DJ Custodian Property Income REIT plc: Diversified strategy, strong leasing and active asset management continue to drive income growth
Custodian Property Income REIT plc (CREI)
Custodian Property Income REIT plc: Diversified strategy, strong leasing and active asset management continue to drive
income growth
05-Feb-2025 / 07:00 GMT/BST
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5 February 2025
Custodian Property Income REIT plc
("Custodian Property Income REIT" or "the Company")
Diversified strategy, strong leasing and active asset management 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 31 December 2024 ("Q3" or the "Quarter").
Commenting on the trading update, Richard Shepherd-Cross, Managing Director of Custodian Capital Limited, said: "This
Quarter saw further evidence that the market has bottomed out, with the last 12 months seeing two quarters of broadly
flat valuations followed by two quarters of like-for-like valuation growth. These valuation increases add further
support to our belief that we are at the start of a gradual upwards trend having delivered like-for-like average rental
growth of more than 5.0% per annum over the last 18 months, with proactive asset management being the key driver of
returns. We completed 25 plus lettings, lease renewals, re-gears and rent reviews during the Quarter at significant
average premiums to ERV and previous rent, as well as continuing to make disposals on terms ahead of valuation. These
activities will be supportive of future earnings and our longstanding track record of fully covering our dividend,
which now offers investors an attractive c.8% yield."
Highlights
Strong leasing activity continues to support rental growth, underpinning fully covered dividend
-- 1.5p dividend per share approved for the Quarter, fully covered by unaudited EPRA earnings per share[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[2] based on the prevailing 76p share price[3]
-- EPRA earnings per share of 1.5p for the Quarter (Q2: 1.5p)
-- During the Quarter, a 0.9% increase in like-for-like[4] passing rent (FY25 year-to-date ("YTD"): 3.1%)
and an increase in like-for-like estimated rental value ("ERV") of 0.6% (FY25 YTD: 2.1%), driven primarily by 1.0%
like-for-like rental growth in the industrial sector (FY25 YTD: 4.7%)
-- Significant potential for further rental growth with the portfolio's estimate rental value ("ERV") of
GBP49.5m exceeding the current the passing rent of GBP44.5m by 11% (30 Sept 2024: 11%). Approximately 35% of this
reversion is available from leasing events with the remainder from letting vacant space. Based on our track record
and occupier demand for space in our assets we expect to capture this potential rental upside at (typically)
five-yearly rent reviews or on re-letting, in addition to continuing to drive passing rent and ERV growth further
through asset management initiatives
-- Leasing activity during the Quarter comprised the completion of eight rent reviews at an average 19%
increase in annual rent and the letting of eight vacant units which, in aggregate, added GBP1.0m to the rent roll.
10 lease renewals and regears were also completed in line with ERV and previous passing rent
-- EPRA occupancy[5] was stable at 93.4% (30 Sept 2024: 93.5%). 1.8% of vacant ERV is subject to
refurbishment or under offer to let or sell
Valuations stable across the Company's c.GBP590m portfolio, with a small uptick on a like-for-like basis
-- The value of the Company's portfolio of 151 assets at the Quarter end was GBP586.4m (30 Sept 2024:
GBP582.4m), a like-for-like increase of 0.5% during the Quarter (FY25 YTD: 0.8%), net of GBP1.9m of capital
expenditure. Benefitting from a diversified portfolio, in the last 12 months the Company has seen two quarters of
stable valuations followed by two quarters of modest like-for-like capital growth across almost all asset classes
-- Q3 net asset value ("NAV") total return per share[6] of 2.5%
-- NAV per share grew by 0.9% to 94.4p (30 Sept 2024: 93.6p) with a NAV of GBP416.1m (30 Sept 2024: GBP412.7m)
Asset recycling continues to generate aggregate proceeds in excess of valuation
-- During the Quarter, the Company successfully disposed of a recently vacant office asset in Solihull to a
local owner occupier for GBP1.4m, 33% ahead of the 30 June 2024 valuation. Proceeds have been used to fund earnings
accretive capital expenditure.
Redevelopment and refurbishment activity continues to be accretive with an expected yield on cost of c.7%
-- GBP1.9m of capital expenditure undertaken during the Quarter, primarily relating to the pre-let extension
of an industrial building in Livingston, which will allow the current occupier to expand into the new space to help
with its plans for growth. Practical completion is expected in February 2025
-- During the Quarter, the Company generated GBP0.1m (Q2: GBP0.1m) of revenue from its owned solar panel
installations across 10 assets, selling the clean electricity generated to tenants and exporting any surplus. New
solar arrays were installed in Lincoln and Daventry during the Quarter, with further installations under
consideration at 12 sites over the next 12 months
-- Weighted average energy performance certificate rating was C(52) (30 Sept 2024: C(52)) with re-ratings
being carried out across three units during the Quarter
Prudent debt levels
-- Net gearing[7] was 28.5% loan-to-value at 31 December 2024 (30 Sept 24: 28.5%)
-- GBP171m (30 Sept 24: GBP174m) of drawn debt at 31 December 2024 comprising GBP140m (82%) of fixed rate debt and
GBP31m (18%) drawn under the Company's variable rate revolving credit facility ("RCF")
-- Weighted average cost ("WAC") of aggregate borrowings decreased to 3.9% (30 Sept 24: 4.0%) following the
25bps base rate reduction in November 2024
-- The Board intends to utilise the Company's RCF to repay a GBP20m fixed rate loan with Scottish Widows which
is due to expire in August 2025. This refinancing is expected to have a minimal impact on the Company's WAC, as
this loan represents only 12% of drawn debt
-- GBP120m of longer-term fixed-rate debt facilities have a weighted average term of 6.0 years and a WAC of
3.3%, offering significant medium-term interest rate risk mitigation
Dividends
The Company paid an interim dividend per share of 1.5p on Friday 29 November 2024 relating to Q2, fully covered by EPRA
earnings.
The Board has approved a fully covered interim dividend per share of 1.5p for the Quarter payable on 28 February 2025
to shareholders on the register on 7 February 2025, which will be designated as a property income distribution ("PID").
Net asset value
The Company's unaudited NAV at 31 December 2024 was GBP416.1m, or approximately 94.4p per share:
Pence per share GBPm
NAV at 30 September 2024 per Interim Report 93.6 412.7
Valuation increase and depreciation 0.7 3.0
Profit on disposal 0.1 0.3
EPRA earnings for the Quarter 1.5 6.7
Interim quarterly dividend, paid during the Quarter, relating to Q2 (1.5) (6.6)
NAV at 31 December 2024 94.4 416.1
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 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 28 February 2025.
Investment Manager's commentary
Market update
The listed property sector has yet to deliver the forecast recovery despite recent positive indicators in the direct property market. Notwithstanding discernible rental growth and the clear identification of an inflection point in direct investment markets, economic gloom and high 10-year gilt rates are acting as a brake on the listed sector.
However, there are reasons to be cheerful. Property market commentators are forecasting stronger returns in 2025 than 2024, highlighting the importance of income in driving total return. There is a sense that after property values adjusted from 2022-24, reflecting the impact of increasing cost of debt and other external factors, it would take a significant shock to knock the recovery off course. That said, it is also widely believed that the rate and near-term magnitude of recovery will now be more muted relative to earlier estimates.
In considering the current share price and likely performance there are four factors that mitigate against downside risks: the current discount to NAV and associated high dividend yield, the reversionary potential of the portfolio, the benefits of diversification which offers defensiveness of income and flexibility of strategy, and the risk premium of commercial real estate over 10-year gilts.
While we remain firm in our belief that earnings and the dividend we consistently deliver our shareholders are the most effective ways to assess the Company's performance, its average discount to NAV has recently widened to around 20%. While this remains favourable versus many peers, it implies a yield shift on the underlying value of the property portfolio of 1.35% which is sharply at odds with both the Company's independent quarterly valuations, which show a stable portfolio topped-up net initial yield[8] of 6.9%, as well as the direct market expectation that valuations have reached the bottom. With the reasonable expectation of falling interest rates over the short to medium term, there would appear to be far more upside potential on valuations than downside risk, which we do not believe is reflected in the current discount.
Dividends are fully covered by recurring (EPRA) earnings, which are in turn supported by a growing rent roll from the 151 properties in the portfolio. Over the last 18 months annual like-for-like growth in passing rent has averaged 5.8% per annum with ERV growing at 3.2% per annum. We expect this growing rent roll to continue to support dividends of 6.0p per share, a rate that has grown annually by a compound 4.65% since March 2021. Our diversified portfolio is deliberately weighted towards sectors with the most rental growth potential to support both future dividends and capital values.
Research reported by Legal and General last year[9] indicated that since 1981 the risk premium of commercial real estate over 10-year gilts[10] was estimated at 2.6%. Comparing the prevailing 10-year gilt rate[11] of 4.5% to Custodian Property Income REIT's share price yield of 7.9% implies a current risk premium of 3.4%, which excludes rental growth. However, with rental (ERV) growth running at over 3% per annum for the last 18 months, this implies a full risk premium of 6% plus, which is well ahead of the long-term average.
As some of the fear in market prospects is replaced by confidence, this risk premium should reduce, which again provides greater upside potential than downside. Against this setting, timing appears to be optimal for securing a high, fully covered dividend with upside potential on both income and capital. It is our strong contention that with the benefit of hindsight in three to five years' time, 2025 is unlikely to be viewed as a poor entry point into UK real estate. Asset management
Custodian Capital, the Investment Manager, has remained focused on active asset management during the Quarter, completing eight rent reviews at an aggregate 19% increase in annual rent, along with letting eight vacant units and completing 10 further new lettings, lease renewals and lease regears, with rental levels remaining affordable to our occupiers. These initiatives had a positive impact on weighted average unexpired lease term, which only decreased by 0.1 years to 4.8 years during the Quarter (30 Sept 24: 4.9 years).
Details of these asset management initiatives are shown below:
Rent reviews
The following rent reviews were settled in the Quarter, in aggregate increasing rent by 19%, and comprising:
-- Applying fixed rental uplifts across six industrial units let to Menzies Distribution, increasing annualrent by 13% to GBP1.4m;
-- Increasing the passing rent at an industrial unit in Kettering by 78% from GBP128k to GBP227k; and
-- Increasing the passing rent at a retail unit in Dunfermline by 10% from GBP20k to GBP22k.
Renewals
10 lease renewals/regears across retail, retail warehouse and industrial assets in aggregate maintaining passing rent levels, comprising:
-- Five-year reversionary lease to YESSS Electrical at an industrial unit in Normanton, maintaining annualrent at GBP449k;
-- Removal of a tenant break option with DS Smith in Redditch, extending the lease by five years in returnfor six months' rent free, with annual rent remaining GBP404k;
-- Two-year reversionary lease to global consumer brands owner URBN at a retail unit in Southampton,maintaining annual rent of GBP195k;
-- Five-year lease renewal with Magnet at a retail warehouse unit in Gloucester, with annual rent remainingGBP116k;
-- 10-year new lease to Telefonica (t/a O2) at a retail unit in Shrewsbury, with a tenant break option onthe fifth anniversary, increasing annual rent on the unit by 38% to GBP73k;
-- 10-year lease to RTV Worldnet Shipping at an industrial unit in Aberdeen, with annual rent increasing by33% to GBP48k;
-- Five-year lease renewal with Der Touristik at a retail unit in Chester, with annual rent decreasing 42%to GBP41k line in with ERV;
-- Removal of a tenant break option with Your Phone Care at a retail unit in Portsmouth, extending the leaseby five years, with annual rent decreasing 13% to GBP40k;
-- Five-year lease extension with Mobile Care Services at an industrial unit in Atherstone with annual rentincreasing by 69% to GBP23k; and
-- 10-year lease renewal with Greggs at a retail unit in Birmingham, with a tenant break option on the fifthanniversary, at an annual rent of GBP19k.
Vacant premises
GBP0.7m of new annual rental income was added to the rent roll through letting eight vacant units in line with ERV in aggregate:
-- Five new leases with Elizabeth School of London at a newly refurbished office building in Manchester fora term of 12 years with a year seven tenant only break option, at an aggregate annual rent of GBP596k;
-- A 10-year lease to Katani & Co at an office suite in Glasgow, with a tenant break option in the fifthyear, at an annual rent of GBP58k;
-- A 10-year lease to MST Invest at a retail unit in Liverpool, with a tenant break option on the fifthanniversary, at an annual rent of GBP45k; and
-- A five-year lease to Igneus UK at an office unit in Birmingham, with an annual rent of GBP43k.
The impact of this positive letting activity has been tempered since the Quarter end with an industrial asset in Biggleswade and offices in Sheffield falling vacant, in aggregate representing 1.6% (GBP0.8m) of portfolio ERV. The asset in Biggleswade will now be refurbished with rents expected to increase by c. 40% once re-let.
Disposals
During the Quarter, a recently vacant office building in Solihull was sold to an owner occupier for GBP1.4m, 33% ahead of the 30 June 2024 valuation.
Circa GBP8m of office and retail assets are either under offer to sell or being actively marketed, with proceeds expected to be used to pay down the variable rate RCF or fund earnings accretive capital expenditure.
Borrowings
During the Quarter, the Company and Lloyds Bank plc ("Lloyds") agreed to extend the term of the RCF by one year to expire in 2027. An option remains in place to extend the term by a further year to 2028, subject to Lloyds' consent.
At 31 December 2024 the Company had GBP171.0m of debt drawn at an aggregate weighted average cost of 3.9% (30 Sept 24: 4.0%) diversified across a range of lenders. This debt comprised:
-- GBP31m (18%) at a variable prevailing interest rate of 6.3% and a facility maturity of 2.9 years; and
-- GBP140m (82%) at a weighted average fixed rate of 3.4% with a weighted average maturity of 5.2 years.
At 31 December 2024 the Company's borrowing facilities were:
Variable rate borrowing
-- A GBP50m RCF with Lloyds with interest of between 1.62% and 1.92% above SONIA, determined by reference tothe prevailing LTV ratio of a discrete security pool of assets, and now expiring on 10 November 2027. The facilitylimit can be increased to GBP75m with 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% or 40% 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. Upcoming expiry
Despite persistent inflationary pressures, multiple UK base rate decreases are expected during 2025[12]. The Board intends to utilise the Company's RCF to repay the GBP20m fixed rate loan with SWIP due to expire in August 2025 and will consider longer-term options once debt markets are more stable.
Portfolio analysis
At 31 December 2024, the portfolio was 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 Dec 2024 30 Sept 2024
Quarter valuation
Val'n movement
Quarter valuation
GBPm Weighting by Weighting by GBPm movement Weighting by Weighting by
value income value income
Sector
Industrial 290.5 49% 41% 1.6 0.8% 49% 41%
Retail 126.2 22% 22% 1.2 0.9% 22% 22%
warehouse
Other[13] 77.6 13% 14% 0.4 0.5% 13% 14%
Office 58.7 10% 16% (0.7) (1.2%) 10% 16%
High street 33.4 6% 7% 0.5 1.7% 6% 7%
retail
Total 586.4 100% 100% 3.0 100% 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 - Managing Director
Ed Moore - Finance Director Tel: +44 (0)116 240 8740
Ian Mattioli MBE DL - Chairman
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 / 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] Profit after tax excluding net gains or losses on property divided by weighted average number of shares in issue as defined by the European Public Real Estate Association.
[2] Prospective target dividend divided by share price.
[3] Price on 4 February 2025. Source: London Stock Exchange.
[4] Adjusting for property acquisitions, disposals and capital expenditure.
[5] ERV of let property divided by total portfolio ERV.
[6] NAV per share movement including dividends paid during the Quarter.
[7] Gross borrowings less cash (excluding rent deposits) divided by portfolio valuation.
[8] Annualised cash rents adjusted for the expiration of lease incentives (rent free periods, discounted rent periods and stepped rents), less estimated non-recoverable property operating expenses, divided by property valuation plus estimated purchaser's costs.
[9] Source: L&G Research.
[10] Current yields plus growth expectations less depreciation and gilt yields.
[11] Source: FT.com.
[12] Source: City AM.
[13] Comprises drive-through restaurants, car showrooms, trade counters, gymnasiums, restaurants and leisure units.
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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.: 374723 EQS News ID: 2081121 End of Announcement EQS News Service =------------------------------------------------------------------------------------
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February 05, 2025 02:00 ET (07:00 GMT)
