7 February 2024
Custodian
Property Income REIT plc
(“Custodian Property Income REIT”
or “the Company”)
Third quarter
trading update shows rental growth supporting fully covered
dividends
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 31 December 2023
(“Q3” or the “Quarter”).
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 at least 5.5p for the year ending
31 March 2024, representing a 8.0% yield based on the prevailing
69p share price[1]
-
EPRA earnings per share[2]
of 1.4p for the Quarter (FY24 Q2:
1.4p, Q1: 1.5p)
-
Passing rent increased to £43.4m
(FY24 Q2: £43.2m) driven by continued occupier demand for space
across all sectors in the Company’s portfolio, with four rent
reviews settled during the Quarter, on average, in line with ERV
and 21% above previous passing rent. Four new leases also signed securing £0.5m of
annual rent.
These initiatives have increased
property capital value by £1.0m
-
Like-for-like ERV has increased by
0.8% since 30 September 2023, driven primarily by rental growth in
the industrial sector. Portfolio ERV (£50.1m) exceeds passing rent by
15% (30 Sept 2023: 15%) demonstrating the portfolio’s significant
reversionary potential
-
EPRA occupancy[3]
has remained at 91% (30 Sept 2023:
91%).
1.0% of ERV is vacant subject to
refurbishment or redevelopment with 3.1% of ERV vacant but under
offer to let or sell
Valuations
-
The valuation of the Company’s
diversified portfolio of 158 assets decreased on a
like-for-like[4] basis by
1.7% (£10.5m) to £602.4m, net of a £1.0m valuation increase from
active asset management activity (FY24 Q2: £4.5m increase from
asset management)
-
Q3 net asset value (“NAV”) total
return per share[5] of
-1.3%
-
NAV per share of 93.3p (30 Sept
2023: 95.9p) with a NAV of £411.2m (30 Sept 2023:
£422.8m)
Redevelopment
and refurbishment of existing assets continues to be accretive with
an expected yield on cost above average cost of
borrowing
-
£3.6m of capital expenditure undertaken during the Quarter,
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(54) (30 Sept
2023:
C(56)) with re-ratings being
carried out across 30 assets
Prudent debt
levels
-
Net gearing[6] was 30.6% loan-to-value as of 31 December 2023
(30 Sept 2023: 29.6%). Property disposals since the Quarter end,
detailed below, have reduced net gearing to 29.4%, drawing the LTV
closer to the Company’s 25% medium-term target
-
£190.0m of drawn debt comprising
£140m (74%) of fixed rate debt and £50m (26%) drawn under the
Company’s revolving credit facility (“RCF”)
-
Aggregate borrowings have a
weighted average cost of 4.3%
-
Fixed rate debt facilities have a
weighted average term of 6.3 years and a weighted average cost of
3.4% offering significant medium-term interest rate risk
mitigation
Asset recycling
continues to generate aggregate proceeds in excess of
valuation
-
During the Quarter a children’s day
nursery in Chesham was sold at valuation for £0.55m
-
Since the Quarter end, two
properties have been sold for an aggregate £10.1m, 14% ahead of
valuation.
Two further properties, which are
both vacant, are under offer to sell for an aggregate £4.4m, 17% in
excess of valuation. Proceeds are expected to be used to reduce
variable rate borrowings
Net asset
value
The Company’s unaudited NAV at 31
December 2023 decreased to £411.2m, or approximately 93.3p per
share, a decrease of 2.6p (-2.7%) since 30 September
2023:
|
Pence per share
|
£m
|
|
|
|
NAV at 30 September 2023
|
95.9
|
422.8
|
|
|
|
|
|
|
Valuation decreases
|
(2.5)
|
(11.0)
|
Costs of property
acquisitions[7]
|
(0.1)
|
(0.6)
|
Net valuation movement
|
(2.6)
|
(11.6)
|
|
|
|
EPRA earnings for the
Quarter
|
1.4
|
6.1
|
Interim dividend paid[8]
during the Quarter
|
(1.4)
|
(6.1)
|
|
|
|
NAV at 31 December 2023
|
93.3
|
411.2
|
The unaudited NAV attributable to
the ordinary shares of the Company is calculated under
International Financial Reporting Standards and incorporates the
independent portfolio valuation at 31 December 2023 and net income
for the Quarter. The movement in unaudited 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
29 February 2024.
The Company’s unaudited NAV at 31
December 2023 is 0.4p below the Company’s unaudited rolled-forward
NAV at 31 December 2023 as per the combined circular and prospectus
associated with the recommended all-share merger with abrdn
Property Income Trust Limited, announced on 1 February 2024. The
difference reflected movements in the Company’s capital
expenditure, lease incentives and acquisition costs during the
Quarter.
Investment
Manager’s commentary
UK property market
2023 saw rising interest rates,
weak investor sentiment and low transaction
volumes.
This was in contrast to occupier
demand which delivered rental growth and has further improved the
reversionary potential in Custodian Property Income REIT’s
portfolio, which is now greater than it was at the start of
2023.
Investor sentiment towards real
estate appears to have been closely correlated with the expected
trajectory of interest rates, as determined by inflation
data.
Consensus opinion and the interest
rate forward curve suggest that the next move for interest rates
will be down, with the potential for a number of base rate cuts in
late 2024 and into 2025, subject of course to an improving
geopolitical environment. This should be positive for real estate
investors and occupiers.
Asset
management
Over the 12 months to 31 December
2023 the passing rent of the Company’s portfolio has grown by c.3%
to £43.4m and ERV has grown from £48.4m to £50.1m, an increase of
c.3.5%, demonstrating the continued prospects for strong rental
performance which will support earnings and the companies aim of
paying fully covered dividends.
The Investment Manager has remained
focused on active asset management during the Quarter, completing
four rent reviews at an aggregate 21% increase in annual rent from
£1.1m to £1.4m, and regearing four leases which secured £0.5m of
annual rent. These initiatives increased property capital value by
£1.0m.
The new leases had a weighted
average unexpired term to first break or expiry (“WAULT”) of five
years, with the overall portfolio WAULT remaining at 4.8
years.
Details of these asset management
initiatives are shown below:
Rent
reviews
-
Restore plc at an industrial unit
in Salford with annual rent increasing by 33% to £605k.
-
West Midlands Ambulance Service at
an industrial unit in Erdington with annual rent increasing by 12%
to £186k.
-
National Timber Group at an
industrial unit in Grangemouth with annual rent increasing by 13%
to £438k.
-
Starbucks at a drive-through unit
in Maypole with annual rent increasing by 17% to £140k.
New
leases
-
A 20-year lease with a tenth year
break to Andrew Sykes Hire at an industrial unit in Farnborough,
Hampshire, at an annual rent of £226k, a 22% increase on the
previous passing rent, increasing valuation by £0.8m
(28%).
-
A five-year lease over a smaller
floor-plate with 18 and 36 month break options to Liverpool
University Hospitals NHS Foundation Trust in Liverpool at an annual
rent of £125k, increasing valuation by £0.1m (3.6%).
-
A five-year lease renewal with a
third year tenant only break option to ITM Power at an industrial
asset in Sheffield, with an annual rent of £141k reflecting a 36%
increase on previous passing rent, increasing valuation by £0.1m
(5%).
-
A 10-year lease renewal with fifth
year break option on a retail unit in Dunfermline let to Greggs at
an annual rent of £26k in line with ERV, an 11% increase on the
previous passing rent.
Since the Quarter end the Company has completed seven further asset
management initiatives, including:
-
Letting a vacant office unit in
Edinburgh and a vacant retail unit in Liverpool with aggregate
annual rent of £161k; and
-
Completing the comprehensive
refurbishment of David House offices in Leeds which has seen the
tenant, First Title Limited, take a 10.5 year lease without break
at an annual rental of £462k, a 49% increase on the previous
passing level.
This refurbishment has resulted in
the EPC rating of the building improving from C to A, with
refurbishment works now commencing to the adjoining building let to
the same tenant.
Since the Quarter end the Company
has also settled the following rent reviews at an aggregate
29% ahead of previous passing rent with:
-
Chicken Cabins at a drive-through
unit in York Clifton Moor with annual rent increasing by 42% to
£118k;
-
Listers Group at a motor dealership
in Loughborough, with annual rent increasing by 13% to £181k;
and
-
Acorn Web Offset at an industrial
unit in Normanton, with annual rent increasing by 42% to
£155k.
Disposals
Acknowledging the higher cost of
variable rate debt, of which the company currently has £50m drawn
under its Lloyds Bank revolving credit facility (“RCF”), steps have
been taken to advance a number of property sales, where special
purchasers can unlock prices ahead of valuation, but more
importantly ahead of the cost of the RCF, in order to enhance
earnings per share.
During the Quarter a children’s day
nursery in Chesham was sold for £0.55m at valuation.
Since the Quarter end, an
industrial unit in Milton Keynes and an office building on Pride
Park, Derby have been sold for an aggregate
£10.1m.
Two further properties in Redhill
(former car dealership) and Castle Donington (offices), which are
both vacant, are under offer to sell for an aggregate
£4.4m.
These disposals are expected to
complete during the quarter ending 31 March 2024 and proceeds are
expected to be used to reduce variable rate borrowings.
Fully covered
dividend
The Company paid an interim
dividend of 1.375p per share on 30 November 2023 relating to the
quarter ended 30 September 2023. The Board has approved an interim dividend per
share of 1.375p for the Quarter, fully covered by EPRA earnings,
payable on 29 February 2024. The Board is targeting aggregate dividends per
share[9] 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
On 10 November 2023 the Company and
Lloyds Banking Group agreed to extend the RCF for a term of three
years, with options to extend the term by a further year on each of
the first and second anniversaries of the
renewal.
The RCF includes an ‘accordion’
option with the facility limit initially set at £50m, which can be
increased up to £75m subject to Lloyds’ consent. The headline rates of annual interest now
include a LIBOR transition fee previously applied separately,
increasing by 12bps to between 1.62% and 1.92% above SONIA,
determined by reference to the prevailing LTV
ratio.
As a result there is no change to
the aggregate margin from the renewal.
At 31 December 2023 the Company had
£190.0m of debt drawn at an aggregate weighted average cost of 4.3%
with no expiries until August 2025 and diversified across a range
of lenders.
This debt comprised:
-
£50m (26%) at a variable prevailing
interest rate of 6.9% and a facility maturity of 2.9 years;
and
-
£140m (74%) at a weighted average
fixed rate of 3.4% with a weighted average maturity of 6.3
years.
At 31 December 2023 the Company’s
borrowing facilities are:
Variable rate
borrowing
-
A £50m RCF with Lloyds Bank plc
(“Lloyds”) with interest of between 1.62% and 1.92% above SONIA,
determined by reference to the prevailing LTV ratio of a discrete
security pool of assets, and expiring on 10 November
2026.
The facility limit can be increased
to £75m with Lloyds’ approval.
Fixed rate
borrowing
-
A £20m term loan with Scottish
Widows plc (“SWIP”) repayable on 13 August 2025 with interest fixed at 3.935%;
-
A £45m term loan with SWIP
repayable on 5 June 2028 with interest fixed at 2.987%;
and
-
A £75m term loan with Aviva
comprising:
- A £35m tranche repayable on 6 April 2032 with
fixed annual interest of 3.02%;
- A £25m tranche repayable on 3 November 2032
with fixed annual interest of 4.10%; and
- A £15m 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 the property portfolio of a maximum of 35% or 40% LTV;
and
-
Historical interest cover,
requiring net rental receipts from the discrete security pools,
over the preceding three months, to exceed either 200% or 250% of
the associated facility’s quarterly interest liability.
Portfolio
analysis
At 31 December 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:
|
31 December 2023
|
|
|
30 September 2023
|
Sector
|
Val’n
£m
|
Weighting by value
|
Weighting by income
|
Quarter valuation
movement
£m
|
Quarter valuation
movement
|
Weighting by value
|
Weighting by income
|
|
|
|
|
|
|
|
|
Industrial
|
301.0
|
50%
|
41%
|
(3.9)
|
(1%)
|
50%
|
41%
|
Retail warehouse
|
124.6
|
21%
|
22%
|
(3.2)
|
(3%)
|
21%
|
22%
|
Other[10]
|
78.7
|
13%
|
13%
|
0.4
|
1%
|
13%
|
13%
|
Office
|
65.8
|
11%
|
16%
|
(3.2)
|
(5%)
|
11%
|
16%
|
High street retail
|
32.3
|
5%
|
8%
|
(1.1)
|
(3%)
|
5%
|
8%
|
|
|
|
|
|
|
|
|
Total
|
602.4
|
100%
|
100%
|
(11.0)
|
(2%)
|
100%
|
100%
|
For details of
all properties in the portfolio please see
custodianreit.com/property-portfolio.
Recommended
all-share merger with abrdn Property Income Trust Limited
(“API”)
On 19 January 2024 the Company
announced a recommended all-share merger with API and on 1 February
2024 published an associated combined circular and prospectus
incorporating notice of a General Meeting to be held on 27 February
2024.
The Board believes that the merger
would bring together two complementary portfolios to create a
differentiated REIT with enhanced diversification and share
liquidity and a fully covered and sustainable dividend for the
combined group's shareholders.
Documentation
relating to the merger is available, subject to certain access
restrictions, on the Company's website at
https://custodianreit.com/proposed-all-share-merger-with-abrdn-property-income-trust-limited/.
- 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.