Final Results
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Custodian REIT plc (CREI)
23 June 2020
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 2020.
Financial highlights and performance summary
*Alternative performance measures
The Company reports the following alternative performance measures ("APMs") to assist stakeholders in assessing performance alongside the Company's results on a statutory basis: quarterly rent collection, NAV per share total return, new equity raised, target dividend per share, share price total return, dividend cover, NAV per share, share price, market capitalisation, discount/premium to NAV per share, net gearing, ongoing charges ratios and EPRA Best Practice Recommendations. 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. 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. 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:
"Until the outbreak of the COVID-19 pandemic, Custodian REIT had delivered on its objectives for the financial year, despite a struggling retail sector which contributed the majority of the property valuation decreases in the first three quarters of the financial year. However, the COVID-19 pandemic is taking effect, leading to a £12.5m property valuation decrease in the final quarter of the financial year, giving a total fall for the year of £25.8m after asset management gains of £6.1m.
"The recent turmoil in markets has emphasised the importance of having a well-diversified, income focused property portfolio. In the year ended 31 March 2020 Custodian REIT delivered a NAV per share total return of 1.1% (2019: 5.9%) with dividends of 6.65p per share supporting a positive NAV total return despite the impact of the COVID-19 pandemic on valuations in the final quarter.
"The outlook for real estate investment is likely to become clearer and potentially more positive as lockdown eases and most sectors of the economy have the opportunity to re-open. Real estate is likely to remain a key asset for investors looking for income and as rent collection stabilises and deferred rents are recovered, the ability to pay dividends at more meaningful levels will return.
"Property yields are currently showing a circa 6% margin over UK 10 year gilts, which is the widest margin on record. In expectation of continued low gilt rates this margin is likely to support real estate pricing despite a recent decline in capital values. The combination of resilient capital values and an anticipated return to relatively high dividends should lend support to Custodian REIT's objective to be the REIT of choice for private and institutional investors seeking high and stable dividends from well-diversified UK real estate."
Further information
Further information regarding the Company can be found at the Company's website www.custodianreit.com or please contact:
There will be an analyst presentation to discuss the results at 9.30am today.
Those analysts wishing to take part are asked to register at:
https://numiscorp.zoom.us/webinar/register/WN_ybM1V6rvRvijt5Rdmz1Z7Q
After registering, you will receive a confirmation email containing information about joining the webinar.
If you have any questions please contact Justin Bell on +44 (0) 20 7260 1380 or at j.bell@numis.com.
Until the outbreak of the COVID-19 pandemic, Custodian REIT had delivered on its objectives for the financial year, despite a struggling retail sector which contributed the majority of £13.3m of property valuation decreases for the first three quarters of the financial year. However, the COVID-19 pandemic is taking effect, leading to a £12.5m property valuation decrease in the final quarter of the financial year, giving a total fall for the year of £25.8m after asset management gains of £6.1m.
The health and safety of colleagues, tenants and our wider stakeholders remains the Company's top priority. Our current operational focus is on managing liquidity to mitigate the risks associated with the uncertainty created by the global health emergency, working with our tenants to optimise rental income and maintaining a level of distributions to investors broadly linked to net rental receipts.
These have been testing times which have necessitated an exceptional effort from the Investment Manager, both in pursuing rents and in operating remotely as a team, and I would like to acknowledge the positive tangible results of that. I should also thank my fellow Board members who have been flexible and supportive during a period which has required numerous formal and informal additional Board meetings.
During the year £25.3m was raised from the issue of new shares and £15.7m[17] was raised from property disposals. These sums funded property acquisitions and capital expenditure of £27.4m, primarily the £24.6m acquisition of eight distribution units ("the Menzies Portfolio") through a sale and leaseback to Menzies Distribution Limited. This transaction was effected by a corporate acquisition which reduced purchase costs such that the agreed price of £24.6m reflected a net initial yield[18] ("NIY") of 6.4%, supporting our objective to deliver strong income returns from a property portfolio principally of smaller lots in strong, regional markets.
Financial and operational resilience
The Company remains in a strong financial position to address the extraordinary circumstances imposed by COVID-19, having:
Borrowings
The Company operates four loan facilities, each of which has a discrete allocation of the Company's individual properties over which the relevant lender has security. Each loan has covenants over the LTV and interest cover related to each discrete security pool. In the expectation that interest cover covenants on some individual loans at 30 June 2020 may come under short-term pressure, the Company has agreed waivers of certain covenants for the next two quarters in return for depositing cash amounts equivalent to the interest payable for that period into charged accounts.
LTV covenants are not currently a concern. The Company has approximately £184.8m (33% of the property portfolio) of unencumbered assets which could be charged to the security pools to enhance the LTV on individual loans to cure any potential covenant breaches.
The weighted average cost of the Company's agreed debt facilities at 31 March 2020 was 3.0% (2019: 3.2%) with a Weighted Average Maturity ("WAM") of 7.8 years (2019: 7.9 years) and 77% (2019: 84%) 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.
Returns
The recent turmoil in markets has emphasised the importance of having a well-diversified, income focused property portfolio.
In the year ended 31 March 2020 Custodian REIT delivered a NAV per share total return of 1.1% (2019: 5.9%) with dividends of 6.65p per share supporting a positive, if low, NAV total return despite the negative valuation impact of the COVID-19 pandemic in the final quarter.
The Company paid one of the highest fully covered dividends amongst its peer group of listed property investment companies[21] for the year ended 31 March 2020, while minimising 'cash drag' on the issue of new shares by taking advantage of the flexibility offered by the Company's revolving credit facility ("RCF"). During the year the Company increased the total funds available under the RCF to £50m, agreeing a new three year term and a reduction in margin above three month LIBOR from 2.45% to between 1.5% and 1.8%, determined by reference to the prevailing LTV ratio of a discrete security pool. The revised facility has reduced finance costs and will provide additional capacity to exploit acquisition opportunities whilst maintaining the flexibility to minimise cash drag from equity issuance once markets stabilise.
In common with our peers and many commercial property landlords, we are experiencing an inevitable disruption to cash collection in the quarter ending 30 June 2020 as a number of tenants seek to defer rental payments to protect their own cash flows due to the effect of the COVID-19 pandemic on their business. Acknowledging the importance of income for shareholders, the Company intends to pay the next two quarterly dividends at a minimum of 0.75p per share regardless of rent collection rates, with support from prior years' undistributed reserves if required. Should rent collections in the June and September quarters allow, more generous dividends may be possible. Over the course of the financial year, as deferred rents are collected, the Board hopes it will be possible to restore the dividend to a sustainable long-term level akin to previous years.
The Company's relatively stable share price performance in a volatile market during the first 11 months of the year ended 31 March 2020 allowed the Board to issue equity at an average premium of 11% above dividend adjusted NAV, more than covering the costs of issue and deployment.
Net asset value
The NAV of the Company at 31 March 2020 was £426.7m, approximately 101.6p per share, a decrease of 5.5p (5.1%) since 31 March 2019:
The net valuation decrease of £25.8m was primarily driven by high street retail, retail warehouse and 'other' sector valuations falling by £14.4m, £15.3m and £7.8m respectively, further detailed in the Investment Manager's report, due to:
However, the retail valuation declines were partially offset by industrial asset valuations increasing due to latent rental growth and continued investor demand, again demonstrating the benefit of a diversified property portfolio. 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 valuation gains of £12.5m (5.6%) in this sector.
Since the year end the proposed CVAs of Travelodge, The Restaurant Group, Poundstretcher and JTF Wholesale have impacted the Company's assets in Portishead, Perth, Grantham, Evesham and Warrington, which if passed could reduce the Company's rent roll by c. 2.5%.
The market
During the first eleven months of the year ended 31 March 2020 Custodian REIT's shares traded consistently at a premium to NAV while much of the property sector had moved to a discount and since the start of the COVID-19 pandemic, the Company's shares have experienced lower volatility and traded at a lower discount to NAV than most in the sector. However, we believe the Company's shareholders share our view that NAV-related metrics alone are not sufficient to assess a property investment company's prospects. We believe that the Company's share price performance reflects investors' awareness of the merits of diversification of tenant, lease expiry profile, spread of asset type, net gearing level, debt profile, property location and the ability of the management team to generate future income from the assets.
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. The structure of our shareholder base has, in turn, helped to reduce volatility as our shareholders are typically long-term holders looking for relatively stable income-driven returns.
As a long-term investment, any measure of performance from real estate should be considered over a period greater than 12 months. Over the last five years, shareholder have benefitted from positive share price total return, with lower volatility relative to the Company's peer group. This has been particularly noticeable at times of market stress, such as the impact of the EU referendum in June 2016 and more recently with the COVID-19 pandemic.
We believe a large part of the Company's positive absolute return and lower volatility is due to our unremitting focus on income, supporting the relatively high dividend.
Another key metric, alongside price and volatility, is liquidity of the stock and I am pleased to report that Custodian REIT recorded an average daily trading volume of over £0.5m throughout the last 12 months[23].
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 Investment Manager charged the Company £4.0m (2019: £4.0m) in respect of annual management, administrative and marketing 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 the timely deployment of the proceeds from property disposals and new equity on high quality assets. The Board also welcomes the Investment Manager's continuing successful asset management which has contributed to both capital values and income.
The MEC has reviewed, in detail, the arrangements with the Investment Manager following expiry of the three year term of the current Investment Management Agreement ("IMA") on 31 May 2020. In light of the positive performance of the Company the Board and the Investment Manager have agreed a further three year term to the Investment Manager's ongoing engagement, from 1 June 2020, with fees payable to the Investment Manager under the IMA amended to include:
All other key terms of the IMA remain unchanged. The Board considers these amendments to the IMA to be in the best interests of the Company's shareholders because:
Dividends
Income is a major component of total return. The Company paid aggregate dividends of 6.625p per share during the year, comprising the fourth interim dividend of 1.6375p per share relating to the year ended 31 March 2019 and three interim dividends of 1.6625p per share relating to the year ended 31 March 2020.
The Company paid a fourth interim dividend of 1.6625p per share for the quarter ended 31 March 2020 on 29 May 2020 totalling £7.0m, meeting the Company's target of paying a total dividend relating to the year of 6.65p per share (2019: 6.55p), totalling £27.5m (2019: £25.8m). Dividends relating to the year ended 31 March 2020 were 104.4% covered by net recurring income of £28.7m, as calculated in Note 21.
Board expansion
Reflecting the growth of the Company since inception we were delighted to welcome Hazel Adam to the Board as our fifth Non-Executive Director on 12 December 2019. Hazel brings a range of experience including buy side and sell side investment experience, strategies and markets. These skills and experience complement those of the existing Directors and offer scope to add value for the benefit of the Company.
Environmental policy
The majority of the Company's investment properties are let on full repairing and insuring leases, meaning its day-to-day environmental responsibilities are limited because properties are controlled by their tenants. However, the Board adopts sustainable principles and actively seeks opportunities to make environmentally beneficial improvements to its property portfolio where possible. The Company recently engaged Carbon Intelligence, specialist environmental consultants, to review the Company's environmental, social and governance ("ESG") policy, identify and prioritise opportunities for environmental improvements and recommend how best to manage risks. As a result we have committed to:
The Company is reporting sustainability indicators for the first time using the EPRA sustainability best practice indicators, set out in the Sustainability disclosures section of the Annual Report, and in accordance with the Mandatory Greenhouse Gas ("GHG") Reporting Regulations, detailed in the Directors' report. The Company will also make its first Global Real Estate Sustainability Benchmark ("GRESB") submission in 2020, which is one of the most widely used sustainability benchmarks in the real estate sector. The Board expects the results of this submission to provide a valuable insight into the Company's current sustainability performance and identify areas for improvement in the next financial year.
Details of the Company's environmental policy are contained within the Business model and strategy section of the Strategic report.
Outlook
The outlook for real estate investment and more particularly for Custodian REIT is likely to become clearer and potentially more positive as lockdown eases and most sectors of the economy have the opportunity to re-open. At the time of writing the country is at the start of becoming 'unlocked'.
Real estate is likely to remain a key asset for investors looking for income and as rent collection stabilises and deferred rents are recovered, the ability to pay dividends at more meaningful levels will return.
Property yields are currently showing a circa 6% margin over UK 10 year gilts, which is the widest margin on record. In expectation of continued low gilt rates this margin is likely to support real estate pricing despite a recent decline in capital values.
The combination of resilient capital values and an anticipated return to relatively high dividends should lend support to Custodian REIT's objective to be the REIT of choice for private and institutional investors seeking high and stable dividends from well-diversified UK real estate.
David Hunter Chairman 22 June 2020
Investment Manager's report
The UK property market
The financial year ended 31 March 2020 was dominated by two significant headwinds: retail malaise and political uncertainty. The fourth quarter started with increased confidence in commercial property investment following the General Election and reduced uncertainty around Brexit. Sadly, all talk of confidence has been eclipsed by the COVID-19 pandemic and the widespread impact on the UK and global economies.
Our response has been to prioritise protecting cash flow and to secure the balance sheet. As a result the Company withdrew from two regional office acquisitions on which terms had been agreed. In addition, to address the current difficulty of collecting rents in a timely manner, exacerbated by the statutory protections for commercial tenants introduced by the UK Government, the Company has put in place pre-emptive waivers on interest cover covenants for at least the June 2020 and September 2020 quarter-ends to provide the flexibility to collect rent in the most advantageous way for medium/long-term income security while supporting tenants and minimising vacancies.
It is too early to assess the long-term impact of COVID-19 on the commercial property market but we believe it may accelerate pre-existing trends in the use of, and investment in, commercial property. We expect to see a further deterioration in occupational demand and investment appetite for secondary retail, an increase in occupational demand for flexible office space (both traditional offices, fitted out and leased flexibly, as well as serviced offices) and a continuation of the growth of logistics and distribution.
The country has been in lockdown since the Company's financial year end and hence transactional activity has been much reduced. Many transactions have been renegotiated and in some cases pricing has reflected forced, or at least unwilling, sellers. While these transactions have led to a decline in valuations, the lockdown period does not represent a normal market.
Looking back across the year, we saw retailers resorting to CVAs to reduce their liability for rent and property related costs, at the expense of their landlords. While there has been gathering resistance from landlords, we expect further CVAs while they remain legitimate practice. The impact of the COVID-19 pandemic may lead to yet more CVAs if the Government's support package proves insufficient, particularly for retailers.
We believe that in core retail locations the key impact of the COVID-19 pandemic and CVAs will be to hasten a fall in rental values coupled with some inevitable vacancies. However, retailers are likely to want to retain a presence in prime destination locations where retail and leisure combine to create an attractive environment. Such an environment is most likely to be found in major regional city centres or tourist 'hot spots'.
Recent experience has demonstrated the importance of multi-channel retailing where those retailers with a more developed online presence and the associated infrastructure to deal with deliveries and returns have continued to trade. In more normal times, research shows that where retailers have a physical store, they are likely to see higher levels of online sales through a higher profile, click and collect or the ability of shoppers to make returns more conveniently. Online sales alone do not appear to be a panacea for retailers. There are significant costs associated with home delivery and returns, therefore retailers prefer click and collect. This puts location of the store into sharp focus for retailers who are likely to favour core destinations in the centre of large, affluent populations or the ease and convenience of an out of town retail park.
In the out of town retail market there is an important distinction to make between DIY, homewares and value retailers (such as B&M) and the fashion focused out of town parks. Fashion-focused parks have enjoyed rental growth for a number of years but the contraction in sales and the competition from online is now making many fashion-focused park rents potentially unaffordable. Meanwhile DIY, homewares and value retailers that see online sales as complementary to their stores pay much lower rents, which are likely to remain affordable, and in turn should support occupancy levels.
In key regional office markets rental growth potential has been a principal determinant of capital value growth. This growth has been a function of a number of variables: modest levels of speculative development limiting new supply; conversion of secondary offices to alternative uses reducing existing supply; high levels of employment and some decentralisation from London and the South East which has boosted demand. The jury is out on the future of offices, especially with the number of people now working from home, but we expect that offices will continue to be an important real estate investment asset.
Industrial and logistic assets have performed well during the year. While the focus of the market has been on large format logistics properties, where pricing is at its keenest, asset management across the smaller assets in the Custodian REIT portfolio has secured high levels of occupancy, rental growth and capital value growth. Accordingly, this sector was the focus of acquisitions for the Company during the year.
The competing pressures of declining sentiment towards retail and improving prospects for industrial and logistics set in an economic environment driven by Brexit, the General Election and more recently the COVID-19 pandemic has had a net negative impact on commercial property values.
Of more importance than the NAV derived from current valuations in the near-term is the absolute focus on rent collection, future cash flow, ongoing asset management and the affordability of future dividends which are all underpinned by the Company's low ongoing charges ratio (excluding direct property expenses) of 1.12% and low cost of debt of 3.0% (£4.7m interest per annum in aggregate).
As Investment Manager Custodian Capital invoices and collects rent directly allowing it to hold conversations promptly with most tenants regarding the payment of rent through the early stages of the COVID-19 pandemic. Some of these conversations have led to positive asset management outcomes, including the extension of leases in return for rent concessions, providing short-term cash flow relief for occupiers and longer-term income security for the Company. Importantly, at this stage, the Company has not waived or cancelled any contractual rent thus all contractual rent remains due over time.
The Company's rent invoicing profile comprises quarterly in advance (on both English and Scottish quarter days) and monthly in advance. Following negotiations regarding the April - June 2020 quarter rent, the Company has agreed that a number of tenants move from quarterly in advance to monthly in advance rent payments, or a deferral of the April - June 2020 quarter's rent with a full recovery over the next 12-18 months. Some tenants have yet to agree a payment profile but we remain in active discussions with these tenants to agree payment plans for the balance of outstanding rent.
Given the varied profile of the Company's rental invoicing, reporting quarterly rent receipts best reflects the prevailing level of income generation from the Company's property portfolio. To date, 70% of rent due relating to invoicing for the quarter ending 30 June 2020 has been collected, 12% has been deferred by agreement (and is therefore no longer due in the quarter) to be paid either monthly in arrears or to be recovered through a payment plan within existing lease terms over the next 12-18 months and 18% remains the subject of discussion with tenants.
Investment objective
The Company's key objective is to provide shareholders with an attractive relative level of income by paying dividends fully covered by net rental receipts with a conservative level of net gearing. We are pleased to have continued to achieve these objectives with earnings providing 104.4% cover of the total dividend payable relating to the year of 6.65p per share and a net gearing ratio of 22.4% at the year end.
The Board remains committed to a strategy principally focused on regional properties with individual values of less than £10m at acquisition with a weighting towards regional industrial and logistics. Diversification of property type, tenant, location and lease expiry profile continues to be at the centre of the strategy together with maximising cash flow by taking a flexible approach to tenants' requirements and retaining tenants wherever possible.
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:
During the year we have experienced a net decline in the portfolio valuation that broadly reflects the market trends in the differing sectors. Industrial and logistics values have strengthened by 5.6% while office values have been broadly flat. Amongst its far-reaching impacts, the pandemic has deepened the challenges facing the retail sector causing further declines in retail values, although with a greater percentage decline in high street locations (-21.0%) compared to out of town retail warehousing (-12.4%). 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, even if at restricted levels. Furthermore, the average rent across the retail warehouse portfolio is only £14.31 per sq ft which represents an affordable rent for most occupiers.
The 31 March 2020 valuation is reported on the basis of 'material valuation uncertainty' in accordance with the current RICS valuation standards. This basis does not invalidate the valuation but, in the current extraordinary circumstances, implies that less certainty can be attached to the valuation than otherwise would be the case. There is a body of market evidence to support the valuations in the usual way but, in addition, the valuers have reflected market sentiment in their reported numbers. From 12 June 2020, RICS approved removal of the 'material valuation uncertainty' clause for all industrial assets and standalone supermarkets.
Industrial and logistics property remains a very good fit with the Company's strategy where it is possible to acquire modern, 'fit-for-purpose' buildings. One of the advantages of smaller lot-size industrial has been the relative lack of development in recent years. Such industrial development has been focused on large format 'big box' logistics units, where returns have been highest and occupier demand has supported development. The demand for smaller lot-sized units is very broad, from manufacturing, urban logistics, online traders and owner occupiers. This demand supports high residual values (where the vacant possession value is closer to the investment value than in other sectors) and drives rental growth.
Despite the challenges in retail highlighted above, we believe that retail warehousing remains an important asset class for the Company. We expect that well-located retail warehouse units, let off low rents, located on retail parks which are considered dominant in their area will continue to be in demand from retailers. The importance of convenience, free parking, the capacity to support click and collect and the relatively low cost compared to the high street should continue to support occupational demand for the Company's retail warehouse assets. In addition, the out of town retail warehouse market benefits from a restricted supply.
Regional offices will remain an interesting sector for the Company but the focus will be on dominant regional centres, high environmental standards and accessibility to a skilled workforce. There is latent rental growth in many regional offices so value enhancing opportunities still exist.
For details of all properties in the portfolio please see custodianreit.com/property/portfolio.
WAULT
At 31 March 2020 the property portfolio's weighted average unexpired lease term to first break or expiry ("WAULT") was 5.3 years (2019: 5.6 years) with the completion of asset management initiatives during the year substantially offsetting the natural one year decline due to the passage of time.
We have recommended to the Board that shareholders' approval should be sought for an amendment to the Company's investment objectives at the Annual General Meeting ("AGM") on 1 September 2020 to remove the Company's existing WAULT objective which states:
'The Company will seek to minimise rental voids and enhance the WAULT of the portfolio by managing lease expiries and targeting property acquisitions which will in aggregate be accretive to WAULT at the point of acquisition, on a rolling 12-month basis.'
While much-quoted and often considered a proxy for risk, we no longer consider WAULT is a key measure of risk. The increasing demand for flexible leases and the pressures imposed on tenants from the new International Financial Reporting Standard requiring all lease liabilities to be recognised on balance sheet (IFRS 16), is driving tenants to seek shorter leases. Real security comes from the quality of building and location which will ensure that properties are re-let and voids are minimised. Shorter leases, where a greater proportion of the purchase price is in the underlying real estate rather than the lease, should also reduce valuation volatility.
Disposals
Owning the right properties at the right time is one key element of effective property portfolio management, which necessarily involves periodically selling some 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.
After focused pre-sale asset management the following two properties were sold at valuation[27] during the year for a headline consideration of £15.7m:
We used the proceeds from these disposals to help fund the Menzies Portfolio acquisition which was considered better aligned to the Company's long-term investment strategy.
Since the year-end we disposed on an industrial unit in Westerham for £2.8m, £0.5m (23%) ahead of the 31 March 2020 valuation, representing a net initial yield of 4.50%.
Acquisitions
On 1 October 2019 we acquired the Menzies Portfolio for £24.6m through a sale and leaseback transaction with Menzies Distribution Limited ("MDL"). MDL is one of the UK's leading print media logistics companies servicing 1,700 routes per day from over 50 sites across the UK and Ireland. The Menzies Portfolio comprises eight logistics/distribution units spread across the UK with a current passing rent of £1.6m reflecting a NIY of 6.4%.
The Company acquired the Menzies Portfolio by purchasing the issued share capital of Custodian Real Estate (JMP4) Limited (formerly John Menzies Property 4 Limited), the trade and assets of which were subsequently hived up into Custodian REIT plc. All eight properties are let on new 10 year leases with one unit having a second-year break option. The leases provide for a 13% fixed rental uplift at year five.
The Menzies Portfolio is strongly aligned to Custodian REIT's investment strategy and complementary to the Company's existing property portfolio. The pricing benefits of pursuing a smaller lot-size regional strategy is evident when compared with pricing in the highly competitive market for logistics assets. The acquisition of the Menzies Portfolio enhanced the Company's lease expiry profile, supplemented regional diversification and provides secure contractual revenues with fixed rental uplifts in 2024.
Following this transaction, MDL became Custodian REIT's largest tenant, but still represents only 3.8% of the Company's rent roll. No one property from the Menzies portfolio accounts for more than 0.7% of the Company's rent roll supporting the continued drive to mitigate risk through diversification and stock selection. We are very pleased to enter into a long-term relationship with MDL which offers a strong covenant.
The corporate transaction offered compelling economic benefits to both the Company and the vendor compared to acquiring the properties directly.
Asset Management
Our continued focus on asset management including rent reviews, new lettings, lease extensions and the retention of tenants beyond their contractual break clauses resulted in a £6.1m valuation increase in the year. Key asset management initiatives completed during the year include:
Growth in rents and positive asset management outcomes have been tempered by business failures in the retail and other sectors of the property portfolio during the year and since the year end, with Cotswold Outdoor, Paperchase, Travelodge, The Restaurant Group, Poundstretcher and JTF Wholesale entering into or proposing CVAs and Laura Ashley, Thomas Cook and JB Global (t/a Oak Furniture Land) entering Administration, potentially affecting tenancies representing 5.3% of the rent roll.
Since the year-end we have completed a surrender of a lease to Hydro Extrusions UK Limited at Ravensbank Drive, Redditch where the tenant was not in occupation of the property. Rent has been received to the 30 April 2020 contractual lease expiry date and a £95k dilapidations settlement was also agreed. Due to the strong demand in the West Midlands for good quality industrial/warehouse units with vacant possession, we expect to pursue a freehold sale of this property.
We have managed the property portfolio's income expiry profile through successful asset management activities with only 51% of aggregate income expiring within five years at 31 March 2020 (2019: 50%). Short-term income at risk is a relatively low proportion of the property portfolio's income, with only 32% expiring in the next three years (2019: also 32%) and our experience suggests that even in the current uncertain climate, the majority of tenants do not exit at break or expiry.
Outlook
A simple return to pre-COVID-19 pandemic normality by early 2021 appears unlikely. Nevertheless, we still regard commercial real estate as an important and necessary asset for occupiers.
Our experience pre-lockdown was that retailers wanted to continue trading from their core destination locations, albeit at lower rents, and we expect this to remain the case. Rent reductions will support occupancy levels as stores remain affordable. Through this difficult market we have focused on maintaining occupancy whilst securing cash flow. We have worked with tenants to retain them in occupation following CVAs, at lease expiry or at break opportunities and also in response to the pressing challenges of the COVID-19 pandemic, resulting in c.96% occupancy across our high street retail assets.
Over the course of the next 12 months there may be opportunities in retail warehousing if market sentiment continues to weaken and pricing over-compensates. Strong locations should still see demand from retailers and retail warehouse parks could yet make for a compelling investment, benefiting from large sites close to town centres with free car parking for customers and easy loading and servicing for retailers. These factors should make the stores complementary to on-line shopping and suitable for use as urban logistics hubs for the retailers.
Good quality offices in regional markets that can offer flexible accommodation, especially on flexible lease terms, are likely to be attractive to occupiers. The COVID-19 pandemic lockdown has shown a real benefit to employees, both commercially and socially, of an office providing collaborative space and a hub for doing business. However, the increased ability to work from home, with enhanced connectivity from video conferencing and document sharing, has opened up the possibility of more remote working. It is too early to tell which of these trends will have more impact but going forward we expect in-demand offices to fall into two categories, much the same as retail: prime, town centre offices offering meeting rooms, collaborative spaces and flexible hot desking combined with widespread remote working; or out of town, conveniently located, well-connected, lower cost space. We are conscious that obsolescence can be a real cost of office ownership, which can negatively impact cash flow and be at odds with the Company's relatively high target dividend. The need to provide either good value out of town space or flexible town centre space could be a cost to landlords and this will need to be reflected in either price or rent.
Industrial and logistics properties have been the best performers in real estate markets and the Company's weighting of 46%, by value, to the sector has supported returns during the year. We expect this sector to remain in sharp focus and believe there is still some rental growth potential and refurbishment opportunities, such as those carried out on our Warrington asset during the year, that can enhance value.
The COVID-19 pandemic has shone a light on the everyday rent collection and asset management of the Custodian REIT property portfolio. 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.
Once rent collections return to normal and the free cash and undrawn debt of the Company can be deployed, we expect to take advantage of the re-pricing that is likely to be a feature of the market and deliver positive returns to shareholders.
Richard Shepherd-Cross for and on behalf of Custodian Capital Limited Investment Manager 22 June 2020
Property portfolio
Industrial
Office
High street retail
Retail Warehouse
COVID-19 pandemic response
The impact of the COVID-19 pandemic has been pervasive across the globe, and the Board believes it will have a significant impact on rental receipts, tenant stability, property valuations, government legislation, availability of finance and compliance with financial covenants, and will cause significant operational interruption to the Company for at least the financial year ending 31 March 2021. 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 it is still too early to fully comprehend the short-term impact and longer-term ramifications of the COVID-19 pandemic.
The business resilience and risk planning of the Company's key service providers has been tested in recent months and in all cases has responded very well to the challenges presented by the crisis, with all key teams able to work from home and continue to offer high levels of service to the Company.
The Board has met at least fortnightly via video-conference since March to ensure the Company reacts promptly to a dynamic situation, including guiding and challenging the Investment Manager's response and approving decisions quickly when required.
The COVID-19 pandemic has resulted in almost all principal risk areas increasing in overall impact since last year.
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.
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 has also considered the following emerging risks and their potential impact on the Company:
Brexit
The Board is continuing to monitor the potential risks associated with Brexit. Discussions are ongoing and the final outcome regarding the UK's future trading relationship with the EU remains unclear, making it too early to understand fully the impact Brexit will have on our business and our sector. The main potential negative impact of Brexit is a deterioration of the macro-economic environment, potentially leading to further political uncertainty and volatility in interest rates, but it could also impact our investment and occupier market, our ability to execute our investment strategy and our income sustainability in the long term. However, the Board believes the Company is well placed to weather any short-term impact of Brexit because the Company has a diverse portfolio by sector and location with an institutional grade tenant base and low gearing. Environmental
The Board is aware of the increasing focus from external stakeholders on its environmental credentials and the increasing level of disclosure requirements regarding the Company's environmental impact. The Board believes that the risk of negative stakeholder sentiment towards the Company because of a below peer group environmental footprint and non-compliance with environmental disclosure requirements has increased during the year. The Company has complied with the recently implemented Energy Savings Opportunity Scheme and Carbon Reporting requirements and expects further, more onerous requirements in the near future including the Task Force on Climate-related Financial Disclosures. The Board has recently engaged Carbon Intelligence, specialist environmental consultants, to assist it with ensuring compliance with new requirements.
No other emerging risks have been added to the Company's Risk Register during the year.
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 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:
Mitigating actions
In order to preserve cash the Company, as a result of the disruption caused by the COVID-19 pandemic, has:
The Company is in discussion with its lenders regarding charging additional properties and reallocating properties between individual security pools to alleviate short-term covenant compliance pressure.
Results of the assessment
Based on prudent assumptions within the Company's forecasts regarding rent deferrals, tenant default, void rates and property valuation movements, the Directors expect that over the three-year period of their assessment:
Sensitivities
These assessments are subject to sensitivity analysis, which involves flexing a number of key assumptions and judgements included in the financial projections:
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 2020 the Company has:
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 Board notes that the May 2020 IPF Forecasts for UK Commercial Property Investment survey suggests an average 6.3% reduction in rents during 2020 with capital value decreases of between 4.0% and 19.5%. 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 161 assets and over 200 typically 'institutional grade' tenants across all commercial sectors.
Liquidity
At 31 March 2020 the Company has:
The Company has sufficient cash to settle its stated minimum target dividends relating the first half of the financial year ending 31 March 2021 of 1.5p per share and its expense and interest liabilities for a period of at least 12 months, even assuming no further rent is collected. Liquidity is therefore not considered a key area of sensitivity for the going concern assessment.
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 25% from the levels included in the Company's prudent three-year forecasts, with dividends paid at the minimum required by the REIT regime. 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 £35m RCF expires in September 2022 but can be extended by a further two years 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 2022 in the unlikely event of lender support being withdrawn.
REIT regime compliance
The key area of sensitivity in the Company's forecasts to the REIT regime is the requirement to distribute 90% of property rental business profits, calculated on an IFRS basis rather than a cash receipts basis, within 12 months of the financial year end. The Company's prevailing dividend policy, set out in the Business model and strategy section of the Strategic report, aligns itself to the REIT regime by seeking to distribute net rental receipts over the period of disruption caused by the COVID-19 pandemic. All rent deferrals agreed with tenants result in rents being repayable within the year ending 31 March 2021, therefore the Board do not consider this a key sensitivity for the going concern assessment.
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:
Methods used by the Board
The main methods used by the Directors to perform their duties include:
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:
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.
Investment objective and policy
The Company's investment objective is to provide Shareholders with an attractive level of income together with the potential for capital growth from investing in a diversified portfolio of commercial real estate properties in the UK.
The Company's investment policy is:
(i) In the case of a single tenant which is a governmental body or department for which no percentage limit to proportion of the total rent roll shall apply; or (ii) In the case of a single tenant rated by Dun & Bradstreet as having a credit risk score higher than two, where the exposure to such single tenant may not exceed 5% of the total rent roll (a risk score of two represents "lower than average risk").
(i) cash or cash equivalents, money market instruments, bonds, commercial paper or other debt obligations with banks or other counterparties having a single-A (or equivalent) or higher credit rating as determined by an internationally recognised rating agency; or (ii) any "government and public securities" as defined for the purposes of the rules of the Financial Conduct Authority ("FCA").
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.
The Board proposes removing the Company's WAULT investment objective at the AGM as explained in the Investment Manager's report.
Key performance indicators
The Board meets at least four times per year and reviews the Company's quarterly performance against a number of key measures:
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.
Alternative performance measures
Alternative performance measures, including EPRA Best Practice Recommendations, assist stakeholders in assessing performance and are used by research analysts covering the Company in addition to the key performance indicators and comprise:
This year the Company has also disclosed EPRA Sustainability Best Practice Recommendations Guidelines.
Financing
The Company operates with a conservative level of net gearing, with target borrowings over the medium-term of 25% of the aggregate market value of all properties at the time of drawdown.
Debt
The Company has the following facilities available:
Equity
During the year the Company raised £25.3m (before costs and expenses) through the placing of 21,850,000 new ordinary shares.
Dividends
The Company paid dividends totalling 6.625p per share during the year, comprising the fourth interim dividend of 1.6375p per share relating to the year ended 31 March 2019 and three interim dividends of 1.6625p per share relating to the year ended 31 March 2020.
The Company paid an interim dividend of 1.6625p per share for the quarter ended 31 March 2020 on 29 May 2020, meeting its target of paying an annual dividend per share for the financial year of 6.65p (2019: 6.55p).
The Board's objective is to pay dividends on a sustainable basis at a rate which is fully covered by net rental income and does not inhibit the flexibility of the Company's investment strategy.
Due to the disruption to cash collection caused by the COVID-19 pandemic the current level of dividend is not expected to be fully supported by net rental receipts going forward. The Company intends to continue to pay quarterly dividends at a level broadly linked to net rental receipts, with support from prior years' undistributed reserves if required, of no less than an aggregate 1.5p per share for the first half of the financial year ending 31 March 2021. Should rent collections in the June and September quarters allow, more generous dividends may be possible. Over the course of the financial year, as deferred rents are collected, the Board hopes it will be possible to restore the dividend to a sustainable long-term level akin to previous years.
During the year Hazel Adam was appointed as a non-executive director of the Company. The Company has five non-executive directors and no employees. Non-executive directors are paid fixed fees set by the Remuneration Committee and participate in the performance of the Company through their shareholdings. Four non-executive directors are white males and one is a white female.
The Board is conscious of the increased focus on diversity and recognises the value and importance of diversity in the boardroom. The Board supports the recommendations of the Hampton-Alexander and Parker Reports but does not consider it appropriate or in the interests of the Company and its shareholders to set prescriptive diversity targets for the Board.
Corporate social responsibility
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 environmental and social policies address the importance of these issues in the day-to-day running of the business, as detailed below.
Environmental and social policy
The Board 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 Board believes that following this strategy will ultimately be to the benefit of shareholders through enhanced rent and asset values.
The majority of the Company's investment properties are let on full repairing and insuring leases, meaning its day-to-day environmental responsibilities are limited as properties are controlled by the tenants. However, the Board wishes to apply sustainable principles and actively seeks opportunities to make environmentally beneficial improvements to its property portfolio where possible.
Properties are visited periodically by the Investment Manager and any obvious environmental issues are reported to the Board.
The Company recently engaged Carbon Intelligence, specialist environmental consultants, to review the Company's environmental policy, identify and prioritise opportunities for improvements and recommend how best risks might be managed. As a result, during the year the Board approved an updated environmental policy which commits the Company to:
To achieve these aims, we intend to carry out the following initiatives. Energy consumption & management
Building materials
GHG emissions and management
Waste management
Water consumption and management
Climate change adaptation and resilience
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 wellbeing of the occupants of our buildings is maximised. We will implement a property portfolio approach to wellbeing 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:
To monitor energy consumption across the property portfolio, as well as identify opportunities to make energy reductions, the Company has engaged with specialist consultants 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 - Warrington
In line with our policy commitment to use building materials which have a lower environmental impact and ultimately result in improved Energy Performance Certificate ("EPC") ratings across our property portfolio, during the year the Company undertook the refurbishment of a 66,000 sq ft industrial property at Unit 4 Kingsland Grange, Warrington at a cost of £1.6m. The refurbishment primarily consisted of the replacement of the original asbestos roof with modern, new insulated roof sheets, removal of curtain walling, replacement of shutters and dock level doors and an overhaul of the mechanical and electrical services.
Following the refurbishment the property is now significantly more energy efficient and as a result its EPC rating has improved from an 'E' to a 'B'. Tenant demand for energy efficient property is becoming ever more apparent and as a result we have seen the ERV for this property increase from £309k (£4.68 per sq ft) to £368k (5.60 per sq ft) and the valuation of the property has increased from £2.7m at 31 March 2019 to £4.5m at 31 March 2020. The property now meets the requirements of the modern occupier and we anticipate further valuation increases for the property once a new letting has been completed.
Case study - Instavolt
Instavolt has helped create a reliable network of electrical vehicle ("EV") charging stations on a number of the Company's retail parks to reduce the carbon footprint and improve sustainability. Air pollution has reached critical levels in cities across the UK and the government is introducing legislation to ban the sale of all petrol and diesel cars by 2040. We will see an increase of EVs on the roads over the next 10 years and introducing EV charging points will futureproof our sites. The service benefits EV drivers, landlords that house the charging units and, ultimately, the UK's environment by supporting use of less polluting EVs.
As the number of EVs on the roads increase, our retail parks should see increased footfall as EV charging station use increases. This should prove attractive when securing new tenants. Introducing the EV charging points to our retail parks makes commercial sense as we can cater for the demand and keep on the right track for the future.
We have installed a total of 16 EV charging points across eight of our retail parks with two chargers per site with the potential to increase the number of chargers on some of our larger sites when demand increases. The charge points are classed as rapid vehicle chargers and are a minimum 50kW and can be upgraded to 350kW, offering the fastest rates of charge. As charging units can be upgraded up to 350kW, they would not need to be replaced as battery technology develops.
With the benefit of an established relationship with Instavolt we are looking to introduce this technology for the benefit of our tenants on our non-retail park sites.
Approval of Strategic report
The Strategic report, (incorporating the Chairman's statement, Investment Manager's report, Property portfolio, Principal risks and uncertainties, Section 172 statement and stakeholder relationships and Business model and strategy) was approved by the Board of Directors and signed on its behalf by:
David Hunter Chairman 22 June 2020 Consolidated statement of comprehensive income For the year ended 31 March 2020
The profit for the year arises from the Company's continuing operations.
Consolidated and Company statements of financial position As at 31 March 2020 Registered number: 08863271
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 £2,123,000 (2019: £23,646,000).
These consolidated and Company financial statements of Custodian REIT plc were approved and authorised for issue by the Board of Directors on 22 June 2020 and are signed on its behalf by:
David Hunter Chairman
Consolidated and Company statements of cash flows For the year ended 31 March 2020
Consolidated and Company statements of changes in equity For the year ended 31 March 2020
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 (£000), except when otherwise indicated. The consolidated financial statements were authorised for issue in accordance with a resolution of the Directors on 22 June 2020.
The consolidated financial statements and the separate financial statements of the parent company have been prepared in accordance with International Financial Reporting Standards adopted by the International Accounting Standards Board ("IASB") and interpretations issued by the International Financial Reporting Interpretations Committee ("IFRIC") of the IASB (together "IFRS") as adopted by the European Union, and in accordance with the requirements of the Companies Act applicable to companies reporting under IFRS, and therefore they comply with Article 4 of the EU IAS Regulation.
Certain statements in this report are forward looking statements. By their nature, forward looking statements involve a number of risks, uncertainties or assumptions that could cause actual results or events to differ materially from those expressed or implied by those statements. Forward looking statements regarding past trends or activities should not be taken as representation that such trends or activities will continue in the future. Accordingly, undue reliance should not be placed on forward looking statements.
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.
IFRS 16
The Company adopted IFRS 16 'Leases' on 1 April 2019. The impact of adoption of this standard is shown below:
IFRS 16 removes the distinction between operating and finance leases for lessees and replaces them with the concept of 'right-of-use' assets and associated financial liabilities which will result in almost all leases being recognised on the balance sheet. A leasee's rent expense under IAS 17 for operating leases is removed and replaced with depreciation and finance costs.
Additional disclosure requirements include presenting:
The Company's right of use assets meet the IAS 40 'Investment Property' definition of investment property. The impact of the adoption of IFRS 16 'Leases' during the year has been:
These amendments have been recognised in the year as the Company has elected not to restate comparatives on initial application of IFRS 16.
The Company has adopted the amendments included in the Annual Improvements to IFRS Standards 2015-2017 Cycle for the first time in the current year, which have had no impact on reported results, and which includes amendments to the following Standards:
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. The Company has not completed its review of the impact of this new standard but does not anticipate it having a significant impact.
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.
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.
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.
Estimates
There are no areas where accounting estimates are significant to the financial statements.
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.
Operating profit is stated after charging/(crediting):
Fees payable to the Company's auditor, Deloitte LLP, are further detailed in the Audit and Risk Committee report.
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:
The Company operates as a REIT and hence profits and gains from the property investment business are normally exempt from corporation tax.
The Company paid a fourth interim dividend relating to the quarter ended 31 March 2020 of 1.6625p per ordinary share (totalling £7.0m) on 29 May 2020 to shareholders on the register at the close of business on 24 April 2020. This dividend has not been included as a liability in these financial statements.
£375.1m (2019: £371.4m) of investment property has been charged as security against the Company's borrowings. £0.6m (2019: £nil) of investment property comprises right-of-use assets.
The carrying value of investment property at 31 March 2020 comprises £447.9m freehold (2019: £462.3m) and £111.9m leasehold property (2019: £110.4m).
Investment property is stated at the Directors' estimate of its 31 March 2020 fair value. Lambert Smith Hampton Group Limited ("LSH") and Knight Frank LLP ("KF"), professionally qualified independent valuers, each valued approximately half of the property portfolio as at 31 March 2020 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 are subject to a 'material uncertainty' clause in line with prevailing 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 4.7% to 10.1%. Valuation reports are based on both information provided by the Company e.g. current rents and lease terms, which are derived from the Company's financial and property management systems 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, 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.
Shares in subsidiaries
* Held indirectly
On 1 October 2019 the Company acquired entire issued share capital of Custodian Real Estate (JMP4) Limited (formerly John Menzies Property 4 Limited) for £24.6m which owned the Menzies Portfolio.
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.
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:
Irrespective of the above analysis the Company considers that default has occurred when a financial asset is past due, based on the current uncertainty around rental receipts due to the COVID-19 pandemic, unless the Company has reasonable and supportable information to demonstrate an alternative criteria is more appropriate.
Trade receivables include £nil (2019: £0.2m) which are past due as at 31 March 2020 for which no provision has been made because the amounts are considered recoverable.
The provision for doubtful debts at the year end was £0.3m (2019: £0.0m).
Tenant rent deposits of £0.7m (2019: £1.2m) are held as collateral against certain trade receivable balances.
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.
Cash and cash equivalents include £0.9m (2019: £1.4m) of restricted cash comprising £0.7m (2019: £1.2m) of rental deposits held on behalf of tenants and £0.2m (2019: £0.1m) of retentions held in respect of development fundings and capital expenditure.
On 17 September 2019 the Company and Lloyds agreed to increase the total funds available under the RCF from £35m to £50m for a term of three years, with an option to extend the term by a further two years, and a reduction in the rate of annual interest to between 1.5% and 1.8% above three-month LIBOR, determined by reference to the prevailing LTV ratio of a discrete portfolio of properties. The RCF includes an 'accordion' option with the year end facility limit set at £35m, which can be increased to £50m subject to Lloyds' agreement.
The Company has the following facilities available:
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 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.
During the year, the Company raised £25.3m (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 31 July 2019, the Board was given authority to issue up to 135,734,448 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. 11,850,000 ordinary shares have been issued under the Authority since 31 July 2019, leaving an unissued balance of 123,884,448 at 31 March 2020. The Authority expires on the earlier of 15 months from 31 July 2019 and the subsequent AGM, due to take place on 1 September 2020.
In addition, the Company was granted authority to make market purchases of up to 40,720,334 ordinary shares under section 701 of the Companies Act 2006. No market purchases of ordinary shares have been made.
The nature and purpose of each reserve within equity are:
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:
The following table presents amounts reported in revenue
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:
During the year administrative fees payable to the Investment Manager under the IMA were calculated as follows:
On 22 June 2020 the terms of the IMA were varied with effect from that date to extend the appointment of the Investment Manager for a further three years and to introduce further fee hurdles such that annual management fees payable to the Investment Manager under the IMA are now:
Administrative fees payable to the Investment Manager under the IMA are now:
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% (2019: 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 £4.01m (2019: £3.95m) comprising £3.52m (2019: £3.49m) in respect of annual management fees, £0.43m (2019: £0.43m) in respect of administrative fees and £0.06m (2019: £0.03m) in respect of marketing fees.
Properties
The Company owns 1, Penman Way, Leicester (formerly MW House) and Gateway House located at Grove Park, Leicester, which were partially let to Mattioli Woods for part of the prior year. On 31 October 2018 Mattioli Woods surrendered one lease and terminated its other lease over parts of Gateway House, paying the remaining 13 months' rent in full, and on 26 November 2018 Mattioli Woods assigned its lease over MW House for the remainder of its term. Mattioli Woods paid the Company rentals of £nil (2019: £0.26m) and £nil (2019: £0.56m) in dilapidation settlements during the year.
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 22.4% (2019: 24.1%).
Externally imposed capital requirements
The Company is not subject to externally imposed capital requirements, although there are restrictions on the level of interest that can be paid due to conditions imposed on REITs.
Financial risk management
The Company seeks to minimise the effects of interest rate risk, credit risk, liquidity risk and cash flow risk by using fixed and floating rate debt instruments with varying maturity profiles, at low levels of 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:
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 2020, the RCF was drawn at £35m. 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 2020 would decrease/increase by £0.2m 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 35% (2019: 31%).
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 2020 was £4.4m (2019: £2.5m).
The Company has no significant concentration of credit risk, with exposure spread over a large number of tenants covering a wide variety of business types. Further detail on the Company's credit risk management process is included within the Strategic report.
Liquidity risk management
Ultimate responsibility for liquidity risk management rests with the Board, which has built an appropriate liquidity risk management framework for the management of the Company's short, medium and long-term funding and liquidity management requirements. The Company manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities by continuously monitoring forecast and actual cash flows and matching the maturity profile of financial assets and liabilities. The following 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.
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:
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 2020, the fair value of the Company's investment properties was £559.8m (2019: £572.7m).
Interest bearing loans and borrowings - level 3
As at 31 March 2020 the value of the Company's loans was £150m (2019: £137.5m) and the amortised cost of the Company's loans with Lloyds, SWIP and Aviva approximated their fair value.
The carrying amount of all receivables and payables deemed to be due within one year are considered to reflect their fair value.
Impact of Brexit and 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 impact of the COVID-19 pandemic and Brexit, 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.
On 22 June 2020 the IMA was renewed as detailed in Note 18.
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.
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.
Dividend cover
The extent to which dividends relating to the year are supported by recurring net income.
The difference between the Company's share price and NAV, shown as a percentage at the end of the year.
Net gearing
Gross borrowings less cash (excluding rent deposits), divided by property portfolio value.
A measure of the regular, recurring costs of running an investment company expressed as a percentage of average NAV.
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.
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;
EPRA NAV per share
The EPRA NAV highlights the fair value of net assets on an ongoing, long-term basis. It excludes assets and liabilities that are not expected to crystallise in normal circumstances such as the fair value of financial derivatives and deferred taxes on property valuation surpluses.
The EPRA triple NAV is the EPRA NAV adjusted to reflect the fair value of debt and derivatives and to include deferred taxation on revaluations.
There is no difference between the carrying value of the Company's interest-bearing loans included in the balance sheet at amortised cost and their fair value. Fair value excludes 'break' costs chargeable should the Company settle loans ahead of their contractual expiry.
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).
EPRA vacancy rate
EPRA vacancy rate is the ERV of vacant space as a percentage of the ERV of the whole property portfolio.
EPRA cost ratios
EPRA cost ratios reflect overheads and operating costs as a percentage of gross rental income.
EPRA capital expenditure
Capital expenditure incurred on the Company's property portfolio during the year.
EPRA like-for-like rental growth
Like-for-like rental growth of the property portfolio by sector.
The financial information set out above does not constitute the Company's statutory accounts for the years ended 31 March 2020 or 2019, but is derived from those accounts. Statutory accounts for 2019 have been delivered to the Registrar of Companies and those for 2020 will be delivered following the Company's AGM being held at 1 September 2020 at 2:00pm. The auditor has reported on those accounts: their reports were 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] Rent receipts relating to 25 March to 24 June 2020 English rent quarter invoicing, April-June 2020 monthly invoicing and a pro-rata allocation of the 28 February - 28 August 2020 Scottish quarterly invoicing. [2] Net Asset Value ("NAV") movement including dividends paid and approved for the year on shares in issue at 31 March 2019. [3] The European Public Real Estate Association ("EPRA"). [4] Profit after tax excluding net gains or losses on investment property and one-off costs divided by weighted average number of shares in issue. [5] Profit after tax divided by weighted average number of shares in issue. [6] Comprising £6.1m of valuation uplift from successful asset management initiatives less £31.9m of other valuation decreases and £0.6m of acquisition costs. [7] Before costs and expenses of £0.3m. [8] Before disposal costs of £0.2m. [9] Before rental top-ups and cost guarantees of c. £0.3m. [10] Before acquisition costs of £0.6m. [11] Share price movement including dividends paid and approved for the year. [12] Profit after tax, excluding net gains or losses on investment property and one-off costs, divided by dividends paid and approved for the year. [13] Dividends paid and approved for the year. [14] Gross borrowings less cash (excluding rent deposits), divided by property portfolio value. [15] Expenses (excluding operating expenses of rental property recharged to tenants) divided by average quarterly NAV. [16] Expenses (excluding operating expenses of rental property) divided by average quarterly NAV. [17] Before rental top-ups, cost guarantees and disposal costs of £0.5m [18] Passing rent divided by property valuation plus purchaser's costs. [19] Passing rent of let property divided by passing rent of let property plus estimated rental value of vacant property. [20] Historical rental income received and projected contractual rental income receivable less certain property expenses divided by interest and fees payable to its lenders. [21] Source: Numis Securities Limited. [22] Dividends totalling 6.625p per share (1.6375p relating to the prior year and 4.9875p relating to the year) were paid on shares in issue throughout the year. Dividends paid on shares in issue at the year end averaged 6.4p per share due to new shares being issued after the first ex-dividend date. [23] Source: Numis Securities Limited. [24] Annual management fees comprise property management services fees and investment management services fees. [25] Current passing rent plus ERV of vacant properties. [26] Includes car showrooms, petrol filling stations, children's day nurseries, restaurants, health and fitness units, hotels and healthcare centres. [27] Before disposal costs of £0.2m. [28] As defined by the Corporation Tax Act 2010. [29] 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. [30] Assumed at 6.5% of investment property valuation. |
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| ISIN: | GB00BJFLFT45 |
| Category Code: | FR |
| 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.: | 71267 |
| EQS News ID: | 1076027 |
| End of Announcement | EQS News Service |
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