Managing our diversified portfolio
Annual Report and Accounts 2024
Custodian Property Income REIT - Annual Report 2024
Strategic Report Governance Financial Statements
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Inside this report
Welcome to our Annual Report and Accounts 2024
Custodian Property Income REIT plc ("Custodian Property Income REIT" or "the Company") is a UK real estate investment trust ("REIT") which seeks to deliver an enhanced income return by investing in a diversified portfolio of smaller, regional properties with strong income characteristics let to predominantly institutional grade tenants across the UK.
For more information, visit: custodianreit.com
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Asset Management and Sustainability Report 2024
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01
Strategic Report
Property highlights | 01 |
Financial highlights and performance summary | 02 |
Business model and strategy | 04 |
Chairman's statement | 08 |
Investment Manager's report | 13 |
Financial review | 17 |
Principal risks and uncertainties | 21 |
Section 172 statement and stakeholder | |
relationships | 27 |
32 | |
Governance | |
Board of Directors | 32 |
Investment Manager personnel | 35 |
Governance report | 37 |
ESG Committee report | 42 |
Audit and Risk Committee report | 46 |
Management Engagement Committee report | 48 |
Nominations Committee report | 49 |
Remuneration report | 51 |
Directors' report | 53 |
Directors' responsibilities statement | 58 |
Hilton
59
Financial Statements
Independent auditor's report | 59 |
Consolidated statement of | |
comprehensive income | 65 |
Consolidated and Company statement | |
of financial position | 66 |
Consolidated and Company statements | |
of cash flows | 67 |
Consolidated statement of changes in equity | 68 |
Company statement of changes in equity | 68 |
Notes to the financial statements | 69 |
Environmental disclosures (unaudited) | 89 |
Historical performance summary (unaudited) | 90 |
Company information | 91 |
Investment policy | 92 |
Glossary of terms | 93 |
Financial calendar | 95 |
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Custodian Property Income REIT - Annual Report 2024
Strategic Report Governance Financial Statements
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Property highlights
Improving occupancy and significant capital investment
Property highlights
Portfolio value1
£589.1m
Property valuation decreases
£-27.0m
Representing a 4.0% like-for-like decrease, explained further in the Investment Manager's report.
Occupational demand has been resilient during the year
Occupancy
91.7%
Occupancy rates have increased from 90.3% to 91.7% by the year end, improving further post year end to c.93%.
Capital investment
£19.0m
Primarily comprising:
- £6.8m refurbishing four office buildings in Leeds and Manchester
- £3.5m redeveloping an industrial site in Redditch
- £2.2m refurbishing an industrial asset in Ashby-de-la-Zouch
- £1.3m buying the long-leasehold of a unit at a 10- unit industrial asset in Knowsley
- £1.0m reconfiguring retail assets in Shrewsbury and Liverpool
- £2.0m invested in photovoltaics and electric vehicle chargers at various sites
Disposal proceeds
£18.2m
At an aggregate 8% premium to valuation (£1.4m profit on disposal) comprising:
- £8.0m industrial unit in Milton Keynes
- £6.0m industrial unit in Weybridge
- £1.6m high street retail units in Bury St Edmunds and Cirencester
- £2.0m vacant offices in Derby
- £0.6m children's day nursery in Chesham
Disposal proceeds since the year end
£11.3m
At an aggregate 49% premium to pre-offer valuation comprising:
- £9.0m vacant industrial unit in Warrington
- £2.3m vacant former car showroom in Redhill
Crewe
1. Includes £11.0m of assets sold since the year end classified as 'held- for-sale'.
Custodian Property Income REIT - Annual Report 2024 | Strategic Report Governance Financial Statements |
Financial highlights and performance summary
Earnings growth supporting dividend increases
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Returns | ||||||||||||
*EPRA2 earnings per share3 | Loss before tax (£m) | *Dividend cover6 | *Share price total return8 | |||||||||
5.8p | £-1.5m | 100.7% | -2.6% | |||||||||
2023: 5.6p | 2023: £-65.8m | 2023: 102.2% | 2023: -7.0% | |||||||||
Rental growth and improvement in occupancy | Loss for the year a result of £27.0m valuation | In line with the Company's policy of paying fully | Share price decreased from 89.2p to 81.4p | |||||||||
have offset administrative cost inflation and higher | decreases. | covered dividends. | during the year. | |||||||||
finance costs. | ||||||||||||
Basic and diluted earnings per share4 | Dividends per share5 | *NAV total return per share7 | ||||||||||
-0.3p | 5.8p | -0.4% | 2. | The European Public Real Estate Association ("EPRA"). | ||||||||
3. | Profit after tax, excluding net loss on investment property, | |||||||||||
divided by weighted average number of shares in issue. | ||||||||||||
4. | Profit after tax divided by weighted average number of shares | |||||||||||
2023: -1.4p | 2023: 5.5p | 2023: -12.5% | 5. | in issue. | ||||||||
Dividends paid and approved for the year. | ||||||||||||
Loss resulting from a £27.0m valuation decreases. | Special dividend of 0.3p approved for the year. Target | 5.5% dividends paid (2023: 4.6%) and a 5.9% capital | 6. | Profit after tax, net loss on investment property, divided by | ||||||||
dividends paid and approved for the year. | ||||||||||||
dividend per share for the year ended 31 March 2025 | decrease (2023: 17.1% capital decrease). | |||||||||||
7. | Net Asset Value ("NAV") movement including dividends paid | |||||||||||
of 6.0p. | during the year on shares in issue at 31 March 2023. | |||||||||||
8. | Share price movement including dividends paid during the year. | |||||||||||
Langley Mill
Custodian Property Income REIT - Annual Report 2024 | Strategic Report Governance Financial Statements |
Financial highlights and performance summary continued
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Capital values
NAV per share and *NTA per share
93.4p
2023: 99.3p
NAV and *EPRA NTA9 (£m)
£411.8m
2023: £437.6m
Decreased due to £27.0m of valuation decreases.
*Net gearing 10
29.2%
2023: 27.4%
Further reduced to 27.9% following property disposals since the year-end and broadly in line with the Company's 25% target.
*Weighted average cost of drawn debt facilities
4.1%
2023: 3.8%
Base rate (SONIA) increased from c.4.2% to c.5.2% during the year. Impact mitigated by 78% fixed rate debt.
Costs
*Ongoing charges ratio11 ("OCR")
2.20%
2023: 1.96%
*OCR excluding direct property expenses12
1.24%
2023: 1.23%
Environmental
*Weighted average energy performance certificate ("EPC") rating13
C (53)
2023: C (58)
EPCs updated across 42 properties demonstrating continuing improvements in the environmental performance of the portfolio.
- EPRA net tangible assets ("NTA") does not differ from the Company's IFRS NAV or EPRA NAV.
- Gross borrowings less cash (excluding restricted cash) divided by property portfolio value.
- Expenses (excluding operating expenses of rental property recharged to tenants) divided by average quarterly NAV.
- Expenses (excluding operating expenses of rental property) divided by average quarterly NAV.
- Weighted by floor area. For properties in Scotland, English equivalent EPC ratings have been obtained.
- Alternative performance measures ("APMs") - the Company reports APMs alternative performance measures ("APMs") to assist stakeholders in assessing performance alongside the Company's results on a statutory basis, set out above. APMs are among the key performance indicators used by the Board to assess the Company's performance and are used by research analysts covering the Company. The Company uses APMs based upon the EPRA Best Practice Recommendations Reporting Framework which is widely recognised and used by public real estate companies. Certain other APMs may not be directly comparable with other companies' adjusted measures and APMs are not intended to be a substitute for, or superior to, any IFRS measures of performance. Supporting calculations for APMs and reconciliations between APMs and their IFRS equivalents are set out in Note 22.
Custodian Property Income REIT - Annual Report 2024
Strategic Report Governance Financial Statements
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Business model and strategy
Purpose
Custodian Property Income REIT offers investors the opportunity to access a diversified portfolio of UK commercial real estate through a closed-ended fund. The Company seeks to provide investors with an attractive level of income and the potential for capital growth from a portfolio with strong environmental credentials, becoming the REIT of choice for private and institutional investors seeking high and stable dividends from well-diversified UK real estate.
The Board reviews the Company's investment objectives annually to ensure they remain appropriate and in shareholders' best interests
Stakeholder interests
The Board recognises the importance of all stakeholder interests and keeps these at the forefront of business and strategic decisions, ensuring the Company:
- Understands and meets the needs of its occupiers, owning fit-for-purpose properties with strong environmental credentials in the right locations which comply with safety regulations;
- Protects and improves its stable cash flows with long-term planning and decision making, implementing its policy of paying dividends fully covered by recurring earnings and securing the Company's future; and
- Adopts a responsible approach to communities and the environment, actively seeking ways to minimise the Company's impact on climate change and providing the real estate fabric of the economy, giving employers a place of business.
Investment policy
The Company's investment policy14 is summarised below:
- To invest in a diverse portfolio of UK commercial real estate, principally characterised by smaller, regional, core/core-plus15 properties that provide enhanced income;
- The property portfolio should be diversified by sector, location, tenant and lease term, with a maximum weighting to any one property sector or geographic region of 50%;
- To acquire modern buildings or those considered fit for purpose by occupiers, focusing on areas with:
- - High residual values;
- - Strong local economies; and
- - An imbalance between supply and demand.
- No one tenant or property should account for more than 10% of the rent roll at the time of purchase, except for:
- - Governmental bodies or departments; or
- - Single tenants rated by Dun & Bradstreet as having a credit risk score worse than two16, where exposure may not exceed 5% of the rent roll.
- Not to undertake speculative development, except for the refurbishment or redevelopment of existing holdings;
- To seek further growth, which may involve strategic property portfolio acquisitions and corporate consolidation; and
- The Company may use gearing provided that the maximum loan-to-value ("LTV") shall not exceed 35%, with a medium-term net gearing target of 25% LTV.
The Board reviews the Company's investment objectives at least annually to ensure they remain appropriate to the market in which the Company operates and in the best interests of shareholders.
Differentiated property strategy
The Company's portfolio is focused on smaller, regional, core/core-plus assets which helps achieve our target of high and stable dividends from well- diversified real estate by offering:
- An enhanced yield on acquisition - with no need to sacrifice quality of property, location, tenant or environmental performance for income and with a greater share of value in 'bricks and mortar';
- Greater diversification - spreading risk across more assets, locations and tenants and offering more stable cash flows; and
- A higher income component of total return - driving out-performance with forecastable and predictable returns.
Success in achieving the Company's performance and sustainability objectives is, in part, measured by performance against key performance indicators set out in detail in the Financial review and ESG Committee reports respectively. The Principal risks and uncertainties section of the Strategic Report sets out potential risks in achieving the Company's objectives.
- A full version of the Company's Investment Policy is shown in the Investment Policy section of this Annual Report.
- Core real estate generally offers the lowest risk and target returns, requiring little asset management and fully let on long leases. Core-plus real estate generally offers low-to-moderate risk and target returns, typically high-quality and well-occupied properties but also providing asset management opportunities.
- A risk score of two represents "lower than average risk".
Custodian Property Income REIT - Annual Report 2024
Business model and strategy continued
Strategic Report Governance Financial Statements
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Growth strategy
The Board is committed to seeking further growth in the Company to increase the liquidity of its shares and reduce ongoing charges. Our growth strategy involves:
- Organic growth through share issuance at a premium to NAV;
- Broadening the Company's shareholder base, particularly through further penetration into online platforms;
- Becoming the natural choice for private clients and wealth managers seeking to invest in UK real estate;
- Taking investor market share from open-ended funds and peer group companies being wound- down; and
- Strategic property portfolio acquisitions and corporate consolidation.
The Board ensures that property fundamentals are central to all decisions.
1 year rolling average transaction yield
8.50 | ||||||||||||||||||||||||
8.00 | ||||||||||||||||||||||||
7.50 | ||||||||||||||||||||||||
7.00 | ||||||||||||||||||||||||
6.50 | ||||||||||||||||||||||||
6.00 | ||||||||||||||||||||||||
5.50 | ||||||||||||||||||||||||
5.00 | ||||||||||||||||||||||||
4.50 | ||||||||||||||||||||||||
4.00 | ||||||||||||||||||||||||
2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 |
The Board is committed to seeking further growth in the Company to increase the liquidity of its shares and reduce the ongoing charges ratio
Eurocentral
Weighting by income | ||||||
Sector | 31 March 2024 | |||||
Industrial | 40% | |||||
Retail warehouse | 23% | |||||
Office | 16% | |||||
Other | 13% | |||||
High street retail | 8% | |||||
Weighting by income | |||||||||
Location | 31 March 2024 | ||||||||
West Midlands | 20% | ||||||||
North-West | 20% | ||||||||
East Midlands | 13% | ||||||||
South-East | 11% | ||||||||
Scotland | 12% | ||||||||
South-West | 10% | ||||||||
North-East | 9% | ||||||||
Eastern | 4% | ||||||||
Wales | 1% | ||||||||
Custodian Property Income REIT - Annual Report 2024
Business model and strategy continued
Diverse portfolio
Strategic Report Governance Financial Statements | < 06 | < |
Annual | ||||
passing rent | % portfolio | |||
Top 10 tenants | Asset locations | (£m) | income | |
Aberdeen, Edinburgh, | ||||
Glasgow, Ipswich, Norwich, | ||||
Menzies Distribution | Dundee, Swansea, York | 1.5 | 3.6% | |
Swindon, Ashton-under-Lyne, | ||||
B&M Retail | Plymouth, Carlisle | 1.4 | 3.2% | |
Wickes Building | Winnersh, Burton upon Trent, | |||
Supplies | Southport, Nottingham | 1.2 | 2.8% | |
B&Q | Banbury, Weymouth | 1.0 | 2.3% | |
Matalan | Leicester, Nottingham | 1.0 | 2.3% | |
DFS | Droitwich, Measham | 0.9 | 2.1% | |
First Title (t/a Enact | ||||
Conveyancing) | Leeds | 0.8 | 1.9% | |
Zavvi | Winsford | 0.7 | 1.7% | |
Homebase | Leighton Buzzard, Cromer | 0.6 | 1.5% | |
Regus (West Malling) | West Malling | 0.6 | 1.5% | |
Custodian Property Income REIT - Annual Report 2024
Strategic Report Governance Financial Statements
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Business model and strategy continued
Experian Tenant Risk rating
Investment Manager
Custodian Capital Limited ("the Investment
57%
as at 31 March 2024
Manager") is appointed under an investment
% of ERV | ||||||
13% | 10% | |||||
8% | 8% | |||||
2% | 2% | |||||
Government | Very low risk | Low risk | Below average | Above average | High risk | Other |
risk | risk | Perth |
management agreement ("IMA") to provide property management and administrative services to the Company. Richard Shepherd-Cross is Managing Director of the Investment Manager. Richard has over 25 years' experience in commercial property, qualifying as a Chartered Surveyor in 1996 and until 2008 worked for JLL, latterly running its national portfolio investment team.
Richard established Custodian Capital Limited as the Property Fund Management subsidiary of Mattioli Woods plc ("Mattioli Woods") and in 2014 was instrumental in the launch of Custodian Property Income REIT from Mattioli Woods' syndicated property portfolio and its 1,200 investors. Following the successful IPO of the Company, Richard has overseen the growth of the Company to its current property portfolio of c.£600m.
Our environmental, social and governance ("ESG") objectives
- Improving the energy performance of our buildings - investing in carbon-reducing technology, infrastructure and onsite renewables and ensuring redevelopments are completed to high environmental standards which are essential to the future leasing prospects and valuation of each property
- Reducing energy usage and emissions - liaising closely with our tenants to gather and analyse data on the environmental performance of our properties to identify areas for improvement
- Achieving positive social outcomes and supporting local communities - engaging constructively with tenants and local government
to ensure we support the wider community through local economic and environmental plans and strategies and playing our part in providing the real estate fabric of the economy, giving employers safe places of business that promote tenant well-being
- Understanding environmental risks and opportunities - allowing the Board to maintain appropriate governance structures to ensure the Investment Manager is appropriately mitigating risks and maximising opportunities
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Complying with all requirements and reporting in line with best practice where appropriate
- exposing the Company to public scrutiny and communicating our targets, activities and initiatives to stakeholders
Our smaller-lot specialism has consistently delivered significantly higher yields with lower volatility without exposing shareholders to additional risk
Richard Shepherd-Cross
Investment Manager
Richard is supported by the Investment Manager's other key personnel: Ed Moore - Finance Director, Alex Nix - Assistant Investment Manager and Tom Donnachie - Portfolio Manager, along with a team of five other surveyors and four accountants.
Custodian Property Income REIT - Annual Report 2024
Strategic Report Governance Financial Statements
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Chairman's statement
A year of earnings improvement
Our 10 year average annual NAV total return of 5.5% was driven by strong recurring earnings with fully covered dividends
In my first annual report as chairman of Custodian Property Income REIT, I am very pleased to note March 2024 as a significant milestone for the Company, marking the 10 year anniversary since launch. Over the last decade there has been significant amounts of change: politically; economically; and in terms of social volatility including COVID.
During that time the Company has grown successfully and delivered on its objectives with an over sixfold increase in the size of the portfolio delivering an average annual NAV total return of 5.5%, paying
an annual average 5.9p per share of fully covered dividends and a decreasing ongoing charges ratio. This success has been achieved by the Company's resolute focus on its key strategic objectives: to be fully invested in a portfolio of UK, commercial real estate, characterised by smaller regional properties; and to provide enhanced income-centric total returns. Through the growth of the Company we are able to provide access to the income advantages offered by sub-institutionallot-sized properties to a broad range of institutional, wealth management and private investors.
Corporate activity
During the last 12 months listed real estate news has been dominated by corporate activity. The Boards of five of the Company's close peer group determined that being consolidated or selling their portfolio best solves the issue of trading at an embedded deep discount to NAV, with another announcing a strategic review in April 2024. By this time next year Custodian Property Income REIT could be one of very few active, genuinely diversified property investment companies available to investors in the listed sector.
The Board believes strongly in the benefits of diversification in mitigating property and sector specific risk, while still delivering dividends that are fully covered by recurring earnings. The Board also remains firm in its belief that this is a strategy that is well suited to long-term investors in real estate, allowing for the timely execution of acquisitions and disposals without the constraints of sector specificity, while setting the Company apart from the single sector, often higher risk funds which have dominated the market over the last few years.
A decade of dividend cover
Mar-15
Mar-16
Mar-17
Mar-18
Mar-19
Mar-20
Mar-21
Mar-22
Mar-23
Mar-24
Mar-25
0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 |
Pence per share
David | Dividend |
MacLellan | EPRA earnings |
Chairman |
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Custodian REIT plc published this content on 03 July 2024 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 03 July 2024 08:48:06 UTC.