Net Asset Value and Market Update Custodian REIT February 2016 1 Overview Custodian REIT • Portfolio £309m1 (Market Cap £258.61m1) • Main Market of London Stock Exchange • Objective: to provide an attractive level of income with the potential for capital growth ‐ Target annual dividend of 6.25 pence per share2 to March 2016 ‐ Target annual dividend of 6.35 pence per share2 to March 2017 ‐ Fully covered from net income, paid quarterly • Differentiated investment strategy – targeting small lot size property 1. As at 20th January 2016 2. The target distribution is not a forecast and should not be seen as an indication of Custodian REIT’s expected or actual results or returns 2 Financial highlights 3 months to 31 December 2015 • NAV total return1 of 1.5% • Proposed dividend for the Period of 1.5875p per share • NAV per share of 103.0p • RCF facility increased to £35m and term extended to 2020 • £49.8m of new equity raised at average premium of 3.0% to adjusted2 NAV • Increase in target dividend for the year ending 31 March 2017 to 6.35p per share 1 NAV movement plus dividends paid. 2 Premium adjusted to deduct dividends earned but not paid post ex-dividend date. 3 Differentiated property strategy Market transaction data shows: • Small lot sizes, £2m-£7.5m Net initial yield advantage for small lot sizes 10.0 3.00 • Institutional grade tenants/long leases Margin Under £10m £10m plus 9.0 2.50 • Low obsolescence 8.0 7.0 • High residual values 2.00 6.0 • Strategic exposure to: 5.0 1.50 4.0 – Alternative Sectors (17%) 138 bps yield 1.00 3.0 advantage for 2.0 smaller lots – Pre-let forward funding c.£5m (7%) 0.50 1.0 • Target gearing – 25% LtV (20.7% today) - - Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Sourcing of opportunities 2013 2013 2013 2013 2014 2014 2014 2014 2015 2015 2015 *Graphs LSH Investment Transactions data • Wide exposure agency network across the UK • Over £2bn of opportunities considered in acquiring £200m of new property • Over 30% of completed transactions have been genuinely off-market transactions 4 Income focused returns 6.50% Inceased Yield Yield Maximum Covered Yield • Long-term property returns have 6.00% strong income bias - circa 80% of 5.50% total return 5.00% • Target dividend 6.25pps/6.35pps 4.50% • Implied yield 5.81%1 rising to 5.91%2 4.00% Prospective Prospective Yield • Fully covered from earnings 3.50% • Scope to continue dividend growth, 3.00% subject to maintaining full cover 2.50% 2.00% Inc Custodian REITCustodian 1. Based on share price of 107.5 pence per share Ediston Property Tritax Big Box REIT Big Box Tritax F&C Estate UK Real 2. Forecast for year to March 2017 Estate Real Schroder Picton Property Income Picton Property 5 UK Commercial Property UK Commercial F&C Commercial Property F&C Commercial Standard Life Inv Property Standard Inv Life Market context • Close to 10 year low NIYs for large, good quality, regional assets – particularly office, shopping centre, retail warehouse and distribution sectors • Smaller lots not experienced the same excess demand driven yield compression • Resulting in lower volatility of Custodian REIT valuations • Positive for sourcing accretive assets Yield compression Market vs Custodian REIT Date CBRE JLL Custodian REIT All Property Yield Prime Yield Equivalent Yield 2014 Q3 5.66% 5.01% 6.75% Compression 32 bps 37 bps 2 bps 2015 Q4 5.34% 4.64% 6.73% Source: CBRE Marketview Q4, 2015 JLL Monthly Commentary LSH valuations November, 2015 6 Market outlook Income will drive total returns in 2016 IPF Consensus Forecast (November 2015) 10.0% 9.3% • Income expected to make up a larger proportion of total return in 2016 8.0% 7.7% and beyond 4.1% 2.6% 6.0% 5.7% • Investment Property Forum 5.4% 4.8% Consensus Forecast expects capital 0.4% 0.6% growth to be less than half that 4.0% witnessed in 2015 5.2% 5.0% 5.1% 5.1% 5.1% • We expect the value of small lot size, 2.0% regional property will grow sustainably as a result of underlying 0.0% -0.3% rental growth, rather than simply 2016 2017 2018 2019 2015-19 demand-led valuation growth -2.0% Income Return (Implied) Capital Return Total Return 7 Rental growth forecast Market IPF Consensus Forecast (November 2015) • IPF consensus forecast shows consistent 4.00% rental growth over the next 4 years 3.50% 3.4% • Lack of supply in office and industrial 3.00% 2.8% markets is driving rental growth 2.7% 2.50% • Rental growth has also returned to retail 2.2% markets 2.00% 1.8% • Low vacancy rates should enhance cash 1.50% flow and dividend cover 1.00% 0.50% 0.00% 2016 2017 2018 2019 2015-19 8 Diversification - current portfolio Diverse UK commercial property investment portfolio* Industrial • Current portfolio circa £309 million Other Retail Office • 111 assets • Nationwide portfolio • All major commercial property sectors • Over 220 separate tenancies • Average weighted unexpired lease term 6.8 years to first break • Void rate 2.8% • 6.97% net initial yield 9 *As at 4th January 2016 Diversification by property, sector and geography Sector split by income Regional split by income East Midlands Other Wales 13% 17% Industrial South-West 2% Retail 40% 9% Scotland Warehouse 8% 7% West Midlands North-East 16% 9% Retail North-West East Anglia 20% 13% 6% Office 16% Split of “Other” income South-East 24% Leisure Hotel 8% 13% Restaurant 17% Motor Trade 34% Residential 2% As at 4th January 2016 Nursery Trade Counter 5% 21% 10 Diversification by income Full list of tenants in the appendix Split of income by tenant Portfolio ICC Credit Rating weighted by income 71.4* * ICC score 61-100 Confidence, low risk potential Top 10 Tenants 51-60 Normal, limited risk potential, normal terms 11 Managed income profile 4,000,000 Lease expiry profile Income at risk 0-1 years 9% 10 years + 3,500,000 22% Pipeline Existing Portfolio 2-3 years 23% 3,000,000 2,500,000 5-10 years 25% 2,000,000 3-5 years 21% 1,500,000 6.8 years weighted average 1,000,000 unexpired lease term (to first break) 500,000 - 12 months to 12 Portfolio acquisition Indigo Portfolio - £69.4m • Agreed “off market” • Unconditional exchange on £27m for which funds were available immediately • Conditional exchange on £42.4m, subject to fund raising • Reduced speculative risk for shareholders • Two sub-sales agreed between exchange and completion • £5.8m industrial property in Kingston upon Thames reflecting 4.77% NIY • £8.6m retail and office property in Richmond reflecting 5.0% NIY • Sub-sales enhanced the income return on the remaining portfolio • Net portfolio price £55.1 million • 6.32% NIY with a reversion to 6.89% Outcome for shareholders • Economies of scale, reducing fixed costs and AMC from 0.9% to 0.75% (over £200m NAV) • Improved forecast dividend cover • Enabled dividend to increase to 6.35pps for year to March 2017 13 Portfolio acquisition Location: Winnersh, Reading Price: £8,550,000 Location: West Malling, Price: £7,500,000 Tenant: Multi-Let Unexpired term: Kent Unexpired term: 2yrs Type: Retail Various Tenant: Regus Net Initial Yield: Rent: £571,950 pa Net Initial Yield: Type: Office 7.03% 6.32% Rent: £558,160 pa Location: Colchester Price: £6,620,000 Location: Redditch Price: £4,525,000 Tenant: Multi-Let Unexpired term: Tenant: Amco Unexpired term: 3yrs Type: Retail Various Type: Industrial Net Initial Yield: Rent: £448,600 pa Net Initial Yield: Rent: £315,000 pa 6.58% 6.41% Location: Edinburgh Price: £8,980,000 Location: Chepstow Price: £3,600,000 Tenant: Multi-Let Unexpired term: Tenant: Multi-Let Unexpired term: Various Type: Office/Retail Various Type: Industrial Net Initial Yield: Rent (assuming fully let) Net Initial Yield: Rent: £279,628 pa 7.34% £659,334 6.94% (assuming fully let) Rent: £442,153 pa Location: Portsmouth Price: £6,625,000 Location: Guildford Price: £4,850,000 Tenant: Multi-Let Unexpired term: Tenant: Multi-Let Unexpired term: Type: Retail Various 1.75yrs Type: Retail Rent: £525,800 pa Net Initial Yield: 7.50% Rent: £283,483 pa Net Initial Yield: 5.53% Location: Warrington Price: £3,780,000 Tenant: Multi-Let Unexpired term: Type: Industrial Various Rent: £259,903 pa Net Initial Yield: 6.50% 14 Asset management Active discussions with tenants Bardon – New 3 yr lease to MTS at in connection with one or more £129k pa after Jewson’s lease expiry of: £105k valuation uplift • Rent review • Lease renewal Bedford – removing 2017 break in • New letting return for 6 month rent free. £355k valuation uplift and improved • Refurbishment WAULT • Property extension Leicester – Chesham Insurance agreed • Lease re-gear a 5yr lease from Dec 2015. Rent has • Lease surrender increased by £3k to £67k. £75k valuation uplift Redditch - 2015 rent review agreed at £304k, a £54k uplift. £215k valuation uplift 15 Pipeline Pipeline Status Value 2 retail units in a strong North West location Under offer £2m Retail Warehouse in South East Under offer £6.5m Distribution Warehouse in Midlands Tracking £4.5m Leisure Park in Scotland Tracking £4.5m Car Showroom in East Midlands Tracking £2.0m Retail portfolio in East London and East Anglia Tracking £11.5m Office building in North East Tracking £6.5m Office building in North Tracking £4.3m Mixed used (industrial and gym) in South East Tracking £5.6m Total £47.4m 16 Conclusion Custodian • Objective of attractive income level with potential for capital growth REIT • LSE Main Market with £258.61m Market Cap1 Differentiated • Highly diversified portfolio focused on small lot sizes Investment • Institutional grade tenants on long leases Strategy • High residual values, low obsolescence • Conservative gearing policy Opportunity • High income return • Security of income through diversification of tenant, property and location • Low volatility of underlying portfolio • Economies of scale, AMC falling from 0.9% to 0.75% on NAV above £200 million and dilution of the Company's fixed cost base.