Custodian REIT plc (CREI)
4 May 2021
Custodian REIT plc
("Custodian REIT" or "the Company")
Unaudited net asset value as at 31 March 2021 and dividend update
Custodian REIT (LSE: CREI), the UK commercial real estate investment company, today reports its unaudited net asset value ("NAV") as at 31 March 2021, highlights for the period from 1 January 2021 to 31 March 2021 ("the Period") and dividends payable.
1 Profit after tax excluding net gains or losses on investment property divided by weighted average number of shares in issue.
2 NAV per share movement including dividends paid during the period.
3 Gross borrowings less cash (excluding rent deposits) divided by portfolio valuation.
4 Estimated rental value ("ERV") of let property divided by total portfolio ERV.
Net asset value
The unaudited NAV of the Company at 31 March 2021 was £409.9m, reflecting approximately 97.6p per share, an increase of 1.2p (1.2%) since 31 December 2020:
5 Dividends of 1.25p per share relating to the quarter ended 31 December 2020 were paid on 26 February 2021.
The NAV attributable to the ordinary shares of the Company is calculated under International Financial Reporting Standards and incorporates the independent portfolio valuation at 31 March 2021 and net income for the Period. The movement in NAV reflects the payment of a 1.25p per share dividend relating to the quarter ended 31 December 2020 during the Period, which was fully covered by net cash collections and EPRA earnings in that quarter, but does not include any provision for the approved dividend of 1.25p per share for the Period to be paid on 28 May 2021.
Commenting on the market, Richard Shepherd-Cross, Managing Director of Custodian Capital Limited (the Company's discretionary investment manager) said:
"In common with the wider economy the commercial property investment market has experienced a year unlike any other, with office workers deserting their offices, shoppers going online as retailers were obliged to close and pubs and restaurants unable to serve customers for a large part of the year. The government's moratorium on the eviction of tenants for non-payment of rent has left landlords unable to compel tenants to pay rent, but despite these challenges, I believe real estate investment has been remarkably resilient.
"The clear winner in real estate investment has been the industrial and logistics sector which has benefited from the shift from the High Street to 'E-tailing' and from the onshoring of the national supply chain post Brexit. Investment demand and pricing are both at record levels which has been strongly positive for Custodian REIT as this sector makes up 49% of the portfolio, by value, and its valuation increased by 2.6% during the Period.
"The high street retail sector's future is uncertain, but, I believe as part of a combined retail and leisure-based city centre there will still be active demand from occupiers. Some of the crowds and queues witnessed, notably outside Primark, as non-essential retail re-opened, and outside pubs, were testament to the appeal of city centre locations. The trend for fewer shops was well established prior to the pandemic, but, in core locations we still expect to see high occupancy levels albeit at rental levels 25-50% below the peak. High Street retail makes up only 8% of the property portfolio by value and we have sold four small shops in the last six months, with another under offer, where we felt a return to rental growth in the medium term was unlikely.
"By contrast the out of town retail sector, which makes up 18% of the Custodian REIT property portfolio by value, is witnessing investors openly competing for assets. This is a sector where there is confidence that the combination of convenience, lower costs per square foot and the complementary offer to online retail will keep these assets relevant. Through the last year we have seen DIY and discounters (B&Q and B&M for example) trading strongly.
"It is widely believed that after a year of working from home the majority of workers are itching to get back to the office. Without doubt the way we use offices and how frequently we visit them has changed, following the largely successful national experiment of remote working. As always when considering real estate investment the location of offices will be key."
EPRA earnings per share for FY21 decreased to 5.6p (2020: 7.0p) due primarily to a £2.7m (0.6p per share) increase in the doubtful debt provision, reflecting our prudent assumptions regarding the recovery of overdue and deferred rents, and a £2.1m (5.0%) decrease in the annual rent roll since 31 March 2020 due to tenants exiting at lease expiry (2.6%), cessation of rents through Company Voluntary Arrangements ("CVAs") and Administrations (3.2%), partially offset through net property acquisitions (0.8%). Helpfully, rental increases in the industrial sector offset rental decreases seen in other sectors.
As Investment Manager, Custodian Capital invoices and collects rent directly, importantly allowing it to hold direct conversations promptly with most tenants regarding the payment of rent. This direct contact has proved invaluable through the COVID-19 pandemic, facilitating better outcomes for the Company.
90% of rent relating to the Period, net of contractual rent deferrals, has been collected and 91% of rent relating to FY21 has been collected, net of contractual rent deferrals, or 89% before contractual deferrals, as set out below:
Outstanding rental income remains the subject of discussion with various tenants, and some arrears are potentially at risk of non-recovery due to disruption caused by the recent national lockdown and from CVAs or Administrations.
To date 66% of rent relating to FY22 Q1 has been collected, net of contractual deferrals, which is in line with the same point in previous quarters.
Significant economic uncertainty remains regarding the impact of the withdrawal of government financial COVID-19 support for businesses, but the Board believes the Company is well placed to weather any medium-term impact because the Company has a diverse portfolio by sector and location with an institutional grade tenant base and low gearing.
An interim dividend of 1.25p per share for the quarter ended 31 December 2020 was paid on 26 February 2021.
The Board is pleased to approve an interim dividend per share of 1.25p for the Period, resulting in dividends per share of 4.5p for the year ended 31 March 2021, fully covered by net cash receipts and 125% covered by EPRA earnings, in line with the Board's current policy of paying dividends at a level broadly linked to net rental receipts.
The Board has set a target dividend6 per share of not less than 5.0p for the year ending 31 March 2022, based on rent collection levels remaining in line with expectations. 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.
The quarterly interim dividend for the Period of 1.25p per share is payable on 28 May 2021 to shareholders on the register on 14 May 2021 and will be designated as a property income distribution ("PID").
6 This is a target only and not a profit forecast. There can be no assurance that the target can or will be met and it should not be taken as an indication of the Company's expected or actual future results. Accordingly, shareholders or potential investors in the Company should not place any reliance on this target in deciding whether or not to invest in the Company or assume that the Company will make any distributions at all and should decide for themselves whether or not the target dividend yield is reasonable or achievable.
Despite the ongoing economic uncertainty caused by the COVID-19 pandemic, the Investment Manager has remained focused on active asset management during the Period, undertaking the following initiatives:
The positive impact of these asset management outcomes on earnings has been partially offset by the liquidation of The Human Office, the Administration of Paperchase and the CVA of Total Fitness, which resulted in an aggregate reduction in annual passing rent of £146k (c.0.4% of the Company's rent roll).
Tenant business failures have contributed to occupancy levels decreasing to 91.5% from 95.9% at 31 March 2020, but letting activity is increasing across most sectors. We have a strong pipeline of potential new tenants and in April completed a new five year letting to Green Retreats at a recently refurbished industrial unit in Farnborough with annual rent of £185k, which increased occupancy by 0.6%. Without further significant tenant failures, we expect occupancy levels across the portfolio to continue to recover over the next 3-6 months as we complete more new lettings.
The portfolio's weighted average unexpired lease term to first break or expiry decreased from 5.1 years at 31 December 2020 to 5.0 years, with the impact of lease re-gears, new lettings and disposals partially offsetting the natural elapse of a quarter of a year due to the passage of time.
The Company operates the following loan facilities:
Each facility has a discrete security pool, comprising a number of the Company's individual properties, over which the relevant lender has security and covenants:
The Company complied with all loan covenants during the Period. During the previous quarter the Company charged five unencumbered properties valued at £21.1m to add additional headroom to certain facilities.
At 31 March 2021 the Company's property portfolio comprised 159 assets with a net initial yield7 of 6.6% (31 December 2020: 6.7%). The portfolio is split between the main commercial property sectors, in line with the Company's objective to maintain a suitably balanced investment portfolio. Sector weightings are shown below:
7 Passing rent divided by property valuation plus purchaser's costs.
8 Current passing rent plus ERV of vacant properties.
9 Includes car showrooms, petrol filling stations, children's day nurseries, restaurants, gymnasiums, hotels and healthcare units.
The Company operates a geographically diversified property portfolio across the UK, seeking to ensure that no one region represents more than 50% of portfolio income. The geographic analysis of the Company's portfolio at 31 March 2021 was as follows:
For details of all properties in the portfolio please see custodianreit.com/property-portfolio.
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Further information regarding the Company can be found at the Company's website www.custodianreit.com or please contact:
Notes to Editors
Custodian REIT plc is a UK real estate investment trust, which listed on the main market of the London Stock Exchange on 26 March 2014. Its portfolio comprises properties predominantly let to institutional grade tenants on long leases throughout the UK and is principally characterised by properties with individual values of less than £10m at acquisition.
The Company offers investors the opportunity to access a diversified portfolio of UK commercial real estate through a closed-ended fund. By targeting sub £10m lot-size, regional properties, the Company seeks to provide investors with an attractive level of income with the potential for capital growth.
Custodian Capital Limited is the discretionary investment manager of the Company.
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