REG-Custodian Property Income REIT plc Custodian Property Income REIT plc: Final results for the year ended 31 March 2024
13/06/2024 07:15
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Custodian Property Income REIT plc (CREI)
Custodian Property Income REIT plc: Final results for the year ended 31 March 2024
13-Jun-2024 / 07:00 GMT/BST
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13 June 2024
Custodian Property Income REIT plc
(“the Company” or “Custodian Property Income REIT”)
Final results for the year ended 31 March 2024
Custodian Property Income REIT’s 10th annual results marked by strong operational
performance driving further growth in fully covered dividend
Custodian Property Income REIT (LSE: CREI), which seeks to deliver an enhanced income
return by investing in a diversified portfolio of smaller regional properties with
strong income characteristics across the UK, today announces its final results for
the year ended 31 March 2024.
Commenting on the final results, David MacLellan, Chairman of Custodian Property
Income REIT, said: In my first annual results as Chairman, I am very pleased to note
the year to March 2024 as a significant milestone for the Company, marking the 10
year anniversary since launch, and that the Company once again performed well.
Despite the significant challenges and changes we have all faced over the last
decade, politically, economically and in terms of social volatility including COVID,
Custodian Property Income REIT has grown successfully and delivered on its objectives
with an over sixfold increase in the size of the portfolio, an average annual NAV
total return of 5.5%, an annual average fully covered dividend of 5.9p per share and
a decreasing ongoing charges ratio.
“This success has been achieved by the Company’s resolute focus on being fully
invested in a portfolio of below institutional lot-sized regional properties to
capture the income advantages that these types of assets afford, in order to deliver
enhanced income-centric total returns to institutional, wealth management and private
investors.
“Looking at the year under review, the occupational market has continued to remain
robust, with rental growth and falling vacancy reflected in recurring EPRA earnings
per share increasing by 3.6%. This increase in earnings allowed the Board to declare
a special dividend in March 2024 to take the aggregate dividend for the year to 5.8p,
along with announcing a 9% increase in the prospective dividend per share from 5.5p
to 6.0p due to an improved outlook.
“The quarter ended 31 March 2024 saw a marginal increase in NAV due to profitable
disposals on the back of flat valuations, as rental growth and falling vacancy rates
started to have a positive impact. Despite stabilising valuations and the prospect
of rental growth, sentiment towards listed UK commercial real estate has caused
weakness and volatility in the share price. The prevailing share price implied a
dividend yield of 8.3%, compared to 6.3% and 5.8% at 31 March 2023 and 2022
respectively. However, the first move down in interest rates should be the real
catalyst for a positive shift in sentiment towards real estate investment, so later
in 2024 could be a turning point in the market.
“The Company’s portfolio is well placed to benefit from any upwards rerating in
sector valuations as the economy improves. In an inflationary environment and with a
lack of supply of modern, smaller regional properties we expect to see continued
rental growth over the year ahead and it will be this growth in income that is likely
to form the greater component of total return over the next phase of the property
market and we believe that Custodian Property Income REIT’s strong income yielding
portfolio, supported by higher-than-peer group recurring earnings per share, will
continue to underpin shareholder returns”.
Highlights of the year:
• 3.6% growth in EPRA earnings per share to 5.8p (FY23: 5.6p)
• 5.6% growth in like-for-like contracted rental income to £43.1m with a 3.9%
increase in rental revenue to £42.2m (FY23: £40.6m)
• Estimated rental value (“ERV”) grew 3.6% with ERV now 15% ahead of passing rent
providing a significant opportunity to unlock further rental growth through asset
management and at lease events
• 15 rent reviews completed during the year across all sectors at an average 23%
ahead of previous passing rent, with 47 new lettings, lease renewals and lease
regears completed reflecting the continued strong demand for space in the
Company’s portfolio and adding £9.5m to valuation
• Occupancy increased to 91.7% during the year (FY23: 90.3%), with further
improvement to c.93% since April 2024
• Valuation of the Company’s portfolio of 155 properties, including assets
held-for-sale, remained flat at £589.1m in the final quarter, with a modest 4.0%
like-for-like fall over the full year (31 March 23: £613.6m) suggesting that a
turning point in sentiment and valuations has been reached
• £19.0m of capital investment during the year into refurbishment and EPC
improvement of offices in Leeds and Manchester and Midlands industrial units,
including solar panel and electric vehicle charger installations, leading to a
21.7% increase in the ERV of the properties
• £18.2m proceeds from selective disposals achieved at an aggregate 8% premium to
last valuation, with a further £11.3m of disposals since year end at an average
49% premium to pre-offer valuation
• Net gearing remains low at 29.2% (31 March 2023: 27.4%) with 78% fixed and no
expiries until August 2025
• 5.5% increase in fully covered dividends paid to shareholders during the year
comprising 5.5p of ordinary dividends and a 0.3p special dividend
• 9% increase in the prospective dividend announced in May 2024 from 5.5p to 6.0p
per share reflecting the Board’s confidence in the Company’s prospects, together
with its commitment to a property strategy that supports a relatively high
dividend, fully covered by EPRA earnings.
For further information, please contact:
Custodian Capital Limited
Richard Shepherd-Cross / Ed Moore / Ian Mattioli Tel: +44 (0)116 240 8740
MBE
1 www.custodiancapital.com
Deutsche Numis Tel: +44 (0)20 7260 1000
2 www.dbnumis.com
Hugh Jonathan / Nathan Brown
FTI Consulting Tel: +44 (0)20 3727 1000
Richard Sunderland / Ellie Sweeney / Andrew Davis 3 custodianreit@fticonsulting.com
Custodian Property Income REIT plc Annual Report and Accounts for the year ended 31
March 2024
Custodian Property Income REIT plc (“Custodian Property Income REIT” or “the
Company”) is a UK real estate investment trust (“REIT”) which seeks to deliver an
enhanced income return by investing in a diversified portfolio of smaller, regional
properties with strong income characteristics let to predominantly institutional
grade tenants across the UK.
Property highlights
2024
£m Comments
Portfolio value 4 1 589.1
Property valuation Representing a 4.0% like-for-like decrease,
decreases: (27.0) explained further in the Investment Manager’s
report
Occupancy rates have increased from 90.3% to 91.7%
Occupancy 91.7% by the year end, improving further post year end
to c.93%.
Primarily comprising:
• £6.8m refurbishing four office buildings in
Leeds and Manchester
• £3.5m redeveloping an industrial site in
Redditch
Capital investment 19.0 • £2.2m refurbishing an industrial asset in
Ashby-de-la-Zouch
• £1.3m buying the long-leasehold of a unit at a
10-unit industrial asset in Knowsley
• £1.0m reconfiguring retail assets in
Shrewsbury and Liverpool
• £2.0m invested in photovoltaics and electric
vehicle chargers at various sites
At an aggregate 8% premium to valuation (£1.4m
profit on disposal) comprising:
• £8.0m industrial unit in Milton Keynes
Disposal proceeds 18.2 • £6.0m industrial unit in Weybridge
• £1.6m high street retail units in Bury St
Edmunds and Cirencester
• £2.0m vacant offices in Derby
• £0.6m children’s day nursery in Chesham
At an aggregate 49% premium to pre-offer valuation
comprising:
Disposal proceeds since the
year end 11.3 • £9.0m vacant industrial unit in Warrington
• £2.3m vacant former car showroom in Redhill
Financial highlights and performance summary
2024 2023 Comments
Returns
*EPRA 5 2 earnings per Rental growth and improvement in
share 6 3 5.8p 5.6p occupancy have offset administrative
cost inflation and higher finance costs
Basic and diluted earnings per (0.3p) (14.9p) Loss resulting from a £27.0m valuation
share 7 4 decreases
Loss before tax (£m) (1.5) (65.8)
Special dividend of 0.3p approved for
Dividends per share 8 5 5.8p 5.5p the year. Target dividend per share
for the year ended 31 March 2025 of
6.0p
*Dividend cover 9 6 100.7% 102.2% In line with the Company’s policy of
paying fully covered dividends
*NAV total return per 5.5% dividends paid (2023: 4.6%) and a
share 10 7 (0.4%) (12.5%) 5.9% capital decrease (2023: 17.1%
capital decrease)
*Share price total (2.6%) (7.0%) Share price decreased from 89.2p to
return 11 8 81.4p during the year
Capital values
NAV and *EPRA NTA 12 9 (£m) 411.8 437.6 Decreased due to £27.0m of valuation
NAV per share and *NTA per 93.4 99.3p decreases
share
Further reduced to 27.9% following
*Net gearing 13 10 29.2% 27.4% property disposals since the year-end
and broadly in line with the Company’s
25% target
*Weighted average cost of Base rate (SONIA) increased from 4.2%
drawn debt facilities 4.1% 3.8% to 5.2% during the year. Impact
mitigated by 78% fixed rate debt.
Costs
*Ongoing charges ratio 14 11 2.20% 1.96%
(“OCR”)
*OCR excluding direct property 1.24% 1.23%
expenses 15 12
Environmental
*Weighted average energy EPCs updated across 42 properties
performance certificate (“EPC”) C (53) C (58) demonstrating continuing improvements
rating 16 13 in the environmental performance of the
portfolio
*Alternative performance measures (“APMs”) - the Company reports APMs to assist
stakeholders in assessing performance alongside the Company’s results on a statutory
basis, set out above. APMs are among the key performance indicators used by the
Board to assess the Company’s performance and are used by research analysts covering
the Company. The Company uses APMs based upon the EPRA Best Practice Recommendations
Reporting Framework which is widely recognised and used by public real estate
companies. Certain other APMs may not be directly comparable with other companies’
adjusted measures and APMs are not intended to be a substitute for, or superior to,
any IFRS measures of performance. Supporting calculations for APMs and
reconciliations between APMs and their IFRS equivalents are set out in Note 22.
Business model and strategy
Purpose
Custodian Property Income REIT offers investors the opportunity to access a
diversified portfolio of UK commercial real estate through a closed-ended fund. The
Company seeks to provide investors with an attractive level of income and the
potential for capital growth from a portfolio with strong environmental credentials,
becoming the REIT of choice for private and institutional investors seeking high and
stable dividends from well-diversified UK real estate.
Stakeholder interests
The Board recognises the importance of all stakeholder interests and keeps these at
the forefront of business and strategic decisions, ensuring the Company:
• Understands and meets the needs of its occupiers, owning fit for purpose
properties with strong environmental credentials in the right locations which
comply with safety regulations;
• Protects and improves its stable cash flows with long-term planning and decision
making, implementing its policy of paying dividends fully covered by recurring
earnings and securing the Company’s future; and
• Adopts a responsible approach to communities and the environment, actively
seeking ways to minimise the Company’s impact on climate change and providing the
real estate fabric of the economy, giving employers a place of business.
Investment Policy
The Company’s investment policy 17 14 is summarised below:
• To invest in a diverse portfolio of UK commercial real estate, principally
characterised by smaller, regional, core/core-plus 18 15 properties that
provide enhanced income;
• The property portfolio should be diversified by sector, location, tenant and
lease term, with a maximum weighting to any one property sector or geographic
region of 50%;
• To acquire modern buildings or those considered fit for purpose by occupiers,
focusing on areas with:
• High residual values;
• Strong local economies; and
• An imbalance between supply and demand.
• No one tenant or property should account for more than 10% of the rent roll at
the time of purchase, except for:
• Governmental bodies or departments; or
• Single tenants rated by Dun & Bradstreet as having a credit risk score worse than
two 19 16 , where exposure may not exceed 5% of the rent roll.
• Not to undertake speculative development, except for the refurbishment or
redevelopment of existing holdings;
• To seek further growth, which may involve strategic property portfolio
acquisitions and corporate consolidation; and
• The Company may use gearing provided that the maximum loan-to-value (“LTV”) shall
not exceed 35%, with a medium-term net gearing target of 25% LTV.
The Board reviews the Company’s investment objectives at least annually to ensure
they remain appropriate to the market in which the Company operates and in the best
interests of shareholders.
Differentiated property strategy
The Company’s portfolio is focused on smaller, regional, core/core-plus assets which
helps achieve our target of high and stable dividends from well-diversified real
estate by offering:
• An enhanced yield on acquisition – with no need to sacrifice quality of property,
location, tenant or environmental performance for income and with a greater share
of value in ‘bricks and mortar’;
• Greater diversification – spreading risk across more assets, locations and
tenants and offering more stable cash flows; and
• A higher income component of total return – driving out-performance with
forecastable and predictable returns.
Success in achieving the Company’s performance and sustainability objectives is, in
part, measured by performance against key performance indicators set out in detail in
the Financial review and ESG Committee reports respectively. The Principal risks and
uncertainties section of the Strategic Report sets out potential risks in achieving
the Company’s objectives.
Richard Shepherd-Cross, Investment Manager, commented: "Our smaller-lot specialism
has consistently delivered significantly higher yields with lower volatility without
exposing shareholders to additional risk”.
Growth strategy
The Board is committed to seeking further growth in the Company to increase the
liquidity of its shares and reduce ongoing charges. Our growth strategy involves:
• Organic growth through share issuance at a premium to NAV;
• Broadening the Company’s shareholder base, particularly through further
penetration into online platforms;
• Becoming the natural choice for private clients and wealth managers seeking to
invest in UK real estate;
• Taking investor market share from open-ended funds and peer group companies being
wound-down; and
• Strategic property portfolio acquisitions and corporate consolidation.
The Board ensures that property fundamentals are central to all decisions.
Diverse portfolio with institutional grade tenants
Weighting
by income
Weighting by income Location 31 March 2024
31 March 2024
West Midlands 20%
North-West 20%
Sector East Midlands 13%
South-East 11%
Industrial 40% Scotland 12%
Retail warehouse 23% South-West 10%
Office 16% North-East 9%
Other 13% Eastern 4%
High street retail 8% Wales 1%
Annual
passing rent % portfolio
income
(£m)
Top 10 tenants Asset locations
Aberdeen, Edinburgh, Glasgow,
Menzies Distribution Ipswich, Norwich, Dundee, Swansea, 1.5 3.6%
York
B&M Retail Swindon, Ashton-under-Lyne, Plymouth, 1.4 3.2%
Carlisle
Wickes Building Winnersh, Burton upon Trent, 1.2 2.8%
Supplies Southport, Nottingham
B&Q Banbury, Weymouth 1.0 2.3%
Matalan Leicester, Nottingham 1.0 2.3%
DFS Droitwich, Measham 0.9 2.1%
First Title (t/a Enact Leeds 0.8 1.9%
Conveyancing)
Zavvi Winsford 0.7 1.7%
Homebase Leighton Buzzard, Cromer 0.6 1.5%
Regus (West Malling) West Malling 0.6 1.5%
Experian tenant risk rating
31 March 2024
Sector
Government 2%
Very low risk 57%
Low risk 8%
Below average risk 13%
Above average risk 8%
High risk 2%
Other 10%
Our environmental, social and governance (“ESG”) objectives
• Improving the energy performance of our buildings - investing in carbon reducing
technology, infrastructure and onsite renewables and ensuring redevelopments are
completed to high environmental standards which are essential to the future
leasing prospects and valuation of each property
• Reducing energy usage and emissions - liaising closely with our tenants to gather
and analyse data on the environmental performance of our properties to identify
areas for improvement
• Achieving positive social outcomes and supporting local communities - engaging
constructively with tenants and local government to ensure we support the wider
community through local economic and environmental plans and strategies and
playing our part in providing the real estate fabric of the economy, giving
employers safe places of business that promote tenant well-being
• Understanding environmental risks and opportunities - allowing the Board to
maintain appropriate governance structures to ensure the Investment Manager is
appropriately mitigating risks and maximising opportunities
• Complying with all requirements and reporting in line with best practice where
appropriate - exposing the Company to public scrutiny and communicating our
targets, activities and initiatives to stakeholders
Investment Manager
Custodian Capital Limited (“the Investment Manager”) is appointed under an investment
management agreement (“IMA”) to provide property management and administrative
services to the Company. Richard Shepherd-Cross is Managing Director of the
Investment Manager. Richard has over 25 years’ experience in commercial property,
qualifying as a Chartered Surveyor in 1996 and until 2008 worked for JLL, latterly
running its national portfolio investment team.
Richard established Custodian Capital Limited as the Property Fund Management
subsidiary of Mattioli Woods plc (“Mattioli Woods”) and in 2014 was instrumental in
the launch of Custodian Property Income REIT from Mattioli Woods’ syndicated property
portfolio and its 1,200 investors. Following the successful IPO of the Company,
Richard has overseen the growth of the Company to its current property portfolio of
circa £600m.
Richard is supported by the Investment Manager’s other key personnel: Ed Moore -
Finance Director, Alex Nix - Assistant Investment Manager and Tom Donnachie -
Portfolio Manager, along with a team of five other surveyors and four accountants.
Chairman’s statement
In my first annual report as chairman of Custodian Property Income REIT, I am very
pleased to note March 2024 as a significant milestone for the Company, marking the 10
year anniversary since launch. Over the last decade there has been significant
amounts of change: politically; economically; and in terms of social volatility
including COVID.
During that time the Company has grown successfully and delivered on its objectives
with an over sixfold increase in the size of the portfolio delivering an average
annual NAV total return of 5.5%, paying an annual average 5.9p per share of fully
covered dividends and a decreasing ongoing charges ratio. This success has been
achieved by the Company’s resolute focus on its key strategic objectives: to be
fully invested in a portfolio of UK, commercial real estate, characterised by smaller
regional properties; and to provide enhanced income-centric total returns. Through
the growth of the Company we are able to provide access to the income advantages
offered by sub-institutional lot-sized properties to a broad range of institutional,
wealth management and private investors.
Corporate activity
During the last 12 months listed real estate news has been dominated by corporate
activity. The Boards of five of the Company’s close peer group determined that being
consolidated or selling their portfolio best solves the issue of trading at an
embedded deep discount to NAV, with another announcing a strategic review in April
2024. By this time next year Custodian Property Income REIT could be one of very few
active, genuinely diversified property investment companies available to investors in
the listed sector.
The Board believes strongly in the benefits of diversification in mitigating property
and sector specific risk, while still delivering dividends that are fully covered by
recurring earnings. The Board also remains firm in its belief that this is a strategy
that is well suited to long-term investors in real estate, allowing for the timely
execution of acquisitions and disposals without the constraints of sector
specificity, while setting the Company apart from the single sector, often higher
risk funds which have dominated the market over the last few years.
Performance
The Company’s NAV decreased by 5.9% during the year but at an increasingly slower
rate, quarter-on-quarter, as the impact of higher interest rates and investor
sentiment became fully reflected in valuations. The quarter ended 31 March 2024
recorded a marginal increase in NAV due to profitable disposals on the back of flat
valuations, suggesting an improving outlook, as rental growth and falling vacancy
rates start to have a positive impact. The first move down in interest rates should
be the real catalyst for a positive shift in sentiment towards real estate
investment, so later in 2024 could be a turning point in the market.
By applying its institutional expertise to the sector, through high quality asset
management, covenant management and portfolio construction, the Company is able to
provide an institutional offering to shareholders, generating superior income and,
notwithstanding recent volatility in pricing, Custodian Property Income REIT can look
back over a 10 year average annual NAV total return of 5.5% driven by strong
recurring earnings with fully covered dividends.
In a departure from other cycles, the valuation decreases arising from the recent
rerating have been at odds with occupational market sentiment, which has remained
robust. Our management of the portfolio and the types of assets we own are focused
on areas where occupational demand is strongest, allowing us to lease vacant space
across all sectors and deliver rental growth. Both rental growth and falling vacancy
have been a feature of the year’s performance, discussed in more detail in the
Investment Manager’s Statement, and reflected in EPRA earnings per share increasing
to 5.8p for the year compared to 5.6p in the previous year.
Despite stability in valuations and earnings, and the prospect of rental growth,
sentiment towards listed UK commercial real estate has caused weakness and volatility
in the share price. The relative weakness in the share price has enhanced the
Company’s dividend yield 20 17 , which we believe should be highlighted as a key
metric for analysts and shareholders in assessing the ‘worth’ of Custodian Property
Income REIT. The prevailing share price 21 18 implied a dividend yield of 8.3%,
compared to 6.3% and 5.8% at 31 March 2023 and 2022 respectively.
The Board continues to believe in the merits of the Company's income-focused
investment strategy with an emphasis on regional, below-institutional sized assets
that are well-positioned to deliver rental growth. These types of assets provide a
clear yield advantage over larger properties with similar tenant profiles and allow
us to generate higher income returns and capital growth for shareholders.
Dividends
The Company’s commitment to a property strategy that supports a relatively high
dividend, fully covered by EPRA earnings, remains a defining characteristic. In May
2024 the Board announced a 9% increase in the prospective dividend per share from
5.5p to 6.0p and a special dividend for the year of 0.3p per share to take the
dividend for the year to 5.8p, which is testament to that commitment.
These dividend increases, which are expected to be fully covered by net rental
income, reflect the improving earnings characteristics of the Company’s portfolio
with recent asset management initiatives and the profitable disposal of vacant
properties also increasing occupancy and crystallising rental growth. Our Investment
Manager continues to control costs tightly, while the Company’s substantially
fixed-rate debt profile is keeping borrowing costs below the current market rate.
Based on the current forward interest rate curve the Board expects that the ongoing
cost of the Company’s revolving credit facility will fall, improving earnings
further.
The Board’s objective remains to continue to grow the dividend at a rate which is
fully covered by net rental income and does not inhibit the flexibility of the
Company’s investment strategy.
Net asset value
The NAV of the Company at 31 March 2024 was £411.8m, approximately 93.4p per share:
Pence per share £m
NAV at 31 March 2023 99.3 437.6
Valuation decrease and depreciation (6.1) (27.1)
Profit on disposal of investment property 0.3 1.4
Net loss on property portfolio (5.8) (25.7)
EPRA earnings 5.8 25.7
Dividends paid during the year 22 19 (5.5) (24.2)
Costs of aborted acquisitions 23 20 (0.4) (1.6)
NAV at 31 March 2024 93.4 411.8
Valuations decreased by £27.1m during the year but appear to have now largely
stabilised and the Company saw a return to a positive quarterly NAV total return per
share in Q4 of 1.6%, and -0.4% for the full year as shown above. A property
valuation commentary is detailed in the Investment Manager’s report. The movement in
NAV also reflects the payment of interim dividends of 5.5p per share during the year,
but does not include any provision for the approved dividends totalling 1.675p per
share to be paid on 31 May 2024.
Strategy for future growth
On 19 January 2024 the Company announced a potential all-share merger with abrdn
Property Income Trust Limited (“API”) (“the Merger”) but at General Meetings on 27
March 2024 API shareholder support was below the requisite 75% needed to pass,
meaning the Merger did not proceed.
Having heeded clear calls from the market regarding the need for consolidation
amongst the listed REITs, we worked with our Investment Manager and the API board of
directors ("the API Board") to negotiate what we and the Company’s advisers believed
to be a fair deal for both our and API shareholders. Our proposal was fully aligned
with the existing investment strategies of both companies and structured on an
adjusted net asset-to-net basis to ensure that the exchange ratio was based upon the
latest respective underlying property valuations. Furthermore, it was unanimously
recommended by the API Board and allowed both API and our shareholders to benefit
from the long-term benefits of being invested in a combined business which brought
together two highly complementary portfolios, with a growing and fully covered
dividend.
We were therefore disappointed that despite very strong support from Company
shareholders, the majority of votes cast by API shareholder being in favour of the
resolutions was not enough to meet the 75% threshold required to approve the Merger.
In fact, shareholders accounting for just 14% of API's register proved sufficient to
prevent the resolutions passing. These votes were, we understand, primarily from
institutional investors who believe a 'managed wind-down' of API's portfolio will
better protect shareholder value, despite the API Board clearly and publicly opposing
this conclusion.
I would like to reiterate the point I made at the time of the transaction, that the
Board and our Investment Manager viewed the Merger as an augmentation of, rather than
critical to, the strategy that the Company has pursued successfully over the 10 years
since it launched in 2014. Instead of gaining a jump in scale via the Merger, the
Company will maintain its strategy of incremental growth and, most importantly,
continue to offer shareholders an attractive dividend from a highly diversified
portfolio, significant rental growth potential, low costs relative to its peers, as
well as a strong balance sheet with a low cost of debt.
Custodian Property Income REIT remains committed to growth, despite the thwarted
attempt to merge with API. Through the first 10 years of trading the Company has
grown, largely organically, but also via corporate acquisitions, with an over
six-fold increase in the size of the portfolio from £90m of property assets at IPO to
£589m currently across a portfolio of 155 properties, compared to 40 at launch. This
growth has not only improved shareholder liquidity, it has also increased
diversification, both mitigating property specific and tenant risk while stabilising
earnings.
The Board of Custodian Property Income REIT still believes that there is a strong
case for consolidation and we intend to seek opportunities to purchase complementary
portfolios via mergers or corporate acquisitions, similar to our successful
acquisition of Drum Income Plus REIT plc (“DRUM”) in 2021.
Borrowings
The Company’s net gearing increased from 27.4% LTV at 31 March 2023 to 29.2% during
the year. Property disposals since the year end have reduced pro-forma net gearing
to 27.9%, drawing the LTV closer to the Company’s 25% medium-term target.
The proportion of the Company’s drawn debt facilities with a fixed rate of interest
was 78% at 31 March 2024 (2023: 81%), significantly mitigating interest rate risk for
the Company and maintaining the accretive margin between the Company’s 4.1% (2023:
3.8%) weighted average cost of debt and property portfolio EPRA topped-up net initial
yield 24 21 (“NIY”) of 6.6% (2023: 6.2%).
The Company’s debt is summarised in Note 16.
Investment Manager
The performance of the Investment Manager is reviewed each year by the Management
Engagement Committee. During the year the fees charged by the Investment Manager
were £4.0m (2023: £4.5m) in respect of annual management, administrative and
transaction fees, resulting in an ongoing charges ratio excluding direct property
expenses of 1.24% (2023: 1.23%), which compares favourably to the peer group.
Further details of fees payable to the Investment Manager are set out in Note 19.
The Board continues to be pleased with the performance of the Investment Manager,
particularly its effective communication programme with shareholders, continued
successful asset management initiatives and capital improvements to the Company’s
portfolio, which mitigated decreases in valuations, enhanced the environmental
performance and maintained occupancy and income. As a result the Board believes the
continued appointment of the Investment Manager is in the interests of the
shareholders as a whole.
Board
Succession
After nine years as Chairman of the Company David Hunter retired at the annual
general meeting (“AGM”) on 8 August 2023, in line with the succession plan. David
chaired the board from the Company’s IPO in 2014. On behalf of my fellow Directors
and our shareholders, I would like to thank him for his significant contribution to
the development of the Company over that period. Following a search process in line
with the Company’s policy when hiring new board members, I joined the Board on 9 May
2023 and took over from David Hunter as Chairman at the 2023 AGM.
Diversity
The Board is conscious of the importance stakeholders place on diversity and
understands a diverse Board brings constructive challenge and fresh perspectives to
discussions. The Company follows the AIC Code which recommends:
• The Board has a combination of skills, experience and knowledge; and
• Both appointments and succession plans should be based on merit and objective
criteria and, within this context, should promote diversity of gender, social and
ethnic backgrounds, cognitive and personal strengths.
Sustainability
The Board recognises that its decisions have an impact on the environment, people and
communities. The Board also believes that the Company’s property strategy and ESG
aspirations create a compelling rationale to make environmentally beneficial
improvements to its property portfolio, which have a direct correlation on a
property’s ability to generate future income, and incorporate ESG best practice into
everything the Company does. Further details of the Company’s approach to
sustainability can be found in the ESG Committee report.
Investment policy
During the year, the Company amended its Investment Policy, as set out below, to
better align with its stated property and growth strategies and to provide more
flexibility when considering future acquisitions:
• Amending its target portfolio characteristics from ‘properties with individual
values of less than £15m at acquisition’ to ‘smaller, regional, core/core-plus
properties that provide enhanced income returns’. While smaller lot-size
properties will continue to dominate the strategy, we believe their
characteristics can be found in a wider range of properties that offer the same
enhanced income characteristics, which are not purely defined by lot-size.
• Clarifying that the Company’s growth strategy may involve strategic property
portfolio acquisitions and corporate consolidation, such transactions potentially
including public and private companies, holding companies and special purpose
vehicles.
General meeting voting
At the Company’s AGM on 8 August 2023 resolutions to re-elect Ian Mattioli and
Elizabeth McMeikan as Directors of the Company received votes against of 41.6% and
23.7% respectively, which comprised 9.8% and 5.8% respectively of total shareholders
due to a 23% turnout rate. I have since sought feedback from shareholders, which
identified that votes against were primarily a result of perceived ‘over-boarding’
due to Ian’s roles as CEO of Mattioli Woods plc and Chair of Kanabo Group plc, and
Elizabeth’s roles as Chair of Nichols plc and Non-Executive Director of Dalata Hotel
Group plc and McBride plc. These institutional shareholders applied stricter
internal voting policies than Institutional Shareholder Services which allow fewer
‘mandates’ and their voting policies do not acknowledge the generally lower time
commitments as Directors of investment companies or companies of a relatively small
size. The Nominations Committee is satisfied with Ian and Elizabeth’s attendance and
responsiveness to the demands of being Directors of the Company. I believe
additional roles offer Directors helpful insight and experience which benefits the
Boards on which they sit and I do not intend to ask my colleagues to reduce their
additional roles.
The Company’s Articles require that at every seventh AGM a Continuation Resolution be
proposed but at the 2020 AGM this was not brought to the attention of the Board and,
as a result, a Continuation Resolution was not proposed. On 21 November 2023 the
Company passed a Special Resolution at a General Meeting (“GM”) to release the
Company and its directors from an historical obligation to propose a Continuation
Vote at the 2020 AGM and ratify this breach of the Company’s Articles. The
Continuation Resolution in 2020 was overlooked during a period of strong performance
by the Company relative to its peers and amidst the COVID-19 pandemic. Shareholders
were not pressing for such a resolution at that time and the Board is not aware of
any desire for a Continuation Resolution to be considered at this stage either. As a
result, the Board did not propose a replacement Continuation Resolution at the GM and
the next Continuation Resolution will be proposed per the Articles at the fourteenth
AGM of the Company expected to be held in 2027.
Outlook
I am grateful for the support of a wide range of shareholders with the majority
classified as private client or discretionary wealth management investors. Custodian
Property Income REIT’s investment and dividend strategy and diversified portfolio are
well suited to investors looking for a close proxy to direct real estate investment
but in a managed and liquid structure.
While the Company’s portfolio is well placed to benefit from any upwards rerating in
sector valuations as the economy improves, capturing rental growth to support
earnings will continue to be the key focus of the Investment Manager as discussed in
its report. In an inflationary environment and with a lack of supply of modern,
smaller regional properties we expect to see continued rental growth over the year
ahead. Furthermore, where we can provide space that meets the modern environmental
standards demanded by both legislation and tenants, we expect to see additional
rental growth.
It will be this growth in income that is likely to form the greater component of
total return over the next phase of the property market and we believe that Custodian
Property Income REIT’s strong income yielding portfolio, supported by
higher-than-peer group EPRA EPS 25 22 , will continue to underpin shareholder
returns.
David MacLellan
Chairman
12 June 2024
Investment Manager’s report
The UK property market
The year to 31 March 2024 has felt like a turning point in the UK commercial property
market. Data shows the industrial and logistics sector, which represents 49% of the
Custodian Property Income REIT portfolio by value, has shown modest capital value
growth and consistent rental growth month on month. While retail and office values
have fallen, month on month falls have been at a decreasing rate, with retail moving
back into growth in March 2024. This return to growth was led by retail warehousing
which comprises 21% of Custodian Property Income REIT’s portfolio by value. Data
reported by CBRE highlights this slowing of valuation falls, recording all property
capital values decreasing by 3.9% in the 12 months to December 2023, but falling by
just 0.4% in the three months to March 2024 and only 0.1% in the month of March 2024.
This market data is supported by the performance of the Company’s portfolio which
recorded a cessation in valuation falls in the quarter ended 31 March 2024. The
first green shoots of investor confidence showed in early 2024, rooted in an
expectation of falling interest rates and an acknowledgement that, in many sectors of
the property market, valuations had adjusted sufficiently to reflect investor
sentiment. However, the early part of 2024 witnessed an increase in the five year
swap rate, and a hiatus in the improving inflation statistics. These factors may
have delayed a recovery, but a recovery is still expected over the next 12 months as
inflation settles and interest rate decreases follow.
Core statistics from the Company’s portfolio tell a more promising story than
investor sentiment might suggest. Over the year to 31 March 2024, on a like-for-like
basis, the contractual rental income of the portfolio has grown by 5.6% and the
estimated rental value has grown by 3.6%. Occupancy rates have increased from 90.3%
to 91.7% by the year end, and post year end have improved still further to c.93%.
This points to the strength in occupational markets and a greater level of confidence
from tenants than from investors. These positive numbers are set against a portfolio
valuation which fell modestly, on a like-for-like basis by 4.0%, but was flat for the
final quarter, supporting the suggestion that we may have reached a turning point in
sentiment and valuations.
Further support for a recovery comes from a recent report from Acuitus on the
commercial auction market, which recorded the busiest first quarter since the
previous peak in Q1 2017. Prior cycles’ data shows that increased activity in the
commercial auction market has been a lead indicator for a general market recovery, by
some nine months.
The table below shows the reversionary potential of the portfolio by sector, by
comparing EPRA topped-up NIY to the equivalent yield, which factors in expected
rental growth and the letting of vacant units. Across the whole portfolio, valuers’
estimated rental values are 15% (2023: 16%) ahead of passing rent and while part of
the reversionary potential is due to vacancy, the balance is this latent rental
growth which will be unlocked at rent review and lease renewal.
EPRA topped-up NIY
Equivalent yield 26 23
31 March 2024
31 March 2024
Sector
Industrial 5.4% 6.7%
Retail warehouse 8.0% 7.4%
Other 7.1% 8.0%
Office 7.1% 9.8%
High street retail 9.9% 8.1%
6.6% 7.5%
Prevailing property investment approach
Based on our assessment of the current market, our strategy of a regionally focused
diversified portfolio, set out below, has proven resilient. We expect to reinvest
the proceeds from selective disposals in funding capital expenditure to improve the
environmental credentials of the portfolio and to pay down variable rate debt. Over
the long-term we intend to focus on:
• Maintaining weighting to industrial and logistics – assets in this sector still
have latent rental growth and strong occupier demand for small/’mid-box’ units;
• Retail warehousing let off low rents which are starting to show rental growth and
supply side restrictions;
• Selective regional offices with a focus on strong city centre locations instead
of out-of-town business parks;
• Drive-through expansion involving acquisition and development where rental growth
is anticipated;
• Selective high street retail assets in the country’s strongest locations where
rents have stabilised and there is potential for growth; and
• Refurbishment of existing property, maximising all opportunities to invest in the
quality of our assets and support our ESG goals.
Sectoral view
Industrial and logistics
Rental growth remains strongest in the industrial and logistics sector which accounts
for the largest share of the Company’s rent roll. Lack of supply, and in some urban
areas reducing supply, limited development of smaller and ‘mid-box’ industrial units
and construction cost inflation have all combined to focus occupational demand and
create low vacancy rates, driving rental growth for new-build regional industrial
units and well specified, refurbished space. The industrial sector is also providing
the greatest opportunity for solar panels, generally referred to as photovoltaic
(“PV”) installations, which is not only delivering on our environmental commitments
but also growing revenue through the sale of the electricity generated to tenants via
a power purchase agreement.
In summary:
• Occupational demand is robust
• Limited supply of modern, “low carbon”, buildings
• Latent rental growth potential
• Target sector for well-priced opportunities
Retail warehouse
Retail warehousing pricing has shown much greater volatility than demonstrated by the
leasing market where we are starting to experience some rental growth, particularly
in our favoured sub-sectors of food, homewares, DIY and the discounters. Vacancy
rates are very low and future rental growth appears affordable for occupiers.
The combination of convenience, lower costs per square foot and the complementary
offer to online retail has kept these assets trading strongly. As the second largest
sector in the Custodian Property Income REIT portfolio, the recovery in market
sentiment towards out-of-town retail is positive and vacancy rates remain low.
In summary:
• Units let off low rents
• Lower costs of occupation
• Complementary to online
Offices
In the office sector, a much clearer picture is emerging of how tenants will use and
occupy offices in the new world of hybrid working. Occupiers are demanding much
higher levels of amenity both from their offices and from their office locations.
This favours modern, flexible office space in city centre locations with strong
transport links and high environmental credentials. Where this space can be provided
there appears to be meaningful rental growth, but conversely office space that cannot
meet these criteria risks becoming obsolete and will need to be re-purposed. In our
portfolio we have seen strong rental growth in Oxford and central Manchester where we
have refurbished offices to meet the new market demand, despite overall valuation
decreases from negative market sentiment. Meanwhile, over the past few years, we
have been selling out of town, business park offices where rental growth prospects
are low, and/or vacancy risks are high.
While there is talk of ‘stranded assets’ that are incapable of meeting modern
environmental standards, obsolescence in commercial property and particularly in
offices is a well understood concept. For many years offices have required regular
updating and refurbishment to meet prevailing tenant requirements. The focus on
environmental improvements is little different and we believe that the offices in the
portfolio will be able to keep up with modern requirements or be profitably
re-purposed.
In summary:
• Occupiers demanding much higher levels of amenity
• Strong rental growth in key locations
• Valuation decreases reflect overall negative sentiment
High street retail
We have been a seller of smaller retail units in market towns where we do not
forecast rental growth. We continue to see low vacancy rates in prime locations and
occupier demand, from both retail and leisure operators, should be supportive of
future rental growth.
In summary:
• Low vacancy rates in prime locations
• Rents have bottomed out
• Rental yields are supporting dividends
Other
Weighting Weighting
by income by income
31 March 2024 31 March 2023
Sub-sector of ‘Other’ sector assets
Gym 18% 18%
Drive-through 17% 17%
Motor trade 17% 16%
Pub and restaurant 15% 20%
Leisure 13% 13%
Other, including day nursery and hotel 13% 8%
Trade counter 7% 8%
100% 100%
The additional diversification provided by the ‘other’ or ‘alternative’ sector of the
commercial property market has long been a differentiator and mitigator of risk for
the Company. It continues to be a target sector with opportunities for the
development of drive-through units being explored on existing sites and the roll out
of public access electric vehicle (“EV”) chargers on retail parks adding to the rent
roll.
Property portfolio balance
Property portfolio summary
2024 2023
Property portfolio value 27 24 £589.1m £613.6m
Separate tenancies 335 319
EPRA vacancy rate 8.3% 9.7%
Assets 155 161
Weighted average unexpired lease term to first break of expiry 4.9 years 5.0 years
(“WAULT”)
EPRA topped-up NIY 6.6% 6.2%
Weighted average EPC rating C (53) C (58)
The property portfolio is split between the main commercial property sectors in line
with the Company’s objective to maintain a suitably balanced investment portfolio.
The Company’s strategy since IPO has been a relatively low exposure to office and
high street retail combined with a relatively high weighting to the industrial and
alternative sectors, often referred to as ‘other’ in property market analysis. The
current sector weightings are:
Valuation Weighting by Valuation Weighting
income 28 25 by income Valuation
31 March 31 March movement
2024 31 March 2023 31 March Weighting Weighting
£m by value by value
£m 2024 £m 2023 31 March 31 March
2024 2023
Sector
Industrial 291.4 40% 295.1 40% 0.4 49% 48%
Retail 122.7 23% 131.8 23% (10.2) 21% 21%
warehouse
Other 78.8 13% 78.6 13% (1.2) 13% 13%
Office 63.9 16% 71.7 16% (13.5) 11% 12%
High
street 32.3 8% 36.4 8% (2.5) 6% 6%
retail
Total 589.1 100% 613.6 100% (27.0) 100% 100%
For details of all properties in the portfolio please see
29 custodianreit.com/property/portfolio.
Disposals
Owning the right properties at the right time is a key element of effective property
portfolio management, which necessarily involves periodically selling properties to
balance the property portfolio. Custodian Property Income REIT is not a trading
company but identifying opportunities to dispose of assets significantly ahead of
valuation or that no longer fit within the Company’s investment strategy is
important.
The Company sold the following properties during the year for an aggregate
consideration of £18.2m, reflecting an aggregate premium of 12% to 31 March 2023
valuations (shown below):
• Industrial unit in Milton Keynes for £8.0m, £1.0m ahead of valuation;
• Industrial unit in Weybridge for £6.0m, £0.1m ahead of valuation;
• Offices on Pride Park, Derby for £2.0m, £0.6m ahead of valuation;
• Day nursery in Chesham for £0.6m, £0.1m below valuation; and
• High street retail units in Cirencester and Bury St Edmunds for £1.6m at
valuation.
Since the year end the Company has sold a vacant industrial unit in Warrington for
£9.0m and a vacant former car showroom in Redhill for £2.3m, which had an aggregate
year-end value of £11.0m.
Asset management
During the year we have remained focused on active asset management, completing 15
rent reviews at an aggregate 23% increase in annual rent from £2.8m to £3.4m, along
with 47 new lettings, lease renewals and lease regears, with rental levels remaining
affordable to our occupiers. In aggregate these initiatives increased property
capital value by £9.5m.
ESG
The sustainability credentials of both the building and the location have become ever
more important for occupiers and investors. As Investment Manager we are absolutely
committed to achieving the Company’s challenging goals in relation to ESG and believe
the real estate sector should be a leader in this field.
The weighted average EPC across the portfolio is following a positive trajectory
towards an average B rating (equivalent to a score of between 25 and 50). With
energy efficiency a core tenet of the Company’s asset management strategy and with
tenant requirements aligning with our energy efficiency goals we see this as an
opportunity to secure greater tenant engagement and higher rents.
Outlook
We remain confident that our ongoing close asset management of the portfolio, which
still offers a number of wide-ranging opportunities to add value, will unlock its
reversionary potential, enhance cash flow and support consistent returns. Coupled
with the strength of the Company’s balance sheet, this has enable growth in the
dividend and should continue to support our high income return strategy.
Richard Shepherd-Cross
for and on behalf of Custodian Capital Limited
Investment Manager
12 June 2024
Financial review
A summary of the Company’s financial performance for the year is shown below:
Year ended Year ended
Financial summary 31 March 2024 31 March 2023
£000
£000
Rental revenue 42,194 40,558
Other income 195 63
Expenses, net tenant recharges and finance costs (16,647) (15,833)
EPRA profits 25,742 24,788
Abortive acquisition costs (1,557) -
Net loss on investment property and depreciation (25,687) (90,609)
Loss before tax (1,502) (65,821)
EPRA EPS (p) 5.8 5.6
Dividend cover 100.7% 102.2%
OCR excluding direct property costs 1.24% 1.23%
Borrowings
Net gearing 29.2% 27.4%
Weighted average debt maturity 5.3 years 5.9 years
Weighted average cost of drawn debt 4.1% 3.8%
Rental revenue increased by 4.0% compared to the year ended 31 March 2023 with
contractual passing rent increasing by 2.6% from £42.0m to £43.1m during the year,
driven primarily by occupancy improving from 90.3% to 91.7%.
During the year we deployed £19.0m (2023: £11.1m) of variable rate debt on property
redevelopments and refurbishments, including spend on EV chargers and PV
installation. This capital expenditure was primarily incurred on Leeds and
Manchester offices and industrial units in Redditch and Ashby-de-la-Zouch. The
aggregate estimated rental value (“ERV”) of these assets has increased by 21.7% since
commencement of these works, which will be reflected in subsequent year earnings when
the properties are let.
Base rate (SONIA) increased from c.4.2% to c.5.2% during the year and, in aggregate,
these rising interest rates and deployment of debt increased finance costs on the
Company’s variable rate revolving credit facility (“RCF”) facility. However, growth
in the rent roll more than offset these costs, increasing EPRA earnings per share to
5.8p (2023: 5.6p), facilitating payment of a fully covered ‘special’ dividend on 31
May 2024. This increase in recurring earnings demonstrates the robust nature of the
Company’s diverse property portfolio despite significant economic headwinds.
During the year sentiment towards real estate continued to be affected by concerns
over high interest rates and the outlook for medium-term earnings, although Q4 showed
a flat like-for-like valuation movement following 18 months of previous decreases
which offered some optimism. Over the entire year, however, this overall sentiment
resulted in a £27.0m valuation decrease (2023: £95.0m decrease) and an associated
loss before tax of £1.5m (2023: £65.8m loss).
Dividends
The Company paid dividends totalling 5.5p per share during the year (£24.2m)
comprising a fourth interim dividend relating to the year ended 31 March 2023 of
1.375p, and three quarterly interim dividends of 1.375p per share relating to the
year ended 31 March 2024.
On 31 May 2024 the Company paid a fourth quarterly interim dividend per share of
1.375p for the quarter ended 31 March 2024 and a special dividend of 0.3p per share
relating to the year, totalling £7.4m. Dividends relating to the year ended
31 March 2024 of 5.8p (2023: 5.5p) were 100.7% (2023: 102.2%) covered by EPRA
earnings of £25.7m (2023: £24.8m), as calculated in Note 22.
Debt financing
The Company operates with a conservative level of net gearing, with target borrowings
over the medium-term of 25% of the aggregate market value of all properties at the
time of drawdown. The Company’s net gearing increased from 27.4% LTV last year to
29.2% at the year end primarily due to £27.0m of valuation decreases and £19.0m of
deployment on capital expenditure.
On 10 November 2023 the Company agreed an extension to the RCF with Lloyds Banking
Group plc (“Lloyds”) for a term of three years, with options to extend the term by a
further year on each of the first and second anniversaries of the renewal. The RCF
includes an ‘accordion’ option with the facility limit initially set at £50m, which
can be increased up to £75m subject to Lloyds’ agreement. The headline rates of
annual interest now include a LIBOR transition fee previously applied separately,
increasing by 12bps to between 1.62% and 1.92% above SONIA, determined by reference
to the prevailing LTV ratio. As a result there is no change to the aggregate margin
from the renewal.
At the year end the Company had the following facilities available:
• A £50m RCF with Lloyds with interest of between 1.62% and 1.92% above SONIA,
determined by reference to the prevailing LTV ratio of a discrete security pool
of assets, and expiring on 10 November 2026 (with extension options to 2028).
The facility limit can be increased to £75m with Lloyds’ approval;
• A £20m term loan facility with Scottish Widows Limited (“SWIP”) repayable in
August 2025, with fixed annual interest of 3.935%;
• A £45m term loan facility with SWIP repayable in June 2028, with fixed annual
interest of 2.987%; and
• A £75m term loan facility with Aviva Real Estate Investors (“Aviva”) comprising:
• A £35m tranche repayable on 6 April 2032, with fixed annual interest of 3.02%;
• A £15m tranche repayable on 3 November 2032 with fixed annual interest of 3.26%;
and
• A £25m tranche repayable on 3 November 2032 with fixed annual interest of 4.10%.
Each facility has a discrete security pool, comprising a number of the Company’s
individual properties, over which the relevant lender has security and the following
covenants:
• The maximum LTV of each discrete security pool is either 45% or 50%, with an
overarching covenant on the Company’s property portfolio of a maximum of either
35% or 40% LTV; and
• Historical interest cover, requiring net rental income from each discrete
security pool, over the preceding three months, to exceed either 200% or 250% of
the facility’s quarterly interest liability.
At the year end the Company had £105.3m (18% of the property portfolio) of
unencumbered assets which could be charged to the security pools to enhance the LTV
on the individual loans.
The weighted average cost of the Company’s drawn debt facilities at 31 March 2023 was
4.1% (2023: 3.8%), with a weighted average maturity of 5.3 years (2023: 5.9 years).
At 31 March 2024 the Company had £39.0m (2023: £33.5m) drawn under its Lloyds RCF,
meaning 78% (2023: 81%) of the Company’s drawn debt facilities were at fixed rates of
interest.
This high proportion of fixed rate debt significantly mitigates long-term interest
rate risk for the Company and provides shareholders with a beneficial margin between
the fixed cost of debt and income returns from the property portfolio.
The current SONIA forward curve indicates an expectation of decreasing interest rates
over the next four years which would boost earnings.
Key performance indicators
The Board reviews the Company’s quarterly performance against a number of key
financial and non-financial measures:
• EPS and EPRA EPS – reflect the Company’s ability to generate recurring earnings
from the property portfolio which underpin dividends;
• Dividends per share and dividend cover - to provide an attractive level of income
to shareholders, fully covered from net rental income. The Board reviews target
dividends in conjunction with detailed financial forecasts to ensure that target
dividends are being met and are maintainable;
• Target dividend per share – an expectation of the Company’s ability to deliver an
income stream to shareholders for the forthcoming year;
• NAV per share total return – reflects both the NAV growth of the Company and
dividends payable to shareholders. The Board assesses NAV per share total return
over various time periods and compares the Company's returns to those of its peer
group of listed, closed-ended property investment funds;
• Share price total return – reflects the movement in share price and dividends
payable to shareholders, giving returns that were available to shareholders
during the year;
• NAV/NTA per share, share price and market capitalisation – reflect various
measures of shareholder value at a point in time;
• Net gearing – measures the Company’s borrowings as a proportion of its investment
property, balancing the additional returns available from utilising debt with the
need to effectively manage risk;
• Weighted average cost of debt – measures the cost of the Company’s borrowings
based on amounts drawn and base rate at the year end;
• OCR – measures the annual running costs of the Company and indicates the Board’s
ability to operate the Company efficiently, keeping costs low to maximise
earnings from which to pay fully covered dividends; and
• Weighted average EPC rating – measures the overall environmental performance of
the Company’s property portfolio.
The Board considers the key performance measures over various time periods and
against similar funds. A record of these measures is disclosed in the Financial
highlights and performance summary, the Chairman's statement and the Investment
Manager's report.
EPRA performance measures
EPRA Best Practice Recommendations, which are APMs, have been disclosed to facilitate
comparison with the Company’s peers through consistent reporting of key real estate
specific performance measures.
2024 2023
EPRA EPS (p) 5.8 5.6
EPRA Net Tangible Assets (“NTA”) and Net Reinstatement Value (“NRV”) per 93.4 99.3
share (p)
EPRA Net Disposal Value (“NDV”) per share (p) 97.3 101.0
EPRA NIY 6.3% 5.8%
EPRA ‘topped-up’ NIY 6.6% 6.2%
EPRA vacancy rate 8.3% 9.7%
EPRA cost ratio (including direct vacancy costs) 22.0% 23.3%
EPRA cost ratio (excluding direct vacancy costs) 17.7% 18.7%
EPRA LTV 29.6% 27.3%
EPRA capital expenditure (£m) 17.0 63.7
EPRA like-for-like annual rent (£m) 41.0 36.6
• EPRA EPS – a key measure of the Company’s underlying operating results and an
indication of the extent to which current dividend payments are supported by
earnings
• EPRA NAV per share metrics – make adjustments to the NAV per the IFRS financial
statements to provide stakeholders with information on the fair value of the
assets and liabilities of a real estate investment company, under different
scenarios. EPRA NTA - assumes that entities buy and sell assets, thereby
crystallising certain levels of unavoidable deferred tax. EPRA NDV – includes an
adjustment for the fair value of fixed rate debt.
• EPRA NIY and ‘topped-up’ NIY – alternative measures of property portfolio
valuation based on cash passing rents at the reporting date and once lease
incentive periods have expired, net of vacant property operating costs
• EPRA vacancy rate – ERV of vacant space as a percentage of the ERV of the whole
property portfolio and offers insight into the additional rent generating
capacity of the portfolio.
• EPRA cost ratios – alternative measures of ongoing charges based on expenses,
excluding operating expenses of rental property recharged to tenants, but
including increases in the doubtful debt provision, compared to gross rental
income
• EPRA LTV – a measure of gearing including all payables and receivables
• EPRA capital expenditure - capital expenditure incurred on the Company’s property
portfolio during the year
• EPRA like-for-like rental growth - a measure of passing rent of the property
portfolio, excluding acquisitions and disposals
• EPRA Sustainability Best Practice Recommendations – environmental performance
measures focusing on emissions and resource consumption which create transparency
to potential investors by enabling a comparison against peers and set a direction
towards improving the integration of ESG into the management of the Company’s
property portfolio.
Outlook
The Company’s business model has remained resilient during the year and we have
further mitigated against refinancing risk by renewing the Company’s RCF. We have a
scalable cost structure and flexible capital structure to be on the front foot when
opportunities present themselves to raise new equity and exploit acquisition
opportunities.
Ed Moore
Finance Director
for and on behalf of Custodian Capital Limited
Investment Manager
12 June 2024
Principal risks and uncertainties
The Board has overall responsibility for reviewing the effectiveness of the system of
risk management and internal control which is operated by the Investment Manager.
During the year the Board has performed a robust assessment of the principal and
emerging risks facing the Company through a periodic review of its risk register.
The Company’s risk management process is designed to identify, evaluate and mitigate
the significant risks the Company faces. At least annually, the Board undertakes a
risk review, with the assistance of the Audit and Risk Committee, to assess the
effectiveness of the Investment Manager’s risk management and internal control
systems. During this review, no significant failings or weaknesses were identified
in respect of risk management, internal control and related financial and business
reporting. Further information on the risk governance and risk management processes
are included in the Internal control and risk management section of the Governance
report.
The Company holds a portfolio of high quality property let predominantly to
institutional grade tenants and is primarily financed by fixed rate debt. It does
not undertake speculative development.
There are a number of potential risks and uncertainties which could have a material
impact on the Company's performance over the forthcoming financial year and could
cause actual results to differ materially from expected and historical results. The
Directors have assessed the risks facing the Company, including risks that would
threaten the business model, future performance, solvency or liquidity. The table
below outlines the principal risks identified, but does not purport to be exhaustive
as there may be additional risks that materialise over time that the Company has not
yet identified or has deemed not likely to have a potentially material adverse effect
on the business.
Overall
Risk on business Likelihood and change in Mitigating factors Appetite
impact risk from
last year
• Diverse property
portfolio
covering all key
sectors and
geographical
areas
Loss of revenue • The Company has
335 individual
• Tenant default tenancies with
due to a the largest
cessation or tenant
curtailment of accounting for
trade 3.6% of the rent
• An increasing roll
number of • Investment
tenants policy limits
exercising the Company’s
contractual Likelihood: rent roll to no
breaks or not Moderate more than 10%
renewing at from a single
lease expiry tenant and 50% The Board
• Enforced from a single relies on the
reduction in Impact: High sector Investment
contractual • Primarily Manager’s
rents through a No change institutional processes
CVA or grade tenants regarding due
legislative Loss of revenue • Focused on diligence on
changes has an immediate established acquisitions
• Property impact on Discussed business and lettings.
environmental earnings and further in locations for A degree of
performance dividend the investment tenant
insufficient to capacity. There Investment • Active covenant risk
attract tenants is also an Manager’s management of and short
or maintain increased risk report lease expiry WAULTs are
rents of breaching profile accepted due
• Decreases in interest cover considered in to the nature
ERVs resulting covenants on forming of the
in decreases in borrowings acquisition and business
passing rent to detailed in Note disposal
secure long-term 16, which could decisions
occupancy ultimately lead • Building
• Expiries or to default. specifications
breaks typically not
concentrated in tailored to one
a specific year user
• Unable to re-let • Strong tenant
void units relationships
• Low UK economic • Significant
growth impacting focus and
the occupational pro-active
property market investment in
asset-by-asset
environmental
performance to
maintain or
improve rental
levels
• Occupational
demand has been
resilient during
the year despite
economic
Decreases in headwinds
property portfolio • Active property
valuation portfolio
Likelihood: Decreased – diversification
• Reduced property Moderate the rate of between office,
market sentiment valuation industrial
and investor decreases (distribution,
demand affecting has fallen manufacturing There is no
market pricing Impact: Moderate during the and certainty that
• Decreases in year due to warehousing),
sector-specific stabilising retail property
ERVs UK economic warehousing, values will be
• Loss of Significant outlook, high street realised.
contractual valuation and the retail and other
revenue decreases potential • Investment This is an
• Tenants increase the for policy limits inherent risk
exercising risk of interest the Company’s of property
contractual non-compliance rate property investment.
breaks or not with LTV decreases portfolio to no
renewing at covenants on following more than 50% in The Investment
lease expiry borrowings, improving any specific Manager aims
• Change in demand detailed in Note inflation sector or to minimise
for space 16, which could figures geographical this risk
• Property ultimately lead region through its
environmental to default. The • Smaller lot-size asset
performance Company’s business model selection
insufficient to sensitivity to Discussed limits exposure
attract tenants valuation further in to individual and active
• Properties decreases is the asset values asset
concentrated in considered in Chairman’s • High quality management
a specific Going concern statement assets in good initiatives.
geographical and longer-term and locations should
location or viability below Investment remain popular
sector Manager’s with investors
• Lack of report • Significant
transactional focus on
evidence asset-by-asset
ESG performance
and pro-actively
investing in
environmental
performance to
maintain or
improve demand
Likelihood:
Moderate
• The Company has
three lenders
Impact: High • The Company’s
weighted average
maturity on its The Board and
debt is c. six Investment
Financial Increases in years Manager focus
interest rates • Target net
• Reduced in the gearing of 25% on having
availability or short-term LTV on property funding in
increased cost reduce earnings portfolio place to take
of arranging or and dividend • 78% of drawn advantage of
servicing debt capacity to the debt facilities opportunities
• Breach of extent the at the year end as they arise.
financial and Company has No change at a fixed rate
non-financial drawn balances of interest The Board’s
borrowing on its variable • Significant aim is to
covenants rate RCF. Lack unencumbered minimise this
• Significant of availability properties risk to the
increases in of financing available to extent
interest rates would have a cure any possible
• Refinancing risk significant potential through
from upcoming impact on breaches of LTV arranging
expiries property covenants longer-term
strategy if • Ongoing facilities.
properties monitoring and
needed to be management of
sold to repay the forecast
loans. liquidity and
covenant
position
• Ongoing review
of performance
Likelihood: Low by independent
Board of
Directors
• Outsourced
Impact: High internal audit
function
Operational reporting
directly to the
• Inadequate Increased risk Audit and Risk The Board
performance, of sub-optimal Committee relies on the
controls or returns • External Investment
systems operated impacting depositary with Manager’s
by the earnings and No change responsibility processes. Its
Investment dividend for safeguarding appetite for
Manager capacity, assets and such
• Over-reliance on ineffective risk performing cash
key investment or threat monitoring risk is low
manager management or • The Investment
personnel decisions made Management
on inaccurate Agreement
information. contain key
personnel
Inability to provisions
retain or designed to
recruit staff of mitigate the
an appropriate potential impact
calibre of key
individuals
leaving
• Strong
compliance
culture
• External
professional
Regulatory and legal advisers are
Likelihood: Low engaged to
• Adverse impact review and
of new or advise upon
revised control
legislation or Impact: High environment,
regulations, or ensure
by changes in regulatory
the compliance and
interpretation Reputational advise on the
or enforcement damage could impact of
of existing impact demand changes
government for shares. • Business model The Board has
policy, laws and Earnings and and culture no appetite
regulations dividend No change embraces FCA for
• Non-compliance capacity would principles non-compliance
with the REIT decrease with • REIT regime
regime 30 26 penalties/fines compliance is
or changes to for considered by
the Company’s non-compliance the Board in
tax status or through an assessing the
• Properties increased tax Company’s
aren’t compliant charge financial
with prevailing position and
fire safety Remedial costs setting
legislation or claims could dividends and by
be substantial the Investment
Manager in
making
operational
decisions
• Fire safety
policy goes over
and above
minimum
requirements
• Data is
regularly backed
up and
replicated and
the Investment
Manager’s IT
systems are
Likelihood: protected by
Business Moderate anti-virus
interruption software and
firewalls that
• Cyber-attack are regularly
results in the Impact: High updated
Investment • Fire protection
Manager being and
unable to use access/security The Board
its IT systems Reputational procedures are relies on the
and/or losing damage from not in place at all Investment
data being able to of the Company’s Manager’s
• Terrorism or communicate with No change managed processes. It
pandemics shareholders on properties has no
interrupt the a timely and • Comprehensive appetite for
Company’s accurate basis. property damage such risk
operations Loss of earnings and business
through impact and dividend interruption
on either the capacity if insurance is
Investment contractual held, including
Manager or the rents not three years’
Company’s assets invoiced. Fines lost rent and
or tenants and penalties terrorism
from • At least
non-compliance annually, a fire
with reporting risk assessment
requirements. and health and
safety
inspection is
performed for
each property in
the Company’s
managed
portfolio
• The Company has
engaged
specialist
environmental
consultants to
advise the Board
on compliance
with
requirements and
adopting best
practice where
ESG possible
• The Company has
• Failure to a published ESG
appropriately policy which
manage the seeks to improve
environmental energy
performance of efficiency and
the property reduce emissions
portfolio, • The ESG
resulting in it Likelihood: Committee
not meeting the Moderate ensures
required compliance with
standards of environmental
environmental requirements,
legislation and Impact: Moderate the ESG policy
making and
properties environmental The Board has
unlettable or KPIs a low
unsellable Risk of No change • At a property tolerance for
• ESG policies and reputational level an non-compliance
targets being damage, environmental with risks
insufficient to suboptimal assessment is that adversely
meet the returns for Discussed undertaken which impact
required shareholders, further in influences reputation,
standards of decreased asset the ESG decisions stakeholder
stakeholders liquidity, Committee regarding sentiment and
• Non-compliance reduced access report acquisitions, asset
with to debt and refurbishments liquidity.
environmental capital markets and asset
reporting and poor management
requirements relationships initiatives
• Insufficient with • Upgrading power
electricity stakeholders supplies where
supply to availability
maintain tenant permits
requirements for • All investments
clean energy due are scrutinised
to inadequate by the
infrastructure Investment
• Unsuccessful Manager’s
investment in Investment
new technology Committee.
Investment
Committee
reports include
a dedicated ESG
rationale.
Carbon reducing
technology is a
key part of the
carbon-reduction
strategy but is
not invested in
speculatively
and only
established
products are
considered.
• Comprehensive
due diligence is
undertaken in
Acquisitions conjunction with
professional
• Unidentified Likelihood: Low advisers and the
liabilities provision of The Board
associated with insured accepts risk
the acquisition warranties and with such
of new Impact: Moderate No change indemnities are transactions
properties sought from with the
(whether vendors where mitigations
acquired appropriate opposite used
directly or via Decrease in NAV • Acquired to manage risk
a corporate and loss of companies’ trade where possible
structure) shareholder and assets are
value hived-up into
Custodian
Property Income
REIT plc and the
acquired
entities are
subsequently
liquidated
Emerging risks
No emerging risks have been added to the Company’s risk register during the year,
albeit the impact of the ongoing conflicts in Ukraine and Gaza add to uncertainty
over the global macroeconomic outlook.
Going concern and longer-term viability
The Board assesses the Company’s prospects over the long-term, taking into account
rental growth expectations, climate related risks, longer-term debt strategy,
expectations around capital investment in the portfolio and the UK’s long-term
economic outlook. At quarterly Board meetings, the Board reviews summaries of the
Company’s liquidity position and compliance with loan covenants, as well as forecast
financial performance and cash flows.
Forecast
The Investment Manager maintains a detailed forecast model projecting the financial
performance of the Company over a period of three years, which provides a reasonable
level of accuracy regarding projected lease renewals, asset-by-asset capital
expenditure, property acquisitions and disposals, rental growth, interest rate
changes, cost inflation and refinancing of the Company’s debt facilities ahead of
expiry. The detailed forecast model allows robust sensitivity analysis to be
conducted and over the three year forecast period included the following assumptions:
• A 1% annual loss of contractual revenue through CVA or tenant default;
• No changes to the demand for leasing the Company’s assets going forwards,
maintaining the prevailing occupancy rate;
• No portfolio valuation movements;
• Completing a programme of asset disposals;
• Rental growth, captured at lease expiry, based on current ERVs adjusted for
consensus forecast changes;
• The Company’s capital expenditure programme to invest in its existing assets
continues as expected; and
• Interest rates follow the prevailing forward curve.
The Directors have assessed the Company’s prospects and longer-term viability over
this three-year period in accordance with Provision 36 of the AIC Code, and the
Company’s prospects as a going concern over a period of 12 months from the date of
approval of the Annual Report, using the same forecast model and assessing the risks
against each of these assumptions.
The Directors note that the Company has performed strongly during the year despite
economic headwinds and valuation decreases, with like-for-like rents and occupancy
increasing over the last 12 months.
Sensitivities
Sensitivity analysis involves flexing key assumptions, taking into account the
principal risks and uncertainties and emerging risks detailed in the Strategic
Report, and assessing their impact on the following areas:
Covenant compliance
The Company operates the loan facilities summarised in Note 16. At 31 March 2024 the
Company had sufficient headroom on lender covenants at a portfolio level with:
• Net gearing of 29.2% compared to a maximum LTV covenant of 35% on its Aviva
facilities and 40% on its Lloyds and SWIP facilities, with £105.3m (18% of the
property portfolio) unencumbered by the Company’s borrowings; and
• 63% minimum headroom on interest cover covenants for the quarter ended 31 March
2024.
Over the one and three year assessment periods the Company’s forecast model projects
a small increase in net gearing and an increase in headroom on interest cover
covenants. Reverse stress testing has been undertaken to understand what
circumstances would result in potential breaches of financial covenants over these
periods. While the assumptions applied in these scenarios are possible, they do not
represent the Board’s view of the likely outturn, but the results help inform the
Directors’ assessment of the viability of the Company. The testing indicated that:
• The rate of loss of contractual rent on the borrowing facility with least
headroom would need to deteriorate by 10% (for the going concern assessment
period) to breach its interest cover covenant from the levels included in the
Company’s prudent base case forecasts, assuming no unencumbered properties were
charged. This loan expires in August 2025 and for the remainder of the
longer-term viability assessment period contractual rent on properties secured
under the loan with next least headroom would need to deteriorate by 22% to
breach its interest cover covenant, assuming no unencumbered properties were
charged; or
• At a portfolio level, property valuations would have to decrease by 17% from the
31 March 2024 position to risk breaching the overall 35% LTV covenant for both
assessment periods. Note 10 details the expected movements in the valuation of
investment properties if the equivalent yield at 31 March 2024 is increased or
decreased by 0.25% and if the estimated rental value is increased or decreased by
5.0%, which the Board believes are reasonable sensitivities to apply given
historical changes.
The Board notes that the February 2024 IPF Forecasts for UK Commercial Property
Investment survey suggests an average 2.0% increase in rents during 2024 with capital
value increases of 0.8%. The Board believes that the valuation of the Company’s
property portfolio will prove resilient due to its higher weighting to industrial
assets and overall diverse and high-quality asset and tenant base comprising over 150
assets and over 300 typically 'institutional grade' tenants across all commercial
sectors.
Liquidity
At 31 March 2024 the Company had:
• £7.2m of unrestricted cash and £11.0m undrawn RCF (can be increased to £36.0m
with Lloyds’ consent), with gross borrowings of £179.0m resulting in low net
gearing of 29.2%, with no short-term refinancing risk and a weighted average debt
facility maturity of 5.3 years; and
• An annual contractual rent roll of £43.1m, with interest costs on drawn loan
facilities of only c. £7.4m per annum.
The Company’s forecast model projects it will have sufficient cash and undrawn
facilities to settle its target dividends and its expense and interest liabilities
over the one and three year assessment periods.
As detailed in Note 16, the Company’s £20m loan with SWIP expires in August 2025.
The Board anticipates lender support in agreeing a refinancing, and would seek to
utilise the undrawn RCF to repay the loan on expiry in the unlikely event of lender
support being withdrawn.
Results of the assessments
Based on the prudent assumptions within the Company’s forecasts regarding the factors
set out above, the Directors expect that over the one-year and three-year periods of
their assessment:
• The Company has surplus cash to continue in operation and meet its liabilities as
they fall due;
• Borrowing covenants are complied with; and
• REIT tests are complied with.
Section 172 statement and stakeholder relationships
The Directors consider that in conducting the business of the Company over the course
of the year they have complied with Section 172(1) of the Companies Act 2006 (“the
Act”) by fulfilling their duty to promote the success of the Company and act in the
way they consider, in good faith, would be most likely to promote the success of the
Company for the benefit of its members as a whole.
Issues, factors and stakeholders
The Board has direct engagement with the Company’s shareholders and seeks a rounded
and balanced understanding of the broader impact of its decisions through regular
engagement with its stakeholder groups (detailed below) to understand their views,
typically through feedback from the Investment Manager and the Company’s broker,
which is regularly communicated to the Board via quarterly meetings. Stakeholder
engagement also ensures the Board is kept aware of any significant changes in the
market, including the identification of emerging trends and risks, which in turn can
be factored into its strategy discussions.
Management of the Company’s day-to-day operations has been delegated to the
Investment Manager, Custodian Capital Limited, and the Company has no employees.
This externally managed structure allows the Board and the Investment Manager to have
due regard to the impact of decisions on the following matters specified in Section
172 (1) of the Act:
Section 172(1) factor
Approach taken
The business model and strategy of the Company is set out
within the Strategic Report. Any deviation from or
amendment to that strategy is subject to Board and, if
necessary, shareholder approval. The Company’s
Management Engagement Committee ensures that the
Investment Manager is operating within the scope of the
Company’s investment objectives.
At least annually, the Board considers a budget for the
delivery of its strategic objectives based on a three
year forecast model. The Investment Manager reports
non-financial and financial key performance indicators to
the Board, set out in detail in the Business model and
strategy section of the Strategic report, at least
quarterly which are used to assess the outcome of
decisions made.
Likely consequences of any
decision in the long-term The Board’s commitment to keeping in mind the long-term
consequences of its decisions underlies its focus on
risk, including risks to the long-term success of the
business.
The investment strategy of the Company is focused on
medium to long-term returns and minimising the Company’s
impact on communities and the environment and as such the
long-term is firmly within the sights of the Board when
all material decisions are made.
The board gains an understanding of the views of the
Company’s key stakeholders from the Investment Manager,
broker, distribution agents and Management Engagement
Committee, and considers those stakeholders’ interests
and views in board discussions and long-term
decision-making.
The Company has no employees as a result of its external
management structure, but the Directors have regard to
the interests of the individuals responsible for delivery
of the property management and administration services to
The interests of the the Company to the extent that they are able to.
Company’s employees
The Company’s Nominations Committee is responsible for
applying the diversity policy set out in the Nominations
Committee Report to Board recruitment.
Business relationships with suppliers, tenants and other
counterparties are managed by the Investment Manager.
Suppliers and other counterparties are typically
professional firms such as lenders, property agents and
other property professionals, accounting firms and legal
firms and tenants with which the Investment Manager often
has a longstanding relationship. Where material
counterparties are new to the business, checks, including
anti money laundering checks where appropriate, are
conducted prior to transacting any business to ensure
that no reputational or legal issues would arise from
The need to foster the engaging with that counterparty. The Company also
Company’s business periodically reviews the compliance of all material
relationships with counterparties with relevant laws and regulations such as
suppliers, customers and the Modern Slavery Act 2015. The Company pays suppliers
others in accordance with pre-agreed terms. The Management
Engagement Committee engages directly with the Company’s
key service providers providing a direct line of
communication for receiving feedback and resolving
issues.
Because the Investment Manager directly invoices most
tenants and collects rent without using managing agents,
it has open lines of communication with tenants and can
understand and resolve any issues promptly.
The Board recognises the importance of supporting local
communities where the Company’s assets are located and
seeks to invest in properties which will be fit for
future purpose and which align with ESG targets. The
Company also seeks to benefit local communities by
creating social value through employment, viewing its
properties as a key part of the fabric of the local
economy.
The impact of the Company’s
operations on the community
and the environment
The Board takes overall responsibility for the Company’s
impact on the community and the environment and its ESG
policies are set out in the ESG report.
The Company’s approach to preventing bribery, money
laundering, slavery and human trafficking is disclosed in
the Governance report.
The Board believes that the ability of the Company to
conduct its investment business and finance its
activities depends in part on the reputation of the Board
The desirability of the and Investment Manager’s team. The risk of falling short
Company maintaining a of the high standards expected and thereby risking its
reputation for high business reputation is included in the Board’s review of
standards of business the Company’s risk register, which is conducted
conduct periodically. The principal risks and uncertainties
facing the business are set out in that section of the
Strategic report. The Company’s requirements for a high
standard of conduct and business ethics are set out in
the Governance report.
The Company’s shareholders are a very important
stakeholder group. The Board oversees the Investment
Manager’s investor relations programme which involves the
Investment Manager engaging routinely with the Company’s
shareholders. The programme is managed by the Company’s
broker and distribution agents and the Board receives
prompt feedback from both the Investment Manager and
broker on the outcomes of meetings and presentations.
The Board and Investment Manager aim to be open with
shareholders and available to them, subject to compliance
with relevant securities laws. The Chairman of the
Company and other Non-Executive Directors make themselves
The need to act fairly as available for meetings as appropriate and attend the
between members of the Company’s AGM.
Company
The investor relations programme is designed to promote
formal engagement with investors and is typically
conducted after each half-yearly results announcement.
The Investment Manager also engages with existing
investors who may request meetings and with potential new
investors on an ad hoc basis throughout the year,
including where prompted by Company announcements.
Shareholder presentations are made available on the
Company’s website. The Company has a single class of
share in issue with all members of the Company having
equal rights.
Methods used by the Board
The main methods used by the Directors to perform their duties include:
• Board Strategy meetings are held typically twice annually to review all aspects
of the Company’s business model and strategy and assess the long-term success of
the Company and its impact on key stakeholders;
• The Management Engagement Committee assesses the Company’s engagements with its
key service providers. The Investment Manager reports on their performance to
the Committee which in turn reports key issues to the Board. The
responsibilities of the Management Engagement Committee are detailed in the
Management Engagement Committee report;
• The Board is ultimately responsible for the Company’s ESG activities set out in
the ESG Committee report, which it believes are a key part of benefitting the
local communities where the Company’s assets are located;
• The Board’s risk management procedures set out in the Governance report identify
the potential consequences of decisions in the short, medium and long-term so
that mitigation plans can be put in place to prevent, reduce or eliminate risks
to the Company and wider stakeholders;
• The Board sets the Company’s purpose, values and strategy, detailed in the
Business model and strategy section of the Strategic report, and the Investment
Manager ensures they align with its culture;
• The Board carries out direct shareholder engagement via the AGM and Directors
attend shareholder meetings on an ad hoc basis;
• External assurance is received through internal and external audits and reports
from brokers and advisers;
• Specific training for existing Directors and induction for new Directors as set
out in the Governance report; and
• Ad hoc meetings to consider corporate acquisition opportunities.
Principal decisions in the year
The Board has delegated operational functions to the Investment Manager and other key
service providers. In particular, responsibility for management of the Company’s
property portfolio has been delegated to the Investment Manager. The Board retains
responsibility for reviewing the engagement of the Investment Manager and exercising
overall control of the Company, reserving certain key matters as set out in the
Governance report. The principal non-routine decisions taken by the Board during the
year, and its rationale on how the decision was made, were:
Decision How decision was made
The Company undertook a significant amount of
property, legal, financial and tax due diligence
work on API and the Company’s advisors modelled
various scenarios for the combined entity to
understand the projected short and medium-term
impact of the Merger on the combined portfolio and
Recommending an all-share merger its earnings. The Board held meetings at least
with API weekly to understand progress and any issues
arising to remain in position to make decisions
regarding the Merger as they arose. The key
challenges faced by the Board focused on ensuring
forecasts and potential risks were accurately
identified to ensure the transaction was in the
best long-term interests of all stakeholders by
increasing earnings within the Company’s stated
investment policy.
The amendments made during the year clarified the
Amending the Company’s Investment existing strategy and were considered necessary to
Policy ensure the policy did not inhibit the Investment
Manager seeking growth in the most beneficial way
for shareholders.
Setting target dividends at In line with the Board’s dividend policy of paying
6.0pps for the year ending 31 a high, fully covered level of dividend which
March 2025 and paying a special maximises shareholder returns without negatively
dividend of 0.3pps for the year. influencing property strategy.
Renewing the RCF, originally To mitigate refinancing risk, secure the existing
expiring in September 2024, and competitive margin for a further two years. The
increasing total funds available increase in total funds available provides
under the facility from £50m to flexibility over the medium-term for the Company’s
£75m, subject to lender approval, property strategy to invest in its current
for a term of three years with an buildings and, minimise cash drag for larger equity
option to extend the term by a or debt issuance.
further two years.
Appointing a new Director as The Board believes David MacLellan brings a wealth
detailed in the Chairman’s of experience and skills including leadership,
statement. financial and investment company expertise, and
governance, which will benefit shareholders.
Due to the nature of these decisions, a variety of stakeholders had to be factored
into the Board’s discussions. Each decision was announced at the time, so that all
stakeholders were aware of the decisions.
Stakeholders
The Board recognises the importance of stakeholder engagement to deliver its
strategic objectives and believes its stakeholders are vital to the continued success
of the Company. The Board is mindful of stakeholder interests and keeps these at the
forefront of business and strategic decisions. Regular engagement with stakeholders
is fundamental to understanding their views. The below section highlights how the
Company engages with its key stakeholders, why they are important and the impact they
have on the Company and therefore its long-term success, which the Board believes
helps demonstrate the successful discharge of its duties under s172(1) of the Act.
The Board assesses the effectiveness of stakeholder engagement through discussion
with the Investment Manager and the Company’s broker.
Stakeholder Stakeholder interests Stakeholder engagement
• Regular dialogue through
rent collection process
Tenants • Review published data,
such as accounts, trading
The Investment Manager updates and analysts’
understands the businesses • High quality assets reports
occupying the Company’s • Profitability • Ensured buildings comply
assets and seeks to create • Efficient operations with safety regulations
long-term partnerships and • Knowledgeable and and insurance
understand their needs to committed landlord requirements
deliver fit for purpose real • Flexibility to adapt • Most tenants contacted to
estate and develop asset to the changing UK request environmental
management opportunities to commercial landscape performance data and
underpin long-term • Buildings with strong offer an engagement
maintainable income growth environmental programme on their
and maximise occupier credentials premises’ environmental
satisfaction performance
• Occupancy has remained
above 90% during the year
The Investment Manager and
its employees • Long-term viability
of the Company
As an externally managed fund • Long-term • Board and Committee
the Company’s key service relationship with the meetings
provider is the Investment Company • Face-to-face and
Manager and its employees are • Well-being of the video-conference meetings
a key stakeholder. The Investment Manager’s with the Chairman and
Investment Manager’s culture employees other Board Directors
aligns with that of the • Being able to attract • Quarterly KPI reporting
Company and its long-standing and retain to the Board
reputation of operating in high-calibre staff • Board evaluation,
the smaller lot-size market • Maintaining a including feedback from
is key when representing the positive and key Investment Manager
Company transparent personnel
relationship with the • Ad hoc meetings and calls
Board
Suppliers
• Collaborative and • Board and Committee
A collaborative relationship transparent working meetings
with our suppliers, including relationships • One-to-one meetings
those to whom key services • Responsive • Annual review of key
are outsourced, ensures that communication service provider
we receive high quality • Being able to deliver engagements by the
services to help deliver service level Management Engagement
strategic and investment agreements Committee, which includes
objectives appropriateness of
internal policies and
payment practices
• Annual and half year
presentations
• Maintainable growth • AGM
Shareholders • Attractive level of • Market announcements and
income returns corporate website
Building a strong investor • Strong Corporate • Regular investor feedback
base through clear and Governance and received from the
transparent communication is environmental Company’s broker,
vital to building a credentials distribution agents and
successful business and • Transparent reporting PR adviser as well as
generating long-term growth framework seeking feedback from
face-to-face meetings
• On-going dialogue with
analysts
Lenders • Stable cash flows
• Stronger covenants
Our lenders play an important • Being able to meet
role in our business. The interest payments
Investment Manager maintains • Maintaining agreed
close and supportive gearing ratios • Regular covenant
relationships with this group • Regular financial reporting
of long-term stakeholders, reporting • Regular catch-up calls
characterised by openness, • Proactive
transparency and mutual notification of
understanding issues or changes
• Openness and
Government, local authorities transparency
and communities • Proactive compliance
with new legislation
As a responsible corporate • Proactive engagement
citizen the Company is • Support for local
committed to engaging economic and • Engagement with local
constructively with central environmental plans authorities where we
and local government and and strategies operate
ensuring we support the wider • Playing its part in • Two way dialogue with
community providing the real regulators and HMRC
estate fabric of the
economy, giving
employers a place of
business
Approval of Strategic report
The Strategic report, (incorporating the Business model and strategy, Chairman’s
statement, Investment Manager’s report, Financial report, Principal risks and
uncertainties and Section 172 statement and stakeholder relationships) was approved
by the Board of Directors and signed on its behalf by:
David MacLellan
Chairman
12 June 2024
Board of Directors and Investment Manager personnel
The Board comprises six non-executive directors. A short biography of each director
is set out below:
David MacLellan - Independent Chairman
David was appointed to the Board on 9 May 2023 and took over the Chairman role on 8
August 2023.
He has over 35 years’ experience in private equity and fund management and an
established track record as Chairman and Non-Executive director of public and private
companies. During his executive career David was an Executive Director of Aberdeen
Asset Management plc following its purchase of Murray Johnstone Limited (“MJ”) in
2000. At the time of the purchase he was Group Managing Director of MJ, a Glasgow
based fund manager managing inter alia closed and open ended funds, having joined
MJ’s venture capital team in 1984. Prior to joining MJ he qualified as a Chartered
Accountant at Arthur Young McLelland Moores (now EY).
David is currently Chairman and Managing Partner of RJD Partners, a private equity
business; Non-Executive Director and Audit Committee Chairman of Lindsell Train
Investment Trust plc, a closed-ended equity investment fund; Non-Executive Director
and Audit Committee Chair of J&J Denholm Limited, a family owned business involved in
shipping, logistics, seafoods and industrial services; and Non-Executive Director and
Audit Committee Chair of Aquila Renewables plc, an investment trust.
David is former Chairman and Senior Independent Director (“SID”) of John Laing
Infrastructure Fund, a FTSE 250 investment company, former Chairman of Stone
Technologies Limited, former Chairman of Havelock Europa plc and former Non-Executive
Director of Maven Income & Growth VCT 2 plc. He was also Chairman of Britannic UK
Income Fund for 12 years until 2013 as well as a director of a number of private
equity backed businesses.
David’s other roles are not considered to impact his ability to allocate sufficient
time to the Company to discharge his responsibilities effectively.
Elizabeth McMeikan – Senior Independent Director
Elizabeth’s substantive career was with Tesco plc, where she was a Stores Board
Director before embarking on a non-executive career in 2005.
Elizabeth is currently Chair of Nichols plc, the AIM listed diversified soft drinks
group. She is Senior Independent Director and Remuneration Committee Chair at both
Dalata Hotel Group plc, the largest hotel group in Ireland, and at McBride plc,
Europe’s leading manufacturer of cleaning and hygiene products. She is also
Non-Executive Director of Fresca Group Limited, a fruit and vegetable grower and
importer.
Previously Elizabeth was SID and Remuneration Committee Chair at both The Unite Group
plc and at Flybe plc, SID at J D Wetherspoon plc and Chair of Moat Homes Limited.
Elizabeth’s other roles are not considered to impact her ability to allocate
sufficient time to the Company to discharge her responsibilities effectively.
Hazel Adam - Independent Director
Hazel was an investment analyst with Scottish Life until 1996 and then joined
Standard Life Investments. As a fund manager she specialised in UK and then Emerging
Market equities. In 2005 Hazel joined Goldman Sachs International as an executive
director on the new markets equity sales desk before moving to HSBC in 2012, holding
a similar equity sales role until 2016.
Hazel was an independent non-executive director of Aberdeen Latin American Income
Fund Limited until June 2023 and holds the CFA Level 4 certificate in ESG Investing
and the Financial Times Non-Executive Directors Diploma.
Chris Ireland FRICS - Independent Director
Chris joined international property consultancy King Sturge in 1979 as a graduate and
has worked his whole career across the UK investment property market. He ran the
investment teams at King Sturge before becoming Joint Managing Partner and
subsequently Joint Senior Partner prior to its merger with JLL in 2011.
Chris was Chief Executive Officer of JLL UK between 2016 and 2021 and subsequently
its Chair from 2021 until retiring in March 2023. Chris is committed to leading the
property sector on sustainability and supporting the debate around the climate
emergency.
Chris is a former Chair of the Investment Property Forum and is a Non-Executive
Director of Le Masurier, a Jersey based family trust with assets across the UK,
Germany and Jersey. Chris is also a keen supporter of the UK homelessness charity
Crisis.
Chris’ other roles are not considered to impact his ability to allocate sufficient
time to the Company to discharge his responsibilities effectively.
Malcolm Cooper FCCA FCT - Independent Director
Malcolm is a qualified accountant and an experienced FTSE 250 company Audit Committee
Chair with an extensive background in corporate finance and a wide experience in
infrastructure and property.
Malcolm worked with Arthur Andersen and British Gas/BG Group/Lattice before spending
15 years with National Grid with roles including Managing Director of National Grid
Property and Global Tax and Treasury Director, and culminated in the successful sale
of a majority stake in National Grid’s gas distribution business, now known as Cadent
Gas.
Malcolm is currently a Non-Executive Director of Morgan Sindall Group plc, a FTSE 250
UK construction and regeneration business, Chairing its Audit and Responsible
Business Committees. He is also Senior Independent Director and Credit Committee
Chair of MORhomes plc, Non-Executive Director, Remuneration Committee Chair and Audit
Committee Chair at Southern Water Services Limited and Non-Executive Director and
Audit and Risk Committee Chair at Local Pensions Partnership Investment. Malcolm was
recently appointed as President of the Association of Corporate Treasurers.
Malcolm was previously Senior Independent Director and Audit Committee Chair at CLS
Holdings plc, a Non-Executive Director of St William Homes LLP and a member of the
Financial Conduct Authority’s Listing Authority Advisory Panel.
Malcolm’s other roles are not considered to impact his ability to allocate sufficient
time to the Company to discharge his responsibilities effectively.
Ian Mattioli MBE - Director
Ian is CEO of Mattioli Woods with over 35 years’ experience in financial services,
wealth management and property businesses and is the founder director of Custodian
Property Income REIT. Together with Bob Woods, Ian founded Mattioli Woods, the
AIM-listed wealth management and employee benefits business which is the parent
company of the Investment Manager. Mattioli Woods now has over £15bn of assets under
management, administration and advice. Ian is responsible for the vision and
operational management of Mattioli Woods and instigated the development of its
investment proposition, including the syndicated property initiative that developed
into the seed portfolio for the launch of Custodian Property Income REIT.
Ian is a non-independent Director of the Company due to his role with Mattioli Woods
and is viewed by the Board as representative of Mattioli Woods’ client shareholders
which represent approximately 68% of the Company’s shareholders.
His personal achievements include winning the London Stock Exchange AIM Entrepreneur
of the Year award and CEO of the year in the 2018 City of London wealth management
awards. Ian was awarded an MBE in the Queen's 2017 New Year's Honours list for his
services to business and the community in Leicestershire and was appointed High
Sheriff of Leicestershire in March 2021, an independent non-political Royal
appointment for a single year. Ian and his family own 6.1m shares in the Company.
Ian’s other roles are not considered to impact his ability to allocate sufficient
time to the Company to discharge his responsibilities effectively.
Investment Manager personnel
Short biographies of the Investment Manager’s key personnel and senior members of its
property team are set out below:
Richard Shepherd-Cross MRICS - Managing Director
Richard qualified as a Chartered Surveyor in 1996 and until 2008 worked for JLL,
latterly running its national portfolio investment team.
Since joining Mattioli Woods in 2009, Richard established Custodian Capital as the
Property Fund Management subsidiary to Mattioli Woods and in 2014 was instrumental in
the establishment of Custodian Property Income REIT from Mattioli Woods’ syndicated
property portfolio and its 1,200 investors. Following the successful IPO of the
Company, Richard has overseen the growth of the Company to its current property
portfolio of over £0.6bn. Richard and his close family own 0.4m shares in the
Company.
Ed Moore FCA – Finance Director
Ed qualified as a Chartered Accountant in 2003 with Grant Thornton, specialising in
audit, financial reporting and internal controls across its Midlands practice. He is
Finance Director of Custodian Capital with responsibility for all day-to-day
financial aspects of its operations.
Since IPO in 2014 Ed has overseen the Company raising over £300m of new equity,
arranging or refinancing eight loan facilities and completing four corporate
acquisitions, including leading on the acquisition of DRUM in 2021. Ed’s key
responsibilities for Custodian Property Income REIT are accurate external and
internal financial reporting, ongoing regulatory compliance and maintaining a robust
control environment. Ed is Company Secretary of Custodian Property Income REIT and
is a member of the Investment Manager’s Investment Committee. Ed is also responsible
for the Investment Manager’s environmental initiatives, attending Custodian Property
Income REIT ESG Committee meetings and co-leading the Investment Manager’s ESG
working group.
Ian Mattioli MBE - Founder and Chair
Ian’s biography is set out above.
Alex Nix MRICS – Assistant Investment Manager
Alex graduated from Nottingham Trent University with a degree in Real Estate
Management before joining Lambert Smith Hampton, where he spent eight years and
qualified as a Chartered Surveyor in 2006.
Alex is Assistant Investment Manager to Custodian Property Income REIT having joined
Custodian Capital in 2012. Alex heads the Company’s property management and asset
management initiatives, assists in sourcing and executing new investments and is a
member of the Investment Manager’s Investment Committee.
Tom Donnachie MRICS – Portfolio Manager
Tom graduated from Durham University with a degree in Geography before obtaining an
MSc in Real Estate Management from Sheffield Hallam University. Tom worked in London
for three years where he qualified as a Chartered Surveyor with Workman LLP before
returning to the Midlands first with Lambert Smith Hampton and then CBRE.
Tom joined Custodian Capital in 2015 as Portfolio Manager with a primary function to
maintain and enhance the existing property portfolio and assist in the selection and
due diligence process regarding new acquisitions. Tom co-leads the Investment
Manager’s environmental working group and attends Custodian Property Income REIT ESG
Committee meetings.
Javed Sattar MRICS – Portfolio Manager
Javed joined Custodian Capital in 2011 after graduating from Birmingham City
University with a degree in Estate Management Practice. Whilst working as a trainee
surveyor on Custodian Property Income REIT’s property portfolio for Custodian Capital
he completed a PGDip in Surveying via The College of Estate Management and qualified
as a Chartered Surveyor in 2017.
Javed operates as Portfolio Manager managing properties predominantly located in the
North-West of England.
Consolidated statement of comprehensive income
For the year ended 31 March 2024
Year ended Year ended
31 March 31 March
2024 2023
Note £000 £000
Revenue 4 46,243 44,147
Investment management (3,451) (3,880)
Operating expenses of rental property
• rechargeable to tenants (3,280) (3,526)
• directly incurred (4,032) (3,530)
Professional fees (791) (911)
Directors’ fees (349) (318)
Other expenses (683) (934)
Expenses (12,586) (13,099)
Abortive acquisition costs (1,557) -
Operating profit before loss on property portfolio,
financing and group reorganisations
32,100 31,048
Unrealised loss on revaluation of investment property:
• relating to property revaluations 10 (26,972) (91,551)
• relating to costs of acquisition 10 - (3,426)
Valuation decrease (26,972) (94,977)
Profit on disposal of investment property 1,418 4,368
Net loss on investment property (25,554) (90,609)
Operating profit/(loss) 6,546 (59,561)
Finance income 6 78 22
Finance costs 7 (8,126) (6,282)
Net finance costs (8,048) (6,260)
Loss before tax (1,502) (65,821)
Income tax expense 8 - -
Loss for the year and total comprehensive income for the year, net (1,502) (65,821)
of tax
Attributable to:
Owners of the Company (1,502) (65,821)
Earnings per ordinary share:
Basic and diluted (p) 3 (0.3) (14.9)
Basic and diluted EPRA (p) 3 5.8 5.6
The profit for the year arises from continuing operations.
Consolidated and Company statement of financial position
As at 31 March 2024
Registered number: 08863271
31 March 2024 31 March 2023
Note £000 £000
Group and Company
Non–current assets
Investment property 10 578,122 613,587
Property, plant and equipment 11 2,957 1,113
Investments 12 - -
Total non-current assets 581,079 614,700
Current assets
Assets held for sale 10 11,000 -
Trade and other receivables 13 3,330 3,748
Cash and cash equivalents 15 9,714 6,880
Total current assets 24,044 10,628
Total assets 605,123 625,328
Equity
Issued capital 17 4,409 4,409
Share premium 17 250,970 250,970
Merger reserve 17 18,931 18,931
Retained earnings 17 137,510 163,259
Total equity attributable to equity holders of
the Company
411,820 437,569
Non-current liabilities
Borrowings 16 177,290 172,102
Other payables 569 570
Total non-current liabilities 177,859 172,672
Current liabilities
Trade and other payables 14 8,083 7,666
Deferred income 7,361 7,421
Total current liabilities 15,444 15,087
Total liabilities 193,303 187,759
Total equity and liabilities 605,123 625,328
The parent Company’s loss for the year was £1,502,000 (2023: loss of £57,671,000).
These consolidated and Company financial statements of Custodian Property Income REIT
plc, company number 08863271, were approved and authorised for issue by the Board of
Directors on 12 June 2024 and are signed on its behalf by:
David MacLellan
Chairman
Consolidated and Company statements of cash flows
For the year ended 31 March 2024
Group Company
Year Year
Year ended Year ended
ended ended
31 March 31 March
31 March 31 March
2024 2024
2023 2023
Note £000 £000 £000 £000
Operating activities
Loss for the year (1,502) (65,821) (1,502) (57,671)
Net finance costs 8,048 6,260 8,048 6,083
Valuation decrease of investment 10 26,972 94,977 26,972 95,266
property
Impact of rent free 10 (2,105) (1,677) (2,105) (1,690)
Net income from group reorganisations 12 - - - (8,771)
Amortisation of right-of-use asset 7 8 7 8
Profit on disposal of investment (1,418) (4,368) (1,418) (4,368)
property
Depreciation 133 112 133 112
Cash flows from operating activities
before changes in working capital and
provisions 30,135 29,491 30,135 28,969
Decrease in trade and other receivables 418 2,954 418 4,349
Increase/(decrease) in trade and other 357 (2,104) 357 (1,559)
payables and deferred income
Cash generated from operations 30,910 30,341 30,910 31,759
Interest and other finance charges (7,694) (6,072) (7,694) (5,918)
Net cash inflows from operating 23,216 24,269 23,216 25,841
activities
Investing activities
Purchase of investment property - (52,603) - (52,603)
Capital expenditure and development (17,034) (11,333) (17,034) (11,333)
Acquisition costs - (3,426) - (3,426)
Purchase of property, plant and (1,977) (1,225) (1,977) (1,225)
equipment
Disposal of investment property 18,176 28,767 18,176 28,767
Costs of disposal of investment property (134) (237) (134) (237)
Interest and finance income received 6 78 22 78 22
Loan to subsidiaries - - - (23,228)
Cash acquired through the hive up of - - - 835
DRUM
Net cash outflows from investing (891) (40,035) (891) (62,428)
activities
Financing activities
New borrowings 16 5,500 58,500 5,500 58,500
Repayment of borrowings and origination 16 (744) (23,228) (744) -
costs
Dividends paid 9 (24,247) (24,250) (24,247) (24,250)
Net cash (outflow)/inflow from financing (19,491) 11,022 (19,491) 34,250
activities
Net increase/(decrease) in cash and cash 2,834 (4,744) 2,834 (2,337)
equivalents
Cash and cash equivalents at start of 6,880 11,624 6,880 9,217
the year
Cash and cash equivalents at end of the 9,714 6,880 9,714 6,880
year
Consolidated statement of changes in equity
For the year ended 31 March 2024
Issued Share Retained Total
Merger reserve
capital premium earnings equity
£000
Note £000 £000 £000 £000
As at 31 March 2022 4,409 18,931 250,970 253,330 527,640
Loss for the year - - - (65,821) (65,821)
Total comprehensive loss for - - - (65,821) (65,821)
year
Transactions with owners of the
Company, recognised directly in
equity
Dividends 9 - - - (24,250) (24,250)
As at 31 March 2023 4,409 18,931 250,970 163,259 437,569
Loss for the year - - - (1,502) (1,502)
Total comprehensive loss for - - - (1,502) (1,502)
year
Transactions with owners of the
Company, recognised directly in
equity
Dividends 9 - - - (24,247) (24,247)
As at 31 March 2024 4,409 18,931 250,970 137,510 411,820
Company statement of changes in equity
For the year ended 31 March 2024
Issued Share Retained Total
Merger reserve
capital premium earnings equity
£000
Note £000 £000 £000 £000
As at 31 March 2022 4,409 18,931 250,970 245,180 519,490
Loss for the year - - - (57,671) (57,671)
Total comprehensive loss for - - - (57,671) (57,671)
year
Transactions with owners of the
Company, recognised directly in
equity
Dividends 9 - - - (24,250) (24,250)
As at 31 March 2023 4,409 18,931 250,970 163,259 437,569
Loss for the year - - - (1,502) (1,502)
Total comprehensive loss for - - - (1,502) (1,502)
year
Transactions with owners of the
Company, recognised directly in
equity
Dividends 9 - - - (24,247) (24,247)
As at 31 March 2024 4,409 18,931 250,970 137,510 411,820
Notes to the financial statements for the year ended 31 March 2024
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 and parent company financial
statements have been prepared on a historical cost basis, except for the revaluation
of investment property, and are presented in pounds sterling with all values rounded
to the nearest thousand pounds (£000), except when otherwise indicated. The
consolidated financial statements were authorised for issue in accordance with a
resolution of the Directors on 12 June 2024.
2. Basis of preparation and accounting policies
1. Basis of preparation
The consolidated financial statements and the separate financial statements of the
parent company have been prepared in accordance with United Kingdom adopted
international accounting standards and International Financial Reporting Standards
(IFRSs) as issued by the IASB. The financial statements have also been prepared in
accordance with International Financial Reporting Standards as issued by the IASB.
The Company has taken advantage of the exemption in section 408 of the Companies Act
2006 not to present its own statement of comprehensive income.
Certain statements in this report are forward looking statements. By their nature,
forward looking statements involve a number of risks, uncertainties or assumptions
that could cause actual results or events to differ materially from those expressed
or implied by those statements. Forward looking statements regarding past trends or
activities should not be taken as representation that such trends or activities will
continue in the future. Accordingly, undue reliance should not be placed on forward
looking statements.
2. Basis of consolidation
The consolidated financial statements consolidate those of the parent company and its
subsidiaries. The parent controls a subsidiary if it is exposed, or has rights, to
variable returns from its involvement with the subsidiary and has the ability to
affect those returns through its power over the subsidiary. Custodian Real Estate
Limited has a reporting date in line with the Company. 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 the Company gains control up to the effective date when the
Company ceases to control the subsidiary.
3. Business combinations
Where property is acquired, via corporate acquisitions or otherwise, the substance of
the assets and activities of the acquired entity are considered in determining
whether the acquisition represents a business combination or an asset purchase under
IFRS 3 - Business Combinations.
A business combination is a transaction or event in which an acquirer obtains control
of one or more businesses. A business is defined in IFRS 3 as an integrated set of
activities and assets that is capable of being conducted and managed for the purpose
of providing goods or services to customers, generating investment income (such as
dividends or interest) or generating other income from ordinary activities. To
assist in determining whether a purchase of investment property via corporate
acquisition or otherwise meets the definition of a business or is the purchase of a
group of assets, the group will apply the optional concentration test in IFRS 3 to
determine whether substantially all of the fair value of the gross assets acquired is
concentrated in a single identifiable asset or group of similar identifiable assets.
If the concentration test is not met the group applies judgement to assess whether
acquired set of activities and assets includes, at a minimum, an input and a
substantive process by applying IFRS 3:B8 to B12D. Where such acquisitions are not
judged to be a business combination, due to the asset or group of assets not meeting
the definition of a business, they are accounted for as asset acquisitions and the
cost to acquire the corporate entity is allocated between the identifiable assets and
liabilities of the entity based on their relative fair values at the acquisition
date. Accordingly no goodwill or additional deferred taxation arises.
Under the acquisition accounting method, the identifiable assets, liabilities and
contingent liabilities acquired are measured at fair value at the acquisition date.
The consideration transferred is measured at fair value which is calculated as the
sum of the acquisition-date fair values of assets transferred by the Group,
liabilities incurred by the Group to the former owners of the acquiree and the equity
interest issued by the Group in exchange for control of the acquiree.
Acquisition-related costs are recognised in profit or loss as incurred.
4. Application of new and revised International Financial Reporting Standards
During the year the Company adopted the following new standards with no impact on
reported financial performance or position:
• Amendments to IFRS 10 and IAS Sale or Contribution of Assets between an Investor
28 and its Associate or Joint Venture
• Amendments to IAS 1 Classification of Liabilities as Current or
Non-current
• Amendments to IAS 1 Non-current Liabilities with Covenants
• Amendments to IAS 7 and IFRS 7 Supplier Finance Arrangements
• Amendments to IFRS 16 Lease Liability in a Sale and Leaseback
5. Material accounting policies
The principal accounting policies adopted by the Group and Company and applied to
these financial statements are set out below.
Going concern
The Directors believe the Company is well placed to manage its business risks
successfully and the Company’s projections show that it should be able to operate
within the level of its current financing arrangements for at least the 12 months
from the date of approval of these financial statements, set out in more detail in
the Directors’ report and Principal risks and uncertainties section of the Strategic
report. Accordingly, the Directors continue to adopt the going concern basis for the
preparation of the financial statements.
Income recognition
Contractual revenues are allocated to each performance obligation of a contract and
revenue is recognised on a basis consistent with the transfer of control of goods or
services. Revenue is measured at the fair value of the consideration received,
excluding discounts, rebates, VAT and other sales taxes or duties.
Rental income from operating leases on properties owned by the Company is accounted
for on a straight-line basis over the term of the lease. Rental income excludes
service charges and other costs directly recoverable from tenants which are
recognised within ‘income from recharges to tenants’.
Amounts received from occupiers to terminate leases or to compensate for dilapidation
work not carried out by the occupier is recognised in the statement of comprehensive
income when the right to receive them arises, typically at the cessation of the
lease.
Lease incentives are recognised on a straight-line basis over the lease term. The
initial direct costs incurred in negotiating and arranging an operating lease are
recognised as an expense over the lease term on the same basis.
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 and costs of disposal.
Finance income relates to bank interest receivable and amounts receivable on ongoing
development funding contracts.
Taxation
The Group operates as a REIT and hence profits and gains from the property rental
business are normally expected to be exempt from corporation tax. The tax expense
represents the sum of the tax currently payable and deferred tax relating to the
residual (non-property rental) business. The tax currently payable is based on
taxable profit for the year. Taxable profit differs from net profit as reported in
the statement of comprehensive income because it excludes items of income and expense
that are taxable or deductible in other years and it further excludes items that are
never taxable or deductible. The Company’s liability for current tax is calculated
using tax rates that have been enacted or substantively enacted by the reporting
date.
Investment property
Investment property is held to earn rentals and/or for capital appreciation and is
initially recognised at cost including direct transaction costs. Investment property
is subsequently valued externally on a market basis at the reporting date and
recorded at valuation. Any surplus or deficit arising on revaluing investment
property is recognised in profit or loss in the year in which it arises. Any
ultimate gains or shortfalls are measured by reference to previously published
valuations and recognised in profit or loss, offset against any directly
corresponding movement in fair value of the investment properties to which they
relate.
Held-for-sale assets
Non-current assets are classified as held-for-sale if their carrying amount will be
recovered through a sale transaction rather than through continuing use. This
condition is regarded as met only when the sale is highly probable and the asset is
available for immediate sale in its present condition, generally considered to be on
unconditional exchange of contracts. Non-current assets classified as held for sale
are valued externally on a market basis at the reporting date and recorded at
valuation.
Group undertakings
Investments are included in the Company only statement of financial position at cost
less any provision for impairment. The hive up of the trade and assets of DRUM
during the prior year was undertaken at their carrying value on the date of hive-up.
Trade since the date of the hive-up was included in the parent company results,
whilst trade before hive-up was excluded.
Non-listed equity investments
Non-listed equity investments are classified at fair value through profit and loss
and are subsequently measured using level 3 inputs, meaning valuation techniques for
which the lowest level input that is significant to the fair value measurement is
unobservable.
Property, plant and equipment
Plant, machinery, fixtures and fittings are stated at cost less accumulated
depreciation and accumulated impairment loss.
Depreciation is recognised so as to write off the cost of assets (less their residual
values) over their useful lives, using the straight-line method, on the following
bases:
EV chargers 10 years
PV cells 20 years
The estimated useful lives, residual values and depreciation method are reviewed at
the end of each reporting period, with the effect of any changes in estimate
accounted for on a prospective basis.
Cash and cash equivalents
Cash and cash equivalents include cash in hand and on-demand deposits, and other
short-term highly liquid investments that are held for the purpose of meeting
short-term cash commitments rather than for investment or other purposes and are
readily convertible into a known amount of cash and are subject to an insignificant
risk of changes in value.
Other financial assets
Financial assets and financial liabilities are recognised in the balance sheet when
the Company becomes a party to the contractual terms of the instrument.
The Company’s financial assets include cash and cash equivalents and trade and other
receivables. Interest resulting from holding financial assets is recognised in
profit or loss on an accruals basis.
Trade receivables are initially recognised at their transaction price and
subsequently measured at amortised cost as the business model is to collect the
contractual cash flows due from tenants. An impairment provision is created based on
expected credit losses, which reflect the Company’s historical credit loss experience
and an assessment of current and forecast economic conditions at the reporting date.
Financial liabilities and equity
Financial liabilities and equity instruments are classified according to the
substance of the contractual arrangements entered into. An equity instrument is any
contract that evidences a residual interest in the assets of the Company after
deducting all of its liabilities. Equity instruments issued by the Company are
recorded at the proceeds received, net of direct issue costs.
Share capital represents the nominal value of equity shares issued. Share premium
represents the excess over nominal value of the fair value of the consideration
received for equity shares, net of direct issue costs.
Retained earnings include all current and prior year results as disclosed in profit
or loss. Retained earnings include realised and unrealised profits. Profits are
considered unrealised where they arise from movements in the fair value of investment
properties that are considered to be temporary rather than permanent.
Borrowings
Interest-bearing bank loans and overdrafts are recorded at the fair value of proceeds
received, net of direct issue costs. Finance charges, including premiums payable on
settlements or redemption and direct issue costs, are accounted for on an accruals
basis in profit or loss using the effective interest rate method and are included in
accruals to the extent that they are not settled in the period in which they arise.
Trade payables
Trade payables are initially measured at fair value and are subsequently measured at
amortised cost, using the effective interest rate method.
Leases
Where an investment property is held under a leasehold interest, the headlease is
initially recognised as an asset at cost plus the present value of minimum ground
rent payments. The corresponding rental liability to the head leaseholder is included
in the balance sheet as a liability. Lease payments are apportioned between the
finance charge and the reduction of the outstanding liability so as to produce a
constant periodic rate of interest on the remaining lease liability.
Segmental reporting
An operating segment is a distinguishable component of the Company that engages in
business activities from which it may earn revenues and incur expenses, whose
operating results are regularly reviewed by the Company’s chief operating decision
maker (the Board) to make decisions about the allocation of resources and assessment
of performance and about which discrete financial information is available. As the
chief operating decision maker reviews financial information for, and makes decisions
about the Company’s investment properties as a portfolio, the Directors have
identified a single operating segment, that of investment in commercial properties.
6. Key sources of judgements and estimation uncertainty
The preparation of the financial statements requires the Company to make estimates
and assumptions that affect the reported amount of revenues, expenses, assets and
liabilities and the disclosure of contingent liabilities. If in the future such
estimates and assumptions, which are based on the Directors’ best judgement at the
date of preparation of the financial statements, deviate from actual circumstances,
the original estimates and assumptions will be modified as appropriate in the period
in which the circumstances change.
Judgements
No significant judgements have been made in the process of applying the Group’s and
parent company's accounting policies, other than those involving estimations, that
have had a significant effect on the amounts recognised within the financial
statements.
Estimates
The accounting estimate with a significant risk of a material change to the carrying
values of assets and liabilities within the next year relates to the valuation of
investment property. Investment property is valued at the reporting date at fair
value. Where an investment property is being redeveloped the property continues to
be treated as an investment property. Surpluses and deficits attributable to the
Company arising from revaluation are recognised in profit or loss. Valuation
surpluses reflected in retained earnings are not distributable until realised on
sale. In making its judgement over the valuation of properties, the Company
considers valuations performed by the independent valuers in determining the fair
value of its investment properties. The valuers make reference to market evidence of
transaction prices for similar properties. The valuations are based upon assumptions
including future rental income, anticipated capital expenditure and maintenance costs
(particularly in the context of mitigating the impact of climate change) and
appropriate discount rates (ie property yields). The key sources of estimation
uncertainty within these inputs above are future rental income and property yields.
Reasonably possible changes to these inputs across the portfolio would have a
material impact on its valuation. The valuers have considered
the impact of climate change which has not had a material impact on the valuation.
Further detail on the Company’s climate related risks are set out in the recently
published Asset Management and Sustainability report 2024.
The sensitivity analysis in Note 10 details the expected movements in the valuation
of investment properties if the equivalent yield at 31 March 2024 is increased or
decreased by 0.25% and if the estimated rental value is increased or decreased by
5.0%, which the Board believes are reasonable sensitivities to apply given historical
changes.
3. Earnings per ordinary share
Basic EPS amounts are calculated by dividing net profit for the year attributable to
ordinary equity holders of the Company by the weighted average number of ordinary
shares outstanding during the year.
Diluted EPS amounts are calculated by dividing the net profit attributable to
ordinary equity holders of the Company by the weighted average number of ordinary
shares outstanding during the year plus the weighted average number of ordinary
shares that would be issued on the conversion of all the dilutive potential ordinary
shares into ordinary shares. There are no dilutive instruments in issue. Any shares
issued after the year end are disclosed in Note 21.
The Company is a FTSE EPRA/NAREIT index series constituent and EPRA performance
measures have been disclosed to facilitate comparability with the Company’s peers
through consistent reporting of key performance measures. EPRA has issued
recommended bases for the calculation of EPS as alternative indicators of
performance.
Year Year
ended ended
31 March 31 March
2024 2023
Group
Net loss and diluted net profit attributable to equity holders of
the Company (£000)
(1,502) (65,821)
Net loss on investment property and depreciation (£000) 25,687 90,609
Abortive acquisition costs 1,557 -
EPRA net profit attributable to equity holders of the Company 25,742 24,788
(£000)
Weighted average number of ordinary shares:
Issued ordinary shares at start of the year (thousands) 440,850 440,850
Effect of shares issued during the year (thousands) - -
Basic and diluted weighted average number of shares (thousands) 440,850 440,850
Basic and diluted EPS (p) (0.3) (14.9)
Basic and diluted EPRA EPS (p) 5.8 5.6
4. Revenue
Year Year
ended ended
31 March 31 March
2024 2023
£000 £000
Gross rental income from investment property 42,194 40,558
Income from recharges to tenants 3,280 3,526
Income from dilapidations 574 -
Other income 195 63
46,243 44,147
5. Operating profit
Operating profit is stated after (crediting)/charging:
Year Year
ended ended
31 March 31 March
2024 2023
£000 £000
Profit on disposal of investment property (1,418) (4,368)
Investment property valuation decrease 26,972 94,977
Net loss on investment property 25,554 90,609
Fees payable to the Company’s auditor and its associates for the
audit of the Company’s annual financial statements
163 154
Fees payable to the Company’s auditor and its associates for other 37 35
services
Administrative fee payable to the Investment Manager 511 581
Directly incurred operating expenses of vacant rental property 1,968 1,857
Directly incurred operating expenses of let rental property 1,124 1,286
Amortisation of right-of-use asset 7 8
Fees payable to the Company’s auditor, Deloitte, are further detailed in the Audit
and Risk Committee report.
6. Finance income
Year Year
ended
ended
31 March
31 March
2024
2023
£000
£000
Bank interest 78 22
Finance income - -
78 22
7. Finance costs
Year
ended Year ended
31 March 31 March
2024 2023
£000 £000
Amortisation of arrangement fees on debt facilities 432 220
Other finance costs 113 375
Bank interest 7,581 5,687
8,126 6,282
8. Income tax
The tax charge assessed for the year is lower than the standard rate of corporation
tax in the UK during the year of 25.0%. The differences are explained below:
Year
ended Year ended
31 March 31 March
2024 2023
£000 £000
Loss before income tax (1,502) (65,821)
Tax charge on profit at a standard rate of 25.0% (2023: 19.0%) (376) (12,506)
Effects of:
REIT tax exempt rental profits and gains 376 12,506
Income tax expense - -
Effective income tax rate 0.0% 0.0%
The standard rate of UK corporation tax increased to 25% on 1 April 2023.
The Company operates as a REIT and hence profits and gains from the property
investment business are normally exempt from corporation tax.
9. Dividends
Year Year
ended ended
31 March 31 March
2024 2023
£000 £000
Group and Company
Interim dividends paid on ordinary shares relating to the quarter
ended:
Prior year
- 31 March 2023: 1.375p (2022: 1.375p) 6,062 6,065
Current year
- 30 June 2023: 1.375p (2022: 1.375p) 6,061 6,062
- 30 September 2023: 1.375p (2022: 1.375p) 6,062 6,062
- 31 December 2023: 1.375p (2022: 1.375p) 6,062 6,061
24,247 24,250
The Company paid a fourth interim dividend relating to the quarter ended 31 March
2024 of 1.375p per ordinary share and a special dividend relating to the year of 0.3p
per ordinary share (totalling £7.4m) on 31 May 2024 to shareholders on the register
at the close of business on 10 May 2024 which has not been included as liabilities in
these financial statements.
10. Investment property and assets held for sale
Assets held-for-sale
At 31 March 2024 At 31 March At 31 March
2023 2022
Group and Company £000
£000 £000
Balance at the start of the year - - -
Reclassification from investment 11,000 - -
property
Balance at the end of the year 11,000 - -
Assets held-for-sale comprise a vacant industrial unit in Warrington and a vacant
former car showroom in Redhill for, which had an aggregate year-end value of £11.0m.
Sale contracts for each were unconditionally exchanged before the year end and since
the year end both assets have been sold for an aggregate £11.3m.
Investment property
Group Company
£000 £000
At 31 March 2022 665,186 616,211
Impact of lease incentives 1,677 1,690
Additions 56,033 56,033
Transfers from group companies - 49,251
Amortisation of right-of-use asset (8) (8)
Capital expenditure and development 9,954 9,954
Disposals (24,278) (24,278)
Valuation decrease before acquisition costs (91,551) (91,840)
Acquisition costs (3,426) (3,426)
Valuation decrease including acquisition costs (94,977) (95,266)
At 31 March 2023 613,587 613,587
Impact of lease incentives 2,105 2,105
Amortisation of right-of-use asset (7) (7)
Capital expenditure 17,034 17,034
Disposals (16,625) (16,625)
Valuation decrease (26,972) (26.972)
Reclassification as held-for-sale (11,000) (11,000)
At 31 March 2024 578,122 578,122
£486.8m (2023: £447.3m) of investment property was charged as security against the
Company’s borrowings at the year end. £0.6m (2023: £0.6m) of investment property
comprises right-of-use assets.
The carrying value of investment property at 31 March 2024 comprises £493.0m freehold
(2023: £526.1m) and £85.1m leasehold property (2023: £87.5m). The aggregate
historical cost of investment property and assets held-for-sale was £637.6m (2023:
£633.9m).
Investment property is stated at the Directors’ estimate of its 31 March 2024 fair
value. Savills (UK) Limited (“Savills”) and Knight Frank LLP (“KF”), professionally
qualified independent valuers, each valued approximately half of the property
portfolio as at 31 March 2024 in accordance with the Appraisal and Valuation
Standards published by the Royal Institution of Chartered Surveyors (“RICS”).
Savills and KF have recent experience in the relevant locations and categories of the
property being valued.
Investment property has been valued using the investment method which involves
applying a yield to rental income streams. Inputs include yield, current rent and
ERV. For the year end valuation, the following inputs were used:
Weighted
Weighted
Valuation average Topped-up
passing rent average ERV Equivalent NIY
31 March 2024 range yield
Sector (£ per sq ft)
£000 (£ per sq
ft)
Industrial 291.4 6.2 4.75 – 12.6 6.7% 5.4%
Retail 122.7 12.9 6.1 – 22.4 7.4% 8.0%
warehouse
Other 78.8 16.5 2.7 – 66.7* 8.0% 7.1%
Office 63.9 12.7 8.5 – 38.0 9.8% 7.1%
High street 32.3 26.5 3.7 – 57.4 8.1% 9.9%
retail
*Drive-through restaurants’ ERV per sq ft are based on building floor area rather
than area inclusive of drive-through lanes.
Valuation reports are based on both information provided by the Company eg current
rents and lease terms, which are derived from the Company’s financial and property
management systems and are subject to the Company’s overall control environment, and
assumptions applied by the valuers e.g. ERVs, expected capital expenditure and
yields. These assumptions are based on market observation and the valuers’
professional judgement. In estimating the fair value of each property, the highest
and best use of the properties is their current use.
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. There are interrelationships between unobservable inputs which are partially
determined by market conditions, which could impact on these changes, but the table
below presents the sensitivity of the investment property valuations to changes in
the most significant assumptions underlying their valuation, being equivalent yield
and estimated rental value (“ERV”). The Board believes these are reasonable
sensitivities given historical changes.
Group and Company
Year Year
ended ended
31 March 31 March
2024 2023
£000 £000
Increase in equivalent yield of 0.25% 21,627 35,944
Decrease in equivalent yield of 0.25% (20,134) (31,664)
Increase of 5% in ERV 1,807 1,801
Decrease of 5% in ERV (1,754) (1,737)
11. Property, plant and equipment
EV chargers and PV cells
At 31 March 2024 At 31 March 2023 At 31 March 2022
£000 £000 £000
Group and Company
Cost
Balance at the start of the year 1,225 - -
Additions 1,977 1,225 -
3,202 1,225 -
Depreciation
At the start of the year (112) - -
During the year (133) (112) -
(245) (112) -
Net book value at the end of the 2,957 1,113 -
year
12. Investments
Shares in subsidiaries
Company
31 31
Country of Principal Ordinary March March
registration and activity shares 2024 2023
Company incorporation held
number £000 £000
Name
Custodian REIT Limited 08882372 England and Non-trading 100% - -
Wales
Custodian Real Estate
(DROP Holdings) Limited 09511797 England and In 100% - -
(formerly DRUM Income Plus Wales Liquidation
REIT plc)
Custodian Real Estate England and In
(DROP) Limited (formerly 09515513 Wales Liquidation 100% - -
DRUM Income Plus Limited)*
- -
* Held indirectly
The Company’s non-trading UK subsidiaries have claimed the audit exemption available
under Section 479A of the Companies Act 2006. The Company’s registered office is
also the registered office of each UK subsidiary.
Non-listed equity investments
Group and
Company 31 31
March March
Country of registration and Principal Ordinary 2024 2023
incorporation activity shares held
Company £000 £000
number
Name
AGO Hotels 12747566 England and Wales Operator of 4.5% - -
Limited hotels
- -
The Company was allotted 4.5% of the ordinary share capital of AGO Hotels Limited on
31 January 2021 as part of a new letting of its hotel asset in Portishead.
13. Trade and other receivables
31 March 31 March
Group and Company 2024 2023
£000 £000
Falling due in less than one year:
Trade receivables 1,056 1,355
Other receivables 2,081 2,100
Prepayments 191 248
Accrued income 2 45
3,330 3,748
The Company regularly monitors the effectiveness of the criteria used to identify
whether there has been a significant increase in credit risk, for example a
deterioration in a tenant’s or sector’s outlook or rent payment performance, and
revises them as appropriate to ensure that the criteria are capable of identifying
significant increases in credit risk before amounts become past due.
Tenant rent deposits of £1.7m (2023: £1.5m) are held as collateral against certain
trade receivable balances.
The Company considers the following as constituting an event of default for internal
credit risk management purposes as historical experience indicates that financial
assets that meet either of the following criteria are generally not recoverable:
• When there is a breach of financial covenants by the debtor; or
• Available information indicates the debtor is unlikely to pay its creditors.
Such balances are provided for in full. For remaining balances the Company has
applied an expected credit loss (“ECL”) matrix based on its experience of collecting
rent arrears. The majority of tenants are invoiced for rental income quarterly in
advance and are issued with invoices before the relevant quarter starts. Invoices
become due on the first day of the rent quarter and are considered past due if
payment is not received by this date. Other receivables are considered past due when
the given terms of credit expire.
Group and Company 31 March 31 March
2024 2023
Expected credit loss provision £000 £000
Opening balance 1,143 2,739
(Decrease)/increase in provision relating to trade receivables (241) 453
that are credit-impaired
Utilisation of provisions (47) (2,049)
Closing balance 855 1,143
The significant utilisation of the expected credit loss provision during the prior
year was a result of clearing down a large proportion of provisions made during
2020/2021 as a result of the COVID-19 pandemic.
The ageing of receivables considered credit impaired is as follows:
Group and Company 31 March 31 March
2024 2023
£000 £000
0 to 3 months 288 141
3 – 6 months - 135
Over 6 months 567 867
Closing balance 855 1,143
14. Trade and other payables
31 March
31 March 2024
Group and Company 2023
£000
£000
Falling due in less than one year:
Trade and other payables 1,442 972
Social security and other taxes 830 498
Accruals 4,079 4,693
Rental deposits 1,732 1,503
8,083 7,666
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
Group and Company
31 March 31 March
2024 2023
£000 £000
Cash and cash equivalents 9,714 6,880
Cash and cash equivalents at 31 March 2024 include £2.5m (2023: £1.6m) of restricted
cash comprising: £1.7m (2023: £1.5m) rental deposits held on behalf of tenants, £0.6m
(2023: £0.1m) retentions held in respect of development fundings and £0.2m (2023:
£nil) disposal deposit.
16. Borrowings
The table below sets out changes in liabilities arising from financing activities
during the year.
Group Company
Costs incurred Costs incurred
in the in the
arrangement of arrangement of
borrowings borrowings
Borrowings £000 Total Borrowings £000 Total
£000 £000
£000 £000
Falling due
within one year:
At 31 March 2022 22,760 (33) 22,727 - - -
Repayment of (22,760) - (22,760) - - -
borrowings
Amortisation of - 33 33 - - -
arrangement fees
At 31 March 2023 - - - - - -
Repayment of - - - - - -
borrowings
Amortisation of - - - - - -
arrangement fees
At 31 March 2024 - - - - - -
Falling due in more than one year:
At 31 March 2022 115,000 (1,117) 113,883 115,000 (1,117) 113,883
Additional borrowings 58,500 - 58,500 58,500 - 58,500
Arrangement fees incurred - (468) (468) - (454) (454)
Amortisation of arrangement fees - 187 187 - 173 173
At 31 March 2023 173,500 (1,398) 172,102 173,500 (1,398) 172,102
Additional borrowings 5,500 - 5,500 5,500 - 5,500
Arrangement fees incurred - (744) (744) - (744) (744)
Amortisation of arrangement fees - 432 432 - 432 432
At 31 March 2024 179,000 (1,710) 177,290 179,000 (1,710) 177,290
On 10 November 2023 the Company agreed an extension to the RCF with Lloyds for a term
of three years, with options to extend the term by a further year on each of the
first and second anniversaries of the renewal. The RCF includes an ‘accordion’
option with the facility limit initially set at £50m, which can be increased up to
£75m subject to Lloyds’ agreement. The headline rates of annual interest now include
a LIBOR transition fee previously applied separately, increasing by 12bps to between
1.62% and 1.92% above SONIA, determined by reference to the prevailing LTV ratio. As
a result there is no change to the aggregate margin from the renewal.
At the year end the Company has the following facilities available:
• A £50m RCF with Lloyds with interest of between 1.62% and 1.92% above SONIA and
is repayable on 10 November 2026. The RCF limit can be increased to £75m with
Lloyds’ consent, with £39m drawn at the year end;
• A £20m term loan with Scottish Widows plc with interest fixed at 3.935% and is
repayable on 13 August 2025;
• A £45m term loan with Scottish Widows plc with interest fixed at 2.987% and is
repayable on 5 June 2028; and
• A £75m term loan facility with Aviva comprising:
• A £35m tranche repayable on 6 April 2032, with fixed annual interest of 3.02%;
• A £15m tranche repayable on 3 November 2032 with fixed annual interest of 3.26%;
and
• A £25m tranche repayable on 3 November 2032 with fixed annual interest of 4.10%.
Each facility has a discrete security pool, comprising a number of the Company’s
individual properties, over which the relevant lender has security and covenants:
• The maximum LTV of each discrete security pool is either 45% and 50%, with an
overarching covenant on the Company’s property portfolio of a maximum of either
35% or 40% LTV; and
• Historical interest cover, requiring net rental income from each discrete
security pool, over the preceding three months, to exceed either 200% or 250% of
the facility’s quarterly interest liability.
The Company’s debt facilities contain market-standard cross-guarantees such that a
default on an individual facility will result in all facilities falling into default.
17. Share capital
Group and Company
Ordinary shares
of 1p
Issued and fully paid share capital £000
At 1 April 2022, 31 March 2023 and 31 March 2024 440,850,398 4,409
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 8 August 2023, the Board was given authority to
issue up to 146,950,133 shares, pursuant to section 551 of the Companies Act 2006
(“the Authority”). The Authority is intended to satisfy market demand for the
ordinary shares and raise further monies for investment in accordance with the
Company’s investment policy. No ordinary shares have been issued under the Authority
since 8 August 2023. The Authority expires on the earlier of 15 months from 8 August
2023 and the subsequent AGM, due to take place on 8 August 2024.
In addition, the Company was granted authority to make market purchases of up to
44,085,039 ordinary shares under section 701 of the Companies Act 2006. No market
purchases of ordinary shares have been made.
Company Group Group and Company
Retained
earnings Retained Share premium Merger
earnings account £000 reserve
Other reserves £000
£000 £000
At 1 April 2022 245,180 253,330 250,970 18,931
Shares issued during - - - -
the year
Costs of share issue - - - -
Loss for the year (57,671) (65,821) - -
Dividends paid (24,250) (24,250) - -
At 31 March 2023 163,259 163,259 250,970 18,931
Shares issued during - - - -
the year
Costs of share issue - - - -
Loss for the year (1,502) (1,502) - -
Dividends paid (24,247) (24,247) - -
At 31 March 2024 137,510 137,510 250,970 18,931
The nature and purpose of each reserve within equity are:
• Share premium - Amounts subscribed for share capital in excess of nominal value
less any associated issue costs that have been capitalised.
• Retained earnings - All other net gains and losses and transactions with owners
(e.g. dividends) not recognised elsewhere.
• Merger reserve - A non-statutory reserve that is credited instead of a company's
share premium account in circumstances where merger relief under section 612 of
the Companies Act 2006 is obtained.
18. Commitments and contingencies
Company as lessor
Operating leases, in which the Company is the lessor, relate to investment property
owned by the Company with lease terms of between 0 to 15 years. The aggregated
future minimum rentals receivable under all non-cancellable operating leases are:
31 March 31 March
2024 2023
Group and Company £000 £000
Not later than one year 39,751 37,930
Year 2 34,984 33,519
Year 3 31,620 28,669
Year 4 26,113 25,193
Year 5 19,946 19,839
Later than five years 74,059 71,446
226,473 216,596
The following table presents rent amounts reported in revenue:
Group Company
31 March 31 March 31 March 31 March
2024 2023 2024 2023
£000 £000 £000 £000
Lease income on operating leases 41,926 40,371 41,926 39,571
Therein lease income relating to variable lease 268 187 268 187
payments that do not depend on an index or rate
42,194 40,558 42,194 39,758
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.
Ian Mattioli is Chief Executive of Mattioli Woods, the parent company of the
Investment Manager, and is a director of the Investment Manager. As a result, Ian
Mattioli is not independent. The Company Secretary, Ed Moore, is also a director of
the Investment Manager.
Compensation paid to the directors, who are also considered ‘key management
personnel’ in addition to the key Investment Manager personnel, is disclosed in the
Remuneration report. The directors' remuneration report also satisfies the
disclosure requirements of paragraph 1 of Schedule 5 to the Accounting Regulations.
Investment Management Agreement
The Investment Manager is engaged as AIFM under an IMA with responsibility for the
management of the Company’s assets, subject to the overall supervision of the
Directors. The Investment Manager manages the Company’s investments in accordance
with the policies laid down by the Board and the investment restrictions referred to
in the IMA. The Investment Manager also provides day-to-day administration of the
Company and acts as secretary to the Company, including maintenance of accounting
records and preparing the annual and interim financial statements of the Company.
Annual management fees payable to the Investment Manager under the IMA are:
• 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;
• 0.75% of the NAV of the Company as at the relevant quarter day which is in excess
of £200m but below £500m divided by 4;
• 0.65% of the NAV of the Company as at the relevant quarter day which is in excess
of £500m but below £750m divided by 4; plus
• 0.55% of the NAV of the Company as at the relevant quarter day which is in excess
of £750m divided by 4.
In June 2023 the rates applicable to each NAV hurdle for calculating the
Administrative fees payable to the Investment Manager under the IMA were amended,
with effect from 1 April 2022, to:
• 0.125% of the NAV of the Company as at the relevant quarter day which is less
than or equal to £200m divided by 4;
• 0.115% of the NAV of the Company as at the relevant quarter day which is in
excess of £200m but below £500m divided by 4;
• 0.02% of the NAV of the Company as at the relevant quarter day which is in excess
of £500m but below £750m divided by 4; plus
• 0.015% of the NAV of the Company as at the relevant quarter day which is in
excess of £750m divided by 4.
The IMA is terminable by either party by giving not less than 12 months’ prior
written notice to the other. The IMA may also be terminated on the occurrence of an
insolvency event in relation to either party, if the Investment Manager is
fraudulent, grossly negligent or commits a material breach which, if capable of
remedy, is not remedied within three months, or on a force majeure event continuing
for more than 90 days.
The Investment Manager receives a marketing fee of 0.25% (2023: 0.25%) of the
aggregate gross proceeds from any issue of new shares in consideration of the
marketing services it provides to the Company.
During the year the Investment Manager charged the Company £4.0m (2023: £4.5m)
comprising £3.5m (2023: £3.9m) in respect of annual management fees and £0.5m (2023:
£0.6m) in respect of administrative fees. During the year Mattioli Woods charged the
Company £0.1m relating to work carried out contacting shareholders in connection with
voting at General Meetings.
Mattioli Woods arranges insurance on behalf of the Company’s tenants through an
insurance broker and the Investment Manager is paid a commission by the Company’s
tenants for administering the policy.
On 8 March 2024 the boards of Mattioli Woods and Tiger Bidco Limited (“Bidco”), a
wholly-owned subsidiary of vehicles advised and managed by Pollen Street Capital
Limited, announced agreement on the terms and conditions of a recommended cash offer
by Bidco for Mattioli Woods. This offer was approved by Mattioli Woods shareholders
on 25 April 2024 and is expected to complete later in the current financial year,
subject to FCA approval.
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.
Net gearing
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
it. The Company has a medium-term target net gearing ratio of 25% determined as the
proportion of debt (net of unrestricted cash) to investment property. The net
gearing ratio at the year-end was 29.2% (2023: 27.4%).
Externally imposed capital requirements
The Company is not subject to externally imposed capital requirements, although there
are restrictions on the level of interest that can be paid due to conditions imposed
on REITs.
Financial risk management
The Company seeks to minimise the effects of interest rate risk, credit risk,
liquidity risk and cash flow risk by using fixed and floating rate debt instruments
with varying maturity profiles, at low levels of net gearing.
Interest rate risk management
The Company’s activities expose it primarily to the financial risks of increases in
interest rates, as it borrows funds at floating interest rates. The risk is managed
by maintaining:
• An appropriate balance between fixed and floating rate borrowings;
• A low level of net gearing; and
• An RCF whose flexibility allows the Company to manage the risk of changes in
interest rates by paying down variable borrowings using the proceeds of equity
issuance, property sales or arranging fixed-rate debt.
The Board periodically considers the availability and cost of hedging instruments to
assess whether their use is appropriate and also considers the maturity profile of
the Company’s borrowings.
Interest rate sensitivity analysis
Interest rate risk arises on interest payable on the RCF only, as interest on all
other debt facilities is payable on a fixed rate basis. At 31 March 2024, the RCF
was drawn at £39m (2023: £33.5m). Assuming this amount was outstanding for the whole
year and based on the exposure to interest rates at the reporting date, if SONIA had
been 1.0% higher/lower and all other variables were constant, the Company’s profit
for the year ended 31 March 2024 would decrease/increase by £0.4m (2023: £0.3m).
Market risk management
The Company manages its exposure to market risk by holding a portfolio of investment
property diversified by sector, location and tenant.
Market risk sensitivity
Market risk arises on the valuation of the Company’s property portfolio in complying
with its bank loan covenants (Note 16). The Company would breach its overall
borrowing covenant if the valuation of its property portfolio fell by 17% (2023:
19%).
Credit risk management
Credit risk refers to the risk that a counterparty will default on its contractual
obligations resulting in a financial loss to the Company. The Company’s credit risk
is primarily attributable to its trade receivables and cash balances. The amounts
included in the statement of financial position are net of allowances for bad and
doubtful debts. An allowance for impairment is made where a debtor is in breach of
its financial covenants, available information indicates a debtor can’t pay or where
balances are significantly past due.
The Company has adopted a policy of only dealing with creditworthy counterparties as
a means of mitigating the risk of financial loss from defaults. The maximum credit
risk on financial assets at 31 March 2024, which comprise trade receivables plus
unrestricted cash, was £8.3m (2023: £6.6m).
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.
Cash of £9.7m (2023: £6.9m) is held with Lloyds Bank plc which has a credit rating of
A1 31 27 .
Liquidity risk management
Ultimate responsibility for liquidity risk management rests with the Board, which has
built an appropriate liquidity risk management framework for the management of the
Company’s short, medium and long-term funding and liquidity management requirements.
The Company manages liquidity risk by maintaining adequate reserves, banking
facilities and reserve borrowing facilities, by continuously monitoring forecast and
actual cash flows and matching the maturity profile of financial assets and
liabilities.
The following tables detail the Company’s contractual maturity for its financial
liabilities. The table has been drawn up based on undiscounted cash flows of
financial liabilities based on the earliest date on which the Company can be required
to pay. The table includes both interest and principal cash flows.
31 March 31 March
31 March 2024 2024
Interest rate 2024 3 months – 1 31 March
Group and Company % 0-3 months year 2024 5 years +
1-5 years
£000 £000 £000
£000
Trade and other N/a 5,922 - 151 420
payables
Borrowings:
Variable rate 6.9 673 2,018 46,041 -
Fixed rate 3.935 197 590 20,295 -
Fixed rate 2.987 336 1,008 49,283 -
Fixed rate 3.020 264 793 4,228 38,191
Fixed rate 3.260 122 367 1,956 16,760
Fixed rate 4.100 154 461 2,460 27,214
7,668 5,237 124,414 82,585
31 March 31 March
31 March 2023 2023
Interest rate 2023 3 months – 1 31 March
Group and Company % 0-3 months year 2023 5 years +
1-5 years
£000 £000 £000
£000
Trade and other N/a 7,168 - 151 420
payables
Borrowings:
Variable rate 5.98 501 1,502 34,439 -
Fixed rate 3.935 197 590 21,082 -
Fixed rate 2.987 336 1,008 5,377 45,250
Fixed rate 3.020 264 793 4,228 39,248
Fixed rate 3.260 122 367 1,956 17,249
Fixed rate 4.100 154 461 2,462 25,367
8,742 4,722 69,694 127,535
Fair values
The fair values of financial assets and liabilities are not materially different from
their carrying values in the financial statements. The fair value hierarchy levels
are as follows:
• Level 1 – quoted prices (unadjusted) in active markets for identical assets and
liabilities;
• Level 2 – inputs other than quoted prices included within level 1 that are
observable for the asset or liability, either directly (i.e. as prices) or
indirectly (i.e. derived from prices); and
• Level 3 – inputs for the assets or liabilities that are not based on observable
market data (unobservable inputs).
There have been no transfers between Levels 1, 2 and 3 during the year. The main
methods and assumptions used in estimating the fair values of financial instruments
and investment property are detailed below.
Investment property and assets held-for-sale – level 3
Fair value is based on valuations provided by independent firms of chartered
surveyors and registered appraisers, which uses the inputs set out in Note 10. These
values were determined after having taken into consideration recent market
transactions for similar properties in similar locations to the investment properties
held by the Company. The fair value hierarchy of investment property is level 3. At
31 March 2024, the fair value of the Company’s investment properties and assets
held-for-sale was £589.1m (2023: £613.6m).
Interest bearing loans and borrowings – level 3
At 31 March 2023 the gross value of the Company’s loans with Lloyds, SWIP and Aviva
all held at amortised cost was £179.0m (2023: £173.5m). The difference between the
carrying value of Company’s loans and their fair value is detailed in Note 22.
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
On 31 May 2024 the Company paid a fourth quarterly interim dividend per share of
1.375p and a special dividend of 0.3p per share.
22. Alternative performance measures
NAV per share total return
An alternative measure of performance taking into account both capital returns and
dividends by assuming dividends declared are reinvested at NAV at the time the shares
are quoted 32 ex-dividend, shown as a percentage change from the start of the year.
Year ended Year ended
31 March 31 March
2024 2023
Group Calculation
Net assets (£000) 411,820 437,569
Shares in issue at 31 March (thousands) 440,850 440,850
NAV per share at the start of the year (p) A 99.3 119.7
Dividends per share paid during the year (p) B 5.5 5.5
NAV per share at the end of the year (p) C 93.4 99.3
(0.4%) (12.5%)
NAV per share total return (C-A+B)/A
Share price total return
An alternative measure of performance taking into account both share price returns
and dividends by assuming 33 dividends declared are reinvested at the ex-dividend
share price, shown as a percentage change from the start of the year.
Year ended Year ended
31 March 31 March
2024 2023
Group Calculation
Share price at the start of the year (p) A 89.2 101.8
Dividends per share paid during the year (p) B 5.5 5.5
Share price at the end of the year (p) C 81.4 89.2
(2.6%) (7.0%)
Share price total return (C-A+B)/A
Dividend cover
The extent to which dividends relating to the year are supported by recurring net
income.
Year ended Year ended
31 March 31 March
2024 2023
Group £000 £000
Dividends paid relating to the year 18,185 18,185
Dividends approved relating to the year 7,384 6,062
Dividends relating to the year 25,569 24,247
Loss after tax (1,502) (65,821)
One-off costs 1,557 -
Net loss on investment property and depreciation 25,687 90,609
Recurring net income 25,742 24,788
Dividend cover 100.7% 102.2%
Weighted average cost of debt
The interest rate payable on bank borrowings at the year end weighted by the amount
of borrowings at that rate as a proportion of total borrowings.
Amount drawn
31 March 2024
£m Interest rate
Weighting
RCF 39.0 6.900% 1.50%
Total variable rate 39.0
SWIP £20m loan 20.0 3.935% 0.44%
SWIP £45m loan 45.0 2.987% 0.75%
Aviva
• £35m tranche 35.0 3.020% 0.59%
• £15m tranche 15.0 3.260% 0.27%
• £25m tranche 25.0 4.100% 0.57%
Total fixed rate 140.0
Weighted average drawn facilities 179.0 4.13%
Amount drawn
31 March 2023
£m Interest rate
Weighting
RCF 33.5 5.830% 1.13%
Total variable rate 33.5
SWIP £20m loan 20.0 3.935% 0.45%
SWIP £45m loan 45.0 2.987% 0.78%
Aviva
£35m tranche 35.0 3.020% 0.61%
• £15m tranche 15.0 3.260% 0.28%
• £25m tranche 25.0 4.100% 0.59%
Total fixed rate 140.0
Weighted average rate on drawn facilities 173.5 3.84%
Net gearing
Gross borrowings less cash (excluding restricted cash), divided by property portfolio
value. This ratio indicates whether the Company is meeting its investment objective
to target 25% loan-to-value in the medium-term to balance enhancing shareholder
returns without facing excessive financial risk.
Year ended Year ended
31 March 31 March
2024 2023
Group £000 £000
Gross borrowings 179,000 173,500
Cash (9,714) (6,880)
Restricted cash 2,502 1,503
Net borrowings 171,788 168,123
Investment property and assets held-for-sale 589,122 613,587
Net gearing 29.2% 27.4%
Ongoing charges
A measure of the regular, recurring costs of running an investment company expressed
as a percentage of average NAV, and indicates how effectively costs are controlled in
comparison to other property investment companies.
Year ended Year ended
31 March 31 March
2024 2023
Group £000 £000
Average quarterly NAV during the year 423,622 489,075
Expenses 12,586 13,099
Operating expenses of rental property rechargeable to tenants (3,280) (3,526)
Ongoing charges 9,306 9,573
Operating expenses of rental property directly incurred (4,032) (3,530)
One-off costs - -
Ongoing charges excluding direct property expenses 5,274 6,043
OCR 2.20% 1.96%
OCR excluding direct property expenses 1.24% 1.23%
EPRA performance measures
The Company uses EPRA alternative performance measures based on its Best Practice
Recommendations to supplement IFRS measures, in line with best practice in the
sector. The measures defined by EPRA are designed to enhance transparency and
comparability across the European real estate sector. The Board supports EPRA’s
drive to bring parity to the comparability and quality of information provided in
this report to investors and other key stakeholders. EPRA alternative performance
measures are adopted throughout this report and are considered by the directors to be
key business metrics.
EPRA earnings per share
A measure of the Company’s operating results excluding gains or losses on investment
property, giving an alternative indication of performance compared to basic EPS which
sets out the extent to which dividends relating to the year are supported by
recurring net income.
Year ended Year ended
31 March 31 March
2024 2023
£000 £000
Group
Loss for the year after taxation (1,502) (65,821)
Net loss on investment property and depreciation 25,687 90,609
Abortive acquisition costs 1,557 -
EPRA earnings 25,742 24,788
Weighted average number of shares in issue (thousands) 440,850 440,850
EPRA earnings per share (p) 5.8 5.6
EPRA NAV per share metrics
EPRA NAV metrics make adjustments to the IFRS NAV to provide stakeholders with
additional information on the fair value of the assets and liabilities of a real
estate investment company, under different scenarios.
EPRA Net Reinstatement Value (“NRV”)
NRV assumes the Company never sells its assets and aims to represent the value
required to rebuild the entity.
31 March 31 March
2024 2023
Group £000 £000
IFRS NAV 411,820 437,569
Fair value of financial instruments - -
Deferred tax - -
EPRA NRV 411,820 437,569
440,850 440,850
Number of shares in issue (thousands)
EPRA NRV per share (p) 93.4 99.3
EPRA Net Tangible Assets (“NTA”)
Assumes that the Company buys and sells assets for short-term capital gains, thereby
crystallising certain deferred tax balances.
31 March 31 March
2024 2023
Group £000 £000
IFRS NAV 411,820 437,569
Fair value of financial instruments - -
Deferred tax - -
Intangibles - -
EPRA NTA 411,820 437,569
440,850 440,850
Number of shares in issue (thousands)
EPRA NTA per share (p) 93.4 99.3
EPRA Net Disposal Value (“NDV”)
Represents the shareholders’ value under a disposal scenario, where deferred tax,
financial instruments and certain other adjustments are calculated to the full extent
of their liability, net of any resulting tax.
31 March 31 March
2024 2023
Group £000 £000
IFRS NAV 411,820 437,569
Fair value of fixed rate debt below book value 16,926 7,636
Deferred tax - -
EPRA NDV 428,746 445,205
440,850 440,850
Number of shares in issue (thousands)
EPRA NDV per share (p) 97.3 101.0
At 31 March 2024 the Company’s gross fixed-rate debt included in the balance sheet at
amortised cost was £179.0m (2023: £173.5m) and its fair value is considered to be
£160.4m (2023: £165.9m). This fair value has been calculated based on prevailing
mark-to-market valuations provided by the Company’s lenders, and excludes ‘break’
costs chargeable should the Company settle loans ahead of their contractual expiry.
EPRA NIY and EPRA ‘topped-up’ NIY
EPRA NIY represents annualised rental income based on cash rents passing at the
balance sheet date, less non-recoverable property operating expenses, divided by the
property valuation plus estimated purchaser’s costs. The EPRA ‘topped-up’ NIY is
calculated by making an adjustment to the EPRA NIY in respect of the expiration of
rent free periods (or other unexpired lease incentives such as discounted rent
periods and stepped rents). These measures offer comparability between the rent
generating capacity of portfolios.
31 March 31 March
2024 2023
Group £000 £000
Investment property 34 28 589,122 613,587
Allowance for estimated purchasers’ costs 35 29 38,293 39,883
Gross-up property portfolio valuation 627,415 653,470
Annualised cash passing rental income 36 30 41,732 39,908
Property outgoings 37 31 (1,931) (1,875)
Annualised net rental income 39,801 38,033
Impact of expiry of current lease incentives 38 32 1,408 2,144
Annualised net rental income on expiry of lease incentives 41,209 40,177
EPRA NIY 6.3% 5.8%
EPRA ‘topped-up’ NIY 6.6% 6.2%
EPRA vacancy rate
EPRA vacancy rate is the ERV of vacant space as a percentage of the ERV of the whole
property portfolio and offers insight into the additional rent generating capacity of
the portfolio.
31 March 31 March
2024 2023
Group £000 £000
Annualised potential rental value of vacant premises 4,113 4,743
Annualised potential rental value for the property portfolio 49,395 48,976
EPRA vacancy rate 8.3% 9.7%
EPRA cost ratios
EPRA cost ratios reflect overheads and operating costs as a percentage of gross
rental income and indicate how effectively costs are controlled in comparison to
other property investment companies.
Year ended Year ended
31 March 31 March
2024 2023
Group £000 £000
Directly incurred operating expenses and other expenses 9,306 9,461
Ground rent costs (38) (37)
EPRA costs (including direct vacancy costs) 9,268 9,424
Property void costs (1,807) (1,828)
EPRA costs (excluding direct vacancy costs) 7,461 7,596
Gross rental income 42,194 40,558
Ground rent costs (38) (37)
Rental income net of ground rent costs 42,156 40,521
EPRA cost ratio (including direct vacancy costs) 22.0% 23.3%
17.7%
EPRA cost ratio (excluding direct vacancy costs) 18.7%
EPRA LTV
An alternative measure of gearing including all payables and receivables. This ratio
indicates whether the Company is complying with its investment objective to target
25% loan-to-value in the medium-term to balance enhancing shareholder returns without
facing excessive financial risk.
Year ended Year ended
31 March 31 March
2024 2023
Group £000 £000
Gross borrowings 179,000 173,500
Trade and other receivables 3,330 3,748
Trade and other payables (8,083) (7,666)
Deferred income (7,361) (7,421)
Cash 9,714 6,880
Restricted cash (2,502) (1,503)
Net borrowings 174,098 167,538
Investment property and assets held-for-sale 589,122 613,587
EPRA LTV 29.6% 27.3%
EPRA capital expenditure
Capital expenditure incurred on the Company’s property portfolio during the year.
This ratio offers insight into the proportion of cash deployment relating to
acquisitions compared to the like-for-like portfolio.
31 March 31 March
2024 2023
Group £000 £000
Acquisitions - 56,033
Development 3,567 3,580
Like-for-like portfolio 13,467 4,066
Total capital expenditure 17,034 63,679
EPRA like-for-like rental growth
Like-for-like rental growth of the property portfolio by sector which offers an
alternative view on the ‘run-rate’ of revenues at the year end.
31 March 2024
Retail warehouse
Industrial Retail Other Office Total
£000
Group £000 £000 £000 £000 £000
Like-for-like rent 16,357 3,679 9,785 5,807 5,415 41,043
Acquired properties - - - - - -
Sold properties 918 14 - 28 191 1,151
17,275 3,693 9,785 5,835 5,606 42,194
31 March 2023
Retail warehouse
Industrial Retail Other Office Total
£000
Group £000 £000 £000 £000 £000
Like-for-like rent 14,377 8,074 3,405 5,184 5,597 36,637
Acquired properties 824 1,377 217 139 - 2,557
Sold properties 583 - 34 57 690 1,364
15,784 9,451 3,656 5,380 6,287 40,558
Investment policy
The Company's investment objective is to provide Shareholders with an attractive
level of income together with the potential for capital growth from investing in a
diversified portfolio of commercial real estate properties in the UK.
The Company's investment policy is:
a. To invest in a diversified portfolio of UK commercial real estate principally
characterised by smaller, regional, core/core-plus properties that provide
enhanced income returns. Core real estate generally offers the lowest risk and
target returns, requiring little asset management and fully let on long leases.
Core-plus real estate generally offers low to moderate risk and target returns,
typically high-quality and well-occupied properties but also providing asset
management opportunities.
b. The property portfolio should not exceed a maximum weighting to any one property
sector, or to any geographic region, of greater than 50%.
c. 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.
d. No one tenant or property should account for more than 10% of the total rent roll
of the Company's portfolio at the time of purchase, except:
i. in the case of a single tenant which is a governmental body or department for
which no percentage limit to proportion of the total rent roll shall apply; or
ii. in the case of a single tenant rated by Dun & Bradstreet with a credit risk score
higher than 2, in which case the exposure to such single tenant may not exceed 5%
of the total rent roll (a risk score of 2 represents “lower than average risk”).
e. The Company will not undertake speculative development (that is, development of
property which has not been leased or pre-leased), save for redevelopment and
refurbishment of existing holdings, but may 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. Substantial redevelopments and
refurbishments of existing properties which expose the Company to development
risk would not exceed 10% of the Company’s gross assets.
f. For the avoidance of doubt, the Company is committed to seeking further growth in
the Company, which may involve strategic property portfolio acquisitions and
corporate consolidation, such transactions potentially including public and
private companies, holding companies and special purpose vehicles.
g. The Company may use gearing, including to fund the acquisition of property and
cash flow requirements, provided that the maximum gearing shall not exceed 35% of
the aggregate market value of all the properties of the Company at the time of
borrowing. Over the medium-term the Company is expected to target borrowings of
25% of the aggregate market value of all the properties of the Company at the
time of borrowing.
h. The Company reserves the right to use efficient portfolio management techniques,
such as interest rate hedging and credit default swaps, to mitigate market
volatility.
i. Uninvested cash or surplus capital or assets may be invested on a temporary basis
in:
(i) cash or cash equivalents, money market instruments, bonds, commercial paper or
other debt obligations with banks or other counterparties having a single-A (or
equivalent) or higher credit rating as determined by an internationally recognised
rating agency; or
(ii) any "government and public securities" as defined for the purposes of the FCA
rules.
j. Gearing, calculated as borrowings as a percentage of the aggregate market value
of all the properties of the Company and its subsidiaries, may not exceed 35% at
the time such borrowings are incurred.
Glossary of terms
Explanation
Term
The AIC Code addresses the Principles and Provisions
set out in the UK Corporate Governance Code, as well
2019 AIC Corporate Governance as setting out additional provisions on issues that
Code for Investment Companies are of specific relevance to the Company and provide
(AIC Code) more relevant information to shareholders.
External investment manager with appropriate FCA
Alternative Investment Fund permissions to manage an ‘alternative investment
Manager (AIFM) fund’
Alternative performance measures
(APMs) Assess Company performance alongside IFRS measures
Building Research Establishment
Environmental Assessment Method A set of assessment methods and tools designed to
(BREEAM) help understand and mitigate the environmental
impacts of developments
A project focused on carbon risk assessment for the
European real estate industry’s push to decarbonise,
building a methodology to empirically quantify the
different scenarios and their impact on the investor
portfolios and identify which properties will be at
Carbon Risk Real Estate Monitor risk of stranding due to the expected increase in
(CRREM) the stringent building codes, regulation, and carbon
prices. It also enables an analysis of the effects
of refurbishing single properties on the total
carbon performance of a company
Generally offer the lowest risk and target returns,
Core real estate requiring little asset management and fully let on
long leases.
Generally offer low-to-moderate risk and target
Core-plus real estate returns, typically high-quality and well-occupied
properties but also providing asset management
opportunities.
EPRA earnings divided by dividends paid and approved
Dividend cover for the year
Earnings per share (EPS) Profit before tax dividend by number of shares in
issue
Required certificate whenever a property is built,
sold or rented. An EPC gives a property an energy
efficiency rating from A (most efficient) to G
Energy performance certificate (least efficient). An EPC contains information about
(EPC) a property’s energy use and typical energy costs,
and recommendations about how to reduce energy use
and save money
Profit after tax, excluding net loss on property
portfolio, divided by weighted average number of
EPRA earnings per share shares in issue
ERV of occupied space as a percentage of the ERV of
EPRA occupancy the whole property portfolio
EPRA BPR and sBPR facilitate comparison with the
Company’s peers through consistent reporting of key
EPRA (Sustainability) Best real estate specific and environmental performance
Practice Recommendations (BPR), measures
(sBPR)
Annualised cash rents at the year-end date, adjusted
for the expiration of lease incentives (rent free
periods or other lease incentives such as discounted
rent periods and stepped rents), less
EPRA topped-up net initial yield non-recoverable vacant property operating expenses
and ground rent costs, divided by property valuation
plus estimated purchaser’s costs
The external valuers’ opinion of the open market
rent which, on the date of valuation, could
Estimated rental value (ERV) reasonably be expected to be obtained on a new
letting or rent review of a property
Weighted average of annualised cash rents at the
year-end date and ERV, less estimated
non-recoverable property operating expenses, divided
Equivalent yield by property valuation plus estimated purchaser’s
costs
Unbiased, probability-weighted amount of doubtful
debt provision, using reasonable and supportable
Expected credit loss (ECL) information that is available without undue cost or
effort at the reporting date
GRESB independently benchmarks ESG data to provide
Global Real Estate financial markets with actionable insights, ESG data
Sustainability Benchmark (GRESB) and benchmarks
Gasses in the earth’s atmosphere which trap heat and
Greenhouse gas (GHG) lead directly to climate change
Investment management agreement The Investment Manager is engaged under an IMA to
(IMA) manage the Company’s assets, subject to the overall
supervision of the Directors
Published, FCA approved policy that contains
information about the policies which the Company
will follow relating to asset allocation, risk
Investment policy diversification, and gearing, and that includes
maximum exposures. This is a requirement of Listing
Rule 15
The Company’s environmental and performance targets
are measured by KPIs which provide a strategic way
Key performance indicator (KPI) to assess its success towards achieving its
objectives
Comparisons adjusted to exclude assets bought or
Like-for-like sold during the current or prior year
Market Abuse Regulation (MAR) Regulations to which the Company’s code for
directors’ share dealings is aligned
Minimum Energy Efficiency
Standards (MEES) MEES regulations set a minimum energy efficiency
level for rented properties.
Equity attributable to owners of the Company
Net asset value (NAV)
The movement in EPRA Net Tangible Assets per share
plus the dividend paid during the period expressed
NAV per share total return as a percentage of the EPRA net tangible assets per
share at the beginning of the period
Gross borrowings less cash (excluding restricted
Net gearing / loan-to-value cash), divided by property portfolio value
(LTV)
Annualised cash rents at the year-end date, adjusted
for the expiration of lease incentives, divided by
Net initial yield (NIY) property valuation plus estimated purchaser’s costs
Annualised cash rents at the year-end date, adjusted
for the expiration of lease incentives, less
estimated non-recoverable property operating
Net rental income expenses including void costs and net service charge
expenses
NAV adjusted to reflect the fair value of trading
properties and derivatives and to exclude deferred
Net tangible assets (NTA) taxation on revaluations
Expenses (excluding operating expenses of rental
property recharged to tenants) divided by average
Ongoing charges ratio (OCR) quarterly NAV, representing the Annual running costs
of the Company
Annualised cash rents at the year-end date, adjusted
Passing rent for the expiration of lease incentives
A property company which qualifies for and has
elected into a tax regime which is exempt from
Real Estate Investment Trust corporation tax on profits from property rental
(REIT) income and UK capital gains on the sale of
investment properties
Variable rate loan which can be drawn down or repaid
Revolving credit facility (RCF) periodically during the term of the facility
Expected future increase in rents once reset to
Reversionary potential market rate
Share price movement including dividends paid during
Share price total return the year
Sterling Overnight Index Average
(“SONIA”) Base rate payable on variable rate bank borrowings
before the bank’s margin
SECR requirements aim to put green credentials into
Streamlined Energy and Carbon the public domain and help organisations achieve the
Report (SECR) benefits of environmental reporting
The total loan interest cost per annum, based on
Weighted average cost of drawn prevailing rates on variable rate debt, divided by
debt facilities the total debt in issue
Weighted average unexpired lease
term to first break or expiry Average unexpired lease term across the investment
(WAULT) portfolio weighted by contracted rent
Distribution of the Annual Report and accounts to members
The financial information set out above does not constitute the Company's statutory
accounts for the years ended 31 March 2024 or 2023, but is derived from those
accounts. Statutory accounts for 2023 have been delivered to the Registrar of
Companies and those for 2024 will be delivered following the Company's AGM. The
auditor has reported on the 2024 accounts: their report was unqualified, did not draw
attention to any matters by way of emphasis and did not contain statements under
39 s498(2) or 40 (3) of the Companies Act 2006. The Annual Report and accounts
will be posted to shareholders in due course, and will be available on our website
(custodianreit.com) and for inspection by the public at the Company’s registered
office address: 1 New Walk Place, Leicester LE1 6RU during normal business hours on
any weekday. Further copies will be available on request.
- Ends -
═════════════════════════════════════════════════════════════════════════════════════
41 1 Includes £11.0m of assets sold since the year end classified as
‘held-for-sale’.
42 2 The European Public Real Estate Association (“EPRA”).
43 3 Profit after tax, excluding net loss on investment property, divided by
weighted average number of shares in issue.
44 4 Profit after tax divided by weighted average number of shares in issue.
45 5 Dividends paid and approved for the year.
46 6 Profit after tax, net loss on investment property, divided by dividends paid
and approved for the year.
47 7 Net Asset Value (“NAV”) movement including dividends paid during the year on
shares in issue at 31 March 2023.
48 8 Share price movement including dividends paid during the year.
49 9 EPRA net tangible assets (“NTA”) does not differ from the Company’s IFRS NAV
or EPRA NAV.
50 10 Gross borrowings less cash (excluding restricted cash) divided by property
portfolio value.
51 11 Expenses (excluding operating expenses of rental property recharged to
tenants) divided by average quarterly NAV.
52 12 Expenses (excluding operating expenses of rental property) divided by
average quarterly NAV.
53 13 Weighted by floor area. For properties in Scotland, English equivalent EPC
ratings have been obtained.
54 14 A full version of the Company’s Investment Policy is shown in the Investment
Policy section of this Annual Report.
55 15 Core real estate generally offers the lowest risk and target returns,
requiring little asset management and fully let on long leases. Core-plus real estate
generally offers low-to-moderate risk and target returns, typically high-quality and
well-occupied properties but also providing asset management opportunities.
56 16 A risk score of two represents “lower than average risk”.
57 17 Prospective target dividend divided by share price.
58 18 Price on 12 June 2024. Source: London Stock Exchange.
59 19 Dividends totalling 5.5p per share (1.375p relating to the prior year and
4.125p relating to the year) were paid on shares in issue throughout the year.
60 20 Provisional costs relating to the aborted acquisition of abrdn Property
Income Trust Limited.
61 21 Annualised cash rents at the year-end date, adjusted for the expiration of
lease incentives, less estimated non-recoverable property operating expenses
(excluding letting and rent review fees), divided by property valuation plus
estimated purchaser’s costs. Considered an APM.
62 22 Source: Deutsche Numis.
63 23 Weighted average of annualised cash rents at the year-end date and ERV, less
estimated non-recoverable property operating expenses, divided by property valuation
plus estimated purchaser’s costs. Source: Knight Frank.
64 24 Includes £11.0m of assets sold since the year end classified as
‘held-for-sale’.
65 25 Current passing rent plus ERV of vacant properties.
66 26 As defined by the Corporation Tax Act 2010.
67 27 Source: Moody’s.
68 28 Including assets held-for-sale.
69 29 Assumed at 6.5% of investment property valuation.
70 30 Annualised cash rents at the year date
71 31 Non-recoverable directly incurred operating expenses of vacant rental
property and ground rent costs.
72 32 Adjustment for the expiration of lease incentives.
═════════════════════════════════════════════════════════════════════════════════════
Dissemination of a Regulatory Announcement that contains inside information in
accordance with the Market Abuse Regulation (MAR), transmitted by EQS Group.
The issuer is solely responsible for the content of this announcement.
═════════════════════════════════════════════════════════════════════════════════════
ISIN: GB00BJFLFT45
Category Code: MSCH
TIDM: CREI
LEI Code: 2138001BOD1J5XK1CX76
OAM Categories: 1.1. Annual financial and audit reports
Sequence No.: 327595
EQS News ID: 1923939
End of Announcement EQS News Service
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