Custodian Property Income REIT plc (CREI)
Custodian Property Income REIT plc: Second quarter trading update shows rental growth supporting fully covered
dividends and stable values
31-Oct-2023 / 07:00 GMT/BST
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31 October 2023
Custodian Property Income REIT plc
("Custodian Property Income REIT" or "the Company")
Second quarter trading update shows rental growth supporting fully covered dividends and stable values
Custodian Property Income REIT (LSE: CREI), which seeks to deliver an enhanced income return by investing in a
diversified portfolio of smaller, regional properties with strong income characteristics across the UK, today provides
a trading update for the quarter ended 30 September 2023 ("Q2" or the "Quarter").
Strong leasing activity continues to support rental growth and underpin fully covered dividends
-- 1.375p dividend per share approved for the Quarter, fully covered by unaudited EPRA earnings, in line
with target of no less than 5.5p for the year ending 31 March 2024, representing a 6.8% yield based on the
prevailing 81p share price[1]
-- EPRA earnings per share[2] of 1.4p for the Quarter (FY24 Q1: 1.5p, FY23 Q4: 1.4p)
-- Nine new leases signed and one rent review settled during the Quarter across a range of property sectors,
on average, in line with ERV and 24% above previous passing rent. These initiatives added GBP1.0m of new annual rent
through letting vacant assets and secured a further GBP0.7m of existing annual rent roll, increasing property capital
value by GBP4.5m
-- ERV has increased by 0.7% since 30 June 2023, driven primarily by capital expenditure. Portfolio ERV
(GBP49.7m) now exceeds passing rent (GBP43.2m) by 15% (30 June 2023: 17%) demonstrating the portfolio's significant
reversionary potential
-- EPRA occupancy[3] increased to 91% (30 June 2023: 90%). 2.8% of ERV is vacant subject to refurbishment
or redevelopment with 2.2% of ERV vacant but under offer to let or sell
Valuations remain stable
-- The valuation of the Company's diversified portfolio of 159 assets decreased like-for-like[4] by 1.8%
(GBP12.3m) to GBP609.8m, net of a GBP4.5m valuation increase from active asset management activity (FY24 Q1: GBP2.0m
increase from asset management)
-- Q2 net asset value ("NAV") total return per share[5] of -1.4%
-- NAV per share of 95.9p (30 June 2023: 98.6p) with a NAV of GBP422.8m (30 June 2023: GBP434.9m)
Redevelopment and refurbishment of existing assets continues to be accretive with an expected yield on cost above
average cost of borrowing
-- GBP6.9m of capital expenditure undertaken during the Quarter, including buying the long-leasehold of a unit
at a 10-unit industrial asset in Knowsley (GBP1.3m) and the refurbishment of: offices in Manchester and Leeds
(GBP2.7m); an industrial unit in Ashby-de-la-Zouch (GBP1.1m) and retail assets in Shrewsbury and Liverpool (GBP0.6m)
-- All ongoing capital works are expected to enhance the assets' valuations and environmental credentials
and, once let, increase rents to give a yield on cost of at least 7%, ahead of the Company's marginal cost of
borrowing
-- Weighted average energy performance certificate rating has improved to C(56) (30 June 2023: C(58)) due
to re-ratings being carried out at three assets following refurbishment (Redditch, Winsford and Liverpool) and one
following a new letting (Grantham), with ongoing capital expenditure initiatives expected to drive further
improvements in subsequent quarters
Prudent debt levels mean gearing remains broadly in line with target, with significant borrowing covenant headroom
-- Net gearing[6] was 29.6% loan-to-value as of 30 September 2023 (30 June 2023: 28.0%), broadly in line
with the Company's 25% target
-- GBP185.0m of drawn debt comprising GBP140m (76%) of fixed rate debt and GBP45m (24%) drawn under the Company's
revolving credit facility ("RCF"). We expect that sales proceeds from the disposal of properties under offer will
reduce drawn debt over the remainder of the financial year
-- Aggregate borrowings have a weighted average cost of 4.2%
-- Fixed rate debt facilities have a weighted average term of 6.5 years and a weighted average cost of 3.4%
offering significant medium-term interest rate risk mitigation
Asset recycling continues to generate proceeds in excess of valuation
-- At 30 September 2023 five properties were under offer to sell valued at c.GBP19m which are expected, in
aggregate, to generate proceeds more than 10% in excess of valuation. Proceeds are expected to be invested in the
Company's remaining pipeline of profitable capital expenditure and to reduce variable rate borrowings
-- Of these properties under offer, we have exchanged contracts to sell a children's day nursery in Chesham
for GBP0.55m and out-of-town offices on Pride Park, Derby for GBP2.05m (including receipt of a GBP0.2m deposit)
Net asset value
In line with the portfolio valuation, the Company's unaudited NAV at 30 September 2023 decreased to GBP422.8m, or
approximately 95.9p per share, a decrease of 2.7p (-2.7%) since 30 June 2023:
Pence per share GBPm
NAV at 30 June 2023 98.6 434.9
Valuation movements relating to:
- Asset management activity 1.0 4.5
- General valuation decreases (3.7) (16.8)
Net valuation movement (2.7) (12.3)
EPRA earnings for the Quarter 1.4 6.3
Interim dividend paid[7] during the Quarter (1.4) (6.1)
NAV at 30 September 2023 95.9 422.8
The NAV attributable to the ordinary shares of the Company is
calculated under International Financial Reporting Standards and
incorporates the independent portfolio valuation at 30 September
2023 and net income for the Quarter. The movement in NAV reflects
the payment of an interim dividend of 1.375p per share during the
Quarter, but as usual this does not include any provision for the
approved dividend of 1.375p per share for the Quarter to be paid on
30 November 2023.
Investment Manager's commentary
UK property market
The disconnect between the occupational and investment markets
in UK real estate continues to persist. While the impacts of high
inflation and interest rates appear to weigh heavily on investor
sentiment, perhaps the greater influence has been the marked
re-rating of valuations in the final quarter of 2022, which still
seems to colour investors' attitude to real estate investment.
However, since the start of 2023 valuations have been reasonably
stable across the market, with some sub-sectors showing signs of
recovery while others continue to drift. The outcome for the NAV of
Custodian Property Income REIT has been a marginal decrease of 3.9%
over the past three quarters.
By contrast, occupational demand has been consistently strong
which has led to a reduced vacancy rate and increase in the
portfolio rent roll. We experienced a post lockdown increase in
vacancy to c.10%, but this has steadily improved and based on
lettings under offer, vacancy is expected to reach c.7% by 31
December 2023.
Similarly, the portfolio rent roll has grown 2.9% from GBP42.0m
at the start of the financial year to GBP43.2m at the end of the
Quarter, through both reduced vacancy and rental growth. During the
Quarter, letting vacant units added GBP1.0m (2.3%) to the rent
roll.
It is the strength of the occupational market driving rental
growth and low vacancy that will ultimately support fully covered
dividends and earnings growth. Income/earnings remain a central
focus for Custodian Property Income REIT, and it is income that
will deliver positive total returns for shareholders. On this basis
we remain cautiously optimistic.
Asset management
The Investment Manager has remained focused on active asset
management during the Quarter, completing nine new leases adding
GBP1.0m of new annual rent through letting vacant assets and
secured a further GBP0.7m of existing annual rent roll, increasing
property capital value by GBP4.5m. These new leases had a weighted
average unexpired term to first break or expiry ("WAULT") of 5.5
years, with the overall portfolio WAULT remaining at 4.8 years.
These asset management initiatives included completing:
-- A 10 year lease with fifth year break option to Zavvigroup on
a vacant, comprehensively refurbishedindustrial unit in Winsford at
annual rent of GBP741k, a 75% increase on the previous passing
rent, increasingvaluation by GBP2.2m (24%);
-- A 10 year lease renewal with fifth year break option on an
industrial unit in Hamilton let to IchorSystems at an annual rent
of GBP295k, a 29% increase on the previous passing rent, increasing
valuation by GBP0.8m(27%);
-- A 15 year lease with tenth year break option to JD Gyms on a
vacant retail warehouse unit in Swindon atan annual rent of
GBP150k, in line with ERV, increasing valuation by GBP0.7m
(12%);
-- A 15 year lease with tenth year break to Farmfoods at a
vacant retail warehouse unit in Grantham at anannual rental of
GBP100k, in line with ERV, increasing valuation by GBP0.5m
(22%);
-- A five year lease renewal with Next on a retail warehouse
unit in Evesham, at an annual rent of GBP128k, inline with ERV;
-- A 10 year lease with fifth year break to Aubin & Wills on
a retail unit in Edinburgh at an annual rent ofGBP95k, in line with
ERV, increasing valuation by GBP0.3m (31%);
-- A five year lease renewal with third year break option to
Halfords on a retail warehouse unit in Weymouthat an annual rental
of GBP71k, in line with ERV;
-- A five year lease to Blue Cross on a retail unit in
Shrewsbury at an annual rental of GBP33k, in line withERV; and
-- A three year lease to Community 360 at a retail unit in
Colchester at an annual rental of GBP24k.
During the Quarter the Company also settled an open market rent
review with Charles Stanley at Willow Court, Oxford at GBP111k, a
43% increase on the previous passing level, and completed the
following capital initiatives:
-- Purchased the long leasehold interest of a unit at a 10-unit
industrial asset in Knowsley for GBP1.25m; and
-- Achieved practical completion of a GBP7m redevelopment of an
industrial unit in Redditch.
The impact of these positive outcomes was partially offset by
the Administration of Wilko, which exited the Company's retail unit
in Taunton, decreasing the Company's annual rent roll by
GBP0.1m.
Post Quarter end we exchanged contracts for the disposal of an
out-of-town office property on Pride Park, Derby for GBP2.05m. A
deposit of GBP0.2m was received with completion expected in
December 2023.
Fully covered dividend
The Company paid an interim dividend of 1.375p per share on 31
August 2023 relating to the quarter ended 30 June 2023. The Board
has approved an interim dividend per share of 1.375p for the
Quarter, fully covered by EPRA earnings, payable on 30 November
2023. The Board is targeting aggregate dividends per share[8] of at
least 5.5p for the year ending 31 March 2024. The Board's objective
is to grow the dividend on a sustainable basis, at a rate which is
fully covered by net rental income and does not inhibit the
flexibility of the Company's investment strategy.
Borrowings
At 30 September 2023 the Company had GBP185.0m of debt drawn at
an aggregate weighted average cost of 4.2% with no expiries until
September 2024 and diversified across a range of lenders. This debt
comprised:
-- GBP45m (24%) at a variable prevailing interest rate of 6.84%
and a facility maturity of 1.0 years; and
-- GBP140m (76%) at a weighted average fixed rate of 3.4% with a
weighted average maturity of 6.5 years.
At 30 September 2023 the Company's borrowing facilities are:
Variable rate borrowing
-- GBP45m drawn under the Lloyds RCF.
The Company expects to complete an extension of the Lloyds RCF
during November 2023, increasing the total funds available from
GBP50m to GBP75m for a term of three years, with an option to
extend the term by a further two years subject to Lloyds'
approval.
Fixed rate borrowing
-- A GBP20m term loan with Scottish Widows plc ("SWIP")
repayable on 13 August 2025 with interest fixed at3.935%;
-- A GBP45m term loan with SWIP repayable on 5 June 2028 with
interest fixed at 2.987%; and
-- A GBP75m term loan with Aviva comprising:? A GBP35m tranche
repayable on 6 April 2032 with fixed annual interest of 3.02%; ? A
GBP25m tranche repayable on 3 November 2032 with fixed annual
interest of 4.10%; and ? A GBP15m tranche repayable on 3 November
2032 with fixed annual interest of 3.26%.
Each facility has a discrete security pool, comprising a number
of individual properties, over which the relevant lender has
security and covenants:
-- The maximum LTV of the discrete security pools is either 45%
or 50%, with an overarching covenant on theproperty portfolio of a
maximum of 35% LTV; and
-- Historical interest cover, requiring net rental receipts from
the discrete security pools, over thepreceding three months, to
exceed either 200% or 250% of the associated facility's quarterly
interest liability.
Portfolio analysis
At 30 September 2023 the portfolio is split between the main
commercial property sectors, in line with the Company's objective
to maintain a suitably balanced investment portfolio. Sector
weightings are shown below:
Valuation
Quarter valuation
30 Sept movement
2023 Weighting by value 30 Quarter valuation Weighting by value 30
Sept 2023 GBPm movement Jun 2023
GBPm
Sector
Industrial 303.2 50% (0.2) - 49%
Retail 127.6 21% (3.7) (3%) 21%
warehouse
Other[9] 78.1 13% (1.8) (2%) 13%
Office 67.5 11% (5.9) (8%) 11%
High street 33.4 5% (0.7) (2%) 6%
retail
Total 609.8 (12.3) (2%) 100%
For details of all properties in the portfolio please see
custodianreit.com/property-portfolio.
- Ends -
Further information:
Further information regarding the Company can be found at the
Company's website custodianreit.com or please contact:
Custodian Capital Limited
Richard Shepherd-Cross / Ed Moore / Ian Mattioli MBE Tel: +44 (0)116 240 8740
www.custodiancapital.com
Numis Securities Limited
Hugh Jonathan / Nathan Brown Tel: +44 (0)20 7260 1000
www.numis.com/funds
FTI Consulting
Richard Sunderland / Andrew Davis / Oliver Parsons Tel: +44 (0)20 3727 1000
custodianreit@fticonsulting.com
Notes to Editors
Custodian Property Income REIT plc is a UK real estate
investment trust, which listed on the main market of the London
Stock Exchange on 26 March 2014. Its portfolio comprises properties
predominantly let to institutional grade tenants throughout the UK
and is principally characterised by smaller, regional,
core/core-plus properties.
The Company offers investors the opportunity to access a
diversified portfolio of UK commercial real estate through a
closed-ended fund. By principally targeting smaller, regional,
core/core-plus properties, the Company seeks to provide investors
with an attractive level of income with the potential for capital
growth.
Custodian Capital Limited is the discretionary investment
manager of the Company.
For more information visit custodianreit.com and
custodiancapital.com.
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[1] Price on 30 October 2023. Source: London Stock Exchange.
[2] Profit after tax excluding net gains or losses on investment
property divided by weighted average number of shares in issue.
[3] Estimated rental value ("ERV") of let property divided by
total portfolio ERV.
[4] Adjusting for capital expenditure.
[5] NAV per share movement including dividends paid during the
Quarter.
[6] Gross borrowings less cash (excluding rent deposits) divided
by portfolio valuation.
[7] An interim dividend of 1.375p per share relating to the
quarter ended 30 June 2023 was paid on 31 August 2023.
[8] This is a target only and not a profit forecast. There can
be no assurance that the target can or will be met and it should
not be taken as an indication of the Company's expected or actual
future results. Accordingly, shareholders or potential investors in
the Company should not place any reliance on this target in
deciding whether or not to invest in the Company or assume that the
Company will make any distributions at all and should decide for
themselves whether or not the target dividend yield is reasonable
or achievable.
[9] Comprises drive-through restaurants, car showrooms, trade
counters, gymnasiums, restaurants and leisure units.
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Dissemination of a Regulatory Announcement that contains inside
information in accordance with the Market Abuse Regulation (MAR),
transmitted by EQS Group. The issuer is solely responsible for the
content of this announcement.
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ISIN: GB00BJFLFT45
Category Code: MSCH
TIDM: CREI
LEI Code: 2138001BOD1J5XK1CX76
OAM Categories: 3.1. Additional regulated information required to be disclosed under the laws of a Member State
Sequence No.: 281485
EQS News ID: 1760901
End of Announcement EQS News Service
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