Custodian REIT plc : Interim Results

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Custodian REIT plc (CREI)

06-Dec-2018 / 07:00 GMT/BST
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6 December 2018



Custodian REIT plc


('Custodian REIT' or 'the Company')


Interim Results


Custodian REIT (LSE: CREI), the UK commercial real estate investment company, today reports its interim results for the six months ended 30 September 2018 ('the Period').


Financial highlights and performance


  • NAV per share total return[1] of 4.3% (2017: 4.2%)
  • Basic and diluted earnings per share[2] up 13% to 4.3p (2017: 3.8p)
  • EPRA[3] earnings per share[4] of 3.5p (2017: 3.4p)
  • Portfolio value of £547.0m (2017: £474.3m)
  • Profit before tax up 26% to £16.6m (2017: £13.2m)
  • £8.4m[5] of new equity raised at an average premium of 13.2% to dividend adjusted NAV
  • Dividends of 3.275p per share paid and approved for the Period
  • £27.7m[6] invested in seven acquisitions, one development and one refurbishment
  • £3.9m valuation uplift from successful asset management initiatives
  • £3.5m valuation decrease due to company voluntary arrangements ('CVAs')
  • £1.4m net valuation decrease[7]
  • £4.3m profit on disposal of three properties for an aggregate consideration of £15.4m
  • EPRA occupancy[8] 96.9% (2017: 96.7%)



6 months to
30 Sept 2018


6 months to
30 Sept 2017


12 months to 31 Mar 2018

Total return




NAV per share total return




Share price total return[9]





Capital values




NAV (£m)




NAV per share (p)




Share price (p)




Portfolio value (£m)




Market capitalisation (£m)








Premium to NAV per share




Net gearing[10]





Alternative performance measures, including EPRA Best Practice Recommendations, are used to assess the Company's performance.  Explanations as to why alternative performance measures give valuable further insight into the Company's performance are given in the Company's Annual Report.  Supporting calculations for alternative performance measures and reconciliations between non-statutory performance measures and their IFRS equivalents are set out in the 'Additional disclosures' section of the interim financial statements.


David Hunter, Chairman of Custodian REIT, said:


'I am pleased to report another successful period of positive shareholder returns and cautious investment in a market where value can still be found with a disciplined approach to deployment.  We continue to target growth to realise the potential economies of scale offered by the Company's relatively fixed administrative cost base and tiered annual management charge.


'The Board and Investment Manager are closely monitoring the potential impact of evolving trends in the UK retail industry and 'Brexit' on commercial property markets.  Our role is to look beyond the media coverage to weigh up dispassionately the associated risks, which often create opportunity, and we expect proactive asset management will continue to drive performance in the portfolio, as rental growth at lease renewal or rent review remains robust.  We also expect occupational demand, combined with a limited supply of new development, to maintain low vacancy rates across our regional portfolio.


'We are well placed to meet our target of paying further quarterly dividends, fully covered by net income, to achieve an annual dividend for the year of 6.55p per share, and remain committed to both growing the dividend on a sustainable basis and delivering capital value growth for our shareholders over the long-term.'


Further information


Further information regarding the Company can be found at the Company's website or please contact:


Custodian Capital Limited


Richard Shepherd-Cross / Nathan Imlach / Ian Mattioli MBE

Tel: +44 (0)116 240 8740


Numis Securities Limited


Hugh Jonathan/Nathan Brown

Tel: +44 (0)20 7260 1000




Ed Gascoigne-Pees

Tel: +44 (0)20 3757 4984


Chairman's statement


I am pleased to report the Company delivered further positive returns for the six months ended 30 September 2018.  Earnings per share increased by 13% to 4.3p (2017: 3.8p) and the property portfolio increased through the investment of £27.7m in seven acquisitions, one refurbishment and one development.  This expansion was funded by £8.4m raised from the issue of new shares and through the Company's existing debt facilities.  We continue to target growth to realise the potential economies of scale offered by the Company's relatively fixed administrative cost base and the reducing scale of management charges.  The Company continues to adhere to its investment policy and seeks to maintain the quality of both properties and income.


At the same time as growing the portfolio, we have continued to pay fully covered dividends in line with target and we have minimised 'cash drag' on the issue of new shares by taking advantage of the flexibility offered by the Company's £35m revolving credit facility.


The successful deployment of new monies on the acquisition of high quality regional assets at an average net initial yield[11] of 7.2% supports our objective to deliver strong income returns from a portfolio principally of sub £10m lots in strong, regional markets.


The Company's share price performance has allowed the Board to issue equity at an average premium of 13.2% above dividend adjusted NAV, more than covering the costs of issue and deployment.




During the Period we have taken a cautious approach to acquisitions in a market where, in general, industrial values are increasing and certain retail asset values are decreasing, with little clarity on where they will settle.  The Company has stuck firmly to its investment strategy of deploying its available resources into the right property assets and disposed of two weaker retail assets to improve the quality of the Company's retail portfolio.  Property market conditions have restricted our ability to acquire properties that meet our strategy at a sufficient rate to satisfy demand for new equity issuance.  As a result new issuance has been limited which, in turn, has seen the Company's shares trade at a premium well ahead of most of our peers.


The Board and the Investment Manager follow closely the evolving trends in the UK retail industry, and its impact on commercial property markets.  Our role is to look beyond the media coverage to weigh up dispassionately the risks in a sector which often creates opportunity through a sweeping market reaction, and we believe the current retail environment is no different.  Since the Period end we have acquired £25.0m of retail warehousing and £2.1m of high street retail at a significant discount to recent market pricing.  These properties have been carefully selected with strong underlying attributes, are leased at affordable rents to tenants with sustainable business models and which trade strongly from those locations.


Net asset value


The Company delivered NAV per share total return of 4.3% for the Period, where the initial costs (primarily stamp duty) of investing £27.7m in property acquisitions, one development and one refurbishment diluted NAV per share total return by circa 0.4p, partially offset by raising £8.3m from the issue of new equity (net of costs), which added 0.2p per share.





Pence per share







NAV at 31 March 2018





Issue of equity (net of costs)















Valuation movements relating to:





-          Asset management activity





-          Other valuation movements





Gross valuation increase










Impact of acquisition costs





Net valuation decrease










Profit on disposal of investment property





Net gain on investment property















Expenses and net finance costs





Dividends paid[12]










NAV at 30 September 2018






Activity during the Period also centred on pro-active asset management, which generated a £3.9m valuation uplift.  However, these gains were largely offset by a £3.5m valuation decrease due to the CVAs of Homebase, Office Outlet (formerly Staples) and Carpetright impacting the Company's units in Leighton Buzzard, Milton Keynes and Grantham respectively.


Share price


Share price total return for the first half of the financial year was 10.3%, with a closing price of 121.4p per share on 30 September 2018 representing a 11.8% premium to NAV.  During the Period the Company shares traded consistently at a premium to NAV with low volatility offering shareholders stable returns.  I believe the increasing, but still relatively stable premium to NAV, has been a function of strong demand for closed-ended property funds, the increasing daily liquidity of the Company's shares, the Company's regional property investment strategy, focused asset management and the attractive level of income offered by the Company's dividend policy.


Issue of new ordinary shares


The Company issued 7.0m new shares during the Period at an average premium to the prevailing dividend adjusted NAV of 13.2%.  These issues have been accretive to NAV with positive investor demand for the Company's shares a testament to the successful implementation of our strategy to date.


At the Annual General Meeting ('AGM') of the Company held on 19 July 2018, shareholders voted to limit the authority to issue new shares with pre-emption rights disapplied to a maximum of 10% of the Company's issued share capital ('Limit').  The Board had proposed a Limit of 20% in line with the 2017 changes to the EU Prospectus Directive, which increased the maximum proportion of the Company's issued share capital that can be issued over a 12-month period on a non-pre-emptive basis before the Company is required to publish a prospectus from 10% to 20%.


The Pre-Emption Group's Statement of Principles on Disapplying Pre-emption Rights, however, continues to support a Limit of 10%.  Accordingly, 26.0m votes against a Limit of 20% were received, representing 47.4% of votes cast but only 7.4% of eligible votes, largely from shareholders following institutional proxy voting adviser recommendations which typically follow the Pre-emption Group's guidance.


In the Board's opinion, a Limit of 20% is justified to continue the Company's programme of tap issuance, allowing the Company to fund suitable property acquisitions in a cost-efficient manner by avoiding the significant costs of publishing a prospectus.


The Board believes that growing the Company efficiently is in the best interests of all shareholders as it reduces the Company's ongoing charges, diversifies income and increases share liquidity.


Due to the votes against a 20% Limit only representing 7.4% of eligible votes, and based on feedback from Shareholders since the 2018 AGM, the Board currently expects to request approval for a 20% Limit at the 2019 AGM.




As at 30 September 2018 net gearing equated to 20.5% LTV.  The Board's strategy is to:


  • Increase debt facilities in line with portfolio growth targeting net gearing of 25% LTV;
  • Facilitate expansion of the portfolio to take advantage of expected rental growth and reduce ongoing charges; and
  • Reduce shareholders' exposure to risk by:

­        Taking advantage of low interest rates to secure long-term, fixed rate borrowing; and

­        Managing the weighted average maturity ('WAM') of the Company's debt facilities.


The Company operates the following debt facilities:


  • A £35m revolving credit facility with Lloyds Bank plc which attracts interest of 2.45% above three-month LIBOR and expires on 13 November 2020;
  • A £20m term loan with Scottish Widows plc which attracts interest fixed at 3.935% and is repayable on 13 August 2025;
  • A £45m term loan with Scottish Widows plc which attracts interest fixed at 2.987% and is repayable on 5 June 2028; and
  • A £50m term loan with Aviva Real Estate Investors comprising:

a)      £35m Tranche 1 repayable on 6 April 2032 attracting fixed annual interest of 3.02%; and

b)      £15m Tranche 2 repayable on 3 November 2032 attracting fixed annual interest of 3.26%.


The weighted average cost of the Company's agreed debt facilities is 3.1% (2017: 3.1%) with a WAM of 9 years (2017: 10 years) and 77% (2017: 77%) of the Company's debt facilities are at a fixed rate of interest, significantly mitigating interest rate risk.


Investment Manager


The Board is pleased with the Investment Manager's performance, particularly the timely deployment of new monies on high quality assets, securing the earnings required to fully cover the target dividend.


The Investment Manager is appointed under an investment management agreement ('IMA') to provide property management and administrative services to the Company.  Fees payable to the Investment Manager are set out in Note 16.




Income is a major component of total return.  The Company paid dividends totalling 3.25p per share during the six-month Period, all classified as property income distributions, comprising interim dividends of 1.6125p per share and 1.6375p per share relating to the quarters ended 31 March 2018 and 30 June 2018 respectively.


The Board has approved an interim dividend of 1.6375p per share for the quarter ended 30 September 2018 which was paid on 30 November 2018.  In the absence of unforeseen circumstances the Board believes the Company is well placed to meet its target[13] of paying further quarterly dividends, fully covered by income, to achieve an annual dividend per share for the year ending 31 March 2019 of 6.55p (2018: 6.45p).


The Board's objective is to grow the dividend on a sustainable basis, at a rate which is fully covered by projected net rental income and does not inhibit the flexibility of the Company's investment strategy.




Notwithstanding our cautious approach to investment in the current market we believe that value can still be found with a disciplined approach to deployment.  The strength of the occupational market and softening yields for prime retail warehouse assets let to blue chip tenants both represent exciting opportunities, discussed more fully in the Investment Manager's report.  Rental growth at lease renewal and rent review remains robust.  We expect proactive asset management and rental growth will continue to drive performance in the portfolio and are confident we can maintain occupancy levels, which in turn will sustain our policy of paying a growing and fully-covered dividend to shareholders.


While we can never rule out some future impact on NAV as a result of falling confidence in the property market or general economic and political turbulence, we believe our strategy of securing sustainable income will support future dividends through any medium-term market volatility and deliver capital growth for shareholders over the long-term.


David Hunter


5 December 2018




Investment Manager's report


Property market


Investment market demand has continued in 2018 Q3 from property companies, institutions, private investors and overseas investors.  While there have been marginal outflows from the open-ended funds and many REITs are trading at a discount to NAV (whereas the Company is currently trading at a premium to NAV), the demand for income focused investments has not abated.  The rise in UK interest rates was sufficiently well forecast that it only had an imperceptible impact on the market and there does not appear to be an imminent threat of meaningful rate rises in prospect.


The continued demand for industrial/logistics properties has led to the sector showing the lowest initial yields in regional markets, in large part explained by the rental growth prospects in the sector which are being driven by occupational demand and more crucially, a lack of supply.  This demand has led to an increase in speculative development, principally of 'big box' logistics units.  We have yet to witness an increase in the development of smaller or mid-sized industrial units so the rental growth dynamics might be stronger at this end of the market. 


The strength of the industrial market was evident in the sale of the Company's industrial building in Southwark.  Not only had we recently secured a rental uplift from £9 per sq ft to £16 per sq ft, demonstrating extraordinary rental growth but subsequently negotiated the sale of the property to a special purchaser for £12.0m, £4.4m or 58% ahead of its 30 June 2018 valuation.  Industrial property remains a very good fit with the Company's strategy but recent price inflation is limiting the opportunity to acquire properties that meet the investment mandate.  Notwithstanding this challenge we added to the industrial sector of the portfolio during the Period and I expect the sector to remain a strong driver of rental growth for the Company.


Investment in the regional office market has also been consistently strong which has coincided with a number of the UK's 'big six' regional cities[14] hitting record rental levels for prime offices.  Like the industrial sector it is restricted supply, the lack of development and the extensive conversion of secondary offices to residential which is maintaining the upward pressure on rents.  However, we are conscious that economic and environmental obsolescence and lease incentives can be a real cost of office ownership, which can hit cash flow and be at odds with the Company's relatively high target dividend, so we remain very selective although open to opportunities.


There is a general move against retail as many institutional investors feel overweight in the sector where we have also witnessed an increase in CVA activity.  While the easy explanation for the changing retail market is the rise of online retailing, the real picture is much more complex.  Over-gearing, poor management strategy and an inability to modernise over an extended period of time has had a more detrimental impact on certain retailers than the internet.  The challenge in the retail sector is not so much identifying the retailers who will prevail in the modern retail environment but to identify trends in rental levels in both retail sub-sectors and locations.  In many locations rents need to adjust to support retailers, not least because labour costs are increasing and business rates are too high.


We generally feel comfortable that retail warehousing, with low rents per sq ft, 'big box' formats and free parking will be more robust than the High Street.  Following in the footsteps of the USA the UK retail landscape is increasingly polarising, with robust city centre retail in the major conurbations where the experience of retail and leisure together has remained attractive and resilient out of town retail in smaller towns where convenience and choice is the stock-in-trade.


There is continued weakness in secondary high street retail locations with rental levels still under pressure and a very real threat of vacancy, but retailers are still keen to have representation on prime high streets.  The challenge across all high street retail locations is to understand where rental levels will settle following the current retail shakeout.  We will continue to rebalance the portfolio to focus on strong retail locations while working on the orderly disposal of those assets we believe are ex-growth.


Across the portfolio we settled eight rent reviews and agreed six new lettings during the Period with a weighted average rental increase of 11.1% (5.4% simple average).  This growth has come across all sectors from open market lettings and rent reviews and two RPI linked rent reviews.  These rent reviews demonstrate the continuing opportunity to enhance earnings across Custodian REIT's diverse regional portfolio.


Portfolio performance


At 30 September 2018 the Company's property portfolio comprised 151 assets, 218 tenants and 259 tenancies with an aggregate net initial yield ('NIY') of 6.6%.  The portfolio is split between the main commercial property sectors, in line with the Company's objective to maintain a suitably balanced investment portfolio, with a relatively low exposure to office and a relatively high exposure to industrial, retail warehouse and alternative sectors, often referred to as 'other' in property market analysis.  The current sector weightings are:




30 Sept 2018


Weighting by income[15] 30 Sept


Weighting by income 31 Mar


Gross valuation movement £m

Net valuation movement














Retail warehouse












High street retail



























We continue to find opportunities that fit our investment strategy as demonstrated by the investment of £27.7m during the Period at an average NIY of 7.2%.


Since the Period end, we have invested £27.1m in the following acquisitions:


  • On 16 November 2018 the Company acquired the Evesham Shopping Park for £14.2m comprising a terrace of five units occupied by Next, M&S, Boots, Argos and Poundstretcher.  The units have a weighted average unexpired lease term to first break or expiry ('WAULT') of 6.8 years, and the price reflects a NIY of 6.04%.
  • On 3 December 2018 the Company acquired Jubilee Close Retail Park in Weymouth for £10.8m comprising a terrace of three units occupied by B&Q, Halfords and Sports Direct.  The units have a WAULT of 7.8 years, and the price reflects a NIY of 6.97%.
  • On 2 November 2018 the Company acquired a high street unit on The Grove in Stratford, East London for £2.1m let to Foxton's Estate Agents and The Universal Church of the Kingdom of God with leases expiring on 30 April 2031 and 2 May 2025 respectively and the price reflects a NIY of 6.78%.


Investment objective


The Company's key objective is to provide shareholders with an attractive level of income by maintaining the high level of dividend, fully covered by earnings, with a conservative level of net gearing.


We continue to pursue a pipeline of new investment opportunities with the aim of deploying the Company's undrawn debt facilities up to the net gearing target of 25% LTV.  While the cost of debt remains near historical lows, we believe this strategy will improve dividend cover as net gearing increases towards the target level.


We expect to see continuing strong asset management performance as we secure rental increases and extend contractual income.


We remain committed to a strategy principally focused on sub £10m lot-size regional property, diversified across sector, geography and a broad tenant mix stands the portfolio in good stead against market shocks.  The largest tenant in the portfolio, B&M, represents only 3.2% of the rent roll across four properties, with the average tenant representing only 0.5% of the rent roll.




During the Period the Company completed the following property acquisitions:




Location: Bellshill, Glasgow

Tenant: Yodel Delivery Network

NIY: 6.94%

Purchase price[17]: £3.72m

Location: Hilton, Derby

Tenant: Daher Aerospace

NIY: 6.72%

Purchase price: £5.585m




Location: Lincoln

Tenant: Total Fitness

Subsector: Leisure

NIY: 7.64%

Purchase price: £4.30m

Location: Shrewsbury

Tenant: TJ Vickers

Subsector: Motor trade

NIY: 6.75%

Purchase price: £1.675m

Location: Shrewsbury

Tenant: VW Group

Subsector: Motor trade

NIY: 6.58%

Purchase price: £2.825m

Location: Stafford

Tenant: VW Group

Subsector: Motor trade

NIY: 6.29%

Purchase price: £4.55m




Location: Sheffield

Tenant: Secretary of State for Communities and Local Government

NIY: 9.79%

Purchase price: £3.56m



For details of all properties in the portfolio please see


Portfolio risk


The portfolio's security of income is enhanced by 13% of income benefitting from either fixed or indexed rent reviews although there is increasingly strong evidence of open market rental growth across all sectors.


Short-term income at risk is a relatively low proportion of the portfolio's total income, with 33% expiring in the next three years (8% within one year).


The Investment Manager does not anticipate any changes to the principal risks and uncertainties set out in the Company's Annual Report for the year ended 31 March 2018 over the remainder of the financial year.  The Board considers it is too early to understand the full impact of 'Brexit' on revenues and portfolio valuation while the terms of the UK's future trading arrangement with the EU remain unclear.  However, subject to there not being a 'no deal' Brexit, this political risk is not considered likely to have a material impact on the Company's performance due to the 'Mitigating factors' set out on page 64 of the Annual Report.


Asset management


Owning the right properties at the right time is one key element of effective portfolio management, which necessarily involves some selling from time to time to balance the portfolio.  While Custodian REIT is not a trader, identifying opportunities to dispose of assets significantly ahead of valuation or that no longer fit within the Company's investment strategy, is important.


After focused pre-sale asset management, the following three properties were sold during the Period for a total of £15.4m, realising a profit on disposal of £4.3m at an aggregate NIY of 4.1%, with gross proceeds 39.8% ahead of aggregate valuation:


  • An industrial unit in Southwark for £12.0m, £4.4m (58%) ahead of its 30 June 2018 valuation.  The lack of available investment stock in Central London, strong investment demand and a recent, substantial rental increase had led to a significant recent valuation increase.  In addition, redevelopment potential and the identification of a special purchaser offering a NIY of 2.95% allowed us to crystallise a substantial profit;
  • A retail development in Stourbridge for £2.25m, in line with valuation, as we did not anticipate future rental growth; and
  • A town centre retail unit in Dumfries for £1.125m, in line with valuation, as we did not anticipate future rental growth.


We intend to use the proceeds from these disposals to fund acquisitions better aligned to the Company's long-term investment strategy.


Our continued focus on active asset management including rent reviews, new lettings, lease extensions and the retention of tenants beyond their contractual break clauses resulted in a £3.9m valuation increase in the Period.  Key asset management initiatives completed during the Period include:


  • Agreeing a new 10 year lease with Teleperformance of an industrial unit in Ashby-de-la-Zouch, with annual rent increasing by 15% to £0.5m, which increased the valuation by £2.0m;
  • Letting the Company's largest vacant property, an industrial unit in Tamworth, to ICT Express on a 10 year lease without break at a 28% higher rent, which increased the valuation by £1.3m; and
  • Documenting a reversionary lease with Synergy Health for an industrial building at Sheffield Parkway to extend the lease by 7.5 years until 2034 and adjust the rent review pattern to increase in line with RPI, which increased the valuation by £0.2m.


Further initiatives on other properties currently under review are expected to complete during the remainder of the financial year, although growth in rents and positive asset management outcomes were tempered by the following events: 


  • The CVA of Homebase resulted in the Company experiencing a 35% annual rent reduction from £524k to £341k at its Leighton Buzzard unit;
  • In Milton Keynes, the CVA of Office Outlet (formerly Staples) resulted in the tenant contracting into 50% of the space previously occupied, with rent halving from £419k pa to £209k pa;
  • The CVA of Carpetright resulted in a 25% annual rent reduction from £100k to £75k at the Company's Grantham unit; and
  • In Crewe we took the difficult decision to implement a forfeiture of the lease of a bowling operator which failed to pay its rent, thereby regaining control and opening up the opportunity of re-letting to a stronger tenant.  Passing rent on the unit was £200k pa.


The portfolio's WAULT decreased from 5.9 years at 31 March 2018 to 5.6 years principally due to the natural 0.5 of a year's decline due to the passage of time over the Period and the Crewe lease forfeiture, partially offset by the positive impact of acquisitions with an aggregate WAULT of 6.2 years and asset management activities completed during the Period.




We do not expect to see a meaningful change in investor demand for UK real estate over the next few months.  The conundrum of a 'soft Brexit' or a 'no deal Brexit' appears increasingly to be occupying investors' thoughts and we anticipate continued relative inaction while investors wait to see what happens next.  Meanwhile the occupational market in the regions remains short of supply which continues to support rental growth in office and industrial markets.


Secondary retail is also worrying the market and we may see further asset sales with falling values to match.  We also expect a clearer picture to emerge as to which retail assets are in demand by occupiers which, in turn, might start to allay investors' fears in this sector.


We remain confident that the Company's strategy of targeting income with conservative net gearing in a well-diversified regional portfolio will continue to deliver the stable long-term returns demanded by our shareholders.


Richard Shepherd-Cross

for and on behalf of Custodian Capital Limited

Investment Manager

5 December 2018







% Portfolio Income[18]