Custodian Property Income REIT — Strong leasing has delivered targeted dividends

Custodian Property Income REIT (LSE: CREI)

Currency in GBP

Last close As at 06/12/2023

GBP0.87

1.10 (1.28%)

Market capitalisation

GBP385m

More on this equity

Research: Real Estate

Custodian Property Income REIT — Strong leasing has delivered targeted dividends

Custodian Property Income REIT (CREI) has met its 5.5p DPS target for the year to 31 March 2023 and, with property yields stabilising, the Q423 NAV total return was an income-driven 0.9%. Average rental values have continued to increase and this, combined with asset management opportunities and a strong balance sheet, provides strong ongoing support for the company’s high-income strategy.

Martyn King

Written by

Martyn King

Director, Financials

Real Estate

Custodian Property Income REIT

Strong leasing has delivered targeted dividends

Q423 trading update

Real estate

24 May 2023

Price

91.5p

Market cap

£403m

Net debt (£m) at 31 March 2023

(excluding restricted cash)

168.1

Net LTV at 31 March 2023

27.4%

Shares in issue

440.9m

Free float

91.8%

Code

CREI

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(0.5)

(0.5)

(7.6)

Rel (local)

1.1

1.5

(9.3)

52-week high/low

110p

83p

Business description

Custodian Property Income REIT is a London Main Market-listed REIT focused on smaller lot-size (<£15m) 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

FY23 results announcement

Expected June 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) has met its 5.5p DPS target for the year to 31 March 2023 and, with property yields stabilising, the Q423 NAV total return was an income-driven 0.9%. Average rental values have continued to increase and this, combined with asset management opportunities and a strong balance sheet, provides strong ongoing support for the company’s high-income strategy.

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

0.94

5.5

03/22

35.6

25.3

5.9

119.7

5.25

0.76

5.7

03/23e

37.8

24.8

5.6

99.3

5.50

0.92

6.0

03/24e

38.3

24.4

5.5

99.3

5.50

0.92

6.0

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

Progress and opportunities but economic caution

Successful leasing activity, at an average 5% ahead of estimated rental value (ERV), supported income and valuations during Q423. EPRA occupancy improved to 90.3% (Q3: 89.9%). ERV increased by a like-for-like 1.4% during the period and now exceeds passing rent by 16%, providing a wide range of opportunities to further grow income and add value. Income is substantially protected from rising interest rates, with 81% of debt fixed cost with an average maturity of seven years, while Q4 loan to value (LTV) was a moderate 27.4%. Q4 EPRA EPS of 1.4p took the FY23 total to 5.6p, covering DPS by 1.02x. For FY24 the company targets aggregate DPS of a minimum 5.5p. Property market valuations showed an improving trend through the first quarter of 2023, reflected in CREI’s moderate 0.7% like-for-like valuation decline. NAV per share fell marginally to 99.3p (Q3: 99.8p). Despite the Q4 progress we have moderated our FY24 expectations, reflecting broad economic pressures, with FY24e EPRA EPS of 5.5p (previously 5.9p), fully covering DPS of 5.5p (previously 5.6p).

Income at the core of the strategy

CREI is focused on delivering attractive and stable dividend returns from an actively managed, well-diversified portfolio of UK commercial real estate. Within this, it is differentiated by a principal focus on properties with smaller individual values (‘lot sizes’) of less than £15m at the point of investment. These typically provide a yield premium over larger assets, partly the result of a broader range of potential occupiers, while attracting less competition from larger institutional investors. Average NAV total return since the company listed in 2014 is 4.9% pa, with unbroken dividend payments accounting for 98% of the total.

Valuation: Consistent income returns

The FY23 fully covered DPS of 5.5p represents an attractive yield of 6.0%. The discount to NAV has closed to 7%, versus c 25% for close peers, but is still below the average 3% premium since listing.

The relative stability of income return has been significantly boosted by capital growth in FY22

With some optimism returning to the UK commercial property market during the first quarter of CY23, following the sharp and fast re-pricing to higher interest rate expectations in the second half of 2022, income returns more than offset a moderate reduction in NAV during CREI’s Q4.

Exhibit 1: FY23 quarterly NAV returns

Pence per share (p) unless stated otherwise

Q123

Q223

Q323

Q423

FY23*

Jun-22

Sep-22

Dec-22

Mar-23

Mar-23

Opening NAV per share

119.7

122.2

113.7

99.8

119.7

Closing NAV per share

122.2

113.7

99.8

99.3

99.3

Dividends paid per share

1.4

1.4

1.4

1.4

5.5

Dividend return

1.1%

1.1%

1.2%

1.4%

4.6%

Capital return

2.1%

-7.0%

-12.2%

-0.5%

-17.1%

NAV total return

3.2%

-5.8%

-11.0%

0.9%

-12.5%

Source: Custodian Income REIT data, Edison Investment Research. Note: *FY23 unaudited.

The unaudited quarterly data indicate an FY23 return from dividends paid of 4.6% but an NAV total return of -12.5% after NAV reduction resulting from property revaluation losses. This was the only year of negative NAV total return since listing, despite the COVID-19 pandemic.

Exhibit 2: NAV total returns since listing

Pence per share (p) unless stated otherwise

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19

Mar-20

Mar-21

Mar-22

Mar-23

March-14 to March-23

2015

2016

2017

2018

2019

2020

2021

2022

2023*

Opening NAV per share

98.2

101.3

101.5

103.8

107.3

107.1

101.6

97.6

119.7

98.2

Closing NAV per share

101.3

101.5

103.8

107.3

107.1

101.6

97.6

119.7

99.3

99.3

Dividends paid per share

3.750

6.350

6.350

6.425

6.525

6.625

4.913

5.625

5.500

52.1

Dividend return

3.8%

6.3%

6.3%

6.2%

6.1%

6.2%

4.8%

5.8%

4.6%

53.0%

Capital return

3.2%

0.2%

2.2%

3.4%

-0.2%

-5.2%

-4.0%

22.7%

-17.1%

1.1%

NAV total return

7.0%

6.4%

8.5%

9.6%

5.9%

1.0%

0.9%

28.4%

-12.5%

54.1%

Average annual return

4.9%

Source: Custodian Income REIT data, Edison Investment Research. Note: *FY23 unaudited.

Dividend returns have accounted for 98% of CREI’s NAV total return since listing and the relative stability versus more volatile capital returns can be seen clearly in Exhibit 2. Across the broad UK commercial property market, income returns have historically accounted for c 70% of property returns through the cycle.

Exhibit 3: Relative stability of income returns

Source: Custodian Income REIT data, Edison Investment Research

Exhibit 4 shows a reconciliation of the quarterly movements in NAV. Both NAV and NAV per share were sightly (0.5%) lower in Q423. For the year, NAV was 17.1% lower. With dividends fully covered by EPRA earnings, the decline in NAV resulted from property valuation movements.

Exhibit 4: FY23 quarterly NAV development

Q123

Q223

Q323

Q423

FY23e

£m unless stated otherwise

Jun-22

Sep-22

Dec-22

Mar-23

Mar-23*

Opening NAV

527.6

538.7

501.4

440.0

527.6

Movement in property values

11.4

(39.2)

(61.5)

(2.2)

(91.5)

o/w asset management

6.9

1.4

3.0

2.6

13.9

o/w other valuation movement

4.5

(40.6)

(64.5)

(4.8)

(105.4)

Profit/(loss) on disposal

1.3

3.4

(0.1)

(0.2)

4.4

Acquisition costs

(1.6)

(1.8)

0.0

0.0

(3.4)

EPRA earnings

6.1

6.4

6.3

6.1

24.9

Dividends paid

(6.1)

(6.1)

(6.1)

(6.1)

(24.4)

Closing NAV

538.7

501.4

440.0

437.6

437.6

NAV per share (p)

122.2

113.7

99.8

99.3

99.3

EPRA EPS (p)

1.4

1.4

1.5

1.4

5.6

Source: Custodian Income REIT data, Edison Investment Research. Note: *FY23 unaudited.

Compared with Q323, when the main UK commercial property indices showed the largest quarterly decline on record, Q423 showed considerable stabilisation with asset management/leasing continuing to make a positive impact. The £2.2m or 0.7% like-for-like decline in values was net of a £2.6m or 0.4% increase from asset management. During Q423, new leases, lease renewals and rental uplifts added £2.5m pa of income.

During the year to end-FY23, CREI experienced an 11.8% decline in property values, which compares favourably with c 17% for the broad UK market. Factors highlighted by the company are its focus on smaller regional assets, leaving it less exposed to some of the ‘hot’ sectors in 2022 (eg prime logistics), and the diversified nature of its portfolio.

Including £5.8m invested in the development and refurbishment of existing assets and a small (c £0.5m) disposal, the portfolio value increased modestly in Q423, by £0.8m.

The end-FY23 portfolio EPRA net initial yield was 5.8% and an equivalent yield was 7.3%, demonstrating the further opportunity to increase rental income and enhance value.

Exhibit 5: Quarterly movements in property valuation

Q123

Q223

Q323

Q423

Q123

Q223

Q323

Q423

Q123

Q223

Q323

Q423

Jun-22

Sep-22

Dec-22

Mar-23

Jun-22

Sep-22

Dec-22

Mar-23

Jun-22

Sep-22

Dec-22

Mar-23

Sector position (£m)

Valuation movement (£m)

Like-for-like valuation movement (%)

Industrial

339.6

327.3

291.6

295.1

6.2

(22.6)

(36.0)

1.4

1.9%

-7.1%

-11.0%

1.0%

Retail warehouse

144.8

147.3

135

131.8

4.8

(7.5)

(11.5)

(0.3)

3.8%

-6.0%

-8.0%

0.0%

Other*

87.8

77.2

74.3

78.6

0.9

(2.7)

(4.6)

0.9

1.4%

-3.5%

-6.0%

1.0%

Office

74.5

83.4

73.9

71.7

(0.4)

(5.0)

(7.1)

(3.3)

-0.4%

-5.7%

-9.0%

-4.0%

High street retail

53.1

50.2

38

36.4

(0.1)

(1.4)

(2.3)

(0.9)

-0.5%

-2.8%

-6.0%

-3.0%

Portfolio total

699.8

685.4

612.8

613.6

11.4

(39.2)

(61.5)

(2.2)

1.7%

-5.4%

-9.1%

-0.7%

Source: Custodian Income REIT data. Note: *Other comprises drive-through restaurants, car showrooms, trade counters, gymnasiums, restaurants and leisure units.

Progress and opportunities but economic caution reflected in our forecasts

Despite the consistent leasing progress through the year, the unaudited FY23 EPRA earnings are slightly (1.4%) below our forecast. Ahead of the FY23 results, which we expect will be published in June (FY22: 17 June 2022), we have provisionally reduced our FY24 earnings forecast by £1.7m or 6.5%, reflecting a range of factors including property disposals, slower underlying rent-roll growth in what remains a challenging market environment, inflationary cost growth and slightly higher costs on the floating rate borrowings. On this basis, we expect a flat but fully covered DPS of 5.5p (previously 5.6p).

Exhibit 6: Forecast update

Forecast

Previous forecast

Change

£m unless stated otherwise

FY23

FY24

FY23

FY24

FY23

FY24

FY23

FY24

Gross rental income

40.9

42.3

41.9

43.4

(0.9)

(1.2)

-2.2%

-2.7%

Non-recoverable property costs

(3.1)

(4.0)

(4.0)

(4.1)

0.9

0.1

Net rental income

37.8

38.3

37.9

39.3

(0.1)

(1.1)

-0.2%

-2.8%

Administrative expenses

(6.3)

(6.3)

(6.2)

(5.8)

(0.2)

(0.4)

2.6%

7.3%

Net Interest

(6.6)

(7.6)

(6.5)

(7.4)

(0.1)

(0.2)

2.0%

2.5%

EPRA earnings

24.8

24.4

25.2

26.1

(0.4)

(1.7)

-1.4%

-6.5%

Realised & unrealised property gain/(losses)

(89.9)

0.0

(93.8)

0.0

4.0

0.0

IFRS earnings

(65.0)

24.4

(68.6)

26.1

3.6

(1.7)

EPRA EPS (p)

5.6

5.5

5.7

5.9

(0.1)

(0.4)

-1.4%

-6.5%

IFRS EPS (p)

(14.7)

5.5

(15.6)

5.9

0.8

(0.4)

DPS declared (p)

5.50

5.50

5.50

5.60

0.0

(0.1)

0.0%

-1.8%

Dividend cover (x)

1.02

1.01

1.04

1.06

EPRA NTA (p)

99.3

99.3

98.5

98.9

0.8

0.5

0.8%

0.5%

EPRA NTA total return

-12.5%

5.6%

-13.1%

6.0%

LTV

27.4%

28.4%

28.9%

29.8%

Source: Edison Investment Research

Exhibit 7: Financial summary

Year end 31 March, £m

2020

2021

2022

2023e

2024e

PROFIT & LOSS

Gross rental income

40.0

38.7

39.0

40.9

42.3

Non-recoverable property costs

(1.9)

(5.6)

(3.4)

(3.1)

(4.0)

Net rental income

 

38.1

33.1

35.6

37.8

38.3

Administrative expenses

(4.8)

(4.6)

(5.5)

(6.3)

(6.3)

Operating Profit before revaluations

 

33.4

28.5

30.1

31.5

32.0

Revaluation of investment properties

(25.9)

(19.6)

94.0

(91.5)

0.0

Costs of acquisitions

(0.6)

(0.7)

(2.3)

(3.4)

0.0

Profit/(loss) on disposal

(0.1)

0.4

5.4

5.1

0.0

Operating Profit

6.8

8.6

127.2

(58.4)

32.0

Net Interest

(4.7)

(4.8)

(4.8)

(6.6)

(7.6)

Profit Before Tax

 

2.1

3.7

122.3

(65.0)

24.4

Taxation

0.0

0.0

0.0

0.0

0.0

Profit After Tax

2.1

3.7

122.3

(65.0)

24.4

Net revaluation of investment property/costs of acquisition

26.4

20.3

(91.7)

94.9

0.0

Gains/(losses) on disposal

0.1

(0.4)

(5.4)

(5.1)

0.0

EPRA earnings

28.7

23.7

25.3

24.8

24.4

Average Number of Shares Outstanding (m)

409.7

420.1

428.7

440.9

440.9

IFRS EPS (p)

 

0.5

0.9

28.5

(14.7)

5.5

EPRA EPS (p)

 

7.0

5.6

5.9

5.6

5.5

Dividend per share (p)

 

6.65

5.00

5.25

5.50

5.5

Dividend cover (x)

1.04

1.13

1.10

1.02

1.01

Ongoing charges ratio (excluding property expenses)

1.12%

1.12%

1.20%

1.29%

1.38%

NAV total return

1.1%

0.9%

28.4%

-12.5%

5.6%

BALANCE SHEET

Fixed Assets

 

559.8

551.9

665.2

613.6

624.4

Investment properties

559.8

551.9

665.2

613.6

624.4

Other non-current assets

0.0

0.0

0.0

0.0

0.0

Current Assets

 

30.7

9.9

16.8

14.8

10.4

Debtors

5.3

6.0

5.2

8.6

7.6

Cash

25.4

3.9

11.6

6.3

2.8

Current Liabilities

 

(14.9)

(12.8)

(39.9)

(17.9)

(17.8)

Creditors/Deferred income

(14.9)

(12.8)

(17.2)

(17.9)

(17.8)

Short term borrowings

0.0

0.0

(22.7)

0.0

0.0

Non-current Liabilities

 

(148.9)

(139.2)

(114.5)

(172.8)

(179.2)

Long term borrowings

(148.3)

(138.6)

(113.9)

(172.3)

(178.6)

Other long term liabilities

(0.6)

(0.6)

(0.6)

(0.6)

(0.6)

Net Assets

 

426.8

409.9

527.6

437.6

437.8

NAV/share (p)

101.6

97.6

119.7

99.3

99.3

EPRA NTA/share (p)

101.6

97.6

119.7

99.3

99.3

NAV total return

1.1%

0.9%

28.4%

-12.5%

5.6%

CASH FLOW

Operating Cash Flow

 

31.0

23.8

32.6

27.6

32.0

Net Interest

(4.4)

(4.5)

(4.5)

(6.3)

(7.2)

Tax

0.0

0.0

0.0

0.0

0.0

Net additions to investment property

(12.2)

(10.1)

26.6

(37.0)

(10.0)

Ordinary dividends paid

(27.0)

(20.6)

(24.2)

(24.3)

(24.2)

Debt drawn/(repaid)

10.5

(10.1)

(25.1)

35.3

6.0

Proceeds from shares issued (net of costs)

25.0

0.0

0.5

0.0

0.0

Other cash flow from financing activities

0.0

0.0

1.7

0.0

0.0

Net Cash Flow

22.9

(21.5)

7.7

(4.6)

(3.4)

Opening cash

2.5

25.4

3.9

11.6

7.0

Closing cash

 

25.4

3.9

11.6

7.0

3.6

Debt as per balance sheet

(148.3)

(138.6)

(136.6)

(172.3)

(178.6)

Unamortised loan arrangement fees

(1.7)

(1.4)

(1.2)

(1.2)

(0.9)

Total debt

(150.0)

(140.0)

(137.8)

(173.5)

(179.5)

Restricted cash

(0.9)

(1.2)

(1.1)

(1.7)

(1.7)

Closing net debt

 

(125.5)

(137.3)

(127.3)

(168.2)

(177.6)

Net LTV

22.4%

24.9%

19.1%

27.4%

28.4%

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


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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.

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London, WC1R 4PS

United Kingdom

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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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