DJ Custodian REIT plc: Final Results
Custodian REIT plc (CREI)
Custodian REIT plc: Final Results
06-Jun-2019 / 07:00 GMT/BST
Dissemination of a Regulatory Announcement that contains inside information according to
REGULATION (EU) No 596/2014 (MAR), transmitted by EQS Group.
The issuer is solely responsible for the content of this announcement.
6 June 2019
Custodian REIT plc
("Custodian REIT" or "the Company")
Final Results
Custodian REIT (LSE: CREI), the UK commercial real estate investment company, today reports
its final results for the year ended 31 March 2019.
Financial highlights and performance summary
· NAV per share total return[1],* of 5.9% (2018: 9.6%) comprising 6.1% income (2018:
6.2%) and a 0.2% capital decrease (2018: 3.4% capital increase)
· EPRA[2] earnings per share[3],* of 7.3p (2018: 6.9p)
· Basic and diluted earnings per share[4] of 6.0p (2018: 8.9p)
· Portfolio value of GBP572.7m (2018: GBP528.9m)
· Profit before tax down 27% to GBP23.6m (2018: GBP32.4m) primarily due to a GBP8.9m aggregate
property valuation decrease[5]
· GBP13.4m[6] of new equity raised at average premium of 11% to dividend adjusted NAV*
· 2020 target dividend per share* increased 1.5% to 6.65p (2019: 6.55p)
· GBP55.5m[7] invested in 11 property acquisitions, GBP2.5m capital expenditure incurred
primarily on one pre-let development and two significant refurbishments
· GBP6.4m property valuation uplift from successful asset management initiatives
· GBP5.3m property valuation decrease due to company voluntary arrangements
· GBP4.3m profit on disposal of three properties for an aggregate consideration of GBP15.4m
2019 2018 change
Return
NAV per share total return* 5.9% 9.6% -3.7%
Share price total return[8],* 4.2% 6.7% -2.5%
Dividend cover[9],* 110.4% 105.5% 4.9%
Dividends per share[10] (p) 6.55 6.45 1.5%
Capital values
NAV (GBPm) 426.6 415.2 2.7%
NAV per share* (p) 107.1 107.3 -0.2%
Share price* (p) 111.2 113.0 -1.6%
Portfolio value (GBPm) 572.7 528.9 8.3%
Market capitalisation* (GBPm) 442.8 437.1 1.3%
Premium of share price to NAV 3.8% 5.3% -1.5%
per share*
Net gearing[11],* 24.1% 21.0% 3.1%
Costs
Ongoing charges ratio[12],* 1.53% 1.37% 0.16%
("OCR")
OCR excluding direct property 1.12% 1.15% -0.03%
expenses[13],*
EPRA performance measures*
EPRA EPS (p) 7.3 6.9 5.8%
EPRA NAV per share (p) 107.1 107.3 -0.2%
EPRA net initial yield ("NIY") 6.2% 6.1% 0.1%
EPRA 'topped up' NIY 6.4% 6.5% -0.1%
EPRA vacancy rate 4.1% 3.5% 0.6%
EPRA cost ratio (including 16.1% 15.3% 0.8%
direct vacancy costs)
EPRA cost ratio (excluding 14.5% 14.6% -0.1%
direct vacancy costs)
EPRA capital expenditure (GBPm) 2.53 2.50 1.2%
EPRA like-for-like rental growth 39.1 34.1 14.7%
(GBPm)
*Alternative performance measures
The Company presents NAV per share total return, new equity raised, target dividend per
share, share price total return, dividend cover, NAV per share, share price, market
capitalisation, premium to NAV per share, net gearing, ongoing charges ratios and EPRA Best
Practice Recommendations as alternative performance measures ("APMs") to assist
stakeholders in assessing performance alongside the Company's results on a statutory basis.
APMs are among the key performance indicators used by the Board to assess the Company's
performance and are used by research analysts covering the Company. EPRA Best Practice
Recommendations have been disclosed to facilitate comparison with the Company's peers
through consistent reporting of key real estate specific performance measures. Certain
other APMs may not be directly comparable with other companies' adjusted measures, and APMs
are not intended to be a substitute for, or superior to, any IFRS measures of performance.
Supporting calculations for APMs and reconciliations between APMs and their IFRS
equivalents are set out in the Alternative performance measure workings section of the
Annual Report.
Commenting on the final results, David Hunter, Chairman of Custodian REIT, said:
"I am pleased to report that five years since its initial public offering ("IPO") Custodian
REIT is continuing to deliver on its objectives and performing for shareholders. The
Company's market capitalisation has grown from GBP132m to GBP443m through managing a portfolio
of increasingly well diversified regional properties with a gross value that has increased
from GBP95m at IPO to GBP573m. Since IPO the Company has successfully deployed new equity,
reached target net gearing and grown dividends annually. While property market dynamics may
have assisted performance through much of the last five years, we expect our focus on
income to provide a stable platform to deliver positive shareholder returns in the future.
"Custodian REIT's shares have continued to trade at a premium to NAV while many in its
direct peer group have moved to a discount. The premium undoubtedly reflects the relatively
high dividend yield coupled with a diverse, regional property strategy.
"The Company paid an interim dividend of 1.6375p per share for the quarter ended 31 March
2019 on 31 May 2019, meeting the Company's target of paying an annual dividend per share
relating to the year of 6.55p (2018: 6.45p), 110.4% covered by net recurring income".
Further information
Further information regarding the Company can be found at the Company's website
www.custodianreit.com [1] or please contact:
Custodian Capital Limited
Richard Shepherd-Cross / Nathan Tel: +44 (0)116 240 8740
Imlach / Ian Mattioli MBE
www.custodiancapital.com [2]
Numis Securities Limited
Hugh Jonathan / Nathan Brown Tel: +44 (0)20 7260 1000
www.numiscorp.com
Camarco
Hazel Stevenson/ Emily Hall Tel: +44 (0)20 3757 4989
www.camarco.co.uk
Analyst presentation
There will be an analyst presentation to discuss the results at 10.30am today.
Those analysts wishing to take part are asked to contact Emily Hall on +44 (0) 20 3757 4996
or at emily.hall@camarco.co.uk.
Chairman's statement
I am pleased to report that five years since its initial public offering ("IPO") Custodian
REIT is continuing to deliver on its objectives and performing for shareholders. The
Company's market capitalisation has grown from GBP132m to GBP443m through managing a portfolio
of increasingly well diversified regional properties with a gross value that has increased
from GBP95m at IPO to GBP573m. Since IPO the Company has successfully deployed new equity,
reached target net gearing and grown dividends annually. While property market dynamics may
have assisted performance through much of the last five years, we expect our focus on
income to provide a stable platform to deliver positive shareholder returns in the future.
The Company has delivered strong NAV per share total returns through its first five years.
The commitment to delivering income from well-located properties predominantly let to
institutional grade tenants has underpinned returns with income accounting for 78% of NAV
per share total return over the last five years. The recent turmoil in the High Street has
underscored the importance of having a well-diversified, income focused portfolio that can
perform even when valuations are under pressure in certain sectors.
In the year ended 31 March 2019 Custodian REIT delivered a NAV per share total return of
5.9% (2018: 9.6%).
We continue to target growth to realise the potential economies of scale offered by the
Company's relatively fixed administrative cost base and the reducing scale of management
charges. These economies of scale and a continued focus on controlling costs have reduced
the ongoing charges ratio (excluding direct property expenses) from 1.41% during the
financial year ended 31 March 2015 to 1.12% in the financial year ended 31 March 2019,
demonstrating the benefits to shareholders of scale and growth.
The Company pays one of the highest fully covered dividends amongst its peer group of
listed property investment companies[14]. During a period of further growth we have
mitigated the impact from 'cash drag' following the issue of new shares by taking advantage
of the flexibility offered by the Company's revolving credit facility ("RCF"). Total funds
available under the RCF were increased from GBP35.0m to GBP45.0m in January 2019 for six months
to provide further flexibility to exploit potential acquisition opportunities. The Board
expects the RCF facility to be permanently increased to GBP45m later this year.
The Company's stable share price performance in a volatile market has allowed the Board to
issue equity at an average premium of 11% above dividend adjusted NAV, more than covering
the costs of issue and deployment.
While we have taken a cautious approach to investment through the year, I am pleased to
report that GBP58m has been invested across 11 acquisitions, the completion of one pre-let
development and two significant refurbishments, funded principally by GBP13.4m raised from
the issue of new shares and through the Company's existing debt facilities. The new
acquisitions reflected an average net initial yield[15] ("NIY") of 6.8%. The Company
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June 06, 2019 02:03 ET (06:03 GMT)
continues to maintain a diverse portfolio strategy, allowing enough flexibility to make
contra-cyclical investments where appropriate but always with a strong focus on acquiring
assets that support our dividend policy. We believe a well-defined investment strategy that
offers secure income and focuses on long-term goals and deliverable targets will provide
considerable protection to shareholders from market volatility.
The prompt deployment of cash coupled with the flexibility of the RCF and the proactive
asset management of the portfolio to secure rental growth have allowed us to increase the
target dividend[16] for the fifth year running. The target dividend for the year ending 31
March 2020 is proposed to be increased by 1.5% to 6.65p per share. The Board's objective is
to grow the dividend on a sustainable basis at a rate which is fully covered by projected
net rental income and does not inhibit the flexibility of the Company's investment
strategy.
Net asset value
The NAV of the Company at 31 March 2019 was GBP426.6m, approximately 107.1p per share, a
decrease of 0.2p (0.2%) since 31 March 2018:
Pence per GBPm
share
NAV at 31 March 2018 107.3 415.2
Issue of equity in the year (net of costs) 0.3 13.2
107.6 428.4
Valuation movements relating to:
- Asset management activity 1.6 6.4
- Other valuation movements (3.0) (11.9)
Valuation decrease before acquisition (1.4) (5.5)
costs
Impact of acquisition costs (0.9) (3.4)
Valuation decrease including acquisition (2.3) (8.9)
costs
Profit on disposal of investment property 1.1 4.3
Net loss on investment property (1.2) (4.6)
Revenue 10.0 40.0
Expenses and net finance costs (2.9) (11.7)
Dividends paid[17] (6.4) (25.5)
NAV at 31 March 2019 107.1 426.6
The Company delivered NAV per share total return of 5.9% for the year despite continued new
investment. The initial costs (primarily stamp duty) of investing GBP55.5m across 11 property
acquisitions diluted NAV total return by GBP3.4m (0.9p per share), partly offset by raising
GBP13.2m of new equity (net of costs) at an average 11% premium to dividend adjusted NAV
which added 0.4p per share[18] and fully covered the cost of raising and deploying the
proceeds.
The Company experienced a GBP5.3m valuation decrease due to company voluntary arrangements
("CVAs"), an application of insolvency law intended to be used by companies in difficulty
to enforce a reduction in current and prospective liabilities, typically involving
continuing to trade from leased properties at lower rents to avoid administration or
insolvency. The CVAs of Homebase, Office Outlet (formerly Staples), Paperchase and
Carpetright impacted the Company's units in Leighton Buzzard, Milton Keynes, Shrewsbury and
Grantham respectively, resulting in contractual rent reductions of GBP485k. Since the year
end, a further CVA has been proposed by Cotswold Outdoor, potentially reducing our
Shrewsbury store's rent by GBP75k. In each CVA during the year the Company retained the right
to terminate the lease at short notice and consistent with our asset selection strategy we
believe all assets would appeal to a broad range of alternative tenants should the
incumbent vacate.
I am pleased to say that the GBP5.3m valuation decrease due to CVAs was more than outweighed
by a GBP6.4m valuation uplift from pro-active asset management.
Share price
Consistent demand for the Company's shares led to the share price showing a relatively
stable premium to NAV through the year.
Custodian REIT's shares have continued to trade at a premium to NAV while many in its
direct peer group have moved to a discount. The premium undoubtedly reflects the relatively
high dividend yield coupled with a diverse, regional property strategy. However we believe
that investors are increasingly recognising that a property investment company's share
price also should be based on earnings potential rather than just NAV related metrics. We
believe the Company's share price reflects investor awareness of the merits of
diversification of tenant, lease expiry profile, spread of asset type, net gearing level,
debt profile and property location, and the ability of the management team to generate
future income from the assets.
The share price performance has been combined with a steadily increasing level of liquidity
which now sees Custodian REIT recording an average daily trading volume of over GBP500k over
the last 12 months[19]. This liquidity, combined with share issuance, has done much to help
price stability and diminish volatility.
The Company enjoys the support of a wide range of shareholders with the majority classified
as private client or discretionary wealth management investors. The Company's investment
and dividend strategy is well suited to investors looking for a close proxy to direct real
estate investment but in a managed and liquid structure. The structure of our shareholder
base has, in turn, helped to reduce volatility as our shareholders are typically long-term
holders looking for stable dividend-driven returns.
Authority to place new ordinary shares
At last year's Annual General Meeting ("AGM") held on 19 July 2018, 6.7% of eligible
shareholders voted to limit the authority to issue new ordinary shares with pre-emption
rights disapplied to a maximum of 10% of the Company's issued ordinary share capital
("Limit"). The Board had proposed a Limit of 20%, comprising two 10% tranches, in line with
the 2017 changes to the EU Prospectus Directive which increased the maximum proportion of
share capital from 10% to 20% that can be issued over a 12-month period on a
non-pre-emptive basis before a company is required to publish a prospectus. Due to low
voter turnout, this 6.7% represented 47.4% of votes cast and the Resolution (requiring 75%
support) failed to pass.
The Pre-Emption Group's Statement of Principles on Disapplying Pre-emption Rights continues
to support a Limit of 10% but, in the Board's opinion, a Limit of 20% is justified to
continue a programme of tap issuance allowing the Company to fund suitable property
acquisitions in a cost-efficient manner by avoiding the significant costs of publishing a
prospectus.
The Board believes that growing the Company efficiently through NAV accretive issuance is
in the best interests of all shareholders as it reduces ongoing charges, diversifies income
and increases share liquidity, and will request approval once again for a 20% Limit at the
2019 AGM.
Borrowings
The Company's property investment activity has increased LTV from 21.0% at the start of the
year to 24.1% at the year end, which contributed to an increase in dividend cover,
demonstrating the benefits of prudent leverage. The Board's strategy is to:
· Increase debt facilities in line with portfolio growth, targeting net gearing of 25%
LTV;
· Facilitate expansion of the portfolio to take advantage of expected rental growth and
secure further reductions in the OCR; and
· Reduce shareholders' exposure to risk by:
· Taking advantage of low interest rates to secure long-term, fixed rate borrowing; and
· Managing the weighted average maturity ("WAM") of the Company's debt facilities.
The weighted average cost of the Company's agreed debt facilities at 31 March 2019 was 3.2%
(2018: 3.1%) with a WAM of 7.9 years (2018: 9.1 years) and 72% (2018: 77%) of the Company's
agreed debt facilities are now at fixed rates. This high proportion of fixed rate debt
significantly mitigates interest rate risk for the Company and provides shareholders with a
beneficial margin between the fixed cost of debt and income returns from the portfolio.
Investment Manager
Custodian Capital Limited ("the Investment Manager") is appointed under an investment
management agreement ("IMA") expiring on 31 May 2020 to provide property management and
administrative services to the Company. The performance of the Investment Manager is
reviewed each year by the Management Engagement Committee ("MEC").
The Board is pleased with the performance of the Investment Manager, particularly the
timely deployment of new monies on high quality assets and successful asset management
securing the earnings required to fully cover the target dividend.
Dividends
Income is a major component of total return. The Company paid aggregate dividends of 6.525p
per share during the year, comprising the fourth interim dividend of 1.6125p per share
relating to the year ended 31 March 2018 and three interim dividends of 1.6375p per share
relating to the year ended 31 March 2019.
The Company paid an interim dividend of 1.6375p per share for the quarter ended 31 March
2019 on 31 May 2019 totalling GBP6.5m, meeting the Company's target of paying a total
dividend relating to the year of 6.55p per share (2018: 6.45p), totalling GBP25.8m. Dividends
relating to the year ended 31 March 2019 were 110.4% covered by net recurring income of
GBP28.5m, as calculated in the Alternative performance measure workings section of the Annual
Report.
In the absence of unforeseen circumstances, the Board intends to pay quarterly interim
dividends to achieve a target dividend of 6.65p per share for the year ending 31 March
2020.
Board composition
Reflecting the growth of the Company since inception, the Nominations Committee is
currently recruiting an additional Non-Executive Director with the skills and experience to
complement the existing Directors and offer scope to add value to the Company, with due
regard for the benefits of diversity on the Board.
Outlook
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