TIDMCREI
RNS Number : 2000H
Custodian REIT PLC
06 June 2017
6 June 2017
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 2017.
Financial highlights and performance summary
-- NAV per share total return(1) of 8.5% (2016: 6.4%)
-- EPRA(2) earnings per share(3) of 6.6p (2016: 6.8p), basic and
diluted earnings per share of 8.1p (2016: 5.5p)
-- Portfolio value of GBP415.8m (2016: GBP319.0m)
-- Profit after tax up 116% to GBP24.2m (2016: GBP11.2m)
-- GBP92.4m(4) of new equity raised at average premium of 5.1% to NAV
-- 2018 target dividend per share increased to 6.45p (2017: 6.35p)
-- GBP105.0m(5) invested in 25 acquisitions and one on-going pre-let development
-- GBP8.9m valuation uplift from successful asset management
initiatives, GBP2.9m net valuation increase(6)
-- GBP1.6m profit on disposal of six properties for an aggregate consideration of GBP18.9m
1 Net Asset Value ("NAV") movement including dividends paid and
approved relating to the year on shares in issue at 31 March
2016.
2 The European Public Real Estate Association ("EPRA").
3 Profit after tax excluding net gains on investment properties
divided by weighted average number of shares in issue.
4 Before costs and expenses of GBP1.3m.
5 Before acquisition costs of GBP6.1m.
6 Comprising GBP8.9m of valuation uplift from successful asset
management initiatives and GBP0.1m of other valuation increases,
less GBP6.1m of acquisition costs.
2017 2016 % change
----------------------------------- ---------- ------------ -----------
Return
NAV per share total return 8.5% 6.4%
Share price total return(7) 10.3% 3.5%
Dividend cover(8) 101.0% 100.8%
Dividends per share(9) (p) 6.35 6.25 +1.6%
Capital values
NAV (GBPm) 351.9 255.1 +37.9%
NAV per share (p) 103.8 101.5 +2.3%
Share price (p) 112.0 107.25 +4.4%
Portfolio value (GBPm) 415.8 319.0 +30.3%
Market capitalisation (GBPm) 379.7 269.5 +40.9%
Premium to NAV per share 7.9% 5.7%
Net gearing(10) 14.5% 19.1%
Costs
Ongoing charges ratio(11) ("OCR") 1.6% 1.6%
OCR excluding direct property
expenses(12) 1.2% 1.3%
EPRA performance measures
EPRA EPS (p) 6.6 6.8
EPRA NAV per share (p) 103.8 101.5
EPRA net initial yield ("NIY") 6.4% 6.4%
EPRA 'topped up' NIY 6.8% 6.7%
EPRA vacancy rate 1.4% 3.1%
EPRA cost ratio (including direct
vacancy costs) 18.0% 18.2%
EPRA cost ratio (excluding direct
vacancy costs) 16.1% 17.3%
EPRA performance measures have been disclosed to facilitate
comparability with the Company's peers through consistent reporting
of key performance measures, as the Company became a FTSE
EPRA/NAREIT index series constituent in March 2017.
7 Share price movement including dividends paid and approved for
the year.
8 Profit after tax, excluding net gains on investment properties
and one-off costs, divided by dividends paid and approved for the
year.
9 Dividends paid and approved for the year.
10 Gross borrowings less unrestricted cash, divided by portfolio
value.
11 Expenses (excluding operating expenses of rental property
rechargeable to tenants) divided by average quarterly NAV.
12 Expenses (excluding operating expenses of rental property)
divided by average quarterly NAV.
Commenting on the final results, David Hunter, Chairman of
Custodian REIT, said:
"I am pleased to report that Custodian REIT has continued to
deliver strong shareholder returns with NAV per share total return
of 8.5% (2016: 6.4%) for the year. We invested a total of GBP105.0m
on the completion of 25 acquisitions and one ongoing pre-let
development, funded by GBP92.4m raised from the issue of new shares
and GBP25m of new term debt.
"I anticipate that occupational demand combined with a limited
supply of new development will continue to drive rental growth
across regional markets, supporting a low vacancy rate and securing
dividends and long-term capital growth for the Company's
shareholders.
"The Company has met its target of paying an annual dividend per
share for the year of 6.35p (2016: 6.25p, 2015: 5.25p), 101%
covered by net recurring income. Our objective is to grow the
dividend on a sustainable basis at a rate which is fully covered by
projected net rental income, and the Board is pleased to have
increased the target dividend for the year ending 31 March 2018 by
1.6% to 6.45p per share."
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 Imlach Tel: +44 (0)116 240 8740
/ Ian Mattioli MBE
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 10:30am
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 that Custodian REIT has continued to
deliver strong shareholder returns with NAV per share total return
of 8.5% (2016: 6.4%) for the year ended 31 March 2017. During the
year we invested a total of GBP105.0m on the completion of 25
acquisitions and one ongoing pre-let development, funded by
GBP92.4m raised from the issue of new shares and GBP25m of new term
debt. Increasing the scale of the Company and a continued focus on
controlling costs has reduced the OCR (excluding direct property
expenses) from 1.3% to 1.2%. We plan to achieve further growth to
realise the economies of scale offered by the Company's relatively
fixed cost base and the recently announced reduction in Investment
Manager fees, detailed below, 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(13)
. 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 dividend(14) for the
year ending 31 March 2018 by 1.6% to 6.45p per share, and to
accelerate the payment of quarterly dividends by one month.
13 Source: Numis Securities Limited.
14 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.
Market
Recent experience has reinforced Confucius' time honoured maxim:
"Wisdom is knowing you cannot predict the future". At the time of
writing we are in the midst of an election campaign with a
predicted, but not entirely predictable outcome. Throughout the
year political norms were overturned, 'knowns' became unknown and
'certainties' became uncertain. Against this backdrop Custodian
REIT has been a stable and predictable performer in an otherwise
turbulent market.
We believe that in uncertain times a well-defined investment
strategy, offering secure income and focusing on long-term goals
and deliverable targets will protect shareholders from unwanted
volatility.
There was a sharp decrease in the share prices of listed
property stocks in early 2016 and a high level of redemptions from
open ended funds post the EU referendum ("the Referendum"). If
these events had been taken as a prediction of poor times ahead for
commercial property, the market confounded those predictions in the
fourth quarter of 2016 and the first quarter of 2017 with investor
sentiment towards commercial property showing a marked improvement
through this period.
-- While central London lost much of its domestic appeal for
investment and development it gained overseas demand, driven both
by currency arbitrage and the relative stability of the London
property market on the global spectrum.
-- Regional markets witnessed increasing domestic demand as
confidence built around the impact of Brexit.
-- A shortage of supply, limited development and stable demand
from occupiers drove rental growth.
-- The relatively high investment yield available from property
continued to look attractive in a low return environment.
The Company's strategy of targeting sub GBP10m regional
properties that produce a relatively high income return, with the
real potential of rental growth, has stood us in good stead through
this year's market ups and downs.
Net asset value
The NAV of the Company at 31 March 2017 was GBP351.9m,
reflecting approximately 103.8p per share, an increase of 2.3%
since 31 March 2016:
Pence per
share GBPm
------------------------------------------- ---------- -------
NAV at 31 March 2016 101.5 255.1
Issue of equity (net of costs) 0.6 91.1
102.1 346.2
Valuation movements relating to:
- Asset management activity 2.7 8.9
- Other valuation movements 0.0 0.1
- Acquisition costs (1.8) (6.1)
Net valuation increase 0.9 2.9
Profit on disposal of investment property 0.5 1.6
Net gain on investment property 1.4 4.5
------------------------------------------- ---------- -------
Income 8.1 27.6
Expenses and net finance costs (2.3) (7.9)
Dividends paid(15) (5.5) (18.5)
NAV at 31 March 2017 103.8 351.9
------------------------------------------- ---------- -------
15 Dividends totalling 6.425p per share (1.6625p relating to the
prior year and 4.7625p relating to the year) were paid on shares in
issue throughout the year. Dividends paid on shares in issue at the
year end averaged 5.5p per share due to new shares being issued
ex-dividend.
The Company delivered NAV total return of 8.5% for the year,
which was a period of significant new investment where the initial
costs (primarily stamp duty) of investing GBP105.0m in 25 property
acquisitions and one pre-let development diluted NAV per share
total return by circa 1.8p, largely offset by raising GBP91.1m of
new equity (net of costs) at an average 5.1% premium to dividend
adjusted NAV, which added 1.5p per share(16) .
Acquisition costs incurred during the year represented 5.8% of
the total invested, lower than typical purchasers' costs of circa
6.5% due to GBP2.9m of development funding and the purchase of a
portfolio of 10 light industrial units ("the Light Industrial
Portfolio") for GBP26.75m being made by way of a corporate
acquisition (detailed in Note 10), allowing the Company and vendor
to share the associated cost savings. The recent increases in
premium to the Company's NAV have allowed equity issuance during Q1
2017 to be at an average 7.7% premium to dividend adjusted NAV,
fully covering the cost of raising and deploying the proceeds.
In addition to acquisitions, activity during the year also
focused on pro-active asset management, which generated an GBP8.9m
valuation uplift. 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 ("LTV").
16 0.6p per share through new issuance plus 0.9p per share
notional dividend saving due to new shares being issued
ex-dividend.
Share price
The defining event of the year for property investment was the
Referendum which triggered a rush for the door by retail investors
from open ended property funds. The subsequent suspension of
redemptions in certain of these funds was widely covered in the
news at the time and did little for the reputation of property as
an investment asset class. Most property investment companies'
shares moved to trade at a significant discount to NAV in the
immediate aftermath but, save for a single day's trading, Custodian
REIT's share price maintained a premium to NAV. I believe this was
due to:
-- The relatively high, fully covered dividend;
-- The exclusive focus on UK regional property; and
-- The predominance amongst the Company's shareholders of
private clients and discretionary wealth managers, who value the
high income and low volatility.
The Company's peer group of property investment companies have
since all seen their share prices return to or exceed
pre-Referendum levels. This bounce demonstrates the strength of the
closed-ended property investment company structure and the
continued investment demand for exposure to UK commercial property
markets. In contrast the large development and investment Real
Estate Investment Trusts ("REITs"), typically carrying out
significant property development activity and with a largely
institutional shareholder base ("Large REITs")(17) , have not
witnessed a similar rebound in their share prices since the
Referendum.
17 Large development and investment REITs comprise: British Land
Company Plc, Land Securities Group Plc, Hammerson Plc, Intu
Properties Plc, Derwent London Plc, Great Portland Estates Plc,
Workspace Group Plc, Capital & Counties Properties Plc,
Shaftesbury Plc, Hansteen Holdings Plc, Segro Plc, Big Yellow Group
Plc, Safestore Holdings Plc, Empiric Student Property Plc, Unite
Group Plc, Capital & Regional Plc, Helical Plc, LondonMetric
Property Plc.
Placing of new ordinary shares
The Company raised GBP92.4m of new equity during the year,
placing 87.8m new shares at an average 5.1% (2016: 3.5%) premium to
dividend adjusted NAV via an ongoing programme of tap issuance.
Since the year end, the Company has issued a further 6.0m new
shares at an average premium of 9.1% to dividend adjusted NAV. All
share issues have been accretive to NAV and the sustained investor
demand for the Company's shares is testament to the success of our
strategy to date.
Borrowings
As at 31 March 2017 net gearing equated to 14.5% LTV. The
Board's strategy is to:
-- Increase debt facilities in line with portfolio growth, targeting net gearing of 25% LTV;
-- Facilitate expansion of the portfolio to take advantage of expected rental growth; and
-- Reduce shareholders' exposure to risk by:
- Taking advantage of the prevailing low interest rates to
secure long-term, fixed rate borrowing; and
- Managing the weighted average maturity ("WAM") of the
Company's debt facilities.
To achieve these objectives, the Company agreed a new 12 year
GBP45m term loan facility with Scottish Widows Limited ("SWIP") on
6 June 2016, with a fixed rate of interest of 2.987%. GBP20m of the
proceeds were used to repay in full a GBP20m term loan with Lloyds
Bank plc, which attracted interest of 1.95% per annum above three
month LIBOR and was due to be repaid in October 2019.
On 5 April 2017, the Company and Aviva Investors Real Estate
Finance ("Aviva") entered into an agreement for Aviva to provide
the Company with a new 15 year GBP50m term loan facility,
comprising two tranches of GBP35m ("Tranche 1") and GBP15m
("Tranche 2") respectively. The Company drew down Tranche 1 on 6
April 2017, with a fixed rate of interest of 3.02% per annum.
Tranche 2 is available for draw down on or before 5 October 2017
with a fixed rate of interest, calculated at the same margin as
Tranche 1 above the prevailing 2032 gilt rate on the date of draw
down.
The weighted average cost of the Company's agreed debt
facilities at 5 April 2017 was 3.1%(18) (2016: 3.1%) with a WAM of
10.1 years (2016: 5.2 years) and 77% (2016: 65%) of the Company's
agreed debt facilities now at a fixed rate of interest. This
removes significant interest rate risk from the Company and
provides shareholders with a wide, beneficial margin between the
fixed cost of debt and income returns from the portfolio.
18 Assuming three month LIBOR of 0.35% and that Tranche 2
attracts fixed annual interest of 3.02%.
Investment Manager
The Investment Manager was appointed at IPO under an investment
management agreement ("IMA") to provide property management and
administrative services to the Company. The performance of the
Investment Manager and fees payable to it are reviewed each year by
the Management Engagement Committee ("MEC").
The Board has been pleased with the progress and performance of
the Investment Manager, particularly the timely deployment of new
monies on high quality assets, securing the earnings required to
fully cover the increased target dividend.
The MEC has reviewed, in detail, the arrangements with the
Investment Manager this year, following expiry of the initial three
year term. In light of the positive performance of the Company
since IPO the Board and the Investment Manager have agreed a
further three year term with 12 months' notice to the Investment
Manager's ongoing engagement, from 1 June 2017. Fees payable to the
Investment Manager under the IMA have been amended to include:
-- A step down in the property management fee from 0.75% to
0.65% of net asset value ("NAV") applied to NAV in excess of
GBP500m; and
-- A step down in the administrative fee from 0.125% to 0.08% of
NAV applied to NAV between GBP200m and GBP500m and a further step
down to 0.05% of NAV applied to NAV in excess of GBP500m.
All other key terms of the IMA remain unchanged. The Board
considers these amendments to the IMA to be in the best interests
of the Company's shareholders because:
-- The administrative fee will immediately fall, increasing
dividend cover on target dividends for the year ending 31 March
2018;
-- Further growth in NAV, particularly above GBP500m, will
further reduce the Company's OCR and increase dividend capacity;
and
-- Another three year term provides the Investment Manager with
security of tenure and allows further investment in the dedicated
systems and people providing its services under the IMA.
Dividends
Income is a major component of total return. The Company paid
aggregate dividends of 6.425p per share during the year (totalling
GBP18.5m), comprising the fourth interim dividend of 1.6625p per
share relating to the year ended 31 March 2016 and three interim
dividends of 1.5875p per share relating to the year ended 31 March
2017.
The Board has approved an interim dividend of 1.5875p per share
for the quarter ended 31 March 2017 payable on 30 June 2017 to
shareholders on the register on 28 April 2017, meeting the
Company's target of paying an annual dividend per share for the
year of 6.35p (2016: 6.25p, 2015: 5.25p), totalling GBP19.7m.
Dividends relating to the year are 101% covered by net recurring
income of GBP19.9m.
In the absence of unforeseen circumstances the Board intends to
pay quarterly dividends to achieve a target dividend of 6.45p per
share for the year ending 31 March 2018. The Board's objective is
to grow the dividend on a sustainable basis at a rate which is
fully covered by projected net rental income and does not inhibit
the flexibility of the Company's investment strategy.
The payment of dividends relating to the year ending 31 March
2018 will be accelerated by one month to align more closely with
London Stock Exchange best practice and the Company's peer group.
The dividend relating to the quarter ending 30 June 2017 is
therefore expected to be payable on 31 August 2017.
Outlook
Property investment and occupational markets continue to exhibit
a less than perfect correlation, which is slightly at odds with
expected theory that occupational demand drives rental growth which
in turn drives valuation increases. This aspect makes the outlook
for total returns harder to predict as external influences can
cause investment markets to move in a contrary fashion. While the
occupational market has strengthened through the year and rental
growth has taken hold across large parts of regional economies, the
investment market has been more volatile. I anticipate that
occupational demand combined with a limited supply of new
development will continue to drive rental growth across regional
markets, supporting a low vacancy rate and securing dividends and
long-term capital growth for the Company's shareholders.
David Hunter
Independent Chairman
5 June 2017
Investment Manager's report
The UK property market
Markets, we are told, are driven by fear and greed. The Chairman
has commented on the recent market volatility which was principally
a function of fear surrounding the outcome of the Referendum and
'Brexit'. However, it would appear that the fear of Brexit is not
having the impact on commercial property markets that had been
predicted, although this may still be too early to call. Our
experience of managing 131 properties let to 265 tenants across a
nationwide portfolio suggests that it is business as usual from a
property perspective. This is evident in the occupancy rate(19) of
the portfolio which currently stands at 98.6% (2016: 96.8%).
Strong demand from buyers dominated the property investment
market and resulted in yield compression through 2014 and 2015 to a
'false' summit and a pause in mid-2016 in anticipation of the
Referendum. Following a period of relative inaction in the two
months prior to the Referendum and a period of 'reflection' in the
two months following, we now find ourselves in a market with very
few sellers but an extensive field of buyers comprising private
investors, developer/trader property companies, local authorities,
listed property companies and overseas buyers. So demand is back
and in aggregate yields have recovered most of the ground lost in
2016, albeit retail yields continue to soften while industrial
yields continue to harden.
Does the return of strong demand suggest that the market has yet
to peak? We are not unduly concerned by this risk to Custodian
REIT. The equivalent yield of the portfolio has been constant at
6.75% since September 2014, although the net initial yield of the
portfolio has hardened to reflect rental growth. This suggests that
capital growth has been driven by the prospect of rental growth and
not by underlying yield compression, lessening the risk of a
reversal of gains made in the near future.
Is fear driving market demand for long dated income with indexed
linked rent reviews? Is this reflective of the fear of weak
economic growth and weak property markets in the near future? This
possible weakness is not our experience in regional economies. We
are witnessing rental growth driven by a lack of supply and very
limited speculative development. We are enjoying low vacancy rates
and tenants are happy to commit to extending leases or agree rental
increases, demonstrating a confidence in their businesses.
Are open ended property funds still fearful? The Financial Times
reports fund managers are sitting on between 18-30% in cash, which
amounts to over GBP3bn of cash, or 20% of total funds(20) . While
this is explained as being appropriate caution in the face of
current and feared redemptions, this strategy can be doing nothing
to enhance returns.
One challenge affecting the whole market is the limited supply
of property being offered to the market. This shortage of supply,
in part, might explain the significant cash reserves of the open
ended funds. A lack of suitable opportunities may cause investors
to sit on their hands, but it also creates a vicious circle, with
potential sellers fearful of not being able to re-invest their
capital receipts. We have opted to exploit this position by selling
six properties this year, for a total of GBP18.9m, to either
capitalise on the strong market for long dated income or maximise
value through sales to owner occupiers and special purchasers.
Others in the market have also sought to benefit from selling in
the current market. Savills reported that the first quarter of 2017
saw a record level of nearly GBP5bn transacted in the London office
market, 84% of which involved overseas investors(21) . However, the
market outside London was decidedly short of sellers and investment
volumes were down by 31% in the first quarter of 2017 according to
Lambert Smith Hampton(22) . This supply shortage has slowed
deployment of the Company's debt facilities, although a nationwide
brief and a focus on sub GBP10m lot sizes has allowed us to
continue to secure properties that meet the Company's investment
criteria.
There is a fear that the high street will lose out to on-line
retail. This concern is causing many to divest themselves of high
street property and acquire logistics and distribution assets in
their place. While we believe that many convenience retail
locations and smaller market towns will weaken as people change
their shopping habits, this cannot be said of all retail locations.
We believe in strong regional retail towns, particularly those with
a high tourist footfall and those with a diverse leisure offering
including coffee shops and restaurants in their town centres.
Shopping remains one of the nation's favourite leisure
activities.
The widespread demand for distribution and logistics properties
has the potential to create a bubble in market pricing if the
current trajectory continues. Greed triumphing over fear. We are
vigilant about the pricing of investment opportunities in this
sector but we believe pricing is still at sustainable levels, given
the real prospect of rental growth.
While there appears to be more fear than greed in the market,
greed is never too far from the surface. One recent phenomenon has
been the rise of local authorities buying real estate, funded by
cheap money from the Public Works Loan Board ("PWLB"). Local
authorities, who can borrow up to 100% of a property's value from
the PWLB, invested over GBP1bn during 2016(23) , often outside
their local authority area in a push to close the funding gap, as
central government reduces direct financial support. Our experience
of the rising activity of local authorities in the market is that
they are having an inflationary impact on pricing, perhaps because
they are too focused on short-term income returns rather than the
long-term risk of capital depreciation. This local authority
activity has created some competition for the Company, but in the
main, local authorities seem to be focused on larger lot size
property, or simply long dated income, which has limited this
impact.
In conclusion, we believe there is strength and longevity in the
occupational market and across regional markets, with good
prospects for low vacancy rates and rental growth. We believe that
fears of short-term volatility in the economy may be pushing
investment into long-term income strategies, making this segment of
the market very expensive. However we believe the impact on the
property market of many of these fears may be misplaced. The demand
for industrial investment property let with long-term, RPI-linked
income is risking the stability of market pricing. We believe the
abundance of cheap debt is pushing some market protagonists to
understate the inherent risks of property ownership and over-price
property. However, allowing for some caution around competitive
pressures on pricing and careful stock selection, we believe we can
still invest in properties that meet our core investment criteria
and provide solid, long-term performance for the Company.
19 ERV of occupied property divided by total portfolio ERV.
20 Source: Financial Times 23 April 2017.
21 Source: Savills UK Commercial Market in Minutes April
2017.
22 Source: Lambert Smith Hampton Q1 2017 UK Investment
Transactions Bulletin.
23 Source: Financial Times 17 October 2016.
Activity
Notwithstanding some of the competitive headwinds described
above we were delighted to complete GBP105m of acquisitions during
the year. GBP60m of these acquisitions were made in the immediate
aftermath of the Referendum where we were able to exploit the
short-term weakness in market sentiment, having had the courage to
raise new equity in the run-up to the Referendum. This courage was
rooted in our belief that the strength of occupational markets
would underpin investment sentiment once the Referendum was behind
us.
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 continued to achieve this, with
earnings providing 101% cover of the approved total dividend for
the year of 6.35p per share, with a net gearing ratio of 14.5% at
the year end. As a result of the fund's growth and consequential
reduction in OCR (excluding direct property expenses) the Board has
increased the target dividend for the next financial year to 6.45p
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% LTV. At the current cost
of debt we believe this strategy can improve dividend cover as
gearing increases towards the target level.
We remain committed to a strategy focused on sub GBP10m lot size
regional property and expect to see long-term total return
out-performance from a higher income component of total return
compared to London and the South East, and continuing strong asset
management performance as we secure rental increases and extend
contractual income.
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 Valuation Weighting Weighting
31 March 31 March Gross valuation by income by income
2017 2016 increase(24) 31 March 31 March
Sector GBPm GBPm GBPm 2017 2016
------------ ---------- ---------- ---------------- ----------- -----------
Industrial 187.2 123.2 6.7 45% 39%
Retail 120.2 92.0 0.6 28% 28%
Other(25) 56.4 59.8 0.8 13% 18%
Office 52.0 44.0 0.9 14% 15%
Total 415.8 319.0 9.0 100% 100%
------------ ---------- ---------- ---------------- ----------- -----------
Industrial property is a very good fit with the Company's
strategy where it is possible to acquire modern, 'fit-for-purpose'
buildings with high residual values (ie the vacant possession value
is closer to the investment value than in other sectors) and where
the real estate is less exposed to obsolescence. GBP4.7m of the
GBP6.7m gross valuation increase in the industrial sector was
driven by asset management initiatives, with occupational demand
driving rental growth and generating positive returns.
Retail represents 28% of portfolio income, comprising 17% high
street and 11% out-of-town retail (retail warehousing). 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. Retail warehousing is
witnessing close to record low vacancy rates as a restricted
planning policy and lack of development combine with retailers'
requirements to offer large format stores, free parking and 'click
and collect' to consumers. This made retail a target sector for
acquisitions throughout the year.
While deemed to be outside the core sectors of office, retail
and industrial the 'other' sector offers diversification of income
without adding to portfolio risk, containing assets considered
mainstream but which typically have not been owned by institutional
investors. The 'other' sector has proved to be an out-performer
over the long-term and continues to be a target for
acquisitions.
Office rents in regional markets 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. 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 and lease incentives can be a real cost
of office ownership which can hit cash flow and be at odds with the
Company's relatively high target dividend.
For details of all properties in the portfolio please see
www.custodianreit.com/property/portfolio.
24 Before the impact of GBP6.1m acquisition costs.
25 Includes car showrooms, petrol filling stations, children's
day nurseries, restaurants, health and fitness units, hotels and
healthcare centres.
Asset management
During the year we focused on proactively managing the portfolio
to enhance income and maintain the weighted average unexpired lease
term to the earlier of first break or expiry ("WAULT") ahead of the
Company's objective of a WAULT of over five years. At 31 March 2017
the portfolio's WAULT had fallen by 0.8 years to 5.9 years (2016:
6.7 years) with the completion of the asset management initiatives
detailed below partially offsetting the one year natural annual
decline.
WAULT is a much quoted statistic and is often considered a proxy
for risk. This perception has encouraged many investors in the
market to pursue long-dated income causing significant price
inflation where long leases are combined with fixed or index-linked
rent reviews. Property investment value is a combination of the
value of the land, the building and the lease. Land should
appreciate over time. The building will depreciate but should have
30-50 years of economic use before it needs to be redeveloped. The
lease is the fastest depreciating part of a property's investment
value yet we believe leases are currently being over-valued by the
market. This possible lease over-valuation has encouraged us to buy
properties with shorter leases, where we expect to experience less
depreciation in value over the long-term. Although buying shorter
leases puts pressure on the WAULT of the portfolio, we believe that
with the current strength of the occupational market and a
portfolio of high quality properties, risk is better managed by
pursuing a strategy of buying high quality properties that are
likely to re-let, rather than highly priced properties with long
leases, simply to mitigate an artificial measure of risk.
Successful asset management strategies including rent reviews,
new lettings, lease extensions and the retention of tenants beyond
their contractual break clauses have more than offset the impact on
valuations of acquisition costs. In aggregate asset management
activities increased NAV by GBP8.9m delivering the largest
component of NAV performance through the year. This element of NAV
growth underlines the importance of pro-active, strategic asset
management of the portfolio. As a fund manager who collects rent
and has direct relationships with all the tenants in the portfolio,
we have been able to deliver mutually beneficial outcomes for both
the Company and its tenants.
In a competitive market with pressure to invest, it would have
been easy to rule out selling to avoid cash-drag and the
requirement for re-investment. However, when markets are making
buying difficult it is often the best time to sell. We were
sufficiently confident of our ability to deploy new monies into the
market that we felt 2016/17 would be a good time to look at those
properties not considered long-term prospects for the Company and
where we could exploit special purchasers or market
mis-pricing.
Accordingly, we disposed of six properties for an aggregate
consideration of GBP18.9m during the year to funds and private
investors who paid very strongly for long-term secure income, owner
occupiers and special purchasers, comprising:
-- Purpose-built student residential building in Lenton,
Nottingham sold for GBP1.2m in May 2016, GBP0.1m above
valuation;
-- 63 room Premier Inn hotel in Dudley sold for GBP4.45m in July 2016, GBP0.2m above valuation;
-- Kia car dealership in Solihull sold for GBP1.875m in November 2016, GBP0.3m above valuation;
-- Wetherspoons public house in Southsea sold for GBP1.67m in
February 2017, GBP0.2m above valuation;
-- Toyota car dealership in Peterborough sold for GBP2.75m in
March 2017, GBP0.3m above valuation; and
-- Bentley car dealership in Knutsford sold for GBP7.0m in March 2017, GBP0.7m above valuation.
The Bentley car dealership in Knutsford was acquired at IPO in
March 2014 for GBP5.7m and was valued at GBP6.3m at 31 December
2016, with a WAULT of circa 12 years and benefitting from RPI
linked rent reviews. The site was considered marginally over-rented
and its valuation significantly exceeded its GBP4.0m vacant
possession value meaning, as the unexpired term reduced, we could
have witnessed a sharp decline in valuation. In our view the market
is overpaying for long, index linked income and the decision was
taken to sell. A lack of available investment stock coupled with
strong demand for long-term income with structured rent reviews
resulted in the Company benefitting from an extremely competitive
bidding process, with interest from across the investor spectrum,
and the 31 December 2016 valuation net initial yield of 5.49%
compared favourably to a net initial yield on sale price of
4.92%.
Each disposal was made above purchase price, generating a
combined profit on disposal of GBP1.6m(26) with an average net
initial yield(27) of 5.7%.
The Company intends to redeploy the sale proceeds on property
with better short-term income growth and long-term capital growth
potential.
Key asset management initiatives completed during the year
included:
-- Arrangement of a simultaneous surrender and agreement of a
new lease of a retail unit on High Street, Colchester to Metro
Bank. The new lease secured an increase in annual rent from
GBP0.15m to GBP0.20m, significantly ahead of ERV and increased the
unexpired lease term from 0.25 years to 25 years, with a break
option in year 15, increasing valuation by GBP1.6m;
-- Agreeing a surrender and re-grant of a lease to Assa Abloy at
Cannock Road, Wolverhampton with expiry moving from July 2018 to
July 2023 and annual rent increasing by 42% from GBP0.36m to
GBP0.51m, increasing valuation by GBP1.6m;
-- Extending DX Network's lease at Harrington Way, Nuneaton with
expiry moving from August 2016 to March 2022 and rent increasing by
10%, increasing valuation by GBP1.0m;
-- Following a comprehensive refurbishment, a vacant unit at
Tilbrook 44 in Milton Keynes let to Saint Gobain on a 10 year lease
with annual rent of GBP0.27m, increasing valuation by GBP0.6m;
-- Extending Geldard LLP's lease at Pride Park, Derby by
removing a break option with the lease expiry now in June 2023,
increasing valuation by GBP0.5m;
-- Letting a vacant unit in Gateshead to Jump Arena on a 15 year
lease with annual rent of GBP0.16m, increasing valuation by
GBP0.5m;
-- Extending R Scott Bathrooms' lease at Causewayside House,
Edinburgh with expiry moving from November 2017 to November 2027,
increasing valuation by GBP0.4m;
-- Agreeing a 10 year lease extension with Brenntag UK at an
industrial unit in Cambuslang with expiry moving from April 2021 to
April 2031 with a 2.5% (annually compounded) minimum rental uplift
from 2026, increasing valuation by GBP0.4m;
-- Removing a January 2018 break clause in Pets at Home's lease
in Winnersh increasing WAULT from 0.7 years to 10.7 years,
increasing valuation by GBP0.4m;
-- Extending DHL's lease at Dyce Drive, Aberdeen with expiry
moving from February 2017 to February 2022 and rent increasing by
7%, increasing valuation by GBP0.4m;
-- Removing a 2020 break clause in Pizza Hut's lease in Crewe
increasing WAULT to 13 years and valuation by GBP0.3m;
-- Extending Tesco's lease at Causewayside House, Edinburgh with
expiry moving from December 2019 to December 2029, increasing
valuation by GBP0.3m;
-- Extension of two leases at the multi-let industrial estate in
Chepstow with expiries now in May 2026, increasing valuation by
GBP0.2m;
-- Entering into a reversionary lease with Savers' at a retail
unit in Colchester, at a rent ahead of ERV with expiry moving from
December 2017 to December 2022, increasing valuation by
GBP0.2m;
-- Letting a vacant retail unit in Portsmouth to The Works on a
10 year lease with annual rent of GBP0.1m, increasing valuation by
GBP0.2m;
-- Letting a trade counter unit at Counterpoint, Crewe to
Edmunson Electrical ahead of ERV on a 10 year lease following the
simultaneous surrender of the former tenant's lease, increasing
WAULT from 0.3 years to 10 years, increasing valuation by
GBP0.2m;
-- Following the refurbishment of the common parts at
Causewayside House, Edinburgh, surrendering Metaswitch Networks'
lease over 4,700 sq ft as at January 2017 and re-granting a new
lease expiring in January 2027 over 9,500 sq ft, increasing
valuation by GBP0.1m; and
-- Documenting a number of outstanding rent reviews across the
portfolio, with increases secured in Dumfries (+8%), Portishead
(+11%), Perth (+8%) and Sheffield (+4%).
26 Net of disposal costs of GBP0.2m.
27 Portfolio passing rent divided by portfolio valuation plus
estimated purchasers' costs of 6.5%.
Portfolio risk
We have managed the portfolio's income expiry profile through
successful asset management activities such that the WAULT of 5.9
years is ahead of target with only 53% of income expiring within
five years at 31 March 2017 (2016: 48%). Short-term income at risk
is a relatively low proportion of the portfolio's income, with only
28% expiring in the next three years (2016: 29%).
31 March 31 March
Income expiry 2017 2016
----------------- --------- ---------
0-1 years 13% 9%
1-3 years 15% 20%
3-5 years 25% 19%
5-10 years 33% 29%
10+ years 14% 23%
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 the next financial year we intend to
continue our asset management activities and complete on the
current strong acquisition pipeline of GBP38.6m, with the aim of
deploying debt facilities to increase gearing towards the target
level of 25%. We expect asset management initiatives to positively
impact 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.
The sub GBP10m lot size, regional market has not seen the same
level of price inflation as the London and large lot size markets
over the last two years, and consequently it is still possible to
acquire properties with strong investment credentials that meet our
return requirements. We are keen to capitalise on the strength of
the occupational market and are seeing sufficient opportunities,
consistent with our investment strategy, to maintain the level of
deployment necessary to minimise cash drag and enhance gearing. 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 increase as uncertainty
diminishes after the General Election on 8 June 2017.
I am confident the Company's existing strategy can deliver
enhanced income cover to the 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
5 June 2017
Portfolio
31 March 2017 31 March 2016
-------------------- -------------- --------------
Portfolio value GBP415.8m GBP319.0m
Separate tenancies 265 228
Occupancy rate 98.6% 96.8%
Assets 131 113
WAULT 5.9 years 6.7 years
NIY(28) 6.9% 6.9%
28 Portfolio passing rent divided by portfolio valuation plus
estimated purchasers' costs of 6.5%.
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 assessed 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% from a single tenant, and no more
than 50% in any specific sector or geographical
* Change in demand for space. region.
* Market pricing affecting value. * Focused on established business locations for
investment.
* Properties concentrated in a specific geographical
location or sector. * Active portfolio diversification between office,
industrial (distribution, manufacturing and
warehousing), retail and other.
* Lease expiries concentrated in a specific year.
* Active management of lease expiry profile and impact
* Decrease in occupancy. on WAULT considered in forming acquisition decisions.
* Building specifications not tailored to one user.
------------- -------------------------------------------------------------- -----------------------------------------------------------------
Financial
* Reduced availability or increased cost of debt. * Target gearing of 25% 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(29) . 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
Investment Manager in making operational decisions.
------------- -------------------------------------------------------------- -----------------------------------------------------------------
Acquisitions
* Unidentified liabilities associated with the * Comprehensive due diligence is undertaken in
acquisition of new properties (whether acquired conjunction with professional advisors and the
directly or via a corporate structure). provision of insured warranties and indemnities are
sought from vendors where appropriate.
------------- -------------------------------------------------------------- -----------------------------------------------------------------
The outcome of the general election on 8 June 2017 is uncertain
and the Board considers it is too early to understand the full
impact of 'Brexit', but these political risks are not considered
likely to have a material impact on the Company's performance.
29 As defined by the Corporation Tax Act 2010.
Longer-term viability statement
In accordance with provision C2.2 of the UK Corporate Governance
Code issued by the Financial Reporting Council ("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 and uncertainties set out above should they
actually occur.
Current debt and associated covenants are summarised in Note 15,
with no covenant breaches during the year. The Company's dividend
policy is set out in Business Model and Strategy. The principal
risks and uncertainties 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. The Company targets individual properties
with a value of less than GBP10m at acquisition, seeking to benefit
from a significant NIY advantage as a result.
The Company's current investment objectives are:
-- To not exceed a maximum weighting to any one property sector
or to any one geographic region of greater than 50%;
-- 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, 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 25% of the aggregate market value of
all the properties of the Company at the time of borrowing.
The Board keeps the Company's investment objectives under review
to ensure they remain appropriate to the market in which the
Company operates and in the best interests of shareholders. During
the year the Investment Manager has acquired properties with
shorter leases, believing that long leases are currently
over-valued by the market and that this approach more effectively
manages risk by taking advantage of the current strength of the
occupational market. This puts pressure on the WAULT of the
portfolio which the Board continues to monitor carefully.
Key performance indicators
The Board meets quarterly and at each meeting reviews
performance against a number of key measures:
-- 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;
-- EPRA EPS - reflects the Company's ability to generate
earnings from the portfolio which underpin dividends;
-- Net gearing - measures the prudence of the Company's
financing strategy, balancing the additional returns available from
employing debt with the need to effectively manage risk;
-- Dividends per share, dividend yield and dividend cover - A
key objective is to provide an attractive, sustainable level of
income to shareholders, fully covered from net rental income. The
Board reviews target dividends in conjunction with detailed
financial forecasts to ensure that target dividends are being met
and are sustainable;
-- Occupancy - 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;
-- OCR - measures the annual running costs of the Company and
indicates the Board's ability to operate the Company efficiently,
keeping costs low to maximise earnings from which to pay fully
covered dividends; 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 or buy back shares with a view to
trying to limit this volatility.
The Board considers the key performance measures over various
time periods and against similar funds. A record of these measures
is disclosed in the Financial highlights and performance summary,
the Chairman's statement and the Investment Manager's report.
Financing
The Company operates with a conservative level of gearing, with
target borrowings over the medium term of 25% of the aggregate
market value of all properties at the time of drawdown.
Debt
The Company has the following facilities available:
-- A GBP35m RCF with Lloyds Bank plc 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%;
-- A GBP45m term loan facility with SWIP repayable in June 2028,
attracting fixed annual interest of 2.987%; and
-- A GBP50m term loan facility with Aviva comprising:
a) A GBP35m tranche repayable on 5 April 2032, attracting fixed annual interest of 3.02%; and
b) A GBP15m tranche repayable 15 years from drawdown attracting
fixed annual interest of 1.6% over the prevailing 2032 swap rate on
the date of drawdown.
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 one-off costs of GBP0.165m related to
the accelerated recognition of the associated deferred arrangement
fees.
Equity
During the year the Company raised GBP92.4m (before costs and
expenses) through the placing of 87,771,274 new ordinary shares.
Following the year end, the Company issued a further 6.0m of new
ordinary shares raising GBP6.7m (before costs and expenses).
Dividends
The Company paid dividends totalling 6.425p per share during the
year, comprising the fourth interim dividend of 1.6625p per share
relating to the financial year ended 31 March 2016 and three
interim dividends of 1.5875p per share relating to the year ended
31 March 2017.
The Board has approved an interim dividend of 1.5875p per share
for the quarter ended 31 March 2017 which will be paid on 30 June
2017, meeting its target of paying an annual dividend per share for
the year of 6.35p (2016: 6.25p, 2015: 5.25p).
In the absence of unforeseen circumstances, the Board intends to
pay quarterly dividends to achieve a target dividend of 6.45p per
share for the year ending 31 March 2018. The Board's objective is
to grow the dividend on a sustainable basis, at a rate which is
fully covered by projected net rental income and does not inhibit
the flexibility of the Company's investment strategy.
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 assess the risk of pollution
occurring. The Company monitors all incoming tenants through its
insurance programme to identify potential risks, and activities
deemed to be high-risk 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 one industrial
development at a site in Stevenage. The developer is sensitive to
both ecological and sustainability considerations and has complied
with environmental standards. The development at Stevenage has been
designed to achieve an EPC grade "A". 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.
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
Independent Chairman
5 June 2017
Independent auditor's report to the members of Custodian REIT
plc on the final results for the year ended 31 March 2017
We confirm that we have issued an unqualified opinion on the
full financial statements of Custodian REIT plc. Our audit report
on the full financial statements sets out the following risks of
material misstatement which had the greatest effect on our audit
strategy; the allocation of resources in our audit; and directing
the efforts of the engagement team, together with how our audit
responded to those risks and the key observations arising from our
work:
Valuation of the property portfolio
===============================================================================
Risk description As disclosed in Note 10, the Group's investment
property portfolio is GBP415.8m (31 March 2016:
GBP318.9m). The Group's accounting policy in Note
2 states that investment property is held at fair
value and Note 2.5 describes key judgements made
in valuation of investment property. In determining
the fair value, the external valuer makes a number
of key estimates and assumptions, in particular
assumptions in relation to market comparable yields
and estimates in relation to future rental income
increases or decreases, void periods and purchasers'
costs. Certain of these estimates and assumptions
require input from the Investment Manager. Some
of these estimates and assumptions are subject to
market forces and will change over time.
Valuation of investment property is an area of judgement
which could materially affect the financial statements.
The Audit committee report discloses this as a significant
financial matter.
================= ============================================================
How the scope Together with our real estate experts, who are Chartered
of our audit Surveyors, we met with the third party valuer appointed
responded by those charged with governance with the aim of
to the risk understanding the valuation methodology adopted.
We assessed the competence, capabilities and objectivity
of the external valuer. We selected a sample of
investment properties for further investigation
(based on value, absolute and percentage movement,
and some randomly selected properties). For this
sample, we assessed and challenged the reasonableness
of the significant judgments and assumptions applied
in the valuation model for each property in our
sample, focusing in particular on the yields assumed
and assessing sensitivity of the valuation to changes
in assumptions. We assessed the completeness and
accuracy of the data provided by the Group to the
valuer for the purposes of its valuation excercise.
With the assistance of expert members of our audit
team who are Chartered Surveyors, we reviewed the
significant assumptions in the valuation process,
tested a sample of properties by benchmarking against
external appropriate property indices and understood
the valuation methodology and the wider market analysis.
We reviewed the information provided by the valuers
both in the meeting and contained in the detailed
valuation reports; and we undertook our own research
into the relevant markets to evaluate the reasonableness
of the valuation inputs and the resulting fair values.
================= ============================================================
Key observations We are satisfied that the key assumptions applied
in determining the property valuations by the external
valuer were appropriate. The testing performed in
relation to the final property valuations proved
satisfactory.
================= ============================================================
Revenue recognition cut-off and accounting for lease incentives
==============================================================================
Risk description As disclosed in Note 4, the Company recognised GBP27.2m
of gross income from investment properties (2016:
GBP18.6m), where GBP6.2m (2016: GBP4.5m) related
to last quarterly billing which is exposed to revenue
cut-off risk and GBP2.7m (2016: GBP1.2m) to lease
incentives revenue. As set out in Note 4 to the
financial statements, the Company's accounting policy
is to account for the rental income from properties
owned by the Company on a straight line basis over
the term of the lease. Lease incentives are amortised
on a straight-line basis over the lease term. There
is a risk that lease incentives such as rent free
periods or stepped rent agreements may not be treated
appropriately to ensure rental income is recognised
in each accounting period on straight line basis
over the lease length. We have also have defined
revenue recognition risk as arising from revenue
cut-off errors of rental income near the year-end.
================= ===========================================================
How the scope To respond to the risk we tested new tenancy agreements
of our audit entered into in the year (on a sample basis); tested
responded cut off for a sample of revenue recognised near
to the risk either side of year end to ensure the transactions
have been recognised in the correct period; and
performed substantive testing of a selection of
tenancy rental revenue recognised to signed rental
agreements ensuring lease incentives have been recognised
over the correct period.
================= ===========================================================
Key observations The results of our tests were satisfactory and we
concluded revenue had been appropriately recognised.
The Group's accounting policies in relation to revenue
recognition were found to be in line with IFRS and
industry peers.
================= ===========================================================
Compliance with REIT regime
===============================================================================
Risk description The UK REIT regime affords the Company a beneficial
tax treatment for income and capital gains, provided
certain criteria are met. As a REIT, the Company
must ensure that it monitors its compliance with
the requirements of the regime. If the Company breaches
one or more of the REIT regime conditions, the penalty
can range from automatic expulsion from the regime
to additional tax liabilities for the REIT.
The Audit Committee report discloses this as a significant
financial matter.
================= ============================================================
How the scope We obtained copies of the Investment Manager's calculations
of our audit to support compliance with these conditions, which
responded we recalculated. We also agreed compliance with
to the risk these conditions by reference to the REIT requirements
at the balance sheet date, and in the forecast period
of 12 months from the balance sheet date.
================= ============================================================
Key observations The results of our tests were satisfactory and we
found no instances of breaches or forecast breaches
of compliance with the REIT regime.
================= ============================================================
Loan covenant compliance
===============================================================================
Risk description Given the existing and new finance facilities undertaken
by the Company and their maturities as disclosed
in Note 15, a key factor in assessing the going
concern basis of the Company is covenant compliance.
Compliance is based on cash management and the associated
headroom, property valuations and the terms of the
finance facilities available, as well as consideration
of existing non-financial covenants. In assessing
going concern, management is expected to demonstrate
compliance for the forecast period.
Key judgements relate to the forecast of growth
and the impact of receipt of additional facilities
on the ratios. A key risk arises as forecasts inherently
include assumptions and judgements applied by management
in relation to the timing of receipt and payment
of cash flows, as well as forecasted growth level.
The Audit Committee report discloses this as a significant
financial matter.
================= ============================================================
How the scope We challenged management's judgements when arriving
of our audit at their forecast covenant compliance by testing
responded forecast numbers, testing of historic forecast accuracy,
to the risk as well as corroborating management's analysis on
completeness of existing non-financial covenants.
We also confirmed that adequate disclosures have
been made in the Annual Report.
================= ============================================================
Key observations The results of our tests were satisfactory and we
found no instances of breaches or forecast breaches
of the covenant compliance.
================= ============================================================
These matters were addressed in the context of our audit of the
financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these
matters.
Our liability for this report, and for our full audit report on
the financial statements is to the Company's members as a body, in
accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our
audit work has been undertaken so that we might state to the
Company's members those matters we are required to state to them in
an auditor's report and for no other purpose. To the fullest extent
permitted by law, we do not accept or assume responsibility to
anyone other than the Company and the Company's members as a body,
for our audit work, for our audit report or this report, or for the
opinions we have formed.
Deloitte LLP
Statutory Auditor
Consolidated and Company statements of comprehensive income
For the year ended 31 March 2017
Year ended Year ended
31 March 31 March
2017 2016
Group and Company Note GBP000 GBP000
--------------------------------------------- ----- ----------- -----------
Revenue 4 27,610 19,012
Investment management (2,671) (1,948)
Operating expenses of rental property
* rechargeable to tenants (630) (451)
* directly incurred (1,239) (572)
Professional fees (337) (356)
Directors' fees (160) (172)
Administrative expenses (475) (352)
Expenses (5,512) (3,851)
Operating profit before financing
and revaluation of investment property 22,098 15,161
--------------------------------------------- ----- ----------- -----------
Unrealised gains/(losses) on revaluation
of investment property:
- relating to property revaluations 10 9,016 3,031
* relating to costs of acquisition 10 (6,103) (5,768)
Net valuation increase/(decrease) 2,913 (2,737)
Profit on disposal of investment
property 1,599 56
Net gains/(losses) on investment
property 4,512 (2,681)
--------------------------------------------- ----- ----------- -----------
Operating profit before financing 26,610 12,480
--------------------------------------------- ----- ----------- -----------
Finance income 6 186 221
Finance costs (including one-off
items) 7 (2,591) (1,494)
Net finance costs (2,405) (1,273)
Profit before tax 24,205 11,207
--------------------------------------------- ----- ----------- -----------
Income tax expense 8 - -
Profit for the year and total comprehensive
income for the year, net of tax 24,205 11,207
Attributable to:
Owners of the Company 24,205 11,207
Earnings per ordinary share:
Basic and diluted (p per share) 3 8.1 5.5
EPRA (p per share) 3 6.6 6.8
The profit for the year arises from the Company's continuing
operations.
Consolidated and Company statements of financial position
As at 31 March 2017
Registered number: 08863271
Group Company
31 March 31 March 31 March 31 March
2017 2016 2017 2016
Note GBP000 GBP000 GBP000 GBP000
----------------------------------- ----- ---------- ---------- ---------- ----------
Non-current assets
Investment property 10 415,812 318,966 415,812 318,966
Investments 11 - - 7,109 -
----------------------------------- ----- ---------- ---------- ---------- ----------
Total non-current assets 415,812 318,966 422,921 318,966
----------------------------------- ----- ---------- ---------- ---------- ----------
Trade and other receivables 12 7,189 4,518 7,189 4,518
Cash and cash equivalents 14 5,807 5,455 5,807 5,455
Total current assets 12,996 9,973 12,996 9,973
----------------------------------- ----- ---------- ---------- ---------- ----------
Total assets 428,808 328,939 435,917 328,939
----------------------------------- ----- ---------- ---------- ---------- ----------
Equity
Issued capital 16 3,390 2,512 3,390 2,512
Share premium 16 159,101 68,874 159,101 68,874
Retained earnings 16 189,386 183,674 189,386 183,674
Total equity attributable
to equity holders of the Company 351,877 255,060 351,877 255,060
----------------------------------- ----- ---------- ---------- ---------- ----------
Non-current liabilities
Borrowings 15 63,788 65,143 63,788 65,143
Other payables 571 571 571 571
Total non-current liabilities 64,359 65,714 64,359 65,714
----------------------------------- ----- ---------- ---------- ---------- ----------
Current liabilities
Trade and other payables 13 7,014 3,681 14,123 3,681
Deferred income 5,558 4,484 5,558 4,484
Total current liabilities 12,572 8,165 19,681 8,165
----------------------------------- ----- ---------- ---------- ---------- ----------
Total liabilities 76,931 73,879 84,040 73,879
----------------------------------- ----- ---------- ---------- ---------- ----------
Total equity and liabilities 428,808 328,939 435,917 328,939
----------------------------------- ----- ---------- ---------- ---------- ----------
These consolidated and Company financial statements of Custodian
REIT plc were approved and authorised for issue by the Board of
Directors on 5 June 2017 and are signed on its behalf by:
David Hunter
Independent Chairman
Consolidated and Company statements of cash flows
For the year ended 31 March 2017
Year ended Year
31 March ended
2017 31 March
Group and Company 2016
Note GBP000 GBP000
---------------------------------------------- ----- ----------- ----------
Operating activities
Operating profit 26,610 12,480
Adjustments for:
Net (increase)/decrease in fair value of
investment property 10 (2,913) 2,737
Profit on disposal of investment property
(excluding costs of disposal) (1,807) (56)
Income tax 8 - -
Cash flows from operating activities before
changes in working capital and provisions 21,890 15,161
Increase in trade and other receivables (3,225) (3,615)
Increase in trade and other payables 4,401 2,399
Cash generated from operations 23,066 13,945
Interest paid 7 (2,233) (1,307)
Net cash flows from operating activities 20,833 12,638
---------------------------------------------- ----- ----------- ----------
Investing activities
Purchase of investment property (104,968) (109,674)
Acquisition costs (6,103) (5,768)
Disposal of investment property 18,945 1,821
Interest received 6 33 22
Net cash from investing activities (92,093) (113,599)
Financing activities
Proceeds from the issue of share capital 16 92,425 77,719
Payment of costs of share issue (1,320) (1,632)
(Repayment of)/new borrowings 15 (1,000) 41,700
Dividends paid 9 (18,493) (12,220)
Net cash from financing activities 71,612 105,567
Net increase in cash and cash equivalents 352 4,606
---------------------------------------------- ----- ----------- ----------
Cash and cash equivalents at start of the
year 5,455 849
Cash and cash equivalents at end of the year 5,807 5,455
---------------------------------------------- ----- ----------- ----------
Consolidated and Company statements of changes in equity
For the year ended 31 March 2017
Issued Share Retained Total
capital premium earnings equity
Note GBP000 GBP000 GBP000 GBP000
----------------------------- ------- --------- ---------- ---------- ---------
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 9 - - (12,220) (12,220)
Issue of share capital 16 736 75,351 - 76,087
Transfer of reserves 16 - (181,486) 181,486 -
As at 31 March 2016 2,512 68,874 183,674 255,060
----------------------------- ------- --------- ---------- ---------- ---------
Profit for the year - - 24,205 24,205
Total comprehensive income
for year - - 24,205 24,205
Transactions with owners
of the Company, recognised
directly in equity
Dividends 9 - - (18,493) (18,493)
Issue of share capital 16 878 90,227 - 91,105
As at 31 March 2017 3,390 159,101 189,386 351,877
----------------------------- ------- --------- ---------- ---------- ---------
Notes to the financial statements for the year ended 31 March
2017
1 Corporate information
The Company is a public limited company incorporated and
domiciled in England and Wales, whose shares are publicly traded on
the London Stock Exchange plc's main market for listed securities.
The consolidated financial statements have been prepared on a
historical cost basis, except for the revaluation of investment
property, and are presented in pounds sterling with all values
rounded to the nearest thousand pounds (GBP000), except when
otherwise indicated. The consolidated financial statements were
authorised for issue in accordance with a resolution of the
Directors on 5 June 2017.
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.
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 subsidiaries. The parent controls a
subsidiary if it is exposed, or has rights, to variable returns
from its involvement with the subsidiary and has the ability to
affect those returns through its power over the subsidiary.
Custodian Real Estate Limited has a reporting date in line with the
Company. Other subsidiaries have a December accounting reference
date which has not been amended as those companies are expected to
be liquidated during the next financial year. All transactions and
balances between group companies are eliminated on consolidation,
including unrealised gains and losses on transactions between group
companies. Where unrealised losses on intra-group asset sales are
reversed on consolidation, the underlying asset is also tested for
impairment from a group perspective. Amounts reported in the
financial statements of the subsidiary are adjusted where necessary
to ensure consistency with the accounting policies adopted by the
Group. Profit or loss and other comprehensive income of
subsidiaries acquired or disposed of during the year are recognised
from the effective date of acquisition, or up to the effective date
of disposal, as applicable.
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 2016:
-- Annual Improvements to IFRSs 2012-2014 Cycle and;
-- Amendments to IAS 1 'Disclosure Initiative'.
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';
-- IFRS 16 'Leases'; and
-- IAS 7 (amendments) 'Disclosure Initiative'.
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, IFRS 15 may have an impact on
revenue recognition and related disclosures and IFRS 16 may have an
impact on the classification of ground rent in the statement of
comprehensive income and disclosure of an associated right of use
asset in the statement of financial position. Beyond the
information above, it is not practicable to provide a reasonable
estimate of the effect of these standards 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 bank interest receivable and amounts
receivable on ongoing development funding contracts.
Taxation
The Group operates as a REIT and hence profits and gains from
the property rental business are normally expected to be exempt
from corporation tax. The tax expense represents the sum of the tax
currently payable and deferred tax relating to the residual
(non-property rental) business. The tax currently payable is based
on taxable profit for the year. Taxable profit differs from net
profit as reported in the statement of comprehensive income because
it excludes items of income and expense that are taxable or
deductible in other years and it further excludes items that are
never taxable or deductible. The Company's liability for current
tax is calculated using tax rates that have been enacted or
substantively enacted by the reporting date.
Investment property
Investment properties are 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 a 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. Dilapidations receipts are held in the statement of
financial position and offset against subsequent associated
expenditure. Any ultimate gains or shortfalls are measured by
reference to previously published valuations and recognised in the
statement of comprehensive income, offset against any directly
corresponding movement in fair value of the investment properties
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 on-demand
deposits, and other short-term highly liquid investments that are
readily convertible into a known amount of cash and are subject to
an insignificant risk of changes in value.
Financial liabilities and equity
Financial liabilities and equity instruments are classified
according to the substance of the contractual arrangements entered
into. An equity instrument is any contract that evidences a
residual interest in the assets of the Company after deducting all
of its liabilities. Equity instruments issued by the Company are
recorded at the proceeds received, net of direct issue costs.
Share capital represents the nominal value of equity shares
issued. Share premium represents the excess over nominal value of
the fair value of the consideration received for equity shares, net
of direct issue costs.
Retained earnings include all current and prior year results as
disclosed in 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 statement of comprehensive
income on a straight-line basis over the term of the lease.
Segmental reporting
An operating segment is a distinguishable component of the
Company that engages in business activities from which it may earn
revenues and incur expenses, whose operating results are regularly
reviewed by the Company's chief operating decision maker (the
Board) to make decisions about the allocation of resources and
assessment of performance and about which discrete financial
information is available. As the chief operating decision maker
reviews financial information for, and makes decisions about the
Company's investment properties as a portfolio, the Directors have
identified a single operating segment, that of investment in
commercial properties.
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.
Judgements
The areas where a higher degree of judgement or complexity
arises are discussed below.
Valuation of property
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.
In making its judgement over the valuation of properties, 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.
Acquisition of subsidiaries
The Board applies judgement as to whether the acquisition of a
subsidiary comprises an asset purchase or a business
combination(30) . A business comprises an integrated set of
activities, including strategic and operational management, and
assets capable of being managed for the purpose of providing an
economic benefit to the owner.
The Board assessed the acquisition of the Light Industrial
Portfolio, as detailed in Note 10, as an asset purchase because all
outsourced strategic and operational management contracts were
terminated on acquisition.
30 As defined by IFRS 3 - Business Combinations.
Estimates
There are no areas where assumptions and estimates are
significant to the financial statements.
3 Earnings per ordinary share
Basic EPS amounts are calculated by dividing net profit for the
year attributable to ordinary equity holders of the Company by the
weighted average number of ordinary shares outstanding during the
year.
Diluted EPS amounts are calculated by dividing the net profit
attributable to ordinary equity holders of the Company by the
weighted average number of ordinary shares outstanding during the
year plus the weighted average number of ordinary shares that would
be issued on the conversion of all the dilutive potential ordinary
shares into ordinary shares. There are no dilutive instruments in
issue. Shares issued after the year end are disclosed in Note
20.
The Company became a FTSE EPRA/NAREIT index series constituent
in March 2017 and EPRA performance measures have been disclosed to
facilitate comparability with the Company's peers through
consistent reporting of key performance measures. EPRA has issued
recommended bases for the calculation of EPS which the Directors
consider are better indicators of performance.
Year Year
ended ended
31 March 31 March
Group and Company 2017 2016
------------------------------------------------ ------------ ------------
Net profit and diluted net profit attributable
to equity holders of the Company (GBP000) 24,205 11,207
Net (gains)/losses on investment property
(GBP000) (4,512) 2,681
EPRA net profit attributable to equity holders
of the Company (GBP000) 19,693 13,888
------------------------------------------------- ------------ ------------
Weighted average number of ordinary shares:
Issued ordinary shares at start of the year 251,242,071 177,605,659
Effect of shares issued during the year 47,489,151 26,590,709
Basic and diluted weighted average number
of shares 298,731,222 204,196,368
------------------------------------------------- ------------ ------------
Basic and diluted EPS (p) 8.1 5.5
------------------------------------------------- ------------ ------------
EPRA EPS (p) 6.6 6.8
------------------------------------------------- ------------ ------------
4 Revenue
Year Year
ended ended
31 March 31 March
2017 2016
Group and Company GBP000 GBP000
--------------------------------------------- --------- ---------
Gross rental income from investment property 26,980 18,561
Income from recharges to tenants 630 451
27,610 19,012
--------------------------------------------- --------- ---------
5 Operating profit
Operating profit is stated after charging/(crediting):
Year Year
ended ended
31 March 31 March
2017 2016
Group and Company GBP000 GBP000
-------------------------------------------------------------------------------- --------- ---------
Profit on disposal of investment property (1,599) (56)
Net investment property valuation (increase)/decrease (2,913) 2,737
Fees payable to the Company's Auditor and their associates for the audit of the
Company's annual financial statements 57 52
Fees payable to the Company's Auditor and its associates for other services 11 616
Administrative fee payable to the Investment Manager 365 252
Fees payable to the Company's auditor, Deloitte LLP, are
detailed in the Audit Committee report.
6 Finance income
Year Year
ended ended
31 March 31 March
2017 2016
Group and Company GBP000 GBP000
-------------------- --------- ---------
Bank interest 33 22
Finance income 153 199
186 221
-------------------- --------- ---------
7 Finance costs
Year Year ended
ended 31 March
31 March 2016
2017 GBP000
Group and Company GBP000
---------------------------------------------------- --------- ----------
Amortisation of arrangement fees on debt facilities 358 187
Bank interest 2,233 1,307
2,591 1,494
---------------------------------------------------- --------- ----------
During the year the Company repaid a GBP20m term loan with
Lloyds Bank plc resulting in one-off costs of GBP0.165m related to
the accelerated recognition of the associated deferred arrangement
fees.
8 Income tax
The tax charge assessed for the year is lower than the standard
rate of corporation tax in the UK during the year of 20.0%. The
differences are explained below:
Year Year ended
ended 31 March
31 March 2016
2017 GBP000
Group and Company GBP000
--------------------------------------------------------------- --------- ----------
Profit before income tax 24,205 11,207
---------------------------------------------------------------- --------- ----------
Tax charge on profit at a standard rate of 20.0% (2016: 20.0%) 4,841 2,241
Effects of:
REIT tax exempt rental profits and gains (4,841) (2,241)
Income tax expense - -
--------------------------------------------------------------- --------- ----------
Effective income tax rate 0.0% 0.0%
---------------------------------------------------------------- --------- ----------
The Company operates as a REIT and hence profits and gains from
the property investment business are normally exempt from
corporation tax. Reductions in the UK corporation tax rate from 20%
to 19% (effective from 1 April 2017) and to 17% (effective 1 April
2020) were substantively enacted at 6 September 2016.
9 Dividends
Year Year
ended ended
31 March 31 March
2017 2016
Group and Company GBP000 GBP000
---------------------------------------------------- ---------- ----------
Interim dividends paid on ordinary shares relating
to the quarter ended:
Prior year
- 31 March 2016: 1.6625p (31 March 2015: 1.50p) 4,227 2,672
Current year
- 30 June 2016: 1.5875p (30 June 2015: 1.50p) 4,492 2,775
- 30 September 2016: 1.5875p (30 September 2015:
1.50p) 4,638 2,907
- 31 December 2016: 1.5875p (31 December 2015:
1.5875p) 5,136 3,866
18,493 12,220
---------------------------------------------------- ---------- ----------
The Directors propose that the Company pays a fourth interim
dividend relating to the quarter ended 31 March 2017 of 1.5875p per
ordinary share (totalling GBP5.4m). 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 2017 to
shareholders on the register at the close of business on 28 April
2017.
10 Investment property
Group and Company GBP000 GBP000
-------------------------- -------- ---------
At 31 March 2015 207,287
Additions 116,181
Disposals (1,765)
Gross valuation increase 3,031
Acquisition costs (5,768)
-------------------------- -------- ---------
Net valuation decrease (2,737)
At 31 March 2016 318,966
-------------------------- -------- ---------
Additions 111,071
Disposals (17,138)
Gross valuation increase 9,016
Acquisition costs (6,103)
-------------------------- -------- ---------
Net valuation increase 2,913
-------------------------- -------- ---------
At 31 March 2017 415,812
-------------------------- -------- ---------
Included in investment properties is GBP3.4m relating to ongoing
pre-let developments.
GBP233.1m (2016: GBP166.9m) of investment property has been
charged as security against the Company's borrowings.
The carrying value of investment property at 31 March 2017
comprises GBP361.6m freehold (2016: GBP274.6m) and GBP54.2m
leasehold property (2016: GBP44.3m).
The investment properties are stated at the Directors' estimate
of their 31 March 2017 fair values. Lambert Smith Hampton Group
Limited ("LSH"), a professionally qualified independent valuer,
valued the properties as at 31 March 2017 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 ERV. For the year end
valuation, the equivalent yields used ranged from 4.7% to 14.3%.
Valuation reports are based on both information provided by the
Company e.g. current rents and lease terms, which are derived from
the Company's financial and property management systems and are
subject to the Company's overall control environment, and
assumptions applied by the 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 each
property, the highest and best use of the properties is their
current use.
All other factors being equal, a higher equivalent yield would
lead to a decrease in the valuation of investment property, and an
increase in the current or estimated future rental stream would
have the effect of increasing capital value, and vice versa.
However, there are interrelationships between unobservable inputs
which are partially determined by market conditions, which could
impact on these changes.
Investment property additions include GBP26.75m relating to the
Light Industrial Portfolio, which the Company acquired by
purchasing the entire issued share capital of Custodian Real Estate
GP Limited (formerly BLME (UK) GP Limited) and Custodian Real
Estate Luxembourg S.Ã .r.l. (formerly LIBF (II) S.Ã .r.l.), being the
partners in Custodian Real Estate Light Industrial Limited
Partnership (formerly BLME Light Industrial Building Limited
Partnership), an English limited partnership holding the title and
beneficial interest in the Light Industrial Portfolio on
acquisition.
On 13 October 2016 the trade and assets of Custodian Real Estate
Light Industrial Limited Partnership were transferred to the
Company at market value.
11 Investments
Shares in subsidiaries
Company 31 March
Country of Ordinary 2017 31 March
Company registration Principal shares GBP000 2016
Name number and incorporation activity held GBP000
--------------------------- ---------- ------------------- ------------------ --------- --------- ---------
Custodian Real England and
Estate Limited 08882372 Wales Dormant 100% - -
Custodian Real
Estate GP Limited
(formerly BLME England and Dormant
(UK) GP Limited) 07631899 Wales - in liquidation 100% 7 -
Custodian Real
Estate Nominees
Limited* (formerly
BLME Nominees LIBF England and Dormant
Limited) 07661151 Wales - in liquidation 100% - -
Custodian Real LP014551 England and Dormant 100% - -
Estate Light Industrial Wales - in liquidation
Limited Partnership*
(formerly BLME
Light Industrial
Building Limited
Partnership)
Custodian Real
Estate Luxembourg
S.Ã .r.l. (formerly
LIBF (II) S.Ã .r.l.) B8162.013 Luxembourg Dormant 100% 7,102 -
7,109 -
--------------------------- ---------- ------------------- ------------------ --------- --------- ---------
* Held indirectly
The Company's dormant UK subsidiaries have claimed the audit
exemption available under Section 479A of the Companies Act 2006.
The Company's registered office is also the registered office of
each UK subsidiary. The registered office of Custodian Real Estate
Luxembourg S.Ã .r.l. is 2 Rue d'Alsace, L-1122, Luxembourg.
The Company acquired 100% of the ordinary share capital of
Custodian Real Estate GP Limited and Custodian Real Estate
Luxembourg S.Ã .r.l. on 29 September 2016 as part of the acquisition
of the Light Industrial Portfolio. Custodian Real Estate GP Limited
owns 100% of the ordinary share capital of Custodian Real Estate
Nominees Limited. Custodian Real Estate Luxembourg S.Ã .r.l. and
Custodian Real Estate GP Limited hold 99.9% and 0.1% beneficial
interests respectively in Custodian Real Estate Light Industrial
Limited Partnership.
12 Trade and other receivables
31 March 31 March
2017 2016
Group and Company GBP000 GBP000
Trade receivables 1,342 1,019
Other receivables 2,771 1,857
Prepayments and accrued income 3,076 1,642
7,189 4,518
-------------------------------- --------- ---------
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. Trade receivables
include GBP0.1m (2016: GBP0.1m) which are past due as at 31 March
2017 for which no provision has been made because the amounts are
considered recoverable. Included within accrued income are deferred
lease incentives totalling GBP2.48m which are to be held for a
period over one year.
13 Trade and other payables
Group Company
31 March 31 March 31 March 31 March
2017 2016 2017 2016
GBP000 GBP000 GBP000 GBP000
Falling due in less than one
year:
Trade and other payables 608 437 608 437
Social security and other taxes 2,423 1,231 2,423 1,231
Accruals 2,761 1,566 2,761 1,566
Rental deposits 1,222 447 1,222 447
Amounts due to subsidiary undertakings - - 7,109 -
7,014 3,681 14,123 3,681
---------------------------------------- --------- --------- --------- ---------
The Directors consider that the carrying amount of trade and
other payables approximates to their fair value. Trade payables and
accruals principally comprise amounts outstanding for trade
purchases and ongoing costs. For most suppliers interest is charged
if payment is not made within the required terms. Thereafter,
interest is chargeable on the outstanding balances at various
rates. The Company has financial risk management policies in place
to ensure that all payables are paid within the credit
timescale.
Amounts payable to subsidiary undertakings, arising on the
transfer of the trade and assets of Custodian Real Estate Light
Industrial Limited Partnership to the Company, are due on
demand.
14 Cash and cash equivalents
31 March 31 March
2017 2016
Group and Company GBP000 GBP000
Cash and cash equivalents 5,807 5,455
--------------------------- --------- ---------
Cash and cash equivalents include GBP1.31m (2016: GBP0.49m) of
restricted cash comprising GBP1.22m of rental deposits held on
behalf of tenants and GBP0.09m of retentions held in respect of
development fundings.
15 Borrowings
Group and Company 31 March 31 March
2017 2016
GBP000 GBP000
Falling due in more than one year:
Bank borrowings 65,000 66,000
Costs incurred in the arrangement of bank borrowings (1,212) (857)
63,788 65,143
------------------------------------------------------ --------- ---------
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. 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 2017, the RCF
drawn was GBPnil.
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 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 one-off costs of GBP0.165m related to the
accelerated recognition of the associated deferred arrangement
fees.
On 14 August 2015, the Company and SWIP, with Lloyds Bank plc
acting as agent, entered into an agreement for SWIP to provide the
Company with a term loan facility of GBP20m, repayable on 14 August
2025. The loan is secured by way of a first charge over a discrete
portfolio of properties, providing the lender with a maximum LTV
ratio of 45% on those properties specifically charged to it and a
floating charge. Under the terms of the agreement, the Company will
pay fixed interest of 3.935% per annum on the balance.
On 6 June 2016, the Company and SWIP, with Lloyds Bank plc
acting as agent, entered into an agreement for SWIP to provide the
Company with a term loan facility of GBP45m, repayable on 6 June
2028. The loan is secured by way of a first charge over a discrete
portfolio of properties, providing the lender with a maximum LTV
ratio of 45% on those properties specifically charged to it and a
floating charge. 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.
On 5 April 2017, the Company and Aviva entered into an agreement
for Aviva to provide the Company with a new term loan facility of
GBP50m. The loan 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 Company drew down the first
tranche of GBP35m on 6 April 2017, which is repayable on 6 April
2032 with a fixed rate of interest of 3.02% per annum payable 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%.
16 Share capital
Group and Company
Ordinary shares
Issued share capital of 1p GBP000
------------------------ ---------------- ---------
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
------------------------- ---------------- ---------
Issue of share capital 87,771,274 878
At 31 March 2017 339,013,345 3,390
------------------------- ---------------- ---------
During the year, the Company raised GBP92.4m (before costs and
expenses) through the placing of 87,771,274 new ordinary
shares.
The Company has made further issues of new shares since the year
end, which are detailed in Note 20 to the 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 26 July 2016, the Board was
given authority to issue up to 100,000,000 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. 58,781,274 ordinary shares have been issued under this
authority since 26 July 2016, leaving an unissued balance of
41,218,726 at 31 March 2017.
In addition, the Company was granted authority to make market
purchases of up to 27,888,207 ordinary shares under section 701 of
the Companies Act 2006. No market purchases of ordinary shares have
been made.
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.
Group and Company
Share premium account Retained earnings
Other reserves GBP000 GBP000
------------------------------- ---------------------- --------------------
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
------------------------------- ---------------------- --------------------
Shares issued during the year 91,547 -
Costs of share issue (1,320) -
Profit for the year - 24,205
Dividends paid - (18,493)
At 31 March 2017 159,101 189,386
------------------------------- ---------------------- --------------------
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.
17 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
2017 2016
Group and Company GBP000 GBP000
Not later than one year 29,279 21,782
Later than one year but not later than five years 85,803 63,657
Later than five years 63,180 55,816
178,262 141,255
--------------------------------------------------- --------- ---------
18 Related party transactions
Save for transactions described below, the Company is not a
party to, nor had any interest in, any other related party
transaction during the year.
Transactions with directors
Each of the directors is engaged under a letter of appointment
with the Company and does not have a service contract with the
Company. Under the terms of their appointment, each director is
required to retire by rotation and seek re-election at least every
three years. Each director's appointment under their respective
letter of appointment is terminable immediately by either party
(the Company or the director) giving written notice and no
compensation or benefits are payable upon termination of office as
a director of the Company becoming effective.
Ian Mattioli is Chief Executive of Mattioli Woods, the parent
company of the Investment Manager, and is a director of the
Investment Manager. As a result, Ian Mattioli is not independent.
The Company Secretary, Nathan Imlach, is also a director of
Mattioli Woods and the Investment Manager.
Investment Management Agreement
On 25 February 2014 the Company entered into a three year IMA
with the Investment Manager commencing on Admission, under which
the Investment Manager was 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.
During the year the Investment Manager was paid an annual
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 provides day-to-day administration of the
Company and acts as secretary to the Company, including maintenance
of accounting records and preparing the annual financial statements
of the Company. During the year the Company paid the Investment
Manager an administrative fee equal to 0.125% of the NAV of the
Company at the end of each quarter.
On 1 June 2017 the terms of the IMA were varied with effect from
that date to extend the appointment of the Investment Manager for a
further three years and to introduce further fee hurdles such that
annual management fees payable to the Investment Manager under the
IMA are now:
-- 0.9% of the NAV of the Company as at the relevant quarter day
which is less than or equal to GBP200m divided by 4;
-- 0.75% of the NAV of the Company as at the relevant quarter
day which is in excess of GBP200m but below GBP500m divided by 4;
plus
-- 0.65% of the NAV of the Company as at the relevant quarter
day which is in excess of GBP500m divided by 4.
Administrative fees payable to the Investment Manager under the
IMA are now:
-- 0.125% of the NAV of the Company as at the relevant quarter
day which is less than or equal to GBP200m divided by 4;
-- 0.08% of the NAV of the Company as at the relevant quarter
day which is in excess of GBP200m but below GBP500m divided by 4;
plus
-- 0.05% of the NAV of the Company as at the relevant quarter
day which is in excess of GBP500m divided by 4.
The IMA is terminable by either party by giving not less than 12
months' prior written notice to the other, which notice may only be
given after the expiry of the 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% (2016: 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 GBP2.49m
(2016: GBP1.80m) in respect of annual management charges, GBP0.37m
(2016: GBP0.25m) in respect of administrative fees and GBP0.23m
(2016: GBP0.22m) in respect of marketing fees.
During the prior year the Company paid Mattioli Woods GBP0.02m
in respect of corporate transaction support.
Properties
The Company owns MW House and Gateway House located at Grove
Park, Leicester, which are partially let to Mattioli Woods.
Mattioli Woods paid the Company rentals of GBP0.41m (2016:
GBP0.41m) during the year.
19 Financial risk management
Capital risk management
The Company manages its capital to ensure it can continue as a
going concern while maximising the return to stakeholders through
the optimisation of the debt and equity balance within the
parameters of its investment policy. The capital structure of the
Company consists of debt, which includes the borrowings disclosed
below, cash and cash equivalents and equity attributable to equity
holders of the parent, comprising issued ordinary share capital,
share premium and retained earnings.
Gearing ratio
The Board reviews the capital structure of the Company on a
regular basis. As part of this review, the Board considers the cost
of capital and the risks associated with each class of capital. The
Company has a target net gearing ratio of 25% determined as the
proportion of debt (net of unrestricted cash) to investment
property. The net gearing ratio at the year end was 14.5% (2016:
19.1%).
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 considers the availability and cost of
hedging instruments to assess whether their use is appropriate, and
also considers the maturity profile of the Company's
borrowings.
Interest rate sensitivity analysis
Interest rate risk arises on interest payable on the RCF only,
as interest on all other debt facilities is payable on a fixed rate
basis. At 31 March 2017, the RCF was drawn at GBPnil and therefore
the Company was not exposed to interest rate risk.
Market risk management
The Company manages its exposure to market risk by holding a
portfolio of investment property diversified by sector, location
and tenant.
Market risk sensitivity
Market risk arises on the valuation of the Company's property
portfolio in complying with its bank loan covenants (Note 15). The
Company would breach its overall borrowing covenant if the
valuation of its property portfolio fell by 59%.
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 2017 was GBP1.4m (2016: GBP1.1m).
The Company has no significant concentration of credit risk,
with exposure spread over a large number of tenants covering a wide
variety of business types. Further detail on the Company's credit
risk management process is included within the Strategic
report.
Liquidity risk management
Ultimate responsibility for liquidity risk management rests with
the Board, which has built an appropriate liquidity risk management
framework for the management of the Company's short, medium and
long-term funding and liquidity management requirements. The
Company manages liquidity risk by maintaining adequate reserves,
banking facilities and reserve borrowing facilities by continuously
monitoring forecast and actual cash flows and matching the maturity
profile of financial assets and liabilities.
The following tables detail the Company's contractual maturity
for its financial liabilities. The table has been drawn up based on
undiscounted cash flows of financial liabilities based on the
earliest date on which the Company can be required to pay. The
table includes both interest and principal cash flows.
31 March 2017 31 March 2017 31 March 2017
0-3 months 3 months- 1 year 1-5 years 31 March 2017
Group Weighted average effective interest rate % GBP000 GBP000 GBP000 6 years +
------------- ------------------------------------------- -------------- ------------------- --------------- --------------
Trade and
other
payables - 7,014 - 146 425
Borrowings:
Variable - - - - -
rate
Fixed rate 3.935 197 590 3,935 22,654
Fixed rate 2.987 275 826 6,721 53,312
7,486 1,416 10,802 76,391
------------- ------------------------------------------- -------------- ------------------- --------------- --------------
31 March 2017 31 March 2017 31 March 2017
0-3 months 3 months- 1 year 1-5 years 31 March 2017
Company Weighted average effective interest rate % GBP000 GBP000 GBP000 6 years +
------------- ------------------------------------------- -------------- ------------------- --------------- --------------
Trade and
other
payables - 14,123 - 146 425
Borrowings:
Variable - - - - -
rate
Fixed rate 3.935 197 590 3,935 22,654
Fixed rate 2.987 275 826 6,721 53,312
14,595 1,416 10,802 76,391
------------- ------------------------------------------- -------------- ------------------- --------------- --------------
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
------------------- ------------------------------------------- -------------- ------------------- --------------- --------------
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 2017, the fair value
of the Company's investment properties was GBP415.8m (2016:
GBP319.0m).
Interest bearing loans and borrowings - level 3
As at 31 March 2017 the value of the Company's loans was
GBP63.8m (2016: GBP65.1m) and the amortised cost of the Company's
loans with Lloyds Bank plc and SWIP approximated their fair value.
The loans from SWIP 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 2017 by
GBP2.6m (2016: 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.
20 Events after the reporting date
New equity
Since the reporting date the Company has issued 6.0m new
ordinary shares of 1p each, raising GBP6.7m (before costs and
expenses).
Acquisitions
On 28 April 2017 the Company acquired a 22,663 sq ft retail
warehouse in Gloucester for GBP4.725m let to Magnet and Smyths
Toys. The units' leases expire in September 2024 and September 2021
respectively with a total passing rent of GBP0.373m per annum,
reflecting a NIY of 7.41%.
On 11 May 2017 the Company acquired a 27,480 sq ft car
dealership in York for GBP3.92m let to Pendragon on a lease
expiring on 27 February 2030 with a current passing rent of
GBP0.24m per annum, reflecting a NIY of 5.75%.
On 12 May 2017 the Company acquired a 31,062 sq ft retail
warehouse in Galashiels for GBP3.145m let to B&Q plc. The
unit's lease expires on 27 December 2024 with a current passing
rent of GBP0.275m per annum, reflecting a NIY of 8.21%.
On 12 May 2017 the Company acquired three retail warehouse units
in Plymouth for GBP7.487m let to Oak Furniture Land, SCS and
McDonald's. The units' leases expire on 6 June 2025, 13 October
2026 and 28 September 2031 respectively with a total passing rent
of GBP538,226 per annum, reflecting a NIY of 6.74%.
Borrowings
On 5 April 2017, the Company and Aviva entered into an agreement
for Aviva to provide the Company with a new term loan facility of
GBP50m. The Company drew down the first tranche of GBP35m on 6
April 2017, which is repayable on 6 April 2032 with a fixed rate of
interest of 3.02% per annum payable on the balance.
IMA
On 1 June 2017 the terms of the IMA were varied to extend the
appointment of the Investment Manager for a further three years and
to introduce further fee hurdles as set out in Note 18.
21 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 years ended 31 March 2016
or 31 March 2017. The Group's auditors have reported on the full
accounts of each year 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 20 July
2017.
- Ends -
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR UVABRBKANRAR
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