Custodian REIT plc (CREI)
Custodian REIT plc : Final Results
16-Jun-2021 / 07:13 GMT/BST
Dissemination of a Regulatory Announcement that contains inside information according to REGULATION (EU) No 596/2014
(MAR), transmitted by EQS Group.
The issuer is solely responsible for the content of this announcement.
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16 June 2021
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 2021.
Financial highlights and performance summary
? 91% of rent collected for the year, adjusted for contractual rent deferrals
? EPRA[1] earnings per share[2] decreased to 5.6p (2020: 7.0p) due to providing for deferred and overdue rent and a
5.0% decrease in the annual rent roll
? Basic and diluted earnings per share[3] of 0.9p (2020: 0.5p), impacted by property valuation decreases of GBP19.6m
(2020: GBP25.9m)
? Profit before tax up 76.6% to GBP3.7m (2020: GBP2.1m)
? Aggregate dividends per share for the year of 5.0p (2020: 6.65p), reflecting the decreases in rent collection rate
and rent roll since the onset of the COVID-19 pandemic
? Target dividend per share for the year ending 31 March 2022 of not less than 5.0p, based on rent collection levels
remaining in line with expectations
? NAV total return per share[4] of 0.9% (2020: 1.1%) comprising 4.8% dividends (2020: 6.2%) and a 3.9% capital
decrease (2020: 5.1% capital decrease)
? Property value of GBP551.9m (2020: GBP559.8m):
? GBP19.6m aggregate valuation decrease (3.5% of property portfolio value) comprising a GBP9.4m property valuation uplift
from successful asset management initiatives and GBP29.0m of general valuation decreases, primarily due to decreases
in the estimated rental value ("ERV") of high street retail properties, negative market sentiment for retail assets
and the impact of the COVID-19 pandemic
? GBP11.4m[5] invested in three property acquisitions
? Disposal of five properties for aggregate consideration of GBP4.4m[6]
? GBP2.3m capital expenditure incurred including GBP0.7m on construction of a drive-through restaurant on an existing
site
2021 2020 Change
Return
Share price total return[7] (2.3%) (5.0%) 2.7%
Dividend cover[8] 112.7% 104.4% 8.3%
Dividends per share[9] (p) 5.0 6.65 (24.8%)
Capital values
NAV and EPRA NTA[10] (GBPm) 409.9 426.7 (3.9%)
NAV per share and NTA per share (p) 97.6 101.6 (3.9%)
Share price (p) 91.8 99.0 (7.3%)
Market capitalisation (GBPm) 385.6 415.9 (7.3%)
Discount of share price to NAV per share (5.9%) (2.6%) (3.3%)
Net gearing[11] 24.9% 22.4% (2.5%)
Costs
Ongoing charges ratio[12] ("OCR") 2.48% 1.55% 0.93%
OCR excluding direct property expenses[13] 1.12% 1.12% 0.0%
Environmental
Weighted average energy performance certificate ("EPC") rating[14] C (63) C (70) (10%)
Alternative performance measures
The Company reports alternative performance measures ("APMs") to
assist stakeholders in assessing performance alongside the
Company's results on a statutory basis, set out above. APMs are
among the key performance indicators used by the Board to assess
the Company's performance and are used by research analysts
covering the Company. Certain other APMs may not be directly
comparable with other companies' adjusted measures, and APMs are
not intended to be a substitute for, or superior to, any IFRS
measures of performance. Supporting calculations for APMs and
reconciliations between APMs and their IFRS equivalents are set out
in Note 21.
Commenting on the final results, David Hunter, Chairman of
Custodian REIT, said:
"Custodian REIT's investment strategy has been tested, with the
Company operating for a full year under the shadow of COVID-19.
From a low point in May 2020, Custodian REIT's share price has been
gently recovering, matching the greater clarity that the Company
has provided around dividends through the course of the year.
"The impact of the pandemic has been to accelerate the decline
in high street retail, pushing an increasing number of occupiers
into insolvency and many occupiers into seeking to defer rental
payments. Despite the strongly positive performance of the
Company's industrial and logistics portfolio, the net result has
been a 3.5% property valuation decrease during the year.
"However, 91% of rent was collected, net of contractual
deferrals, meaning I was delighted to be able to announce dividends
per share totalling 5.0p for the year and that the Company is
targeting a dividend per share of at least 5.0p for the year ending
31 March 2022, based on rent collection levels remaining in line
with expectations. This dividend outcome is significantly ahead of
the minimum level announced in April 2020 of 0.75p per quarter
before the full impact of the first national lockdown could be
ascertained.
"The combination of resilient capital values and a return to
stabilised dividends should lend support to Custodian REIT's
objective to be the REIT of choice for private and institutional
investors seeking high and well supported dividends from
diversified UK commercial property."
Further information
Further information regarding the Company can be found at the
Company's website www.custodianreit.com or please contact:
Custodian Capital Limited
Richard Shepherd-Cross / Ed Moore / Ian Mattioli MBE Tel: +44 (0)116 240 8740
www.custodiancapital.com
Numis Securities Limited
Hugh Jonathan / Nathan Brown Tel: +44 (0)20 7260 1000
www.numiscorp.com
Camarco
Hazel Stevenson/ Emily Hall Tel: +44 (0)20 3757 4989
www.camarco.co.uk Analyst presentation
There will be an analyst presentation to discuss the results at
2:00pm today. Those analysts wishing to take part are asked to
register at:
numiscorp.zoom.us/webinar/register/WN_cZmwSfrpTAqdmcWrYM4pmQ
After registering, you will receive a confirmation email
containing information about joining the webinar. If you have any
questions please contact Amy Rush on +44 (0) 20 7260 1365 or at
a.rush@numis.com.
Investor presentation
The Board has been monitoring whether COVID-19 guidance limiting
public gatherings and travel will be in place when the Company
holds its AGM on 25 August 2021. To provide certainty and encourage
interaction and engagement with our shareholders, the Company has
arranged an online investor presentation at 2:00pm on 6 July 2021
at which shareholders will receive updates from the Chairman and
Investment Manager with the opportunity for an interactive question
and answer session.
Those investors wishing to take part are asked to register
at:
bigmarker.com/mattioli-woods-plc/Custodian-REIT-plc-annual-results
Business model and strategy
Purpose
Custodian REIT offers investors the opportunity to access a
diversified portfolio of UK commercial real estate through a
closed-ended fund. The Company seeks to provide investors with an
attractive level of income and the potential for capital growth,
becoming the REIT of choice for private and institutional investors
seeking high and stable dividends from well-diversified UK real
estate.
Investment Policy
The Company's investment policy[15] is summarised below: ? To
invest in a diverse portfolio of UK commercial real estate,
principally characterised by individual property
values of less than GBP10m at acquisition. ? The property
portfolio should be diversified by sector, location, tenant and
lease term, with a maximum weighting
to any one property sector or geographic region of 50%. ? To
focus on areas with high residual values, strong local economies
and an imbalance between supply and demand,
acquiring modern buildings or those considered fit for purpose
by occupiers. ? No one tenant or property should account for more
than 10% of the rent roll at the time of purchase, except for:
(i) governmental bodies or departments; or
(ii) single tenants rated by Dun & Bradstreet as having a
credit risk score higher than two[16], where exposure may not
exceed 5% of the rent roll. ? The Company will not undertake
speculative development except for the refurbishment of existing
holdings, but may
invest in forward funding agreements where the Company may
acquire pre-let development land and construct
investment property with the intention of owning the completed
development. ? The Company may use gearing provided that the
maximum LTV shall not exceed 35%, with a medium-term net
gearing
target of 25% LTV.
The Board reviews the Company's investment objectives at least
annually to ensure they remain appropriate to the market in which
the Company operates and in the best interests of shareholders.
Diverse portfolio
Annual
passing rent % portfolio
income
(GBPm)
Top ten tenants Asset locations
Aberdeen, Edinburgh, Glasgow, Ipswich, Norwich,
Menzies Distribution Stockton-on-Tees, Swansea, Weybridge 1.6 3.8%
Banbury, Galashiels, Weymouth
B&Q 1.4 3.2%
Swindon, Ashton-under-Lyne, Plymouth, Carlisle
B&M Retail 1.3 2.9%
VW Group Derby, Stafford, Shrewsbury 0.8 2.0%
Weston-super-Mare, Avonmouth, Southsea, Worcester
Superdrug Stores 0.8 1.9%
Wickes Building Supplies Winnersh, Burton upon Trent 0.8 1.8%
Williams Motor Co (t/a Williams Stockport
BMW and Mini) 0.6 1.5%
Regus (Maidstone West Malling) West Malling 0.6 1.5%
First Title (t/a Enact Leeds
Conveyancing) 0.6 1.5%
H&M Winsford 0.6 1.5%
Financial resilience
31 Mar 2021 31 Mar 2020
Net gearing 24.9% 22.4%
Number of property assets 159 161
Debt facility average maturity 7.4 years 7.8 years Our environmental, social and governance ("ESG") objectives ? Minimising our environmental impact - seek to reduce pollution and comply with all relevant environmental
legislation, gather and analyse data on the environmental
performance of our properties and measure environmental
performance against targets. ? Engaging with our stakeholders -
the Board and Investment Manager ensure ESG progress is discussed
and embedded
across all work done. The Investment Manager liaises closely
with tenants to understand consumption trends and
data and understand where we can upgrade and optimise buildings
for tenant well-being and environmental impact
reductions. ? Supporting local communities - the Company is
committed to engaging constructively with central and local
government to ensure we support the wider community through
local economic and environmental plans and strategies
and play our part in providing the real estate fabric of the
economy, giving employers a place of business. ? Transparent
disclosure - the Investment Manager has been working with the
Company's environmental consultants,
Carbon Intelligence, to put in place an environmental vision and
strategy including implementation of environmental
key performance indicators, data collection and monitoring and
long-term emissions targets.
Chairman's statement
Custodian REIT's investment strategy has been tested, with the
Company operating for a full year under the shadow of COVID-19. The
Company's absolute focus on income by maximising rent collection
and preserving cash flow from the property portfolio has enabled it
to weather the storm. Following the shock of the first lockdown,
and from a low point in May 2020, Custodian REIT's share price
showed less volatility through the second half of 2020. Since the
start of 2021 the share price has been gently recovering. This
trajectory in share price performance has matched the greater
clarity that the Company was able to provide around dividends
through the course of the year, demonstrating the importance placed
on income by shareholders.
The impact of the pandemic has been to accelerate the decline in
high street retail, pushing an increasing number of occupiers into
Administration or company voluntary arrangements ("CVAs") and many
occupiers into seeking to defer rental payments for later
collection. Despite the strongly positive performance of the
Company's industrial and logistics portfolio, the net result has
been a 3.5% (GBP19.6m) property valuation decrease during the year.
91% of rent was collected, net of contractual deferrals, or 89%
before contractual deferrals. Most tenants are honouring rent
deferral agreements but some arrears are still at risk of
non-recovery from CVAs or Administrations.
In the circumstances I was delighted to be able to announce that
the Company's successful focus on rent collection allowed dividends
per share totalling 5.0p to be declared for the year. This dividend
outcome is significantly ahead of the minimum level announced in
April 2020 of 0.75p per quarter before the full impact of the first
national lockdown could be ascertained.
This dividend was one of the highest fully covered dividends
amongst its peer group of listed property investment companies[17]
for the year ended 31 March 2021 and, in line with the Company's
policy, was fully covered by net cash receipts and 113% covered by
EPRA earnings.
Acknowledging the importance of income for shareholders, I was
also very pleased to announce that the Company is targeting a
dividend per share of at least 5.0p for the year ending 31 March
2022, based on rent collection levels remaining in line with
expectations.
These have been testing times which have necessitated an
exceptional effort from the Investment Manager both in the
collection of rents and in operating remotely as a team. I would
like to acknowledge this achievement. I also thank my fellow Board
members who have been flexible and supportive during a year which
has required numerous formal and informal additional Board
meetings.
Financial and operational resilience
The Company remains in a strong financial position to address
the extraordinary circumstances imposed by the COVID-19 pandemic.
At 31 March 2021 it had: ? A diverse and high-quality asset and
tenant base comprising 159 assets and 201 typically 'institutional
grade'
tenants across all commercial sectors, with an occupancy rate of
91.6%; ? GBP3.9m of cash and GBP10.0m of undrawn revolving credit
facility ("RCF"), with gross borrowings of GBP140m resulting in
low net gearing, with no short-term refinancing risk and a
weighted average debt facility maturity of seven years; ?
Significant headroom on lender covenants at a portfolio level, with
net gearing of 24.9% and a maximum loan to
value ("LTV") covenant of 35%; and ? Interest cover covenant[18]
waivers in place to mitigate the risk that covenants on individual
longer-term
fixed-rate debt facilities might have come under pressure due to
curtailed rent receipts.
Covenant waivers have not been required due to the level of rent
collected and are not expected to be requested beyond 31 March
2021. No lender covenants have been breached during the Period.
Net asset value
The NAV of the Company at 31 March 2021 was GBP409.9m,
approximately 97.6p per share, a decrease of 4.0p (3.9%) since 31
March 2020:
Pence per share GBPm
NAV at 31 March 2020 101.6 426.7
Valuation movements relating to:
- Asset management activity 2.2 9.4
- General valuation decreases (6.9) (29.0)
Valuation decrease before acquisition costs (4.7) (19.6)
Impact of acquisition costs (0.2) (0.7)
Valuation decrease including acquisition costs (4.9) (20.3)
Profit on disposal of investment property 0.1 0.4
Net valuation movement (4.8) (19.9)
Revenue 9.5 39.7
Expenses and net finance costs (3.8) (16.0)
Dividends paid[19] (4.9) (20.6)
NAV at 31 March 2021 97.6 409.9
The net valuation decrease of 3.5% (GBP19.6m) saw falls in
retail, other and office sector valuations, partially offset by a
4.6% (GBP12.0m) increase in industrial and logistics further
detailed in the Investment Manager's report, due to: ? The
Company's valuers reflecting historical rent arrears within
valuations and downgrading valuations for
properties let to tenants which had ceased or significantly
curtailed trading, in line with current RICS advice to
valuers; ? A steep reduction in retail rental values; ? Strongly
polarised investment demand, favouring logistics and long income
and shunning consumer facing property,
especially retail; and ? The impact of CVAs and company
Administrations detailed in the Asset management report.
Custodian REIT's investment strategy continues to be weighted
towards regional industrial and logistics assets which has stood
the Company in good stead again this year. With investment yields
tightening in this very popular sector and with income returns
coming under pressure the opportunities for a diversified
investment strategy, to support future dividends, remain a focus
for the Company.
The market
FY21 has seen a market where almost every commercial property
investment has been impacted by COVID-19 - some negatively and some
positively. We have not seen such a widespread impact across the
whole property investment market since the Global Financial Crisis.
However, a downturn is often the best time for an investment
strategy to be tested, and so the last year has proved. Custodian
REIT has endured lower volatility relative to its close peer group
of diversified property investment companies[20], and its property
portfolio continues to deliver asset management opportunities which
are value accretive as discussed in the Asset management
report.
Property investment companies with certain sector specific
investment strategies, such as healthcare and logistics, have
outperformed during the year. However, we believe that for a large
swathe of investors the long-term attributes of a diversified
strategy remain the key attraction of real estate investment. Our
strategy offers diversification of tenant, lease expiry profile and
asset type, low net gearing, a risk-averse debt profile, strong
regional property locations and the ability of the management team
to generate future income from the assets. These attributes
contribute to lower share price volatility than the close peer
group and have been rewarded with continued dividends, supporting a
5% plus dividend yield for most of the year.
The Company enjoys the support of a wide range of shareholders
with the majority classified as private client or discretionary
wealth management investors. The Company's investment and dividend
strategy is well suited to investors looking for a close proxy to
direct real estate investment but in a managed and liquid
structure. After many months of Open-Ended Property Funds blocking
redemptions, (in part due to FCA restrictions and in part due to
lack of liquidity) the investment trust structure offers a natural
choice for retail investors seeking high and stable dividends from
well-diversified UK real estate through a liquid vehicle.
Investment Manager
Custodian Capital Limited ("the Investment Manager") is
appointed under an investment management agreement ("IMA") to
provide property management and administrative services to the
Company. The performance of the Investment Manager is reviewed each
year by the Management Engagement Committee ("MEC"). During the
year the fees paid to Investment Manager were GBP3.8m (2020:
GBP4.0m) in respect of annual management and administrative fees.
Further details of fees payable to the Investment Manager are set
out in Note 18.
The Board is pleased with the performance of the Investment
Manager, particularly in rent collection levels and its continued
successful asset management during the pandemic which contributed
to both capital values and income. The Board is satisfied that the
Investment Manager's performance remains aligned with the Company's
purpose, values and strategy.
The MEC reviewed, in detail, the arrangements with the
Investment Manager when the Investment Management Agreement ("IMA")
reached the end of its three-year term on 31 May 2020. In light of
the positive performance of the Company the Board agreed a further
three-year term with the Investment Manager, from 1 June 2020. The
fees payable to the Investment Manager under the IMA were amended
to include: ? A step down in the annual management fees[21] from
0.65% to 0.55% of NAV applied to NAV in excess of GBP750m; and ? A
step down in the administrative fee from 0.05% to 0.03% of NAV
applied to NAV in excess of GBP750m.
All other key terms of the IMA remained unchanged. The Board
consider these amendments to the IMA to be in the best interests of
the Company's shareholders because: ? Continued growth in NAV,
particularly above thresholds of GBP500m and GBP750m, will further
reduce the Company's OCR
and increase dividend capacity; and ? Another three-year term
provides the Investment Manager with appropriate security of tenure
and allows further
investment in the dedicated systems and people providing its
services under the IMA.
Board succession and remuneration
Although the Company's succession policy allows for a director
tenure of longer than nine years, in line with the 2019 AIC
Corporate Governance Code for Investment Companies ("AIC Code"),
the Board acknowledges the benefits of ongoing Board refreshment
and for this reason expected Director retirement dates are
staggered within a nine year tenure period.
On 1 January 2021, after nearly seven years of service,
Professor Barry Gilbertson retired as Senior Independent
Non-Executive Director of the Company. The Board would like to
thank Barry for his significant contribution to the development of
the Company since his appointment on IPO in 2014.
Responding to Barry's departure and the growth of the Company
since inception we were delighted to welcome Elizabeth McMeikan and
Chris Ireland to the Board on 1 April 2021. Both new Directors
bring a range of different but complementary skills which
strengthen the Board's property and governance experience and add
to its diversity. We look forward to the contribution they will
both make.
The Board is conscious of the increased focus on diversity and
recognises the value and importance of diversity in the boardroom.
No Directors are from a minority ethnic background. The appointment
of Elizabeth McMeikan increases the female representation on the
Board to 33% which meets the gender diversity recommendations of
the Hampton-Alexander Review for at least 33% female representation
on FTSE350 company boards. As a constituent of the FTSESmallCap
Index Custodian REIT is not bound by this recommendation. The Board
supports the overall recommendations of the Hampton-Alexander and
Parker Reports although it is not seen to be in the interests of
the Company and its shareholders to set prescriptive diversity
targets for the Board at this point.
In March 2020 the Remuneration Committee determined that there
would be no increase in the level of Directors' annual fees for the
year ending 31 March 2021 due to the uncertainty caused by the
COVID-19 pandemic. For the year ending 31 March 2022 the
Remuneration Committee has continued its historical policy of
paying appropriately benchmarked Directors' fees.
Environmental, social and governance ("ESG")
The Board recognises that its decisions have an impact on the
environment, people and communities. It also believes there are
positive financial reasons to incorporate good ESG practices into
the way we do business.
The Board shares the increased stakeholder interest in, and
recognises the importance of, compliance requirements around good
ESG management. It seeks to adopt sustainable principles wherever
possible, actively seeking opportunities to make environmentally
beneficial improvements to its property portfolio and encouraging
tenants to report and improve emissions data. As testament to this
commitment, the Board recently constituted an ESG Committee to
monitor the Company's performance against its environmental key
performance indicators ("KPIs"); ensure it complies with its
environmental reporting requirements; assess the engagement with
the Company's environmental consultants; and assess the level of
social outcomes being achieved for its stakeholders and the
communities in which it operates.
The Company's ESG policy outlines our approach to managing ESG
impacts and provides the framework for setting and reviewing
environmental and social objectives to ensure we are continuously
improving our performance and setting a leadership direction.
As a result, the Board committed to: ? Seek to minimise
pollution and comply with all relevant environmental legislation; ?
Gather and analyse data on our environmental performance across our
property portfolio; and ? Monitor environmental performance and
achievements against targets for our properties as a commitment to
continuous
improvement.
Progress towards these commitments during the year is summarised
below: ? The Company's Annual Report for the year ended 31 March
2020 received a 'most improved' award for its first year
complying with EPRA Sustainability Best Practice Recommendation
reporting. ? The Company made its first Global Real Estate
Sustainability Benchmark ("GRESB") submission in July 2020, one
of
the most widely used sustainability benchmarks in the real
estate sector. The results of this submission have
provided a valuable insight into the Company's current
sustainability performance and identified certain areas for
improvement. As a result during the year the Company implemented
a comprehensive data management service using a
dedicated software system that collects, verifies, stores and
reports on the key carbon and ESG performance
metrics. This system will both ensure all data is robust and
accurate for external and internal reporting and
provide data access for tenants to upload data direct and share
information to assist them in improving
environmental performance. ? The Company set target
environmental KPIs to provide a way to measure its success towards
achieving its
environmental objectives and ensure the Investment Manager is
embedding key ESG principles into portfolio
management. ? The Company undertook its first in-depth review of
climate-related risks and opportunities to begin to align
disclosures to the recommendations of the Taskforce on
Climate-related Financial Disclosures ("TCFD") and better
understand how the Company and the portfolio will be impacted by
climate change and the transition to a low-carbon
economy.
Details of the Company's environmental policy and its KPIs are
contained within the ESG Committee report within the Strategic
report.
Outlook
Despite the headwinds, real estate continues to be in demand by
occupiers and as an investment class. The Asset management report
looks more closely at occupier demand and paints a rosier picture
than a year of pandemic headlines might suggest, and although
occupancy has decreased from 95.9% to 91.6%, more than half of our
vacant properties are currently under offer to let. The outlook
feels more positive and predictable than 12 months ago and we
expect that the Company's property portfolio will continue to
support the policy of stable dividends in a post-pandemic world. As
discussed in the Financial review, dividends per share of 5.0p have
been approved for the year and the Board has announced a minimum
dividend of 5.0p for the year in prospect.
In a long-term low interest rate environment the marginal income
return from real estate investment over risk-free investment,
represented by UK 10 year gilts, and the low cost of debt are both
likely to support property pricing.
The combination of resilient capital values and a return to
stabilised dividends should lend support to Custodian REIT's
objective to be the REIT of choice for private and institutional
investors seeking high and well supported dividends from
diversified UK commercial property.
David Hunter
Chairman
15 June 2021
Investment Manager's report
The UK property market
In common with the wider economy, the commercial property
investment market has experienced a year unlike any other with
office workers deserting their offices, shoppers going online as
retailers were forced to close and pubs and restaurants unable to
serve customers for a large part of the year. The government's
moratorium on the eviction of tenants for non-payment of rent has
left landlords unable to compel tenants to pay rent but, despite
these challenges, I believe real estate investment has been
remarkably resilient.
As a diversified property investment company, Custodian REIT's
resilience in the face of the pandemic is representative of the
resilience of the real estate market more broadly. Custodian REIT's
NAV decreased by 4.0p over the year which was exceeded by dividends
paid to deliver a marginal, but positive NAV total return of 0.9%
for the year. We go into the year ending 31 March 2022 with the
estimated rental value ("ERV") of the property portfolio, adjusted
for acquisitions and disposals, only 1.4% diminished, albeit with
an increased vacancy rate.
These positive total returns and limited rental reductions, when
compared to significant share price volatility, particularly in Q1,
suggest that real estate outperformed market expectations of
earlier in the year. A share price recovery began in Q4 in line
with greater certainty of rent collection rates which were much
better than forecast and had been improving through the year.
The clear winner in real estate investment has been the
industrial and logistics sector which has benefited from the shift
from the High Street to 'E-tailing' and from the onshoring of the
national supply chain post Brexit. Investment demand and pricing
are both at record levels which has been strongly positive for
Custodian REIT as this sector makes up 49% by value of the
portfolio and its valuation increased by 4.6% during the year.
The high street retail sector's future is uncertain, but, I
believe, as part of a combined retail and leisure-based city centre
there will still be active demand from occupiers. The trend for
fewer shops was well established prior to the pandemic but in core
locations we still expect to see high occupancy levels albeit at
rental levels 25-50% below the peak. High Street retail makes up
only 8% by value of the property portfolio and we have sold four
small shops in the last six months, with another under offer, which
we did not feel had medium-term potential for a return to rental
growth.
By contrast the out of town retail sector which makes up 18% of
the Custodian REIT portfolio by value, is witnessing investors
openly competing for assets. This is a sector where there is
confidence that the combination of convenience, lower costs per
square foot and the complementary offer to online retail will keep
these assets relevant. Through the last year we have seen DIY and
discounters (B&Q and B&M for example) trading strongly.
After a year of working from home many workers are looking
forward to returning to the office. Without doubt the way we use
offices and how frequently we visit them has changed, following the
largely successful national experiment of remote working. As
always, when considering real estate investment, the location of
offices will be key. Having withdrawn from an office acquisition in
Oxford, to preserve cash, at the start of the first lockdown
Custodian REIT completed on the same office building one year later
in a city which is benefiting from the growth in Biotech, driven in
part by the university and the focus of this growing sector in the
Oxford-Cambridge arc. We have already agreed terms to lease the
last remaining space in the building at a new headline rent
demonstrating the positive future prospects for the property.
The sustainability credentials of both the building and the
location will be evermore important for occupiers and investors. As
investment manager we are absolutely committed to the Company's
ambitious goals in relation to ESG and believe the real estate
sector should be a leader in this field.
ESG has become an imperative for many investors. Commercial real
estate is a significant contributor to national emissions, so we
believe an emphasis on how we can improve the "E" is particularly
relevant for real estate. In this regard we are striving to beat
the Company's target to improve the Energy Performance Certificates
("EPC") of the portfolio. We expect to eradicate all EPC's of "F"
and "G" ahead of the target set of end of 2022 and all EPC's of "E"
before 2025. We are well advanced with this project with plans in
place for all the "F" and "G" EPCs and 30% of the "E" EPCs.
Energy performance and emissions are important considerations
across all redevelopments and refurbishments in the portfolio as is
the importance of "S" (Social) in creating an engaging, appropriate
and sustainable (in all senses of the word) built environment.
These commitments are demonstrated in the refurbishment of a
property in West Bromwich, the details of which are set out in the
ESG Committee report. Investing in real estate that meets the ESG
requirements of occupiers and legislation will lead to shorter
periods of vacancy, higher rents and enhanced values. We have
policies, embedded in our strategy, to keep Custodian REIT on
target to meet the required standards but we remain focused on
delivering returns at the same time. The KPIs the Company has set
itself are set out in the ESG Committee report.
Before considering rent collection, which has been a key focus
through the year, it is worth reflecting on the continued use of
CVAs by tenants to reduce their operating costs. As discussed in
the Asset management report CVAs have been the cause of an 1.3%
reduction in annual passing rent during the year. While, on the
face of it, CVAs are disadvantageous for landlords this is not
always the case over a medium-term time horizon. An example of how
this can be positive for investors is the CVA of Pizza Hut. The
Custodian REIT portfolio contains three Pizza Hut restaurants
operating an arguably outdated model. The CVA enabled the Company
to gain vacant possession of each property with increasingly
competitive bids received to secure the assets from new
drive-through operators including fast food and coffee shops and
Pizza Hut itself. All three units now have 21st century tenants
lined up to take occupation.
Rent collection
As Investment Manager, Custodian Capital invoices and collects
rent directly, importantly allowing it to hold conversations
promptly with most tenants regarding the payment of rent. This
direct contact has proved invaluable, through the COVID-19 pandemic
disruption, enabling better outcomes for the Company. Many of these
conversations have led to positive asset management outcomes, some
of which are discussed in the Asset management report. The
financial resilience of the Company and the pragmatic approach of
the Manager has enabled the Company to take a longer-term view of
rent collection. It was better to acknowledge the challenges faced
by certain occupiers and balance their contractual requirement to
pay rent and the ability of the Company to fund short-term rent
deferrals. If quarterly rent payments could not be secured
consensually the Manager sought to allow tenants to pay monthly
and, only if this was not achievable, to allow for an element of
rent to be deferred. Where possible longer lease commitments were
sought in return as part of a lease re-gear. Rent concessions were
offered, as a last resort, but amounted to less than 1% of the
total contractual rent roll.
91% of rent relating to the year has been collected, net of
contractual rent deferrals, or 89% before contractual deferrals, as
set out below:
31 Mar Net of contractual rent Before contractual rent
2021 deferrals deferrals
GBPm
Rental income from investment property (IFRS basis) 38.7
Lease incentives (1.9)
Cash rental income expected, before contractual rent 36.8 100%
deferrals
Contractual rent deferred until subsequent financial (0.9) (3%)
years
Cash rental income expected, net of contractual rent 35.9 100%
deferrals
Outstanding rental income (3.1) (9%) (8%)
Rental income collected 32.8 91% 89%
Outstanding rental income remains the subject of discussion with
various tenants, and some arrears are potentially at risk of
non-recovery due to disruption caused by the recent national
lockdown and from CVAs or Administrations.
The Company's doubtful debt provision has increased by GBP2.7m
(0.6p per share) from GBP0.3m to GBP3.0m during the year to reflect
the risk of failing to collect outstanding and deferred rent.
Property portfolio balance
The property portfolio is split between the main commercial
property sectors in line with the Company's objective to maintain a
suitably balanced investment portfolio. The Company has a
relatively low exposure to office and high street retail combined
with a relatively high exposure to industrial and to alternative
sectors, often referred to as 'other' in property market analysis.
The current sector weightings are:
Valuation Weighting Valuation Weighting
by income by income Valuation Valuation movement
31 March [22] 31 March movement before including
2021 2020 31 March acquisition costs acquisition costs
31 March GBPm Weighting by Weighting by
GBPm GBPm 2020 GBPm value 31 value 31
2021 March 2021 March 2020
Sector
Industrial 270.2 41% 257.3 40% 12.0 11.8 49% 46%
Retail 99.7 21% 109.7 22% (10.9) (10.9) 18% 20%
warehouse
Other[23] 84.4 16% 87.4 17% (5.6) (5.7) 15% 16%
Office 54.8 12% 52.6 10% (5.8) (6.2) 10% 9%
High street 42.8 10% 52.8 11% (9.3) (9.3) 8% 9%
retail
Total 551.9 100% 559.8 100% (19.6) (20.3) 100% 100%
During the year the different sectors have performed in line
with market norms. Industrial and logistics values have
strengthened by 4.6% recording high levels of occupancy and
continued rental growth. Office values have suffered a 10.4%
decrease experiencing an increase in vacancy as occupiers exercised
their options to vacate at lease expiry or break, in order to ride
out the pandemic. For the second year retail has been the worst
hit, although with a greater percentage decline in high street
locations of 21.6% compared to out of town retail warehousing
decline of 10.8%. This lower decline for out of town is perhaps a
reflection of the stock selection in the Custodian REIT portfolio
where retail warehouse occupiers are predominantly value retailers
and homewares/DIY, many of whom have remained open for trading
during the COVID-19 pandemic lockdown.
The 31 March 2020 valuation was reported on the basis of
'material valuation uncertainty' in accordance with RICS valuation
standards. This basis did not invalidate the valuation but, in the
circumstances, implied that less certainty could be attached to the
valuation than otherwise would be the case. However, for 31 March
2021 valuations, no 'material valuation uncertainty' clauses were
applied to any asset classes in the Company's property
portfolio.
The Company has appointed Savills as valuer to replace Lambert
Smith Hampton and to work alongside Knight Frank. We thank Lambert
Smith Hampton which has valued the Custodian REIT portfolio since
IPO in 2014. From the quarter ending 30 June 2021, Knight Frank and
Savills will take responsibility for approximately half of the
property portfolio each.
For details of all properties in the portfolio please see
custodianreit.com/property/portfolio.
Acquisitions
The Company invested GBP11.4m in three acquisitions during the
year described below: ? In December 2020 the Company acquired
Willow Court for GBP7.86m, a 22,545 sq ft office building on Minns
Business
Park, one mile west of Oxford city centre. The property
comprises four floors let to RBS, Dehns, Charles Stanley,
Oxentia and the Smith Institute with a weighted average
unexpired lease term to first break or expiry of four years
and an aggregate rent of GBP537k per annum, reflecting a net
initial yield ("NIY") of 6.41%. ? In November 2020 the Company
acquired four industrial units on Hilton Business Park, Derby for
GBP1.975m, covering an
aggregate 23,250 sq ft. The units are occupied by MP Bio
Science, Shakespeare Pharma and Jangala Softplay with a
weighted average unexpired term to first break or expiry of 2.0
years and aggregate passing rent of GBP134k per
annum, reflecting a NIY of 6.39%. ? During the year the Company
acquired 0.6 acres of land in Nottingham on which it has developed
a 2,163 sq ft
drive-through coffee shop with 34 parking spaces, with land and
construction costs totalling GBP1.60m. The unit was
pre-let to KBeverage Limited (trading as Starbucks Coffee) on a
20 year lease with no breaks and five yearly upward
only market rent reviews with passing rent of GBP115k pa,
reflecting a NIY of 6.67%.
The Company has also invested GBP0.7m of capital expenditure
developing a drive through restaurant on an existing retail park
holding in Burton upon Trent pre-let to 1 Oak Limited (t/a
Starbucks) at an annual rent of GBP55k for a term of 20 years with
a break in year 10, which commenced trading in November 2020.
Since the year end the Company acquired an industrial asset in
Knowsley for GBP3.5m.
Disposals
Owning the right properties at the right time is a key element
of effective property portfolio management, which necessarily
involves periodically selling properties to balance the property
portfolio. Custodian REIT is not a trading company but identifying
opportunities to dispose of assets significantly ahead of valuation
or that no longer fit within the Company's investment strategy is
important.
The following properties were sold during the year for an
aggregate headline consideration of GBP4.4m: ? In May 2020 the
Company sold a 20,280 sq ft industrial warehouse in Westerham for
GBP2.8m, GBP0.5m (23%) ahead of the
31 March 2020 valuation, representing a net initial yield of
4.50%. ? In October 2020 the Company sold four high street retail
properties at auction in Chester, Scarborough, Bedford and
Llandudno for an aggregate GBP1.6m, in line with the most recent
valuations. The properties were originally acquired
within larger portfolios in 2014 and 2015 and were either vacant
or let on short-term leases and the disposals
reduced the Company's high street retail sector weighting by
income from 11% to 10%.
Since the year end the Company sold a high street retail
property at auction in Nottingham for GBP0.7m, in line with the
most recent valuation.
Outlook
In March 2020, as the country entered the first lockdown, the
pandemic was taking hold. At that stage a marginal but positive NAV
total return for the year ahead would have been seen as an
exceptional result. 12 months later Custodian REIT has delivered a
positive NAV total return, demonstrating the resilience of UK
commercial real estate and the power of income to support returns.
It also underscores the need to look at real estate investment over
the long-term. NAV total return since IPO seven years ago has
averaged 6.3% per annum and as we look forward to a post pandemic
world the Company is in a good position to continue to deliver
positive returns.
In ordinary times rent collection and asset management are
rightly taken for granted by shareholders but the importance of the
close relationships between manager and tenant and the manager's
ability to influence the outcome of negotiations has come to the
fore this year. From the outside, it may appear that property fund
managers have spent the year chasing rent collection and worrying
about the pandemic. From our perspective we are largely
experiencing business as usual, managing landlord/tenant
relationships and engaging in normal levels of activity in terms of
new lettings, extending existing leases, acquiring new assets and
selling assets that we do not believe will perform over the medium
to long-term. Through the year we have completed 50 separate asset
management transactions, each designed to keep the portfolio
relevant, to protect value and to support dividends which have
always been out key objectives.
The important consideration for the outlook for commercial
property is occupier demand. If commercial property remains in use
by occupiers, then it has a bright future. As touched on above,
occupier demand in the industrial and logistics sector is very
strong and forecast to remain so, which is supporting rental
growth. We are seeing demand from occupiers on retail parks and in
prime town centres but on rebased rents. Offices are likely to
continue to be an essential feature of most businesses and we are
seeing occupiers look beyond the pandemic to secure appropriate
space. The overlay on all this demand will be ESG. As a manager we
are committed to achieving the objectives set out in the ESG
Committee report. We have an ongoing project to improve the
environmental performance of the portfolio when properties are
under landlord's control and also when looking at the let
portfolio. We understand that our commitment to ESG must mirror our
tenants' objectives. Meeting the demands of our tenants will ensure
ongoing performance for shareholders.
Richard Shepherd-Cross
for and on behalf of Custodian Capital Limited
Investment Manager
15 June 2021
Asset management report
Our continued focus on asset management during the year
including rent reviews, new lettings, lease extensions and the
retention of tenants beyond their contractual break clauses
resulted in a GBP9.4m valuation increase in the year.
Property portfolio summary
2021 2020
Property portfolio value GBP551.9m GBP559.8m
Separate tenancies 265 280
EPRA occupancy rate 91.6% 95.9%
Assets 159 161
WAULT 5.0 years 5.3 years
NIY 6.6% 6.8%
Weighted average EPC rating C (63) C (70)
In what has been a challenging year we have seen that close
collaboration with tenants will generate asset management
opportunities including lease extensions and re-gears which has
seen the Company maintain its weighted average unexpired lease term
to first break or expiry ("WAULT") above five years despite the
effects of the COVID-19 pandemic.
Key asset management initiatives completed during the year
include: 1. Completing a 10 year lease with Life Technologies at an
industrial unit in Warrington at an annual rent of GBP378k,
with a tenant only break option and open market rent review in
year five, increasing valuation by GBP1.6m; 2. Completing a 20-year
lease extension with Bannatyne Fitness on a leisure scheme in
Perth, extending lease expiry to
August 2046 and incorporating five yearly RPI linked rent
reviews, which increased valuation by GBP1.5m; 3. Completing a
lease extension without break with DX Networks at a logistics unit
in Nuneaton, with lease expiry
moving from March 2022 to March 2032. The March 2022 rent review
is expected to result in an increase in the
annual GBP267k passing rent. This lease extension increased
valuation by GBP1.4m; 4. Completing a new lease to Nuffield Health
at Stoke for a term of 20 years without break, at an annual rent of
GBP300k
subject to five yearly CPI-linked rent reviews, increasing
valuation by GBP0.9m; 5. Unconditionally exchanging an agreement
for lease with MCC Labels in Daventry on a new ten-year lease
without break
commencing in Spring 2021 after the current tenant vacates in
December 2020, at a rent of GBP295k pa, which increased
valuation by GBP0.8m; 6. Commencing a letting with Nationwide
Building Society on a high street retail unit in Shrewsbury for a
term of 10
years without break, at an annual rental of GBP100k, increasing
valuation by GBP0.6m; 7. Completing a five year reversionary lease
with Worthington Armstrong on an industrial unit in Gateshead at
an
increased annual rent of GBP285k, increasing valuation by
GBP0.4m; 8. Completing a 10 year lease renewal with Silgan Closures
at an industrial unit in Doncaster, with tenant break
options in years three and five at an increased annual rent of
GBP400k, increasing valuation by GBP0.3m; 9. Completing a 10 year
lease renewal with a break in year five to Royal Mail at an
industrial unit in Kilmarnock,
maintaining the current passing rent of GBP95k with an open
market rent review in year five, increasing valuation by
GBP0.3m; 10. Completing a lease assignment for a car showroom in
Stockport from Benham Specialist Cars to the stronger covenant
of Williams Motor Company, and rebasing the annual rent from
GBP740k to GBP640k with a fixed uplift to GBP669k in August
2022, increasing valuation by GBP0.3m; 11. Completing a
five-year lease extension with DHL on an industrial unit at Speke,
Liverpool, subject to a tenant-only
break in year three, maintaining annual passing rent at GBP119k
which increased valuation by GBP0.2m; 12. Varying the lease with
Elma Electronics at an industrial unit in Bedford to remove the
September 2022 break option,
moving lease expiry out to September 2027, increasing valuation
by GBP0.2m; 13. Settling an outstanding rent review with Unilin
Distribution at a logistics unit in Manchester, securing an
uplift
in annual passing rent from GBP220k to GBP254k, increasing
valuation by GBP0.2m; 14. Completing an open market rent review
with Yodel at a logistics unit in Bellshill, securing an uplift
from GBP275k to
GBP310k, increasing valuation by GBP0.2m; 15. Completing lease
renewal with Rexel at an industrial unit in Gateshead on a 10 year
term with a tenant break option
in year five and open market rent reviews and annual passing
rent increasing from GBP50k to GBP55k, increasing
valuation by GBP0.1m; 16. Completing a five-year lease extension
with Erskine Murray at an office building in Leicester, extending
the lease
expiry from December 2020 to December 2025 at an increased
annual rental of GBP72.5k (previously GBP66.5k) which
increased valuation by GBP0.1m; 17. Completing a deed of
variation with Urban Outfitters in Southampton to push the October
2021 tenant only break
option back to April 2024, increasing the term certain to 3.5
years, which increased valuation by GBP0.1m; 18. Settling an open
market rent review with Synergy Health at an industrial unit in
Sheffield, increasing the annual
rent from GBP142k to GBP158k which increased valuation by
GBP0.1m; 19. Completing a five year lease extension with Homebase
at Leighton Buzzard, maintaining annual passing rent of GBP341k
and moving lease expiry from December 2023 to 2028, increasing
valuation by GBP0.1m; 20. Exchanging an agreement for lease with
Just for Pets on a retail warehouse unit in Evesham for a term of
10 years
with a break in year six, at an annual rent of GBP95k, with no
impact on valuation; 21. Completing a deed of variation to remove
the September 2021 break option with Felldale Group at a retail
unit in
Chester, extending the lease expiry to September 2026 with no
impact on valuation; 22. Completing a lease assignment from JB
Global to Oak Furniture Land Group at a retail warehouse unit in
Plymouth,
rebasing the passing rent from GBP250k to GBP150k and including
mutual break options in years two and four, with no
impact on valuation; 23. Unconditionally exchanging an agreement
for lease with MKM in Lincoln on a new 10 year reversionary lease
on a
trade counter unit, extending expiry from June 2022 to June 2032
without break and maintaining annual passing rent
at GBP192k with 12 months' rent free, with no impact on
valuation; 24. Re-gearing with The Works in Portsmouth which
removed a tenant only break option in October 2021, extending
the
term certain to October 2026, with no impact on valuation; 25.
Completing a lease renewal with The White Company in Nottingham for
a five year lease with 2.5 year tenant only
break option at a reduced annual rent of GBP65k, with the
property disposed of since the year end at valuation; 26.
Completing a short-term turnover-based lease with mutual breaks to
retain Game in Portsmouth following expiry of
its existing lease whilst we re-market the premises, with no
impact on valuation; 27. Completing a five-year lease renewal with
Sports Direct on a retail park in Weymouth at a rebased annual rent
of
GBP90k (previously GBP118k), subject to a 5% turnover top-up
clause and featuring rolling mutual break options after 36
months, with no impact on valuation; 28. Commencing the letting
of a newly developed drive-through coffee restaurant in Burton upon
Trent let to 1 Oak (t/a
Starbucks) on a 20 year lease subject to a tenant break option
in year 10, at an annual rent of GBP55k with
five-yearly RPI-linked rent reviews; 29. Exchanging an agreement
for lease with Tim Hortons Fast Food Restaurants on a drive-through
restaurant in Perth
(formerly a Frankie & Benny's) at an annual rent of GBP90k
for a term of 15 years, with a tenant only break option in
year 10, with no impact on valuation; 30. Completing a five year
lease renewal with Reiss on a high street retail unit in Guildford
at an annual rent of
GBP170k, which reduced Reiss' footprint to allow access to the
unused upper floors for potential residential
conversion, with no impact on valuation; and 31. Completing a
five year lease to Oak Furniture Land Group in Carlisle with annual
tenant break options and landlord
break options in years two and four, at an annual rent of
GBP100k, with no impact on valuation. Although these positive asset
management outcomes have been tempered by the impact of the
following business failures, which have resulted in GBP1,346k (3.3%
of rent roll) of lost annual contractual rent since 31 March 2020,
in most cases we have subsequently seen positive letting
activity:
Lost annual
contractual
rent
Location Tenant Sector GBP000 Event Activity following business failure
Tenant vacated and in Comprehensive building
West Bromwich Office Team Industrial 280 liquidation refurbishment underway, with unit
being remarketed
CVA - tenant remains in
occupation rent free whilst
Grantham and Retail units are remarketed
Evesham Poundstretcher warehouse 221 Agreement for lease with new tenant
exchanged for Evesham site
CVA - rent reduced to 25% in
2020 and 70% in 2021
Portishead Travelodge Hotel 167 Lease assigned to AGO Hotels at
above the CVA rent
CVA - base rent reduced by an
average of 66% of passing rent
Leicester, plus an 8% of turnover top-up Leicester and Watford sites under
Watford and Pizza Hut Restaurant 155 offer to national drive-through
Crewe chains. Crewe unit is being
marketed
Pre-pack Administration - Oak
Carlisle and JB Global (t/a Retail Furniture Land now occupying
Oak Furniture warehouse 140 under licence at a lower rent Leases assigned to new Oak
Plymouth Land) Furniture Land trading company on
rebased rents
CVA - rent reduced to 0% for 12
Perth* The Restaurant Restaurant 100 months before closure
Group Now let to Tim Hortons Restaurants
CVA - rent reduced by 25% for
Lincoln Total Fitness Other 95 three years
Tenant remains in occupation at CVA
rent
Edinburgh High Tenant vacated and in
Shrewsbury Woollen Mill street 93 Administration
retail Unit vacant and being marketed
Tenant in liquidation
Gateshead Human Office Industrial 32 Unit vacant and being marketed
High Pre-pack Administration Lease assigned to Ask Italian
Shrewsbury Azzuri street 24 Restaurant at a reduced rent
retail
Torquay Las Iguanas Restaurant 20 In Administration Tenant remains in occupation under
licence at a lower rent
High Unit vacant and being marketed
Shrewsbury Paperchase street 19 Tenant in Administration
retail
1,346
Tenant business failures have contributed to occupancy levels
decreasing to 91.6% from 95.9% at 31 March 2020, but letting
activity is increasing across most sectors. We have a strong
pipeline of potential new tenants and since the year end have
completed: ? A new five year letting to Green Retreats at a
recently refurbished industrial unit in Farnborough with annual
rent
of GBP185k; ? A new 10 year letting to Just for Pets at a retail
warehouse unit in Evesham with an annual rent of GBP95k; ? A new 10
year letting to Dehns on the ground floor suite of an office
building in Oxford with an annual rent of
GBP81k; and ? A new 10 year letting to Spa Medica on the ground
floor suite of an office building in Leicester with an annual
rent of GBP80k.
In aggregate these lettings increased occupancy by 1.0%. We
expect occupancy levels across the portfolio to continue to recover
over the next 3-6 months as we complete more new lettings, unless
there were to be further significant tenant failures. Property
portfolio risk
We have managed the property portfolio's income expiry profile
through successful asset management activities with only 53% of
aggregate income expiring within five years from 31 March 2021
(2020: 51%). Short-term income at risk is a relatively low
proportion of the property portfolio's income, with only 31%
expiring in the next three years (2020: 32%) and our experience
suggests that even in the current uncertain climate, the majority
of tenants do not exit at break or expiry.
31 March 31 March
2021 2020
Aggregate income expiry
0-1 years 11% 9%
1-3 years 20% 23%
3-5 years 22% 19%
5-10 years 34% 37%
10+ years 13% 12%
100% 100%
Outlook
Looking forward, we maintain a positive outlook with many of the
asset management initiatives currently under way expected to come
to fruition over the next 6-12 months which should see new tenants
secured, leases extended and new investment into existing assets
improving their environmental credentials and realising their full
potential.
Alex Nix
Assistant Investment Manager
for and on behalf of Custodian Capital Limited
Investment Manager
15 June 2021
ESG Committee report
The ESG Committee ("the Committee") was constituted on 1 April
2021. Its key responsibilities are: ? To monitor and report on the
Company's performance against its environmental KPIs and ensure the
Investment Manager
is managing its property portfolio in line with the ESG policy;
? To ensure the Company complies with its external reporting
requirements and obligations on ESG matters such as
GRESB, EPRA, TCFD, SECR and adopts sector best practice where
appropriate; ? To assess, at least annually, the fees and scope of
engagement of the Company's environmental consultants; and ? To
assess whether the Company is obtaining a suitable level of social
outcomes for its tenants, other stakeholders
and the communities in which it operates.
The Company is committed to delivering its strategic objectives
in an ethical and responsible manner and meeting its corporate
responsibilities towards society, human rights and the environment.
The Board acknowledges its responsibility to society is broader
than simply generating financial returns for shareholders. The
Company's approach to ESG matters addresses the importance of these
issues in the day-to-day running of the business, as detailed
below.
ESG policy
Environmental - we want our properties to minimise their impact
on the local and wider environment. The Investment Manager
carefully considers the environmental performance of our
properties, both before we acquire them, as well as during our
period of management. Sites are visited on a regular basis by the
Investment Manager and any obvious environmental issues are
reported.
Social - Custodian REIT strives to manage and develop buildings
which are comfortable, safe and high-quality spaces. As such, our
aim is that the safety and well-being of occupants of our buildings
is maximised. We have implemented a portfolio approach to
well-being which encourages engagement with tenants, ensures
maximum building safety and optimises comfort and quality of
occupancy.
Governance - high standards of corporate governance and
disclosure are essential to ensuring the effective operation of the
Company and instilling confidence amongst our stakeholders. We aim
to continually improve our levels of governance and disclosure to
achieve industry best practice.
The Committee encourages the Investment Manager to act
responsibly in the areas it can influence as a landlord, for
example by working with tenants to improve the environmental
performance of the Company's properties and minimise their impact
on climate change. The Committee believes that following this
strategy will ultimately be to the benefit of shareholders through
enhanced rent and asset values.
The Company's environmental policy commits the Company to: ?
Seek to reduce pollution and comply with all relevant environmental
legislation; ? Gather and analyse data on the environmental
performance of our properties; and ? Set targets for the
environmental performance of our properties and monitor
achievements as a commitment to
continuous improvement.
Environmental key performance indicators
During the year with the assistance of Carbon Intelligence,
specialist environmental consultants, the Company set target
environmental key performance indicators ("KPIs") to provide a
strategic way to measure its success towards achieving its
environmental objectives and ensure the Investment Manager is
embedding key ESG principles. These environmental KPIs cover our
main areas of environmental impact including energy efficiency,
greenhouse emissions, water, waste and tenant engagement.
These KPIs help the Company to monitor our ESG progress and
directly support climate risk mitigation and capture some ESG
opportunities from the transition to a low-carbon economy. As we
progress our climate-related risk identification and management, we
aim to identify and implement further climate-related metrics that
can more clearly define the impact of climate-related risks and
opportunities on our business. ESG reporting frameworks, including
GRESB, require businesses to disclose the KPIs which contribute
towards benchmark scoring and potentially influence investor
decisions.
The Company's qualitative and quantitative environmental
targets, measured via the KPIs, cover four 'boundaries' and are set
out below:
Boundary KPI
Reduce total portfolio absolute emissions by 30% by 2025
Whole portfolio All 'D' EPC ratings to be removed or improved by 2027, all 'E' EPC ratings to be removed or improved
boundary by 2025 and all 'F' and 'G' EPC ratings to be removed or improved by 31 March 2022
Reduce absolute energy consumption of the property portfolio by 15% against a 2019 baseline by 2025
Switch all landlord-controlled sites to 100% renewables by 2025
Switch all landlord-controlled sites to green gas by 2025
Landlord
controlled Install EV charging points across 100% of the Company's retail warehouse assets by 2025 and
boundary investigate onsite renewables on one asset by 2025
Zero waste to landfill from landlord-controlled waste by 2022
Reduce landlord-controlled water consumption by 50% by 2025
Engage with occupiers during lease negotiations to incorporate sustainability clauses into new leases
Tenant boundary
Engage with tenants on quarterly basis on ESG issues
Achieve EPRA Gold Standard for the year ended 31 March 2021
Development
boundary Report to TCFD by 2021
Incorporate ESG factors into all investment due diligence undertaken
These KPIs were formulated during the year ended 31 March 2021.
The Company intends to report on progress against each measure in
subsequent financial years.
To help this assessment of progress against KPIs a central data
management system, hosted by the Company's environment consultants,
has been established to provide a robust data collation and
validation process. This data management system is being used to
identify tenant engagement and asset optimisation opportunities and
facilitates the communication of environmental performance data to
various stakeholders.
Investment decisions
Investment decisions will play a key role in achieving the
Company's environmental KPIs. The Company undertakes an
environmental assessment on vacated assets and during the
acquisition due diligence process, rating assets or tenants against
a number of ESG factors which form part of the Investment Committee
decision making process. This process also helps the Investment
Manager evaluate the potential environmental risks and
opportunities associated with an asset and the impact on the
achievement of the KPIs.
During the year the Company amended its procurement policy for
property services to include an assessment of new suppliers on
their specification and use of sustainable and energy efficient
materials, systems, equipment, onsite operating practices and
performance evaluation/incentives put in place for direct external
suppliers and/or service providers to employ sustainable processes
in day-to-day work.
Current initiatives
To achieve the Company's environmental objectives and targets,
the Investment Manager seeks to achieve the following
initiatives:
Energy consumption & management ? Comply with all
applicable, relevant energy-related legislation and other
requirements; ? Monitor energy consumption across our properties
and tenant consumption, where possible; ? Undertake thorough
environmental due diligence including obtaining an EPC for all new
property acquisitions; ? Identify and, where possible, upgrade high
energy-consuming properties within our property portfolio assets
to
achieve higher energy efficiency levels and improved EPC
ratings; ? Review our energy objectives and targets on an annual
basis; ? Promote energy efficiency and management to our tenants;
and ? Where possible, build in green lease[24] clauses into our
tenant leases.
Building materials ? When we have the opportunity to develop new
property or refurbish current assets, we commit to reviewing
building
materials which have a lower environmental impact and to select
these materials, if appropriate; and ? Select greener building
materials, in line with our vision to increase the sustainability
certifications of our
property portfolio.
GHG emissions and management ? Quantify our Scope 1 and 2
(landlord controlled) emissions on an annual basis in line with
reporting requirements; ? Gather tenant energy consumption data,
where possible, to quantify our properties' emissions; ? Comply
with, and make representations to, industry standard ESG frameworks
including the EPRA Annual Sustainability
Report and GRESB; and ? Continue to expand our carbon reporting
in line with industry expectations and relevant legislation.
Further information on our GHG emissions is set out within our
Streamlined Energy and Carbon Report (SECR) in the Directors'
report.
Waste management ? Monitor waste levels across our properties
and monitor tenant consumption, where possible; ? Implement
landfill diversion waste streams such as recycling in our
properties, where possible; and ? Promote waste management to our
tenants.
Water consumption and management ? Monitor water consumption
across our properties and monitor tenant consumption, where
possible; ? Identify and implement water reduction technologies and
opportunities within our property portfolio, where
possible; and ? Promote water management to our tenants.
Climate change adaptation and resilience ? Through our risk
management processes, identify climate-related risks, both physical
and financial; ? Perform environmental risk assessments of our
property portfolio on an on-going basis; and ? Design mitigation
and management strategies for climate and environmental risks.
Biodiversity
In the circumstances where we are developing new assets, the
biodiversity of the development area will be considered and
maintained to the highest level possible.
Asset level safety, health and well-being
We wish to manage and develop buildings which are comfortable,
safe and high-quality spaces. As such, our aim is that the safety
and well-being of the occupants of our buildings is maximised. We
will implement a property portfolio approach to well-being which
encourages engagement with tenants, ensures maximum building safety
and optimises the comfort and quality of occupancy.
Stakeholder engagement
We engage regularly with the following internal and external
stakeholders on environmental and social matters: ? Board - the
Board meets at least quarterly and monitors ESG performance and
progress towards our objectives; ? Investment Manager - as part of
the Investment Manager's training and staff roles and
responsibilities, ESG
progress is discussed and embedded across the work it does; ?
Managing agents - we receive quarterly reports on our asset
performance and engage directly on property portfolio
optimisation; and ? Tenants - we attempt to engage with tenants
on a quarterly basis both to understand consumption trends and data
and
understand where we can upgrade and optimise buildings for
tenant well-being and environmental impact reductions.
To monitor energy consumption across the property portfolio, as
well as identify opportunities to make energy reductions, the
Company has engaged with Carbon Intelligence to provide strategic
advice on the process. This collaboration promotes the ethos of
investing responsibly and has ensured statutory compliance with the
Energy Savings Opportunity Scheme (ESOS) Regulations 2014 and The
Companies (Director's report) and Limited Liability Partnerships
(Energy and Carbon Report) Regulations 2018, and has facilitated
inclusion of EPRA Sustainability Best Practice Recommendations in
the Annual Report.
Case study - West Bromwich
As part of a comprehensive refurbishment of Units 1-7 Hawthorns
Business Park, West Bromwich, significant investment is being made
to improve the ESG credentials of the asset. This additional
investment will significantly reduce the use in carbon for
operation when assessed against competing buildings in the local
market.
On completion, the refurbished property will be served by six EV
charging points to promote and support the use of electric
vehicles. These installations support all forms of electric
vehicles currently on the market and will be an attractive
proposition to any future tenant.
In addition, Custodian REIT is making an investment of circa
GBP85k to provide solar photovoltaic (PV) coverage to over 700 sq m
of the roof area. This renewable energy is anticipated to offset
circa 116 tonnes of carbon in Year 1, meaning the anticipated
payback on investment is 3.5 years. As well as aiding tenants in
their reduction of carbon usage, the Company is able to offer
future tenants a reduction in their utility costs by selling
generated energy directly to the tenant rather than directing to
the central network. The panels are self-cleaning and offer a 20
year guarantee.
A further investment of circa GBP50k is being made to install
air source heat pumps to provide heating and hot water. This
installation will see a saving of nearly GBP2k a year in running
costs and a reduction in carbon use of around 12k kg a year in
comparison to traditional gas boilers. As part of this investment
new energy efficient radiators are also being installed. Warehouse
and office lighting is being replaced with new LED fittings
including passive infrared sensors to reduce operational use.
Pre-refurbishment, the EPC rating for the property was C (69)
and it is projected that a high B will be achieved on completion of
the refurbishment.
It is anticipated that the ERV of the property on completion of
the works will increase from GBP280k pa (GBP4.80 per sq ft) to
circa GBP350k pa (GBP6.00 per sq ft). Once re-let it is estimated
that the uplift in property valuation will be well in excess of the
capital outlay for refurbishment.
EPC ratings
During the year the Company has updated EPCs at 63 units across
43 properties covering 983k sq ft for properties where existing
EPCs had expired or where works had been completed. For updated
EPCs, there was an aggregate decrease in rating of 37 'energy
performance asset rating points[25]'. Some of the properties
showing an improvement are detailed below: ? Burton upon Trent - a
new Starbucks drive through restaurant was built on the site of a
former tool hire centre,
improving the EPC score from D (99) to B (43) ? Daventry - a
significant refurbishment of this industrial property was carried
out during the year, improving the
EPC score from C (52) to B (46) ? Glasgow West George Street - a
refurbishment of these offices improved the EPC score from E (62)
to B (34) Climate-related risks and opportunities
Climate change poses a number of physical risks to our property
portfolio, for example those caused by the increased frequency and
severity of extreme weather events. The Committee also recognises
there are a number of transition-related risks, including economic,
technology or regulatory challenges related to moving to a greener
economy which it needs to consider. But climate change also
provides opportunities to invest in alternative asset classes or to
provide tenants with additional services.
The Company has commenced work to identify and understand our
climate-related risks and opportunities alongside our work on our
wider ESG ambitions and metrics. Below we have outlined our first
year of disclosures aligned to the recommendations of Taskforce on
Climate-related Financial Disclosures ("TCFD"). We are working
together with our sustainability partner, Carbon Intelligence, to
continue to refine our TCFD programme over the next financial
year.
Governance
The Board is ultimately responsible to stakeholders for the
Company's activities and for oversight of our climate-related risks
and opportunities. Specifically, the ESG Committee is the
Board-level governance body responsible for reviewing our
identified climate-related risks alongside our ESG strategy.
The Investment Manager maintains the Company's risk management
framework and risk register, which means our ESG objectives are
embedded into the way the Company conducts and manages the business
and the property portfolio day to day.
Risk management
This year, the Company conducted a risk identification and
materiality assessment to determine our climate-related impacts,
identifying the following climate-related risks and opportunities
as material to the business:
Climate-related risks: Climate-related opportunities:
Physical risks ? Exposure to new asset classes for potential
investment
? Asset damage from storms and flooding
? Global temperature increases reducing the appeal of less ? Shifting tenant preferences may create new demand for
energy-efficient assets new or existing products/ services
? Insufficient electricity supply to maintain tenant ? Opportunities to expand low-carbon buildings and
operations due to inadequate infrastructure low-carbon landlord services
? Shifting tenant preferences to diversify sectors and
asset types
Transition risks
? Reducing emissions footprint of buildings for tenants
? Reduced attractiveness of the portfolio due to changing
tenant preferences
? Changing insurance products, pricing and availability
? Investor divestment or activism due to changing ESG
expectations
? Sector stigmatisation due to high emissions
? Unsuccessful investment in new technology
To account for the long-term nature of climate change three time
horizons were used within the assessment: ? Short-term (0-3 years);
? Medium-term (3-12 years); and ? Long-term (12-20 years).
This period differs from the longer-term viability assessment of
three years, as the outputs of our climate-related materiality
assessment will be reviewed and built upon over time in order to
effectively embed identified risks into our risk management
framework.
Strategy
In line with the TCFD recommendations, the next phase of
implementing TCFD will be to conduct climate scenario analysis, to
improve our understanding of the specific impacts of climate change
on the Company. Scenario analysis will increase our understanding
of our business and portfolio resilience under different climate
scenarios including best and worst-case scenarios. This will ensure
we are able to comprehensively assess and build upon the existing
risk management processes and controls to further mitigate our
climate risks.
Approval
This report was approved by the Committee and signed on its
behalf by:
Hazel Adam
Chair of the ESG Committee
15 June 2021
Financial review
The Company has faced its most challenging year since IPO in
2014 due to the impact of the COVID-19 pandemic on rent collection
rates, occupancy and property portfolio valuations but its
financial performance has been robust, allowing dividends of 5.0p
per share to be declared for the year, fully covered by net cash
receipts and 112.7% covered by EPRA earnings.
A summary of the Company's financial performance for the year is
shown below:
Year ended 31 Mar 2021 Year ended 31 Mar 2020
Financial summary GBP000
GBP000
Revenue 39,578 40,903
Expenses and net finance costs (15,904) (12,230)
EPRA profits 23,674 28,673
Net loss on investment property (19,925) (26,550)
Profit before tax 3,749 2,123
EPRA EPS (p) 5.6 7.0
Dividend cover 112.7% 104.4%
OCR excluding direct property costs 1.12% 1.12%
Borrowings
Net gearing 24.9% 22.4%
Weighted average debt maturity 7.4 years 7.8 years
Weighted average cost of debt 3.0% 3.0%
The Company's rent roll has decreased by 5.0% from GBP40,749k at
31 March 2020 to GBP38,692k at 31 March 2021, which resulted in
IFRS revenue decreasing by 3.2% from GBP40,903k to GBP39,578k.
This decrease in contractual rent was due to tenants exiting at
contractual lease break or expiry (2.6%) and cessation of rents
through Company Voluntary Arrangements ("CVAs") and Administrations
(3.2%), partially offset by net property acquisitions (0.8%).
Helpfully, rental increases in the industrial sector offset rental
decreases seen in other sectors, demonstrating the robust nature of
the Company's diverse property portfolio.
EPRA earnings per share decreased to 5.6p (2020: 7.0p) due
primarily to this decrease in revenue, a GBP2.7m increase in the
doubtful debt provision reflecting our prudent assumptions
regarding the recovery of overdue and deferred contractual rents,
GBP0.6m of irrecoverable debts due to tenant failure and the
concession of GBP0.25m of contractual rent to support tenants most
severely impacted by government restrictions.
Dividends
The Board acknowledges the importance of income for shareholders
and during the year its objective was to pay dividends on a
sustainable basis at a rate which was fully covered by net rental
receipts and does not inhibit the flexibility of the Company's
investment strategy.
The Company paid dividends totalling 4.9125p per share during
the year, comprising the fourth interim dividend of 1.6625p per
share relating to the year ended 31 March 2020 and interim
dividends of 0.95p, 1.05p and 1.25p per share relating to the year
ended 31 March 2021.
The Company paid a fourth interim dividend of 1.25p per share
for the quarter ended 31 March 2021 on 28 May 2021 totalling
GBP5.3m, and has approved a fifth interim dividend per share of
0.5p totalling GBP2.1m resulting in a total dividend relating to
the year of 5.0p per share (2020: 6.65p), totalling GBP21.0m (2020:
GBP27.5m). Dividends relating to the year ended 31 March 2021 were
112.7% covered by net recurring income of GBP23.7m, as calculated
in Note 21.
Cost control
Despite the operational disruption caused by the COVID-19
pandemic, increasingly onerous compliance requirements and
additional expenditure in ensuring the Company's environmental
impact is minimised, the Investment Manager's focus on cost control
and the Company's competitive management fee structure meant that
OCR (excluding direct property costs) was maintained at 1.12% for
the year. Although governance related expenditure is likely to
continue to increase we believe the economies of scale provided by
the Company's relatively fixed cost base and fee structure will
mean that further growth will allow ongoing charges to be kept
proportionately low.
Key performance indicators
The Board reviews the Company's quarterly performance against a
number of key measures: ? NAV per share total return - reflects
both the NAV growth of the Company and dividends payable to
shareholders.
The Board regards this as the best overall measure of value
delivered to shareholders. The Board assesses NAV per
share 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; ? NAV per share,
share price and market capitalisation - reflect various measures of
shareholder value at a point in
time; ? Share price total return - reflects the movement in
share price and dividends payable to shareholders; ? EPS and EPRA
EPS - reflect the Company's ability to generate recurring earnings
from the property portfolio which
underpin dividends; ? Dividends per share and dividend cover -
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; ? Target dividend per share - an expectation of the
Company's ability to deliver an income stream to shareholders
for
the forthcoming year; ? 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
manage this volatility; ? Net gearing - measures the Company's
borrowings as a proportion of its investment property, balancing
the
additional returns available from utilising debt with the need
to effectively manage risk; ? OCR - measures the annual running
costs of the Company and indicates the Board's ability to operate
the Company
efficiently, keeping costs low to maximise earnings from which
to pay fully covered dividends; ? EPRA vacancy rate - the Board
reviews the level of property voids within the Company's property
portfolio on a
quarterly basis and compares this to its peer group average; and
? Weighted average EPC rating - measures the overall environmental
performance of the Company's property portfolio
The Board considers the key performance measures over various
time periods and against similar funds. A record of these measures
is disclosed in the Financial highlights and performance summary,
the Chairman's statement and the Investment Manager's report.
EPRA performance measures
EPRA Best Practice Recommendations have been disclosed to
facilitate comparison with the Company's peers through consistent
reporting of key real estate specific performance measures.
2021 2020 Change
EPRA EPS (p) 5.6 7.0 (20.0%)
EPRA Net Tangible Assets ("NTA") per share (p) 97.6 101.6 (3.9%)
EPRA net initial yield ("NIY") 6.0% 6.2% (0.2%)
EPRA 'topped up' NIY 6.4% 6.6% (0.2%)
EPRA vacancy rate 8.4% 4.1% 4.3%
EPRA cost ratio (including direct vacancy costs) 26.1% 16.6% 9.5%
EPRA cost ratio (excluding direct vacancy costs) 23.9% 14.5% 9.4%
EPRA capital expenditure (GBPm) 14.5 27.5 (47.3%)
EPRA like-for-like rental growth (GBPm) 37.5 40.0 (6.3%) ? EPRA EPS - a key measure of the Company's underlying operating results and an indication of the extent to which
current dividend payments are supported by earnings ? EPRA NAV
per share metrics - make adjustments to the NAV per the IFRS
financial statements to provide stakeholders
with the most relevant information on the fair value of the
assets and liabilities of a real estate investment
company, under different scenarios. EPRA Net Tangible Assets -
assumes that entities buy and sell assets, thereby
crystallising certain levels of unavoidable deferred tax; ? EPRA
NIY and 'topped up' NIY - alternative measures of property
portfolio valuation based on cash passing rents at
the reporting date and once lease incentive periods have
expired, net of ongoing property costs; ? EPRA cost ratios -
alternative measures of ongoing charges based on expenses,
excluding operating expenses of
rental property recharged to tenants, but including increases in
the doubtful debt provision, compared to gross
rental income; ? EPRA capital expenditure - capital expenditure
incurred on the Company's property portfolio during the year; ?
EPRA like-for-like rental growth - a measure of rental growth of
the property portfolio by sector, excluding
acquisitions and disposals; and ? EPRA Sustainability Best
Practice Recommendations - environmental performance measures
focusing on emissions and
resource consumption which create transparency to potential
investors by enabling a comparison against peers and
set a direction towards improving the integration of ESG into
the management of the Company's property portfolio.
Debt financing
Since the onset of the COVID-19 pandemic we have maintained a
regular dialogue with our lenders, proactively reporting on rent
collection and discussing individual asset performance on a timely
basis. These positive actions have reinforced the excellent
relationships we have built with our lenders.
The Company operates with a conservative level of net gearing,
with target borrowings over the medium-term of 25% of the aggregate
market value of all properties at the time of drawdown. The
Company's net gearing increased from 22.4% LTV last year to 24.9%
at the year end due to GBP11.4m of acquisitions made during the
year and a GBP19.6m decrease in the property portfolio
valuation.
The Company has the following facilities available: ? A GBP35m
revolving credit facility ("RCF") with Lloyds Bank plc ("Lloyds")
with interest of between 1.5% and 1.8%
above three-month LIBOR, determined by reference to the
prevailing LTV ratio of a discrete security pool of assets,
and expiring on 17 September 2022. The RCF limit can be
increased to GBP50m with Lloyds' consent; ? A GBP20m term loan
facility with Scottish Widows Limited ("SWIP") repayable in August
2025, with fixed annual
interest of 3.935%; ? A GBP45m term loan facility with SWIP
repayable in June 2028, with fixed annual interest of 2.987%; and ?
A GBP50m term loan facility with Aviva Real Estate Investors
("Aviva") comprising: ? A GBP35m tranche repayable on 6 April 2032,
with fixed annual interest of 3.02%; and ? A GBP15m tranche
repayable on 3 November 2032 with fixed annual interest of
3.26%.
Each facility has a discrete security pool, comprising a number
of the Company's individual properties, over which the relevant
lender has security and the following covenants: ? The maximum LTV
of each discrete security pool is between 45% and 50%, with an
overarching covenant on the
Company's property portfolio of a maximum 35% LTV; and ?
Historical interest cover, requiring net rental receipts from each
discrete security pool, over the preceding three
months, to exceed 250% of the facility's quarterly interest
liability.
The Company has GBP165.0m (30% of the property portfolio) of
unencumbered assets which could be charged to the security pools to
enhance the LTV on the individual loans. During the year the
Company charged five unencumbered properties valued at GBP21.1m to
add additional headroom to certain facilities.
In the expectation that interest cover covenants on some
individual loans could have come under short-term pressure due to
COVID-19 pandemic restrictions, the Company obtained waivers of
interest cover covenants until 31 March 2021. These waivers were
not utilised and the Company complied with all loan covenants
during the year.
The weighted average cost of the Company's agreed debt
facilities at 31 March 2021 was 3.0% (2020: 3.0%) with a Weighted
Average Maturity ("WAM") of 7.4 years (2020: 7.8 years) and 82%
(2020: 77%) of the Company's drawn debt facilities are now at fixed
rates. This high proportion of fixed rate debt significantly
mitigates long-term interest rate risk for the Company and provides
shareholders with a beneficial margin between the fixed cost of
debt and income returns from the property portfolio.
LIBOR, the London Inter Bank Offer Rate interest rate benchmark
used for setting the interest rate charged on the Company's RCF
facility is expected to be discontinued after the end of 2021. In
its place, a replacement 'risk free' rate, the Sterling Overnight
Index Average ("SONIA") will generally be used. We are working with
Lloyds to prepare for a smooth transition in preparation for the
cessation of LIBOR and do not expect the transition to have a
material impact on the interest rate on the RCF. We expect to
complete this process during the year ending 31 March 2022.
Outlook
The Company's business model has remained resilient during the
year. Although we took pre-emptive action at the beginning of the
pandemic to arrange debt covenant waivers, these waivers were not
utilised and the Company's lenders remain supportive of our
ambition for continued growth. We have a scalable cost structure
and flexible capital structure to be on the front foot when
opportunities present themselves to raise new equity and exploit
acquisition opportunities.
Ed Moore
Finance Director
for and on behalf of Custodian Capital Limited
Investment Manager
15 June 2021
Property portfolio
Industrial
Tenant Location % portfolio income
Menzies Distribution Various 3.8%
H&M Winsford 1.5%
JTF Wholesale Warrington 1.4%
Teleperformance Ashby-de-la-Zouch 1.3%
ATL Transport Burton upon Trent 1.2%
Restore Salford 1.1%
Daher Aerospace Hilton 0.9%
Revlon International Stone 0.9%
Next Eurocentral 0.9%
Life Technologies Warrington 0.9%
ICT Express Tamworth 0.8%
Silgan Closures Doncaster 0.8%
Yesss Electrical Normanton 0.8%
Turpin Distribution Services Biggleswade 0.8%
Royal Mail Group Coventry/Kilmarnock 0.8%
Yodel Bellshill 0.7%
HellermannTyton Cannock 0.7%
Massmould Milton Keynes 0.7%
Sherwin Williams Plymouth 0.7%
Worthington Armstrong Gateshead - Team Valley 0.6%
DX Nuneaton 0.6%
Saint-Gobain Milton Keynes 0.6%
Superdrug Avonmouth 0.6%
Unilin Distribution Manchester 0.6%
Heywood Williams Components Bedford 0.6%
BSS Group Bristol 0.6%
Elma Electronics Bedford 0.5%
Ichor Systems Hamilton 0.5%
Morrison Utility Services Stevenage 0.5%
A Share & Sons (t/a SCS) Livingston 0.5%
Sytner Oldbury 0.5%
Vertiv Infrastructure Bedford 0.5%
DHL Supply Chain Aberdeen 0.5%
Interserve Project Services Christchurch 0.5%
Semcon Warwick 0.5%
Procurri Europe Warrington 0.5%
Brenntag Cambuslang 0.5%
Dinex Exhausts Warrington 0.4%
VP Packaging Kettering 0.4%
MTS Logistics Coalville 0.4%
West Midlands Ambulance Service Erdington 0.4%
Warburton Langley Mill 0.4%
Northern Commercials Irlam 0.4%
Synergy Health Sheffield Parkway 0.4%
Bunzl Castleford 0.3%
Powder Systems Liverpool, Speke 0.3%
WH Partnership Gateshead 0.3%
Arkote Sheffield 0.3%
Sealed Air Kettering 0.3%
North Warwickshire Borough Council Atherstone 0.3%
DHL International Liverpool, Speke 0.3%
PHS Huntingdon 0.3%
Synertec Warrington 0.3%
DHL Global Forwarding (UK) Glasgow 0.2%
Acorn Web Offset Normanton 0.2%
ITM Power Sheffield 0.2%
Tricel Composites Leeds 0.2%
Sovereign Air Movement Leeds 0.2%
Rapid Vehicle Repairs Kettering 0.2%
Boots Gateshead 0.2%
MP Bio Science Harrison Court 0.1%
Rexel Gateshead 0.1%
Equinox Aromas Kettering 0.1%
Jangala Softplay Harrison Court 0.1%
Nital Training Academy Kettering 0.1%
The Human Office Gateshead 0.1%
Shakespeare Pharma Harrison Court 0.1%
Other smaller tenants Kettering 0.1%
VACANT 3.3%
41.4%
Office
Regus (Maidstone West Malling) West Malling 1.5%
First Title (t/a Enact Conveyancing) Leeds 1.5%
National Grid Castle Donnington 0.8%
Wienerberger Cheadle 0.8%
Home Office Sheffield 0.6%
Edwards Geldards Derby 0.6%
Countryside Properties Leicester 0.5%
Lyons Davidson Solihull 0.4%
Regus (Leicester Grove Park) Leicester 0.4%
Systra Birmingham 0.3%
Dehns Oxford 0.3%
Oxentia Oxford 0.3%
Cognizant Technology Glasgow 0.2%
Health & Safety Executive Sheffield 0.2%
NatWest Oxford 0.2%
Charles Stanley Oxford 0.2%
Erskine Murray Leicester 0.2%
KWB Property Management Birmingham 0.1%
Bell Cornwall Associates Birmingham 0.1%
Copeland Wedge Associates Birmingham 0.1%
Smith Institute Oxford 0.1%
Quantem Consulting Birmingham 0.1%
Bradley & Cuthbertson LLP Birmingham 0.1%
Safe Deposits Glasgow 0.1%
Other smaller tenants Various 0.1%
VACANT 1.9%
11.7%
Other
VW Group Derby/Shrewsbury/Stafford 2.0%
Williams Motor Co (Holdings) Stockport 1.5%
Total Fitness Health Clubs Lincoln - Total Fitness 0.9%
MKM Buildings Supplies Castleford/Lincoln 0.7%
Nuffield Health Stoke 0.7%
Co-Operative Gillingham 0.6%
Bannatyne Fitness Perth 0.5%
Pendragon Property York 0.5%
Liverpool Community Health NHS Trust Liverpool 0.5%
Royalbase Liverpool 0.5%
Parkwood Health & Fitness Salisbury 0.5%
Pizza Hut* Crewe/Leicester/Watford 0.4%
Listers Group Loughborough 0.4%
Mecca Bingo Crewe 0.3%
Chokdee Bath 0.3%
MTOR Gateshead 0.3%
Stonegate Pub Co High Wycombe 0.3%
Starbucks Coffee Maypole 0.3%
TJ Vickers & Sons Shrewsbury 0.3%
Loungers Kings Lynn/Torquay 0.3%
KBeverage (t/a Starbucks) Nottingham 0.3%
Mecca Bingo (sublet to Odeon Cinemas) Crewe 0.3%
The Gym Group Carlisle 0.3%
AGO Hotels Portishead 0.2%
Las Iguanas Torquay 0.2%
Le Bistrot Pierre Torquay 0.2%
Tim Hortons Perth 0.2%
McDonald's Plymouth 0.2%
JD Wetherspoons Portishead 0.2%
Scotco Eastern (t/a KFC) Perth 0.2%
Ask Italian Restaurant Shrewsbury 0.2%
Wedgmoor Crewe 0.2%
The Universal Church of the Kingdom of God Stratford 0.1%
Bright Horizons Chesham 0.1%
Raven Valley Gateshead 0.1%
Knutsford Day Nursery Knutsford 0.1%
F1 Autocentres Crewe 0.1%
Sam's Club (t/a House of the Rising Sun) Shrewsbury 0.1%
Edmundson Electrical Crewe 0.1%
Jurassic Coast (t/a Costa Coffee) Torquay 0.1%
Other smaller tenants Various 0.1%
VACANT 0.9%
16.3%
Retail
Superdrug Southsea/Weston-super-Mare/Worcester 1.3%
Specsavers Cardiff 0.8%
URBN UK Southampton 0.5%
Sportswift Cardiff/Portsmouth 0.5%
The Works Bury St Edmunds/Portsmouth 0.4%
Reiss Guildford 0.4%
Phase Eight Edinburgh 0.3%
Poundland Portsmouth 0.3%
Nationwide Shrewsbury 0.2%
Portsmouth City Council Southsea 0.2%
Foxtons Stratford 0.2%
Wilko Retail Taunton 0.2%
Signet Trading (t/a Ernest Jones) Chester 0.2%
Tesco Stores Birmingham 0.2%
Greggs Birmingham/Shrewsbury 0.2%
Holland & Barrett Shrewsbury 0.2%
Kruidvat Real Estate (t/a Savers) Colchester 0.2%
Crepeaffaire St Albans 0.2%
Lush Colchester 0.2%
H Samuel Colchester 0.2%
Der Touristik Chester 0.2%
The White Company Nottingham 0.1%
Savers Health & Beauty Bury St Edmunds 0.1%
Your Phone Care Portsmouth 0.1%
Feldale Retail (t/a Lakeland) Chester 0.1%
Ciel (Concessions) (t/a Chesca) Chester 0.1%
Aslan Jewellery Chester 0.1%
Done Brothers (t/a Betfred) Cheltenham 0.1%
Brook Taverner Cirencester 0.1%
Leeds Building Society Colchester 0.1%
The Danish Wardrobe (t/a Noa Noa) Cirencester 0.1%
Coral Birmingham 0.1%
Other smaller tenants Various 0.1%
VACANT 1.4%
9.7%
Retail Warehouse
B&Q Banbury/Galashiels/Weymouth 3.2%
Swindon/Ashton-under-Lyne/ Plymouth/Carlisle
B&M 2.9%
Wickes Winnersh/Burton upon Trent 1.8%
Matalan Leicester 1.2%
Magnet Gloucester/Leicester/Plymouth 1.1%
Halfords Carlisle/Sheldon/Weymouth 0.8%
Homebase Leighton Buzzard 0.8%
Go Outdoors Swindon 0.8%
Smyths Toys Gloucester 0.6%
JB Global (t/a Oak Furniture Land) Plymouth 0.6%
A Share & Sons (t/a SCS) Plymouth 0.5%
M&S Evesham 0.5%
Sainsbury's Torpoint 0.5%
Pets at Home Winnersh 0.5%
Boots Evesham 0.5%
CDS Burton upon Trent 0.5%
Argos Evesham 0.4%
Next Evesham 0.4%
Poundstretcher* Evesham/Grantham 0.4%
Dreams Sheldon 0.4%
TJ Morris (t/a HomeBargains) Portishead 0.3%
Iceland Carlisle 0.3%
Poundland Carlisle 0.2%
Sports Direct Weymouth 0.2%
Carpetright* Grantham 0.2%
1 Oak (t/a Starbucks) Burton upon Trent 0.1%
Majestic Wine Warehouse Portishead 0.1%
Other smaller tenants Various 0.1%
VACANT 1.0%
20.9%
*Includes tenants in occupation paying GBPnil rent through CVAs
where ERV has been used to calculate % portfolio income.
Principal risks and uncertainties
COVID-19 pandemic response
The impact of the COVID-19 pandemic has been pervasive across
the globe, and has had a significant impact on rental receipts,
tenant stability, property valuations, headroom against borrowing
covenants and government legislation, and could cause further
operational interruption to the Company for at least the financial
year ending 31 March 2022. This expected impact has been reflected
in the table below and is considered further in the Going concern
and longer-term viability section of the Strategic report, although
the Board believes uncertainty remains regarding the longer-term
ramifications of the COVID-19 pandemic.
The business resilience and risk planning of the Company's key
service providers has been tested during the year and in all cases
has responded very well to the challenges presented by the COVID-19
pandemic disruption, with all key teams able to work from home and
continue to offer high levels of service to the Company.
The Board met at least fortnightly via video-conference during
the initial period of lockdown and has continued to receive regular
updates on rent collection levels during the year to ensure the
Company reacted promptly to the dynamic situation, including
guiding and challenging the Investment Manager's response and
approving decisions quickly when required.
Risk assessment
The Board has overall responsibility for reviewing the
effectiveness of the system of risk management and internal control
which is operated by the Investment Manager. The Company's risk
management process is designed to identify, evaluate and mitigate
the significant risks the Company faces. At least annually, the
Board undertakes a risk review, with the assistance of the Audit
and Risk Committee, to assess the effectiveness of the Investment
Manager's risk management and internal control systems. During this
review, no significant failings or weaknesses were identified in
respect of risk management, internal control and related financial
and business reporting.
The Company holds a portfolio of high quality property let to
institutional grade tenants and is primarily financed by fixed rate
debt with no short-term refinancing risk. It does not undertake
speculative development.
There are a number of potential risks and uncertainties which
could have a material impact on the Company's performance over the
forthcoming financial year and could cause actual results to differ
materially from expected and historical results. The Directors have
assessed the risks facing the Company, including risks that would
threaten the business model, future performance, solvency or
liquidity. The table below outlines the principal risks identified,
but does not purport to be exhaustive as there may be additional
risks that materialise over time that the Company has not yet
identified or has deemed not likely to have a potentially material
adverse effect on the business.
Risk Assessment Mitigating factors
? Diverse property portfolio covering all key
Loss of revenue sectors and geographical areas
Likelihood: ? The Company has 265 individual tenancies with
? Tenant default due to a cessation or curtailment High the largest tenant accounting for 3.8% of the
of trade due to the COVID-19 pandemic rent roll
? An increasing number of tenants exercising ? Investment policy limits the Company's rent
contractual breaks or not renewing at lease expiry roll to no more than 10% from a single tenant
? Enforced reduction in contractual rents through a and 50% from a single sector
CVA or legislative changes due to the COVID-19 ? Primarily institutional grade tenants
pandemic Impact: High ? Focused on established business locations for
? Decreases in ERVs resulting in decreases in investment
passing rent to secure long-term occupancy ? Active management of lease expiry profile
? Expiries or breaks concentrated in a specific year considered in forming acquisition decisions
? Unable to re-let void units ? Building specifications typically not
? Low UK economic growth impacting the commercial tailored to one user
property market Overall change ? Strong tenant relationships have meant
in risk from short-term rent deferrals have been agreed
last year: where necessary to address arrears caused by
Remains high COVID-19 pandemic interruption
Decreases in property portfolio valuation
Likelihood:
? Decreases in sector-specific ERVs Moderate
? Loss of contractual revenue
? Tenants exercising contractual breaks or not ? Active property portfolio diversification
renewing at lease expiry between office, industrial (distribution,
? Market pricing affecting value manufacturing and warehousing), retail
? Change in demand for space warehousing, high street retail and other
? Properties concentrated in a specific geographical Impact: High ? Investment policy limits the Company's
location or sector property portfolio to no more than 50% in any
? Reduced property market sentiment and investor specific sector or geographical region
demand ? Smaller lot-size business model limits
? Lack of transactional evidence exposure to individual asset values
? High quality assets in good locations should
Overall change remain popular with investors
in risk from
last year:
Decreased
Likelihood:
Moderate ? The Company has three lenders
? Interest cover covenant waivers were in place
during the year
Financial ? Target net gearing of 25% LTV on property
portfolio
? Reduced availability or increased cost of ? 82% of drawn debt facilities at a fixed rate
arranging or servicing debt Impact: High of interest
? Breach of borrowing covenants ? Significant unencumbered properties available
? Significant increases in interest rates to cure any potential breaches of LTV
covenants
? Ongoing monitoring and management of the
forecast liquidity and covenant position
Overall change
in risk from
last year:
Decreased
Likelihood:
Low
Operational ? Ongoing review of performance by independent
Board of Directors
? Inadequate performance, controls or systems Impact: High ? Outsourced internal audit function reporting
operated by the Investment Manager directly to the Audit and Risk Committee
? External depositary with responsibility for
safeguarding assets and performing cash
monitoring
Overall change
in risk from
last year: No
change
Likelihood:
Moderate ? Strong compliance culture
? External professional advisers are engaged to
Regulatory and legal review and advise upon control environment,
ensure regulatory compliance and advise on
? Adverse impact of new or revised legislation or the impact of changes due to the COVID-19
regulations, or by changes in the interpretation pandemic
or enforcement of existing government policy, laws Impact: High ? Business model and culture embraces FCA
and regulations principles
? Non-compliance with the REIT regime[26] or changes ? REIT regime compliance is considered by the
to the Company's tax status Board in assessing the Company's financial
position and setting dividends and by the
Investment Manager in making operational
Overall change decisions
in risk from
last year:
Decreased
Likelihood:
Moderate
? Investment Manager staff are all capable of
working from home for an extended period
? Data is regularly backed up and replicated
Business interruption and the Investment Manager's IT systems are
protected by anti-virus software and
? Cyber-attack results in the Investment Manager Impact: High firewalls that are regularly updated
being unable to use its IT systems and/or losing ? Fire protection and access/security
data procedures are in place at all of the
? Terrorism or pandemics interrupt the Company's Company's managed properties
operations through impact on either the Investment ? Comprehensive property damage and business
Manager or the Company's assets or tenants interruption insurance is held, including
Overall change three years' lost rent and terrorism
in risk from ? At least annually, a fire risk assessment and
last year: health and safety inspection is performed for
Decreased each property in the Company's managed
portfolio
Likelihood: ? The Company engaged specialist environmental
Moderate consultants in 2019 to advise the Board on
ESG compliance with requirements and adopting
best practice where possible
? Failure to appropriately manage the environmental ? The Company published its ESG policy in 2020
performance of the property portfolio, resulting which seeks to improve energy efficiency and
in it not meeting the required standards of reduce emissions
environmental legislation and making properties Impact: ? In April 2021 the Company constituted an ESG
unlettable or unsellable Moderate Committee to ensure compliance with
? ESG policies and targets being insufficient to environmental requirements, the ESG policy
meet the required standards of stakeholders and environmental KPIs, detailed in the ESG
? Non-compliance with environmental reporting Committee report
requirements ? At a property level an environmental
assessment is undertaken which influences
Overall change decisions regarding acquisitions,
in risk from refurbishments and asset management
last year: initiatives
Increased
Likelihood:
Low
Acquisitions
? Unidentified liabilities associated with the Impact: High ? Comprehensive due diligence is undertaken in
acquisition of new properties (whether acquired conjunction with professional advisers and
directly or via a corporate structure) the provision of insured warranties and
indemnities are sought from vendors where
appropriate
Overall change
in risk from
last year: No
change
Emerging risks
The COVID-19 pandemic represents a principal risk and has
significantly impacted the Company in the current financial year,
but its medium and long-term impacts on the global economy are yet
to be fully understood.
The Board is continuing to monitor the potential longer-term
risks associated with Brexit. The main potential negative impact of
Brexit is a deterioration of the macro-economic environment,
potentially leading to further political uncertainty and the
investment and occupier markets. The Board believes the Company is
well placed to weather any longer-term impact of Brexit because the
Company has a diverse portfolio by sector and location with an
institutional grade tenant base and low gearing.
No emerging risks have been added to the Company's Risk Register
during the year. Going concern and longer-term viability
In accordance with Provision 31 of the UK Corporate Governance
Code 2018 issued by the Financial Reporting Council ("the Code"),
the Directors have assessed the prospects of the Company over a
period longer than 12 months. The Board resolved to conduct this
review for a period of three years, because: ? The Company's
forecasts cover a three-year period; and ? The Board believes a
three-year horizon maintains a reasonable level of accuracy
regarding projected rental income
and costs, allowing robust sensitivity analysis to be
conducted.
The Directors have assessed the following factors, in particular
relating to the impact of the COVID-19 pandemic, in assessing the
Company's status as a going concern and its longer-term viability,
including events up to the date of authorisation of the financial
statements: ? The extent of any operational disruption; ? Potential
curtailment of rental receipts; ? Diminished demand for leasing the
Company's assets going forwards; ? Contractual obligations due or
anticipated within one year; ? Potential liquidity and working
capital shortfalls; ? Access to funding and compliance with banking
covenants; and ? Ongoing compliance with regulatory requirements
including the REIT regime.
The Directors note that the Company has performed better than
expected over the course of the COVID-19 pandemic disruption, with
rent collection rates ahead of forecast and industrial asset
valuations and rents in particular improving over the last 12
months.
Results of the assessment
Based on prudent assumptions within the Company's forecasts
regarding the recovery of deferred rent, tenant default, void rates
and property valuation movements, the Directors expect that over
the three-year period of their assessment: ? The Company has
surplus cash to continue in operation and meet its liabilities as
they fall due; ? Interest cover covenants on borrowings are
complied with; ? LTV covenants aren't breached; and ? REIT tests
are complied with.
Sensitivities
These assessments are subject to sensitivity analysis, which
involves flexing a number of key assumptions and judgements
included in the financial projections: ? The anticipated level of
recovery of rents deferred due to the impact of the COVID-19
pandemic; ? Tenant default; ? Length of potential void period
following lease break or expiry; ? Acquisition NIY, disposals,
anticipated capital expenditure and the timing of deployment of
cash; ? Interest rate changes; and ? Property portfolio valuation
movements.
This sensitivity analysis also evaluates the potential impact of
the principal risks and uncertainties should they occur which,
together with the steps taken to mitigate them, are highlighted
above and in the Audit and Risk Committee report. The Board seeks
to ensure that risks are mitigated appropriately and managed within
its risk appetite all times.
Sensitivity analysis considered the following areas:
Covenant compliance
The Company operates four loan facilities which are summarised
in Note 15. At 31 March 2021 the Company had significant headroom
on lender covenants at a portfolio level with: ? Company net
gearing of 24.9% compared to a maximum LTV covenant of 35% and
GBP165.0m (30% of the property portfolio)
unencumbered by the Company's borrowings; and ? Covenant waivers
in place on its fixed-rate debt facilities for the quarter ended 31
March 2021 to mitigate risk on
each individual security pool.
Reverse stress testing has been undertaken to understand what
circumstances would result in potential breaches of financial
covenants. While the assumptions applied in these scenarios are
possible, they do not represent the Board's view of the likely
outturn, but the results help inform the Directors' assessment of
the viability of the Company. The testing indicated that: ? The
rate of loss or deferral of contractual rent on the borrowing
facility with least headroom would need to
deteriorate by a further 38% from the levels included in the
Company's prudent forecasts to breach interest cover
covenants; and ? At a portfolio level property valuations would
have to decrease by 28% from the 31 March 2021 position to risk
breaching the overall 35% LTV covenant.
The Board notes that the May 2021 IPF Forecasts for UK
Commercial Property Investment survey suggests an average 0.4%
increase in rents during 2021 with capital value increases of 1.8%.
The Board believes that the valuation of the Company's property
portfolio will prove resilient due to its higher weighting to
industrial assets and overall diverse and high-quality asset and
tenant base comprising 159 assets and over 201 typically
'institutional grade' tenants across all commercial sectors.
Liquidity
At 31 March 2021 the Company has: ? GBP3.9m of cash-in-hand and
GBP10m undrawn RCF, with gross borrowings of GBP140m resulting in
low net gearing, with no
short-term refinancing risk and a weighted average debt facility
maturity of seven years; ? An annual contractual rent roll of
GBP38.7m, with interest costs on drawn loan facilities of only c.
GBP4.7m per annum;
and ? Received 90% of rents due relating to the April - June
2021 quarter.
The Company's forecast model projects it will have sufficient
cash and undrawn facilities to settle its target dividends and its
expense and interest liabilities for a period of at least 12
months.
The Board has considered the scenario used in covenant
compliance reverse stress testing, where the rate of loss or
deferral of contractual rent deteriorates by a further 10% from the
levels included in the Company's prudent three-year forecasts. In
this scenario, over the three year longer-term viability assessment
horizon, all financial covenants and the REIT tests are complied
with and the Company has surplus cash to settle its
liabilities.
As detailed in Note 15, the Company's GBP35m RCF expires in
September 2023 but can be extended by a further year at the
lender's discretion. The Board anticipates lender support in
agreeing to the available extensions, and would seek to refinance
the RCF with another lender or dispose of sufficient properties to
repay it in September 2023 in the unlikely event of lender support
being withdrawn.
Impact of the COVID-19 pandemic
The Board believes it too early to understand fully the
longer-term impact of the COVID-19 pandemic, in particular on the
future use of office and the impact of the acceleration of retail
sales moving online, but the Board believes the Company is well
placed to weather any shorter-term impacts due to the reasons set
out in the Principal risks and uncertainties section.
Section 172 statement and stakeholder relationships
The Directors consider that in conducting the business of the
Company over the course of the year they have complied with Section
172(1) of the Companies Act 2006 ("the Act") by fulfilling their
duty to promote the success of the Company and act in the way they
consider, in good faith, would be most likely to promote the
success of the Company for the benefit of its members as a
whole.
Issues, factors and stakeholders
The Board has direct engagement with the Company's shareholders
and seeks a rounded and balanced understanding of the broader
impact of its decisions through regular engagement with its
stakeholder groups (detailed below) to understand their views,
typically through feedback from the Investment Manager and the
Company's broker, which is regularly communicated to the Board via
quarterly meetings. Stakeholder engagement also ensures the Board
is kept aware of any significant changes in the market, including
the identification of emerging trends and risks, which in turn can
be factored into its strategy discussions.
Management of the Company's day-to-day operations has been
delegated to the Investment Manager, Custodian Capital Limited, and
the Company has no employees. This externally managed structure
allows the Board and the Investment Manager to have due regard to
the impact of decisions on the following matters specified in
Section 172 (1) of the Act:
Section 172(1) factor
Approach taken
The business model and strategy of the Company is set out within the Strategic Report. Any
deviation from or amendment to that strategy is subject to Board and, if necessary,
shareholder approval. The Company's Management Engagement Committee ensures that the
Investment Manager is operating within the scope of the Company's investment objectives.
At least annually, the Board considers a budget for the delivery of its strategic objectives
based on a three year forecast model. The Investment Manager reports non-financial and
financial key performance indicators to the Board, set out in detail in the Business model and
strategy section of the Strategic report, at least quarterly which are used to assess the
outcome of decisions made.
Likely consequences of The Board's commitment to keeping in mind the long-term consequences of its decisions
any decision in the underlies its focus on risk, including risks to the long-term success of the business. This
long-term approach resulted in the change to dividend policy during the year to preserve cash resources
by broadly paying dividends from net rental income, in response to the political and market
uncertainty caused by the COVID 19 pandemic.
The investment strategy of the Company is focused on medium to long-term returns and
minimising the Company's impact on communities and the environment and as such the long-term
is firmly within the sights of the Board when all material decisions are made.
The board gains an understanding of the views of the Company's key stakeholders from the
Investment Manager, broker and Management Engagement Committee, and considers those
stakeholders' interests and views in board discussions and long-term decision-making.
The Company has no employees as a result of its external management structure, but the
Directors have regard to the interests of the individuals responsible for delivery of the
property management and administration services to the Company to the extent that they are
The interests of the able to.
Company's employees
The Company's Nominations Committee is responsible for applying the diversity policy set out
in the Nominations Committee Report to Board recruitment.
Business relationships with suppliers, tenants and other counterparties are managed by the
Investment Manager. Suppliers and other counterparties are typically professional firms such
as lenders, property agents and other property professionals, accounting firms and legal firms
and tenants with which the Investment Manager often has a longstanding relationship. Where
material counterparties are new to the business, checks, including anti money laundering
checks where appropriate, are conducted prior to transacting any business to ensure that no
reputational or legal issues would arise from engaging with that counterparty. The Company
The need to foster the also periodically reviews the compliance of all material counterparties with relevant laws and
Company's business regulations such as the Modern Slavery Act 2015. The Company pays suppliers in accordance
relationships with with pre-agreed terms. The Management Engagement Committee engages directly with the
suppliers, customers and Company's key service providers providing a direct line of communication for receiving
others feedback and resolving issues.
Because the Investment Manager directly invoices most tenants and collects rent without using
managing agents, it has open lines of communication with tenants and can understand and
resolve any issues promptly.
The Board recognises the importance of supporting local communities where the Company's assets
are located and seeks to invest in properties which will be fit for future purpose and which
align with ESG targets. The Company also seeks to benefit local communities by creating
social value through employment, viewing its properties as a key part of the fabric of the
local economy.
The impact of the
Company's operations on
the community and the
environment The Board takes overall responsibility for the Company's impact on the community and the
environment and its ESG policies are set out in the ESG report.
The Company's approach to preventing bribery, money laundering, slavery and human trafficking
is disclosed in the Governance report.
The Board believes that the ability of the Company to conduct its investment business and
The desirability of the finance its activities depends in part on the reputation of the Board and Investment Manager's
Company maintaining a team. The risk of falling short of the high standards expected and thereby risking its
reputation for high business reputation is included in the Board's review of the Company's risk register, which is
standards of business conducted periodically. The principal risks and uncertainties facing the business are set out
conduct in that section of the Strategic report. The Company's requirements for a high standard of
conduct and business ethics are set out in the Governance report.
The Company's shareholders are a very important stakeholder group. The Board oversees the
Investment Manager's formal investor relations programme which involves the Investment Manager
engaging routinely with the Company's shareholders. The programme is managed by the Company's
broker and the Board receives prompt feedback from both the Investment Manager and broker on
the outcomes of meetings and presentations. The Board and Investment Manager aim to be open
with shareholders and available to them, subject to compliance with relevant securities laws.
The Chairman of the Company and other Non-Executive Directors make themselves available for
The need to act fairly meetings as appropriate and attend the Company's AGM.
as between members of
the Company
The investor relations programme is designed to promote formal engagement with investors and
is typically conducted after each half-yearly results announcement. The Investment Manager
also engages with existing investors who may request meetings and with potential new investors
on an ad hoc basis throughout the year, including where prompted by Company announcements.
Shareholder presentations are made available on the Company's website. The Company has a
single class of share in issue with all members of the Company having equal rights.
Methods used by the Board
The main methods used by the Directors to perform their duties
include: ? Board Strategy Days held at least annually to review all
aspects of the Company's business model and strategy and
assess the long-term sustainable success of the Company and its
impact on key stakeholders; ? The Management Engagement Committee
engages with the Company's key service providers and reports on
their
performance to the Board. The responsibilities of the Management
Engagement Committee are detailed in the
Management Engagement Committee report; ? The Board is
responsible for the Company's ESG activities set out in the ESG
Committee report, which it believes
are a key part of benefitting the local communities where the
Company's assets are located; ? The Board's risk management
procedures set out in the Governance report identify the potential
consequences of
decisions in the short, medium and long-term so that mitigation
plans can be put in place to prevent, reduce or
eliminate risks to the Company and wider stakeholders; ? The
Board sets the Company's purpose, values and strategy, detailed in
the Business model and strategy section of
the Strategic report, and the Investment Manager ensures they
align with its culture; ? The Board carries out direct shareholder
engagement via the AGM and Directors attend shareholder meetings on
an ad
hoc basis; ? External assurance is received through internal and
external audits and reports from brokers and advisers; and ?
Specific training for existing Directors and induction for new
Directors as set out in the Governance report. Principal decisions
in the year
The Board has delegated operational functions to the Investment
Manager and other key service providers. In particular,
responsibility for management of the Company's property portfolio
has been delegated to the Investment Manager. The Board retains
responsibility for reviewing the engagement of the Investment
Manager and exercising overall control of the Company, reserving
certain key matters as set out in the Governance report.
The principal non-routine decisions taken by the Board during
the year were: ? Liaising with the Investment Manager to implement
measures to ameliorate the effects of the COVID-19 pandemic; ?
Extending the term of the RCF as detailed in Note 15; ? Renewing
the Investment Management Agreement as detailed in Note 18; ?
Appointing two new Directors as detailed in the Chairman's
statement; ? Changing one of the Company's independent valuers from
the quarter ending 30 June 2021 as detailed in the
Investment Manager's report; and ? Constituting an ESG Committee
as detailed in the ESG Committee report.
Due to the nature of these decisions, a variety of stakeholders
had to be factored into the Board's discussions. Each decision was
announced at the time, so that all stakeholders were aware of the
decisions.
Stakeholders
The Board recognises the importance of stakeholder engagement to
deliver its strategic objectives and believes its stakeholders are
vital to the continued success of the Company. The Board is mindful
of stakeholder interests and keeps these at the forefront of
business and strategic decisions. Regular engagement with
stakeholders is fundamental to understanding their views. The below
section highlights how the Company engages with its key
stakeholders, why they are important and the impact they have on
the Company and therefore its long-term success, which the Board
believes helps demonstrate the successful discharge of its duties
under s172(1) of the Act.
Stakeholder Stakeholder interests Stakeholder engagement
? Regular dialogue
through rent
collection process
? Review published
data, such as
Tenants ? High quality assets accounts, trading
? Profitability updates and
The Investment Manager understands the businesses occupying the ? Efficient operations analysts' reports
Company's assets and seeks to create long-term partnerships and ? Knowledgeable and ? Ensured buildings
understand their needs to deliver fit for purpose real estate committed landlord comply with the
and develop asset management opportunities to underpin long-term ? Flexibility to adapt to necessary safety
sustainable income growth and maximise occupier satisfaction the changing UK regulations and
commercial landscape insurance
? Buildings with strong ? Most tenants
environmental credentials contacted to request
environmental
performance data
? Occupancy has
remained at over 90%
during the year
? Board and Committee
? Long-term viability of meetings
the Company ? Face-to-face and
The Investment Manager and its employees ? Long-term relationship video-conference
with the Company meetings with the
As an externally managed fund the Company's key service provider ? Well-being of the Chairman and other
is the Investment Manager and its employees are a key Investment Manager's Board Directors
stakeholder. The Investment Manager's culture aligns with that employees ? Monthly and
of the Company and its long-standing reputation of operating in ? Being able to attract and quarterly KPI
the smaller lot-size market is key when representing the Company retain high-calibre staff reporting to the
? Maintaining a positive Board
and transparent ? External Board
relationship with the evaluation,
Board including feedback
from key Investment
Manager personnel
? Informal meetings
and calls
Suppliers ? Collaborative and ? Board and Committee
transparent working meetings
A collaborative relationship with our suppliers, including those relationships ? One-to-one meetings
to whom key services are outsourced, ensures that we receive ? Responsive communication ? Annual review of key
high quality services to help deliver strategic and investment ? Being able to deliver service providers
objectives service level agreements for the Management
Engagement Committee
? Annual and half year
presentations
? Sustainable growth ? AGM
Shareholders ? Attractive level of ? Market announcements
income returns and corporate
Building a strong investor base through clear and transparent ? Strong Corporate website
communication is vital to building a successful and sustainable Governance and ? Regular investor
business and generating long-term growth environmental credentials feedback received
? Transparent reporting from the Company's
framework broker
? On-going dialogue
with analysts
? Stable cash flows
? Stronger covenants
Lenders ? Being able to meet
interest payments ? Regular covenant
Our lenders play an important role in our business. The ? Maintaining agreed reporting
Investment Manager maintains close and supportive relationships gearing ratios ? Face-to-face
with this group of long-term stakeholders, characterised by ? Regular financial meetings, when
openness, transparency and mutual understanding reporting restrictions allow
? Proactive notification of
issues or changes
? Openness and transparency
? Proactive compliance with
new legislation
Government, local authorities and communities ? Proactive engagement
? Support for local ? Engagement with
As a responsible corporate citizen the Company is committed to economic and local authorities
engaging constructively with central and local government and environmental plans and where we operate
ensuring we support the wider community strategies ? Two way dialogue
? Playing its part in with regulators and
providing the real estate HMRC
fabric of the economy,
giving employers a place
of business
Approval of Strategic report
The Strategic report, (incorporating the Business model and
strategy, Chairman's statement, Investment Manager's report, Asset
management report, ESG Committee report, Financial report, Property
portfolio, Principal risks and uncertainties and Section 172
statement and stakeholder relationships) was approved by the Board
of Directors and signed on its behalf by:
David Hunter
Chairman
15 June 2021
Consolidated statement of comprehensive income
For the year ended 31 March 2021
Year ended Year ended
31 March 31 March
2021 2020
Note GBP000 GBP000
Revenue 4 39,578 40,903
Investment management (3,331) (3,517)
Operating expenses of rental property
? rechargeable to tenants (914) (880)
? directly incurred (5,559) (1,883)
Professional fees (489) (445)
Directors' fees (218) (200)
Administrative expenses (551) (620)
Expenses (11,062) (7,545)
Operating profit before financing and revaluation of investment property
28,516 33,358
Unrealised losses on revaluation of investment property:
? relating to property revaluations 10 (19,611) (25,850)
? relating to costs of acquisition 10 (707) (599)
Valuation decrease (20,318) (26,449)
Profit/(loss) on disposal of investment property 393 (101)
Net loss on investment property (19,925) (26,550)
Operating profit before financing 8,591 6,808
Finance income 6 61 36
Finance costs 7 (4,903) (4,721)
Net finance costs (4,842) (4,685)
Profit before tax 3,749 2,123
Income tax expense 8 - -
Profit for the year and total comprehensive income for the year, net of tax
3,749 2,123
Attributable to:
Owners of the Company 3,749 2,123
Earnings per ordinary share:
Basic and diluted (p) 3 0.9 0.5
EPRA (p) 3 5.6 7.0
The profit for the year arises from the Company's continuing
operations.
Consolidated and Company statements of financial position
As at 31 March 2021
Registered number: 08863271
Group Company
31 March
31 March 2021 31 March 2021 31 March 2020
2020
Note GBP000 GBP000 GBP000
GBP000
Non-current assets
Investment property 10 551,922 559,817 551,922 559,817
Investments 11 - - 3,405 3,405
Total non-current assets 551,922 559,817 555,327 563,222
Current assets
Trade and other receivables 12 6,001 5,297 6,001 5,297
Cash and cash equivalents 14 3,920 25,399 3,920 25,399
Total current assets 9,921 30,696 9,921 30,696
Total assets 561,843 590,513 565,248 593,918
Equity
Issued capital 16 4,201 4,201 4,201 4,201
Share premium 16 250,469 250,469 250,469 250,469
Retained earnings 16 155,196 172,082 155,196 172,082
Total equity attributable to equity holders of the Company
409,866 426,752 409,866 426,752
Non-current liabilities
Borrowings 15 138,604 148,323 138,604 148,323
Other payables 572 576 572 576
Total non-current liabilities 139,176 148,899 139,176 148,899
Current liabilities
Trade and other payables 13 6,185 7,794 9,590 11,199
Deferred income 6,616 7,068 6,616 7,068
Total current liabilities 12,801 14,862 16,206 18,267
Total liabilities 151,977 163,761 155,382 167,166
Total equity and liabilities 561,843 590,513 565,248 593,918
As permitted by Section 408 of the Companies Act 2006, no
separate profit and loss account is presented in respect of the
parent company. The profit for the financial year dealt with in the
financial statements of the parent company was GBP3,749,000 (2020:
GBP2,123,000).
These consolidated and Company financial statements of Custodian
REIT plc were approved and authorised for issue by the Board of
Directors on 15 June 2021 and are signed on its behalf by:
David Hunter
Chairman
Consolidated and Company statements of cash flows
For the year ended 31 March 2021
Year
Year ended
ended
Group and Company 31 March
31 March
2021
2020
Note GBP000 GBP000
Operating activities
Profit for the year 3,749 2,123
Net finance costs 4,842 4,685
Valuation decrease of investment property 10 20,318 26,449
Impact of rent free 10 (1,932) (1,402)
Amortisation of right-of-use asset 7 7
(Profit)/loss on disposal of investment property (393) 101
Cash flows from operating activities before changes in working capital and provisions
26,591 31,963
Increase in trade and other receivables (704) (1,623)
(Decrease)/increase in trade and other payables and deferred income (2,065) 702
Cash generated from operations 23,822 31,042
Interest and other finance charges (4,556) (4,435)
Net cash flows from operating activities 19,266 26,607
Investing activities
Purchase of investment property (11,443) (24,048)
Capital expenditure and development (2,308) (2,804)
Acquisition costs (707) (599)
Disposal of investment property 4,422 15,383
Costs of disposal of investment property (69) (159)
Interest and finance income received 6 61 36
Net cash used in investing activities (10,044) (12,191)
Financing activities
Proceeds from the issue of share capital 16 - 25,300
Costs of share issue - (292)
New borrowings net of origination costs 15 (10,066) 10,505
Dividends paid 9 (20,635) (27,002)
Net cash from financing activities (30,701) 8,511
Net (decrease)/increase in cash and cash equivalents (21,479) 22,927
Cash and cash equivalents at start of the year 25,399 2,472
Cash and cash equivalents at end of the year 3,920 25,399
Consolidated and Company statements of changes in equity
For the year ended 31 March 2021
Issued Share Retained Total
capital premium earnings equity
Note GBP000 GBP000 GBP000 GBP000
As at 1 April 2019 3,982 225,680 196,961 426,623
Profit for the year - - 2,123 2,123
Total comprehensive income for year - - 2,123 2,123
Transactions with owners of the Company, recognised directly in equity
Dividends 9 - - (27,002) (27,002)
Issue of share capital 16 219 24,789 - 25,008
As at 31 March 2020 4,201 250,469 172,082 426,752
Profit for the year - - 3,749 3,749
Total comprehensive income for year - - 3,749 3,749
Transactions with owners of the Company, recognised directly in equity
Dividends 9 - - (20,635) (20,635)
Issue of share capital 16 - - - -
As at 31 March 2021 4,201 250,469 155,196 409,866
Notes to the financial statements for the year ended 31 March
2021 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 15 June 2021. 2. Basis of preparation and accounting
policies 1. Basis of preparation
The consolidated financial statements and the separate financial
statements of the parent company have been prepared in accordance
with international accounting standards in conformity with the
requirements of the Companies Act 2006 and International Financial
Reporting Standards adopted pursuant to Regulation (EC) No
1606/2002 as it applies in the European Union. The financial
statements have also been prepared in accordance with International
Financial Reporting Standards as issued by the IASB.
Certain statements in this report are forward looking
statements. By their nature, forward looking statements involve a
number of risks, uncertainties or assumptions that could cause
actual results or events to differ materially from those expressed
or implied by those statements. Forward looking statements
regarding past trends or activities should not be taken as
representation that such trends or activities will continue in the
future. Accordingly, undue reliance should not be placed on forward
looking statements. 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 December accounting reference
dates which have not been amended since their acquisition as those
companies are expected to be liquidated during the next financial
year. All transactions and balances between group companies are
eliminated on consolidation, including unrealised gains and losses
on transactions between group companies. Where unrealised losses on
intra-group asset sales are reversed on consolidation, the
underlying asset is also tested for impairment from a group
perspective. Amounts reported in the financial statements of the
subsidiary are adjusted where necessary to ensure consistency with
the accounting policies adopted by the Group. Profit or loss and
other comprehensive income of subsidiaries acquired or disposed of
during the year are recognised from the effective date of
acquisition, or up to the effective date of disposal, as
applicable. 3. Application of new and revised International
Financial Reporting Standards
During the year the Company adopted the following new standards
with no impact on reported financial performance or position: ?
COVID-19-related rent concessions amendment to IFRS 16 ? Amendments
to References to the Conceptual Framework in IFRS Standards ?
Amendments to IAS 1 and IAS 8 Definition of material ? Amendments
to IAS 1 Classification of Liabilities as Current or
Non-current
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 17 - 'Insurance Contracts'
IFRS 17 was published in May 2017 and is effective for periods
commencing on or after 1 January 2021. IFRS 17 establishes the
principles for the recognition, measurement, presentation and
disclosure of insurance contracts and supersedes IFRS 4 Insurance
Contracts. ? Annual Improvements to IFRS Standards 2018-2020
The Company has not completed its review of the impact of these
new standards but does not anticipate them having a significant
impact. 4. Significant accounting policies
The principal accounting policies adopted by the Group and
Company and applied to these financial statements are set out
below.
Going concern
The Directors believe the Company is well placed to manage its
business risks successfully despite the impact of the COVID-19
pandemic on rent deferrals and tenant default. The Company's
projections show that the Company should be able to operate within
the level of its current financing arrangements for at least the
next 12 months, set out in more detail in the Directors' report and
Principal risks and uncertainties section of the Strategic report.
Accordingly, the Directors continue to adopt the going concern
basis for the preparation of the financial statements.
Income recognition
Contractual revenues are allocated to each performance
obligation of a contract and revenue is recognised on a basis
consistent with the transfer of control of goods or services.
Revenue is measured at the fair value of the consideration
received, excluding discounts, rebates, VAT and other sales taxes
or duties.
Rental income from operating leases on properties owned by the
Company is accounted for on a straight-line basis over the term of
the lease. Rental income excludes service charges and other costs
directly recoverable from tenants.
Lease incentives are recognised on a straight-line basis over
the lease term.
Revenue and profits on the sale of properties are recognised on
the completion of contracts. The amount of profit recognised is the
difference between the sale proceeds and the carrying amount.
Finance income relates to bank interest receivable and amounts
receivable on ongoing development funding contracts.
Taxation
The Group operates as a REIT and hence profits and gains from
the property rental business are normally expected to be exempt
from corporation tax. The tax expense represents the sum of the tax
currently payable and deferred tax relating to the residual
(non-property rental) business. The tax currently payable is based
on taxable profit for the year. Taxable profit differs from net
profit as reported in the statement of comprehensive income because
it excludes items of income and expense that are taxable or
deductible in other years and it further excludes items that are
never taxable or deductible. The Company's liability for current
tax is calculated using tax rates that have been enacted or
substantively enacted by the reporting date.
Investment property
Investment property is held to earn rentals and/or for capital
appreciation and is initially recognised at cost including direct
transaction costs. Investment property is subsequently valued
externally on a market basis at the reporting date and recorded at
valuation. Any surplus or deficit arising on revaluing investment
property is recognised in profit or loss in the year in which it
arises. Dilapidations receipts are held in the statement of
financial position and offset against subsequent associated
expenditure. Any ultimate gains or shortfalls are measured by
reference to previously published valuations and recognised in
profit or loss, offset against any directly corresponding movement
in fair value of the investment properties to which they
relate.
Group undertakings
Investments are included in the Company only statement of
financial position at cost less any provision for impairment.
Non-listed equity investments
Non-listed equity investments are classified at fair value
through profit and loss and are subsequently measured using level 3
inputs, meaning valuation techniques for which the lowest level
input that is significant to the fair value measurement is
unobservable.
Financial assets
The Company's financial assets include cash and cash equivalents
and trade and other receivables. Interest resulting from holding
financial assets is recognised in profit or loss on an accruals
basis.
Loans and receivables are measured subsequent to initial
recognition at amortised cost using the effective interest method,
less provision for impairment. Provision for impairment of trade
and other receivables is made when objective evidence is received
that the Company will not be able to collect all amounts due to it
in accordance with the original terms of the receivable. The amount
of the impairment is determined as the difference between the
asset's carrying amount and the present value of estimated future
cash flows, discounted at the effective rate computed at initial
recognition. Any change in value through impairment or reversal of
impairment is recognised in profit or loss.
A financial asset is de-recognised only where the contractual
rights to the cash flows from the asset expire or the financial
asset is transferred and that transfer qualifies for
de-recognition. A financial asset is transferred if the contractual
rights to receive the cash flows of the asset have been transferred
or the Company retains the contractual rights to receive the cash
flows of the asset but assumes a contractual obligation to pay the
cash flows to one or more recipients. A financial asset that is
transferred qualifies for de-recognition if the Company transfers
substantially all the risks and rewards of ownership of the
asset.
Cash and cash equivalents
Cash and cash equivalents include cash in hand and on-demand
deposits, and other short-term highly liquid investments that are
readily convertible into a known amount of cash and are subject to
an insignificant risk of changes in value.
Financial liabilities and equity
Financial liabilities and equity instruments are classified
according to the substance of the contractual arrangements entered
into. An equity instrument is any contract that evidences a
residual interest in the assets of the Company after deducting all
of its liabilities. Equity instruments issued by the Company are
recorded at the proceeds received, net of direct issue costs.
Share capital represents the nominal value of equity shares
issued. Share premium represents the excess over nominal value of
the fair value of the consideration received for equity shares, net
of direct issue costs.
Retained earnings include all current and prior year results as
disclosed in profit or loss. Retained earnings include realised and
unrealised profits. Profits are considered unrealised where they
arise from movements in the fair value of investment properties
that are considered to be temporary rather than permanent.
Bank borrowings
Interest-bearing bank loans and overdrafts are recorded at the
fair value of proceeds received, net of direct issue costs. Finance
charges, including premiums payable on settlements or redemption
and direct issue costs, are accounted for on an accruals basis in
profit or loss using the effective interest rate method and are
added to the carrying amount of the instrument to the extent that
they are not settled in the period in which they arise.
Trade payables
Trade payables are initially measured at fair value and are
subsequently measured at amortised cost, using the effective
interest rate method.
Leases
Where an investment property is held under a leasehold interest,
the headlease is initially recognised as an asset at cost plus the
present value of minimum ground rent payments. The corresponding
rental liability to the head leaseholder is included in the balance
sheet as a liability. Lease payments are apportioned between the
finance charge and the reduction of the outstanding liability so as
to produce a constant periodic rate of interest on the remaining
lease liability.
Segmental reporting
An operating segment is a distinguishable component of the
Company that engages in business activities from which it may earn
revenues and incur expenses, whose operating results are regularly
reviewed by the Company's chief operating decision maker (the
Board) to make decisions about the allocation of resources and
assessment of performance and about which discrete financial
information is available. As the chief operating decision maker
reviews financial information for, and makes decisions about the
Company's investment properties as a portfolio, the Directors have
identified a single operating segment, that of investment in
commercial properties. 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 investment property -
Investment property is valued at the reporting date at fair value.
Where an
investment property is being redeveloped the property continues
to be treated as an investment property. Surpluses
and deficits attributable to the Company arising from
revaluation are recognised in profit or loss. Valuation
surpluses reflected in retained earnings are not distributable
until realised on sale. In making its judgement
over the valuation of properties, the Company considers
valuations performed by the independent valuers in
determining the fair value of its investment properties. The
valuers make reference to market evidence of
transaction prices for similar properties. The valuations are
based upon assumptions including future rental
income, anticipated maintenance costs and appropriate discount
rates. In response to the COVID-19 pandemic, 31
March 2020 valuations were subject to a 'material uncertainty'
clause in line with RICS guidance. Valuation
assumptions also include, for certain assets occupied by tenants
currently not trading or with trade significantly
curtailed at the year end, a three-month rental void and a yield
increase of 10-75bps.
Estimates
Areas where accounting estimates are significant to the
financial statements are: ? Doubtful debt provisioning - the
approach to providing for 'expected credit losses' is detailed in
Note 12 and uses
estimates within a matrix of how much the credit risk of trade
receivables has increased since initial recognition
based on a number of days overdue, taking into account
qualitative and quantitative supportable information. Due
to the impact of the COVID-19 pandemic on collection rates,
there has been a significant increase in assessed
credit risk during the year. Each individual property rental
receivable is reviewed to assess whether there is a
probability of default and expected credit loss given the
Investment Manager's knowledge of the specific tenant
over and above the provision calculated from the matrix. 3.
Earnings per ordinary share
Basic EPS amounts are calculated by dividing net profit for the
year attributable to ordinary equity holders of the Company by the
weighted average number of ordinary shares outstanding during the
year.
Diluted EPS amounts are calculated by dividing the net profit
attributable to ordinary equity holders of the Company by the
weighted average number of ordinary shares outstanding during the
year plus the weighted average number of ordinary shares that would
be issued on the conversion of all the dilutive potential ordinary
shares into ordinary shares. There are no dilutive instruments in
issue. Shares issued after the year end are disclosed in Note
20.
The Company is a FTSE EPRA/NAREIT index series constituent and
EPRA performance measures have been disclosed to facilitate
comparability with the Company's peers through consistent reporting
of key performance measures. EPRA has issued recommended bases for
the calculation of EPS which the Directors consider are better
indicators of performance.
Year Year
ended ended
31 March 31 March
2021 2020
Net profit and diluted net profit attributable to equity holders of the Company (GBP000)
3,749 2,123
Net loss on investment property (GBP000) 19,925 26,550
EPRA net profit attributable to equity holders of the Company (GBP000) 23,674 28,673
Weighted average number of ordinary shares:
Issued ordinary shares at start of the year (thousands) 420,053 398,203
Effect of shares issued during the year (thousands) - 11,508
Basic and diluted weighted average number of shares (thousands) 420,053 409,711
Basic and diluted EPS (p) 0.9 0.5
EPRA EPS (p) 5.6 7.0 4. Revenue
Year Year
ended ended
31 March 31 March
2021 2020
GBP000 GBP000
Gross rental income from investment property 38,664 40,022
Income from recharges to tenants 914 881
39,578 40,903 5. Operating profit
Operating profit is stated after (crediting)/charging:
Year Year
ended ended
31 March 31 March
2021 2020
GBP000 GBP000
(Profit)/loss on disposal of investment property (393) 101
Investment property valuation decrease 20,318 26,449
Fees payable to the Company's auditor and its associates for the audit of the
Company's annual financial statements 106 96
Fees payable to the Company's auditor and its associates for other services 20 26
Administrative fee payable to the Investment Manager 416 434
Directly incurred operating expenses of vacant rental property 822 910
Directly incurred operating expenses of let rental property 1,142 600
Increase in doubtful debt provision, write offs due to tenant business failure and rent concessions
3,591 336
Amortisation of right-of-use asset 7 7
Fees payable to the Company's auditor, Deloitte LLP, are further
detailed in the Audit and Risk Committee report. 6. Finance
income
Year Year
ended
ended
31 March
31 March
2021
2020
GBP000
GBP000
Bank interest 28 36
Finance income
33 -
61 36 7. Finance costs
Year
ended Year ended
31 March 31 March
2021 2020
GBP000 GBP000
Amortisation of arrangement fees on debt facilities 347 286
Other finance costs 287 200
Bank interest 4,269 4,235
4,903 4,721 8. Income tax
The tax charge assessed for the year is lower than the standard
rate of corporation tax in the UK during the year of 19.0%. The
differences are explained below:
Year
ended Year ended
31 March 31 March
2021 2020
GBP000 GBP000
Profit before income tax 3,749 2,123
Tax charge on profit at a standard rate of 19.0% (2020: 19.0%) 712 403
Effects of:
REIT tax exempt rental profits and gains (712) (403)
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. 9. Dividends
Year Year
ended ended
31 March 31 March
2021 2020
GBP000 GBP000
Group and Company
Interim dividends paid on ordinary shares relating to the quarter ended:
Prior year
- 31 March 2020: 1.6625p (2019: 1.6375p) 6,983 6,521
Current year
- 30 June 2020: 0.95p (2019: 1.6625p) 3,990 6,786
- 30 September 2020: 1.05p (2019: 1.6625p) 4,411 6,828
- 31 December 2020: 1.25p (2019: 1.6625p) 5,251 6,867
20,635 27,002
The Company paid a fourth interim dividend relating to the
quarter ended 31 March 2021 of 1.25p per ordinary share (totalling
GBP5.3m) on 28 May 2021 to shareholders on the register at the
close of business on 14 May 2021. The Company has approved a fifth
interim dividend per share relating to the year of 0.5p totalling
GBP2.1m payable on 30 June 2021 to shareholders on the register at
the close of business on 21 May 2021. These dividends have not been
included as liabilities in these financial statements. 10.
Investment property
Group and Company GBP000
At 31 March 2019 572,745
Impact of lease incentives 1,402
Additions 24,647
Amortisation of right-of-use asset (7)
Capital expenditure and development 2,804
Disposals (15,325)
Valuation decrease before acquisition costs (25,850)
Acquisition costs (599)
Valuation decrease including acquisition costs (26,449)
At 31 March 2020 559,817
Impact of lease incentives 1,932
Additions 12,150
Amortisation of right-of-use asset (7)
Capital expenditure and development 2,308
Disposals (3,960)
Valuation decrease before acquisition costs (19,611)
Acquisition costs (707)
Valuation decrease including acquisition costs (20,318)
At 31 March 2021 551,922
GBP391.9m (2020: GBP375.1m) of investment property has been
charged as security against the Company's borrowings. GBP0.6m
(2020: GBP0.6m) of investment property comprises right-of-use
assets.
The carrying value of investment property at 31 March 2021
comprises GBP444.1m freehold (2020: GBP447.9m) and GBP107.8m
leasehold property (2020: GBP111.9m).
Investment property is stated at the Directors' estimate of its
31 March 2021 fair value. Lambert Smith Hampton Group Limited and
Knight Frank LLP, professionally qualified independent valuers,
each valued approximately half of the property portfolio as at 31
March 2021 in accordance with the Appraisal and Valuation Standards
published by the Royal Institution of Chartered Surveyors ("RICS").
LSH and KF have recent experience in the relevant locations and
categories of the property being valued. 31 March 2020 valuations
were subject to a 'material uncertainty' clause in line with RICS
guidance.
Investment property has been valued using the investment method
which involves applying a yield to rental income streams. Inputs
include yield, current rent and ERV. For the year end valuation,
the equivalent yields used ranged from 4.3% to 12.3%. Valuation
reports are based on both information provided by the Company e.g.
current rents and lease terms, which are derived from the Company's
financial and property management systems and are subject to the
Company's overall control environment, and assumptions applied by
the valuers e.g. ERVs and yields. These assumptions are based on
market observation and the valuers' professional judgement. In
estimating the fair value of each property, the highest and best
use of the properties is their current use. In response to the
COVID-19 pandemic, for all assets occupied by tenants currently not
trading or with trade significantly curtailed at the year end, the
Company's valuers assumed a three-month rental void and applied a
yield increase of 25-75bps to valuations. It is not possible to
estimate sensitivity to these assumptions.
All other factors being equal, a higher equivalent yield would
lead to a decrease in the valuation of investment property, and an
increase in the current or estimated future rental stream would
have the effect of increasing capital value, and vice versa.
However, there are interrelationships between unobservable inputs
which are partially determined by market conditions, which could
impact on these changes. 11. Investments
Shares in subsidiaries
Company
31 31
Country of Principal Ordinary March March
registration and activity shares held 2021 2020
Company incorporation
number GBP000 GBP000
Name
Custodian Real Estate Limited 08882372 England and Wales Non-trading 100% - -
Custodian Real Estate BL Limited Non-trading -
09270501 England and Wales in liquidation 100% - -
Custodian Real Estate (Beaumont Leys)
Limited* 04364589 England and Wales Non-trading - 100% 4 4
in liquidation
Custodian Real Estate (Leicester) Limited* Non-trading -
04312180 England and Wales in liquidation 100% 497 497
Custodian Real Estate (JMP4) Limited 11187952 England and Wales Non-trading - 100% 2,904 2,904
(formerly John Menzies Property 4 Limited) in liquidation
3,405 3,405
* Held indirectly
The Company's non-trading UK subsidiaries have claimed the audit
exemption available under Section 479A of the Companies Act 2006.
The Company's registered office is also the registered office of
each UK subsidiary.
Non-listed equity investments
Group and
Company
31 March 31 March
Country of registration and Principal Ordinary shares 2021 2020
incorporation activity held
Company GBP000 GBP000
number
Name
AGO Hotels 12747566 England and Wales Operator of 4.5% - -
Limited hotels
- -
The Company was allotted 4.5% of the ordinary share capital of
AGO Hotels Limited on 31 January 2021 as part of a new letting of
its hotel asset in Portishead. 12. Trade and other receivables
31 March 31 March
2021 2020
Group and Company GBP000 GBP000
Falling due in less than one year:
Trade receivables 4,192 4,359
Other receivables 1,706 217
Prepayments and accrued income 103 721
6,001 5,297
The Company regularly monitors the effectiveness of the criteria
used to identify whether there has been a significant increase in
credit risk and revises them as appropriate to ensure that the
criteria are capable of identifying significant increases in credit
risk before amounts become past due.
The Company considers the following as constituting an event of
default for internal credit risk management purposes as historical
experience indicates that financial assets that meet either of the
following criteria are generally not recoverable: ? When there is a
breach of financial covenants by the debtor; or ? Available
information indicates the debtor is unlikely to pay its
creditors.
Such balances are provided for in full. For remaining balances
the Company has applied an expected credit loss ("ECL") matrix
based on its experience of collecting rent arrears and deferred
rents since the onset of COVID-19 disruption. The ECL matrix fully
provides for receivable balances more than 90 days past due,
partially provides against receivable balances between one and 90
days past due and partially provides against receivable balances
not yet due because of a contractual deferral.
The movement in the expected credit loss provision, set out
below, is recognised within directly incurred operating expenses of
rental property of GBP5,559k (2020: GBP1,883k) in the income
statement.
31 March 31 March
2021 2020
Group and Company GBP000 GBP000
Expected credit loss provision
Opening balance 341 18
Increase in provision relating to trade receivables that are credit-impaired 2,689 323
Closing balance 3,030 341
The increase in provision during the year is due to tenant's not
settling their contractual rental obligations on a timely basis,
primarily due to a cessation or curtailment of trade due to the
COVID-19 pandemic.
Tenant rent deposits of GBP0.9m (2020: GBP0.7m) are held as
collateral against certain trade receivable balances. 13. Trade and
other payables
Group Company
31 March 31 March
31 March 2021 31 March 2021
2020 2020
GBP000 GBP000
GBP000 GBP000
Falling due in less than one year:
Trade and other payables 1,730 2,091 1,730 2,091
Social security and other taxes 882 2,462 882 2,462
Accruals 2,665 2,563 2,665 2,563
Rental deposits 908 678 908 678
Amounts due to subsidiary undertakings - - 3,405 3,405
6,185 7,794 9,590 11,199
The Directors consider that the carrying amount of trade and
other payables approximates to their fair value. Trade payables and
accruals principally comprise amounts outstanding for trade
purchases and ongoing costs. For most suppliers interest is charged
if payment is not made within the required terms. Thereafter,
interest is chargeable on the outstanding balances at various
rates. The Company has financial risk management policies in place
to ensure that all payables are paid within the credit
timescale.
Amounts payable to subsidiary undertakings are due on demand.
14. Cash and cash equivalents
31 March 31 March
2021 2020
Group and Company GBP000 GBP000
Cash and cash equivalents 3,920 25,399
Cash and cash equivalents at 31 March 2021 include GBP2.6m
(2020: GBP0.9m) of restricted cash comprising: GBP1.5m (2020:
GBPnil) interest 'prepayments' in connection with arranging
interest cover covenant waivers, GBP0.9m (2020: GBP0.7m) rental
deposits held on behalf of tenants and GBP0.2m (2020: GBP0.2m)
retentions held in respect of development fundings. 15.
Borrowings
Costs incurred in the arrangement of bank borrowings
Group and Company Bank borrowings
GBP000 GBP000 Total
GBP000
Falling due in more than one year:
At 31 March 2020 150,000 (1,677) 148,323
Net repayment of borrowings (10,000) (66) (10,066)
Amortisation of arrangement fees ? 347 347
At 31 March 2021 140,000 (1,396) 138,604
During the year the Company and Lloyds agreed to extend the term
of the RCF by one year to expire in 2023, and an option remains to
extend the term by a further year to 2024.
The Company has the following facilities available: ? A GBP35m
RCF with Lloyds Bank plc ("Lloyds") with interest of between 1.5%
and 1.8% above three-month LIBOR and is
repayable on 17 September 2023. The RCF limit can be increased
to GBP50m with Lloyds' consent; ? A GBP20m term loan with Scottish
Widows plc with interest fixed at 3.935% and is repayable on 13
August 2025; ? A GBP45m term loan with Scottish Widows plc with
interest fixed at 2.987% and is repayable on 5 June 2028; and ? A
GBP50m term loan with Aviva comprising: ? GBP35m Tranche 1
repayable on 6 April 2032 attracting fixed annual interest of
3.02%; and ? GBP15m Tranche 2 repayable on 3 November 2032
attracting fixed annual interest of 3.26%.
Each facility has a discrete security pool, comprising a number
of the Company's individual properties, over which the relevant
lender has security and covenants: ? The maximum LTV of the
discrete security pool is between 45% and 50%, with an overarching
covenant on the Company's
property portfolio of a maximum 35% LTV; and ? Historical
interest cover, requiring net rental receipts from each discrete
security pool, over the preceding three
months, to exceed 250% of the facility's quarterly interest
liability.
The Company's debt facilities contain market-standard
cross-guarantees such that a default on an individual facility will
result in all facilities falling into default. 16. Share
capital
Group and Company
Ordinary shares
of 1p
Issued share capital GBP000
At 1 April 2019 398,203,344 3,982
Issue of share capital 21,850,000 219
At 31 March 2020 420,053,344 4,201
Issue of share capital - -
At 31 March 2021 420,053,344 4,201
During the prior year, the Company raised GBP25.3m (before costs
and expenses) through the placing of 21,850,000 new ordinary
shares.
Rights, preferences and restrictions on shares
All ordinary shares carry equal rights and no privileges are
attached to any shares in the Company. All the shares are freely
transferable, except as otherwise provided by law. The holders of
ordinary shares are entitled to receive dividends as declared from
time to time and are entitled to one vote per share at meetings of
the Company. All shares rank equally with regard to the Company's
residual assets.
At the AGM of the Company held on 1 September 2020, the Board
was given authority to issue up to 140,017,781 shares, pursuant to
section 551 of the Companies Act 2006 ("the Authority"). The
Authority is intended to satisfy market demand for the ordinary
shares and raise further monies for investment in accordance with
the Company's investment policy. No ordinary shares have been
issued under the Authority since 1 September 2020, leaving an
unissued balance of 140,017,781 at 31 March 2021. The Authority
expires on the earlier of 15 months from 1 September 2020 and the
subsequent AGM, due to take place on 25 August 2021.
In addition, the Company was granted authority to make market
purchases of up to 42,005,300 ordinary shares under section 701 of
the Companies Act 2006. No market purchases of ordinary shares have
been made.
Group and Company
Share premium account
Retained earnings
GBP000
GBP000
Other reserves
At 1 April 2019 225,680 196,961
Shares issued during the year 25,081 ?
Costs of share issue (292) -
Profit for the year - 2,123
Dividends paid - (27,002)
At 31 March 2020 250,469 172,082
Shares issued during the year - -
Costs of share issue - -
Profit for the year - 3,749
Dividends paid - (20,635)
At 31 March 2021 250,469 155,196
The nature and purpose of each reserve within equity are: ?
Share premium - Amounts subscribed for share capital in excess of
nominal value less any associated 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
Operating leases, in which the Company is the lessor, relate to
investment property owned by the Company with lease terms of
between 0 to 15 years. The aggregated future minimum rentals
receivable under all non-cancellable operating leases are:
31 March 31 March
2021 2020
Group and Company GBP000 GBP000
Not later than one year 36,191 37,519
Year 2 31,771 34,941
Year 3 27,987 29,335
Year 4 23,875 25,810
Year 5 19,300 22,403
Later than five years 72,428 75,893
211,552 225,901
The following table presents amounts reported in revenue:
31 March 31 March
2021 2020
Group and Company GBP000 GBP000
Lease income on operating leases 38,621 39,833
Therein lease income relating to variable lease payments that do not depend on an index or rate 152 189
38,773 40,022 18. Related party transactions
Save for transactions described below, the Company is not a
party to, nor had any interest in, any other related party
transaction during the year.
Transactions with directors
Each of the directors is engaged under a letter of appointment
with the Company and does not have a service contract with the
Company. Under the terms of their appointment, each director is
required to retire by rotation and seek re-election at least every
three years. Each director's appointment under their respective
letter of appointment is terminable immediately by either party
(the Company or the director) giving written notice and no
compensation or benefits are payable upon termination of office as
a director of the Company becoming effective.
Ian Mattioli is Chief Executive of Mattioli Woods, the parent
company of the Investment Manager, and is a director of the
Investment Manager. As a result, Ian Mattioli is not independent.
The Company Secretary, Ed Moore, is also a director of the
Investment Manager.
Investment Management Agreement
The Investment Manager is engaged as AIFM under an IMA with
responsibility for the management of the Company's assets, subject
to the overall supervision of the Directors. The Investment Manager
manages the Company's investments in accordance with the policies
laid down by the Board and the investment restrictions referred to
in the IMA. The Investment Manager also provides day-to-day
administration of the Company and acts as secretary to the Company,
including maintenance of accounting records and preparing the
annual and interim financial statements of the Company.
During the year annual management fees payable to the Investment
Manager under the IMA were calculated 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; ? 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.
During the year administrative fees payable to the Investment
Manager under the IMA were calculated as follows: ? 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.
On 22 June 2020 the terms of the IMA were varied to extend the
appointment of the Investment Manager for a further three years,
with a further year's notice, and to introduce further fee hurdles
such that annual management fees payable to the Investment Manager
under the IMA are now: ? 0.9% of the NAV of the Company as at the
relevant quarter day which is less than or equal to 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; ? 0.65% of the NAV of the Company as at the relevant
quarter day which is in excess of GBP500m but below GBP750m
divided
by 4; plus ? 0.55% 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; ? 0.05% of the NAV of the Company as at the relevant
quarter day which is in excess of GBP500m but below GBP750m
divided
by 4; plus ? 0.03% of the NAV of the Company as at the relevant
quarter day which is in excess of GBP750m divided by 4.
The IMA is terminable by either party by giving not less than 12
months' prior written notice to the other, which notice may only be
given after the expiry of the three year term. The IMA may also be
terminated on the occurrence of an insolvency event in relation to
either party, if the Investment Manager is fraudulent, grossly
negligent or commits a material breach which, if capable of remedy,
is not remedied within three months, or on a force majeure event
continuing for more than 90 days.
The Investment Manager receives a marketing fee of 0.25% (2020:
0.25%) of the aggregate gross proceeds from any issue of new shares
in consideration of the marketing services it provides to the
Company.
During the year the Investment Manager charged the Company
GBP3.75m (2020: GBP4.01m) comprising GBP3.33m (2020: GBP3.52m) in
respect of annual management fees, GBP0.42m (2020: GBP0.43m) in
respect of administrative fees and GBPnil (2020: GBP0.06m) in
respect of marketing fees. 19. Financial risk management
Capital risk management
The Company manages its capital to ensure it can continue as a
going concern while maximising the return to stakeholders through
the optimisation of the debt and equity balance within the
parameters of its investment policy. The capital structure of the
Company consists of debt, which includes the borrowings disclosed
below, cash and cash equivalents and equity attributable to equity
holders of the parent, comprising issued ordinary share capital,
share premium and retained earnings.
Net gearing ratio
The Board reviews the capital structure of the Company on a
regular basis. As part of this review, the Board considers the cost
of capital and the risks associated with each class of capital. The
Company has a target net gearing ratio of 25% determined as the
proportion of debt (net of unrestricted cash) to investment
property. The net gearing ratio at the year end was 24.9% (2020:
22.4%).
Externally imposed capital requirements
The Company is not subject to externally imposed capital
requirements, although there are restrictions on the level of
interest that can be paid due to conditions imposed on REITs.
Financial risk management
The Company seeks to minimise the effects of interest rate risk,
credit risk, liquidity risk and cash flow risk by using fixed and
floating rate debt instruments with varying maturity profiles, at
low levels of net gearing.
Interest rate risk management
The Company's activities expose it primarily to the financial
risks of increases in interest rates, as it borrows funds at
floating interest rates. The risk is managed by maintaining: ? An
appropriate balance between fixed and floating rate borrowings; ? A
low level of net gearing; and ? The RCF whose flexibility allows
the Company to manage the risk of changes in interest rates.
The Board periodically considers the availability and cost of
hedging instruments to assess whether their use is appropriate and
also considers the maturity profile of the Company's
borrowings.
Interest rate sensitivity analysis
Interest rate risk arises on interest payable on the RCF only,
as interest on all other debt facilities is payable on a fixed rate
basis. At 31 March 2021, the RCF was drawn at GBP25m. Assuming this
amount was outstanding for the whole year and based on the exposure
to interest rates at the reporting date, if three-month LIBOR had
been 0.5% higher /lower and all other variables were constant, the
Company's profit for the year ended 31 March 2021 would decrease/
increase by GBP0.1m due to its variable rate borrowings.
Market risk management
The Company manages its exposure to market risk by holding a
portfolio of investment property diversified by sector, location
and tenant.
Market risk sensitivity
Market risk arises on the valuation of the Company's property
portfolio in complying with its bank loan covenants (Note 15). The
Company would breach its overall borrowing covenant if the
valuation of its property portfolio fell by 29% (2020: 35%).
Credit risk management
Credit risk refers to the risk that a counterparty will default
on its contractual obligations resulting in a financial loss to the
Company. The Company's credit risk is primarily attributable to its
trade receivables and cash balances. The amounts included in the
statement of financial position are net of allowances for bad and
doubtful debts. An allowance for impairment is made where a debtor
is in breach of its financial covenants, available information
indicates a debtor can't pay or where balances are significantly
past due.
The Company has adopted a policy of only dealing with
creditworthy counterparties as a means of mitigating the risk of
financial loss from defaults. The maximum credit risk on financial
assets at 31 March 2021 was GBP4.2m (2020: GBP4.4m).
The Company has no significant concentration of credit risk,
with exposure spread over a large number of tenants covering a wide
variety of business types. Further detail on the Company's credit
risk management process is included within the Strategic
report.
Liquidity risk management
Ultimate responsibility for liquidity risk management rests with
the Board, which has built an appropriate liquidity risk management
framework for the management of the Company's short, medium and
long-term funding and liquidity management requirements. The
Company manages liquidity risk by maintaining adequate reserves,
banking facilities and reserve borrowing facilities by continuously
monitoring forecast and actual cash flows and matching the maturity
profile of financial assets and liabilities.
The following tables detail the Company's contractual maturity
for its financial liabilities. The table has been drawn up based on
undiscounted cash flows of financial liabilities based on the
earliest date on which the Company can be required to pay. The
table includes both interest and principal cash flows.
31 March
31 March 31 March 2021 2021
Weighted average effective interest 2021 3 months - 1 31 March
Group rate % 0-3 months year 2021 5 years +
1-5 years
GBP000 GBP000 GBP000
GBP000
Trade and other N/a 6,185 - 151 421
payables
Borrowings:
Variable rate 1.888 118 354 25,692 ?
Fixed rate 3.935 197 590 2,656 ?
Fixed rate 2.987 336 1,008 5,377 47,939
Fixed rate 3.020 264 793 4,228 41,362
Fixed rate 3.260 122 367 1,956 18,227
7,222 3,112 40,060 107,949
31 March 31 March 2021 31 March
Weighted average effective interest 2021 3 months - 1 31 March 2021
Company rate % 0-3 months year 2021 5 years +
1-5 years
GBP000 GBP000 GBP000
GBP000
Trade and other N/a 9,590 - 151 421
payables
Borrowings:
Variable rate 1.888 118 354 25,692 -
Fixed rate 3.935 197 590 2,656 ?
Fixed rate 2.987 336 1,008 5,377 47,939
Fixed rate 3.020 264 793 4,228 41,362
Fixed rate 3.260 122 367 1,956 18,227
10,627 3,112 40,060 107,949
31 March
31 March 31 March 2020 2020
Weighted average effective interest 2020 3 months - 1 31 March
Group rate % 0-3 months year 2020 5 years +
1-5 years
GBP000 GBP000 GBP000
GBP000
Trade and other N/a 7,794 - 151 425
payables
Borrowings:
Variable rate 1.988 174 522 37,413 ?
Fixed rate 3.935 197 590 3,148 20,295
Fixed rate 2.987 336 1,008 5,377 49,279
Fixed rate 3.020 264 793 4,228 42,419
Fixed rate 3.260 122 367 1,956 18,716
8,887 3,280 52,273 131,134
31 March 31 March 2020 31 March
Weighted average effective interest 2020 3 months - 1 31 March 2020
Company rate % 0-3 months year 2020 5 years +
1-5 years
GBP000 GBP000 GBP000
GBP000
Trade and other N/a 11,199 - 151 425
payables
Borrowings:
Variable rate 1.988 174 522 37,413 ?
Fixed rate 3.935 197 590 3,148 20,295
Fixed rate 2.987 336 1,008 5,377 49,279
Fixed rate 3.020 264 793 4,228 42,419
Fixed rate 3.260 122 367 1,956 18,715
12,292 3,280 52,273 131,133
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 liabilities
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, which uses
the inputs set out in Note 10. These values were determined after
having taken into consideration recent market transactions for
similar properties in similar locations to the investment
properties held by the Company. The fair value hierarchy of
investment property is level 3. At 31 March 2021, the fair value of
the Company's investment properties was GBP551.9m (2020:
GBP559.8m).
Interest bearing loans and borrowings - level 3
As at 31 March 2021 the value of the Company's loans with
Lloyds, SWIP and Aviva all held at amortised cost was GBP140.0m
(2020: GBP150.0m). The difference between the carrying value of
Company's loans and their fair value is detailed in Note 21.
Trade and other receivables/payables - level 3
The carrying amount of all receivables and payables deemed to be
due within one year are considered to reflect their fair value.
Impact of the COVID-19 pandemic
As set out in the Principal risks and uncertainties section of
the Strategic report, the Board believes it too early to understand
fully the longer-term impact of the COVID-19 pandemic, but the
Board believes the Company is well placed to weather any short-term
impact due to the reasons set out in the Strategic report.
The Board does therefore not consider it necessary or possible
to carry out sensitivity analysis on its valuation or cashflow
assumptions. 20. Events after the reporting date
On 7 May 2021 the Company raised GBP0.6m (before costs and
expenses) through the issue of 550,000 new ordinary shares of 1p
each in the capital of the Company at a price of 101.5p per
share.
On 24 May 2021 the Company the Company sold a high street retail
property at auction in Nottingham for GBP0.7m, in line with the
most recent valuation.
On 8 June 2021 the Company acquired an industrial asset in
Knowsley, Liverpool for GBP3.5m. 21. Alternative performance
measures
NAV per share total return
A measure of performance taking into account both capital
returns and dividends by assuming dividends declared are reinvested
at NAV at the time the shares are quoted ex-dividend, shown as a
percentage change from the start of the year.
Year ended Year ended
31 March 31 March
2021 2020
Group and Company
Net assets (GBP000) 409,866 426,752
Shares in issue at 31 March (thousands) 420,053 420,053
NAV per share at the start of the year (p) 101.6 107.1
Dividends per share paid during the year (p) 4.9125 6.625
NAV per share at the end of the year (p) 97.6 101.6
NAV per share total return 0.9% 1.1%
Share price total return
A measure of performance taking into account both share price
returns and dividends by assuming dividends declared are reinvested
at the ex-dividend share price, shown as a percentage change from
the start of the year.
Year ended Year ended
31 March 31 March
2021 2020
Group and Company
Share price at the start of the year (p) 99.0 111.2
Dividends per share paid during the year (p) 4.9125 6.625
Share price at the end of the year (p) 91.8 99.0
Share price total return (2.3%) (5.0%) Dividend cover
The extent to which dividends relating to the year are supported
by recurring net income.
Year ended Year ended
31 March 31 March
2021 2020
GBP000 GBP000
Group and Company
Dividends paid relating to the year 13,652 20,481
Dividends approved relating to the year 7,354 6,983
21,006 27,464
Profit after tax 3,749 2,123
One-off costs - -
Net loss on investment property 19,925 26,550
23,674 28,673
Dividend cover 112.7% 104.4%
Premium of share price to NAV per share
The difference between the Company's share price and NAV, shown
as a percentage at the end of the year.
Year ended Year ended
31 March 31 March
2021 2020
Group and Company
NAV per share (p) 97.6 101.6
Share price at the end of the year (p) 91.8 99.0
Discount (5.9%) (2.6%) Net gearing
Gross borrowings less cash (excluding rent deposits), divided by
property portfolio value.
Year ended Year ended
31 March 31 March
2021 2020
GBP000 GBP000
Group and Company
Gross borrowings 140,000 150,000
Cash (3,920) (25,399)
Cash held on behalf of tenants 1,179 911
Net borrowings 137,259 125,512
Investment property 551,922 559,817
Net gearing 24.9% 22.4%
Ongoing charges
A measure of the regular, recurring costs of running an
investment company expressed as a percentage of average NAV.
Year ended Year ended
31 March 31 March
2021 2020
GBP000 GBP000
Group and Company
Average quarterly NAV during the year 408,703 428,979
Expenses 11,062 7,545
Operating expenses of rental property rechargeable to tenants (914) (880)
10,148 6,665
Operating expenses of rental property directly incurred (5,559) (1,883)
One-off costs - -
4,589 4,782
OCR 2.48% 1.55%
OCR excluding direct property expenses 1.12% 1.12% EPRA performance measures
EPRA promotes, develops and represents the European public real
estate sector, providing leadership in matters of common interest
by publishing research and encouraging discussion of issues
impacting the property industry, both within the membership and
with a wide range of stakeholders, including the EU institutions,
governmental and regulatory bodies and business partners. The Board
supports EPRA's drive to bring parity to the comparability and
quality of information provided in this report to investors and
other key stakeholders.
EPRA earnings per share
A measure of the Company's operating results excluding gains or
losses on investment property, giving a better indication than
basic EPS of the extent to which dividends paid in the year are
supported by recurring net income;
Year ended Year ended
31 March 31 March
2021 2020
GBP000 GBP000
Group and Company
Profit for the year after taxation 3,749 2,123
Net loss on investment property 19,925 26,550
EPRA earnings 23,674 28,673
Weighted average number of shares in issue (thousands) 420,053 409,711
EPRA earnings per share (p) 5.6 7.0 EPRA NAV per share metrics
EPRA NAV metrics make adjustments to the IFRS NAV to provide
stakeholders with the most relevant
information on the fair value of the assets and liabilities of a
real estate investment company, under different scenarios.
EPRA Net Reinstatement Value ("NRA")
NRA assumes the Company never sells its assets and aims to
represent the value required to rebuild the entity.
31 March 31 March
2021 2020
Group and Company GBP000 GBP000
IFRS NAV 409,865 426,751
Fair value of financial instruments - -
Deferred tax - -
EPRA NRA 409,865 426,751
Closing number of shares in issue (thousands) 420,053 420,053
EPRA NRA per share (p) 97.6 101.6
EPRA Net Tangible Assets ("NTA")
Assumes that the Company buys and sells assets for short-term
capital gains, thereby crystallising certain deferred tax
balances.
31 March 31 March
2021 2020
Group and Company GBP000 GBP000
IFRS NAV 409,865 426,751
Fair value of financial instruments - -
Deferred tax - -
EPRA NTA 409,865 426,751
Closing number of shares in issue (thousands) 420,053 420,053
EPRA NTA per share (p) 97.6 101.6 EPRA Net Disposal Value ("NDV")
Represents the shareholders' value under a disposal scenario,
where deferred tax, financial instruments and certain other
adjustments are calculated to the full extent of their liability,
net of any resulting tax.
31 March
2021
Group and Company GBP000
IFRS NAV 409,865
Fair value of fixed rate debt (9,468)
Deferred tax -
EPRA NDV 400,397
Closing number of shares in issue (thousands) 420,053
EPRA NDV per share (p) 95.3
The fair value of the Company's interest-bearing loans included
in the balance sheet at amortised cost has been calculated based on
prevailing swap rates, and excludes 'break' costs chargeable should
the Company settle loans ahead of their contractual expiry. This
information is not retrospectively available for the year ended 31
March 2021.
EPRA NIY and EPRA 'topped-up' NIY
EPRA NIY represents annualised rental income based on cash rents
passing at the balance sheet date, less non-recoverable property
operating expenses, divided by the gross property valuation. The
EPRA 'topped-up' NIY is calculated by making an adjustment to the
EPRA NIY in respect of the expiration of rent free periods (or
other unexpired lease incentives such as discounted rent periods
and stepped rents).
31 March 31 March
2021 2020
Group and Company GBP000 GBP000
Investment property 551,922 559,817
Allowance for estimated purchasers' costs[27] 35,875 36,388
Gross up property portfolio valuation 587,797 596,205
Annualised cash passing rental income 36,314 38,196
Property outgoings (1,004) (1,115)
Annualised net rents 35,310 37,109
Impact of expiry of current lease incentives 2,378 2,553
37,688 39,634
EPRA NIY 6.0% 6.2%
EPRA 'topped-up' NIY 6.4% 6.6%
EPRA vacancy rate
EPRA vacancy rate is the ERV of vacant space as a percentage of
the ERV of the whole property portfolio.
31 March 31 March
2021 2020
Group and Company GBP000 GBP000
Annualised potential rental value of vacant premises 3,562 1,745
Annualised potential rental value for the property portfolio 42,554 42,600
EPRA vacancy rate 8.4% 4.1%
EPRA cost ratios
EPRA cost ratios reflect overheads and operating costs as a
percentage of gross rental income.
Year ended Year ended
31 March 31 March
2021 2020
GBP000 GBP000
Group and Company
Directly incurred operating expenses and administrative fees 10,147 6,667
Ground rent costs (37) (37)
EPRA costs (including direct vacancy costs) 10,110 6,630
Property void costs (888) (836)
EPRA costs (excluding direct vacancy costs) 9,222 5,794
Gross rental income 38,698 40,022
Ground rent costs (37) (37)
Rental income net of ground rent costs 38,661 39,985
EPRA cost ratio (including direct vacancy costs) 26.1% 16.6%
EPRA cost ratio (excluding direct vacancy costs) 23.9% 14.5%
EPRA capital expenditure
Capital expenditure incurred on the Company's property portfolio
during the year.
31 March 31 March
2021 2020
Group and Company GBP000 GBP000
Acquisitions 12,150 24,647
Development 691 79
Like-for-like portfolio 1,617 2,725
Total capital expenditure 14,458 27,451
EPRA like-for-like rental growth
Like-for-like rental growth of the property portfolio by
sector.
2021
Retail warehouse
Industrial Retail Other Office Total
GBP000
Group and Company GBP000 GBP000 GBP000 GBP000 GBP000
Like-for-like rent 16,085 7,739 3,449 5,845 3,454 36,572
Acquired properties 38 - - 59 127 225
Sold properties 18 - 144 - - 162
16,141 7,739 3,593 5,904 3,581 36,958
2020
Retail warehouse
Industrial Retail Other Office Total
GBP000
Group and Company GBP000 GBP000 GBP000 GBP000 GBP000
Like-for-like rent 15,128 8,928 4,689 6,656 3,601 39,002
Acquired properties 424 - - - - 424
Sold properties 208 - - - 388 596
15,760 8,928 4,689 6,656 3,989 40,022
Distribution of the Annual Report and accounts to members
The financial information set out above does not constitute the
Company's statutory accounts for the years ended 31 March 2021 or
2020, but is derived from those accounts. Statutory accounts for
2020 have been delivered to the Registrar of Companies and those
for 2021 will be delivered following the Company's AGM. The auditor
has reported on the 2021 accounts: their report was unqualified,
did not draw attention to any matters by way of emphasis and did
not contain statements under s498(2) or (3) of the Companies Act
2006. The Annual Report and accounts will be posted to shareholders
in due course, and will be available on our website
(custodianreit.com) and for inspection by the public at the
Company's registered office address: 1 New Walk Place, Leicester
LE1 6RU during normal business hours on any weekday. Further copies
will be available on request.
- Ends -
-----------------------------------------------------------------------------------------------------------------------
[1] The European Public Real Estate Association ("EPRA").
[2] Profit after tax excluding net gains or losses on investment
property divided by weighted average number of shares in issue.
[3] Profit after tax divided by weighted average number of
shares in issue.
[4] Net Asset Value ("NAV") movement including dividends paid
during the year on shares in issue at 31 March 2020.
[5] Before acquisition costs of GBP0.7m.
[6] Before disposal costs of GBP0.1m.
[7] Share price movement including dividends paid during the
year.
[8] Profit after tax, excluding net gains or losses on
investment property, divided by dividends paid and approved for the
year.
[9] Dividends paid and approved for the year.
[10] Following the recent update to EPRA's Best Practice
Recommendations Guidelines the Company's peer group has adopted
EPRA net tangible assets ("NTA") as the primary measure of net
asset value. There are no differences between the Company's IFRS
NAV, EPRA NAV and EPRA NTA.
[11] Gross borrowings less cash (excluding rent deposits)
divided by property portfolio value.
[12] Expenses (excluding operating expenses of rental property
recharged to tenants) divided by average quarterly NAV.
[13] Expenses (excluding operating expenses of rental property)
divided by average quarterly NAV.
[14] For properties in Scotland, English equivalent EPC ratings
have been obtained.
[15] A full version of the Company's Investment Policy is
available at custodianreit.com/wp-content/uploads/2021/02/
CREIT-Investment-policy.pdf
[16] A risk score of two represents "lower than average
risk".
[17] Source: Numis Securities Limited.
[18] Historical rental income received and projected contractual
rental income receivable less certain property expenses divided by
interest and fees payable to its lenders must exceed 250%.
[19] Dividends totalling 4.9125p per share (1.6625p relating to
the prior year and 3.25p relating to the year) were paid on shares
in issue throughout the year.
[20] Source: Numis Securities Limited.
[21] Annual management fees comprise property management
services fees and investment management services fees.
[22] Current passing rent plus ERV of vacant properties.
[23] Includes car showrooms, petrol filling stations, children's
day nurseries, restaurants, health and fitness units, hotels and
healthcare centres.
[24] A 'green lease' incorporates clauses where the owner and
occupier undertake specific responsibilities/ obligations regarding
the sustainable operation/occupation of a property, for example:
energy efficiency measures, waste reduction/ management and water
efficiency.
[25] One EPC letter represents 25 energy performance asset
rating points.
[26] As defined by the Corporation Tax Act 2010.
[27] Assumed at 6.5% of investment property valuation.
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ISIN: GB00BJFLFT45
Category Code: MSCU
TIDM: CREI
LEI Code: 2138001BOD1J5XK1CX76
OAM Categories: 3.1. Additional regulated information required to be disclosed under the laws of a Member State
Sequence No.: 111474
EQS News ID: 1208360
End of Announcement EQS News Service
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