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GBP412m
Research: Real Estate
Custodian Property Income REIT (CREI) has published its Q125 NAV and trading update. With rental growth continuing, Q125 DPS (+9% vs Q124) is in line with the full year target of 6.0p and was fully covered. The dividend-driven quarterly NAV total return was 1.6%, while the share price yield is almost 8%. Property values appear to have stabilised and CREI expects a benefit from interest rate reductions.
Custodian Property Income REIT |
Positive outlook for further growth |
Q125 trading update |
Real estate |
8 August 2024 |
Share price performance
Business description
Analyst
Custodian Property Income REIT is a research client of Edison Investment Research Limited |
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Custodian Property Income REIT (CREI) has published its Q125 NAV and trading update. With rental growth continuing, Q125 DPS (+9% vs Q124) is in line with the full year target of 6.0p and was fully covered. The dividend-driven quarterly NAV total return was 1.6%, while the share price yield is almost 8%. Property values appear to have stabilised and CREI expects a benefit from interest rate reductions.
Year end |
Net rental income (£m) |
EPRA earnings* (£m) |
EPRA |
NAV/** |
DPS |
P/NAV** |
Yield |
|
03/23 |
37.1 |
24.8 |
5.6 |
99.3 |
5.50 |
0.79 |
7.1 |
|
03/24 |
38.9 |
25.7 |
5.8 |
93.4 |
5.80 |
0.83 |
7.4 |
|
03/25e |
40.3 |
27.3 |
6.2 |
94.3 |
6.00 |
0.83 |
7.7 |
|
03/26e |
40.8 |
27.5 |
6.2 |
94.5 |
6.12 |
0.83 |
7.8 |
|
Note: *Excludes revaluation gains/losses and other exceptional items. **Defined as EPRA net tangible assets (EPRA NTA) per share.
Across much of the commercial market, especially for industrial and logistics, occupier demand remains robust, new supply restricted, and rents are increasing. Investment demand has begun to pick up from very low levels and the turn of the interest rate cycle should provide further support. MSCI data has shown three consecutive quarters of positive capital growth for the first time since 2022.
For CREI, on a like-for-like basis, Q125 passing rents increased 1.2%. On the same basis, estimated rental values (ERV) rose 1.0%, driven by the industrial sector, but with all other sectors stable. New lettings, lease renewals and rent reviews were all on average well ahead of ERV and/or previous passing rents. Portfolio ERV of £49.4m is £5.8m or 13% above passing rent of £43.6m, representing a significant opportunity for further income growth through asset management and lease events. Asset management also supports valuation and initiatives in Q125 added £0.8m to valuations, which were up 0.3% on a like-for-like basis, but down 0.1% net of capital expenditure. NAV per share fell marginally from 93.4p to 93.1p. CREI continues to invest in its portfolio to enhance environmental credentials and the attractiveness of selected assets, rent potential and valuations, with a target yield on cost of at least 7%, above the marginal cost of borrowing. £1.9m was invested in Q125, primarily relating to office refurbishments in Leeds and Manchester.
Selective property disposals, especially vacant properties, are accretive to earnings and NAV, with proceeds supporting investment in the portfolio, debt reduction and lower weighted average cost of debt. During Q125 two previously announced disposals were completed, with an aggregate value of £11.3m, 49% ahead of the end-FY23 valuation. The proceeds were used to repay more expensive variable rate borrowings, reducing average cost to 3.9% from 4.1%. 83% of borrowings are now fixed rate, at an average cost of 3.4%, with an average maturity of 5.8 years.
We have made no changes to the forecasts contained in our recent detailed review. We expect continuing growth in earnings and dividends, as the company realises organic potential. CREI obviously recognises the potential for sector consolidation to generate economies of scale and further enhance diversification and was disappointed that its proposed merger with API, supported by both boards, was unsuccessful. We expect it to remain open to further opportunities.
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Research: Real Estate
Target Healthcare REIT has released its Q424 trading update. We expect the full year results to be published in late September. Income and capital values are benefiting from inflation-linked rental growth, reflected in fully covered dividends and a sixth consecutive quarter of NAV growth and positive total returns. Q424 NAV total return was 2.8%, taking the FY24 total to more than 11%.