REG-Custodian Property Income REIT plc Custodian Property Income REIT plc: Fourth quarter trading update shows strong leasing momentum driving income and supporting fully covered dividend as well as value stabilisation
10/05/2023 07:15
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Custodian Property Income REIT plc (CREI)
Custodian Property Income REIT plc: Fourth quarter trading update shows
strong leasing momentum driving income and supporting fully covered
dividend as well as value stabilisation
10-May-2023 / 07:00 GMT/BST
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10 May 2023
Custodian Property Income REIT plc
(“Custodian Property Income REIT” or “the Company”)
Fourth quarter trading update shows strong leasing momentum driving income
and supporting fully covered dividend as well as value stabilisation
Custodian Property Income REIT (LSE: CREI), which seeks to deliver a
strong income return by investing in a diversified portfolio of smaller
regional properties across the UK, today provides a trading update for the
fourth quarter ended 31 March 2023 (“Q4” or the “Quarter”) and the year
ended 31 March 2023 (“FY23”).
Strong leasing activity continues to support rental growth and underpin
fully covered dividends
• 1.375p dividend per share approved for the Quarter achieving aggregate
FY23 dividends per share of 5.5p, in line with target, 102% covered by
unaudited EPRA earnings
• Target dividends per share of no less than 5.5p for the year ending 31
March 2024
• EPRA earnings per share 1 1 of 1.4p for Q4 (Q3: 1.5p) and 5.6p for
FY23 (FY22: 5.9p) with the impact of positive asset management
outcomes offset by increases in interest rates and Q3 disposals
• £2.5m of new rental income secured during the Quarter through leasing,
renewals and rental uplifts reflecting a 5% aggregate premium to ERV
and comprising:
• Six new leases and two agreements for lease signed across a range of
property sectors at an aggregate 5% ahead of ERV, adding £2.4m of
annual rent for a weighted average of 9.5 years to first break (Q3: 10
new leases adding £1.2m of annual rent for 7.3 years)
• 24% (£0.1m) aggregate rental increase across three open market rent
reviews settled during the Quarter, at an aggregate 5% ahead of ERV
• 1.4% increase in like-for-like 2 2 ERV since 31 December 2022. ERV
now exceeds passing rent by 16%
• EPRA occupancy 3 3 improved to 90.3% (31 December 2022: 89.9%)
primarily due to letting a vacant leisure unit in Milton Keynes on a
25 year lease at an annual rent of £320k during the Quarter, which had
been vacant since 2019
• 84% of current vacancy is subject to refurbishment or redevelopment
(57%) or is under offer to let (27%)
Valuation movements
• £2.2m (-0.7% like-for-like) valuation decrease, net of a £2.6m (0.4%)
valuation increase from active asset management activity (Q3: £3.0m
increase from asset management), moves the Company’s diversified
portfolio of 161 assets to £613.6m
• Q4 net asset value (“NAV”) total return per share 4 4 of 0.9%
• NAV per share of 99.3p (31 December 2022: 99.8p) with a NAV of £437.6m
(31 December 2022: £440.0m)
Sales continued at above book value while £5.8m was invested in the
development and refurbishment of existing assets
• During the Quarter:
• A high street retail unit in Bury St Edmunds was sold at auction in
January 2023 for £0.54m, £0.14m (35%) ahead of valuation
• £5.8m of capital expenditure was undertaken, primarily on the
redevelopment of an industrial unit in Redditch and the refurbishment,
including improving the environmental credentials, of an industrial
unit in Winsford and offices in Manchester, which are expected to
enhance valuation, and rents once complete and let
Gearing remains low and in line with target, with significant borrowing
headroom
• Net gearing 5 5 remains low at 27.4% loan-to-value as of 31 March
2023 (31 December 2022: 27.1%), broadly in line with the Company’s 25%
target
• £173.5m of drawn debt with an aggregate weighted average cost of 3.8%
and of which 81% is at a fixed rate of interest
• Fixed rate debt facilities have a weighted average term of 7.0 years
and a weighted average cost of 3.4% offering significant medium-term
interest rate risk mitigation
• The Company’s £50m variable rate revolving credit facility, of which
£33.5m is drawn, expires in September 2024 and discussions are
underway regarding an extension to the facility
Richard Shepherd-Cross, Managing Director of Custodian Capital Limited,
said: “We are beginning to see some optimism returning to real estate
markets following six months of economic turbulence, which had a direct
impact on real estate values. Property pricing has reacted quickly to the
new interest rate environment allowing the market to continue to function
despite transaction levels remaining low. As a result, and assisted by
our asset management initiatives, valuations have largely stabilised
during the Quarter allowing delivery of a positive quarterly NAV total
return.
“Much of the optimism in real estate is due to the prospect of rental
growth which is the key component of anticipated total returns. In an
inflationary environment, real returns from real assets can be achieved
when rents are growing. The Company’s portfolio has an EPRA net initial
yield 6 6 of 5.8% and an equivalent yield 7 7 of 7.3%, demonstrating
the reversionary potential of the Company’s properties, which we continue
to capture.
“Our asset management of the portfolio and the types of assets we own are
focused on where occupational demand is strongest, allowing us to lease
vacant space across all sectors and deliver rental growth. This has
supported EPRA earnings per share and underpins the Company’s long term
track record of paying a fully covered dividend.
“Custodian Property Income REIT’s balance sheet resilience, with low
gearing and a longer-term fixed rate debt profile, has left the Company
well insulated from the negative impact of interest rate rises. Rental
growth feeding into the portfolio will create headroom for eventual
refinancing.
“As energy performance certificate (“EPC”) requirements of the Minimum
Energy Efficiency Standards (“MEES”) tighten we expect to maintain a
compliant portfolio of properties. With energy efficiency a core tenet of
the Company’s asset management strategy and with tenant requirements
aligning with our energy efficiency goals we see the advance of MEES as an
opportunity to secure greater tenant engagement and higher rents.
“We remain confident that our ongoing intensive asset management of the
portfolio, which still offers a number of wide-ranging opportunities to
add value, will maintain cash flow and support consistent returns.
Coupled with the strength of the Company’s balance sheet, this will
continue to support our high income return strategy.”
Net asset value
The Company’s unaudited NAV at 31 March 2023 was £437.6m, or approximately
99.3p per share, a marginal decrease of 0.5p (-0.5%) since 31 December
2022:
Pence per share £m
NAV at 31 December 2022 99.8 440.0
Valuation movements relating to:
- Asset management activity 0.6 2.6
- General valuation decreases (1.1) (4.8)
Net valuation movement (0.5) (2.2)
Profit on disposal 8 8 0.0 (0.2)
(0.5) (2.4)
EPRA earnings for the Quarter 1.4 6.1
Interim dividend paid 9 9 during the Quarter (1.4) (6.1)
NAV at 31 March 2023 99.3 437.6
The NAV attributable to the ordinary shares of the Company is calculated
under International Financial Reporting Standards and incorporates the
independent portfolio valuation at 31 March 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 does not include any provision
for the approved dividend of 1.375p per share for the Quarter to be paid
on 31 May 2023.
Investment Manager’s commentary
UK property market
In the 12 months to 31 March 2023 the UK commercial property market saw
valuations decline by 17% with the bulk of the rerating in the quarter to
December 2023. The Company’s portfolio experienced a more muted fall of
only 11.8% like-for-like and we believe this lower volatility is primarily
due to Custodian Property Income REIT’s smaller regional property strategy
and focus on income returns. Firstly, the Company’s valuations did not
‘overheat’ during mid-2022 to the same extent as, say, prime logistics.
Secondly, the diversified strategy provided a softer landing as
sub-sectors such as high street retail, drive through restaurants and car
showrooms saw much less pricing volatility than logistics. With
valuations appearing to have stabilised it is possible to see the rapid
correction due to the new interest rate environment as strongly positive
for the market, maintaining liquidity and providing future acquisition
opportunities.
The table below shows the reversionary potential of the portfolio by
sector once asset management initiatives are complete, by comparing EPRA
net initial yields to the equivalent yield, which factors in expected
rental growth and the letting of vacant units. Across the whole
portfolio, valuers’ estimated rental values are 16% ahead of passing rent
and while part of the reversionary potential is due to vacancy, the
balance is this latent rental growth which will be unlocked at rent review
and lease renewal.
Equivalent EPRA Topped-up NIY 11 11
yield 10 10
31 Mar 2023 EPRA NIY 12 12
31 Mar 2023
Sector 31 Mar 2023
Industrial 6.6% 5.1% 4.9%
Retail warehouse 7.3% 7.2% 6.7%
Other 8.0% 6.8% 6.3%
Office 8.9% 6.4% 5.4%
High street 8.6% 9.6% 9.4%
retail
Portfolio total 7.3% 6.2% 5.8%
Retail warehousing has been a key sector for acquisitions for some time
and it demonstrated extraordinary resilience through the pandemic,
particularly in our favoured sub-sectors of food, homewares, DIY and the
discounters. Vacancy rates are very low and future rental growth appears
affordable for occupiers.
In the office sector, a much clearer picture is emerging of how tenants
will use and occupy offices in the new world of hybrid working. Occupiers
are demanding much higher levels of amenity both from their offices and
from their office locations. This favours modern, flexible office space
in city centre locations with strong transport links and high
environmental credentials. Where this space can be provided there appears
to be meaningful rental growth, but conversely office space that cannot
meet these criteria risks becoming obsolete and will need to be
re-purposed. In our portfolio we have seen strong rental growth in Oxford
and central Manchester where we are currently refurbishing offices to meet
the new market demand.
Rental growth remains strong in the industrial and logistics sector which
accounts for 40% of the Company’s rent roll and 48% of the portfolio by
value. Lack of supply, limited development of smaller and mid-box
industrial units and construction cost inflation have all combined to
heighten occupational demand and produce low vacancy rates, driving rental
growth for new-build regional industrial units and well specified,
refurbished space.
Asset management
The Investment Manager has remained focused on active asset management
during the Quarter, completing leasing initiatives, with a weighted
average unexpired term to first break or expiry (“WAULT”) of 9.5 years,
increasing the portfolio total to 5.0 years:
• A five year reversionary lease to B&M on a retail warehouse unit in
Ashton Under Lyme at an annual rent of £421k, increasing valuation by
£0.7m (13%);
• A 25 year lease with a 15 year tenant break option to Ten Pin Bowling
on a leisure unit in Milton Keynes which had been vacant since July
2019 at an annual rent of £320k, increasing valuation by £0.7m (22%);
• A 10 year lease to CB Printforce on an industrial unit in Biggleswade
with annual rent increasing from £330k to £400k, increasing valuation
by £0.6m (13%);
• A five year lease to Intelligent Facility Solutions on an industrial
unit in Sheffield at an annual rent of £35k, increasing valuation by
£0.1m;
• A five year lease renewal with a year three break to Portakabin on an
industrial unit in Knowsley at an annual rent of £64k, increasing
valuation by £0.1m;
• A five year lease renewal with a year three break to Lush on a retail
unit in Colchester at an annual rent of £36k with no impact on
valuation; and
• Exchanging agreements for lease with First Title Limited (t/a Enact
Conveyancing) on two office buildings in Leeds. The transaction will
see CREIT fund the comprehensive refurbishment of both buildings to
achieve A rated EPCs at a total cost of circa £3.9m, with the tenant
taking on new 10 year leases without break on completion. Following
completion of the refurbishment the aggregate annual passing rent is
set to increase from £649k to £942k, a 45% increase, with an expected
increase in valuation of c. £1m above expenditure once completed.
During the Quarter rent reviews were settled with:
• Synertec at an industrial unit in Warrington with annual rent
increasing by 62% to £190k, increasing valuation by £0.4m (5%);
• Edmundson Electrical at a trade counter unit in Crewe with annual rent
increasing by 11% to £31k, with no impact on valuation; and
• Pendragon at a car dealership unit in York with annual rent increasing
by 6% to £255k, with no impact on valuation.
The positive impact of letting vacant space has increased EPRA occupancy
to 90.3% (31 December 2022: 89.9%). Of the Company’s remaining vacant
space 57% is subject to refurbishment or redevelopment and 27% is under
offer to let.
The weighted average EPC score of the portfolio has improved during the
last 12 months from 61 (C) at 31 March 2022 to 58 (C) at the Quarter end.
Fully covered dividend
The Company paid an interim dividend of 1.375p per share on 28 February
2023 relating to the quarter ended 31 December 2022. The Board has
approved another interim dividend per share of 1.375p for the Quarter,
fully covered by EPRA earnings, payable on 31 May 2023. The Board is
targeting aggregate dividends per share 13 13 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.
Additional details on disposals
During the Quarter the Company sold a high street retail unit in Bury St
Edmunds at auction for £0.54m, £0.14m (35%) ahead of valuation. The lease
term had been recently increased by five years but with annual rent
decreasing from £53k to £40k, and rents were not anticipated to recover in
the short-medium term.
Borrowings
At 31 March 2023 the Company had £173.5m of debt drawn at an aggregate
weighted average cost of 3.8% with no expiries until September 2024. This
debt comprised:
• £33.5m (19%) at a variable prevailing interest rate of 5.83% and a
facility maturity of 1.5 years; and
• £140m (81%) at a weighted average fixed rate of 3.4% with a weighted
average maturity of 7.0 years.
The Company’s borrowing facilities are:
Variable rate borrowing
• A £40m RCF with Lloyds Bank plc expiring on 17 September 2024 with
interest of between 1.5% and 1.8% above SONIA determined by reference
to the prevailing LTV ratio of a discrete security pool. At 31 March
2023 £33.5m was drawn under the revolving credit facility (“RCF”).
The RCF limit can be increased to £50m with Lloyds’ consent.
Discussions are underway regarding an extension to the facility.
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 pool is between 45% and 50%,
with an overarching covenant on the property portfolio of a maximum
35% LTV; and
• Historical interest cover, requiring net rental receipts from each
discrete security pool, over the preceding three months, to exceed
250% of the facility’s quarterly interest liability.
Portfolio analysis
At 31 March 2023 the property portfolio comprised 161 assets. 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
31 Mar 2023 Weighting by movement Quarter Weighting
value 31 Mar valuation by value 31
£m 2023 £m movement Dec 2022
Sector
Industrial 295.1 48% 1.4 1% 48%
Retail 131.8 21% (0.3) - 22%
warehouse
Other 14 14 78.6 13% 0.9 1% 12%
Office 71.7 12% (3.3) (4%) 12%
High street 36.4 6% (0.9) (3%) 6%
retail
Total 613.6 100% (2.2) - 100%
For details of all properties in the portfolio please see
15 custodianreit.com/property-portfolio.
- Ends -
Further information:
Further information regarding the Company can be found at the Company's
website 16 custodianreit.com or please contact:
Custodian Capital Limited
Richard Shepherd-Cross / Ed Moore / Ian Tel: +44 (0)116 240 8740
Mattioli MBE
17 www.custodiancapital.com
Numis Securities Limited
Hugh Jonathan / Nathan Brown Tel: +44 (0)20 7260 1000
www.numis.com/funds
FTI Consulting
Richard Sunderland / Ellie Sweeney / Tel: +44 (0)20 3727 1000
Andrew Davis
18 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 on long leases throughout the UK and is
principally characterised by properties with individual values of less
than £15m at acquisition.
The Company offers investors the opportunity to access a diversified
portfolio of UK commercial real estate through a closed-ended fund. By
principally targeting sub £15m, regional 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 19 custodianreit.com and
20 custodiancapital.com.
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21 1 Profit after tax excluding net gains or losses on investment
property divided by weighted average number of shares in issue.
22 2 Adjusting for property acquisitions, disposals and capital
expenditure.
23 3 Estimated rental value (“ERV”) of let property divided by total
portfolio ERV.
24 4 NAV per share movement including dividends paid during the
Quarter.
25 5 Gross borrowings less cash (excluding rent deposits) divided by
portfolio valuation.
26 6 Annualised cash rents at the Quarter-end, less estimated
non-recoverable property operating expenses, divided by the gross property
valuation plus estimated purchaser’s costs.
27 7 Weighted average of annualised cash rents at the Quarter-end date
and ERV, less estimated non-recoverable property operating expenses,
divided by property valuation plus estimated purchaser’s costs.
28 8 Net of £0.3m movements in prior period disposal cost and rent
top-up accruals.
29 9 An interim dividend of 1.375p per share relating to the quarter
ended 31 December 2022 was paid on 28 February 2023.
30 10 Weighted average of annualised cash rents at the Quarter-end date
and ERV, less estimated non-recoverable property operating expenses,
divided by property valuation plus estimated purchaser’s costs.
31 11 Annualised cash rents at the Quarter-end date, adjusted for the
expiration of lease incentives, less estimated non-recoverable property
operating expenses, divided by property valuation plus estimated
purchaser’s costs.
32 12 Annualised cash rents at the Quarter-end, less estimated
non-recoverable property operating expenses, divided by the property
valuation plus estimated purchaser’s costs.
33 13 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.
34 14 Comprises drive-through restaurants, car showrooms, trade
counters, gymnasiums, restaurants and leisure units.
══════════════════════════════════════════════════════════════════════════
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.
══════════════════════════════════════════════════════════════════════════
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.: 242493
EQS News ID: 1628513
End of Announcement EQS News Service
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