Custodian REIT plc: Unaudited Net Asset Value as at 30 September 2019

Custodian REIT plc (CREI) 
Custodian REIT plc: Unaudited Net Asset Value as at 30 September 2019 
 
29-Oct-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. 
 
          29 October 2019 
 
     Custodian REIT plc 
 
     ("Custodian REIT" or "the Company") 
 
     Unaudited Net Asset Value as at 30 September 2019 
 
        Custodian REIT (LSE: CREI), the UK commercial real estate investment 
       company, today reports its unaudited net asset value ("NAV") as at 30 
         September 2019 and highlights for the period from 1 July 2019 to 30 
          September 2019 ("the Period"). 
 
          Financial highlights 
 
  · NAV total return per share1 for the Period of -0.04% with a 1.6625p 
  dividend approved for the Period being offset by a 1.7p decrease in NAV, 
  primarily due to property valuation decreases 
 
  · NAV per share of 104.3p (30 June 2019: 106.0p) 
 
  · NAV of GBP428.5m (3 0 June 2019: GBP432.7m) 
 
  · Net gearing2 of 20.5% loan-to-value (30 June 2019: 22.8%) 
 
  · Increase in the Company's revolving credit facility ("RCF") from GBP35m to 
  GBP50m for a three year term plus a two year extension option, with the 
  interest rate margin above three-month LIBOR reduced from 2.45% to between 
  1.5% and 1.8% 
 
  · GBP2.9m of new equity raised during the Period at an average premium of 
  11.9% to dividend adjusted NAV per share 
 
  · Market capitalisation of GBP483.0m (30 June 2019: GBP484.1m) 
 
          Property highlights 
 
  · Property value of GBP547.2m (30 June 2019: GBP568.0m): 
 
  · Disposal of two properties at valuation3 for aggregate headline 
  consideration of GBP15.7m4 
 
  · GBP7.0m valuation decrease (1.2% of property value), primarily due to 
  decreases in the estimated rental value ("ERV") of high street retail 
  properties and negative market sentiment for retail assets 
 
  · EPRA occupancy5 95.5% (30 June 2019: 95.9%) 
 
  · Continued focus on active asset management 
 
  · Since the Period end GBP24.65m6 invested in the acquisition of eight 
  distribution units 
 
1 NAV per share movement including dividends approved for the Period. 
 
2 Gross borrowings less cash (excluding tenant rental deposits and 
retentions) divided by property valuation. 
 
3 Before disposal costs of GBP0.1m. 
 
4 Before rental top-ups and cost guarantees of c. GBP0.3m. 
 
5.ERV of let property divided by total property ERV. 
 
6 Before acquisition costs and completion balance sheet adjustments. 
 
          Net asset value 
 
          The unaudited NAV of the Company at 30 September 2019 was GBP428.5m, 
  reflecting approximately 104.3p per share, a decrease of 1.7p (1.6%) since 
          30 June 2019: 
 
                                           Pence per share    GBPm 
 
NAV at 30 June 2019                                  106.0 432.7 
Issue of equity                                        0.1   2.9 
 
Valuation movements relating to: 
- Loss on disposal of investment                     (0.0) (0.1) 
properties (net of disposal costs) 
- Valuation movements                                (1.8) (7.0) 
 
Acquisition costs7                                   (0.0) (0.2) 
Net valuation movement                               (1.8) (7.3) 
 
Income earned for the Period                           2.4   9.8 
Expenses and net finance costs for the               (0.7) (2.8) 
Period 
Dividends paid8                                      (1.7) (6.8) 
 
NAV at 30 September 2019                             104.3 428.5 
 
7 Acquisition costs relate to unconditional costs incurred on acquisitions 
completed following the Period-end. 
 
8 A dividend of 1.6625p per share was paid on shares in issue throughout the 
Period. 
 
    The NAV attributable to the ordinary shares of the Company is calculated 
      under International Financial Reporting Standards and incorporates the 
  independent property valuation as at 30 September 2019 of GBP547.2m (30 June 
 2019: GBP568.0m) and income for the Period but does not include any provision 
 for the approved dividend of 1.6625p per share for the Period to be paid on 
          29 November 2019. 
 
Acquisitions since the Period end 
 
    On 1 October 2019 the Company acquired the share capital of John Menzies 
Property 4 Limited to facilitate the purchase of a portfolio of distribution 
 units ("the Menzies Portfolio") for an agreed purchase price of GBP24.65m via 
 a sale and leaseback transaction with Menzies Distribution Limited ("MDL"). 
    The Menzies Portfolio comprises eight units across the UK with a passing 
        rent of GBP1.61m, reflecting a net initial yield9 ("NIY") of 6.4%. The 
  Portfolio's weighted average unexpired lease term to first break or expiry 
      ("WAULT") is 8.8 years and the acquisition increased the Company's net 
          borrowings to 23.2% loan-to-value ("LTV"). 
 
        9 Passing rent divided by property valuation plus purchaser's costs. 
 
Property market 
 
          Commenting on the regional commercial property market, Richard 
          Shepherd-Cross said: 
 
 "The investment market has been notably quiet this quarter with transaction 
        volumes down 20% from 2018 according to Knight Frank research. While 
        overseas investors still make up a significant proportion of buyers, 
domestic investors have increased activity to account for 53% of the market. 
 That said, the institutional managers of open-ended funds have recorded low 
     acquisition activity, with most being net sellers of (typically) larger 
          lot-size assets to meet current redemption pressures. 
 
 "While reduced transaction volumes tell a story about demand, it is also an 
        issue for supply. Opportunities that meet the investment criteria of 
 Custodian REIT have been in very short supply, resulting in a third quarter 
          where the Company made no property acquisitions. 
 
      "Custodian REIT's investment strategy has always been weighted towards 
    regional industrial and logistics assets, which has stood the Company in 
good stead again this quarter. Valuation gains of 2.1% in this sector during 
  the Period point to both underlying rental growth and continued investment 
   demand. We expect the addition of the Menzies Portfolio, post Period-end, 
      will prove to be an excellent addition to this sector of the Company's 
          property portfolio. 
 
    "There has been much focus in the press on the woes of retailers and the 
  resulting impact on real estate. There is no doubt that the over-supply of 
       shops on the high street needs to be addressed and, while a number of 
      Company Voluntary Arrangements ("CVAs") have reduced rents on specific 
   assets, there remains widespread rental value decline as a result of this 
over-supply. Notwithstanding these falls in rental value, Custodian REIT has 
   continued to focus on maintaining occupancy whilst securing cash flow. We 
 have worked with tenants to retain them in occupation following CVAs and at 
  lease expiry or break, resulting in 96.2% occupancy across our high street 
          retail property portfolio. 
 
   "We have previously forecast greater resilience in the out of town retail 
 market, which benefits from a restricted supply, generally free parking and 
     the convenience that is complementary to online sales for both 'click & 
   collect' and customer returns. This forecast remains robust, although the 
read-across from the impact on high street retailers and investors generally 
   turning away from the retail sector as a whole, for the moment is in turn 
          having a negative impact on retail warehouse values. 
 
      "Regional offices have provided fairly stable returns over the Period. 
      Sustained demand coupled with low levels of development and restricted 
     supply of Grade A offices in regional markets has led to rental growth, 
 which is most apparent in the six major regional cities where Grade A rents 
      are hitting new headline peaks. Although the costs of office ownership 
 (through landlord's capital expenditure and tenant lease incentives) remain 
 higher for offices than other sectors, we expect to see a relatively steady 
   market ahead. WeWork is a relatively new entrant into the regional office 
   market but continues to make headlines both corporately and in new office 
 lettings. Time will tell whether it will be complementary or competitive to 
     the Custodian REIT strategy but at present it has minimal impact on the 
          markets in which we operate. 
 
"Custodian REIT benefits from a balanced and diverse property portfolio with 
        17% of income derived from 'other' assets, which are broadly showing 
    resilience from occupiers and continued demand from investors seeking to 
          diversify out of retail. 
 
      "This diversification successfully mitigates some of the challenges in 
  retail, whilst the continued asset management of the property portfolio is 
          supporting the Company's NAV." 
 
          Asset management 
 
         Owning the right properties at the right time is one key element of 
    effective property portfolio management, which necessarily involves some 
selling from time to time to balance the property portfolio. While Custodian 
  REIT is not a trader, it is important to identify opportunities to dispose 
 of assets significantly ahead of valuation or that no longer fit within the 
          Company's investment strategy. 
 
  After focused pre-sale asset management, the following two properties were 
 sold at valuation during the Period for a headline consideration of GBP15.7m: 
 
· A city centre office unit with retail on the ground floor in Edinburgh 
for GBP9.1m, in line with valuation; and 
 
· An industrial unit in Wolverhampton for GBP6.6m, in line with valuation. 
 

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