Acquisition of Property Portfolio and Intention to Issue Equity

Property portfolio

Custodian REIT (LSE: CREI), the UK property investment company, is pleased to announce the acquisition of a £26.75 million portfolio of properties (“the Portfolio”).

The Portfolio comprises 10 light industrial sites spread throughout the UK with a current passing rent of £2.21 million reflecting a net initial yield of 7.86%, with an expected reversionary yield of 8.03%. The Portfolio’s weighted average unexpired lease term (“WAULT”) is 5.4 years.

The Company acquired the Portfolio by purchasing the entire issued share capital of BLME (UK) GP Limited and LIBF (II) S.à.r.l., being the partners in BLME Light Industrial Building LP, an English limited partnership holding the title and beneficial interest in the Portfolio. The acquisition was funded using the Company’s existing cash and debt facilities, increasing the Company’s borrowings to 20.7% loan-to-value.

Commenting on the acquisition, Richard Shepherd-Cross, Managing Director of Custodian Capital Limited (the Company’s discretionary investment manager), said:

“The Portfolio is a strong fit with our investment strategy and is complementary to our existing property portfolio, augmenting our regional, industrial bias and adding diversification by both tenant and location. The Portfolio was compiled between 2011 and 2015 but is being sold due to the vendor restructuring its funds business. This provides Custodian REIT with opportunities to continue the asset management plan and enhance value.

“We agreed terms at the height of market uncertainty regarding the EU referendum and anticipate a valuation increase at 30 September 2016 as market sentiment recovers. This corporate transaction offered compelling economic benefits for the Company and the vendor versus the Company acquiring the properties directly, demonstrating our commitment to enhance shareholder value and secure economies of scale through growth in the fund.”

Details of each property in the Portfolio are set out at the end of this announcement.

Intention to issue equity

Following the acquisition, in response to continued investor demand and to take advantage of a pipeline of attractive investment opportunities and prevailing market conditions, the Board today announces that the Company intends to raise additional equity capital through the issue of new ordinary shares (“the New Shares”) by way of a placing (“the Placing”). The Board proposes to raise gross proceeds of up to £20 million, with the ability to increase this dependent on demand and pipeline opportunities.

The New Shares will be issued at a premium of 3.5% to the unaudited net asset value (“NAV”) per share as at 30 September 20161 (“the Issuance Price”), to be published on 14 October 2016.

The Company’s existing Placing Programme set out in the Company’s prospectus dated 4 November 2015 (“the Prospectus”) will remain in place until its expiry on 3 November 2016.

1.Adjusted to exclude the dividend relating to the quarter ending 30 September 2016, payable on 31 December 2016 to shareholders on the register on 14 October 2016.

Reasons for the Placing and use of proceeds

The acquisition of the Portfolio and a committed pipeline of £22.4 million of further property acquisitions will increase loan-to-value to 23.9%, compared to target gearing of 25.0% loan-to-value, leaving limited headroom for further investment. The net proceeds of the Placing are expected to be used firstly to repay an element of the £22 million drawn at 28 September 2016 under the Company’s £35 million revolving credit facility (“RCF”). Any remaining net proceeds are then expected to be used to acquire additional UK commercial real estate that can further diversify the portfolio and enhance income yield. Net proceeds of the Placing are expected to be fully invested within three to six months after admission of the New Shares, depending on the amount.

Pipeline of acquisition opportunities

We continue to experience a strong flow of investment opportunities and currently have £22.4 million of assets under offer, in funding of a pre-let development or in solicitors’ hands. We have seen a steady flow of opportunities following the EU referendum and have been pleased to capitalise on some short-term pricing opportunities as open-ended funds continue to unwind their liquidity positions and the market adjusts. We remain confident in regional property markets, which are showing no signs of change to the fundamental dynamics that lead to rental growth, and fully expect to acquire assets that will enhance cash flow and safeguard dividend cover and growth.

How to participate

Qualified investors (as defined in section 86(7) of the Financial Services and Markets Act 2000 (as amended)) are invited to apply for New Shares by contacting Numis Securities Limited (“Numis”) on the contact details below. The decision to allot New Shares to any qualified investor shall be at the absolute discretion of the Company and Numis.

Expected timetable

Commenting on the Placing, Richard Shepherd-Cross said:

“We continue to identify many opportunities in the property market, as highlighted by today’s portfolio acquisition. Although the Placing proceeds initially will be used to repay borrowings, we intend to use the Placing proceeds in conjunction with our RCF facility to enhance the Company’s property portfolio in the manner most likely to deliver additional shareholder value.”

The Portfolio

Details of each property within the Portfolio are set out below:

West Bromwich – a 59,973 sq ft unit, five miles north-west of Birmingham city centre and 0.6 miles from junction 1 of the M5 providing access to the M6, M42 and M40. The property is let to Oyez Straker Group Limited with an unexpired term of 11.5 years and passing rent of £280,000 per annum. Nearby occupiers include Interlink Express, Keltruck, and Office Team. Hawthorns Business Park is an established location and the lease is subject to five yearly fixed rental uplifts, which guarantees future rental growth.

Christchurch – a 34,046 sq ft unit within eight miles of Bournemouth and with good access to the M27. The property is let to Interserve Construction Limited with an unexpired term of 6.5 years and passing rent of £199,496 per annum. Nearby occupiers include Screwfix, Lidl, Wickes and Howdens Joinery. The tenant has recently installed a significant amount of fixed plant, demonstrating their commitment to the location.

Sheffield – a 23,000 sq ft unit with access to junctions 33 and 34 of the M1. The property is let to Arkote Limited with an unexpired lease of 7.6 years and passing rent of £120,750 per annum. Nearby occupiers include Jack Wills, FPS Distribution, HSS Hire and Hertz. This is a modern building in an established industrial location situated between Sheffield city centre and the M1 Motorway.

Warrington – a 40,810 sq ft unit with excellent access to the M6, M63 and M56. The property is let to Dinex Limited with an unexpired lease of 9.5 years and passing rent of £183,645 per annum. Nearby occupiers include Norbert Dentressangle, Iceland, Marks and Spencer and DHL. This property acts as Dinex’s UK headquarters. The tenant recently entered into a 10 year lease renewal to December 2025.

Warrington – a 66,990 sq ft recently refurbished unit with excellent access to the M6, M63 and M56. The property is let to DHL Supply Chain Limited with an unexpired lease of 4.8 years and passing rent of £229,653 per annum. At £3.43 per sq ft the unit is under-rented and an outstanding April 2016 rent review provides opportunity for an immediate uplift.

Manchester – a 21,357 sq ft unit nine miles south-west of Manchester and nearby junctions 11 and 12 of the M62. The property is let to Northern Commercial Limited with an unexpired lease term of 9.9 years and passing rent of £140,000 per annum. Nearby occupiers include DPD, Ceva Logistics, Screwfix and FX Sameday. This modern commercial vehicle maintenance/repair unit has an extremely low site cover of only 19%, providing potential for further development.

Atherstone – a 23,046 sq ft industrial estate near to the A5 which links the M1 and M6. The property is let to North Warwickshire Borough Council with an unexpired lease of 3.8 years and passing rent of £115,000 per annum. Nearby occupiers include Aldi (UK Head office), 3M and TNT. This is an established industrial and distribution location and the site has short-term asset management opportunities.

Westerham – a 19,300 sq ft unit located 23 miles south of central London and 22 miles from Gatwick Airport with excellent access to junction 5 of the M25 and junction 21 of the M6. The property is let to Aqualisa Products Limited with an unexpired lease of 9.2 years and passing rent of £135,000 per annum. The tenant has recently consolidated its operations to this site, emphasising its belief in the strength of the location. Industrial space in this area is in short supply, leading to upward pressure on rents and the likelihood of rental growth at rent review or lease renewal.

Gateshead – six well specified warehouse/distribution units occupying a total of 83,025 sq ft adjacent to the Metrocentre with excellent access to the A1. The units are let to Boots UK Limited, WH Partnership Limited, Rexel UK Limited, Travis Perkins (Properties) Limited and The Human Office Limited with a WAULT of 1.7 years and passing rent of £331,200 per annum. Significant asset management opportunities have been identified at this property which, once complete, will enhance value.

Kettering – eight modern industrial/warehouse units of 65,034 sq ft located near to junction 9 of the A14 which links the M1, A1(M) and M11. The units are let to VP Packaging Limited, DP Press Limited, Nital Training Academy Limited, Rapid Vehicle Repairs Limited and Equinox Aromas Limited with a WAULT of 6.6 years and passing rent of £278,350 per annum. Nearby occupiers include Weetabix, Alpro and Knights of Old Group. This location is experiencing high demand for industrial units of this specification.

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