Last close As at 05/08/2026
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GBP412m
Research: Real Estate
Custodian REIT has provided an update on the impact of COVID-19 and its response to the near-term challenges this poses. In line with its strong income focus and supported by moderate gearing and a liquid balance sheet, the company has confirmed payment of the Q420 DPS and has guided to the minimum DPS that it intends to pay through H121.
Custodian REIT |
Q4 DPS confirmed |
COVID-19 update |
Real estate |
16 April 2020 |
Share price performance
Business description
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Analyst
Custodian REIT is a research client of Edison Investment Research Limited |
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Custodian REIT has provided an update on the impact of COVID-19 and its response to the near-term challenges this poses. In line with its strong income focus and supported by moderate gearing and a liquid balance sheet, the company has confirmed payment of the Q420 DPS and has guided to the minimum DPS that it intends to pay through H121.
Year end |
Net rental |
EPRA |
EPRA |
EPRA |
DPS |
P/NAV |
Yield |
03/18 |
33.2 |
25.2 |
6.94 |
107 |
6.45 |
0.89 |
6.8 |
03/19 |
37.6 |
28.5 |
7.26 |
107 |
6.55 |
0.89 |
6.9 |
03/20e |
38.1 |
28.5 |
6.96 |
105 |
6.65 |
0.93 |
7.0 |
Note: *EPRA EPS excludes revaluation gains/losses and other exceptional items.
Guiding to continuing distributions
Ahead of the crisis, rents for the three months ending 31 March 2020 (Q420) were collected in full. As a result, Custodian intends to make a fourth quarterly DPS for FY20 of 1.6625p on 29 May 2020, bringing the aggregate DPS for the year to 6.65p (FY19: 6.55p) in line with the target set earlier in the year. In common with peers, the company has subsequently seen a material slowdown in rents collected as tenants seek to protect their own cash flows from the effects of the COVID-19 pandemic but intends to continue to pay quarterly dividends at a reduced rate. For H121, it intends to pay on a quarterly basis amounting to at least 1.5p, broadly linked to expected net rental receipts with support from prior years’ undistributed reserves if required. Thereafter it is hoped that as deferred rents are collected, the DPS can return towards the target level. We have made no material changes to our FY20 EPRA earnings forecast. However, due to uncertainty over the extent and duration of the effects of the pandemic, we note the risk to property valuations and our forecast NAV and have temporarily withdrawn FY21 forecasts.
Diversified, income-focused strategy
Custodian has a balanced portfolio of regional UK commercial real estate, diversified by sector, location, tenant and lease term. It is focused on institutional quality assets but with lot sizes of less than £10m, where the investment manager believes it has a competitive advantage. Portfolio diversification is an important element of Custodian’s income-focused strategy but, although diversified, the portfolio is actively positioned with a relatively high exposure to industrial, retail warehouse and alternative sectors. Management focus is on maintaining high levels of occupancy and supporting income through active asset management. For now, acquisitions are on hold to preserve liquidity.
Valuation: Continuing income focus
Custodian has a strong income focus and has consistently grown DPS each year since IPO, fully covered by earnings. Despite the more challenging market conditions, this income focus remains. The shares have moved to a discount to NAV, having consistently traded at a premium since IPO.
Additional details
Custodian has a balanced portfolio of regional UK commercial real estate, diversified by sector, location, tenant and lease term. Portfolio diversification has always been an important element of Custodian’s income-based strategy but, although diversified, the portfolio is actively positioned with a relatively high exposure to industrial, retail warehouse and alternative sectors. It is focused on institutional quality assets but with lot sizes of less than £10m, where the investment manager believes it has a competitive advantage. Occupancy is strong at more than 95%.
Across the portfolio, rents are due quarterly or monthly in advance. As a result of negotiations with tenants regarding the March quarterly rent, the company has agreed that some may move from quarterly in advance to monthly in advance or defer the March quarter’s rent with a full recovery over the next 12 months. Not all tenants have yet agreed a payment profile and active discussions are continuing with the remaining tenants to agree plans for payment of outstanding rents due.
Overall, 67% of rent due relating to April has been collected, with a further 5% expected to be received shortly.
Financials and valuation
Balance sheet and liquidity
Custodian operates with moderate gearing, has a liquid balance sheet, no short-term refinancing risk and significant headroom on borrowing covenants (maximum 35% loan to value (LTV) and minimum 250% interest cover).
At the date of the trading update, the company held £25m in cash with gross borrowings of £150m and a net LTV of 21.9% (down from 23.2% at end-Q320).
Custodian operates with four loan facilities amounting to £165m in aggregate, comprising:
■
A £20m term loan with Scottish Widows at a fixed rate of 3.9335%, repayable in August 2023.
■
A £45m term loan with Scottish Widows at a fixed rate of 2.987%, repayable in June 2028.
■
A £50m term loan with Aviva Investors Real Estate Financing comprising:
•
a £35m tranche at a fixed rate of 3.02%, repayable in April 2032; and
•
a £15m tranche at a fixed rate of 3.26%, repayable in November 2032.
■
A £50m variable rate revolving credit facility with Lloyds Bank that carries an interest margin of between 1.5% and 1.8% (depending on LTV) and matures in September 2022 with an option to extend by a further two years, subject to the bank’s agreement.
In total, 70% of the facilities were at a fixed interest rate and the weighted average maturity is seven years.
Each of the facilities has its own pool of properties allocated as collateral and while overall covenant headroom is strong, Custodian indicates the interest cover covenant on some individual loans may come under pressure at 30 June 2020 (end-H120) about which it is in advanced discussions with the lenders to agree the terms of waivers. With £191.3m of unencumbered property assets there is considerable room for the management of LTV covenants.
Near-term forecasting uncertainty
Given the main COVID-19 impacts began late in March and Custodian has confirmed full collection of the Q420 rents, we do not expect a significant impact on the FY20 underlying earnings. We have made no changes to the FY20 forecasts that we set out in detail in our December Outlook note other than to adjust for subsequent share issuance under the company’s block listing facility (eight million shares at an average price of 113.7p in Q420) and to remove the £7.5m acquisition (including costs and a net initial yield of 6.7%) that we had assumed late in FY20. However, we would highlight a note of caution about our forecast NAV given there is clearly more uncertainty about property valuations, with industry valuers highlighting the material uncertainty that exists across the sector. As a result of the current high level of near-term uncertainty facing the economy and the commercial property sector, we have temporarily withdrawn our FY21 forecasts.
Based on the FY20 declared aggregate annual DPS of 6.65p, the shares yield c 7% and annualising the targeted H120 DPS of a minimum 1.5p represents a yield of more than 3%. No guidance has been given on DPS beyond H120, but if the contracted rents deferred can be collected there is upside potential. The shares now trade at a 7% discount to the end-Q319 unaudited NAV per share of 104.4p having traded at a premium since IPO.
Exhibit 1: Financial summary
Year end 31 March |
£'000s |
2015 |
2016 |
2017 |
2018 |
2019 |
2020e |
|
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
|||
PROFIT & LOSS |
||||||||
Gross rental income |
11,228 |
18,561 |
26,980 |
34,055 |
39,108 |
39,995 |
||
Re-charge income |
342 |
451 |
630 |
758 |
866 |
918 |
||
Total revenue |
|
|
11,570 |
19,012 |
27,610 |
34,813 |
39,974 |
40,913 |
Gross property expenses |
(715) |
(1,023) |
(1,869) |
(1,610) |
(2,396) |
(2,802) |
||
Net rental income |
|
|
10,855 |
17,989 |
25,741 |
33,203 |
37,578 |
38,111 |
Administrative expenses |
(2,327) |
(2,828) |
(3,643) |
(4,377) |
(4,919) |
(4,763) |
||
Operating Profit before revaluations |
|
|
8,528 |
15,161 |
22,098 |
28,826 |
32,659 |
33,348 |
Revaluation of investment properties |
6,083 |
3,031 |
9,016 |
11,859 |
(5,499) |
(13,239) |
||
Costs of acquisitions |
(5,844) |
(5,768) |
(6,103) |
(6,212) |
(3,391) |
(522) |
||
Profit/(loss) on disposal |
269 |
56 |
1,599 |
1,606 |
4,250 |
(79) |
||
Operating Profit |
9,036 |
12,480 |
26,610 |
36,079 |
28,019 |
19,508 |
||
Net Interest |
(289) |
(1,273) |
(2,405) |
(3,659) |
(4,373) |
(4,838) |
||
Profit Before Tax |
|
|
8,747 |
11,207 |
24,205 |
32,420 |
23,646 |
14,671 |
Taxation |
(2) |
0 |
0 |
0 |
0 |
0 |
||
Profit After Tax |
8,745 |
11,207 |
24,205 |
32,420 |
23,646 |
14,671 |
||
Net revaluation of investment property/costs of acquisition |
(239) |
2,737 |
(2,913) |
(5,647) |
8,890 |
13,761 |
||
Gains/(losses) on disposal |
(269) |
(56) |
(1,599) |
(1,606) |
(4,250) |
79 |
||
EPRA earnings |
8,237 |
13,888 |
19,693 |
25,167 |
28,456 |
28,510 |
||
Average Number of Shares Outstanding (m) |
146.1 |
204.2 |
298.7 |
362.4 |
391.9 |
409.7 |
||
IFRS EPS (p) |
|
|
5.99 |
5.49 |
8.10 |
8.95 |
6.03 |
3.58 |
EPRA EPS (p) |
|
|
5.64 |
6.80 |
6.59 |
6.94 |
7.26 |
6.96 |
Dividend per share (p) |
|
|
5.25 |
6.25 |
6.35 |
6.45 |
6.55 |
6.65 |
Dividend cover (x)* |
1.00 |
1.01 |
1.01 |
1.06 |
1.10 |
1.04 |
||
Ongoing charges ratio (excluding property expenses) |
1.41% |
1.33% |
1.20% |
1.15% |
1.12% |
1.11% |
||
BALANCE SHEET |
||||||||
Fixed Assets |
|
|
207,287 |
318,966 |
418,548 |
528,943 |
572,745 |
572,632 |
Investment properties |
207,287 |
318,966 |
418,548 |
528,943 |
572,745 |
572,632 |
||
Other non-current assets |
0 |
0 |
0 |
0 |
0 |
0 |
||
Current Assets |
|
|
1,921 |
9,973 |
10,260 |
12,942 |
6,146 |
28,635 |
Debtors |
1,072 |
4,518 |
4,453 |
7,883 |
3,674 |
6,071 |
||
Cash |
849 |
5,455 |
5,807 |
5,059 |
2,472 |
22,564 |
||
Current Liabilities |
|
|
(5,411) |
(8,165) |
(12,572) |
(12,755) |
(14,160) |
(13,057) |
Creditors/Deferred income |
(5,411) |
(8,165) |
(12,572) |
(12,755) |
(14,160) |
(13,057) |
||
Short term borrowings |
0 |
0 |
0 |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
(23,811) |
(65,714) |
(64,359) |
(113,928) |
(138,108) |
(148,922) |
Long term borrowings |
(23,811) |
(65,143) |
(63,788) |
(113,357) |
(137,532) |
(148,346) |
||
Other long term liabilities |
0 |
(571) |
(571) |
(571) |
(576) |
(576) |
||
Net Assets |
|
|
179,986 |
255,060 |
351,877 |
415,202 |
426,623 |
439,288 |
NAV/share (p) |
101 |
102 |
104 |
107 |
107 |
105 |
||
EPRA NAV/share (p) |
101 |
102 |
104 |
107 |
107 |
105 |
||
CASH FLOW |
||||||||
Operating Cash Flow |
|
|
12,780 |
13,945 |
23,066 |
28,388 |
36,035 |
28,726 |
Net Interest |
(204) |
(1,285) |
(2,200) |
(3,521) |
(4,198) |
(4,540) |
||
Tax |
0 |
0 |
0 |
0 |
0 |
0 |
||
Net additions to investment property |
(129,788) |
(113,621) |
(92,126) |
(105,884) |
(46,199) |
(12,472) |
||
Ordinary dividends paid |
(5,546) |
(12,220) |
(18,493) |
(23,007) |
(25,484) |
(26,985) |
||
Debt drawn/(repaid) |
23,811 |
41,700 |
(1,000) |
49,364 |
24,000 |
11,000 |
||
Proceeds from shares issued (net of costs) |
99,796 |
76,087 |
91,105 |
53,912 |
13,259 |
24,980 |
||
Other cash flow from financing activities |
0 |
0 |
0 |
0 |
0 |
|||
Net Cash Flow |
849 |
4,606 |
352 |
(748) |
(2,587) |
20,709 |
||
Opening cash |
0 |
849 |
5,455 |
5,807 |
5,059 |
2,472 |
||
Closing cash |
|
|
849 |
5,455 |
5,807 |
5,059 |
2,472 |
23,181 |
Debt as per balance sheet |
(23,811) |
(65,143) |
(63,788) |
(113,357) |
(137,532) |
(148,346) |
||
Unamortised loan arrangement fees |
(489) |
(857) |
(1,212) |
(1,643) |
(1,468) |
(1,654) |
||
Total debt |
(24,300) |
(66,000) |
(65,000) |
(115,000) |
(139,000) |
(150,000) |
||
Restricted cash |
(230) |
(490) |
(1,307) |
(1,341) |
(1,369) |
(1,328) |
||
Closing net debt |
|
|
(23,681) |
(61,035) |
(60,500) |
(111,282) |
(137,897) |
(128,147) |
Net LTV |
11.4% |
19.1% |
14.4% |
21.0% |
24.1% |
22.4% |
Source: Company accounts, Edison Investment Research
|
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