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REG-Custodian REIT plc Custodian REIT plc : Final Results

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Custodian REIT plc (CREI)
Custodian REIT plc : Final Results

17-Jun-2022 / 07:00 GMT/BST
Dissemination of a Regulatory Announcement that contains inside information according to REGULATION
(EU) No 596/2014 (MAR), transmitted by EQS Group.
The issuer is solely responsible for the content of this announcement.

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                                                                                          17 June 2022

 

                                                   

                                          Custodian REIT plc

                                                   

                                 (“Custodian REIT” or “the Company”)

                                                   

                                            Final Results

                                                   

 

Custodian REIT (LSE: CREI), the UK commercial real estate investment company, today reports its  final
results for the year ended 31 March 2022.

 

Property strategy

 

Custodian REIT offers investors  the opportunity to  access a diversified  portfolio of UK  commercial
real estate providing an attractive level of income and the potential for capital growth, becoming the
REIT of  choice  for private  and  institutional investors  seeking  high and  stable  dividends  from
well-diversified UK real  estate.  The  Company’s portfolio is  focused on  smaller lots,  principally
targeting properties of less than £10m at acquisition, which offers:

 

  • An enhanced yield on acquisition – with  no need to sacrifice quality of  property/location/tenant
    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.

Financial highlights and performance summary

 

                                                                                                      
                                        2022   2021 Comments
Returns                                              
                                                    Increased due to stabilisation of rent  collection
EPRA 1  1  earnings per share 2  2      5.9p   5.6p following the  COVID-19  pandemic,  with  a  £0.3m
                                                    decrease in the doubtful debt provision during the
                                                    year (2021: £2.7m increase)
Basic and diluted earnings per         28.5p   0.9p  
share 3  3 
Profit before tax (£m)                 122.3    3.7  
Dividends per share 4  4               5.25p   5.0p Target dividend per  share for the  year ended  31
                                                    March 2022 of not less than 5.5p
Dividend cover 5  5                   110.3% 112.7% In line with the Company’s policy of paying  fully
                                                    covered dividends
NAV total return per share 6  6        28.4%   0.9% 5.8% dividends  paid  (2021:  4.8%)  and  a  22.6%
                                                    capital increase (2021: 3.9% capital decrease)
Share price total return 7  7          17.0%   2.3% Share price increased from 91.8p to 101.8p  during
                                                    the year
                                                     
Capital values                                       
NAV and EPRA NTA 8  8  (£m)            527.6  409.9 Increased due  to £94.0m  of valuation  increases,
                                                    £5.4m profit on disposals  and the acquisition  of
NAV per share and NTA per share       119.7p  97.6p DRUM REIT for £19.1m of new shares
Net gearing 9  9                       19.1%  24.9%  
                                                     
Costs                                                
Ongoing charges ratio 10  10  (“OCR”)  1.94%  2.48%  
                                                    Increases in ESG  compliance and marketing  costs,
OCR excluding direct property          1.20%  1.12% partially offset  by  NAV increasing  above  £500m
expenses 11  11                                     which resulted in a marginal reduction in the rate
                                                    of management fees
                                                     
Environmental                                        
Weighted average  energy  performance C (61) C (63) Continued  improvements   in   the   environmental
certificate (“EPC”) rating 12  12                   performance of the portfolio

 

Commenting on the final results, David Hunter, Chairman of Custodian REIT, said:

 

“The year to 31 March 2022 has been a period of significant recovery for the Company’s net asset value
and share price after the extreme challenges presented by the global pandemic.

 

“The recovery in  NAV has been  testament to  the strength of  the UK commercial  property, allied  to
Custodian REIT’s focus  on smaller  regional property  and the close  management of  the portfolio  to
maximise occupancy, rent collection, cash flow and earnings.

 

“Rent collection  is  back at  pre-pandemic  levels and  tenants  have honoured  their  deferred  rent
agreements allowing the Board to  increase fully covered quarterly dividends  to at least 5.5p in  the
forthcoming financial year.

 

“Although the impact of  inflation and political  uncertainty could lead to  an economic downturn,  we
believe Custodian REIT’s  portfolio, diversified by  sector, geography and  tenants, with low  gearing
will remain resilient in the face of any economic headwinds.”

 

Alternative performance measures

 

The Company reports  alternative performance  measures (“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.  Certain other APMs may not be directly comparable with  other
companies’ adjusted measures, and APMs are  not intended to be a  substitute for, or superior to,  any
IFRS measures of performance.  Supporting calculations  for APMs and reconciliations between APMs  and
their IFRS equivalents are set out in Note 21.

 

Further information

 

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

 

Custodian Capital Limited                                                        
Richard Shepherd-Cross / Ed Moore / Ian Mattioli MBE     Tel: +44 (0)116 240 8740
                                                      14 www.custodiancapital.com

 

Numis Securities Limited                             
Hugh Jonathan / Nathan Brown Tel: +44 (0)20 7260 1000
                                    www.numiscorp.com

 

Camarco                                   
Ed Gascoigne-Pees Tel: +44 (0)20 3757 4989
                         www.camarco.co.uk

 

Property highlights

                                        2022  
 
                                          £m Comments
                                              
Portfolio value                        665.2  
                                              
Property valuation increases 15  13 :         
  • From asset management initiatives   13.4 Detailed in the Asset management report
  • Acquisition of DRUM REIT             7.3 The acquisition of DRUM REIT was completed at a  discount
                                             to NAV
  • General valuation increases         73.3 Primarily due to hardening  yields in the industrial  and
                                             logistics sector
                                        94.0  
                                              
                                               • A portfolio  of  10  office,  retail  and  industrial
                                                 assets through  the  corporate  acquisition  of  DRUM
                                                 Income Plus REIT plc (“DRUM REIT”) - £41.7m
Property acquisitions 16  14            63.5   • Industrial  units  in  York,  Knowsley,  Dundee   and
                                                 Nottingham - £11.1m
                                               • Offices in central Manchester - £6.2m
                                               • A retail warehouse in Cromer - £4.5m
                                              
Capital expenditure                      3.5 Includes £1.2m  completion  of the  redevelopment  of  an
                                             industrial site in West Bromwich
                                              
                                               • A portfolio of  seven industrial  assets for  £32.6m,
                                                 £5.1m ahead of valuation when the terms of sale  were
                                                 agreed
                                               • Two car  showrooms  in  Stockport  and  Stafford  for
Profit on disposal 17  15                5.4     £13.9m, £2.6m ahead  of valuation when  the terms  of
                                                 sale were agreed
                                               • A retail  warehouse in  Galashiels for  £4.5m,  £1.8m
                                                 ahead of valuation
                                               • Five smaller units  in the retail  and other  sectors
                                                 for £3.5m at valuation
                                              
                                               • Grangemouth acquisition - £7.5m
Net cash deployment since the year end   5.6   • Winchester acquisition - £3.7m
                                               • Derby disposal - (£5.6m)

 

Business model and strategy

 

Investment Policy

 

The Company’s investment policy 18  16  is summarised below:

 

  • To invest  in a  diverse portfolio  of UK  commercial real  estate, principally  characterised  by
    individual property values of less than £10m 19  17  at acquisition.
  • 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, focussing 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 higher than  two 20  18 ,
    where exposure may not exceed 5% of the rent roll.

  • The Company will  not undertake speculative  development except for  the refurbishment 21  19   of
    existing holdings, but  may invest in  forward funding  agreements where the  Company may  acquire
    pre-let development  land and  construct investment  property  with the  intention of  owning  the
    completed development.
  • The Company may use gearing provided that the maximum 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.

 

Richard Shepherd-Cross, Investment  Manager, commented: "Our  smaller-lot specialism has  consistently
delivered significantly higher yields 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 market share from failing open-ended funds;
  • Strategic property portfolio acquisitions and corporate consolidation.

 

In all situations, the Board ensures that property fundamentals are central to all decisions.

 

Acquisition of DRUM Income Plus REIT plc

 

In November 2021 the Company acquired DRUM Income Plus REIT plc (“DRUM REIT”) at a 28% discount to its
net asset value, resulting in a £7.3m valuation gain post-acquisition.  Since acquisition DRUM REIT
has traded well, enhancing the Company’s EPRA earnings per share and maintaining its ‘red-book’
valuation at £49m.  Since the year end new lettings have been secured at certain sites which should
further enhance total returns in the coming periods.

 

David Hunter, Chairman of Custodian REIT  plc, commented: “Shareholders are seeking the  consolidation
of smaller REITs as larger  funds typically offer lower operating  costs with better liquidity.   This
acquisition demonstrated  that  the Company  and  its Investment  Manager  are capable  of  delivering
accretive corporate acquisitions which benefit both existing and incoming shareholders.”

 

Diverse portfolio

                                                                    
                                                                     Annual passing
                                                                               rent
                                                                                    % portfolio income
                                                                               (£m)

Top ten tenants                                      Asset locations
                                                                                                      
Menzies Distribution          Aberdeen, Edinburgh, Glasgow, Ipswich,            1.5               3.4%
                                      Norwich, Dundee, Swansea, York
B&M Retail                     Swindon, Ashton-under-Lyne, Plymouth,            1.3               2.7%
                                                            Carlisle
B&Q                                                Banbury, Weymouth            1.1               2.4%
Wickes Building Supplies                 Winnersh, Burton upon Trent            0.8               1.8%
First Title (t/a Enact                                         Leeds            0.6               1.4%
Conveyancing)
Sainsbury’s                                       Torpoint, Gosforth            0.6               1.4%
Regus (Maidstone West                                   West Malling            0.6               1.4%
Malling)
H&M                                                         Winsford            0.6               1.4%
Next                                            Eurocentral, Evesham            0.6               1.2%
VW Group                                           Derby, Shrewsbury            0.5               1.2%

 

                                        

                                                       Weighting
                                                       by income
                   Weighting by income               31 Mar 2022
                           31 Mar 2022
                                       Location
                                                                
Sector                                 West Midlands         18%
                                       North-West            19%
Industrial                         38% South-East            14%
Retail warehouse                   21% East Midlands         13%
Office                             17% Scotland              10%
Other                              13% North-East            12%
High street retail                 11% South-West             9%
                                       Eastern                4%
                                       Wales                  1%

                                        

 

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.
  • 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 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 and  in 2014  was instrumental  in the  launch of  Custodian REIT plc  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 £650m.

 

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
six other surveyors and four accountants.

Chairman’s statement

 

The year to 31 March 2022  has been a period of significant  recovery for the Company’s NAV and  share
price after the extreme challenges  presented by the global pandemic.   NAV total return for the  year
was 28.4%, up from 0.9% in the previous financial year due primarily to valuation increases of  £94.0m
during the  year. Rent  collection is  back at  pre-pandemic levels  and tenants  have honoured  their
deferred rent agreements which has taken recurring (EPRA) earnings to 5.9p per share.

 

Acknowledging the importance of income for shareholders I was delighted the Board was able to increase
quarterly dividends during the year which took the  total dividend declared for the year to 5.25p  per
share.  This dividend was one of the highest fully covered dividends amongst its peer group of  listed
property investment companies 22  20  for the year ended 31 March 2022 and, in line with the Company’s
policy, was 110% covered by EPRA earnings. 

 

The Company is targeting a dividend per share of at least 5.5p per share for the year ending 31  March
2023.

 

Strategy for future growth

 

Custodian REIT supportively acknowledges the market desire  for consolidation in the REIT sector,  but
inertia and entrenched interests  can make delivering  consolidation much harder  than it should  be. 
Despite these challenges we were delighted to  announce the all-share acquisition of Drum Income  Plus
REIT in November 2021.   Alignment of property strategy  and a shared focus  on income returns made  a
compelling rationale for the benefit of shareholders old and new.

 

The proposed closure of  two large open-ended property  funds by Aviva and  Aegon and the  anticipated
sale of  the entire  £940m Janus  Henderson UK  property fund  portfolio has  marked a  watershed  for
open-ended property funds  offering theoretical  daily dealing  to retail  investors.  With  universal
recognition that the  open-ended model  has failed investors  we see  diversified property  investment
companies as  the  natural  choice for  retail  investors  and wealth  managers  seeking  income  from
commercial property. 

 

Shareholder income  is derived  from earnings  and Custodian  REIT operates  with one  of the  highest
earnings yields of its peer  group giving it the greatest  capacity to pay sustainable, fully  covered
dividends, which  will make  up the  largest part  of total  return to  shareholders.  Based  on  most
recently reported EPRA earnings  Custodian REIT delivered  an earnings yield 23  21 ,  as at 31  March
2022 of 5.9%, versus a peer group average of 4.1%.

 

Net asset value

 

The NAV of the Company at  31 March 2022 was £527.6m, approximately  119.7p per share, an increase  of
22.1p (22.6%) since 31 March 2021:

                                               Pence per share     £m
                                                                     
NAV at 31 March 2021                                      97.6  409.9
                                                                     
Issue of equity 24  22                                   (0.2)   19.6
                                                                     
Valuation movements relating to:                                     
- Acquiring DRUM REIT at a discount to NAV                 1.7    7.3
- Asset management activity                                3.0   13.4
- General valuation increases                             16.7   73.3
Valuation increase before acquisition costs               21.4   94.0
                                                                     
Impact of asset acquisition costs                        (0.5)  (2.3)
Valuation increase including acquisition costs            20.9   91.7
                                                                     
Profit on disposal of investment property                  1.2    5.4
Net valuation movement                                    22.1   97.1
                                                                     
Revenue                                                    8.9   39.9
Expenses and net finance costs                           (3.2) (14.7)
Dividends paid 25  23                                    (5.5) (24.2)
                                                                     
NAV at 31 March 2022                                     119.7  527.6

 

The net valuation increase  of £94.0m saw  significant increases in the  industrial and logistics  and
retail warehouse sectors, comprising in aggregate 68%  of the portfolio by value, which together  have
been the principal drivers of NAV growth through the year.  Also of note has been the return to modest
growth in the latter  part of the  year in our  High Street portfolio,  perhaps marking an  inflection
point in  investor demand.   Property valuation  commentary is  detailed in  the Investment  Manager’s
report.

 

Custodian REIT’s investment strategy  has stood the Company  in good stead again  this year.  For  the
year to March 2022, NAV total return of 28.4% has outstripped total share price return of 17.0%, which
the Board regards  as vindication of  the quality of  the portfolio and  dividend capacity that  might
support future share price growth. 

 

During May and June 2022  all of the serving Non-Executive  Directors acquired shares in the  Company,
reflecting the Board’s view that the Company’s  current share price does not sufficiently reflect  the
true value of its net assets.

 

The market

 

Thematic investment continues to  dominate fund raising and  is polarising property investment  demand
and pricing.  The  weight of capital  chasing the industrial  and logistics sector  and more  recently
retail warehousing has led to some significant yield compression 26  24  and has boosted capital value
returns for investors in logistics  specialists.  While this yield compression  has led to NAV  growth
for existing  investors, the  counterbalance is  that income  yields are  being materially  squeezed. 
Custodian REIT’s regional smaller  property specialism, targeting the  marginal income advantage  from
smaller lots which offer a  higher rental yield for  the same level of  property and tenant risk,  has
never been of greater relative importance than in current market conditions.

 

With logistics  property  yields now  by  some distance  at  historical lows,  investors  are  acutely
sensitive to any hint of slowdown from operators such  as Amazon.  At a time of rising interest  rates
we simply do not believe that yield compression driven growth will continue in logistics property over
the next two  years.  Without  further yield  compression, investors  are relying  on continuing  high
levels of rental growth to deliver  returns, which again points to  the fortunes of the operators.   A
reversal of returns  from logistics property  will quickly highlight  the risks inherent  in a  single
sector property strategy, and  we believe would  generate a re-focus  on diversified strategies  where
managers can exploit mispricing in sub-sectors of the office and retail markets, while still  enjoying
rental growth from industrial, logistics and retail warehousing.

 

Property investment strategy

 

The Company targets  smaller regional properties,  typically below  the value level  sought by  larger
investment funds, which results in higher yields and more robust vacant possession values with  better
mitigation against binary tenant and geographical risk compared to investing in larger lots.

 

Since 2016 the Company’s upper target lot-size has been £10m but capital values have seen  significant
price inflation since then, particularly in the  industrial and logistics sector. The Board  therefore
recommends that shareholders approve an increase in the upper target lot-size from £10m to £15m at the
Company’s next Annual General Meeting  (“AGM”) on 31 August 2022.   While even £15m remains below  the
general level of  institutional demand, assets  larger than £10m  will only be  acquired where we  can
still achieve a beneficial yield margin relative to larger lots and the proposed change will offer the
Investment Manager the flexibility to consider a  wider range of opportunities that fit the  Company’s
investment policy.

 

The Board will also propose broadening its investment policy’s definition of refurbishment to  include
the redevelopment  of existing  holdings, to  a maximum  10% of  the Company’s  gross assets,  at  the
Company’s forthcoming AGM to provide flexibility to maximise shareholder returns from existing assets.

 

Borrowings

 

Since the year end  the Company has arranged  a £25m tranche  of 10 year debt  with Aviva Real  Estate
Investors (“Aviva”) at a fixed rate of interest of  4.10% per annum to refinance a £25m variable  rate
revolving  credit  facility  with  Royal  Bank  of  Scotland  (“RBS”),  acquired  via  the  DRUM  REIT
acquisition.  This refinancing will mitigate interest rate risk and refinancing risk for  shareholders
and increase  the proportion  of the  Company’s agreed  debt facilities  that are  at fixed  rates  of
interest from 61%  to 74%.  The  refinancing maintains  the significant accretive  margin between  the
Company’s 3.2% weighted average cost of debt post-refinancing and property portfolio net initial yield
of 5.7%.

 

Investment Manager

 

The performance of the Investment Manager is reviewed each year by the Management Engagement Committee
(“MEC”).  During the year the fees paid to the Investment Manager were £4.4m (2021: £3.8m) in  respect
of annual management, administrative  and transaction fees.   Further details of  fees payable to  the
Investment Manager are set out in Note 18.

 

The Board is  pleased with  the performance  of the  Investment Manager,  particularly completing  the
corporate acquisition of DRUM REIT and its continued successful asset management initiatives, detailed
in the  Investment  Manager’s report  and  Asset  management report  respectively,  which  contributed
significantly to increases in  net asset value,  portfolio value and income.   The Board is  satisfied
that the  Investment Manager’s  performance remains  aligned with  the Company’s  purpose, values  and
strategy.

 

Board succession

 

After eight years of service,  Matthew Thorne has indicated his  intention to retire as  Non-Executive
Director of the Company at  the AGM on 31  August 2022, in line with  its succession plan.  The  Board
would like to thank Matthew for his significant  contribution to the development of the Company  since
his appointment on IPO in 2014.

 

Responding to Matthew’s expected departure we are  delighted to welcome Malcolm Cooper who joined  the
Board on 6 June 2022 and will offer a range of skills including the financial expertise to take on the
role of  Chair of  the Audit  and Risk  Committee and  maintain the  Board’s property  and  governance
experience.  We look forward to the contribution Malcolm will make.

 

The Board is conscious of  stakeholder focus on diversity and  recognises the value and importance  of
diversity in the  boardroom.  No Directors  are from a  minority ethnic background  but the  Company’s
Board contains two women which satisfied the gender diversity recommendations of the Hampton-Alexander
Review for  at least  33% female  representation on  FTSE350 company  boards at  the year  end.  As  a
constituent of the FTSESmallCap Index Custodian REIT  is not bound by this recommendation.  The  Board
supports the  overall recommendations  of the  Hampton-Alexander and  Parker Reviews  for  appropriate
gender and ethnic diversity  although it is not  seen to be  in the interests of  the Company and  its
shareholders to set prescriptive diversity targets for the Board at this point.

 

The recruitment process  involved the  use of external  consultants and  focused on key  skills a  new
Director would bring including financial experience as well as diversity of experience, background and
approach as well as the traditional facets of gender, ethnicity and age.

 

Environmental, social and governance

 

The Board recognises that its  decisions have an impact on  the environment, people and  communities. 
The Board also believes that the Company’s  property strategy and ESG aspirations create a  compelling
rationale to make environmentally  beneficial improvements to its  property portfolio and  incorporate
ESG best practice into everything the Company does. 

 

On 1 April 2021 the Board constituted an ESG Committee to: set and amend where necessary the Company’s
environmental key performance indicators (“KPIs”) and monitor its performance against them; ensure  it
complies with its environmental reporting requirements  and best practice; assess the engagement  with
the Company’s environmental consultants and assess the level of social outcomes being achieved for its
stakeholders and the communities in which it operates.

 

The Company's ESG policy outlines our approach to managing ESG impacts and provides the framework  for
setting and reviewing environmental and social objectives to ensure we are continuously improving  our
performance and setting a leadership direction.

 

As a result, the Board has committed to:

 

  • Understanding environmental risks and opportunities;
  • Improving the energy performance of our buildings;
  • Reducing energy usage and emissions;
  • Achieving social outcomes and supporting local communities; and
  • Complying with all requirements and reporting in line with best practice where appropriate.

 

Progress towards these commitments during the year, details of the Company’s environmental policy  and
performance against its targets  are contained within  the ESG Committee  report within the  Strategic
report. 

 

The Board is determined to ensure the Company’s pathway towards net zero carbon fits with  stakeholder
expectations and the Company’s property  strategy.  We see the  careful implementation of a  practical
carbon reduction strategy as a crucial next step in the Company’s ESG journey and during the course of
the year ending 31 March 2023 we will engage advisors to assist the Investment Manager in developing a
detailed plan to achieve this.

 

Cladding

 

Custodian REIT’s portfolio has no exposure to ‘high risk’ assets which are typically either  high-rise
buildings (those over 18m tall)  which use cladding in their  construction or those used for  multiple
residential occupation.   However, during  the year  the Board  instigated a  detailed review  of  the
Company’s  cladding  risks  and  obligations  involving  the  Investment  Manager  and  the  Company’s
solicitors.  This review has resulted in the Investment Manager implementing a more extensive cladding
policy, moving  beyond  the mandatory  fire  risk assessment  requirements  for properties  where  the
composition of  cladding  material is  unknown  and  considering core-drilling  and  replacing,  where
necessary, cladding not compliant with Loss Prevention Certification Board guidelines.

 

Company name

 

To better  reflect the  Company’s focus  on  income and  to facilitate  retail investors  more  easily
accessing the Company’s shares  via online platforms,  the Board will  propose changing the  Company’s
name from Custodian REIT plc to Custodian Property Income REIT plc at the 31 August 2022 AGM.

 

Outlook

 

The Company enjoys the support of a wide range of shareholders with the majority classified as private
client or discretionary wealth management investors.   The Company’s investment and dividend  strategy
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.  Capital  flows out  of the  failing  open-ended
property fund model and investors moving from a yield compression fuelled capital growth strategy to a
long-term, secured income strategy will find their interests aligned with Custodian REIT.

 

Inflation is a clear  and present risk in  the market today.  Traditionally  investors have looked  to
real estate as a  hedge against the  negative impact of  inflation on investment  returns as over  the
longer term historically property values and rents increase in an inflationary environment.  Following
a period of growth, the challenge for real  estate companies is to own properties with further  rental
growth potential whose  valuation will most  closely keep  pace with rising  prices; Custodian  REIT’s
approach to this challenge is expanded upon in the Investment Manager’s report. 

 

The impact of inflation, particularly  in energy and food prices,  on consumer spending, supply  chain
constraints and  the uncertainty  caused by  the war  in Ukraine  and the  aftermath of  the  COVID-19
pandemic could lead to an economic downturn but we believe Custodian REIT’s portfolio, diversified  by
sector, geography and  tenants, with low  gearing will remain  resilient in the  face of any  economic
headwinds.

 

Income is likely to form  the greater component of  total return over the  next phase of the  property
market  and  we  believe  that  Custodian  REIT’s  strong  income  yielding  portfolio,  supported  by
higher-than-peer group EPRA earnings per share, will underpin shareholder returns.

 

David Hunter

Chairman

16 June 2022

Investment Manager’s report

 

The UK property market

 

Market sentiment remains strongly  positive for the industrial  and logistics sector.  Positivity  has
emerged, post COVID-19 lockdowns, for  central London and major regional  city offices and the  retail
warehouse sector has challenged  the general retail malaise.   As we have reported  over the last  six
months there is a nascent recovery in sentiment towards high street retail, but only in prime  pitches
and in leading retail centres.  So, with the exception of secondary retail, business park offices  and
secondary leisure schemes, market  demand is driving  value increases across the  board which has  led
directly to seven consecutive quarters of NAV growth for Custodian REIT.

 

Sector by sector the  Custodian REIT portfolio has  followed the wider market  trends during the  year
with, like for like, the  industrial and logistics valuation  increasing by 26.4%, retail  warehousing
increasing 16.4% and high street, although decreasing by 4.8% in the year, bottoming out and showing a
7.3% increase over the last six months.   The office portfolio showed a slight like-for-like  increase
in value of 1.9% reflecting the 50% weighting to business park offices, which have been a slight  drag
on performance.  Prime regional city  centre offices have fared  better post COVID-19 lockdowns.   The
current strategy is to weight our office allocation  away from business parks and towards strong  city
centres, as recent acquisitions in  Manchester and Oxford have  demonstrated, where we are  witnessing
the strongest occupier and  investor demand and  we believe the  office portfolio is  set fair to  see
growth.

 

There is rightly a keen focus on inflation at  present and whether real estate investment can offer  a
degree of inflation hedging.  In short, the answer must  be ‘yes’ as rents should grow over time,  but
with typically  five-yearly rent  reviews  and average  unexpired lease  terms  of circa  five  years,
investors should not expect a straight-line relationship  between rents and inflation.  Much focus  is
currently on RPI and CPI linked rent reviews, generally capped at up to 4% per annum, which of  course
provide shorter-term comfort but can have the effect of creating bond like investment  characteristics
with a greater emphasis placed on tenant covenant than the property fundamentals.  At some point in  a
property’s life cycle rents will always be re-based to open market values.  An over-reliance on  index
linked rent reviews can lead  to disparity between investment  values and underlying property  values.
Over the long term we do  not feel indexed rent reviews are  a worthy substitute for owning good  real
estate where we back open market rent reviews to deliver rental growth.  For long-term investors, such
as Custodian REIT, the aim is to provide inflation protection from the bricks and mortar, not from the
contractual terms of the leases.

 

The table below shows how Custodian REIT’s portfolio rental growth performance has played its part in
mitigating the negative impacts of inflation on costs and interest rates.  Notably, in the last six
months all sectors have shown rental growth:

 

                            Like-for-like rental value change
 
                   12 months to 31 March 2022 6 months to 31 March 2022
Sector
Industrial                             +10.7%                     +4.9%
Retail warehouse                        -1.7%                     +0.3%
Office                                  +2.7%                     +1.1%
Other                                   -2.9%                     +1.9%
High street retail                      -5.3%                     +2.0%
Whole portfolio                         +3.8%                     +2.9%

 

Across the industrial and logistics portfolio, notwithstanding the rental growth to date, the  average
rent stands at only £6.17 per sq ft  for let properties (£5.27 including vacancies) with an  estimated
rental value of  £7.05 per sq  ft (£6.20 including  vacancies), suggesting a  latent rental uplift  of
c.14%.  Furthermore,  both passing  rents and  estimated rental  values are  some way  below the  rent
required to bring forward new development, indicating further growth potential. 

 

Retail warehousing and high  street retail rents appear  to have bottomed out  and we are seeing  some
recent demand led rental  growth in these sectors.   Importantly retail rents are  growing from a  low
base, following a period of rental decline making them affordable for tenants.  By way of example, the
average retail warehouse rent across the portfolio stands at circa £14.30 per sq ft (£13.58  including
vacancies), broadly in line with  current estimated rental values and  much lower than average  market
levels.

 

In select locations, notably prime regional city centres, we are seeing office rents increasing.  This
is by no means  applicable to all  regional offices but  is focused on  high quality, flexible  office
space with  strong  environmental  credentials.  The  recent  acquisition  of 60  Fountain  Street  in
Manchester is an example of  how Custodian REIT is taking  advantage of the opportunity to  reposition
property to meet  the expected demands  of tenants,  post pandemic, and  to pick up  the higher  rents
attributable to refurbished space.

 

The greater  driver of  inflation appears  to  be cost-push  rather than  demand-pull as  the  economy
struggles with supply chain constraints, energy price increases, labour shortages and the aftermath of
pandemic  restrictions.   These  factors  all  mitigate  against  widespread,  low  cost,  speculative
development which would otherwise  help resolve the demand/supply  imbalance that is promoting  rental
growth. 

 

We believe Custodian REIT’s portfolio  is particularly well positioned to  see rental growth as it  is
focused on smaller regional properties:

 

In the industrial  and logistics sector,  which accounts for  49% of the  portfolio by value,  smaller
properties are more expensive to develop, pro-rata,  so require higher rents to justify  development. 
Rents will continue to grow until they balance out inflation in build costs.

 

The retail warehouse portfolio is almost exclusively focused on DIY, homewares, discounters and  food,
all let off affordable rents.  This occupier profile is best matched with current market demand and so
well placed to pick up rental growth.

 

We have reorganised our  high street retail  portfolio over the  last two years,  exiting most of  the
secondary retail locations.  We have let three vacant high street properties during the year and  have
terms agreed or are seeing active  demand for the very limited remaining  vacant space we have in  the
high street portfolio from both  retail and leisure occupiers.  Low  vacancy rates in prime  locations
and occupier demand should be supportive of future rental growth.

 

In  the  office  portfolio  we  have  identified,  or  are  progressing,  a  number  of  refurbishment
opportunities with a keen eye on environmental  improvements.  Owners of smaller regional offices  are
often not sufficiently well resourced to create high quality small suite offices that are a match  for
the larger floorplates.  However, we  believe that occupier demand will  be focused on higher  quality
space to support businesses in  attracting their employees back into  the office.  We believe that  by
positioning our office  portfolio to  meet occupier  demand we will  reduce vacancy  and drive  rental
growth.

 

Prevailing investment approach

 

Based on  our assessment  of the  current market,  our strategy  of a  regionally focused  diversified
portfolio, set out below, has proven resilient and we expect to continue to reinvest the proceeds from
selective disposals.

 

  • Maintain weighting to industrial and  logistics - assets in this  sector still have latent  rental
    growth, but yields are ‘topping out’ and there have been recent significant share price  decreases
    in the large distribution shed sector over fears of decreasing demand for new space;
  • Retail warehousing let off low rents which should recover from 2021 levels;
  • Selective regional offices with  a focus on  strong city centre  locations instead of  out-of-town
    business parks;
  • Drive thru’ 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

 

The industrial and logistics sector has been flooded with capital, much of it overseas private equity,
which has been a  big driver of  price inflation.  The fundamental  occupational dynamics for  smaller
industrial and logistics assets continue to support rental growth: increased demand from the logistics
sector servicing ‘E-tailing’ and the onshoring of the national supply chain; lack of supply of modern,
fit-for-purpose units  and build  cost  inflation which  is setting  higher  threshold rents  to  fund
development.  All of this has led to valuation  growth which has been strongly positive for  Custodian
REIT. Vacancy rates are very low, against  long-term averages, supporting cash flow and  opportunities
to invest at prices that are fully supported  by vacant possession values still exist amongst  smaller
regional properties.   Recently  there  have  been indications  that  occupational  demand  for  large
distribution sheds may be decreasing, with Amazon suggesting it potentially has over-capacity, but the
favourable dynamics of smaller lot-sizes which have  seen less recent speculative development and  are
less reliant on the large retailers should make the Company’s portfolio defensive.

 

In summary:

 

  • Occupational demand is robust; supply is tight
  • Vacancy rate below the long-term average
  • Latent rental growth potential
  • Investment demand at record levels with pricing to match
  • Target sector for well-priced opportunities

 

High street retail

 

The high street retail sector is starting to find its feet after a difficult four years.  The pandemic
cleared out the last of the ‘lame ducks’ on  the high street, so most retailers who are still  trading
appear robust and want to be in physical stores.  In prime locations rents appear to be bottoming out,
or even seeing a  slight re-bound.  Lower  rents are supporting occupier  demand and reducing  vacancy
rates and void periods, in prime locations, which is providing a degree of confidence to investors not
seen for some  time.  The Company’s  high street retail  portfolio is, by  and large, concentrated  on
retailers of essentials  such as groceries,  pharmaceuticals, banking and  discount items rather  than
luxury or fashion items.  This focus on ‘need’ versus ‘want’ retailers should prove more defensive  as
consumer spending capacity decreases in the current inflationary environment. 

 

In summary:

 

  • Over-supply - rents have suffered but are bottoming out

Retail warehouse

 

Out-of-town retail has  seen a  quick turnaround  in investor  demand over  the last  24 months,  most
particularly in the last 12 months.  The combination  of convenience, lower costs per square foot  and
the complementary offer to online retail has  kept these assets trading strongly most notably  amongst
DIY, discounters, homewares  and food  retailers, which should  prove defensive  if consumer  spending
levels decrease.  As the second largest sector in the Custodian REIT portfolio, the recovery in market
sentiment towards out-of-town retail has been positive and vacancy rates remain low.

 

In summary:

 

  • Units let off low rents
  • Lower costs of occupation
  • Complementary to online

 

Offices

 

The office sector is likely to be forever  changed following the mass working from home experiment  of
the pandemic despite  the government’s  current drive  to encourage  a return  to the  office and  the
uncertainty a potential economic downturn  brings.  In truth, the change  that this has brought  about
has been an acceleration of a trend that was already embedded.  Prime, regional city centres appear to
be showing demand from occupiers and investors  alike and have outperformed business park offices.   A
clear trend that  has emerged is  the need for  landlords to provide  a greater level  of service  and
flexibility to office tenants, the so called ‘hotelisation’ of offices.

 

The ‘hotelisation’ of offices

 

We expect a ‘hotelisation’ of office buildings to be necessary to entice employees away from their
home office while driving rents higher.

 

The COVID-19 pandemic led many to call the demise of the office and valuations plummeted as employees
set up work at kitchen tables across the country, but we do not believe that offices will become
redundant and in ‘the eye of the pandemic’ Custodian REIT acquired offices in Manchester and Oxford
and is using the former as a trial run for the next phase of office investing: ‘the hotelisation of
offices’.

 

The Company is not quite breaking new ground but we are at the vanguard of other landlords with akin
to a concierge service for office occupants, giving flexibility and services that are not typical in
standard 25-year leases.  While the concept is yet to be proven we know that tenants want more from
their landlords than just a lease.

 

From conversations we are having with occupants and being occupants ourselves as a business, we know
that there is nothing tenants hate more than looking at offices and being shown floor after floor of
empty space with grey carpets.  They don’t want to take a five-year lease, have to fit the space out
and install a broadband connection; they don’t have interest in it, they don’t have time, or the
resources to do it.  On top of those costs, tenants then pay dilapidation costs to the landlord when
they leave and must return the building to the state it was in when they took it.

 

What you are asking tenants to do is fit out an office, then strip it out, and put it all in a skip
and that is not good for their ESG credentials.

 

Instead, we plan to offer tenants a ‘turnkey’ office with all facilities, fit out, and services
managed by the Investment Manager.  Occupants want a space they can walk into and most businesses need
the same thing; a large meeting room, a small meeting room, a breakout area, a kitchen, a comfortable
reception, desks with an internet connection as most people work from laptops, and there will be an
element of hotdesking.  Companies expect a flexible workspace where they will have three days a week
heavy use.

 

Overall, we are seeking to invest in making the offices ‘nicer than being at home’ so people actually
want to work there.

 

We are trialling the concept with the building in Manchester, and this includes converting the top
floor into a covered roof terrace with a coffee lounge, additional meeting rooms for tenants to use
and a yoga studio.  Having spoken to tenants, we are confident they will pay more for a space that
they can just walk into and start operating from.  Most say they are willing to pay more to take all
the hassle away and this will minimise vacancies and drive the rents higher, but we will be selective
over appropriate locations for this format and will ensure upgrades are properly costed to ensure
estimated costs are supported by expected rental and valuation increases.

 

This is just consumer behaviour playing out.  People don’t buy cars anymore, they lease them with a
service plan because that takes the problem away.  You lease your phone and when the battery starts to
die, you trade it in for a new one.

 

People are demanding a higher level of service but  they do not want the same level of  responsibility
and ownership as 20 years ago.

 

Other

 

Our key sub-sector for growth within the alternative  sector is drive-through where we have grown  our
holding to eight assets through acquisition,  development or conversion of existing restaurant  sites,
with a further conversion and acquisition in  the pipeline. We believe these assets offer  significant
rental growth  potential and  the conversions  carried  out during  the year  were subject  to  fierce
occupier competition from established operators  and, in particular, new  entrants into the UK  market
from North America.

 

 
                                      Weighting   Weighting
                                      by income   by income
                                    31 Mar 2022 31 Mar 2021
Sub-sector of ‘Other’ sector assets
                                                           
Motor trade                                 24%         35%
Gym                                         20%         18%
Pub and restaurant                          18%         16%
Drive-through                               14%          7%
Trade counter                                8%          7%
Leisure                                      8%          9%
Other                                        8%          8%
Total of ‘Other’ sector                    100%        100%

 

ESG

 

The sustainability credentials of both  the building and the location  will be evermore important  for
occupiers and  investors.   As  Investment  Manager  we are  absolutely  committed  to  the  Company’s
challenging goals in relation to  ESG and believe the  real estate sector should  be a leader in  this
field.

 

ESG has become an imperative for many investors.  Commercial real estate is a significant  contributor
to national emissions  so we believe  an emphasis  on how we  can improve the  “E” (Environmental)  is
particularly relevant for real estate.  In this regard we are striving to beat the Company’s target to
improve the Energy Performance Certificates (“EPC”) of the portfolio.  During the year the Company has
updated EPCs at 20 units across 15 properties  covering 358k sq ft for properties where existing  EPCs
had expired or where works had been completed.   For updated EPCs, there was an aggregate decrease  in
rating of 34 energy performance asset rating points. 

 

Energy  performance  and  emissions  are  important  considerations  across  all  redevelopments   and
refurbishments in  the portfolio  as  is the  importance  of “S”  (Social)  in creating  an  engaging,
appropriate and  sustainable (in  all senses  of the  word) built  environment.  We  believe that  ESG
improvements are an opportunity for  shareholders to benefit from  the enhanced rents, valuations  and
‘lettablilty’ of the portfolio which should deliver valuation improvements over and above the cost  of
the investment.  Investing in real estate that meets the ESG requirements of occupiers and legislation
should lead to  shorter periods of  vacancy, higher rents  and enhanced values.   Remembering the  “G”
(Governance) we have policies, embedded in our strategy, to keep Custodian REIT on target to meet  the
required standards but  we remain focused  on delivering returns  at the same  time.  The targets  the
Company has set itself are set out in the ESG Committee report.

 

Property portfolio balance

 

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

                                                                                                      
              Valuation   Weighting by Valuation Weighting   Valuation   Valuation
                        income 27  25            by income    movement    movement                    
               31 March                 31 March                before   including
                   2022       31 March      2021  31 March acquisition acquisition Weighting Weighting
                                                                 costs       costs  by value  by value
                     £m           2022        £m      2021                      £m  31 March  31 March
                                                                    £m                  2022      2021
Sector
                                                                                                      
Industrial        325.1            38%     270.2       41%        69.1        67.5       49%       49%
Retail            125.4            21%      99.7       21%        17.0        16.7       19%       18%
warehouse
Office             88.1            17%      54.8       12%         0.1       (0.3)       13%       10%
Other 28  26       76.9            13%      84.4       16%         4.7         4.7       12%       15%
High street        49.7            11%      42.8       10%       (4.2)       (4.2)        7%        8%
retail
Gain on
acquisition         N/a            N/a       N/a       N/a         7.3         7.3       N/a       N/a
of DRUM REIT
                                                                                                      
Total             665.2           100%     551.9      100%        94.0        91.7      100%      100%

 

For details of all properties in the portfolio please see  29 custodianreit.com/property/portfolio.

 

Acquisitions

 

The Company invested £63.5m in the following asset acquisitions during the year:

 

  • A 20k sq ft  office building on  Fountain Street, Manchester for  £6.25m.  The property  comprises
    basement parking and six floors  let to Leyton UK,  Meridian Healthcomms, Venditan and  Fourthline
    with an aggregate annual rent of £407k, reflecting a net initial yield 30  27  (“NIY”) of 6.1%;
  • A 46k sq ft retail warehouse in Cromer for £4.5m occupied by Homebase with an annual passing  rent
    of £300k, reflecting a NIY of 6.3%;
  • A 49k sq ft industrial  asset in Knowsley, Liverpool for  £4.325m.  The asset comprises six  units
    occupied by Engineering  Solutions and  Automations, Portakabin, Green  Thumb, Central  Electrical
    Armature and Med Imaging with an aggregate annual passing rent of £260k, reflecting a NIY of 5.6%;
  • A 29k sq ft  industrial unit in  York for £3.0m  occupied by Menzies  Distribution with an  annual
    passing rent of £186k, reflecting a NIY of 5.9%;
  • A 30k sq ft industrial unit  in Dundee for £1.9m occupied  by Menzies Distribution with an  annual
    passing rent of £118k, reflecting a NIY of 5.9%; and
  • A 24k sq ft industrial unit in Nottingham for £1.875m occupied by Hickling & Squires printers with
    an annual passing rent of £130k, reflecting a NIY of 6.53%.

 

On 3 November 2021 the Company  acquired 100% of the ordinary share  capital of DRUM Income Plus  REIT
plc.  Consideration  for  the  acquisition of  20,247,040  new  ordinary shares  in  the  Company  was
calculated on an ‘adjusted NAV-for-NAV basis’, with each company’s 30 June 2021 NAV being adjusted for
respective acquisition costs  with DRUM  REIT’s property portfolio  valuation adjusted  to the  agreed
purchase price of £43.5m (31 March 2022 valuation: £49.0m).

 

DRUM REIT’s property portfolio at 31 March 2022 is summarised below:

 

  • 10 regional properties comprising five  offices, three retail parks,  one shopping centre and  one
    industrial estate in aggregate covering approximately 330k sq ft
  • 79 tenants, the largest of which is Skills  Development Scotland with annual rent of £0.4m  (c.13%
    of DRUM REIT’s rent roll)
  • EPRA occupancy rate of 80.1%, providing some short-term asset management opportunities
  • WAULT 31  28  of 3.3 years
  • Contractual annual rent roll of £3.3m with an estimated rental value (“ERV”) of £4.5m
  • Portfolio valuation of £49.0m
  • Reversionary yield 32  29  (“RY”) of 8.6%

 

DRUM REIT’s portfolio represents an excellent  fit with Custodian REIT’s investment policy,  targeting
smaller regional property  with a  strong income  focus.  The  purchase price  reflected a  sufficient
discount to DRUM REIT’s  NAV to be accretive  to existing Custodian REIT  shareholders and to  provide
DRUM REIT shareholders with an  increase in like for  like share price, as  well as delivering them  a
growing dividend from  a much  larger specialist  in the smaller  regional property  sector with  much
improved liquidity.

 

Details of each property within DRUM REIT’s portfolio are:

 

Location: Gosforth, Newcastle                        Location: Central Glasgow

Sector: Retail (shopping centre)                     Sector: Office

Tenants: Sainsbury’s, multiple small local retailers Tenant: Skills Development Scotland

RY: 8.1%                                             RY: 6.8%

Agreed purchase price: £8.975m                       Agreed purchase price: £7.087m
Location: Cheadle, Greater Manchester                Location: Edinburgh Business Park

Sector: Office                                       Sector: Office

Tenants: Agilent Technologies, Micron Europe         Tenant: Multiple

RY: 9.3%                                             RY: 10.0%

Agreed purchase price: £5.036m                       Agreed purchase price: £4.593m
Location: Central Manchester                         Location: Southport

Sector: Office                                       Sector: Retail warehouse

Tenants: Multiple                                    Tenant: Multiple

RY: 12.4%                                            RY: 9.0%

Agreed purchase price: £4.503m                       Agreed purchase price: £3.963m
Location: Dunfermline                                Location: Gloucester

Sector: Retail warehouse                             Sector: Retail warehouse

Tenants: Multiple                                    Tenant: Farmfoods

RY: 9.8%                                             RY: 8.3%

Agreed purchase price: £3.687m                       Agreed purchase price: £2.396m
Location: Aberdeen airport                           Location: Gateshead

Sector: Industrial                                   Sector: Office

Tenants: Multiple                                    Tenants: Worldpay, Datawright

RY: 11.8%                                            RY: 17.0%

Agreed purchase: £1.66m                              Agreed purchase: £1.6m

 

Since the year end the Company has acquired:

 

  • A 87k sq ft industrial facility in Grangemouth for £7.5m occupied by Thornbridge Sawmills with  an
    annual passing rent of £388k, reflecting a NIY of 5.5%; and
  • A 5k sq ft retail asset in Winchester for £3.65m occupied by Nationwide Building Society and Hobbs
    with an aggregate annual passing rent of £249k, reflecting a NIY of 6.4%.

 

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. Identifying opportunities to dispose of assets  which the market overrates, have a  special
purchaser or that no longer fit within the Company’s investment strategy is important and through  the
year sales proceeds of £54.4m were £9.6m ahead  of valuation when the disposals were agreed (or  £5.4m
above final quarterly valuations prior to sale).

 

Taking advantage  of the  strength and  depth of  demand in  the industrial/logistics  sector and  the
increasing demand from owner occupiers, we were delighted to conclude some opportunistic sales  during
the year.  We concluded the portfolio  sale of seven industrial units which  we felt did not meet  our
medium-term aspirations for  rental growth or  might require a  level of capital  expenditure that  we
would not recover in the valuation.  As part of the sale, we agreed a delayed completion which enabled
us to partially reinvest the  expected proceeds in advance of  completion, which has helped to  reduce
cash drag. 

 

We also sold, to owner occupiers/special purchasers, a B&Q retail warehouse in Galashiels and two  car
show rooms, in Stockport and Stafford as detailed in the complete list for the year below:

 

  • A portfolio of  seven industrial  properties located in  Gateshead, Stockton-on-Tees,  Warrington,
    Stone, Christchurch, Aberdeen and Bedford for £32.6m, £5.1m (19%) above the properties’  valuation
    when terms of  the sale  were agreed  and £2.9m  above the  last valuation.   The properties  were
    acquired either in the seed portfolio at IPO or within subsequent portfolio acquisitions and  have
    an aggregate current passing rent of £2.0m reflecting a NIY on sale price of 5.9%; 
  • A 42k sq ft car showroom in Stockport for £9.0m, £1.4m (18%) ahead of valuation when terms of  the
    sale were agreed and £0.4m above the last valuation;
  • A 23k sq ft car showroom in Stafford for £4.9m, £1.15m (31%) ahead of valuation when terms of  the
    sale were agreed and £0.9m above the last valuation;
  • A 31k sq ft retail warehouse in Galashiels occupied by B&Q for £4.5m to a special purchaser, £1.8m
    (67%) ahead of valuation;
  • High street retail units  in Norwich, Nottingham,  Kings Lynn and Cheltenham  at valuation for  an
    aggregate £2.9m; and
  • A vacant  children’s day  nursery in  Basingstoke for  £0.6m, £0.1m  ahead of  the last  published
    valuation.

 

Since the year end the Company has sold a 25k sq ft car showroom occupied by Audi for £5.6m.

 

Outlook

 

The recovery in NAV during the year has been testament to the strength of the UK commercial  property,
allied to  Custodian REIT’s  focus  on smaller  regional  property and  the  close management  of  the
portfolio to maximise occupancy, rent collection, cash flow and earnings.

 

The absolute focus on income is central to the management style and strategy of Custodian REIT.   This
approach is likely to be validated as yield  compression slows and shareholder returns are reliant  on
earnings and dividends.  Rent collection  has normalised and Custodian  REIT has latent rental  growth
which will justify current valuations.

 

While thematic investment has been  the overwhelming focus of investment  over the last 12 months,  we
believe the  diversified  strategy, if  applied  with  discretion and  clear  aims, will  be  able  to
capitalise on  market  mispricing  for  recovering  sectors and  offer  shareholders  a  balanced  and
attractive risk adjusted return.

 

Richard Shepherd-Cross

for and on behalf of Custodian Capital Limited

Investment Manager

16 June 2022

 

Asset management report

 

Asset management strategy

 

Our asset management strategy is summarised as follows:

 

 1. Generating strong and predictable levels of cash flow by:

 

  • In-house management  and rent  collection  - maintaining  direct  relationships with  tenants  and
    identifying early any issues to they can promptly be addressed
  • Minimising vacancies – proactively discussing renewals and regears and pre-empting exits to ensure
    marketing has commenced in advance of expiry

 

 2. Enhancing asset value through:

 

  • Refurbishment –  ensuring  tenants perform  maintenance  obligations within  lease  contracts  and
    working with tenants to actively refurbish and improve assets
  • Improving energy  performance –  encouraging tenants  to  reduce carbon  emissions and  usage  and
    investing in assets to enhance ESG credentials and future-proof rents

 

 3. Maximising opportunities of differing cycles in different sectors:

 

  • Adjusting allocations – focusing on  areas with the best  medium-term rental growth prospects  and
    mitigating risk by maintaining a diversified portfolio
  • Opportunistic sales and acquisitions  – taking advantage  of off-market acquisition  opportunities
    and only selling assets ahead of valuation or  that no longer fit within the Company’s  investment
    strategy

 

Our continued focus on asset  management during the year including  rent reviews, new lettings,  lease
extensions and the retention of  tenants beyond their contractual break  clauses resulted in a  £13.4m
valuation increase in the year. 

 

Property portfolio summary

                                                            2022      2021
                           Property portfolio value      £665.2m   £551.9m
                           Separate tenancies                339       265
                           EPRA occupancy rate             89.8%     91.6%
                           Assets                            160       159
                           WAULT                       4.7 years 5.0 years
                           NIY                              5.7%      6.6%
                           Weighted average EPC rating    C (61)    C (63)

 

Key asset management initiatives completed during the year include:

 

  • A 10  year lease  with a  fifth year  tenant break  option with  DS Smith  Packaging on  a  vacant
    industrial unit in Redditch with an annual rent of £401k, increasing valuation by £3.5m;
  • A 10 year lease  with a fifth year  tenant break option with  Harbour International Freight on  an
    industrial unit in Manchester with an annual rent of £316k, increasing valuation by £2.1m;
  • A 10 year lease with a fifth year tenant break option with PDS Group on a newly refurbished vacant
    industrial unit in West Bromwich with an annual rent of £395k, increasing valuation by £2.0m;
  • Exchanging agreements  for  lease  for 15  year  leases  with  Tim Hortons  on  former  Pizza  Hut
    restaurants in  Leicester and  Watford, which  are to  be converted  to drive-through  restaurants
    following Pizza Hut’s company voluntary arrangement  (“CVA”) with aggregate annual rent of  £275k,
    increasing valuations by £1.9m;
  • A five year lease with a third year break option to Green Retreats at a vacant industrial unit  in
    Farnborough at an annual rent of £185k, increasing valuation by £0.9m;
  • A 10 year lease renewal with a fifth year tenant break option with MTS Logistics on an  industrial
    unit in Bardon  with a  stepped annual rent  of £175k,  rising to £205k,  increasing valuation  by
    £0.8m;
  • A five year lease without  break to Galliford Try  on a vacant office  suite in Leicester with  an
    annual rent of £165k, increasing valuation by £0.5m;
  • A 10 year lease renewal  with a fifth year  break option with BSS Group  at an industrial unit  in
    Bristol, increasing the annual passing rent from £250k to £255k with an open market rent review in
    year five, increasing valuation by £0.3m;
  • A 15 year lease without break with Pure Gym on a vacant retail warehouse unit in Grantham with  an
    annual rent of £90k, increasing valuation by £0.3m;
  • A five year lease  with a fourth year  tenant break option with  Carbide Properties (t/a  Tungsten
    Properties) on  a vacant  office  suite in  Leicester  with an  annual  rent of  £78k,  increasing
    valuation by £0.2m;
  • A five year lease renewal with a third year tenant break option with The Works on a retail unit in
    Bury St Edmunds with an annual rent of £85k, increasing valuation by £0.2m;
  • A 10 year lease of the vacant ground floor and a five year extension of the first floor with Dehns
    at the Company’s  recently acquired offices  in Oxford with  an aggregate annual  passing rent  of
    £271k, increasing valuation by £0.2m;
  • A 10 year lease with a  fifth year tenant break option with  Livingstone Brown on a vacant  office
    suite in Glasgow with an annual rent of £56k, increasing valuation by £0.2m;
  • A five year  lease renewal  with a  third year  break option  with DHL  at an  industrial unit  in
    Aberdeen, maintaining passing rent at £208k and increasing valuation by £0.1m;
  • A 10 year lease with third and fifth year tenant break options with Ramsdens Financial on a vacant
    retail unit in Glasgow with an annual rent of £55k, increasing valuation by £0.1m;
  • A 10  year  lease with  fifth  and  seventh year  tenant  break options  with  Industrial  Control
    Distributors on an industrial unit in Kettering with an annual rent of £25k, increasing  valuation
    by £0.1m;
  • A 15 year lease without break with Loungers on a retail unit in Shrewsbury, with an annual rent of
    £90k, with no impact on valuation;
  • A 15 year  lease renewal  with a  tenth year  tenant break  option with  Smyths Toys  on a  retail
    warehouse unit in Gloucester with an annual rent of £130k, with no impact on valuation;
  • A 10 year lease with a fifth year tenant break option with Diamonds of Chester Camelot on a vacant
    retail unit in Chester, with an annual rent of £35k, with no impact on valuation;
  • A five year lease without break with Midon on an industrial unit in Knowsley, with an annual  rent
    of £37k, with no impact on valuation;
  • A five year lease with  a third year tenant  break option with Clogau on  a vacant retail unit  in
    Shrewsbury with an annual rent of £50k, with no impact on valuation;
  • A six month lease extension with Saint Gobain on an industrial unit in Milton Keynes, with passing
    rent increasing from £265k to a ‘premium rent’ of £441k, with no impact on valuation;
  • A short-term four month  licence with Royal  Mail on a  vacant industrial unit  in Redditch for  a
    licence fee of £135k, with no impact on valuation;
  • A 10 year lease renewal with a fifth year  break option with MP Bio Science at an industrial  unit
    in Hilton, increasing passing rent from £28k  to £36k, resulting in an aggregate valuation  uplift
    of £0.1m;
  • A 10 year lease to SpaMedica at a vacant office building in Leicester with annual rent of £87k and
    open market rent review in year five, with no impact on valuation;
  • A lease with Just for  Pets on a vacant retail  warehouse unit in Evesham for  a term of 10  years
    with a break in year six, at an annual rent of £95k, with no impact on valuation;
  • A five year lease renewal with Quantem Consulting at an office building in Birmingham,  increasing
    the annual passing rent from £30k to £39k, with no impact on valuation;
  • A 10 year  lease extension  with a  break option  in year five  with Subway  at a  retail unit  in
    Birmingham, maintaining the annual passing rent of £14k, with no impact on valuation;
  • A five year lease renewal with a third year tenant break option with Superdrug on a retail unit in
    Weston-super-Mare with an annual rent of £60k, with no impact on valuation;
  • A five year lease renewal without  break with Holland and Barrett  on a retail unit in  Shrewsbury
    with an annual rent of £60k, with no impact on valuation;
  • A three year lease with  Saima Rani Salon on  a vacant retail unit  in Shrewsbury, with an  annual
    rent of £15k, with no impact on valuation;
  • A five year  lease without break  to Realty Law  on a vacant  office suite in  Birmingham with  an
    annual rent of £28k, with no impact on valuation; and
  • A five year  lease renewal with  a third year  break option to  Done Brothers (t/a  Betfred) at  a
    retail unit in Cheltenham with an annual rent of £25k, with no impact on valuation.

 

These  positive  asset  management  outcomes  have  been  partially  offset  by  the  impact  of   the
Administrations of JTF Wholesale (£586k of annual rent) and Rapid Vehicle Repair (£71k of annual rent)
which have resulted in an aggregate 1.8% decrease in the annual rent roll.

 

Letting activity is strong across  most sectors.  We have a  strong pipeline of potential new  tenants
and since the year end have completed:

 

  • A five year  lease extension  with CDS  (t/a The Range)  moving lease  expiry out  to 2036,  which
    involved expanding the external demise by 2k sq  ft to accommodate a larger garden centre with  an
    additional £10k per annum of rent payable on the new space;
  • A 10-year lease on a vacant industrial unit in Avonmouth to Nationwide Platforms with passing rent
    of £300k;
  • A 10-year lease renewal  with Heywood Williams (t/a  Window Ware) with the  agreed annual rent  of
    £289k reflecting £8 per sq ft;
  • A new 10-year lease with Bunzl on an industrial unit in Castleford at an increased rent of  £164k,
    an £18k uplift from the previous passing rent;
  • A 10-year lease renewal with B&Q in Banbury with a passing rent of £400k, reflecting £11.50 per sq
    ft; and
  • An agreement for a 10-year lease with Costa Coffee on a high street unit in Colchester with annual
    rent of £65k.

 

Occupancy has been negatively impacted by the acquisition of DRUM REIT but we expect levels across the
portfolio, including DRUM REIT assets, to continue to recover over the next 6-12 months as we complete
more new lettings, unless there were to be further significant tenant failures.

 

Property portfolio risk

 

We have managed  the property portfolio’s  income expiry profile  through successful asset  management
activities with 57% of aggregate  income expiring within five years  from 31 March 2022 (2021:  53%). 
Short-term income at risk is a relatively low proportion of the property portfolio’s income, with  38%
expiring in the next  three years (2021:  31%) and our  experience suggests that  even in the  current
uncertain climate, the majority of tenants do not exit at break or expiry.

 

                              31 March 31 March
                                  2022     2021
Aggregate income expiry
                                               
0-1 years                          15%      11%
1-3 years                          23%      20%
3-5 years                          19%      22%
5-10 years                         31%      34%
10+ years                          12%      13%
                                               
                                  100%     100%

 

Outlook

 

Looking forward,  we  maintain a  positive  outlook with  many  of the  asset  management  initiatives
currently under way  expected to  come to  fruition over the  next 6-12  months which  should see  new
tenants secured, leases extended and new investment into existing assets improving their environmental
credentials and realising their full potential.

 

Alex Nix

Assistant Investment Manager

for and on behalf of Custodian Capital Limited

Investment Manager

16 June 2022

 

ESG Committee report

 

The ESG Committee (“the Committee”) was constituted on 1 April 2021.  Its key responsibilities are:

 

  • To set the Company’s  environmental KPIs, monitor  performance against those  KPIs and ensure  the
    Investment Manager is managing its property portfolio in line with the ESG policy;
  • To ensure the Company complies with its  external reporting requirements on ESG matters  including
    the Global Real Estate Sustainability Benchmark (“GRESB”), EPRA and Streamlined Energy and  Carbon
    Report (“SECR”) and adopts sector best practice where appropriate;
  • To assess, at  least annually, the  fees and scope  of engagement of  the Company’s  environmental
    consultants; and
  • To assess whether the Company  is obtaining a suitable level  of social outcomes for its  tenants,
    other stakeholders and the communities in which it operates.

 

The Company is committed to delivering its  strategic objectives in an ethical and responsible  manner
and meeting its  corporate responsibilities towards  society, human rights  and the environment.   The
Board acknowledges its responsibility to society  is broader than simply generating financial  returns
for shareholders.  The Company’s approach to ESG  matters addresses the importance of these issues  in
the day-to-day running of the business, as detailed below.

 

ESG approach

 

Environmental - we want our properties to minimise  their impact on the local and wider  environment. 
The Investment  Manager carefully  considers the  environmental performance  of our  properties,  both
before we acquire them,  as well as  during our period of  ownership. Sites are  visited on a  regular
basis by the Investment Manager and any obvious environmental issues are reported.

 

Social -  Custodian REIT  strives to  manage and  develop buildings  which are  safe, comfortable  and
high-quality spaces.  As such, our aim is that the safety and well-being of occupants of our buildings
is maximised. 

 

Governance - high  standards of  corporate governance  and disclosure  are essential  to ensuring  the
effective operation of  the Company and  instilling confidence  amongst our stakeholders.   We aim  to
continually improve our levels of governance and disclosure to achieve industry best practice.

 

The Committee encourages the Investment Manager to act responsibly in the areas it can influence as  a
landlord, for  example  by working  with  tenants to  improve  the environmental  performance  of  the
Company’s properties  and  minimise their  impact  on climate  change.   The Committee  believes  that
following this strategy will ultimately  be to the benefit of  shareholders through enhanced rent  and
asset values. 

 

The Company’s environmental policy commits the Company to:

 

  • Improving the  energy performance  of our  buildings -  investing in  carbon reducing  technology,
    infrastructure  and  onsite  renewables   and  ensuring  redevelopments   is  completed  to   high
    environmental standards.
  • 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 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
  • Reporting in line with best practice and complying with all requirements - exposing the Company to
    public scrutiny and communicating our targets, activities and initiatives to stakeholders

 

Cladding

 

Custodian REIT’s portfolio currently has no exposure to ‘high risk’ assets which are typically  either
high-rise buildings (characteristically those over 18m tall) which use cladding in their  construction
or those used for multiple residential occupation.  Custodian REIT does have exposure properties where
cladding material has been used  in their construction, and where  the composition of the material  is
unknown.  During the year the Board instigated a  detailed review of the Company’s cladding risks  and
obligations involving the Investment Manager and  the Company’s solicitors.  This review has  resulted
in the Investment Manager implementing a more  extensive cladding policy, moving beyond the  mandatory
fire risk assessment requirements for properties where the composition of cladding material is unknown
and actively core-drilling and replacing, where necessary, cladding not compliant with Loss Prevention
Certification Board guidelines.  This  improved policy demonstrates that  the Company’s commitment  to
community safety significantly exceeds the minimum required in discharging its duty as a  ‘Responsible
Person’ 33  30 .  A summary of the revised policy is set out below:

 

 

  • ‘High risk’ buildings will not be acquired  without a comprehensive rationale to decrease risk  on
    acquisition, and require specific approval by the Board;
  • All tenants provide the Investment Manager their Fire Risk Assessment (“FRA”) which is reviewed to
    ensure;

       ◦ It has been undertaken by a reputable fire risk assessor;
       ◦ The tenant confirms in writing that recommendations and remediations are being actioned to
         mitigate the overall risk profile; and
       ◦ The local fire authority is contacted as required.

  • Following a desktop review of  each building within the  portfolio, including approaches to  local
    building control,  to  ascertain  the  composition  of any  cladding  used  in  construction,  the
    Investment Manager  will arrange  to undertake  core drill  samples of  cladding where  considered
    appropriate with priority given to  buildings identified as ‘Code  1’ under LPCB guidelines  which
    includes those with cladding recommended for immediate  sampling or properties open to the  public
    use.
  • Where non LPCB compliant cladding is identified the Investment Manager will:

       ◦ Notify building insurers, the Local Fire Authority and the tenants in occupation;
       ◦ Insist that tenants undertake an updated FRA based on the cladding composition;
       ◦ Review the FRA and ensure the tenant is complying with any recommended actions.

  • Going forwards the Investment Manager will:

       ◦ Hold quarterly fire risk review meetings to specifically review progress to date and
         implement any outstanding actions
       ◦ Maintain a live cladding log, detailing the progress to date in implementing and maintaining
         compliance with the cladding policy;
       ◦ Maintain an approved list of suitable Fire Risk Assessors which can be provided to tenants if
         they do not have any of their own fire consultants;
       ◦ Engage with its legal advisors to seek to make lease clause obligations around Fire Risk more
         explicit and comprehensive in all new leases.

 

Environmental key performance indicators

 

During the prior  financial year the  Company set  environmental targets measured  by key  performance
indicators (“KPIs”)  which  provide a  strategic  way to  assess  its success  towards  achieving  its
environmental objectives and  ensure the Investment  Manager has embedded  key ESG principles.   These
environmental KPIs  cover  our  main  areas  of  environmental  impact  including  energy  efficiency,
greenhouse gas emissions, water, waste and tenant engagement.

 

These environmental  KPIs  also  directly  support  climate  risk  mitigation  and  capture  some  ESG
opportunities from the transition  to a low-carbon  economy. As we  progress our climate-related  risk
identification and management, we aim to  identify and implement further climate-related metrics  that
can more clearly define the  impact of climate-related risks and  opportunities on our business.   ESG
reporting frameworks,  including GRESB,  require  businesses to  disclose  the KPIs  which  contribute
towards benchmark scoring and potentially influence investor decisions.

 

The Company’s environmental KPIs in  place during the year, and  comments relating to our  performance
against each one, are set out below:

 

Boundary            KPI                              Progress during the year
                                                     The like-for-like  data  collected  from  tenants
                                                     indicates  a  44%  reduction  against  the   2019
                                                     baseline.  However,  because this  percentage  is
                                                     based on  a relatively  small sample  population,
                    Reduce total  portfolio Scope  1 the Board believes that although this indicates a
                    and 2 emissions by 30% by 2025   positive performance  by the  Company’s  tenants,
                                                     the population is  insufficient to conclude  that
                                                     this objective  has  been  met and  in  the  year
                                                     ending 31 March 2023 the Investment Manager  will
                                                     continue  to  make  efforts  to  improve   tenant
                                                     response rates.
                                                     There are no longer any ‘G’ rated assets and  the
                                                     one remaining ‘F’ is being improved. 
Whole portfolio
                    All  ‘D’  EPC   ratings  to   be During the year the  Company has updated EPCs  at
                    removed or improved by 2027, all 20 units across  15 properties  covering 358k  sq
                    ‘E’ EPC ratings to be removed or ft.
                    improved by 2025 and all ‘F’ and
                    ‘G’ EPC ratings to be removed or The   Company   is   currently   reviewing    and
                    improved by 31 March 2022        undertaking new assessments of any EPCs that  are
                                                     older than five years below a ‘C’ rating.  A  ‘C’
                                                     rating is expected to become the minimum standard
                                                     under  the  Minimum  Energy  Efficiency  Standard
                                                     (“MEES”) in 2027.
                    Reduce  Scope  1  and  2  energy The like-for-like  data  collected  from  tenants
                    consumption  of   the   property indicates  a  54%  reduction  against  the   2019
                    portfolio by 15% against a  2019 baseline, but  subject to  uncertainty due  to  a
                    baseline by 2025                 small sample population as explained above.
                    Switch  all  landlord-controlled Currently at 94% and we expect to achieve 100% by
                    sites    to    100%    renewable 2023.
                    electricity by 2025
                    Switch  all  landlord-controlled 12 properties have moved  during the year and  we
                    sites to green gas by 2025       remain on track to achieve this target by 2025.
                    Install   EV   charging   points
                    across  100%  of  the  Company’s We have EV chargers operating at seven of our  11
                    retail warehouse assets by  2025 retail warehouse sites  with installation at  the
Landlord controlled and      investigate      onsite remainder currently underway.
                    renewables on one asset by 2025
                                                     Zero waste to  landfill from  landlord-controlled
                    Zero  waste  to  landfill   from waste was achieved  during 2021.  2% of  tenants’
                    landlord-controlled   waste   by waste has been sent  to landfill during the  year
                    2022                             due to a one-off capital project undertaken.

                                                      
                    Reduce landlord-controlled water Landlord water  consumption  has reduced  by  18%
                    consumption by 50% by 2025       since the prior year.
                    Engage  with  occupiers   during
                    lease      negotiations       to Green clauses to include renewable electricity as
                    incorporate       sustainability standard within all new leases.
Tenant              clauses into new leases
                                                     Tenant  engagement  is  part  of  the  Investment
                    Engage with tenants on quarterly Manager’s  remit,  which  it  has  complied  with
                    basis on ESG issues              during the  year, as  it  collects all  rent  and
                                                     directly manages each property in the portfolio.
                    Achieve EPRA  Gold Standard  for Achieved.
                    the year ended 31 March 2021
                    Report to TCFD by 2021           Selected elements of the TCFD reporting framework
Development                                          have been followed.
                    Incorporate ESG factors into all Investment Committee reports for any new property
                    investment     due     diligence acquisition/refurbishment now  include  dedicated
                    undertaken                       ESG rationale detailing  improvements to be  made
                                                     alongside relevant expected capital expenditure.

 

To help the  assessment of  progress against  KPIs a  central data  management system,  hosted by  the
Company’s environment  consultants,  has been  established  to provide  a  robust data  collation  and
validation process.  This data management system is being used to identify tenant engagement and asset
optimisation opportunities  and facilitates  the communication  of environmental  performance data  to
various stakeholders.

 

Due to the success of  the Investment Manager in meeting  certain of the environmental targets  during
the year and the Board’s ambition to strengthen the Company’s environmental credentials, the Board has
set the following revised targets to be reported against in the financial year ending 31 March 2023:

 

Area                      Target                                    Change from previous targets
                          Increase  EV  charging  capacity  to  the
                          following by 2025 34  31 :

                            • 4,200  kW/h 35  32    across   retail
                              warehouse and  other  sector  assets; New
                              and
                            • 980 kW/h 36  33   across  office  and
                              industrial assets

                           
                          Install  onsite   renewable   electricity
                          generation at 75%  of redevelopments  and
Physical         building major refurbishments                      New
improvements       (whole
portfolio boundary)        
                          Install smart  meters across  25% of  the New
                          portfolio by floor area
                          All ‘D’  EPC  ratings to  be  removed  or
                          improved by 2027 and all ‘E’ EPC  ratings
                          to be removed or improved by 2025         Retained

                           
                          All redevelopments  to  achieve  Building
                          Research   Establishment    Environmental
                          Assessment  Method  (“BREEAM”)  Excellent New
                          rating

                           
                          For landlord controlled areas in the like
                          for like portfolio,  on a 2019  baseline,
                          achieve:

                            • Reduction in Scope 1 and 2  emissions
                              of 30% by 2025
                            • Reduction in  energy  consumption  of Retained
                              15% by 2025
Landlord controlled usage   • Less than  5%  waste to  landfill  by
(landlord      controlled     2022
boundary)                   • Reduction in water consumption by 50%
                              by 2025

                           
                          Switch all  landlord-controlled sites  to
                          100% renewable electricity by 2023        Retained but timetable accelerated

                           
                          Switch all landlord  controlled sites  to Retained but timetable accelerated
                          green gas by 2023.
                          Use TCFD  recommendations  and  reporting
                          framework to  disclose  our  approach  to Amended to omit  elements of  TCFD
                          climate  related  governance,   strategy, as  the  Company  is  exempt  from
                          risk management and opportunities         mandatory TCFD reporting

                           
                          Incorporate   ESG   factors   into    all
                          investment due diligence undertaken       Retained
Risk    management    and
reporting                  
                          Achieve an  annual improvement  in  GRESB
                          score between 2021 and 2025               New

                           
                          Continue to  report  in  line  with  EPRA
                          sustainability       Best        Practice Retained
                          Recommendations  to   achieve  a   ‘gold’
                          standard
                          For    the    non-landlord     controlled
                          like-for-like  portfolio,   on   a   2019
                          baseline, achieve:                        Amended   to   separate   landlord
                                                                    controlled and  tenant  controlled
                            • Reduction in Scope 1 and 2  emissions emissions, with lower targets  for
                              of 20% by 2025                        tenant   performance   where   the
                            • Reduction in  energy  consumption  of Company  does   not  have   direct
                              10% by 2025                           control
Tenant engagement (tenant
boundary)                  
                          Engage with tenants on a quarterly  basis
                          on ESG issues                             Retained

                           
                          Engage  with   occupiers   during   lease
                          negotiations        to        incorporate
                          sustainability clauses into new leases    Retained

                           
                          Utilise 25% of vacant high street  retail
                          space   for   short-term   not-for-profit
                          lettings                                  New

                           
                          Install changing  facilities  and  secure
                          cycle parking at all appropriate assets   New

Social outcomes            
                          Ensure   properties   comply   with   the
                          Company’s cladding  policy  within  three
                          months of acquisition                     New

                           
                          Consider   biodiversity    and    habitat
                          strategy during all redevelopments        New

                           

 

Investment decisions

 

Investment decisions will play a key role in achieving the Company’s environmental KPIs.  The  Company
undertakes an environmental  assessment on  vacated assets and  during the  acquisition due  diligence
process, rating assets or tenants against  a number of ESG factors  which form part of the  Investment
Committee decision  making process.   This process  also  helps the  Investment Manager  evaluate  the
potential environmental  risks and  opportunities  associated with  an asset  and  the impact  on  the
achievement of the KPIs.

 

The Company’s procurement  policy for property  services includes  an assessment of  new suppliers  on
their specification and use of sustainable and energy efficient materials, systems, equipment,  onsite
operating practices and performance evaluation/incentives put  in place for direct external  suppliers
and/or service providers to employ sustainable processes in day-to-day work.

 

ESG policy

 

To achieve the Company’s environmental objectives and targets, the Investment Manager seeks to achieve
the following:

 

Environment

 

  • Ensure operations are  in place to  commit to the  minimisation of pollution  and comply with  all
    relevant environmental legislation;
  • Gather and analyse data on our environmental performance across our business and portfolio; and
  • Set long-term targets of environmental performance for our properties and monitor achievements  as
    a commitment to continuous improvement.

 

Climate change adaptation & resilience

 

  • Through our risk management process, identify climate-related risks, both physical and financial;
  • Perform environmental risk assessments of our property portfolio on an on-going basis;
  • Design mitigation and management strategies for climate and environmental risks and resilience  to
    catastrophe/disaster; and
  • Improve our  reputation on  environmental issues  by incorporating  resilience to  climate-related
    transition and physical risk disclosures

 

Energy consumption & management

 

  • Comply with all applicable, relevant energy-related  legislation and other requirements and  adopt
    best practice beyond the mandatory minimum where appropriate;
  • Seek to reduce energy usage across properties we control;
  • Monitor energy consumption across properties we control, and tenant consumption, where possible;
  • Seek engagement with tenants to make meaningful reductions to their emissions and pollution;
  • Procure renewable energy across properties we control;
  • Review our energy objectives and targets on an annual basis;
  • Promote energy efficiency and management to our tenants; and
  • Where possible, build in green lease clauses 37  34  into our tenant leases.

 

Building materials

 

  • When we have the  opportunity to develop new  property or refurbish current  assets, we commit  to
    reviewing building  materials  which  have  a  lower environmental  impact  and  to  select  these
    materials, if appropriate; and
  • Select greener  building  materials,  in line  with  our  vision to  increase  the  sustainability
    certifications of our property portfolio.

 

Greenhouse gas (“GHG”) emissions and management

 

  • Quantify our Scope 1  and 2 (landlord controlled)  emissions on an annual  basis in line with  our
    reporting requirements;
  • Gather tenant energy consumption data, where possible, to quantify our leased assets emissions;
  • Comply with and make representations to  industry-standard ESG frameworks including both the  EPRA
    Annual Sustainability Report and the GRESB;
  • Continue to  expand  our  carbon  reporting  in  line  with  industry  expectations  and  relevant
    legislation; and
  • Reduce our greenhouse gas emissions through various energy reduction initiatives including virtual
    conferencing meetings to reduce travel.

 

Further information on  our GHG emissions  is set out  within our SECR  disclosures in the  Directors’
report.

 

Waste management

 

  • Monitor waste levels across our properties and monitor tenant consumption, where possible;
  • Implement landfill diversion waste  streams such as recycling  in our properties, where  possible;
    and
  • Promote waste management to our tenants.

 

Water consumption and management

 

  • Monitor water consumption across our properties and monitor tenant consumption, where possible;
  • Identify and  implement  water  reduction  technologies  and  opportunities  within  our  property
    portfolio, where possible; and
  • Promote water management to our tenants.

 

On-site carbon-reducing technology

 

  • Install electric vehicle charging points across the portfolio where demand is sufficient;
  • Install smart meters where tenants are amenable and in all vacant properties once re-let; and
  • Investigate other carbon-reducing technology during significant refurbishments.

 

Biodiversity

 

  • In the circumstances where we are developing new assets, the biodiversity of the development  area
    will be considered  and maintained to  the highest  level possible.  We  will promote  sustainable
    practices by  reducing  the  direct  pressure  on  biodiversity  and  habitat  by  selecting  more
    sustainable materials.

 

Asset level safety, health and well-being

 

We wish to manage and develop buildings which are safe, comfortable and high-quality spaces.  As such,
our aim is that the  safety and well-being of  the occupants of our  buildings is maximised.  We  will
implement a  property portfolio  approach  to well-being  which  encourages engagement  with  tenants,
promotes carbon reducing  behaviours, ensures maximum  building safety and  optimises the comfort  and
quality of occupancy.

 

Stakeholder engagement

 

We engage regularly with the following internal and external stakeholders on environmental and  social
matters:

 

  • Board –  the Board  meets at  least quarterly  and receives  a report  from the  ESG Committee  on
    performance and progress towards our objectives;
  • Investment Manager – the  Investment Manager has  an ESG working  group which meets  fortnightly. 
    Property team staff roles and  responsibilities include ESG which is  embedded across the work  it
    carries out on behalf of the Company;
  • Managing agents – we  receive quarterly reports  on our asset performance  and engage directly  on
    property portfolio optimisation;
  • Tenants – we  seek to  engage with tenants  on a  quarterly basis both  to understand  consumption
    trends and data and understand where we  can upgrade and optimise buildings for tenant  well-being
    and environmental impact reductions;
  • Local communities  and  charities-  we  work  closely with  local  communities  and  charities  in
    particular utilising un-let space for the benefit of the local community
  • Suppliers and  business  partners  –  we  operate a  procurement  policy  which  seeks  to  ensure
    sustainable products and business practices are adopted by our suppliers.

 

To monitor energy consumption across the property portfolio, as well as identify opportunities to make
energy reductions, the Company has engaged with Carbon Intelligence to provide strategic advice on the
process.  This collaboration  promotes the ethos  of investing responsibly  and has ensured  statutory
compliance with  the Energy  Savings Opportunity  Scheme  (ESOS) Regulations  2014 and  The  Companies
(Director’s report) and Limited  Liability Partnerships (Energy and  Carbon Report) Regulations  2018,
and has  facilitated inclusion  of EPRA  Sustainability Best  Practice Recommendations  in the  Annual
Report.

 

Case study – Redditch

 

The Company expects to receive planning permission in June 2022 to redevelop an existing 59,000 sq  ft
industrial building constructed in the  1980’s into a brand  new 60,000 sq ft  industrial/distribution
facility.

 

The new  development will  be built  with  exceptional ESG  compliance and  will be  certified  BREEAM
‘Excellent’ as well as having an Energy Performance rating ‘A’.

 

In order to achieve this the specification will include: a carbon neutral base build, electric vehicle
charging points,  solar photovoltaic  panels to  the south  facing roof  elevations, LED  lighting  to
warehouse and  offices,  cycle  storage and  shower  facilities  and  bat roost  to  cater  for  local
biodiversity.

 

The expected cost of  the redevelopment is £5.8m  and will generate an  estimated rental value in  the
region of £500k pa.  Given the occupation demand in this locality, we are confident the property  will
be pre-let prior to completion of the construction.

 

Case study – EV chargers

 

Our latest  round  of electric  vehicle  (“EV”) charger  installations  has resulted  in  the  Company
partnering with Pod  Point, one  of the  largest national charging  networks, to  install EV  charging
points at  our  remaining retail  warehousing  sites and  commencing  the rollout  across  appropriate
industrial and office sites.

 

At each retail warehousing site Pod Point identifies the optimum number of chargers to:

 

  • Minimise the  ‘payback’ period  on the  upfront capital  expenditure, targeting  4-6 years,  which
    enhances short-term earnings and minimises obsolescence risk;
  • Maximise overall investment return over a ten year investment horizon; and
  • Maximise the total available charging capacity to help achieve the Company’s ESG targets.

 

Installing EV chargers for  public use also  enhances properties’ occupier  appeal by increasing  both
customer footfall and dwell time.

 

Office and industrial tenants now expect EV charging as a feature on-site when looking for  properties
based on their requirements for their EV/hybrid fleet or staff use.  Pod Point provides advice on  the
required load management system, groundworks, and  infrastructure to suit tenants’ requirements  which
are typically willing to pay a rental premium which allows the Company to at least re-coup its capital
expenditure whilst meeting our ESG targets and future-proofing the asset. 

 

We currently have  14 properties in  the pipeline  for installation with  a total of  14 rapid  (75kW)
chargers at retail warehousing  sites and a further  23 fast (7kW) chargers  at office and  industrial
locations.

 

With many towns in the UK  introducing clean air zones where a  congestion fee is charged for  driving
through certain areas and the Government banning production of all new petrol or diesel vehicles  from
2030, we expect to receive further demand and income for these chargers in the coming years.

 

Case study – charitable lettings

 

During the year the Company has allowed the following charitable lettings at some of its vacant retail
space, rent free, which  has saved the  Company vacant rates  and helped the  communities in which  it
operates:

 

                     Rent (rateable Annual rates
Location                     value)              Previous tenant                        Charitable use
                                            £000
                               £000
Grafton Gate, Milton            325          166         Staples     Willen Hospice - clearance outlet
Keynes
Eastern      Avenue,            186           95         Staples Furniture Recycling Project - storage
Gloucester
Trinity      Square,            114           58    Laura Ashley We are the Minories - art gallery and
Colchester                                                                    creative community space
Long  Wyre   Street,             75           38       Poundland        One Colchester - community hub
Colchester

 

EPC ratings

 

During the year the Company has updated EPCs at 20 units across 15 properties covering 358k sq ft  for
properties where existing EPCs had expired or where works had been completed.  For updated EPCs, there
was an aggregate decrease in rating of 34 ‘energy performance asset rating points 38  35 

 

The Investment Manager is  currently reviewing and  undertaking new assessments of  any EPCs that  are
older than five years and below a ‘C’ rating.  A ‘C’ rating is expected to become the minimum standard
under the Minimum Energy Efficiency Standard (“MEES”) in 2027.

 

The Company has the following ESG initiatives planned in the coming financial year:

 

  • The tenant at a 100k sq ft industrial unit  in Winsford is vacating in June 2022 and an  extensive
    refurbishment is expected  to be undertaken  including installing  solar panels to  the roof,  LED
    lighting throughout, air source heats pumps to heat the office space and EV charging.  These works
    are expected to increase the EPC of this site from a ‘C’ to a ‘B’.
  • During the year  we purchased a  19k sq ft  of office on  Fountain Street in  Manchester with  the
    intention of undertaking a comprehensive refurbishment  of the site which will include  installing
    solar panels, LED lighting, bike racks, shower  facilities with lockers and EV charging.  Recycled
    furniture will also be incorporated  into the cat B fitout  and roof terrace with a  consequential
    improvement on EPC rating.

 

The Company’s weighted average EPC score by rating is shown below:

 

EPC rating 2022 2021
A            3%   1%
B           21%  15%
C           49%  43%
D           20%  30%
E            7%  11%
F             -   1%

 

 

The majority ‘E’ rated assets are within the office sector, including a number of assets from the DRUM
REIT acquisition, and appropriate investment  is planned to make  the necessary improvements in  these
assets.

 

Climate-related risks and opportunities

 

Climate change poses a number of physical risks to our property portfolio, for example those caused by
the increased frequency and severity of extreme  weather events.  The Committee also recognises  there
are a number  of transition-related  risks, including  economic, technology  or regulatory  challenges
related to moving to a greener economy which  it needs to consider.  But climate change also  provides
opportunities to invest in alternative asset classes or to provide tenants with additional services.

 

Governance

 

The Board is ultimately responsible to stakeholders for the Company’s activities and for oversight  of
our climate-related  risks and  opportunities.  Specifically,  the ESG  Committee is  the  Board-level
governance body  responsible for  reviewing our  identified climate-related  risks alongside  our  ESG
strategy.

 

The Investment Manager  maintains the  Company’s risk management  framework and  risk register,  which
means our ESG objectives are embedded into the  way the Company conducts and manages the business  and
the property portfolio day to day.

 

 

Risk management

 

During the year the Committee has revisited  its climate-related risks and opportunities to  determine
continued relevancy and impact on  the Company. With the  external consultant, the Committee  assessed
the completeness and effectiveness of current controls  and processes in place to mitigate and  manage
risks and opportunities. The Committee deemed all mitigation controls in place to be effective however
a number of continuous improvement areas were determined  which are highlighted in the table below  as
next steps which will be addressed and actioned via the ESG Committee. The Company’s ESG targets  also
support continuous monitoring of progress against the ESG strategy, capturing of opportunities and the
mitigation of climate risks. These targets are reported against on a quarterly basis to the  Committee
by the Investment Manager and the Company’s environmental consultants. 

 

Climate-related     What  this   means   for Management  and  mitigation   of Next steps
risk/opportunity    Custodian REIT           risk
Physical risks                                                                 
                                                                                • Begin  to  establish
                                                                                  which   assets   are
                                                                                  likely to be most at
                                                                                  risk  of   potential
                                                                                  extreme      weather
                                                                                  damage
                                                                                • Update  flood   risk
                                               • Annual property  inspections     for existing  assets
                                                 enabling   the    Investment     and  understand  how
                                                 Manager  to   identify   any     this may  change  in
                      • Extreme weather          damage    or    areas     of     the future
                        events causing           improvements    to    ensure   • With      identified
                        damage to                increased           property     assets   at    risk,
                        infrastructure or        resilience against potential     develop a management
                        assets, making           storms                           plan    to     build
                        assets unusable by     • Building maintenance  (where     property  resilience
                        tenants, making          in  the  Company's  control)     such   as    through
Asset  damage  from     insurance cover          ensures    properties    are     fitout,        asset
storms and flooding     harder or more           maintained    to     prevent     upgrades or plan  to
and      associated     expensive for            increased     levels      of     divest,           as
changing  insurance     tenants to arrange       potential damage from storms     appropriate
products,   pricing     and impacting future     and floods                     • Ensure backup  power
and availability        lettability through    • Buildings insurance coverage     is available in  all
                        lower occupational       minimises   the    financial     building types where
                        demand                   impact of the damage  caused     this is  Custodian's
                      • Historical impact of     by storms                        responsibility
Long-term               floods or increasing   • Environmental  reports   are   • Review   maintenance
                        flood risk impacting     carried    out    for    all     and           fitout
                        the long term            acquisitions including flood     guidelines        to
                        attractiveness of        risk   assessment,    albeit     include guidance  on
                        properties due to        flood risk  is  measured  on     upgrades  to  storms
                        tenants avoiding         likelihood                of     such as securing  of
                        rentals with flood       river/sea/surface      water     external  equipment,
                        risk                     flooding  based  on  current     roof  specifications
                                                 scenarios/historical    data     etc.
                                                 rather than  future  climate   • Review environmental
                                                 change                           reports procured  at
                                                                                  acquisition       to
                                                                                  determine    whether
                                                                                  future       climate
                                                                                  projection of  flood
                                                                                  risk can be included

                                                                               
                                                                                • Monitor  any  tenant
                                                                                  concerns      around
                                                                                  temperature  through
                                                                                  tenant    engagement
                                             The Company’s tenant  engagement     programme
Global  temperature                          programme   provides   Custodian   • Continue     ongoing
increases  reducing Certain assets  will  be with up  to date  insights  into     monitoring of energy
the appeal of  less more       significantly changing   tenant   preferences,     consumption,
energy-efficient    impacted    by    rising current challenges  or  feedback     particularly      of
assets              temperatures,  such   as on  building   performance   and     glass properties, to
                    glass offices, requiring provides an opportunity for  the     determine    whether
                    more energy for  cooling Investment  Manager  to  further     the  risk  trend  is
                    and      being      less understand solutions to continue     accelerating     and
Long-term           attractive to tenants    to  meet  tenants’   preferences     consider  the   need
                                             over time                            for  upgrade   plans
                                                                                  such   as   facades,
                                                                                  insultation etc.  to
                                                                                  reduce the  property
                                                                                  exposure to external
                                                                                  temperature rises
Insufficient
electricity  supply
to maintain  tenant Due to rising demand for                                  Ensure  power   upgrades
operations  due  to energy  such   as   from                                  are utilising  renewable
inadequate          cooling requirements and                                  energy  sources,   where
infrastructure      EV   chargers,   current Upgrading power  supplies  where contracts   are    under
                    infrastructure might  be availability permits             Custodian's control,  in
                    unable   to   meet   the                                  line  with   Custodian's
                    energy demand                                             emissions   and   energy
Medium – long-term                                                            targets

 

 

 

Transition risks                                                            
                                            • Capital          expenditure
                                              considered   necessary    to
                                              maintain each  asset  within
                                              the portfolio to a  suitable
                                              standard   to   secure   new
                                              lettings at expected  rental
                                              levels   is   forecast   and
                                              factored    into    cashflow
                                              projections    to     ensure
                                              resources are available.
                                            • EPCs are maintained for  the
                                              whole portfolio, with higher
                                              scoring assets under  review
                                              to ensure  improvements  are
                                              carried  out   as  soon   as
                                              practical   as    well    as
                                              monitoring the renewal dates
                                              and      tracking      score   • Improve acquisition due
                                              improvements.  This  control     diligence processes  to
                                              provides Custodian oversight     more accurately  assess
Reduced               Changing     tenant     and  transparency   of   the     forecast investment  to
attractiveness of the preferences      to     assets improvement over time     upgrade the asset  over
portfolio   due    to occupy less  energy     and provides the basis of an     its life  in line  with
changing       tenant and          carbon     improvement  plan  with  key     compliance  and  tenant
preferences           intensive buildings     assets   to    target    and     requirements
                      as     well      as     directly relates  to one  of   • Improve coverage of the
                      requirements  under     our ESG KPIs                     tenant       engagement
                      MEES                  • Asset   due   diligence   is     programme  and  broaden
Short – medium-term                           performed   at   acquisition     its  remit  to   better
                                              stage for  all  new  assets.     capture        tenants’
                                              The    Investment    Manager     concerns            and
                                              considers  the   long   term     sustainability plans
                                              suitability  of  the   asset
                                              including  ESG  requirements
                                              against our ESG strategy and
                                              calculates   the    forecast
                                              investment  to  upgrade  the
                                              asset over its life in  line
                                              with compliance  and  tenant
                                              requirements
                                            • Custodian’s           tenant
                                              engagement         programme
                                              provides live insights  into
                                              the     changing      tenant
                                              preferences to stay  abreast
                                              of   changing   trends    to
                                              maintain   lettability    of
                                              portfolio  and   levels   of
                                              occupation

 

 

                                                                          • Continue     to     engage
                                                                            proactively with investors
                                                                            and  the  Company’s  wider
                                                                            stakeholder group  on  ESG
                                                                            matters
                                             • External   environmental   • Continued         Director
                                               consultants are  engaged     training     to      build
                                               to   advise    on    the     knowledge around Net  Zero
                  Increased    stakeholder     Company's            ESG     and  climate   issues   to
                  scrutiny over  Custodian     initiatives and  compare     ensure  ongoing  effective
Investor          REIT's ESG ambitions and     to  requirements,   best     governance and guidance
divestment     or climate    action    and     practice and  peer-group   • Consider future pricing of
activism  due  to awareness of the  impact     performance.                 GHG     emissions      and
changing      ESG of       the       built   • Shareholder expectations     emissions   offsets    and
expectations      environment,   including     are established  by  the     future enhanced  emissions
                  carbon  emissions   from     Company's  brokers   and     reporting     obligations.
                  refurbishment        and     distribution agents  and     Climate    change    could
                  construction, leading to     directly during meetings     affect the input costs  to
Short-term        reduced      confidence,     with         investors.      produce        traditional
                  shareholder activism  or     Significant  changes  in     development        related
                  divestment.                  expectations          or     materials   or    building
                                               potential activism would     services.  Utilising  more
                                               be communicated.             innovative   low    carbon
                                                                            materials  could  also  to
                                                                            mitigate   some   of   the
                                                                            potential this risk  might
                                                                            impose.

                                                                         
                                           All     investments      are
                                           scrutinised      by      the
                  If technology  that  has Investment         Manager’s
Unsuccessful      been invested in is  not Investment       Committee. 
investment in new properly     researched, Investment Committee reports
technology        developed             or include  a   dedicated   ESG
                  implemented, or  becomes rationale.  Carbon  reducing  
                  obsolete  or  no  longer technology is a key part  of
                  industry best  practise, the         carbon-reduction
Medium-term       it  may  not  bring  the strategy but is not invested
                  return that was forecast in  speculatively  and  only
                                           established   products   are
                                           considered. 

 

 

Opportunities                                                              
                                                                            • Continue  to   encourage
                                                                              investment    in     the
                                                                              Investment     Manager’s
                                                                              staff  development   for
                                                                              them to  remain  abreast
                                                                              of  low-carbon  building
                                                                              solutions   and    other
Exposure to new                                                               competitive    offerings
asset classes for                                                             through industry bodies,
potential           Investment                                                associations         and
investment          opportunities through All investments are scrutinised     memberships
                    exposure to new asset by  the  Investment   Manager’s   • At Board Strategy  days,
                    classes               Investment Committee                include a more prominent
                                                                              segment focused  on  ESG
Short – medium-term                                                           and   future    strategy
                                                                              involving ESG  Committee
                                                                              recommendations and  the
                                                                              Company’s  environmental
                                                                              consultants,   including
                                                                              how  the  Company  might
                                                                              expand        low-carbon
                                                                              services and review  new
                                                                              investment classes
                                            • ESG     Credentials     are
                    The    effects     of     currently   part   of   the
Shifting     tenant climate   change   on     marketing/prospectus of  an
preferences     may tenant    preferences     asset   -   which   ensures
create  new  demand may     bring     the     tenants   are   aware    of
for new or existing opportunity        to     Custodian    REIT's     ESG  
products/ services  diversify    business     credentials to attract  ESG
                    activities  such   as     conscious tenants            
                    low-carbon              • Tenant engagement programme
                    alternative assets or     -  provides  insights  into
Short – medium-term development        or     the     changing     tenant
                    expansion   of    low     preferences
                    emissions services
                                           
                                            • Establishment  of  an   ESG Continue     to      improve
Increased    demand Increased demand  for     Committee of the Board  and communication           with
for shares  due  to shares from investors     publication   of   revised, stakeholders  regarding  ESG
ESG credentials     preferring         to     stretching ESG targets      initiatives          through
                    specifically   invest   • Annual  external  reporting quarterly    stock    market
                    in   companies   with     on  progress  against   ESG reporting,    Annual     and
                    strong            ESG     targets                     Interim     Reports      and
Short-term          credentials             • Investor    feedback     is shareholder   meetings   and
                                              captured regularly          webinars

 

To account  for the  long-term nature  of climate  change three  time horizons  were used  within  the
assessment:

 

  • Short-term (0-3 years);
  • Medium-term (3-12 years); and
  • Long-term (12-20 years).

 

This period differs from the  longer-term viability assessment of three  years, as the outputs of  our
climate-related materiality  assessment  will  be reviewed  and  built  upon over  time  in  order  to
effectively embed identified risks into our risk management framework.

 

 

Net zero 39  36  carbon pathway

 

Starting the journey towards net  zero carbon is a  crucial next step in  our ESG strategy and  making
this journey  fit with  stakeholder  goals and  the Company’s  property  strategy is  one of  the  key
challenges facing the Company and the real estate  sector.  Developing a net zero carbon pathway,  and
choosing the  right level  of consultancy  to support  the Investment  Manager in  achieving this,  is
squarely on the Committee’s agenda for the forthcoming year.

 

Outlook

 

The Company will work towards achieving its refined ESG targets over the course of the next  financial
year, improving our understanding of the specific impacts of climate change on the Company, seeking to
influence tenant  behaviour to  improve  environmental outcomes  and  assessing our  strategy  towards
creating a Net Zero pathway. 

 

Approval

 

This report was approved by the Committee and signed on its behalf by:

 

Hazel Adam

Chair of the ESG Committee

16 June 2022

 

Financial review

 

The Company has enjoyed its strongest year of  total return as the market continued its recovery  from
the impact of  the COVID-19  pandemic, with  a profit before  tax of  £122.3m (2021:  £3.7m) and  EPRA
earnings per  share of  5.9p (2021:  5.6p).  The  Company’s rent  collection level  has stabilised  to
pre-pandemic levels which has supported the Board increasing dividends per share declared for the year
to 5.25p (2021: 5.0p), 110% covered by EPRA earnings. 

 

A summary of the Company’s financial performance for the year is shown below:

 

                                         Year ended 31 Mar 2022 Year ended 31 Mar 2021
Financial summary                                          £000
                                                                                  £000
                                                                                      

Revenue                                                  39,891                 39,578
Expenses and net finance costs                         (14,639)               (15,904)
EPRA profits                                             25,252                 23,674
Net profit/(loss) on investment property                 97,073               (19,925)
Profit before tax                                       122,325                  3,749
                                                                                      
EPRA EPS (p)                                                5.9                    5.6
Dividend cover                                           110.3%                 112.7%
OCR excluding direct property costs                       1.20%                  1.12%
                                                                                      
Borrowings                                                                            
Net gearing                                               19.1%                  24.9%
Weighted average debt maturity                        5.7 years              7.4 years
Weighted average cost of agreed debt                       3.0%                   3.0%

 

The Company’s rent roll has increased by 4.7% from  £38,692k at 31 March 2021 to £40,493k at 31  March
2022, which resulted in IFRS revenue increasing from £39,578k to £39,891k.

 

This increase in contractual rent was due primarily to net property acquisitions, but importantly also
from aggregate rental growth across the portfolio and the positive impact of asset management activity
in increasing like-for-like occupancy through net new lettings, which demonstrate the robust nature of
the Company’s diverse property portfolio.

 

EPRA earnings per  share increased to  5.9p (2021: 5.6p)  due primarily to  the stabilisation of  rent
collection rates, with a £0.3m decrease in the doubtful debt provision during the year comparing to  a
£2.7m increase  in the  prior financial  year;  partially offset  by the  timing of  acquisitions  and
disposals and increased professional fees from more regear and new letting activity.

 

Dividends

 

The Board acknowledges the importance of income for shareholders and during the year its objective was
to pay dividends on a sustainable basis at a rate fully covered by net rental receipts which does  not
inhibit the flexibility of the Company’s investment strategy. 

 

The Company paid dividends totalling 5.625p per  share during the year (£24.2m) comprising fourth  and
fifth interim  dividends relating  to  the year  ended  31 March  2021 of  1.25p  and 0.5p  per  share
respectively, and quarterly interim  dividends of 1.25p,  1.25p and 1.375p per  share relating to  the
year ended 31 March 2022.

 

The Company  paid a  fourth quarterly  interim dividend  of 1.375p  per share  for the  quarter  ended
31 March 2022 on 31 May 2022 totalling £6.1m.  Dividends  relating to the year ended 31 March 2022  of
5.25p (2021: 5.0p) were 110% covered by net recurring income of £25.3m, as calculated in Note 21.

 

Cost control

 

The Company’s tiered management  fee structure, detailed  in Note 18,  meant that marginal  investment
management and administration  fees decreased  during the  year as NAV  increased to  above the  £500m
hurdle.  However, the Company has continued to  invest in its environmental and governance  structures
and has also increased its marketing budget which  has resulted in the OCR (excluding direct  property
costs) increasing from 1.12% for the year to 1.20%.  Although governance related expenditure is likely
to continue to increase we believe the economies  of scale provided by the Company’s relatively  fixed
cost base and  fee structure  will mean  that further growth  will allow  ongoing charges  to be  kept
proportionately low.

 

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, sustainable 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 sustainable;
  • NAV per share total return – reflects both the NAV growth of the Company and dividends payable  to
    shareholders.  The  Board  regards  this  as  the best  overall  measure  of  value  delivered  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;
  • NAV per share, share  price and market  capitalisation – reflect  various measures of  shareholder
    value at a point in time;
  • Share price  total  return –  reflects  the  movement in  share  price and  dividends  payable  to
    shareholders;
  • Target dividend per share – an expectation of the Company’s ability to deliver an income stream to
    shareholders for the forthcoming year;
  • 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;
  • 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
  • EPRA vacancy rate – the  Board reviews the level of  property voids within the Company's  property
    portfolio on a quarterly basis and compares this to its peer group average.
  • 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 have been  disclosed to facilitate  comparison with the  Company’s
peers through consistent reporting of key real estate specific performance measures.

                                                  2022  2021
                                                            
EPRA EPS (p)                                       5.9   5.6
EPRA Net Tangible Assets (“NTA”) per share (p)   123.1  97.6
EPRA NIY                                          5.0%  6.0%
EPRA ‘topped up’ NIY                              5.5%  6.4%
EPRA vacancy rate                                10.2%  8.4%
EPRA cost ratio (including direct vacancy costs) 22.9% 26.1%
EPRA cost ratio (excluding direct vacancy costs) 19.0% 23.9%
EPRA capital expenditure (£m)                     69.0  14.5
EPRA like-for-like rental growth (£m)             35.3  38.3

 

  • 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 the  most relevant  information on  the fair  value of  the assets  and
    liabilities of a  real estate investment  company, under different  scenarios.  EPRA Net  Tangible
    Assets -  assumes that  entities buy  and sell  assets, thereby  crystallising certain  levels  of
    unavoidable deferred tax
  • 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  ongoing
    property costs
  • 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 capital expenditure - capital expenditure incurred on the Company’s property portfolio during
    the year
  • EPRA like-for-like rental growth - a measure of rental growth of the property portfolio by sector,
    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.

 

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 decreased from  24.9% LTV last year  to 19.1% at the  year end primarily due  to
£94.0m of valuation increases.

 

Since the year end the Company has arranged a £25m tranche of 10 year debt with Aviva at a fixed  rate
of interest of 4.10% per annum to refinance  a £25m variable rate revolving credit facility with  RBS,
acquired via the  DRUM REIT  acquisition.  Following  the refinancing  the Company  had the  following
facilities available:

 

  • A £50m revolving credit facility (“RCF”) with Lloyds Bank plc (“Lloyds”) with interest of  between
    1.5% and  1.8% above  SONIA 40  37 , determined  by reference  to the  prevailing LTV  ratio of  a
    discrete security pool of assets, and expiring on 17 September 2024;
  • 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 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 between  45% and  50%, with  an  overarching
    covenant on the Company’s property portfolio of a maximum 35% LTV; and
  • Historical interest cover, requiring  net rental receipts from  each discrete security pool,  over
    the preceding three months, to exceed 250% of the facility’s quarterly interest liability.

 

At the year end the Company had £207.2m  (31% of the property portfolio) of unencumbered assets  which
could be charged to the security  pools to enhance the LTV on  the individual loans.  During the  year
the Company charged unencumbered  properties valued at £30.3m  to certain facilities as  substitutions
for charged properties sold during the year.  Since  the year end £53.5m of unencumbered property  has
been charged to the new £25m tranche of debt  with Aviva with charges over £49.0m of property  secured
on the £25m RCF with RBS released on that facility’s subsequent cancellation.

 

The weighted average cost (“WAC”)  of the Company’s agreed debt  facilities at 31 March 2022 was  3.0%
(2021: 3.0%), with a weighted average  maturity (“WAM”) of 5.2 years  (2021: 7.4 years).  At 31  March
2022 the Company had £nil drawn under its Lloyds  RCF and £22.8m drawn under its RBS RCF, meaning  84%
(2021: 82%) of the Company’s drawn debt facilities, and 61% (2021: 70%) of its agreed debt facilities,
were at fixed rates. 

 

On completion of the new  tranche of Aviva debt  and repayment and cancellation  of the £25m RCF  with
RBS, the Company’s WAC of  its agreed debt facilities  increases to 3.2% with 74%  at a fixed rate  of
interest and a WAM of 6.3 years.

 

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.

 

LIBOR, the London Inter  Bank Offer Rate interest  rate benchmark used for  setting the interest  rate
charged on the  Company’s RCF facilities  was discontinued during  the year and  has been replaced  by
SONIA.  The transition has not had a material impact on the interest rates on the RCFs.

 

Outlook

 

The Company’s business  model has remained  resilient during the  year and we  have further  mitigated
against interest rate rises  by refinancing £25m  of variable rate debt  at a fixed  rate.  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

16 June 2022

Property portfolio

 

Industrial

 

Tenant                                      Location                % portfolio income
Menzies Distribution                        Various                               3.4%
H&M                                         Winsford                              1.4%
Teleperformance                             Ashby                                 1.2%
ATL Transport                               Burton                                1.1%
Restore                                     Salford                               1.0%
Saint Gobain Building Distribution          Milton Keynes                         1.0%
DS Smith Packaging                          Redditch                              0.9%
Daher Aerospace                             Hilton                                0.9%
Silgan Closures                             Doncaster                             0.9%
PDS Group Holdings                          West Bromwich                         0.9%
Next                                        Eurocentral                           0.8%
Life Technologies                           Warrington                            0.8%
Massmould                                   Milton Keynes                         0.8%
ICT Express                                 Tamworth                              0.8%
Royal Mail                                  Coventry/Kilmarnock                   0.8%
Yesss (B) Electrical                        Normanton                             0.7%
Turpin Distribution                         Biggleswade                           0.7%
Harbour International Freight               Manchester                            0.7%
HellermannTyton                             Cannock                               0.7%
Yodel                                       Bellshill                             0.7%
Multi-Colour Daventry England               Daventry                              0.6%
Zentia Profiles                             Gateshead - Team Valley               0.6%
Sherwin Williams                            Plymouth                              0.6%
DX Network Service                          Nuneaton                              0.6%
BSS Group                                   Bristol                               0.5%
Heywood Williams Components                 Bedford                               0.5%
Ichor Systems                               Hamilton                              0.5%
Morrison Utility Services                   Stevenage                             0.5%
Brenntag UK                                 Cambuslang                            0.5%
A Share & Sons (t/a SCS)                    Livingston                            0.5%
Sytner                                      Oldbury                               0.5%
MTS Logistics                               Coalville                             0.4%
Procurri Europe                             Warrington                            0.4%
Semcon                                      Warwick                               0.4%
Green Retreats                              Farnborough                           0.4%
VP Packaging                                Kettering                             0.4%
West Midlands Ambulance Service NHS Trust   Erdington                             0.4%
Warburton                                   Langley Mill                          0.4%
Northern Commercials                        Irlam                                 0.4%
Synergy Health                              Sheffield Parkway                     0.3%
Bunzl                                       Castleford                            0.3%
Powder Systems                              Liverpool, Speke                      0.3%
Tricel Composites                           Leeds                                 0.3%
Arkote                                      Sheffield                             0.3%
Hickling and Squires                        Nottingham                            0.3%
Sealed Air                                  Kettering                             0.3%
North Warwickshire Borough Council          Atherstone                            0.3%
DHL International                           Liverpool, Speke                      0.3%
PHS Group                                   Huntingdon                            0.2%
Synertec                                    Warrington                            0.2%
DHL Global Forwarding                       Glasgow Airport                       0.2%
Acorn Web Offset                            Normanton                             0.2%
ITM Power                                   Sheffield                             0.2%
Rapid Vehicle Repairs                       Kettering                             0.2%
Med Imaging                                 Knowsley                              0.2%
MP Bio Science                              Hilton                                0.1%
Central Electrical Armature Winding         Knowsley                              0.1%
Equinox Aromas                              Kettering                             0.1%
Engineering Solutions & Automation Services Knowsley                              0.1%
Portakabin                                  Knowsley                              0.1%
Jangala Softplay                            Hilton                                0.1%
Midon                                       Knowsley                              0.1%
Precision Pumping and Metering              Aberdeen                              0.1%
RTV - Worldnet Shipping                     Aberdeen                              0.1%
Shakespeare Pharma                          Hilton                                0.1%
Grampian Geotechnical (Scotland)            Aberdeen                              0.1%
Razor Oiltools                              Aberdeen                              0.1%
Industrial Control Distributors             Kettering                             0.1%
Other smaller tenants                                                             0.1%
VACANT                                                                            3.7%
                                                                                      
                                                                                 38.5%

 

Retail Warehouse                                                 
                                                                 
B&M                          Various                         2.7%
B&Q                          Banbury/Weymouth                2.4%
Wickes                       Burton/Southport/Winnersh       1.8%
HHGL (t/a Homebase)          Cromer/Leighton Buzzard         1.4%
Matalan                      Leicester                       1.1%
Magnet                       Gloucester/Leicester/Plymouth   1.0%
Halfords                     Carlisle/Sheldon/Weymouth       0.8%
Oak FurnitureLand Group      Carlisle/Plymouth               0.5%
Poundstretcher*              Grantham/Southport              0.5%
A Share & Sons (t/a SCS)     Plymouth                        0.5%
M&S                          Evesham                         0.5%
CDS (t/a The Range)          Burton                          0.5%
Sainsbury’s                  Torpoint                        0.5%
Dreams*                      Sheldon/Southport               0.5%
Pets at Home                 Sheldon/Winnersh                0.4%
Boots                        Evesham                         0.4%
Argos                        Evesham                         0.4%
Next                         Evesham                         0.4%
TJ Morris (t/a Homebargains) Portishead                      0.3%
Smyths Toys                  Gloucester                      0.3%
Iceland Foods                Carlisle                        0.3%
Sofology                     Southport                       0.2%
Poundland                    Carlisle                        0.2%
Just For Pets                Evesham                         0.2%
Pure Gym                     Grantham                        0.2%
SportsDirect.com             Weymouth                        0.2%
Farmfoods                    Gloucester                      0.2%
Majestic Wine                Portishead                      0.1%
Parts Alliance Group         Southport                       0.1%
InstaVolt                    Various                         0.1%
Other smaller tenants                                        0.1%
VACANT                                                       2.3%
                                                                 
                                                            21.1%

 

*Tenants in occupation paying £nil rent through CVAs where ERV has been used to calculate %  portfolio
income.

 

                                                                   
Office                                                             
                                                                   
First Title (t/a Enact)            Leeds                       1.4%
Regus (Maidstone West Malling)     West Malling                1.4%
The Skills Development Scotland Co Glasgow                     0.9%
National Grid                      Castle Donnington           0.7%
Wienerberger                       Cheadle                     0.7%
Agilent Technologies               Cheadle                     0.7%
Home Office                        Sheffield                   0.6%
Dehns                              Oxford                      0.6%
Edwards Geldards                   Derby                       0.6%
Countryside Properties             Leicester                   0.4%
Lyons Davidson                     Solihull                    0.4%
Nucana                             Edinburgh                   0.4%
Galliford Try Construction         Leicester                   0.4%
Regus (Leicester Grove Park)       Leicester                   0.3%
Worldpay                           Gateshead                   0.3%
Systra                             Birmingham                  0.3%
Oxentia                            Oxford                      0.3%
Cognizant Technology Solutions     Glasgow                     0.2%
Spa Medica                         Leicester                   0.2%
Health & Safety Executive          Sheffield                   0.2%
NatWest                            Oxford                      0.2%
Carbide Properties                 Leicester                   0.2%
Charles Stanley                    Oxford                      0.2%
Erskine Murray                     Leicester                   0.2%
Meridian Healthcomms               Manchester Fountain Street  0.2%
Nucana Biomed                      Edinburgh                   0.2%
Datawright Computer Services       Gateshead                   0.2%
Tony Gee and Partners              Manchester Arthur House     0.1%
IJ Tours                           Manchester Arthur House     0.1%
Venditan                           Manchester Fountain Street  0.1%
Livingstone Brown                  Glasgow                     0.1%
Copeland Wedge Associates          Birmingham                  0.1%
KWB Property Management            Birmingham                  0.1%
Fourthline                         Manchester Fountain Street  0.1%
Bell Cornwall Associates           Birmingham                  0.1%
UK Speeder Consulting              Manchester Arthur House     0.1%
Smith Institute                    Oxford                      0.1%
Quantem Consulting                 Birmingham                  0.1%
Coulters Legal LLP                 Edinburgh                   0.1%
GoFor Finance                      Edinburgh                   0.1%
Bradley & Cuthbertson LLP          Birmingham                  0.1%
Safe Deposits                      Glasgow                     0.1%
Reality Law                        Birmingham                  0.1%
Other smaller tenants                                          0.3%
VACANT                                                         2.3%
                                                                   
                                                              16.6%

 

Other                                                                                
                                                                                     
VW Group                                   Derby/Shrewsbury                      1.2%
TH UK & Ireland (t/a Tim Hortons)          Leicester/Perth/Watford               0.8%
MKM Buildings Supplies                     Castleford/Lincoln                    0.7%
Nuffield Health                            Stoke                                 0.7%
Total Fitness                              Lincoln                               0.6%
Co-Operative                               Gillingham                            0.6%
Bannatyne Fitness                          Perth                                 0.6%
Pendragon Property Holdings                York                                  0.5%
Liverpool Community Health NHS Trust       Liverpool                             0.4%
Parkwood Health & Fitness                  Salisbury                             0.4%
Listers Group                              Loughborough                          0.4%
Mecca Bingo                                Crewe                                 0.3%
Chokdee                                    Bath                                  0.3%
TJ Vickers & Sons                          Shrewsbury                            0.3%
Stonegate Pub Co                           High Wycombe                          0.3%
Starbucks                                  Maypole                               0.3%
Kbeverage (t/a Starbucks)                  Nottingham                            0.3%
Mecca Bingo (sublet to Odeon Cinemas)      Crewe                                 0.2%
The Gym Group                              Carlisle                              0.2%
AGO Hotels                                 Portishead                            0.2%
Iguanas                                    Torquay                               0.2%
Bistrot Pierre                             Torquay                               0.2%
Ask Italian Restaurant                     Shrewsbury                            0.2%
McDonalds                                  Plymouth                              0.2%
JD Wetherspoons                            Portishead                            0.2%
Scotco Eastern (t/a KFC)                   Perth                                 0.2%
Wedgmoor                                   Crewe                                 0.2%
Loungers                                   Torquay                               0.1%
The Universal Church of the Kingdom of God Stratford                             0.1%
1 Oak (t/a Starbucks)                      Burton                                0.1%
Knutsford Day Nursery                      Knutsford                             0.1%
F1 Autocentres                             Crewe                                 0.1%
Ashbourne Day Nurseries                    Chesham                               0.1%
Sam's Club (t/a House of the Rising Sun)   Shrewsbury                            0.1%
Edmundson Electrical                       Crewe                                 0.1%
Other smaller tenants                                                            0.1%
VACANT                                                                           1.0%
                                                                                     
                                                                                12.6%
 
                                                                                     
Retail
                                                                                     
Superdrug                                  Southsea/Weston-super-Mare/Worcester  1.1%
Sainsbury’s                                Gosforth                              0.9%
Specsavers                                 Cardiff                               0.5%
Sportswift                                 Cardiff/Gosforth/Portsmouth           0.5%
The Works                                  Bury St Edmunds/Portsmouth            0.4%
URBN UK                                    Southampton                           0.4%
Reiss                                      Guildford                             0.4%
Phase Eight                                Edinburgh                             0.3%
Poundland                                  Portsmouth                            0.3%
Nationwide Building Society                Shrewsbury                            0.2%
Portsmouth City Council                    Southsea                              0.2%
Foxtons                                    Stratford                             0.2%
Wilko Retail                               Taunton                               0.2%
Loungers                                   Shrewsbury                            0.2%
Signet Trading (t/a Ernest Jones)          Chester                               0.2%
Savers Health & Beauty                     Bury St Edmunds/Newcastle             0.2%
Tesco                                      Birmingham                            0.2%
Boots                                      Gosforth                              0.2%
Holland & Barrett                          Shrewsbury                            0.2%
Kruidvat Real Estate (t/a Savers)          Colchester                            0.1%
Crepeaffaire                               St Albans                             0.1%
Lush                                       Colchester                            0.1%
H Samuel                                   Colchester                            0.1%
Der Touristik                              Chester                               0.1%
WH Smith                                   Gosforth                              0.1%
Barrhead Travel                            Dunfermline                           0.1%
British Red Cross Society                  Dunfermline                           0.1%
Lloyds Bank                                Gosforth                              0.1%
Ramsdens Financials                        Glasgow                               0.1%
Clogau Gold                                Shrewsbury                            0.1%
Felldale Retail (t/a Lakeland)             Chester                               0.1%
Your Phone Care                            Portsmouth                            0.1%
Ciel (Concessions) (t/a Chesca)            Chester                               0.1%
Aslan Jewellery                            Chester                               0.1%
Virgin Money                               Gosforth                              0.1%
Greggs                                     Birmingham/Dunfermline                0.1%
Brook Taverner                             Cirencester                           0.1%
Leeds Building Society                     Colchester                            0.1%
Subway                                     Birmingham/Dunfermline                0.1%
Diamonds of Chester Camelot                Chester                               0.1%
CHAS Trading                               Dunfermline                           0.1%
Lloyds Pharmacy                            Dunfermline                           0.1%
Indigo Sun Retail                          Dunfermline                           0.1%
Johnson Cleaners                           Dunfermline                           0.1%
Viva Italia                                Dunfermline                           0.1%
The Danish Wardrobe (t/a Noa Noa)          Cirencester                           0.1%
Coral                                      Birmingham                            0.1%
Costa                                      Gosforth                              0.1%
Cancer Research UK                         Gosforth                              0.1%
RMS Estate Agents                          Gosforth                              0.1%
Other smaller tenants                                                            0.5%
VACANT                                                                           0.9%
                                                                                     
                                                                                11.3%

 

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.  The  Company’s risk  management
process is designed to identify,  evaluate and mitigate the significant  risks the Company faces.   At
least annually,  the Board  undertakes  a risk  review, with  the  assistance of  the Audit  and  Risk
Committee, to  assess the  effectiveness of  the  Investment Manager’s  risk management  and  internal
control systems.  During this review, no significant failings or weaknesses were identified in respect
of risk management, internal control and related financial and business reporting.

 

The Company holds  a portfolio  of high quality  property let  to institutional grade  tenants and  is
primarily financed by fixed rate debt.  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.

Risk                                   Assessment                  Mitigating factors
                                                                    

                                                                     • Diverse   property    portfolio
                                                                       covering all  key  sectors  and
Loss of revenue                                                        geographical areas
                                                                     • The Company has 339  individual
  • Tenant default due to a  cessation                                 tenancies  with   the   largest
    or curtailment of trade                                            tenant accounting  for 3.8%  of
  • An increasing  number  of  tenants                                 the rent roll
    exercising contractual  breaks  or                               • Investment  policy  limits  the
    not renewing at lease expiry                                       Company’s rent roll to no  more
  • Enforced reduction in  contractual    Likelihood: Moderate         than 10% from  a single  tenant
    rents through a CVA or legislative                                 and 50% from a single sector
    changes  due   to   the   COVID-19                               • Primarily  institutional  grade
    pandemic                                                           tenants
  • Property environmental performance        Impact: High           • Focused on established business
    insufficient to attract tenants                                    locations for investment
  • Decreases  in  ERVs  resulting  in                               • Active  management   of   lease
    decreases  in   passing  rent   to                                 expiry  profile  considered  in
    secure long-term occupancy         Overall change in risk from     forming acquisition decisions
  • Expiries or breaks concentrated in   last year: Decreased -      • Building         specifications
    a specific year                       reduced impact of the        typically not  tailored to  one
  • Unable to re-let void units             COVID-19 pandemic          user
  • Low UK  economic growth  impacting                               • Strong tenant relationships
    the commercial property market                                   • Significant      focus       on
                                                                       asset-by-asset ESG  performance
                                                                       and pro-actively  investing  in
                                                                       environmental  performance   to
                                                                       maintain  or   improve   rental
                                                                       levels

                                                                    
                                                                    

                                                                    
Decreases in property portfolio
valuation                                                            • Active    property    portfolio
                                                                       diversification between office,
  • Decreases in sector-specific ERVs                                  industrial       (distribution,
  • Loss of contractual revenue                                        manufacturing and warehousing),
  • Tenants   exercising   contractual    Likelihood: Moderate         retail warehousing, high street
    breaks or  not renewing  at  lease                                 retail and other
    expiry                                                           • Investment  policy  limits  the
  • Market pricing affecting value                                     Company’s property portfolio to
  • Change in demand for space              Impact: Moderate           no  more   than  50%   in   any
  • Property environmental performance                                 specific sector or geographical
    insufficient to attract tenants                                    region
  • Properties   concentrated   in   a                               • Smaller lot-size business model
    specific geographical location  or Overall change in risk from     limits exposure  to  individual
    sector                               last year: Decreased –        asset values
  • Reduced property market  sentiment    reduced impact of the      • High  quality  assets  in  good
    and investor demand                   COVID-19 pandemic and        locations should remain popular
  • Lack of transactional evidence     stabilisation of the retail     with investors
                                            sector valuations        • Significant      focus       on
                                                                       asset-by-asset ESG  performance
                                                                       and pro-actively  investing  in
                                                                       environmental  performance   to
                                                                       maintain or improve demand
                                                                    

                                                                     • The Company has three lenders
                                                                     • Target net gearing  of 25%  LTV
Financial                                 Likelihood: Moderate         on property portfolio
                                                                     • 84% of drawn debt facilities at
  • Reduced availability or  increased                                 the year end at a fixed rate of
    cost  of  arranging  or  servicing                                 interest
    debt                                      Impact: High           • Additional   fixed-rate    debt
  • Breach of borrowing covenants                                      agree post year-end
  • Significant increases in  interest                               • Significant        unencumbered
    rates                                                              properties  available  to  cure
  • Refinancing  risk  from  acquiring Overall change in risk from     any potential  breaches of  LTV
    £25m of debt due to expire in 2022 last year: Increased due to     covenants
                                       upward pressure in interest   • Ongoing     monitoring      and
                                                  rates                management  of   the   forecast
                                                                       liquidity and covenant position

                                                                    
                                                     

                                             Likelihood: Low        

                                                                     • Ongoing review  of  performance
Operational                                                            by   independent    Board    of
                                                                       Directors
  • Inadequate  performance,  controls                               • Outsourced    internal    audit
    or   systems   operated   by   the        Impact: High             function reporting directly  to
    Investment Manager                                                 the Audit and Risk Committee
                                                                     • External    depositary     with
                                                                       responsibility for safeguarding
                                                                       assets  and   performing   cash
                                                                       monitoring
                                       Overall change in risk from
                                          last year: No change      

                                                     
                                                                    
                                                     
                                                                     • Strong compliance culture
                                          Likelihood: Moderate       • External professional  advisers
Regulatory and legal                                                   are  engaged   to  review   and
                                                                       advise       upon       control
  • Adverse impact of  new or  revised                                 environment, ensure  regulatory
    legislation or regulations, or  by                                 compliance and  advise  on  the
    changes in  the interpretation  or                                 impact of  changes due  to  the
    enforcement of existing government        Impact: High             COVID-19 pandemic
    policy, laws and regulations                                     • Business  model   and   culture
  • Non-compliance   with   the   REIT                                 embraces FCA principles
    regime 41  38  or  changes to  the                               • REIT   regime   compliance   is
    Company’s tax status                                               considered  by  the  Board   in
                                                                       assessing     the     Company’s
                                       Overall change in risk from     financial position and  setting
                                          last year: No change         dividends and by the Investment
                                                                       Manager in  making  operational
                                                                       decisions
                                                                    

                                                                     • Investment  Manager  staff  are
                                                                       all  capable  of  working  from
                                                                       home for an extended period
                                                                     • Data is regularly backed up and
                                          Likelihood: Moderate         replicated and  the  Investment
Business interruption                                                  Manager’s   IT   systems    are
                                                                       protected     by     anti-virus
  • Cyber-attack   results   in    the                                 software and firewalls that are
    Investment Manager being unable to        Impact: High             regularly updated
    use its IT  systems and/or  losing                               • Fire       protection       and
    data                                                               access/security procedures  are
  • Terrorism or  pandemics  interrupt                                 in  place   at   all   of   the
    the Company’s  operations  through Overall change in risk from     Company’s managed properties
    impact on  either  the  Investment    last year: No change       • Comprehensive  property  damage
    Manager or the Company’s assets or                                 and    business    interruption
    tenants                                                            insurance  is  held,  including
                                                                       three  years’  lost  rent   and
                                                                       terrorism
                                                                     • At least annually, a fire  risk
                                                                       assessment   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
ESG                                                                    on compliance with requirements
                                                                       and  adopting   best   practice
  • Failure  to  appropriately  manage    Likelihood: Moderate         where possible
    the environmental  performance  of                               • The Company has a published ESG
    the property portfolio,  resulting                                 which seeks  to improve  energy
    in it  not  meeting  the  required                                 efficiency and reduce emissions
    standards     of     environmental      Impact: Moderate         • In  April   2021  the   Company
    legislation and making  properties                                 constituted an ESG Committee to
    unlettable or unsellable                                           ensure     compliance      with
  • ESG  policies  and  targets  being                                 environmental requirements, the
    insufficient to meet the  required Overall change in risk from     ESG  policy  and  environmental
    standards of stakeholders          last year: Increased due to     KPIs,  detailed   in  the   ESG
  • Non-compliance with  environmental  increasing best practice       Committee report
    reporting requirements                    requirements           • At   a   property   level    an
                                                                       environmental   assessment   is
                                                                       undertaken   which   influences
                                                                       decisions             regarding
                                                                       acquisitions,    refurbishments
                                                                       and      asset       management
                                                                       initiatives

                                                                    
                                                     

                                             Likelihood: Low        
Acquisitions
                                                                     • Comprehensive due diligence  is
  • Unidentified           liabilities                                 undertaken in conjunction  with
    associated with the acquisition of      Impact: Moderate           professional advisers  and  the
    new properties  (whether  acquired                                 provision of insured warranties
    directly  or   via   a   corporate                                 and indemnities are sought from
    structure)                                                         vendors where appropriate
                                       Overall change in risk from   • Acquired companies’  trade  and
                                       last year: Increased due to     assets   are    hive-up    into
                                         the acquisition of DRUM       Custodian  REIT  plc  and   the
                                                  REIT                 acquired entities liquidated

                                                     

 

Emerging risks

 

The following emerging risks have been identified:

 

  • Inflation - the recovery in global demand following  the COVID-19 pandemic and the ongoing war  in
    Ukraine have contributed to  global supply chain  issues, inflation and  the risk of  agricultural
    shortages.  These impact the Company in terms of the cost and availability of materials and labour
    in carrying  out  redevelopments,  refurbishments  and maintenance,  their  effect  on  increasing
    interest rates and  indirectly through  their impact  on the  UK economy  in terms  of growth  and
    consumer spending and the consequential impact on occupational demand for real estate. 

 

  • COVID-19 -  the COVID-19  pandemic impacted  the Company  in previous  financial years  and  there
    remains a principal risk  around potential new  variants and the associated  impact on the  global
    economy. 

 

The Board believes the Company is well placed to weather the longer-term impact of these risks because
the Company has:

 

  • A diverse portfolio by sector and location with an institutional grade tenant base;
  • Low gearing with 84% of drawn debt facilities at the year end at a fixed rate of interest; and
  • A stable investment portfolio and does not undertake speculative development.

 

No other emerging risks have been added to the Company’s Risk Register during the year.

 

Going concern and longer-term viability

 

In accordance with  Provision 31  of the UK  Corporate Governance  Code 2018 issued  by the  Financial
Reporting Council (“the Code”), the Directors have assessed the prospects of the Company over a period
longer than  12 months.   The Board  resolved to  conduct this  review for  a period  of three  years,
because:

 

  • The Company’s forecasts cover a three-year period; and
  • The Board  believes  a three-year  horizon  maintains a  reasonable  level of  accuracy  regarding
    projected rental income and costs, allowing robust sensitivity analysis to be conducted.

 

The Directors have assessed the following factors in assessing the Company’s status as a going concern
and its longer-term  viability, including  events up  to the date  of authorisation  of the  financial
statements:

 

  • A decrease in revenue through losses of contractual rent or tenant default;
  • Diminished demand for leasing the Company’s assets going forwards resulting in rental decreases or
    an increase in void units;
  • Contractual obligations due or anticipated within one year;
  • Potential liquidity and working capital shortfalls;
  • Access to funding and compliance with banking covenants; and
  • Ongoing compliance with regulatory requirements including the REIT regime.

 

The Directors note that the Company has performed strongly during the year with rent collection  rates
back a pre-pandemic levels and industrial valuations  and rents in particular improving over the  last
12 months.

 

Results of the assessment

 

Based on prudent  assumptions within  the Company’s forecasts  regarding losses  of contractual  rent,
tenant default,  void rates  and property  valuation movements,  the Directors  expect that  over  the
three-year period 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.

 

Sensitivities

 

These assessments  are  subject to  sensitivity  analysis, which  involves  flexing a  number  of  key
assumptions and judgements included in the financial projections:

 

  • A decrease in revenue through losses of contractual rent or tenant default;
  • Length of potential void period following lease break or expiry;
  • Acquisition NIY, disposals, anticipated capital expenditure and the timing of deployment of cash;
  • Interest rate changes; and
  • Property portfolio valuation movements.

 

This sensitivity analysis also evaluates the potential impact of the principal risks and uncertainties
should they occur which, together with the steps taken to mitigate them, are highlighted above and  in
the Audit and Risk Committee report.  The Board seeks to ensure that risks are mitigated appropriately
and managed within its risk appetite all times.

 

Sensitivity analysis considered the following areas:

 

Covenant compliance

 

The Company operates the  loan facilities summarised  in Note 15.   At 31 March  2022 the Company  had
significant headroom on lender covenants at a portfolio level with:

 

  • Company net gearing of 19.1%  compared to a maximum  LTV covenant of 35%  and £207.2m (31% of  the
    property portfolio) unencumbered by the Company’s borrowings; and
  • Had 207% minimum headroom on interest cover covenants for the quarter ended 31 March 2022.

 

Reverse stress testing has been undertaken to understand what circumstances would result in  potential
breaches of financial covenants.  While the assumptions applied in these scenarios are possible,  they
do not represent the Board’s view  of the likely outturn, but  the results help inform the  Directors’
assessment of the viability of the Company.  The testing indicated that:

 

  • The rate of loss  or deferral of contractual  rent on the borrowing  facility with least  headroom
    would need to deteriorate by  45% from the levels included  in the Company’s prudent forecasts  to
    breach interest cover covenants; or
  • At a portfolio level  property valuations would  have to decrease  by 41% from  the 31 March  2022
    position to risk breaching the overall 35% LTV covenant.

 

The Board notes  that the February  2022 IPF Forecasts  for UK Commercial  Property Investment  survey
suggests an average  2.5% increase in  rents during 2022  with capital value  increases of 4.1%.   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 160  assets and  over 300  typically 'institutional  grade' tenants  across all  commercial
sectors.

 

Liquidity

 

At 31 March 2022 the Company had:

 

  • £11.6m of cash-in-hand and £52.2m undrawn RCF,  with gross borrowings of £137.8m resulting in  low
    net gearing, with no short-term refinancing risk (on  refinancing the RBS RCF in June 2022) and  a
    weighted average debt facility maturity of six years; and
  • An annual contractual rent roll of £40.5m, with interest costs on drawn loan facilities of only c.
    £4.6m 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 for a period of at least 12 months. 

 

As detailed in Note  15, the Company’s Lloyds  RCF expires in September  2024.  The Board  anticipates
lender support in agreeing  subsequent facilities, and  would seek to refinance  the RCF with  another
lender or dispose of  sufficient properties to  repay it in  September 2024 in  the unlikely event  of
lender support being withdrawn.

 

Impact of emerging risks

 

The Board believes it too early to understand  fully the longer-term impact of the COVID-19  pandemic,
Brexit and the  war in  Ukraine but  the Board  believes the  Company is  well placed  to weather  any
shorter-term impacts due to the reasons set out in the Principal risks and uncertainties section.

 

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.

                                 

                                The Board’s commitment to keeping  in mind the long-term  consequences
Likely  consequences   of   any of its decisions underlies its focus  on risk, including risks to  the
decision in the long-term       long-term success  of the  business.  This  approach resulted  in  the
                                change to dividend policy during  the year to preserve cash  resources
                                by broadly paying dividends from net rental income, in response to the
                                political and market uncertainty caused by the COVID 19 pandemic.

                                 

                                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  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 Company  to the extent  that they  are
The interests of the  Company’s able to.
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 engaging  with
The   need   to   foster    the that  counterparty.   The  Company   also  periodically  reviews   the
Company’s              business compliance of  all  material  counterparties with  relevant  laws  and
relationships  with  suppliers, regulations such as  the Modern  Slavery Act 2015.   The Company  pays
customers and others            suppliers  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
The desirability of the Company investment business and finance its activities depends in part on  the
maintaining  a  reputation  for reputation of the Board  and Investment Manager’s  team.  The risk  of
high  standards   of   business falling short of the high  standards expected and thereby risking  its
conduct                         business reputation is included in the Board’s review of the Company’s
                                risk register, which is  conducted 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 formal 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 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 available  for  meetings  as
The  need  to  act  fairly   as appropriate and attend the Company’s AGM. 
between members of the 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 Days held at least annually to  review all aspects of the Company’s business  model
    and strategy and assess  the long-term sustainable success  of the Company and  its impact on  key
    stakeholders;
  • The Management Engagement Committee engages with  the Company’s key service providers and  reports
    on their performance 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; and
  • Specific training  for existing  Directors and  induction  for new  Directors as  set out  in  the
    Governance report.

 

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 were:

 

  • Completing the corporate acquisition of DRUM REIT as detailed in the Investment Manager’s report;
  • Appointing Savills as one of the Company’s independent valuers from 30 June 2021 replacing Lambert
    Smith Hampton;
  • Extending the term of the RCF as detailed in Note 15;
  • Finalising the Company’s policy on cladding explained further in the ESG Committee report;
  • Appointing new Directors as detailed in the Chairman’s statement; and
  • Constituting an ESG Committee as detailed in the ESG Committee report.

 

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. 

Stakeholder                             Stakeholder interests          Stakeholder engagement
                                                                        

Tenants                                                                  • Regular  dialogue   through
                                                                           rent collection process
The Investment Manager understands  the   • High quality assets          • Review published data, such
businesses  occupying   the   Company’s   • Profitability                  as    accounts,     trading
assets and  seeks to  create  long-term   • Efficient operations           updates    and    analysts’
partnerships and understand their needs   • Knowledgeable          and     reports
to deliver fit for purpose real  estate     committed landlord           • Ensured  buildings   comply
and    develop     asset     management   • Flexibility  to  adapt  to     with the  necessary  safety
opportunities  to  underpin   long-term     the changing UK commercial     regulations and insurance
sustainable income growth and  maximise     landscape                    • Most tenants  contacted  to
occupier satisfaction                     • Buildings   with    strong     request       environmental
                                            environmental credentials      performance data
                                                                         • Occupancy has  remained  at
                                                                           over 90% during the year
                                                                        

                                                                        
The   Investment   Manager   and    its
employees                                 • Long-term viability of the   • Board     and     Committee
                                            Company                        meetings
As  an  externally  managed  fund   the   • Long-term     relationship   • Face-to-face            and
Company’s key service  provider is  the     with the Company               video-conference   meetings
Investment Manager  and  its  employees   • Well-being     of      the     with the Chairman and other
are a key stakeholder.  The  Investment     Investment       Manager’s     Board Directors
Manager’s culture aligns  with that  of     employees                    • Monthly and  quarterly  KPI
the  Company   and  its   long-standing   • Being able to attract  and     reporting to the Board
reputation of operating in the  smaller     retain high-calibre staff    • Board evaluation, including
lot-size    market    is    key    when   • Maintaining a positive and     feedback      from      key
representing the Company                    transparent   relationship     Investment          Manager
                                            with the Board                 personnel
                                                                         • Informal meetings and calls
                                         
                                                                        
Suppliers
                                          • Collaborative          and   • Board     and     Committee
A collaborative  relationship with  our     transparent        working     meetings
suppliers, including those to whom  key     relationships                • One-to-one meetings
services are  outsourced, ensures  that   • Responsive communication     • Annual   review   of    key
we receive  high  quality  services  to   • Being  able   to   deliver     service providers  for  the
help deliver  strategic and  investment     service level agreements       Management       Engagement
objectives                                                                 Committee
                                         
                                                                        
                                         
                                                                         • Annual   and   half    year
Shareholders                              • Sustainable growth             presentations
                                          • Attractive level of income   • AGM
Building a strong investor base through     returns                      • Market  announcements   and
clear and transparent communication  is   • Strong           Corporate     corporate website
vital  to  building  a  successful  and     Governance             and   • Regular  investor  feedback
sustainable  business  and   generating     environmental credentials      received from the Company’s
long-term growth                          • Transparent      reporting     broker
                                            framework                    • On-going   dialogue    with
                                                                           analysts
                                         
                                                                        
                                                       

Lenders                                   • Stable cash flows
                                          • Stronger covenants
Our lenders play  an important role  in   • Being   able    to    meet
our business.   The Investment  Manager     interest payments           
maintains    close    and    supportive   • Maintaining agreed gearing
relationships  with   this   group   of     ratios                       • Regular covenant reporting
long-term  stakeholders,  characterised   • Regular          financial   • Regular catch-up calls
by openness,  transparency  and  mutual     reporting
understanding                             • Proactive notification  of
                                            issues or changes

                                         
                                                       

                                                       

                                          • Openness and transparency   
Government, local authorities and         • Proactive compliance  with
communities                                 new legislation             
                                          • Proactive engagement
As a responsible corporate citizen  the   • Support for local economic   • Engagement    with    local
Company  is   committed   to   engaging     and  environmental   plans     authorities    where     we
constructively with  central and  local     and strategies                 operate
government and ensuring we support  the   • Playing   its   part    in   • Two   way   dialogue   with
wider community                             providing the real  estate     regulators and HMRC
                                            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, Asset management report, ESG Committee report, Financial report, Property portfolio,
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 Hunter

Chairman

16 June 2022

Board of Directors and Investment Manager personnel

 

The Board currently comprises seven  non-executive directors.  A short  biography of each director  is
set out below:

 

David Hunter - Independent Chairman, age 68

 

David is a professional  non-executive director and  strategic adviser focused  principally on UK  and
international real estate.  He chairs the Company and  its Nominations Committee and is on the  boards
of both listed and unlisted companies  in the UK and overseas,  as well as holding corporate  advisory
roles.  He qualified  as a chartered  surveyor in 1978  and has over  25 years’ experience  as a  fund
manager, including as Managing Director of Aberdeen Asset Management’s property fund business.   David
is a former President of the British Property Federation and was actively involved in the introduction
of REITs to the UK.  He is also Honorary  Swedish Consul to Glasgow and an Honorary Professor of  real
estate at Heriot-Watt University. 

 

David is Non-Executive  Chair of  Capital &  Regional plc (“C&R”).   The Board  perceives no  material
conflicts of interest between Custodian REIT and the activities of C&R due to their divergent property
strategies.

 

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, age 60

 

Elizabeth joined the Board as  Senior Independent Director (“SID”) on  1 April 2021.  Her  substantive
executive career was  with Tesco  plc where  she was a  Stores Board  Director before  embarking on  a
non-executive career in 2005.

 

Elizabeth is currently SID and Remuneration Committee Chair  at The Unite Group Plc, the UK's  largest
owner, manager and developer of purpose-built student accommodation and Non-Executive Director and ESG
Committee Chair of Dalata Hotel Group  plc, the largest hotel group  in the Republic of Ireland.   Her
other Board roles  include Non-Executive  Director and Remuneration  Committee Chair  at McBride  plc,
Europe’s leading manufacturer of cleaning and  hygiene products, and Non-Executive Director of  Fresca
Group Limited, a fruit and vegetable import/export company. 

 

Previously she was SID of JD  Wetherspoon plc, SID and Remuneration  Committee Chair of Flybe 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.

 

Matthew Thorne FCA - Independent Director, age 69

 

Matthew chairs the Company’s Audit and Risk Committee.  Matthew qualified as a chartered accountant in
1978 with Price Waterhouse.  He  was an independent non-executive director  for nine years of  Bankers
Investment Trust plc, retiring in 2018 having chaired the Audit Committee.  Since May 2007 Matthew has
been an  adviser to  Consensus Business  Group (led  by Vincent  Tchenguiz).  Matthew  was also  Audit
Committee chair and the finance member of the Advisory Board and Advisory Panel of Greenwich Hospital,
the Naval Charity, until January 2020.  Matthew’s previous executive roles have included Group Finance
Director of McCarthy & Stone plc from 1993 to 2007, Finance Director of Ricardo plc from 1991 to  1992
and Investment Director of Beazer plc from 1983 to 1991.

 

Matthew is expected to retire from the Board at the AGM on 31 August 2022.

 

Hazel Adam - Independent Director, age 53

 

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 is an  independent non-executive director  of Aberdeen  Latin American Income  Fund Limited  and
holds the CFA Level  4 certificate in  ESG Investing and the  Financial Times Non-Executive  Directors
Diploma.

 

Hazel’s other role is not considered to impact her ability to allocate sufficient time to the  Company
to discharge her responsibilities effectively.

 

Chris Ireland FRICS - Independent Director, age 64

 

Chris was appointed as an Independent Director  on 1 April 2021.  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 appointed as Chief Executive Officer of JLL UK in 2016 and became its Chair in April  2021. 
He will continue to play an  active role in the capital markets  business and 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, age 63

 

Malcolm was appointed to the Board on 6 June 2022. 

 

He 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 of  MORhomes plc, Non-Executive  Director 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 previously Senior Independent  Director and Audit Committee chair  at CLS Holdings plc,  a
Non-Executive Director of St William Homes LLP,  President of the Association of Corporate  Treasurers
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, age 59

 

Ian is CEO  of Mattioli  Woods plc  (“Mattioli Woods”)  with over  35 years’  experience in  financial
services, wealth management and property  businesses and is the  founder director of Custodian  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 REIT.  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 is also Non-Executive Chair of  K3
Capital Group plc, which is listed on AIM and specialises in business transfer, business brokerage and
corporate finance across the UK.

 

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 REIT plc  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 family own 371,381 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.  Ed  is also  a
member of the Custodian Capital Investment Committee.

 

Since IPO  in 2014  Ed  has overseen  the  Company raising  over £300m  of  new equity,  arranging  or
refinancing seven loan facilities and completing four corporate acquisitions, including leading on the
acquisition of DRUM  REIT.  Ed’s key  responsibilities for  Custodian REIT are  accurate external  and
internal  financial  reporting,  ongoing  regulatory  compliance  and  maintaining  a  robust  control
environment.  Ed is Company Secretary  of Custodian 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 REIT  ESG Committee meetings  and co-leading the  Investment Manger’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 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 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 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 statements of comprehensive income

For the year ended 31 March 2022

                                                                   Group                Company
                                                           Year ended Year ended Year ended Year ended

                                                             31 March   31 March   31 March   31 March

                                                                 2022       2021       2022       2021
                                                      Note       £000       £000       £000       £000
                                                                                                      
Revenue                                                  4     39,891     39,578     38,490     39,578
                                                                                                      
Investment management                                         (3,854)    (3,331)    (3,782)    (3,331)
Operating expenses of rental property                                                                 
                                                          
  • rechargeable to tenants                                     (852)      (914)      (852)      (914)
  • directly incurred                                         (3,422)    (5,559)    (3,174)    (5,559)
Professional fees                                               (617)      (489)      (579)      (489)
Directors’ fees                                                 (291)      (218)      (291)      (218)
Administrative expenses                                         (776)      (551)      (774)      (551)
                                                                                                      
Expenses                                                      (9,812)   (11,062)    (9,452)   (11,062)
                                                                                                      
Operating profit before financing and revaluation of                                                  
investment property                                       
                                                               30,079     28,516     29,038     28,516
                                                                                                      
Unrealised profits/(losses) on revaluation of                                                         
investment property:
                                                        10     93,977   (19,611)     86,656   (19,611)
  • relating to property revaluations
  • relating to costs of acquisition                    10    (2,273)      (707)    (2,273)      (707)
Valuation increase/(decrease)                                  91,704   (20,318)     84,383   (20,318)
                                                                                                      
Profit on disposal of investment property                       5,369        393      5,369        393
                                                                                                      
Net profit/(loss) on investment property                       97,073   (19,925)     89,752   (19,925)
                                                                                                      
Operating profit before financing                             127,152      8,591    118,790      8,591
                                                                                                      
Finance income                                           6          -         61          -         61
Finance costs                                            7    (4,827)    (4,903)    (4,615)    (4,903)
                                                                                                      
Net finance costs                                             (4,827)    (4,842)    (4,615)    (4,842)
                                                                                                      
Profit before tax                                             122,325      3,749    114,175      3,749
                                                                                                      
Income tax expense                                       8          -          -          -          -
                                                                                                      
                                                                     
Profit for the year and total comprehensive income                                                    
for the year, net of tax                                      122,325
                                                                           3,749    114,175      3,749
                                                                     
                                                                                                      
Attributable to:                                                                                      
Owners of the Company                                         122,325      3,749    114,175      3,749
                                                                                                      
Earnings per ordinary share:                                                                          
Basic and diluted (p)                                    3       28.5        0.9                      
EPRA (p)                                                 3        5.9        5.6                      

 

The profit for the year arises from continuing operations.

Consolidated and Company statements of financial position

As at 31 March 2022

Registered number: 08863271

 

                                                            Group                    Company
                                                                  31 March
                                                    31 March 2022          31 March 2022 31 March 2021
                                                                      2021
                                               Note          £000                   £000          £000
                                                                      £000
                                                                                                      
Non–current assets
                                                                                                      
 
Investment property                              10       665,186  551,922       616,211       551,922
Investments                                      11             -        -        22,538         3,405
Total non-current assets                                  665,186  551,922       638,749       555,327
                                                                                                      
Current assets
                                                                                                      
 
Trade and other receivables                      12         5,201    6,001         3,365         6,001
Cash and cash equivalents                        14        11,624    3,920         9,217         3,920
Total current assets                                       16,825    9,921        12,582         9,921
                                                                                                      
Total assets                                              682,011  561,843       651,331       565,248
                                                                                                      
Equity
                                                                                                      
 
Issued capital                                   16         4,409    4,201         4,409         4,201
Share premium                                    16       250,970  250,469       250,970       250,469
Merger reserve                                   16        18,931        -        18,931             -
Retained earnings                                16       253,330  155,196       245,180       155,196
                                                                                                      
Total equity attributable to equity holders of                                                        
the Company                                        
                                                          527,640  409,866       519,490       409,866
                                                                                                      
Non-current liabilities
                                                                                                      
 
Borrowings                                       15       113,883  138,604       113,883       138,604
Other payables                                                570      572           570           572
                                                                                                      
Total non-current liabilities                             114,453  139,176       114,453       139,176
                                                                                                      
Current liabilities                                                                                   
                                                                                                      
Borrowings                                       15        22,727        -             -             -
Trade and other payables                         13         9,783    6,185        10,985         9,590
Deferred income                                             7,408    6,616         6,403         6,616
                                                                                                      
Total current liabilities                                  39,918   12,801        17,388        16,206
                                                                                                      
Total liabilities                                         154,371  151,977       131,841       155,382
                                                                                                      
Total equity and liabilities                              682,011  561,843       651,331       565,248

 

These consolidated and Company financial statements of Custodian REIT plc were approved and authorised
for issue by the Board of Directors on 16 June 2022 and are signed on its behalf by:

 

David Hunter

Chairman

Consolidated and Company statements of cash flows

For the year ended 31 March 2022

 

                                                                      Group              Company
                                                                              Year                Year
                                                               Year ended          Year ended
                                                                             ended               ended
                                                                 31 March            31 March
                                                                          31 March            31 March
                                                                     2022                2022
                                                                              2021                2021
                                                          Note       £000     £000       £000     £000
                                                                                                      
Operating activities                                                                                  
Profit for the year                                               122,325    3,749    114,175    3,749
Net finance costs                                                   4,827    4,842      4,615    4,842
Valuation (increase)/decrease of investment property        10   (91,704)   20,318   (84,383)   20,318
Impact of rent free                                         10    (1,112)  (1,932)    (1,157)  (1,932)
Amortisation of right-of-use asset                                      7        7          7        7
Profit on disposal of investment property                         (5,369)    (393)    (5,369)    (393)
                                                                                                      
Cash flows from operating activities before changes in                                                
working capital and provisions                                
                                                                   28,974   26,591     27,888   26,591
                                                                                                      
(Increase)/decrease in trade and other receivables                  1,923    (704)      2,636    (704)
(Decrease)/increase in trade and other payables and                 1,702  (2,065)      1,180  (2,065)
deferred income
                                                                                                      
Cash generated from operations                                     32,599   23,822     31,704   23,822
                                                                                                      
Interest and other finance charges                                (4,463)  (4,556)    (4,279)  (4,556)
                                                                                                      
Net cash flows from operating activities                           28,136   19,266     27,425   19,266
                                                                                                      
Investing activities                                                                                  
Purchase of investment property                                  (21,529) (11,443)   (21,529) (11,443)
Capital expenditure and development                               (3,515)  (2,308)    (3,510)  (2,308)
Acquisition costs                                                 (2,272)    (707)    (2,272)    (707)
Disposal of investment property                                    54,403    4,422     54,403    4,422
Costs of disposal of investment property                            (479)     (69)      (479)     (69)
Interest and finance income received                         6          -       61          -       61
                                                                                                      
Net cash used in investing activities                              26,608 (10,044)     26,613 (10,044)
                                                                                                      
Financing activities                                                                                  
Proceeds from the issue of share capital                    16        558        -        558        -
Costs of share issue                                                 (51)        -       (51)        -
Repayment of borrowings and origination costs               15   (25,057) (10,066)   (25,057) (10,066)
Dividends paid                                               9   (24,191) (20,635)   (24,191) (20,635)
                                                                                                      
Net cash from financing activities                               (48,741) (30,701)   (48,741) (30,701)
                                                                                                      
Net increase/(decrease) in cash and cash equivalents                6,003 (21,479)      5,297 (21,479)
Cash acquired through the acquisition of DRUM REIT                  1,701        -          -        -
                                                                                                      
Cash and cash equivalents at start of the year                      3,920   25,399      3,920   25,399
                                                                                                      
Cash and cash equivalents at end of the year                       11,624    3,920      9,217    3,920

 

Consolidated statement of changes in equity

For the year ended 31 March 2022

 

                                                       Issued                  Share Retained    Total
                                                              Merger reserve
                                                      capital                premium earnings   equity
                                                                        £000
                                                 Note    £000                   £000     £000     £000
                                                                                                      
As at 31 March 2020                                     4,201              - 250,469  172,082  426,752
                                                                                                      
Profit for the year                                         -              -       -    3,749    3,749
                                                                                                      
Total comprehensive income for year                         -              -       -    3,749    3,749
                                                                                                      
Transactions with owners of the Company,                                                              
recognised directly in equity
Dividends                                           9       -              -       - (20,635) (20,635)
Issue of share capital                             16       -              -       -        -        -
                                                                                                      
As at 31 March 2021                                     4,201              - 250,469  155,196  409,866
                                                                                                      
Profit for the year                                         -              -       -  122,325  122,325
                                                                                                      
Total comprehensive income for year                         -              -       -  122,325  122,325
                                                                                                      
Transactions with owners of the Company,                                                              
recognised directly in equity
Dividends                                           9       -              -       - (24,191) (24,191)
Issue of share capital                             16     208         18,931     501        -   19,640
                                                                                                      
As at 31 March 2022                                     4,409         18,931 250,970  253,330  527,640

 

Company statement of changes in equity

For the year ended 31 March 2022

 

                                                       Issued                  Share Retained    Total
                                                              Merger reserve
                                                      capital                premium earnings   equity
                                                                        £000
                                                 Note    £000                   £000     £000     £000
                                                                                                      
As at 31 March 2020                                     4,201              - 250,469  172,082  426,752
                                                                                                      
Profit for the year                                         -              -       -    3,749    3,749
                                                                                                      
Total comprehensive income for year                         -              -       -    3,749    3,749
                                                                                                      
Transactions with owners of the Company,                                                              
recognised directly in equity
Dividends                                           9       -              -       - (20,635) (20,635)
Issue of share capital                             16       -              -       -        -        -
                                                                                                      
As at 31 March 2021                                     4,201              - 250,469  155,196  409,866
                                                                                                      
Profit for the year                                         -              -       -  114,175  114,175
                                                                                                      
Total comprehensive income for year                         -              -       -  114,175  114,175
                                                                                                      
Transactions with owners of the Company,                                                              
recognised directly in equity
Dividends                                           9       -              -       - (24,191) (24,191)
Issue of share capital                             16     208         18,931     501        -   19,640
                                                                                                      
As at 31 March 2022                                     4,409         18,931 250,970  245,180  519,490

 

Notes to the financial statements for the year ended 31 March 2022

 

 1. Corporate information

 

The Company is a public limited company incorporated and domiciled in England and Wales, whose  shares
are publicly  traded on  the  London Stock Exchange  plc’s main  market  for listed  securities.   The
consolidated financial  statements have  been prepared  on a  historical cost  basis, except  for  the
revaluation of investment 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 16 June 2022.

 

 2. Basis of preparation and accounting policies

 

  ◦             Basis of preparation

 

The consolidated financial statements and the separate financial statements of the parent company have
been  prepared  in  accordance  with  international  accounting  standards  in  conformity  with   the
requirements of the Companies Act 2006 and International Financial Reporting Standards adopted by  the
UK.  The  financial statements  have also  been prepared  in accordance  with International  Financial
Reporting Standards as issued by the IASB.

 

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.

 

  ◦             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.   Other
subsidiaries have September or December accounting reference  dates which have not been amended  since
their acquisition as those companies  are expected to be liquidated  during the next financial  year. 
All transactions  and balances  between group  companies are  eliminated on  consolidation,  including
unrealised gains  and losses  on transactions  between group  companies.  Where  unrealised losses  on
intra-group asset  sales are  reversed  on consolidation,  the underlying  asset  is also  tested  for
impairment from a group perspective.  Amounts reported  in the financial statements of the  subsidiary
are adjusted where necessary to ensure consistency with the accounting policies adopted by the Group. 
Profit or loss and other comprehensive income of subsidiaries acquired or disposed of during the  year
are recognised from the  effective date of acquisition,  or up to the  effective date of disposal,  as
applicable.

 

  ◦             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.   Where  such
acquisitions are not judged to be a business  combination 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. 
Otherwise, acquisitions are accounted for as business combinations using the acquisition method. 

 

  ◦             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:

 

  • IFRS 17 – ‘Insurance Contracts’

IFRS 17 became effective for periods commencing on  or after 1 January 2021.  IFRS 17 establishes  the
principles for the recognition,  measurement, presentation and disclosure  of insurance contracts  and
supersedes IFRS 4 Insurance Contracts. 

 

At the date of authorisation of these financial statements, there were no new and revised IFRSs  which
have not been applied in these financial statements were in issue but not yet effective.

 

  ◦             Significant 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 next 12  months, set out in  more detail in  the Directors’ report  and
Principal risks  and  uncertainties section  of  the  Strategic report.   Accordingly,  the  Directors
continue to adopt the going concern basis for the preparation of the financial statements.

 

Income recognition

 

Contractual revenues  are allocated  to  each performance  obligation of  a  contract and  revenue  is
recognised on a  basis consistent  with the  transfer of  control of  goods or  services.  Revenue  is
measured at the fair value of the consideration received, excluding discounts, rebates, VAT and  other
sales taxes or duties.

 

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

 

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

 

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

 

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

 

Taxation

 

The Group  operates as  a REIT  and hence  profits and  gains from  the property  rental business  are
normally expected to be exempt from  corporation tax.  The tax expense  represents the sum of the  tax
currently payable and deferred tax relating to  the residual (non-property rental) business.  The  tax
currently payable is based on taxable profit for the year.  Taxable profit differs from net profit  as
reported in the statement of comprehensive income because it excludes items of income and expense that
are taxable or  deductible in other  years and  it further excludes  items that are  never taxable  or
deductible.  The Company’s  liability for current  tax is calculated  using tax rates  that have  been
enacted or substantively enacted by the reporting date.

 

Investment property

 

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

 

Group undertakings

 

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

 

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.

 

Financial assets

 

The Company’s financial assets  include cash and  cash equivalents and  trade and other  receivables. 
Interest resulting from holding financial assets is recognised in profit or loss on an accruals basis.

 

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

 

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

 

Cash and cash equivalents

 

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

 

Financial liabilities and equity

 

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

 

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

 

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

 

Bank borrowings

 

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

 

Trade payables

 

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

 

Leases

 

Where an investment property is held under a leasehold interest, the headlease is initially recognised
as an asset at cost plus the present  value of minimum ground rent payments. The corresponding  rental
liability to the head leaseholder is included in the balance sheet as a liability.  Lease payments are
apportioned between the finance charge and the reduction of the outstanding liability so as to produce
a constant periodic rate of interest on the remaining lease liability.

 

Segmental reporting

 

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

 

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

 

The areas where a higher degree of judgement or complexity arises are discussed below:

 

  • Valuation of investment property  - Investment property  is valued at the  reporting date at  fair
    value.  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 maintenance costs and appropriate discount rates. 

 

Estimates

 

Areas where accounting estimates are significant to the financial statements are:

 

  • Doubtful debt provisioning – the approach to providing for ‘expected credit losses’ is detailed in
    Note 12 and uses estimates within  a matrix of how much the  credit risk of trade receivables  has
    increased since  initial recognition  based  on a  number of  days  overdue, taking  into  account
    qualitative and quantitative supportable information.  Each individual property rental  receivable
    is reviewed to assess whether there is a probability of default and expected credit loss given the
    Investment Manager’s knowledge of the specific tenant over and above the provision calculated from
    the matrix.

 

 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 20.

 

The Company is a  FTSE EPRA/NAREIT index  series constituent and EPRA  performance measures have  been
disclosed to facilitate  comparability with the  Company’s peers through  consistent reporting of  key
performance measures.   EPRA  has issued  recommended  bases for  the  calculation of  EPS  which  the
Directors consider are better indicators of performance.

 

                                                                                         Year     Year
                                                                                        ended    ended
 
                                                                                     31 March 31 March
 
                                                                                         2022     2021
Group
                                                                                                      
Net profit and diluted  net profit attributable to  equity holders of the  Company                    
(£000)                                                                              
                                                                                      122,325    3,749
Net (profit)/loss on investment property (£000)                                      (97,073)   19,925
                                                                                                      
EPRA net profit attributable to equity holders of the Company (£000)                   25,252   23,674
                                                                                                      
Weighted average number of ordinary shares:                                                           
                                                                                                      
Issued ordinary shares at start of the year (thousands)                               420,053  420,053
Effect of shares issued during the year (thousands)                                     8,649        -
                                                                                                      
Basic and diluted weighted average number of shares (thousands)                       428,702  420,053
                                                                                                      
Basic and diluted EPS (p)                                                                28.5      0.9
                                                                                                      
EPRA EPS (p)                                                                              5.9      5.6

 

 4. Revenue

 

                                                   Group            Company
                                                 Year     Year     Year     Year
                                                ended    ended    ended    ended
 
                                             31 March 31 March 31 March 31 March
 
                                                 2022     2021     2022     2021
 
                                                 £000     £000     £000     £000
 
                                                                                
Gross rental income from investment property   39,039   38,664   37,638   38,664
Income from recharges to tenants                  852      914      852      914
                                                                                
                                               39,891   39,578   38,490   39,578

 

 5. Operating profit

 

Operating profit is stated after (crediting)/charging:

                                                                         Group            Company
                                                                       Year     Year     Year     Year
                                                                      ended    ended    ended    ended
 
                                                                   31 March 31 March 31 March 31 March
 
                                                                       2022     2021     2022     2021
 
                                                                       £000     £000     £000     £000
 
                                                                                                      
Profit on disposal of investment property                           (5,369)    (393)  (5,369)    (393)
Investment property valuation (increase)/decrease                  (91,704)   20,318 (91,704)   20,318
Fees payable to the Company’s  auditor and its associates for  the                                    
audit of the Company’s annual financial statements
                                                                        138      106      138      106
Fees payable to the Company’s auditor and its associates for other       25       20       25       20
services
Administrative fee payable to the Investment Manager                    459      416      459      416
Directly incurred operating expenses of vacant rental property        1,826      822    1,611      822
Directly incurred operating expenses of let rental property           1,444    1,142    1,418    1,142
Movement in  doubtful debt  provision, write  offs due  to  tenant                                    
business failure and rent concessions
                                                                          7    3,591     (26)    3,591
Amortisation of right-of-use asset                                        7        7        7        7

 

Fees payable to  the Company’s  auditor, Deloitte  LLP, are  further detailed  in the  Audit and  Risk
Committee report.

 

 

 6. Finance income

                     Group            Company
                   Year     Year     Year     Year
                  ended             ended
                           ended             ended
               31 March          31 March
                        31 March          31 March
                   2022              2022
                            2021              2021
                   £000              £000
                            £000              £000
                                                  
Bank interest         -       28        -       28
Finance income        -       33        -       33
                                                  
                      -       61        -       61

 

 7. Finance costs

                                                           Group              Company
                                                        Year                Year
                                                       ended Year ended    ended Year ended
 
                                                    31 March   31 March 31 March   31 March
 
                                                        2022       2021     2022       2021
 
                                                        £000       £000     £000       £000
 
                                                                                           
Amortisation of arrangement fees on debt facilities      364        347      337        347
Other finance costs                                      307        287      302        287
Bank interest                                          4,156      4,269    3,976      4,269
                                                                                           
                                                       4,827      4,903    4,615      4,903

 

 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 19.0%.  The differences are explained below:

 

                                                                      Group              Company
                                                                   Year                Year
                                                                  ended Year ended    ended Year ended
 
                                                               31 March   31 March 31 March   31 March
 
                                                                   2022       2021     2022       2021
 
                                                                   £000       £000     £000       £000
 
                                                                                                      
Profit before income tax                                        122,325      3,749  114,175      3,749
                                                                                                      
Tax charge on profit at a standard rate of 19.0% (2021: 19.0%)   23,242        712   21,693        712
                                                                                                      
Effects of:                                                                                           
REIT tax exempt rental profits and gains                       (23,242)      (712) (21,693)      (712)
                                                                                                      
Income tax expense                                                    -          -        -          -
                                                                                                      
Effective income tax rate                                          0.0%       0.0%     0.0%       0.0%

 

 

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
 
                                                                             2022     2021
 
                                                                             £000     £000
Group and Company
                                                                                          
Interim dividends paid on ordinary shares relating to the quarter ended:                  

                                                                                          

Prior year                                                                                

- 31 March 2021: 1.25p (2020: 1.6625p)                                      5,257    6,983

- 31 March 2021: 0.5p (2020: nil)                                           2,102        -
 
                                                                                          
Current year
- 30 June 2021: 1.25p (2020: 0.95p)                                         5,257    3,990
- 30 September 2021: 1.25p (2020: 1.05p)                                    5,511    4,411
- 31 December 2021: 1.375p (2020: 1.25p)                                    6,062    5,251
                                                                                          
                                                                           24,191   20,635

 

The Company paid a fourth interim dividend relating  to the quarter ended 31 March 2022 of 1.375p  per
ordinary share (totalling  £6.1m) on  31 May  2022 to shareholders  on the  register at  the close  of
business on 13 May 2022 which has not been included as liabilities in these financial statements.

 

10. Investment property

 

                                                  Group  Company
                                                   £000     £000
                                                                
At 31 March 2020                                559,817  559,817
                                                                
Impact of lease incentives                        1,932    1,932
Additions                                        12,150   12,150
Amortisation of right-of-use asset                  (7)      (7)
Capital expenditure and development               2,308    2,308
Disposals                                       (3,960)  (3,960)
                                                                
Valuation decrease before acquisition costs    (19,611) (19,611)
Acquisition costs                                 (707)    (707)
Valuation decrease including acquisition costs (20,318) (20,318)
                                                                
At 31 March 2021                                551,922  551,922
                                                                
                                                                
Impact of lease incentives                        1,112    1,158
Additions                                        65,495   23,801
Amortisation of right-of-use asset                  (7)      (7)
Capital expenditure and development               3,515    3,510
Disposals                                      (48,555) (48,555)
                                                                
Valuation increase before acquisition costs      93,977   86,655
Acquisition costs                               (2,273)  (2,273)
Valuation increase including acquisition costs   91,704   84,382
                                                                
At 31 March 2022                                665,186  616,211

 

£458.0m (2021:  £391.9m)  of  investment  property  was charged  as  security  against  the  Company’s
borrowings at the year end.  £0.6m (2021: £0.6m) of investment property comprises right-of-use assets.

 

The carrying value of investment property at 31 March 2022 comprises £557.8m freehold (2021:  £444.1m)
and £107.4m leasehold property (2021: £107.8m).

 

Investment property is stated  at the Directors’ estimate  of its 31 March  2022 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 2022 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
equivalent yields used ranged  from 4.3% to  12.3%.  Valuation reports are  based on both  information
provided by the  Company e.g.  current rents and  lease terms,  which are derived  from the  Company’s
financial  and  property  management  systems  and  are  subject  to  the  Company’s  overall  control
environment, and assumptions applied by the valuers e.g. ERVs and yields.  These assumptions are based
on market observation and the valuers’ professional  judgement.  In estimating the fair value of  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.  However,  there are interrelationships  between
unobservable inputs which are partially determined by  market conditions, which could impact on  these
changes.

 

11. Investments

 

Shares in subsidiaries

 

Company                             
                                                                                     31 March 31 March
                                            Country of         Principal    Ordinary     2022     2021
                                      registration and          activity shares held
                             Company     incorporation                                   £000     £000
                              number
Name
                                                                                                      
Custodian Real Estate       08882372 England and Wales       Non-trading        100%        -        -
Limited
Custodian Real Estate BL
Limited                     09270501 England and Wales  Non-trading – in        100%        -        -
                                                             liquidation
 
Custodian Real Estate
(Beaumont Leys) Limited*    04364589 England and Wales Non-trading  – in        100%        4        4
                                                             liquidation
 
Custodian Real Estate
(Leicester) Limited*        04312180 England and Wales  Non-trading – in        100%      497      497
                                                             liquidation
 
Custodian Real Estate       11187952 England and Wales  Non-trading – in        100%    2,904    2,904
(JMP4) Limited                                               liquidation
Custodian Real Estate (DROP                                     Property
Holdings) Limited (formerly  9511797 England and Wales        investment        100%   19,133        -
DRUM Income Plus REIT plc)
Custodian Real Estate                                           Property
(DROP) Limited (formerly     9515513 England and Wales        investment        100%        -        -
DRUM Income Plus Limited)*
                                                                                       22,538    3,405

 

* 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.

 

Custodian Real Estate (JMP4) Limited was dissolved on 18 April 2022.

 

DRUM REIT acquisition

 

The acquisition  of DRUM  REIT  during the  year has  been  accounted for  as an  asset  acquisition. 
Consideration of £19.1m comprised the issue of 20,247,040 shares at their market value of 94.5p.  This
consideration was allocated between the fair value of the acquired assets and liabilities of DRUM REIT
comprising £0.15m of working capital, £22.7m of net borrowings and £41.65m of investment property.

 

Non-listed equity investments

 

Group and
Company            
                                                                                     31 March 31 March
                                 Country of registration and   Principal    Ordinary     2022     2021
                                               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.

 

12. Trade and other receivables

 

                                         Group            Company
                                   31 March 31 March 31 March 31 March

                                       2022     2021     2022     2021

                                       £000     £000     £000     £000
Falling due in less than one year:
                                                                      
 
Trade receivables                     3,094    4,192    2,642    4,192
Other receivables                     1,960    1,706      576    1,706
Prepayments and accrued income          147      103      147      103
                                                                      
                                      5,201    6,001    3,365    6,001

 

The Company regularly monitors the  effectiveness of the criteria used  to identify whether there  has
been a significant increase in credit risk and revises them as appropriate to ensure that the criteria
are capable of identifying significant increases in credit risk before amounts become past due.

 

The Company considers  the following  as constituting  an event of  default for  internal credit  risk
management purposes as historical experience indicates that  financial assets that meet either of  the
following criteria are generally not recoverable:

 

  • 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 ECL matrix  fully
provides for receivable balances more than 180 days past due and partially provides against receivable
balances between 60 and 180 days past due.

 

                                                                         Group            Company
                                                                   31 March 31 March 31 March 31 March

                                                                       2022     2021     2022     2021

                                                                       £000     £000     £000     £000
Expected credit loss provision
                                                                                                      
 
Opening balance                                                       3,030      341    3,030      341
(Decrease)/increase in  provision  relating to  trade  receivables    (291)    2,689    (291)    2,689
that are credit-impaired
                                                                                                      
Closing balance                                                       2,739    3,030    2,739    3,030

 

The decrease in provision during the year is due to the collection of previously provided for debts.

 

Tenant rent deposits of £1.1m  (2021: £0.9m) are held as  collateral against certain trade  receivable
balances.

 

13. Trade and other payables

                                               Group                 Company
                                                     31 March               31 March
                                       31 March 2022          31 March 2022
                                                         2021                   2021
                                                £000                   £000
                                                         £000                   £000
Falling due in less than one year:                                                  
                                                                                    
Trade and other payables                       3,960    1,730         1,973    1,730
Social security and other taxes                  456      882           366      882
Accruals                                       4,226    2,665         4,100    2,665
Rental deposits                                1,141      908         1,141      908
Amounts due to subsidiary undertakings             -        -         3,405    3,405
                                                                                    
                                               9,783    6,185        10,985    9,590

 

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

 

Amounts payable to subsidiary undertakings are due on demand.

 

14. Cash and cash equivalents

                                Group            Company
                          31 March 31 March 31 March 31 March

                              2022     2021     2022     2021

                              £000     £000     £000     £000
                                                             
Cash and cash equivalents   11,624    3,920    9,217    3,920

 

Group and Company cash and cash equivalents at 31 March 2022 include £1.7m (2021: £2.6m) of restricted
cash comprising: £1.1m (2021:  £0.9m) rental deposits  held on behalf of  tenants, £0.3m (2021:  £nil)
exchange deposits  on  pipeline  acquisitions, £0.3m  (2021:  £0.2m)  retentions held  in  respect  of
development fundings and £nil (2021: £1.5m) interest prepayments.

 

15. Borrowings

 

                                        Group                                  Company
                                                                                                      

                                    Costs incurred in                       Costs incurred in         
                                   the arrangement of                      the arrangement of
                                      bank borrowings                         bank borrowings         
 
                              Bank               £000    Total        Bank               £000    Total
                        borrowings                              borrowings
                              £000                        £000        £000                        £000
Falling due within one                                                                                
year:
At 31 March 2021                 -                  -        -                  -           -        -
Borrowings arising
from the acquisition        22,760               (60)   22,700                  -           -        -
of DRUM REIT
Amortisation of                  -                 27       27                  -           -        -
arrangement fees
At 31 March 2022            22,760               (33)   22,727                  -           -        -
                                                                                                      
Falling due in more                                                                                   
than one year:
                                                                                                      

At 31 March 2021           140,000            (1,396)  138,604            140,000     (1,396)  138,604
Net repayment of          (25,000)                  - (25,000)           (25,000)           - (25,000)
borrowings
Arrangement fees                 -               (57)     (57)                  -        (57)     (57)
incurred
Amortisation of                •                  336      336           -                336      336
arrangement fees
At 31 March 2022           115,000            (1,117)  113,883            115,000     (1,117)  113,883
                                                                                                      
Total borrowings:                                                                                     
At 31 March 2022           137,760            (1,150)  136,610            115,000     (1,117)  113,883
                                                                                               

 

During the year the Company and Lloyds agreed to extend  the term of the RCF by one year to expire  in
2024.

 

At the year end the Company has the following facilities available:

 

  • A £20m RCF  with Lloyds with  interest of  between 1.5% and  1.8% above three-month  LIBOR and  is
    repayable on 17 September 2024.  The RCF  limit was increased to  £50m with Lloyds’ consent  since
    the year end;
  • A £25m RCF with RBS with interest of 1.75% above SONIA, expiring on 30 September 2022;
  • 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 £50m term loan with Aviva comprising:

  • £35m Tranche 1 repayable on 6 April 2032 attracting fixed annual interest of 3.02%; and
  • £15m Tranche 2 repayable on 3 November 2032 attracting fixed annual interest of 3.26%.

 

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 the discrete security pool is between 45% and 50%, with an overarching covenant
    on the Company’s property portfolio of a maximum 35% LTV; and
  • Historical interest cover, requiring  net rental receipts from  each discrete security pool,  over
    the preceding three months, to exceed 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.

 

Since the year end the Company has arranged a £25m tranche of 10 year debt with Aviva at a fixed  rate
of interest of 4.10% per annum to refinance the £25m variable rate revolving credit facility with RBS.

 

16. Share capital

 

Group and Company                             
                         Ordinary shares
                                              
                                   of 1p
Issued share capital                      £000
                                              
At 1 April 2020              420,053,344 4,201
                                              
Issue of share capital                 -     -
                                              
At 31 March 2021             420,053,344 4,201
                                              
Issue of share capital        20,797,054   208
                                              
At 31 March 2022             440,850,398 4,409

 

During the  year, the  Company  raised £19.7m  (before  costs and  expenses)  through the  placing  of
20,797,054 new ordinary shares.

 

Rights, preferences and restrictions on shares

 

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

 

At the AGM  of the  Company held on  25 August  2021, the  Board was given  authority to  issue up  to
140,201,115 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.  20,797,054 ordinary shares have  been
issued under the  Authority since 25  August 2021, leaving  an unissued balance  of 119,404,061 at  31
March 2022.  The Authority expires on the earlier of 15 months from 25 August 2021 and the  subsequent
AGM, due to take place on 31 August 2022.

 

In addition, the Company was granted authority to  make market purchases of up to 42,060,344  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                    Share premium account
                                               Retained earnings                   £000 Merger reserve
                                          £000
Other reserves                                              £000                                  £000
                                                                                                      
At 1 April 2020                        172,082           172,082                250,469              -
                                                                                                      
Shares issued during the                     -                 -                      -              -
year
Costs of share issue                         -                 -                      -              -
Profit for the year                      3,749             3,749                      -              -
Dividends paid                        (20,635)          (20,635)                      -              -
                                                                                                      
At 31 March 2021                       155,196           155,196                250,469              -
                                                                                                      
Shares  issued  during   the                 -                 -                    552         18,931
year
Costs of share issue                         -                 -                   (51)              -
Profit for the year                    114,175           122,325                      -              -
Dividends paid                        (24,191)          (24,191)                      -              -
At 31 March 2022                       245,180           253,330                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.

 

17. 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:

 

                              Group            Company
                        31 March 31 March 31 March 31 March

                            2022     2021     2022     2021

                            £000     £000     £000     £000
                                                           
Not later than one year   36,512   36,191   33,565   36,191
Year 2                    32,830   31,771   30,332   31,771
Year 3                    27,986   27,987   25,819   27,987
Year 4                    23,367   23,875   21,975   23,875
Year 5                    19,764   19,300   18,546   19,300
Later than five years     67,843   72,428   62,418   72,428
                                                           
                         208,302  211,552  192,655  211,552

 

The following table presents amounts reported in revenue:

 

                                                                         Group            Company
                                                                   31 March 31 March 31 March 31 March

                                                                       2022     2021     2022     2021

                                                                       £000     £000     £000     £000
                                                                                                      
Lease income on operating leases                                     38,884   38,621   37,483   38,621
Therein lease income relating to variable lease payments that do        155      152      155      152
not depend on an index or rate
                                                                                                      
                                                                     39,039   38,773   37,638   38,773

 

18. 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.

 

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.

 

On 22 June 2020 the terms of the IMA  were varied to secure the appointment of the Investment  Manager
for a further three  years, with a further  year’s notice, and to  introduce further fee hurdles  such
that annual management fees payable to the Investment Manager under the IMA are now:

 

  • 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.

 

Administrative fees payable to the Investment Manager under the IMA are now:

 

  • 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;
  • 0.08% of the NAV of  the Company as at the  relevant quarter day which is  in excess of £200m  but
    below £500m divided by 4;
  • 0.05% 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
  • 0.03% 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, which notice may only be  given after the expiry of the  Initial three year term.  The IMA  may
also be terminated  on the  occurrence of  an insolvency event  in relation  to either  party, if  the
Investment Manager is fraudulent, grossly negligent or commits a material breach which, if capable  of
remedy, is not remedied within three months, or on  a force majeure event continuing for more than  90
days.

 

The Investment Manager receives a marketing fee of 0.25% (2021: 0.25%) of the aggregate gross proceeds
from any issue of new shares in consideration of the marketing services it provides to the Company. 

 

During the year the  Investment Manager charged  the Company £4.41m  (2021: £3.75m) comprising  £3.86m
(2021:  £3.33m)  in  respect  of  annual  management  fees,  £0.46m  (2021:  £0.42m)  in  respect   of
administrative fees, £nil (2021: £nil)  in respect of marketing fees  and a transaction fee of  £0.09m
relating to work carried out on the acquisition of DRUM REIT.

 

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.

 

19. 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 ratio

 

The Board reviews the capital structure  of the Company on a regular  basis.  As part of this  review,
the Board considers the  cost of capital  and the risks  associated with each  class of capital.   The
Company has  a  target  net gearing  ratio  of  25% determined  as  the  proportion of  debt  (net  of
unrestricted cash) to investment  property.  The net  gearing ratio at the  year-end was 19.1%  (2021:
24.9%).

 

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

 

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  RCFs only,  as interest  on all  other  debt
facilities is payable on  a fixed rate basis.   At 31 March  2022, the RBS RCF  was drawn at  £22.8m. 
Assuming this amount was outstanding for the whole year and based on the exposure to interest rates at
the reporting date, if three-month LIBOR/SONIA had been 0.5% higher/lower and all other variables were
constant, the Company’s profit for the year ended  31 March 2022 would decrease/increase by £0.1m  due
to its variable rate borrowings.

 

Market risk management

 

The Company  manages its  exposure  to market  risk  by holding  a  portfolio of  investment  property
diversified by sector, location and tenant.

 

Market risk sensitivity

 

Market risk arises on  the valuation of the  Company’s property portfolio in  complying with its  bank
loan covenants (Note 15).  The Company would breach its overall borrowing covenant if the valuation of
its property portfolio fell by 45% (2021: 29%).

 

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 2022 was £3.1m (2021: £4.2m).

 

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

 

Liquidity risk management

 

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

 

The following tables  detail the Company’s  contractual maturity for  its financial liabilities.   The
table has  been drawn  up based  on undiscounted  cash flows  of financial  liabilities based  on  the
earliest date on  which the Company  can be  required to pay.   The table includes  both interest  and
principal cash flows.

 

                                                             31 March 2022               31 March 2022
                                              31 March 2022   3 months – 1
Group              Weighted average effective    0-3 months           year 31 March 2022     5 years +
                              interest rate %                                  1-5 years
                                                       £000           £000                        £000
                                                                                    £000
                                                                                                      
Trade and other                           N/a         9,783              -           151           420
payables
Borrowings:                                                                                           
Variable rate                           2.491           100            299        16,585             -
Variable rate                           2.441           139            139             -             -
Fixed rate                              3.935           197            590         2,656             -
Fixed rate                              2.987           336          1,008         5,377        47,939
Fixed rate                              3.020           264            793         4,228        41,362
Fixed rate                              3.260           122            367         1,956        18,227
                                                                                                      
                                                     10,941          3,196        30,953       107,948

 

                                                             31 March 2022              
                                              31 March 2022   3 months – 1               31 March 2022
Company            Weighted average effective    0-3 months           year 31 March 2022     5 years +
                              interest rate %                                  1-5 years
                                                       £000           £000                        £000
                                                                                    £000
                                                                                                      
Trade and other                           N/a        10,985              -           151           420
payables
Borrowings:                                                                                           
Variable rate                           2.491           100            299        16,585  
Fixed rate                              3.935           197            590         2,656       -
Fixed rate                              2.987           336          1,008         5,377        47,939
Fixed rate                              3.020           264            793         4,228        41,362
Fixed rate                              3.260           122            367         1,956        18,227
                                                                                                      
                                                     12,004          3,057        30,953       107,949

 

                                                             31 March 2021               31 March 2021
                                              31 March 2021   3 months – 1
Group              Weighted average effective    0-3 months           year 31 March 2021     5 years +
                              interest rate %                                  1-5 years
                                                       £000           £000                        £000
                                                                                    £000
                                                                                                      
Trade and other                           N/a         6,185              -           151           421
payables
Borrowings:                                                                                           
Variable rate                           1.888           118            354        25,692           •  
Fixed rate                              3.935           197            590         2,656           •  
Fixed rate                              2.987           336          1,008         5,377        47,939
Fixed rate                              3.020           264            793         4,228        41,362
Fixed rate                              3.260           122            367         1,956        18,227
                                                                                                      
                                                      7,222          3,112        40,060       107,949

 

                                                             31 March 2021              
                                              31 March 2021   3 months – 1               31 March 2021
Company            Weighted average effective    0-3 months           year 31 March 2021     5 years +
                              interest rate %                                  1-5 years
                                                       £000           £000                        £000
                                                                                    £000
                                                                                                      
Trade and other                           N/a         9,590              -           151           421
payables
Borrowings:                                                                                           
Variable rate                           1.888           118            354        25,692 -
Fixed rate                              3.935           197            590         2,656           •  
Fixed rate                              2.987           336          1,008         5,377        47,939
Fixed rate                              3.020           264            793         4,228        41,362
Fixed rate                              3.260           122            367         1,956        18,227
                                                                                                      
                                                     10,627          3,112        40,060       107,949

 

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 – level 3

 

Fair value  is  based on  valuations  provided  by an  independent  firm of  chartered  surveyors  and
registered appraisers, which uses the inputs set out  in Note 10.  These values were determined  after
having taken into consideration recent market transactions for similar properties in similar locations
to the investment properties held by the Company.  The fair value hierarchy of investment property  is
level 3.  At 31 March 2021, the fair  value of the Company’s investment properties was £665.2m  (2021:
£551.9m).

 

Interest bearing loans and borrowings – level 3

 

As at 31 March  2022 the value of  the Company’s loans with  Lloyds, RBS, SWIP and  Aviva all held  at
amortised cost was £137.8m (2021:  £140.0m).  The difference between  the carrying value of  Company’s
loans and their fair value is detailed in Note 21.

 

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.

 

Impact of the COVID-19 pandemic

 

As set  out in  the Principal  risks and  uncertainties section  of the  Strategic report,  the  Board
believes it too early  to understand fully the  longer-term impact of the  COVID-19 pandemic, but  the
Board believes the Company is well placed to weather any short-term impact due to the reasons set  out
in the Strategic report.

 

The Board does therefore not  consider it necessary or possible  to carry out sensitivity analysis  on
its valuation or cashflow assumptions.

 

20. Events after the reporting date

 

Property transactions

 

Since the year end the Company has acquired:

 

  • A 87k sq ft industrial facility in Grangemouth for £7.5m occupied by Thornbridge Sawmills with  an
    annual passing rent of £388k, reflecting a NIY of 5.5%; and
  • A 5k sq ft retail asset in Winchester for £3.65m occupied by Nationwide Building Society and Hobbs
    with an aggregate annual passing rent of £249k, reflecting a NIY of 6.4%.

 

Since the year end the Company has sold a 25k sq ft car showroom occupied by Audi for £5.6m.

 

Borrowings

 

Since the year end the Company has arranged a £25m tranche of 10 year debt with Aviva at a fixed  rate
of interest of 4.10% per annum to refinance a £25m variable rate revolving credit facility with RBS.

21. Alternative performance measures

 

NAV per share total return

 

A measure  of  performance  taking  into  account both  capital  returns  and  dividends  by  assuming
 42 dividends declared are reinvested at NAV at the time the shares are quoted  43 ex-dividend,  shown
as a percentage change from the start of the year.

 

 
                                               Year ended Year ended
 
                                                 31 March   31 March
 
                                                     2022       2021
Group
                                                                    
Net assets (£000)                                 527,640    409,866
Shares in issue at 31 March (thousands)           440,850    420,053
NAV per share at the start of the year (p)           97.6      101.6
Dividends per share paid during the year (p)        5.625     4.9125
NAV per share at the end of the year (p)            119.7       97.6
                                                                    
                                                                    
                                              
NAV per share total return                          28.4%       0.9%

 

Share price total return

 

A measure  of performance  taking into  account both  share price  returns and  dividends by  assuming
 44 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
 
                                                     2022       2021
Group
                                                                    
Share price at the start of the year (p)             91.8       99.0
Dividends per share paid during the year (p)        5.625     4.9125
Share price at the end of the year (p)              101.8       91.8
                                                                    
                                                                    
                                              
Share price total return                            17.0%     (2.3%)

 

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
                                          
                                                 2022       2021
 
                                                 £000       £000
Group
                                                                
Dividends paid relating to the year            16,830     13,652
Dividends approved relating to the year         6,062      7,354
                                                                
                                               22,892     21,006
                                                                
                                          
Profit after tax                              122,325      3,749
One-off costs                                       -          -
Net (profit)/loss on investment property     (97,073)     19,925
                                                                
                                               25,252     23,674
                                                                
Dividend cover                                 110.3%     112.7%

 

Net gearing

 

Gross borrowings less cash (excluding rent deposits), divided by property portfolio value.

 

 
                               Year ended Year ended
 
                                 31 March   31 March
 
                                     2022       2021
 
                                     £000       £000
Group
                                                    
Gross borrowings                  137,760    140,000
Cash                             (11,624)    (3,920)
Cash held on behalf of tenants      1,141      1,179
                                                    
Net borrowings                    127,277    137,259
                                                    

Investment property               665,186    551,922
                                                    

Net gearing                         19.1%      24.9%

 

Ongoing charges

 

A measure of the regular, recurring costs of  running an investment company expressed as a  percentage
of average NAV.

 

                                                              Year ended Year ended

                                                                31 March   31 March

                                                                    2022       2021

Group                                                               £000       £000
                                                                                   
Average quarterly NAV during the year                            462,501    408,703
                                                                                   
Expenses                                                           9,812     11,062
Operating expenses of rental property rechargeable to tenants      (852)      (914)
                                                                                   
                                                                   8,960     10,148
                                                                                   
Operating expenses of rental property directly incurred          (3,422)    (5,559)
One-off costs                                                          -          -
                                                                                   
                                                                   5,538      4,589
                                                                                   

OCR                                                                1.94%      2.48%
                                                                                   

OCR excluding direct property expenses                             1.20%      1.12%

 

EPRA performance measures

 

EPRA promotes, develops and represents the European public real estate sector, providing leadership in
matters of common interest by publishing research  and encouraging discussion of issues impacting  the
property industry, both within the membership and with a wide range of stakeholders, including the  EU
institutions, governmental and  regulatory bodies and  business partners.  The  Board supports  EPRA’s
drive to bring  parity to  the comparability and  quality of  information provided in  this report  to
investors and other key stakeholders.

 

EPRA earnings per share

 

A measure of the Company’s operating results excluding gains or losses on investment property,  giving
a better indication than basic EPS of the extent to which dividends paid in the year are supported  by
recurring net income.

 
                                                       Year ended Year ended
 
                                                         31 March   31 March
 
                                                             2022       2021
 
                                                             £000       £000
Group
                                                                            
Profit for the year after taxation                        122,325      3,749
Net (profit)/loss on investment property                 (97,073)     19,925
                                                                            
EPRA earnings                                              25,252     23,674
                                                                            

Weighted average number of shares in issue (thousands)    428,702    420,053
                                                                            

EPRA earnings per share (p)                                   5.9        5.6

 

EPRA NAV per share metrics

 

EPRA NAV metrics make adjustments to the IFRS NAV to provide stakeholders with the most relevant

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

                                                           2022     2021

Group                                                      £000     £000
                                                                        
IFRS NAV                                                527,640  409,865
Fair value of financial instruments                           -        -
Deferred tax                                                  -        -
                                                                        
EPRA NRV                                                527,640  409,865
                                                                        

Weighted average number of shares in issue (thousands)  428,702  420,053
                                                                        

EPRA NRV per share (p)                                    123.1     97.6

 

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

                                                           2022     2021

Group                                                      £000     £000
                                                                        
IFRS NAV                                                527,640  409,865
Fair value of financial instruments                           -        -
Deferred tax                                                  -        -
Intangibles                                                   -        -
                                                                        
EPRA NTA                                                527,640  409,865
                                                                        

Weighted average number of shares in issue (thousands)  428,702  420,053
                                                                        

EPRA NTA per share (p)                                    123.1     97.6

 

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

                                                           2022     2021

Group                                                      £000     £000
                                                                        
IFRS NAV                                                527,640  409,865
Fair value of fixed rate debt                                 -  (9,468)
Deferred tax                                                  -        -
                                                                        
EPRA NDV                                                         400,397
                                                                        

Weighted average number of shares in issue (thousands)  428,702  420,053
                                                                        

EPRA NDV per share (p)                                    123.1     95.3

 

The fair value of the liability of Company’s  interest-bearing loans included in the balance sheet  at
amortised cost  has  been calculated  based  on prevailing  swap  rates, and  excludes  ‘break’  costs
chargeable should the Company settle loans ahead of their contractual expiry.  At 31 March 2022 all of
the Company’s fixed rate  debt instruments were ‘in  the money’ so no  fair value adjustment has  been
made in calculating EPRA NDV.

 

EPRA NIY and EPRA ‘topped-up’ NIY

 

EPRA NIY represents annualised rental  income based on cash rents  passing at the balance sheet  date,
less non-recoverable property operating expenses, divided  by the gross property valuation.  The  EPRA
‘topped-up’ NIY is calculated by making an adjustment to the EPRA NIY in respect of the expiration  of
rent free periods (or  other unexpired lease  incentives such as discounted  rent periods and  stepped
rents).

 

                                                  31 March 31 March

                                                      2022     2021

Group                                                 £000     £000
                                                                   
Investment property                                665,186  551,922
Allowance for estimated purchasers’ costs 45  39    43,237   35,875
                                                                   
Gross-up property portfolio valuation              708,423  587,797
                                                                   

Annualised cash passing rental income               37,367   36,314
Property outgoings                                 (1,719)  (1,004)
                                                                   
Annualised net rents                                35,648   35,310
                                                                   
Impact of expiry of current lease incentives         3,126    2,378
                                                                   
                                                    38,773   37,688
                                                                   

EPRA NIY                                              5.0%     6.0%
                                                                   

EPRA ‘topped-up’ NIY                                  5.5%     6.4%

 

EPRA vacancy rate

 

EPRA vacancy  rate is  the ERV  of vacant  space as  a percentage  of the  ERV of  the whole  property
portfolio.

 

                                                             31 March 31 March

                                                                 2022     2021

Group                                                            £000     £000
                                                                              
Annualised potential rental value of vacant premises            4,643    3,562
Annualised potential rental value for the property portfolio   45,580   42,554
                                                                              

EPRA vacancy rate                                               10.2%     8.4%

 

EPRA cost ratios

 

EPRA cost ratios reflect overheads and operating costs as a percentage of gross rental income.

 

 
                                                             Year ended Year ended
 
                                                               31 March   31 March
 
                                                                   2022       2021
 
                                                                   £000       £000
Group
                                                                                  
Directly incurred operating expenses and administrative fees      8,960     10,147
Ground rent costs                                                  (37)       (37)
                                                                                  
EPRA costs (including direct vacancy costs)                       8,923     10,110
                                                                                  
Property void costs                                             (1,525)      (888)
                                                                                  
EPRA costs (excluding direct vacancy costs)                       7,398      9,222
                                                                                  
Gross rental income                                              39,039     38,698
Ground rent costs                                                  (37)       (37)
                                                                                  
Rental income net of ground rent costs                           39,002     38,661
                                                                                  
EPRA cost ratio (including direct vacancy costs)                  22.9%      26.1%
                                                                                  

EPRA cost ratio (excluding direct vacancy costs)                  19.0%      23.9%

 

EPRA capital expenditure

 

Capital expenditure incurred on the Company’s property portfolio during the year.

 

                          31 March 31 March

                              2022     2021

Group                         £000     £000
                                           
Acquisitions                65,495   12,150
Development                      -      691
Like-for-like portfolio      3,515    1,617
                                           
                                           

Total capital expenditure   69,010   14,458

 

EPRA like-for-like rental growth

 

Like-for-like rental growth of the property portfolio by sector.

                                        31 March 2022
                                                                          
                               Retail warehouse
                    Industrial                  Retail Other Office  Total
                                           £000
Group                     £000                    £000  £000   £000   £000
                                                                          
Like-for-like rent      14,637            7,887  3,167 5,397  4,168 35,256
Acquired properties        218              182    538     -  1,074  2,012
Sold properties            976              100    149   546      -  1,771
                                                                          
                                                                          

                        15,831            8,169  3,854 5,943  5,242 39,039

 

                                            31 March 2021
                                                                          
                               Retail warehouse
                    Industrial                  Retail Other Office  Total  
                                           £000
Group                     £000                    £000  £000   £000   £000
                                                                            
Like-for-like rent      16,143            8,641  3,653 6,355  3,500 38,292  
Acquired properties         38                -      -    26    127    191  
Sold properties             18                -    163     -      -    181  
                                                                            
                                                                          
                                                                            
                        16,199            8,641  3,816 6,381  3,627 38,664
                                                                            

 

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  2022 or 2021, but  is derived from those  accounts. Statutory accounts for  2021
have been delivered to the Registrar of Companies  and those for 2022 will be delivered following  the
Company's AGM.  The auditor has reported on the  2022 accounts: their report was unqualified, did  not
draw attention to any matters by way of  emphasis and did not contain statements under  46 s498(2)  or
 47 (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 -

══════════════════════════════════════════════════════════════════════════════════════════════════════

^ 48  1  The European Public Real Estate Association (“EPRA”).
^ 49  2  Profit after tax excluding net gains or losses on investment property divided by weighted
average number of shares in issue.
^ 50  3  Profit after tax divided by weighted average number of shares in issue.
^ 51  4  Dividends paid and approved for the year.
^ 52  5  Profit after tax, excluding net gains or losses on investment property, divided by dividends
paid and approved for the year.
^ 53  6  Net Asset Value (“NAV”) movement including dividends paid during the year on shares in issue
at 31 March 2021.
^ 54  7  Share price movement including dividends paid during the year.
^ 55  8  EPRA net tangible assets (“NTA”) does not differ from the Company’s IFRS NAV or EPRA NAV.
^ 56  9  Gross borrowings less cash (excluding rent deposits) divided by property portfolio value.
^ 57  10  Expenses (excluding operating expenses of rental property recharged to tenants) divided by
average quarterly NAV.
^ 58  11  Expenses (excluding operating expenses of rental property) divided by average quarterly NAV.
^ 59  12  For properties in Scotland, English equivalent EPC ratings have been obtained.
^ 60  13  Before acquisition costs of £2.3m.
^ 61  14  Before rent top-ups of £0.3m.
^ 62  15  Net of disposal costs of £0.5m.
^ 63  16  A full version of the Company’s Investment Policy is available at
custodianreit.com/wp-content/uploads/2021/02/CREIT-Investment-policy.pdf.
^ 64  17  The Board proposes increasing this upper lot-size limit to £15m at the Company’s forthcoming
AGM.
^ 65  18  A risk score of two represents “lower than average risk”.
^ 66  19  The Board proposes broadening the definition of refurbishment to include the redevelopment
of existing holdings, to a maximum 10% of the Company’s gross assets, at the Company’s forthcoming
AGM.
^ 67  20  Source: Numis Securities Limited.
^ 68  21  EPRA earnings per share divided by average share price.
^ 69  22  Comprising the tap issue of 550,000 shares on 7 May 2021 at 101.5p per share, a 6% premium
to NAV, and the issue of 20,247,040 shares as consideration for the acquisition of DRUM REIT on 3
November 2021 at their market value of 94.5p.
^ 70  23  Dividends totalling 5.625p per share (1.75p relating to the prior year and 3.875p relating
to the year) were paid on shares in issue throughout the year.
^ 71  24  An increase in the valuation of a property due to an excess of demand over supply.
^ 72  25  Current passing rent plus ERV of vacant properties.
^ 73  26  Includes car showrooms, petrol filling stations, children’s day nurseries, restaurants,
health and fitness units, hotels and healthcare centres.
^ 74  27  Passing rent divided by purchase price plus assumed purchasers’ costs.
^ 75  28  Weighted average unexpired lease term to first break or expiry.
^ 76  29  ERV of portfolio divided by property valuation plus purchaser’s costs.
^ 77  30  As defined by the LPCB Loss Prevention Standards.
^ 78  31  Excluding assets with no car parking facilities.
^ 79  32  Equating to 56 75kW ‘Rapid’ Chargers.
^ 80  33  Equating to 140 7kW ‘Fast’ Chargers.
^ 81  34  A ‘green lease’ incorporates clauses where the owner and occupier undertake specific
responsibilities/obligations regarding the sustainable operation/occupation of a property, for
example: energy efficiency measures, waste reduction/management and water efficiency.
^ 82  35  One EPC letter represents 25 energy performance asset rating points.
^ 83  36  As defined by the Committee on Climate Change.
^ 84  37  The sterling overnight index average (“SONIA”) which has replaced LIBOR as the UK’s main
interest rate benchmark.
^ 85  38  As defined by the Corporation Tax Act 2010.
^ 86  39  Assumed at 6.5% of investment property valuation.
 

══════════════════════════════════════════════════════════════════════════════════════════════════════

   ISIN:          GB00BJFLFT45
   Category Code: MSCM
   TIDM:          CREI
   LEI Code:      2138001BOD1J5XK1CX76
   Sequence No.:  168905
   EQS News ID:   1377669


    
   End of Announcement EQS News Service

   ══════════════════════════════════════════════════════════════════════════

    87 fncls.ssp?fn=show_t_gif&application_id=1377669&application_name=news&site_id=reuters9

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  45. file:///data/ucdp/tmp/xhtmlconvert_parsn_eqs_4GXgjlvz.html#_ftn39
  46. https://eqs-cockpit.com/cgi-bin/fncls.ssp?fn=redirect&url=d40eb87bd5aa208220b6fdccef1297dd&application_id=1377669&site_id=reuters9&application_name=news
  47. https://eqs-cockpit.com/cgi-bin/fncls.ssp?fn=redirect&url=a8a1751ef9f70e39d1d7238ca22cbdd2&application_id=1377669&site_id=reuters9&application_name=news
  48. file:///data/ucdp/tmp/xhtmlconvert_parsn_eqs_4GXgjlvz.html#_ftnref1
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