FY21 has seen a market where almost every commercial property investment has been impacted by COVID-19 - some negatively and some positively. We have not seen such a widespread impact across the whole property investment market since the Global Financial Crisis. However, a downturn is often the best time for an investment strategy to be tested, and so the last year has proved. Custodian REIT has endured lower volatility relative to its close peer group of diversified property investment companies, and its property portfolio continues to deliver asset management opportunities which are value accretive as discussed in the Asset management report.
Property investment companies with certain sector specific investment strategies, such as healthcare and logistics, have outperformed during the year. However, we believe that for a large swathe of investors the long-term attributes of a diversified strategy remain the key attraction of real estate investment. Our strategy offers diversification of tenant, lease expiry profile and asset type, low net gearing, a risk-averse debt profile, strong regional property locations and the ability of the management team to generate future income from the assets. These attributes contribute to lower share price volatility than the close peer group and have been rewarded with continued dividends, supporting a 5% plus dividend yield for most of the year.
The Company enjoys the support of a wide range of shareholders with the majority classified as private client or discretionary wealth management investors. The Company's investment and dividend strategy is well suited to investors looking for a close proxy to direct real estate investment but in a managed and liquid structure. After many months of Open-Ended Property Funds blocking redemptions, (in part due to FCA restrictions and in part due to lack of liquidity) the investment trust structure offers a natural choice for retail investors seeking high and stable dividends from well-diversified UK real estate through a liquid vehicle.
Custodian Capital Limited ("the Investment Manager") is appointed under an investment management agreement ("IMA") to provide property management and administrative services to the Company. The performance of the Investment Manager is reviewed each year by the Management Engagement Committee ("MEC"). During the year the fees paid to Investment Manager were GBP3.8m (2020: GBP4.0m) in respect of annual management and administrative fees. Further details of fees payable to the Investment Manager are set out in Note 18.
The Board is pleased with the performance of the Investment Manager, particularly in rent collection levels and its continued successful asset management during the pandemic which contributed to both capital values and income. The Board is satisfied that the Investment Manager's performance remains aligned with the Company's purpose, values and strategy.
The MEC reviewed, in detail, the arrangements with the Investment Manager when the Investment Management Agreement ("IMA") reached the end of its three-year term on 31 May 2020. In light of the positive performance of the Company the Board agreed a further three-year term with the Investment Manager, from 1 June 2020. The fees payable to the Investment Manager under the IMA were amended to include: ? A step down in the annual management fees from 0.65% to 0.55% of NAV applied to NAV in excess of GBP750m; and ? A step down in the administrative fee from 0.05% to 0.03% of NAV applied to NAV in excess of GBP750m.
All other key terms of the IMA remained unchanged. The Board consider these amendments to the IMA to be in the best interests of the Company's shareholders because: ? Continued growth in NAV, particularly above thresholds of GBP500m and GBP750m, will further reduce the Company's OCR
and increase dividend capacity; and ? Another three-year term provides the Investment Manager with appropriate security of tenure and allows further
investment in the dedicated systems and people providing its services under the IMA.
Board succession and remuneration
Although the Company's succession policy allows for a director tenure of longer than nine years, in line with the 2019 AIC Corporate Governance Code for Investment Companies ("AIC Code"), the Board acknowledges the benefits of ongoing Board refreshment and for this reason expected Director retirement dates are staggered within a nine year tenure period.
On 1 January 2021, after nearly seven years of service, Professor Barry Gilbertson retired as Senior Independent Non-Executive Director of the Company. The Board would like to thank Barry for his significant contribution to the development of the Company since his appointment on IPO in 2014.
Responding to Barry's departure and the growth of the Company since inception we were delighted to welcome Elizabeth McMeikan and Chris Ireland to the Board on 1 April 2021. Both new Directors bring a range of different but complementary skills which strengthen the Board's property and governance experience and add to its diversity. We look forward to the contribution they will both make.
The Board is conscious of the increased focus on diversity and recognises the value and importance of diversity in the boardroom. No Directors are from a minority ethnic background. The appointment of Elizabeth McMeikan increases the female representation on the Board to 33% which meets the gender diversity recommendations of the Hampton-Alexander Review for at least 33% female representation on FTSE350 company boards. As a constituent of the FTSESmallCap Index Custodian REIT is not bound by this recommendation. The Board supports the overall recommendations of the Hampton-Alexander and Parker Reports although it is not seen to be in the interests of the Company and its shareholders to set prescriptive diversity targets for the Board at this point.
In March 2020 the Remuneration Committee determined that there would be no increase in the level of Directors' annual fees for the year ending 31 March 2021 due to the uncertainty caused by the COVID-19 pandemic. For the year ending 31 March 2022 the Remuneration Committee has continued its historical policy of paying appropriately benchmarked Directors' fees.
Environmental, social and governance ("ESG")
The Board recognises that its decisions have an impact on the environment, people and communities. It also believes there are positive financial reasons to incorporate good ESG practices into the way we do business.
The Board shares the increased stakeholder interest in, and recognises the importance of, compliance requirements around good ESG management. It seeks to adopt sustainable principles wherever possible, actively seeking opportunities to make environmentally beneficial improvements to its property portfolio and encouraging tenants to report and improve emissions data. As testament to this commitment, the Board recently constituted an ESG Committee to monitor the Company's performance against its environmental key performance indicators ("KPIs"); ensure it complies with its environmental reporting requirements; assess the engagement with the Company's environmental consultants; and assess the level of social outcomes being achieved for its stakeholders and the communities in which it operates.
The Company's ESG policy outlines our approach to managing ESG impacts and provides the framework for setting and reviewing environmental and social objectives to ensure we are continuously improving our performance and setting a leadership direction.
As a result, the Board committed to: ? Seek to minimise pollution and comply with all relevant environmental legislation; ? Gather and analyse data on our environmental performance across our property portfolio; and ? Monitor environmental performance and achievements against targets for our properties as a commitment to continuous
Progress towards these commitments during the year is summarised below: ? The Company's Annual Report for the year ended 31 March 2020 received a 'most improved' award for its first year
complying with EPRA Sustainability Best Practice Recommendation reporting. ? The Company made its first Global Real Estate Sustainability Benchmark ("GRESB") submission in July 2020, one of
the most widely used sustainability benchmarks in the real estate sector. The results of this submission have
provided a valuable insight into the Company's current sustainability performance and identified certain areas for
improvement. As a result during the year the Company implemented a comprehensive data management service using a
dedicated software system that collects, verifies, stores and reports on the key carbon and ESG performance
metrics. This system will both ensure all data is robust and accurate for external and internal reporting and
provide data access for tenants to upload data direct and share information to assist them in improving
environmental performance. ? The Company set target environmental KPIs to provide a way to measure its success towards achieving its
environmental objectives and ensure the Investment Manager is embedding key ESG principles into portfolio
management. ? The Company undertook its first in-depth review of climate-related risks and opportunities to begin to align
disclosures to the recommendations of the Taskforce on Climate-related Financial Disclosures ("TCFD") and better
understand how the Company and the portfolio will be impacted by climate change and the transition to a low-carbon
Details of the Company's environmental policy and its KPIs are contained within the ESG Committee report within the Strategic report.
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