24 April 2018

Custodian REIT plc

 

("Custodian REIT" or "the Company")

 

Unaudited Net Asset Value as at 31 March 2018

 

Custodian REIT (LSE: CREI), the UK commercial real estate investment company, today reports its unaudited net asset value ("NAV") as at 31 March 2018 and highlights for the period from 1 January 2018 to 31 March 2018 ("the Period").

 

Financial highlights

 

• NAV total return per share1 for the year ended 31 March 2018 ("FY18") of 9.6% (year ended 31 March 2017 ("FY17"): 8.5%)
• NAV per share of 107.3p (31 December 2017: 106.0p)
• NAV of £415.2m (31 December 2017: £401.0m)
• FY18 EPRA earnings per share2 6.9p (FY17: 6.6p)
• Target dividend per share3 for the year ending 31 March 2019 ("FY19") increased to 6.55p (FY18: 6.45p, FY17: 6.35p)
• Net gearing4 of 21.0% loan-to-value (31 December 2017: 22.3%)
• £9.8m5 of new equity raised during the Period (FY18: £54.7m) at an average premium of 10.0% to dividend adjusted NAV per share (FY18: 11.1%)

 

Portfolio highlights

 

• Portfolio value of £528.9m (31 December 2017: £518.7m)
• £4.5m valuation increase from successful asset management initiatives
• £4.9m6 invested in two property acquisitions, £1.6m capital expenditure
• EPRA occupancy7 96.5% (31 December 2017: 97.2%)
• £9.3m committed pipeline of property acquisitions

 

1 NAV per share movement including dividends paid and approved relating to the Period.

2 Profit after tax excluding net gains on investment properties and one-off costs divided by weighted average number of shares in issue.

3 Dividends paid and approved relating to the year.

4 Gross borrowings less unrestricted cash divided by portfolio valuation.

5 Before costs and expenses of £0.2m.

6 Before acquisition costs of £0.3m.

7 Estimated rental value ("ERV") of let property divided by total portfolio ERV.

 

Net asset value

 

The unaudited NAV of the Company at 31 March 2018 was £415.2m, reflecting approximately 107.3p per share, an increase of 1.2% per share since 31 December 2017:

 

	Pence per share	£m
NAV at 31 December 2017	106.0	401.0
Issue of equity (net of costs)	0.2	9.6
	106.2	410.6
Valuation movements relating to:
- Asset management activity	1.2	4.5
- Other valuation movements	(0.2)	(0.6)
	1.0	3.9
Acquisition costs	(0.1)	(0.3)
Net valuation movement	0.9	3.6
Income earned for the Period	2.3	8.9
Expenses and net finance costs for the Period	(0.6)	(2.3)
One-off impact of settling tenant dispute	0.1	0.5
Dividends paid8	(1.6)	(6.1)
NAV at 31 March 2018	107.3	415.2

 

8 Dividends of 1.6125p per share were paid on shares in issue throughout the Period. 

 

During the Period the initial costs (primarily stamp duty) of investing £4.9m (before acquisition costs) in new property acquisitions diluted NAV per share total return by 0.1p, offset by raising new equity of £9.6m (net of costs) at an average 10.0% premium to dividend adjusted NAV, which added 0.2p per share. 

 

The NAV attributable to the ordinary shares of the Company is calculated under International Financial Reporting Standards and incorporates the independent portfolio valuation as at 31 March 2018 and income for the Period, but does not include any provision for the approved dividend for the Period, to be paid on 31 May 2018.  

 

During the Period the Company acquired the following assets:

 

• Land in Maypole, Birmingham for a pre-let development to be occupied by Starbucks for £1.0m, with a NIY9 of 6.43%; and
• An industrial unit on Team Valley Trading Estate, Gateshead occupied by Worthington Armstrong for £3.9m, reflecting a NIY of 6.73%.

 

9 Passing rent divided by property valuation plus assumed purchasers' costs.

 

Asset management

 

In February 2018 the Company settled a disputed 2015 tenant break at National Court in Leeds.  The Company recovered all rent and insurance due to the date of settlement, plus all costs associated with the dispute and dilapidations, resulting in a one-off £0.5m release of rent and cost provisions.

 

Our continued focus on active asset management which includes rent reviews, lease extensions and retaining tenants beyond their lease break clauses resulted in a £4.5m valuation increase.  

 

A key asset management initiative completed during the Period was agreement of a new 10 year lease with Regus in West Malling, increasing annual rent by 14.5% from £558k pa (£19.20 per sq ft) to £639k pa (£22.00 per sq ft), resulting in a £2.4m valuation increase.

 

Other asset management initiatives completed during the Period include:

 

• Agreeing a five year reversionary lease with YESSS Electrical at Foxbridge Way, Normanton, increasing valuation by £0.6m;
• Settling a rent review with the tenant at Leacroft Road, Warrington and assigning the lease to a larger group entity with a stronger covenant, increasing valuation by £0.5m;
• Agreeing a new 10 year reversionary lease with Powder Systems at Estuary Commerce Park, Speke with expiry moving from July 2020 to July 2030 and annual rent increasing by 7.5% from £0.14m to £0.15m, increasing valuation by £0.4m;
• Assigning the lease at Ravensbank Drive, Redditch to a larger group entity with a stronger covenant, increasing valuation by £0.3m;
• Completing a new five year reversionary lease at Sainsburys, Torpoint with expiry moving from December 2022 to December 2027, increasing valuation by £0.2m; and
• Agreeing a five year reversionary lease at West George Street, Glasgow with Safe Deposits Scotland, increasing valuation by £0.1m.

 

Rental increases of 20% have been secured on another two properties since the Period end, illustrating that rental growth is taking hold.  Further asset management initiatives in solicitor's hands are expected to complete over the coming months including new lettings, lease renewals, rent reviews and re-gears. 

 

The portfolio's WAULT has been maintained at 5.9 years during the Period due to asset management activity offsetting the natural one quarter's decline due to the effluxion of time.  We believe long leases remain over-valued by the market and will not over-pay for long leases simply to support the WAULT.  Due to the current strength of the occupational market, we believe that risk and maintenance of robust income generation is better managed by pursuing a strategy of buying high quality properties that are likely to re-let, rather than highly priced properties with long leases simply to mitigate the WAULT metric that is of less relevance to a well-diversified portfolio.

 

Property market

 

Commenting on the commercial property market, Richard Shepherd-Cross, Managing Director of Custodian Capital Limited (the Company's discretionary investment manager) said:

 

"The first quarter of 2018 has been characterised by a very tight supply of investment opportunities and a significant level of demand from a range of investors.  This has led to strong competition, particularly for industrial/logistics assets and properties let on long leases, particularly those with rents indexed to inflation.  We believe the market is over-pricing some assets and have taken a cautious approach to acquisitions through the Period.  However, as this price inflation is being caused by a supply side constraint, rather than fundamental weakness in the property investment proposition, we are hopeful that an increase in the supply of investment opportunities will see the market settle back to a more sustainable level of pricing.

 

"The occupational market, as witnessed by the rental growth we are experiencing at lease renewal and rent reviews, remains robust, albeit there is weakness in secondary high streets.  It is this robustness that will continue to drive performance in the portfolio and maintain occupancy levels, which in turn will sustain cash flow and support our policy of paying fully-covered dividends."

 

Financing

 

Equity

 

The Company issued 8.5m new ordinary shares of 1p each in the capital of the Company during the Period ("the New Shares") raising £9.8m (before costs and expenses).  The New Shares were issued at an average premium of 10.0% to the unaudited NAV per share at 31 December 2017, adjusted to exclude the dividend paid on 28 February 2018.

 

 

Debt

 

At the Period end the Company operated:

 

• A £35m revolving credit facility ("RCF") with Lloyds Bank plc, which attracts interest of 2.45% above three month LIBOR and expires on 13 November 2020;
• A £20m term loan with Scottish Widows plc, which attracts fixed annual interest of 3.935% and is repayable on 13 August 2025;
• A £45m term loan facility with Scottish Widows plc which attracts fixed annual interest of 2.987% and is repayable on 5 June 2028; and

• A £50m term loan facility with Aviva Investors Real Estate Finance comprising:

(i)      A £35m tranche repayable on 6 April 2032, attracting fixed annual interest of 3.02%; and

(ii)    A £15m tranche repayable on 3 November 2032, attracting fixed annual interest of 3.26%.

 

Portfolio analysis

 

At 31 March 2018 the Company's property portfolio comprised 147 assets with a NIY of 6.6% and current passing rent of £37.1m per annum.

 

The portfolio is split between the main commercial property sectors, in line with the Company's objective to maintain a suitably balanced investment portfolio, with a relatively low exposure to office and a relatively high exposure to the industrial and alternative sectors, often referred to as 'other' in property market analysis, compared to its peers.  Sector weightings are shown below:

 

Sector	Valuation  31 Mar 2018  £m	Period valuation movement £m	Weighting by income10 31 Mar 2018	Weighting by income10 31 Dec 2017
Industrial	209.8	2.0	39%	39%
Retail warehousing	107.5	(0.2)	20%	20%
Other11	80.4	0.2	15%	15%
High street retail	75.3	(0.7)	14%	15%
Office	55.9	2.6	12%	11%
Total	528.9	3.9	100%	100%

 

10 Current passing rent plus ERV of vacant properties.

11 Includes car showrooms, petrol filling stations, children's day nurseries, restaurants, gymnasiums, hotels and healthcare units.

 

Industrial property remains a very good fit with the Company's strategy although the current price inflation seen in the market is limiting our opportunity to acquire properties that meet our investment mandate.

 

There is continued weakness in secondary high street retail locations, with rental levels still under pressure and a very real threat of vacancy.  However, the high street is a polarised sector where many locations continue to be in demand by retailers.  We will continue to rebalance the portfolio to focus on strong retail locations while working on an orderly disposal of those assets we believe are ex-growth.  The current well-publicised crop of company voluntary arrangements ("CVAs") has the potential to increase vacancy levels in our retail warehousing portfolio, but set against a backdrop of very low vacancy rates in this sector we do not feel unduly exposed to long term void risk.

 

While deemed to be outside the core sectors of office, retail and industrial the 'other' sector offers diversification of income without adding to portfolio risk, containing assets considered mainstream but which typically have not been owned by institutional investors.  The 'other' sector continues to be a target for acquisitions.

 

Office rents in regional markets are growing and supply remains constrained by a lack of development and the extensive conversion of secondary offices to residential making returns very attractive.  However, we are conscious that obsolescence and lease incentives can be a real cost of office ownership, which can hit cash flow and be at odds with the Company's relatively high target dividend, so while we are experiencing rental growth in our office portfolio, we remain a cautious investor.

 

The Company operates a geographically diversified portfolio across the UK, seeking to ensure that no one area represents the majority of the portfolio.  The geographic analysis of the Company's portfolio at 31 March 2018 was as follows:

 

Location			Valuation  31 Mar 2018  £m	Period valuation movement £m	Weighting by income12 31 Mar 2018	Weighting by income12 31 Dec 2017
West Midlands			108.5	0.2	20%	20%
North-West			91.7	1.1	18%	17%
South-East			88.9	2.1	15%	15%
South-West			61.2	(0.1)	12%	12%
East Midlands			56.6	(0.4)	12%	12%
North-East			44.9	0.6	8%	8%
Scotland			41.9	0.1	8%	8%
Eastern			28.7	0.3	6%	6%
Wales			6.5	0.0	1%	2%
Total			528.9	3.9	100%	100%

 

12 Current passing rent plus ERV of vacant properties.

 

For details of all properties in the portfolio please see www.custodianreit.com/property-portfolio.

 

Dividends

 

An interim dividend of 1.6125p per share for the quarter ended 31 December 2017 was paid on 28 February 2018.  The Board has approved an interim dividend relating to the Period of 1.6125p per share payable on 31 May 2018 to shareholders on the register on 27 April 2018.

 

In the absence of unforeseen circumstances, the Board intends to pay quarterly dividends to achieve a target dividend13 per share for FY19 of 6.55p (FY18: 6.45p, FY17: 6.35p).  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. 

 

13 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 is reasonable or achievable. 

 

- Ends -

 

Further information:

 

Further information regarding the Company can be found at the Company's website www.custodianreit.com or please contact:

 

Custodian Capital Limited
Richard Shepherd-Cross / Nathan Imlach / 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
Camarco
Ed Gascoigne-Pees	Tel: +44 (0)20 3757 4984
	www.camarco.co.uk

 

 

Notes to Editors

 

Custodian 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 £10m 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 £10m lot size, regional properties, the Company intends to provide investors with an attractive level of income and the potential for capital growth, becoming the REIT of choice for private and institutional investors seeking high and stable dividends from well-diversified UK real estate. 

 

Custodian Capital Limited is the discretionary investment manager of the Company.

 

For more information visit www.custodianreit.com and www.custodiancapital.com.