Final Results

RNS Number : 5928A

Custodian REIT PLC

08 June 2016

 

The following replaces the Final Results announcement released on 7 June 2016. Reference to the Company's investment properties total at 31 March 2016 on the Consolidated and Company statements of financial position and in Note 11 should have read £318,966,000 rather than £319,966,000, and the total equity and liabilities total on the Consolidated and Company statements of financial position should have read £328,939,000 rather than £328,331,000. Additionally, EPRA EPS on the Consolidated and Company statements of comprehensive income should have read 6.8p rather than 6.9p for the year ended 31 March 2016 and 5.6p rather than 6.3p for the year ended 31 March 2015. The amended announcement is detailed in full below.

7 June 2016

Custodian REIT plc

("Custodian REIT" or "the Company")

Final Results

Custodian REIT (LSE: CREI), the UK commercial real estate investment company, today reports its final results for the year ended 31 March 2016. 

Financial highlights and performance summary

·     NAV total return¹ of 6.2% (2015: 7.0%)

·     NAV per share up 0.2% to 101.5p (2015: 101.3p)

·     Dividends per share² up 19.0% to 6.25p (2015: 5.25p)

·     Profit after tax up 28.7% to £11.2m (2015: £8.7m)

·     Portfolio value of £319.0m (2015: £207.3m)

·     £109.8m invested in 29 acquisitions and on-going developments

·     Average portfolio net initial yield ("NIY") 6.9% (2015: 7.2%)

·     Weighted average unexpired lease term 6.7 years (2015: 7.2 years)

·     Occupancy rate³ 96.8% (2015: 99.2%)

·     £77.7m⁴ of new equity raised at average premium of 3.45% to NAV

·     Completion of a new £45.0m, 12 year, fixed rate loan following the year end

1.  Net Asset Value ("NAV") movement including dividends paid.

2.  Dividends paid and approved for the year ended 31 March 2016.

3.  Estimated rental value ("ERV") of vacant space divided by the portfolio passing rent plus ERV of vacant space.

4.  Before costs and expenses of £1.6m..

	Year ended 31 March 2016	Period ended 31 March 2015		% change
Return
NAV total return	6.2%	7.0%
Share price total return5	3.5%	13.3%
Dividend cover6	100.8%	103.6%
Dividends per share (p)	6.25	5.25		+19.0%
EPRA earnings per share7 (p)	6.8	5.6		+21.4%
Capital values
NAV (£m)	255.1	180.0		+41.7%
NAV per share (p)	101.5	101.3		+0.2%
Share price (p)	107.25	109.5		-2.1%
Portfolio value (£m)	319.0	207.3		+53.9%
Premium to NAV per share	5.7%	8.1%
Net gearing8	19.1%	11.4%
Costs
Ongoing charges ratio9 ("OCR")	1.6%	1.7%
OCR excluding direct property expenses10	1.3%	1.4%

5.  Share price movement including dividends paid.

6.  Profit after tax, excluding net gains on investment properties and exceptional items, divided by dividends paid and proposed for the year ended 31 March 2016

7.  Earnings per share ("EPS") excluding gains on investment properties.  Basic EPS for the year is 5.5p (2015: 6.0p) 

8.  Gross borrowings less unrestricted cash, divided by portfolio value. 

9.  Expenses (excluding exceptional costs and operating expenses of rental property rechargeable to tenants) divided by average quarterly NAV.

10.  Expenses (excluding exceptional costs and operating expenses of rental property) divided by average quarterly NAV.

Further information

Further information regarding the Company can be found at the Company's website www.custodianreit.com or please contact:

Custodian Capital Limited
Richard Shepherd-Cross / Nathan Imlach / Ian Mattioli	Tel: [phone]
	www.custodiancapital.com

Numis Securities Limited
Hugh Jonathan / Nathan Brown	Tel: [phone]
	www.numiscorp.com

Camarco
Hazel Stevenson	Tel: [phone]
	www.camarco.co.uk

Analyst call

There will be an analyst call to discuss the results with Richard Shepherd-Cross, Managing Director of Custodian Capital Limited, the Company's discretionary investment manager, at 9:30am today. 

Those analysts wishing to attend are asked to contact Hazel Stevenson at Camarco on [phone] or at [e-mail].

Chairman's statement

I am pleased to report strong performance by the Company for the year ended 31 March 2016, with profit after tax up 28.7% and EPRA EPS up 21.4% on the prior year.  During the year we invested a total of £109.8m on the completion of 29 acquisitions and achieving practical completion on two pre-let developments, funded by £77.7m raised from the issue of new shares and a new £20m term loan.  We plan to seek further growth to realise the economies of scale offered by the Company's relatively fixed cost base, while adhering to the Company's investment policy and maintaining the quality of both properties and income. 

The Company pays one of the highest fully covered dividends amongst its peer group of listed property investment companies¹¹.  Despite the fund's rapid growth, we have sought to minimise the impact of 'cash drag' following the issue of new shares by taking advantage of the flexibility offered by the Company's £35m revolving credit facility ("RCF").  I am delighted that the flexibility of the RCF, coupled with proactive asset management of the portfolio and the rapid deployment of cash as it has been raised, has allowed us to increase the target¹² dividend for the year ending 31 March 2017 by 1.6% to 6.35p per share.  

In December 2015, the Company raised £44.25m of new equity to fund the acquisition of the £55.1m Indigo Portfolio, as detailed in the Investment Manager's report.  This was our largest acquisition to date and marked a step-change in the scale of the business, taking the Company's NAV above the £200m hurdle where the Annual Management Charge falls from 0.9% to 0.75%, reducing the OCR (excluding direct property expenses) from 1.4% to 1.3%. 

Since the year end, we have been delighted to announce the successful completion of another placing on 13 May 2016, raising a further £20.98m to pursue a pipeline of attractive investment opportunities, followed by the completion of a new £45m, 12 year, fixed rate loan on 6 June 2016. 

11.  Source: Numis Securities Limited

12.  This is a target only and not a profit forecast.  There can be no assurance that the target can or will be met and it should not be taken as an indication of the Company's expected or actual future results.  Accordingly, shareholders or potential investors in the Company should not place any reliance on this target in deciding whether or not to invest in the Company or assume that the Company will make any distributions at all and should decide for themselves whether or not the target dividend yield is reasonable or achievable. 

Target lot size

We continue to target smaller lot size properties in strong, regional markets where there is less competition from 'institutional' buyers.  The successful deployment of new monies on the acquisition of high quality assets at an average NIY of 6.72% during the year highlights the success of this strategy. 

The Company has historically targeted lot sizes below £7.5m and has benefitted from a significant NIY advantage as a result.  However, it is increasingly clear that the market sets the small versus large threshold at £10m-15m and hence the Board recommends that shareholders approve an increase in the maximum target lot size to £10m at the Company's next Annual General Meeting ("AGM") on 26 July 2016.  This increased lot size will only be applied where we can still achieve a beneficial yield margin relative to larger lots and will offer the Investment Manager the flexibility to consider portfolio opportunities that are a strong fit with the Company's investment policy, save for the lot size of one or two assets. 

Market

In 2014 and particularly in 2015, excessive investment demand, both domestic and overseas, was focused on London, the South-East and the dominant regional cities.  This imbalance of demand over supply resulted in price inflation, which delivered NAV growth to many funds as a result of the exceptional yield compression felt strongly in prime markets, while smaller lot size regional properties were less affected.  This enhanced yield advantage supports the Company's attractive level of dividend payout.

Investment in commercial property was reported to be down 30% in the first quarter of 2016, with circa £170m of net redemptions recorded from open-ended funds and many listed property funds moving to trade at a discount to NAV.  Market sentiment has not been helped by uncertainty over the EU referendum and, while it is unclear whether property investment activity will pick up post-referendum, there appears to be a less compelling argument for investing for capital growth, with a shift in emphasis to sustainable income and income growth. 

The current market dynamics fit with Custodian REIT's investment strategy and the Company's discretionary investment manager, Custodian Capital Limited ("CCL" or "the Manager"), anticipates more muted capital growth in 2016, with some market 'hotspots' potentially witnessing a decline in values as investment demand weakens and redemptions from the open-ended funds lead to increased supply. 

I believe smaller lot size regional property remains good value, with an increasing supply of opportunities coming from institutional vendors and a strong occupational market set to drive rental growth.  By exploiting these opportunities we intend to enhance income returns to shareholders and offer more stable total returns in an uncertain environment. 

Net asset value

The Company delivered NAV total return of 6.2% for the year, which was a period of significant new investment where the initial costs (primarily stamp duty) of acquiring 29 new properties diluted NAV total return by circa 2.5%. 

	Pence per share	£m
NAV at 1 April 2015	101.3	180.0
Issue of equity (net of costs)	0.6	76.1
	101.9	256.1
Valuation movements relating to:
- Asset management activity	1.7	2.9
- Changes to stamp duty land tax ("SDLT")	(0.5)	(0.8)
- Other valuation movements	0.5	0.9
Valuation uplift	1.7	3.0
Profit on disposal of investment property	0.0	0.1
Impact of acquisition costs	(2.6)	(5.8)
Net loss on investment properties	(0.9)	(2.7)
Income	9.5	19.0
Expenses and net finance costs	(2.9)	(5.1)
Dividends paid	(6.1)	(12.2)
NAV at 31 March 2016	101.5	255.1

In addition to new acquisitions, activity during the year also focused on pro-active asset management, which generated £2.9m of the £3.0m valuation uplift.  During the remainder of 2016 we intend to continue our asset management activities and complete the current acquisition pipeline with the deployment of existing debt facilities expected to increase gearing towards our target level of 25% loan to value.

On 1 April 2016 the headline rate of SDLT for commercial property increased from 4% to 5%, with relief for smaller properties via a new SDLT-free band up to £0.15m and a 2% band from £0.15m to £0.25m, replacing the previous flat rate.  The increase in headline rate impacts transactions above £1.05m on a sliding scale as lot-size increases.  The Company's focus on smaller lot-size properties, with an average lot size of £2.9m, partially insulated it against the impact of the SDLT changes, which resulted in a 0.25% valuation decrease. 

Share price

The Company has traded at a consistent premium to NAV throughout the year with low volatility offering shareholders stable returns.  This contrasts with many of the other listed property investment companies which have moved to trading at a discount in Q1 2016.  Some commentators predict that recent valuation gains driven by investor demand for large lots and South-East properties will begin to reverse, despite forecast rental growth from occupational demand.  I believe Custodian REIT's stable premium to NAV has been a function of both the attractive income yield offered by our progressive dividend policy and the Company's committed shareholder base. 

Placing of new ordinary shares

The Company raised £77.7m of new equity during the year, placing 42.5m new shares in November 2015 at a price of 104.2p per share with a further 31.2m new shares issued at a 5% premium to dividend adjusted NAV via an ongoing programme of tap issuance. 

Since the year end, the Company has issued a further 27.6m new shares at an average premium of 5% to dividend adjusted NAV.  All these share issues have been accretive to NAV and sustained investor demand for the Company's shares is testament to the success of our strategy to date. 

Borrowings

Year end gross borrowings of £66.0m represent 19.1% loan to value.  The Board's strategy is to:

·     Ensure debt facilities keep pace with portfolio growth, targeting gearing of 25% loan to value;

·     Facilitate expansion of the portfolio to take advantage of expected rental growth; and

·     Reduce risk to shareholders by:

-  Taking advantage of the prevailing low interest rates to secure fixed rate borrowing; and

-  Managing the weighted average maturity ("WAM") of the Company's debt facilities.

In pursuit of these objectives, during the year the Company:

·     Agreed a new £20m, 10 year loan at a fixed interest rate of 3.935% per annum with Scottish Widows Limited ("SWIP"),  repayable in August 2025; 

·     Increased the limit of the RCF facility from £25m to £35m and extended its expiry date from March 2019 to November 2020; and

·     Agreed a new £45m term loan facility ("the New Loan") with SWIP, repayable 12 years from drawdown at a fixed rate of interest.  The New Loan completed and was drawn down on 6 June 2016 at an all-in-rate of 2.987% with £20m of these proceeds used to repay the Company's £20m variable rate term loan with Lloyds Bank plc.

The weighted average cost of debt at 31 March 2016 was 3.13% with a WAM of 5.2 years.  Completion of the New Loan and repayment of the existing £20m term loan increased the WAM to 11.0 years, with 65% of the Company's debt facilities now at a fixed rate of interest.

Investment Manager

The performance and fees payable to the Investment Manager are reviewed each year by the Management Engagement Committee.  The Board is pleased with the progress and performance of the Investment Manager, particularly the timely deployment of new monies, while at the same time securing the earnings required to pay fully covered dividends in line with target.

Dividends

The Company has paid four interim dividends during the year, totalling 6.25p per share.  In the absence of unforeseen circumstances, the Board believes the Company is well placed to meet its target of paying further quarterly dividends, fully covered by income, to achieve an annual dividend of 6.35p per share for the current financial year.

Income is a major component of the Company's total return and the Board is committed to growing the dividend sensibly, at a rate which remains fully covered by net rental income but does not inhibit the flexibility of the Company's investment strategy.  To provide greater flexibility over future dividend policy, in August 2015 the Company's share premium account of £181.5m was cancelled and transferred to distributable reserves. 

Governance

The Company is committed to the principles of good corporate governance for which the Board is accountable to shareholders.  Non-audit fees paid to the Company's auditor, Deloitte LLP, during the year of £0.6m were significantly higher than the statutory audit fees of £0.1m.  This was due to Deloitte Real Estate acting for the Company on the acquisition of the Indigo Portfolio, in line with normal market practice when a property firm brings a new opportunity to a prospective buyer.  The Audit Committee reviewed the proposed appointment and following careful consideration, resolved that the independence of Deloitte LLP's statutory audit would not be impaired by the engagement and the appointment of Deloitte Real Estate was approved.  Subsequently, Deloitte LLP has announced its intention to sell parts of Deloitte Real Estate, which we expect to reduce any potential conflicts of interest that might arise with its auditing division in the future.  

Outlook

While the investment market appears to have become more competitive, in large part this is being matched by a strengthening occupational market.  This, combined with a dearth of modern vacant space, is leading to rental growth in most office and industrial markets with reducing vacancy rates on the High Street driving a return to rental growth in many retail centres. 

I anticipate occupational demand, combined with a limited supply of new development, will drive further rental growth across regional markets, supporting the delivery of both sustainable income returns and capital value growth to our shareholders over the long-term. 

David Hunter

Chairman

6 June 2016

Investment Manager's report

Reporting on the UK property market is often focused on London, not least because it makes up a significant proportion of the total commercial property investment market.  However, it is important to look through the headlines to understand what is really driving returns from this very varied asset class.

It appears the start of 2016 marked a watershed in recent attitudes to UK commercial property.  In January many mainstream listed property companies saw a dramatic fall in their share price, many property investment companies saw their shares fall to a discount to NAV and the open-ended property funds witnessed significant net outflows of capital after three years of positive net inflows. 

This shift in attitude might be due in part to the uncertainty of 'Brexit' or the perceived end of a cycle, but questioning whether or not it is appropriate to call time on commercial property investment is too simplistic.  Property is a diverse asset class and its investment performance is driven by myriad different dynamics.  Furthermore, it might be considered hasty to ignore a high yielding asset class in a largely low return environment, or to conform to a short-term change in sentiment when assessing an asset class that performs well over the long-term.

UK commercial property returns in 2015 were skewed by significant cash inflows chasing a capital growth story that was particularly focused on the prime and central London markets.  The capital growth witnessed was largely a result of a self-fulfilling prophecy, in so far as the pressure on fund managers to invest the capital that swung into property in itself caused price inflation, which delivered the lion's share of total return.  However, this phenomenon was always going to be short-term and recent out-flows of capital have shown this to be the case.

Meanwhile, the real commercial property story of the last two years has been the return to health of the occupational market.  In office and industrial markets a lack of supply following seven years of minimal speculative development is pushing vacancy rates to all-time lows and driving rental growth.  Low vacancy rates, which are also a feature of the retail warehouse sector, enhance cash flows from investment portfolios and support dividend cover.  We believe the key determinants of return and the sustainability of returns in 2016 are likely to be income and income growth, both of which are driven by the occupational market dynamics described above, rather than flows of capital into the investment market.  As a result, I expect rental growth to offer Custodian REIT the potential for further dividend growth and sustainable capital growth over time. 

The occupational market story is particularly resonant in smaller lot size regional property.  As the majority of fund managers set a minimum target lot size for individual assets of £10m-15m, market pricing of smaller lots has been more stable, having not experienced the excess demand pressure seen in the broader investment market.  Accordingly, returns have been more closely linked to the underlying occupational market performance, and across the Custodian REIT portfolio, we are witnessing rental growth and low vacancy rates, with the portfolio moving from a position of over-rent to one of reversionary potential over the last two years. 

Activity

We were delighted to complete £66.7m of acquisitions in the last quarter of the financial year, bringing total investment in the 12 months to £109.8m.  The most significant transaction during the year was in January 2016 when the Company completed the £55.1m off-market acquisition of nine of the 11 properties in the Indigo Portfolio following a £44.25m equity issue.  The Indigo Portfolio was described as the 'target portfolio' in the Company's November 2015 prospectus.  The nine properties acquired had a passing rent of £3.68m reflecting a NIY of 6.32%, with an expected reversionary yield of 6.89%.  Between exchange and completion the Company sub-sold the remaining two properties in the Indigo Portfolio, comprising an industrial unit in Kingston upon Thames and three shops with offices above in Richmond at prices of £5.8m and £8.6m respectively, reflecting a blended NIY of less than 5%.

This acquisition maintained the quality of property that we demand and demonstrated our ability to secure exclusive opportunities and deploy cash ahead of expected timeframes.  Despite incurring significant acquisition costs during the year, NAV has increased and the portfolio profile has strengthened in terms of diversification of tenant, sector and lease break/expiry.  In addition, the portfolio's rental growth potential has been enhanced as a result of these acquisitions.

Investment objective

The Company's key objective is to provide shareholders with an attractive level of income by maintaining the high level of dividend, fully covered by earnings, with a conservative level of gearing.  I am delighted we have achieved this, with earnings providing 101% cover to the proposed total dividend for the year of 6.25p per share, with a gearing ratio of 19.1% at the year end.  As a result of the fund's growth and consequential reduction in OCR, the Board has increased the target¹³ dividend for the new financial year to 6.35p per share. 

We continue to pursue a pipeline of new investment opportunities with the aim of deploying the Company's undrawn debt facilities up to the conservative gearing target of 25% loan to value.  At the current cost of debt we believe this strategy can improve dividend cover as gearing increases towards the target level. 

We expect to see redemptions from the open-ended funds create an increased pipeline of suitable opportunities and believe this will enhance our ability to acquire additional properties that meet the Company's investment criteria and improve the portfolio mix. 

We remain committed to a strategy focused on regional property and expect to see long-term total return out-performance for regional UK property assets of less than £10m versus London and the South East.  We believe the reason for the historic total return out-performance of regional property is a result of higher yields.  As income return is the majority component of the Company's total return, the compound effect of higher recurring income is to deliver superior long-term performance.  Total return on property in London and the South East has out-performed over the last three years due to the significant yield compression that has been driven by extraordinary flows of capital into this market.  We are confident that the return of rental growth, coupled with sustainable valuations, will maintain regional property's long-term out-performance credentials.

13.  This is a target only and not a profit forecast.  There can be no assurance that the target can or will be met and it should not be taken as an indication of the Company's expected or actual future results.  Accordingly, shareholders or potential investors in the Company should not place any reliance on this target in deciding whether or not to invest in the Company or assume that the Company will make any distributions at all and should decide for themselves whether or not the target dividend yield is reasonable or achievable. 

Portfolio balance

The portfolio is split between the main commercial property sectors, in line with the Company's objective to maintain a suitably balanced investment portfolio, but with a relatively low exposure to office and a relatively high exposure to industrial and to alternative sectors, often referred to as 'other' in property market analysis.  The current sector weightings are:

Sector	Valuation 31 March 2016  £m	Valuation movement £m	Valuation movement %	Weighting by income 31 March 2016	Weighting by income 31 March 2015
Industrial	123.2	4.0	3.4	39%	40%
Retail	91.4	(1.4)	(1.5)	28%	27%
Other14	59.8	0.6	1.0	18%	17%
Office	44.0	(0.2)	(0.5)	15%	16%
Total	318.4	3.0	1.0	100%	100%

14.  Includes car showrooms, petrol filling stations, children's day nurseries, restaurants and hotels.

The industrial and 'other' sectors have historically generated the highest total return for sub-£10m properties.  I believe the fund's current weightings towards those sectors positions the Company to deliver competitive long-term total returns.

The 'other' sector has proved to be an out-performer over the long-term.  While outside the core sectors of office, retail and industrial, the 'other' sector offers diversification of income without adding to portfolio risk, containing assets that are considered mainstream, but which typically have not been owned by institutional investors. 

Office rents are growing strongly and supply is constrained by a lack of development and the extensive conversion of secondary offices to residential, making returns very attractive.  We were pleased to increase exposure to the office sector through the recent Indigo Portfolio acquisition.  However, the Company's relatively low exposure to the office sector is a long-term strategic decision rather than a short-term comment on the state of the office market.  We are conscious that obsolescence can be a real cost of office ownership, which can hit cash flow and is at odds with the Company's relatively high target dividend.

Similar to the office market, lack of supply and very limited speculative development is driving rental growth in the industrial sector as demand exceeds supply.  As industrial property is less exposed to obsolescence this sector remains a very good fit with the Company's strategy.

In both regional office and industrial markets passing rents are, in many cases, 20% below the levels of rent required to make new development viable.  This low level of rent limits supply and leads to rental growth as the need for new space forces tenants to accept higher rents.

Retail is split between high street and out-of-town retail (retail warehousing).  On the high street strong comparison retail pitches in dominant regional towns continue to show very low vacancy rates and offer stable long-term cash flow, with the opportunity for rental growth.  We are also witnessing rental growth in some smaller market towns where rents over-corrected in the downturn.  It would be wrong to deduce from the failure of BHS and Austin Reed that high street retailing is dead and buried.  Both of these retailers had structural problems, some of which will be much debated in the press, but it is important to remember that shopping remains the nation's favourite pastime.  Our high streets are constantly evolving and remain an essential element of multi-channel retailing. 

Retail warehousing is witnessing close to record low vacancy rates as a restrictive planning policy and lack of development combine with retailers' requirements to offer large format stores, free parking and 'click and collect' to consumers. 

For details of all properties in the portfolio please see www.custodianreit.com/property/portfolio.php.

Asset management

During the year we focused on proactively managing the portfolio to enhance income and maintain the weighted average unexpired lease term ("WAULT").  At 31 March 2016 the portfolio's WAULT was 6.7 years (2015: 7.2 years), ahead of the Company's objective of maintaining a WAULT of over five years to the first lease break or lease expiry across the portfolio. 

Successful asset management strategies including rent reviews, new lettings, lease extensions and the retention of tenants beyond their contractual break clauses have helped to minimise the natural decrease in WAULT and offset the impact on valuations of acquisition costs and the recent increase in SDLT. 

Key asset management initiatives include:

·     Extending Pizza Hut UK Limited's lease at Triangle Retail Park, Leicester with expiry moving from June 2018 to June 2033, subject to a tenant-only break option in June 2028, and rent increasing from £82,250 per annum to £104,512 per annum from June 2018.

·     Extending leases at the 40 St. David Street and Cardinal House offices in Leeds, occupied by Enact Direct Legal Solutions (the Company's largest tenant by income representing 2.7% of the rent roll) by five years to expire in December 2023.  Both leases have also been assigned to First Title Limited, Enact Direct Legal Solutions' UK parent company, significantly strengthening the covenant.

·     Completion of a comprehensive refurbishment of the Tilbrook 44 distribution unit in Milton Keynes for £750,000 (net of early exit premium and dilapidations), acquired in January 2015 in the knowledge of the tenant having served notice to exit.  Exit rent has grown from £250,000 to an expected £275,000 with exit yield hardening from circa 7.25% to 6.75%, giving an expected £675,000 valuation impact once let.

We are in active discussions with more than 20 tenants across the portfolio regarding various asset management initiatives, including new lettings, lease renewals, lease extensions, rent reviews, lease surrenders, refurbishment, development or a combination of the above. 

Portfolio risk

We have managed the portfolio's income expiry profile through successful asset management activities and by acquiring long leases, such that the WAULT of 6.7 years is ahead of target, with only 48% of income expiring within five years at 31 March 2016.  Short term income at risk is a relatively low proportion of the portfolio's income, with only 29% expiring in the next three years (9% within one year). 

Income expiry				31 March 2016	31 March 2015
0-1 years				9%	6%
1-3 years				20%	15%
3-5 years				19%	20%
5-10 years				29%	35%
10+ years				23%	24%
Total				100%	100%

The portfolio's exposure to risk is reduced by 23% of income benefitting from either fixed or indexed rent reviews and there is increasingly strong evidence of open market rental growth across all sectors. 

Outlook and pipeline

Over the remainder of this financial year we intend to continue our asset management activities and complete on the current acquisition pipeline, with the aim of deploying debt facilities to increase gearing towards the target level of 25%.  We expect recent asset management initiatives to improve the WAULT of the portfolio, with tenants keen to agree lease extensions or to waive their options to break, enhancing the rent roll as increases are agreed at review or renewal.  We also have a strong committed pipeline including pre-let development funding projects totaling £3.4m which, once complete, will further improve the portfolio's WAULT.

The smaller lot-size, regional market has not yet seen the price inflation which has been a feature of London and large lot-sizes, so it is still possible to acquire properties with strong investment credentials.  We are keen to capitalise on the strength of the occupational market and are seeing a robust stream of opportunities consistent with our investment strategy.  We are actively considering £25m - £50m of opportunities that maintain a threshold level of quality in building, location and tenant and expect this pipeline to improve if redemptions from the open-ended funds lead to an increasing flow of sales.

Custodian REIT has an investment strategy targeting income with low gearing in a well-diversified regional portfolio.  We believe it is still possible to identify 'value' in the market, despite recent price inflation, by targeting properties where provable rental growth will underpin long term capital growth.  I am confident this strategy can deliver enhanced income cover to the Company's target dividend in the years ahead and provide the stable long term returns demanded by our shareholders.

Richard Shepherd-Cross

for and on behalf of Custodian Capital Limited

Investment Manager

6 June 2016

Portfolio

	31 March 2016	31 March 2015
Portfolio value	£319.0m	£207.3m
Separate tenancies	228	135
Occupancy rate	96.8%	99.2%
Assets	113	85
WAULT	6.7 years	7.2 years
Net initial yield	6.9%	7.2%

Principal risks and uncertainties

There are a number of potential risks and uncertainties which could have a material impact on the Company's performance over the forthcoming financial year and could cause actual results to differ materially from expected and historical results.  

The Directors have carried out a robust assessment of the principal risks facing the company, including those that would threaten the business model, future performance, solvency or liquidity.  The table below outlines the risk factors identified, but does not purport to be exhaustive as there may be additional risks that materialise over time that the Company has not yet identified or has deemed not likely to have a potentially material adverse effect on the business.

Risk type	Risks	Mitigating factors
Investment portfolio	·     Tenant default. ·     Change in demand for space. ·     Market pricing affecting value. ·     Excess concentration in geographical location or sector. ·     Lease expiries concentrated in a specific year. ·     Decrease in occupancy.	·     Investment policy limits the Company's rent roll to no more than 10% to a single tenant, and no more than 50% in any particular sector or geographical region. ·     Focused on established business locations for investment. ·     Active portfolio diversification between office, industrial (distribution, manufacturing and warehousing), retail and other. ·     Active management of lease expiry profile and acknowledging in forming acquisition decisions. ·     Building specifications not tailored to one user.
Financial	·     Reduced availability or increased cost of debt. ·     Breach of borrowing covenants.	·     Target gearing of 25% loan-to-value ("LTV") on property portfolio. ·     Existing facilities sufficient for spending commitments and agreed until 2020. ·     On-going monitoring and management of the forecast liquidity and covenant position.
Operational	·     Inadequate performance, controls or systems operated by the Investment Manager.	·     Ongoing review of performance by independent Board of Directors.
Regulatory	·     Adverse impact of new or revised legislation or regulations or by changes in the interpretation or enforcement of existing laws and regulations. ·     Non-compliance with the REIT regime15.	·     Strong compliance culture. ·     External professional advisers are engaged to review and advise upon control environment and ensure regulatory compliance. ·     Business model and culture embraces FCA principles. ·     REIT regime compliance is considered by the Board in assessing the Company's financial position and by the Manager in making operational decisions.

15.  As defined by the Corporation Tax Act 2010

While the outcome of the EU referendum on 23 June 2016 is uncertain, the Board does not consider its outcome as being likely to have a material impact on the Company's performance. 

Long term viability statement

In accordance with provision C2.2 of the UK Corporate Governance Code issued by the Financial Reporting Council in 2012 ("the Code"), the Directors have assessed the prospects of the Company over a period longer than the 12 months required by the 'Going Concern' provision.  The Board resolved to conduct this review for a period of three years, because:

·     The Company's strategic review covers a three-year period; and

·     The Board believes a three-year horizon maintains a reasonable level of accuracy regarding projected rental income and costs, allowing robust sensitivity analysis to be conducted.

The Board's three-year strategic review considered the Company's profit, cash flows, dividend cover, REIT regime compliance, borrowing covenant compliance and other key financial ratios over the period. These metrics are subject to sensitivity analysis, which involves flexing a number of key assumptions underlying the projections, including:

·     Tenant default;

·     Length of potential void period following lease break or expiry;

·     Acquisition NIY and the timing of deployment of cash;

·     Interest rate changes; and

·     Property portfolio valuation movements.

This analysis also evaluates the potential impact of the principal risks actually occurring.

Current debt and associated covenants are summarised in Note 16, with no covenant breaches during the year. The Company's dividend policy is set out in Business Model and Strategy.  The principal risks faced by the Company, together with the steps taken to mitigate them, are highlighted above, and in the Audit Committee report.  The Board seeks to ensure that risks are kept to a minimum at all times.

Based on the results of this analysis, the Directors expect that the Company will be able to continue in operation and meet its liabilities as they fall due over the three year period of their assessment.

Business model and strategy

Investment objective and policy

The Company seeks to provide shareholders with an attractive level of income together with the potential for capital growth from investing in a diversified portfolio of commercial real estate properties in the UK.  Since Admission, the Company has targeted individual properties with a value of less than £7.5m at acquisition, benefitting from a significant NIY advantage as a result.  However, it is increasingly clear that the market sets the threshold for smaller lot sizes at £10m and hence the Board recommends that shareholders approve an increase in the maximum target lot size to £10m at the Company's next AGM¹⁶.  

The portfolio should not exceed a maximum weighting to any one property sector, or to any geographic region, of greater than 50%, with the Company's investment objectives being:

·     To hold a portfolio of UK commercial property, diversified by sector, location, tenant and lease term; 

·     To focus on areas with high residual values, strong local economies and an imbalance between supply and demand.  Within these locations, the objective is to acquire modern buildings or those that are considered fit for purpose by occupiers. 

·     To have no one tenant or property accounting for more than 10% of the total rent roll of the portfolio at the time of purchase, except:

a)   In the case of a single tenant which is a governmental body or department, where no limit shall apply; or

b)   In the case of a single tenant rated by Dun & Bradstreet ("D&B") as having a credit risk score higher than two¹⁷, where the exposure to such single tenant may not exceed 5% of the total rent roll (a risk score of two represents "lower than average risk"). 

·     To maintain an average unexpired lease term to first break of over five years across the portfolio secured against low risk tenants and to minimise rental voids; 

·     Not to undertake speculative development (that is, development of property which has not been leased or pre-leased), save for refurbishment of existing holdings, but may (provided that it shall not exceed 20% of the gross assets of the Company) invest in forward funding agreements or forward commitments (these being arrangements by which the Company may acquire pre-development land under a structure designed to provide the Company with investment rather than development risk) of pre-let developments, where the Company intends to own the completed development; and 

·     To target borrowings of up to 25% of the aggregate market value of all the properties of the Company at the time of borrowing. 

16.  The Company's 2016 AGM is being held at the offices of Canaccord Genuity Limited, 88 Wood Street, London, EC2V 7QR at 11a.m on 26 July 2016.

17.  Previously D&B ICC Client Services credit rating of less than 60 ("normal, limited risk potential, normal terms"), which is no longer published by D&B.

Key performance indicators

The Board meets quarterly and at each meeting reviews performance against a number of key measures:

·     Dividends per share and dividend yield - A key objective is to provide an attractive, sustainable level of income to shareholders.  The Board reviews dividends per share and dividend yield in conjunction with detailed financial forecasts to ensure that target dividends are being met and are sustainable;

·     Property voids - The Board reviews the level of property voids within the Company's portfolio on a quarterly basis and compares this to the market average, as measured by the IPD.  The Board seeks to ensure that the Investment Manager is giving proper consideration to replacing the Company's income;

·     Rent arrears - The Board assesses rent collection by reviewing the percentage of rents past due at each quarter end;

·     NAV total return - The NAV total return reflects both the NAV growth of the Company and dividends paid to shareholders.  The Board regards this as the best overall measure of value delivered to shareholders.  The Board assesses NAV total return over various time periods and compares the Company's returns to those of its peer group of listed, closed-ended property investment funds; and

·     Premium or discount of the share price to NAV - The Board closely monitors the premium or discount of the share price to the NAV and believes a key driver of this is the Company's long term investment performance.  However, there can be short term volatility in the premium or discount and the Board therefore seeks limited authority at each AGM to issue shares with a view to trying to limit this volatility.

The Board considers the performance measures over various time periods and against similar funds.  A record of these measures are disclosed in the Financial highlights and performance summary, the Chairman's statement and the Investment Manager's report.

Finance

The Company operates with a conservative level of gearing, with expected borrowings over the medium term of up to 25% of the aggregate market value of all properties at the time of drawdown. 

Debt

The Company operates the following facilities:

·     A £35m RCF with Lloyds Bank plc expiring in November 2020, attracting annual interest of 2.45% above three-month LIBOR on advances drawn down under the agreement from time to time;

·     A £20m term loan facility with SWIP repayable in August 2025, attracting fixed annual interest of 3.935%; and

·     A £45m term loan facility with Scottish Widows Limited repayable in June 2028, attracting fixed annual interest of 2.987%.  

The Company's borrowing facilities all require minimum interest cover of 250% of the net rental income of the security pool.  The maximum LTV of the Company combining the value of all property interests (including the properties secured against the facilities) must be no more than 35%.

On 6 June 2016 a £20m term loan with Lloyds Bank repayable in 2019, attracting annual interest of 1.95% above three-month LIBOR was repaid in full, incurring no early repayment charges.

Equity

On 5 November 2015 the Board announced a placing, open offer and offer for subscription in conjunction with a twelve month placing programme for the issue of up to 100m new ordinary shares in the Company. 

On 30 November 2015 the Company raised £44.25m (before costs and expenses) through a placing of 42,466,411 new ordinary shares under the placing, open offer and offer for subscription.  In addition, the Company raised £33.5m (before costs and expenses) through the tap issuance of 31,170,000 new ordinary shares. 

Following the year end, the Company issued a further 27.6m of new ordinary shares under the placing programme raising £29.0m (before costs and expenses).

Dividends

Three quarterly interim dividends totalling 4.5875p per share have been paid in respect of the year.  The Board has approved a fourth interim dividend relating to the quarter ended 31 March 2016 of 1.6625p per share, payable on 30 June 2016, achieving the target dividend¹³ of 6.25p per share for the year ended 31 March 2016, which is fully covered by net rental income.

In the absence of unforeseen circumstances, the Board intends to pay further quarterly dividends to achieve a target dividend¹⁸ of 6.35p per share for the year ending 31 March 2017.  The Board plans to increase future dividends in a sustainable way, at a rate which is fully covered by net rental income and does not inhibit the flexibility of the Company's investment strategy. 

18.  This is a target only and not a profit forecast.  There can be no assurance that the target can or will be met and it should not be taken as an indication of the Company's expected or actual future results.  Accordingly, shareholders or potential investors in the Company should not place any reliance on this target in deciding whether or not to invest in the Company or assume that the Company will make any distributions at all and should decide for themselves whether or not the target dividend yield is reasonable or achievable. 

Employees

The Company has four non-executive directors and no employees.  Non-executive directors are paid fixed salaries and participate in the performance of the Company through their shareholdings.  The Board is conscious of the increased focus on diversity in the boardroom and acknowledges the importance of diversity, while noting that changes to the composition of the Board should not be forced.  All non-executive directors are white males.  The Board believes that for any future appointment the best person for the role should be selected, while recognising the benefits of diversity when considering a particular appointment. 

Corporate social responsibility

The Company is committed to delivering its strategic objectives in an ethical and responsible manner.  The Company's environmental and social policies address the importance of these issues in the day-to-day running of the business, as detailed below. 

Environmental policy

The four key elements of the Company's environmental policy are:

·     An independent environmental report is required for all potential acquisitions, which considers, amongst other matters, the historical and current usage of the site and the extent of any contamination present; 

·     An ongoing examination of existing and new tenants' business activities is carried out to prevent pollution risks occurring.  The Company monitors all incoming tenants through its insurance programme to identify potential risks, and high-risk business activities are avoided.  As part of the active management of the portfolio, any change in tenant business practices considered to be an environmental hazard is reported and suitably dealt with; 

·     Sites are visited periodically and any obvious environmental issues are reported to the Board; and 

·     All leases prepared after the adoption of the policy commit occupiers to observe any environmental regulations.  Any problems are referred to the Board. 

Development activity

During the year the Company carried out two industrial developments at sites in Warwick and Cannock.  The respective developers are sensitive to both ecological and sustainability considerations and each development has complied with environmental standards. The development at Cannock has been designed to achieve a "very good" BREEAM rating and an EPC grade "A".  The development at Warwick has been fitted with solar photovoltaic panels generating over 10% of the new building's energy requirements from a renewable energy source. Developments built to this environmental specification ensure the creation of an improved, stable environment and reduce heating and energy costs.

Social policy

The activities of the Company are carried out in a responsible manner, taking into account the social impact. 

Greenhouse gas emissions

Under the Companies Act 2006 (Strategic and Directors' Reports) Regulations 2013, the Company is required to report greenhouse gas emissions for each financial year as follows:

Sources of greenhouse gas emissions	Year ended 31 March 2016	Period ended 31 March 2015
	tCO2e19	tCO2e
Scope 1
Gas, refrigerants and fuel	-	-
Scope 2
Landlord controlled electricity	554.7	66.6
Intensity measure
Emissions per £1m of rent	24.1	4.2

19.  Tonnes of carbon dioxide equivalent.

The operational control method has been used to reflect influence over energy consumption, with the increase in landlord controlled electricity due to the acquisition of several multi-let properties during the year.  Tenants' usage or emissions are not included as the Company does not have control over those items.  Emissions from vacant space have been included.

Approval of Strategic Report

The Strategic Report, (incorporating the Chairman's statement, Investment Manager's report, Portfolio, Principal risks and uncertainties and Business model and strategy) was approved by the Board of Directors and signed on its behalf by:

David Hunter

Director

6 June 2016

Consolidated and Company statements of comprehensive income 

For the year ended 31 March 2016

			Year ended 31 March 2016	Period ended 31 March 2015
Group and Company	Note		£000	£000
Revenue	4		19,012	11,570
Investment management fee			(2,200)	(1,542)
Operating expenses of rental property -     rechargeable to tenants			(451)	(342)
-     directly incurred			(572)	(373)
Professional fees			(356)	(494)
Directors' fees			(172)	(190)
Administrative expenses			(100)	(101)
Expenses			(3,851)	(3,042)
Operating profit before financing and revaluation of investment properties			15,161	8,528
Analysed as:
Operating profit before exceptional items			15,161	8,747
Exceptional costs of Admission	6		-	(219)
			15,161	8,528
Profit on disposal of investment properties			56	269
Unrealised gains/(losses) on revaluation of investment properties:  -     relating to property revaluations	11		3,031	6,083
-     relating to costs of acquisition	11		(5,768)	(5,844)
Net (losses)/gains on investment properties			(2,681)	508
Operating profit before financing			12,480	9,036
Finance income	7		221	84
Finance costs	8		(1,494)	(373)
Net finance costs			(1,273)	(289)
Profit before tax			11,207	8,747
Income tax expense	9		-	(2)
Profit for the year and total comprehensive income for the year, net of tax			11,207	8,745
Attributable to:
Owners of the Company			11,207	8,745
Earnings per ordinary share:
Basic and diluted (pence per share)	3		5.5	6.0
EPRA (pence per share)	3		6.8	5.6

The profit for the year arises from the Company's continuing operations.

Consolidated and Company statements of financial position

As at 31 March 2016

Registered number: 8863271

		Group		Company
		31 March 2016	31 March 2015	31 March 2016	31 March 2015
	Note	£000	£000	£000	£000
Non-current assets
Investment properties	11	318,966	207,287	318,966	207,287
Investments	12	-	-	-	-
Total non-current assets		318,966	207,287	318,966	207,287
Trade and other receivables	13	4,518	1,072	4,518	1,072
Cash and cash equivalents	15	5,455	849	5,455	849
Total current assets		9,973	1,921	9,973	1,921
Total assets		328,939	209,208	328,939	209,208
Equity
Issued capital	17	2,512	1,776	2,512	1,776
Share premium	17	68,874	175,009	68,874	175,009
Retained earnings	17	183,674	3,201	183,674	3,201
Total equity attributable to equity holders of the Company		255,060	179,986	255,060	179,986
Non-current liabilities
Borrowings	16	65,143	23,811	65,143	23,811
Other payables		571	-	571	-
Total non-current liabilities		65,714	23,811	65,714	23,811
Current liabilities
Trade and other payables	14	3,681	2,292	3,681	2,292
Deferred income		4,484	3,119	4,484	3,119
Total current liabilities		8,165	5,411	8,165	5,411
Total liabilities		73,879	29,222	73,879	29,222
Total equity and liabilities		328,939	209,208	328,939	209,208

These consolidated and Company financial statements of Custodian REIT plc were approved and authorised for issue by the Board of Directors on 6 June 2016 and are signed on its behalf by:

David Hunter

Director

Consolidated and Company statement of cash flows

For the year ended 31 March 2016

Group and Company			Year ended 31 March 2016	Period ended 31 March 2015
	Note		£000	£000
Operating activities
Operating profit			12,480	9,036
Adjustments for:
Increase in fair value of investment property	11		(3,031)	(6,083)
Profit on disposal of investment properties			(56)	(269)
Income tax	9		-	(2)
Cash flows from operating activities before changes in working capital and provisions			9,393	2,682
Increase in trade and other receivables			(3,615)	(1,072)
Increase in trade and other payables			2,399	5,326
Cash generated from operations			8,177	6,936
Interest paid	8		(1,307)	(258)
Net cash flows from operating activities			6,870	6,678
Investing activities
Purchase of investment property			(109,674)	(125,728)
Disposal of investment property			1,821	1,784
Interest received	7		22	54
Net cash from investing activities			(107,831)	(123,890)
Financing activities
Proceeds from the issue of share capital	17		77,719	102,620
Payment of costs of share issue			(1,632)	(2,824)
New borrowings	16		41,700	23,811
Dividends paid	10		(12,220)	(5,546)
Net cash from financing activities			105,567	118,061
Net increase in cash and cash equivalents			4,606	849
Cash and cash equivalents at start of the year/period			849	-
Cash and cash equivalents at end of the year/period			5,455	849

Consolidated and Company statement of changes in equity 

For the year ended 31 March 2016

	Note	Issued capital £000	Share premium £000	Retained earnings £000	Total equity £000
As at 24 March 2014		50	-	-	50
Profit for the period		-	-	8,745	8,745
Total comprehensive income for year		-	-	8,745	8,745
Transactions with owners of the Company, recognised directly in equity
Dividends	10	-	-	(5,546)	(5,546)
Issue of share capital	17	1,726	175,009	-	176,735
Profit on disposal of own shares	17	-	-	2	2
As at 31 March 2015		1,776	175,009	3,201	179,986
Profit for the year		-	-	11,207	11,207
Total comprehensive income for year		-	-	11,207	11,207
Transactions with owners of the Company, recognised directly in equity
Dividends	10	-	-	(12,220)	(12,220)
Issue of share capital	17	736	75,351	-	76,087
Transfer of reserves	17	-	(181,486)	181,486	-
As at 31 March 2016		2,512	68,874	183,674	255,060

Notes to the financial statements for the year ended 31 March 2016

1    Corporate information

The Company is a public limited company incorporated and domiciled in England and Wales, whose shares are publicly traded on the London Stock Exchange plc's main market for listed securities.   The consolidated financial statements have been prepared on a historical cost basis, except for the revaluation of investment properties, and are presented in pounds sterling with all values rounded to the nearest thousand pounds (£000), except when otherwise indicated.  The consolidated financial statements were authorised for issue in accordance with a resolution of the Directors on 6 June 2016.

2        Basis of preparation and accounting policies

2.1.    Basis of preparation

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards adopted by the International Accounting Standards Board ("IASB") and interpretations issued by the International Financial Reporting Interpretations Committee ("IFRIC") of the IASB (together "IFRS") as adopted by the European Union, and in accordance with the requirements of the Companies Act applicable to companies reporting under IFRS, and therefore they comply with Article 4 of the EU IAS Regulation.

The prior period financial information has been prepared for the 53 week period from 25 March 2014 to 31 March 2015.

Certain statements in this report are forward looking statements.  By their nature, forward looking statements involve a number of risks, uncertainties or assumptions that could cause actual results or events to differ materially from those expressed or implied by those statements.  Forward looking statements regarding past trends or activities should not be taken as representation that such trends or activities will continue in the future.  Accordingly, undue reliance should not be placed on forward looking statements. 

2.2.    Basis of consolidation

The consolidated financial statements consolidate those of the parent company and its subsidiary.  The parent controls a subsidiary if it is exposed, or has rights, to variable returns from its involvement with the subsidiary and has the ability to affect those returns through its power over the subsidiary.  The subsidiary has a reporting date in line with the Company.  All transactions and balances between group companies are eliminated on consolidation, including unrealised gains and losses on transactions between group companies.  Where unrealised losses on intra-group asset sales are reversed on consolidation, the underlying asset is also tested for impairment from a group perspective.  Amounts reported in the financial statements of the subsidiary are adjusted where necessary to ensure consistency with the accounting policies adopted by the group.  Profit or loss and other comprehensive income of subsidiaries acquired or disposed of during the year are recognised from the effective date of acquisition, or up to the effective date of disposal, as applicable. 

2.3.    Application of new and revised International Financial Reporting Standards

During the year the Company has applied a number of amendments to IFRSs and a new interpretation issued by the International Accounting Standards Board (IASB) that are mandatorily effective for accounting periods beginning on or after 31 March 2015:

·     Annual improvements to IFRSs 2010- 2012 Cycle;

·     Annual improvements to IFRSs 2011- 2013 Cycle;

The application of the above amendments and interpretations has had no impact on the disclosures or on the amounts recognised in the Company's financial statements.  At the date of authorisation of these financial statements, the following new and revised IFRSs which have not been applied in these financial statements were in issue but not yet effective:

·     IFRS 9 'Financial Instruments';

·     IFRS 15 'Revenue from Contracts with Customers';

·     Amendments to IAS 16 and IAS 38 'Clarification of Acceptable Methods of Depreciation and Amortisation';

·     IAS 27 'Equity Method in Separate Financial Statements';

·     IFRS 10, IFRS 12 and IAS 28 'Investment Entities: Applying the Consolidation Exemption'; and

·     Annual Improvements to IFRSs: 2012-2014 Cycle 'IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, IFRS 7 Financial Instruments: Disclosures, IAS 19 Employee Benefits and IAS 34 Interim Financial Reporting'.

Other than to expand certain disclosures within the financial statements, the Directors do not anticipate that the application of these standards, amendments and interpretations will have a material impact on the Company's financial statements in future periods, except that IFRS 9 will impact both the measurement and disclosures of financial instruments and IFRS 15 may have an impact on revenue recognition and related disclosures.  Beyond the information above, it is not practicable to provide a reasonable estimate of the effect of IFRS 9 and IFRS 15 until a detailed review has been completed. 

2.4.    Significant accounting policies

The principal accounting policies adopted by the Company and applied to these financial statements are set out below. 

Going concern

The Directors believe the Company is well placed to manage its business risks successfully.  The Company's projections show that the Company should continue to be cash generative and be able to operate within the level of its current financing arrangements.  Accordingly, the Directors continue to adopt the going concern basis for the preparation of the financial statements. 

Income recognition

Revenue is recognised to the extent that it is probable that economic benefits will flow to the Company and the revenue can be reliably measured.  Revenue is measured at the fair value of the consideration received, excluding discounts, rebates, VAT and other sales taxes or duties.

Rental income from operating leases on properties owned by the Company is accounted for on a straight line basis over the term of the lease.  Rental income excludes service charges and other costs directly recoverable from tenants.

Lease incentives are amortised on a straight-line basis over the lease term.

Revenue and profits on the sale of properties are recognised on the completion of contracts.  The amount of profit recognised is the difference between the sale proceeds and the carrying amount.

Finance income relates to amounts receivable on ongoing development funding contracts.

Taxation

The tax expense represents the sum of the tax currently payable and deferred tax.  The tax currently payable is based on taxable profit for the year.  Taxable profit differs from net profit as reported in the statement of comprehensive income because it excludes items of income and expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible.  The Company's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the reporting date.  

Investment properties

Investment properties are properties held to earn rentals and/or for capital appreciation.  Investment properties are initially recognised at cost including direct transaction costs.  Investment properties are subsequently valued externally on an open market basis at the reporting date and recorded at valuation.  Any surplus or deficit arising on revaluing investment properties is recognised in the statement of comprehensive income in the year in which it arises.  Dilapidation receipts are held in the statement of financial position and offset against subsequent associated expenditure.  Any ultimate gains or shortfalls are measured by reference to previously published valuations and recognised in the statement of comprehensive income, offset against any directly corresponding movement in fair value of the investment property to which they relate. 

Group undertakings

Investments are included in the statement of financial position at cost less any provision for impairment.

Financial assets

The Company's financial assets include cash and cash equivalents and trade and other receivables.  All financial assets are initially recognised at fair value plus transaction costs, when the Company becomes party to the contractual provisions of the instrument.  Interest resulting from holding financial assets is recognised in the statement of comprehensive income on an accruals basis.

Loans and receivables are measured subsequent to initial recognition at amortised cost using the effective interest method, less provision for impairment.  Provision for impairment of trade and other receivables is made when objective evidence is received that the Company will not be able to collect all amounts due to it in accordance with the original terms of the receivable.  The amount of the impairment is determined as the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the effective rate computed at initial recognition.  Any change in value through impairment or reversal of impairment is recognised in the statement of comprehensive income.

A financial asset is derecognised only where the contractual rights to the cash flows from the asset expire or the financial asset is transferred and that transfer qualifies for de-recognition.  A financial asset is transferred if the contractual rights to receive the cash flows of the asset have been transferred or the Company retains the contractual rights to receive the cash flows of the asset but assumes a contractual obligation to pay the cash flows to one or more recipients.  A financial asset that is transferred qualifies for de-recognition if the Company transfers substantially all the risks and rewards of ownership of the asset.

Cash and cash equivalents

Cash and cash equivalents include cash in hand and demand deposits, and other short term highly liquid investments that are readily convertible into a known amount of cash and are subject to an insignificant risk of changes in value.

Financial liabilities and equity

Financial liabilities and equity instruments are classified according to the substance of the contractual arrangements entered into.  An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities.  Equity investments issued by the Company are recorded at the proceeds received, net of direct issue costs.

Share capital represents the nominal value of equity shares issued.  Share premium represents the excess over nominal value of the fair value of the consideration received for equity shares, net of direct issue costs.

Retained earnings include all current and prior period results as disclosed in the statement of comprehensive income.  Retained earnings include realised and unrealised profits.  Profits are considered unrealised where they arise from movements in the fair value of investment properties that are considered to be temporary rather than permanent.

Bank borrowings

Interest-bearing bank loans and overdrafts are recorded at the fair value of proceeds received, net of direct issue costs.  Finance charges, including premiums payable on settlements or redemption and direct issue costs, are accounted for on an accruals basis in the statement of comprehensive income using the effective interest rate method and are added to the carrying amount of the instrument to the extent that they are not settled in the period in which they arise.

Trade payables

Trade payables are initially measured at fair value and are subsequently measured at amortised cost, using the effective interest rate method.

Leases

Payments on operating lease agreements where the Company is lessor are recognised as an expense on a straight-line basis over the lease term.  Payments on operating lease agreements where the Company is lessee are charged to the income statement on a straight-line basis over the term of the lease.

Exceptional items

Certain items have been disclosed as exceptional in the income statement where they relate to Admission and are therefore considered to be one off costs, as set out in Note 6 to the financial statements.

Segmental reporting

An operating segment is a distinguishable component of the Company that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the Company's chief operating decision maker to make decisions about the allocation of resources and assessment of performance and about which discrete financial information is available.  As the chief operating decision maker reviews financial information for, and makes decisions about the Company's investment properties and properties held for trading as a portfolio, the Directors have identified a single operating segment, that of investment in commercial properties.

2.5.    Key sources of judgements and estimation uncertainty

The preparation of the financial statements requires the Company to make estimates and assumptions that affect the reported amount of revenues, expenses, assets and liabilities and the disclosure of contingent liabilities.   If in the future such estimates and assumptions, which are based on the Directors' best judgement at the date of preparation of the financial statements, deviate from actual circumstances, the original estimates and assumptions will be modified as appropriate in the period in which the circumstances change.   The areas where a higher degree of judgement or complexity arises, or where assumptions and estimates are significant to the financial statements, are discussed below. 

Valuation of properties

Investment properties are valued at the reporting date at fair value.  Where investment properties are being redeveloped the property continues to be treated as an investment property.  Surpluses and deficits attributable to the Company arising from revaluation are recognised in the statement of comprehensive income.  Valuation surpluses reflected in retained earnings are not distributable until realised on sale.

The Company considers valuations performed by independent valuers in determining the fair value of its investment properties.  The valuations are based upon assumptions including future rental income, anticipated maintenance costs and appropriate discount rates.  The valuers also make reference to market evidence of transaction prices for similar properties.

3        Earnings per ordinary share

Basic EPS amounts are calculated by dividing net profit for the year attributable to ordinary equity holders of the Company by the weighted average number of ordinary shares outstanding during the year. 

Diluted EPS amounts are calculated by dividing the net profit attributable to ordinary equity holders of the Company by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares.  There are no dilutive instruments.  Shares issued after the year end are disclosed in Note 21.

The European Public Real Estate Association ("EPRA") has issued recommended bases for the calculation of EPS which the directors consider is a better indicator of performance.

		Year  ended 31 March 2016	Period  ended 31 March 2015
Net profit and diluted net profit attributable to equity holders of the Company (£000)		11,207	8,745
Net losses/(gains) on investment properties (£000)		2,681	(508)
EPRA net profit attributable to equity holders of the Company (£000)		13,888	8,237
Weighted average number of ordinary shares:
Issued ordinary shares at start year		177,605,659	5,000,000
Effect of shares issued during the year		26,590,709	141,061,038
Basic and diluted weighted average number of shares		204,196,368	146,061,038
Basic and diluted EPS (pence)		5.5	6.0
EPRA EPS (pence)		6.8	5.6

4        Revenue

	Year  ended 31 March 2016 £000	Period  ended 31 March 2015 £000
Gross rental income from investment properties	18,561	11,228
Income from recharges to tenants	451	342
	19,012	11,570

5        Operating profit

Operating profit is stated after charging/(crediting):

	Year  ended 31 March 2016 £000	Period  ended 31 March 2015 £000
Profit on disposal of investment property	56	269
Net (losses)/gains on revaluation of investment properties	(2,737)	239
Fees payable to the Company's Auditor and their associates for the audit of the Company's annual financial statements	52	102
Fees payable to the Company's Auditor and its associates for other services	616	271

Fees payable to the Company's auditor, Deloitte LLP, are detailed in the Audit Committee report.

6        Exceptional items

One-off costs incurred in the period ended 31 March 2015 on Admission totalling £2.40m of which £0.22m was recognised in the statement of comprehensive income and £2.18m was taken to the share premium account as being directly related to the issue of new shares. 

7        Finance income

	Year  ended 31 March 2016 £000	Period ended 31 March 2015 £000
Bank interest	22	54
Finance income	199	30
	221	84

8        Finance costs

	Year  ended 31 March 2016 £000	Period ended 31 March 2015 £000
Amortisation of arrangement fees on debt facilities	187	115
Bank interest	1,307	258
	1,494	373

9        Income tax

The tax charge assessed for the year is lower than the standard rate of corporation tax in the UK during the year of 20.0%.  The differences are explained below:

		Year  ended 31 March 2016 £000	Period ended 31 March 2015 £000
Profit before income tax		11,207	8,747
Tax charge on profit at a standard rate of 20.0% (2015: 21.0%)		2,241	1,837
Effects of:
REIT tax exempt rental profits and gains		(2,241)	(1,835)
Income tax expense		-	2
Effective income tax rate		0.0%	0.0%

The Company operated as a REIT from 27 March 2014 and hence profits and gains from the property investment business since that date are normally exempt from corporation tax. 

The UK Government has reduced the rate of corporation tax from 23% to 21% with effect from 1 April 2014, from 21% to 20% effective from 1 April 2015, from 20% to 19% effective from 1 April 2017 and from 19% to 18% effective from 1 April 2020. 

10      Dividends

		Year  ended 31 March 2016 £000	Period  ended 31 March 2015 £000
Interim dividends paid on ordinary shares for the quarter ended: - 31 March 2015: 1.5p (31 March 2014: nil)		2,672	-
- 30 June 2015: 1.5p (30 June 2014: 1.25p)		2,782	1,650
- 30 September 2015: 1.5p (30 September 2014: 1.25p)		2,900	1,948
- 31 December 2015: 1.5875p (31 December 2014: 1.25p)		3,866	1,948
		12,220	5,546

The Directors propose that the Company pays a fourth interim dividend relating to the year ended 31 March 2016 of 1.6625p per ordinary share.  This dividend has not been included as a liability in these financial statements.  The fourth interim dividend is expected to be paid on 30 June 2016 to shareholders on the register at the close of business on 5 May 2016.

11      Investment properties

	£000	£000
At 24 March 2014		-
Additions		208,563
Disposals		(1,515)
Property revaluations	6,083
Acquisition costs	(5,844)
Net revaluation gain		239
As at 31 March 2015		207,287
Additions		116,181
Disposals		(1,765)
Property revaluations	3,031
Acquisition costs	(5,768)
Net revaluation gain		(2,737)
As at 31 March 2016		318,966

Included in investment properties is £4.0m relating to ongoing development fundings, of which £3.2m completed following the year end.

The carrying value at 31 March 2016 comprises freehold and leasehold properties summarised as follows:

	Freehold	Leasehold	Total
Investment properties	£000	£000	£000
Cost	278,818	44,080	322,898
Valuation (deficit)/gain	(3,765)	1,598	(2,167)
Disposals	(415)	(1,350)	(1,765)
At 31 March 2016	274,638	44,328	318,966

The investment properties are stated at the Directors' estimate of their 31 March 2016 fair values.  Lambert Smith Hampton Group Limited ("LSH"), a professionally qualified independent valuer, valued the properties as at 31 March 2016 in accordance with the Appraisal and Valuation Standards published by the Royal Institution of Chartered Surveyors.  LSH has recent experience in the relevant location and category of the properties being valued. 

Investment properties have been valued using the investment method which involves applying a yield to rental income streams.  Inputs include yield, current rent and estimated rental value ("ERV").  For the year end valuation, the equivalent yields used ranged from 5.0% to 10.1%.  Valuation reports are based on both information provided by the Company e.g. current rents and lease terms which are derived from the Company's financial and property management systems are subject to the Company's overall control environment, and assumptions applied by the valuer e.g. ERVs and yields.  These assumptions are based on market observation and the valuer's professional judgement.  In estimating the fair value of the property, the highest and best use of the properties is their current use.

All other factors being equal, a higher equivalent yield would lead to a decrease in the valuation of investment property, and an increase in the current or estimated future rental stream would have the effect of increasing capital value, and vice versa.  However, there are interrelationships between unobservable inputs which are partially determined by market conditions, which would impact on these changes.

12      Investments

Shares in subsidiaries

Company Name and company number	Country of registration and incorporation	Principal activity	Ordinary shares held	At 31 March 2015 and 31 March 2016 £
Custodian Real Estate Limited (Company number 8882372)	England and Wales	Dormant	100%	2

13      Trade and other receivables

	31 March 2016 £000	31 March 2015 £000
Trade receivables	1,019	451
Other receivables	1,857	92
Prepayments and accrued income	1,642	529
	4,518	1,072

The Company has provided fully for those receivable balances that it does not expect to recover.  This assessment has been undertaken by reviewing the status of all significant balances that are past due and involves assessing both the reason for non-payment and the creditworthiness of the counterparty.  Included within accrued income are balances totalling £1.35m which are to be held for a period over one year.

14      Trade and other payables

	31 March 2016 £000	31 March 2015 £000
Falling due in less than one year:
Trade and other payables	437	338
Social security and other taxes	1,231	687
Accruals	1,566	1,037
Rental deposits	447	230
	3,681	2,292

The Directors consider that the carrying amount of trade and other payables approximates to their fair value.  Trade payables and accruals principally comprise amounts outstanding for trade purchases and ongoing costs.  For most suppliers interest is charged if payment is not made within the required terms.  Thereafter, interest is chargeable on the outstanding balances at various rates.  The Company has financial risk management policies in place to ensure that all payables are paid within the credit timescale. 

15      Cash and cash equivalents

	31 March 2016 £000	31 March 2015 £000
Cash and cash equivalents	5,455	849

Cash and cash equivalents include £0.47m (2015: £0.23m) of restricted cash in the form of rental deposits and retentions held on behalf of tenants, and £0.21m of restricted cash held within charged bank accounts relating to the share premium reduction detailed in Note 17, which has been utilised since the year end.

16      Borrowings

	31 March 2016 £000	31 March 2015 £000
Falling due in more than one year:
Bank borrowings	66,000	24,300
Costs incurred in the arrangement of bank borrowings	(857)	(489)
	65,143	23,811

On 25 February 2014, the Company agreed a RCF of £25m with Lloyds Bank plc for a term of five years.  On 13 November 2015, the Company and Lloyds Bank plc entered into an agreement to increase the total funds available under the RCF from £25m to £35m and extend the termination date to 13 November 2020.  The RCF is secured by way of a first charge over a discrete portfolio of properties, providing the lender with a maximum LTV ratio of 50% on those properties specifically charged to it and a floating charge.  The interest cover will be at least 250% LTV.  Under the terms of agreement, the Company pays interest of 2.45% above three-month LIBOR per annum on the outstanding amounts utilised under the agreement from time to time.  At 31 March 2016, £26.0m of the RCF had been drawn down to fund property acquisitions.

On 9 December 2014 the Company agreed a £20m term loan with Lloyds Bank plc ("the Lloyds Loan"), secured by way of a first charge over a discrete portfolio of properties, providing the lender with a maximum LTV ratio of 50% on those properties specifically charged to it and a floating charge. The interest cover will be at least 250% LTV.  The loan attracts interest of 1.95% above three-month LIBOR per annum and is repayable on 10 October 2019.  On 6 June 2016 the Lloyds Loan was repaid in full, incurring no early repayment charges.

On 14 August 2015, the Company and Scottish Widows Limited, with Lloyds Bank plc acting as agent, entered into an agreement for Scottish Widows Limited to provide the Company with a term loan facility of £20m, repayable on 14 August 2025.  Under the terms of the agreement, the Company will pay fixed interest of 3.935% per annum on the balance.

All of the Company's borrowing facilities require minimum interest cover of 250% of the net rental income of the security pool.  The maximum LTV of the Company combining the value of all property interests (including the properties secured against the facilities) must be no more than 35%.

On 6 June 2016, the Company and Scottish Widows Limited, with Lloyds Bank plc acting as agent, entered into an agreement for Scottish Widows Limited to provide the Company with a new term loan facility of £45m, repayable on 6 June 2028.  Under the terms of the agreement, the Company will pay fixed interest of 2.987% per annum on the balance.  The proceeds from this new loan were partially used to repay the Lloyds Loan.

17      Share capital

Issued share capital		Ordinary shares  of 1p	£000
At 25 March 2014		131,989,310	1,320
Issue of share capital		45,616,349	456
At 31 March 2015		177,605,659	1,776
Issue of share capital		73,636,412	736
At 31 March 2016		251,242,071	2,512

On 5 November 2015 the Board announced a Placing, Open Offer and Offer for Subscription and a twelve month Placing Programme of up to 100m new Ordinary Shares.  The Company raised £44.25m (before costs and expenses) through a placing of 42,466,412 new ordinary shares in the Company on 30 November 2015 under the Placing, Open Offer and Offer for Subscription.

During the year, the Company raised £33.5m (before costs and expenses) through further placings of 31,170,000 new ordinary shares. 

The Company has made further issues of new shares since the year end, which are detailed in Note 21 to the financial statements.

Rights, preferences and restrictions on shares

All ordinary shares carry equal rights and no privileges are attached to any shares in the Company.  All the shares are freely transferable, except as otherwise provided by law.  The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company.  All shares rank equally with regard to the Company's residual assets.

At the AGM of the Company held on 22 July 2015, the Board was given authority to issue up to 120,670,439 shares, pursuant to section 551 of the Companies Act 2006.  This authority is intended to satisfy market demand for the ordinary shares and raise further monies for investment in accordance with the Company's investment policy.  67,486,412 ordinary shares have been issued under this authority since 22 July 2015, leaving an unissued balance of 53,184,027 at 31 March 2016.  In addition, the Company was granted authority to make market purchases of up to 18,100,565 ordinary shares under section 701 of the Companies Act 2006.

At 31 March 2015, an unissued balance of 122,394,341 ordinary shares remained from the authority granted to the Board at the previous AGM of the Company held on 21 January 2015.

On 14 August 2015, registration was completed of the Chancery Division of the High Court of Justice's approval of the cancellation of the Company's share premium account, standing at £181,485,649 as of 22 July 2015.  Further details, including the rationale for the cancellation, are set out in the Notice of Annual General Meeting available on the Company's website.

Other reserves				Share premium account £000	Retained earnings £000
At 25 March 2014
Shares issued during the period				177,833	-
Costs of share issue				(2,824)	-
Profit for the period				-	8,745
Dividends				-	(5,546)
Profit on sale of own shares taken directly to equity				-	2
At 31 March 2015				175,009	3,201
Shares issued during the year				76,983	-
Costs of share issue				(1,632)	-
Profit for the year				-	11,207
Dividends paid				-	(12,220)
Transfer of reserves				(181,486)	181,486
At 31 March 2016				68,874	183,674

The following table describes the nature and purpose of each reserve within equity:

Reserve	Description and purpose
Share premium	Amounts subscribed for share capital in excess of nominal value less any associated issue costs that have been capitalised.
Retained earnings	All other net gains and losses and transactions with owners (e.g. dividends) not recognised elsewhere.

18      Commitments and contingencies

Company as lessor

The Company lets all investment properties under operating leases.  The aggregated future minimum rentals receivable under all non-cancellable operating leases are:

	31 March 2016 £000	31 March 2015 £000
Not later than one year	21,782	15,257
Later than one year but not later than five years	63,657	48,407
Later than five years	55,816	46,840
	141,255	110,504

19      Related party transactions

Save for transactions described below, the Company is not a party to, nor had any interest in, any other related party transaction during the year. 

Transactions with directors

Each of the directors is engaged under a letter of appointment with the Company and does not have a service contract with the Company.  Under the terms of their appointment, each director is required to retire by rotation and seek re-election at least every three years.  Each director's appointment under their respective letter of appointment is terminable immediately by either party (the Company or the director) giving written notice and no compensation or benefits are payable upon termination of office as a director of the Company becoming effective. 

Investment Management Agreement

On 25 February 2014 the Company entered into a three year IMA with the Investment Manager, under which the Investment Manager has been appointed as AIFM with responsibility for the property management of the Company's assets, subject to the overall supervision of the Directors.  The Investment Manager manages the Company's investments in accordance with the policies laid down by the Board and the investment restrictions referred to in the IMA.  

Ian Mattioli is Chief Executive of Mattioli Woods, the parent company of the Investment Manager, and is a director of the Investment Manager.  As a result, Ian Mattioli is not independent.  The Company Secretary, Nathan Imlach, is also a director of Mattioli Woods and the Investment Manager. 

The Investment Manager is paid a fund and asset management fee calculated by reference to the NAV of the Company each quarter as follows:

·     0.9% of the NAV of the Company as at the relevant quarter day which is less than or equal to £200m divided by 4; plus

·     0.75% of the NAV of the Company as at the relevant quarter day which is in excess of £200m divided by 4.

The Investment Manager has agreed to provide day-to-day administration of the Company and act as secretary to the Company, including maintenance of accounting records and preparing annual accounts of the Company.  The Company pays the Investment Manager an administrative fee equal to 0.125% of the NAV of the Company at the end of the quarter, subject to a minimum of £44,000 per quarter (adjusted for RPI). 

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 initial three year term.  The IMA may also be terminated on the occurrence of an insolvency event in relation to either party, if the Investment Manager is fraudulent, grossly negligent or commits a material breach which, if capable of remedy, is not remedied within three months, or on a force majeure event continuing for more than 90 days.

The Investment Manager receives a fee of 0.25% of the aggregate gross proceeds from any issue of new shares in consideration of the marketing services it provides to the Company.  

During the year the Company paid the Investment Manager £2.72m in respect of annual management charges, administrative fees and marketing fees. 

The Company owed £0.02m to the Investment Manager at 31 March 2016 (2015: £nil) relating to marketing services and recharged insurance. 

Acquisition of properties

On 26 March 2014 the Company acquired a portfolio of 48 properties held in a syndicated structure by clients of Mattioli Woods ("the Portfolio") including Ian Mattioli, Nathan Imlach and Richard Shepherd-Cross and the private pension schemes of Ian Mattioli, Nathan Imlach and Richard Shepherd-Cross.

The Portfolio included MW House and Gateway House at Grove Park, Enderby, which are partially let to Mattioli Woods.  Mattioli Woods paid the Company rentals of £0.41m (2015: £0.35m) during the year and owed the Company £nil at 31 March 2016 (2015: £nil).

Ian Mattioli, Nathan Imlach, Richard Shepherd-Cross and the private pension schemes of Ian Mattioli, Nathan Imlach and Richard Shepherd-Cross continue to have a beneficial interest in the Company.

20      Financial risk management

Capital risk management

The Company manages its capital to ensure it can continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance within the parameters of its investment policy.  The capital structure of the Company consists of debt, which includes the borrowings disclosed below, cash and cash equivalents and equity attributable to equity holders of the parent, comprising issued ordinary share capital, share premium and retained earnings. 

Gearing ratio

The Board reviews the capital structure of the Company on a regular basis.  As part of this review, the Board considers the cost of capital and the risks associated with each class of capital.  The Company has a target gearing ratio of 25% determined as the proportion of debt (net of unrestricted cash) to investment property.  The gearing ratio at the year end was 19.1% (2015: 11.4%).

Externally imposed capital requirements

The Company is not subject to externally imposed capital requirements, although there are restrictions on the level of interest that can be paid due to conditions imposed on REITs. 

Financial risk management

The Company seeks to minimise the effects of interest rate risk, credit risk, liquidity risk and cash flow risk by using fixed and floating rate debt instruments with varying maturity profiles, at low levels of gearing.

Interest rate risk management

The Company's activities expose it primarily to the financial risks of increases in interest rates, as it borrows funds at floating interest rates.  The risk is managed by maintaining:

·     An appropriate balance between fixed and floating rate borrowings;

·     A low level of gearing; and

·     The RCF whose flexibility allows the Company to manage the risk of changes in interest rates. 

The Board periodically consider the availability and cost of hedging instruments to assess whether their use is appropriate, and also consider the maturity profile of the Company's borrowings. 

Interest rate sensitivity analysis

The sensitivity analyses below have been determined based on the exposure to interest rates at the balance sheet date.  For floating rate liabilities, the analysis is prepared assuming the amount of liability outstanding at the balance sheet date was outstanding for the whole year. If three-month LIBOR had been 0.5% higher and all other variables were constant, the Company's profit for the year ended 31 March 2016 would decrease by £0.1m (2015: £0.1m) due to its variable rate borrowings.  If three-month LIBOR had been 0.5% lower and all other variables were constant, the Company's profit for the year ended 31 March 2016 would have increased by £0.1m (2015: £0.1m). 

Credit risk management

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in a financial loss to the Company.  The Company's credit risk is primarily attributable to its trade receivables and cash balances.  The amounts included in the statement of financial position are net of allowances for bad and doubtful debts.  An allowance for impairment is made where there is an identified loss event which, based on previous experience, is evidence of a reduction in the recoverability of the cash flows. 

The Company has adopted a policy of only dealing with creditworthy counterparties as a means of mitigating the risk of financial loss from defaults.  The maximum credit risk on financial assets at 31 March 2016 was £1.0m (2015: £0.5m).

The Company has no significant concentration of credit risk, with exposure spread over a large number of tenants covering a wide variety of business types.  Further detail on the Company's credit risk management process is included within the Strategic Report.

Liquidity risk management

Ultimate responsibility for liquidity risk management rests with the Board, which has built an appropriate liquidity risk management framework for the management of the Company's short, medium and long term funding and liquidity management requirements.  The Company manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities by continuously monitoring forecast and actual cash flows and matching the maturity profile of financial assets and liabilities.

The following table details the Company's contractual maturity for its financial liabilities not disclosed elsewhere.  The table has been drawn up based on undiscounted cash flows of financial liabilities based on the earliest date on which the Company can be required to pay.  The table includes both interest and principal cash flows.

Group and Company	Weighted average effective interest rate %	31 March 2016 0-3 months £000	31 March 2016 3 months- 1 year £000	31 March 2016 1-5 years £000	31 March 2016 6 years +
Trade and other payables	-	3,681	-	148	423
Borrowings:
Variable rate	2.856	322	967	24,127	26,000
Fixed rate	3.935	197	590	3,148	23,441
		4,200	1,557	27,423	49,864

	Weighted average effective interest rate %	31 March 2015 0-3 months £000	31 March 2015 3 months- 1 year £000	31 March 2015 1-5 years £000	31 March 2015 6 years +
Trade and other payables	-
Borrowings:
Variable rate	2.095	126	377	26,087	-
		126	377	26,087	-

Fair values

The fair values of financial assets and liabilities are not materially different from their carrying values in the financial statements.  The fair value hierarchy levels are as follows:

·     Level 1 - quoted prices (unadjusted) in active markets for identical assets and liabilities;

·     Level 2 - inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

·     Level 3 - inputs for the assets or liability that are not based on observable market data (unobservable inputs).

There have been no transfers between Levels 1, 2 and 3 during the year.  The main methods and assumptions used in estimating the fair values of financial instruments and investment property are detailed below. 

Investment property - level 3

Fair value is based on valuations provided by an independent firm of chartered surveyors and registered appraisers. These values were determined after having taken into consideration recent market transactions for similar properties in similar locations to the investment properties held by the Company. The fair value hierarchy of investment property is level 3. At 31 March 2016, the fair value of the Company's investment properties was £319.0m (2015: £207.3m).

Interest bearing loans and borrowings - level 3

As at 31 March 2016 the value of the Company's loans was £65.1m (2015: £24.3m) and the amortised cost of the Company's loans with Lloyds Bank plc and Scottish Widows Limited approximated their fair value.  The loan from Scottish Widows Limited includes a market-based break cost for early repayment ("Prepayment Option"), which is classified as a non-separable component of the loan.  If the Prepayment Option was classified as a separate financial instrument, it would increase the Company's borrowings and decrease NAV at 31 March 2016 by £1.5m. 

Trade and other receivables/payables - level 3

The carrying amount of all receivables and payables deemed to be due within one year are considered to reflect their fair value. 

21      Events after the reporting date

New equity

Since the reporting date the Company has issued 27,640,000 new ordinary shares of 1p each, raising £29.0m (before costs and expenses). 

Acquisitions

On 15 April 2016 the Company acquired a high street retail unit in Chester, let to TSB and Ciel Concessions (trading as Chesca) for £2.1m, with lease expiries between September 2019 and March 2020 and a total passing rent of £0.13m per annum, reflecting a net initial yield of 5.9%. 

On 26 May 2016 the Company acquired an industrial unit in Tamworth let to Schenker Limited, a subsidiary of Deutsche Bahn, for £4.7m.  The lease expires in September 2017 with total passing rent of £0.28m per annum, reflecting a net initial yield of 5.7%.

Borrowings

On 6 June 2016, the Company and Scottish Widows Limited, with Lloyds Bank plc acting as agent, entered into an agreement for Scottish Widows Limited to provide the Company with a new term loan facility of £45m, repayable on 6 June 2028.  Under the terms of the agreement, the Company will pay fixed interest of 2.987% per annum on the balance.  

22      Distribution of the annual report and accounts to members

The announcement above does not constitute a full financial statement of the Group's affairs for the period ended 31 March 2015 or the year ended 31 March 2016.  The Group's auditors have reported on the full accounts of each period and have accompanied them with an unqualified report.  The accounts have yet to be delivered to the Registrar of Companies. 

The annual report and accounts will be posted to shareholders in due course, and will be available on our website (www.custodianreit.com) and for inspection by the public at the Company's registered office address: 1 Penman Way, Grove Park, Enderby, Leicester LE19 1SY during normal business hours on any weekday.  Further copies will be available on request. 

The AGM of the Company will be held at Canaccord Genuity Limited, 88 Wood Street, London, EC2V 7QR at 11:00am on 26 July 2016. 

- Ends -

 

END

 

 

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