DJ Custodian REIT plc: Final Results
Custodian REIT plc (CREI)
Custodian REIT plc: Final Results
23-Jun-2020 / 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.
23 June 2020
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 2020.
Financial highlights and performance summary
· Significant impact of the COVID-19 pandemic, with a GBP12.5m (2.2% of property portfolio)
valuation decrease in the final quarter of the year and 70% of rent collected relating to
the quarter ending 30 June 2020[1],* both largely attributable to the pandemic
· NAV total return per share[2],* of 1.1% (2019: 5.9%) comprising 6.2% dividends (2019:
6.1%) and a 5.1% capital decrease (2019: 0.2% capital decrease)
· EPRA[3] earnings per share[4],* of 7.0p (2019: 7.3p)
· Basic and diluted earnings per share[5] of 0.5p (2019: 6.0p)
· Profit before tax down 91% to GBP2.1m (2019: GBP23.6m) primarily due to a GBP25.8m aggregate
property valuation decrease[6]
· GBP25.3m[7] of new equity raised at average premium of 11% to dividend adjusted NAV*
· Target dividends per share* for the first half of the year ending 31 March 2021 of no
less than an aggregate 1.5p (2020: 3.325p )
· Property value of GBP559.8m (2019: GBP572.7m) subject to a 'material uncertainty' clause in
line with prevailing RICS guidance:
· GBP25.8m aggregate valuation decrease ( 4.7% of property portfolio value) comprising a
GBP6.1m property valuation uplift from successful asset management initiatives and GBP31.9m
of valuation decreases, primarily due to decreases in the estimated rental value ("ERV")
of high street retail properties, negative market sentiment for retail assets and the
impact of the COVID-19 pandemic
· Disposal of two properties at valuation[8] for aggregate headline consideration of
GBP15.7m[9]
· GBP24.6m[10] invested in eight property acquisitions
· GBP2.8m capital expenditure incurred primarily on three significant refurbishments
2020 2019 change
Return
NAV per share total return* 1.1% 5.9% (4.8%)
Share price total return[11],* (5.0%) 4.2% (9.2%)
Dividend cover[12],* 104.4% 110.4% (6.0%)
Dividends per share[13] (p) 6.65 6.55 1.5%
Capital values
NAV (GBPm) 426.7 426.6 0.0%
NAV per share* (p) 101.6 107.1 (5.1%)
Share price* (p) 99.0 111.2 (11.0%)
Property portfolio value (GBPm) 559.8 572.7 (2.3%)
Market capitalisation* (GBPm) 415.9 442.8 (6.1%)
(Discount)/premium of share (2.6%) 3.8% (6.4%)
price to NAV per share*
Net gearing[14],* 22.4% 24.1% (1.7%)
Costs
Ongoing charges ratio[15],* 1.55% 1.53% 0.2%
("OCR")
OCR excluding direct property 1.12% 1.12% 0.0%
expenses[16],*
EPRA performance measures*
EPRA EPS (p) 7.0 7.3 (4.1%)
EPRA NAV per share (p) 101.6 107.1 (5.1%)
EPRA net initial yield ("NIY") 6.2% 6.2% 0.0%
EPRA 'topped up' NIY 6.6% 6.4% 0.2%
EPRA vacancy rate 4.1% 4.1% 0.0%
EPRA cost ratio (including 16.6% 16.1% 0.5%
direct vacancy costs)
EPRA cost ratio (excluding 14.5% 14.5% 0.0%
direct vacancy costs)
EPRA capital expenditure (GBPm) 2.80 2.53 10.7%
EPRA like-for-like rental 40.0 39.1 2.3%
growth (GBPm)
*Alternative performance measures
The Company reports the following alternative performance measures ("APMs") to assist
stakeholders in assessing performance alongside the Company's results on a statutory basis:
quarterly rent collection, 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, discount/premium to NAV per share, net gearing, ongoing charges ratios and
EPRA Best Practice Recommendations. 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 Note 21.
Commenting on the final results, David Hunter, Chairman of Custodian REIT, said:
"Until the outbreak of the COVID-19 pandemic, Custodian REIT had delivered on its
objectives for the financial year, despite a struggling retail sector which contributed the
majority of the property valuation decreases in the first three quarters of the financial
year. However, the COVID-19 pandemic is taking effect, leading to a GBP12.5m property
valuation decrease in the final quarter of the financial year, giving a total fall for the
year of GBP25.8m after asset management gains of GBP6.1m.
"The recent turmoil in markets has emphasised the importance of having a well-diversified,
income focused property portfolio. In the year ended 31 March 2020 Custodian REIT delivered
a NAV per share total return of 1.1% (2019: 5.9%) with dividends of 6.65p per share
supporting a positive NAV total return despite the impact of the COVID-19 pandemic on
valuations in the final quarter.
"The outlook for real estate investment is likely to become clearer and potentially more
positive as lockdown eases and most sectors of the economy have the opportunity to re-open.
Real estate is likely to remain a key asset for investors looking for income and as rent
collection stabilises and deferred rents are recovered, the ability to pay dividends at
more meaningful levels will return.
"Property yields are currently showing a circa 6% margin over UK 10 year gilts, which is
the widest margin on record. In expectation of continued low gilt rates this margin is
likely to support real estate pricing despite a recent decline in capital values. The
combination of resilient capital values and an anticipated return to relatively high
dividends should lend support to Custodian REIT's objective to be the REIT of choice for
private and institutional investors seeking high and stable dividends from well-diversified
UK real estate."
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 / Ed Moore / Tel: +44 (0)116 240 8740
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 9.30am today.
Those analysts wishing to take part are asked to register at:
https://numiscorp.zoom.us/webinar/register/WN_ybM1V6rvRvijt5Rdmz1Z7Q [3]
After registering, you will receive a confirmation email containing information about
joining the webinar.
If you have any questions please contact Justin Bell on +44 (0) 20 7260 1380 or at
j.bell@numis.com.
Chairman's statement
Until the outbreak of the COVID-19 pandemic, Custodian REIT had delivered on its objectives
for the financial year, despite a struggling retail sector which contributed the majority
of GBP13.3m of property valuation decreases for the first three quarters of the financial
year. However, the COVID-19 pandemic is taking effect, leading to a GBP12.5m property
valuation decrease in the final quarter of the financial year, giving a total fall for the
year of GBP25.8m after asset management gains of GBP6.1m.
The health and safety of colleagues, tenants and our wider stakeholders remains the
Company's top priority. Our current operational focus is on managing liquidity to mitigate
the risks associated with the uncertainty created by the global health emergency, working
with our tenants to optimise rental income and maintaining a level of distributions to
investors broadly linked to net rental receipts.
These have been testing times which have necessitated an exceptional effort from the
Investment Manager, both in pursuing rents and in operating remotely as a team, and I would
like to acknowledge the positive tangible results of that. I should also thank my fellow
Board members who have been flexible and supportive during a period which has required
numerous formal and informal additional Board meetings.
During the year GBP25.3m was raised from the issue of new shares and GBP15.7m[17] was raised
from property disposals. These sums funded property acquisitions and capital expenditure of
GBP27.4m, primarily the GBP24.6m acquisition of eight distribution units ("the Menzies
Portfolio") through a sale and leaseback to Menzies Distribution Limited. This transaction
(MORE TO FOLLOW) Dow Jones Newswires
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DJ Custodian REIT plc: Final Results -2-
was effected by a corporate acquisition which reduced purchase costs such that the agreed
price of GBP24.6m reflected a net initial yield[18] ("NIY") of 6.4%, supporting our objective
to deliver strong income returns from a property portfolio principally of smaller lots in
strong, regional markets.
Financial and operational resilience
The Company remains in a strong financial position to address the extraordinary
circumstances imposed by COVID-19, having:
· A diverse and high-quality asset and tenant base comprising 161 assets valued at
GBP559.8m, with over 200 typically 'institutional grade' tenants across all commercial
sectors with an occupancy rate[19] of more than 95%;
· Low levels of net debt, with GBP25m of cash and gross borrowings of GBP150m at 31 March
2020 resulting in low net gearing, with no short-term refinancing risk and a weighted
average debt facility maturity of seven years;
· Significant headroom on lender covenants at 31 March 2020, with the maximum 35% loan to
value ("LTV") and minimum 250% interest cover[20] covenants comparing to net gearing of
22.4% LTV and aggregate three-month interest cover on borrowings of more than 600% for
the three months ended 31 March 2020. With further reductions in rent collections
expected in the first quarter of the new financial year we have put pre-emptive interest
cover covenant waivers in place for at least the June 2020 and September 2020
quarter-ends with all our lenders, recognising that covenants on individual facilities
may come under some short-term pressure; and
· An annual contractual rent roll of GBP40.7m, with interest costs on drawn loan facilities
of only c.GBP4.7m per annum.
Borrowings
The Company operates four loan facilities, each of which has a discrete allocation of the
Company's individual properties over which the relevant lender has security. Each loan has
covenants over the LTV and interest cover related to each discrete security pool. In the
expectation that interest cover covenants on some individual loans at 30 June 2020 may come
under short-term pressure, the Company has agreed waivers of certain covenants for the next
two quarters in return for depositing cash amounts equivalent to the interest payable for
that period into charged accounts.
LTV covenants are not currently a concern. The Company has approximately GBP184.8m (33% of
the property portfolio) of unencumbered assets which could be charged to the security pools
to enhance the LTV on individual loans to cure any potential covenant breaches.
The weighted average cost of the Company's agreed debt facilities at 31 March 2020 was 3.0%
(2019: 3.2%) with a Weighted Average Maturity ("WAM") of 7.8 years (2019: 7.9 years) and
77% (2019: 84%) of the Company's drawn debt facilities are now at fixed rates. This high
proportion of fixed rate debt significantly mitigates long-term interest rate risk for the
Company and provides shareholders with a beneficial margin between the fixed cost of debt
and income returns from the property portfolio.
Returns
The recent turmoil in markets has emphasised the importance of having a well-diversified,
income focused property portfolio.
In the year ended 31 March 2020 Custodian REIT delivered a NAV per share total return of
1.1% (2019: 5.9%) with dividends of 6.65p per share supporting a positive, if low, NAV
total return despite the negative valuation impact of the COVID-19 pandemic in the final
quarter.
The Company paid one of the highest fully covered dividends amongst its peer group of
listed property investment companies[21] for the year ended 31 March 2020, while minimising
'cash drag' on the issue of new shares by taking advantage of the flexibility offered by
the Company's revolving credit facility ("RCF"). During the year the Company increased the
total funds available under the RCF to GBP50m, agreeing a new three year term and a reduction
in margin above three month LIBOR from 2.45% to between 1.5% and 1.8%, determined by
reference to the prevailing LTV ratio of a discrete security pool. The revised facility has
reduced finance costs and will provide additional capacity to exploit acquisition
opportunities whilst maintaining the flexibility to minimise cash drag from equity issuance
once markets stabilise.
In common with our peers and many commercial property landlords, we are experiencing an
inevitable disruption to cash collection in the quarter ending 30 June 2020 as a number of
tenants seek to defer rental payments to protect their own cash flows due to the effect of
the COVID-19 pandemic on their business. Acknowledging the importance of income for
shareholders, the Company intends to pay the next two quarterly dividends at a minimum of
0.75p per share regardless of rent collection rates, with support from prior years'
undistributed reserves if required. Should rent collections in the June and September
quarters allow, more generous dividends may be possible. Over the course of the financial
year, as deferred rents are collected, the Board hopes it will be possible to restore the
dividend to a sustainable long-term level akin to previous years.
The Company's relatively stable share price performance in a volatile market during the
first 11 months of the year ended 31 March 2020 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.
Net asset value
The NAV of the Company at 31 March 2020 was GBP426.7m, approximately 101.6p per share, a
decrease of 5.5p (5.1%) since 31 March 2019:
Pence per GBPm
share
NAV at 31 March 2019 107.1 426.6
Issue of equity in the year (net of costs) 0.4 25.0
107.5 451.6
Valuation movements relating to:
- Asset management activity 1.5 6.1
- Other valuation movements (7.7) (31.9)
Valuation decrease before acquisition (6.2) (25.8)
costs
Impact of acquisition costs (0.1) (0.6)
Valuation decrease including acquisition (6.3) (26.4)
costs
Loss on disposal of investment property - (0.1)
Net valuation movement (6.3) (26.5)
Revenue 9.7 40.9
Expenses and net finance costs (2.9) (12.3)
Dividends paid[22] (6.4) (27.0)
NAV at 31 March 2020 101.6 426.7
The net valuation decrease of GBP25.8m was primarily driven by high street retail, retail
warehouse and 'other' sector valuations falling by GBP14.4m, GBP15.3m and GBP7.8m respectively,
further detailed in the Investment Manager's report, due to:
· The impact of COVID-19, with the Company's valuers assuming a three-month rent deferral
and overall increase in yield to all assets let to tenants which have ceased or
significantly curtailed trading, in line with current RICS advice to valuers;
· A reduction in retail ERVs;
· A worsening of investment market sentiment towards retail; and
· Two Company Voluntary Arrangements ("CVAs") and two company Administrations impacting
the valuation of assets in Shrewsbury, Grantham and Colchester.
However, the retail valuation declines were partially offset by industrial asset valuations
increasing due to latent rental growth and continued investor demand, again demonstrating
the benefit of a diversified property portfolio. Custodian REIT's investment strategy
continues to be weighted towards regional industrial and logistics assets, which has stood
the Company in good stead again this year, with valuation gains of GBP12.5m (5.6%) in this
sector.
Since the year end the proposed CVAs of Travelodge, The Restaurant Group, Poundstretcher
and JTF Wholesale have impacted the Company's assets in Portishead, Perth, Grantham,
Evesham and Warrington, which if passed could reduce the Company's rent roll by c. 2.5%.
The market
During the first eleven months of the year ended 31 March 2020 Custodian REIT's shares
traded consistently at a premium to NAV while much of the property sector had moved to a
discount and since the start of the COVID-19 pandemic, the Company's shares have
experienced lower volatility and traded at a lower discount to NAV than most in the sector.
However, we believe the Company's shareholders share our view that NAV-related metrics
alone are not sufficient to assess a property investment company's prospects. We believe
that the Company's share price performance reflects investors' awareness of the merits of
diversification of tenant, lease expiry profile, spread of asset type, net gearing level,
debt profile, property location and the ability of the management team to generate future
income from the assets.
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 relatively stable income-driven returns.
As a long-term investment, any measure of performance from real estate should be considered
over a period greater than 12 months. Over the last five years, shareholder have benefitted
from positive share price total return, with lower volatility relative to the Company's
peer group. This has been particularly noticeable at times of market stress, such as the
impact of the EU referendum in June 2016 and more recently with the COVID-19 pandemic.
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DJ Custodian REIT plc: Final Results -3-
We believe a large part of the Company's positive absolute return and lower volatility is
due to our unremitting focus on income, supporting the relatively high dividend.
Another key metric, alongside price and volatility, is liquidity of the stock and I am
pleased to report that Custodian REIT recorded an average daily trading volume of over
GBP0.5m throughout the last 12 months[23].
Investment Manager
Custodian Capital Limited ("the Investment Manager") is appointed under an investment
management agreement ("IMA") to provide property management and administrative services to
the Company. The performance of the Investment Manager is reviewed each year by the
Management Engagement Committee ("MEC"). During the year the Investment Manager charged the
Company GBP4.0m (2019: GBP4.0m) in respect of annual management, administrative and marketing
fees. Further details of fees payable to the Investment Manager are set out in Note 18.
The Board is pleased with the performance of the Investment Manager, particularly the
timely deployment of the proceeds from property disposals and new equity on high quality
assets. The Board also welcomes the Investment Manager's continuing successful asset
management which has contributed to both capital values and income.
The MEC has reviewed, in detail, the arrangements with the Investment Manager following
expiry of the three year term of the current Investment Management Agreement ("IMA") on 31
May 2020. In light of the positive performance of the Company the Board and the Investment
Manager have agreed a further three year term to the Investment Manager's ongoing
engagement, from 1 June 2020, with fees payable to the Investment Manager under the IMA
amended to include:
· A step down in the annual management fees[24] from 0.65% to 0.55% of NAV applied to NAV
in excess of GBP750m; and
· A step down in the administrative fee from 0.05% to 0.03% of NAV applied to NAV in
excess of GBP750m.
All other key terms of the IMA remain unchanged. The Board considers these amendments to
the IMA to be in the best interests of the Company's shareholders because:
· Further growth in NAV, particularly above GBP500m, will further reduce the Company's OCR
and increase dividend capacity; and
· Another three year term provides the Investment Manager with security of tenure and
allows further investment in the dedicated systems and people providing its services
under the IMA.
Dividends
Income is a major component of total return. The Company paid aggregate dividends of 6.625p
per share during the year, comprising the fourth interim dividend of 1.6375p per share
relating to the year ended 31 March 2019 and three interim dividends of 1.6625p per share
relating to the year ended 31 March 2020.
The Company paid a fourth interim dividend of 1.6625p per share for the quarter ended 31
March 2020 on 29 May 2020 totalling GBP7.0m, meeting the Company's target of paying a total
dividend relating to the year of 6.65p per share (2019: 6.55p), totalling GBP27.5m (2019:
GBP25.8m). Dividends relating to the year ended 31 March 2020 were 104.4% covered by net
recurring income of GBP28.7m, as calculated in Note 21.
Board expansion
Reflecting the growth of the Company since inception we were delighted to welcome Hazel
Adam to the Board as our fifth Non-Executive Director on 12 December 2019. Hazel brings a
range of experience including buy side and sell side investment experience, strategies and
markets. These skills and experience complement those of the existing Directors and offer
scope to add value for the benefit of the Company.
Environmental policy
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 because
properties are controlled by their tenants. However, the Board adopts sustainable
principles and actively seeks opportunities to make environmentally beneficial improvements
to its property portfolio where possible. The Company recently engaged Carbon Intelligence,
specialist environmental consultants, to review the Company's environmental, social and
governance ("ESG") policy, identify and prioritise opportunities for environmental
improvements and recommend how best to manage risks. As a result we have committed to:
· Seek to minimise pollution and comply with all relevant environmental legislation;
· Gather and analyse data on our environmental performance across our property portfolio;
and
· Set targets of environmental performance for our properties and monitor achievements as
a commitment to continuous improvement.
The Company is reporting sustainability indicators for the first time using the EPRA
sustainability best practice indicators, set out in the Sustainability disclosures section
of the Annual Report, and in accordance with the Mandatory Greenhouse Gas ("GHG") Reporting
Regulations, detailed in the Directors' report. The Company will also make its first Global
Real Estate Sustainability Benchmark ("GRESB") submission in 2020, which is one of the most
widely used sustainability benchmarks in the real estate sector. The Board expects the
results of this submission to provide a valuable insight into the Company's current
sustainability performance and identify areas for improvement in the next financial year.
Details of the Company's environmental policy are contained within the Business model and
strategy section of the Strategic report.
Outlook
The outlook for real estate investment and more particularly for Custodian REIT is likely
to become clearer and potentially more positive as lockdown eases and most sectors of the
economy have the opportunity to re-open. At the time of writing the country is at the start
of becoming 'unlocked'.
Real estate is likely to remain a key asset for investors looking for income and as rent
collection stabilises and deferred rents are recovered, the ability to pay dividends at
more meaningful levels will return.
Property yields are currently showing a circa 6% margin over UK 10 year gilts, which is the
widest margin on record. In expectation of continued low gilt rates this margin is likely
to support real estate pricing despite a recent decline in capital values.
The combination of resilient capital values and an anticipated return to relatively high
dividends should lend support to Custodian REIT's objective to be the REIT of choice for
private and institutional investors seeking high and stable dividends from well-diversified
UK real estate.
David Hunter
Chairman
22 June 2020
Investment Manager's report
The UK property market
The financial year ended 31 March 2020 was dominated by two significant headwinds: retail
malaise and political uncertainty. The fourth quarter started with increased confidence in
commercial property investment following the General Election and reduced uncertainty
around Brexit. Sadly, all talk of confidence has been eclipsed by the COVID-19 pandemic and
the widespread impact on the UK and global economies.
Our response has been to prioritise protecting cash flow and to secure the balance sheet.
As a result the Company withdrew from two regional office acquisitions on which terms had
been agreed. In addition, to address the current difficulty of collecting rents in a timely
manner, exacerbated by the statutory protections for commercial tenants introduced by the
UK Government, the Company has put in place pre-emptive waivers on interest cover covenants
for at least the June 2020 and September 2020 quarter-ends to provide the flexibility to
collect rent in the most advantageous way for medium/long-term income security while
supporting tenants and minimising vacancies.
It is too early to assess the long-term impact of COVID-19 on the commercial property
market but we believe it may accelerate pre-existing trends in the use of, and investment
in, commercial property. We expect to see a further deterioration in occupational demand
and investment appetite for secondary retail, an increase in occupational demand for
flexible office space (both traditional offices, fitted out and leased flexibly, as well as
serviced offices) and a continuation of the growth of logistics and distribution.
The country has been in lockdown since the Company's financial year end and hence
transactional activity has been much reduced. Many transactions have been renegotiated and
in some cases pricing has reflected forced, or at least unwilling, sellers. While these
transactions have led to a decline in valuations, the lockdown period does not represent a
normal market.
Looking back across the year, we saw retailers resorting to CVAs to reduce their liability
for rent and property related costs, at the expense of their landlords. While there has
been gathering resistance from landlords, we expect further CVAs while they remain
legitimate practice. The impact of the COVID-19 pandemic may lead to yet more CVAs if the
Government's support package proves insufficient, particularly for retailers.
We believe that in core retail locations the key impact of the COVID-19 pandemic and CVAs
will be to hasten a fall in rental values coupled with some inevitable vacancies. However,
retailers are likely to want to retain a presence in prime destination locations where
retail and leisure combine to create an attractive environment. Such an environment is most
likely to be found in major regional city centres or tourist 'hot spots'.
Recent experience has demonstrated the importance of multi-channel retailing where those
retailers with a more developed online presence and the associated infrastructure to deal
with deliveries and returns have continued to trade. In more normal times, research shows
that where retailers have a physical store, they are likely to see higher levels of online
sales through a higher profile, click and collect or the ability of shoppers to make
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returns more conveniently. Online sales alone do not appear to be a panacea for retailers.
There are significant costs associated with home delivery and returns, therefore retailers
prefer click and collect. This puts location of the store into sharp focus for retailers
who are likely to favour core destinations in the centre of large, affluent populations or
the ease and convenience of an out of town retail park.
In the out of town retail market there is an important distinction to make between DIY,
homewares and value retailers (such as B&M) and the fashion focused out of town parks.
Fashion-focused parks have enjoyed rental growth for a number of years but the contraction
in sales and the competition from online is now making many fashion-focused park rents
potentially unaffordable. Meanwhile DIY, homewares and value retailers that see online
sales as complementary to their stores pay much lower rents, which are likely to remain
affordable, and in turn should support occupancy levels.
In key regional office markets rental growth potential has been a principal determinant of
capital value growth. This growth has been a function of a number of variables: modest
levels of speculative development limiting new supply; conversion of secondary offices to
alternative uses reducing existing supply; high levels of employment and some
decentralisation from London and the South East which has boosted demand. The jury is out
on the future of offices, especially with the number of people now working from home, but
we expect that offices will continue to be an important real estate investment asset.
Industrial and logistic assets have performed well during the year. While the focus of the
market has been on large format logistics properties, where pricing is at its keenest,
asset management across the smaller assets in the Custodian REIT portfolio has secured high
levels of occupancy, rental growth and capital value growth. Accordingly, this sector was
the focus of acquisitions for the Company during the year.
The competing pressures of declining sentiment towards retail and improving prospects for
industrial and logistics set in an economic environment driven by Brexit, the General
Election and more recently the COVID-19 pandemic has had a net negative impact on
commercial property values.
Of more importance than the NAV derived from current valuations in the near-term is the
absolute focus on rent collection, future cash flow, ongoing asset management and the
affordability of future dividends which are all underpinned by the Company's low ongoing
charges ratio (excluding direct property expenses) of 1.12% and low cost of debt of 3.0%
(GBP4.7m interest per annum in aggregate).
Rent collection
As Investment Manager Custodian Capital invoices and collects rent directly allowing it to
hold conversations promptly with most tenants regarding the payment of rent through the
early stages of the COVID-19 pandemic. Some of these conversations have led to positive
asset management outcomes, including the extension of leases in return for rent
concessions, providing short-term cash flow relief for occupiers and longer-term income
security for the Company. Importantly, at this stage, the Company has not waived or
cancelled any contractual rent thus all contractual rent remains due over time.
The Company's rent invoicing profile comprises quarterly in advance (on both English and
Scottish quarter days) and monthly in advance. Following negotiations regarding the April -
June 2020 quarter rent, the Company has agreed that a number of tenants move from quarterly
in advance to monthly in advance rent payments, or a deferral of the April - June 2020
quarter's rent with a full recovery over the next 12-18 months. Some tenants have yet to
agree a payment profile but we remain in active discussions with these tenants to agree
payment plans for the balance of outstanding rent.
Given the varied profile of the Company's rental invoicing, reporting quarterly rent
receipts best reflects the prevailing level of income generation from the Company's
property portfolio. To date, 70% of rent due relating to invoicing for the quarter ending
30 June 2020 has been collected, 12% has been deferred by agreement (and is therefore no
longer due in the quarter) to be paid either monthly in arrears or to be recovered through
a payment plan within existing lease terms over the next 12-18 months and 18% remains the
subject of discussion with tenants.
Investment objective
The Company's key objective is to provide shareholders with an attractive relative level of
income by paying dividends fully covered by net rental receipts with a conservative level
of net gearing. We are pleased to have continued to achieve these objectives with earnings
providing 104.4% cover of the total dividend payable relating to the year of 6.65p per
share and a net gearing ratio of 22.4% at the year end.
The Board remains committed to a strategy principally focused on regional properties with
individual values of less than GBP10m at acquisition with a weighting towards regional
industrial and logistics. Diversification of property type, tenant, location and lease
expiry profile continues to be at the centre of the strategy together with maximising cash
flow by taking a flexible approach to tenants' requirements and retaining tenants wherever
possible.
Property portfolio balance
The property portfolio is split between the main commercial property sectors in line with
the Company's objective to maintain a suitably balanced investment portfolio. The Company
has a relatively low exposure to office and high street retail combined with a relatively
high exposure to industrial and to alternative sectors, often referred to as 'other' in
property market analysis. The current sector weightings are:
Valuation Weighting Weighting Valuation Valuation
by by income movement movement
income[25 31 March before including
] 2019 acquisiti acquisiti
31 March on costs on costs
2020 GBPm
31 March
Valuation GBPm Weighting Weighting
GBPm by value by value
31 March 31 March
2020 2020 2019
31 March
2019
Sector GBPm
Industrial 257.3 40% 224.3 38% 12.5 12.0 46% 39%
Retail 109.7 22% 123.4 22% (15.3) (15.3) 20% 21%
warehouse
Other[26] 87.4 17% 95.7 17% (7.8) (7.9) 16% 17%
High 52.8 11% 68.6 12% (14.4) (14.4) 9% 12%
street
retail
Office 52.6 10% 60.7 11% (0.8) (0.8) 9% 11%
Total 559.8 100% 572.7 100% (25.8) (26.4) 100% 100%
During the year we have experienced a net decline in the portfolio valuation that broadly
reflects the market trends in the differing sectors. Industrial and logistics values have
strengthened by 5.6% while office values have been broadly flat. Amongst its far-reaching
impacts, the pandemic has deepened the challenges facing the retail sector causing further
declines in retail values, although with a greater percentage decline in high street
locations (-21.0%) compared to out of town retail warehousing (-12.4%). This lower decline
for out of town is perhaps a reflection of the stock selection in the Custodian REIT
portfolio where retail warehouse occupiers are predominantly value retailers and
homewares/DIY, many of whom have remained open for trading during the COVID-19 pandemic
lockdown, even if at restricted levels. Furthermore, the average rent across the retail
warehouse portfolio is only GBP14.31 per sq ft which represents an affordable rent for most
occupiers.
The 31 March 2020 valuation is reported on the basis of 'material valuation uncertainty' in
accordance with the current RICS valuation standards. This basis does not invalidate the
valuation but, in the current extraordinary circumstances, implies that less certainty can
be attached to the valuation than otherwise would be the case. There is a body of market
evidence to support the valuations in the usual way but, in addition, the valuers have
reflected market sentiment in their reported numbers. From 12 June 2020, RICS approved
removal of the 'material valuation uncertainty' clause for all industrial assets and
standalone supermarkets.
Industrial and logistics property remains a very good fit with the Company's strategy where
it is possible to acquire modern, 'fit-for-purpose' buildings. One of the advantages of
smaller lot-size industrial has been the relative lack of development in recent years. Such
industrial development has been focused on large format 'big box' logistics units, where
returns have been highest and occupier demand has supported development. The demand for
smaller lot-sized units is very broad, from manufacturing, urban logistics, online traders
and owner occupiers. This demand supports high residual values (where the vacant possession
value is closer to the investment value than in other sectors) and drives rental growth.
Despite the challenges in retail highlighted above, we believe that retail warehousing
remains an important asset class for the Company. We expect that well-located retail
warehouse units, let off low rents, located on retail parks which are considered dominant
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