Custodian REIT : reports unaudited net asset value as at 30 September 2020 and dividend update

29 October 2020

Custodian REIT plc

("Custodian REIT" or "the Company")

Unaudited net asset value as at 30 September 2020 and dividend update

Custodian REIT (LSE: CREI), the UK commercial real estate investment company, today reports its unaudited net asset value ("NAV") as at 30 September 2020, highlights for the period from 1 July 2020 to 30 September 2020 ("the Period") and the dividend payable for the Period.

Financial highlights

• Rent collection remains impacted by the COVID-19 pandemic:
• • 88% of rent collected relating to the Period, adjusted for contractual rent deferrals (quarter ended 30 June 2020: 90%); and
  • To date, 74% of rent collected relating to the quarter ending 31 December 2020, adjusted for contractual rent deferrals
• NAV total return per share1 for the Period of 0.5%, comprising 1.0% dividends paid less a 0.5% capital decrease
• Dividend per share approved for the Period of 1.05p (quarter ended 30 June 2020: 0.95p)
• Aggregate dividends per share of 2.0p for the first half of the year ending 31 March 2021 (2020: 3.325p), 33% ahead of the 1.5p minimum announced in April 2020
• EPRA earnings per share2 for the first half of the year ending 31 March 2021 of 2.6p (2020: 3.4p)
• NAV per share of 95.2p (30 June 2020: 95.7p)
• NAV of £399.8m (30 June 2020: £402.1m)
• Net gearing3 of 23.4% loan-to-value (30 June 2020: 23.5%)

Portfolio highlights

• Property portfolio value of £532.3m (30 June 2020: £533.7m):
• • £3.1m aggregate valuation decrease for the Period (0.6% of property portfolio) comprising a £2.8m valuation increase from successful asset management initiatives and a £5.9m decrease due primarily to the impact of COVID-19 on estimated rental values ("ERVs")

• • £0.9m invested in the acquisition of land for a pre-let development of a Starbucks drive-through restaurant in Nottingham
• EPRA occupancy4 92.9% (30 June 2020: 93.8%)

1. NAV per share movement including dividends paid during the Period.
2. Profit after tax excluding net gains or losses on investment property divided by weighted average number of shares in issue.
3. Gross borrowings less cash (excluding rent deposits) divided by portfolio valuation.
4. ERV of let property divided by total portfolio ERV.

Net asset value

The unaudited NAV of the Company at 30 September 2020 was £399.8m, reflecting approximately 95.2p

per share, a decrease of 0.5p (0.5%) since 30 June 2020:
	Pence per
	share	£m
NAV at 30 June 2020	95.7	402.1
Valuation movements relating to:
- Asset management activity	0.7	2.8
- Other valuation movements	(1.4)	(5.9)
Net valuation movement	(0.7)	(3.1)
Acquisition costs	-	(0.1)
	(0.7)	(3.2)
Income earned for the Period5	2.5	10.5
Expenses, receivable provisioning and net finance costs for the Period5	(1.3)	(5.6)
Dividends paid6 relating to the previous quarter	(1.0)	(4.0)
NAV at 30 September 2020	95.2	399.8

1. Including £0.9m of annual insurance premium recharged to tenants.
2. Dividends of 0.95p per share relating to the quarter ended 30 June 2020 were paid on 28 August 2020.

The NAV attributable to the ordinary shares of the Company is calculated under International Financial Reporting Standards and incorporates the independent portfolio valuation as at 30 September 2020 and net income for the Period. The movement in NAV reflects the payment of a 0.95p per share dividend relating to the quarter ended 30 June 2020 during the Period, which was fully covered by net cash collections and EPRA earnings in that quarter, but does not include any provision for the approved dividend of 1.05p per share for the Period to be paid on 30 November 2020.

Market commentary

Commenting on the market, Richard Shepherd-Cross, Managing Director of Custodian Capital Limited (the Company's discretionary investment manager) said:

"Investment activity is increasing and appears to be tracking the emerging picture of forecast occupier demand. There is confidence in the industrial and logistics market where record investment volumes have been matched by record occupational demand for warehouse space. This occupational demand, driven by the continued growth of e-commerce and onshoring of supply chains, combined with low vacancy rates has led to the continuation of rental growth. Much of the investment capital that might have been focused on the office or retail sectors has been redirected to industrial and logistics. We see continued opportunity in this sector as the UK has yet to build a sufficient logistics network to support the continued growth in e- commerce.

"Despite widespread remote working and the resulting low utilisation of offices across the country we expect recognition from occupiers of the social and well-being impact of returning to offices in some meaningful way, post the COVID-19 pandemic. Office owners must invest in their existing buildings to create flexible working spaces which may result in greater space requirements per head but perhaps for fewer workers. Offices allow space for organisational productivity, rather than individual productivity which may prove better when delivered working remotely either from home or smaller satellite offices. The lettings market has already seen an increase in enquiries in satellite office locations reflecting this trend which could be positive for Custodian REIT's portfolio of small regional offices, acknowledging that forecasting office demand is currently subject to significant uncertainty.

"The retail market has borne the brunt of the impact of lockdown with a huge reduction in footfall and consumers switching to online retailing instead. The COVID-19 pandemic disruption has accelerated trends that were already embedded in retailing when online retail already made up almost 20% of all UK retail sales, namely an oversupply of shops, downward pressure on rents and a rise in the number of retailers failing.

"ONS data indicates online retail sales reached 32.8% in May 2020 during the national lockdown compared to 18.8% in May 2019. As lockdown was eased in the summer, so people returned to the shops and online sales dipped, which is a positive signal for physical retail. While online sales will remain an important part of retailers' strategies, the physical shop is not yet dead. This physical presence is particularly relevant for prime city centre locations where retailers benefit from high footfall promoting brand awareness and enabling 'showrooming'. We also believe the physical shop will survive in convenience-led, out of town locations, especially for goods which are less likely to be bought online: DIY, furniture, homewares, and discount brands. We expect the Company's strategy of a low weighting to high street retail and a greater focus on out-of-town retail, let at affordable rents, will position the portfolio well to pick up as and when consumers can return to the shops with confidence.

"Investment volumes have been sufficient for the Company's valuers to remove the 'material uncertainty' caveat from the property portfolio valuation as at 30 September 2020. However, in an attempt to reflect market sentiment in the valuations a risk factor has still been applied to the collection of deferred rent or rents arrears due from tenants adversely affected by the COVID-19 pandemic. This rental risk continues to have an impact on NAV but as deferred rents start to be recovered, as indeed they are, this risk adjustment applied to rents within valuations will diminish.

"As we see increasing confidence in the collection of contractually deferred rents and once landlords can formally pursue non-payers, positive sentiment towards the income credentials of commercial real estate investment is likely to return. In a low return environment, where dividends are under pressure across all investment markets, we believe that property returns will look attractive and the search for income and long-term capital security will bring many investors back to real estate. However, if we see an acceleration in tenant failures as Government support packages are withdrawn and while Company Voluntary Arrangements ("CVAs") remain legitimate practice, this could work against the prospects for real estate.

"Over the last eight months the market's focus has been on income (and therefore EPRA earnings per share) rather than NAV and we expect this to continue whilst disruption to contractual rent collections remains. We believe that EPRA earnings per share is a more important metric than NAV per share in demonstrating the Company's ability to deliver long-term sustainable dividends. As a result our focus has understandably been, and will remain, centred on rent collection."

Rent collection

As Investment Manager, Custodian Capital invoices and collects rent directly, importantly allowing it to hold direct conversations promptly with most tenants regarding the payment of rent. This direct contact has proved invaluable through the Pandemic, enabling better outcomes for the Company. Many of these conversations have led to positive asset management outcomes, some of which are discussed below.

FY21 Q1

90% of rent relating to the quarter ended 30 June 2020 ("FY21 Q1"), net of contractual rent deferrals, has been collected, an increase from the 80% previously reported, demonstrating the dynamic picture of rent collection at present.