8 August 2024
Custodian
Property Income REIT plc
(“Custodian Property Income REIT”
or “the Company”)
Continued strong
leasing supporting a c. 8% dividend yield
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 June 2024 (“Q1”
or the “Quarter”).
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],
in line with target of at least 6.0p for the year ending 31 March
2025 (FY24: 5.8p). This target dividend
represents a 7.7% yield based on the prevailing 78p share
price[2]
-
EPRA earnings per share of 1.5p for
the Quarter (FY24 Q4: 1.5p)
-
During the Quarter, 1.2% increase
in like-for-like[3] passing
rent and 1.0% increase in like-for-like estimated rental value
(“ERV”), driven by rental growth in the industrial sector, with all
other sectors showing stable ERVs
-
Portfolio ERV (£49.4m) exceeds
passing rent (£43.6m) by 13% (31 Mar 2024: 15%) reflecting the
reversion captured and sales undertaken during the
Quarter.
There remains significant potential
to grow rental income by capturing reversion typically at
five-yearly rent reviews or on re-letting, in addition to
continuing to drive rental growth through asset
management
-
Leasing activity during the Quarter
added £0.7m of new annual rent, comprising:
- Three rent reviews on industrial assets at an
aggregate 11% ahead of ERV and 41% above previous passing
rent;
- Two renewals agreed in aggregate in line with
previous passing rent and at a 6% premium to ERV; and
- Seven new leases across various sectors adding
£0.3m of new rent, in line with ERV.
-
EPRA occupancy[4]
has remained stable at 92% (31 Mar
2024: 92%) and is expected to rise towards 95% when vacant property
currently under offer to let or sell is
excluded.
A further 1% of ERV is vacant but
subject to refurbishment
-
Asset management initiatives
completed during the Quarter increased property capital values by
£0.8m
Valuations now
stabilised across the Company’s c.£580m portfolio
-
The valuation of the Company’s
portfolio of 153 assets of £579.6m remained flat on a like-for-like
basis during the Quarter, net of a £0.8m valuation increase from
active asset management activity (FY24 Q4: £2.0m increase from
asset management) and £1.9m of capital expenditure
-
Q1 net asset value (“NAV”) total
return per share[5] of
1.6%
-
NAV per share of 93.1p (31 Mar
2024: 93.4p) with a NAV of £410.3m (31 Mar 2024:
£411.8m)
Asset recycling
continues to generate aggregate proceeds in excess of
valuation
-
During the Quarter a former car
showroom in Redhill and an industrial property in Warrington were
sold for £11.3m, an aggregate 49% ahead of their 31 December 2023
valuations
-
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%
-
£1.9m of capital expenditure
undertaken during the Quarter, primarily relating to office
refurbishments in Leeds and Manchester, 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 of revenue from its owned solar panel arrays,
selling the clean electricity generated to tenants and exporting
any surplus.
During the Quarter new solar arrays
in Swansea and Warrington were brought into use with further
installations planned during the remainder of the financial
year
-
Weighted average energy performance
certificate rating has remained at C(53) with re-ratings being
carried out across six assets during the Quarter
Prudent debt
levels
-
Net gearing[6] was 28.8% loan-to-value as of 30 June 2024 (31
Mar 24: 29.2%) with property disposals during the Quarter drawing
the LTV closer to the Company’s 25% medium-term target
-
£168.0m of drawn debt comprising
£140m (83%) of fixed rate debt and £28m (17%) drawn under the
Company’s available revolving credit facility (“RCF”)
-
Weighted average cost of aggregate
borrowings has decreased to 3.9% (31 Mar 24: 4.1%) due to proceeds
from the disposal of properties being used to repay the
RCF
-
Fixed rate debt facilities have a
weighted average term of 5.8 years and a weighted average cost of
3.4% offering significant medium-term interest rate risk
mitigation
Dividends
The Company paid total dividends
per share of 1.675p on 31 May 2024, comprising the FY24 Q4 target
dividend of 1.375p and a fifth interim (special) dividend of 0.3p,
resulting in aggregate dividends relating to the year ended 31
March 2024 of 5.8p, 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 30 August 2024 to shareholders on the
register on 12 July 2024, which will be designated as a property
income distribution (“PID”).
Net asset
value
The Company’s unaudited NAV at 30
June 2024 was £410.3m, or approximately 93.1p per share:
|
Pence per share
|
£m
|
|
|
|
NAV at 31 March 2024
|
93.4
|
411.8
|
|
|
|
Valuation decrease and profit on
disposal
|
(0.1)
|
(0.8)
|
|
|
|
EPRA earnings for the
Quarter
|
1.5
|
6.7
|
Interim quarterly dividend,
paid during the Quarter,
relating to FY24 Q4
|
(1.4)
|
(6.1)
|
|
0.1
|
0.6
|
|
|
|
Special dividend, paid
during the Quarter, relating to
FY24
|
(0.3)
|
(1.3)
|
|
|
|
NAV at 30 June 2024
|
93.1
|
410.3
|
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 June 2024 and net income for
the Quarter.
The movement in unaudited NAV
reflects the payment of interim dividends per share of 1.375p and
0.3p 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 30 August 2024.
Investment
Manager’s commentary
Market
update
In the six months to 30 June 2024
Custodian Property Income REIT recorded near flat valuations, with
headline valuations for the Quarter up 0.3% on a like-for-like
basis, but down 0.1% net of capital expenditure. After a period of stabilisation, the trajectory
of valuations appears to be turning positive and the Company,
together with its peers, has a more optimistic outlook.
Investors in listed real estate
have reason to be optimistic with falling vacancy rates, rental
growth and discounted share prices creating generous dividend
yields and room for share price recovery. Along with the recent cut in interest rates
which we expect to support valuations further, we believe this
could be a very opportune time for investors to re-engage with real
estate.
LSH’s recent UK Investment
Transactions report recorded a 12% increase in UK transaction
volumes for the six months to 30 June 2024, albeit this is still
below the five-year average. CBRE’s UK Mid-Year Market Outlook reported
stronger signs of a turning point for real estate noting inflation
is on target and cost of living pressures have moderated, creating
space for consumer demand to rebound. Overall, according to this report, the economic
backdrop is positive for both occupiers and investors.
This positive outlook has flowed
through into the Custodian Property Income REIT portfolio which has
recorded a 1.2% like-for-like increase in the passing rent over the
Quarter to £43.6m and a 1.0% increase in the estimated rental value
of the portfolio. The portfolio now offers reversionary potential
of 13%, reflecting the reversion captured and sales
undertaken during the Quarter. This has supported earnings per share of 1.5p,
fully covering the target dividend.
An example of the dynamic nature of
rental growth being delivered is the settlement of a rent review
during the Quarter at the Company’s 55k sqft warehouse in Tamworth
where the annual rent, set in 2018, was £359k and our independent
estimated rental value, based on evidence in the market, was
£400k.
Such is the shortage of supply and
the rapid pace of change in letting markets we recently agreed the
rent review at £508k, crystallising a 42% increase in
rent.
Asset
management
The Investment Manager has remained
focused on active asset management during the Quarter, completing
three rent reviews at an aggregate 41% increase in annual rent from
£0.9m to £1.3m, along with nine new lettings, lease renewals and
lease regears, with rental levels remaining affordable to our
occupiers.
In aggregate these initiatives
increased property capital value by £0.8m and had a positive impact
on weighted average unexpired lease term, which only decreased to
4.7 years during the Quarter. (31 Mar 24: 4.9 years)
Details of these asset management
initiatives are shown below:
Rent
reviews
Three rent reviews undertaken at an
aggregate 11% above ERV and increasing the aggregate rent by 41%
comprising new annual rent of:
-
£579k with Next at an industrial
unit in Motherwell;
-
£173k with Arkote at an industrial
unit in Sheffield; and
-
£508k with ICT Express at an
industrial unit in Tamworth.
Renewals
Two lease renewals signed in line
with previous passing rent and 6% ahead of ERV:
-
For 10 years to Jangala Soft Play
at a warehouse unit in Hilton, with an annual rent of £48k,
increasing the valuation by £0.1m; and
-
For five years to Superdrug with a
third-year break option at a retail unit in Southsea, at an annual
rent of £46k, increasing the valuation by £0.1m.
New
leases
A further £0.3m of new rental
income was added through seven new leases completed on vacant
units, in line with ERV, during the Quarter:
-
A 10-year lease with a five-year
tenant break option and open market rent review to Ark Housing
Association on an office unit in Edinburgh, at an annual rent of
£92k, increasing valuation by £0.3m
-
Two five-year leases to Razor Oil
Tools with third year tenant break options at industrial units in
Aberdeen, with aggregate annual rent of £64k, increasing valuation
by £0.2m
-
A five-year lease to KWB Property
Management at an office suite in Birmingham, with an annual rent of
£48k, increasing valuation by £0.1m
-
Two of four newly refurbished flats
in Shrewsbury, recently converted from vacant retail storage space,
successfully let on 12 month and 36 month fixed terms respectively
with aggregate income of £25k
-
A new 10-year lease with fifth year
break option and open market rent review to McLaren Group, on an
office suite in Glasgow, with an annual rent of £29k
Since the Quarter end the Company
has completed two lease renewals and three new leases at a combined
average of 35% above the previous passing rent:
-
A five-year lease renewal to
NatWest at an office suite in Oxford, with an annual rent of
£128k;
-
A 10-year lease renewal to Barrhead
Travel Service, with a tenant break option on the
5th
and 7th
anniversaries, at an annual rent of
£65k; and
-
Three leases of industrial units in
Atherstone, with a combined annual rent of £29k.
In addition, two 12-month fixed
term leases of the remaining flats in Shrewsbury have been agreed,
delivering annual aggregate income of £23k.
Occupancy
EPRA occupancy has remained at 92%,
with the impact of new lettings and the sale of vacant assets
offset by the exit of an industrial tenant in Plymouth at lease
expiry which was no longer in occupation. We are progressing plans for a comprehensive
refurbishment of the property whilst interest from owner-occupiers
to purchase the property is assessed.
Sustainability
The Company
published its Asset Management and Sustainability report In June
2024 which is available at:
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.
Disposals
During the Quarter a vacant former
car showroom in Redhill and a vacant industrial property in
Warrington were sold for £11.3m. In aggregate these disposals were made 49%
ahead of their 31 December 2023 valuations and broadly in line with
prevailing valuations.
The Company has three smaller units
under offer to sell with aggregate expected proceeds of
£4.0m.
Borrowings
At 30 June 2024 the Company had
£168.0m of debt drawn at an aggregate weighted average cost of 3.9%
(31 Mar 24: 4.1%) with no expiries until August 2025 and
diversified across a range of lenders. This debt comprised:
-
£28m (17%) at a variable prevailing
interest rate of 6.9% and a facility maturity of 2.4 years;
and
-
£140m (83%) at a weighted average
fixed rate of 3.4% with a weighted average maturity of 5.8
years.
At 30 June 2024 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 30 June 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 June 2024
|
|
|
31 March 2024
|
Sector
|
Val’n
£m
|
Weighting by value
|
Weighting by income
|
Quarter valuation
movement
£m
|
Quarter valuation
movement
|
Weighting by value
|
Weighting by income
|
|
|
|
|
|
|
|
|
Industrial
|
284.5
|
49%
|
41%
|
1.7
|
0.6%
|
49%
|
40%
|
Retail warehouse
|
122.8
|
21%
|
22%
|
-
|
-
|
21%
|
23%
|
Other[7]
|
76.9
|
13%
|
14%
|
(0.4)
|
(0.6%)
|
13%
|
13%
|
Office
|
63.3
|
11%
|
16%
|
(2.0)
|
(3.2%)
|
11%
|
16%
|
High street retail
|
32.1
|
6%
|
7%
|
(0.3)
|
(0.7%)
|
6%
|
8%
|
|
|
|
|
|
|
|
|
Total
|
579.6
|
100%
|
100%
|
(1.0)
|
(0.2%)
|
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 / 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 / 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.