Interim Results
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Custodian REIT plc (CREI)
1 December 2020
Custodian REIT plc
("Custodian REIT" or "the Company")
Interim Results
Custodian REIT (LSE: CREI), the UK commercial real estate investment company, today reports its interim results for the six months ended 30 September 2020 ("the Period").
Financial highlights and performance summary
The Company presents NAV per share total return, dividend per share, share price total return, NAV per share, share price, market capitalisation, discount of share price to NAV per share, net gearing, and certain EPRA Best Practice Recommendations as alternative performance measures ("APMs") to assist stakeholders in assessing performance alongside the Company's results on a statutory basis.
APMs are among the key performance indicators used by the Board to assess the Company's performance and are used by research analysts covering the Company. Certain other APMs may not be directly comparable with other companies' adjusted measures, and APMs are not intended to be a substitute for, or superior to, any IFRS measures of performance. Supporting calculations for APMs and reconciliations between APMs and their IFRS equivalents are set out in Note 18.
David Hunter, Chairman of Custodian REIT, said:
"I am very pleased to announce that despite the inevitable disruption to cash collection caused by the COVID-19 pandemic, the Company's better than expected cash collection rate has allowed dividends per share of 2.0p to be paid for the Period, 33% ahead of the minimum level of 1.5p announced in April 2020 before the full impact of the national lockdown could be ascertained.
"We expect further tenant failures as Government support packages are withdrawn, the November 2020 English lockdown and subsequent restrictions bite and while CVAs remain legal, if questionable, practice, but this is likely to be heavily weighted towards the retail sector and should not diminish the overall appeal of real estate. In a low return environment we believe that property returns will look attractive and the search for income and long-term capital security will bring many investors back to real estate.
"The COVID-19 pandemic has reinforced Custodian REIT's strategy which has always placed income and financial resilience at the heart of the Company's objectives. When allied to the appropriate property strategy this focus underpins sustainable dividends, which in turn support total return, and we remain committed to both growing the dividend on a sustainable basis and delivering capital value growth for our shareholders over the long-term."
Further information
Further information regarding the Company can be found at the Company's website www.custodianreit.com or please contact:
Custodian REIT plc interim results for the six months ended 30 September 2020
Chairman's statement
The COVID-19 pandemic is continuing to impact the property market and our tenants, leading to a £27.4m property valuation decrease during the Period and 88% of rent being collected, net of contractual deferrals. EPRA earnings per share decreased to 2.6p (2019: 3.4p) due to a £2.9m increase in the doubtful debt provision, reflecting our prudent assumptions regarding the recovery of overdue and deferred rents, and a £1.9m (4.7%) decrease in the annual rent roll since 31 March 2020 due to tenants exiting at lease expiry (2.4%), cessation of rents through Company Voluntary Arrangements ("CVAs") and Administrations (2.0%) and the disposal of an industrial asset (0.3%). Helpfully, rental decreases seen in the high street retail and other sectors were offset by increases in the industrial sector.
The recent turmoil in markets has emphasised the importance of having a well-diversified, income focused property portfolio. I was very pleased to be able to announce that despite the inevitable disruption to cash collection caused by the COVID-19 pandemic, the Company's better than expected cash collection rate has allowed dividends per share of 2.0p to be paid for the Period, 33% ahead of the minimum level of 1.5p announced in April 2020 before the full impact of the national lockdown could be ascertained.
This higher dividend reflects the levels of rent collection seen since the onset of the COVID-19 pandemic and is fully covered by net cash receipts and 130% covered by EPRA earnings. The Board acknowledges the importance of income for shareholders, and its objective remains paying dividends at a level broadly linked to net rental receipts that does not inhibit the flexibility of the Company's investment strategy.
These have been testing times which have necessitated an exceptional effort from the Investment Manager, both in the collection of rents and in operating remotely as a team. I would like to acknowledge the results of their efforts. I 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.
The Company retains its strong financial position to address the extraordinary circumstances imposed by the COVID-19 pandemic. At 30 September 2020 it had:
No lender covenants have been breached during the Period. Since the Period end the Company has charged, or is in the process of charging, five additional properties valued at £21.1m to alleviate short-term LTV covenant compliance pressure on individual security pools.
The NAV of the Company at 30 September 2020 was £399.7m, approximately 95.2p per share, a decrease of 6.4p (6.3%) since 31 March 2020:
The valuation decrease before acquisition costs of £27.4m was experienced across all sectors of the portfolio, further detailed in the Investment Manager's report, due to:
The Company operates the following debt facilities:
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 complied with all loan covenants during the Period. The Company has £174.1m (33% of the property portfolio) of unencumbered assets which could be charged to the security pools to enhance the LTV on the individual loans and since the Period end has charged, or is in the process of charging, five of these unencumbered properties valued at £21.1m.
The weighted average cost of the Company's agreed debt facilities is 2.9% (2019: 3.0%) with a WAM of 7 years (2019: 8 years). 77% (2019: 75%) of the Company's debt facilities are at a fixed rate of interest, significantly mitigating interest rate risk.
Dividends
During the Period the Company paid the fourth quarterly interim dividend per share for the financial year ended 31 March 2020 of 1.6625p, relating to the quarter ended 31 March 2020, and the first quarterly dividend per share for the financial year ending 31 March 2021 of 0.95p, relating to the quarter ended 30 June 2020.
In line with the Company's dividend policy the Board approved a quarterly interim dividend of 1.05p per share for the quarter ended 30 September 2020 which was paid on 30 November 2020 to shareholders on the register on 6 November 2020.
Investment Manager
Custodian Capital Limited ("the Investment Manager") is appointed under an investment management agreement ("IMA") to provide asset management, investment management and administrative services to the Company. The IMA fee structure was amended in June 2020 as detailed in Note 16.
Board succession and remuneration
Three of the Company's four independent Directors were appointed in 2014. The Company's succession policy allows for a tenure of longer than nine years, in line with the 2019 AIC Corporate Governance Code for Investment Companies ("AIC Code"), but the Board acknowledges the benefits of ongoing Board refreshment. For this reason expected Director retirement dates are staggered within a nine year tenure period. Where possible, the Board's policy is to recruit successors well ahead of the retirement of Directors.
The gender diversity recommendations of the Hampton-Alexander Review are for at least 33% female representation on FTSE350 company boards. With the appointment of Hazel Adam during the past year, the female representation on the Board is 20%. The Company is a constituent of the FTSESmallCap Index where no female representation recommendations apply, but the Board recognises the value and importance of diversity in the boardroom.
In June 2020 the Remuneration Committee postponed its decision regarding Directors' annual fees for the year ending 31 March 2021 due to the uncertainty caused by the COVID-19 pandemic in anticipation of a clearer fiscal outlook later in the year. In November 2020 the Remuneration Committee determined that there would be no increase in level of Directors' annual fees for the time being and subsequent reviews would be undertaken on a quarterly basis whilst uncertainty caused by the COVID-19 pandemic remained.
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 where possible and the key elements of the Company's current environmental policy are:
During the Period the Company agreed environmental KPIs for the property portfolio and completed its inaugural submission for the Global Real Estate Sustainability Benchmark ("GRESB"). The Company's Annual Report for the year ended 31 March 2020 received a 'most improved' award for its first year complying with EPRA Sustainability Best Practice Recommendation reporting.
Brexit
The Board is continuing to monitor the potential risks associated with Brexit but believes the Company is well placed to weather any short-term impact because of its diverse property portfolio by sector and location with an institutional grade tenant base and low gearing.
Outlook
The absolute focus on rent collection, financial resilience and maintaining fully covered dividend payments has occupied the Board's attention throughout the Period. Indeed, the COVID-19 pandemic has reinforced Custodian REIT's strategy which, over and above decisions in relation to investment approach, has always placed income and financial resilience at the heart of the Company's objectives. When allied to the appropriate property strategy this focus underpins sustainable dividends, which in turn support long-term total return.
Notwithstanding some ongoing challenges the post-pandemic outlook for real estate in a low interest, low return environment looks promising. It has been reported that global institutional investors plan to increase their allocation to real assets over the next 12 months which should encourage wealth managers and private clients to re-weight to real estate for its income credentials.
David Hunter Chairman 30 November 2020
Investment Manager's report
Property market
Investment activity is increasing and appears to be tracking the emerging picture of forecast occupier demand. There is confidence in the industrial and logistics market, which represents 47% of the Company's property portfolio value, where record investment volumes have been matched by record occupational demand for warehouse space. This occupational demand, driven by the continued growth of e-commerce and the onshoring of supply chains, combined with low vacancy rates has led to the continuation of rental growth. Much of the investment capital that might have been focused on the office or retail sectors has been redirected to industrial and logistics. We see continued opportunity in this sector as the UK has yet to build a sufficient logistics network to support the continued growth in e-commerce.
Despite widespread remote working and the resulting low utilisation of offices across the country we expect recognition from occupiers of the social and well-being impact of returning to offices in some meaningful way, post the COVID-19 pandemic. Office owners must invest in their existing buildings to create flexible working spaces which may result in greater space requirements per head but perhaps for fewer office workers. Offices allow space for organisational productivity, rather than individual productivity which may prove better when delivered working remotely either from home or from smaller satellite offices. The lettings market has already seen an increase in enquiries for satellite office locations reflecting this trend which could be positive for Custodian REIT's portfolio of small regional offices, acknowledging that forecasting office demand is currently subject to significant uncertainty.
The retail market has borne the brunt of the impact of lockdown with a huge reduction in footfall and consumers switching to online retailing instead. The COVID-19 pandemic disruption has accelerated trends that were already embedded in retailing when online retail already made up almost 20% of all UK retail sales, namely an oversupply of shops, downward pressure on rents and a rise in the number of retailers failing.
ONS data indicates online retail sales reached 32.8% in May 2020 during the first national lockdown compared to 18.8% in May 2019. As lockdown was eased in the summer, so people returned to the shops and online sales dipped, which is a positive signal for physical retail. While online sales will remain an important part of retailers' strategies, the physical shop is not yet dead. This physical presence is particularly relevant for prime city centre locations where retailers benefit from high footfall facilitating brand awareness and enabling 'showrooming'. We also believe the physical shop will survive in convenience-led, out of town locations, especially for goods which are less likely to be bought online, namely DIY, furniture, homewares, and discount brands. We expect the Company's strategy of a low weighting to high street retail and a greater focus on out-of-town retail, let at affordable rents, will position the portfolio well to pick up as and when consumers can return to the shops with confidence.
Investment volumes have been sufficient for the Company's valuers to remove the 'material uncertainty' caveat from the property portfolio valuation as at 30 September 2020. However, in an attempt to reflect market sentiment in the valuations a risk factor has still been applied to the collection of deferred rent or rents arrears due from tenants adversely affected by the COVID-19 pandemic. This rental risk continues to have an impact on NAV but, as deferred rents continue to be recovered, this risk adjustment applied to rents within valuations will diminish.
Rent collection
As Investment Manager, Custodian Capital invoices and collects rent directly, importantly allowing it to hold direct conversations promptly with most tenants regarding the payment of rent. This direct contact has proved invaluable through the COVID-19 pandemic disruption, enabling better outcomes for the Company. Many of these conversations have led to positive asset management outcomes, some of which are discussed below.
88% of rent relating to the Period net of contractual rent deferrals has been collected, or 82% before contractual deferrals, as set out below:
88% of the £0.2m contractual rent deferred falling due during the Period has been collected, indicating that the support offered to tenants during the first national lockdown is now returning a more positive result on overall rent collections.
Outstanding rental income remains the subject of discussion with various tenants, although some arrears are potentially at risk of non-recovery from CVAs or Pre-pack Administrations. We expect the rent recovery rate for the Period to exceed 90% once tenant discussions are concluded.
To date 92% of rent relating to the quarter ending 31 December 2020 has been collected, net of contractual deferrals7.
All contractual deferrals offered to date are to be recovered through payment plans over the next 12-18 months.
The Company's doubtful debt provision has increased by £2.9m during the Period to reflect the risk over collecting outstanding and deferred rent.
7 The proportion of rent collected relating to the quarter ending 31 December 2020 ("FY21 Q3") invoiced rents now due, adjusted for the agreed deferral of 1% of FY21 Q3 invoiced rents and the rents now due previously deferred from FY21 Q1 and Q2.
Property portfolio performance
At 30 September 2020 the Company's property portfolio comprised 161 assets (31 March 2020: 161 assets), 200 tenants and 265 tenancies with an aggregate net initial yield[11] ("NIY") of 6.9% (31 March 2020: 6.8%) and weighted average unexpired lease term to first break or expiry ("WAULT") was 5.1 years (31 March 2020: 5.3 years).
The property portfolio is split between the main commercial property sectors, in line with the Company's objective to maintain a suitably balanced portfolio, with a relatively low exposure to office and a relatively high exposure to industrial, retail warehouse and alternative sectors, often referred to as 'other' in property market analysis.
The current sector weightings are:
A number of smaller assets in the high street retail sector are earmarked for disposal which should limit possible future valuation decreases in that sector.
The 31 March 2020 valuation was reported on the basis of 'material valuation uncertainty' in accordance with RICS valuation standards. This basis did not invalidate the valuation but, in the circumstances, implied that less certainty could be attached to the valuation than otherwise would be the case. However, for 30 September 2020 valuations, no 'material valuation uncertainty' clause was applied for all asset classes in the Company's property portfolio.
Industrial and logistics property remains a very good fit with the Company's strategy. The demand for smaller lot-sized units is very broad, from manufacturing, urban logistics, online traders and owner occupiers. This demand, combined with a restricted supply resulting from limited new development, supports high residual values (where the vacant possession value is closer to the investment value than in other sectors) and drives rental growth. Despite a long period of growth in this sector, we still see opportunity.
Amongst its far-reaching impacts, the COVID-19 pandemic has deepened the challenges facing the retail sector causing further declines in retail values across the portfolio, although with a greater percentage decline in high street locations (-10.1%) than in out-of-town locations (-6.7%). We believe that out-of-town retail/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.
Regional offices will remain a sector of interest for the Company and we expect there to be activity post-pandemic in regional office markets. The rise in working remotely may not be restricted to working from home with a potential increase in working from regional satellite offices. Locations that offer an attractive environment to both live and work in and that offer buildings with high environmental standards and accessibility to a skilled workforce, will be most desirable. There is latent rental growth in many regional office markets where supply has been much diminished through redevelopment to alternative uses.
For details of all properties in the portfolio please see custodianreit.com/property/portfolio.
Acquisition
In July 2020 the Company acquired 0.6 acres of land in Nottingham for £0.9m to be developed into a 2,163 sq ft drive-through coffee shop with 34 parking spaces. Construction, costing £0.825m, is being phased over an expected six month build period. The unit has been pre-let to KBeverage Limited (trading as Starbucks Coffee) on a 20 year lease with no breaks and five yearly upward only market rent reviews. On completion of the development passing rent will be £115k pa, reflecting a NIY of 6.67%.
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.
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 risk
The property portfolio's security of income is enhanced by 19.1% of income benefitting from either fixed or indexed rent reviews.
Short-term contractual income at risk is a relatively low proportion of the property portfolio's total income, with 31% (2019: 35%) expiring in the next three years and 8% within one year (2019: 15%).
The Company's Annual Report for the year ended 31 March 2020 set out the principal risks and uncertainties facing the Company at that time. We do not anticipate any changes to those risk and uncertainties over the remainder of the financial year, but highlight the following risks:
COVID-19 pandemic
The impact of the COVID-19 pandemic has been pervasive across the globe, and we believe it will continue to have a significant impact on rental receipts, tenant stability, property valuations, government legislation and availability of finance and compliance with financial covenants for at least the remainder of the financial year ending 31 March 2021. We believe it is still too early to fully comprehend the short-term impact and longer-term ramifications of the COVID-19 pandemic. The Board has met frequently via video-conference during the Period to ensure the Company reacts promptly to a dynamic situation, including guiding and challenging our response and approving decisions quickly when required.
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 the Company's business. 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 the investment and occupier markets, our ability to execute the Company's investment strategy and its income sustainability in the long-term. However, we believe the Company is well placed to weather any short-term impact of Brexit because of its 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 the Company's environmental credentials and the increasing level of disclosure requirements regarding the Company's environmental impact. We continue to work with specialist environmental consultants to ensure compliance with new requirements and identify cost-effective opportunities to improve the Company's environmental performance. The Board recently approved a suite of environmental KPIs on which the Investment Manager will report to ensure the Company's ongoing environmental impact is considered in the decision making process.
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 £2.8m valuation increase in the Period. Key asset management initiatives completed during the Period include:
Since the Period end the following initiatives have been completed:
These positive asset management outcomes have been tempered by the impact of the following business failures, which have resulted in £801k (2.0% of rent roll) of lost annual rent with a further £1,008k (2.5% of rent roll) at risk:
Lost contractual annual rent since 31 March 2020
*An agreement for a 15 year lease has been exchanged on the Perth asset with Tim Hortons Fast Food Restaurants with rent of £90k per annum.
Contractual annual rent at risk at 30 September 2020
All tenants in properties with rent at risk remain in occupation and continue to trade, with negotiations for new lease terms either agreed and in solicitors hands or under negotiation, demonstrating occupier demand remains in the market for well-located assets.
Outlook
As we see increasing confidence in the collection of contractually deferred rents and once landlords can formally pursue non-payers, positive sentiment towards the income credentials of commercial real estate investment is likely to return. In a low return environment, where dividends are under pressure across all investment markets, we believe that property returns will look attractive and the search for income and long-term capital security will bring many investors back to real estate. We expect further tenant failures as Government support packages are withdrawn, the November 2020 English lockdown and subsequent restrictions bite and while CVAs remain legal, if questionable, practice, but this is likely to be heavily weighted towards the retail sector and should not diminish the overall appeal of real estate.
Over the last eight months the market's focus has been on income (and therefore EPRA earnings per share) rather than NAV and we expect this focus to continue whilst disruption to contractual rent collections remains. We believe that EPRA earnings per share is a more important metric than NAV per share in demonstrating the Company's ability to deliver long-term sustainable dividends. As a result our focus has understandably been, and will remain, centred on rent collection.
We remain confident that the Company's strategy of targeting income with conservative net gearing in a well-diversified regional property portfolio will continue to deliver the long-term returns demanded by our shareholders.
Richard Shepherd-Cross for and on behalf of Custodian Capital Limited Investment Manager 30 November 2020
Property portfolio
Condensed consolidated statement of comprehensive income For the six months ended 30 September 2020
The loss for the Period arises from the Company's continuing operations.
As at 30 September 2020 Registered number: 08863271
These interim financial statements of Custodian REIT plc were approved and authorised for issue by the Board of Directors on 30 November 2020 and are signed on its behalf by:
David Hunter Director
Condensed consolidated statement of cash flows For the six months ended 30 September 2020
Condensed consolidated statements of changes in equity For the six months ended 30 September 2020
For the six months ended 30 September 2019
Notes to the interim financial statements for the period ended 30 September 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 interim 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 interim financial statements were authorised for issue in accordance with a resolution of the Directors on 30 November 2020.
The interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting. The interim financial statements do not include all the information and disclosures required in the annual financial statements. The Annual Report for the year ending 31 March 2021 will be 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.
The information relating to the Period is unaudited and does not constitute statutory financial statements within the meaning of section 434 of the Companies Act 2006. A copy of the statutory financial statements for the year ended 31 March 2020 has been delivered to the Registrar of Companies. The auditor's report on those financial statements was not qualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report and did not contain statements under section 498(2) or (3) of the Companies Act 2006.
The interim financial statements have been reviewed by the auditor and its report to the Company is included within these interim financial statements.
The principal accounting policies adopted by the Company and applied to these interim financial statements are consistent with those policies applied to the Company's Annual Report and financial statements.
Preparation of the interim financial statements requires the Company to make judgements and estimates and apply assumptions that affect the reported amount of revenues, expenses, assets and liabilities.
The areas where a higher degree of judgement or complexity arises are discussed below:
Valuation of investment property - Investment property is valued at the reporting date at fair value. In making its judgement over the valuation of properties, the Company considers valuations performed by the independent valuers in determining the fair value of its investment properties. The valuers make reference to market evidence of transaction prices for similar properties. The valuations are based upon assumptions including future rental income, anticipated maintenance costs and appropriate discount rates. In response to the COVID-19 pandemic, 31 March 2020 valuations were subject to a 'material uncertainty' clause in line with prevailing RICS guidance, which has not been applied to 30 September 2020 valuations. In response to the COVID-19 pandemic, the Company's valuers used historical rent arrears to indicate the potential for further short-term disruptions in tenants' trading and rental payments as well as reflecting changes to market rents and yields. This approach means for certain assets occupied by tenants currently not trading or with trade significantly curtailed, the Company's valuers assumed a prospective three-six-month rental void and applied a yield increase of 25-75bps to valuations.
The areas where a higher degree of estimation uncertainty arises significant to the interim financial statements are discussed below:
Impairment of trade receivables - As a result of the COVID-19 pandemic the Company's assessment of expected credit losses is inherently subjective due to the forward-looking nature of the assumptions made, most notably around the assessment over the likelihood of tenants having the ability to pay rent as demanded, as well as the likelihood of rent deferrals and lease incentives being offered to tenants as a result of the pandemic. The expected credit loss which has been recognised is therefore subject to a degree of uncertainty which may not prove to be accurate given the uncertainty caused by COVID-19. Details of the changes made to the assessment of expected credit losses are set out in Note 10.
Under Provision 30 of the UK Corporate Governance Code 2018 ("the Code"), the Board needs to report whether the business is a going concern and identify any material uncertainties to the Company's ability to continue to do so. The levels of rent collection since the onset of the COVID-19 pandemic have been ahead of base case forecasts made in June 2020 to support the going concern assessment for the year ended 31 March 2020. However, in considering the Code's requirements, the Investment Manager has continued to forecast prudently in particular regarding cash flows and borrowing facilities. This twelve month forecast indicates that:
This assessment was subject to sensitivity analysis, which involved flexing a number of key assumptions and judgements included in the financial projections to understand what circumstances would result in potential breaches of financial covenants or the Company not being able to meet its liabilities as they fall due:
Sensitivity analysis considered the following areas:
Covenant compliance
The Company operates four loan facilities which are summarised in Note 13. At 30 September 2020 the Company has:
Since the Period end the Company has charged, or is in the process of charging, five additional properties valued at £21.1m to alleviate short-term LTV covenant compliance pressure on individual security pools. On charging these additional assets each security pool will have at least 17% headroom on valuations before LTV covenants are breached, leaving £153.0m of unencumbered properties available to charge if required.
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' going concern assessment. The testing indicated that at a portfolio level:
The Board notes that the September 2020 IPF Forecasts for UK Commercial Property Investment survey suggests an average 5.0% reduction in rents during 2020 and a 1.9% decrease in 2021, with capital value decreases forecast of between 4.0% and 16.0% in 2020 and a 1.8% decrease in 2021. 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 circa 200 typically 'institutional grade' tenants across all commercial sectors.
Liquidity
At 30 September 2020 the Company has:
The Company has sufficient cash to settle 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 44% from the levels included in the Company's prudent forecast, with dividends paid at the minimum required by the REIT regime. In this scenario all financial covenants and the REIT tests are complied with and the Company has surplus cash to settle its liabilities.
As detailed in Note 13, 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.
The Company's financial resilience is described in the Chairman's statement.
Having due regard to these matters and after making appropriate enquiries, the Directors have reasonable expectation that the Company has adequate resources to continue in operational existence for a period of at least 12 months from the date of signing of these condensed consolidated financial statements and, therefore, the Board continues to adopt the going concern basis in their preparation.
An operating segment is a distinguishable component of the Company that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the Company's chief operating decision maker to make decisions about the allocation of resources and assessment of performance and about which discrete financial information is available. As the chief operating decision maker reviews financial information for, and makes decisions about, the Company's investment property as a portfolio, the Directors have identified a single operating segment, that of investment in commercial properties.
The Company's assets consist of direct investments in UK commercial property. Its principal risks are therefore related to the UK commercial property market in general, the particular circumstances of the properties in which it is invested and their tenants. Principal risks faced by the Company are:
These risks, and the way in which they are mitigated and managed, are described in more detail under the heading 'Principal risks and uncertainties' within the Company's Annual Report for the year ended 31 March 2020. The Company's principal risks and uncertainties have not changed materially since the date of that report but the following emerging risks are discussed in more detail in the Investment Manager's report which may change materially during the remaining six months of the Company's financial year and will be detailed within the Company's Annual Report for the year ending 31 March 2021:
Basic earnings per share ("EPS") amounts are calculated by dividing net profit for the Period attributable to ordinary equity holders of the Company by the weighted average number of ordinary shares outstanding during the Period.
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 Period 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.
The following reflects the income and share data used in the basic and diluted earnings per share computations:
The effective tax rate for the Period is lower than the standard rate of corporation tax in the UK during the Period of 19.0%. The differences are explained below:
The Company operates as a Real Estate Investment Trust and hence profits and gains from the property investment business are normally exempt from corporation tax.
All dividends paid are classified as property income distributions.
The Directors approved an interim dividend relating to the quarter ended 30 September 2020 of 1.05p per ordinary share in October 2020 which has not been included as a liability in these interim financial statements. This interim dividend was paid on 30 November 2020 to shareholders on the register at the close of business on 6 November 2020.
Included in investment property is £610k relating to right-of-use long-leasehold assets.
The investment property is stated at the Directors' estimate of its 30 September 2020 fair value. Lambert Smith Hampton Group Limited ("LSH") and Knight Frank LLP ("KF"), professionally qualified independent valuers, valued the properties as at 30 September 2020 in accordance with the Appraisal and Valuation Standards published by the Royal Institution of Chartered Surveyors. LSH and KF have recent experience in the relevant location and category of the properties being valued. The 31 March 2020 valuations for all properties were subject to a 'material uncertainty' clause in line with prevailing RICS guidance. This clause has not been applied to 30 September 2020 valuations.
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 Period end valuation, the equivalent yields used ranged from 4.7% to 12.0%. Valuation reports are based on both information provided by the Company e.g. current rents and lease terms which are derived from the Company's financial and property management systems are subject to the Company's overall control environment, and assumptions applied by the valuers e.g. ERVs and yields. These assumptions are based on market observation and the valuers professional judgement. In estimating the fair value of the property, the highest and best use of the properties is their current use. In response to the COVID-19 pandemic, the Company's valuers used historical rent arrears to indicate the potential for further short-term disruptions in tenants' trading and rental payments as well as reflecting changes to market rents and yields. This approach means for certain assets occupied by tenants currently not trading or with trade significantly curtailed, the Company's valuers assumed a prospective three to six-month rental void and applied a yield increase of 25-75bps to valuations.
The Company has provided fully for those receivable balances that it does not expect to recover based on a specific assessment of the reason for non-payment and the creditworthiness of the counterparty.
For remaining balances the Company has applied an updated expected credit loss ("ECL") matrix based on its experience of collecting rent arrears and deferred rents since the onset of COVID-19 disruption. The ECL matrix fully provides for receivable balances more than 90 days past due, partially provides against receivable balances between one and 90 days past due and partially provides against receivable balances subject to contractual deferral.
The movement in the expected credit loss provision is recognised within directly incurred operating expenses of rental property of £3,781k in the income statement.
The Directors consider that the carrying amount of trade and other payables approximates 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.
Included within social security and other taxes is £3.5m of VAT relating to the period March - June 2020 due on 31 March 2021 due to the COVID-19 VAT payments deferral scheme.
Cash and cash equivalents at 30 September 2020 include £3.5m (2019: £16.5m, 31 March 2020: £0.9m) of restricted cash comprising: £2.6m (2019: £nil, 31 March 2020: £nil) interest 'prepayments' in connection with arranging interest cover covenant waivers, £0.7m (2019: £1.1m, 31 March 2020: £0.7m) rental deposits held on behalf of tenants, £0.2m (2019: £0.2m, 31 March 2020: £0.2m) retentions held in respect of development fundings and £nil (2019: £15.2m, 31 March 2020: £nil) disposal proceeds.
All of the Company's borrowing facilities require minimum interest cover of 250% of the net rental income of the security pool. The maximum LTV of the Company combining the value of all property interests (including the properties secured against the facilities) must be no more than 35%.
The Company's borrowing position at 31 March 2020 is set out in the Annual Report for the year ended 31 March 2020.
The Company has made no further issues of new shares since the Period end.
The following table describes the nature and purpose of each reserve within equity:
Fair values
The fair values of financial assets and liabilities are not materially different from their carrying values in the half yearly financial report. The IFRS 13 Fair Value Measurement fair value hierarchy levels are as follows:
There have been no transfers between Levels 1, 2 and 3 during the Period. 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 independent firms of chartered surveyors and registered appraisers. These values were determined after having taken into consideration recent market transactions for similar properties in similar locations to the investment property held by the Company. The fair value hierarchy of investment property is level 3. At 30 September 2020, the fair value of investment property was £532.3m and during the Period the valuation decrease was £27.5m.
Interest bearing loans and borrowings - level 3
As at 30 September 2020, the amortised cost of the Company's loans with Lloyds Bank plc, Scottish Widows plc and Aviva Real Estate Investors approximated their fair value.
Trade and other receivables/payables - level 3
The carrying amount of all receivables and payables deemed to be due within one year are considered to reflect the fair value.
Directors and officers
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 plc ("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 period from 1 April 2020 to 22 June 2020 asset management and investment management fees payable to the Investment Manager under the IMA were calculated as follows:
During the period from 1 April 2020 to 22 June 2020 administrative fees payable to the Investment Manager under the IMA were calculated as follows:
On 22 June 2020 the terms of the IMA were amended to extend the appointment of the Investment Manager for a further three years and to introduce further fee hurdles such that since 22 June 2020 asset management and investment management fees payable to the Investment Manager under the IMA were:
Administrative fees payable to the Investment Manager under the IMA since 22 June 2020 were:
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 Period the Investment Manager charged the Company £1.63m (2019: £1.76m) in respect of asset management and investment management fees, £0.21m (2019: £0.22m) in respect of administrative fees and £nil (2019: £0.03m) in respect of marketing fees.
Property acquisitions
In November 2020 the Company acquired four industrial units covering an aggregate 23,250 sq ft on Hilton Business Park, Derby for £1.975m. The units are occupied by M P Bio Science, Shakespeare Pharma and Jangala Softplay with an aggregate passing rent of £134k per annum, reflecting a NIY of 6.39%.
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 period.
Share price total return
A measure of performance taking into account both share price returns and dividends by assuming dividends declared are reinvested at the ex-dividend share price, shown as a percentage change from the start of the period.
Premium of share price to NAV per share
The difference between the Company's share price and NAV, shown as a percentage at the end of the period.
Gross borrowings less unrestricted cash, divided by property portfolio value.
EPRA EPS
EPRA earnings represent the earnings from core operational activities, excluding investment property valuation movements and gains or losses on asset disposals. It demonstrates the extent to which dividend payments are underpinned by recurring operational activities.
EPRA vacancy rate
EPRA vacancy rate is the ERV of vacant space as a percentage of the ERV of the whole property portfolio.
The Directors have prepared the interim financial statements of the Company for the period from 1 April 2020 to 30 September 2020.
We confirm that to the best of our knowledge:
A list of the current directors of Custodian REIT plc is maintained on the Company's website at www.custodianreit.com.
By order of the Board
David Hunter Chairman 30 November 2020
Independent review report to Custodian REIT plc
We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2020, which comprises the condensed consolidated statement of comprehensive income, the condensed consolidated statement of financial position, the condensed consolidated statement of cash flows, the condensed consolidated statement of changes in equity and related notes 1 to 18. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.
Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.
As disclosed in note 2.1, the annual financial statements of the Company are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting" as adopted by the European Union.
Our responsibility
Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2020 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.
Use of our report
This report is made solely to the Company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council. Our work has been undertaken so that we might state to the Company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our review work, for this report, or for the conclusions we have formed.
Deloitte LLP Statutory Auditor Crawley, United Kingdom 30 November 2020 - Ends - [1] The European Public Real Estate Association. [2] Profit after tax excluding net loss on investment property divided by weighted average number of shares in issue. [3] Profit after tax divided by weighted average number of shares in issue. [4] Before acquisition costs of £0.1m. [5] Net Asset Value ("NAV") movement including dividends paid during the period on shares in issue at 31 March 2020. [6] Share price movement including dividends paid during the six-month period. [7] Gross borrowings less cash (excluding tenant rental deposits and retentions) divided by property portfolio value. [8] ERV of vacant space as a percentage of the ERV of the whole property portfolio. [9] Historical rental income received and projected contractual rental income receivable less certain property expenses divided by interest and fees payable to its lenders. [10] Dividends of 2.6125p per share were paid during the Period on shares in issue throughout the Period. [11] Passing rent divided by property valuation plus purchaser's costs. [12] Current passing rent plus ERV of vacant properties. [13] Includes car showrooms, petrol filling stations, children's day nurseries, restaurants, health and fitness units, hotels and healthcare centres. [14] % of property portfolio passing rent plus ERV of vacant units. |
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| ISIN: | GB00BJFLFT45 |
| Category Code: | MSCH |
| 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.: | 88800 |
| EQS News ID: | 1151705 |
| End of Announcement | EQS News Service |
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