Custodian REIT plc (CREI)
30 November 2021
Custodian REIT plc
("Custodian REIT" or "the Company")
Custodian REIT (LSE: CREI), the UK commercial real estate investment company focused on smaller lot-sizes, today reports its interim results for the six months ended 30 September 2021 ("the Period").
Financial highlights and performance summary
The Company presents alternative performance measures ("APMs") to assist stakeholders in assessing performance alongside the Company's results on a statutory basis.
APMs are among the key performance indicators used by the Board to assess the Company's performance and are used by research analysts covering the Company. Certain other APMs may not be directly comparable with other companies' adjusted measures, and APMs are not intended to be a substitute for, or superior to, any IFRS measures of performance. Supporting calculations for APMs and reconciliations between APMs and their IFRS equivalents are set out in Note 18.
David Hunter, Chairman of Custodian REIT, said:
"The UK property market has shown significant resilience since the outbreak of the COVID-19 pandemic. The subsequent recovery, in certain sectors, since the successful vaccination roll-out has been marked with the Company's rent collections improving to 95%, net of contractual deferrals, and EPRA earnings per share increasing to 3.0p (2020: 2.6p) reflecting this improvement and the stabilisation of the Company's rent roll.
"As a result of this recovery I was very pleased to be able to declare dividends per share of 2.5p (2020: 2.0p) for the Period and, from the quarter ending 31 December 2021, the Board intends to increase quarterly dividends per share to 1.375p to achieve an annualised target dividend per share of no less than 5.5p, based on rent collection levels remaining at least in line with expectations.
"The COVID-19 pandemic has reinforced Custodian REIT's strategy which, over and above decisions in relation to investment approach, has always placed income and financial resilience at the heart of the Company's objectives. When allied to the appropriate property strategy this focus underpins sustainable dividends, which in turn support long-term total return."
Further information regarding the Company can be found at the Company's website www.custodianreit.com or please contact:
The UK property market has shown significant resilience since the outbreak of the COVID-19 pandemic. The subsequent recovery, in certain sectors, since the successful vaccination roll-out has been marked with the Company enjoying a £32.3m valuation increase during the six months ended 30 September 2021. EPRA earnings per share increased to 3.0p (2020: 2.6p) reflecting the stabilisation of the Company's rent roll and the Company's rent collections improving to 95%, net of contractual deferrals, which provided 120% cover for dividends relating to the Period.
The recent volatility in markets has emphasised the importance of having a well-diversified, income focused property portfolio. I was very pleased to be able to announce that despite the inevitable disruption to cash collection caused by the COVID-19 pandemic, dividends per share of 2.5p (2020: 2.0p) have been declared relating to the Period. From the quarter ending 31 December 2021 the Board intends to increase quarterly dividends per share to 1.375p to achieve a target dividend per share for the year ending 31 March 2022 of no less than 5.25p and for the year ending 31 March 2023 of no less than 5.5p, based on rent collection levels remaining at least in line with expectations.
While it is clear that a renewed spread of the pandemic, possibly through further variants, will lead to a reintroduction of some restrictions, the UK Government has made it clear that they are committed to avoiding a return to lockdown, if at all possible. We will approach any such event in the same manner as previous restrictions, optimising rent collection through close liaison with our tenants. The Company's strategy of direct rent collection ensures a close understanding of tenant needs and an ability to react appropriately to these, to mutual benefit.
The Board acknowledges the importance of income for shareholders and its objective is to grow the dividend on a sustainable basis at a rate which is fully covered by projected net rental income and does not inhibit the flexibility of the Company's investment strategy.
These have been testing times which have necessitated an exceptional effort from the Investment Manager, both in the collection of rents and in operating remotely as a team. I would like to acknowledge the results of their efforts. I also thank my fellow Board members who have been flexible and supportive during a period which has required numerous formal and informal additional Board meetings.
The NAV of the Company at 30 September 2021 was £445.9m, approximately 106.0p per share, an increase of 8.4p (8.6%) since 31 March 2021:
Borrowings and cash
The Company operates the following debt facilities:
Each facility has a discrete security pool, comprising a number of the Company's individual properties, over which the relevant lender has security and the following financial covenants:
The Aviva facility also contains a projected interest cover covenant requiring net contractual rents from the security pool over the next 12 months to exceed 250% of the facility's quarterly interest liability.
The Company complied with all loan covenants during the Period.
The Company is in the process of charging £30.3m of property to replace charged assets sold during the Period which, once complete, will mean £153.4m (27% of the property portfolio at 30 September 2021) of unencumbered assets will be available to be charged to the security pools to enhance the LTV on individual loans if required.
Through the corporate acquisition of DRUM REIT since the Period end, the Custodian REIT group now also operates a £25m RCF facility with the Royal Bank of Scotland expiring on 30 September 2022 with interest of 1.75% above three-month LIBOR. The facility's key financial covenants comprise a maximum LTV of DRUM REIT's property portfolio of 50% and minimum historical interest cover of 250%.
The weighted average cost of the Company's agreed debt facilities is 2.9% (2020: 2.9%) with a weighted average maturity of 6.9 years (2020: 7.3 years). 78% (2020: 77%) of the Company's agreed debt facilities are at a fixed rate of interest, significantly mitigating interest rate risk.
During the Period the Company paid fourth and fifth interim dividends per share for the financial year ended 31 March 2021 of 1.25p and 0.5p respectively, and the first quarterly dividend per share for the financial year ending 31 March 2022 of 1.25p, relating to the quarter ended 30 June 2021.
In line with the Company's dividend policy the Board approved an interim dividend of 1.25p per share for the quarter ended 30 September 2021 which will be paid on 30 November 2021 to shareholders on the register on 12 November 2021.
Business model and strategy
Custodian REIT offers investors the opportunity to access a diversified portfolio of UK commercial real estate through a closed-ended fund. The Company seeks to provide investors with an attractive level of income and the potential for capital growth, becoming the REIT of choice for private and institutional investors seeking high and stable dividends from well-diversified UK real estate.
The Company's investment policy is summarised below:
(i) governmental bodies or departments; or
(ii) single tenants rated by Dun & Bradstreet as having a credit risk score higher than two, where exposure may not exceed 5% of the rent roll.
Custodian Capital Limited ("the Investment Manager") is appointed under an investment management agreement ("IMA") to provide asset management, investment management and administrative services to the Company.
We were delighted to welcome Elizabeth McMeikan and Chris Ireland to the Board on 1 April 2021 who bring a range of different but complementary skills, strengthen the Board's property and governance experience and add to its diversity.
Two of the Company's five independent Directors were appointed in 2014. The Company's succession policy allows for a tenure of longer than nine years, in line with the 2019 AIC Corporate Governance Code for Investment Companies ("AIC Code"), but the Board acknowledges the benefits of ongoing Board refreshment. For this reason expected Director retirement dates are staggered within a nine year tenure period. Where possible, the Board's policy is to recruit successors well ahead of the retirement of Directors and a recruitment process is underway to appoint an Audit and Risk Committee Chair designate.
The Board is conscious of the increased focus on diversity and recognises the value and importance of diversity in the boardroom. No Directors are from a minority ethnic background. The appointment of Elizabeth McMeikan increased the female representation on the Board to 33% which meets the gender diversity recommendations of the Hampton-Alexander Review for at least 33% female representation on FTSE350 company boards. 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 Reports 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.
Environmental, social and governance ("ESG")
The Board recognises that its decisions have an impact on the environment, people and communities. It also believes there are positive financial reasons to incorporate good ESG practices into the way we do business.
The Board shares the increased stakeholder interest in, and recognises the importance of, compliance requirements around good ESG management. It seeks to adopt sustainable principles wherever possible, actively seeking opportunities to make environmentally beneficial improvements to its property portfolio and encouraging tenants to report and improve emissions data. The ESG Committee monitors the Company's performance against its environmental key performance indicators ("KPIs") to ensure it complies with its environmental reporting requirements and encourages positive social outcomes being achieved for its stakeholders and the communities in which it operates.
As a result, the Board has committed to:
The absolute focus on rent collection, financial resilience and maintaining fully covered dividends has occupied the Board's attention throughout the Period. Indeed, the COVID-19 pandemic has reinforced Custodian REIT's strategy which, over and above decisions in relation to investment approach, has always placed income and financial resilience at the heart of the Company's objectives. When allied to the appropriate property strategy this focus underpins sustainable dividends, which in turn support long-term total return.
The Board is confident that the Company's portfolio is well placed to meet these objectives through income and valuation growth.
29 November 2021
Investment Manager's report
The valuation movements by sector in the Custodian REIT property portfolio during the Period tell a story that is repeated across the market. Industrial and logistics assets continue to see strong demand from investors and occupiers. Occupier demand is driving rental growth, which is encouraging investors still further in their pricing. This virtuous circle appears to have some way to run, particularly amongst smaller regional properties, where inflationary pressures on construction costs, limited development and an ongoing excess of occupier demand over supply support continued rental growth.
Pricing in the retail warehouse sector is recovering strongly as occupiers have proved resilient through the pandemic with those in DIY, discounting, homewares and food all trading well. Where investors are confident that rental levels are sustainable, pricing has moved noticeably during the Period.
We were delighted to take advantage of the strength and depth of demand in the industrial/logistics sector and the increasing demand for retail warehousing by making some opportunistic sales during the Period. We completed the sale of a portfolio 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 part-invest the expected proceeds in advance of completion which helped reduce cash drag. We also sold, to a special purchaser, a B&Q retail warehouse in Galashiels 67% ahead of valuation. While this property would normally be considered a target property for Custodian REIT we did not feel holding the property would achieve the upside value delivered by the sale.
To capitalise on the marginal yield achievable when buying smaller lot-size regional property, during the Period we acquired a distribution unit in Dundee and an office building in central Manchester and, since the Period end, a distribution unit in York for a combined sum of £11.1m at an aggregate net initial yield of c.6%. In all cases we believe there is strong rental growth potential over the short term.
Custodian Capital invoices and collects rent directly, importantly allowing it, as Investment Manager, to hold direct conversations promptly with most tenants regarding the payment of rent. This direct contact has proved invaluable through the COVID-19 pandemic disruption, enabling better outcomes for the Company. Many of these conversations have led to positive asset management outcomes, some of which are discussed below.
95% of rent relating to the Period net of contractual rent deferrals has been collected, or 98% before contractual deferrals, as set out below:
Outstanding rental income remains the subject of discussion with various tenants, although some arrears are potentially at risk of non-recovery from CVAs or Pre-pack Administrations.
Property portfolio performance
At 30 September 2021 the Company's property portfolio comprised 152 assets (31 March 2021: 159 assets), 197 tenants and 263 tenancies with an aggregate net initial yield ("NIY") of 6.2% (31 March 2021: 6.6%) and weighted average unexpired lease term to first break or expiry ("WAULT") was 5.0 years (31 March 2021: 5.0 years).
The property portfolio is split between the main commercial property sectors, in line with the Company's objective to maintain a suitably balanced portfolio, with a relatively low exposure to office and a relatively high exposure to industrial, retail warehouse and alternative sectors, often referred to as 'other' in property market analysis.
The current sector weightings are:
Industrial and logistics property remains a very good fit with the Company's strategy. The demand for smaller lot-sized units is very broad, from manufacturing, urban logistics, online traders and owner occupiers. This demand, combined with a restricted supply resulting from limited new development, supports high residual values (where the vacant possession value is closer to the investment value than in other sectors) and drives rental growth. Despite a long period of growth in this sector, we still see opportunity.
The COVID-19 pandemic has deepened the challenges facing the high street retail sector causing further declines in retail values and the Company has continued to re-balance the portfolio away from secondary high street locations. By contrast we have witnessed a strong recovery in out-of-town retail/retail warehousing which remains an important asset class for the Company. We expect that well-located retail warehouse units, let off low rents, located on retail parks which are considered dominant in their area will continue to be in demand by retailers. The importance of convenience, free parking, the capacity to support click and collect and the relatively low cost compared to the high street should continue to support occupational demand for the Company's retail warehouse assets.
Regional offices will remain a sector of interest for the Company and we expect there to be activity post-pandemic in regional office markets. The rise in working remotely may not be restricted to working from home with a potential increase in working from regional satellite offices. Locations that offer an attractive environment to both live and work in and that offer buildings with high environmental standards and accessibility to a skilled workforce, will be most desirable. There is latent rental growth in many regional office markets where supply has been much diminished through redevelopment to alternative uses.
Custodian REIT targets properties across all asset classes that are capable of supporting the Company's ESG objectives and it is fully committed to investing in and refurbishing both new properties and the existing portfolio to meet these objectives.
The Company operates a geographically diversified property portfolio across the UK, seeking to ensure that no one region represents more than 50% of portfolio income. The geographic analysis of the Company's portfolio at 30 September 2021 was as follows:
For details of all properties in the portfolio please see custodianreit.com/property/portfolio.
The Company invested £12.475m in three acquisitions during the Period described below:
On 20 October 2021 the Company acquired a 29k sq ft industrial unit in York for £2.962m occupied by Menzies Distribution with a WAULT of 2.8 years and an annual passing rent of £186k, reflecting a NIY of 5.9%.
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. DRUM REIT's property portfolio at 30 September 2021 is summarised below:
DRUM REIT 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:
Owning the right properties at the right time is a key element of effective property portfolio management, which necessarily involves periodically selling properties to balance the property portfolio. Custodian REIT is not a trading company but identifying opportunities to dispose of assets significantly ahead of valuation or that no longer fit within the Company's investment strategy is important.
The Company sold the following properties during the Period for an aggregate consideration of £38.5m:
Since the Period end the Company sold:
Property portfolio risk
The property portfolio's security of income is enhanced by 18% of income benefitting from either fixed or indexed rent reviews.
Short-term contractual income at risk is a relatively low proportion of the property portfolio's total income, with 32% expiring in the next three years and 14% within one year.
The Company's Annual Report for the year ended 31 March 2021 set out the principal risks and uncertainties facing the Company at that time. We do not anticipate any changes to those risks and uncertainties over the remainder of the financial year, but highlight the following:
The purchase of DRUM REIT increases the likelihood of unidentified liabilities having been acquired, but this risk has been mitigated through comprehensive financial, tax, property and legal due diligence being undertaken in conjunction with the Company's professional advisers.
The impact of the COVID-19 pandemic has been pervasive across the globe and we believe it will continue to impact rental receipts, tenant stability, property valuations and government legislation for at least the remainder of the financial year ending 31 March 2022.
We believe the Company is well placed to weather any further negative impacts of the COVID-19 pandemic because of its diverse portfolio by sector and location with an institutional grade tenant base and low net gearing.
The Board is aware of the increasing focus from external stakeholders on the Company's environmental credentials and the increasing level of disclosure requirements regarding the Company's environmental impact. We continue to work with specialist environmental consultants to ensure compliance with new requirements and identify cost-effective opportunities to improve the Company's environmental performance.
Health and safety
Although the Company's portfolio has no exposure to 'high risk' assets, typically high-rise properties (over 18m tall) or properties used for multiple residential occupation, it owns properties where cladding material has been used in construction. Whilst there is no legal requirement to remove composite cladding which is not Loss Prevention Certification Board ("LCPB") compliant (typically used in construction prior to 2005), to mitigate risk, the Investment Manager:
If core drilling identified non LCPB compliant cladding and the FRA recommended removal as potential mitigation measures might not be sufficient the Investment Manager would work with the tenants to ensure cladding was replaced.
The resilience shown by real estate during the Pandemic and its strong recovery in the last six months, notwithstanding the threat from new COVID-19 variants, bears testament to continued occupier demand in industrial/logistics and retail warehousing, in particular. In addition, the motor trade has also performed well and we are witnessing a recovery in occupier demand for offices.
Increasingly tenants require properties that meet their environmental and social objectives, never more so than in the office sector, where businesses will need to attract their staff back to the office and away from home. Custodian REIT is poised to meet the demands of its tenants and potential new occupiers, in this regard, investing in EV ("electric vehicle") charging on its retail parks and office sites and focusing refurbishment and re-development budgets on environmentally responsible fit out while working with tenants to improve the energy performance of existing buildings.
For so long as we can offer properties to our tenants that are fit for purpose and that lead on environmental performance improvements, we remain confident that the Company's diversified portfolio of smaller regional property will continue to deliver the long-term returns demanded by our shareholders.
for and on behalf of Custodian Capital Limited
29 November 2021
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 and expiries resulted in a £2.3m valuation increase in the Period.
Property portfolio summary
During the Period we have seen that continued close collaboration with tenants will generate asset management opportunities including lease extensions and re-gears which has seen the Company maintain its weighted average unexpired lease term to first break or expiry ("WAULT") at five years despite the effects of the COVID-19 pandemic.
Key asset management initiatives completed during the Period include:
Since the Period end the following initiatives have been completed:
These positive asset management outcomes have been 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.
While the short-term impact of an Administration is a hit to cash flow and valuation, the opportunity created by taking back control of the JTF site in Warrington in a prime distribution location, with the prospect of redeveloping the site to create a BREEAM 'Excellent' rated, high bay distribution unit should lead to a substantial net valuation uplift and also help meet the ESG objectives of Custodian REIT.
Tenant business failures have resulted in occupancy levels being maintained at 91.6% since 31 March 2021, but letting activity is increasing across most sectors.
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.
Assistant Investment Manager
for and on behalf of Custodian Capital Limited
29 November 2021
ESG Committee Report
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 addresses the importance of these issues in the day-to-day running of the business, as detailed below.
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 management. 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 comfortable, safe and high-quality spaces. As such, our aim is that the safety and well-being of occupants of our buildings is maximised. We have implemented a portfolio approach to well-being which encourages engagement with tenants, ensures maximum building safety and optimises comfort and quality of occupancy.
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:
Environmental key performance indicators
Target environmental key performance indicators ("KPIs") provide a strategic way to measure the Company's success towards achieving its environmental objectives and ensure the Investment Manager is embedding key ESG principles in order to directly support climate risk mitigation and capture some ESG opportunities from the transition to a low-carbon economy.
The Company's qualitative and quantitative environmental targets, measured via the KPIs, cover four 'boundaries' and are set out below:
During the Period we completed a comprehensive refurbishment of an industrial unit in West Bromwich which involved installing six electric vehicle charging points, solar photovoltaic coverage to over 700 sq m of the roof area, air source heat pumps to provide heating and hot water, new energy efficient radiators and LED lights with passive infrared sensors. The refurbishment is expected to increase the EPC rating from C (69) to a high B, with the ERV of the property increasing from £280k pa (£4.80 per sq ft) to £345k pa (c.£6.00 per sq ft). Once re-let we expect the uplift in property valuation will be well in excess of the capital outlay for refurbishment.
We expect to commence the redevelopment of an industrial asset in Redditch to BREEAM 'Excellent' standard, once it becomes vacant in January 2022, with further initiatives planned as we continue to invest in our property portfolio to minimise its environmental impact and maximise shareholder value.
During the Period the Company has updated EPCs at 20 units across 14 properties covering 272k sq ft for properties where existing EPCs had expired or where works had been completed, and at the Period end have a weighted average EPC rating of C (62) (31 March 2021: C (63)). For updated EPCs, there was an aggregate improvement in the rating of 16 energy performance asset rating points. Some of the properties showing an improvement are detailed below:
The Company's weighted average EPC score is shown below:
The Committee is pleased with the progress made on the Company's environmental credentials during the Period, in particular the continued improvement in the weighted average EPC rating and looks forward to the Company making further progress against its environmental KPIs over the remainder of the financial year.
This report was approved by the Committee and signed on its behalf by:
Chair of the ESG Committee
29 November 2021
Condensed consolidated statement of comprehensive income
For the six months ended 30 September 2021
The profit/(loss) for the Period arises from the Company's continuing operations.
As at 30 September 2021
Registered number: 08863271
These interim financial statements of Custodian REIT plc were approved and authorised for issue by the Board of Directors on 29 November 2021 and are signed on its behalf by:
Condensed consolidated statement of cash flows
For the six months ended 30 September 2021
Condensed consolidated statements of changes in equity
For the six months ended 30 September 2021
For the six months ended 30 September 2020
Notes to the interim financial statements for the period ended 30 September 2021
The Company is a public limited company incorporated and domiciled in England and Wales, whose shares are publicly traded on the London Stock Exchange plc's main market for listed securities. The interim financial statements have been prepared on a historical cost basis, except for the revaluation of investment property, and are presented in pounds sterling with all values rounded to the nearest thousand pounds (£000), except when otherwise indicated. The interim financial statements were authorised for issue in accordance with a resolution of the Directors on 29 November 2021.
The interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting. The interim financial statements do not include all the information and disclosures required in the annual financial statements. The Annual Report for the year ending 31 March 2022 will be prepared in accordance with International Financial Reporting Standards adopted by the International Accounting Standards Board ("IASB") and interpretations issued by the International Financial Reporting Interpretations Committee ("IFRIC") of the IASB (together "IFRS") as adopted by United Kingdom, and in accordance with the requirements of the Companies Act applicable to companies reporting under IFRS.
The information relating to the Period is unaudited and does not constitute statutory financial statements within the meaning of section 434 of the Companies Act 2006. A copy of the statutory financial statements for the year ended 31 March 2021 has been delivered to the Registrar of Companies. The auditor's report on those financial statements was not qualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report and did not contain statements under section 498(2) or (3) of the Companies Act 2006.
The interim financial statements have been reviewed by the auditor and its report to the Company is included within these interim financial statements.
The principal accounting policies adopted by the Company and applied to these interim financial statements are consistent with those policies applied to the Company's Annual Report and financial statements.
Preparation of the interim financial statements requires the Company to make judgements and estimates and apply assumptions that affect the reported amount of revenues, expenses, assets and liabilities.
The areas where a higher degree of judgement or complexity arises are discussed below:
Valuation of investment property - Investment property is valued at the reporting date at fair value. In making its judgement over the valuation of properties, the Company considers valuations performed by the independent valuers in determining the fair value of its investment properties. The valuers make reference to market evidence of transaction prices for similar properties. The valuations are based upon assumptions including future rental income, anticipated maintenance costs and appropriate discount rates.
The areas where a higher degree of estimation uncertainty arises significant to the interim financial statements are discussed below:
Impairment of trade receivables - As a result of the COVID-19 pandemic the Company's assessment of expected credit losses is inherently subjective due to the forward-looking nature of the assumptions made, most notably around the assessment over the likelihood of tenants having the ability to pay rent as demanded, as well as the likelihood of rent deferrals and lease incentives being offered to tenants as a result of the pandemic. The expected credit loss which has been recognised is therefore subject to a degree of uncertainty which may not prove to be accurate given the uncertainty caused by COVID-19. Details of the changes made to the assessment of expected credit losses are set out in Note 10.
Provision 30 of the UK Corporate Governance Code 2018 ("the Code") requires the Board to report whether the business is a going concern and identify any material uncertainties to the Company's ability to continue to do so. 95% of rent, adjusted for contractual deferrals, was collected for the Period and in considering the Code's requirements the Investment Manager has continued to forecast prudently in particular regarding cash flows and borrowing facilities. This 12 month forecast indicates that:
This assessment considered the following key assumptions and judgements included in the financial projections to understand what circumstances would result in potential breaches of financial covenants or the Company not being able to meet its liabilities as they fall due:
The results of this assessment are described below:
The Company operates four loan facilities which are summarised in Note 13. At 30 September 2021 the Company has significant headroom on lender covenants at a portfolio level with net gearing of 19.6% and compared to a maximum LTV covenant of 35% and, once the process of charging £30.3m of property to replace charged assets sold during the Period is complete, £153.4m (27% of the property portfolio at 30 September 2021) of unencumbered assets will be available to be charged to the security pools to enhance the LTV on individual loans if required.
Completion of property acquisitions and disposals since the Period end have increased net gearing to approximately 22%.
While the assumptions applied in these scenarios are possible, they do not represent the Board's view of the likely outturn, but the results help inform the Directors' going concern assessment. The testing indicated that at a portfolio level:
The Board notes that the October 2021 IPF Forecasts for UK Commercial Property Investment survey suggests an average 0.7% reduction in rents during 2021 and a 1.2% increase in 2022, with capital value increases forecast of 2.3% in both 2021 and 2022. The Board believes the valuation of the Company's property portfolio will prove resilient due to its higher weighting to industrial assets and overall diverse and high-quality asset and tenant base comprising over 150 assets and circa 200 typically 'institutional grade' tenants across all commercial sectors.
At 30 September 2021 the Company has:
The acquisition of DRUM REIT since the period end has resulted in the addition of a £25m RCF facility, currently £22.5m drawn, which expires in September 2022. We expect this facility to be refinanced before expiry.
The Company has sufficient cash and undrawn facilities at 30 September 2021 to settle DRUM REIT's RCF facility and its expense and interest liabilities for a period of at least 12 months, even assuming no further rent is collected. Liquidity is therefore not considered a key area of sensitivity for the going concern assessment.
The Board has considered the scenario used in covenant compliance reverse stress testing, where the rate of loss or deferral of contractual rent deteriorates by a further 44% from the levels included in the Company's prudent forecast. In this scenario all financial covenants and the REIT tests are complied with and the Company has surplus cash to settle its liabilities.
Having due regard to these matters and after making appropriate enquiries, the Directors have reasonable expectation that the Company has adequate resources to continue in operational existence for a period of at least 12 months from the date of signing of these condensed consolidated financial statements and, therefore, the Board continues to adopt the going concern basis in their preparation.
An operating segment is a distinguishable component of the Company that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the Company's chief operating decision maker to make decisions about the allocation of resources and assessment of performance and about which discrete financial information is available. As the chief operating decision maker reviews financial information for, and makes decisions about, the Company's investment property as a portfolio, the Directors have identified a single operating segment, that of investment in commercial properties.
The Company's assets consist of direct investments in UK commercial property. Its principal risks are therefore related to the UK commercial property market in general, the particular circumstances of the properties in which it is invested and their tenants. Principal risks faced by the Company are:
These risks, and the way in which they are mitigated and managed, are described in more detail under the heading 'Principal risks and uncertainties' within the Company's Annual Report for the year ended 31 March 2021. The Company's principal risks and uncertainties have not changed materially since the date of that report. Brexit is not considered to be a principal risk to the Company.
Basic earnings per share ("EPS") amounts are calculated by dividing net profit for the Period attributable to ordinary equity holders of the Company by the weighted average number of ordinary shares outstanding during the Period.
Diluted EPS amounts are calculated by dividing the net profit attributable to ordinary equity holders of the Company by the weighted average number of ordinary shares outstanding during the Period plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares. There are no dilutive instruments.
The following reflects the income and share data used in the basic and diluted earnings per share computations:
The effective tax rate for the Period is lower than the standard rate of corporation tax in the UK during the Period of 19.0%. The differences are explained below:
The Company operates as a Real Estate Investment Trust and hence profits and gains from the property investment business are normally exempt from corporation tax.
All dividends paid are classified as property income distributions.
The Directors approved an interim dividend relating to the quarter ended 30 September 2021 of 1.25p per ordinary share in November 2021 which has not been included as a liability in these interim financial statements. This interim dividend will be paid on 30 November 2021 to shareholders on the register at the close of business on 12 November 2021.
The investment property is stated at the Directors' estimate of its 30 September 2021 fair value. Savills and Knight Frank LLP ("KF"), professionally qualified independent valuers, valued the properties as at 30 September 2021 in accordance with the Appraisal and Valuation Standards published by the Royal Institution of Chartered Surveyors. Savills and KF have recent experience in the relevant location and category of the properties being valued.
Investment property has been valued using the investment method which involves applying a yield to rental income streams. Inputs include yield, current rent and ERV. For the Period end valuation, the equivalent yields used ranged from 4.0% to 11.5%. Valuation reports are based on both information provided by the Company (e.g. current rents and lease terms) which are derived from the Company's financial and property management systems and are subject to the Company's overall control environment, and assumptions applied by the valuers (e.g. ERVs and yields). These assumptions are based on market observation and the valuers' professional judgement. In estimating the fair value of the property, the highest and best use of the properties is their current use.
The Company has provided fully for those receivable balances that it does not expect to recover based on a specific assessment of the reason for non-payment and the creditworthiness of the counterparty.
For remaining balances the Company has applied an expected credit loss ("ECL") matrix based on its experience of collecting rent arrears and deferred rents since the onset of the COVID-19 disruption. The ECL matrix fully provides for receivable balances more than 90 days past due, partially provides against receivable balances between one and 90 days past due and partially provides against receivable balances subject to contractual deferral.
The movement in the expected credit loss provision is recognised within directly incurred operating expenses of rental property of £1,788k in the income statement.
The Directors consider that the carrying amount of trade and other payables approximates their fair value. Trade payables and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. For most suppliers interest is charged if payment is not made within the required terms. Thereafter, interest is chargeable on the outstanding balances at various rates. The Company has financial risk management policies in place to ensure that all payables are paid within the credit timescale.
Cash and cash equivalents at 30 September 2021 include £24.5m (2020: £3.5m, 31 March 2021: £2.6m) of restricted cash comprising: £23.4m (2020: £15.2m, 31 March 2020: £nil) disposal proceeds held in charged disposal accounts, £0.8m (2020: £0.7m, 31 March 2020: £0.7m) rental deposits held on behalf of tenants, £0.3m (2020: £0.2m, 31 March 2020: £0.2m) retentions held in respect of development fundings and £nil (2020: £2.6m, 31 March 2021: £1.5m) interest 'prepayments' in connection with arranging interest cover covenant waivers in April 2020.
All of the Company's borrowing facilities require minimum interest cover of 250% of the net rental income of the security pool. The maximum LTV of the Company combining the value of all property interests (including the properties secured against the facilities) must be no more than 35%.
The Company's borrowing position at 31 March 2021 is set out in the Annual Report for the year ended 31 March 2021.
During the Period the Company extended the term of its RCF facility by one year, with expiry now on 17 September 2024.
The Company has made no further issues of new shares since the Period end.
The following table describes the nature and purpose of each reserve within equity:
The fair values of financial assets and liabilities are not materially different from their carrying values in the half yearly financial report. The IFRS 13 Fair Value Measurement fair value hierarchy levels are as follows:
There have been no transfers between Levels 1, 2 and 3 during the Period. The main methods and assumptions used in estimating the fair values of financial instruments and investment property are detailed below.
Investment property - level 3
Fair value is based on valuations provided by independent firms of chartered surveyors and registered appraisers. These values were determined after having taken into consideration recent market transactions for similar properties in similar locations to the investment property held by the Company. The fair value hierarchy of investment property is level 3. At 30 September 2021, the fair value of investment property was £565.3m and during the Period the valuation increase was £31.2m.
Interest bearing loans and borrowings - level 3
As at 30 September 2021, the amortised cost of the Company's loans with Lloyds Bank plc, Scottish Widows plc and Aviva Real Estate Investors approximated their fair value.
Trade and other receivables/payables - level 3
The carrying amounts of all receivables and payables deemed to be due within one year are considered to reflect the fair value.
Directors and officers
Each of the directors is engaged under a letter of appointment with the Company and does not have a service contract with the Company. Under the terms of their appointment, each director is required to retire by rotation and seek re-election at least every three years. Each director's appointment under their respective letter of appointment is terminable immediately by either party (the Company or the director) giving written notice and no compensation or benefits are payable upon termination of office as a director of the Company becoming effective.
Ian Mattioli is Chief Executive of Mattioli Woods plc ("Mattioli Woods"), the parent company of the Investment Manager, and is a director of the Investment Manager. As a result, Ian Mattioli is not independent.
The Company Secretary, Ed Moore, is also a director of the Investment Manager.
Investment Management Agreement
The Investment Manager is engaged as AIFM under an IMA with responsibility for the management of the Company's assets, subject to the overall supervision of the Directors. The Investment Manager manages the Company's investments in accordance with the policies laid down by the Board and the investment restrictions referred to in the IMA. The Investment Manager also provides day-to-day administration of the Company and acts as secretary to the Company, including maintenance of accounting records and preparing the annual and interim financial statements of the Company.
During the Period asset management and investment management fees payable to the Investment Manager under the IMA were calculated as follows:
Administrative fees payable to the Investment Manager under the IMA since during the Period were:
The IMA is terminable by either party by giving not less than 12 months' prior written notice to the other, which notice may only be given after the expiry of the three year term which commenced in June 2020. The IMA may also be terminated on the occurrence of an insolvency event in relation to either party, if the Investment Manager is fraudulent, grossly negligent or commits a material breach which, if capable of remedy, is not remedied within three months, or on a force majeure event continuing for more than 90 days.
The Investment Manager receives a marketing fee of 0.25% (2020: 0.25%) of the aggregate gross proceeds from any issue of new shares in consideration of the marketing services it provides to the Company.
During the Period the Investment Manager charged the Company £1.79m (2020: £1.63m) in respect of asset management and investment management fees, £0.21m (2020: £0.21m) in respect of administrative fees and £2k (2020: £nil) in respect of marketing fees.
On 4 November 2021 the Company completed the corporate acquisition of DRUM REIT for consideration of 20,247,040 new ordinary shares in the Company. Based on the nature of the acquisition it does not fall within the scope of IFRS 3 Business Combinations and the assets acquired were purchased at fair value. The transaction was financed by way of a share for share exchange with DRUM REIT maintaining its existing £25m RCF which expires in September 2022.
On 20 October 2021 the Company acquired a 29k sq ft industrial unit in York for £2.962m.
On 21 October 2021 the Company sold a 42,289 sq ft car showroom in Stockport for £9.0m.
On 29 October 2021 the Company sold a 22,720 sq ft car showroom in Stafford for £4.9m.
On 11 November the Company sold a high street retail unit in Cheltenham at valuation for £0.2m.
NAV per share total return
A measure of performance taking into account both capital returns and dividends by assuming dividends declared are reinvested at NAV at the time the shares are quoted ex-dividend, shown as a percentage change from the start of the Period.
Share price total return
A measure of performance taking into account both share price returns and dividends by assuming dividends declared are reinvested at the ex-dividend share price, shown as a percentage change from the start of the period.
Gross borrowings less cash (excluding rent deposits), divided by property portfolio value.
A measure of the Company's operating results excluding gains or losses on investment property, giving a better indication than basic EPS of the extent to which dividends paid in the year are supported by recurring net income.
EPRA vacancy rate
EPRA vacancy rate is the ERV of vacant space as a percentage of the ERV of the whole property portfolio.
Assumes that the Company buys and sells assets for short-term capital gains, thereby crystallising certain deferred tax balances.
The Directors have prepared the interim financial statements of the Company for the Period from 1 April 2021 to 30 September 2021.
We confirm that to the best of our knowledge:
A list of the current directors of Custodian REIT plc is maintained on the Company's website at custodianreit.com.
By order of the Board
29 November 2021
Independent review report to Custodian REIT plc
We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2021, which comprise the condensed consolidated statement of comprehensive income, the condensed consolidated statement of financial position, the condensed consolidated statement of cash flows, the condensed consolidated statement of changes in equity and related notes 1 to 18. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.
The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.
As disclosed in note 2.1, the annual financial statements of the Company will be prepared in accordance with United Kingdom adopted international accounting standards. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with United Kingdom adopted International Accounting Standard 34 "Interim Financial Reporting".
Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2021 is not prepared, in all material respects, in accordance with United Kingdom adopted International Accounting Standard 34 and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.
Use of our report
This report is made solely to the Company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Financial Reporting Council. Our work has been undertaken so that we might state to the Company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our review work, for this report, or for the conclusions we have formed.
London, United Kingdom
29 November 2021
- Ends -
 The six-month period ended 30 September 2020.
 Before rent top-ups of £0.3m and acquisition costs of £1.1m.
 Net of rent top-ups of £0.2m and disposal costs of £0.4m.
 The European Public Real Estate Association.
 Profit after tax excluding net gain or loss on investment property divided by the weighted average number of shares in issue.
 Profit after tax divided by the weighted average number of shares in issue.
 Net Asset Value ("NAV") movement including dividends paid during the period on shares in issue at 31 March 2021.
 Before issue costs of £0.1m.
 Share price movement including dividends paid during the six-month period.
 Following the recent update to EPRA's Best Practice Recommendations Guidelines the Company's peer group has adopted EPRA net tangible assets ("NTA") as the primary measure of net asset value. There are no differences between the Company's IFRS NAV, EPRA NAV and EPRA NTA.
 Gross borrowings less cash (excluding tenant rental deposits and retentions) divided by property portfolio value.
 ERV of vacant space as a percentage of the ERV of the whole property portfolio.
 For properties in Scotland, English equivalent EPC ratings have been obtained.
 Dividends of 3.0p per share were paid during the Period on shares in issue throughout the Period.
 A full version of the Company's Investment Policy is available at custodianreit.com/wp-content/uploads/2021/02/CREIT-Investment-policy.pdf
 A risk score of two represents "lower than average risk".
 Current passing rent plus ERV of vacant properties.
 ERV of portfolio divided by property valuation plus purchaser's costs.
 One EPC letter represents 25 energy performance asset rating points.
 % of property portfolio passing rent plus ERV of vacant units.
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