Custodian Property Income REIT — Enhanced income-driven strategy

Custodian Property Income REIT (LSE: CREI)

Last close As at 21/05/2024

GBP0.75

−0.40 (−0.53%)

Market capitalisation

GBP336m

More on this equity

Research: Financials

Custodian Property Income REIT — Enhanced income-driven strategy

Custodian Property Income REIT (CREI) continues to generate stable underlying earnings, fully covering DPS and providing an attractive 6.5% yield. Total return is benefiting from a stabilisation of property yields. Average rental values have continued to increase and, combined with asset management opportunities and a strong balance sheet, this provides strong ongoing support for the company’s enhanced income strategy.

Martyn King

Written by

Martyn King

Director, Financials

Custodian-REIT_resized

Financials

Custodian Property Income REIT

Enhanced income-driven strategy

Company outlook

Real estate

27 September 2023

Price

84p

Market cap

£370m

Estimated net debt (£m) at 30 June 2023

150.5

Net LTV as at 30 June 2023

21.5%

Shares in issue

440.9m

Free float

91.2%

Code

CREI

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

2.4

0.6

(9.1)

Rel (local)

(1.0)

(1.6)

(15.6)

52-week high/low

99.6p

76.1p

Business description

Custodian Property Income REIT is a London Main Market-listed REIT focused on smaller lot-size commercial properties across the UK regions outside London. It is income focused, with a commitment to pay a high but sustainable and covered dividend, with the potential for capital growth.

Next events

Q224 NAV update

Expected November 2023

Analyst

Martyn King

+44 (0)20 3077 5700

Custodian Property Income REIT is a research client of Edison Investment Research Limited

Custodian Property Income REIT (CREI) continues to generate stable underlying earnings, fully covering DPS and providing an attractive 6.5% yield. Total return is benefiting from a stabilisation of property yields. Average rental values have continued to increase and, combined with asset management opportunities and a strong balance sheet, this provides strong ongoing support for the company’s enhanced income strategy.

Year end

Net rental income (£m)

EPRA earnings* (£m)

EPRA
EPS* (p)

NAV/**
share (p)

DPS
(p)

P/NAV**
(x)

Yield
(%)

03/22

35.6

25.3

5.9

119.7

5.25

0.70

6.3

03/23

37.1

24.8

5.6

99.3

5.50

0.85

6.5

03/24e

38.2

24.5

5.6

98.6

5.50

0.85

6.5

03/25e

38.8

24.8

5.6

98.7

5.50

0.85

6.5

Note: *Excludes revaluation gains/losses and other exceptional items. **Defined as EPRA net tangible assets (EPRA NTA) per share.

Consistent income-driven returns

CREI targets attractive and stable dividend returns from an actively managed, diversified portfolio of UK commercial real estate, differentiated by a focus on properties with smaller individual values (‘lot sizes’), typically from £2m to £15m. These provide a yield premium over larger assets, partly the result of a broader range of potential occupiers and less competition from larger institutional investors. Average NAV total return since the company listed in 2014 is 4.8% pa, all generated by unbroken, fully covered dividend payments. In an inflationary environment and with a lack of supply of modern, smaller regional properties, CREI expects continued rental growth over the year ahead, while there is significant upside potential from letting vacant space. Much of this space is under refurbishment, enhancing its quality, environmental credentials and attraction to tenants, with CREI expecting the investment to be accretive.

Little change to forecasts, with DPS fully covered

Leasing progress, rental growth and net acquisitions are substantially offsetting higher expenses and interest costs. FY23 EPRA earnings of £24.8m were 1.8% lower y-o-y and, including the impact of shares issued to acquire Drum Income Plus REIT (Drum) in FY22, EPRA EPS of 5.6p was 4.6% lower. Up 4.8% to 5.5p, DPS was 102% covered and the company targets at least 5.5p for the current (FY24) year. Q124 EPRA EPS was 1.5p. Asset management has mitigated the impact of market-wide property valuation pressure (the 11.8% decline in the CREI portfolio in FY23 compared well with the wider market decline of 17%) and, with yields stabilising, NAV total return has been positive for the past two quarters. Our forecasts are little changed.

Valuation: Fully covered 6.5% yield

The FY24 DPS target of at least 5.5p represents an attractive yield of 6.5%, slightly below peers (average 6.8%), with potential for capital growth. The 15% discount to end-Q124 NAV per share is well below the average c 2% premium since listing, albeit narrower than the 28% peer group average.

Investment summary

In addition to recent financial performance, this report covers CREI’s long-term performance and strategy. In summary, the investment case for the company is as follows:

CREI is focused on income-driven returns, a more consistent component of total property returns compared with more volatile capital values.

It provides diversified exposure to UK commercial real estate, enabling it to spread risks, adapt its portfolio to changing market and economic conditions and seek investment opportunities across a wide pool of assets.

A focus on properties with smaller individual values differentiates it from most of its peers. Properties of this size typically provide a yield premium over larger assets, in part the result of a broader range of potential occupiers, while attracting less competition from larger institutional investors.

The company has successfully managed the complexities of a smaller lot-size portfolio through asset and tenant selection, and active asset management. Combined with well-controlled costs, this has generated a well-established track record of income-driven returns.

Rents are continuing to increase (estimated rental value, or ERV, increased 1.2% on a like-for-like basis in Q124), with significant reversionary potential embedded in the portfolio (ERV is 16% above gross contracted rents).

Gearing is low and 79% of drawn debt is long term and fixed rate, providing earnings protection against increasing interest rates.

Commercial real estate has traditionally provided a medium-term hedge against inflation as, at least in part, this is reflected in rental growth and valuations over time. Increasing building costs tend to restrict new construction.

Returns driven by strong track record of portfolio outperformance

CREI’s income-focused strategy has generated positive annual total returns in each year since listing in March 2014, with the exception of FY23, when the adjustment to increased bond yields led to sharp falls in property values across the UK commercial property sector. The aggregate return from listing to end-Q124 is 54.4%, effectively all accounted for by fully covered dividends paid. The average annual return is 4.8%.

With property valuation yields showing significantly greater stability compared with H223, NAV return has been positive in the past two quarters (Q423 and Q124) although still driven by income. For Q124, fully covered dividends paid contributed 1.4% (or an annualised 5.6%) to a total return of 0.7%, with NAV per share declining slightly to 98.6p from 99.3p at end-FY23. Although DPS is yet to return to pre-pandemic levels (Exhibit 3), the dividend yield on NAV is broadly similar as a result of the decline in property values and NAV in FY23. As we show in the valuation section below, with the shares trading at a discount to NAV, the dividend yield on the share price is significantly higher.

Exhibit 1: NAV/Accounting total return history

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19

Mar-20

Mar-21

Mar-22

Mar-23

Jun-23

FY14-Q124

Pence per share (p) unless stated otherwise

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

Q124

Opening NAV per share

98.2

101.3

101.5

103.8

107.3

107.1

101.6

97.6

119.7

99.3

98.2

Closing NAV per share

101.3

101.5

103.8

107.3

107.1

101.6

97.6

119.7

99.3

98.6

98.6

Dividends paid per share

3.750

6.350

6.350

6.425

6.525

6.625

4.913

5.625

5.500

1.375

53.4

Dividend return

3.8%

6.3%

6.3%

6.2%

6.1%

6.2%

4.8%

5.8%

4.6%

1.4%

54.4%

Capital return

3.2%

0.2%

2.2%

3.4%

-0.2%

-5.2%

-4.0%

22.7%

-17.1%

-0.7%

0.4%

NAV total return

7.0%

6.4%

8.5%

9.6%

5.9%

1.0%

0.9%

28.4%

-12.5%

0.7%

54.8%

Average annual return

4.8%

Source: Custodian Property Income REIT data, Edison Investment Research

The greater stability of CREI’s income return as a percentage of NAV compared with more volatile capital returns is consistent with across-the-cycle sector returns, but the contribution from income to CREI’s returns is above the sector average, which we estimate to be c 70%.

Exhibit 2: Dividend returns versus capital returns

Exhibit 3: Fully covered DPS

Source: Custodian Property Income REIT data, Edison Investment Research

Source: Custodian Property Income REIT data, Edison Investment Research

Exhibit 2: Dividend returns versus capital returns

Source: Custodian Property Income REIT data, Edison Investment Research

Exhibit 3: Fully covered DPS

Source: Custodian Property Income REIT data, Edison Investment Research

While capital returns are volatile, we note that in FY23 the like-for-like valuation decline on the CREI portfolio of 11.8% compared favourably with the c 17% market-wide decline. An element of this outperformance is likely to be the above-average yield on CREI’s smaller lot-size assets in a market where otherwise ‘popular’ lower-yielding assets showed a sharper correction, regardless of underlying fundamentals. Calendar year to date, there has been a greater stability in values, with the market having substantially adjusted to higher interest rates while rental growth has continued. During Q124, CREI’s property valuation remained broadly flat, reflecting a marginal like-for-like decrease of 0.5% or £3.3m, net of a £2.0m valuation increase from active asset management activity.

Smaller lot-size yield premium supports portfolio income

Since IPO, CREI has sought to provide enhanced income returns from UK real estate by following a smaller lot-sized, regional property strategy. Its portfolio is built on a balance of core and core-plus strategies, or core/core plus. The core strategy is expected to deliver stable, long-term income from well-let, good-quality, predominantly smaller regional properties, in attractive locations. The core-plus strategy provides the opportunity to enhance income through asset management initiatives such as lease renewals, regears and new lets and refurbishment. Taken together, CREI aims to generate better risk-adjusted returns than would be possible from a core strategy alone, without a material increase in the volatility of underlying asset values.

Investment strategy does not target value-add acquisitions, often requiring significant improvement and void reduction measures, although the company will invest to reposition existing assets when there is the potential for attractive risk-adjusted returns. Investment policy allows for the redevelopment of properties already owned to a limit of 10% of gross assets. To be clear, CREI will not acquire land assets or properties with the intention of development or redevelopment. The purpose is to provide additional flexibility to enhance asset quality, including environmental performance, to better meet the demands of tenants and drive income growth.

The higher yield on smaller properties is often considered to reflect higher risk and, typically, a higher cost of management relative to income. However, smaller size does not in itself determine the quality of the property, its appeal to tenants or the quality of tenant. While there may be less competition for smaller assets from investors, there is an active owner-occupier market which supports vacant possession values and mitigates valuation risk. Asset selection and a long-term approach to investment are key to managing risk and hence CREI’s strategy for producing an attractive risk-adjusted income return, more than sufficient to offset the additional administrative complexity. Other key elements of CREI’s investment strategy for achieving above-average, risk-adjusted returns include:

diversification by asset, tenant and geographical location, which may be made easier by having a larger number of smaller properties;

a focus on areas with high residual values; and

regional locations with strong local economies and favourable demand-supply characteristics.

Small lot-size yield premium

Exhibit 4 compares the transaction net initial yields for properties below £10m versus those above, on a two-year rolling average basis. On this basis, over a c 20-year period, the yield spread of sub-£10m transactions over those of more than £10m has averaged c 1.1%. At end 2023, the spread had widened to c 1.9% compared with c 1.4% immediately before the pandemic. Independent data provided to CREI indicate that the spread based on lot sizes of less than £15m is a little narrower than for lot sizes of less than £10m but is still clearly positive. We would not take the change in investment policy with regards to lot sizes as an indication that CREI plans a greater focus on larger, lower-yielding assets. Rather, the company will have increased flexibility to invest selectively in a wider range of opportunities.

Exhibit 4: Comparison of transaction yields on assets of less than £10m and those greater than £10m

Source: Custodian Property Income REIT. Note: *One-year rolling average basis.

Adapting to market changes

Although CREI’s smaller lot-size strategy has remained constant, the pool of suitable properties for investment has evolved over time, in step with market changes, and the stated investment policy has been adjusted to match. This primarily relates to the specified maximum lot size and the minimum weighted average unexpired lease term (WAULT).

At the 2023 AGM, shareholders approved the removal of the upper lot size limit of £15m on new investments. The £15m limit had been approved by shareholders in 2022, an increase from the £10m in place since 2016 and £7.5m prior to that. Irrespective of this change, the company says that smaller properties will remain the overwhelming focus of its strategy, allowing it to operate below the general level of institutional demand. Allowing for the market-wide reduction in property values in the latter half of 2023, CREI’s end-FY23 average portfolio lot size of £3.9m showed no material change on the £4.2m at end-FY22 (end-FY21: £3.5m). The average lot size on acquisitions in FY23 was £6.6m (FY22: £5.4m1), with the largest being the £15.0m purchase of a retail park in Nottingham and the smallest being the £3.0m investment in two drive-through restaurants in York.

  Includes each of the 10 properties acquired with Drum for an aggregate £43.5m at their individual values.

The 2020 AGM approved the amendment of the company’s portfolio WAULT objective, which had previously targeted a minimum of five years, due to market shifts, including increasing tenant demand for shorter and more flexible leases.2 The additional flexibility that this provided recognised that the quality of the properties in the portfolio and the ability to re-let these on suitable terms are the fundamental drivers of income security rather than a simple focus on WAULT. Acquisitions are targeted at properties with lease maturity profiles that enhance the overall portfolio WAULT which, including the impact of asset management activity and despite the passage of time, increased to 5.0 years at end-FY23 compared with 4.7 years at end-FY22. Leases representing approximately one-third of gross contracted rents, or c £14m, mature over the next three years.

  In some cases, driven by changes to the International Financial Reporting Standard 16 (IFRS 16) requiring all lease liabilities to be recognised on the balance sheet.

Exhibit 5: Income at risk*

Source: Custodian Property Income REIT. *The earlier of expiry or first break.

Diversification provides income resilience

Portfolio diversification provides a mitigation to risk in uncertain times such as these and CREI’s portfolio is well spread across the main commercial property sectors and by location, tenant and lease term.

Exhibit 6: Portfolio summary

31-Mar-23

31-Mar-22

31-Mar-21

31-Mar-20

FY23

FY22

FY21

FY20

Portfolio value

£613.6m

£665.2m

£551.9m

£559.8m

Number of assets

159

160

159

161

Average lot size

£3.9m

£4.2m

£3.5m

£3.5m

Separate tenancies

319

339

265

280

Gross contracted rent roll

£42.1m

£40.4m

£38.7m

£40.4m

Estimated rental value (ERV)

£49.0m

£45.6m

£42.6m

£42.6m

EPRA occupancy rate

90.3

89.9%

91.6%

95.9%

WAULT

5.0 years

4.7 years

5.0 years

5.3 years

Net initial yield

6.2%

5.7%

6.6%

6.8%

Weighted average EPC rating

C (58)

C (61)

C (63)

C (70)

Source: Custodian Property Income REIT

At 31 March 2023 (end-FY23), the externally appraised portfolio value of £613.6m3 reflected a net initial yield of 6.2%, up from 5.7% at end-FY22, with a rent roll of £42.1m pa. The number of properties has been relatively stable in recent years at c 160 and, allowing for multi-lets, the total number of tenancies is more than 300. The portfolio value at 30 June 2023 (end-Q124) was £614.3m, adjusted for capex, disposals and a 0.5% like-for-like valuation decrease.

  The portfolio value at 30 June 2023 was £614.3m.

At end-FY23, the top 10 tenants represented a little more than 22% of overall rent roll, with rents from the largest tenant, Menzies Distribution, spread over seven individual assets. Menzies is one of the UK's leading urban logistics businesses.

Exhibit 7: Top 10 occupiers

Asset locations

Passing rent

% of total

Menzies Distribution

Aberdeen, Edinburgh, Ipswich, Norwich, Dundee, Swansea, York

£1.5m

3.7%

B&M Retail

Swindon, Ashton-under-Lyne, Plymouth, Carlisle

£1.3m

3.0%

Wickes Building Supplies

Winnersh, Burton-on-Trent, Southport, Nottingham

£1.2m

2.8%

B&Q

Banbury, Weymouth

£1.0m

2.4%

Matalan

Leicester, Nottingham

£1.0m

2.3%

DFS

Droitwich, Measham

£0.9m

2.1%

First Title*

Leeds

£0.6m

1.5%

Homebase

Leighton Buzzard, Cromer

£0.6m

1.5%

Regus

West Malling

£0.6m

1.5%

Gist

Glasgow

£0.6m

1.5%

Top 10 tenants

£9.3m

22.3%

Source: Custodian Property Income REIT. Note: *Trading as Enact Conveyancing.

Exhibits 8 and 9 show the sector and geographic spread of the portfolio. Geographically, it has minimal exposure to London, but exposure to every other region. It is split between the main property sectors, in line with the company’s objective of maintaining a suitably balanced portfolio, with relatively high exposures to the industrial, retail warehouse and alternative sectors (‘other’, including pubs and restaurants, gymnasiums, drive-through restaurants, car showrooms, leisure, units and trade counters), with relatively low exposure to offices and high street retail.

Exhibit 8: Sector split by income at 31 March 2023 (end-FY23)

Exhibit 9: Regional split by income at 31 March 2023 (end-FY23)

Source: Custodian Property Income REIT

Source: Custodian Property Income REIT

Exhibit 8: Sector split by income at 31 March 2023 (end-FY23)

Source: Custodian Property Income REIT

Exhibit 9: Regional split by income at 31 March 2023 (end-FY23)

Source: Custodian Property Income REIT

The current investment focus is summarised by the company as:

Industrial and logistics assets where, outside of the very large ‘big box’ segment, low vacancy rates and strong occupier demand continue to drive rental growth.

Retail warehousing, where a combination of convenience, lower costs per square foot and the complementary offer to online retail continues to support trading at these assets, most notably among DIY, discounters, homewares and food retailers, which should prove defensive if consumer spending levels decrease.

Selective regional offices with a focus on strong city centre locations instead of out-of-town business parks.

Drive-through restaurant expansion, involving acquisition and development, where rental growth is anticipated.

Selective high street retail assets, in strong trading locations, where rents have stabilised and there is potential for growth.

Refurbishment of existing property, enhancing the quality of the assets, including their ESG credentials, their attractiveness to tenants, to generate higher income and support capital values.

The Investment Property Forum’s second quarterly survey of the year, based on data received from 18 organisations, whose forecasts were generated between end-March and mid-May 2023, showed a clear uplift in consensus expectations for rental growth and capital performance compared with the previous survey. The industrial and retail warehouse sector is confirmed as offering the strongest expected total returns over the next two years, supported by rental and capital growth.

Exhibit 10: Investment Property Forum spring forecasts

Rental value growth

Capital value growth (%)

Total return (%)

2023

2024

2025

2023/7*

2023

2024

2025

2023/7*

2023

2024

2025

2023/7*

Office

(0.4)

0.2

1.4

1.1

(7.3)

0.3

2.1

(0.2)

(2.9)

4.9

6.8

4.4

Industrial

4.8

3.0

2.9

3.3

(0.8)

4.0

3.6

2.5

3.6

8.5

8.0

7.0

Standard retail

(0.7)

0.3

0.9

0.6

(3.3)

2.2

2.4

1.0

1.4

7.1

7.2

5.7

Shopping centre

(1.8)

(0.5)

0.5

0.0

(4.1)

0.2

0.9

(0.4)

2.7

7.4

8.0

6.6

Retail warehouse

0.0

1.0

1.0

0.8

(1.7)

3.1

2.4

1.4

4.4

9.2

8.4

7.4

West-End office

1.1

2.0

2.0

1.9

(4.3)

2.7

3.6

1.6

(1.0)

6.3

7.1

5.1

City office

(1.0)

1.6

1.6

1.2

(8.7)

0.3

3.3

(0.1)

(4.6)

4.6

7.3

4.1

All property

1.6

1.3

1.8

1.8

(3.2)

2.3

2.8

1.3

1.5

7.1

7.7

6.1

Source: Investment Property Forum. Note: *Annualised rate.

Opportunities to grow income

Significant reversion potential while rents continue to increase

In an inflationary environment and with a lack of supply of modern, smaller regional properties, the company expects to see continued rental growth over the year ahead, especially for properties with strong environmental credentials. Additionally, meanwhile, the portfolio contains significant reversionary potential while rents continue to grow. During Q124, the externally estimated portfolio rental value increased by 1.2% on a like-for-like basis.

Providing a strong opportunity to organically increase income, the end-FY23 ERV of £49.0m was £9.1m or c 22% ahead of cash passing rent of £39.9m and £7.0m or 17% ahead of contracted rent of £42.1m, which included c £2.1m of lease incentives. Void reduction represented £4.7m of the potential upside to income with a further £2.2m from a closing of the gap between current rents and externally estimated market rents.

Exhibit 11: Bridge to ERV

Source: Custodian Property Income REIT data, Edison Investment Research

At 90% at end-Q124, EPRA vacancy is well above the average of 5% since listing but is in line with close peers. The main uplift in vacancy came during the pandemic and, more recently, has reflected increased refurbishment activity within the portfolio. Properties under refurbishment accounted for 37% of end-Q124 vacancy and a further 39% was under offer to let. Just 24% of the vacancy was available to let at the time. While the income upside potential is strong, a continuation of leasing progress will be required, both in respect of refurbished properties as they reach completion and at lease maturities.

Exhibit 12: Trend in occupancy

Source: Custodian Property Income REIT data

Sustainability-driven, profitable capex

The sustainability credentials of the assets in the portfolio have become increasingly become ever more important for occupiers and investors and are now central to the asset management. Positively, where investment is required, it is being reflected in greater tenant demand, additional rental growth and, increasingly, in valuations. All ongoing capital works are expected to enhance the assets’ valuations and, once let, increase rents to give a yield on cost of at least 7%, ahead of the company’s marginal cost of borrowing.

In FY23, capex amounted to £10.0m, or 1.5% of the opening portfolio value, compared with an average £2.7m/0.5% in the five years previously. An additional £1.2m was invested in electrical vehicle charging points, included in fixed assets. During Q124, capex was £5.3m. The investment was spread across a range of assets in different sectors but, notably, included the redevelopment of an industrial site in Redditch. The Redditch development accounted for £3.6m of the FY23 spend and £2.7m in Q124 as it approaches completion. The 1980s industrial building has been fully upgraded to a modern industrial/distribution facility, expected to be rated BREEAM4 ‘excellent’ with an EPC5 A rating. The base build is carbon neutral, includes electric vehicle charging points (referred to above), solar voltaic panels, LED lighting, cycle storage and shower facilities. The site also incorporates a bat roost. Demand for the property is strong and the ERV has reached £660k per year.

  BREEAM, or the Building Research Establishment Environmental Assessment Methodology, is a framework which helps measure the environmental impact of an asset in the built environment.

  Energy performance certificate.

Where the risk-return balance of investing in properties is unfavourable they will continue to be sold, often for alternative use. For this reason and other strategic reasons, the company has properties under offer for sale with an aggregate value of c £10m and expects to achieve proceeds ahead of this, to be invested in its remaining capex pipeline. Further potential sales have been identified, with proceeds expected to be used, at least initially, to reduce borrowings.

From 2023, MEES6 regulations prohibited the leasing of space that is rated EPC F or G and it is proposed that from 2027 a rating of at least EPC C will be required. During FY23, within the CREI portfolio, the weighted average share of properties EPC rated A to C increased from 63% to 70% as a result of improvements embedded in refurbishment programmes as well as asset disposals. There were just two properties containing EPC F-rated units, for which asset management plans are underway.

  Minimum Energy Efficiency Standards.

Exhibit 13: Weighted average portfolio EPC ratings

Source: Custodian Property Income REIT

More broadly, CREI’s approach and strategic objectives are set out in its inaugural ESG report.

External growth opportunities

With much of the sector trading at wide discounts to NAV, CREI sees a strong case for further consolidation, especially among the subscale listed REITs. Leveraging its own low gearing and below average discount to NAV, the company seeks opportunities to purchase complementary portfolios via mergers or corporate acquisitions, similar to its acquisition of Drum in November 2021. Drum was acquired for £43.5m, adding a portfolio of 10 assets with a valuation of £49m, with the consideration settled by the issue of new CREI shares.

Predominantly fixed-rate borrowing provides interest rate protection

CREI has debt facilities of £180m or £190m including an accordion option7 on its £40m revolving credit facility (RCF) with Lloyds Bank, of which £178m was drawn at end-Q124. £140m of debt is fixed rate with a blended cost of c 3.6% and average term to maturity of 6.8 years at end-Q124. Including the £38m of shorter-term, flexible, floating rate RCF with Lloyds Bank, the total average cost of debt at end-Q124 was 4.0%, with an average term to maturity of just 5.6 years.

  The accordion option provides for CREI to increase the existing facility size subject to approval from the lender, Lloyds.

With 79% of end-Q124 debt fixed/hedged, CREI is substantially protected from further interest rate increases such that a 0.5% increase in the SONIA benchmark rate applied to the RCF increases the average cost of debt by just 11bp or c £0.2m.

Exhibit 14: Summary of debt facilities at 30 June 2023

Lender

Facility
(£m)

Drawn
(£m)

Margin

Term to maturity
(years)

Maturity date

Scottish Widows

20.0

20.0

3.935%

2.1

Aug-25

Scottish Widows

45.0

45.0

2.987%

4.9

Jun-28

Aviva tranche 1

35.0

35.0

3.020%

8.8

Apr-32

Aviva tranche 2

15.0

15.0

3.260%

9.4

Nov-32

Aviva tranche 3

25.0

25.0

4.100%

9.4

Nov-32

Total fixed rate

140.0

140.0

3.359%

6.8

Lloyds Bank revolving credit facility*

50.0

38.0

SONIA +1.5%-1.8%

1.2

Sep-24

Total debt facilities

190.0

178.0

5.6

Source: Custodian Property Income REIT data, Edison Investment Research. *Includes £10m accordion option.

CREI operates with moderate gearing and at end-Q124 the net loan to value ratio (LTV) was 28.0% (end-FY23: 27.4%), just a little ahead of its medium-term target of 25%, with significant headroom against debt covenants.8 With a substantial pool of assets unencumbered by borrowings (£166m at end-FY23), the company estimated at end-FY23 that at portfolio level, property valuations would have to decrease by 19% to risk breaching the overall 35% LTV covenant. The rate of loss or deferral of contractual rent on the borrowing facility with least headroom would need to deteriorate by 30%9 to breach interest cover covenants.

  Each debt facility has a discrete security pool over which the relevant lender has security and covenants. The maximum LTV of each discrete security pool is between 45% and 50%, with an overarching covenant on the property portfolio of a maximum 35% LTV. The interest cover covenant requires net rental income from each discrete security pool, over the preceding three months, to exceed 250% of the facility’s quarterly interest liability. The debt facilities contain market-standard cross-guarantees such that a default on an individual facility will result in all facilities falling into default.

  From the levels included in the company’s ‘prudent’ base case forecasts.

Earnings forecasts

FY23 EPRA earnings were in line with our forecast, although the composition included lower rental income than we forecast, offset by lower expenses and finance costs. Our FY24 forecast is little changed. We forecast FY24 and FY25 EPRA earnings to be broadly in line with FY24, with steady but modest rental growth offsetting higher interest costs on the portion of borrowing that remains unhedged. Forecast rental growth is driven by net leasing and rent reviews. We have not assumed any acquisitions or disposals, although these are likely, explicitly assuming that the disposals expected by the company, referred to above, are offset by a combination of income on reinvestment, lower direct property costs and lower finance costs.

Given the continuing uncertainty regarding market-wide property valuations, we have assumed no change net of capex (capex contributes positively to total portfolio valuation). We assume capex of £10m pa from Q224 onwards.

Exhibit 15: Forecast summary

Actual

New forecasts

Previous forecasts

Difference/change

£m unless stated otherwise

FY23

FY24

FY25

FY23

FY24

FY25

FY23

FY24

FY23

FY24

Gross rental income

40.6

41.8

42.4

40.9

42.3

N/A

(0.4)

(0.5)

-0.9%

-1.1%

Non-recoverable property costs

(3.5)

(3.6)

(3.6)

(3.1)

(4.0)

N/A

(0.4)

0.4

Net rental income

37.0

38.2

38.8

37.8

38.3

N/A

(0.8)

(0.1)

-2.1%

-0.1%

Administrative expenses

(6.0)

(5.8)

(5.8)

(6.3)

(6.3)

N/A

0.3

0.5

-4.8%

-8.2%

Net Interest

(6.3)

(8.0)

(8.1)

(6.6)

(7.6)

N/A

0.4

(0.4)

-5.5%

5.1%

EPRA earnings

24.8

24.5

24.8

24.8

24.4

N/A

(0.1)

0.1

-0.5%

0.3%

Realised & unrealised property gain/(losses)

(90.6)

(3.3)

0.0

(89.9)

0.0

N/A

(0.8)

(3.3)

IFRS earnings

(65.9)

21.2

24.8

(65.0)

24.4

N/A

(0.9)

(3.2)

EPRA EPS (p)

5.6

5.6

5.6

5.6

5.54

N/A

(0.01)

0.02

-0.3%

0.3%

IFRS EPS (p)

(14.9)

4.8

5.6

(14.7)

5.5

N/A

(0.2)

(0.7)

DPS declared (p)

5.50

5.50

5.50

5.50

5.50

N/A

0.0

0.0

0.0%

0.0%

Dividend cover (x)

1.02

1.01

1.02

1.02

1.01

N/A

EPRA NTA (p)

99.3

98.6

98.7

99.3

99.3

N/A

(0.0)

(0.7)

0.0%

-0.7%

EPRA NTA total return

-12.5%

4.8%

5.7%

-12.5%

5.6%

N/A

LTV

27.4%

28.5%

29.6%

27.4%

28.4%

N/A

Source: Custodian Property Income REIT FY23 actual data, Edison Investment Research forecasts

Valuation and performance

CREI’s target DPS for FY24 of at least 5.5p represents a prospective yield of 6.5%. Meanwhile, the shares trade at a c 15% discount to the Q124 NAV per share of 98.6p.

Exhibit 16: Dividend yield history

Exhibit 17: P/NAV history

Source: Custodian Property Income REIT trailing DPS data, Refinitiv share prices

Source: Custodian Property Income REIT trailing NAV data, Refinitiv share price

Exhibit 16: Dividend yield history

Source: Custodian Property Income REIT trailing DPS data, Refinitiv share prices

Exhibit 17: P/NAV history

Source: Custodian Property Income REIT trailing NAV data, Refinitiv share price

In Exhibit 18, we show a summary performance and valuation comparison of CREI and what we consider to be its closest diversified income-oriented peers. CREI’s share price performance is similar to that of the peer group and the broad UK property sector over one year and ahead of the sector, but below the peer group, over three years. The sector has underperformed the broader market, most recently as interest rates have risen.

CREI trades on a higher P/NAV than the average of the group, as it has done for most of the period since IPO and, while its trailing yield is slightly below the average, its dividend is fully covered.10. The company’s focus on smaller lot-size properties with a yield premium that has historically supported risk-adjusted income returns.

  The last published dividend cover for abrdn Property Income Trust is 89% and for AEW REIT it is 88%.

Exhibit 18: Peer performance and valuation

Price
(p)

Market cap (£m)

P/NAV
(x)*

Trailing yield (%)**

Share price performance

One month

Three months

One year

Three years

AEW REIT

100

158

0.93

8.0

4%

5%

13%

35%

CT Property Trust

83

192

0.86

4.8

0%

13%

17%

61%

Balanced Commercial Property Trust

69

482

0.59

7.0

4%

4%

-10%

11%

Picton Property Income

69

375

0.69

5.1

1%

-2%

-5%

6%

Schroder REIT

42

203

0.67

7.9

1%

1%

1%

38%

abrdn Property Income Trust

48

184

0.58

8.3

5%

2%

-15%

3%

UK Commercial Property REIT

54

696

0.66

6.3

2%

9%

-5%

-16%

Average

0.72

6.9

2%

5%

-1%

20%

Custodian Property Income

84

369

0.85

6.6

2%

0%

-4%

-7%

UK property sector index

1,203

1%

3%

1%

-14%

UK equity market index

4,137

3%

2%

9%

27%

Source: Company data, Refinitiv prices at 27 September 2023. Note: *Based on last reported EPRA NAV/NTA. **Based on trailing 12-month DPS declared.

Summary of FY23 results published in June 2023

FY23 results were published in June 2023 and the company has subsequently published its quarterly update for the three months ending 30 June 2023 (Q124). A summary of the Q124 performance is shown in Exhibit 19.

FY23 included a steady recurring income performance, with DPS fully covered by EPRA earnings, but a sharp reversal in the prior year property gains, particularly in Q323 (September to December 2023), in line with but less pronounced than the wider market trend. Seven assets were acquired for an aggregate £52.6m (before costs) at a blended net initial yield of 6.3%. Six assets were disposed of for an aggregate £28.8m, at a 28% premium to valuation, generating a £4.4m realised gain (net of selling costs), and reflecting a net initial yield of 8.3%. Gross contracted rent roll increased by £1.5m to £42.0m, including £1.3m from acquisitions net of disposals and £0.3m from rental growth and a small increase in occupancy. Gross rent roll was little changed in Q124, although positive leasing events added a gross £2.2m of annual rental income, in aggregate in line with ERV, offsetting lease maturities and terminations, with occupancy flat at 90%. EPRA EPS increased to 1.5p (Q423: 1.4p), fully covering DPS of 1.375p.

Exhibit 19: Q124 NAV movement

Jun-23

Mar-23

Dec-23

Sep-23

Mar-23

Pence per share

Q124

Q423

Q323

Q223

Q123

Opening NAV

99.3

99.8

113.7

122.2

119.7

Movement in property values

(0.8)

(0.5)

(14.0)

(8.9)

2.6

o/w asset management

0.4

(0.5)

0.7

0.3

1.6

o/w other valuation movement

(1.2)

0.0

(14.7)

(9.2)

1.0

Profit/(loss) on disposal

0.0

0.0

0.0

0.8

0.3

Acquisition costs

0.0

0.0

0.0

(0.4)

(0.4)

EPRA earnings

1.5

1.4

1.5

1.4

1.4

Dividends paid

(1.4)

(1.4)

(1.4)

(1.4)

(1.4)

Closing NAV

98.6

99.3

99.8

113.7

122.2

Source: Custodian Property Income REIT data

Exhibit 20 shows a summary of the FY23 results. We highlight the following:

Net rental income increased by £1.5m (4.1%) to £37.1m, with rental growth and acquisitions partly offset by higher non-recoverable property operating costs.

Administrative expenses increased £0.5m to £6.0m. The increase was driven by other administrative costs with the management fee, linked to NAV, little changed at c £3.9m.

Net interest expense increased by £1.5m to £6.3m, reflecting both higher average debt drawn (to fund net acquisitions and capex) and a higher average cost of debt.

EPRA earnings of £24.8m was 1.8% lower and EPRA EPS of 5.6p was 4.6% lower including the impact of the shares issued in H222, primarily to the shareholders of Drum but also c 500,000 shares at a premium to NAV under the company’s tap issuance facility.

DPS declared increased by 5% to 5.5p and 102% (FY22: 110%) covered despite lower EPRA EPS.

Including unrealised property losses, partly offset by net gains on disposal, the IFRS loss was £65.8m, taking NAV per share to 99.3p (FY22: 119.7p). Including DPS paid, the total return was a negative 12.5% (FY22: 28.4%).

Exhibit 20: Summary of FY23 financial performance

Year to 31 March (£m unless stated otherwise)

FY23

FY22

FY23/FY22

H123

H223

Gross rental & other income

40.6

39.0

4.1%

19.6

21.0

Non-rechargeable property costs

(3.5)

(3.3)

(1.1)

(2.4)

Receivables provision/write-off

0.0

(0.2)

0.0

0.0

Net rental income

37.1

35.6

4.1%

18.5

18.6

Administrative expenses

(6.0)

(5.5)

9.1%

(3.1)

(2.9)

Operating Profit before revaluations

31.0

30.1

3.2%

15.3

15.7

Net interest

(6.3)

(4.8)

(3.0)

(3.3)

EPRA earnings

24.8

25.3

-1.8%

12.4

12.4

Revaluation of investment properties

(91.6)

94.0

(27.7)

(63.8)

Costs of acquisitions

(3.4)

(2.3)

(3.4)

(0.0)

Profit on disposal

4.4

5.4

4.7

(0.3)

IFRS earnings

(65.8)

122.3

(14.1)

(51.7)

IFRS EPS (p)

(14.9)

28.5

(3.2)

(11.7)

EPRA EPS (p)

5.6

5.9

-4.6%

2.8

2.8

DPS (declared) (p)

5.50

5.25

4.8%

2.75

2.75

EPRA earnings/dividends paid in period (x)

102.2

110.3

1.02

1.02

IFRS NAV & EPRA NTA per share (p)

99.3

119.7

113.7

99.3

Investment portfolio (£000s)

613.6

665.2

-7.8%

685.4

613.6

NTA total return

-12.5%

28.4%

-2.7%

-10.3%

Net LTV

27.4%

19.1%

4.1%

25.5%

27.4%

Source: Custodian Property Income REIT data, Edison Investment Research

Additional details on the company and management

Custodian Property Income REIT is an externally managed UK real estate investment trust (REIT), listed on the Main Market of the London Stock Exchange. Its stated purpose is to offer investors the opportunity to access a diversified portfolio of UK commercial real estate, with strong environmental credentials, which can provide an attractive level of income and the potential for capital growth. It aims to be the REIT of choice for private and institutional investors seeking high and stable dividends from well diversified UK real estate.

The board

CREI’s board of directors comprises six members, all of whom are non-executive and five of whom are deemed independent. The board is chaired by David MacLellan, who joined the board in May 2023, taking over from David Hunter as chair on his retirement from the board at the 2023 AGM after nine years of service. David MacLellan has more than 35 years’ experience in private equity and fund management and has an established track record as chair and as a non-executive director of public and private companies.

The other directors are Hazel Adam, who joined the board in December 2019, bringing a range of experience including in the buy-side and sell-side investment industry, strategies and markets, Elizabeth McMeikan, a former Tesco executive and experienced board member, appointed in March 2021, Chris Ireland, a former CEO of JLL UK and former chair of the Investment Property Forum, who also joined the board in March 2021, Malcolm Cooper, who has extensive board experience and a background in corporate finance, infrastructure and property, and who joined the board in June 2022, and Ian Mattioli, who as chief executive officer of Mattioli Woods and a board member of the investment manager, is deemed not to be independent. Ed Moore, finance director of Custodian Capital, is company secretary to CREI. Full details of the board can be found on the company’s website.

The investment manager

The company is externally managed by Custodian Capital, a wholly owned subsidiary of Mattioli Woods. Custodian Capital was appointed investment manager at the IPO, an arrangement that is subject to regular board review. Richard Shepherd-Cross is the managing director of Custodian Capital and the fund manager of CREI. He is a former director of Jones Lang LaSalle in London, where he led the portfolio investment team before joining Mattioli Woods in 2009, with responsibility for its syndicated property initiative, the precursor to Custodian. Richard is supported by Custodian Capital’s other key personnel, including Ed Moore (finance director), Alex Nix (assistant investment manager) and Tom Donnachie (portfolio manager), along with a team of five other surveyors and four accountants

Management and administration fees are paid to the manager on a sliding scale that allows shareholders to benefit from growth in NAV. The fees on continued growth in NAV above £500m were reduced during the year.

Property management fees are charged at 0.90% pa on average net assets of up to £200m, 0.75% pa between £200m and £500m, 0.65% between £500m and £750m, and 0.55% above £750m.

Administrative fees11 are charged at 0.125% pa on average net assets up to £200m, 0.115% pa between £200m and £500m, 0.020% between £500m and £750m and 0.015% above £750m.

  Until 31 March 2022 the fees in place were 0.125% pa on average net assets up to £200m, 0.080% pa between £200m and £500m, 0.050% between £500m and £750m, and 0.030% above £750m. The increase in fees at a NAV between £200m and £500m reflects the additional work that is being undertaken by the investment manager in respect of CREI’s environmental performance enhancement objectives. Based on the end-FY23 NAV of £437.6m, the annualised additional fees were £83k but this would reduce at a NAV above £500m.

Sensitivities

The commercial property market is cyclical, historically exhibiting substantial swings in valuation through cycles. Income returns are significantly more stable, but still fluctuate according to tenant demand and rent terms. From a sector viewpoint, we also highlight the increased risks and uncertainties that attach to development activity, including planning consents, timing, construction risks and the long lead times to completion and eventual occupation. CREI’s development exposure is modest and limited to the improvement of existing properties. In this respect, it may best be seen as an extension of its refurbishment activity, aimed at enhancing long-term income growth and returns. Forward-funded development activity is likewise modest and, in our view, very low risk. More generally, we note the sensitivity to:

Economic risk: the war in Ukraine and sharp rising inflation and interest rates has created a high level of uncertainty regarding the global and UK economic outlook.

Sector risk: some of the inherent cyclical risk to vacancy in commercial property can be mitigated by portfolio diversification. CREI’s portfolio is highly diversified by asset, sector, tenant and geography, with a focus on properties with higher yields and residual values.

Energy performance considerations: a failure to successfully meet regulatory and/or tenant expectations for energy performance enhancement would likely affect CREI’s ability to let properties on satisfactory terms and may make properties unlettable.

Funding risks: c 80% of drawn debt is fixed rate and longer term, with no exposure to increased interest rates. The balance of borrowing is drawn from an RCF which expires in September 2024. With moderate gearing, a significant pool of unencumbered assets and strong interest cover, CREI is well-placed to refinance borrowings that become due.

Management risk: as CREI is externally managed, any management risk is indirect. Custodian Capital, the external manager, operates with a relatively small team and if a senior member of that team were to leave, they would need to be replaced.

Exhibit 21: Financial summary

Year end 31 March, £m

2020

2021

2022

2023

2024e

2025e

INCOME STATEMENT

Gross rental & other income

40.0

38.7

39.0

40.6

41.8

42.4

Non-recoverable property costs

(1.9)

(5.6)

(3.4)

(3.5)

(3.6)

(3.6)

Net rental income

 

38.1

33.1

35.6

37.1

38.2

38.8

Administrative expenses

(4.8)

(4.6)

(5.5)

(6.0)

(5.8)

(5.8)

Operating Profit before revaluations

 

33.4

28.5

30.1

31.0

32.4

32.9

Revaluation of investment properties

(25.9)

(19.6)

94.0

(91.6)

(3.3)

0.0

Costs of acquisitions

(0.6)

(0.7)

(2.3)

(3.4)

0.0

0.0

Profit/(loss) on disposal

(0.1)

0.4

5.4

4.4

0.0

0.0

Operating Profit

6.8

8.6

127.2

(59.6)

29.1

32.9

Net Interest

(4.7)

(4.8)

(4.8)

(6.3)

(8.0)

(8.1)

Profit Before Tax

 

2.1

3.7

122.3

(65.8)

21.2

24.8

Taxation

0.0

0.0

0.0

0.0

0.0

0.0

Profit After Tax

2.1

3.7

122.3

(65.8)

21.2

24.8

Adjust for:

Net revaluation of investment property/costs of acquisition

26.4

20.3

(91.7)

95.0

3.3

0.0

Gains/(losses) on disposal

0.1

(0.4)

(5.4)

(4.4)

0.0

0.0

EPRA earnings

28.7

23.7

25.3

24.8

24.5

24.8

Average Number of Shares Outstanding (m)

409.7

420.1

428.7

440.9

440.9

440.9

IFRS EPS (p)

 

0.5

0.9

28.5

(14.9)

4.8

5.6

EPRA EPS (p)

 

7.0

5.6

5.9

5.6

5.6

5.6

Dividend per share (p)

 

6.65

5.00

5.25

5.50

5.50

5.50

Dividend cover (x)*

1.04

1.13

1.10

1.02

1.01

1.02

Ongoing charges ratio (excluding property expenses)

1.12%

1.12%

1.20%

1.23%

1.27%

1.31%

NAV total return

1.1%

0.9%

28.4%

-12.5%

4.8%

5.7%

BALANCE SHEET

Non-current assets

 

559.8

551.9

665.2

614.7

623.5

634.3

Investment properties

559.8

551.9

665.2

613.6

622.4

633.2

Other non-current assets

0.0

0.0

0.0

1.1

1.1

1.1

Current assets

 

30.7

9.9

16.8

10.6

6.3

-3.5

Debtors

5.3

6.0

5.2

3.7

4.4

4.4

Cash

25.4

3.9

11.6

6.9

2.0

(7.9)

Current liabilities

 

(14.9)

(12.8)

(39.9)

(15.1)

(17.9)

(18.0)

Creditors/Deferred income

(14.9)

(12.8)

(17.2)

(15.1)

(17.9)

(18.0)

Short term borrowings

0.0

0.0

(22.7)

0.0

0.0

0.0

Non-current liabilities

 

(148.9)

(139.2)

(114.5)

(172.7)

(177.4)

(177.7)

Long term borrowings

(148.3)

(138.6)

(113.9)

(172.1)

(176.9)

(177.2)

Other long term liabilities

(0.6)

(0.6)

(0.6)

(0.6)

(0.6)

(0.6)

Net Assets

 

426.8

409.9

527.6

437.6

434.5

435.1

NAV/share (p)

101.6

97.6

119.7

99.3

98.6

98.7

EPRA NTA/share (p)

101.6

97.6

119.7

99.3

98.6

98.7

NAV total return

1.1%

0.9%

28.4%

-12.5%

4.8%

5.7%

CASH FLOW

Operating Cash Flow

 

31.0

23.8

32.6

30.3

33.7

32.2

Net Interest

(4.4)

(4.5)

(4.5)

(6.1)

(7.7)

(7.8)

Tax

0.0

0.0

0.0

0.0

0.0

0.0

Net additions to investment property (including property, plant & equipment

(12.2)

(10.1)

26.6

(40.1)

(11.2)

(10.0)

Ordinary dividends paid

(27.0)

(20.6)

(24.2)

(24.3)

(24.2)

(24.2)

Debt drawn/(repaid)

10.5

(10.1)

(25.1)

35.3

4.5

0.0

Proceeds from shares issued (net of costs)

25.0

0.0

0.5

0.0

0.0

0.0

Other cash flow from financing activities

0.0

0.0

1.7

0.0

0.0

0.0

Net Cash Flow

22.9

(21.5)

7.7

(4.7)

(4.9)

(9.9)

Opening cash

2.5

25.4

3.9

11.6

6.9

2.0

Closing cash

 

25.4

3.9

11.6

6.9

2.0

(7.9)

Debt as per balance sheet

(148.3)

(138.6)

(136.6)

(172.1)

(176.9)

(177.2)

Unamortised loan arrangement fees

(1.7)

(1.4)

(1.1)

(1.4)

(1.1)

(0.8)

Total debt

(150.0)

(140.0)

(137.8)

(173.5)

(178.0)

(178.0)

Restricted cash

(0.9)

(1.2)

(1.1)

(1.6)

(1.6)

(1.6)

Closing net debt

 

(125.5)

(137.3)

(127.3)

(168.2)

(177.6)

(187.5)

Net LTV

22.4%

24.9%

19.1%

27.4%

28.5%

29.6%

Source: Custodian Property Income REIT historical data, Edison Investment Research forecasts

Contact details

Portfolio value by sector as at 30 June 2023

Custodian REIT
c/o Custodian Capital
1 New Walk Place, Leicester
LE1 6RU UK
+44116 240 8740
Company website:
www.custdianreit.com
Investment adviser website:
www.custodiancapital.com

Leadership team

Independent non-executive chair, Custodian REIT: David MacLellan

Senior independent NED, Custodian REIT: Elizabeth McMeikan

David MacLellan has over 35 years’ experience in private equity and fund management, significant board experience, both public and private, and is a chartered accountant. During his executive career he was an executive director of Aberdeen Asset Management following its purchase of Murray Johnstone (MJ) in 2000, where he was group managing director of MJ. He is currently chair and managing partner of RJD Partners, a private equity business, NED of J&J Denholm, a family-owned business involved in shipping, logistics, seafoods and industrial services, and NED of Aquila Renewables, an investment trust. Previously, David has chaired John Laing Infrastructure Fund, a UK 250 investment company, Stone Technologies, Havelock Europa, Britannic UK Income Fund, he was NED at Maven Income & Growth VCT 2 and has been a director of a number of private equity-backed businesses.

Elizabeth McMeikan’s substantive executive career was with Tesco, where she was a stores board director before embarking on a non-executive career in 2005. She is currently senior independent director (SID) at Unite, the UK’s largest owner, manager and developer of purpose-built student accommodation and non-executive director of Dalata Hotel Group, the largest hotel group in the Republic of Ireland. Her other board roles include NED at McBride, Europe’s leading manufacturer of cleaning and hygiene products, and NED of Fresca Group, a fruit and vegetable import/export company. Previously Elizabeth was SID of JD Wetherspoons and Flybe and chair of Moat Homes.

Managing director of Custodian Capital: Richard Shepherd-Cross

Finance director, Custodian Capital: Ed Moore

Richard Shepherd-Cross is the managing director of Custodian Capital and the fund manager of Custodian REIT. He is a chartered surveyor and a former director of Jones Lang LaSalle in London, where he led the portfolio investment team. He joined Mattioli Woods in 2009, where he was responsible for the management and growth of the syndicated property portfolio, which was the precursor to CREI. He was instrumental in establishing CREI and raising £55m at IPO.

Ed Moore qualified as a chartered accountant with Grant Thornton in 2003. He is finance director of Custodian Capital, with responsibility for all day-to-day financial aspects of its operations, and company secretary of Custodian REIT, where his key responsibilities are ongoing regulatory compliance, accurate external and internal financial reporting and maintaining a robust control environment. Since the Custodian REIT IPO in 2014, Ed has overseen it raising more than £300m in new equity, arranging or refinancing six loan facilities and completing three corporate acquisitions.

Principal shareholders (Source: Refinitiv at 25 August 2023)

(%)

BlackRock

5.0

Mattioli Woods

4.0


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This report has been commissioned by Custodian Property Income REIT and prepared and issued by Edison, in consideration of a fee payable by Custodian Property Income REIT. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

This report has been commissioned by Custodian Property Income REIT and prepared and issued by Edison, in consideration of a fee payable by Custodian Property Income REIT. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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