Custodian Property Income REIT — On track to meet dividend target

Custodian Property Income REIT (LSE: CREI)

Last close As at 20/06/2024

GBP0.73

−0.40 (−0.55%)

Market capitalisation

GBP321m

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Research: Real Estate

Custodian Property Income REIT — On track to meet dividend target

Custodian Property Income REIT (CREI) has released a trading update for the three months to 31 December 2023 (Q424). The quarterly DPS was fully covered by unaudited EPRA earnings and was in line with the full year target of at least 5.5p; at the current share price the target DPS reflects a yield of 8%.

Martyn King

Written by

Martyn King

Director, Financials

Real Estate

Custodian Property Income REIT

On track to meet dividend target

Q324 update

Real estate

12 February 2024

Price

69p

Market cap

£305m

Net debt at 31 December 2023 (Q324)

£30m

Net LTV at 31 December. 2023 (Q324)

(loan to value ratio)

30.6%

Shares in issue

440.9m

Free float

(source: Refinitiv as at 23 January 2024)

91.1%

Code

CREI

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(20.0)

(20.3)

(23.9)

Rel (local)

(18.8)

(22.1)

(20.3)

52-week high/low

95p

69p

Business description

Custodian Property Income REIT (CREI) is a UK REIT seeking to deliver an enhanced income return by investing in a diversified portfolio of smaller, regional, core/core-plus properties let to predominantly institutional-grade tenants across the UK. It seeks to provide an attractive level of income and the potential for capital growth from a portfolio with strong environmental credentials, becoming the REIT of choice for private and institutional investors seeking high and stable dividends from well-diversified UK real estate.

Next event

FY24 results

March 2024

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) has released a trading update for the three months to 31 December 2023 (Q424). The quarterly DPS was fully covered by unaudited EPRA earnings and was in line with the full year target of at least 5.5p; at the current share price the target DPS reflects a yield of 8%.

Year end

Net rental income (£m)

EPRA earnings* (£m)

EPRA
EPS* (p)

NAV/**
share (p)

DPS
(p)

P/NAV**
(x)

Yield
(%)

03/21

33.1

23.7

5.6

97.6

5.00

0.71

7.2

03/22

35.6

25.3

5.9

119.7

5.25

0.58

7.6

03/23

37.1

24.8

5.6

99.3

5.50

0.70

8.0

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

Asset management benefit to income and valuations

Passing rent increased to £43.4m during the quarter (H124: £43.2m), driven by continued occupier demand across all sectors of CREI’s portfolio. Rent reviews settled in the period were at an average 21% premium to estimated rental value (ERV), and four newly signed leases added £0.5m of annual rent. EPRA occupancy was stable at 91%, with the vacant space (9.0% of ERV) including properties subject to refurbishment or development (1.0% of ERV) and vacant properties under offer (3.1% of ERV). ERV increased by 0.8% on a like-for-like basis and exceeded passing rent by 15%, reflecting significant reversionary income potential. Consistent with broad market trends, the portfolio valuation was £10.5m or 1.7% lower on a like-for-like basis, net of a £1.0m benefit from asset management initiatives. The MSCI UK Monthly Property Index capital return was -2.7% over the same period. The unaudited NAV per share was 93.3p (H124: 95.9p) and adjusted for DPS paid the accounting total return was -1.3%.

Merger update

We provided details of CREI’s proposed all-share merger with abrdn Property Income Trust (API), recommended by both boards, in our January note. This recommendation reflects the increased diversification of income that the combined company would provide, with potential to benefit from increased scale and share liquidity, and the opportunity for cost savings. The investment strategy will remain income focused, emphasising below institutional-sized regional assets, typically offering a yield premium. Assuming completion, anticipated in April 2024, subject to court sanction and shareholder approvals, existing CREI shareholders will hold c 60% of the enlarged company and existing API shareholders the balance. The expected timetable of events is contained in the recently published combined circular and prospectus, available on both companies’ websites.

Valuation

CREI’s 8.0% prospective dividend yield compares with a 4.1% yield on the 10-year UK gilt. The discount to Q324 unaudited Q324 NAV is 26%.

Additional details from the trading update

With EPRA earnings mostly distributed, the movement in NAV was overwhelmingly driven by the property valuation movements.

Exhibit 1: CREI NAV movement in Q324

Pence per share

£m

NAV at 30 September 2023

95.9

422.8

Valuation decreases

(2.5)

(11.0)

Costs of property acquisitions

(0.1)

(0.6)

Net valuation movement

(2.6)

(11.6)

EPRA earnings for the quarter

1.4

6.1

Interim dividend paid during the quarter

(1.4)

(6.1)

NAV at 31 December 2023

93.3

411.2

Source: CREI

CREI’s large industrial asset weighting had a positive impact on the portfolio valuation performance, consistent with the broad UK property market trend. The ‘other’ sector, comprising a range of ‘alternative’ assets, delivered a positive performance. The company’s unaudited NAV at 31 December 2023 is 0.4p below its unaudited rolled-forward NAV at 31 December 2023 as per the combined circular and prospectus associated with the recommended all-share merger with abrdn Property Income Trust Limited, announced on 1 February 2024. The difference reflected movements in the company’s capital expenditure, lease incentives and acquisition costs during the quarter.

Exhibit 2: Portfolio weightings and Q324 like-for-like valuation movements

Valuation
(£m)

Weighting by value

Quarterly valuation movement (£m)

Quarterly valuation movement (%)

Industrial

301.0

50%

(3.9)

(1)

Retail warehouse

124.6

21%

(3.2)

(3)

Other*

78.7

13%

0.4

1

Office

65.8

11%

(3.2)

(5)

High street retail

32.3

5%

(1.1)

(3)

Portfolio total

602.4

100%

(11.0)

(2)

Source: CREI Q324 report. Note: *Comprises drive-through restaurants, car showrooms, trade counters, gymnasiums, restaurants and leisure units.

Reflecting yield differentials across the sectors, CREI’s portfolio weightings by value (above) differ somewhat from those by income (below). By income, industrials remain CREI’s largest exposure but, reflecting higher yields, the weightings of offices and high street retail increase. Exhibit 3 shows the complementary nature of the CREI and API portfolios.

Exhibit 3: CREI and API portfolios by income*

CREI

API

Combined group

Industrial

41%

48%

44%

Office

16%

25%

20%

Retail warehousing

22%

11%

18%

Other

13%

12%

12%

High street retail

8%

4%

6%

Total portfolio

100%

100%

100%

Source: Joint (CREI and API) merger document. Note: *Income based on estimated rental vales (ERV).

Exhibit 4: Financial summary

Year end 31 March, £m

2021

2022

2023

H124

INCOME STATEMENT

Gross rental & other income

38.7

39.0

40.6

21.2

Non-recoverable property costs

(5.6)

(3.4)

(3.5)

(1.7)

Net rental income

33.1

35.6

37.1

19.5

Administrative expenses

(4.6)

(5.5)

(6.0)

(2.9)

Operating Profit before revaluations

28.5

30.1

31.0

16.6

Revaluation of investment properties

(19.6)

94.0

(91.6)

(15.6)

Costs of acquisitions

(0.7)

(2.3)

(3.4)

0.0

Profit/(loss) on disposal

0.4

5.4

4.4

0.0

Operating Profit

8.6

127.2

(59.6)

1.0

Net Interest

(4.8)

(4.8)

(6.3)

(3.9)

Profit Before Tax

3.7

122.3

(65.8)

(3.0)

Taxation

0.0

0.0

0.0

0.0

Profit After Tax

3.7

122.3

(65.8)

(3.0)

Adjust for:

Net revaluation of investment property/costs of acquisition

20.3

(91.7)

95.0

15.6

Gains/(losses) on disposal

(0.4)

(5.4)

(4.4)

0.0

EPRA earnings

23.7

25.3

24.8

12.6

Average Number of Shares Outstanding (m)

420.1

428.7

440.9

440.9

IFRS EPS (p)

0.9

28.5

(14.9)

(0.7)

EPRA EPS (p)

5.6

5.9

5.6

2.9

Dividend per share (p)

5.00

5.25

5.50

2.75

Dividend cover (x)

1.13

1.10

1.02

1.04

Ongoing charges ratio (excluding property expenses)

1.12%

1.20%

1.23%

1.23%

BALANCE SHEET

Non-current assets

551.9

665.2

614.7

610.9

Investment properties

551.9

665.2

613.6

609.8

Other non-current assets

0.0

0.0

1.1

1.1

Current assets

9.9

16.8

10.6

14.9

Debtors

6.0

5.2

3.7

4.8

Cash

3.9

11.6

6.9

10.1

Current liabilities

(12.8)

(39.9)

(15.1)

(19.0)

Creditors/Deferred income

(12.8)

(17.2)

(15.1)

(19.0)

Short term borrowings

0.0

(22.7)

0.0

0.0

Non-current liabilities

(139.2)

(114.5)

(172.7)

(184.3)

Long term borrowings

(138.6)

(113.9)

(172.1)

(183.8)

Other long term liabilities

(0.6)

(0.6)

(0.6)

(0.6)

Net assets

409.9

527.6

437.6

422.5

NAV/share (p)

97.6

119.7

99.3

95.8

EPRA NTA/share (p)

97.6

119.7

99.3

95.8

NAV total return

0.9%

28.4%

-12.5%

-0.7%

CASH FLOW

Operating Cash Flow

23.8

32.6

30.3

18.6

Net Interest

(4.5)

(4.5)

(6.1)

(3.8)

Tax

0.0

0.0

0.0

0.0

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

(10.1)

26.6

(40.1)

(11.0)

Ordinary dividends paid

(20.6)

(24.2)

(24.3)

(12.1)

Debt drawn/(repaid)

(10.1)

(25.1)

35.3

11.5

Proceeds from shares issued (net of costs)

0.0

0.5

0.0

0.0

Other cash flow from financing activities

0.0

1.7

0.0

0.0

Net Cash Flow

(21.5)

7.7

(4.7)

3.2

Opening cash

25.4

3.9

11.6

6.9

Closing cash

3.9

11.6

6.9

10.1

Debt as per balance sheet

(138.6)

(136.6)

(172.1)

(183.8)

Unamortised loan arrangement fees

(1.4)

(1.1)

(1.4)

(1.2)

Total debt

(140.0)

(137.8)

(173.5)

(185.0)

Restricted cash

(1.2)

(1.1)

(1.6)

(1.6)

Closing net debt

(137.3)

(127.3)

(168.2)

(176.5)

Net LTV

24.9%

19.1%

27.4%

28.9%

Source: Custodian Property Income REIT data


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 2024 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

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 2024 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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