Good afternoon, and welcome to the Custodian Property Income REIT plc investor presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time by the Q&A tab situated in the right corner of your screen. Just simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all questions submitted today and publish responses where it is appropriate to do so. Before we begin, I'd like to submit the following poll, and I'd now like to hand you over to Richard Shepherd-Cross, managing director. Good afternoon, sir. Good afternoon, everyone, and welcome to this webinar. We're talking about Custodian Property Income REIT. As the name suggests, income is a key focus for us, and we have set out to be the real estate investment trust of choice for those private and institutional investors looking for high and stable dividends from a well-diversified UK portfolio of real estate. As we go through, you'll see a number of pictures. All of those properties are properties in the portfolio, and perhaps that's the best way to describe what we mean when we talk about regional smaller properties. We're not talking about workshops under the arches, corner shops. These are mainstream commercial properties, often modern, certainly fit for purpose and let to more often than not, household name tenants. So these numbers are, as at the thirteenth of September, a portfolio of GBP 610 million, spread, as you can see in this pie chart, between, the industrial and logistics sector. That makes up nearly half the portfolio by value. Retail warehousing or out-of-town retail, which has been a very robust part of the retail sector. Some offices, I can hear, over the airwaves, people sucking wind through their teeth, but I've got some good news to tell you about offices. And then, a spread of the balance of the portfolio through those assets that fit into none of these sectors, making them other. But that might include children's day nurseries, car showrooms, restaurants, hotel, and some high street retail properties as well. So it is a proudly diversified portfolio. Over 300 tenancies in 159 properties spread across the UK. As I said before, a very strong focus on income. As at the 13th of September, our annualized earnings per share GBP 0.058, and that was supporting a dividend of GBP 0.055. Importantly for us, that dividend is fully covered by earnings. Target gearing 25%. Loan-to-value currently 29.6%. We are a little bit above our target, but not so meaningfully that we feel need to panic. We do have some properties under offer to sell, with the specific intention of bringing down that some of the variable rate debt we have in the portfolio. We'll look at debt a little bit more as we go through. Just before we get into the detail, I just want to talk about worth versus value. There is an awful lot of analysis carried out by an awful lot of, I'm sure, very bright people looking at commercial property values and real estate investment trusts are all too often valued by reference to Net Asset Value, so the aggregate value of all the properties in the portfolio. But I don't think that Net Asset Value is a very good measure of worth. And after all, the valuation of our properties is what the properties could have sold for three months ago. So it's backwards looking. And what we should be looking at is in a forward projection of how much income the portfolio can generate. Perhaps this chart is a good example of what I'm talking about. The blue line in the chart looks at the net asset value of our portfolio going back two and a half years, and you can see how values grew really quite sharply in 2022, which was a pretty difficult year for real estate. 'Cause in the final quarter of the year, we saw values fall back, losing all those gains that had been made over the previous 12-18 months. That net asset value, that apparent worth, turned out to be nothing, nothing more than Scotch mist. Here today, gone tomorrow. Happily, the shareholders of Custodian Property Income REIT didn't allow the share price to chase that net asset value figure up to those dizzy heights, but much more kept the share price as a more constant metric as a multiple of earnings. And if you look at the red line, that is the annual earnings per share from Custodian Property Income REIT over that same period. And you can see it was doggedly consistent. And as we look forward, we can be reasonably confident of consistency of earnings, if not some earnings growth into the future, because we have a portfolio of properties that are let on average for about five years, and that's contractual income that we know we are going to receive. So I think if you want to be a happier investor in real estate... Focused on earnings as a metric, not net asset value. It's forward-looking, it's more predictable, and it will lead to a less volatile experience of investing in real estate. It will mean that you have acknowledged that you're investing for income, which is exactly how you should look at real estate. The good news in the market at the moment, and I said that there might be an opportunity for future earnings growth, is that there is rental growth in real estate. I think there's been a real disconnect between the investment market, which has very poor sentiment towards real estate investments at the moment, and you can see that writ large across the share prices of not only Custodian Property Income REIT, your trading is a slight discount to net asset value, but many of our peers and some of whom are trading at much greater discounts to their net asset value. Investors have turned away from real estate, and I'm convinced it's because a lot of them had a very bad experience in 2022, and you could see that if you had been following a valuation metric, you would have seen values rise in the early part of the year and then fall back very sharply at the end of the year. And that did an awful lot to discourage people from considering real estate. But on the ground, the occupational market's pretty strong, and we're seeing rental growth, and actually valuations have been pretty flat through 2023. I think in our portfolio, values down just over 4% in the year, so not a significant move in what has been a pretty torrid time for macroeconomic markets, interest rates, most particularly. What this chart is showing is the net initial yield of our portfolio, sector by sector, so that is the rent, divided by the current value, and the equivalent yield, which is effectively a weighted average yield between the initial yield and the reversion yield. So taking account of future rental growth and the timing of that rental growth. You can see that there is quite a big step up in yield as we pick up the rental growth that's in the market. Across our portfolio, that's about GBP 6.5 million or 15% of the rent roll. These numbers are important when you consider debt. If we look at debt, and you absolutely should look at the debt of any property investment company at the moment, not least because it is debt and the rising cost of debt that has made a lot of investors turn away from real estate. Custodian has always taken a long-term, low-risk attitude to debt, and you can see in this chart, we have four tranches of debt. We have the short-term revolving credit facility. Cost of that is about 6.75% today, which is why if we sell properties, and we have a number of under offer to sell at the moment, and we pay down that debt, and we are giving up less than 6.75% income, to save paying out 6.75% in debt, then that will be accretive to earnings. But the majority of our debt, nearly three-quarters of our debt, is fixed, fixed rate. Fixed for an average of 6.5 years at an average cost of 3.4%. You set that against our initial yield of 5.8 and an equivalent yield, picking up that reversion of 7.3%, you can see that debt is still accretive to the earnings of Custodian Property Income REIT, and that's why we are not particularly concerned that our current level of gearing is a little bit over target. One of the reasons it's over target is because values have fallen. So that is a simple mathematical equation. And the other reason is that we have remained committed to our capital expenditure program to invest in the assets in the portfolio, and we'll talk about that a little bit more as we go through. But I don't consider that discretionary spend. I think it's absolutely essential that you keep your properties up to date and in so doing, making sure they hit the best possible energy performance criteria, a minimal carbon output, because it's those sorts of buildings that are gonna attract the best tenants, secure the best rents, and protect value over the long term. And we've remained committed to that program, and that has been gearing creep up a little bit through the last 12 months. What has this strategy done in terms of relative performance? Well, it's led to outperformance by Custodian against its peer group of diversified property investment companies. And we think it's largely due to that focus on income and that stable, relatively high level of earnings, which comes from our specific property strategy, which is smaller regional properties. And this is the bit to remember. This is the bit that's at the center of our strategy and the bit of our strategy that I think will lead to long-term outperformance. What the chart is showing is looking at whole market data going back to 2000. It's looking at the net transaction yields, so the net initial yields of properties traded in the market with a lot size of less than GBP 10 million. That's represented by the dark blue line, and properties of greater than GBP 10 million, represented by the light blue line. So if you look at the first 10 years of the chart, there was a very consistent and quite narrow margin of about 75 basis points. Now, detractors might say that's the risk premium, that's the additional risk you take for buying smaller properties. I'm prepared to accept that some of that is risk, but an awful lot of it is just hassle factor. People don't want to manage a large portfolio of small properties, if in fact, they could have a large portfolio of larger properties, so fewer assets to manage. So let's say, let's be generous to my detractors and say that there's a 50 basis point risk premium and 25 basis points of hassle factor. What happened in 2010 and for the subsequent 13 years? We saw. So not much longer than that, isn't it? Because many times have passed. Anyway, we've seen this huge divergence in yield, not because the smaller properties have become higher risk, or indeed the larger properties have become lower risk. What we've seen is a change in the supply and demand dynamics in the market. So from 2010, we saw the open-ended funds, the property unit trusts, actively buying as they recovered post Global Financial Crisis, and they are now in rapid retreat. But at the time, they were actively buying. We saw pension U.K. pension funds upweighting to real estate. We saw overseas investors, both sovereign wealth funds and private equity, all buying relatively large, relatively prime assets, and because of the cost of debt at the time, you also had debt-driven investors in that large prime market. Prime yields were still above the cost of debt, so those purchases could be funded with debt, which was unusual. And again, it's unusual today, because that situation is reversed. You cannot fund prime assets with debt in the current market, and that is a new normal, or indeed a return to normal, that I think we should all learn to live with. So you saw this huge increase in demand for a relatively small supply of large prime assets, and it's demand and supply that's driven that yield divergence. So we have been able to secure 150 basis point margin through that period for pursuing a smaller lot strategy. But if we were accepting that only 50 basis points of the margin for the first 10 years was risk premium, we're getting 100 basis points of margin for taking no additional risk. And that is why we do what we do, why we go to the effort of managing a portfolio of small properties. One of the benefits of a smaller lot strategy is that in GBP 610 million, you end up with 159 properties, and if you look at the rent roll, you can see in this chart the amount of rent that is paid by any one tenant in the portfolio, and it is sufficiently diverse that no one property let to any single tenant represents more than 1.5% of the rent roll. So this is genuine diversification. And if you look at our larger tenants, most of whose names you will recognize, let's take Menzies Distribution, our largest tenant. We've got eight properties let to Menzies, so there is further diversification within that blue slice of the pie. And the same is true as you go around. We have three properties let to Wickes, three to B&M Bargains, two to B&Q. So the diversification continues. So our top 25 tenants make up only 38% of our income. If you looked at a number of our peers, their top 25 tenants might make up 50%-70% of their total income. So much more concentration of income, which is the opposite of what we're trying to achieve. One of the challenges that is sometimes laid at our door when we say we are pursuing a smaller lot strategy, is that we must have poorer quality tenants. This is something that we look at very closely. We don't believe that's true, and the Experian credit ratings that you can see in front of you, I think, bear that out. Here, you can see in this chart, 89% of our tenants are rated lower than average risk by Experian. Those of you who are glass half empty might be looking at the imminently failing tenants that represent 3.2% of the rent roll. When I look at that, I see opportunity, because when one of our tenants fail, we get the property back. It's not like an investment in the underlying business, when if the business fails, you lose everything. If the tenants, if our tenants' businesses fail, we get the property back, and I'll show you an example in just a moment of how that can work out quite well for us. We believe that you don't have to forgo the quality of property, location, tenant, just because you are pursuing a smaller lot strategy. Indeed, we think that there are positive benefits to shareholders of pursuing this strategy. Spread of risk, stability of cash flow, and a slight quirk of smaller properties, is that we believe you get a higher percentage of your investment secured in the underlying bricks and mortar and less in the lease contract. And that's a good thing, because the lease contract is depreciating every single day. It's getting a day shorter. And why is that? It's because even when some of our smaller properties, and that's not the case across the board, but for a large number of our smaller properties, even vacant, there is demand from owner-occupiers, and that is not the case of larger buildings. It's very rare, unless perhaps you're a Goldman Sachs, where you might want to own your own office building in the city. It's rare for most businesses to want to own their real estate. They tend to be lessees of property. But in the smaller property sector, there are owner-occupiers, particularly in the industrial sector, but also in offices. And that does give us that greater residual value in the underlying real estate. The asset management of the portfolio is a 365-day-a-year operation. We may be time off for good behavior at Christmas, but we're pretty busy all year round. And this image you can see here is the CGI of what we have, in fact, now refurbished to exactly the standard of an office building we bought in Manchester in lockdown. Brave, you might say, even foolhardy, but we believed that there would still be demand for offices, and indeed there is. We believed it was a real opportunity to provide the sort of offices that the modern occupier requires, particularly in small plates, small floor plate formats. Very often, these smaller occupiers had to put up with secondary buildings, buildings where they needed to put an awful lot of capital expenditure in to fit out, while the big corporate occupiers were enjoying brand-new, well-fitted offices in large, large floor plates. So we acquired this building on Fountain Street in central Manchester. It's a very core office location. Rents in the building were GBP 20 a sq ft at the point of acquisition. We have cleared out all but one of the tenants. The final tenant was happy to remain in while we refurbished the building. We have created fully fitted offices in the style that you can see here. So not your typical grays and whites of most modern offices, but more homely, warmer tones, nice furniture. On the top floor of this building, we have created a business lounge, roof terrace, additional meeting room and breakout space for all the six floors of the building that sit below it. And that's for the use of all the tenants. It's additional amenity. In the basement, we've got hotel quality showers and changing rooms and bike storage and electric charging points for vehicles. And the expectation is that we will, on the fully fitted office space, get rents of not GBP 20 a sq ft, but GBP 42 a sq ft. And we launched this building two weeks ago. We have strong interest in one floor already. I would love to tell you this story again in six months' time and tell you that the whole building had been let, and I wouldn't be surprised if that were the case, because this is the sort of quality of space that simply hasn't been made available to the market, but appears to be very much the focus of occupiers' demands at the moment. That doesn't make up a huge part of our portfolio. You know, it's about 10% of the portfolio, but it's not all bad news. And unfortunately, all we hear in the press is bad news about offices, but I think we have reason to be optimistic. When we consider asset management, we also have to consider about energy, energy performance. Probably six years ago, if you'd asked me about environmental strategies, I would have said that, yes, we had an environmental policy, and it was in a drawer in the office, but I could find it if you were particularly interested. Maybe three or four years ago, probably four years ago, we had that environmental policy out on the desk, and we were considering the ramifications for us as property investors and implications for shareholders. Roll forward to today, it's just how you manage real estate. If you don't manage real estate with a keen eye on environmental performance, you are both missing the moral imperative to improve the quality of your buildings. But perhaps more importantly for shareholders, you're missing out on a huge financial opportunity that is there for providing the highest quality buildings to your tenants. Through the course of the last quarter alone, we improved our weighted average Energy Performance Certificate, or EPC, from 58- 56, and there is an ambition to be compliant with legislation by 2030, and have all of our properties rated B or above. For the most part, we have asset management plans in place to achieve that. I said the market, occupational market, was strong at the moment. If we look at what happened over the last quarter, nine new leases agreed. All of those leases agreed on average, at 24% ahead of the previous rent, so strong rental growth. Of those 9 new leases, a million pounds of that new income was thanks to new lettings. So that's adding to the rent roll of the portfolio, and another point seven million was lease renewals. They all had a positive impact on valuation. And we are also reducing our vacancy rate, or indeed occupancy, if you're more optimistic, which was 90% at the start of the year, as we were recovering from that sort of post-COVID tenant failures, and happily, there weren't many, but there were one or two. Occupancy is increased to 91%, and we expect it to be 93% by the end of the year. So really strong and positive progress. Rents are growing, estimated rental value, so that rental growth is also growing, and that's grown from GBP 48 million to GBP 49 million in round terms over the last six months as well. So the overall rental potential is growing. So here is an example of an imminently failing tenant that failed. This was a Pizza Hut on the outskirts of Leicester on a retail park. They failed to trade through lockdown and then put the business into company voluntary arrangement immediately post-COVID. We don't like tenants that enter into a CVA. We think they clearly don't respect the landlord and tenant relationship, which we believe needs to be a two-way street. So we exercised our right to repossess the building. We spent GBP 200,000 on it improving the EPC from D to A. We added a drive-through lane, and let the building to Tim Hortons as a coffee shop, or drive-through coffee shop, doubling the value from GBP 1 million- GBP 2 million and increasing the rent by 35%. So an imminently failing tenant that just needed to fail so we could take the building back, that shows you one of the great strengths of real estate as an investment, is that you always have the underlying property. Another example of slightly larger assets, and this property had been let to H&M. It was the distribution center for them in Winsford, in Cheshire. Their lease came to an end. We have a dilapidations claim with them, so they paid to put the building back into the condition they took it at the start of the lease. Over and above that, that dilapidations payment, we have invested GBP 1.9 million into the building, and it is now fully electrified. So we have a gas supply, but we've capped it off. The offices are heated with air source heat pumps. You can see on the roof, there are now solar panels. And we have leased this building to the Zavvi Group. Rent has gone from GBP 423,000 a year to GBP 740,000, EPC from C to an A. And in addition to the rent, we also have agreed; it's called a Power Purchase Agreement, whereby the tenant will buy the electricity that we generate from the solar panels from us. They get a discount on the retail price of electricity, and we get an estimated 7-year payback on our solar panel installation, and importantly, an additional line of revenue from a property that we already owned. So it just shows you how by making these investments, improving the environmental credentials of the buildings, you are ticking a lot of boxes both from an ESG and a cash flow perspective, and indeed, valuation. If we just think forward, what's the outlook? Values have been pretty stable through this year. There's been quite a lot of poor press against real estate. I think it's some of that is still very backward looking. There are, of course, fears about interest rates, but perhaps, the example that we saw, last week, 10 days ago, maybe, when the, interest rates were kept on hold by the Bank of England, and inflation, numbers came out, much better than expected, we saw across the whole listed real estate sector, share prices jump by about 5%. I'm happy to say we've hung on to most of those gains that were made, but what is that telling you? It's telling you that there is money waiting in the wings, waiting for that absolute certainty that interest rate cycle has peaked, because investors can see the stability of income and the rental growth, importantly, that is coming through, as we let up vacant space and settle rent reviews and drive rents on at lease renewal. We remain committed, as I said, to our capital expenditure program. We have, over an 18-month period, GBP 28 million of investment into 23 separate projects. We expect that to deliver, around about GBP 10 million profit over above the cost of the works. And of course, at the same time, we are creating the buildings that are then set fair for the future. Fundamentally, though, our diversified earnings base, supporting fully covered dividends. With an entry point of the share price today, with an earnings yield of, North of 6%, that feels like a pretty good place to start if you're investing in real estate. That's all from me. There have been, I hope, some questions, which have come through on the screen, and I will pick some of those up and do my best to answer them. The first question is: Given the strong leasing activity and rental growth, what specific strategies and sectors are driving this growth, and how sustainable do you view these trends to be? Half our portfolio is in the industrial and logistics sector, and that is the sector that is seeing the strongest level of growth. If you took a typical regional industrial property in most towns in the country, built a few years ago, rents would be GBP 5.50-GBP 6.50 per sq ft. If you were to build a brand new property in that location, probably rents would be 10-12 GBP per sq ft. So you can see significant growth if you can provide those brand new low energy rated highly energy efficient buildings. And particularly our market, that sub-100,000 sq ft industrial and logistics space, has been completely under-supplied with new development. Really, very little development since 2006. Most of the development that has been has been in a big box format, large format logistics units. So for the smaller units, there is a distinct lack of supply, and if new buildings are gonna command rents of GBP 10-12 per sq ft, good refurbished buildings, probably GBP 7-9 per sq ft, passing rents, GBP 6.50, 550-650. You can see there is an awful lot of latent rental growth, and we're not yet seeing an increase in the development of the sort of space that the market is demanding. So in terms of how sustainable is that trend, I think it is, it has got a good few years to run. And at the same time, with very little development really since 2006, which was 17 years ago, there are quite a few buildings that are falling off the end of their useful life. You know, they were the buildings that are 40, 50 years old. You know, so supply is actually shrinking, and we're not replacing that built supply. So that's where we see the strongest growth, I think, in retail warehousing. Out of town retail, there is room for growth. It proved to be the more resilient side of the retail sector, as opposed to shopping centers and high street retail. And rents are at very affordable levels, so I think a potential for further growth there as well. Happily, those are the two largest components of our portfolio. Next question, which is split into two. How does the asset recycling process fit into the company's overall investment strategy? And how do the current capital expenditures and redevelopment projects enhance the portfolio's value, and what are the expected returns on these investments? I think the second half I perhaps answered, GBP 28 million being invested, we expect to see about a GBP 10 million profit on that 20 million-28 million invested. Plus, we're gonna see higher rents, plus we will have more environmentally efficient buildings. But the asset recycling process, we are, for the most part, long-term holders, if indeed that's the thrust of the question. We're not really in the business of buying poor assets, improving them and selling them. That's typical property company trader activity. We're long-term investors. So we recycle assets by improving them, we've then created the assets that perhaps we've always wanted. So we tend to be holders of those assets once they have been improved. But one of the, I think, quirks of how we all deal with environmental performance at the moment, is that the way environmental performance is measured is very static and absolute. So if we were to replace all our current properties with brand new, newly developed, BREEAM Excellent rated EPC A grade buildings, we would score very highly from, certainly an E and an S perspective, maybe not so much for a G. Because in doing that, we have sold all the properties that we can't be bothered to refurbish and sold them to someone who perhaps doesn't have sufficient resources to improve those buildings. And bought buildings where the embedded carbon in building those new buildings hasn't been considered, because there's an absolute focus on operational carbon, the amount of carbon that's generated during the running of the buildings. I think that needs to change, and I think we need to give credit to ourselves, and indeed, our shareholders need to give us credit. And when I say us, I mean we as an industry, and indeed us in particular. For improving the buildings that we've got, and every time we improve a building, we are making a difference to the overall carbon intensity of the portfolio. So if it's that sort of recycling that the question was aimed at, I hope I've answered that as well. well. The next question is: How does the company manage relationships with tenants to ensure steady rental income and minimize vacancies? The first thing to say on that is we manage this portfolio in-house. We collect all our own rent. It's not something we outsource, which means we have a one-to-one relationship with each and every tenant in the portfolio. We will start speaking to tenants comfortably two years before the end of their lease about what their future intentions are. We have approached a large number of our tenants in recent months and indeed years, offering to improve the environmental performance of their buildings through the adding of solar PV on the roof, and you can see this image in front of us now, the solar PV on the roof of that building. And the offer is that we'll make that capital investment to put the solar on the roof, and in return, the tenant will enter into a power purchase agreement to buy the energy from us. They will make a saving on their electricity bills. They will be able to improve their environmental performance, and claim that they are a greener business than they were, as indeed can we, and we get an additional cash flow. So it's a partnership relationship. I think the days of adversarial landlord and tenant relationships really should be in the past, and it's not the way we approach things. I mean, if you take a look back three years to when we were in the depths of COVID, in the year itself, we collected 91% of the rent that was due, without falling out with a single tenant, and while it was not contractually required to pay rent in that year, and that was largely based on those relationships. In terms of minimizing vacancies, it's about keeping one step ahead, speaking to tenants well in advance, and making sure that when you do get the properties back, you make the investment to make them attractive to current levels of demand, current demand on the market. The next question: When some owners are converting offices to residential, what do you believe the future for office ownership is, and will you be buying any more in this sector? This is something that's talked about a lot, and the words that I hear again and again, when people talk about office is stranded assets. The trouble is, you can't just dream up a new word for an old problem and claim it's a new problem. All a stranded asset is, is an obsolete asset, and obsolescence in real estate has, it has been a fact of property investment forever, and it's been particularly acute in offices. Buildings wear out, they become unfashionable, the plant and machinery in them wears out, we come up with better ways of heating and cooling, and we need to make sure that we're keeping buildings up to date. There are parts of the office market that I don't want to own, out of town, offices on business parks, but there are parts of the sector that I'm only too happy to own. And as I said, we acquired offices in central Manchester, we acquired offices in Oxford, but I think it will always be a smaller part of our portfolio. I'd be very surprised if it was ever more than 20% of our portfolio, given our penchant for the industrial and the logistics sector and for retail warehousing, which I think will always make up the bulk of the portfolio. I think there is a future for offices. I'm sitting in our office in London today. The train this morning was busy. Busy, busy, busy. And I don't think they're all going Christmas shopping. I think people are coming to the office. And whether you come to the office three days a week or five days a week, those businesses still need offices to accommodate their staff on the days that they're in. So there is a future, but it's a market that is changing and perhaps will always change. That's the end of the questions. So thank you very much. I hope that's been interesting, and I hope I'll see you on a webinar again before too long. Perfect. Richard, thank you very much for updating investors today. Could I please ask investors not to close the session, as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. This will only take a few moments to complete, but some should be greatly valued by the company. On behalf of the management team of Custodian Property Income REIT plc, we'd like to thank you for attending today's presentation, and good afternoon to you all.