Custodian Property Income REIT plc (CREI) Custodian Property
Income REIT plc: Leasing momentum continues to drive income returns
and support fully covered dividends 08-Feb-2023 / 07:00 GMT/BST
Dissemination of a Regulatory Announcement that contains inside
information in accordance with the Market Abuse Regulation (MAR),
transmitted by EQS Group. The issuer is solely responsible for the
content of this announcement.
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8 February 2023
Custodian Property Income REIT plc
("Custodian Property Income REIT" or "the Company")
Leasing momentum continues to drive income returns and support
fully covered dividends
Custodian Property Income REIT (LSE: CREI), which seeks to
deliver a strong income return by investing in a diversified
portfolio of smaller regional properties across the UK, today
provides a trading update for the quarter ended 31 December 2022
("Q3" 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, in line
with a target dividend of no less than 5.5pfor the current
financial year, fully covered by EPRA earnings (102% year to
date)
-- 7% increase in EPRA earnings per share[1] to 1.5p for Q3 (Q2:
1.4p) due to GBP18m of net investment intoacquisitions during the
previous quarter and recent positive asset management outcomes
-- 10 new lease agreements signed across a range of property
sectors during the Quarter at an aggregate 7%ahead of ERV, adding
GBP1.2m of annual rent for a weighted average of 7.3 years to first
break (Q2: five new leasesadding GBP0.4m of annual rent for 6.3
years)
-- EPRA occupancy[2] improved to 89.9% (30 September 2022:
89.3%) due to letting five vacant propertiesduring the Quarter
-- 18% aggregate rental increase across two rent reviews settled
during the Quarter, a total additionalGBP0.4m of annual rent
-- 48% of current vacancy is subject to refurbishment or
redevelopment, 8% was let post Quarter end and afurther 8% has been
put under offer for sale or lease
-- 1.4% increase in the like-for-like[3] rent roll since 30
September 2022 and like-for-like ERV growing by0.6%
-- Lettings momentum has continued into the final quarter of the
financial year with a further four newleases completing since the
Quarter end, adding GBP0.8m of annual rental income for a weighted
average 12 years tofirst break Valuation movements
-- 9.1% like-for-like valuation decrease across the Company's
diversified portfolio of 162 assets to GBP612.8mfollowing a market
wide rerating of UK commercial property driven by sentiment around
the UK's economic outlook,but positively impacted by a GBP3.0m
(0.5% increase) from active asset management activity
-- Q3 net asset value ("NAV") total return per share[4] of
-11.0% comprising 1.2% dividends paid offset by a-12.2% capital
movement, leading to a NAV per share of 99.8p (30 September 2022:
113.7p) with a NAV of GBP440.0m (30September 2022: GBP501.4m)
GBP13.5m of disposals during the Quarter achieved at valuation,
demonstrating the continued demand for small lot sized commercial
property
-- Disposals during the Quarter comprised:
-- A shopping centre in Gosforth for GBP9.3m, 3.5% ahead of the
November 2021 purchase price and 4% belowvaluation
-- A business park office in Leicester for GBP2.8m in line with
valuation
-- An industrial unit in Kilmarnock at auction for GBP1.4m, 12%
ahead of valuation
-- Since 31 December 2022 a high street retail unit in Bury St
Edmunds has been sold at auction for GBP0.5m,GBP0.1m (35%) ahead of
valuation
-- GBP3.0m of value enhancing capital expenditure undertaken
during the Quarter, primarily on theredevelopment of an industrial
unit in Redditch and the refurbishment of an industrial unit in
Winsford which areexpected to enhance rents and the assets'
environmental credentials once complete
Gearing remains low and in line with target, with significant
borrowing headroom
-- At 31 December 2022:
-- Net gearing[5] remains low and broadly in line with the
Company's 25% target, increasing to 27.1%loan-to-value during the
Quarter (30 September 2022: 25.4%) as a result of valuation
decreases, partially offset byGBP13.5m of disposals
-- GBP175m of drawn debt of which 80% is at a fixed rate of
interest and with an aggregate weighted averagecost of 3.7%. There
are no facility expiries until September 2024 and agreed facilities
have a weighted averageterm of 6.1 years
Richard Shepherd-Cross, Managing Director of Custodian Capital
Limited, said: "Our active asset management has enabled us to
capture occupational demand, lease vacant space across all sectors
and deliver rental growth which will support earnings and underpins
the Company's fully covered dividend. This strong recent leasing
activity demonstrates the resilience of Custodian Property Income
REIT's well-diversified investment portfolio and the depth of the
occupational market for space in high quality, well located and
affordable assets such as ours.
"Despite recent market wide valuation decreases, Custodian
Property Income REIT's prudent approach to investment and the
management of its balance sheet, with low gearing and a longer-term
fixed rate debt profile, has left the Company well insulated from
the negative impact of interest rate rises continuing in the short
to medium-term.
"More broadly, despite investment market volatility during 2022
and the threat of an imminent recession, I believe the real estate
market is in a much better place than it has been for the last 18
months. Rent collection levels remain very strong, the restrictions
and impact of COVID-19 on tenants' businesses are largely resolved
and unlike in previous recessions we are not faced with an
over-supply of real estate and rising vacancy rates at the
outset.
"As a result, we remain confident that our ongoing intensive
asset management of the portfolio, which still offers a number of
wide-ranging opportunities to add value, will maintain cash flow
and support consistent returns. Coupled with the strength of the
Company's balance sheet, this will continue to support our high
income return strategy."
Net asset value
The unaudited NAV of Custodian Property Income REIT at 31
December 2022 was GBP440.0m, reflecting approximately 99.8p per
share, a decrease of 13.9p (-12.2%) since 30 September 2022:
Pence per share GBPm
NAV at 30 September 2022 113.7 501.4
Valuation movements relating to:
- Asset management activity 0.7 3.0
- General valuation decreases (14.7) (64.5)
Net valuation movement (14.0) (61.5)
Loss on disposal - (0.1)
(14.0) (61.6)
EPRA earnings for the Quarter 1.5 6.3
Interim dividend paid[6] during the Quarter (1.4) (6.1)
NAV at 31 December 2022 99.8 440.0
The 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
2022 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 28
February 2023.
Investment Manager's commentary
UK property market
During the last six months Custodian Property Income REIT has
demonstrated the strength of its strategy and the continued
attractiveness to all sizes of occupiers of the assets in the
Company's portfolio, despite significant economic adversity. While
our capital values are not immune from the effects of cost
inflation and rising interest rates the Company's income focused
strategy and highly diversified portfolio of smaller regional
properties has delivered robust earnings, supporting fully covered
dividends and lower volatility in valuations than the wider
market.
The broader UK property market saw valuations fall by 18% during
the second half of 2022[7]. By contrast the Company's smaller
regional property strategy, which had not seen the pricing extremes
of the post-COVID-19 period, experienced only a 15% decrease in
like-for-like values over that six-month period. This contrast is
even more marked for the industrial sector where during the Quarter
the market recorded a 20% reduction in logistics values[8] compared
to the Company's industrial portfolio experiencing only an 11%
decrease.
The lower volatility of the Company's underlying property
portfolio was mirrored in share price total return[9]. 2022
delivered negative total returns for nearly all listed property
companies and REITs recorded aggregate -34% share price total
returns for 2022 with companies ranging from just positive to
-46%[10]. Custodian Property Income REIT delivered -2% share price
total return during 2022 and we believe as confidence in real
estate is restored in 2023 dividends, fully covered by earnings,
will be recognised as the key element of total return.
In common with many market commentators, we believe that market
values are stabilising, as the Bank of England makes increasingly
clear statements about the trajectory of interest rates and gilt
rates offer a more consistent comparator for investment returns and
provide some certainty for lending banks.
Despite investment market volatility during 2022, in many ways
the real estate market is in a much better place than it has been
for the last 18 months. Rent collection levels are very strong,
COVID-19 restrictions appear to be behind us and the impact of
COVID-19 on tenants' businesses is largely resolved. Despite the
threat of an imminent recession, unlike in previous recessions we
are not faced with an over-supply of real estate and rising vacancy
rates at the outset.
Indeed, record low vacancy rates in the industrial sector are
still driving rental growth. The economics of development now
require rents on new developments to be higher than six months ago.
To generate the necessary gross development value required to
deliver new developments, higher investment yields and increased
costs of labour and materials dictate that rents must also be
higher, adding to upward rental growth pressure in the sector.
We still see rental growth potential in strong regional city
centres for offices that are well-specified for post-pandemic
working practices, with high levels of amenity, excellent
environmental credentials, flexible lease terms and a high quality
fit out - possibly fully fitted by the landlord. There is, however,
a two-tier office market developing with buildings that cannot meet
occupational trends seeing continued valuation falls and a very
limited investor market.
We see continued growth in drive-through restaurant rents and
have recently settled rent reviews ahead of ERV at two
drive-throughs in York.
Across the whole portfolio, valuers' estimates of rental value
stand some 15% ahead of passing rent. While part of this reversion
is due to vacancy, the balance is latent rental growth which will
be unlocked at rent review and lease renewal.
During the Quarter, the Company agreed ten new leases securing
GBP1.2m rent for a further 7.3 years and has continued to see good
levels of occupier activity. Four new leases have already been
signed since the Quarter end and there is a strong pipeline of
asset management and refurbishment/redevelopment opportunities.
One of the strengths of a diversified and mature real estate
portfolio is that even when market conditions do not favour
acquisitions or disposals there are wide ranging investment
opportunities in the standing portfolio. We have a 12-18 month
capital investment pipeline of c.GBP28m across 23 projects, which
is forecast to deliver superior investment properties, improved
energy performance, enhanced rental cash flows and a positive
impact on net asset value.
Asset management
The Investment Manager has remained focused on active asset
management during the Quarter, completing the following new leases,
with a weighted average unexpired term to first break or expiry
("WAULT") of 7.3 years, bringing the portfolio total to 4.8
years:
-- A new 25 year lease with a 15 year tenant break option to Ten
Pin Bowling on a vacant leisure unit inPhoenix Leisure Park, Crewe
at an annual rent of GBP210k, increasing valuation by GBP0.9m
(24%);
-- A new 20 year lease with a 15 year tenant break option to
Ocado Retail on a vacant industrial unit inLeeds at an annual rent
of GBP103k, increasing valuation by GBP0.4m (13%);
-- A 10 year lease renewal with a five year tenant break option
to Warburtons on an industrial unit inLangley Mill with annual rent
increasing by 23% from GBP165k to GBP203k, reflecting a 27% premium
to ERV, andincreasing the valuation by GBP0.4m (13%);
-- A new 10 year lease with a five year tenant break option to
Rexel on a vacant retail warehouse unit inGloucester at an annual
rent of GBP55k, increasing valuation by GBP0.3m (15%);
-- A 15 year lease renewal without break to F1 Autocentres on an
industrial unit in Crewe with annual rentof GBP50k, increasing
valuation by GBP0.3m (19%);
-- A new 10 year lease with a five year tenant break option to
Galaxy Technical Services on a vacantindustrial unit in Weybridge
at an annual rent of GBP158k, increasing valuation by GBP0.2m;
-- A new 10 year lease with a five year tenant break option to
iON Ambulance on a vacant industrial unit inKettering at an annual
rent of GBP40k, increasing valuation by GBP0.2m;
-- A new five year lease with a year two tenant break option to
IJ Tours on the 5th floor of an office unitin Manchester at an
annual rent of GBP24k, with no impact on valuation;
-- A 15-year lease renewal with a tenth-year tenant break option
to Tesco on a convenience retail unit inBirmingham with an annual
rent of GBP69k, with no impact on valuation; and
-- An interim tenancy regear until practical completion to A
Share & Sons (t/a SCS) on an industrial unit inLivingston at an
annual rent of GBP282k, with no impact on valuation.
During the Quarter the following rent reviews were settled
with:
-- Morrison Utility Services at an industrial unit in Stevenage
with annual rent increasing by 19% to GBP271k,increasing valuation
by GBP0.3m; and
-- Karali (t/a Burger King) on a drive-through unit in York with
annual rent increasing 11% to GBP83k, with noimpact on
valuation.
The positive impact of letting vacant space has increased EPRA
occupancy to 89.9% (30 September 2022: 89.3%). Of the Company's
remaining vacant space 48% is subject to refurbishment or
redevelopment, 8% was let post Quarter end and 8% is under offer
for sale or lease.
Since the Quarter end the following initiatives have
completed:
-- A new 25 year lease with a 15 year tenant break option to Ten
Pin Bowling on a vacant retail warehouseunit in Milton Keynes, at
an annual rent of GBP320k, increasing valuation by GBP1.2m;
-- A new 10 year lease straight term to CB Printforce on an
industrial unit in Biggleswade with an annualrent of GBP400k,
increasing valuation by GBP0.5m;
-- A new five year lease straight term to Intelligent Facility
Solutions on an industrial unit in Sheffieldwith an annual rent of
GBP35k, increasing valuation by GBP0.1m; and
-- Exchanged on an Agreement for Lease, subject to Landlord
works, for a new year 15 year lease with a 10year tenant break to
Campana (t/a Taco Bell) on a vacant leisure unit in Phoenix Leisure
Park, Crewe at an annualrent of GBP65k.
Fully covered dividend
The Company paid an interim dividend of 1.375p per share on 30
November 2022 relating to the quarter ended 30 September 2022. The
Board has approved another interim dividend per share of 1.375p for
the Quarter, fully covered by EPRA earnings, payable on 28 February
2023. The Board is targeting aggregate dividends per share[11] of
at least 5.5p for the year ending 31 March 2023. 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.
Additional details on disposals
During the Quarter the Company made the following disposals:
-- A shopping centre in Gosforth for GBP9.3m, which had been
part of the purchase of DRUM Income Plus REIT plcin November 2021,
for a 3.5% premium to the GBP8.975 million apportioned value of the
asset at purchase. Sinceacquisition, the asset has produced rental
income of c. GBP0.9m with the completion of several asset
managementactivities increasing occupancy and extending contractual
lease terms;
-- An out-of-town office property in Leicester for GBP2.8m, in
line with the most recent valuation. The assetwas acquired as part
of the Company's IPO portfolio in 2014 and had been fully let
since, delivering an averageyield of 9% per annum, but had seen no
rental or valuation growth over our period of ownership and that
trend wasexpected to continue; and
-- An industrial unit in Kilmarnock at auction for GBP1.4m, 12%
ahead of valuation. The unit's environmentalcredentials did not fit
with the Company's ESG objectives and it was not considered
practical to mitigate theserisks.
Since the Quarter end the Company has sold a high street retail
unit in Bury St Edmunds at auction for GBP0.54m, GBP0.14m (35%)
ahead of valuation. The lease term had been recently increased by
five years but with annual rent decreasing from GBP53k to GBP40k,
and rents were not anticipated to recover in the short-medium
term.
Borrowings
Custodian Property Income REIT operates the following agreed
borrowing facilities, with GBP175m currently drawn of which 80% is
at a fixed rate of interest. These facilities have no expiries
until September 2024 and a weighted average term of 6.1 years:
Variable rate borrowing
-- A GBP40m RCF with Lloyds Bank plc expiring on 17 September
2024 with interest of between 1.5% and 1.8%above SONIA determined
by reference to the prevailing LTV ratio of a discrete security
pool. At 31 December 2022GBP35m was drawn under the RCF. The RCF
limit can be increased to GBP50m with Lloyds' consent;
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%.
The Company's weighted average cost of its drawn debt facilities
is 3.7%.
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 pool is between 45%
and 50%, with an overarching covenant on theproperty portfolio of a
maximum 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 31 December 2022 the property portfolio comprised 162 assets
with a net initial yield[12] ("NIY") of 6.5% (30 September 2022:
5.9%). 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
31 Dec movement
NIY 2022
Weighting by value 31 GBPm Quarter valuation Weighting by value 30
31 Dec GBPm Dec 2022 movement Sept 2022
2022
Sector
Industrial 5.5% 291.6 48% (36.0) (11%) 48%
Retail 7.1% 135.0 22% (11.5) (8%) 22%
warehouse
Other[13] 6.9% 74.3 12% (4.6) (6%) 11%
Office 7.2% 73.9 12% (7.1) (9%) 12%
High street 9.7% 38.0 6% (2.3) (6%) 7%
retail
Total 6.5% 612.8 100% (61.5) 9% 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 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 properties
with individual values of less than GBP15m at acquisition.
The Company offers investors the opportunity to access a
diversified portfolio of UK commercial real estate through a
closed-ended fund. By principally targeting sub GBP15m, regional
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 investment
property divided by weighted average number of shares in issue.
[2] Estimated rental value ("ERV") of let property divided by
total portfolio ERV.
[3] Adjusting for property acquisitions, disposals and capital
expenditure.
[4] NAV per share movement including dividends paid during the
Quarter.
[5] Gross borrowings less cash (excluding rent deposits) divided
by portfolio valuation.
[6] An interim dividend of 1.375p per share relating to the
quarter ended 30 September 2022 was paid on 30 November 2022.
[7] Source: React News 18 January 2023.
[8] Source: Goodbody equity research.
[9] Share price movement including dividends paid during the
year.
[10] Source: Jeffries research.
[11] 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.
[12] Passing rent divided by property valuation plus purchaser's
costs.
[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.: 221474
EQS News ID: 1554123
End of Announcement EQS News Service
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