CREI Custodian Property Income Reit Plc

 

 

 

13 June 2024

Custodian Property Income REIT plc

(“the Company” or “Custodian Property Income REIT”)

 

Final results for the year ended 31 March 2024

 

Custodian Property Income REIT’s 10th annual results marked by strong operational performance driving further growth in fully covered dividend

 

Custodian Property Income REIT (LSE: CREI), which seeks to deliver an enhanced income return by investing in a diversified portfolio of smaller regional properties with strong income characteristics across the UK, today announces its final results for the year ended 31 March 2024.

 

Commenting on the final results, David MacLellan, Chairman of Custodian Property Income REIT, said:  In my first annual results as Chairman, I am very pleased to note the year to March 2024 as a significant milestone for the Company, marking the 10 year anniversary since launch, and that the Company once again performed well.  Despite the significant challenges and changes we have all faced over the last decade, politically, economically and in terms of social volatility including COVID, Custodian Property Income REIT has grown successfully and delivered on its objectives with an over sixfold increase in the size of the portfolio, an average annual NAV total return of 5.5%, an annual average fully covered dividend of 5.9p per share and a decreasing ongoing charges ratio. 

 

“This success has been achieved by the Company’s resolute focus on being fully invested in a portfolio of below institutional lot-sized regional properties to capture the income advantages that these types of assets afford, in order to deliver enhanced income-centric total returns to institutional, wealth management and private investors.

 

“Looking at the year under review, the occupational market has continued to remain robust, with rental growth and falling vacancy reflected in recurring EPRA earnings per share increasing by 3.6%.  This increase in earnings allowed the Board to declare a special dividend in March 2024 to take the aggregate dividend for the year to 5.8p, along with announcing a 9% increase in the prospective dividend per share from 5.5p to 6.0p due to an improved outlook.

 

“The quarter ended 31 March 2024 saw a marginal increase in NAV due to profitable disposals on the back of flat valuations, as rental growth and falling vacancy rates started to have a positive impact.  Despite stabilising valuations and the prospect of rental growth, sentiment towards listed UK commercial real estate has caused weakness and volatility in the share price.  The prevailing share price implied a dividend yield of 8.3%, compared to 6.3% and 5.8% at 31 March 2023 and 2022 respectively.  However, the first move down in interest rates should be the real catalyst for a positive shift in sentiment towards real estate investment, so later in 2024 could be a turning point in the market.

 

“The Company’s portfolio is well placed to benefit from any upwards rerating in sector valuations as the economy improves.  In an inflationary environment and with a lack of supply of modern, smaller regional properties we expect to see continued rental growth over the year ahead and it will be this growth in income that is likely to form the greater component of total return over the next phase of the property market and we believe that Custodian Property Income REIT’s strong income yielding portfolio, supported by higher-than-peer group recurring earnings per share, will continue to underpin shareholder returns”.

 

Highlights of the year:

 

• 3.6% growth in EPRA earnings per share to 5.8p (FY23: 5.6p)
• 5.6% growth in like-for-like contracted rental income to £43.1m with a 3.9% increase in rental revenue to £42.2m (FY23: £40.6m)
• Estimated rental value (“ERV”) grew 3.6% with ERV now 15% ahead of passing rent providing a significant opportunity to unlock further rental growth through asset management and at lease events
• 15 rent reviews completed during the year across all sectors at an average 23% ahead of previous passing rent, with 47 new lettings, lease renewals and lease regears completed reflecting the continued strong demand for space in the Company’s portfolio and adding £9.5m to valuation
• Occupancy increased to 91.7% during the year (FY23: 90.3%), with further improvement to c.93% since April 2024
• Valuation of the Company’s portfolio of 155 properties, including assets held-for-sale, remained flat at £589.1m in the final quarter, with a modest 4.0% like-for-like fall over the full year (31 March 23: £613.6m) suggesting that a turning point in sentiment and valuations has been reached
• £19.0m of capital investment during the year into refurbishment and EPC improvement of offices in Leeds and Manchester and Midlands industrial units, including solar panel and electric vehicle charger installations, leading to a 21.7% increase in the ERV of the properties
• £18.2m proceeds from selective disposals achieved at an aggregate 8% premium to last valuation, with a further £11.3m of disposals since year end at an average 49% premium to pre-offer valuation
• Net gearing remains low at 29.2% (31 March 2023: 27.4%) with 78% fixed and no expiries until August 2025
• 5.5% increase in fully covered dividends paid to shareholders during the year comprising 5.5p of ordinary dividends and a 0.3p special dividend
• 9% increase in the prospective dividend announced in May 2024 from 5.5p to 6.0p per share reflecting the Board’s confidence in the Company’s prospects, together with its commitment to a property strategy that supports a relatively high dividend, fully covered by EPRA earnings.

 

For further information, please contact:

 

Custodian Capital Limited
Richard Shepherd-Cross / Ed Moore / Ian Mattioli MBE	Tel: +44 (0)116 240 8740
	www.custodiancapital.com
Deutsche Numis	Tel: +44 (0)20 7260 1000
Hugh Jonathan / Nathan Brown	www.dbnumis.com
FTI Consulting	Tel: +44 (0)20 3727 1000
Richard Sunderland / Ellie Sweeney / Andrew Davis	custodianreit@fticonsulting.com

 

Custodian Property Income REIT plc Annual Report and Accounts for the year ended 31 March 2024

 

Custodian Property Income REIT plc (“Custodian Property Income REIT” or “the Company”) is a UK real estate investment trust (“REIT”) which seeks to deliver an enhanced income return by investing in a diversified portfolio of smaller, regional properties with strong income characteristics let to predominantly institutional grade tenants across the UK.

 

Property highlights

	2024 £m	Comments
Portfolio value[1]	589.1
Property valuation decreases:	(27.0)	Representing a 4.0% like-for-like decrease, explained further in the Investment Manager’s report
Occupancy	91.7%	Occupancy rates have increased from 90.3% to 91.7% by the year end, improving further post year end to c.93%.
Capital investment	19.0	Primarily comprising: £6.8m refurbishing four office buildings in Leeds and Manchester £3.5m redeveloping an industrial site in Redditch £2.2m refurbishing an industrial asset in Ashby-de-la-Zouch £1.3m buying the long-leasehold of a unit at a 10-unit industrial asset in Knowsley £1.0m reconfiguring retail assets in Shrewsbury and Liverpool £2.0m invested in photovoltaics and electric vehicle chargers at various sites
Disposal proceeds	18.2	At an aggregate 8% premium to valuation (£1.4m profit on disposal) comprising: £8.0m industrial unit in Milton Keynes £6.0m industrial unit in Weybridge £1.6m high street retail units in Bury St Edmunds and Cirencester £2.0m vacant offices in Derby £0.6m children’s day nursery in Chesham
Disposal proceeds since the year end	11.3	At an aggregate 49% premium to pre-offer valuation comprising: £9.0m vacant industrial unit in Warrington £2.3m vacant former car showroom in Redhill

 

Financial highlights and performance summary

	2024	2023	Comments
Returns
*EPRA[2] earnings per share[3]	5.8p	5.6p	Rental growth and improvement in occupancy have offset administrative cost inflation and higher finance costs
Basic and diluted earnings per share[4]	(0.3p)	(14.9p)	Loss resulting from a £27.0m valuation decreases
Loss before tax (£m)	(1.5)	(65.8)
Dividends per share[5]	5.8p	5.5p	Special dividend of 0.3p approved for the year.  Target dividend per share for the year ended 31 March 2025 of 6.0p
*Dividend cover[6]	100.7%	102.2%	In line with the Company’s policy of paying fully covered dividends
*NAV total return per share[7]	(0.4%)	(12.5%)	5.5% dividends paid (2023: 4.6%) and a 5.9% capital decrease (2023: 17.1% capital decrease)
*Share price total return[8]	(2.6%)	(7.0%)	Share price decreased from 89.2p to 81.4p during the year
Capital values
NAV and *EPRA NTA[9] (£m)	411.8	437.6	Decreased due to £27.0m of valuation decreases
NAV per share and *NTA per share	93.4	99.3p
*Net gearing[10]	29.2%	27.4%	Further reduced to 27.9% following property disposals since the year-end and broadly in line with the Company’s 25% target
*Weighted average cost of drawn debt facilities	4.1%	3.8%	Base rate (SONIA) increased from 4.2% to 5.2% during the year.  Impact mitigated by 78% fixed rate debt.
Costs
*Ongoing charges ratio[11] (“OCR”)	2.20%	1.96%
*OCR excluding direct property expenses[12]	1.24%	1.23%

 

Environmental
*Weighted average energy performance certificate (“EPC”) rating[13]	C (53)	C (58)	EPCs updated across 42 properties demonstrating continuing improvements in the environmental performance of the portfolio

 

*Alternative performance measures (“APMs”) - the Company reports APMs to assist stakeholders in assessing performance alongside the Company’s results on a statutory basis, set out above.  APMs are among the key performance indicators used by the Board to assess the Company’s performance and are used by research analysts covering the Company.  The Company uses APMs based upon the EPRA Best Practice Recommendations Reporting Framework which is widely recognised and used by public real estate companies.  Certain other APMs may not be directly comparable with other companies’ adjusted measures and APMs are not intended to be a substitute for, or superior to, any IFRS measures of performance.  Supporting calculations for APMs and reconciliations between APMs and their IFRS equivalents are set out in Note 22.

 

Business model and strategy

 

Purpose

 

Custodian Property Income REIT offers investors the opportunity to access a diversified portfolio of UK commercial real estate through a closed-ended fund.  The Company seeks to provide investors with an attractive level of income and the potential for capital growth from a portfolio with strong environmental credentials, becoming the REIT of choice for private and institutional investors seeking high and stable dividends from well-diversified UK real estate.

 

Stakeholder interests

 

The Board recognises the importance of all stakeholder interests and keeps these at the forefront of business and strategic decisions, ensuring the Company:

 

• Understands and meets the needs of its occupiers, owning fit for purpose properties with strong environmental credentials in the right locations which comply with safety regulations;

• Protects and improves its stable cash flows with long-term planning and decision making, implementing its policy of paying dividends fully covered by recurring earnings and securing the Company’s future; and

• Adopts a responsible approach to communities and the environment, actively seeking ways to minimise the Company’s impact on climate change and providing the real estate fabric of the economy, giving employers a place of business.

 

Investment Policy

 

The Company’s investment policy[14] is summarised below:

 

• To invest in a diverse portfolio of UK commercial real estate, principally characterised by smaller, regional, core/core-plus[15] properties that provide enhanced income;
• The property portfolio should be diversified by sector, location, tenant and lease term, with a maximum weighting to any one property sector or geographic region of 50%;
• To acquire modern buildings or those considered fit for purpose by occupiers, focusing on areas with:

• High residual values;
• Strong local economies; and
• An imbalance between supply and demand.

• No one tenant or property should account for more than 10% of the rent roll at the time of purchase, except for:

• Governmental bodies or departments; or
• Single tenants rated by Dun & Bradstreet as having a credit risk score worse than two[16], where exposure may not exceed 5% of the rent roll.

• Not to undertake speculative development, except for the refurbishment or redevelopment of existing holdings;
• To seek further growth, which may involve strategic property portfolio acquisitions and corporate consolidation; and
• The Company may use gearing provided that the maximum loan-to-value (“LTV”) shall not exceed 35%, with a medium-term net gearing target of 25% LTV.

 

The Board reviews the Company’s investment objectives at least annually to ensure they remain appropriate to the market in which the Company operates and in the best interests of shareholders.

 

Differentiated property strategy

 

The Company’s portfolio is focused on smaller, regional, core/core-plus assets which helps achieve our target of high and stable dividends from well-diversified real estate by offering:

 

• An enhanced yield on acquisition – with no need to sacrifice quality of property, location, tenant or environmental performance for income and with a greater share of value in ‘bricks and mortar’;
• Greater diversification – spreading risk across more assets, locations and tenants and offering more stable cash flows; and
• A higher income component of total return – driving out-performance with forecastable and predictable returns.

 

Success in achieving the Company’s performance and sustainability objectives is, in part, measured by performance against key performance indicators set out in detail in the Financial review and ESG Committee reports respectively.  The Principal risks and uncertainties section of the Strategic Report sets out potential risks in achieving the Company’s objectives.

 

Richard Shepherd-Cross, Investment Manager, commented: "Our smaller-lot specialism has consistently delivered significantly higher yields with lower volatility without exposing shareholders to additional risk”.

 

Growth strategy

 

The Board is committed to seeking further growth in the Company to increase the liquidity of its shares and reduce ongoing charges.  Our growth strategy involves:

 

• Organic growth through share issuance at a premium to NAV;
• Broadening the Company’s shareholder base, particularly through further penetration into online platforms;
• Becoming the natural choice for private clients and wealth managers seeking to invest in UK real estate;
• Taking investor market share from open-ended funds and peer group companies being wound-down; and
• Strategic property portfolio acquisitions and corporate consolidation.

 

The Board ensures that property fundamentals are central to all decisions.

 

Diverse portfolio with institutional grade tenants

Sector Weighting by income 31 March 2024     Industrial 40% Retail warehouse 23% Office 16% Other 13% High street retail 8%

Location Weighting by income 31 March 2024     West Midlands 20% North-West 20% East Midlands 13% South-East 11% Scotland 12% South-West 10% North-East 9% Eastern 4% Wales 1%

Top 10 tenants	Asset locations	Annual passing rent (£m)	% portfolio income
Menzies Distribution	Aberdeen, Edinburgh, Glasgow, Ipswich, Norwich, Dundee, Swansea, York	1.5	3.6%
B&M Retail	Swindon, Ashton-under-Lyne, Plymouth, Carlisle	1.4	3.2%
Wickes Building Supplies	Winnersh, Burton upon Trent, Southport, Nottingham	1.2	2.8%
B&Q	Banbury, Weymouth	1.0	2.3%
Matalan	Leicester, Nottingham	1.0	2.3%
DFS	Droitwich, Measham	0.9	2.1%
First Title (t/a Enact Conveyancing)	Leeds	0.8	1.9%
Zavvi	Winsford	0.7	1.7%
Homebase	Leighton Buzzard, Cromer	0.6	1.5%
Regus (West Malling)	West Malling	0.6	1.5%

 

Sector	Experian tenant risk rating 31 March 2024
Government	2%
Very low risk	57%
Low risk	8%
Below average risk	13%
Above average risk	8%
High risk	2%
Other	10%

 

Our environmental, social and governance (“ESG”) objectives

 

• Improving the energy performance of our buildings - investing in carbon reducing technology, infrastructure and onsite renewables and ensuring redevelopments are completed to high environmental standards which are essential to the future leasing prospects and valuation of each property
• Reducing energy usage and emissions - liaising closely with our tenants to gather and analyse data on the environmental performance of our properties to identify areas for improvement
• Achieving positive social outcomes and supporting local communities - engaging constructively with tenants and local government to ensure we support the wider community through local economic and environmental plans and strategies and playing our part in providing the real estate fabric of the economy, giving employers safe places of business that promote tenant well-being
• Understanding environmental risks and opportunities - allowing the Board to maintain appropriate governance structures to ensure the Investment Manager is appropriately mitigating risks and maximising opportunities
• Complying with all requirements and reporting in line with best practice where appropriate - exposing the Company to public scrutiny and communicating our targets, activities and initiatives to stakeholders

 

Investment Manager

 

Custodian Capital Limited (“the Investment Manager”) is appointed under an investment management agreement (“IMA”) to provide property management and administrative services to the Company.  Richard Shepherd-Cross is Managing Director of the Investment Manager.  Richard has over 25 years’ experience in commercial property, qualifying as a Chartered Surveyor in 1996 and until 2008 worked for JLL, latterly running its national portfolio investment team.

 

Richard established Custodian Capital Limited as the Property Fund Management subsidiary of Mattioli Woods plc (“Mattioli Woods”) and in 2014 was instrumental in the launch of Custodian Property Income REIT from Mattioli Woods’ syndicated property portfolio and its 1,200 investors.  Following the successful IPO of the Company, Richard has overseen the growth of the Company to its current property portfolio of circa £600m.

 

Richard is supported by the Investment Manager’s other key personnel: Ed Moore - Finance Director, Alex Nix - Assistant Investment Manager and Tom Donnachie - Portfolio Manager, along with a team of five other surveyors and four accountants.

Chairman’s statement

 

In my first annual report as chairman of Custodian Property Income REIT, I am very pleased to note March 2024 as a significant milestone for the Company, marking the 10 year anniversary since launch.  Over the last decade there has been significant amounts of change: politically; economically; and in terms of social volatility including COVID.

 

During that time the Company has grown successfully and delivered on its objectives with an over sixfold increase in the size of the portfolio delivering an average annual NAV total return of 5.5%, paying an annual average 5.9p per share of fully covered dividends and a decreasing ongoing charges ratio.  This success has been achieved by the Company’s resolute focus on its key strategic objectives:  to be fully invested in a portfolio of UK, commercial real estate, characterised by smaller regional properties; and to provide enhanced income-centric total returns.  Through the growth of the Company we are able to provide access to the income advantages offered by sub-institutional lot-sized properties to a broad range of institutional, wealth management and private investors.

 

Corporate activity

 

During the last 12 months listed real estate news has been dominated by corporate activity.  The Boards of five of the Company’s close peer group determined that being consolidated or selling their portfolio best solves the issue of trading at an embedded deep discount to NAV, with another announcing a strategic review in April 2024.  By this time next year Custodian Property Income REIT could be one of very few active, genuinely diversified property investment companies available to investors in the listed sector. 

 

The Board believes strongly in the benefits of diversification in mitigating property and sector specific risk, while still delivering dividends that are fully covered by recurring earnings. The Board also remains firm in its belief that this is a strategy that is well suited to long-term investors in real estate, allowing for the timely execution of acquisitions and disposals without the constraints of sector specificity, while setting the Company apart from the single sector, often higher risk funds which have dominated the market over the last few years.

 

Performance

 

The Company’s NAV decreased by 5.9% during the year but at an increasingly slower rate, quarter-on-quarter, as the impact of higher interest rates and investor sentiment became fully reflected in valuations.  The quarter ended 31 March 2024 recorded a marginal increase in NAV due to profitable disposals on the back of flat valuations, suggesting an improving outlook, as rental growth and falling vacancy rates start to have a positive impact.  The first move down in interest rates should be the real catalyst for a positive shift in sentiment towards real estate investment, so later in 2024 could be a turning point in the market.

 

By applying its institutional expertise to the sector, through high quality asset management, covenant management and portfolio construction, the Company is able to provide an institutional offering to shareholders, generating superior income and, notwithstanding recent volatility in pricing, Custodian Property Income REIT can look back over a 10 year average annual NAV total return of 5.5% driven by strong recurring earnings with fully covered dividends.

 

In a departure from other cycles, the valuation decreases arising from the recent rerating have been at odds with occupational market sentiment, which has remained robust.  Our management of the portfolio and the types of assets we own are focused on areas where occupational demand is strongest, allowing us to lease vacant space across all sectors and deliver rental growth.  Both rental growth and falling vacancy have been a feature of the year’s performance, discussed in more detail in the Investment Manager’s Statement, and reflected in EPRA earnings per share increasing to 5.8p for the year compared to 5.6p in the previous year. 

 

Despite stability in valuations and earnings, and the prospect of rental growth, sentiment towards listed UK commercial real estate has caused weakness and volatility in the share price.  The relative weakness in the share price has enhanced the Company’s dividend yield[17], which we believe should be highlighted as a key metric for analysts and shareholders in assessing the ‘worth’ of Custodian Property Income REIT.  The prevailing share price[18] implied a dividend yield of 8.3%, compared to 6.3% and 5.8% at 31 March 2023 and 2022 respectively.

 

The Board continues to believe in the merits of the Company's income-focused investment strategy with an emphasis on regional, below-institutional sized assets that are well-positioned to deliver rental growth.  These types of assets provide a clear yield advantage over larger properties with similar tenant profiles and allow us to generate higher income returns and capital growth for shareholders.

 

Dividends

 

The Company’s commitment to a property strategy that supports a relatively high dividend, fully covered by EPRA earnings, remains a defining characteristic.  In May 2024 the Board announced a 9% increase in the prospective dividend per share from 5.5p to 6.0p and a special dividend for the year of 0.3p per share to take the dividend for the year to 5.8p, which is testament to that commitment.

 

These dividend increases, which are expected to be fully covered by net rental income, reflect the improving earnings characteristics of the Company’s portfolio with recent asset management initiatives and the profitable disposal of vacant properties also increasing occupancy and crystallising rental growth.  Our Investment Manager continues to control costs tightly, while the Company’s substantially fixed-rate debt profile is keeping borrowing costs below the current market rate.  Based on the current forward interest rate curve the Board expects that the ongoing cost of the Company’s revolving credit facility will fall, improving earnings further.

 

The Board’s objective remains to continue to grow the dividend at a rate which is fully covered by net rental income and does not inhibit the flexibility of the Company’s investment strategy.

 

Net asset value

 

The NAV of the Company at 31 March 2024 was £411.8m, approximately 93.4p per share:

	Pence per share	£m
NAV at 31 March 2023	99.3	437.6
Valuation decrease and depreciation	(6.1)	(27.1)
Profit on disposal of investment property	0.3	1.4
Net loss on property portfolio	(5.8)	(25.7)
EPRA earnings	5.8	25.7
Dividends paid during the year[19]	(5.5)	(24.2)
Costs of aborted acquisitions[20]	(0.4)	(1.6)
NAV at 31 March 2024	93.4	411.8

 

Valuations decreased by £27.1m during the year but appear to have now largely stabilised and the Company saw a return to a positive quarterly NAV total return per share in Q4 of 1.6%, and -0.4% for the full year as shown above.  A property valuation commentary is detailed in the Investment Manager’s report.  The movement in NAV also reflects the payment of interim dividends of 5.5p per share during the year, but does not include any provision for the approved dividends totalling 1.675p per share to be paid on 31 May 2024. 

 

Strategy for future growth

 

On 19 January 2024 the Company announced a potential all-share merger with abrdn Property Income Trust Limited (“API”) (“the Merger”) but at General Meetings on 27 March 2024 API shareholder support was below the requisite 75% needed to pass, meaning the Merger did not proceed.

 

Having heeded clear calls from the market regarding the need for consolidation amongst the listed REITs, we worked with our Investment Manager and the API board of directors ("the API Board") to negotiate what we and the Company’s advisers believed to be a fair deal for both our and API shareholders.  Our proposal was fully aligned with the existing investment strategies of both companies and structured on an adjusted net asset-to-net basis to ensure that the exchange ratio was based upon the latest respective underlying property valuations. Furthermore, it was unanimously recommended by the API Board and allowed both API and our shareholders to benefit from the long-term benefits of being invested in a combined business which brought together two highly complementary portfolios, with a growing and fully covered dividend.

 

We were therefore disappointed that despite very strong support from Company shareholders, the majority of votes cast by API shareholder being in favour of the resolutions was not enough to meet the 75% threshold required to approve the Merger.  In fact, shareholders accounting for just 14% of API's register proved sufficient to prevent the resolutions passing. These votes were, we understand, primarily from institutional investors who believe a 'managed wind-down' of API's portfolio will better protect shareholder value, despite the API Board clearly and publicly opposing this conclusion.

 

I would like to reiterate the point I made at the time of the transaction, that the Board and our Investment Manager viewed the Merger as an augmentation of, rather than critical to, the strategy that the Company has pursued successfully over the 10 years since it launched in 2014.  Instead of gaining a jump in scale via the Merger, the Company will maintain its strategy of incremental growth and, most importantly, continue to offer shareholders an attractive dividend from a highly diversified portfolio, significant rental growth potential, low costs relative to its peers, as well as a strong balance sheet with a low cost of debt.

 

Custodian Property Income REIT remains committed to growth, despite the thwarted attempt to merge with API.  Through the first 10 years of trading the Company has grown, largely organically, but also via corporate acquisitions, with an over six-fold increase in the size of the portfolio from £90m of property assets at IPO to £589m currently across a portfolio of 155 properties, compared to 40 at launch.  This growth has not only improved shareholder liquidity, it has also increased diversification, both mitigating property specific and tenant risk while stabilising earnings.

 

The Board of Custodian Property Income REIT still believes that there is a strong case for consolidation and we intend to seek opportunities to purchase complementary portfolios via mergers or corporate acquisitions, similar to our successful acquisition of Drum Income Plus REIT plc (“DRUM”) in 2021.

 

Borrowings

 

The Company’s net gearing increased from 27.4% LTV at 31 March 2023 to 29.2% during the year.  Property disposals since the year end have reduced pro-forma net gearing to 27.9%, drawing the LTV closer to the Company’s 25% medium-term target.

 

The proportion of the Company’s drawn debt facilities with a fixed rate of interest was 78% at 31 March 2024 (2023: 81%), significantly mitigating interest rate risk for the Company and maintaining the accretive margin between the Company’s 4.1% (2023: 3.8%) weighted average cost of debt and property portfolio EPRA topped-up net initial yield[21] (“NIY”) of 6.6% (2023: 6.2%). 

 

The Company’s debt is summarised in Note 16.

 

Investment Manager

 

The performance of the Investment Manager is reviewed each year by the Management Engagement Committee.  During the year the fees charged by the Investment Manager were £4.0m (2023: £4.5m) in respect of annual management, administrative and transaction fees, resulting in an ongoing charges ratio excluding direct property expenses of 1.24% (2023: 1.23%), which compares favourably to the peer group.

 

Further details of fees payable to the Investment Manager are set out in Note 19.

 

The Board continues to be pleased with the performance of the Investment Manager, particularly its effective communication programme with shareholders, continued successful asset management initiatives and capital improvements to the Company’s portfolio, which mitigated decreases in valuations, enhanced the environmental performance and maintained occupancy and income.  As a result the Board believes the continued appointment of the Investment Manager is in the interests of the shareholders as a whole.

 

Board

 

Succession

 

After nine years as Chairman of the Company David Hunter retired at the annual general meeting (“AGM”) on 8 August 2023, in line with the succession plan.  David chaired the board from the Company’s IPO in 2014.  On behalf of my fellow Directors and our shareholders, I would like to thank him for his significant contribution to the development of the Company over that period.  Following a search process in line with the Company’s policy when hiring new board members, I joined the Board on 9 May 2023 and took over from David Hunter as Chairman at the 2023 AGM.

 

Diversity

 

The Board is conscious of the importance stakeholders place on diversity and understands a diverse Board brings constructive challenge and fresh perspectives to discussions. The Company follows the AIC Code which recommends:

 

• The Board has a combination of skills, experience and knowledge; and
• Both appointments and succession plans should be based on merit and objective criteria and, within this context, should promote diversity of gender, social and ethnic backgrounds, cognitive and personal strengths.

 

Sustainability

 

The Board recognises that its decisions have an impact on the environment, people and communities.  The Board also believes that the Company’s property strategy and ESG aspirations create a compelling rationale to make environmentally beneficial improvements to its property portfolio, which have a direct correlation on a property’s ability to generate future income, and incorporate ESG best practice into everything the Company does.  Further details of the Company’s approach to sustainability can be found in the ESG Committee report.

 

Investment policy

 

During the year, the Company amended its Investment Policy, as set out below, to better align with its stated property and growth strategies and to provide more flexibility when considering future acquisitions:

 

• Amending its target portfolio characteristics from ‘properties with individual values of less than £15m at acquisition’ to ‘smaller, regional, core/core-plus properties that provide enhanced income returns’.  While smaller lot-size properties will continue to dominate the strategy, we believe their characteristics can be found in a wider range of properties that offer the same enhanced income characteristics, which are not purely defined by lot-size.

• Clarifying that the Company’s growth strategy may involve strategic property portfolio acquisitions and corporate consolidation, such transactions potentially including public and private companies, holding companies and special purpose vehicles.

 

General meeting voting

 

At the Company’s AGM on 8 August 2023 resolutions to re-elect Ian Mattioli and Elizabeth McMeikan as Directors of the Company received votes against of 41.6% and 23.7% respectively, which comprised 9.8% and 5.8% respectively of total shareholders due to a 23% turnout rate.  I have since sought feedback from shareholders, which identified that votes against were primarily a result of perceived ‘over-boarding’ due to Ian’s roles as CEO of Mattioli Woods plc and Chair of Kanabo Group plc, and Elizabeth’s roles as Chair of Nichols plc and Non-Executive Director of Dalata Hotel Group plc and McBride plc.  These institutional shareholders applied stricter internal voting policies than Institutional Shareholder Services which allow fewer ‘mandates’ and their voting policies do not acknowledge the generally lower time commitments as Directors of investment companies or companies of a relatively small size.  The Nominations Committee is satisfied with Ian and Elizabeth’s attendance and responsiveness to the demands of being Directors of the Company.  I believe additional roles offer Directors helpful insight and experience which benefits the Boards on which they sit and I do not intend to ask my colleagues to reduce their additional roles.

 

The Company’s Articles require that at every seventh AGM a Continuation Resolution be proposed but at the 2020 AGM this was not brought to the attention of the Board and, as a result, a Continuation Resolution was not proposed.  On 21 November 2023 the Company passed a Special Resolution at a General Meeting (“GM”) to release the Company and its directors from an historical obligation to propose a Continuation Vote at the 2020 AGM and ratify this breach of the Company’s Articles.  The Continuation Resolution in 2020 was overlooked during a period of strong performance by the Company relative to its peers and amidst the COVID-19 pandemic.  Shareholders were not pressing for such a resolution at that time and the Board is not aware of any desire for a Continuation Resolution to be considered at this stage either. As a result, the Board did not propose a replacement Continuation Resolution at the GM and the next Continuation Resolution will be proposed per the Articles at the fourteenth AGM of the Company expected to be held in 2027.

 

Outlook

 

I am grateful for the support of a wide range of shareholders with the majority classified as private client or discretionary wealth management investors.  Custodian Property Income REIT’s investment and dividend strategy and diversified portfolio are well suited to investors looking for a close proxy to direct real estate investment but in a managed and liquid structure. 

 

While the Company’s portfolio is well placed to benefit from any upwards rerating in sector valuations as the economy improves, capturing rental growth to support earnings will continue to be the key focus of the Investment Manager as discussed in its report.  In an inflationary environment and with a lack of supply of modern, smaller regional properties we expect to see continued rental growth over the year ahead.  Furthermore, where we can provide space that meets the modern environmental standards demanded by both legislation and tenants, we expect to see additional rental growth. 

 

It will be this growth in income that is likely to form the greater component of total return over the next phase of the property market and we believe that Custodian Property Income REIT’s strong income yielding portfolio, supported by higher-than-peer group EPRA EPS[22], will continue to underpin shareholder returns.

 

David MacLellan

Chairman

12 June 2024

 

Investment Manager’s report

 

The UK property market

 

The year to 31 March 2024 has felt like a turning point in the UK commercial property market.  Data shows the industrial and logistics sector, which represents 49% of the Custodian Property Income REIT portfolio by value, has shown modest capital value growth and consistent rental growth month on month.  While retail and office values have fallen, month on month falls have been at a decreasing rate, with retail moving back into growth in March 2024.  This return to growth was led by retail warehousing which comprises 21% of Custodian Property Income REIT’s portfolio by value.  Data reported by CBRE highlights this slowing of valuation falls, recording all property capital values decreasing by 3.9% in the 12 months to December 2023, but falling by just 0.4% in the three months to March 2024 and only 0.1% in the month of March 2024.

 

This market data is supported by the performance of the Company’s portfolio which recorded a cessation in valuation falls in the quarter ended 31 March 2024.  The first green shoots of investor confidence showed in early 2024, rooted in an expectation of falling interest rates and an acknowledgement that, in many sectors of the property market, valuations had adjusted sufficiently to reflect investor sentiment.  However, the early part of 2024 witnessed an increase in the five year swap rate, and a hiatus in the improving inflation statistics.  These factors may have delayed a recovery, but a recovery is still expected over the next 12 months as inflation settles and interest rate decreases follow. 

 

Core statistics from the Company’s portfolio tell a more promising story than investor sentiment might suggest.  Over the year to 31 March 2024, on a like-for-like basis, the contractual rental income of the portfolio has grown by 5.6% and the estimated rental value has grown by 3.6%.  Occupancy rates have increased from 90.3% to 91.7% by the year end, and post year end have improved still further to c.93%.  This points to the strength in occupational markets and a greater level of confidence from tenants than from investors.  These positive numbers are set against a portfolio valuation which fell modestly, on a like-for-like basis by 4.0%, but was flat for the final quarter, supporting the suggestion that we may have reached a turning point in sentiment and valuations.

 

Further support for a recovery comes from a recent report from Acuitus on the commercial auction market, which recorded the busiest first quarter since the previous peak in Q1 2017.  Prior cycles’ data shows that increased activity in the commercial auction market has been a lead indicator for a general market recovery, by some nine months.

 

The table below shows the reversionary potential of the portfolio by sector, by comparing EPRA topped-up NIY to the equivalent yield, which factors in expected rental growth and the letting of vacant units.  Across the whole portfolio, valuers’ estimated rental values are 15% (2023: 16%) ahead of passing rent and while part of the reversionary potential is due to vacancy, the balance is this latent rental growth which will be unlocked at rent review and lease renewal.

Sector	EPRA topped-up NIY 31 March 2024	Equivalent yield[23]  31 March 2024
Industrial	5.4%	6.7%
Retail warehouse	8.0%	7.4%
Other	7.1%	8.0%
Office	7.1%	9.8%
High street retail	9.9%	8.1%
	6.6%	7.5%

 

Prevailing property investment approach

 

Based on our assessment of the current market, our strategy of a regionally focused diversified portfolio, set out below, has proven resilient.  We expect to reinvest the proceeds from selective disposals in funding capital expenditure to improve the environmental credentials of the portfolio and to pay down variable rate debt.  Over the long-term we intend to focus on:

 

• Maintaining weighting to industrial and logistics – assets in this sector still have latent rental growth and strong occupier demand for small/’mid-box’ units;
• Retail warehousing let off low rents which are starting to show rental growth and supply side restrictions;
• Selective regional offices with a focus on strong city centre locations instead of out-of-town business parks;
• Drive-through expansion involving acquisition and development where rental growth is anticipated;
• Selective high street retail assets in the country’s strongest locations where rents have stabilised and there is potential for growth; and
• Refurbishment of existing property, maximising all opportunities to invest in the quality of our assets and support our ESG goals.

 

Sectoral view

 

Industrial and logistics

 

Rental growth remains strongest in the industrial and logistics sector which accounts for the largest share of the Company’s rent roll.  Lack of supply, and in some urban areas reducing supply, limited development of smaller and ‘mid-box’ industrial units and construction cost inflation have all combined to focus occupational demand and create low vacancy rates, driving rental growth for new-build regional industrial units and well specified, refurbished space.  The industrial sector is also providing the greatest opportunity for solar panels, generally referred to as photovoltaic (“PV”) installations, which is not only delivering on our environmental commitments but also growing revenue through the sale of the electricity generated to tenants via a power purchase agreement.

 

In summary:

 

• Occupational demand is robust
• Limited supply of modern, “low carbon”, buildings
• Latent rental growth potential
• Target sector for well-priced opportunities

 

Retail warehouse

 

Retail warehousing pricing has shown much greater volatility than demonstrated by the leasing market where we are starting to experience some rental growth, particularly in our favoured sub-sectors of food, homewares, DIY and the discounters.  Vacancy rates are very low and future rental growth appears affordable for occupiers. 

 

The combination of convenience, lower costs per square foot and the complementary offer to online retail has kept these assets trading strongly.  As the second largest sector in the Custodian Property Income REIT portfolio, the recovery in market sentiment towards out-of-town retail is positive and vacancy rates remain low.

 

In summary:

 

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

 

Offices

 

In the office sector, a much clearer picture is emerging of how tenants will use and occupy offices in the new world of hybrid working.  Occupiers are demanding much higher levels of amenity both from their offices and from their office locations.  This favours modern, flexible office space in city centre locations with strong transport links and high environmental credentials.  Where this space can be provided there appears to be meaningful rental growth, but conversely office space that cannot meet these criteria risks becoming obsolete and will need to be re-purposed.  In our portfolio we have seen strong rental growth in Oxford and central Manchester where we have refurbished offices to meet the new market demand, despite overall valuation decreases from negative market sentiment.  Meanwhile, over the past few years, we have been selling out of town, business park offices where rental growth prospects are low, and/or vacancy risks are high.

 

While there is talk of ‘stranded assets’ that are incapable of meeting modern environmental standards, obsolescence in commercial property and particularly in offices is a well understood concept.  For many years offices have required regular updating and refurbishment to meet prevailing tenant requirements.  The focus on environmental improvements is little different and we believe that the offices in the portfolio will be able to keep up with modern requirements or be profitably re-purposed.

 

In summary:

 

• Occupiers demanding much higher levels of amenity
• Strong rental growth in key locations
• Valuation decreases reflect overall negative sentiment

 

High street retail

 

We have been a seller of smaller retail units in market towns where we do not forecast rental growth.  We continue to see low vacancy rates in prime locations and occupier demand, from both retail and leisure operators, should be supportive of future rental growth.

 

In summary:

 

• Low vacancy rates in prime locations
• Rents have bottomed out
• Rental yields are supporting dividends

 

Other

 

Sub-sector of ‘Other’ sector assets	Weighting by income 31 March 2024	Weighting by income 31 March 2023
Gym	18%	18%
Drive-through	17%	17%
Motor trade	17%	16%
Pub and restaurant	15%	20%
Leisure	13%	13%
Other, including day nursery and hotel	13%	8%
Trade counter	7%	8%
	100%	100%

 

The additional diversification provided by the ‘other’ or ‘alternative’ sector of the commercial property market has long been a differentiator and mitigator of risk for the Company.  It continues to be a target sector with opportunities for the development of drive-through units being explored on existing sites and the roll out of public access electric vehicle (“EV”) chargers on retail parks adding to the rent roll.

 

Property portfolio balance

 

Property portfolio summary

	2024	2023
Property portfolio value[24]	£589.1m	£613.6m
Separate tenancies	335	319
EPRA vacancy rate	8.3%	9.7%
Assets	155	161
Weighted average unexpired lease term to first break of expiry (“WAULT”)	4.9 years	5.0 years
EPRA topped-up NIY	6.6%	6.2%
Weighted average EPC rating	C (53)	C (58)

 

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

Sector	Valuation 31 March 2024  £m	Weighting by income[25] 31 March 2024	Valuation 31 March 2023  £m	Weighting by income 31 March 2023	Valuation movement £m	Weighting by value 31 March 2024	Weighting by value 31 March 2023
Industrial	291.4	40%	295.1	40%	0.4	49%	48%
Retail warehouse	122.7	23%	131.8	23%	(10.2)	21%	21%
Other	78.8	13%	78.6	13%	(1.2)	13%	13%
Office	63.9	16%	71.7	16%	(13.5)	11%	12%
High street retail	32.3	8%	36.4	8%	(2.5)	6%	6%
Total	589.1	100%	613.6	100%	(27.0)	100%	100%

 

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

 

Disposals

 

Owning the right properties at the right time is a key element of effective property portfolio management, which necessarily involves periodically selling properties to balance the property portfolio.  Custodian Property Income REIT is not a trading company but identifying opportunities to dispose of assets significantly ahead of valuation or that no longer fit within the Company’s investment strategy is important.

 

The Company sold the following properties during the year for an aggregate consideration of £18.2m, reflecting an aggregate premium of 12% to 31 March 2023 valuations (shown below):

 

• Industrial unit in Milton Keynes for £8.0m, £1.0m ahead of valuation;
• Industrial unit in Weybridge for £6.0m, £0.1m ahead of valuation;
• Offices on Pride Park, Derby for £2.0m, £0.6m ahead of valuation;
• Day nursery in Chesham for £0.6m, £0.1m below valuation; and
• High street retail units in Cirencester and Bury St Edmunds for £1.6m at valuation.

 

Since the year end the Company has sold a vacant industrial unit in Warrington for £9.0m and a vacant former car showroom in Redhill for £2.3m, which had an aggregate year-end value of £11.0m.

 

Asset management

 

During the year we have remained focused on active asset management, completing 15 rent reviews at an aggregate 23% increase in annual rent from £2.8m to £3.4m, along with 47 new lettings, lease renewals and lease regears, with rental levels remaining affordable to our occupiers.  In aggregate these initiatives increased property capital value by £9.5m.

 

ESG

 

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

 

The weighted average EPC across the portfolio is following a positive trajectory towards an average B rating (equivalent to a score of between 25 and 50).  With energy efficiency a core tenet of the Company’s asset management strategy and with tenant requirements aligning with our energy efficiency goals we see this as an opportunity to secure greater tenant engagement and higher rents. 

 

Outlook

 

We remain confident that our ongoing close asset management of the portfolio, which still offers a number of wide-ranging opportunities to add value, will unlock its reversionary potential, enhance cash flow and support consistent returns.  Coupled with the strength of the Company’s balance sheet, this has enable growth in the dividend and should continue to support our high income return strategy. 

 

Richard Shepherd-Cross

for and on behalf of Custodian Capital Limited

Investment Manager

12 June 2024
 

 

Financial review

 

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

 

 

Rental revenue increased by 4.0% compared to the year ended 31 March 2023 with contractual passing rent increasing by 2.6% from £42.0m to £43.1m during the year, driven primarily by occupancy improving from 90.3% to 91.7%.

 

During the year we deployed £19.0m (2023: £11.1m) of variable rate debt on property redevelopments and refurbishments, including spend on EV chargers and PV installation.  This capital expenditure was primarily incurred on Leeds and Manchester offices and industrial units in Redditch and Ashby-de-la-Zouch.  The aggregate estimated rental value (“ERV”) of these assets has increased by 21.7% since commencement of these works, which will be reflected in subsequent year earnings when the properties are let. 

 

Base rate (SONIA) increased from c.4.2% to c.5.2% during the year and, in aggregate, these rising interest rates and deployment of debt increased finance costs on the Company’s variable rate revolving credit facility (“RCF”) facility.  However, growth in the rent roll more than offset these costs, increasing EPRA earnings per share to 5.8p (2023: 5.6p), facilitating payment of a fully covered ‘special’ dividend on 31 May 2024.  This increase in recurring earnings demonstrates the robust nature of the Company’s diverse property portfolio despite significant economic headwinds.

 

During the year sentiment towards real estate continued to be affected by concerns over high interest rates and the outlook for medium-term earnings, although Q4 showed a flat like-for-like valuation movement following 18 months of previous decreases which offered some optimism.  Over the entire year, however, this overall sentiment resulted in a £27.0m valuation decrease (2023: £95.0m decrease) and an associated loss before tax of £1.5m (2023: £65.8m loss). 

 

Dividends

 

The Company paid dividends totalling 5.5p per share during the year (£24.2m) comprising a fourth interim dividend relating to the year ended 31 March 2023 of 1.375p, and three quarterly interim dividends of 1.375p per share relating to the year ended 31 March 2024.

 

On 31 May 2024 the Company paid a fourth quarterly interim dividend per share of 1.375p for the quarter ended 31 March 2024 and a special dividend of 0.3p per share relating to the year, totalling £7.4m.  Dividends relating to the year ended 31 March 2024 of 5.8p (2023: 5.5p) were 100.7% (2023: 102.2%) covered by EPRA earnings of £25.7m (2023: £24.8m), as calculated in Note 22.

 

Debt financing

 

The Company operates with a conservative level of net gearing, with target borrowings over the medium-term of 25% of the aggregate market value of all properties at the time of drawdown.  The Company’s net gearing increased from 27.4% LTV last year to 29.2% at the year end primarily due to £27.0m of valuation decreases and £19.0m of deployment on capital expenditure.

 

On 10 November 2023 the Company agreed an extension to the RCF with Lloyds Banking Group plc (“Lloyds”) for a term of three years, with options to extend the term by a further year on each of the first and second anniversaries of the renewal.  The RCF includes an ‘accordion’ option with the facility limit initially set at £50m, which can be increased up to £75m subject to Lloyds’ agreement.  The headline rates of annual interest now include a LIBOR transition fee previously applied separately, increasing by 12bps to between 1.62% and 1.92% above SONIA, determined by reference to the prevailing LTV ratio.  As a result there is no change to the aggregate margin from the renewal.

 

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

 

• A £50m RCF with Lloyds with interest of between 1.62% and 1.92% above SONIA, determined by reference to the prevailing LTV ratio of a discrete security pool of assets, and expiring on 10 November 2026 (with extension options to 2028).  The facility limit can be increased to £75m with Lloyds’ approval;
• A £20m term loan facility with Scottish Widows Limited (“SWIP”) repayable in August 2025, with fixed annual interest of 3.935%;

• A £45m term loan facility with SWIP repayable in June 2028, with fixed annual interest of 2.987%; and
• A £75m term loan facility with Aviva Real Estate Investors (“Aviva”) comprising:

• A £35m tranche repayable on 6 April 2032, with fixed annual interest of 3.02%;
• A £15m tranche repayable on 3 November 2032 with fixed annual interest of 3.26%; and
• A £25m tranche repayable on 3 November 2032 with fixed annual interest of 4.10%.

 

Each facility has a discrete security pool, comprising a number of the Company’s individual properties, over which the relevant lender has security and the following covenants:

 

• The maximum LTV of each discrete security pool is either 45% or 50%, with an overarching covenant on the Company’s property portfolio of a maximum of either 35% or 40% LTV; and
• Historical interest cover, requiring net rental income from each discrete security pool, over the preceding three months, to exceed either 200% or 250% of the facility’s quarterly interest liability.

 

At the year end the Company had £105.3m (18% of the property portfolio) of unencumbered assets which could be charged to the security pools to enhance the LTV on the individual loans.

 

The weighted average cost of the Company’s drawn debt facilities at 31 March 2023 was 4.1% (2023: 3.8%), with a weighted average maturity of 5.3 years (2023: 5.9 years).  At 31 March 2024 the Company had £39.0m (2023: £33.5m) drawn under its Lloyds RCF, meaning 78% (2023: 81%) of the Company’s drawn debt facilities were at fixed rates of interest. 

 

This high proportion of fixed rate debt significantly mitigates long-term interest rate risk for the Company and provides shareholders with a beneficial margin between the fixed cost of debt and income returns from the property portfolio.

 

The current SONIA forward curve indicates an expectation of decreasing interest rates over the next four years which would boost earnings.

 

Key performance indicators

 

The Board reviews the Company’s quarterly performance against a number of key financial and non-financial measures:

 

• EPS and EPRA EPS – reflect the Company’s ability to generate recurring earnings from the property portfolio which underpin dividends;
• Dividends per share and dividend cover - to provide an attractive level of income to shareholders, fully covered from net rental income.  The Board reviews target dividends in conjunction with detailed financial forecasts to ensure that target dividends are being met and are maintainable;
• Target dividend per share – an expectation of the Company’s ability to deliver an income stream to shareholders for the forthcoming year;
• NAV per share total return – reflects both the NAV growth of the Company and dividends payable to shareholders.  The Board assesses NAV per share total return over various time periods and compares the Company's returns to those of its peer group of listed, closed-ended property investment funds;
• Share price total return – reflects the movement in share price and dividends payable to shareholders, giving returns that were available to shareholders during the year;
• NAV/NTA per share, share price and market capitalisation – reflect various measures of shareholder value at a point in time;
• Net gearing – measures the Company’s borrowings as a proportion of its investment property, balancing the additional returns available from utilising debt with the need to effectively manage risk;
• Weighted average cost of debt – measures the cost of the Company’s borrowings based on amounts drawn and base rate at the year end;
• OCR – measures the annual running costs of the Company and indicates the Board’s ability to operate the Company efficiently, keeping costs low to maximise earnings from which to pay fully covered dividends; and
• Weighted average EPC rating – measures the overall environmental performance of the Company’s property portfolio.

 

The Board considers the key performance measures over various time periods and against similar funds.  A record of these measures is disclosed in the Financial highlights and performance summary, the Chairman's statement and the Investment Manager's report.

EPRA performance measures

 

EPRA Best Practice Recommendations, which are APMs, have been disclosed to facilitate comparison with the Company’s peers through consistent reporting of key real estate specific performance measures.

	2024	2023
EPRA EPS (p)	5.8	5.6
EPRA Net Tangible Assets (“NTA”) and Net Reinstatement Value (“NRV”) per share (p)	93.4	99.3
EPRA Net Disposal Value (“NDV”) per share (p)	97.3	101.0
EPRA NIY	6.3%	5.8%
EPRA ‘topped-up’ NIY	6.6%	6.2%
EPRA vacancy rate	8.3%	9.7%
EPRA cost ratio (including direct vacancy costs)	22.0%	23.3%
EPRA cost ratio (excluding direct vacancy costs)	17.7%	18.7%
EPRA LTV	29.6%	27.3%
EPRA capital expenditure (£m)	17.0	63.7
EPRA like-for-like annual rent (£m)	41.0	36.6

 

• EPRA EPS – a key measure of the Company’s underlying operating results and an indication of the extent to which current dividend payments are supported by earnings
• EPRA NAV per share metrics – make adjustments to the NAV per the IFRS financial statements to provide stakeholders with information on the fair value of the assets and liabilities of a real estate investment company, under different scenarios.  EPRA NTA - assumes that entities buy and sell assets, thereby crystallising certain levels of unavoidable deferred tax. EPRA NDV – includes an adjustment for the fair value of fixed rate debt.
• EPRA NIY and ‘topped-up’ NIY – alternative measures of property portfolio valuation based on cash passing rents at the reporting date and once lease incentive periods have expired, net of vacant property operating costs
• EPRA vacancy rate – ERV of vacant space as a percentage of the ERV of the whole property portfolio and offers insight into the additional rent generating capacity of the portfolio.
• EPRA cost ratios – alternative measures of ongoing charges based on expenses, excluding operating expenses of rental property recharged to tenants, but including increases in the doubtful debt provision, compared to gross rental income
• EPRA LTV – a measure of gearing including all payables and receivables
• EPRA capital expenditure - capital expenditure incurred on the Company’s property portfolio during the year
• EPRA like-for-like rental growth - a measure of passing rent of the property portfolio, excluding acquisitions and disposals
• EPRA Sustainability Best Practice Recommendations – environmental performance measures focusing on emissions and resource consumption which create transparency to potential investors by enabling a comparison against peers and set a direction towards improving the integration of ESG into the management of the Company’s property portfolio.

 

Outlook

 

The Company’s business model has remained resilient during the year and we have further mitigated against refinancing risk by renewing the Company’s RCF.  We have a scalable cost structure and flexible capital structure to be on the front foot when opportunities present themselves to raise new equity and exploit acquisition opportunities. 

 

Ed Moore

Finance Director

for and on behalf of Custodian Capital Limited

Investment Manager

12 June 2024

 

Principal risks and uncertainties

 

The Board has overall responsibility for reviewing the effectiveness of the system of risk management and internal control which is operated by the Investment Manager.  During the year the Board has performed a robust assessment of the principal and emerging risks facing the Company through a periodic review of its risk register.  The Company’s risk management process is designed to identify, evaluate and mitigate the significant risks the Company faces.  At least annually, the Board undertakes a risk review, with the assistance of the Audit and Risk Committee, to assess the effectiveness of the Investment Manager’s risk management and internal control systems.  During this review, no significant failings or weaknesses were identified in respect of risk management, internal control and related financial and business reporting.  Further information on the risk governance and risk management processes are included in the Internal control and risk management section of the Governance report.

 

The Company holds a portfolio of high quality property let predominantly to institutional grade tenants and is primarily financed by fixed rate debt.  It does not undertake speculative development.

 

There are a number of potential risks and uncertainties which could have a material impact on the Company's performance over the forthcoming financial year and could cause actual results to differ materially from expected and historical results.  The Directors have assessed the risks facing the Company, including risks that would threaten the business model, future performance, solvency or liquidity.  The table below outlines the principal risks identified, but does not purport to be exhaustive as there may be additional risks that materialise over time that the Company has not yet identified or has deemed not likely to have a potentially material adverse effect on the business.

 

Risk on business	Likelihood and impact	Overall change in risk from last year	Mitigating factors	Appetite
Loss of revenue Tenant default due to a cessation or curtailment of trade An increasing number of tenants exercising contractual breaks or not renewing at lease expiry Enforced reduction in contractual rents through a CVA or legislative changes Property environmental performance insufficient to attract tenants or maintain rents Decreases in ERVs resulting in decreases in passing rent to secure long-term occupancy Expiries or breaks concentrated in a specific year Unable to re-let void units Low UK economic growth impacting the occupational property market	Likelihood: Moderate   Impact: High   Loss of revenue has an immediate impact on earnings and dividend capacity.  There is also an increased risk of breaching interest cover covenants on borrowings detailed in Note 16, which could ultimately lead to default.	No change   Discussed further in the Investment Manager’s report	Diverse property portfolio covering all key sectors and geographical areas The Company has 335 individual tenancies with the largest tenant accounting for 3.6% of the rent roll Investment policy limits the Company’s rent roll to no more than 10% from a single tenant and 50% from a single sector Primarily institutional grade tenants Focused on established business locations for investment Active management of lease expiry profile considered in forming acquisition and disposal decisions Building specifications typically not tailored to one user Strong tenant relationships Significant focus and pro-active investment in asset-by-asset environmental performance to maintain or improve rental levels	The Board relies on the Investment Manager’s processes regarding due diligence on acquisitions and lettings. A degree of tenant covenant risk and short WAULTs are accepted due to the nature of the business
Decreases in property portfolio valuation Reduced property market sentiment and investor demand affecting market pricing Decreases in sector-specific ERVs Loss of contractual revenue Tenants exercising contractual breaks or not renewing at lease expiry Change in demand for space Property environmental performance insufficient to attract tenants Properties concentrated in a specific geographical location or sector Lack of transactional evidence	Likelihood: Moderate   Impact: Moderate   Significant valuation decreases increase the risk of non-compliance with LTV covenants on borrowings, detailed in Note 16, which could ultimately lead to default.  The Company’s sensitivity to valuation decreases is considered in Going concern and longer-term viability below	Decreased – the rate of valuation decreases has fallen during the year due to stabilising UK economic outlook, and the potential for interest rate decreases following improving inflation figures   Discussed further in the Chairman’s statement and Investment Manager’s report	Occupational demand has been resilient during the year despite economic headwinds Active property portfolio diversification between office, industrial (distribution, manufacturing and warehousing), retail warehousing, high street retail and other Investment policy limits the Company’s property portfolio to no more than 50% in any specific sector or geographical region Smaller lot-size business model limits exposure to individual asset values High quality assets in good locations should remain popular with investors Significant focus on asset-by-asset ESG performance and pro-actively investing in environmental performance to maintain or improve demand	There is no certainty that property values will be realised. This is an inherent risk of property investment. The Investment Manager aims to minimise this risk through its asset selection and active asset management initiatives.
Financial Reduced availability or increased cost of arranging or servicing debt Breach of financial and non-financial borrowing covenants Significant increases in interest rates Refinancing risk from upcoming expiries	Likelihood: Moderate   Impact: High   Increases in interest rates in the short-term reduce earnings and dividend capacity to the extent the Company has drawn balances on its variable rate RCF.  Lack of availability of financing would have a significant impact on property strategy if properties needed to be sold to repay loans.	No change	The Company has three lenders The Company’s weighted average maturity on its debt is c. six years Target net gearing of 25% LTV on property portfolio 78% of drawn debt facilities at the year end at a fixed rate of interest Significant unencumbered properties available to cure any potential breaches of LTV covenants Ongoing monitoring and management of the forecast liquidity and covenant position	The Board and Investment Manager focus on having funding in place to take advantage of opportunities as they arise. The Board’s aim is to minimise this risk to the extent possible through arranging longer-term facilities.
Operational Inadequate performance, controls or systems operated by the Investment Manager Over-reliance on key investment manager personnel	Likelihood: Low   Impact: High   Increased risk of sub-optimal returns impacting earnings and dividend capacity, ineffective risk or threat management or decisions made on inaccurate information. Inability to retain or recruit staff of an appropriate calibre	No change	Ongoing review of performance by independent Board of Directors Outsourced internal audit function reporting directly to the Audit and Risk Committee External depositary with responsibility for safeguarding assets and performing cash monitoring The Investment Management Agreement contain key personnel provisions designed to mitigate the potential impact of key individuals leaving	The Board relies on the Investment Manager’s processes. Its appetite for such risk is low
Regulatory and legal Adverse impact of new or revised legislation or regulations, or by changes in the interpretation or enforcement of existing government policy, laws and regulations Non-compliance with the REIT regime[26] or changes to the Company’s tax status Properties aren’t compliant with prevailing fire safety legislation	Likelihood: Low   Impact: High   Reputational damage could impact demand for shares.  Earnings and dividend capacity would decrease with penalties/fines for non-compliance or through an increased tax charge  Remedial costs or claims could be substantial	No change	Strong compliance culture External professional advisers are engaged to review and advise upon control environment, ensure regulatory compliance and advise on the impact of changes Business model and culture embraces FCA principles REIT regime compliance is considered by the Board in assessing the Company’s financial position and setting dividends and by the Investment Manager in making operational decisions Fire safety policy goes over and above minimum requirements	The Board has no appetite for non-compliance
Business interruption Cyber-attack results in the Investment Manager being unable to use its IT systems and/or losing data Terrorism or pandemics interrupt the Company’s operations through impact on either the Investment Manager or the Company’s assets or tenants	Likelihood: Moderate   Impact: High   Reputational damage from not being able to communicate with shareholders on a timely and accurate basis.  Loss of earnings and dividend capacity if contractual rents not invoiced. Fines and penalties from non-compliance with reporting requirements.	No change	Data is regularly backed up and replicated and the Investment Manager’s IT systems are protected by anti-virus software and firewalls that are regularly updated Fire protection and access/security 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	The Board relies on the Investment Manager’s processes. It has no appetite for such risk
ESG Failure to appropriately manage the environmental performance of the property portfolio, resulting in it not meeting the required standards of environmental legislation and making properties unlettable or unsellable ESG policies and targets being insufficient to meet the required standards of stakeholders Non-compliance with environmental reporting requirements Insufficient electricity supply to maintain tenant requirements for clean energy due to inadequate infrastructure Unsuccessful investment in new technology	Likelihood: Moderate   Impact: Moderate   Risk of reputational damage, suboptimal returns for shareholders, decreased asset liquidity, reduced access to debt and capital markets and poor relationships with stakeholders	No change   Discussed further in the ESG Committee report	The Company has engaged specialist environmental consultants to advise the Board on compliance with requirements and adopting best practice where possible The Company has a published ESG policy which seeks to improve energy efficiency and reduce emissions The ESG Committee ensures compliance with environmental requirements, the ESG policy and environmental KPIs At a property level an environmental assessment is undertaken which influences decisions regarding acquisitions, refurbishments and asset management initiatives Upgrading power supplies where availability permits All investments are scrutinised by the Investment Manager’s Investment Committee.  Investment Committee reports include a dedicated ESG rationale. Carbon reducing technology is a key part of the carbon-reduction strategy but is not invested in speculatively and only established products are considered.	The Board has a low tolerance for non-compliance with risks that adversely impact reputation, stakeholder sentiment and asset liquidity.
Acquisitions Unidentified liabilities associated with the acquisition of new properties (whether acquired directly or via a corporate structure)	Likelihood: Low   Impact: Moderate   Decrease in NAV and loss of shareholder value	No change	Comprehensive due diligence is undertaken in conjunction with professional advisers and the provision of insured warranties and indemnities are sought from vendors where appropriate Acquired companies’ trade and assets are hived-up into Custodian Property Income REIT plc and the acquired entities are subsequently liquidated	The Board accepts risk with such transactions with the mitigations opposite used to manage risk where possible

 

Emerging risks

 

No emerging risks have been added to the Company’s risk register during the year, albeit the impact of the ongoing conflicts in Ukraine and Gaza add to uncertainty over the global macroeconomic outlook.

 

Going concern and longer-term viability

 

The Board assesses the Company’s prospects over the long-term, taking into account rental growth expectations, climate related risks, longer-term debt strategy, expectations around capital investment in the portfolio and the UK’s long-term economic outlook.  At quarterly Board meetings, the Board reviews summaries of the Company’s liquidity position and compliance with loan covenants, as well as forecast financial performance and cash flows.

 

Forecast

 

The Investment Manager maintains a detailed forecast model projecting the financial performance of the Company over a period of three years, which provides a reasonable level of accuracy regarding projected lease renewals, asset-by-asset capital expenditure, property acquisitions and disposals, rental growth, interest rate changes, cost inflation and refinancing of the Company’s debt facilities ahead of expiry.  The detailed forecast model allows robust sensitivity analysis to be conducted and over the three year forecast period included the following assumptions:

 

• A 1% annual loss of contractual revenue through CVA or tenant default;
• No changes to the demand for leasing the Company’s assets going forwards, maintaining the prevailing occupancy rate;
• No portfolio valuation movements;
• Completing a programme of asset disposals;
• Rental growth, captured at lease expiry, based on current ERVs adjusted for consensus forecast changes;
• The Company’s capital expenditure programme to invest in its existing assets continues as expected; and
• Interest rates follow the prevailing forward curve.

 

The Directors have assessed the Company’s prospects and longer-term viability over this three-year period in accordance with Provision 36 of the AIC Code, and the Company’s prospects as a going concern over a period of 12 months from the date of approval of the Annual Report, using the same forecast model and assessing the risks against each of these assumptions.

 

The Directors note that the Company has performed strongly during the year despite economic headwinds and valuation decreases, with like-for-like rents and occupancy increasing over the last 12 months.

 

Sensitivities

 

Sensitivity analysis involves flexing key assumptions, taking into account the principal risks and uncertainties and emerging risks detailed in the Strategic Report, and assessing their impact on the following areas:

Covenant compliance

 

The Company operates the loan facilities summarised in Note 16.  At 31 March 2024 the Company had sufficient headroom on lender covenants at a portfolio level with:

 

• Net gearing of 29.2% compared to a maximum LTV covenant of 35% on its Aviva facilities and 40% on its Lloyds and SWIP facilities, with £105.3m (18% of the property portfolio) unencumbered by the Company’s borrowings; and
• 63% minimum headroom on interest cover covenants for the quarter ended 31 March 2024.

 

Over the one and three year assessment periods the Company’s forecast model projects a small increase in net gearing and an increase in headroom on interest cover covenants. Reverse stress testing has been undertaken to understand what circumstances would result in potential breaches of financial covenants over these periods.  While the assumptions applied in these scenarios are possible, they do not represent the Board’s view of the likely outturn, but the results help inform the Directors’ assessment of the viability of the Company.  The testing indicated that:

 

• The rate of loss of contractual rent on the borrowing facility with least headroom would need to deteriorate by 10% (for the going concern assessment period) to breach its interest cover covenant from the levels included in the Company’s prudent base case forecasts, assuming no unencumbered properties were charged.  This loan expires in August 2025 and for the remainder of the longer-term viability assessment period contractual rent on properties secured under the loan with next least headroom would need to deteriorate by 22% to breach its interest cover covenant, assuming no unencumbered properties were charged; or
• At a portfolio level, property valuations would have to decrease by 17% from the 31 March 2024 position to risk breaching the overall 35% LTV covenant for both assessment periods.  Note 10 details the expected movements in the valuation of investment properties if the equivalent yield at 31 March 2024 is increased or decreased by 0.25% and if the estimated rental value is increased or decreased by 5.0%, which the Board believes are reasonable sensitivities to apply given historical changes.

 

The Board notes that the February 2024 IPF Forecasts for UK Commercial Property Investment survey suggests an average 2.0% increase in rents during 2024 with capital value increases of 0.8%.  The Board believes that the valuation of the Company’s property portfolio will prove resilient due to its higher weighting to industrial assets and overall diverse and high-quality asset and tenant base comprising over 150 assets and over 300 typically 'institutional grade' tenants across all commercial sectors.

 

Liquidity

 

At 31 March 2024 the Company had:

 

• £7.2m of unrestricted cash and £11.0m undrawn RCF (can be increased to £36.0m with Lloyds’ consent), with gross borrowings of £179.0m resulting in low net gearing of 29.2%, with no short-term refinancing risk and a weighted average debt facility maturity of 5.3 years; and
• An annual contractual rent roll of £43.1m, with interest costs on drawn loan facilities of only c. £7.4m per annum.

 

The Company’s forecast model projects it will have sufficient cash and undrawn facilities to settle its target dividends and its expense and interest liabilities over the one and three year assessment periods. 

 

As detailed in Note 16, the Company’s £20m loan with SWIP expires in August 2025.  The Board anticipates lender support in agreeing a refinancing, and would seek to utilise the undrawn RCF to repay the loan on expiry in the unlikely event of lender support being withdrawn.

 

Results of the assessments

 

Based on the prudent assumptions within the Company’s forecasts regarding the factors set out above, the Directors expect that over the one-year and three-year periods of their assessment:

 

• The Company has surplus cash to continue in operation and meet its liabilities as they fall due;
• Borrowing covenants are complied with; and
• REIT tests are complied with.

 

Section 172 statement and stakeholder relationships

 

The Directors consider that in conducting the business of the Company over the course of the year they have complied with Section 172(1) of the Companies Act 2006 (“the Act”) by fulfilling their duty to promote the success of the Company and act in the way they consider, in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole.

 

Issues, factors and stakeholders

 

The Board has direct engagement with the Company’s shareholders and seeks a rounded and balanced understanding of the broader impact of its decisions through regular engagement with its stakeholder groups (detailed below) to understand their views, typically through feedback from the Investment Manager and the Company’s broker, which is regularly communicated to the Board via quarterly meetings.  Stakeholder engagement also ensures the Board is kept aware of any significant changes in the market, including the identification of emerging trends and risks, which in turn can be factored into its strategy discussions.

 

Management of the Company’s day-to-day operations has been delegated to the Investment Manager, Custodian Capital Limited, and the Company has no employees.  This externally managed structure allows the Board and the Investment Manager to have due regard to the impact of decisions on the following matters specified in Section 172 (1) of the Act:

 

Section 172(1) factor	Approach taken
Likely consequences of any decision in the long-term	The business model and strategy of the Company is set out within the Strategic Report.  Any deviation from or amendment to that strategy is subject to Board and, if necessary, shareholder approval.  The Company’s Management Engagement Committee ensures that the Investment Manager is operating within the scope of the Company’s investment objectives.   At least annually, the Board considers a budget for the delivery of its strategic objectives based on a three year forecast model.  The Investment Manager reports non-financial and financial key performance indicators to the Board, set out in detail in the Business model and strategy section of the Strategic report, at least quarterly which are used to assess the outcome of decisions made.   The Board’s commitment to keeping in mind the long-term consequences of its decisions underlies its focus on risk, including risks to the long-term success of the business.    The investment strategy of the Company is focused on medium to long-term returns and minimising the Company’s impact on communities and the environment and as such the long-term is firmly within the sights of the Board when all material decisions are made. The board gains an understanding of the views of the Company’s key stakeholders from the Investment Manager, broker, distribution agents and Management Engagement Committee, and considers those stakeholders’ interests and views in board discussions and long-term decision-making.
The interests of the Company’s employees	The Company has no employees as a result of its external management structure, but the Directors have regard to the interests of the individuals responsible for delivery of the property management and administration services to the Company to the extent that they are able to.   The Company’s Nominations Committee is responsible for applying the diversity policy set out in the Nominations Committee Report to Board recruitment.
The need to foster the Company’s business relationships with suppliers, customers and others	Business relationships with suppliers, tenants and other counterparties are managed by the Investment Manager.  Suppliers and other counterparties are typically professional firms such as lenders, property agents and other property professionals, accounting firms and legal firms and tenants with which the Investment Manager often has a longstanding relationship.  Where material counterparties are new to the business, checks, including anti money laundering checks where appropriate, are conducted prior to transacting any business to ensure that no reputational or legal issues would arise from engaging with that counterparty.  The Company also periodically reviews the compliance of all material counterparties with relevant laws and regulations such as the Modern Slavery Act 2015.  The Company pays suppliers in accordance with pre-agreed terms.  The Management Engagement Committee engages directly with the Company’s key service providers providing a direct line of communication for receiving feedback and resolving issues.   Because the Investment Manager directly invoices most tenants and collects rent without using managing agents, it has open lines of communication with tenants and can understand and resolve any issues promptly.
The impact of the Company’s operations on the community and the environment	The Board recognises the importance of supporting local communities where the Company’s assets are located and seeks to invest in properties which will be fit for future purpose and which align with ESG targets.  The Company also seeks to benefit local communities by creating social value through employment, viewing its properties as a key part of the fabric of the local economy.    The Board takes overall responsibility for the Company’s impact on the community and the environment and its ESG policies are set out in the ESG report.    The Company’s approach to preventing bribery, money laundering, slavery and human trafficking is disclosed in the Governance report.
The desirability of the Company maintaining a reputation for high standards of business conduct	The Board believes that the ability of the Company to conduct its investment business and finance its activities depends in part on the reputation of the Board and Investment Manager’s team.  The risk of falling short of the high standards expected and thereby risking its business reputation is included in the Board’s review of the Company’s risk register, which is conducted periodically.  The principal risks and uncertainties facing the business are set out in that section of the Strategic report.  The Company’s requirements for a high standard of conduct and business ethics are set out in the Governance report.
The need to act fairly as between members of the Company	The Company’s shareholders are a very important stakeholder group.  The Board oversees the Investment Manager’s investor relations programme which involves the Investment Manager engaging routinely with the Company’s shareholders.  The programme is managed by the Company’s broker and distribution agents and the Board receives prompt feedback from both the Investment Manager and broker on the outcomes of meetings and presentations.  The Board and Investment Manager aim to be open with shareholders and available to them, subject to compliance with relevant securities laws.  The Chairman of the Company and other Non-Executive Directors make themselves available for meetings as appropriate and attend the Company’s AGM.    The investor relations programme is designed to promote formal engagement with investors and is typically conducted after each half-yearly results announcement.  The Investment Manager also engages with existing investors who may request meetings and with potential new investors on an ad hoc basis throughout the year, including where prompted by Company announcements.  Shareholder presentations are made available on the Company’s website.  The Company has a single class of share in issue with all members of the Company having equal rights.

 

Methods used by the Board

 

The main methods used by the Directors to perform their duties include:

 

• Board Strategy meetings are held typically twice annually to review all aspects of the Company’s business model and strategy and assess the long-term success of the Company and its impact on key stakeholders;
• The Management Engagement Committee assesses the Company’s engagements with its key service providers.  The Investment Manager reports on their performance to the Committee which in turn reports key issues to the Board.  The responsibilities of the Management Engagement Committee are detailed in the Management Engagement Committee report;
• The Board is ultimately responsible for the Company’s ESG activities set out in the ESG Committee report, which it believes are a key part of benefitting the local communities where the Company’s assets are located;
• The Board’s risk management procedures set out in the Governance report identify the potential consequences of decisions in the short, medium and long-term so that mitigation plans can be put in place to prevent, reduce or eliminate risks to the Company and wider stakeholders;
• The Board sets the Company’s purpose, values and strategy, detailed in the Business model and strategy section of the Strategic report, and the Investment Manager ensures they align with its culture;
• The Board carries out direct shareholder engagement via the AGM and Directors attend shareholder meetings on an ad hoc basis;
• External assurance is received through internal and external audits and reports from brokers and advisers;
• Specific training for existing Directors and induction for new Directors as set out in the Governance report; and
• Ad hoc meetings to consider corporate acquisition opportunities.

 

Principal decisions in the year

 

The Board has delegated operational functions to the Investment Manager and other key service providers.  In particular, responsibility for management of the Company’s property portfolio has been delegated to the Investment Manager.  The Board retains responsibility for reviewing the engagement of the Investment Manager and exercising overall control of the Company, reserving certain key matters as set out in the Governance report.  The principal non-routine decisions taken by the Board during the year, and its rationale on how the decision was made, were:

 

Decision	How decision was made
Recommending an all-share merger with API	The Company undertook a significant amount of property, legal, financial and tax due diligence work on API and the Company’s advisors modelled various scenarios for the combined entity to understand the projected short and medium-term impact of the Merger on the combined portfolio and its earnings.  The Board held meetings at least weekly to understand progress and any issues arising to remain in position to make decisions regarding the Merger as they arose.  The key challenges faced by the Board focused on ensuring forecasts and potential risks were accurately identified to ensure the transaction was in the best long-term interests of all stakeholders by increasing earnings within the Company’s stated investment policy.
Amending the Company’s Investment Policy	The amendments made during the year clarified the existing strategy and were considered necessary to ensure the policy did not inhibit the Investment Manager seeking growth in the most beneficial way for shareholders.
Setting target dividends at 6.0pps for the year ending 31 March 2025 and paying a special dividend of 0.3pps for the year.	In line with the Board’s dividend policy of paying a high, fully covered level of dividend which maximises shareholder returns without negatively influencing property strategy.
Renewing the RCF, originally expiring in September 2024, and increasing total funds available under the facility from £50m to £75m, subject to lender approval, for a term of three years with an option to extend the term by a further two years.	To mitigate refinancing risk, secure the existing competitive margin for a further two years.  The increase in total funds available provides flexibility over the medium-term for the Company’s property strategy to invest in its current buildings and, minimise cash drag for larger equity or debt issuance.
Appointing a new Director as detailed in the Chairman’s statement.	The Board believes David MacLellan brings a wealth of experience and skills including leadership, financial and investment company expertise, and governance, which will benefit shareholders.

 

Due to the nature of these decisions, a variety of stakeholders had to be factored into the Board’s discussions.  Each decision was announced at the time, so that all stakeholders were aware of the decisions. 

 

Stakeholders

 

The Board recognises the importance of stakeholder engagement to deliver its strategic objectives and believes its stakeholders are vital to the continued success of the Company.  The Board is mindful of stakeholder interests and keeps these at the forefront of business and strategic decisions.  Regular engagement with stakeholders is fundamental to understanding their views.  The below section highlights how the Company engages with its key stakeholders, why they are important and the impact they have on the Company and therefore its long-term success, which the Board believes helps demonstrate the successful discharge of its duties under s172(1) of the Act.  The Board assesses the effectiveness of stakeholder engagement through discussion with the Investment Manager and the Company’s broker.

Stakeholder	Stakeholder interests	Stakeholder engagement
Tenants The Investment Manager understands the businesses occupying the Company’s assets and seeks to create long-term partnerships and understand their needs to deliver fit for purpose real estate and develop asset management opportunities to underpin long-term maintainable income growth and maximise occupier satisfaction	High quality assets Profitability Efficient operations Knowledgeable and committed landlord Flexibility to adapt to the changing UK commercial landscape Buildings with strong environmental credentials	Regular dialogue through rent collection process Review published data, such as accounts, trading updates and analysts’ reports Ensured buildings comply with safety regulations and insurance requirements Most tenants contacted to request environmental performance data and offer an engagement programme on their premises’ environmental performance Occupancy has remained above 90% during the year
The Investment Manager and its employees As an externally managed fund the Company’s key service provider is the Investment Manager and its employees are a key stakeholder.  The Investment Manager’s culture aligns with that of the Company and its long-standing reputation of operating in the smaller lot-size market is key when representing the Company	Long-term viability of the Company Long-term relationship with the Company Well-being of the Investment Manager’s employees Being able to attract and retain high-calibre staff Maintaining a positive and transparent relationship with the Board	Board and Committee meetings Face-to-face and video-conference meetings with the Chairman and other Board Directors Quarterly KPI reporting to the Board Board evaluation, including feedback from key Investment Manager personnel Ad hoc meetings and calls
Suppliers A collaborative relationship with our suppliers, including those to whom key services are outsourced, ensures that we receive high quality services to help deliver strategic and investment objectives	Collaborative and transparent working relationships Responsive communication Being able to deliver service level agreements	Board and Committee meetings One-to-one meetings Annual review of key service provider engagements by the Management Engagement Committee, which includes appropriateness of internal policies and payment practices
Shareholders Building a strong investor base through clear and transparent communication is vital to building a successful business and generating long-term growth	Maintainable growth Attractive level of income returns Strong Corporate Governance and environmental credentials Transparent reporting framework	Annual and half year presentations AGM Market announcements and corporate website Regular investor feedback received from the Company’s broker, distribution agents and PR adviser as well as seeking feedback from face-to-face meetings On-going dialogue with analysts
Lenders Our lenders play an important role in our business.  The Investment Manager maintains close and supportive relationships with this group of long-term stakeholders, characterised by openness, transparency and mutual understanding	Stable cash flows Stronger covenants Being able to meet interest payments Maintaining agreed gearing ratios Regular financial reporting Proactive notification of issues or changes	Regular covenant reporting Regular catch-up calls
Government, local authorities and communities As a responsible corporate citizen the Company is committed to engaging constructively with central and local government and ensuring we support the wider community	Openness and transparency Proactive compliance with new legislation Proactive engagement Support for local economic and environmental plans and strategies Playing its part in providing the real estate fabric of the economy, giving employers a place of business	Engagement with local authorities where we operate Two way dialogue with regulators and HMRC

 

Approval of Strategic report

 

The Strategic report, (incorporating the Business model and strategy, Chairman’s statement, Investment Manager’s report, Financial report, Principal risks and uncertainties and Section 172 statement and stakeholder relationships) was approved by the Board of Directors and signed on its behalf by:

 

David MacLellan

Chairman

12 June 2024

 

Board of Directors and Investment Manager personnel

 

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

 

David MacLellan - Independent Chairman

 

David was appointed to the Board on 9 May 2023 and took over the Chairman role on 8 August 2023.

 

He has over 35 years’ experience in private equity and fund management and an established track record as Chairman and Non-Executive director of public and private companies.  During his executive career David was an Executive Director of Aberdeen Asset Management plc following its purchase of Murray Johnstone Limited (“MJ”) in 2000.  At the time of the purchase he was Group Managing Director of MJ, a Glasgow based fund manager managing inter alia closed and open ended funds, having joined MJ’s venture capital team in 1984.  Prior to joining MJ he qualified as a Chartered Accountant at Arthur Young McLelland Moores (now EY).

 

David is currently Chairman and Managing Partner of RJD Partners, a private equity business; Non-Executive Director and Audit Committee Chairman of Lindsell Train Investment Trust plc, a closed-ended equity investment fund; Non-Executive Director and Audit Committee Chair of J&J Denholm Limited, a family owned business involved in shipping, logistics, seafoods and industrial services; and Non-Executive Director and Audit Committee Chair of Aquila Renewables plc, an investment trust.

 

David is former Chairman and Senior Independent Director (“SID”) of John Laing Infrastructure Fund, a FTSE 250 investment company, former Chairman of Stone Technologies Limited, former Chairman of Havelock Europa plc and former Non-Executive Director of Maven Income & Growth VCT 2 plc.  He was also Chairman of Britannic UK Income Fund for 12 years until 2013 as well as a director of a number of private equity backed businesses.

 

David’s other roles are not considered to impact his ability to allocate sufficient time to the Company to discharge his responsibilities effectively. 

 

Elizabeth McMeikan – Senior Independent Director

 

Elizabeth’s substantive career was with Tesco plc, where she was a Stores Board Director before embarking on a non-executive career in 2005. 

 

Elizabeth is currently Chair of Nichols plc, the AIM listed diversified soft drinks group.  She is Senior Independent Director and Remuneration Committee Chair at both Dalata Hotel Group plc, the largest hotel group in Ireland, and at McBride plc, Europe’s leading manufacturer of cleaning and hygiene products.  She is also Non-Executive Director of Fresca Group Limited, a fruit and vegetable grower and importer. 

 

Previously Elizabeth was SID and Remuneration Committee Chair at both The Unite Group plc and at Flybe plc, SID at J D Wetherspoon plc and Chair of Moat Homes Limited.

 

Elizabeth’s other roles are not considered to impact her ability to allocate sufficient time to the Company to discharge her responsibilities effectively. 

 

Hazel Adam - Independent Director

 

Hazel was an investment analyst with Scottish Life until 1996 and then joined Standard Life Investments.  As a fund manager she specialised in UK and then Emerging Market equities.  In 2005 Hazel joined Goldman Sachs International as an executive director on the new markets equity sales desk before moving to HSBC in 2012, holding a similar equity sales role until 2016.

 

Hazel was an independent non-executive director of Aberdeen Latin American Income Fund Limited until June 2023 and holds the CFA Level 4 certificate in ESG Investing and the Financial Times Non-Executive Directors Diploma.

 

Chris Ireland FRICS - Independent Director

 

Chris joined international property consultancy King Sturge in 1979 as a graduate and has worked his whole career across the UK investment property market.  He ran the investment teams at King Sturge before becoming Joint Managing Partner and subsequently Joint Senior Partner prior to its merger with JLL in 2011.

 

Chris was Chief Executive Officer of JLL UK between 2016 and 2021 and subsequently its Chair from 2021 until retiring in March 2023.  Chris is committed to leading the property sector on sustainability and supporting the debate around the climate emergency. 

 

Chris is a former Chair of the Investment Property Forum and is a Non-Executive Director of Le Masurier, a Jersey based family trust with assets across the UK, Germany and Jersey.  Chris is also a keen supporter of the UK homelessness charity Crisis.

 

Chris’ other roles are not considered to impact his ability to allocate sufficient time to the Company to discharge his responsibilities effectively. 

 

Malcolm Cooper FCCA FCT - Independent Director

 

Malcolm is a qualified accountant and an experienced FTSE 250 company Audit Committee Chair with an extensive background in corporate finance and a wide experience in infrastructure and property. 

 

Malcolm worked with Arthur Andersen and British Gas/BG Group/Lattice before spending 15 years with National Grid with roles including Managing Director of National Grid Property and Global Tax and Treasury Director, and culminated in the successful sale of a majority stake in National Grid’s gas distribution business, now known as Cadent Gas.

 

Malcolm is currently a Non-Executive Director of Morgan Sindall Group plc, a FTSE 250 UK construction and regeneration business, Chairing its Audit and Responsible Business Committees.  He is also Senior Independent Director and Credit Committee Chair of MORhomes plc, Non-Executive Director, Remuneration Committee Chair and Audit Committee Chair at Southern Water Services Limited and Non-Executive Director and Audit and Risk Committee Chair at Local Pensions Partnership Investment.  Malcolm was recently appointed as President of the Association of Corporate Treasurers.

 

Malcolm was previously Senior Independent Director and Audit Committee Chair at CLS Holdings plc, a Non-Executive Director of St William Homes LLP and a member of the Financial Conduct Authority’s Listing Authority Advisory Panel.

 

Malcolm’s other roles are not considered to impact his ability to allocate sufficient time to the Company to discharge his responsibilities effectively. 

 

Ian Mattioli MBE - Director

 

Ian is CEO of Mattioli Woods with over 35 years’ experience in financial services, wealth management and property businesses and is the founder director of Custodian Property Income REIT.  Together with Bob Woods, Ian founded Mattioli Woods, the AIM-listed wealth management and employee benefits business which is the parent company of the Investment Manager.  Mattioli Woods now has over £15bn of assets under management, administration and advice.  Ian is responsible for the vision and operational management of Mattioli Woods and instigated the development of its investment proposition, including the syndicated property initiative that developed into the seed portfolio for the launch of Custodian Property Income REIT. 

 

Ian is a non-independent Director of the Company due to his role with Mattioli Woods and is viewed by the Board as representative of Mattioli Woods’ client shareholders which represent approximately 68% of the Company’s shareholders.

 

His personal achievements include winning the London Stock Exchange AIM Entrepreneur of the Year award and CEO of the year in the 2018 City of London wealth management awards.  Ian was awarded an MBE in the Queen's 2017 New Year's Honours list for his services to business and the community in Leicestershire and was appointed High Sheriff of Leicestershire in March 2021, an independent non-political Royal appointment for a single year.  Ian and his family own 6.1m shares in the Company.

 

Ian’s other roles are not considered to impact his ability to allocate sufficient time to the Company to discharge his responsibilities effectively.

 

Investment Manager personnel

 

Short biographies of the Investment Manager’s key personnel and senior members of its property team are set out below:

 

Richard Shepherd-Cross MRICS - Managing Director

 

Richard qualified as a Chartered Surveyor in 1996 and until 2008 worked for JLL, latterly running its national portfolio investment team.

 

Since joining Mattioli Woods in 2009, Richard established Custodian Capital as the Property Fund Management subsidiary to Mattioli Woods and in 2014 was instrumental in the establishment of Custodian Property Income REIT from Mattioli Woods’ syndicated property portfolio and its 1,200 investors.  Following the successful IPO of the Company, Richard has overseen the growth of the Company to its current property portfolio of over £0.6bn. Richard and his close family own 0.4m shares in the Company.

 

Ed Moore FCA – Finance Director

 

Ed qualified as a Chartered Accountant in 2003 with Grant Thornton, specialising in audit, financial reporting and internal controls across its Midlands practice.  He is Finance Director of Custodian Capital with responsibility for all day-to-day financial aspects of its operations. 

 

Since IPO in 2014 Ed has overseen the Company raising over £300m of new equity, arranging or refinancing eight loan facilities and completing four corporate acquisitions, including leading on the acquisition of DRUM in 2021.  Ed’s key responsibilities for Custodian Property Income REIT are accurate external and internal financial reporting, ongoing regulatory compliance and maintaining a robust control environment.  Ed is Company Secretary of Custodian Property Income REIT and is a member of the Investment Manager’s Investment Committee.  Ed is also responsible for the Investment Manager’s environmental initiatives, attending Custodian Property Income REIT ESG Committee meetings and co-leading the Investment Manager’s ESG working group. 

 

Ian Mattioli MBE - Founder and Chair

 

Ian’s biography is set out above.

 

Alex Nix MRICS – Assistant Investment Manager

 

Alex graduated from Nottingham Trent University with a degree in Real Estate Management before joining Lambert Smith Hampton, where he spent eight years and qualified as a Chartered Surveyor in 2006.

 

Alex is Assistant Investment Manager to Custodian Property Income REIT having joined Custodian Capital in 2012.  Alex heads the Company’s property management and asset management initiatives, assists in sourcing and executing new investments and is a member of the Investment Manager’s Investment Committee.

 

Tom Donnachie MRICS – Portfolio Manager

 

Tom graduated from Durham University with a degree in Geography before obtaining an MSc in Real Estate Management from Sheffield Hallam University.  Tom worked in London for three years where he qualified as a Chartered Surveyor with Workman LLP before returning to the Midlands first with Lambert Smith Hampton and then CBRE.

 

Tom joined Custodian Capital in 2015 as Portfolio Manager with a primary function to maintain and enhance the existing property portfolio and assist in the selection and due diligence process regarding new acquisitions.  Tom co-leads the Investment Manager’s environmental working group and attends Custodian Property Income REIT ESG Committee meetings. 

 

Javed Sattar MRICS – Portfolio Manager

 

Javed joined Custodian Capital in 2011 after graduating from Birmingham City University with a degree in Estate Management Practice.  Whilst working as a trainee surveyor on Custodian Property Income REIT’s property portfolio for Custodian Capital he completed a PGDip in Surveying via The College of Estate Management and qualified as a Chartered Surveyor in 2017.

 

Javed operates as Portfolio Manager managing properties predominantly located in the North-West of England.

 

Consolidated statement of comprehensive income

For the year ended 31 March 2024

		Year ended 31 March 2024	Year ended 31 March 2023
	Note	£000	£000
Revenue	4	46,243	44,147
Investment management		(3,451)	(3,880)
Operating expenses of rental property rechargeable to tenants		(3,280)	(3,526)
directly incurred		(4,032)	(3,530)
Professional fees		(791)	(911)
Directors’ fees		(349)	(318)
Other expenses		(683)	(934)
Expenses		(12,586)	(13,099)
Abortive acquisition costs		(1,557)	-
Operating profit before loss on property portfolio, financing and group reorganisations		32,100	31,048
Unrealised loss on revaluation of investment property: relating to property revaluations	10	(26,972)	(91,551)
relating to costs of acquisition	10	-	(3,426)
Valuation decrease		(26,972)	(94,977)
Profit on disposal of investment property		1,418	4,368
Net loss on investment property		(25,554)	(90,609)
Operating profit/(loss)		6,546	(59,561)

 

Finance income	6	78	22
Finance costs	7	(8,126)	(6,282)
Net finance costs		(8,048)	(6,260)
Loss before tax		(1,502)	(65,821)
Income tax expense	8	-	-
Loss for the year and total comprehensive income for the year, net of tax		(1,502)	(65,821)
Attributable to:
Owners of the Company		(1,502)	(65,821)
Earnings per ordinary share:
Basic and diluted (p)	3	(0.3)	(14.9)
Basic and diluted EPRA (p)	3	5.8	5.6

 

The profit for the year arises from continuing operations.

Consolidated and Company statement of financial position

As at 31 March 2024

Registered number: 08863271

 

Group and Company				Note	31 March 2024 £000	31 March 2023 £000
Non–current assets
Investment property				10	578,122	613,587
Property, plant and equipment				11	2,957	1,113
Investments				12	-	-
Total non-current assets					581,079	614,700
Current assets
Assets held for sale				10	11,000	-
Trade and other receivables				13	3,330	3,748
Cash and cash equivalents				15	9,714	6,880
Total current assets					24,044	10,628
Total assets					605,123	625,328
Equity
Issued capital				17	4,409	4,409
Share premium				17	250,970	250,970
Merger reserve				17	18,931	18,931
Retained earnings				17	137,510	163,259
Total equity attributable to equity holders of the Company					411,820	437,569
Non-current liabilities
Borrowings				16	177,290	172,102
Other payables					569	570
Total non-current liabilities					177,859	172,672
Current liabilities
Trade and other payables				14	8,083	7,666
Deferred income					7,361	7,421
Total current liabilities					15,444	15,087
Total liabilities					193,303	187,759
Total equity and liabilities					605,123	625,328

 

The parent Company’s loss for the year was £1,502,000 (2023: loss of £57,671,000).

 

These consolidated and Company financial statements of Custodian Property Income REIT plc, company number 08863271, were approved and authorised for issue by the Board of Directors on 12 June 2024 and are signed on its behalf by:

 

David MacLellan

Chairman
 

Consolidated and Company statements of cash flows

For the year ended 31 March 2024

 

		Group		Company
		Year ended 31 March 2024	Year  ended 31 March 2023	Year ended 31 March 2024	Year  ended 31 March 2023
	Note	£000	£000	£000	£000
Operating activities
Loss for the year		(1,502)	(65,821)	(1,502)	(57,671)
Net finance costs		8,048	6,260	8,048	6,083
Valuation decrease of investment property	10	26,972	94,977	26,972	95,266
Impact of rent free	10	(2,105)	(1,677)	(2,105)	(1,690)
Net income from group reorganisations	12	-	-	-	(8,771)
Amortisation of right-of-use asset		7	8	7	8
Profit on disposal of investment property		(1,418)	(4,368)	(1,418)	(4,368)
Depreciation		133	112	133	112
Cash flows from operating activities before changes in working capital and provisions		30,135	29,491	30,135	28,969
Decrease in trade and other receivables		418	2,954	418	4,349
Increase/(decrease) in trade and other payables and deferred income		357	(2,104)	357	(1,559)
Cash generated from operations		30,910	30,341	30,910	31,759
Interest and other finance charges		(7,694)	(6,072)	(7,694)	(5,918)
Net cash inflows from operating activities		23,216	24,269	23,216	25,841
Investing activities
Purchase of investment property		-	(52,603)	-	(52,603)
Capital expenditure and development		(17,034)	(11,333)	(17,034)	(11,333)
Acquisition costs		-	(3,426)	-	(3,426)
Purchase of property, plant and equipment		(1,977)	(1,225)	(1,977)	(1,225)
Disposal of investment property		18,176	28,767	18,176	28,767
Costs of disposal of investment property		(134)	(237)	(134)	(237)
Interest and finance income received	6	78	22	78	22
Loan to subsidiaries		-	-	-	(23,228)
Cash acquired through the hive up of DRUM		-	-	-	835
Net cash outflows from investing activities		(891)	(40,035)	(891)	(62,428)
Financing activities
New borrowings	16	5,500	58,500	5,500	58,500
Repayment of borrowings and origination costs	16	(744)	(23,228)	(744)	-
Dividends paid	9	(24,247)	(24,250)	(24,247)	(24,250)
Net cash (outflow)/inflow from financing activities		(19,491)	11,022	(19,491)	34,250
Net increase/(decrease) in cash and cash equivalents		2,834	(4,744)	2,834	(2,337)
Cash and cash equivalents at start of the year		6,880	11,624	6,880	9,217
Cash and cash equivalents at end of the year		9,714	6,880	9,714	6,880

 

Consolidated statement of changes in equity

For the year ended 31 March 2024

 

	Note	Issued capital £000	Merger reserve £000	Share premium £000	Retained earnings £000	Total equity £000
As at 31 March 2022		4,409	18,931	250,970	253,330	527,640
Loss for the year		-	-	-	(65,821)	(65,821)
Total comprehensive loss for year		-	-	-	(65,821)	(65,821)
Transactions with owners of the Company, recognised directly in equity
Dividends	9	-	-	-	(24,250)	(24,250)
As at 31 March 2023		4,409	18,931	250,970	163,259	437,569
Loss for the year		-	-	-	(1,502)	(1,502)
Total comprehensive loss for year		-	-	-	(1,502)	(1,502)
Transactions with owners of the Company, recognised directly in equity
Dividends	9	-	-	-	(24,247)	(24,247)
As at 31 March 2024		4,409	18,931	250,970	137,510	411,820

 

Company statement of changes in equity

For the year ended 31 March 2024

 

	Note	Issued capital £000	Merger reserve £000	Share premium £000	Retained earnings £000	Total equity £000
As at 31 March 2022		4,409	18,931	250,970	245,180	519,490
Loss for the year		-	-	-	(57,671)	(57,671)
Total comprehensive loss for year		-	-	-	(57,671)	(57,671)
Transactions with owners of the Company, recognised directly in equity
Dividends	9	-	-	-	(24,250)	(24,250)
As at 31 March 2023		4,409	18,931	250,970	163,259	437,569
Loss for the year		-	-	-	(1,502)	(1,502)
Total comprehensive loss for year		-	-	-	(1,502)	(1,502)
Transactions with owners of the Company, recognised directly in equity
Dividends	9	-	-	-	(24,247)	(24,247)
As at 31 March 2024		4,409	18,931	250,970	137,510	411,820

 

Notes to the financial statements for the year ended 31 March 2024

 

1. Corporate information

 

The Company is a public limited company incorporated and domiciled in England and Wales, whose shares are publicly traded on the London Stock Exchange plc’s main market for listed securities.  The consolidated and parent company financial statements have been prepared on a historical cost basis, except for the revaluation of investment property, and are presented in pounds sterling with all values rounded to the nearest thousand pounds (£000), except when otherwise indicated.  The consolidated financial statements were authorised for issue in accordance with a resolution of the Directors on 12 June 2024.

 

2. Basis of preparation and accounting policies

 

1.     Basis of preparation

 

The consolidated financial statements and the separate financial statements of the parent company have been prepared in accordance with United Kingdom adopted international accounting standards and International Financial Reporting Standards (IFRSs) as issued by the IASB.  The financial statements have also been prepared in accordance with International Financial Reporting Standards as issued by the IASB.

 

The Company has taken advantage of the exemption in section 408 of the Companies Act 2006 not to present its own statement of comprehensive income.

 

Certain statements in this report are forward looking statements.  By their nature, forward looking statements involve a number of risks, uncertainties or assumptions that could cause actual results or events to differ materially from those expressed or implied by those statements.  Forward looking statements regarding past trends or activities should not be taken as representation that such trends or activities will continue in the future.  Accordingly, undue reliance should not be placed on forward looking statements.

 

2.     Basis of consolidation

 

The consolidated financial statements consolidate those of the parent company and its subsidiaries.  The parent controls a subsidiary if it is exposed, or has rights, to variable returns from its involvement with the subsidiary and has the ability to affect those returns through its power over the subsidiary.  Custodian Real Estate Limited has a reporting date in line with the Company.  All transactions and balances between group companies are eliminated on consolidation, including unrealised gains and losses on transactions between group companies.  Where unrealised losses on intra-group asset sales are reversed on consolidation, the underlying asset is also tested for impairment from a group perspective.  Amounts reported in the financial statements of the subsidiary are adjusted where necessary to ensure consistency with the accounting policies adopted by the Group.  Profit or loss and other comprehensive income of subsidiaries acquired or disposed of during the year are recognised from the effective date the Company gains control up to the effective date when the Company ceases to control the subsidiary.

 

3.     Business combinations

 

Where property is acquired, via corporate acquisitions or otherwise, the substance of the assets and activities of the acquired entity are considered in determining whether the acquisition represents a business combination or an asset purchase under IFRS 3 - Business Combinations. 

 

A business combination is a transaction or event in which an acquirer obtains control of one or more businesses.  A business is defined in IFRS 3 as an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing goods or services to customers, generating investment income (such as dividends or interest) or generating other income from ordinary activities.  To assist in determining whether a purchase of investment property via corporate acquisition or otherwise meets the definition of a business or is the purchase of a group of assets, the group will apply the optional concentration test in IFRS 3 to determine whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets.  If the concentration test is not met the group applies judgement to assess whether acquired set of activities and assets includes, at a minimum, an input and a substantive process by applying IFRS 3:B8 to B12D.  Where such acquisitions are not judged to be a business combination, due to the asset or group of assets not meeting the definition of a business, they are accounted for as asset acquisitions and the cost to acquire the corporate entity is allocated between the identifiable assets and liabilities of the entity based on their relative fair values at the acquisition date.  Accordingly no goodwill or additional deferred taxation arises.

 

Under the acquisition accounting method, the identifiable assets, liabilities and contingent liabilities acquired are measured at fair value at the acquisition date. The consideration transferred is measured at fair value which is calculated as the sum of the acquisition-date fair values of assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity interest issued by the Group in exchange for control of the acquiree. Acquisition-related costs are recognised in profit or loss as incurred.

 

4.     Application of new and revised International Financial Reporting Standards

 

During the year the Company adopted the following new standards with no impact on reported financial performance or position:

 

Amendments to IFRS 10 and IAS 28	Sale or Contribution of Assets between an Investor and its Associate or Joint Venture
Amendments to IAS 1	Classification of Liabilities as Current or Non-current
Amendments to IAS 1	Non-current Liabilities with Covenants
Amendments to IAS 7 and IFRS 7	Supplier Finance Arrangements
Amendments to IFRS 16	Lease Liability in a Sale and Leaseback

 

5.     Material accounting policies

 

The principal accounting policies adopted by the Group and Company and applied to these financial statements are set out below.

 

Going concern

 

The Directors believe the Company is well placed to manage its business risks successfully and the Company’s projections show that it should be able to operate within the level of its current financing arrangements for at least the 12 months from the date of approval of these financial statements, set out in more detail in the Directors’ report and Principal risks and uncertainties section of the Strategic report.  Accordingly, the Directors continue to adopt the going concern basis for the preparation of the financial statements.

 

Income recognition

 

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

 

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

 

Amounts received from occupiers to terminate leases or to compensate for dilapidation work not carried out by the occupier is recognised in the statement of comprehensive income when the right to receive them arises, typically at the cessation of the lease.

 

Lease incentives are recognised on a straight-line basis over the lease term. The initial direct costs incurred in negotiating and arranging an operating lease are recognised as an expense over the lease term on the same basis. 

 

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

 

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

 

Taxation

 

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

 

Investment property

 

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

 

Held-for-sale assets

 

Non-current assets are classified as held-for-sale if their carrying amount will be recovered through a sale transaction rather than through continuing use.  This condition is regarded as met only when the sale is highly probable and the asset is available for immediate sale in its present condition, generally considered to be on unconditional exchange of contracts.  Non-current assets classified as held for sale are valued externally on a market basis at the reporting date and recorded at valuation.

 

Group undertakings

 

Investments are included in the Company only statement of financial position at cost less any provision for impairment.  The hive up of the trade and assets of DRUM during the prior year was undertaken at their carrying value on the date of hive-up.  Trade since the date of the hive-up was included in the parent company results, whilst trade before hive-up was excluded.

 

Non-listed equity investments

 

Non-listed equity investments are classified at fair value through profit and loss and are subsequently measured using level 3 inputs, meaning valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.

 

Property, plant and equipment

 

Plant, machinery, fixtures and fittings are stated at cost less accumulated depreciation and accumulated impairment loss.

 

Depreciation is recognised so as to write off the cost of assets (less their residual values) over their useful lives, using the straight-line method, on the following bases:

 

EV chargers	10 years
PV cells	20 years

 

The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis.

 

Cash and cash equivalents

 

Cash and cash equivalents include cash in hand and on-demand deposits, and other short-term highly liquid investments that are held for the purpose of meeting short-term cash commitments rather than for investment or other purposes and are readily convertible into a known amount of cash and are subject to an insignificant risk of changes in value.

 

Other financial assets

 

Financial assets and financial liabilities are recognised in the balance sheet when the Company becomes a party to the contractual terms of the instrument.

 

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

 

Trade receivables are initially recognised at their transaction price and subsequently measured at amortised cost as the business model is to collect the contractual cash flows due from tenants. An impairment provision is created based on expected credit losses, which reflect the Company’s historical credit loss experience and an assessment of current and forecast economic conditions at the reporting date.

 

Financial liabilities and equity

 

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

 

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

 

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

 

Borrowings

 

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

 

Trade payables

 

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

 

Leases

 

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

 

Segmental reporting

 

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

 

6.     Key sources of judgements and estimation uncertainty

 

The preparation of the financial statements requires the Company to make estimates and assumptions that affect the reported amount of revenues, expenses, assets and liabilities and the disclosure of contingent liabilities.  If in the future such estimates and assumptions, which are based on the Directors’ best judgement at the date of preparation of the financial statements, deviate from actual circumstances, the original estimates and assumptions will be modified as appropriate in the period in which the circumstances change.

 

Judgements

 

No significant judgements have been made in the process of applying the Group’s and parent company's accounting policies, other than those involving estimations, that have had a significant effect on the amounts recognised within the financial statements.

 

Estimates

 

The accounting estimate with a significant risk of a material change to the carrying values of assets and liabilities within the next year relates to the valuation of investment property.  Investment property is valued at the reporting date at fair value.  Where an investment property is being redeveloped the property continues to be treated as an investment property.  Surpluses and deficits attributable to the Company arising from revaluation are recognised in profit or loss.  Valuation surpluses reflected in retained earnings are not distributable until realised on sale.  In making its judgement over the valuation of properties, the Company considers valuations performed by the independent valuers in determining the fair value of its investment properties.  The valuers make reference to market evidence of transaction prices for similar properties.  The valuations are based upon assumptions including future rental income, anticipated capital expenditure and maintenance costs (particularly in the context of mitigating the impact of climate change) and appropriate discount rates (ie property yields).  The key sources of estimation uncertainty within these inputs above are future rental income and property yields.  Reasonably possible changes to these inputs across the portfolio would have a material impact on its valuation.  The valuers have considered

the impact of climate change which has not had a material impact on the valuation.  Further detail on the Company’s climate related risks are set out in the recently published Asset Management and Sustainability report 2024.

 

The sensitivity analysis in Note 10 details the expected movements in the valuation of investment properties if the equivalent yield at 31 March 2024 is increased or decreased by 0.25% and if the estimated rental value is increased or decreased by 5.0%, which the Board believes are reasonable sensitivities to apply given historical changes.

 

3. Earnings per ordinary share

 

Basic EPS amounts are calculated by dividing net profit for the year attributable to ordinary equity holders of the Company by the weighted average number of ordinary shares outstanding during the year.

 

Diluted EPS amounts are calculated by dividing the net profit attributable to ordinary equity holders of the Company by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on the conversion of all the dilutive potential ordinary shares into ordinary shares.  There are no dilutive instruments in issue.  Any shares issued after the year end are disclosed in Note 21.

 

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

 

Group		Year ended 31 March 2024	Year ended 31 March 2023
Net loss and diluted net profit attributable to equity holders of the Company (£000)		(1,502)	(65,821)
Net loss on investment property and depreciation (£000)		25,687	90,609
Abortive acquisition costs		1,557	-
EPRA net profit attributable to equity holders of the Company (£000)		25,742	24,788
Weighted average number of ordinary shares:
Issued ordinary shares at start of the year (thousands)		440,850	440,850
Effect of shares issued during the year (thousands)		-	-
Basic and diluted weighted average number of shares (thousands)		440,850	440,850
Basic and diluted EPS (p)		(0.3)	(14.9)
Basic and diluted EPRA EPS (p)		5.8	5.6

 

4. Revenue

 

	Year ended 31 March 2024 £000	Year ended 31 March 2023 £000
Gross rental income from investment property	42,194	40,558
Income from recharges to tenants	3,280	3,526
Income from dilapidations	574	-
Other income	195	63
	46,243	44,147

 

5. Operating profit

 

Operating profit is stated after (crediting)/charging:

	Year ended 31 March 2024 £000	Year ended 31 March 2023 £000
Profit on disposal of investment property	(1,418)	(4,368)
Investment property valuation decrease	26,972	94,977
Net loss on investment property	25,554	90,609
Fees payable to the Company’s auditor and its associates for the audit of the Company’s annual financial statements	163	154
Fees payable to the Company’s auditor and its associates for other services	37	35
Administrative fee payable to the Investment Manager	511	581
Directly incurred operating expenses of vacant rental property	1,968	1,857
Directly incurred operating expenses of let rental property	1,124	1,286
Amortisation of right-of-use asset	7	8

 

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

 

6. Finance income

	Year ended 31 March 2024 £000	Year ended 31 March 2023 £000
Bank interest	78	22
Finance income	-	-
	78	22

 

7. Finance costs

	Year ended 31 March 2024 £000	Year ended 31 March 2023 £000
Amortisation of arrangement fees on debt facilities	432	220
Other finance costs	113	375
Bank interest	7,581	5,687
	8,126	6,282

 

8. Income tax

 

The tax charge assessed for the year is lower than the standard rate of corporation tax in the UK during the year of 25.0%.  The differences are explained below:

 

	Year ended 31 March 2024 £000	Year ended 31 March 2023 £000
Loss before income tax	(1,502)	(65,821)
Tax charge on profit at a standard rate of 25.0% (2023: 19.0%)	(376)	(12,506)
Effects of:
REIT tax exempt rental profits and gains	376	12,506
Income tax expense	-	-
Effective income tax rate	0.0%	0.0%

 

 

The standard rate of UK corporation tax increased to 25% on 1 April 2023.

 

The Company operates as a REIT and hence profits and gains from the property investment business are normally exempt from corporation tax.

 

9. Dividends

Group and Company	Year ended 31 March 2024 £000	Year ended 31 March 2023 £000
Interim dividends paid on ordinary shares relating to the quarter ended:   Prior year
- 31 March 2023: 1.375p (2022: 1.375p)	6,062	6,065
Current year
- 30 June 2023: 1.375p (2022: 1.375p)	6,061	6,062
- 30 September 2023: 1.375p (2022: 1.375p)	6,062	6,062
- 31 December 2023: 1.375p (2022: 1.375p)	6,062	6,061
	24,247	24,250

 

The Company paid a fourth interim dividend relating to the quarter ended 31 March 2024 of 1.375p per ordinary share and a special dividend relating to the year of 0.3p per ordinary share (totalling £7.4m) on 31 May 2024 to shareholders on the register at the close of business on 10 May 2024 which has not been included as liabilities in these financial statements.

 

10. Investment property and assets held for sale

 

Assets held-for-sale

 

Group and Company			At 31 March 2024 £000	At 31 March 2023 £000	At 31 March 2022 £000
Balance at the start of the year			-	-	-
Reclassification from investment property			11,000	-	-
Balance at the end of the year			11,000	-	-

Assets held-for-sale comprise a vacant industrial unit in Warrington and a vacant former car showroom in Redhill for, which had an aggregate year-end value of £11.0m.  Sale contracts for each were unconditionally exchanged before the year end and since the year end both assets have been sold for an aggregate £11.3m.

 

Investment property

 

	Group	Company
	£000	£000
At 31 March 2022	665,186	616,211
Impact of lease incentives	1,677	1,690
Additions	56,033	56,033
Transfers from group companies	-	49,251
Amortisation of right-of-use asset	(8)	(8)
Capital expenditure and development	9,954	9,954
Disposals	(24,278)	(24,278)
Valuation decrease before acquisition costs	(91,551)	(91,840)
Acquisition costs	(3,426)	(3,426)
Valuation decrease including acquisition costs	(94,977)	(95,266)
At 31 March 2023	613,587	613,587
Impact of lease incentives	2,105	2,105
Amortisation of right-of-use asset	(7)	(7)
Capital expenditure	17,034	17,034
Disposals	(16,625)	(16,625)
Valuation decrease	(26,972)	(26.972)
Reclassification as held-for-sale	(11,000)	(11,000)
At 31 March 2024	578,122	578,122

 

£486.8m (2023: £447.3m) of investment property was charged as security against the Company’s borrowings at the year end.  £0.6m (2023: £0.6m) of investment property comprises right-of-use assets.

 

The carrying value of investment property at 31 March 2024 comprises £493.0m freehold (2023: £526.1m) and £85.1m leasehold property (2023: £87.5m).  The aggregate historical cost of investment property and assets held-for-sale was £637.6m (2023: £633.9m).

 

Investment property is stated at the Directors’ estimate of its 31 March 2024 fair value.  Savills (UK) Limited (“Savills”) and Knight Frank LLP (“KF”), professionally qualified independent valuers, each valued approximately half of the property portfolio as at 31 March 2024 in accordance with the Appraisal and Valuation Standards published by the Royal Institution of Chartered Surveyors (“RICS”).  Savills and KF have recent experience in the relevant locations and categories of the property being valued.

 

Investment property has been valued using the investment method which involves applying a yield to rental income streams.  Inputs include yield, current rent and ERV.  For the year end valuation, the following inputs were used:

 

Sector	Valuation 31 March 2024 £000	Weighted average passing rent (£ per sq ft)	Weighted average ERV range (£ per sq ft)	Equivalent yield	Topped-up NIY
Industrial	291.4	6.2	4.75 – 12.6	6.7%	5.4%
Retail warehouse	122.7	12.9	6.1 – 22.4	7.4%	8.0%
Other	78.8	16.5	2.7 – 66.7*	8.0%	7.1%
Office	63.9	12.7	8.5 – 38.0	9.8%	7.1%
High street retail	32.3	26.5	3.7 – 57.4	8.1%	9.9%

 

*Drive-through restaurants’ ERV per sq ft are based on building floor area rather than area inclusive of drive-through lanes.

 

Valuation reports are based on both information provided by the Company eg current rents and lease terms, which are derived from the Company’s financial and property management systems and are subject to the Company’s overall control environment, and assumptions applied by the valuers e.g. ERVs, expected capital expenditure and yields.  These assumptions are based on market observation and the valuers’ professional judgement.  In estimating the fair value of each property, the highest and best use of the properties is their current use. 

 

All other factors being equal, a higher equivalent yield would lead to a decrease in the valuation of investment property, and an increase in the current or estimated future rental stream would have the effect of increasing capital value, and vice versa.  There are interrelationships between unobservable inputs which are partially determined by market conditions, which could impact on these changes, but the table below presents the sensitivity of the investment property valuations to changes in the most significant assumptions underlying their valuation, being equivalent yield and estimated rental value (“ERV”). The Board believes these are reasonable sensitivities given historical changes.

 

Group and Company
	Year ended 31 March 2024 £000	Year ended 31 March 2023 £000
Increase in equivalent yield of 0.25%	21,627	35,944
Decrease in equivalent yield of 0.25%	(20,134)	(31,664)
Increase of 5% in ERV	1,807	1,801
Decrease of 5% in ERV	(1,754)	(1,737)

 

11. Property, plant and equipment

 

 

EV chargers and PV cells   Group and Company		At 31 March 2024 £000	At 31 March 2023 £000	At 31 March 2022 £000
Cost
Balance at the start of the year		1,225	-	-
Additions		1,977	1,225	-
		3,202	1,225	-
Depreciation
At the start of the year		(112)	-	-
During the year		(133)	(112)	-
		(245)	(112)	-
Net book value at the end of the year		2,957	1,113	-

 

12. Investments

 

Shares in subsidiaries

Company     Name	Company number	Country of registration and incorporation	Principal activity	Ordinary shares held	31 March 2024 £000	31 March 2023 £000
Custodian REIT Limited	08882372	England and Wales	Non-trading	100%	-	-
Custodian Real Estate (DROP Holdings) Limited (formerly DRUM Income Plus REIT plc)	09511797	England and Wales	In Liquidation	100%	-	-
Custodian Real Estate (DROP) Limited (formerly DRUM Income Plus Limited)*	09515513	England and Wales	In Liquidation	100%	-	-
					-	-

 

* Held indirectly

 

The Company’s non-trading UK subsidiaries have claimed the audit exemption available under Section 479A of the Companies Act 2006.  The Company’s registered office is also the registered office of each UK subsidiary.

 

Non-listed equity investments

 

Group and Company     Name	Company number	Country of registration and incorporation	Principal activity	Ordinary shares held	31 March 2024 £000	31 March 2023 £000
AGO Hotels Limited	12747566	England and Wales	Operator of hotels	4.5%	-	-
					-	-

 

The Company was allotted 4.5% of the ordinary share capital of AGO Hotels Limited on 31 January 2021 as part of a new letting of its hotel asset in Portishead.

 

13. Trade and other receivables

 

Group and Company				31 March 2024 £000	31 March 2023 £000
Falling due in less than one year:
Trade receivables				1,056	1,355
Other receivables				2,081	2,100
Prepayments				191	248
Accrued income				2	45
				3,330	3,748

 

The Company regularly monitors the effectiveness of the criteria used to identify whether there has been a significant increase in credit risk, for example a deterioration in a tenant’s or sector’s outlook or rent payment performance, and revises them as appropriate to ensure that the criteria are capable of identifying significant increases in credit risk before amounts become past due.

 

Tenant rent deposits of £1.7m (2023: £1.5m) are held as collateral against certain trade receivable balances.

 

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

 

• When there is a breach of financial covenants by the debtor; or
• Available information indicates the debtor is unlikely to pay its creditors.

 

Such balances are provided for in full.  For remaining balances the Company has applied an expected credit loss (“ECL”) matrix based on its experience of collecting rent arrears.  The majority of tenants are invoiced for rental income quarterly in advance and are issued with invoices before the relevant quarter starts.  Invoices become due on the first day of the rent quarter and are considered past due if payment is not received by this date. Other receivables are considered past due when the given terms of credit expire.

 

Group and Company   Expected credit loss provision			31 March 2024 £000	31 March 2023 £000
Opening balance			1,143	2,739
(Decrease)/increase in provision relating to trade receivables that are credit-impaired			(241)	453
Utilisation of provisions			(47)	(2,049)
Closing balance			855	1,143

 

The significant utilisation of the expected credit loss provision during the prior year was a result of clearing down a large proportion of provisions made during 2020/2021 as a result of the COVID-19 pandemic. 

 

The ageing of receivables considered credit impaired is as follows:

 

Group and Company			31 March 2024 £000	31 March 2023 £000
0 to 3 months			288	141
3 – 6 months			-	135
Over 6 months			567	867
Closing balance			855	1,143

 

 

14. Trade and other payables

Group and Company			31 March 2024 £000	31 March 2023 £000
Falling due in less than one year:
Trade and other payables			1,442	972
Social security and other taxes			830	498
Accruals			4,079	4,693
Rental deposits			1,732	1,503
			8,083	7,666

 

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

 

15. Cash and cash equivalents

 

Group and Company
			31 March 2024 £000	31 March 2023 £000
Cash and cash equivalents			9,714	6,880

 

Cash and cash equivalents at 31 March 2024 include £2.5m (2023: £1.6m) of restricted cash comprising: £1.7m (2023: £1.5m) rental deposits held on behalf of tenants, £0.6m (2023: £0.1m) retentions held in respect of development fundings and £0.2m (2023: £nil) disposal deposit.

 

 

16. Borrowings

 

The table below sets out changes in liabilities arising from financing activities during the year.

 

	Group			Company
	Borrowings £000	Costs incurred in the arrangement of borrowings £000	Total £000	Borrowings £000	Costs incurred in the arrangement of borrowings £000		Total £000
Falling due within one year:
At 31 March 2022	22,760	(33)	22,727	-		-	-
Repayment of borrowings	(22,760)	-	(22,760)	-		-	-
Amortisation of arrangement fees	-	33	33	-		-	-
At 31 March 2023	-	-	-	-		-	-
Repayment of borrowings	-	-	-	-		-	-
Amortisation of arrangement fees	-	-	-	-		-	-
At 31 March 2024	-	-	-	-		-	-

 

Falling due in more than one year:
At 31 March 2022	115,000	(1,117)	113,883	115,000		(1,117)	113,883
Additional borrowings	58,500	-	58,500	58,500		-	58,500
Arrangement fees incurred	-	(468)	(468)	-		(454)	(454)
Amortisation of arrangement fees	-	187	187	-		173	173
At 31 March 2023	173,500	(1,398)	172,102	173,500		(1,398)	172,102
Additional borrowings	5,500	-	5,500	5,500		-	5,500
Arrangement fees incurred	-	(744)	(744)	-		(744)	(744)
Amortisation of arrangement fees	-	432	432	-	432		432
At 31 March 2024	179,000	(1,710)	177,290	179,000		(1,710)	177,290

 

On 10 November 2023 the Company agreed an extension to the RCF with Lloyds for a term of three years, with options to extend the term by a further year on each of the first and second anniversaries of the renewal.  The RCF includes an ‘accordion’ option with the facility limit initially set at £50m, which can be increased up to £75m subject to Lloyds’ agreement.  The headline rates of annual interest now include a LIBOR transition fee previously applied separately, increasing by 12bps to between 1.62% and 1.92% above SONIA, determined by reference to the prevailing LTV ratio.  As a result there is no change to the aggregate margin from the renewal.

 

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

 

• A £50m RCF with Lloyds with interest of between 1.62% and 1.92% above SONIA and is repayable on 10 November 2026.  The RCF limit can be increased to £75m with Lloyds’ consent, with £39m drawn at the year end;
• A £20m term loan with Scottish Widows plc with interest fixed at 3.935% and is repayable on 13 August 2025;
• A £45m term loan with Scottish Widows plc with interest fixed at 2.987% and is repayable on 5 June 2028; and

• A £75m term loan facility with Aviva comprising:

• A £35m tranche repayable on 6 April 2032, with fixed annual interest of 3.02%;
• A £15m tranche repayable on 3 November 2032 with fixed annual interest of 3.26%; and
• A £25m tranche repayable on 3 November 2032 with fixed annual interest of 4.10%.

 

Each facility has a discrete security pool, comprising a number of the Company’s individual properties, over which the relevant lender has security and covenants:

 

• The maximum LTV of each discrete security pool is either 45% and 50%, with an overarching covenant on the Company’s property portfolio of a maximum of either 35% or 40% LTV; and
• Historical interest cover, requiring net rental income from each discrete security pool, over the preceding three months, to exceed either 200% or 250% of the facility’s quarterly interest liability.

 

The Company’s debt facilities contain market-standard cross-guarantees such that a default on an individual facility will result in all facilities falling into default.
 

17. Share capital

 

Group and Company   Issued and fully paid share capital		Ordinary shares  of 1p	£000
At 1 April 2022, 31 March 2023 and 31 March 2024		440,850,398	4,409

 

Rights, preferences and restrictions on shares

 

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

 

At the AGM of the Company held on 8 August 2023, the Board was given authority to issue up to 146,950,133 shares, pursuant to section 551 of the Companies Act 2006 (“the Authority”).  The Authority is intended to satisfy market demand for the ordinary shares and raise further monies for investment in accordance with the Company’s investment policy.  No ordinary shares have been issued under the Authority since 8 August 2023.  The Authority expires on the earlier of 15 months from 8 August 2023 and the subsequent AGM, due to take place on 8 August 2024.

 

In addition, the Company was granted authority to make market purchases of up to 44,085,039 ordinary shares under section 701 of the Companies Act 2006.  No market purchases of ordinary shares have been made.

 

	Company	Group	Group and Company
Other reserves	Retained earnings £000	Retained earnings £000	Share premium account £000	Merger reserve £000
At 1 April 2022	245,180	253,330	250,970	18,931
Shares issued during the year	-	-	-	-
Costs of share issue	-	-	-	-
Loss for the year	(57,671)	(65,821)	-	-
Dividends paid	(24,250)	(24,250)	-	-
At 31 March 2023	163,259	163,259	250,970	18,931
Shares issued during the year	-	-	-	-
Costs of share issue	-	-	-	-
Loss for the year	(1,502)	(1,502)	-	-
Dividends paid	(24,247)	(24,247)	-	-
At 31 March 2024	137,510	137,510	250,970	18,931

 

The nature and purpose of each reserve within equity are:

 

• Share premium - Amounts subscribed for share capital in excess of nominal value less any associated issue costs that have been capitalised.
• Retained earnings - All other net gains and losses and transactions with owners (e.g. dividends) not recognised elsewhere.
• Merger reserve - A non-statutory reserve that is credited instead of a company's share premium account in circumstances where merger relief under section 612 of the Companies Act 2006 is obtained.

 

18. Commitments and contingencies

 

Company as lessor

 

Operating leases, in which the Company is the lessor, relate to investment property owned by the Company with lease terms of between 0 to 15 years.  The aggregated future minimum rentals receivable under all non-cancellable operating leases are:

 

Group and Company			31 March 2024 £000	31 March 2023 £000
Not later than one year			39,751	37,930
Year 2			34,984	33,519
Year 3			31,620	28,669
Year 4			26,113	25,193
Year 5			19,946	19,839
Later than five years			74,059	71,446
			226,473	216,596

 

The following table presents rent amounts reported in revenue:

 

	Group		Company
	31 March 2024 £000	31 March 2023 £000	31 March 2024 £000	31 March 2023 £000
Lease income on operating leases	41,926	40,371	41,926	39,571
Therein lease income relating to variable lease payments that do not depend on an index or rate	268	187	268	187
	42,194	40,558	42,194	39,758

 

19. Related party transactions

 

Save for transactions described below, the Company is not a party to, nor had any interest in, any other related party transaction during the year.

 

Transactions with directors

 

Each of the directors is engaged under a letter of appointment with the Company and does not have a service contract with the Company.  Under the terms of their appointment, each director is required to retire by rotation and seek re-election at least every three years.  Each director’s appointment under their respective letter of appointment is terminable immediately by either party (the Company or the director) giving written notice and no compensation or benefits are payable upon termination of office as a director of the Company becoming effective.

 

Ian Mattioli is Chief Executive of Mattioli Woods, the parent company of the Investment Manager, and is a director of the Investment Manager.  As a result, Ian Mattioli is not independent.  The Company Secretary, Ed Moore, is also a director of the Investment Manager.

 

Compensation paid to the directors, who are also considered ‘key management personnel’ in addition to the key Investment Manager personnel, is disclosed in the Remuneration report.  The directors' remuneration report also satisfies the disclosure requirements of paragraph 1 of Schedule 5 to the Accounting Regulations.

 

Investment Management Agreement

 

The Investment Manager is engaged as AIFM under an IMA with responsibility for the management of the Company’s assets, subject to the overall supervision of the Directors.  The Investment Manager manages the Company’s investments in accordance with the policies laid down by the Board and the investment restrictions referred to in the IMA.  The Investment Manager also provides day-to-day administration of the Company and acts as secretary to the Company, including maintenance of accounting records and preparing the annual and interim financial statements of the Company.

 

Annual management fees payable to the Investment Manager under the IMA are:

 

• 0.9% of the NAV of the Company as at the relevant quarter day which is less than or equal to £200m divided by 4;
• 0.75% of the NAV of the Company as at the relevant quarter day which is in excess of £200m but below £500m divided by 4;
• 0.65% of the NAV of the Company as at the relevant quarter day which is in excess of £500m but below £750m divided by 4; plus
• 0.55% of the NAV of the Company as at the relevant quarter day which is in excess of £750m divided by 4.

 

In June 2023 the rates applicable to each NAV hurdle for calculating the Administrative fees payable to the Investment Manager under the IMA were amended, with effect from 1 April 2022, to:

 

• 0.125% of the NAV of the Company as at the relevant quarter day which is less than or equal to £200m divided by 4;
• 0.115% of the NAV of the Company as at the relevant quarter day which is in excess of £200m but below £500m divided by 4;
• 0.02% of the NAV of the Company as at the relevant quarter day which is in excess of £500m but below £750m divided by 4; plus
• 0.015% of the NAV of the Company as at the relevant quarter day which is in excess of £750m divided by 4.

 

The IMA is terminable by either party by giving not less than 12 months’ prior written notice to the other.  The IMA may also be terminated on the occurrence of an insolvency event in relation to either party, if the Investment Manager is fraudulent, grossly negligent or commits a material breach which, if capable of remedy, is not remedied within three months, or on a force majeure event continuing for more than 90 days.

 

The Investment Manager receives a marketing fee of 0.25% (2023: 0.25%) of the aggregate gross proceeds from any issue of new shares in consideration of the marketing services it provides to the Company. 

 

During the year the Investment Manager charged the Company £4.0m (2023: £4.5m) comprising £3.5m (2023: £3.9m) in respect of annual management fees and £0.5m (2023: £0.6m) in respect of administrative fees.  During the year Mattioli Woods charged the Company £0.1m relating to work carried out contacting shareholders in connection with voting at General Meetings.

 

Mattioli Woods arranges insurance on behalf of the Company’s tenants through an insurance broker and the Investment Manager is paid a commission by the Company’s tenants for administering the policy.

 

On 8 March 2024 the boards of Mattioli Woods and Tiger Bidco Limited (“Bidco”), a wholly-owned subsidiary of vehicles advised and managed by Pollen Street Capital Limited, announced agreement on the terms and conditions of a recommended cash offer by Bidco for Mattioli Woods.  This offer was approved by Mattioli Woods shareholders on 25 April 2024 and is expected to complete later in the current financial year, subject to FCA approval.
 

20. Financial risk management

 

Capital risk management

 

The Company manages its capital to ensure it can continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance within the parameters of its investment policy.  The capital structure of the Company consists of debt, which includes the borrowings disclosed below, cash and cash equivalents and equity attributable to equity holders of the parent, comprising issued ordinary share capital, share premium and retained earnings.

 

Net gearing

 

The Board reviews the capital structure of the Company on a regular basis.  As part of this review, the Board considers the cost of capital and the risks associated with it.  The Company has a medium-term target net gearing ratio of 25% determined as the proportion of debt (net of unrestricted cash) to investment property.  The net gearing ratio at the year-end was 29.2% (2023: 27.4%).

 

Externally imposed capital requirements

 

The Company is not subject to externally imposed capital requirements, although there are restrictions on the level of interest that can be paid due to conditions imposed on REITs.

 

Financial risk management

 

The Company seeks to minimise the effects of interest rate risk, credit risk, liquidity risk and cash flow risk by using fixed and floating rate debt instruments with varying maturity profiles, at low levels of net gearing.

 

Interest rate risk management

 

The Company’s activities expose it primarily to the financial risks of increases in interest rates, as it borrows funds at floating interest rates.  The risk is managed by maintaining:

 

• An appropriate balance between fixed and floating rate borrowings;
• A low level of net gearing; and
• An RCF whose flexibility allows the Company to manage the risk of changes in interest rates by paying down variable borrowings using the proceeds of equity issuance, property sales or arranging fixed-rate debt.

 

The Board periodically considers the availability and cost of hedging instruments to assess whether their use is appropriate and also considers the maturity profile of the Company’s borrowings.

 

Interest rate sensitivity analysis

 

Interest rate risk arises on interest payable on the RCF only, as interest on all other debt facilities is payable on a fixed rate basis.  At 31 March 2024, the RCF was drawn at £39m (2023: £33.5m).  Assuming this amount was outstanding for the whole year and based on the exposure to interest rates at the reporting date, if SONIA had been 1.0% higher/lower and all other variables were constant, the Company’s profit for the year ended 31 March 2024 would decrease/increase by £0.4m (2023: £0.3m).

 

Market risk management

 

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

 

Market risk sensitivity

 

Market risk arises on the valuation of the Company’s property portfolio in complying with its bank loan covenants (Note 16).  The Company would breach its overall borrowing covenant if the valuation of its property portfolio fell by 17% (2023: 19%).

 

Credit risk management

 

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in a financial loss to the Company.  The Company’s credit risk is primarily attributable to its trade receivables and cash balances.  The amounts included in the statement of financial position are net of allowances for bad and doubtful debts.  An allowance for impairment is made where a debtor is in breach of its financial covenants, available information indicates a debtor can’t pay or where balances are significantly past due.

 

The Company has adopted a policy of only dealing with creditworthy counterparties as a means of mitigating the risk of financial loss from defaults.  The maximum credit risk on financial assets at 31 March 2024, which comprise trade receivables plus unrestricted cash, was £8.3m (2023: £6.6m).

 

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

 

Cash of £9.7m (2023: £6.9m) is held with Lloyds Bank plc which has a credit rating of A1[27].

 

Liquidity risk management

 

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

 

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

 

Group and Company	Interest rate %	31 March 2024 0-3 months £000	31 March 2024 3 months – 1 year £000	31 March 2024 1-5 years £000	31 March 2024 5 years + £000
Trade and other payables	N/a	5,922	-	151	420
Borrowings:
Variable rate	6.9	673	2,018	46,041	-
Fixed rate	3.935	197	590	20,295	-
Fixed rate	2.987	336	1,008	49,283	-
Fixed rate	3.020	264	793	4,228	38,191
Fixed rate	3.260	122	367	1,956	16,760
Fixed rate	4.100	154	461	2,460	27,214
		7,668	5,237	124,414	82,585

 

Group and Company	Interest rate %	31 March 2023 0-3 months £000	31 March 2023 3 months – 1 year £000	31 March 2023 1-5 years £000	31 March 2023 5 years + £000
Trade and other payables	N/a	7,168	-	151	420
Borrowings:
Variable rate	5.98	501	1,502	34,439	-
Fixed rate	3.935	197	590	21,082	-
Fixed rate	2.987	336	1,008	5,377	45,250
Fixed rate	3.020	264	793	4,228	39,248
Fixed rate	3.260	122	367	1,956	17,249
Fixed rate	4.100	154	461	2,462	25,367
		8,742	4,722	69,694	127,535

 

Fair values

 

The fair values of financial assets and liabilities are not materially different from their carrying values in the financial statements.  The fair value hierarchy levels are as follows:

 

• Level 1 – quoted prices (unadjusted) in active markets for identical assets and liabilities;
• Level 2 – inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
• Level 3 – inputs for the assets or liabilities that are not based on observable market data (unobservable inputs).

 

There have been no transfers between Levels 1, 2 and 3 during the year.  The main methods and assumptions used in estimating the fair values of financial instruments and investment property are detailed below.

 

Investment property and assets held-for-sale – level 3

 

Fair value is based on valuations provided by independent firms of chartered surveyors and registered appraisers, which uses the inputs set out in Note 10.  These values were determined after having taken into consideration recent market transactions for similar properties in similar locations to the investment properties held by the Company.  The fair value hierarchy of investment property is level 3.  At 31 March 2024, the fair value of the Company’s investment properties and assets held-for-sale was £589.1m (2023: £613.6m).

 

Interest bearing loans and borrowings – level 3

 

At 31 March 2023 the gross value of the Company’s loans with Lloyds, SWIP and Aviva all held at amortised cost was £179.0m (2023: £173.5m).  The difference between the carrying value of Company’s loans and their fair value is detailed in Note 22.

 

Trade and other receivables/payables – level 3

 

The carrying amount of all receivables and payables deemed to be due within one year are considered to reflect their fair value.