investments 12 - - - -
------------------------------- ----- ---------- --------- ---------- ---------
Total non-current assets 319,966 207,287 319,966 207,287
------------------------------- ----- ---------- --------- ---------- ---------
Trade and other receivables 13 4,518 1,072 4,518 1,072
Cash and cash equivalents 15 5,455 849 5,455 849
Total current assets 9,973 1,921 9,973 1,921
------------------------------- ----- ---------- --------- ---------- ---------
Total assets 328,939 209,208 328,939 209,208
------------------------------- ----- ---------- --------- ---------- ---------
Equity
Issued capital 17 2,512 1,776 2,512 1,776
Share premium 17 68,874 175,009 68,874 175,009
Retained earnings 17 183,674 3,201 183,674 3,201
Total equity attributable
to equity holders of
the Company 255,060 179,986 255,060 179,986
------------------------------- ----- ---------- --------- ---------- ---------
Non-current liabilities
Borrowings 16 65,143 23,811 65,143 23,811
Other payables 571 - 571 -
Total non-current liabilities 65,714 23,811 65,714 23,811
------------------------------- ----- ---------- --------- ---------- ---------
Current liabilities
Trade and other payables 14 3,681 2,292 3,681 2,292
Deferred income 4,484 3,119 4,484 3,119
Total current liabilities 8,165 5,411 8,165 5,411
------------------------------- ----- ---------- --------- ---------- ---------
Total liabilities 73,879 29,222 73,879 29,222
------------------------------- ----- ---------- --------- ---------- ---------
Total equity and liabilities 328,331 209,208 328,331 209,208
------------------------------- ----- ---------- --------- ---------- ---------
These consolidated and Company financial statements of Custodian
REIT plc were approved and authorised for issue by the Board of
Directors on 6 June 2016 and are signed on its behalf by:
David Hunter
Director
Consolidated and Company statement of cash flows
For the year ended 31 March 2016
Year Period
ended ended
31 March 31 March
Group and Company 2016 2015
Note GBP000 GBP000
-------------------------------------- ----- ---------- ----------
Operating activities
Operating profit 12,480 9,036
Adjustments for:
Increase in fair value of investment
property 11 (3,031) (6,083)
Profit on disposal of investment
properties (56) (269)
Income tax 9 - (2)
Cash flows from operating activities
before changes in working capital
and provisions 9,393 2,682
Increase in trade and other
receivables (3,615) (1,072)
Increase in trade and other
payables 2,399 5,326
Cash generated from operations 8,177 6,936
Interest paid 8 (1,307) (258)
Net cash flows from operating
activities 6,870 6,678
-------------------------------------- ----- ---------- ----------
Investing activities
Purchase of investment property (109,674) (125,728)
Disposal of investment property 1,821 1,784
Interest received 7 22 54
Net cash from investing activities (107,831) (123,890)
Financing activities
Proceeds from the issue of
share capital 17 77,719 102,620
Payment of costs of share issue (1,632) (2,824)
New borrowings 16 41,700 23,811
Dividends paid 10 (12,220) (5,546)
Net cash from financing activities 105,567 118,061
Net increase in cash and cash
equivalents 4,606 849
-------------------------------------- ----- ---------- ----------
Cash and cash equivalents at 849 -
start of the year/period
Cash and cash equivalents at
end of the year/period 5,455 849
-------------------------------------- ----- ---------- ----------
Consolidated and Company statement of changes in equity
For the year ended 31 March 2016
Issued Share Retained Total
capital premium earnings equity
Note GBP000 GBP000 GBP000 GBP000
------------------------- ------- --------- ---------- ---------- ---------
As at 24 March 2014 50 - - 50
Profit for the period - - 8,745 8,745
Total comprehensive
income for year - - 8,745 8,745
Transactions with
owners of the Company,
recognised directly
in equity
Dividends 10 - - (5,546) (5,546)
Issue of share capital 17 1,726 175,009 - 176,735
Profit on disposal
of own shares 17 - - 2 2
As at 31 March 2015 1,776 175,009 3,201 179,986
------------------------- ------- --------- ---------- ---------- ---------
Profit for the year - - 11,207 11,207
Total comprehensive
income for year - - 11,207 11,207
Transactions with
owners of the Company,
recognised directly
in equity
Dividends 10 - - (12,220) (12,220)
Issue of share capital 17 736 75,351 - 76,087
Transfer of reserves 17 - (181,486) 181,486 -
As at 31 March 2016 2,512 68,874 183,674 255,060
------------------------- ------- --------- ---------- ---------- ---------
Notes to the financial statements for the year ended 31 March
2016
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
properties, 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 6 June 2016.
2 Basis of preparation and accounting policies
2.1. Basis of preparation
The consolidated financial statements have been prepared in
accordance with International Financial Reporting Standards adopted
by the International Accounting Standards Board ("IASB") and
interpretations issued by the International Financial Reporting
Interpretations Committee ("IFRIC") of the IASB (together "IFRS")
as adopted by the European Union, and in accordance with the
requirements of the Companies Act applicable to companies reporting
under IFRS, and therefore they comply with Article 4 of the EU IAS
Regulation.
The prior period financial information has been prepared for the
53 week period from 25 March 2014 to 31 March 2015.
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.
2.2. Basis of consolidation
The consolidated financial statements consolidate those of the
parent company and its subsidiary. 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. The subsidiary has a
reporting date in line with the Company. 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.
2.3. Application of new and revised International Financial Reporting Standards
During the year the Company has applied a number of amendments
to IFRSs and a new interpretation issued by the International
Accounting Standards Board (IASB) that are mandatorily effective
for accounting periods beginning on or after 31 March 2015:
-- Annual improvements to IFRSs 2010- 2012 Cycle;
-- Annual improvements to IFRSs 2011- 2013 Cycle;
The application of the above amendments and interpretations has
had no impact on the disclosures or on the amounts recognised in
the Company's financial statements. At the date of authorisation of
these financial statements, the following new and revised IFRSs
which have not been applied in these financial statements were in
issue but not yet effective:
-- IFRS 9 'Financial Instruments';
-- IFRS 15 'Revenue from Contracts with Customers';
-- Amendments to IAS 16 and IAS 38 'Clarification of Acceptable
Methods of Depreciation and Amortisation';
-- IAS 27 'Equity Method in Separate Financial Statements';
-- IFRS 10, IFRS 12 and IAS 28 'Investment Entities: Applying the Consolidation Exemption'; and
-- Annual Improvements to IFRSs: 2012-2014 Cycle 'IFRS 5
Non-current Assets Held for Sale and Discontinued Operations, IFRS
7 Financial Instruments: Disclosures, IAS 19 Employee Benefits and
IAS 34 Interim Financial Reporting'.
Other than to expand certain disclosures within the financial
statements, the Directors do not anticipate that the application of
these standards, amendments and interpretations will have a
material impact on the Company's financial statements in future
periods, except that IFRS 9 will impact both the measurement and
disclosures of financial instruments and IFRS 15 may have an impact
on revenue recognition and related disclosures. Beyond the
information above, it is not practicable to provide a reasonable
estimate of the effect of IFRS 9 and IFRS 15 until a detailed
review has been completed.
2.4. Significant accounting policies
The principal accounting policies adopted by the 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. The Company's projections show that
the Company should continue to be cash generative and be able to
operate within the level of its current financing arrangements.
Accordingly, the Directors continue to adopt the going concern
basis for the preparation of the financial statements.
Income recognition
Revenue is recognised to the extent that it is probable that
economic benefits will flow to the Company and the revenue can be
reliably measured. 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 amortised 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 amounts receivable on ongoing
development funding contracts.
Taxation
The tax expense represents the sum of the tax currently payable
and deferred tax. 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 properties
Investment properties are properties held to earn rentals and/or
for capital appreciation. Investment properties are initially
recognised at cost including direct transaction costs. Investment
properties are subsequently valued externally on an open market
basis at the reporting date and recorded at valuation. Any surplus
or deficit arising on revaluing investment properties is recognised
in the statement of comprehensive income in the year in which it
arises. Dilapidation 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 the
statement of comprehensive income, offset against any directly
corresponding movement in fair value of the investment property to
which they relate.
Group undertakings
Investments are included in the statement of financial position
at cost less any provision for impairment.
Financial assets
The Company's financial assets include cash and cash equivalents
and trade and other receivables. All financial assets are initially
recognised at fair value plus transaction costs, when the Company
becomes party to the contractual provisions of the instrument.
Interest resulting from holding financial assets is recognised in
the statement of comprehensive income 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 the statement of comprehensive
income.
A financial asset is derecognised 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 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 investments 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 period results
as disclosed in the statement of comprehensive income. 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
the statement of comprehensive income 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
Payments on operating lease agreements where the Company is
lessor are recognised as an expense on a straight-line basis over
the lease term. Payments on operating lease agreements where the
Company is lessee are charged to the income statement on a
straight-line basis over the term of the lease.
Exceptional items
Certain items have been disclosed as exceptional in the income
statement where they relate to Admission and are therefore
considered to be one off costs, as set out in Note 6 to the
financial statements.
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 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 and properties held for trading as a portfolio, the
Directors have identified a single operating segment, that of
investment in commercial properties.
2.5. 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. The areas where a higher degree of judgement or complexity
arises, or where assumptions and estimates are significant to the
financial statements, are discussed below.
Valuation of properties
Investment properties are valued at the reporting date at fair
value. Where investment properties are 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 the statement of comprehensive
income. Valuation surpluses reflected in retained earnings are not
distributable until realised on sale.
The Company considers valuations performed by independent
valuers in determining the fair value of its investment properties.
The valuations are based upon assumptions including future rental
income, anticipated maintenance costs and appropriate discount
rates. The valuers also make reference to market evidence of
transaction prices for similar properties.
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.
Shares issued after the year end are disclosed in Note 21.
The European Public Real Estate Association ("EPRA") has issued
recommended bases for the calculation of EPS which the directors
consider is a better indicator of performance.
Year Period
ended ended
31 March 31 March
2016 2015
----------------------------------------- ------------ ------------
Net profit and diluted net profit
attributable to equity holders
of the Company (GBP000) 11,207 8,745
Net losses/(gains) on investment
properties (GBP000) 2,681 (508)
EPRA net profit attributable to
equity holders of the Company (GBP000) 13,888 8,237
------------------------------------------ ------------ ------------
Weighted average number of ordinary
shares:
Issued ordinary shares at start
year 177,605,659 5,000,000
Effect of shares issued during
the year 26,590,709 141,061,038
Basic and diluted weighted average
number of shares 204,196,368 146,061,038
------------------------------------------ ------------ ------------
Basic and diluted EPS (pence) 5.5 6.0
------------------------------------------ ------------ ------------
EPRA EPS (pence) 6.8 5.6
------------------------------------------ ------------ ------------
4 Revenue
Year Period
ended ended
31 March 31 March
2016 2015
GBP000 GBP000
----------------------------------------------- --------- ---------
Gross rental income from investment properties 18,561 11,228
Income from recharges to tenants 451 342
19,012 11,570
----------------------------------------------- --------- ---------
5 Operating profit
Operating profit is stated after charging/(crediting):
Year Period
ended ended
31 March 31 March
2016 2015
GBP000 GBP000
-------------------------------------------------------------------------------- --------- ---------
Profit on disposal of investment property 56 269
Net (losses)/gains on revaluation of investment properties (2,737) 239
Fees payable to the Company's Auditor and their associates for the audit of the
Company's annual financial statements 52 102
Fees payable to the Company's Auditor and its associates for other services 616 271
Fees payable to the Company's auditor, Deloitte LLP, are
detailed in the Audit Committee report.
6 Exceptional items
One-off costs incurred in the period ended 31 March 2015 on
Admission totalling GBP2.40m of which GBP0.22m was recognised in
the statement of comprehensive income and GBP2.18m was taken to the
share premium account as being directly related to the issue of new
shares.
7 Finance income
Year Period ended
ended 31 March
31 March 2015
2016 GBP000
GBP000
--------------- --------- ------------
Bank interest 22 54
Finance income 199 30
221 84
--------------- --------- ------------
8 Finance costs
Year Period ended
ended 31 March
31 March 2015
2016 GBP000
GBP000
---------------------------------------------------- --------- ------------
Amortisation of arrangement fees on debt facilities 187 115
Bank interest 1,307 258
1,494 373
---------------------------------------------------- --------- ------------
9 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 20.0%. The
differences are explained below:
Year Period ended
ended 31 March
31 March 2015
2016 GBP000
GBP000
--------------------------------------------------------------- --------- ------------
Profit before income tax 11,207 8,747
---------------------------------------------------------------- --------- ------------
Tax charge on profit at a standard rate of 20.0% (2015: 21.0%) 2,241 1,837
Effects of:
REIT tax exempt rental profits and gains (2,241) (1,835)
Income tax expense - 2
---------------------------------------------------------------- --------- ------------
Effective income tax rate 0.0% 0.0%
---------------------------------------------------------------- --------- ------------
The Company operated as a REIT from 27 March 2014 and hence
profits and gains from the property investment business since that
date are normally exempt from corporation tax.
The UK Government has reduced the rate of corporation tax from
23% to 21% with effect from 1 April 2014, from 21% to 20% effective
from 1 April 2015, from 20% to 19% effective from 1 April 2017 and
from 19% to 18% effective from 1 April 2020.
10 Dividends
Year Period
ended ended
31 March 31 March
2016 2015
GBP000 GBP000
----------------------------------------- ---------- ----------
Interim dividends paid on ordinary
shares for the quarter ended: 2,672 -
- 31 March 2015: 1.5p (31 March
2014: nil)
- 30 June 2015: 1.5p (30 June 2014:
1.25p) 2,782 1,650
- 30 September 2015: 1.5p (30 September
2014: 1.25p) 2,900 1,948
- 31 December 2015: 1.5875p (31
December 2014: 1.25p) 3,866 1,948
12,220 5,546
----------------------------------------- ---------- ----------
The Directors propose that the Company pays a fourth interim
dividend relating to the year ended 31 March 2016 of 1.6625p per
ordinary share. This dividend has not been included as a liability
in these financial statements. The fourth interim dividend is
expected to be paid on 30 June 2016 to shareholders on the register
at the close of business on 5 May 2016.
11 Investment properties
GBP000 GBP000
----------------------- -------- --------
At 24 March 2014 -
Additions 208,563
Disposals (1,515)
Property revaluations 6,083
Acquisition costs (5,844)
----------------------- -------- --------
Net revaluation gain 239
As at 31 March 2015 207,287
----------------------- -------- --------
Additions 116,181
Disposals (1,765)
Property revaluations 3,031
Acquisition costs (5,768)
----------------------- -------- --------
Net revaluation gain (2,737)
----------------------- -------- --------
As at 31 March 2016 319,966
----------------------- -------- --------
Included in investment properties is GBP4.0m relating to ongoing
development fundings, of which GBP3.2m completed following the year
end.
The carrying value at 31 March 2016 comprises freehold and
leasehold properties summarised as follows:
Freehold Leasehold Total
Investment properties GBP000 GBP000 GBP000
--------------------------- -------- --------- -------
Cost 278,818 44,080 322,898
Valuation (deficit)/gain (3,765) 1,598 (2,167)
Disposals (415) (1,350) (1,765)
At 31 March 2016 274,638 44,328 318,966
--------------------------- -------- --------- -------
The investment properties are stated at the Directors' estimate
of their 31 March 2016 fair values. Lambert Smith Hampton Group
Limited ("LSH"), a professionally qualified independent valuer,
valued the properties as at 31 March 2016 in accordance with the
Appraisal and Valuation Standards published by the Royal
Institution of Chartered Surveyors. LSH has recent experience in
the relevant location and category of the properties being
valued.
Investment properties have been valued using the investment
method which involves applying a yield to rental income streams.
Inputs include yield, current rent and estimated rental value
("ERV"). For the year end valuation, the equivalent yields used
ranged from 5.0% to 10.1%. 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 are subject to the Company's overall control
environment, and assumptions applied by the valuer e.g. ERVs and
yields. These assumptions are based on market observation and the
valuer's professional judgement. In estimating the fair value of
the 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 would
impact on these changes.
12 Investments
Shares in subsidiaries
At
31 March
Company 2015 and
Country Ordinary 31 March
of registration Principal shares 2016
Name and company number and incorporation activity held GBP
--------------------------- -------------------- ----------- --------- ----------
Custodian Real Estate
Limited England
(Company number 8882372) and Wales Dormant 100% 2
13 Trade and other receivables
31 March 31 March
2016 2015
GBP000 GBP000
Trade receivables 1,019 451
Other receivables 1,857 92
Prepayments and accrued income 1,642 529
4,518 1,072
-------------------------------- --------- ---------
The Company has provided fully for those receivable balances
that it does not expect to recover. This assessment has been
undertaken by reviewing the status of all significant balances that
are past due and involves assessing both the reason for non-payment
and the creditworthiness of the counterparty. Included within
accrued income are balances totalling GBP1.35m which are to be held
for a period over one year.
14 Trade and other payables
31 March 31 March
2016 2015
GBP000 GBP000
Falling due in less than one year:
Trade and other payables 437 338
Social security and other taxes 1,231 687
Accruals 1,566 1,037
Rental deposits 447 230
3,681 2,292
------------------------------------ --------- ---------
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.
15 Cash and cash equivalents
31 March 31 March
2016 2015
GBP000 GBP000
Cash and cash equivalents 5,455 849
--------------------------- --------- ---------
Cash and cash equivalents include GBP0.47m (2015: GBP0.23m) of
restricted cash in the form of rental deposits and retentions held
on behalf of tenants, and GBP0.21m of restricted cash held within
charged bank accounts relating to the share premium reduction
detailed in Note 17, which has been utilised since the year
end.
16 Borrowings
31 March 31 March
2016 2015
GBP000 GBP000
Falling due in more than one year:
Bank borrowings 66,000 24,300
Costs incurred in the arrangement
of bank borrowings (857) (489)
65,143 23,811
------------------------------------ --------- ---------
On 25 February 2014, the Company agreed a RCF of GBP25m with
Lloyds Bank plc for a term of five years. On 13 November 2015, the
Company and Lloyds Bank plc entered into an agreement to increase
the total funds available under the RCF from GBP25m to GBP35m and
extend the termination date to 13 November 2020. The RCF is secured
by way of a first charge over a discrete portfolio of properties,
providing the lender with a maximum LTV ratio of 50% on those
properties specifically charged to it and a floating charge. The
interest cover will be at least 250% LTV. Under the terms of
agreement, the Company pays interest of 2.45% above three-month
LIBOR per annum on the outstanding amounts utilised under the
agreement from time to time. At 31 March 2016, GBP26.0m of the RCF
had been drawn down to fund property acquisitions.
On 9 December 2014 the Company agreed a GBP20m term loan with
Lloyds Bank plc ("the Lloyds Loan"), secured by way of a first
charge over a discrete portfolio of properties, providing the
lender with a maximum LTV ratio of 50% on those properties
specifically charged to it and a floating charge. The interest
cover will be at least 250% LTV. The loan attracts interest of
1.95% above three-month LIBOR per annum and is repayable on 10
October 2019. On 6 June 2016 the Lloyds Loan was repaid in full,
incurring no early repayment charges.
On 14 August 2015, the Company and Scottish Widows Limited, with
Lloyds Bank plc acting as agent, entered into an agreement for
Scottish Widows Limited to provide the Company with a term loan
facility of GBP20m, repayable on 14 August 2025. Under the terms of
the agreement, the Company will pay fixed interest of 3.935% per
annum on the balance.
All of the Company's borrowing facilities require minimum
interest cover of 250% of the net rental income of the security
pool. The maximum LTV of the Company combining the value of all
property interests (including the properties secured against the
facilities) must be no more than 35%.
On 6 June 2016, the Company and Scottish Widows Limited, with
Lloyds Bank plc acting as agent, entered into an agreement for
Scottish Widows Limited to provide the Company with a new term loan
facility of GBP45m, repayable on 6 June 2028. Under the terms of
the agreement, the Company will pay fixed interest of 2.987% per
annum on the balance. The proceeds from this new loan were
partially used to repay the Lloyds Loan.
17 Share capital
Ordinary shares
Issued share capital of 1p GBP000
------------------------ ---------------- ---------
At 25 March 2014 131,989,310 1,320
Issue of share capital 45,616,349 456
------------------------- ---------------- ---------
At 31 March 2015 177,605,659 1,776
------------------------- ---------------- ---------
Issue of share capital 73,636,412 736
------------------------- ---------------- ---------
At 31 March 2016 251,242,071 2,512
------------------------- ---------------- ---------
On 5 November 2015 the Board announced a Placing, Open Offer and
Offer for Subscription and a twelve month Placing Programme of up
to 100m new Ordinary Shares. The Company raised GBP44.25m (before
costs and expenses) through a placing of 42,466,412 new ordinary
shares in the Company on 30 November 2015 under the Placing, Open
Offer and Offer for Subscription.
During the year, the Company raised GBP33.5m (before costs and
expenses) through further placings of 31,170,000 new ordinary
shares.
The Company has made further issues of new shares since the year
end, which are detailed in Note 21 to the interim financial
statements.
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 22 July 2015, the Board was
given authority to issue up to 120,670,439 shares, pursuant to
section 551 of the Companies Act 2006. This 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. 67,486,412 ordinary shares have been issued under this
authority since 22 July 2015, leaving an unissued balance of
53,184,027 at 31 March 2016. In addition, the Company was granted
authority to make market purchases of up to 18,100,565 ordinary
shares under section 701 of the Companies Act 2006.
At 31 March 2015, an unissued balance of 122,394,341 ordinary
shares remained from the authority granted to the Board at the
previous AGM of the Company held on 21 January 2015.
On 14 August 2015, registration was completed of the Chancery
Division of the High Court of Justice's approval of the
cancellation of the Company's share premium account, standing at
GBP181,485,649 as of 22 July 2015. Further details, including the
rationale for the cancellation, are set out in the Notice of Annual
General Meeting available on the Company's website.
Share premium account Retained earnings
Other reserves GBP000 GBP000
------------------------------------------------------- ---------------------- --------------------
At 25 March 2014
Shares issued during the period 177,833 -
Costs of share issue (2,824) -
Profit for the period - 8,745
Dividends - (5,546)
Profit on sale of own shares taken directly to equity - 2
At 31 March 2015 175,009 3,201
Shares issued during the year 76,983 -
Costs of share issue (1,632) -
Profit for the year - 11,207
Dividends paid - (12,220)
Transfer of reserves (181,486) 181,486
At 31 March 2016 68,874 183,674
---------------------------------------------------------- ---------------------- --------------------
The following table describes the nature and purpose of each
reserve within equity:
Reserve Description and purpose
------------------ ---------------------------------
Share premium Amounts subscribed for share
capital in excess of nominal
value less any associated
issue costs that have been
capitalised.
Retained earnings All other net gains and losses
and transactions with owners
(e.g. dividends) not recognised
elsewhere.
18 Commitments and contingencies
Company as lessor
The Company lets all investment properties under operating
leases. The aggregated future minimum rentals receivable under all
non-cancellable operating leases are:
31 March 31 March
2016 2015
GBP000 GBP000
Not later than one year 21,782 15,257
Later than one year but not later
than five years 63,657 48,407
Later than five years 55,816 46,840
141,255 110,504
----------------------------------- --------- ---------
19 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.
Investment Management Agreement
On 25 February 2014 the Company entered into a three year IMA
with the Investment Manager, under which the Investment Manager has
been appointed as AIFM with responsibility for the property
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.
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, Nathan Imlach, is also a director of
Mattioli Woods and the Investment Manager.
The Investment Manager is paid a fund and asset management fee
calculated by reference to the NAV of the Company each quarter as
follows:
-- 0.9% of the NAV of the Company as at the relevant quarter day
which is less than or equal to GBP200m divided by 4; plus
-- 0.75% of the NAV of the Company as at the relevant quarter
day which is in excess of GBP200m divided by 4.
The Investment Manager has agreed to provide day-to-day
administration of the Company and act as secretary to the Company,
including maintenance of accounting records and preparing annual
accounts of the Company. The Company pays the Investment Manager an
administrative fee equal to 0.125% of the NAV of the Company at the
end of the quarter, subject to a minimum of GBP44,000 per quarter
(adjusted for RPI).
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 fee of 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 Company paid the Investment Manager GBP2.72m
in respect of annual management charges, administrative fees and
marketing fees.
The Company owed GBP0.02m to the Investment Manager at 31 March
2016 (2015: GBPnil) relating to marketing services and recharged
insurance.
Acquisition of properties
On 26 March 2014 the Company acquired a portfolio of 48
properties held in a syndicated structure by clients of Mattioli
Woods ("the Portfolio") including Ian Mattioli, Nathan Imlach and
Richard Shepherd-Cross and the private pension schemes of Ian
Mattioli, Nathan Imlach and Richard Shepherd-Cross.
The Portfolio included MW House and Gateway House at Grove Park,
Enderby, which are partially let to Mattioli Woods. Mattioli Woods
paid the Company rentals of GBP0.41m (2015: GBP0.35m) during the
year and owed the Company GBPnil at 31 March 2016 (2015:
GBPnil).
Ian Mattioli, Nathan Imlach, Richard Shepherd-Cross and the
private pension schemes of Ian Mattioli, Nathan Imlach and Richard
Shepherd-Cross continue to have a beneficial interest in the
Company.
20 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.
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 gearing ratio of 25% determined as the
proportion of debt (net of unrestricted cash) to investment
property. The gearing ratio at the year end was 19.1% (2015:
11.4%).
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 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 gearing; and
-- The RCF whose flexibility allows the Company to manage the
risk of changes in interest rates.
The Board periodically consider the availability and cost of
hedging instruments to assess whether their use is appropriate, and
also consider the maturity profile of the Company's borrowings.
Interest rate sensitivity analysis
The sensitivity analyses below have been determined based on the
exposure to interest rates at the balance sheet date. For floating
rate liabilities, the analysis is prepared assuming the amount of
liability outstanding at the balance sheet date was outstanding for
the whole year. If three-month LIBOR had been 0.5% higher and all
other variables were constant, the Company's profit for the year
ended 31 March 2016 would decrease by GBP0.1m (2015: GBP0.1m) due
to its variable rate borrowings. If three-month LIBOR had been 0.5%
lower and all other variables were constant, the Company's profit
for the year ended 31 March 2016 would have increased by GBP0.1m
(2015: GBP0.1m).
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 there is
an identified loss event which, based on previous experience, is
evidence of a reduction in the recoverability of the cash
flows.
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 2016 was GBP1.0m (2015: GBP0.5m).
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 table details the Company's contractual maturity
for its financial liabilities not disclosed elsewhere. 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 2016 31 March 2016 31 March 2016
0-3 months 3 months- 1 year 1-5 years 31 March 2016
Group and Company Weighted average effective interest rate % GBP000 GBP000 GBP000 6 years +
------------------- ------------------------------------------- -------------- ------------------- --------------- --------------
Trade and other
payables - 3,681 - 148 423
Borrowings:
Variable rate 2.856 322 967 24,127 26,000
Fixed rate 3.935 197 590 3,148 23,441
------------------- ------------------------------------------- -------------- ------------------- --------------- --------------
4,200 1,557 27,423 49,864
------------------- ------------------------------------------- -------------- ------------------- --------------- --------------
31 March 2015 31 March 2015 31 March 2015
0-3 months 3 months- 1 year 1-5 years 31 March 2015
Weighted average effective interest rate % GBP000 GBP000 GBP000 6 years +
------------- ------------------------------------------- -------------- ------------------- --------------- --------------
Trade and -
other
payables
Borrowings:
Variable
rate 2.095 126 377 26,087 -
126 377 26,087 -
------------- ------------------------------------------- -------------- ------------------- --------------- --------------
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 or liability, either
directly (i.e. as prices) or indirectly (i.e. derived from prices);
and
-- Level 3 - inputs for the assets or liability that are not
based on observable market data (unobservable inputs).
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. 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 2016, the fair value
of the Company's investment properties was GBP319.0m (2015:
GBP207.3m).
Interest bearing loans and borrowings - level 3
As at 31 March 2016 the value of the Company's loans was
GBP65.1m (2015: GBP24.3m) and the amortised cost of the Company's
loans with Lloyds Bank plc and Scottish Widows Limited approximated
their fair value. The loan from Scottish Widows Limited includes a
market-based break cost for early repayment ("Prepayment Option"),
which is classified as a non-separable component of the loan. If
the Prepayment Option was classified as a separate financial
instrument, it would increase the Company's borrowings and decrease
NAV at 31 March 2016 by GBP1.5m.
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.
21 Events after the reporting date
New equity
Since the reporting date the Company has issued 27,640,000 new
ordinary shares of 1p each, raising GBP29.0m (before costs and
expenses).
Acquisitions
On 15 April 2016 the Company acquired a high street retail unit
in Chester, let to TSB and Ciel Concessions (trading as Chesca) for
GBP2.1m, with lease expiries between September 2019 and March 2020
and a total passing rent of GBP0.13m per annum, reflecting a net
initial yield of 5.9%.
On 26 May 2016 the Company acquired an industrial unit in
Tamworth let to Schenker Limited, a subsidiary of Deutsche Bahn,
for GBP4.7m. The lease expires in September 2017 with total passing
rent of GBP0.28m per annum, reflecting a net initial yield of
5.7%.
Borrowings
On 6 June 2016, the Company and Scottish Widows Limited, with
Lloyds Bank plc acting as agent, entered into an agreement for
Scottish Widows Limited to provide the Company with a new term loan
facility of GBP45m, repayable on 6 June 2028. Under the terms of
the agreement, the Company will pay fixed interest of 2.987% per
annum on the balance.
22 Distribution of the annual report and accounts to members
The announcement above does not constitute a full financial
statement of the Group's affairs for the period ended 31 March 2015
or the year ended 31 March 2016. The Group's auditors have reported
on the full accounts of each period and have accompanied them with
an unqualified report. The accounts have yet to be delivered to the
Registrar of Companies.
The annual report and accounts will be posted to shareholders in
due course, and will be available on our website
(www.custodianreit.com) and for inspection by the public at the
Company's registered office address: 1 Penman Way, Grove Park,
Enderby, Leicester LE19 1SY during normal business hours on any
weekday. Further copies will be available on request.
The AGM of the Company will be held at Canaccord Genuity
Limited, 88 Wood Street, London, EC2V 7QR at 11:00am on 26 July
2016.
- Ends -
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR UNVNRNVANRAR
(END) Dow Jones Newswires
June 07, 2016 02:00 ET (06:00 GMT)
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