Custodian REIT (LSE: CREI), the UK commercial real estate investment company, today reports its final results for the year ended 31 March 2017.

 

Financial highlights and performance summary

• NAV per share total return[1] of 8.5% (2016: 6.4%)
• EPRA[2] earnings per share[3] of 6.6p (2016: 6.8p), basic and diluted earnings per share of 8.1p (2016: 5.5p)
• Portfolio value of £415.8m (2016: £319.0m)
• Profit after tax up 116% to £24.2m (2016: £11.2m)
• £92.4m[4] of new equity raised at average premium of 5.1% to NAV
• 2018 target dividend per share increased to 6.45p (2017: 6.35p)
• £105.0m[5] invested in 25 acquisitions and one on-going pre-let development
• £8.9m valuation uplift from successful asset management initiatives, £2.9m net valuation increase[6]
• £1.6m profit on disposal of six properties for an aggregate consideration of £18.9m

EPRA performance measures have been disclosed to facilitate comparability with the Company’s peers through consistent reporting of key performance measures, as the Company became a FTSE EPRA/NAREIT index series constituent in March 2017.

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

“I am pleased to report that Custodian REIT has continued to deliver strong shareholder returns with NAV per share total return of 8.5% (2016: 6.4%) for the year.  We invested a total of £105.0m on the completion of 25 acquisitions and one ongoing pre-let development, funded by £92.4m raised from the issue of new shares and £25m of new term debt.

“I anticipate that occupational demand combined with a limited supply of new development will continue to drive rental growth across regional markets, supporting a low vacancy rate and securing dividends and long-term capital growth for the Company’s shareholders.

“The Company has met its target of paying an annual dividend per share for the year of 6.35p (2016: 6.25p, 2015: 5.25p), 101% covered by net recurring income.  Our objective is to grow the dividend on a sustainable basis at a rate which is fully covered by projected net rental income, and the Board is pleased to have increased the target dividend for the year ending 31 March 2018 by 1.6% to 6.45p per share.”

Further information

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

Analyst call

There will be an analyst call to discuss the results with Richard Shepherd-Cross, Managing Director of Custodian Capital Limited, the Company’s discretionary investment manager, at 10:30am today.

Those analysts wishing to attend are asked to contact Hazel Stevenson at Camarco on +44 (0) 20 3757 4989 or at [email protected].

Chairman’s statement

I am pleased to report that Custodian REIT has continued to deliver strong shareholder returns with NAV per share total return of 8.5% (2016: 6.4%) for the year ended 31 March 2017.  During the year we invested a total of £105.0m on the completion of 25 acquisitions and one ongoing pre-let development, funded by £92.4m raised from the issue of new shares and £25m of new term debt.  Increasing the scale of the Company and a continued focus on controlling costs has reduced the OCR (excluding direct property expenses) from 1.3% to 1.2%.  We plan to achieve further growth to realise the economies of scale offered by the Company’s relatively fixed cost base and the recently announced reduction in Investment Manager fees, detailed below, while adhering to the Company’s investment policy and maintaining the quality of both properties and income.

The Company pays one of the highest fully covered dividends amongst its peer group of listed property investment companies[1].  Despite the fund’s rapid growth, we have sought to minimise the impact of ‘cash drag’ following the issue of new shares by taking advantage of the flexibility offered by the Company’s £35m revolving credit facility (“RCF”).  I am delighted that the flexibility of the RCF, coupled with proactive asset management of the portfolio and the rapid deployment of cash as it has been raised, has allowed us to increase the target dividend[2] for the year ending 31 March 2018 by 1.6% to 6.45p per share, and to accelerate the payment of quarterly dividends by one month.

Market

Recent experience has reinforced Confucius’ time honoured maxim: “Wisdom is knowing you cannot predict the future”.  At the time of writing we are in the midst of an election campaign with a predicted, but not entirely predictable outcome.  Throughout the year political norms were overturned, ‘knowns’ became unknown and ‘certainties’ became uncertain.  Against this backdrop Custodian REIT has been a stable and predictable performer in an otherwise turbulent market.

We believe that in uncertain times a well-defined investment strategy, offering secure income and focusing on long-term goals and deliverable targets will protect shareholders from unwanted volatility.

There was a sharp decrease in the share prices of listed property stocks in early 2016 and a high level of redemptions from open ended funds post the EU referendum (“the Referendum”).  If these events had been taken as a prediction of poor times ahead for commercial property, the market confounded those predictions in the fourth quarter of 2016 and the first quarter of 2017 with investor sentiment towards commercial property showing a marked improvement through this period.

·         While central London lost much of its domestic appeal for investment and development it gained overseas demand, driven both by currency arbitrage and the relative stability of the London property market on the global spectrum.

·         Regional markets witnessed increasing domestic demand as confidence built around the impact of Brexit.

·         A shortage of supply, limited development and stable demand from occupiers drove rental growth.

·         The relatively high investment yield available from property continued to look attractive in a low return environment.

The Company’s strategy of targeting sub £10m regional properties that produce a relatively high income return, with the real potential of rental growth, has stood us in good stead through this year’s market ups and downs.

Net asset value

The NAV of the Company at 31 March 2017 was £351.9m, reflecting approximately 103.8p per share, an increase of 2.3% since 31 March 2016:

The Company delivered NAV total return of 8.5% for the year, which was a period of significant new investment where the initial costs (primarily stamp duty) of investing £105.0m in 25 property acquisitions and one pre-let development diluted NAV per share total return by circa 1.8p, largely offset by raising £91.1m of new equity (net of costs) at an average 5.1% premium to dividend adjusted NAV, which added 1.5p per share[1].

Acquisition costs incurred during the year represented 5.8% of the total invested, lower than typical purchasers’ costs of circa 6.5% due to £2.9m of development funding and the purchase of a portfolio of 10 light industrial units (“the Light Industrial Portfolio”) for £26.75m being made by way of a corporate acquisition (detailed in Note 10), allowing the Company and vendor to share the associated cost savings.  The recent increases in premium to the Company’s NAV have allowed equity issuance during Q1 2017 to be at an average 7.7% premium to dividend adjusted NAV, fully covering the cost of raising and deploying the proceeds.

In addition to acquisitions, activity during the year also focused on pro-active asset management, which generated an £8.9m valuation uplift.  We intend to continue our asset management activities and complete the current acquisition pipeline, with the deployment of existing debt facilities expected to increase gearing towards our target level of 25% loan-to-value (“LTV”).

Share price

The defining event of the year for property investment was the Referendum which triggered a rush for the door by retail investors from open ended property funds.  The subsequent suspension of redemptions in certain of these funds was widely covered in the news at the time and did little for the reputation of property as an investment asset class.  Most property investment companies’ shares moved to trade at a significant discount to NAV in the immediate aftermath but, save for a single day’s trading, Custodian REIT’s share price maintained a premium to NAV.  I believe this was due to:

·         The relatively high, fully covered dividend;

·         The exclusive focus on UK regional property; and

·         The predominance amongst the Company’s shareholders of private clients and discretionary wealth managers, who value the high income and low volatility.

The Company’s peer group of property investment companies have since all seen their share prices return to or exceed pre-Referendum levels.  This bounce demonstrates the strength of the closed-ended property investment company structure and the continued investment demand for exposure to UK commercial property markets.  In contrast the large development and investment Real Estate Investment Trusts (“REITs”), typically carrying out significant property development activity and with a largely institutional shareholder base (“Large REITs”)[2], have not witnessed a similar rebound in their share prices since the Referendum.

Placing of new ordinary shares

The Company raised £92.4m of new equity during the year, placing 87.8m new shares at an average 5.1% (2016: 3.5%) premium to dividend adjusted NAV via an ongoing programme of tap issuance.

Since the year end, the Company has issued a further 6.0m new shares at an average premium of 9.1% to dividend adjusted NAV.  All share issues have been accretive to NAV and the sustained investor demand for the Company’s shares is testament to the success of our strategy to date.

Borrowings

As at 31 March 2017 net gearing equated to 14.5% LTV.  The Board’s strategy is to:

·         Increase debt facilities in line with portfolio growth, targeting net gearing of 25% LTV;

·         Facilitate expansion of the portfolio to take advantage of expected rental growth; and

·         Reduce shareholders’ exposure to risk by:

­    Taking advantage of the prevailing low interest rates to secure long-term, fixed rate borrowing; and

­    Managing the weighted average maturity (“WAM”) of the Company’s debt facilities.

To achieve these objectives, the Company agreed a new 12 year £45m term loan facility with Scottish Widows Limited (“SWIP”) on 6 June 2016, with a fixed rate of interest of 2.987%.  £20m of the proceeds were used to repay in full a £20m term loan with Lloyds Bank plc, which attracted interest of 1.95% per annum above three month LIBOR and was due to be repaid in October 2019.

On 5 April 2017, the Company and Aviva Investors Real Estate Finance (“Aviva”) entered into an agreement for Aviva to provide the Company with a new 15 year £50m term loan facility, comprising two tranches of £35m (“Tranche 1”) and £15m (“Tranche 2”) respectively.  The Company drew down Tranche 1 on 6 April 2017, with a fixed rate of interest of 3.02% per annum.  Tranche 2 is available for draw down on or before 5 October 2017 with a fixed rate of interest, calculated at the same margin as Tranche 1 above the prevailing 2032 gilt rate on the date of draw down.

The weighted average cost of the Company’s agreed debt facilities at 5 April 2017 was 3.1%[3] (2016: 3.1%) with a WAM of 10.1 years (2016: 5.2 years) and 77% (2016: 65%) of the Company’s agreed debt facilities now at a fixed rate of interest.  This removes significant interest rate risk from the Company and provides shareholders with a wide, beneficial margin between the fixed cost of debt and income returns from the portfolio.

Investment Manager

The Investment Manager was appointed at IPO under an investment management agreement (“IMA”) to provide property management and administrative services to the Company.  The performance of the Investment Manager and fees payable to it are reviewed each year by the Management Engagement Committee (“MEC”).

The Board has been pleased with the progress and performance of the Investment Manager, particularly the timely deployment of new monies on high quality assets, securing the earnings required to fully cover the increased target dividend.

The MEC has reviewed, in detail, the arrangements with the Investment Manager this year, following expiry of the initial three year term.  In light of the positive performance of the Company since IPO the Board and the Investment Manager have agreed a further three year term with 12 months’ notice to the Investment Manager’s ongoing engagement, from 1 June 2017.  Fees payable to the Investment Manager under the IMA have been amended to include:

·         A step down in the property management fee from 0.75% to 0.65% of net asset value (“NAV”) applied to NAV in excess of £500m; and

·         A step down in the administrative fee from 0.125% to 0.08% of NAV applied to NAV between £200m and £500m and a further step down to 0.05% of NAV applied to NAV in excess of £500m.

All other key terms of the IMA remain unchanged.  The Board considers these amendments to the IMA to be in the best interests of the Company’s shareholders because:

·         The administrative fee will immediately fall, increasing dividend cover on target dividends for the year ending 31 March 2018;

·         Further growth in NAV, particularly above £500m, will further reduce the Company’s OCR and increase dividend capacity; and

·         Another three year term provides the Investment Manager with security of tenure and allows further investment in the dedicated systems and people providing its services under the IMA.

Dividends

Income is a major component of total return.  The Company paid aggregate dividends of 6.425p per share during the year (totalling £18.5m), comprising the fourth interim dividend of 1.6625p per share relating to the year ended 31 March 2016 and three interim dividends of 1.5875p per share relating to the year ended 31 March 2017.

The Board has approved an interim dividend of 1.5875p per share for the quarter ended 31 March 2017 payable on 30 June 2017 to shareholders on the register on 28 April 2017, meeting the Company’s target of paying an annual dividend per share for the year of 6.35p (2016: 6.25p, 2015: 5.25p), totalling £19.7m.  Dividends relating to the year are 101% covered by net recurring income of £19.9m.

In the absence of unforeseen circumstances the Board intends to pay quarterly dividends to achieve a target dividend of 6.45p per share for the year ending 31 March 2018.  The Board’s objective is to grow the dividend on a sustainable basis at a rate which is fully covered by projected net rental income and does not inhibit the flexibility of the Company’s investment strategy.

The payment of dividends relating to the year ending 31 March 2018 will be accelerated by one month to align more closely with London Stock Exchange best practice and the Company’s peer group.  The dividend relating to the quarter ending 30 June 2017 is therefore expected to be payable on 31 August 2017.

Outlook

Property investment and occupational markets continue to exhibit a less than perfect correlation, which is slightly at odds with expected theory that occupational demand drives rental growth which in turn drives valuation increases.  This aspect makes the outlook for total returns harder to predict as external influences can cause investment markets to move in a contrary fashion.  While the occupational market has strengthened through the year and rental growth has taken hold across large parts of regional economies, the investment market has been more volatile.  I anticipate that occupational demand combined with a limited supply of new development will continue to drive rental growth across regional markets, supporting a low vacancy rate and securing dividends and long-term capital growth for the Company’s shareholders.

David Hunter

Independent Chairman

5 June 2017

 

Investment Manager’s report

The UK property market

Markets, we are told, are driven by fear and greed.  The Chairman has commented on the recent market volatility which was principally a function of fear surrounding the outcome of the Referendum and ‘Brexit’.  However, it would appear that the fear of Brexit is not having the impact on commercial property markets that had been predicted, although this may still be too early to call.  Our experience of managing 131 properties let to 265 tenants across a nationwide portfolio suggests that it is business as usual from a property perspective.  This is evident in the occupancy rate[4] of the portfolio which currently stands at 98.6% (2016: 96.8%).

Strong demand from buyers dominated the property investment market and resulted in yield compression through 2014 and 2015 to a ‘false’ summit and a pause in mid-2016 in anticipation of the Referendum.  Following a period of relative inaction in the two months prior to the Referendum and a period of ‘reflection’ in the two months following, we now find ourselves in a market with very few sellers but an extensive field of buyers comprising private investors, developer/trader property companies, local authorities, listed property companies and overseas buyers.  So demand is back and in aggregate yields have recovered most of the ground lost in 2016, albeit retail yields continue to soften while industrial yields continue to harden.

Does the return of strong demand suggest that the market has yet to peak?  We are not unduly concerned by this risk to Custodian REIT.  The equivalent yield of the portfolio has been constant at 6.75% since September 2014, although the net initial yield of the portfolio has hardened to reflect rental growth.  This suggests that capital growth has been driven by the prospect of rental growth and not by underlying yield compression, lessening the risk of a reversal of gains made in the near future.

Is fear driving market demand for long dated income with indexed linked rent reviews? Is this reflective of the fear of weak economic growth and weak property markets in the near future?  This possible weakness is not our experience in regional economies.  We are witnessing rental growth driven by a lack of supply and very limited speculative development.  We are enjoying low vacancy rates and tenants are happy to commit to extending leases or agree rental increases, demonstrating a confidence in their businesses.

Are open ended property funds still fearful?  The Financial Times reports fund managers are sitting on between 18-30% in cash, which amounts to over £3bn of cash, or 20% of total funds[5].  While this is explained as being appropriate caution in the face of current and feared redemptions, this strategy can be doing nothing to enhance returns.

One challenge affecting the whole market is the limited supply of property being offered to the market.  This shortage of supply, in part, might explain the significant cash reserves of the open ended funds.  A lack of suitable opportunities may cause investors to sit on their hands, but it also creates a vicious circle, with potential sellers fearful of not being able to re-invest their capital receipts.  We have opted to exploit this position by selling six properties this year, for a total of £18.9m, to either capitalise on the strong market for long dated income or maximise value through sales to owner occupiers and special purchasers.

Others in the market have also sought to benefit from selling in the current market.  Savills reported that the first quarter of 2017 saw a record level of nearly £5bn transacted in the London office market, 84% of which involved overseas investors[6].  However, the market outside London was decidedly short of sellers and investment volumes were down by 31% in the first quarter of 2017 according to Lambert Smith Hampton[7].  This supply shortage has slowed deployment of the Company’s debt facilities, although a nationwide brief and a focus on sub £10m lot sizes has allowed us to continue to secure properties that meet the Company’s investment criteria.

There is a fear that the high street will lose out to on-line retail.  This concern is causing many to divest themselves of high street property and acquire logistics and distribution assets in their place.  While we believe that many convenience retail locations and smaller market towns will weaken as people change their shopping habits, this cannot be said of all retail locations.  We believe in strong regional retail towns, particularly those with a high tourist footfall and those with a diverse leisure offering including coffee shops and restaurants in their town centres.  Shopping remains one of the nation’s favourite leisure activities.

The widespread demand for distribution and logistics properties has the potential to create a bubble in market pricing if the current trajectory continues.  Greed triumphing over fear.  We are vigilant about the pricing of investment opportunities in this sector but we believe pricing is still at sustainable levels, given the real prospect of rental growth.

While there appears to be more fear than greed in the market, greed is never too far from the surface.  One recent phenomenon has been the rise of local authorities buying real estate, funded by cheap money from the Public Works Loan Board (“PWLB”).  Local authorities, who can borrow up to 100% of a property’s value from the PWLB, invested over £1bn during 2016[8], often outside their local authority area in a push to close the funding gap, as central government reduces direct financial support.  Our experience of the rising activity of local authorities in the market is that they are having an inflationary impact on pricing, perhaps because they are too focused on short-term income returns rather than the long-term risk of capital depreciation.  This local authority activity has created some competition for the Company, but in the main, local authorities seem to be focused on larger lot size property, or simply long dated income, which has limited this impact.

In conclusion, we believe there is strength and longevity in the occupational market and across regional markets, with good prospects for low vacancy rates and rental growth.  We believe that fears of short-term volatility in the economy may be pushing investment into long-term income strategies, making this segment of the market very expensive.  However we believe the impact on the property market of many of these fears may be misplaced.  The demand for industrial investment property let with long-term, RPI-linked income is risking the stability of market pricing.  We believe the abundance of cheap debt is pushing some market protagonists to understate the inherent risks of property ownership and over-price property.  However, allowing for some caution around competitive pressures on pricing and careful stock selection, we believe we can still invest in properties that meet our core investment criteria and provide solid, long-term performance for the Company.

Activity

Notwithstanding some of the competitive headwinds described above we were delighted to complete £105m of acquisitions during the year.  £60m of these acquisitions were made in the immediate aftermath of the Referendum where we were able to exploit the short-term weakness in market sentiment, having had the courage to raise new equity in the run-up to the Referendum.  This courage was rooted in our belief that the strength of occupational markets would underpin investment sentiment once the Referendum was behind us.

NAV has increased and the portfolio profile has strengthened in terms of diversification of tenant, sector and lease break/expiry.  In addition, the portfolio’s rental growth potential has been enhanced as a result of these acquisitions.

Investment objective

The Company’s key objective is to provide shareholders with an attractive level of income by maintaining the high level of dividend, fully covered by earnings, with a conservative level of gearing.  I am delighted we have continued to achieve this, with earnings providing 101% cover of the approved total dividend for the year of 6.35p per share, with a net gearing ratio of 14.5% at the year end.  As a result of the fund’s growth and consequential reduction in OCR (excluding direct property expenses) the Board has increased the target dividend for the next financial year to 6.45p per share.

We continue to pursue a pipeline of new investment opportunities with the aim of deploying the Company’s undrawn debt facilities up to the conservative gearing target of 25% LTV.  At the current cost of debt we believe this strategy can improve dividend cover as gearing increases towards the target level.

We remain committed to a strategy focused on sub £10m lot size regional property and expect to see long-term total return out-performance from a higher income component of total return compared to London and the South East, and continuing strong asset management performance as we secure rental increases and extend contractual income.

Portfolio balance

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

Industrial property is a very good fit with the Company’s strategy where it is possible to acquire modern, ‘fit-for-purpose’ buildings with high residual values (ie the vacant possession value is closer to the investment value than in other sectors) and where the real estate is less exposed to obsolescence.   £4.7m of the £6.7m gross valuation increase in the industrial sector was driven by asset management initiatives, with occupational demand driving rental growth and generating positive returns.

Retail represents 28% of portfolio income, comprising 17% high street and 11% out-of-town retail (retail warehousing).  Strong comparison retail pitches in dominant regional towns continue to show very low vacancy rates and offer stable long-term cash flow, with the opportunity for rental growth.  Retail warehousing is witnessing close to record low vacancy rates as a restricted planning policy and lack of development combine with retailers’ requirements to offer large format stores, free parking and ‘click and collect’ to consumers.  This made retail a target sector for acquisitions throughout the year.

While deemed to be outside the core sectors of office, retail and industrial the ‘other’ sector offers diversification of income without adding to portfolio risk, containing assets considered mainstream but which typically have not been owned by institutional investors.  The ‘other’ sector has proved to be an out-performer over the long-term and continues to be a target for acquisitions.

Office rents in regional markets are growing strongly and supply is constrained by a lack of development and the extensive conversion of secondary offices to residential making returns very attractive.  However, the Company’s relatively low exposure to the office sector is a long-term strategic decision rather than a short-term comment on the state of the office market.  We are conscious that obsolescence and lease incentives can be a real cost of office ownership which can hit cash flow and be at odds with the Company’s relatively high target dividend.

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

Asset management

During the year we focused on proactively managing the portfolio to enhance income and maintain the weighted average unexpired lease term to the earlier of first break or expiry (“WAULT”) ahead of the Company’s objective of a WAULT of over five years.  At 31 March 2017 the portfolio’s WAULT had fallen by 0.8 years to 5.9 years (2016: 6.7 years) with the completion of the asset management initiatives detailed below partially offsetting the one year natural annual decline.

WAULT is a much quoted statistic and is often considered a proxy for risk.  This perception has encouraged many investors in the market to pursue long-dated income causing significant price inflation where long leases are combined with fixed or index-linked rent reviews.  Property investment value is a combination of the value of the land, the building and the lease.  Land should appreciate over time.  The building will depreciate but should have 30-50 years of economic use before it needs to be redeveloped.  The lease is the fastest depreciating part of a property’s investment value yet we believe leases are currently being over-valued by the market.  This possible lease over-valuation has encouraged us to buy properties with shorter leases, where we expect to experience less depreciation in value over the long-term.  Although buying shorter leases puts pressure on the WAULT of the portfolio, we believe that with the current strength of the occupational market and a portfolio of high quality properties, risk is better managed by pursuing a strategy of buying high quality properties that are likely to re-let, rather than highly priced properties with long leases, simply to mitigate an artificial measure of risk.

Successful asset management strategies including rent reviews, new lettings, lease extensions and the retention of tenants beyond their contractual break clauses have more than offset the impact on valuations of acquisition costs.  In aggregate asset management activities increased NAV by £8.9m delivering the largest component of NAV performance through the year.  This element of NAV growth underlines the importance of pro-active, strategic asset management of the portfolio.  As a fund manager who collects rent and has direct relationships with all the tenants in the portfolio, we have been able to deliver mutually beneficial outcomes for both the Company and its tenants.

In a competitive market with pressure to invest, it would have been easy to rule out selling to avoid cash-drag and the requirement for re-investment.  However, when markets are making buying difficult it is often the best time to sell.  We were sufficiently confident of our ability to deploy new monies into the market that we felt 2016/17 would be a good time to look at those properties not considered long-term prospects for the Company and where we could exploit special purchasers or market mis-pricing.

Accordingly, we disposed of six properties for an aggregate consideration of £18.9m during the year to funds and private investors who paid very strongly for long-term secure income, owner occupiers and special purchasers, comprising:

• Purpose-built student residential building in Lenton, Nottingham sold for £1.2m in May 2016, £0.1m above valuation;
• 63 room Premier Inn hotel in Dudley sold for £4.45m in July 2016, £0.2m above valuation;
• Kia car dealership in Solihull sold for £1.875m in November 2016, £0.3m above valuation;
• Wetherspoons public house in Southsea sold for £1.67m in February 2017, £0.2m above valuation;
• Toyota car dealership in Peterborough sold for £2.75m in March 2017, £0.3m above valuation; and
• Bentley car dealership in Knutsford sold for £7.0m in March 2017, £0.7m above valuation.

The Bentley car dealership in Knutsford was acquired at IPO in March 2014 for £5.7m and was valued at £6.3m at 31 December 2016, with a WAULT of circa 12 years and benefitting from RPI linked rent reviews.  The site was considered marginally over-rented and its valuation significantly exceeded its £4.0m vacant possession value meaning, as the unexpired term reduced, we could have witnessed a sharp decline in valuation.  In our view the market is overpaying for long, index linked income and the decision was taken to sell.  A lack of available investment stock coupled with strong demand for long-term income with structured rent reviews resulted in the Company benefitting from an extremely competitive bidding process, with interest from across the investor spectrum, and the 31 December 2016 valuation net initial yield of 5.49% compared favourably to a net initial yield on sale price of 4.92%.

Each disposal was made above purchase price, generating a combined profit on disposal of £1.6m[1] with an average net initial yield[2] of 5.7%.

The Company intends to redeploy the sale proceeds on property with better short-term income growth and long-term capital growth potential.

Key asset management initiatives completed during the year included:

• Arrangement of a simultaneous surrender and agreement of a new lease of a retail unit on High Street, Colchester to Metro Bank. The new lease secured an increase in annual rent from £0.15m to £0.20m, significantly ahead of ERV and increased the unexpired lease term from 0.25 years to 25 years, with a break option in year 15, increasing valuation by £1.6m;
• Agreeing a surrender and re-grant of a lease to Assa Abloy at Cannock Road, Wolverhampton with expiry moving from July 2018 to July 2023 and annual rent increasing by 42% from £0.36m to £0.51m, increasing valuation by £1.6m;
• Extending DX Network’s lease at Harrington Way, Nuneaton with expiry moving from August 2016 to March 2022 and rent increasing by 10%, increasing valuation by £1.0m;
• Following a comprehensive refurbishment, a vacant unit at Tilbrook 44 in Milton Keynes let to Saint Gobain on a 10 year lease with annual rent of £0.27m, increasing valuation by £0.6m;
• Extending Geldard LLP’s lease at Pride Park, Derby by removing a break option with the lease expiry now in June 2023, increasing valuation by £0.5m;
• Letting a vacant unit in Gateshead to Jump Arena on a 15 year lease with annual rent of £0.16m, increasing valuation by £0.5m;
• Extending R Scott Bathrooms’ lease at Causewayside House, Edinburgh with expiry moving from November 2017 to November 2027, increasing valuation by £0.4m;
• Agreeing a 10 year lease extension with Brenntag UK at an industrial unit in Cambuslang with expiry moving from April 2021 to April 2031 with a 2.5% (annually compounded) minimum rental uplift from 2026, increasing valuation by £0.4m;
• Removing a January 2018 break clause in Pets at Home’s lease in Winnersh increasing WAULT from 0.7 years to 10.7 years, increasing valuation by £0.4m;
• Extending DHL’s lease at Dyce Drive, Aberdeen with expiry moving from February 2017 to February 2022 and rent increasing by 7%, increasing valuation by £0.4m;
• Removing a 2020 break clause in Pizza Hut’s lease in Crewe increasing WAULT to 13 years and valuation by £0.3m;
• Extending Tesco’s lease at Causewayside House, Edinburgh with expiry moving from December 2019 to December 2029, increasing valuation by £0.3m;
• Extension of two leases at the multi-let industrial estate in Chepstow with expiries now in May 2026, increasing valuation by £0.2m;
• Entering into a reversionary lease with Savers’ at a retail unit in Colchester, at a rent ahead of ERV with expiry moving from December 2017 to December 2022, increasing valuation by £0.2m;
• Letting a vacant retail unit in Portsmouth to The Works on a 10 year lease with annual rent of £0.1m, increasing valuation by £0.2m;
• Letting a trade counter unit at Counterpoint, Crewe to Edmunson Electrical ahead of ERV on a 10 year lease following the simultaneous surrender of the former tenant’s lease, increasing WAULT from 0.3 years to 10 years, increasing valuation by £0.2m;
• Following the refurbishment of the common parts at Causewayside House, Edinburgh, surrendering Metaswitch Networks’ lease over 4,700 sq ft as at January 2017 and re-granting a new lease expiring in January 2027 over 9,500 sq ft, increasing valuation by £0.1m; and
• Documenting a number of outstanding rent reviews across the portfolio, with increases secured in Dumfries (+8%), Portishead (+11%), Perth (+8%) and Sheffield (+4%).

Portfolio risk

We have managed the portfolio’s income expiry profile through successful asset management activities such that the WAULT of 5.9 years is ahead of target with only 53% of income expiring within five years at 31 March 2017 (2016: 48%).  Short-term income at risk is a relatively low proportion of the portfolio’s income, with only 28% expiring in the next three years (2016: 29%). 

The portfolio’s exposure to risk is reduced by 23% of income benefitting from either fixed or indexed rent reviews and there is increasingly strong evidence of open market rental growth across all sectors.

Outlook and pipeline

Over the remainder of the next financial year we intend to continue our asset management activities and complete on the current strong acquisition pipeline of £38.6m, with the aim of deploying debt facilities to increase gearing towards the target level of 25%.  We expect asset management initiatives to positively impact the WAULT of the portfolio, with tenants keen to agree lease extensions or to waive their options to break, enhancing the rent roll as increases are agreed at review or renewal.

The sub £10m lot size, regional market has not seen the same level of price inflation as the London and large lot size markets over the last two years, and consequently it is still possible to acquire properties with strong investment credentials that meet our return requirements.  We are keen to capitalise on the strength of the occupational market and are seeing sufficient opportunities, consistent with our investment strategy, to maintain the level of deployment necessary to minimise cash drag and enhance gearing.  We are actively considering £25m – £50m of opportunities that maintain a threshold level of quality in building, location and tenant and expect this pipeline to increase as uncertainty diminishes after the General Election on 8 June 2017.

I am confident the Company’s existing strategy can deliver enhanced income cover to the target dividend in the years ahead and provide the stable long-term returns demanded by our shareholders.

Richard Shepherd-Cross

for and on behalf of Custodian Capital Limited

Investment Manager

5 June 2017

 

Portfolio

Principal risks and uncertainties

There are a number of potential risks and uncertainties which could have a material impact on the Company’s performance over the forthcoming financial year and could cause actual results to differ materially from expected and historical results.

The Directors have assessed the principal risks facing the Company, including those that would threaten the business model, future performance, solvency or liquidity.  The table below outlines the risk factors identified, but does not purport to be exhaustive as there may be additional risks that materialise over time that the Company has not yet identified or has deemed not likely to have a potentially material adverse effect on the business.

The outcome of the general election on 8 June 2017 is uncertain and the Board considers it is too early to understand the full impact of ‘Brexit’, but these political risks are not considered likely to have a material impact on the Company’s performance.

Longer-term viability statement

In accordance with provision C2.2 of the UK Corporate Governance Code issued by the Financial Reporting Council (“the Code”), the Directors have assessed the prospects of the Company over a period longer than the 12 months required by the ‘Going Concern’ provision.  The Board resolved to conduct this review for a period of three years, because:

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

The Board’s three-year strategic review considered the Company’s profit, cash flows, dividend cover, REIT regime compliance, borrowing covenant compliance and other key financial ratios over the period.  These metrics are subject to sensitivity analysis, which involves flexing a number of key assumptions underlying the projections, including:

• Tenant default;
• Length of potential void period following lease break or expiry;
• Acquisition NIY and the timing of deployment of cash;
• Interest rate changes; and
• Property portfolio valuation movements.

This analysis also evaluates the potential impact of the principal risks and uncertainties set out above should they actually occur.

Current debt and associated covenants are summarised in Note 15, with no covenant breaches during the year.  The Company’s dividend policy is set out in Business Model and Strategy.  The principal risks and uncertainties faced by the Company, together with the steps taken to mitigate them, are highlighted above and in the Audit Committee report.  The Board seeks to ensure that risks are kept to a minimum at all times.

Based on the results of this analysis, the Directors expect that the Company will be able to continue in operation and meet its liabilities as they fall due over the three year period of their assessment.

 

Business model and strategy

Investment objective and policy

The Company seeks to provide shareholders with an attractive level of income together with the potential for capital growth from investing in a diversified portfolio of commercial real estate properties in the UK.  The Company targets individual properties with a value of less than £10m at acquisition, seeking to benefit from a significant NIY advantage as a result.

The Company’s current investment objectives are:

• To not exceed a maximum weighting to any one property sector or to any one geographic region of greater than 50%;
• To hold a portfolio of UK commercial property, diversified by sector, location, tenant and lease term;
• To focus on areas with high residual values, strong local economies and an imbalance between supply and demand. Within these locations, the objective is to acquire modern buildings or those that are considered fit for purpose by occupiers;
• To have no one tenant or property accounting for more than 10% of the total rent roll of the portfolio at the time of purchase, except:
  1. In the case of a single tenant which is a governmental body or department, where no limit shall apply; or
  2. In the case of a single tenant rated by Dun & Bradstreet (“D&B”) as having a credit risk score higher than two, where the exposure to such single tenant may not exceed 5% of the total rent roll (a risk score of two represents “lower than average risk”).
• To maintain an average unexpired lease term to first break of over five years across the portfolio secured against low risk tenants and to minimise rental voids;
• Not to undertake speculative development (that is, development of property which has not been leased or pre-leased), save for refurbishment of existing holdings, but may (provided that it shall not exceed 20% of the gross assets of the Company) invest in forward funding agreements or forward commitments (these being arrangements by which the Company may acquire pre-development land under a structure designed to provide the Company with investment rather than development risk) of pre-let developments, where the Company intends to own the completed development; and
• To target borrowings of 25% of the aggregate market value of all the properties of the Company at the time of borrowing.

The Board keeps the Company’s investment objectives under review to ensure they remain appropriate to the market in which the Company operates and in the best interests of shareholders.  During the year the Investment Manager has acquired properties with shorter leases, believing that long leases are currently over-valued by the market and that this approach more effectively manages risk by taking advantage of the current strength of the occupational market.  This puts pressure on the WAULT of the portfolio which the Board continues to monitor carefully.

Key performance indicators

The Board meets quarterly and at each meeting reviews performance against a number of key measures:

• NAV total return – reflects both the NAV growth of the Company and dividends paid to shareholders. The Board regards this as the best overall measure of value delivered to shareholders.  The Board assesses NAV 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;
• EPRA EPS – reflects the Company’s ability to generate earnings from the portfolio which underpin dividends;
• Net gearing – measures the prudence of the Company’s financing strategy, balancing the additional returns available from employing debt with the need to effectively manage risk;
• Dividends per share, dividend yield and dividend cover – A key objective is to provide an attractive, sustainable level of income to shareholders, fully covered from net rental income. The Board reviews target dividends in conjunction with detailed financial forecasts to ensure that target dividends are being met and are sustainable;
• Occupancy – the Board reviews the level of property voids within the Company’s portfolio on a quarterly basis and compares this to the market average, as measured by the IPD. The Board seeks to ensure that the Investment Manager is giving proper consideration to replacing the Company’s income;
• OCR – measures the annual running costs of the Company and indicates the Board’s ability to operate the Company efficiently, keeping costs low to maximise earnings from which to pay fully covered dividends; and
• Premium or discount of the share price to NAV – The Board closely monitors the premium or discount of the share price to the NAV and believes a key driver of this is the Company’s long-term investment performance. However, there can be short-term volatility in the premium or discount and the Board therefore seeks limited authority at each AGM to issue or buy back shares with a view to trying to limit this volatility.

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

 

Financing

The Company operates with a conservative level of gearing, with target borrowings over the medium term of 25% of the aggregate market value of all properties at the time of drawdown.

Debt

The Company has the following facilities available:

• A £35m RCF with Lloyds Bank plc attracting annual interest of 2.45% above three-month LIBOR on advances drawn down under the agreement from time to time;
• A £20m term loan facility with SWIP repayable in August 2025, attracting fixed annual interest of 3.935%;
• A £45m term loan facility with SWIP repayable in June 2028, attracting fixed annual interest of 2.987%; and
• A £50m term loan facility with Aviva comprising:
  3. A £35m tranche repayable on 5 April 2032, attracting fixed annual interest of 3.02%; and
  4. A £15m tranche repayable 15 years from drawdown attracting fixed annual interest of 1.6% over the prevailing 2032 swap rate on the date of drawdown.

The Company’s borrowing facilities all require minimum interest cover of 250% of the net rental income of the security pool.  The maximum LTV of the Company combining the value of all property interests (including the properties secured against the facilities) must be no more than 35%.

On 6 June 2016 a £20m term loan with Lloyds Bank repayable in 2019, attracting annual interest of 1.95% above three-month LIBOR was repaid in full, incurring one-off costs of £0.165m related to the accelerated recognition of the associated deferred arrangement fees.

Equity

During the year the Company raised £92.4m (before costs and expenses) through the placing of 87,771,274 new ordinary shares.  Following the year end, the Company issued a further 6.0m of new ordinary shares raising £6.7m (before costs and expenses).

 

Dividends

The Company paid dividends totalling 6.425p per share during the year, comprising the fourth interim dividend of 1.6625p per share relating to the financial year ended 31 March 2016 and three interim dividends of 1.5875p per share relating to the year ended 31 March 2017.

The Board has approved an interim dividend of 1.5875p per share for the quarter ended 31 March 2017 which will be paid on 30 June 2017, meeting its target of paying an annual dividend per share for the year of 6.35p (2016: 6.25p, 2015: 5.25p).

In the absence of unforeseen circumstances, the Board intends to pay quarterly dividends to achieve a target dividend of 6.45p per share for the year ending 31 March 2018.  The Board’s objective is to grow the dividend on a sustainable basis, at a rate which is fully covered by projected net rental income and does not inhibit the flexibility of the Company’s investment strategy.

 

Employees

The Company has four non-executive directors and no employees.  Non-executive directors are paid fixed salaries and participate in the performance of the Company through their shareholdings.  The Board is conscious of the increased focus on diversity in the boardroom and acknowledges the importance of diversity, while noting that changes to the composition of the Board should not be forced.  All non-executive directors are white males.  The Board believes that for any future appointment the best person for the role should be selected, while recognising the benefits of diversity when considering a particular appointment.

 

Corporate social responsibility

The Company is committed to delivering its strategic objectives in an ethical and responsible manner.  The Company’s environmental and social policies address the importance of these issues in the day-to-day running of the business, as detailed below.

Environmental policy

The four key elements of the Company’s environmental policy are:

• An independent environmental report is required for all potential acquisitions, which considers, amongst other matters, the historical and current usage of the site and the extent of any contamination present;
• An ongoing examination of existing and new tenants’ business activities is carried out to assess the risk of pollution occurring. The Company monitors all incoming tenants through its insurance programme to identify potential risks, and activities deemed to be high-risk are avoided.  As part of the active management of the portfolio, any change in tenant business practices considered to be an environmental hazard is reported and suitably dealt with;
• Sites are visited periodically and any obvious environmental issues are reported to the Board; and
• All leases prepared after the adoption of the policy commit occupiers to observe any environmental regulations. Any problems are referred to the Board.

Development activity

During the year the Company carried out one industrial development at a site in Stevenage.  The developer is sensitive to both ecological and sustainability considerations and has complied with environmental standards.  The development at Stevenage has been designed to achieve an EPC grade “A”.  Developments built to this environmental specification ensure the creation of an improved, stable environment and reduce heating and energy costs.

Social policy

The activities of the Company are carried out in a responsible manner, taking into account the social impact.

 

Approval of Strategic report

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

David Hunter

Independent Chairman

5 June 2017

 

Independent auditor’s report to the members of Custodian REIT plc on the final results for the year ended 31 March 2017

We confirm that we have issued an unqualified opinion on the full financial statements of Custodian REIT plc.  Our audit report on the full financial statements sets out the following risks of material misstatement which had the greatest effect on our audit strategy; the allocation of resources in our audit; and directing the efforts of the engagement team, together with how our audit responded to those risks and the key observations arising from our work:

These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Our liability for this report, and for our full audit report on the financial statements is to the Company’s members as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006.  Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose.  To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members as a body, for our audit work, for our audit report or this report, or for the opinions we have formed.

Deloitte LLP

Statutory Auditor

 

Consolidated and Company statements of comprehensive income

For the year ended 31 March 2017

The profit for the year arises from the Company’s continuing operations.

Consolidated and Company statements of financial position

As at 31 March 2017

Registered number: 08863271

These consolidated and Company financial statements of Custodian REIT plc were approved and authorised for issue by the Board of Directors on 5 June 2017 and are signed on its behalf by:

David Hunter

Independent Chairman

 

Consolidated and Company statements of cash flows

For the year ended 31 March 2017

Consolidated and Company statements of changes in equity

For the year ended 31 March 2017

Notes to the financial statements for the year ended 31 March 2017

 

• Corporate information

The Company is a public limited company incorporated and domiciled in England and Wales, whose shares are publicly traded on the London Stock Exchange plc’s main market for listed securities.  The consolidated financial statements have been prepared on a historical cost basis, except for the revaluation of investment property, and are presented in pounds sterling with all values rounded to the nearest thousand pounds (£000), except when otherwise indicated.  The consolidated financial statements were authorised for issue in accordance with a resolution of the Directors on 5 June 2017.

• Basis of preparation and accounting policies

 

• Basis of preparation

The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards adopted by the International Accounting Standards Board (“IASB”) and interpretations issued by the International Financial Reporting Interpretations Committee (“IFRIC”) of the IASB (together “IFRS”) as adopted by the European Union, and in accordance with the requirements of the Companies Act applicable to companies reporting under IFRS, and therefore they comply with Article 4 of the EU IAS Regulation.

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

 

• Basis of consolidation

The consolidated financial statements consolidate those of the parent company and its subsidiaries.  The parent controls a subsidiary if it is exposed, or has rights, to variable returns from its involvement with the subsidiary and has the ability to affect those returns through its power over the subsidiary.  Custodian Real Estate Limited has a reporting date in line with the Company.  Other subsidiaries have a December accounting reference date which has not been amended as those companies are expected to be liquidated during the next financial year.  All transactions and balances between group companies are eliminated on consolidation, including unrealised gains and losses on transactions between group companies.  Where unrealised losses on intra-group asset sales are reversed on consolidation, the underlying asset is also tested for impairment from a group perspective.  Amounts reported in the financial statements of the subsidiary are adjusted where necessary to ensure consistency with the accounting policies adopted by the Group.  Profit or loss and other comprehensive income of subsidiaries acquired or disposed of during the year are recognised from the effective date of acquisition, or up to the effective date of disposal, as applicable.

 

• Application of new and revised International Financial Reporting Standards

During the year the Company has applied a number of amendments to IFRSs and a new interpretation issued by the International Accounting Standards Board (IASB) that are mandatorily effective for accounting periods beginning on or after 31 March 2016:

• Annual Improvements to IFRSs 2012-2014 Cycle and;
• Amendments to IAS 1 ‘Disclosure Initiative’.

The application of the above amendments and interpretations has had no impact on the disclosures or on the amounts recognised in the Company’s financial statements.  At the date of authorisation of these financial statements, the following new and revised IFRSs which have not been applied in these financial statements were in issue but not yet effective:

• IFRS 9 ‘Financial Instruments’;
• IFRS 15 ‘Revenue from Contracts with Customers’;
• IFRS 16 ‘Leases’; and
• IAS 7 (amendments) ‘Disclosure Initiative’.

Other than to expand certain disclosures within the financial statements, the Directors do not anticipate that the application of these standards, amendments and interpretations will have a material impact on the Company’s financial statements in future periods, except that IFRS 9 will impact both the measurement and disclosures of financial instruments, IFRS 15 may have an impact on revenue recognition and related disclosures and IFRS 16 may have an impact on the classification of ground rent in the statement of comprehensive income and disclosure of an associated right of use asset in the statement of financial position.  Beyond the information above, it is not practicable to provide a reasonable estimate of the effect of these standards until a detailed review has been completed.

 

• Significant accounting policies

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

 

Going concern

The Directors believe the Company is well placed to manage its business risks successfully.  The Company’s projections show that the Company should continue to be cash generative and be able to operate within the level of its current financing arrangements.  Accordingly, the Directors continue to adopt the going concern basis for the preparation of the financial statements.

Income recognition

Revenue is recognised to the extent that it is probable that economic benefits will flow to the Company and the revenue can be reliably measured.  Revenue is measured at the fair value of the consideration received, excluding discounts, rebates, VAT and other sales taxes or duties.

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

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

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

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

Taxation

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

Investment property

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

Group undertakings

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

Financial assets

The Company’s financial assets include cash and cash equivalents and trade and other receivables.  All financial assets are initially recognised at fair value plus transaction costs, when the Company becomes party to the contractual provisions of the instrument.  Interest resulting from holding financial assets is recognised in the statement of comprehensive income on an accruals basis.

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

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

Cash and cash equivalents

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

Financial liabilities and equity

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

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

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

Bank borrowings

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

Trade payables

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

Leases

Payments on operating lease agreements where the Company is lessor are recognised as an expense on a straight-line basis over the lease term.  Payments on operating lease agreements where the Company is lessee are charged to the statement of comprehensive income on a straight-line basis over the term of the lease.

 

Segmental reporting

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

• Key sources of judgements and estimation uncertainty

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

Judgements

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

Valuation of property

Investment properties are valued at the reporting date at fair value.  Where investment properties are 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 the statement of comprehensive income.  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 independent valuers in determining the fair value of its investment properties.  The valuations are based upon assumptions including future rental income, anticipated maintenance costs and appropriate discount rates.  The valuers also make reference to market evidence of transaction prices for similar properties.

Acquisition of subsidiaries

The Board applies judgement as to whether the acquisition of a subsidiary comprises an asset purchase or a business combination[1].  A business comprises an integrated set of activities, including strategic and operational management, and assets capable of being managed for the purpose of providing an economic benefit to the owner.

The Board assessed the acquisition of the Light Industrial Portfolio, as detailed in Note 10, as an asset purchase because all outsourced strategic and operational management contracts were terminated on acquisition.

Estimates

There are no areas where assumptions and estimates are significant to the financial statements.

 

• 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.  Shares issued after the year end are disclosed in Note 20.

The Company became a FTSE EPRA/NAREIT index series constituent in March 2017 and EPRA performance measures have been disclosed to facilitate comparability with the Company’s peers through consistent reporting of key performance measures.  EPRA has issued recommended bases for the calculation of EPS which the Directors consider are better indicators of performance.

 

• Revenue

 

 

• Operating profit

Operating profit is stated after charging/(crediting):

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

 

• Finance costs

During the year the Company repaid a £20m term loan with Lloyds Bank plc resulting in one-off costs of £0.165m related to the accelerated recognition of the associated deferred arrangement fees.

 

• 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 20.0%.  The differences are explained below:

The Company operates as a REIT and hence profits and gains from the property investment business are normally exempt from corporation tax.  Reductions in the UK corporation tax rate from 20% to 19% (effective from 1 April 2017) and to 17% (effective 1 April 2020) were substantively enacted at 6 September 2016.

 

• Dividends

The Directors propose that the Company pays a fourth interim dividend relating to the quarter ended 31 March 2017 of 1.5875p per ordinary share (totalling £5.4m).  This dividend has not been included as a liability in these financial statements.  The fourth interim dividend is expected to be paid on 30 June 2017 to shareholders on the register at the close of business on 28 April 2017.

 

• Investment property

Included in investment properties is £3.4m relating to ongoing pre-let developments.

£233.1m (2016: £166.9m) of investment property has been charged as security against the Company’s borrowings.

The carrying value of investment property at 31 March 2017 comprises £361.6m freehold (2016: £274.6m) and £54.2m leasehold property (2016: £44.3m).

The investment properties are stated at the Directors’ estimate of their 31 March 2017 fair values.  Lambert Smith Hampton Group Limited (“LSH”), a professionally qualified independent valuer, valued the properties as at 31 March 2017 in accordance with the Appraisal and Valuation Standards published by the Royal Institution of Chartered Surveyors.  LSH has recent experience in the relevant location and category of the properties being valued.

Investment properties have been valued using the investment method which involves applying a yield to rental income streams.  Inputs include yield, current rent and ERV.  For the year end valuation, the equivalent yields used ranged from 4.7% to 14.3%.  Valuation reports are based on both information provided by the Company e.g. current rents and lease terms, which are derived from the Company’s financial and property management systems and are subject to the Company’s overall control environment, and assumptions applied by the valuer e.g. ERVs and yields.  These assumptions are based on market observation and the valuer’s professional judgement.  In estimating the fair value of each property, the highest and best use of the properties is their current use.

All other factors being equal, a higher equivalent yield would lead to a decrease in the valuation of investment property, and an increase in the current or estimated future rental stream would have the effect of increasing capital value, and vice versa. However, there are interrelationships between unobservable inputs which are partially determined by market conditions, which could impact on these changes.

Investment property additions include £26.75m relating to the Light Industrial Portfolio, which the Company acquired by purchasing the entire issued share capital of Custodian Real Estate GP Limited (formerly BLME (UK) GP Limited) and Custodian Real Estate Luxembourg S.à.r.l. (formerly LIBF (II) S.à.r.l.), being the partners in Custodian Real Estate Light Industrial Limited Partnership (formerly BLME Light Industrial Building Limited Partnership), an English limited partnership holding the title and beneficial interest in the Light Industrial Portfolio on acquisition.

On 13 October 2016 the trade and assets of Custodian Real Estate Light Industrial Limited Partnership were transferred to the Company at market value.

 

• Investments

Shares in subsidiaries

* Held indirectly

The Company’s dormant 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.  The registered office of Custodian Real Estate Luxembourg S.à.r.l. is 2 Rue d’Alsace, L-1122, Luxembourg.

The Company acquired 100% of the ordinary share capital of Custodian Real Estate GP Limited and Custodian Real Estate Luxembourg S.à.r.l. on 29 September 2016 as part of the acquisition of the Light Industrial Portfolio.  Custodian Real Estate GP Limited owns 100% of the ordinary share capital of Custodian Real Estate Nominees Limited.  Custodian Real Estate Luxembourg S.à.r.l. and Custodian Real Estate GP Limited hold 99.9% and 0.1% beneficial interests respectively in Custodian Real Estate Light Industrial Limited Partnership.

 

• Trade and other receivables

The Company has provided fully for those receivable balances that it does not expect to recover.  This assessment has been undertaken by reviewing the status of all significant balances that are past due and involves assessing both the reason for non-payment and the creditworthiness of the counterparty.  Trade receivables include £0.1m (2016: £0.1m) which are past due as at 31 March 2017 for which no provision has been made because the amounts are considered recoverable.  Included within accrued income are deferred lease incentives totalling £2.48m which are to be held for a period over one year.

 

• Trade and other payables

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

Amounts payable to subsidiary undertakings, arising on the transfer of the trade and assets of Custodian Real Estate Light Industrial Limited Partnership to the Company, are due on demand.

 

• Cash and cash equivalents

Cash and cash equivalents include £1.31m (2016: £0.49m) of restricted cash comprising £1.22m of rental deposits held on behalf of tenants and £0.09m of retentions held in respect of development fundings.

 

• Borrowings

On 25 February 2014, the Company agreed a RCF of £25m with Lloyds Bank plc for a term of five years.  On 13 November 2015, the Company and Lloyds Bank plc entered into an agreement to increase the total funds available under the RCF from £25m to £35m and extend the termination date to 13 November 2020.  The RCF is secured by way of a first charge over a discrete portfolio of properties, providing the lender with a maximum LTV ratio of 50% on those properties specifically charged to it and a floating charge.  Under the terms of agreement, the Company pays interest of 2.45% above three-month LIBOR per annum on the outstanding amounts utilised under the agreement from time to time.  At 31 March 2017, the RCF drawn was £nil.

On 9 December 2014 the Company agreed a £20m term loan with Lloyds Bank plc (“the Lloyds Loan”), secured by way of a first charge over a discrete portfolio of properties, providing the lender with a maximum LTV ratio of 50% on those properties specifically charged to it and a floating charge.  The loan attracts interest of 1.95% above three-month LIBOR per annum and is repayable on 10 October 2019.  On 6 June 2016 the Lloyds Loan was repaid in full, incurring one-off costs of £0.165m related to the accelerated recognition of the associated deferred arrangement fees.

On 14 August 2015, the Company and SWIP, with Lloyds Bank plc acting as agent, entered into an agreement for SWIP to provide the Company with a term loan facility of £20m, repayable on 14 August 2025.  The loan is secured by way of a first charge over a discrete portfolio of properties, providing the lender with a maximum LTV ratio of 45% on those properties specifically charged to it and a floating charge.  Under the terms of the agreement, the Company will pay fixed interest of 3.935% per annum on the balance.

On 6 June 2016, the Company and SWIP, with Lloyds Bank plc acting as agent, entered into an agreement for SWIP to provide the Company with a term loan facility of £45m, repayable on 6 June 2028.  The loan is secured by way of a first charge over a discrete portfolio of properties, providing the lender with a maximum LTV ratio of 45% on those properties specifically charged to it and a floating charge.  Under the terms of the agreement, the Company will pay fixed interest of 2.987% per annum on the balance.  The proceeds from this new loan were partially used to repay the Lloyds Loan.

On 5 April 2017, the Company and Aviva entered into an agreement for Aviva to provide the Company with a new term loan facility of £50m.  The loan is secured by way of a first charge over a discrete portfolio of properties, providing the lender with a maximum LTV ratio of 50% on those properties specifically charged to it and a floating charge.  The Company drew down the first tranche of £35m on 6 April 2017, which is repayable on 6 April 2032 with a fixed rate of interest of 3.02% per annum payable on the balance.

All of the Company’s borrowing facilities require minimum interest cover of 250% of the net rental income of the security pool.  The maximum LTV of the Company combining the value of all property interests (including the properties secured against the facilities) must be no more than 35%.

 

• Share capital

During the year, the Company raised £92.4m (before costs and expenses) through the placing of 87,771,274 new ordinary shares.

The Company has made further issues of new shares since the year end, which are detailed in Note 20 to the financial statements.

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 26 July 2016, the Board was given authority to issue up to 100,000,000 shares, pursuant to section 551 of the Companies Act 2006.  This 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.  58,781,274 ordinary shares have been issued under this authority since 26 July 2016, leaving an unissued balance of 41,218,726 at 31 March 2017.

In addition, the Company was granted authority to make market purchases of up to 27,888,207 ordinary shares under section 701 of the Companies Act 2006.  No market purchases of ordinary shares have been made.

On 14 August 2015, registration was completed of the Chancery Division of the High Court of Justice’s approval of the cancellation of the Company’s share premium account, standing at £181,485,649 as of 22 July 2015.

The following table describes the nature and purpose of each reserve within equity:

 

• Commitments and contingencies

Company as lessor

The Company lets all investment properties under operating leases.  The aggregated future minimum rentals receivable under all non-cancellable operating leases are:

 

• 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, Nathan Imlach, is also a director of Mattioli Woods and the Investment Manager.

Investment Management Agreement

On 25 February 2014 the Company entered into a three year IMA with the Investment Manager commencing on Admission, under which the Investment Manager was appointed as AIFM with responsibility for the property 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.

During the year the Investment Manager was paid an annual management fee calculated by reference to the NAV of the Company each quarter as follows:

• 9% of the NAV of the Company as at the relevant quarter day which is less than or equal to £200m divided by 4; plus
• 75% of the NAV of the Company as at the relevant quarter day which is in excess of £200m divided by 4.

The Investment Manager provides day-to-day administration of the Company and acts as secretary to the Company, including maintenance of accounting records and preparing the annual financial statements of the Company.  During the year the Company paid the Investment Manager an administrative fee equal to 0.125% of the NAV of the Company at the end of each quarter.

On 1 June 2017 the terms of the IMA were varied with effect from that date to extend the appointment of the Investment Manager for a further three years and to introduce further fee hurdles such that annual management fees payable to the Investment Manager under the IMA are now:

• 9% of the NAV of the Company as at the relevant quarter day which is less than or equal to £200m divided by 4;
• 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; plus
• 65% of the NAV of the Company as at the relevant quarter day which is in excess of £500m divided by 4.

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

• 125% of the NAV of the Company as at the relevant quarter day which is less than or equal to £200m divided by 4;
• 08% of the NAV of the Company as at the relevant quarter day which is in excess of £200m but below £500m divided by 4; plus
• 05% of the NAV of the Company as at the relevant quarter day which is in excess of £500m divided by 4.

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

The Investment Manager receives a fee of 0.25% (2016: 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 Company paid the Investment Manager £2.49m (2016: £1.80m) in respect of annual management charges, £0.37m (2016: £0.25m) in respect of administrative fees and £0.23m (2016: £0.22m) in respect of marketing fees.

During the prior year the Company paid Mattioli Woods £0.02m in respect of corporate transaction support

Properties

The Company owns MW House and Gateway House located at Grove Park, Leicester, which are partially let to Mattioli Woods.  Mattioli Woods paid the Company rentals of £0.41m (2016: £0.41m) during the year.

 

• 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.

Gearing ratio

The Board reviews the capital structure of the Company on a regular basis.  As part of this review, the Board considers the cost of capital and the risks associated with each class of capital.  The Company has a target net gearing ratio of 25% determined as the proportion of debt (net of unrestricted cash) to investment property.  The net gearing ratio at the year end was 14.5% (2016: 19.1%).

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

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

Interest rate sensitivity analysis

Interest rate risk arises on interest payable on the RCF only, as interest on all other debt facilities is payable on a fixed rate basis.  At 31 March 2017, the RCF was drawn at £nil and therefore the Company was not exposed to interest rate risk.

Market risk management

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

Market risk sensitivity

Market risk arises on the valuation of the Company’s property portfolio in complying with its bank loan covenants (Note 15).  The Company would breach its overall borrowing covenant if the valuation of its property portfolio fell by 59%.

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 there is an identified loss event which, based on previous experience, is evidence of a reduction in the recoverability of the cash flows.

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 2017 was £1.4m (2016: £1.1m).

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

Liquidity risk management

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

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

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 liability that are not based on observable market data (unobservable inputs).

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

Investment property – level 3

Fair value is based on valuations provided by an independent firm of chartered surveyors and registered appraisers. 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 2017, the fair value of the Company’s investment properties was £415.8m (2016: £319.0m).

Interest bearing loans and borrowings – level 3

As at 31 March 2017 the value of the Company’s loans was £63.8m (2016: £65.1m) and the amortised cost of the Company’s loans with Lloyds Bank plc and SWIP approximated their fair value.  The loans from SWIP includes a market-based break cost for early repayment (“Prepayment Option”), which is classified as a non-separable component of the loan.  If the Prepayment Option was classified as a separate financial instrument, it would increase the Company’s borrowings and decrease NAV at 31 March 2017 by £2.6m (2016: £1.5m).

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.

 

• Events after the reporting date

New equity

Since the reporting date the Company has issued 6.0m new ordinary shares of 1p each, raising £6.7m (before costs and expenses).

Acquisitions

On 28 April 2017 the Company acquired a 22,663 sq ft retail warehouse in Gloucester for £4.725m let to Magnet and Smyths Toys.  The units’ leases expire in September 2024 and September 2021 respectively with a total passing rent of £0.373m per annum, reflecting a NIY of 7.41%.

On 11 May 2017 the Company acquired a 27,480 sq ft car dealership in York for £3.92m let to Pendragon on a lease expiring on 27 February 2030 with a current passing rent of £0.24m per annum, reflecting a NIY of 5.75%.

On 12 May 2017 the Company acquired a 31,062 sq ft retail warehouse in Galashiels for £3.145m let to B&Q plc.  The unit’s lease expires on 27 December 2024 with a current passing rent of £0.275m per annum, reflecting a NIY of 8.21%.

On 12 May 2017 the Company acquired three retail warehouse units in Plymouth for £7.487m let to Oak Furniture Land, SCS and McDonald’s.  The units’ leases expire on 6 June 2025, 13 October 2026 and 28 September 2031 respectively with a total passing rent of £538,226 per annum, reflecting a NIY of 6.74%.

Borrowings

On 5 April 2017, the Company and Aviva entered into an agreement for Aviva to provide the Company with a new term loan facility of £50m.  The Company drew down the first tranche of £35m on 6 April 2017, which is repayable on 6 April 2032 with a fixed rate of interest of 3.02% per annum payable on the balance.

IMA

On 1 June 2017 the terms of the IMA were varied to extend the appointment of the Investment Manager for a further three years and to introduce further fee hurdles as set out in Note 18.

 

• Distribution of the Annual Report and accounts to members

The announcement above does not constitute a full financial statement of the Group’s affairs for the years ended 31 March 2016 or 31 March 2017.  The Group’s auditors have reported on the full accounts of each year and have accompanied them with an unqualified report.  The accounts have yet to be delivered to the Registrar of Companies.

The Annual Report and accounts will be posted to shareholders in due course, and will be available on our website (www.custodianreit.com) and for inspection by the public at the Company’s registered office address: 1 Penman Way, Grove Park, Enderby, Leicester LE19 1SY during normal business hours on any weekday.  Further copies will be available on request.

The AGM of the Company will be held at Canaccord Genuity Limited, 88 Wood Street, London, EC2V 7QR at 11:00am on 20 July 2017.

 

[1] Net Asset Value (“NAV”) movement including dividends paid and approved relating to the year on shares in issue at 31 March 2016.

[2] The European Public Real Estate Association (“EPRA”).

[3] Profit after tax excluding net gains on investment properties divided by weighted average number of shares in issue.

[4] Before costs and expenses of £1.3m.

[5] Before acquisition costs of £6.1m.

[6] Comprising £8.9m of valuation uplift from successful asset management initiatives and £0.1m of other valuation increases, less £6.1m of acquisition costs.

[7] Share price movement including dividends paid and approved for the year.

[8] Profit after tax, excluding net gains on investment properties and one-off costs, divided by dividends paid and approved for the year.

[9] Dividends paid and approved for the year.

[10] Gross borrowings less unrestricted cash, divided by portfolio value.

[11] Expenses (excluding operating expenses of rental property rechargeable to tenants) divided by average quarterly NAV.

[12] Expenses (excluding operating expenses of rental property) divided by average quarterly NAV.

[13] Source: Numis Securities Limited.
[14] This is a target only and not a profit forecast.  There can be no assurance that the target can or will be met and it should not be taken as an indication of the Company’s expected or actual future results.  Accordingly, shareholders or potential investors in the Company should not place any reliance on this target in deciding whether or not to invest in the Company or assume that the Company will make any distributions at all and should decide for themselves whether or not the target dividend yield is reasonable or achievable.

[15] Dividends totalling 6.425p per share (1.6625p relating to the prior year and 4.7625p relating to the year) were paid on shares in issue throughout the year.  Dividends paid on shares in issue at the year end averaged 5.5p per share due to new shares being issued ex-dividend.

[16] 0.6p per share through new issuance plus 0.9p per share notional dividend saving due to new shares being issued ex-dividend.
[17] Large development and investment REITs comprise: British Land Company Plc, Land Securities Group Plc, Hammerson Plc, Intu Properties Plc, Derwent London Plc, Great Portland Estates Plc, Workspace Group Plc, Capital & Counties Properties Plc, Shaftesbury Plc, Hansteen Holdings Plc, Segro Plc, Big Yellow Group Plc, Safestore Holdings Plc, Empiric Student Property Plc, Unite Group Plc, Capital & Regional Plc, Helical Plc, LondonMetric Property Plc.
[18] Assuming three month LIBOR of 0.35% and that Tranche 2 attracts fixed annual interest of 3.02%.
[19] ERV of occupied property divided by total portfolio ERV.
[20] Source: Financial Times 23 April 2017.
[21] Source: Savills UK Commercial Market in Minutes April 2017.
[22] Source: Lambert Smith Hampton Q1 2017 UK Investment Transactions Bulletin.
[23] Source: Financial Times 17 October 2016.

[24] Before the impact of £6.1m acquisition costs.

[25] Includes car showrooms, petrol filling stations, children’s day nurseries, restaurants, health and fitness units, hotels and healthcare centres.

[26] Net of disposal costs of £0.2m.

[27] Portfolio passing rent divided by portfolio valuation plus estimated purchasers’ costs of 6.5%.

[28] Portfolio passing rent divided by portfolio valuation plus estimated purchasers’ costs of 6.5%.

[29] As defined by the Corporation Tax Act 2010.

[30] As defined by IFRS 3 – Business Combinations.