Interim Results
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Custodian Property Income REIT plc (CREI)
14 December 2022
Custodian Property Income REIT plc
(“Custodian Property Income REIT” or “the Company”)
Interim Results
DISPOSALS AHEAD OF VALUATION AND ACTIVE MANAGEMENT OF DIVERSIFIED PORTFOLIO UNDERPIN STRONG PERFORMANCE
Custodian Property Income REIT (LSE: CREI), which seeks to deliver a strong income return by investing in a diversified portfolio of smaller regional properties across the UK, today reports its interim results for the six months ended 30 September 2022 (“the Period”).
Commenting on the results, David Hunter, Chairman of Custodian Property Income REIT, said: “The Company’s well-diversified investment portfolio has shown its resilience during the Period and this diversification has mitigated the risks posed by volatility in real estate investment markets. In addition, the Company’s conservative balance sheet and its longer-term fixed rate debt profile have provided insulation against the challenge of rising interest rates in the short to medium term.
“Our dividend remains fully covered and, in line with our objectives, I was very pleased to announce 2.75p of aggregate dividends (2021: 2.5p) for the Period. The Board expects to continue to pay quarterly dividends per share of 1.375p to achieve a target dividend per share for the year ending 31 March 2023 of no less than 5.5p.
“Over the last five years, shareholders have received an income return of 29.7p per share, or an annual average of 5.93p per share, always fully covered by earnings, supported by both a diverse, smaller regional property strategy and a conservative gearing policy. There is depth in occupational demand and latent rental growth in the portfolio which offers the prospect of growth for existing shareholders, despite the current difficult economic circumstances.”
Property highlights
Financial highlights
Further information
Further information regarding the Company can be found at the Company's website www.custodianreit.com or please contact:
Custodian Property Income REIT plc interim results for the six months ended 30 September 2022
Property highlights
Financial highlights and performance summary
The Company presents 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 19.
Chairman’s statement
The Company’s well-diversified investment portfolio has shown its resilience during the Period which has mitigated the risks posed by volatility in real estate investment markets. In particular, the Company’s conservative balance sheet and its longer-term fixed rate debt profile have provided insulation against the challenge of rising interest rates in the short to medium term. We are also confident that the Company’s diversified investment policy and the depth of the occupational market, which continues to support a high income return strategy, will also continue to provide insulation against the potential threat to dividends from increased tenant distress and vacancy caused by a protracted recession. Despite valuation decreases of £27.7m during the Period EPRA earnings per share were 2.8p (2021: 3.0p) reflecting the Company’s stable rent roll which provided 102% cover for dividends relating to the Period.
We expect to see medium term acquisition opportunities as increasing debt costs drive market pricing for new investments closer to our income return requirements. We continue to view income as the key stable component of property returns. In these circumstances we expect investment market sentiment to transition from the relative volatility of single sector investing to a more defensive, diversified, income focused strategy.
We also see opportunities for relative outperformance given the current net initial yield of the Company’s portfolio stands at 5.9%. Not only is this comfortably ahead of our 3.5% weighted average cost of debt but is also in stark contrast to the keen pricing recently seen in specific sectors which are now experiencing more material valuation falls.
In line with the Company’s objective to be the REIT of choice for institutional and private investors seeking high and stable dividends from well diversified UK commercial real estate, I was very pleased to be able to announce that despite ongoing uncertainty, dividends per share of 2.75p (2021: 2.5p) have been declared relating to the Period. The Board expects to continue to pay quarterly dividends per share of 1.375p to achieve a target dividend per share for the year ending 31 March 2023 of no less than 5.5p based on rent collection levels remaining at their current levels.
The Board acknowledges the importance of income for shareholders and its objective is to grow the dividend on a sustainable basis at a rate which is fully covered by projected net rental income and does not inhibit the flexibility of the Company’s investment strategy.
Net asset value
The NAV of the Company at 30 September 2022 was £501.4m, approximately 113.7p per share, a decrease of 6.0p (5.0%) since 31 March 2022:
Borrowings and cash
During the Period the Company refinanced a £25m variable rate revolving credit facility (“RCF”) with the Royal Bank of Scotland, which had been due to expire on 30 September 2022, with an additional £25m tranche of debt from Aviva Real Estate Investors (“Aviva”) expiring in 2032 with a fixed interest rate of 4.1%.
This refinancing increased the proportion of the Company’s agreed debt facilities with a fixed rate of interest from 61% to 74%, significantly mitigating interest rate risk for the Company and maintaining a beneficial margin between the aggregate cost of debt of 3.5% and income returns from the property portfolio.
At 30 September 2022 the Company operates the following debt facilities:
At 30 September 2022 the Company’s RCF had a £40m facility limit (31 March 2022: £20m limit) and was £38m drawn (31 March 2022: £nil drawn). The facility limit can be increased to £50m with Lloyds’ consent. Disposals since the Period end have decreased the drawn RCF to £30m.
Each facility has a discrete security pool, comprising a number of the Company’s individual properties, over which the relevant lender has security and the following financial covenants:
The Aviva facility also contains a projected interest cover covenant requiring net contractual rents from the security pool over the next 12 months to exceed 250% of the facility’s quarterly interest liability.
The Company complied with all loan covenants during the Period.
£188.9m of the Company’s portfolio (representing 27.6%) is unencumbered and available to be charged to the security pools to enhance the LTV on individual loans if required.
The Company’s debt profile is summarised below:
The weighted average term of the Company’s fixed-rate debt facilities is 7.5 years (31 March 2022: 7.4 years).
Dividends
During the Period the Company paid a fourth interim dividend per share for the financial year ended 31 March 2022 of 1.375p, and the first quarterly dividend per share for the financial year ending 31 March 2023 of 1.375p, relating to the quarter ended 30 June 2022.
In line with the Company’s dividend policy the Board approved an interim dividend of 1.375p per share for the quarter ended 30 September 2022 which was paid on 30 November 2022 to shareholders on the register on 14 October 2022.
Business model and strategy
Custodian Property Income REIT offers investors the opportunity to access a diversified portfolio of UK commercial real estate through a closed-ended fund. The Company seeks to provide investors with an attractive level of income and the potential for capital growth, becoming the REIT of choice for private and institutional investors seeking high and stable dividends from well-diversified UK real estate.
The Company’s investment policy[16] is summarised below:
(i) governmental bodies or departments; or (ii) single tenants rated by Dun & Bradstreet as having a credit risk score higher than two[17], where exposure may not exceed 5% of the rent roll.
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.
Board succession and tenure
After eight years of service, Matthew Thorne retired as Non-Executive Director of the Company at the AGM on 31 August 2022, in line with its succession plan. The Board would like to thank Matthew for his significant contribution to the development of the Company since his appointment on IPO in 2014.
Responding to Matthew’s departure we were delighted to welcome Malcolm Cooper, who joined the Board on 6 June 2022, and who brings a range of experience and skills including the financial expertise to take on the role of Chair of the Audit and Risk Committee and maintain the Board’s property and governance experience.
The Company’s Directors are appointed on an initial three-year term, with a typical expectation that two, three-year terms will be served, plus the potential to be invited to serve for an additional three-year period. 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.
In line with the Company’s succession plan I intend to retire as a Non-Executive Director of the Company at the AGM in 2023 when I will have completed my ninth year of service. Where possible, the Board’s policy is to recruit successors well ahead of the retirement of Directors and a recruitment process is underway with an executive search consultancy to identify a suitable replacement in time to allow an appropriate period of handover.
Diversity
The Board is conscious of increased stakeholder focus on diversity and understands a diverse Board brings constructive challenge and fresh perspectives to discussions.
The Company follows the AIC Code which recommends:
The Board supports the overall recommendations of the Hampton-Alexander and Parker Reviews for appropriate gender and ethnic diversity. During the Period the FCA has introduced ‘comply or explain’ targets of:
The Company’s Board contains two females representing 33% with Elizabeth McMeikan acting as the Senior Independent Director. No Directors are from a minority ethnic background.
The Board’s positive approach to diversity means that, where possible, each time a director is recruited at least one of the shortlist candidates is female and at least one of the shortlist candidates is from a minority ethnic background. Custodian Property Income REIT is an investment company with no Executive Directors and a small Board compared to equivalent size listed trading companies. As a result, the Company does not comply with the newly introduced diversity targets. We will report on what steps the Company is taking to address these targets in the Annual Report for the year ending 31 March 2023.
Remuneration
During the Period the Board has reviewed its governance processes and identified that, because the Board has no Executive Directors and the Company has no employees, it is most appropriate for the Board as a whole to be responsible for setting and reviewing the Directors’ remuneration policy. On that basis the Company’s Remuneration Committee has been disbanded with immediate effect with its key duties now performed by the Board. This announcement is made in accordance with Listing Rule 9.6.11 (3).
Environmental, social and governance (“ESG”)
The Board recognises that its decisions have an impact on the environment, people and communities. The Board also believes that the Company’s property strategy and ESG aspirations create a compelling rationale to make environmentally beneficial improvements to its property portfolio and incorporate ESG best practice into everything the Company does.
The Company’s ESG Committee: agrees the Company’s environmental key performance indicators (“KPIs”) and monitors its performance against them; ensures it complies with its environmental reporting requirements and best practice; assesses the engagement with the Company’s environmental consultants; and assesses the level of social outcomes being achieved for its stakeholders and the communities in which it operates.
The Company's ESG policy[18] outlines our approach to managing ESG impacts and provides the framework for setting and reviewing environmental and social objectives to ensure we are continuously improving our performance and setting a leadership direction.
As a result, the Board has committed to:
The Board is determined to ensure the Company’s pathway towards net zero carbon fits with stakeholder expectations and the Company’s property strategy. We see the careful implementation of a practical carbon reduction strategy as a crucial next step in the Company’s ESG journey and during the Period we have engaged Jones Lang LaSalle (“JLL”) to assist the Investment Manager in developing a detailed plan to achieve this.
Change of company name
The Company changed its name from Custodian REIT plc to Custodian Property Income REIT plc on 6 December 2022 to better reflect the property strategy and income focus, and we believe this clarification will be of particular benefit to retail investors investing via platforms. In conjunction with this name change our corporate branding, website and marketing material will be updated to provide all stakeholders with an enhanced experience.
Outlook
Over the last five years shareholders have received an income return of 29.7p per share, or an annual average of 5.93p per share, always fully covered by earnings, supported by both a diverse, smaller regional property strategy and a conservative gearing policy. These core pillars of the Custodian Property Income REIT strategy are set firm and we hope and expect will continue to provide strong income returns as valuations settle into the prevailing market conditions. As the Investment Manager sets out below, there is depth in occupational demand and latent rental growth in the portfolio which offers the prospect of growth for existing shareholders, despite the current difficult economic circumstances.
David Hunter Chairman 13 December 2022 Investment Manager’s report
Property market
The investment market reached record highs in certain sectors earlier this year as positive market sentiment pushed valuation increases. That sentiment has recently reversed due primarily to inflation, the rising cost of debt as well as global economic and market uncertainty, with associated valuation decreases commencing in August 2022. Certain sectors, particularly prime logistics, have seen the most significant valuation increases over the last 12-18 months but pricing of Custodian Property Income REIT’s smaller regional properties never hit the heights of super-prime logistics, so we expect to see a more correspondingly muted pricing correction as the market reacts to current circumstances.
Custodian Property Income REIT has delivered a diversified portfolio strategy, despite the recent trend for single sector investing. This has enabled the acquisition of some prime high street retail properties and strong, regional, city centre offices which have held their value through the Period. In line with our smaller regional property strategy, the Company has assembled a portfolio comprising 165 properties with an average value of £4.2m and no one tenant in any single property accounting for more than 1.5% of the Company’s rent roll. This spread significantly mitigates property specific risk and tenant default risk.
We believe strong recent leasing activity demonstrates the resilience of Custodian Property Income REIT’s well-diversified investment portfolio. The depth of the occupational market remains the backbone of the Company’s robust earnings and this was demonstrated by the 18 new leases signed during the Period adding £2.2m of annual rent for c. six more years.
The Company has continued to see good levels of occupier activity, with seven new leases already signed since the Period end and a strong pipeline of asset management and refurbishment/redevelopment opportunities.
EPRA earnings per share of 2.8p showed an annualised earnings yield[19] of 5.8% at 30 September 2022 and 6.2% at the time of writing. As pricing for listed property companies is increasingly out of step with NAV, we believe earnings yield is a more reliable measure of value and comparator between different companies with differing strategies, as income supports the greater part of total return. On this measure Custodian Property Income REIT rates very strongly against its close peers, offering an annual dividend per share of 5.5p, fully covered by net earnings, representing a dividend yield[20] of 5.7% at 30 September 2022 and 6.1% at the time of writing.
Custodian Property Income REIT’s loan-to-value at 30 September 2022 of 25.5% now stands at 24.0% following post Period end sales. Of the Company’s £178m of drawn debt facilities 79% is at fixed rates of interest and the balance is drawn on a variable rate revolving credit facility. The weighted average term of drawn debt is 6.3 years and the average cost of debt is 3.5%. Thanks to a strong balance sheet with significant covenant headroom and no debt facility maturing until September 2024 the Company is under no pressure to sell and the relatively low cost of debt should remain accretive to earnings through this phase of market turbulence.
Property portfolio performance
At 30 September 2022 the Company’s property portfolio comprised 165 assets (31 March 2022: 160 assets), 263 tenants and 335 tenancies with an aggregate net initial yield (“NIY”)[21] of 5.9% (31 March 2022: 5.7%, 30 September 2021: 6.2%) and a weighted average unexpired lease term to first break or expiry (“WAULT”) of 4.8 years (31 March 2022: 4.7 years).
Across the portfolio there is rental reversionary potential, particularly in the office and industrial sectors, where the potential rental reversion over passing rent is 10.6% and 7.3% respectively, as shown below:
The rental growth prospects for UK commercial property is one of the attractions of real assets in an inflationary environment and we believe the portfolio is set fair to deliver that growth.
Through judicious capital expenditure, refurbishment, redevelopment and an objective to enhance the environmental and social impact of buildings we expect to pick up even more rental growth.
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:
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, as the rental reversionary potential table above demonstrates, there is more rental growth to come.
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 by 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. 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.
Custodian Property Income REIT targets properties across all asset classes that are capable of supporting the Company’s ESG objectives and it is fully committed to investing in and refurbishing both new properties and the existing portfolio to meet these objectives.
The Company operates a geographically diversified property portfolio across the UK, seeking to ensure that no one region represents more than 50% of portfolio income. The geographic analysis of the Company’s portfolio at 30 September 2022 was as follows:
For details of all properties in the portfolio please see custodianreit.com/property/portfolio.
Acquisitions
The Company invested £52.7m during the Period described below:
Disposals
Owning the right properties at the right time is a key element of effective property portfolio management, which necessarily involves periodically selling properties to balance the property portfolio. Custodian Property Income REIT is not a trading company but identifying opportunities to dispose of assets significantly ahead of valuation or that no longer fit within the Company’s investment strategy is important.
The Company sold the following properties during the Period for an aggregate consideration of £14.8m:
Since the Period end the Company has sold:
Property portfolio risk
The property portfolio’s security of income is enhanced by 15% 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 34% expiring in the next three years and 11% within one year.
The Company’s Annual Report for the year ended 31 March 2022 set out the principal risks and uncertainties facing the Company at that time. This disclosure highlighted inflation as an emerging risk due to the recovery in global demand following the COVID-19 pandemic and the ongoing war in Ukraine contributing to global supply chain issues and energy price inflation. Inflation has continued, in particular for energy prices, and interest rates have risen sharply as a result. This prevailing economic situation has continued to impact the Company in terms of the cost and availability of materials and labour in carrying out redevelopments, refurbishments and maintenance, and an increase in the cost of its variable rate borrowing. They also present an indirect risk through their impact on the UK economy in terms of growth and consumer spending and the consequential impact on occupational demand for real estate.
We do not anticipate any changes to the other risks and uncertainties disclosed over the remainder of the financial year. Outlook
Rental growth from real assets, diversified by tenant, location and sector and supported by a strong balance sheet provides a robust model to face down current market volatility. Accordingly we remain optimistic for returns from Custodian Property Income REIT and confident that the smaller regional property portfolio will continue to support fully covered dividends while offering a defensive strategy to investors.
Richard Shepherd-Cross for and on behalf of Custodian Capital Limited Investment Manager 13 December 2022
Asset management report
Our continued focus on asset management during the Period including rent reviews, new lettings, lease extensions and the retention of tenants beyond their contractual break clauses and expiries resulted in a £8.4m valuation increase in the Period.
Property portfolio summary
During the Period we have seen that, despite macroeconomic uncertainty, continued close collaboration with tenants will generate asset management opportunities including lease extensions and re-gears which has seen the Company increase its WAULT to 4.8 years.
Key asset management initiatives completed during the Period include:
During the Period the following rent reviews were settled with:
Of the Company’s remaining vacant space, 25.0% is currently under offer to sell or let and a further 53.8% is planned vacancy to enable redevelopment or refurbishment as illustrated below:
Since the Period end the following initiatives have completed:
The Company has a very strong pipeline of ongoing asset management initiatives, including those detailed below, which we expect to complete during the next 12 months and which are expected to enhance earnings and deliver valuation increases in excess of capital expenditure:
Outlook
Looking forward, we maintain a positive outlook with many of the asset management initiatives currently under way expected to come to fruition over the next 6-12 months which should see new tenants secured, leases extended and new investment into existing assets improving their environmental credentials and realising their full potential.
Alex Nix Assistant Investment Manager for and on behalf of Custodian Capital Limited Investment Manager 13 December 2022
ESG Committee report
The Board recognises that its decisions have an impact on the environment, people and communities. The Board also believes that the Company’s property strategy and ESG aspirations create a compelling rationale to make environmentally beneficial improvements to its property portfolio and incorporate ESG best practice into everything the Company does.
The primary responsibilities of the ESG Committee (“the Committee”) are to agree the Company’s environmental KPIs, monitor performance against those KPIs and ensure the Investment Manager is managing the property portfolio in line with the ESG policy, which commits the Company to:
ESG approach
Environmental - we want our properties to minimise their impact on the local and wider environment. The Investment Manager carefully considers the environmental performance of our properties, both before we acquire them and during our period of ownership. Sites are visited on a regular basis by the Investment Manager and any environmental issues are reported.
Social - Custodian Property Income REIT strives to manage and develop buildings which are safe, comfortable and high-quality spaces. As such, our aim is that the safety and well-being of occupants of our buildings is maximised.
Governance - high standards of corporate governance and disclosure are essential to ensuring the effective operation of the Company and instilling confidence amongst our stakeholders. We aim to continually improve our levels of governance and disclosure to achieve industry best practice.
The Committee encourages the Investment Manager to act responsibly in the areas it can influence as a landlord, for example by working with tenants to improve the environmental performance of the Company’s properties and minimise their impact on climate change. The Committee believes that following this strategy will ultimately be to the benefit of shareholders through enhanced rent and asset values.
The Company’s environmental policy commits it to:
ESG adviser
On 6 October 2022 the Company appointed Jones Lang LaSalle Limited (“JLL”) as its ESG adviser, replacing Carbon Intelligence. JLL is one of the world’s largest investment advisory firms and a market leader in real estate ESG advisory with 90 ESG focused consultants in the UK and over 650 internationally.
The Committee believes JLL’s appointment will enable the Company to accelerate the implementation of its ESG strategy and more effectively achieve its objectives.
The Company’s ESG adviser’s engagement scope, performance and fees are determined by the ESG Committee and ratified by the Board. Chris Ireland, a Non-Executive Director of the Company and Chairman of JLL UK, stepped down from the Committee following JLL’s appointment. Chris was not involved in JLL’s appointment and does not participate in Board discussions regarding Committee recommendations relating to the Company’s ESG adviser.
Environmental key performance indicators
During the prior financial year the Company updated its environmental targets measured by key performance indicators (“KPIs”) which provide a strategic way to assess its success towards achieving its environmental objectives and ensure the Investment Manager has embedded key ESG principles. These environmental KPIs cover our main areas of environmental impact including energy efficiency, greenhouse gas emissions, water, waste and tenant engagement.
These environmental KPIs also directly support climate risk mitigation and capture some ESG opportunities from the transition to a low-carbon economy.
The Company’s environmental KPIs in place during the Period, and comments relating to our performance against each one, are set out below:
Case studies
Redditch
The Company received planning permission in June 2022 to redevelop an existing 59,000 sq ft industrial building constructed in the 1980’s into a new 60,000 sq ft industrial/distribution facility.
The new development will be built to a high ESG specification and will be certified BREEAM ‘Excellent’ as well as having an Energy Performance rating ‘A’.
In order to achieve this the specification will include: a carbon neutral base build, electric vehicle charging points, solar photovoltaic panels (“PV”) to the south facing roof elevations, LED lighting to warehouse and offices, cycle storage and shower facilities and a bat roost to aid biodiversity.
The expected cost of the redevelopment is £7.2m and will generate an ERV in the region of £500k pa. Given the occupation demand in this locality, we are confident the property will be pre-let prior to completion of the construction.
Winsford
The previous tenant at this site vacated in June 2022 and alongside the required dilapidations works we are completing an extensive refurbishment of the site including the following which will significantly improve the building’s ESG credentials and futureproof the site:
The site will also benefit from the installation of solar PV as part of the refurbishment which will be utilised by an incoming tenant. Additionally, any power that isn’t used by the tenant will be sold back to a distribution network operator to assist with the shortfall of green energy currently available in the UK. This assists with the investment returns of the solar PV with providers offering between 5-20p/kWh of energy produced.
EPC ratings
During the Period the Company has updated EPCs at 14 units across 7 properties covering 68k sq ft for properties where existing EPCs had expired or where works had been completed, improving the weighted average EPC rating from C (61) at 31 March 2022 to C (58). For updated EPCs, there was an aggregate improvement in the rating of 24 energy performance asset rating points[28]. Some of the properties showing an improvement are detailed below:
Net zero[29] carbon pathway
Starting the journey towards net zero carbon is a crucial next step in our ESG strategy and making this journey fit with stakeholder goals and the Company’s property strategy is one of the key challenges facing the Company and the real estate sector. Developing a carbon reduction pathway with the Company’s newly appointed ESG advisers, JLL, supporting the Investment Manager, is now underway.
Outlook
The Company will work towards achieving its refined ESG targets over the course of the remainder of the financial year, improving our understanding of the specific impacts of climate change on the Company, seeking to influence tenant behaviour to improve environmental outcomes and assessing our strategy towards creating a carbon reduction pathway.
Approval
This report was approved by the Committee and signed on its behalf by:
Hazel Adam Chair of the ESG Committee 13 December 2022
Property portfolio
Condensed consolidated statement of comprehensive income For the six months ended 30 September 2022
The (loss)/profit for the Period arises from the Company’s continuing operations.
At 30 September 2022 Registered number: 08863271
These interim financial statements of Custodian Property Income REIT plc were approved and authorised for issue by the Board of Directors on 13 December 2022 and are signed on its behalf by:
David Hunter Director
Condensed consolidated statement of cash flows For the six months ended 30 September 2022
Condensed consolidated statements of changes in equity
For the six months ended 30 September 2022
For the six months ended 30 September 2021
Notes to the interim financial statements for the period ended 30 September 2022
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 13 December 2022.
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 2023 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 United Kingdom, 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 2022 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.
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 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, except for the addition of:
Property, plant and equipment
Plant, machinery, fixtures and fittings are stated at cost less accumulated depreciation and accumulated impairment loss.
Depreciation is recognised so as to write off the cost of assets (less their residual values) over their useful lives, using the straight-line method, on the following bases:
The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis.
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 which are recognised within ‘income from recharges to 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.
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.
There are no areas where a higher degree of judgement or complexity arises.
The areas where a higher degree of estimation uncertainty arises significant to the interim financial statements are discussed below:
Valuation of investment property - Investment property is valued at the reporting date at fair value. In making its assessment 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.
Impairment of trade receivables - 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.
Provision 30 of the UK Corporate Governance Code 2018 (“the Code”) requires the Board 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 Investment Manager has continued to forecast prudently in particular regarding cash flows and borrowing facilities.
The Company operates four loan facilities which are summarised in Note 14. At 30 September 2022 the Company has significant headroom on lender covenants at a portfolio level. Net gearing was 25.5% compared to a maximum LTV covenant of 35% with £188.9m (27.6% of the property portfolio at 30 September 2022) of unencumbered assets available to be charged to the security pools to enhance the LTV on individual loans if required. Completion of property disposals since the Period end have decreased net gearing to 24.0%.
The Company’s 12-month forecast indicates that:
The going concern assessment considered the following 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:
The results of this assessment are described below:
Covenant compliance
The testing indicated that at a portfolio level:
While the assumptions applied in these scenarios are possible, they do not represent the Board’s view of a reasonably plausible downside scenario, but the results help inform the Directors’ going concern assessment.
The Board notes that the October 2022 IPF Forecasts for UK Commercial Property Investment survey suggests an average 1.3% increase in rents during 2023 and a 1.5% increase in 2024, with a capital value decrease forecast of 1.5% in 2023 and an increase of 1.3% in 2024. The Board believes the valuation of the Company’s property portfolio will prove resilient due to its higher weighting to smaller lots with low capital values per square foot and an overall diverse and high-quality asset and tenant base comprising over 150 assets and over 200 typically 'institutional grade' tenants across all commercial sectors.
Liquidity
At 30 September 2022 the Company has:
The Board has considered the scenario used in covenant compliance reverse stress testing, where the rate of loss of contractual rent deteriorates by a further 40% from the levels included in the Company’s prudent forecast. In this scenario all financial covenants and the REIT tests are complied with and the Company has surplus cash to settle its liabilities.
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 2022. The Company’s principal risks and uncertainties have not changed materially since the date of that report, except for an exacerbation of the risks around inflation and a worsening of the general economic outlook since 31 March 2022.
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 2022 of 1.375p per ordinary share in October 2022 which has not been included as a liability in these interim financial statements. This interim dividend was be paid on 30 November 2022 to shareholders on the register at the close of business on 14 October 2022.
Investment property is stated at the Directors’ estimate of its 30 September 2022 fair value. Savills and Knight Frank LLP (“KF”), professionally qualified independent valuers, valued the properties at 30 September 2022 in accordance with the Appraisal and Valuation Standards published by the Royal Institution of Chartered Surveyors. Savills and KF have recent experience in the relevant location and category of the properties being valued.
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 3.8% to 13.2% (31 March 2022: 4.3% to 12.3%). Valuation reports are based on both information provided by the Company (e.g. current rents and lease terms) which are derived from the Company’s financial and property management systems and are subject to the Company’s overall control environment, and assumptions applied by the valuers (e.g. ERVs and yields). These assumptions are based on market observation and the valuers’ professional judgement. In estimating the fair value of the property, the highest and best use of the properties is their current use.
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 expected credit loss (“ECL”) matrix based on its experience of collecting rent arrears. The ECL matrix fully provides for receivable balances more than 180 days past due and partially provides against receivable balances between 60 and 180 days past due.
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.
Cash and cash equivalents at 30 September 2022 include £2.4m (2021: £24.5m, 31 March 2022: £1.7m) of restricted cash comprising: £1.4m (2021: £0.8m, 31 March 2022: £0.3m) rental deposits held on behalf of tenants, £0.7m (2021: £23.4m, 31 March 2022: £1.1m) disposal proceeds held in charged disposal accounts and £0.3m (2021: £0.3m, 31 March 2022: £0.3m) retentions held in respect of development fundings.
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 2022 is set out in the Annual Report for the year ended 31 March 2022.
During the Period the Company refinanced a £25m variable rate RCF facility with the Royal Bank of Scotland, which had been due to expire on 30 September 2022, with an additional £25m tranche of 10-year debt from Aviva with a fixed interest rate of 4.1%.
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 2022, the fair value of investment property was £685.4m and during the Period the valuation decrease was £27.7m.
Interest bearing loans and borrowings - level 3
At 30 September 2022, the amortised cost of the Company’s loans with Lloyds, Scottish Widows plc and Aviva approximated their fair value.
Trade and other receivables/payables – level 3
The carrying amounts of all receivables and payables deemed to be due within one year are considered to reflect the fair value.
Property, plant and equipment – level 3 The carrying amount of PPE is considered to reflect its 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 Officer 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 asset management and investment management fees payable to the Investment Manager under the IMA were calculated as follows:
Administrative fees payable to the Investment Manager under the IMA during the Period 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 expiry of the three-year Initial Term which commenced in June 2020. 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% (2021: 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 £2.09m (2021: £1.79m) in respect of asset management and investment management fees, £0.25m (2021: £0.21m) in respect of administrative fees and £nil (2021: £nil) in respect of marketing fees.
Property disposals
Since the Period end the Company has sold:
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.
Net gearing
Gross borrowings less cash (excluding rent deposits), divided by property portfolio value.
Weighted average cost of debt
The interest rate payable on bank borrowings at the period end weighted by the amount of borrowings at that rate as a proportion of total borrowings
EPRA EPS
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 vacancy rate
EPRA vacancy rate is the estimated rental value (“ERV”) of vacant space as a percentage of the ERV of the whole property portfolio.
EPRA Net Tangible Assets (“NTA”)
Assumes that the Company buys and sells assets for short-term capital gains, thereby crystallising certain deferred tax balances.
The Directors have prepared the interim financial statements of the Company for the Period from 1 April 2022 to 30 September 2022.
We confirm that to the best of our knowledge:
A list of the current directors of Custodian Property Income REIT plc is maintained on the Company’s website at custodianreit.com.
By order of the Board
David Hunter Chairman 13 December 2022 Independent review report to Custodian Property Income REIT plc
Conclusion
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 2022 which comprises the Condensed consolidated statement of comprehensive income, the Condensed consolidated statement of financial position, the Condensed consolidated statements of changes in equity, the Condensed consolidated statement of cash flows and related notes 1 to 19.
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 2022 is not prepared, in all material respects, in accordance with United Kingdom adopted International Accounting Standard 34 and the Disclosure Guidance and Transparency Rules of the United Kingdom’s Financial Conduct Authority.
Basis for Conclusion
We conducted our review in accordance with International Standard on Review Engagements (UK) 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 (ISRE (UK) 2410). 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.
As disclosed in note 2.1, the annual financial statements of the Company are prepared in accordance with United Kingdom adopted international accounting standards. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with United Kingdom adopted International Accounting Standard 34, “Interim Financial Reporting”.
Conclusion relating to Going Concern
Based on our review procedures, which are less extensive than those performed in an audit as described in the Basis for Conclusion section of this report, nothing has come to our attention to suggest that the directors have inappropriately adopted the going concern basis of accounting or that the directors have identified material uncertainties relating to going concern that are not appropriately disclosed.
This Conclusion is based on the review procedures performed in accordance with ISRE (UK) 2410; however future events or conditions may cause the entity to cease to continue as a going concern.
Responsibilities of 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.
In preparing the half-yearly financial report, the directors are responsible for assessing the Company’s ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so.
Auditor’s Responsibilities for the review of the financial information
In reviewing the half-yearly financial report, we are responsible for expressing to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report. Our Conclusion, including our Conclusion Relating to Going Concern, are based on procedures that are less extensive than audit procedures, as described in the Basis for Conclusion paragraph of this report.
Use of our report
This report is made solely to the Company in accordance with ISRE (UK) 2410. 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.
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 London, United Kingdom 13 December 2022
- Ends - [1] Before acquisition costs of £3.4m. [2] Net of disposal costs of £0.1m. [3] The European Public Real Estate Association (“EPRA”). [4] Profit after tax excluding net gains or losses on investment property divided by weighted average number of shares in issue. [5] Profit after tax divided by weighted average number of shares in issue. [6] Dividends paid and approved for the Period. [7] Profit after tax, excluding net gains or losses on investment property, divided by dividends paid and approved for the Period. [8] Net Asset Value (“NAV”) movement including dividends paid during the Period on shares in issue at 31 March 2022. [9] Share price movement including dividends paid during the Period. [10] EPRA net tangible assets (“NTA”) does not differ from the Company’s IFRS NAV or EPRA NAV. [11] Gross borrowings less cash (excluding rent deposits) divided by property portfolio value. [12] Expenses (excluding operating expenses of rental property) divided by average quarterly NAV. [13] For properties in Scotland, English equivalent EPC ratings have been obtained. [14] Dividends of 2.75p per share were paid during the Period on shares in issue throughout the Period. [15] The sterling overnight index average (“SONIA”) which has replaced LIBOR as the UK’s main interest rate benchmark. [16] A full version of the Company’s Investment Policy is available at custodianreit.com/wp-content/uploads/2022/09/CREIT-Investment-policy-updated-31_8_22.pdf [17] A risk score of two represents “lower than average risk”. [18] custodianreit.com/wp-content/uploads/2022/06/Custodian-Capital-ESG-Policy-June-2022-FINAL.pdf [19] Annualised EPRA earnings per share divided by the prevailing share price (97.0p.at 30 September 2022, 89.9p at 13 December 2022). [20] Annual target dividend per share of 5.5p divided by the prevailing share price (97.0p.at 30 September 2022, 89.9p at 13 December 2022). [21] Passing rent divided by purchase price plus assumed purchasers’ costs. [22] Current passing rent plus ERV of vacant properties. [23] Includes drive-through restaurants, car showrooms, trade counters, gymnasiums, restaurants and leisure units. [24] Reversionary rent divided by purchase price plus assumed purchasers’ costs. [25] Excluding assets with no car parking facilities. [26] Equating to 56 75kW ‘Rapid’ Chargers. [27] Equating to 140 7kW ‘Fast’ Chargers. [28] One EPC letter represents 25 energy performance asset rating points. [29] As defined by the Committee on Climate Change. [30] % of property portfolio passing rent plus ERV of vacant units. |
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| ISIN: | GB00BJFLFT45 |
| Category Code: | IR |
| TIDM: | CREI |
| LEI Code: | 2138001BOD1J5XK1CX76 |
| OAM Categories: | 1.2. Half yearly financial reports and audit reports/limited reviews |
| Sequence No.: | 208376 |
| EQS News ID: | 1512233 |
| End of Announcement | EQS News Service |
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