DJ Custodian REIT plc: Final Results
Custodian REIT plc (CREI)
Custodian REIT plc: Final Results
06-Jun-2019 / 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.
6 June 2019
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 2019.
Financial highlights and performance summary
· NAV per share total return[1],* of 5.9% (2018: 9.6%) comprising 6.1% income (2018:
6.2%) and a 0.2% capital decrease (2018: 3.4% capital increase)
· EPRA[2] earnings per share[3],* of 7.3p (2018: 6.9p)
· Basic and diluted earnings per share[4] of 6.0p (2018: 8.9p)
· Portfolio value of GBP572.7m (2018: GBP528.9m)
· Profit before tax down 27% to GBP23.6m (2018: GBP32.4m) primarily due to a GBP8.9m aggregate
property valuation decrease[5]
· GBP13.4m[6] of new equity raised at average premium of 11% to dividend adjusted NAV*
· 2020 target dividend per share* increased 1.5% to 6.65p (2019: 6.55p)
· GBP55.5m[7] invested in 11 property acquisitions, GBP2.5m capital expenditure incurred
primarily on one pre-let development and two significant refurbishments
· GBP6.4m property valuation uplift from successful asset management initiatives
· GBP5.3m property valuation decrease due to company voluntary arrangements
· GBP4.3m profit on disposal of three properties for an aggregate consideration of GBP15.4m
2019 2018 change
Return
NAV per share total return* 5.9% 9.6% -3.7%
Share price total return[8],* 4.2% 6.7% -2.5%
Dividend cover[9],* 110.4% 105.5% 4.9%
Dividends per share[10] (p) 6.55 6.45 1.5%
Capital values
NAV (GBPm) 426.6 415.2 2.7%
NAV per share* (p) 107.1 107.3 -0.2%
Share price* (p) 111.2 113.0 -1.6%
Portfolio value (GBPm) 572.7 528.9 8.3%
Market capitalisation* (GBPm) 442.8 437.1 1.3%
Premium of share price to NAV 3.8% 5.3% -1.5%
per share*
Net gearing[11],* 24.1% 21.0% 3.1%
Costs
Ongoing charges ratio[12],* 1.53% 1.37% 0.16%
("OCR")
OCR excluding direct property 1.12% 1.15% -0.03%
expenses[13],*
EPRA performance measures*
EPRA EPS (p) 7.3 6.9 5.8%
EPRA NAV per share (p) 107.1 107.3 -0.2%
EPRA net initial yield ("NIY") 6.2% 6.1% 0.1%
EPRA 'topped up' NIY 6.4% 6.5% -0.1%
EPRA vacancy rate 4.1% 3.5% 0.6%
EPRA cost ratio (including 16.1% 15.3% 0.8%
direct vacancy costs)
EPRA cost ratio (excluding 14.5% 14.6% -0.1%
direct vacancy costs)
EPRA capital expenditure (GBPm) 2.53 2.50 1.2%
EPRA like-for-like rental growth 39.1 34.1 14.7%
(GBPm)
*Alternative performance measures
The Company presents NAV per share total return, new equity raised, target dividend per
share, share price total return, dividend cover, NAV per share, share price, market
capitalisation, premium to NAV per share, net gearing, ongoing charges ratios and EPRA Best
Practice Recommendations as 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. 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. 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 the Alternative performance measure workings section of the
Annual Report.
Commenting on the final results, David Hunter, Chairman of Custodian REIT, said:
"I am pleased to report that five years since its initial public offering ("IPO") Custodian
REIT is continuing to deliver on its objectives and performing for shareholders. The
Company's market capitalisation has grown from GBP132m to GBP443m through managing a portfolio
of increasingly well diversified regional properties with a gross value that has increased
from GBP95m at IPO to GBP573m. Since IPO the Company has successfully deployed new equity,
reached target net gearing and grown dividends annually. While property market dynamics may
have assisted performance through much of the last five years, we expect our focus on
income to provide a stable platform to deliver positive shareholder returns in the future.
"Custodian REIT's shares have continued to trade at a premium to NAV while many in its
direct peer group have moved to a discount. The premium undoubtedly reflects the relatively
high dividend yield coupled with a diverse, regional property strategy.
"The Company paid an interim dividend of 1.6375p per share for the quarter ended 31 March
2019 on 31 May 2019, meeting the Company's target of paying an annual dividend per share
relating to the year of 6.55p (2018: 6.45p), 110.4% covered by net recurring income".
Further information
Further information regarding the Company can be found at the Company's website
www.custodianreit.com [1] or please contact:
Custodian Capital Limited
Richard Shepherd-Cross / Nathan Tel: +44 (0)116 240 8740
Imlach / Ian Mattioli MBE
www.custodiancapital.com [2]
Numis Securities Limited
Hugh Jonathan / Nathan Brown Tel: +44 (0)20 7260 1000
www.numiscorp.com
Camarco
Hazel Stevenson/ Emily Hall Tel: +44 (0)20 3757 4989
www.camarco.co.uk
Analyst presentation
There will be an analyst presentation to discuss the results at 10.30am today.
Those analysts wishing to take part are asked to contact Emily Hall on +44 (0) 20 3757 4996
or at emily.hall@camarco.co.uk.
Chairman's statement
I am pleased to report that five years since its initial public offering ("IPO") Custodian
REIT is continuing to deliver on its objectives and performing for shareholders. The
Company's market capitalisation has grown from GBP132m to GBP443m through managing a portfolio
of increasingly well diversified regional properties with a gross value that has increased
from GBP95m at IPO to GBP573m. Since IPO the Company has successfully deployed new equity,
reached target net gearing and grown dividends annually. While property market dynamics may
have assisted performance through much of the last five years, we expect our focus on
income to provide a stable platform to deliver positive shareholder returns in the future.
The Company has delivered strong NAV per share total returns through its first five years.
The commitment to delivering income from well-located properties predominantly let to
institutional grade tenants has underpinned returns with income accounting for 78% of NAV
per share total return over the last five years. The recent turmoil in the High Street has
underscored the importance of having a well-diversified, income focused portfolio that can
perform even when valuations are under pressure in certain sectors.
In the year ended 31 March 2019 Custodian REIT delivered a NAV per share total return of
5.9% (2018: 9.6%).
We continue to target growth to realise the potential economies of scale offered by the
Company's relatively fixed administrative cost base and the reducing scale of management
charges. These economies of scale and a continued focus on controlling costs have reduced
the ongoing charges ratio (excluding direct property expenses) from 1.41% during the
financial year ended 31 March 2015 to 1.12% in the financial year ended 31 March 2019,
demonstrating the benefits to shareholders of scale and growth.
The Company pays one of the highest fully covered dividends amongst its peer group of
listed property investment companies[14]. During a period of further growth we have
mitigated the impact from 'cash drag' following the issue of new shares by taking advantage
of the flexibility offered by the Company's revolving credit facility ("RCF"). Total funds
available under the RCF were increased from GBP35.0m to GBP45.0m in January 2019 for six months
to provide further flexibility to exploit potential acquisition opportunities. The Board
expects the RCF facility to be permanently increased to GBP45m later this year.
The Company's stable share price performance in a volatile market has allowed the Board to
issue equity at an average premium of 11% above dividend adjusted NAV, more than covering
the costs of issue and deployment.
While we have taken a cautious approach to investment through the year, I am pleased to
report that GBP58m has been invested across 11 acquisitions, the completion of one pre-let
development and two significant refurbishments, funded principally by GBP13.4m raised from
the issue of new shares and through the Company's existing debt facilities. The new
acquisitions reflected an average net initial yield[15] ("NIY") of 6.8%. The Company
(MORE TO FOLLOW) Dow Jones Newswires
June 06, 2019 02:03 ET (06:03 GMT)
DJ Custodian REIT plc: Final Results -2-
continues to maintain a diverse portfolio strategy, allowing enough flexibility to make
contra-cyclical investments where appropriate but always with a strong focus on acquiring
assets that support our dividend policy. We believe a well-defined investment strategy that
offers secure income and focuses on long-term goals and deliverable targets will provide
considerable protection to shareholders from market volatility.
The prompt deployment of cash coupled with the flexibility of the RCF and the proactive
asset management of the portfolio to secure rental growth have allowed us to increase the
target dividend[16] for the fifth year running. The target dividend for the year ending 31
March 2020 is proposed to be increased by 1.5% to 6.65p per share. The Board's objective is
to grow the dividend on a sustainable basis at a rate which is fully covered by projected
net rental income and does not inhibit the flexibility of the Company's investment
strategy.
Net asset value
The NAV of the Company at 31 March 2019 was GBP426.6m, approximately 107.1p per share, a
decrease of 0.2p (0.2%) since 31 March 2018:
Pence per GBPm
share
NAV at 31 March 2018 107.3 415.2
Issue of equity in the year (net of costs) 0.3 13.2
107.6 428.4
Valuation movements relating to:
- Asset management activity 1.6 6.4
- Other valuation movements (3.0) (11.9)
Valuation decrease before acquisition (1.4) (5.5)
costs
Impact of acquisition costs (0.9) (3.4)
Valuation decrease including acquisition (2.3) (8.9)
costs
Profit on disposal of investment property 1.1 4.3
Net loss on investment property (1.2) (4.6)
Revenue 10.0 40.0
Expenses and net finance costs (2.9) (11.7)
Dividends paid[17] (6.4) (25.5)
NAV at 31 March 2019 107.1 426.6
The Company delivered NAV per share total return of 5.9% for the year despite continued new
investment. The initial costs (primarily stamp duty) of investing GBP55.5m across 11 property
acquisitions diluted NAV total return by GBP3.4m (0.9p per share), partly offset by raising
GBP13.2m of new equity (net of costs) at an average 11% premium to dividend adjusted NAV
which added 0.4p per share[18] and fully covered the cost of raising and deploying the
proceeds.
The Company experienced a GBP5.3m valuation decrease due to company voluntary arrangements
("CVAs"), an application of insolvency law intended to be used by companies in difficulty
to enforce a reduction in current and prospective liabilities, typically involving
continuing to trade from leased properties at lower rents to avoid administration or
insolvency. The CVAs of Homebase, Office Outlet (formerly Staples), Paperchase and
Carpetright impacted the Company's units in Leighton Buzzard, Milton Keynes, Shrewsbury and
Grantham respectively, resulting in contractual rent reductions of GBP485k. Since the year
end, a further CVA has been proposed by Cotswold Outdoor, potentially reducing our
Shrewsbury store's rent by GBP75k. In each CVA during the year the Company retained the right
to terminate the lease at short notice and consistent with our asset selection strategy we
believe all assets would appeal to a broad range of alternative tenants should the
incumbent vacate.
I am pleased to say that the GBP5.3m valuation decrease due to CVAs was more than outweighed
by a GBP6.4m valuation uplift from pro-active asset management.
Share price
Consistent demand for the Company's shares led to the share price showing a relatively
stable premium to NAV through the year.
Custodian REIT's shares have continued to trade at a premium to NAV while many in its
direct peer group have moved to a discount. The premium undoubtedly reflects the relatively
high dividend yield coupled with a diverse, regional property strategy. However we believe
that investors are increasingly recognising that a property investment company's share
price also should be based on earnings potential rather than just NAV related metrics. We
believe the Company's share price reflects investor awareness of the merits of
diversification of tenant, lease expiry profile, spread of asset type, net gearing level,
debt profile and property location, and the ability of the management team to generate
future income from the assets.
The share price performance has been combined with a steadily increasing level of liquidity
which now sees Custodian REIT recording an average daily trading volume of over GBP500k over
the last 12 months[19]. This liquidity, combined with share issuance, has done much to help
price stability and diminish volatility.
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 is well suited to investors looking for a close proxy to direct real
estate investment but in a managed and liquid structure. The structure of our shareholder
base has, in turn, helped to reduce volatility as our shareholders are typically long-term
holders looking for stable dividend-driven returns.
Authority to place new ordinary shares
At last year's Annual General Meeting ("AGM") held on 19 July 2018, 6.7% of eligible
shareholders voted to limit the authority to issue new ordinary shares with pre-emption
rights disapplied to a maximum of 10% of the Company's issued ordinary share capital
("Limit"). The Board had proposed a Limit of 20%, comprising two 10% tranches, in line with
the 2017 changes to the EU Prospectus Directive which increased the maximum proportion of
share capital from 10% to 20% that can be issued over a 12-month period on a
non-pre-emptive basis before a company is required to publish a prospectus. Due to low
voter turnout, this 6.7% represented 47.4% of votes cast and the Resolution (requiring 75%
support) failed to pass.
The Pre-Emption Group's Statement of Principles on Disapplying Pre-emption Rights continues
to support a Limit of 10% but, in the Board's opinion, a Limit of 20% is justified to
continue a programme of tap issuance allowing the Company to fund suitable property
acquisitions in a cost-efficient manner by avoiding the significant costs of publishing a
prospectus.
The Board believes that growing the Company efficiently through NAV accretive issuance is
in the best interests of all shareholders as it reduces ongoing charges, diversifies income
and increases share liquidity, and will request approval once again for a 20% Limit at the
2019 AGM.
Borrowings
The Company's property investment activity has increased LTV from 21.0% at the start of the
year to 24.1% at the year end, which contributed to an increase in dividend cover,
demonstrating the benefits of prudent leverage. The Board's strategy is to:
· Increase debt facilities in line with portfolio growth, targeting net gearing of 25%
LTV;
· Facilitate expansion of the portfolio to take advantage of expected rental growth and
secure further reductions in the OCR; and
· Reduce shareholders' exposure to risk by:
· Taking advantage of low interest rates to secure long-term, fixed rate borrowing; and
· Managing the weighted average maturity ("WAM") of the Company's debt facilities.
The weighted average cost of the Company's agreed debt facilities at 31 March 2019 was 3.2%
(2018: 3.1%) with a WAM of 7.9 years (2018: 9.1 years) and 72% (2018: 77%) of the Company's
agreed debt facilities are now at fixed rates. This high proportion of fixed rate debt
significantly mitigates interest rate risk for the Company and provides shareholders with a
beneficial margin between the fixed cost of debt and income returns from the portfolio.
Investment Manager
Custodian Capital Limited ("the Investment Manager") is appointed under an investment
management agreement ("IMA") expiring on 31 May 2020 to provide property management and
administrative services to the Company. The performance of the Investment Manager is
reviewed each year by the Management Engagement Committee ("MEC").
The Board is pleased with the performance of the Investment Manager, particularly the
timely deployment of new monies on high quality assets and successful asset management
securing the earnings required to fully cover the target dividend.
Dividends
Income is a major component of total return. The Company paid aggregate dividends of 6.525p
per share during the year, comprising the fourth interim dividend of 1.6125p per share
relating to the year ended 31 March 2018 and three interim dividends of 1.6375p per share
relating to the year ended 31 March 2019.
The Company paid an interim dividend of 1.6375p per share for the quarter ended 31 March
2019 on 31 May 2019 totalling GBP6.5m, meeting the Company's target of paying a total
dividend relating to the year of 6.55p per share (2018: 6.45p), totalling GBP25.8m. Dividends
relating to the year ended 31 March 2019 were 110.4% covered by net recurring income of
GBP28.5m, as calculated in the Alternative performance measure workings section of the Annual
Report.
In the absence of unforeseen circumstances, the Board intends to pay quarterly interim
dividends to achieve a target dividend of 6.65p per share for the year ending 31 March
2020.
Board composition
Reflecting the growth of the Company since inception, the Nominations Committee is
currently recruiting an additional Non-Executive Director with the skills and experience to
complement the existing Directors and offer scope to add value to the Company, with due
regard for the benefits of diversity on the Board.
Outlook
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June 06, 2019 02:03 ET (06:03 GMT)
DJ Custodian REIT plc: Final Results -3-
In common with many participants in the UK property market the Company has been cautious in
relation to investment during the first quarter of 2019, following a period of much reduced
activity in 2018, primarily due to market pricing exceeding our expectations of value and
there being limited opportunities in our target sectors. At 31 March 2019 the Company had
GBP21m of agreed, yet undrawn, debt facilities to allow for opportunistic acquisitions when
market conditions allow.
Sentiment in the UK property market has moved quite quickly since the September 2018
Interim Report, most notably against retail, where the few transactions which have taken
place reflect the difficulties faced by many retailers and demonstrate lower rental and
capital values. We cannot rule out further falls in confidence in the property market from
general economic or political turbulence, including the uncertain impact of the UK leaving
the European Union ("Brexit"), the impact of which is discussed in the Investment Manager's
Report. However it is important to remember we are operating in a low return environment.
The current arbitrage between property equivalent yields and 10 year gilts is still greater
than 4.5%, well ahead of the 20 year average. We expect the UK market, even in a period of
nervousness, will continue to provide the Company with opportunities to enhance shareholder
value through further investment and active asset management, subject to adhering to
disciplined investment criteria rooted in occupational market dynamics.
David Hunter
Independent Chairman
5 June 2019
Investment Manager's report
The UK property market
The property market in the year ended 31 March 2019 has been marked by two significant
issues: the continued debate around Brexit and the fortunes of retail. No discussion of the
performance of UK commercial property over the last financial year can ignore the negative
impact of these issues, notwithstanding the positive total shareholder returns delivered by
the Company over the year.
Overall, investor sentiment towards UK commercial property has been positive and in certain
sectors remains so. This sentiment has supported valuations through the year but has put
ever more emphasis on good quality income as the principal driver of total returns. Those
factors have played well with Custodian REIT's investment strategy which has focused on
income and maintaining a diversified portfolio that has proved to be robust in the face of
falling retail rents and values, CVAs and Brexit uncertainty.
In the early part of 2018 investors were active in deploying new monies into commercial
property and valuations were edging forwards in a market characterised by a lack of supply
and healthy demand. The most active demand was for logistics and long income, but office
and alternative sectors were also popular. However, a noticeable change in sentiment
towards property investment was revealed by late November 2018, which coincided with a
significant disinvestment well reported in the press by asset managers across other asset
classes. Many investors paused in the expectation that the UK Parliament's "Meaningful
Vote" on the Brexit Withdrawal Agreement would deliver some political clarity. However the
ongoing lack of clarity surrounding Brexit is having an impact on confidence now and
potentially for some time to come, causing many investment decisions to be put on hold.
Recent statistics reported by JLL's UK capital market research indicate that investors are
adopting a 'wait and see' approach, suggesting investment activity is down 15% in Q1 2019,
equating to nearly GBP2bn as investors reflect on the political and economic uncertainties.
However, it is understood there is a significant weight of capital still targeting UK
commercial property. Investors appear to want to see prices fall before they commit but,
with vendors not motivated to sell at below recent valuations, this caution is contributing
to low investment volumes.
There are a number of events that might change the prevailing market, the first of which
could be a conclusion on Brexit, with the removal of uncertainty allowing investors to
focus on economic prospects.
By contrast, continued political uncertainty unbalancing the economy could lead to a repeat
of the redemptions experienced by open-ended property funds in the wake of the EU
referendum in the summer of 2016. While there have been net outflows from these funds over
recent months, a recent turnaround to net inflows suggests this is not an imminent danger.
Nevertheless, fund managers are bolstering their cash reserves with selective sales but not
at sufficiently reduced prices to tempt investors back in meaningful volumes.
A third issue could be a further deterioration in the retail trade and retail investment
values, leading to a general decline in sentiment across other sectors.
The concerns for retail, while present in March 2018, really took hold in the autumn of
2018 and have deepened in 2019. This time last year we reported that we had seen some
weakness in secondary retail locations and that we expected to experience some rental
reductions at lease expiry. We also noted the aggressive use of CVAs by retailers keen to
step away from their lease obligations or to reduce rents. CVAs are now becoming so
commonplace that even profitable retailers are consulting on whether they can put their
businesses through a CVA.
While the market was aware that changing shopping habits coupled with over-leveraged
retailers which had failed to adapt to modern shopping trends would have an impact on rents
and values, most commentators have been surprised by the speed and depth of the impact,
particularly on rents. CVAs aside, recent lease renewals and new lettings have demonstrated
that retailers are no longer prepared to pay rents at prevailing levels. Many retailers are
taking an aggressive position in their negotiations, particularly in secondary High Street
locations. Sometimes retailers are prepared to offer landlords a choice between much lower
rents and flexible lease terms or a vacant store.
It is acknowledged that the UK has too many shops and retailers are actively reducing the
size of their store portfolios, albeit acknowledging that physical stores remain a very
important part of their sales proposition and a key interface with the customer. This
reduction in store portfolios is not all about on-line retailing, although on-line is
clearly having a real impact. The UK is one of the most advanced on-line shopping nations
in Europe, with 2018 on-line sales accounting for 18%[20] of all retail sales. Forecasts of
30% plus on-line sales do not seem unrealistic, although the adoption of on-line retailing
varies from sector to sector. The supermarkets were early adopters of on-line retailing,
but it is reported that the proportion of people grocery shopping on-line has fallen from
49% to 45% since 2016[21]. Shopping habits have evolved so, while superstores are still
important for big basket shops and for dealing with local on-line demand, there has been
huge growth in top-up shopping from smaller local convenience stores. There is an important
lesson for all retailers: as shopping habits evolve, retailers need to be flexible enough
to meet those changing requirements and therefore landlords may need to accept that
retailers will need greater flexibility.
Multi-channel is proving to be the right answer for most retailers. Advances in, and the
innovative use of, technology are allowing retailers to make the best use of their store
portfolio as on-line distribution hubs as well as a traditional store, and the Company's
out-of-town retail portfolio, with ease of access and good car parking, is well aligned to
this strategy. Some retailers have identified that their physical stores have a positive
impact on on-line sales in the locality as shoppers have both brand awareness and the
ability to 'showroom' and deal easily with returns.
Retail is an unfolding story but the short-term impact on retail property investment is
being felt keenly by investors. The long-term picture for retail is likely to be polarised.
Prime and good secondary locations will remain popular with retailers and investors alike,
although rents may need to adjust further downwards. Poor secondary locations may need to
consider re-purposing former retail units into residential, leisure or other uses.
Issues in the retail market have resulted in a swift downgrade of retail valuations, driven
both by falling rental values and weakening investment yields reflecting the increased risk
forecast by investors. Custodian REIT has not been immune from this impact. On a
like-for-like basis the Company's high street retail portfolio has witnessed a GBP7.9m (11%)
reduction in value. Some of this negative movement may be recovered following the
conclusion of lease re-negotiations which are underway or under consideration, although we
cannot rule out further falls in confidence in the property market from general economic or
political turbulence.
However, this reduction in value has been more than offset by the strong performance of the
industrial and logistics portfolio which increased in value by GBP11.5m, underscoring the
strength of a diversified strategy. Despite many negative predictions for the UK economy in
the face of Brexit uncertainty, to date the economy has defied the sceptics. GDP continues
to grow and unemployment is at a 44 year low. Both of these indicators are positive for
commercial property and the occupational market.
Across all regions of the UK the industrial and logistics sector is delivering new
buildings to the market. For "big box" (100,000 sq ft plus) we have witnessed an increase
in speculative development as developers try to capture demand and the relative lack of
supply. During 2018, up to 50% of UK big box was developed speculatively[22] and it was
e-commerce, food and 'other retailers' who dominated the new lettings.
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After five years of focus on big box logistics the market has identified the lack of supply
of smaller buildings and, for the first time in recent years, we have started to see
development focused on this sector. One area of the letting market that has not fully
matured is urban logistics. Meeting the challenge of on-line sales fulfillment is going to
see demand for in-town or suburban logistics buildings. At present such buildings are in
short supply as rental levels are not high enough to bring forward new development, but the
potential for rental growth in this sub-sector is very real. The Company is well positioned
to take advantage of this rental growth with 19% of its assets in the industrial/logistics
sub-sector which continues to be a target for selective acquisitions.
The good news is not restricted to industrial/logistics. Regional office markets have also
performed well. Again it is lack of supply combined with strength in regional economies
that has driven this growth and the pipeline of new development continues to look
restricted. New office lettings across all regional markets were 19%[23] above the five
year average through 2018. Notwithstanding this, longer periods of vacancy remain
commonplace in some office markets.
The Company has experienced a marginal increase in vacancy rate from 3.5% to 4.1% which we
would still regard as within normal levels for a mature portfolio. However, we have
prospective tenants in advanced negotiations to take some of the vacant space and we are
taking the opportunity to improve the quality of vacant buildings with office and
industrial refurbishments underway in Glasgow and Warrington respectively.
The table below illustrates the Company's rent reviews, new leases, lease renewals and
re-gears settled in the year.
No. of lease Simple
events average
settled in
the year
Impact on rent
roll
GBPm
Sector
Industrial 16 0.46 12.8%
Retail warehouse 1 0.01 12.0%)
High street retail 5 (0.03) (7.9%)
Office 5 0.06 22.1%
Other 9 0.18 10.2%
36 0.68 10.5%
Investment objective
The Company's key objective is to provide shareholders with an attractive level of income
by maintaining the high level of dividend, fully covered by earnings, with a conservative
level of net gearing. We are delighted to have continued to achieve these objectives, with
earnings providing 110.4% cover of the total dividend relating to the year of 6.55p per
share, with a net gearing ratio of 24.1% at the year end.
We continue to consider new investment opportunities with the aim of utilising the
Company's undrawn debt facilities to maintain net gearing at the target 25% LTV. At the
current cost of debt, we believe this strategy can improve dividend cover.
The Board remains committed to a strategy principally focused on sub GBP10m lot size regional
property. In the Company's retail portfolio we expect to maximise potential cash flow by
taking a flexible approach to retailers' requirements, retaining tenants wherever possible
and making targeted disposals. Across the rest of the portfolio we expect to see positive
asset management performance as we secure rental increases and extend contractual income.
Portfolio balance
The portfolio is split between the main commercial property sectors, in line with the
Company's objective to maintain a suitably balanced investment portfolio, with 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 Weighting Valuation Valuation
by by income movement movement
income[24 31 March before including
] 2018 acquisiti acquisiti
31 March on costs on costs
2019 GBPm
31 March
Valuation GBPm Weighting Weighting
GBPm by value by value
31 March 31 March
2019 2019 2018
31 March
2018
Sector GBPm
Industrial 224.3 37% 209.8 39% 11.5 11.0 39% 40%
Retail 123.4 22% 107.5 20% (7.7) (9.3) 21% 20%
warehouse
Other[25] 95.7 17% 80.4 15% (1.2) (2.2) 17% 15%
High 68.6 13% 75.3 14% (7.9) (8.0) 12% 14%
street
retail
Office 60.7 11% 55.9 12% (0.2) (0.4) 11% 11%
Total 572.7 100% 528.9 100% (5.5) (8.9) 100% 100%
Industrial property is a very good fit with the Company's strategy where it is possible to
acquire modern, 'fit-for-purpose' buildings with high residual values (ie where the vacant
possession value is closer to the investment value than in other sectors) and where the
real estate is less exposed to obsolescence. GBP5.4m of the GBP11.5m valuation increase (before
acquisition costs) in the industrial sector was driven by asset management initiatives,
with occupational demand driving rental growth and generating positive returns.
There is continued weakness in secondary high street retail locations, with rental levels
still under pressure and a very real threat of vacancy. We will continue to rebalance the
portfolio to focus on strong high street retail locations while working on an orderly
disposal of those assets we believe are ex-growth. We believe retail warehousing, in strong
locations, will remain in demand by retailers. These stores benefit from free car parking
for customers and easy loading and servicing for retailers. These factors should make the
stores complementary to on-line shopping: easy for customer returns and suitable to use as
urban logistics hubs for the retailers.
While deemed to be outside the core sectors of office, retail and industrial the 'other'
sector offers diversification of income without adding to portfolio risk, containing assets
considered mainstream but which typically have not been owned by institutional investors.
The 'other' sector includes the motor trade and 'casual dining' sectors, both of which have
been much in the news. The motor trade has suffered from falling sales over the last two
years. New car sales have dipped from an all-time high in 2017, with the confusion over the
future use of diesel fuel being cited as a principal factor. New diesel car sales are down
21%[26] but petrol and alternative fuel cars are up 5% and 7.5% respectively. We are
watching this position closely but with over 30m cars in the UK[27], we still believe there
is a place for motor trade properties for new sales, used car trading and servicing. The
Company's eight car dealerships also typically have low site coverage and affordable net
rents, supporting valuations if alternative uses are required. The 'casual dining' sector
has witnessed a number of recent CVAs and a slowing of the growth of many chain operators.
However, there is still interest in artisan food and eating out remains popular so a
selective approach can still yield investment opportunities.
Office rents in regional markets are growing and supply remains constrained by a lack of
development, with the extensive conversion of secondary offices to residential making
returns very attractive. However, we are conscious that obsolescence and lease incentives
can be a real cost of office ownership which can hit cash flow and be at odds with the
Company's relatively high target dividend. While we are experiencing rental growth in our
office portfolio, we remain a cautious investor but open to opportunities that offer the
potential rental growth.
For details of all properties in the portfolio please see
www.custodianreit.com/property/portfolio [3].
WAULT
At 31 March 2019 the portfolio's the weighted average unexpired lease term to first break
or expiry ("WAULT") was 5.6 years (2018: 5.9 years) with the completion of asset management
initiatives substantially offsetting the natural one year decline due to the passage of
time.
Disposals
Owning the right properties at the right time is one key element of effective portfolio
management, which necessarily involves periodically selling some properties to balance the
portfolio. While Custodian REIT is not a trader, identifying opportunities to dispose of
assets significantly ahead of valuation or that no longer fit within the Company's
investment strategy is important.
After focused pre-sale asset management, the following three properties were sold during
the year for a total of GBP15.4m, realising a profit on disposal of GBP4.3m at an aggregate NIY
of 4.1%, with gross proceeds circa 40% ahead of aggregate valuation:
· An industrial unit in Southwark sold for GBP12.0m, GBP4.4m (58%) ahead of its 30 June 2018
valuation. The lack of available investment stock in Central London, strong investment
demand and a recent, substantial rental increase had led to a significant valuation
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increase. In addition, redevelopment potential and the identification of a special
purchaser offering a NIY of 2.95% allowed us to crystallise a substantial profit;
· A retail development in Stourbridge sold for GBP2.25m, in line with valuation, as we did
not anticipate future rental growth; and
· A town centre retail unit in Dumfries sold for GBP1.125m, in line with valuation, as we
did not anticipate future rental growth.
We have used the proceeds from these disposals to fund acquisitions better aligned to the
Company's long-term investment strategy.
Acquisitions
We were delighted to make the 11 acquisitions shown below which have contributed to
strengthening the portfolio profile in terms of diversification of tenant, sector and lease
break/expiry, and which enhanced the portfolio's rental growth potential.
Tenant NIY Agreed
purchase
price (GBPm)
WAULT
Location Sector (Years)
Evesham Retail Next, M&S, 6.8 6.00% 14.2
warehouse Boots,
Argos and
Poundstretc
her
Weymouth Retail B&Q, 7.8 6.97% 10.8
warehouse Halfords
and Sports
Direct
Hilton Industrial Daher 3.0 6.72% 5.6
Aerospace
Stafford Other VW Group UK 6.4 6.29% 4.6
Lincoln Other Total 17.1 7.64% 4.3
Fitness
Health
Clubs
Belshill Industrial Yodel 2.3 6.94% 3.7
Sheffield Office Secretary 1.8 9.79% 3.6
of State
for
Communities
Shrewsbury Other VW Group UK 6.4 6.58% 2.8
Loughborough Other Listers 10.0 6.37% 2.4
Stratford High Street Foxtons and 8.6 6.78% 2.1
retail Universal
Church of
the Kingdom
of God
Shrewsbury Other TJ Vickers 7.2 6.75% 1.7
6.8% 55.8[28]
Asset Management
Our continued focus on active asset management including rent reviews, new lettings, lease
extensions and the retention of tenants beyond their contractual break clauses resulted in
a GBP6.4m valuation increase in the year. Key asset management initiatives completed during
the year include:
· Agreeing a new 10 year lease with Teleperformance of an industrial unit in
Ashby-de-la-Zouch, with annual rent increasing by 15% to GBP0.5m, which increased the
valuation by GBP2.0m;
· Letting the Company's largest vacant property, an industrial unit in Tamworth, to ICT
Express on a 10 year lease without break at a 28% higher rent, which increased the
valuation by GBP1.3m;
· Agreeing a new 10 year reversionary lease with Revlon International Corporation for an
industrial unit in Stone, increasing the annual rent by 24% and the valuation by GBP0.7m;
· Agreeing a new 10 year lease with Next plc for an industrial unit on Eurocentral in
Scotland, with annual rent increasing by 10%, which increased the valuation by GBP0.6m;
· Extending the lease with MTS Logistics for an industrial unit in Coalville, with annual
rent increasing by 30%, which increased valuation by GBP0.4m;
· Agreeing a new 10 year lease with Age Scotland at Causewayside House, Edinburgh where
the tenant expanded its letting to take the whole first floor office suite, increasing
the annual rent by 44% and the valuation by GBP0.4m;
· Documenting a reversionary lease with Synergy Health for an industrial building at
Sheffield Parkway to extend the lease by 7.5 years until 2034 and adjust the rent review
pattern to increase in line with RPI, which increased the valuation by GBP0.2m;
· Documenting a 10 year reversionary lease with Synertec at Leacroft Road, Warrington,
extending the lease expiry from July 2022 to July 2032 and increasing the valuation by
GBP0.2m;
· Letting a unit on a retail park in Carlisle to The Gym Group on a 15 year lease without
break, which increased the valuation by GBP0.1m; and
· Agreeing a new lease for additional external seating with Chokdee Limited (t/a Giggling
Squid) at a restaurant in Bath, increasing the annual rent by 12% and the valuation by
GBP0.1m.
The positive impact of growth in rents and active asset management outcomes in the year
ended 31 March 2019 was tempered by the following events which contributed a GBP6.2m
reduction to the portfolio valuation:
· The CVA of Homebase resulted in the Company experiencing a GBP183k (35%) annual rent
reduction at its Leighton Buzzard unit, which decreased the valuation by GBP2.9m;
· In Milton Keynes, the CVA of Office Outlet (formerly Staples) resulted in the tenant
contracting into 50% of the space previously occupied, with rent halving to GBP209k, which
decreased the valuation by GBP1.7m. Office Outlet subsequently went into administration but
continues to trade from the unit;
· The CVA of Paperchase resulted in a GBP68k (45%) annual rent reduction at the Company's
Shrewsbury unit, which decreased the valuation by GBP0.4m;
· The CVA of Carpetright resulted in a GBP25k (25%) annual rent reduction at the Company's
Grantham unit, which decreased the valuation by GBP0.3m; and
· In Crewe we took the difficult decision to implement a forfeiture of the lease of a
bowling operator which failed to pay its rent, thereby regaining control and opening up
the opportunity of re-letting to a stronger tenant, which decreased the valuation by
GBP0.9m.
Rental increases on rent reviews, new lettings and re-gears with a simple average of 4%
have been secured across 15 properties since the year end, illustrating that rental growth
continues. Further asset management initiatives are expected to complete over the coming
months including new lettings, lease renewals, rent reviews and lease re-gears.
Portfolio risk
We have managed the portfolio's income expiry profile through successful asset management
activities with only 50% of aggregate income expiring within five years at 31 March 2019
(2018: 48%). Short-term income at risk is a relatively low proportion of the portfolio's
income, with only 32% expiring in the next three years (2018: 28%) 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
2019 2018
Aggregate income expiry
0-1 years 10% 8%
1-3 years 22% 20%
3-5 years 18% 20%
5-10 years 38% 36%
10+ years 12% 16%
Total 100% 100%
Outlook
Custodian REIT's performance over our first five years has demonstrated that income can be
the principal driver of total return and we believe this is likely to be ever more
important in the year ahead. Asset management aimed at extending contractual income and
enhancing rents where possible, while ensuring the underlying real estate remains fit for
purpose and aligned with market demand, will remain fundamental to our management of
Custodian REIT.
We expect that further turmoil amongst retailers in the year ahead will continue to impact
all property investors with a retail component in the shape of increased vacancies and
reduced rents and values. Custodian REIT is not immune although our mitigating efforts are
explained earlier.
Despite the generally positive indicators in office and industrial markets, it seems clear
that economic uncertainty will prevail until the Brexit situation is resolved and markets
are able to assess the likely consequences, meaning maintaining occupancy levels and a
diversified portfolio are an important and defensive strategy for Custodian REIT.
In the year ended 31 March 2019 new investment by the Company was some 50% below the
previous year, largely reflecting limited opportunities and a cautious approach to sectors
with more volatile prices. While we do not expect the flow of new opportunities to change
imminently, we do expect market pricing to be better suited to Custodian REIT's investment
strategy in the year ahead. One benefit of a nationwide, diverse investment strategy is the
ability to take advantage of opportunities in all sub-sectors or sub-markets and we believe
there may be the potential to make contra-cyclical acquisitions where short-term market
weakness can unlock long-term value for the Company.
Richard Shepherd-Cross
for and on behalf of Custodian Capital Limited
Investment Manager
5 June 2019
Portfolio
31 March 2019 31 March 2018
Portfolio value GBP572.7m GBP528.9m
Separate tenancies 269 254
EPRA occupancy rate 95.9% 96.5%
Assets 155 147
WAULT 5.6 years 5.9 years
NIY[29] 6.6% 6.6%
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
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assistance of the Audit Committee, to assess the effectiveness of the Investment Manager's
risk management and internal control systems. During this review, no significant failings
or weaknesses have been 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 long-term, 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 principal risks facing the Company, including those that would threaten the
business model, future performance, solvency or liquidity. The table below outlines the
risk factors identified, but does not purport to be exhaustive as there may be additional
risks that materialise over time that the Company has not yet identified or has deemed not
likely to have a potentially material adverse effect on the business.
Risk Assessment Mitigating factors
Loss of revenue
· An increasing number Likelihood: · Company's largest
of tenants exercising tenant accounts for
contractual breaks or 3.2% of the rent
not renewing at lease roll.
expiry High.
· Investment policy
· Tenant default or limits the
enforced reduction in Company's rent roll
contractual rents to no more than 10%
through a CVA. from a single
tenant.
· Expiries or breaks
concentrated in a · Target
specific year. institutional grade
tenants.
· Unable to re-let
void units. · Focused on
established
· Low UK economic business locations
growth impacting the for investment.
commercial property Impact:
market. Moderate. · Active management
of lease expiry
profile and impact
on WAULT considered
in forming
acquisition
decisions.
· Building
specifications
typically not
tailored to one
user.
Decreases in portfolio
valuation
· Market pricing
affecting value.
· Change in demand for Likelihood: · Active portfolio
space. High. diversification
between office,
· Properties industrial
concentrated in a (distribution,
specific geographical manufacturing and
location or sector. warehousing),
retail warehousing,
· Reduced property high street retail
market sentiment and and other.
investor demand.
· Investment policy
limits the
Company's portfolio
to no more than 50%
in any specific
sector or
Impact: geographical
Moderate. region.
Financial
· Reduced availability Likelihood: Low. · Target net
or increased cost of gearing of 25% LTV
arranging or servicing on property
debt. portfolio.
· Breach of borrowing · 72% of agreed
covenants. debt facilities at
a fixed rate of
· Significant interest.
increases in interest
rates. · Existing
facilities
Impact: High. sufficient for
spending
commitments and
agreed until 2020.
· Ongoing
monitoring and
management of the
forecast liquidity
and covenant
position.
Operational
· Inadequate Likelihood: Low. · Ongoing review of
performance, controls performance by
or systems operated by independent Board
the Investment of Directors.
Manager.
· Outsourced
internal audit
function reporting
directly to the
Audit Committee.
· External
Impact: High. depositary with
responsibility for
safeguarding assets
and performing cash
monitoring.
Regulatory and legal
· Adverse impact of Likelihood: Low. · Strong compliance
new or revised culture.
legislation or
regulations, or by · External
changes in the professional
interpretation or advisers are
enforcement of engaged to review
existing government and advise upon
policy, laws and control environment
regulations. and ensure
regulatory
· Non-compliance with compliance.
the real estate Impact: High.
investment trust · Business model
("REIT") regime[30] or and culture
changes to the embraces FCA
Company's tax status. principles.
· REIT regime
compliance is
considered by the
Board in assessing
the Company's
financial position
and by the
Investment Manager
in making
operational
decisions.
Business interruption
· Data is regularly
backed up and
· Cyber-attack results Likelihood: Low. replicated and the
in the Investment Investment
Manager being unable Manager's IT
to use its IT systems systems are
and/or losing data. protected by
anti-virus software
· Terrorism interrupts and firewalls that
the Company's are regularly
operations through updated.
impact on either the
Investment Manager or · Fire protection
the Company's assets and access/security
or tenants. Impact: High. procedures are in
place at all of the
Company's managed
properties.
· Comprehensive
property damage and
business
interruption
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.
Acquisitions
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· Unidentified Likelihood: Low. · Comprehensive due
liabilities associated diligence is
with the acquisition undertaken in
of new properties conjunction with
(whether acquired professional
directly or via a advisors and the
corporate structure). provision of
insured warranties
and indemnities are
sought from vendors
where appropriate.
Impact: High.
Emerging risks
The Board has considered emerging risks and their potential impact on the Company.
The Board is continuing to monitor the potential risks associated with Brexit. Discussions
are ongoing and the final outcome regarding the UK's future trading relationship with the
EU remains unclear, making it too early to understand fully the impact Brexit will have on
our business and our sector. As a result the Board does not consider Brexit to be a
principal risk. The main potential negative impact of Brexit is a deterioration of the
macro-economic environment, potentially leading to further political uncertainty and
volatility in interest rates, but it could also impact our investment and occupier market,
our ability to execute our investment strategy and our income sustainability in the long
term. However, the Board believes the Company is well placed to weather any short-term
impact of Brexit because:
· The Company has a diverse portfolio by sector and location with an institutional grade
tenant base;
· The Company's operational focus is on income which is less likely to experience
volatility in an uncertain market; and
· Dividend cover has increased to 110.4% this year, and the Company has significant
valuation headroom on its borrowing covenants.
No other emerging risks have been added to the Company's Risk Register during the year.
Longer-term viability statement
In accordance with provision C2.2 of the UK Corporate Governance Code issued by the
Financial Reporting Council ("the Code"), the Directors have assessed the prospects of the
Company over a period longer than the 12 months required by the 'Going Concern' provision.
The Board resolved to conduct this review for a period of three years, because:
· The Company's 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 Board's forecasts consider the Company's profit, cash flows, dividend cover, REIT
regime compliance, borrowing covenant compliance and other key financial ratios over the
period. These metrics are subject to sensitivity analysis, which involves flexing a number
of key assumptions underlying the projections, including:
· Tenant default;
· Length of potential void period following lease break or expiry;
· Acquisition NIY, anticipated capital expenditure and the timing of deployment of cash;
· Interest rate changes; and
· Property portfolio valuation movements.
This analysis also evaluates the potential impact of the principal risks and uncertainties
set out above should they occur.
Current debt and associated covenants are summarised in Note 15, with no covenant breaches
during the year. The Company's dividend policy is set out in Business Model and Strategy.
The principal and emerging risks and uncertainties faced by the Company, together with the
steps taken to mitigate them, are highlighted above. The Board seeks to ensure that risks
are mitigated appropriately and managed within its risk appetite all times.
Based on the results of this analysis, the Directors expect that the Company will be able
to continue in operation and meet its liabilities as they fall due over the three-year
period of their assessment.
Business model and strategy
Investment objective and policy
The Company's investment objective is to provide Shareholders with an attractive level of
income together with the potential for capital growth from investing in a diversified
portfolio of commercial real estate properties in the UK.
The Company's investment policy is:
a) To invest in a portfolio of UK commercial real estate properties, principally
characterised by individual values of less than GBP10m at acquisition.
b) The portfolio should be diversified by sector, location, tenant and lease term, but
not exceed a maximum weighting to any one property sector, or to any geographic region,
of greater than 50%.
c) To focus on areas with high residual values, strong local economies and an imbalance
between supply and demand. Within these locations the objective is to acquire modern
buildings or those that are considered fit for purpose by occupiers.
d) No one tenant or property should account for more than 10% of the total rent roll of
the Company's portfolio at the time of purchase, except:
(i) In the case of a single tenant which is a governmental body or department for which no
percentage limit to proportion of the total rent roll shall apply; or
(ii) In the case of a single tenant rated by Dun & Bradstreet as having a credit risk score
higher than two, where the exposure to such single tenant may not exceed 5% of the total
rent roll (a risk score of two represents "lower than average risk").
e) To seek to minimise rental voids and enhance the WAULT of the portfolio by managing
lease expiries and targeting property acquisitions which will in aggregate be accretive
to WAULT at the point of acquisition, on a rolling 12-month basis.
f) The Company will not undertake speculative development (that is, development of
property which has not been leased or pre-leased), save for refurbishment of existing
holdings, but may invest in forward funding agreements or forward commitments (these
being, arrangements by which the Company may acquire pre-development land under a
structure designed to provide the Company with investment rather than development risk)
of pre-let developments where the Company intends to own the completed development.
g) The Company may use gearing, including to fund the acquisition of property and cash
flow requirements, provided that the maximum LTV shall not exceed 35%. Over the medium
term the Company is expected to target net gearing of 25% LTV.
h) The Company reserves the right to use efficient portfolio management techniques, such
as interest rate hedging and credit default swaps, to mitigate market volatility.
i) Uninvested cash or surplus capital or assets may be invested on a temporary basis in:
(i) cash or cash equivalents, money market instruments, bonds, commercial paper or other
debt obligations with banks or other counterparties having a single-A (or equivalent) or
higher credit rating as determined by an internationally recognised rating agency; or
(ii) any "government and public securities" as defined for the purposes of the rules of the
Financial Conduct Authority ("FCA").
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.
Key performance indicators
The Board meets quarterly and at each meeting reviews performance against a number of key
measures:
· 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;
· Profit before tax - shareholder value generated in the year including unrealised
property gains and losses;
· EPS and EPRA EPS - reflect the Company's ability to generate recurring earnings from
the portfolio which underpin dividends;
· Net gearing - measures the prudence of the Company's financing strategy, balancing the
additional returns available from utilising debt with the need to effectively manage
risk;
· 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;
· EPRA vacancy rate - the Board reviews the level of property voids within the Company's
portfolio on a quarterly basis and compares this to its peer group average. The Board
seeks to ensure that the Investment Manager is giving proper consideration to replacing
the Company's income;
· WAULT - reflects the aggregate duration of contractual income;
· 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
· Premium or discount of the share price to NAV - the Board closely monitors the premium
or discount of the share price to the NAV and believes a key driver of this is the
Company's long-term investment performance. However, there can be short-term volatility
in the premium or discount and the Board therefore seeks limited authority at each AGM to
issue or buy back shares with a view to trying to manage this volatility.
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.
Alternative performance measures
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Alternative performance measures, including EPRA Best Practice Recommendations, assist
stakeholders in assessing performance and are used by research analysts covering the
Company in addition to the key performance indicators and comprise:
· New equity raised - a measure of growth of the Company;
· Target dividend per share - an expectation of the Company's ability to deliver an
income stream to shareholders for the forthcoming year;
· Share price total return - reflects the movement in share price and dividends payable
to shareholders;
· NAV per share, share price and market capitalisation - reflect various measures of
shareholder value at a point in time;
· EPRA NAV per share - a measure of NAV excluding any adjustments to IFRS NAV not
expected to crystallise in normal circumstances such as fair value adjustments to
borrowings, giving a better indication of NAV of a real estate investment company with a
long-term investment strategy;
· EPRA NIY and 'topped up' NIY - alternative measures of 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) compared to gross rental
income;
· EPRA capital expenditure - capital expenditure incurred on the Company's property
portfolio during the year; and
· EPRA like-for-like rental growth - a measure of rental growth of the portfolio by
sector, excluding acquisitions and disposals.
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.
Debt
The Company has the following facilities available:
· A GBP45m RCF with Lloyds Bank plc with annual interest of 2.45% above three-month LIBOR
on advances drawn down under the agreement from time to time;
· A GBP20m term loan facility with Scottish Widows Limited ("SWIP") repayable in August
2025, with fixed annual interest of 3.935%;
· A GBP45m term loan facility with SWIP repayable in June 2028, with fixed annual interest
of 2.987%; and
· A GBP50m term loan facility with Aviva comprising:
a) A GBP35m tranche repayable on 6 April 2032, with fixed annual interest of 3.02%; and
b) A GBP15m tranche repayable on 3 November 2032 with fixed annual interest of 3.26%.
The Company's borrowing facilities all require minimum interest cover of 250% of the net
rental income of the security pool. The maximum LTV of the Company combining the value of
all property interests (including the properties secured against the facilities) must be no
more than 30%.
Equity
During the year the Company raised GBP13.4m (before costs and expenses) through the placing
of 11,350,000 new ordinary shares.
Dividends
The Company paid dividends totalling 6.525p per share during the year, comprising the
fourth interim dividend of 1.6125p per share relating to the year ended 31 March 2018 and
three interim dividends of 1.6375p per share relating to the year ended 31 March 2019.
The Company paid an interim dividend of 1.6375p per share for the quarter ended 31 March
2019 on 31 May 2019, meeting its target of paying an annual dividend per share for the
financial year of 6.55p (2018: 6.45p).
In the absence of unforeseen circumstances, the Board intends to pay quarterly dividends to
achieve a target dividend of 6.65p per share for the year ending 31 March 2020. The Board's
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.
Employees
The Company has four non-executive directors and no employees. Non-executive directors are
paid fixed salaries set by the Remuneration Committee and participate in the performance of
the Company through their shareholdings. All non-executive directors are white males.
The Nominations Committee is currently recruiting an additional Non-Executive Director. The
Board is conscious of the increased focus on diversity and recognises the value and
importance of diversity in the boardroom. The Board supports the recommendations of the
Hampton-Alexander and Parker Reports but does not consider it appropriate or in the
interests of the Company and its shareholders to set prescriptive diversity targets for the
Board.
Corporate social responsibility
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 Company's environmental and social policies address the importance
of these issues in the day-to-day running of the business, as detailed below.
Environmental policy
The Board's responsibility to society is broader than simply generating financial returns
for shareholders and the Board encourages the Investment Manager to act responsibly in the
areas it can influence as a
landlord, for example by working with customers to improve environmental performance of the
Company's assets and minimise their impact on climate change. The Board believes that
following this strategy will ultimately be to the benefit of shareholders through enhanced
rent and asset values.
The majority of the Company's investment properties are let on full repairing and insuring
leases, meaning its day-to-day environmental responsibilities are limited as properties are
controlled by the tenants. However, the Board wishes to adopt sustainable principles where
possible and the key elements of the Company's environmental policy are:
· We want our properties to minimise their impact on the local and wider environment and
carefully consider the environmental performance of assets before we acquire them,
including obtaining an independent environmental report and energy performance
certificate ("EPC") for all potential acquisitions, which considers, amongst other
matters, the historical and current usage of the site and the extent of any contamination
present. This report may lead to further enquiries of the vendor, surveyor or legal teams
and is considered by the Investment Committee of the Investment Manager when approving
the acquisition;
· An ongoing examination of existing and new tenants' business activities is carried out
to assess the risk of pollution occurring. The Company monitors all incoming tenants
through its insurance programme to identify potential risks. Activities deemed to be
high-risk are avoided. As part of the active management of the portfolio, any change in
tenant business practices considered to be an environmental hazard is reported and
suitably dealt with;
· Sites are visited periodically and any obvious environmental issues are reported to the
Board; and
· All leases prepared after the adoption of the policy commit occupiers to observe any
environmental regulations. Any problems would be referred to the Board.
In order to monitor energy consumption across the portfolio as well as identify
opportunities to make energy reductions, CREIT has engaged with specialist consultants Pick
Everard 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.
Case study - Lancaster House, Birmingham
During the year the Company completed a GBP2.2m refurbishment of Lancaster House, Birmingham,
a multi-let office building located in Birmingham's central business district arranged over
basement, ground and six upper floors totalling 37,000 sq ft. The refurbishment works
comprised:
· Replacing the original single-glazed windows with triple-glazed Crittal equivalents;
· Updating the internal heating works by replacing two antiquated oil-fired boilers with
a modern variable refrigerant flow system, which delivers both heating and cooling to all
office suites; and
· Internal mechanical and electrical improvements.
The refurbishment has significantly improved the energy efficiency of the building,
reducing occupational costs for the office tenants. The removal of the oil-fired boilers is
the principal contributing factor in the reported reduction in carbon emissions across the
Company's estate and has also meant that the EPC rating of the office suites has improved
to a 'B' rating from an 'E' rating at acquisition in 2015. The works have increased the ERV
of the property resulting in the works having a positive net impact on valuation.
Social policy
The activities of the Company are carried out in a responsible manner, taking into account
the social and human rights impact where possible.
Approval of Strategic report
The Strategic report, (incorporating the Chairman's statement, Investment Manager's report,
Portfolio, Principal risks and uncertainties and Business model and strategy) was approved
by the Board of Directors and signed on its behalf by:
David Hunter
Independent Chairman
5 June 2019
Independent auditor's report to the members of Custodian REIT plc on the Preliminary
Announcement of Custodian REIT plc
As the independent auditor of Custodian REIT plc we are required by UK Listing Rule LR
9.7A.1(2)R to agree to the publication of Custodian REIT Plc's proposed preliminary
announcement for the year ended 31 March 2019.
The preliminary statement of annual results for the year ended 31 March 2019 includes
disclosures requires by the Listing Rules, Financial highlights and performance summary,
Chairman's statement, Investment Manager's report, Strategic report, the Consolidated
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statement of comprehensive income, the Consolidated and Company statements of financial
position, the Consolidated and Company statements of cash flows, the Consolidated and
Company statements of changes in equity and Notes to the financial statements. We are not
required to agree to the publication of additional information published alongside the
preliminary statement of annual results, which may include: presentations to analysts and a
trading statement or interim management statement.
The directors of Custodian REIT plc are responsible for the preparation, presentation and
publication of the preliminary statement of annual results in accordance with the UK
Listing Rules.
We are responsible for agreeing to the publication of the preliminary statement of annual
results, having regard to the Financial Reporting Council's Bulletin "The Auditor's
Association with Preliminary Announcements made in accordance with UK Listing Rules".
Status of our audit of the financial statements
Our audit of the annual financial statements of Custodian REIT plc is complete and we
signed our auditor's report on 5 June 2019. Our auditor's report is not modified and
contains no emphasis of matter paragraph.
Our audit report on the full financial statements sets out the following key audit matter
which had the greatest effect on our audit strategy; the allocation of resources in our
audit; and directing the efforts of the engagement team, together with how our audit
responded to those key audit matters and the key observations arising from our work:
Valuation of the property portfolio
Key audit matter description As disclosed in Note 10, the
Company's investment property
portfolio is valued at GBP572.7m
(31 March 2018: GBP528.9m). The
Company's accounting policy in
Note 2 states that investment
property is held at fair value
and Note 2.5 describes key
judgements made in valuation of
investment properties. In
determining the fair value, the
external valuers make a number
of key estimates and
assumptions, in particular
assumptions in relation to
market comparable yields and
estimates in relation to future
rental income increases or
decreases. Certain of these
estimates and assumptions
require input from management.
Some of these estimates and
assumptions are subject to
market forces and will change
over time.
Valuation of investment
property is an area of
judgement which could
materially affect the financial
statements.
How the scope of our audit Together with our real estate
responded to the key audit experts, who are Chartered
matter Surveyors, we met with the
third party valuer appointed by
those charged with governance
with the aim of understanding
the valuation methodology
adopted. We assessed the
competence, capabilities and
objectivity of the external
valuer. We selected a sample of
investment properties for
further investigation (based on
value, absolute and percentage
movement and some further
properties selected at random
from the residual population).
We assessed and challenged the
reasonableness of the
significant judgments and
assumptions applied in the
valuation model for each
property in our sample,
focusing in particular on the
yields assumed and assessing
the sensitivity of the
valuation to changes in
assumptions. We assessed the
completeness and accuracy of
the data provided by the Group
to the valuers for the purposes
of their valuation exercise.
With the assistance of members
of our audit team who are
Chartered Surveyors, we
reviewed the significant
assumptions in the valuation
process, tested a sample of
properties by benchmarking
against external appropriate
property indices and understood
the valuation methodology and
the wider market analysis. We
reviewed the information
provided by the valuers both in
the meeting and contained in
the detailed valuation report;
and we undertook our own
research into the relevant
markets to evaluate the
reasonableness of the valuation
inputs and the resulting fair
values.
Key observations The results of our tests were
satisfactory and we concluded
that the key assumptions
applied in determining the
property valuations by the
external valuer were
appropriate. The testing
performed in relation to the
final property valuations
proved satisfactory.
This matter was addressed in the context of our audit of the financial statements as a
whole, and in forming our opinion thereon, and we did not provide a separate opinion on
this matter.
Procedures performed to agree to the preliminary announcement of annual results
In order to agree to the publication of the preliminary announcement of annual results of
Custodian REIT plc we carried out the following procedures:
a) Checked that the figures in the preliminary announcement covering the full year have
been accurately extracted from the audited financial statements and reflect the
presentation to be adopted in the audited financial statements;
b) Considered whether the information (including the management commentary) is consistent
with other expected contents of the annual report;
c) Considered whether the financial information in the preliminary announcement is
misstated;
d) Considered whether the preliminary announcement includes a statement by directors as
required by section 435 of CA 2006 and whether the preliminary announcement includes the
minimum information required by UKLA Listing Rule 9.7A.1;
e) Where the preliminary announcement includes alternative performance measures ("APMs"),
considered whether appropriate prominence is given to statutory financial information and
whether:
· the use, relevance and reliability of APMs has been explained;
· the APMs used have been clearly defined, and have been given meaningful labels
reflecting their content and basis of calculation;
· the APMs have been reconciled to the most directly reconcilable line item, subtotal or
total presented in the financial statements of the corresponding period; and
· comparatives have been included, and where the basis of calculation has changed over
time this is explained.
f) Read the management commentary, any other narrative disclosures and any final interim
period figures and considered whether they are fair, balanced and understandable.
Use of our report
Our liability for this report, and for our full audit report on the financial statements is
to the Company's members as a body, in accordance with Chapter 3 of Part 16 of the
Companies Act 2006. Our audit work has been undertaken so that we might state to the
Company's members those matters we are required to state to them in an auditor's report and
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DJ Custodian REIT plc: Final Results -10-
for no other purpose. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company and the Company's members as a body, for
our audit work, for our audit report or this report, or for the opinions we have formed.
James Wright (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
Crawley, UK
5 June 2019
Consolidated statement of comprehensive income
For the year ended 31 March 2019
Year ended Year ended
31 March 31 March
2019 2018
Note GBP000 GBP000
Revenue 4 39,974 34,813
Investment management (3,486) (3,124)
Operating expenses of rental property
· rechargeable to tenants (866) (758)
(1,530) (852)
· directly incurred
Professional fees (624) (433)
Directors' fees (183) (167)
Administrative expenses (626) (653)
Expenses (7,315) (5,987)
Operating profit before financing and
revaluation of investment property
32,659 28,826
Unrealised (losses)/gains on
revaluation of investment property:
· relating to property revaluations
10 (5,499) 11,859
10 (3,391) (6,212)
· relating to costs of acquisition
Valuation (decrease)/increase (8,890) 5,647
Profit on disposal of investment 4,250 1,606
property
Net (loss)/gain on investment (4,640) 7,253
property
Operating profit before financing 28,019 36,079
Finance income 6 27 99
Finance costs 7 (4,400) (3,758)
Net finance costs (4,373) (3,659)
Profit before tax 23,646 32,420
Income tax expense 8 - -
Profit for the year and total
comprehensive income for the year,
net of tax
23,646 32,420
Attributable to:
Owners of the Company 23,646 32,420
Earnings per ordinary share:
Basic and diluted (p per share) 3 6.0 8.9
EPRA (p per share) 3 7.3 6.9
The profit for the year arises from the Company's continuing operations.
Consolidated and Company statements of financial position
As at 31 March 2019
Registered number: 08863271
Group Company
31 March 2019 31 March 31 March 2019 31 March
2018
Note GBP000 2018 GBP000
GBP000
GBP000
Non-current
assets
Investment 10 572,745 528,943 572,745 528,943
property
Investments 11 - - 501 7,610
Total 572,745 528,943 573,246 536,553
non-current
assets
Trade and 12 3,674 7,883 3,674 7,883
other
receivables
Cash and 14 2,472 5,059 2,472 5,059
cash
equivalents
Total 6,146 12,942 6,146 12,942
current
assets
Total assets 578,891 541,885 579,392 549,495
Equity
Issued 16 3,982 3,869 3,982 3,869
capital
Share 16 225,680 212,534 225,680 212,534
premium
Retained 16 196,961 198,799 196,961 198,799
earnings
Total equity
attributable
to equity
holders of
the Company 426,623 415,202 426,623 415,202
Non-current
liabilities
Borrowings 15 137,532 113,357 137,532 113,357
Other 576 571 576 571
payables
Total 138,108 113,928 138,108 113,928
non-current
liabilities
Current
liabilities
Trade and 13 6,851 5,870 7,352 13,480
other
payables
Deferred 7,309 6,885 7,309 6,885
income
Total 14,160 12,755 14,661 20,365
current
liabilities
Total 152,268 126,683 152,769 134,293
liabilities
Total equity 578,891 541,885 579,392 549,495
and
liabilities
As permitted by Section 408 of the Companies Act 2006, no separate profit and loss account
is presented in respect of the parent company. The profit for the financial year dealt with
in the financial statements of the parent company was GBP23,646,000 (2018: GBP32,420,000).
These consolidated and Company financial statements of Custodian REIT plc were approved and
authorised for issue by the Board of Directors on 5 June 2019 and are signed on its behalf
by:
David Hunter
Independent Chairman
Consolidated and Company statements of cash flows
For the year ended 31 March 2019
Group and Company Year ended Year
31 March ended
2019 31 March
2018
Note GBP000 GBP000
Operating activities
Profit for the year 23,646 32,420
Net finance costs 4,373 3,659
Valuation decrease/(increase) of 10 8,890 (5,647)
investment property
Impact of rent free 10 (2,237) (1,547)
Profit on disposal of investment (4,250) (1,606)
property
Cash flows from operating activities
before changes in working capital and
provisions
30,422 27,279
Increase in trade and other 4,209 985
receivables
Increase in trade and other payables 1,404 250
and deferred income
Cash generated from operations 36,035 28,514
Interest and other finance charges (4,225) (3,553)
Net cash flows from operating 31,810 24,961
activities
Investing activities
Purchase of investment property (55,523) (103,796)
Capital expenditure and development (2,530) (2,498)
Acquisition costs (3,391) (6,212)
Disposal of investment property 15,375 6,622
Costs of disposal of investment (130) (126)
property
Interest received 6 27 32
Net cash used in investing activities (46,172) (105,978)
Financing activities
Proceeds from the issue of share 16 13,420 54,670
capital
Costs of share issue (161) (758)
New borrowings net of origination 15 24,000 49,364
costs
Dividends paid 9 (25,484) (23,007)
Net cash from financing activities 11,775 80,269
Net decrease in cash and cash (2,587) (748)
equivalents
Cash and cash equivalents at start of 5,059 5,807
the year
Cash and cash equivalents at end of 2,472 5,059
the year
Consolidated and Company statements of changes in equity
For the year ended 31 March 2019
Issued Share Retained Total
capital premium earnings equity
Note GBP000 GBP000 GBP000 GBP000
As at 1 April 2017 3,390 159,101 189,386 351,877
Profit for the year - - 32,420 32,420
Total comprehensive - - 32,420 32,420
income for year
Transactions with owners
of the Company,
recognised directly in
equity
Dividends 9 - - (23,007) (23,007)
Issue of share capital 16 479 53,433 - 53,912
As at 31 March 2018 3,869 212,534 198,799 415,202
Profit for the year - - 23,646 23,646
Total comprehensive - - 23,646 23,646
income for year
Transactions with owners
of the Company,
recognised directly in
equity
Dividends 9 - - (25,484) (25,484)
Issue of share capital 16 113 13,146 - 13,259
As at 31 March 2019 3,982 225,680 196,961 426,623
Notes to the financial statements for the year ended 31 March 2019
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 (GBP000), except when
otherwise indicated. The consolidated financial statements were authorised for issue in
accordance with a resolution of the Directors on 5 June 2019.
2) Basis of preparation and accounting policies
1) Basis of preparation
The consolidated financial statements and the separate financial statements of the parent
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company have been prepared in accordance with International Financial Reporting Standards
adopted by the International Accounting Standards Board ("IASB") and interpretations issued
by the International Financial Reporting Interpretations Committee ("IFRIC") of the IASB
(together "IFRS") as adopted by the European Union, and in accordance with the requirements
of the Companies Act applicable to companies reporting under IFRS, and therefore they
comply with Article 4 of the EU IAS Regulation.
Certain statements in this report are forward looking statements. By their nature, forward
looking statements involve a number of risks, uncertainties or assumptions that could cause
actual results or events to differ materially from those expressed or implied by those
statements. Forward looking statements regarding past trends or activities should not be
taken as representation that such trends or activities will continue in the future.
Accordingly, undue reliance should not be placed on forward looking statements.
2) Basis of consolidation
The consolidated financial statements consolidate those of the parent company and its
subsidiaries. The parent controls a subsidiary if it is exposed, or has rights, to variable
returns from its involvement with the subsidiary and has the ability to affect those
returns through its power over the subsidiary. Custodian Real Estate Limited has a
reporting date in line with the Company. Other subsidiaries have a June accounting
reference date which has 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.
3) Application of new and revised International Financial Reporting Standards
The Company adopted IFRS 9 'Financial instruments' and IFRS 15 'Revenue from contracts with
customers' on 1 April 2018. The impact of the application of these new standards is shown
below:
IFRS 9
IFRS 9 introduces changes to the classification of financial assets and a new impairment
model for financial assets. Under the 'simplified approach' to the expected credit loss
model, loss allowances equal to the lifetime expected credit losses are recognised on
initial recognition of financial assets, depending on assessed credit risk. Additional
requirements include both quantitative and qualitative disclosures supporting the basis and
recognition of loss allowances, and the recognition of the loss allowance within
provisions.
The Company's principal financial assets and liabilities are trade receivables, cash and
cash equivalents, trade payables and other payables which will continue to be measured at
amortised cost. The new impairment model requires the recognition of impairment provisions
based on expected credit losses rather than the incurred credit losses under IAS 39
'Financial Instruments: Recognition and Measurement [4]' and the main impact of this change
is the methodology for the impairment of trade receivables using a provision matrix.
Historically the Company has had minimal write offs of balances due from tenants and GBP5k
additional impairment provision has been required as a result of this change, which has
been recognised in the year as the Company has elected not to restate comparatives on
initial application of IFRS 9.
IFRS 15
IFRS 15 has changed the timing of when revenue from customer contracts is recognised.
Customer contracts are broken down in to separate performance obligations, with contractual
revenues being allocated to each performance obligation and revenue recognised on a basis
consistent with the transfer of control of goods or services.
Revenue from the Company's sole 'turnover rent' arrangement does not pass IFRS 15's 'highly
probable' test to recognise revenue over the service period, and quarterly rent is
therefore no longer accrued. The impact of this change is a reduction in revenue of GBP46k,
which has been recognised in the year as the Company has elected not to restate
comparatives on initial application of IFRS 15.
At the date of authorisation of these financial statements, the following new and revised
IFRSs which have not been applied in these financial statements were in issue but not yet
effective:
· Annual Improvements to IFRSs 2015-2017 Cycle;
· IFRS 16 'Leases'; and
· IFRS 17 'Insurance Contracts'
IFRS 16
IFRS 16 'Leases' was issued in January 2016 and is effective for accounting periods
beginning on or after 1 January 2019 and will be adopted by the Company on 1 April 2019.
IFRS 16 removes the distinction between operating and finance leases for lessees and
replaces them with the concept of 'right-of-use' assets and associated financial
liabilities which will result in almost all leases being recognised on the balance sheet. A
leasee's rent expense under IAS 17 for operating leases will be removed and replaced with
depreciation and finance costs.
Additional disclosure requirements include presenting:
· Depreciation expense;
· Carrying value of right-of-use assets;
· Additions to right-of-use assets;
· Interest expense on lease liabilities;
· Variable lease payments not included in the lease liability; and
· Total cash outflow for leases.
Additional qualitative and quantitative disclosures will also be necessary about the
entity's leasing activities if they are considered necessary to meet the overall disclosure
objective.
The Company has assessed the impact of the accounting and disclosure changes that will
arise under IFRS 16 and anticipates in the year ending 31 March 2020 a GBP38k impact on
income statement categorisation of headlease costs and a GBP7k reduction in profit after tax,
with no impact on bank covenants.
IFRS 17
IFRS 17 was published in May 2017 and is effective for periods commencing on or after 1
January 2021. The Company has not completed its review of the impact of this new standard
but does not anticipate it having a significant impact.
4) 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.
The Company's projections show that the Company should continue to be cash generative and
be able to operate within the level of its current financing arrangements. Accordingly, the
Directors continue to adopt the going concern basis for the preparation of the financial
statements.
Income recognition
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.
Financial assets
The Company's financial assets include cash and cash equivalents and trade and other
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