DJ Custodian Property Income REIT plc: Leasing momentum continues to drive income returns and support fully covered dividends
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.
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