DJ Custodian Property Income REIT plc: First quarter trading update shows rental growth supporting fully covered dividends and stable values
Custodian Property Income REIT plc (CREI)
Custodian Property Income REIT plc: First quarter trading update shows rental growth supporting fully covered dividends
and stable values
09-Aug-2023 / 07:00 GMT/BST
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9 August 2023
Custodian Property Income REIT plc
("Custodian Property Income REIT" or "the Company")
First quarter trading update shows rental growth supporting fully covered dividends and stable values
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 first quarter ended 30 June 2023 ("Q1" or the "Quarter").
Strong leasing activity continues to support rental growth and underpin fully covered dividends
-- 1.375p dividend per share approved for the Quarter fully covered by unaudited EPRA earnings
-- Target dividends per share of no less than 5.5p for the year ending 31 March 2024, representing a 6.4%
yield based on the prevailing 86p share price[1]
-- EPRA earnings per share[2] of 1.5p for the Quarter (FY23 Q4: 1.4p, Q3: 1.5p)
-- GBP2.2m of annual rental income secured, in aggregate in line with ERV, which added GBP2.0m in property
capital value during the Quarter through leasing, renewals and rental uplifts, comprising:
- 14 new leases signed across a range of property sectors at an average 5% ahead of ERV, adding GBP1.1m of
annual rent for a weighted average of 4.9 years to first break; and
- 15% (GBP0.1m) aggregate annual rental increase across six rent reviews settled during the Quarter
-- Like-for-like[3] ERV has increased by 1.2% since 31 March 2023, driven primarily by capital expenditure
in refurbishing industrial assets successfully. Portfolio ERV (GBP49.0m) now exceeds passing rent (GBP42.1m) by 17% (31
March 2023: 16%) demonstrating the portfolio's significant reversionary potential
-- EPRA occupancy[4] maintained at 90% (31 March 2023: 90%). 3.7% of vacant ERV is subject to refurbishment
or redevelopment with 3.9% under offer to let or sell.
Stable valuations
-- The valuation of the Company's diversified portfolio of 159 assets remained broadly flat at GBP614.3m,
reflecting a marginal like-for-like decrease of 0.5% or GBP3.3m, net of a GBP2.0m valuation increase from active asset
management activity (FY23 Q4: GBP2.6m increase from asset management)
-- Q1 net asset value ("NAV") total return per share[5] of 0.7%
-- NAV per share of 98.6p (31 March 2023: 99.3p) with a NAV of GBP434.9m (31 March 2023: GBP437.6m)
GBP5.3m invested in the redevelopment and refurbishment of existing assets
-- During the Quarter:
- GBP5.3m of capital expenditure was undertaken primarily on completing the redevelopment of an industrial
unit in Redditch (GBP2.7m) and the refurbishment of: offices in Manchester and Leeds (GBP1.4m); retail assets in
Shrewsbury and Liverpool (GBP0.6m); and an industrial unit in Winsford (GBP0.4m)
- All ongoing capital 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. The redevelopment in Redditch is nearing completion and based on potential letting demand ERV of the
asset has increased by 122% from GBP298k pa to GBP660k pa
- High street retail units in Bury St Edmunds and Cirencester were sold at auction for an aggregate GBP1.6m,
in line with valuation
-- Weighted average energy performance certificate rating remains C (58) with ongoing capital expenditure
initiatives expected to drive improvements in subsequent quarters
Gearing remains broadly in line with target, with significant borrowing covenant headroom
-- Net gearing[6] was 28.0% loan-to-value as of 30 June 2023 (31 March 2023: 27.4%), broadly in line with
the Company's 25% target
-- GBP178.0m of drawn debt comprising GBP140m (79%) of fixed rate debt and GBP38m (21%) drawn under the Company's
revolving credit facility ("RCF")
-- Aggregate borrowings have a weighted average cost of 4.0%
-- Fixed rate debt facilities have a weighted average term of 6.8 years and a weighted average cost of 3.4%
offering significant medium-term interest rate risk mitigation
-- GBP10m of properties are under offer to sell, expected to generate proceeds in excess of valuation, which
will be invested in the Company's remaining pipeline of profitable capital expenditure. Further potential sales
have been identified with proceeds expected to be used to reduce borrowings
Net asset value
In line with the portfolio valuation, the Company's unaudited NAV at 30 June 2023 remained stable at GBP434.9m, or
approximately 98.6p per share, a marginal decrease of 0.7p (-0.7%) since 31 March 2023:
Pence per share GBPm
NAV at 31 March 2023 99.3 437.6
Valuation movements relating to:
- Asset management activity 0.4 2.0
- General valuation decreases (1.2) (5.3)
Net valuation movement (0.8) (3.3)
Profit on disposal - -
EPRA earnings for the Quarter 1.5 6.7
Interim dividend paid[7] during the Quarter (1.4) (6.1)
NAV at 30 June 2023 98.6 434.9
The 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 2023 and net income for the Quarter. The movement in NAV reflects the payment of an interim dividend of 1.375p per share during the Quarter, but does not include any provision for the approved dividend of 1.375p per share for the Quarter to be paid on 31 August 2023.
Investment Manager's commentary
UK property market
The listed property market is acutely sensitive to broader economic news with inflation, interest rates and potential recession all impacting investors' confidence. Interest rate outlook bites the hardest and at the start of the previous quarter there was a belief that interest rates might have been close to topping out. This optimism saw yields harden in some sectors following a market rerating in the second half of 2022, but by the end of the Quarter that confidence had been eroded with the 50bps rise in the base rate to 5% and the expectation of more to come. On the back of the rate rise listed real estate prices fell sharply, but there has been some recovery since then on the back of the most recent inflation numbers for June 2023.
This volatility suggests that investors are keen to upweight to real estate but are waiting for a more certain economic future to be revealed before we see share prices really rally. There is a strong logic for investing in real estate in the current market as real assets should be a good store of value in an inflationary environment as rents grow over time. In the current market, occupational demand is continuing to drive rental growth which is positive for interest cover and dividends. All of this produced stable valuations over the Quarter, with a marginal like-for-like decrease of 0.5%.
We are engaged in an active capital expenditure programme including re-development, refurbishment, EPC improvements and the roll out of photovoltaic arrays and electric vehicle chargers. This investment is focused on keeping the portfolio up to date, compliant with environmental legislation and positioned to capture rental growth with returns expected well ahead of the prevailing cost of borrowing. During the Quarter this investment and the asset management of the properties has increased the like-for-like estimated rental value of the portfolio by 1.2% (GBP0.6m). Continued rental growth is the Investment Manager's key objective together with capturing the reversionary potential through the letting of vacant space.
The vacancy rate as a proportion of the ERV of the portfolio stands at 10% of which 39% is under offer to let and 37% is under refurbishment, leaving only 24% (or 2.4% of the total) available to let. Vacancy has increased recently as we have taken back space from the residual COVID-19 affected tenants which has allowed us to refurbish that space and, based on current level of interest, we are confident of increasing occupancy and rents going forwards.
Asset management
The Investment Manager has remained focused on active asset management during the Quarter, completing 14 leasing initiatives adding GBP1.2m of new income at an average 5% ahead of ERV and adding GBP2.0m in portfolio valuation. These new leases had a weighted average unexpired term to first break or expiry ("WAULT") of 4.9 years, with the portfolio WAULT now at 4.8 years and included:
-- A six-year reversionary lease to Wickes on a retail warehouse unit in Winnersh, maintaining annual rentof GBP450k and increasing valuation by GBP0.4m (5%);
-- A five-year lease to Communicorp on a vacant industrial unit in Hilton, Derby at an annual rent of GBP46k,reflecting a 2% premium to ERV and increasing valuation by GBP0.4m (20%);
-- A new 15-year lease in line with ERV with a year 10 break option to Howdens Joinery on a trade counter inCrewe at an annual rent of GBP55k, increasing valuation by GBP0.3m (12%);
-- A surrender of North Warwickshire Borough Council's headlease over a multi-let industrial estate inAtherstone, with the tenant paying a GBP375k surrender premium which will be used to fund a comprehensiverefurbishment plan, increasing passing rent by 20% and valuation by GBP0.2m (11%);
-- A new five-year lease with a third year tenant break option to Menzies Aviation on a vacant office unitin Edinburgh at an annual rent of GBP88k (12% above the ERV of GBP78k), increasing valuation by GBP0.2m (4%);
-- A 10-year lease renewal with a five year break to Ladbrokes on a retail unit in Birmingham, at an annualrent of GBP35k 40% ahead of the GBP25k ERV, increasing valuation by GBP0.2m (7%);
-- A 10-year reversionary lease to Scotco Restaurants Limited (t/a KFC) on a drive-through unit in Perthwith annual rent increasing by 5% to GBP75k, increasing valuation by GBP0.2m (2%);
-- A new 10-year lease with a fourth year tenant break option to RSK Group on an office in Lancaster House,Birmingham at an annual rent of GBP78k, increasing valuation by GBP0.1m;
-- A five year lease renewal with annual mutual breaks to Dreams on a retail warehouse unit in Sheldon, atan annual rent of GBP90k;
-- A 10-year lease renewal with fifth year break to Subway on a retail unit in Dunfermline, at an annualrent of GBP23k; and
-- A 10-year lease renewal with fifth and seventh year break to Innovate Hair Salon on a retail unit inDunfermline, at an annual rent of GBP27k.
Post Quarter end we have completed:
-- A 15-year lease with a 10-year break to JD Sports Gyms on a vacant retail warehouse unit in Swindon at anannual rent of GBP150k, increasing valuation by GBP0.7m;
-- A 15-year straight term lease to Farmfoods on a vacant retail warehouse unit in Grantham at an annualrent of GBP100k, increasing valuation by GBP0.3m;
-- A five-year lease renewal with Next on a retail warehouse unit in Evesham at an annual rent of GBP128k and
-- Buying in the long leasehold interest of a unit at a multi-let industrial asset in Knowsley for GBP1.25m.
During the Quarter rent reviews were settled at an aggregate of 15% ahead of previous passing rent with:
-- DX at an industrial unit in Nuneaton with annual rent increasing by 31% to GBP350k;
-- Sytner at an industrial unit in Oldbury with annual rent increasing by 12% to GBP236k;
-- VP Packaging at two industrial units in Kettering with aggregate annual rent increasing by 8% to GBP190k;
-- KFC at a leisure unit in Perth, Scotland with annual rent increasing by 5% to GBP75k; and
-- PSL at an industrial unit in Speke with annual rent increasing by 3% to GBP150k. Fully covered dividend
The Company paid an interim dividend of 1.375p per share on 31 May 2023 relating to the quarter ended 31 March 2023. The Board has approved an interim dividend per share of 1.375p for the Quarter, fully covered by EPRA earnings, payable on 31 August 2023. The Board is targeting aggregate dividends per share[8] of at least 5.5p for the year ending 31 March 2024. The Board's objective is to grow the dividend on a sustainable basis, at a rate which is fully covered by net rental income and does not inhibit the flexibility of the Company's investment strategy.
Borrowings
At 30 June 2023 the Company had GBP178.0m of debt drawn at an aggregate weighted average cost of 4.0% with no expiries until September 2024. This debt comprised:
-- GBP38.0m (21%) at a variable prevailing interest rate of 6.58% and a facility maturity of 1.25 years; and
-- GBP140m (79%) at a weighted average fixed rate of 3.4% with a weighted average maturity of 6.8 years.
At 30 June 2023 the Company's borrowing facilities are:
Variable rate borrowing
-- A GBP40m RCF with Lloyds Bank plc expiring in September 2024 with interest of between 1.5% and 1.8% aboveSONIA determined by reference to the prevailing LTV ratio of a discrete security pool. At 30 June 2023 GBP38.0m wasdrawn under the RCF. The limit on the RCF facility can be increased to GBP50m 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% LTV; and
-- Historical interest cover, requiring net rental receipts from each discrete security pool, over thepreceding three months, to exceed 250% of the facility's quarterly interest liability.
Portfolio analysis
At 30 June 2023 the property portfolio comprised 159 assets. 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:
Valuation
Quarter valuation
30 Jun movement
2023 Weighting by value 30 Quarter valuation Weighting by value 31
Jun 2023 GBPm movement Mar 2023
GBPm
Sector
Industrial 300.1 49% 1.6 1% 48%
Retail 130.7 21% (1.3) (1%) 21%
warehouse
Other[9] 79.4 13% 0.2 - 13%
Office 70.0 11% (3.0) (4%) 12%
High street 34.1 6% (0.8) (2%) 6%
retail
Total 614.3 100% (3.3) (1%) 100%
For details of all properties in the portfolio please see custodianreit.com/property-portfolio.
Board changes
In accordance with Listing Rule 9.6.11 the Company advises that, at the conclusion of its AGM on 8 August 2023, David Hunter retired as a Non-Executive Director of the Company, with David MacLellan replacing him as Chair.
- 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 / 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 on long leases 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] Price on 8 August 2023. Source: London Stock Exchange.
[2] Profit after tax excluding net gains or losses on investment property divided by weighted average number of shares in issue.
[3] Adjusting for property disposals and capital expenditure.
[4] Estimated rental value ("ERV") of let property divided by total portfolio ERV.
[5] NAV per share movement including dividends paid during the Quarter.
[6] Gross borrowings less cash (excluding rent deposits) divided by portfolio valuation.
[7] An interim dividend of 1.375p per share relating to the quarter ended 31 March 2023 was paid on 31 May 2023.
[8] This is a target only and not a profit forecast. There can be no assurance that the target can or will be met and it should not be taken as an indication of the Company's expected or actual future results. Accordingly, shareholders or potential investors in the Company should not place any reliance on this target in deciding whether or not to invest in the Company or assume that the Company will make any distributions at all and should decide for themselves whether or not the target dividend yield is reasonable or achievable.
[9] 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.: 263249 EQS News ID: 1698849 End of Announcement EQS News Service =------------------------------------------------------------------------------------
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August 09, 2023 02:00 ET (06:00 GMT)
