23 January 2018

Custodian REIT plc

 

("Custodian REIT" or "the Company")

 

Unaudited Net Asset Value as at 31 December 2017

 

Custodian REIT (LSE: CREI), the UK commercial real estate investment company, today reports its unaudited net asset value ("NAV") as at 31 December 2017 and highlights for the period from 1 October 2017 to 31 December 2017 ("the Period").

 

Financial highlights

 

• NAV total return per share1 for the Period of 2.6%
• Dividend per share approved for the Period of 1.6125p
• NAV per share of 106.0p (30 September 2017: 104.9p)
• NAV of £401.0m (30 September 2017: £378.6m)
• Net gearing2 of 22.3% loan-to-value (30 September 2017: 19.7%)
• £20.1m3 of new equity raised during the Period at an average premium of 11.8% to dividend adjusted NAV per share at 30 September 2017
• Market capitalisation of £443.6m (30 September 2017: £414.1m)

 

Portfolio highlights

 

• Portfolio value of £518.7m (30 September 2017: £474.3m)
• £43.0m4 invested in six property acquisitions, £0.8m capital expenditure on office refurbishment
• £4.2m property valuation increase, including £2.6m from successful asset management initiatives
• £0.7m profit on disposal of investment properties
• EPRA occupancy5 97.2% (30 September 2017: 96.7%)

 

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

2 Gross borrowings less unrestricted cash divided by portfolio valuation.

3 Before costs and expenses of £0.3m.

4 Before acquisition costs of £2.5m.

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

 

Net asset value

 

The unaudited NAV of the Company at 31 December 2017 was £401.0m, reflecting approximately 106.0p per share, an increase of 1.0% per share since 30 September 2017:

 

	Pence per share	£m
NAV at 30 September 2017	104.9	378.6
Issue of equity (net of costs)	0.4	19.8
	105.3	398.4
Valuation movements relating to:
- Profit on disposal of investment properties	0.2	0.7
- Asset management activity	0.7	2.6
- Other valuation movements	0.4	1.6
	1.3	4.9
Acquisition costs	(0.6)	(2.5)
Net valuation movement	0.7	2.4
Income earned for the Period	2.3	8.7
Expenses and net finance costs for the Period	(0.7)	(2.6)
Dividends paid6	(1.6)	(5.9)
NAV at 31 December 2017	106.0	401.0

 

6 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 £43.0m (before acquisition costs) in new property acquisitions diluted NAV per share total return by 0.6p, partially offset by raising new equity of £19.8m (net of costs) at an average 11.8% premium to dividend adjusted NAV, which added 0.4p 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 December 2017 and income for the Period, but does not include any provision for the approved dividend for the Period, to be paid on 28 February 2018.  

 

During the Period the Company acquired the following properties with a weighted average unexpired lease term ("WAULT") to first break of 9.2 years and an average net initial yield7 ("NIY") of 6.74%:

 

• A high street retail unit in Cardiff occupied by Specsavers and Card Factory for £5.16m, with a NIY of 7.46%;
• A retail warehouse park in Burton upon Trent occupied by Wickes, The Range and HSS for £8.45m, with a NIY of 6.45%;
• A high street retail unit in Worcester occupied by Superdrug for £5.54m, with a NIY of 6.50%;
• A car dealership in Derby occupied by Volkswagen for £5.12m, with a NIY of 6.28%;
• A retail warehouse park in Carlisle, comprising six retail warehouse units and the reversionary interest in a supermarket, occupied by Asda, Halfords, Oak Furniture Land, Iceland, B&M and Poundland for £12.1m, with a NIY of 6.89%; and
• A retail warehouse in Leicester occupied by Matalan for £6.66m, with a NIY of 7.36%.

 

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

 

Asset management

 

A key element of effective portfolio management is identifying opportunities to dispose of assets significantly ahead of valuation such that holding the asset is no longer appropriate.  An industrial property in Chepstow was sold for gross proceeds of £4.6m during the Period, realising a profit on disposal of £0.7m, following pro-active asset management which crystallised 15% rental growth since acquisition.  The current significant demand for industrial property due to a lack of available investment stock meant we felt this was the optimum time to sell the asset, allowing us to crystallise a significant valuation gain.

 

Our continued focus on active asset management resulted in a £2.6m valuation increase. The key asset management initiative completed during the Period was finalising a rent review in Southwark, increasing annual rent by 87% from £200k pa (£9 per sq ft) to £374k pa (£16.25 per sq ft), exceeding ERV of £267k pa (£12 per sq ft) and resulting in a £2.5m valuation increase.

 

Rental increases have been secured on another two properties since the Period end, both resulting in a 20% increase, demonstrating that rental growth is now taking hold.  Further asset management initiatives are expected to complete in the coming months. 

 

The portfolio's WAULT increased to 5.9 years from 5.8 years at 30 September 2017, primarily due to the acquisitions completed during the Period having a WAULT of 9.2 years, but also through the active management of the portfolio.  We believe long leases remain over-valued by the market and are unwilling to over-pay for long leases simply to support the WAULT, although we continue to take advantage of situations where we can find fair value and still benefit from long leases.  We believe that with the current strength of the occupational market and a portfolio comprising high quality properties, 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 a 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:

 

"We had a busy final quarter of 2017, completing £43.0m of new acquisitions and as we start 2018, we find the market seasonally and typically quiet.  We expect to see the market 'wake up' in February and with robust occupational demand, demonstrable rental growth and low vacancy rates across the portfolio, we expect to continue deploying available funds on assets that will further enhance the portfolio."

 

Activity and pipeline

 

Commenting on pipeline, Richard Shepherd-Cross said:

 

"Since IPO we have averaged deployment of £10m per month and we are considering an active pipeline of new acquisition opportunities that fit our investment strategy and will further diversify the portfolio."

 

Financing

 

Equity

 

The Company issued 17.5m new ordinary shares of 1p each in the capital of the Company during the Period ("the New Shares") raising £20.1m (before costs and expenses).  The New Shares were issued at an average premium of 11.8% to the unaudited NAV per share at 30 September 2017, adjusted to exclude the dividend paid on 30 November 2017.

 

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 comprising:

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

(ii)    A £15m tranche repayable on 2 November 2032, attracting fixed annual interest of 3.26%.

 

At the Period end the Company had circa £34m of funds available to deploy.

 

 

Portfolio analysis

 

At 31 December 2017 the Company's property portfolio comprised 146 assets with a NIY of 6.7% and current passing rent of £37.0m pa.

 

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 Dec 2017 £m	Period valuation movement £m	Weighting by income8 31 Dec 2017	Weighting by income8 30 Sep 2017
Industrial			203.5	4.8	39%	42%
Retail warehousing			107.4	(0.2)	20%	16%
Other9			78.9	0.4	15%	15%
High street retail			76.6	(0.1)	15%	14%
Office			52.3	(0.7)	11%	13%
Total			518.7	4.2	100%	100%

 

8 Current passing rent plus ERV of vacant properties.

9 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 investment demand is creating price inflation and limiting our opportunity to acquire properties that meet our investment mandate.

 

Retail represents 35% of portfolio income, comprising 15% high street and 20% out-of-town retail (retail warehousing).  Retail warehousing is witnessing close to record low vacancy rates as a restricted planning policy and lack of development combine with retailers' requirements to offer large format stores, free parking and 'click and collect' to consumers.  These factors made retail warehousing a target sector for acquisitions throughout the Period.

 

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 has proved to be an out-performer over the long-term and continues to be a target for acquisitions.

 

Office rents in regional markets are growing strongly and supply is 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.

 

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 December 2017 was as follows:

 

Location			Valuation  31 Dec 2017 £m	Period valuation movement £m	Weighting by income10 31 Dec 2017	Weighting by income10 30 Sep 2017
West Midlands			106.3	0.5	20%	19%
North-West			90.5	0.5	17%	16%
South-East			86.5	3.2	15%	18%
South-West			60.8	0.1	12%	13%
East Midlands			57.6	(0.7)	12%	10%
Scotland			41.7	0.2	8%	9%
North-East			40.4	0.2	8%	8%
Eastern			28.4	0.1	6%	6%
Wales			6.5	0.1	2%	1%
Total			518.7	4.2	100%	100%

 

10 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 30 September 2017 was paid on 30 November 2017.  The Board has approved an interim dividend relating to the Period of 1.6125p per share payable on 28 February 2018 to shareholders on the register on 26 January 2018.

 

In the absence of unforeseen circumstances, the Board intends to pay a further quarterly dividend to achieve a target dividend11 per share for FY18 of 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. 

 

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. 

 

- 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 targeting sub £10m lot size, regional properties, the Company intends 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 www.custodianreit.com and www.custodiancapital.com.