REG-Custodian Property Income REIT plc Custodian Property Income REIT plc: Strong leasing outcomes continue to drive income growth
07/11/2024 07:15
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Custodian Property Income REIT plc (CREI)
Custodian Property Income REIT plc: Strong leasing outcomes continue to drive
income growth
07-Nov-2024 / 07:00 GMT/BST
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7 November 2024
Custodian Property Income REIT plc
(“Custodian Property Income REIT” or “the Company”)
Strong leasing outcomes continue to drive income growth
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 2024 (“Q2” or
the “Quarter”).
Commenting on the trading update, Richard Shepherd-Cross, Managing Director
of Custodian Capital Limited, said: “Having previously stated that we
believed the market was bottoming out and with two consecutive quarters of
broadly flat valuations behind us, it is pleasing to report a marginal
increase in our portfolio valuation at the halfway point of the year. While
one swallow does not make a summer, this does support our belief that,
generally speaking, we are at the start of a gradual upwards trend. However,
the importance of stock selection and proactive asset management to drive
returns remains as acute as ever and the 20 plus lettings, lease renewals,
re-gears and rent reviews at significant average premiums to ERV and previous
rent that we have undertaken during the Quarter, as well as the sales we
continue to make on terms ahead of valuation, will be supportive of future
earnings and dividend cover.
“In September we also welcomed the Financial Conduct Authority’s exemption of
investment companies from PRIIPs and MiFID II regulation which previously
obliged wealth managers and platforms to make disclosures about costs which
were misleading and ultimately detrimental to investment performance. With
the situation now being resolved and as the investment industry gradually
adjusts to this change, we expect the Company’s competitive cost structure
and high returns to be very attractive to new investors seeking strong
returns from UK real estate.”
Highlights
Strong leasing activity continues to support rental growth and underpins
fully covered dividend
• 1.5p dividend per share approved for the Quarter, fully covered by
unaudited European Public Real Estate Association (“EPRA”) earnings per
share 1 1 , in line with target of at least 6.0p for the year ending 31
March 2025 (FY24: 5.8p). This target dividend represents a 7.9% yield
based on the prevailing 76p share price 2 2
• EPRA earnings per share of 1.5p for the Quarter (FY25 Q1: 1.5p)
• During the Quarter, a 1.5% increase in like-for-like 3 3 passing rent
and a 0.8% increase in like-for-like estimated rental value (“ERV”),
driven by 1.1% like-for-like rental growth in the industrial sector, with
all other sectors showing stable ERVs
• Portfolio ERV (£49.3m) exceeds passing rent (£44.3m) by 11% (30 Jun 2024:
13%) reflecting the reversion captured and sale of vacant property
undertaken during the Quarter. With approximately half of this reversion
available from each of leasing events and vacancy respectively, there
remains significant potential to grow rental income by capturing this at
(typically) five-yearly rent reviews or on re-letting, in addition to
continuing to drive rental growth through asset management and selling
vacant property to developers or owner-managers
• Leasing activity during the Quarter comprised 20 new lettings, lease
renewals and regears across 12 assets as well as two rent reviews. In
aggregate, these initiatives were completed in line with ERV and, for let
properties, 9% above previous passing rent
• EPRA occupancy 4 4 has improved to 93.5% (30 Jun 2024: 91.8%), with 2%
of vacant ERV subject to refurbishment, primarily due to the sale of
vacant offices in Castle Donington and £0.7m of new rent being added to
the rent roll from:
◦ Completing two rent reviews on industrial assets at an aggregate 33%
above previous passing rent; and
◦ Letting eight vacant units across five assets in the industrial,
office and other sectors, in aggregate, in line with ERV.
Valuations stable across the Company’s c.£580m portfolio, with a small uptick
on a like-for-like basis
• Having remained flat during the last two quarters, the value of the
Company’s portfolio of 152 assets was £582.4m, an increase of 0.5% on a
like-for-like basis during the Quarter, net of £2.2m of capital
expenditure
• Q2 net asset value (“NAV”) total return per share 5 5 of 2.0%
• NAV per share grew marginally by 0.4% to 93.5p (30 Jun 2024: 93.1p) with
a NAV of £412.2m (30 Jun 2024: £410.3m)
Asset recycling continues to generate aggregate proceeds in excess of
valuation
Since 30 June 2024 the Company has successfully disposed of three assets at
an aggregate 13% premium to previous valuation, comprising:
• Vacant offices in Castle Donington for £1.75m in line with its 30 June
2024 valuation;
• One unit of a two-unit industrial asset in Sheffield sold to an
owner-occupier for £0.55m, 10% ahead of its 30 June 2024 valuation; and
• In October, a vacant office asset in Solihull sold to a developer for
£1.4m, 33% ahead of 30 June 2024 valuation.
Proceeds from disposals have been used to reduce variable rate borrowings.
Redevelopment and refurbishment activity continues to be accretive with an
expected yield on cost of c.7%
• £2.2m of capital expenditure undertaken during the Quarter, primarily
relating to the extension of an industrial building in Livingston, office
refurbishments in Leeds and Manchester and an industrial refurbishment in
Aberdeen. All 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
• During the Quarter the Company generated £0.1m (Q1: £0.1m) of revenue
from its owned solar panel installations, selling the clean electricity
generated to tenants and exporting any surplus. In addition, new solar
arrays in Norwich and Ipswich were brought into use, meaning 13 of the
Company’s buildings are now generating their own electricity, with
further installations planned during the remainder of the financial year
• Weighted average energy performance certificate rating has improved to
C(52) (30 Jun 2024: C(53)) with re-ratings being carried out across five
assets during the Quarter
Prudent debt levels
• Net gearing 6 6 was 28.6% loan-to-value as of 30 Sept 2024 (30 Jun 24:
28.8%) with property disposal proceeds during the Quarter broadly funding
capital expenditure
• £174m of drawn debt comprising £140m (80%) of fixed rate debt and £34m
(20%) drawn under the Company’s revolving credit facility (“RCF”)
• Weighted average cost of aggregate borrowings is 4.0% (30 Jun 24: 3.9%)
• Fixed rate debt facilities have a weighted average term of 5.5 years and
a weighted average cost of 3.4% offering significant medium-term interest
rate risk mitigation
Dividends
The Company paid an interim dividend per share of 1.5p on Friday 30 August
2024 relating to Q1, fully covered by EPRA earnings.
The Board has approved a fully covered interim dividend per share of 1.5p for
the Quarter payable on Friday 29 November 2024 to shareholders on the
register on 18 October 2024, which will be designated as a property income
distribution (“PID”).
Net asset value
The Company’s unaudited NAV at 30 September 2024 was £412.2m, or
approximately 93.5p per share:
Pence per share £m
NAV at 30 June 2024 93.1 410.3
Valuation increase, depreciation and profit on disposal 0.4 1.9
EPRA earnings for the Quarter 1.5 6.6
Interim quarterly dividend, paid during the Quarter, (1.5) (6.6)
relating to Q1
NAV at 30 September 2024 93.5 412.2
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 30 September 2024 and net income for
the Quarter. The movement in unaudited NAV reflects the payment of an
interim dividend per share of 1.5p during the Quarter, but as usual this does
not include any provision for the approved dividend of 1.5p per share for the
Quarter to be paid on Friday 29 November 2024.
Investment Manager’s commentary
Market update
We mentioned in our last quarterly update that after a period of
stabilisation, the trajectory of valuations appeared to be turning positive
and after two consecutive quarters of being broadly flat, it is pleasing to
report that in this Quarter the valuation of the Company’s portfolio was up
marginally, leading to a stable NAV per share during 2024. This profile is
consistent with our strongly held view that market values have now bottomed
out and the prevailing trend is gradually upwards, supported by falling
interest rates and the continued strength of the occupier markets, which
should also deliver rental growth.
Market research published by Savills is showing rental growth in the three
main commercial property sectors: Industrial and logistics still lead the
growth tables, albeit the rate of rental growth is slowing; office rents are
showing growth, but this is both property and location specific; and retail
has returned to growth after five years of falling rental values. In the
retail sector, it is likely that out-of-town retail will show the greatest
rental growth potential, given the heavily restricted supply and low vacancy
rate, but prime high street rents are also expected to witness modest growth.
So, while the scene is set for stronger total returns, principally driven by
income and income growth, the direct property market has not fully reacted to
this potential, as demonstrated by relatively flat valuations. In the
indirect market we have seen significant corporate activity, often led by
private equity, and a narrowing of discounts to NAV. Both private equity
activity and advancing share prices are lead indicators of a recovering
direct market. It is disappointing to see publicly owned real estate being
sold into private hands at this point in the cycle, but we believe it is
still possible to access attractive income returns with the prospect of
capital growth from listed UK real estate.
Custodian Property Income REIT continues to benefit from positive asset
management with 20 new lettings, lease renewals and lease re-gears, plus two
positive rent reviews during the Quarter, supporting earnings and dividend
cover.
Cost disclosure exemption
We welcome the Financial Conduct Authority’s recent exemption of investment
companies (including REITs) from the Packaged Retail and Insurance-based
Investment Products (“PRIIPs”) and Markets in Financial Instruments Directive
II (“MiFID II”) regulation. Since 2018 this regulation has obliged wealth
managers and platforms to make cost disclosures to clients that were
‘fundamentally misleading’ 7 7 by being presented as being borne by
investors despite actually being incurred by the Company and included within
reported investment performance.
Exacerbated by more recent Consumer Duty regulations these cost disclosures,
which also result in investment companies’ management costs appearing
spuriously more expensive than alternative structures, are likely to have
curtailed investment demand for the Company’s shares over the last six
years.
As the investment industry gradually adjusts to this change, we expect the
Company’s competitive cost structure and high returns to be very attractive
to new investors seeking strong returns from UK real estate.
Asset management
The Investment Manager has remained focused on active asset management during
the Quarter, completing two rent reviews at an aggregate 33% increase in
annual rent, along with 20 new lettings, lease renewals and lease regears
across 12 assets, with rental levels remaining affordable to our occupiers.
These initiatives had a positive impact on weighted average unexpired lease
term, increasing it to 4.9 years during the Quarter (30 Jun 24: 4.7 years).
Details of these asset management initiatives are shown below:
Rent reviews
Two rent reviews completed at an industrial unit in Kettering increasing the
aggregate passing rent by 33% from £54k to £72k, at an aggregate 14% above
ERV.
Renewals
Seven lease renewals across four retail, industrial and office assets signed
at a combined average of 11% ahead of ERV and 23% of previous passing rent,
comprising leases of:
• Five years to NatWest at an office suite in Oxford, with an annual rent
of £128k;
• 10 years to Barrhead Travel at a retail unit in Dunfermline, with a
tenant break option on the 5th and 7th anniversaries, at an annual rent
of £65k;
• Two years to Ciel Concessions at a retail unit in Chester, with an annual
rent of £41k;
• Seven years to L Rowland at a retail unit in Dunfermline, with an annual
rent of £35k; and
• Five years to Atherstone Garage across three industrial units in
Atherstone, with a combined annual rent of £29k.
New leases
£0.7m of new annual rental income was added to the rent roll through letting
eight vacant units across five properties, in addition to a further five new
leases being signed with existing tenants, in aggregate in line with ERV and
7% above previous passing rent, during the Quarter:
• A 10-year lease to Enact Conveyancing at its offices in Leeds, with an
annual rent of 480k, 42% ahead of the previous passing rent with the
building having been comprehensively refurbished while the tenant
remained in occupation and securing an A Rated EPC;
• A 10-year lease to Inspired Gaming at a vacant newly refurbished
industrial unit in Ashby, with an annual rent of £468k;
• An over-riding 15-year lease to Wickes at a retail warehouse in Leighton
Buzzard, with an annual rent of £340k;
• A 20-year lease to Zen Land (t/a Blue Whale Supermarket), at a vacant
retail unit in Liverpool, with an annual rent of £120k;
• A two-year lease to Magnet at a retail warehouse unit in Leicester, with
an annual rent of £88k;
• A 15-year lease with year-five tenant break option to Poppins Restaurant,
at a retail unit in Portsmouth, with an annual rent of £39k;
• A 10-year lease to Bradley and Cuthbertson at a vacant office unit in
Birmingham, with an annual rent of £37k;
• Two 12-month fixed term leases of vacant, newly refurbished flats in
Shrewsbury, delivering an annual aggregate income £23k; and
• Four leases of between three and five years at three vacant and one
occupied industrial units in Atherstone with an aggregate annual rent of
£40k.
Since the Quarter end the Company has completed four new leases, one lease
renewal and one rent review:
• An open market rent review with Sealed Air at an industrial unit in
Kettering, with a new annual rent of £227k, a 78% increase from previous
passing rent;
• A five-year lease renewal with Magnet at a retail warehouse in
Gloucester, with an annual rent of £116k;
• A new 10-year lease to Telefonica at a retail unit in Shrewsbury, with a
new annual rent of £73k, a 38% increase from previous passing rent;
• A new 10-year lease to Katani & Co at a vacant office unit in Glasgow,
with an annual rent of £58k;
• A new 10-year lease to MST Invest at a vacant retail unit in Liverpool,
with an annual rent of £45k; and
• A new five-year lease to Ingeus, at a vacant office unit in Birmingham,
with an annual rent of £43k.
An agreement for lease has also been entered into for the entirety of a
previously multi-let office building in Manchester currently undergoing
partial refurbishment, on a 12-year lease term with an annual rent of £715k,
subject to planning and vacant possession by 31 January 2025.
The positive impact of these initiatives has been partially offset by two
tenant failures:
• The lease with ICT Express (“ICT”) which occupies an industrial unit in
Tamworth with an annual rent of £0.5m is expected to be assigned to
Ziegler UK when it acquires ICT’s business. While this transaction will
maintain the current level of passing rent, it will also result in c.
£0.3m of irrecoverable rent arrears, albeit on completion the assignment
valuation is expected to increase by £0.1m due to the stronger tenant
covenant.
• CB Printforce UK, which occupies an industrial unit in Biggleswade with
an annual rent of £0.4m, entered administration during the quarter with
c. £0.1m of rent arrears. Should the Administrators vacate, we expect to
use this opportunity to carry out a comprehensive refurbishment of the
unit to improve its specification and let it at a higher rent.
Sustainability
The Company published its Asset Management and Sustainability report in June
2024 which is available at:
8 custodianreit.com/environmental-social-and-governance-esg/. This report
contains details of the Company’s asset management initiatives over the
previous 12 months including case studies of recent positive steps taken to
improve the environmental performance of the portfolio.
Borrowings
At 30 September 2024 the Company had £174.0m of debt drawn at an aggregate
weighted average cost of 4.0% (30 Jun 24: 3.9%) with no expiries until August
2025 and diversified across a range of lenders. This debt comprised:
• £34m (20%) at a variable prevailing interest rate of 6.7% and a facility
maturity of 2.1 years; and
• £140m (80%) at a weighted average fixed rate of 3.4% with a weighted
average maturity of 5.5 years.
At 30 September 2024 the Company’s borrowing facilities were:
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 30 September 2024 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:
30 Sept 2024 30 Jun 2024
Quarter
Val’n valuation
movement Quarter
£m Weighting Weighting valuation Weighting Weighting
by value by income £m movement by value by income
Sector
Industrial 287.2 49% 41% 0.9 0.3% 49% 41%
Retail 125.0 22% 22% 2.3 1.8% 21% 22%
warehouse
Other 9 8 77.2 13% 14% 0.2 0.2% 13% 14%
Office 60.2 10% 16% (1.9) (3.1%) 11% 16%
High street 32.8 6% 7% 0.7 2.2% 6% 7%
retail
Total 582.4 100% 100% 2.2 100% 100%
For details of all properties in the portfolio please see
10 custodianreit.com/property-portfolio.
- Ends -
Further information:
Further information regarding the Company can be found at the Company's
website 11 custodianreit.com or please contact:
Custodian Capital Limited
Richard Shepherd-Cross – Managing Director
Ed Moore – Finance Director Tel: +44 (0)116 240 8740
Ian Mattioli MBE DL – Chairman
12 www.custodiancapital.com
Numis Securities Limited
Hugh Jonathan / George Shiel Tel: +44 (0)20 7260 1000
www.numis.com/funds
FTI Consulting
Richard Sunderland / Ellie Sweeney / Tel: +44 (0)20 3727 1000
Andrew Davis / Oliver Parsons
13 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 14 custodianreit.com and
15 custodiancapital.com.
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16 1 Profit after tax excluding net gains or losses on property divided by
weighted average number of shares in issue.
17 2 Price on 6 November 2024. Source: London Stock Exchange.
18 3 Adjusting for property acquisitions, disposals and capital
expenditure.
19 4 ERV of let property divided by total portfolio ERV.
20 5 NAV per share movement including dividends paid during the Quarter.
21 6 Gross borrowings less cash (excluding rent deposits) divided by
portfolio valuation.
22 7 Source: Association of Investment Companies.
23 8 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.: 357543
EQS News ID: 2024229
End of Announcement EQS News Service
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