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Research: Real Estate
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%.
Custodian Property Income REIT |
On track to meet dividend target |
Q324 update |
Real estate |
12 February 2024 |
Share price performance
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Custodian Property Income REIT is a research client of Edison Investment Research Limited |
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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 |
NAV/** |
DPS |
P/NAV** |
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 |
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
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