Outstanding rental income remains the subject of discussion with various tenants, and some arrears are potentially at risk of non-recovery due to disruption caused by the recent national lockdown and from CVAs or Administrations.

The Company's doubtful debt provision has increased by GBP2.7m (0.6p per share) from GBP0.3m to GBP3.0m during the year to reflect the risk of failing to collect outstanding and deferred rent. Property portfolio balance

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


 
              Valuation Weighting Valuation Weighting 
                        by income           by income Valuation         Valuation movement 
              31 March  [22]      31 March            movement before   including 
              2021                2020      31 March  acquisition costs acquisition costs 
                        31 March                                        GBPm                  Weighting by  Weighting by 
               GBPm                  GBPm       2020      GBPm                                    value 31      value 31 
                        2021                                                                March 2021    March 2020 
Sector 
 
Industrial    270.2     41%       257.3     40%       12.0              11.8                49%           46% 
Retail        99.7      21%       109.7     22%       (10.9)            (10.9)              18%           20% 
warehouse 
Other[23]     84.4      16%       87.4      17%       (5.6)             (5.7)               15%           16% 
Office        54.8      12%       52.6      10%       (5.8)             (6.2)               10%           9% 
High street   42.8      10%       52.8      11%       (9.3)             (9.3)               8%            9% 
retail 
 
Total         551.9     100%      559.8     100%      (19.6)            (20.3)              100%          100% 

During the year the different sectors have performed in line with market norms. Industrial and logistics values have strengthened by 4.6% recording high levels of occupancy and continued rental growth. Office values have suffered a 10.4% decrease experiencing an increase in vacancy as occupiers exercised their options to vacate at lease expiry or break, in order to ride out the pandemic. For the second year retail has been the worst hit, although with a greater percentage decline in high street locations of 21.6% compared to out of town retail warehousing decline of 10.8%. This lower decline for out of town is perhaps a reflection of the stock selection in the Custodian REIT portfolio where retail warehouse occupiers are predominantly value retailers and homewares/DIY, many of whom have remained open for trading during the COVID-19 pandemic lockdown.

The 31 March 2020 valuation was reported on the basis of 'material valuation uncertainty' in accordance with RICS valuation standards. This basis did not invalidate the valuation but, in the circumstances, implied that less certainty could be attached to the valuation than otherwise would be the case. However, for 31 March 2021 valuations, no 'material valuation uncertainty' clauses were applied to any asset classes in the Company's property portfolio.

The Company has appointed Savills as valuer to replace Lambert Smith Hampton and to work alongside Knight Frank. We thank Lambert Smith Hampton which has valued the Custodian REIT portfolio since IPO in 2014. From the quarter ending 30 June 2021, Knight Frank and Savills will take responsibility for approximately half of the property portfolio each.

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

Acquisitions

The Company invested GBP11.4m in three acquisitions during the year described below: ? In December 2020 the Company acquired Willow Court for GBP7.86m, a 22,545 sq ft office building on Minns Business

Park, one mile west of Oxford city centre. The property comprises four floors let to RBS, Dehns, Charles Stanley,

Oxentia and the Smith Institute with a weighted average unexpired lease term to first break or expiry of four years

and an aggregate rent of GBP537k per annum, reflecting a net initial yield ("NIY") of 6.41%. ? In November 2020 the Company acquired four industrial units on Hilton Business Park, Derby for GBP1.975m, covering an

aggregate 23,250 sq ft. The units are occupied by MP Bio Science, Shakespeare Pharma and Jangala Softplay with a

weighted average unexpired term to first break or expiry of 2.0 years and aggregate passing rent of GBP134k per

annum, reflecting a NIY of 6.39%. ? During the year the Company acquired 0.6 acres of land in Nottingham on which it has developed a 2,163 sq ft

drive-through coffee shop with 34 parking spaces, with land and construction costs totalling GBP1.60m. The unit was

pre-let to KBeverage Limited (trading as Starbucks Coffee) on a 20 year lease with no breaks and five yearly upward

only market rent reviews with passing rent of GBP115k pa, reflecting a NIY of 6.67%.

The Company has also invested GBP0.7m of capital expenditure developing a drive through restaurant on an existing retail park holding in Burton upon Trent pre-let to 1 Oak Limited (t/a Starbucks) at an annual rent of GBP55k for a term of 20 years with a break in year 10, which commenced trading in November 2020.

Since the year end the Company acquired an industrial asset in Knowsley for GBP3.5m.

Disposals

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

The following properties were sold during the year for an aggregate headline consideration of GBP4.4m: ? In May 2020 the Company sold a 20,280 sq ft industrial warehouse in Westerham for GBP2.8m, GBP0.5m (23%) ahead of the

31 March 2020 valuation, representing a net initial yield of 4.50%. ? In October 2020 the Company sold four high street retail properties at auction in Chester, Scarborough, Bedford and

Llandudno for an aggregate GBP1.6m, in line with the most recent valuations. The properties were originally acquired

within larger portfolios in 2014 and 2015 and were either vacant or let on short-term leases and the disposals

reduced the Company's high street retail sector weighting by income from 11% to 10%.

Since the year end the Company sold a high street retail property at auction in Nottingham for GBP0.7m, in line with the most recent valuation.

Outlook

In March 2020, as the country entered the first lockdown, the pandemic was taking hold. At that stage a marginal but positive NAV total return for the year ahead would have been seen as an exceptional result. 12 months later Custodian REIT has delivered a positive NAV total return, demonstrating the resilience of UK commercial real estate and the power of income to support returns. It also underscores the need to look at real estate investment over the long-term. NAV total return since IPO seven years ago has averaged 6.3% per annum and as we look forward to a post pandemic world the Company is in a good position to continue to deliver positive returns.

In ordinary times rent collection and asset management are rightly taken for granted by shareholders but the importance of the close relationships between manager and tenant and the manager's ability to influence the outcome of negotiations has come to the fore this year. From the outside, it may appear that property fund managers have spent the year chasing rent collection and worrying about the pandemic. From our perspective we are largely experiencing business as usual, managing landlord/tenant relationships and engaging in normal levels of activity in terms of new lettings, extending existing leases, acquiring new assets and selling assets that we do not believe will perform over the medium to long-term. Through the year we have completed 50 separate asset management transactions, each designed to keep the portfolio relevant, to protect value and to support dividends which have always been out key objectives.

The important consideration for the outlook for commercial property is occupier demand. If commercial property remains in use by occupiers, then it has a bright future. As touched on above, occupier demand in the industrial and logistics sector is very strong and forecast to remain so, which is supporting rental growth. We are seeing demand from occupiers on retail parks and in prime town centres but on rebased rents. Offices are likely to continue to be an essential feature of most businesses and we are seeing occupiers look beyond the pandemic to secure appropriate space. The overlay on all this demand will be ESG. As a manager we are committed to achieving the objectives set out in the ESG Committee report. We have an ongoing project to improve the environmental performance of the portfolio when properties are under landlord's control and also when looking at the let portfolio. We understand that our commitment to ESG must mirror our tenants' objectives. Meeting the demands of our tenants will ensure ongoing performance for shareholders.

Richard Shepherd-Cross

for and on behalf of Custodian Capital Limited

Investment Manager

15 June 2021

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