Custodian REIT (LSE: CREI), the UK commercial real estate investment company, today reports its unaudited net asset value (“NAV”) as at 31 March 2017 and highlights for the period from 1 January 2017 to 31 March 2017 (“the Period”).
Financial highlights
· NAV total return per share[1] for the year ended 31 March 2017 (“FY17”) of 8.5% (year ended 31 March 2016 (“FY16”): 6.2%)
· FY17 EPRA earnings per share[2] 6.6p (FY16: 6.8p)
· Target dividend per share for the year ending 31 March 2018 (“FY18”) increased to 6.45p (FY17[3]: 6.35p, FY16: 6.25p)
· NAV per share of 103.8p (31 December 2016: 101.9p)
· NAV of £351.9m (31 December 2016: £329.6m)
· Net gearing[4] of 14.5% loan-to-value (31 December 2016: 17.8%)
· £16.7m[5] of new equity raised during the Period at an average premium of 7.7% to dividend adjusted NAV per share at 31 December 2016
· Market capitalisation of £379.7m (31 December 2016: £353.4m)
· Since the Period end, completion of a £50m, 15 year term loan facility with the first tranche of £35m drawn down, with interest fixed at 3.02% per annum
Portfolio highlights
· Portfolio value of £415.8m (31 December 2016: £407.9m)
· £4.6m valuation increase from successful asset management initiatives
· EPRA occupancy[6] 98.6% (31 December 2016: 98.4%)
· £13.5m[7] invested in two property acquisitions and one on-going development
· £1.2m profit on disposal of three properties for consideration of £11.4m
· £17.4m committed pipeline of property acquisitions
[1]NAV movement including FY17 dividends paid and approved on shares in issue at 31 March 2016.
[2]Profit after tax excluding net gains on investment properties divided by weighted average number of shares in issue.
[3]Dividends paid and approved relating to FY17.
[4]Gross borrowings less unrestricted cash divided by portfolio valuation.
[5]Before costs and expenses of £0.2m.
[6]Estimated rental value (“ERV”) of let property divided by total portfolio ERV.
[7]Before acquisition costs of £0.8m.
Net asset value
The unaudited NAV of the Company at 31 March 2017 was £351.9m, reflecting approximately 103.8p per share, an increase of 1.9% since 31 December 2016:
|
Pence per share |
£m |
|
|
NAV at 31 December 2016 |
101.9 |
329.6 |
|
Issue of equity (net of costs) |
0.2 |
16.5 |
|
102.1 |
346.1 |
|
|
Valuation movements relating to: |
||
|
– Asset management activity |
1.4 |
4.6 |
|
– Profit on disposal of investment properties |
0.3 |
1.2 |
|
– Other valuation movements |
0.0 |
0.2 |
|
1.7 |
6.0 |
|
|
Acquisition costs |
(0.2) |
(0.8) |
|
Net valuation movement |
1.5 |
5.2 |
|
Income earned for the Period |
2.3 |
7.8 |
|
Expenses and net finance costs for the Period |
(0.6) |
(2.1) |
|
Dividends paid[8] |
(1.5) |
(5.1) |
|
NAV at 31 March 2017 |
103.8 |
351.9 |
[8]Dividends of 1.5875p per share were paid on shares in issue throughout the Period. Dividends paid on shares in issue at the end of the Period averaged 1.5p per share due to new shares being issued ex-dividend.
During the Period the initial costs (primarily stamp duty) of investing £13.5m in new property acquisitions and an ongoing development diluted NAV per share total return by 0.2p, was more than offset by raising £16.5m (net of costs) at an average 7.7% premium to dividend adjusted NAV, which added 0.3p per share[9].
The NAV attributable to the ordinary shares of the Company is calculated under International Financial Reporting Standards and incorporates the independent portfolio valuation as at 31 March 2017 and income for the Period, but does not include any provision for the approved dividend for the Period, to be paid on 30 June 2017.
[9] 0.2p per share through new issuance plus 0.1p per share notional dividend saving due to new shares being issued ex-dividend.
The Company completed the following acquisitions during the Period:
· A block of six retail properties and two restaurants in Shrewsbury with occupiers including Paperchase, Holland & Barrett, ASK, Thomas Cook, Greggs and William Hill for £10.3m, with a net initial yield (“NIY”) of 6.07%; and
· A high street retail unit in Chester occupied by Ernest Jones and Lakeland for £2.75m, with a NIY of 4.78%. The unit adjoins two properties held by Custodian REIT, providing a ‘marriage value’ which resulted in an overall valuation increase for the combined lot at 31 March 2017.
Asset management
Our continuing 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 £4.6m valuation increase, with further initiatives expected to complete in the coming months.
These strategies have also had a positive impact on the portfolio’s weighted average unexpired lease term to the first lease break or expiry (“WAULT”), which only decreased to 5.9 years from 6.0 years at 31 December 2016.
Key asset management initiatives undertaken during the Period include:
· Extending Assa Abloy’s lease at Cannock Road, Wolverhampton with expiry moving from July 2018 to July 2023 and annual rent increasing by 42% from £0.36m to £0.512m, increasing valuation by £1.6m;
· Extending DX Network’s lease at Harrington Way, Nuneaton with expiry moving from August 2016 to March 2022 and rent increasing by 10%, increasing valuation by £1.0m;
· Letting a vacant unit in Gateshead to Jump Arena on a 15 year lease at a rent of £0.16m per annum, increasing valuation by £0.5m;
· Removing a January 2018 break clause in Pets at Home’s lease in Winnersh increasing WAULT from 0.7 years to 10.7 years, increasing valuation by £0.4m;
· Extending DHL’s lease at Dyce Drive, Aberdeen with expiry moving from February 2017 to February 2022 and rent increasing by 7%, increasing valuation by £0.4m;
· Removing a 2020 break clause in Pizza Hut’s lease in Crewe increasing WAULT to 13 years and valuation by £0.3m; and
· Letting a trade counter unit at Counterpoint, Crewe to Edmunson Electrical on a 10 year lease following the simultaneous surrender of the former tenant’s lease, increasing WAULT from 0.3 years to 10 years and increasing valuation by £0.2m.
The Company disposed of the following properties during the Period for £11.4m:
· Wetherspoons public house in Southsea for £1.67m, £0.2m ahead of valuation;
· Toyota car dealership in Peterborough for £2.75m, £0.3m ahead of valuation; and
· Bentley car dealership in Knutsford for £7.0m, £0.7m ahead of valuation.
Each disposal was made above purchase price and the latest valuation, with an average NIY on disposal of 5.6%. The Company intends to redeploy the sale proceeds on property with better short-term income growth and long-term capital growth potential.
Property market
Commenting on the commercial property market, Richard Shepherd-Cross, Managing Director of Custodian Capital Limited (the Company’s discretionary investment manager) said:
“The imbalance between supply and demand seen in the fourth quarter of 2016 has so far persisted into 2017. Supply remains tight as a result of less selling from the open-ended funds, who typically account for a significant proportion of market activity, with potential sellers generally more concerned with how they might re-invest any capital receipts.
“This is coupled with a high level of demand from a broad cross section of the market because:
· Overseas investors, encouraged by currency arbitrage and perhaps the relative instability of their domestic markets, continue to pursue central London markets and prime regional cities;
· Private investors have been targeting smaller lot size property for its stability and income credentials, driven by the very low returns available on cash;
· New funds have been established to target properties with long-term secure leases and index-linked rent reviews in an attempt to meet the market demand for income, creating competitive demand and hardening prices as a result;
· There has been a general acceptance that the EU referendum has not called time on the underlying fundamental benefits of UK property investment;
· Occupational market dynamics, with demand outstripping supply and limited new development, have continued to drive rental growth particularly in regional markets; and
· There has been a clear bias in the market for industrial property, which is driving price inflation in this sector.
“In essence, many of the key planks of Custodian REIT’s investment strategy: income, regional markets, sub-£10m lots, a preference for industrial, and a focus on occupational market dynamics have all come centre stage.
“Despite this strong competition in the market, we were delighted to invest £13.5m (before acquisition costs) during the Period on two high quality acquisitions and an ongoing development.”
Activity and pipeline
Commenting on pipeline, Richard Shepherd-Cross said:
“Custodian REIT completed £105m of acquisitions (before acquisition costs) in FY17, demonstrating our continued confidence in the market. Despite the competitive market, we have access to a strengthening pipeline and have a track record of committing available capital promptly to the property market. We are considering a number of current opportunities and have a committed pipeline of £17.4m.
“We sold three properties during the Period, in two cases to owner occupiers and the other to take advantage of the pricing arbitrage for long term secure income. Monies realised will be re-invested in our core £2-10m lot size assets where we can identify sectors or locations which have fundamentally strong occupational characteristics or which have yet to witness significant price inflation.”
Financing
Equity
The Company issued 15.5m new ordinary shares of 1p each in the capital of the Company during the Period (“the New Shares”) raising £16.7m (before costs and expenses). The New Shares were issued at an average premium of 7.7% to the unaudited NAV per share at 31 December 2016, adjusted to exclude the dividend paid on 31 March 2017.
Debt
At the Period end the Company operated:
· A £35m revolving credit facility (“RCF”) 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; and
· A £45m term loan facility with Scottish Widows plc which attracts interest fixed at 2.987% and is repayable on 5 June 2028.
On 5 April 2017, the Company and Aviva Investors Real Estate Finance (“Aviva”) entered into an agreement for Aviva to provide the Company with a new £50m 15 year term loan facility (“the New Loan”). The Company drew down the first tranche of £35m on 6 April 2017 with a fixed rate of interest of 3.02% per annum payable on the balance.
The Company intends to use the proceeds from the New Loan to acquire additional UK commercial real estate that can further diversify the portfolio and enhance income yield.
Portfolio analysis
At 31 March 2017 the Company’s property portfolio comprised 131 assets and 265 contractual tenants with a NIY[10] of 6.91% and current passing rent of £30.7m per annum.
[10]Portfolio passing rent divided by portfolio valuation plus estimated purchasers’ costs of 6.5%.
The portfolio is split between the main commercial property sectors, in line with the Company’s objective to maintain a suitably balanced investment portfolio, but with a relatively low exposure to office and a relatively high exposure to industrial and to alternative sectors, often referred to as ‘other’ in property market analysis. Sector weightings are shown below:
|
Sector |
Valuation 31 Mar 2017 £m |
Period valuation movement £m |
Weighting by income[11] 31 Mar 2017 |
Weighting by income[11] 31 Dec 2016 |
||
|
Industrial |
187.2 |
4.8 |
45% |
45% |
||
|
Retail |
120.2 |
(0.5) |
28%[12] |
26% |
||
|
Other13 |
56.4 |
0.5 |
13% |
15% |
||
|
Office |
52.0 |
– |
14% |
14% |
||
|
Total |
415.8 |
4.8 |
100% |
100% |
[11] Current passing rent plus ERV of vacant properties.
[12]Comprises 17% high street and 11% retail warehouse.
[13]Includes car showrooms, petrol filling stations, children’s day nurseries, restaurants, gymnasiums, hotels and healthcare units.
£3.7m of the £4.8m valuation increase in the industrial sector was driven by asset management initiatives, with occupational demand driving rental growth and generating positive returns. As industrial property is less exposed to obsolescence this sector is a very good fit with the Company’s strategy.
Retail is split between high street and out-of-town retail (retail warehousing). Strong comparison retail pitches in dominant regional towns continue to show very low vacancy rates and offer stable long-term cash flow, with the opportunity for rental growth. Valuation decreases during the Period are primarily the result of shortening leases combined with a level of over-rent. Retail warehousing is witnessing close to record low vacancy rates as a restricted planning policy and lack of development combined with retailers’ requirements to offer large format stores, free parking and ‘click and collect’ to consumers.
While deemed to be outside the core sectors of office, retail and industrial the ‘other’ sector offers diversification of income without adding to portfolio risk, containing assets considered mainstream but which typically have not been owned by institutional investors. The ‘other’ sector has proved to be an out-performer over the long-term and continues to be a target for acquisitions.
Office rents are growing strongly and supply is constrained by a lack of development and the extensive conversion of secondary offices to residential making returns very attractive. However, the Company’s relatively low exposure to the office sector is a long-term strategic decision rather than a short-term comment on the state of the office market. We are conscious that obsolescence 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.
The Company operates a geographically diversified portfolio across the UK, seeking to ensure that no one area represents the majority of the portfolio. The geographic analysis of the Company’s portfolio at 31 March 2017 was as follows:
|
Location |
Valuation 31 Mar 2017 £m |
Period valuation movement £m |
Weighting |
Weighting |
||
|
West Midlands |
85.6 |
2.5 |
20% |
16% |
||
|
South-East |
79.1 |
0.3 |
17% |
20% |
||
|
North-West |
61.1 |
1.1 |
15% |
15% |
||
|
East Midlands |
45.4 |
(0.1) |
12% |
11% |
||
|
South-West |
41.6 |
0.1 |
9% |
10% |
||
|
North-East |
35.4 |
0.5 |
9% |
8% |
||
|
Eastern |
32.4 |
(0.1) |
9% |
10% |
||
|
Scotland |
30.2 |
0.5 |
8% |
8% |
||
|
Wales |
5.0 |
– |
1% |
2% |
||
|
Total |
415.8 |
4.8 |
100% |
100% |
[14]Current passing rent plus ERV of vacant properties.
For details of all properties in the portfolio please see www.custodianreit.com/property-portfolio.
Dividends
An interim dividend of 1.5875p per share for the quarter ended 31 December 2016 was paid on 31 March 2017. The Board has approved an interim dividend relating to the Period of 1.5875p per share payable on 30 June 2017 to shareholders on the register on 28 April 2017, which will achieve the FY17 target dividend per share of 6.35p.
In the absence of unforeseen circumstances, the Board intends to pay quarterly dividends to achieve a target dividend[15] per share for FY18 of 6.45p (FY17: 6.35p, FY16: 6.25p, FY15: 5.25p). 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 payment of quarterly dividends relating to FY18 will be accelerated by one month to align more closely with London Stock Exchange best practice and the Company’s peer group. The dividend relating to the quarter ending 30 June 2017 is therefore expected to be paid on 31 August 2017.
[15] 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.
Activity since the Period end
Equity
On 4 April 2017 the Company issued 1m new ordinary shares of 1p each in the capital of the Company raising £1.1m (before costs and expenses), issued at a premium of 9.7% to the unaudited NAV per share at 31 December 2016, adjusted to exclude the dividend paid on 31 March 2017.
Debt
On 5 April 2017, the Company entered into the New Loan, comprising two tranches of £35m (“Tranche 1”) and £15m (“Tranche 2”). The Company drew down Tranche 1 on 6 April 2017, repayable on 6 April 2032 with a fixed rate of interest of 3.02% per annum payable on the balance. Tranche 2 is available for draw down on or before 5 October 2017 with a fixed rate of interest payable on the balance, calculated at the same margin as Tranche 1 above the prevailing 15 year gilt rate on the date of draw down.
The activity since the Period end has resulted in the Company having uncommitted cash and agreed debt facilities of circa £70m[16].
[16] Comprising circa £20m of uncommitted cash, £35m RCF and £15m Tranche 2.
