Custodian REIT reports unaudited net asset value

Custodian REIT reports unaudited net asset value

Custodian REIT today reports its unaudited net asset value (“NAV”) as at 30 June 2017 and highlights for the period from 1 April 2017 to 30 June 2017 (“the Period”).


Financial highlights

  • NAV total return per share1 for the Period of 2.0%
  • Dividend per share approved for the Period of 1.6125p
  • NAV per share of 104.3p (31 March 2017: 103.8p)
  • NAV of £361.3m (31 March 2017: £351.9m)
  • Net gearing2 of 18.9% loan-to-value (31 March 20173: 14.4%)
  • £8.4m4 of new equity raised during the Period at an average premium of 10.0% to dividend adjusted NAV per share at 31 March 2017
  • Market capitalisation of £405.4m (31 March 2017: £379.7m)
  • Completion of a £50m, 15 year term loan facility and the first tranche of £35m drawn down, with interest fixed at 3.02% per annum


Portfolio highlights

  • Portfolio value of £452.4m (31 March 20173: £418.5m)
  • £31.3m5 invested in seven property acquisitions and one on-going development
  • £1.7m valuation increase from successful asset management initiatives
  • EPRA occupancy69% (31 March 2017: 98.6%)
  • £25.5m committed pipeline of investment properties under offer

1 NAV per share movement including dividends approved for the Period.

2 Gross borrowings less unrestricted cash divided by portfolio valuation.

3 Restated to reclassify the value of deferred lease incentives from receivables to investment properties.

4 Before costs and expenses of £0.1m.

5 Before acquisition costs of £2.0m.

6 Estimated rental value (“ERV”) of let property divided by total portfolio ERV.


Net asset value

The unaudited NAV of the Company at 30 June 2017 was £361.3m, reflecting approximately 104.3p per share, an increase of 0.5% since 31 March 2017:

Pence per share £m
NAV at 31 March 2017 103.8 351.9
Issue of equity (net of costs) 0.1 8.3
103.9 360.2
Valuation movements relating to:
 – Asset management activity 0.5 1.7
 – Other valuation movements 0.3 1.0
0.8 2.7
Acquisition costs (0.6) (2.0)
Net valuation movement 0.2 0.7
Income earned for the Period 2.4 7.9
Expenses and net finance costs for the Period (0.6) (2.1)
Dividends paid7 (1.6) (5.4)
NAV at 30 June 2017 104.3 361.3

7 Dividends of 1.5875p per share were paid on shares in issue throughout the Period. 

During the Period the initial costs (primarily stamp duty) of investing £31.3m in new property acquisitions and an ongoing development diluted NAV per share total return by 0.6p, partially offset by raising new equity of £8.3m (net of costs) at an average 10.0% premium to dividend adjusted NAV, which added 0.1p per share.

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 30 June 2017 and income for the Period, but does not include any provision for the approved dividend for the Period, to be paid on 31 August 2017.

The Company completed the following acquisitions during the Period:

  • Two retail warehouse units in Gloucester occupied by Magnet and Smyths Toys for £4.725m, with a net initial yield8 (“NIY”) of 7.41%;
  • A car dealership in York occupied by Pendragon for £3.92m, with a NIY of 5.75%;
  • A retail warehouse in Galashiels occupied by B&Q for £3.145m, with a NIY of 8.24%;
  • A retail park in Plymouth comprising two retail warehouse units and a restaurant occupied by Oak Furniture Land, SCS and McDonald’s for £7.487m, with a NIY 6.74%;
  • A distribution unit in Langley Mill occupied by Warburtons for £2.15m, with a NIY of 6.29%;
  • A distribution unit on Eurocentral, Glasgow occupied by Next for £4.75m, with a NIY of 6.91%; and
  • A retail park in Sheldon, Birmingham comprising three units occupied by Dreams, Pets at Home and Halfords for £5.1m, with a NIY of 6.64%.

8 Passing rent divided by property valuation plus assumed purchasers’ costs.


Asset management

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 £1.7m valuation increase, with further initiatives expected to complete in the coming months.

Key asset management initiatives completed during the Period include:

  • Finalising a rent review with DHL in Warrington at £0.31 per annum, increasing valuation by £0.6m;
  • Exchanging on an agreement to lease a unit in Gateshead to WH Partnership on a 10 year lease at £0.14m per annum, increasing valuation by £0.4m;
  • Agreeing a rent review with Yesss Electrical in Normanton at £0.33m per annum, increasing valuation by £0.4m; and
  • Removing an August 2018 break clause in Bunzl’s lease in Castleford increasing weighted average unexpired lease term to the first lease break or expiry (“WAULT”) from 1.2 years to 5.2 years, increasing valuation by £0.2m.

The portfolio’s WAULT decreased to 5.7 years from 5.9 years at 31 March 2017.  We believe long leases are currently being over-valued by the market and acquisitions completed during the Period had a WAULT of 6.6 years, as we anticipate less depreciation in value on such assets over the long-term.  Although this puts pressure on our target WAULT for the portfolio of 5.0 years or longer we believe that, with the current strength of the occupational market and a portfolio comprising high quality properties, risk is better managed by pursuing a strategy of buying high quality properties that are likely to re-let, rather than highly priced properties with long leases, simply to mitigate an artificial measure of risk.


Property market

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

“As our recent property management activity demonstrates, demand in the occupational market remains robust.  This demand is driven principally by a lack of supply of new development or modern ‘fit-for-purpose’ property.  The lack of supply is leading to both continued rental growth and low vacancy rates.  We do not envisage any meaningful increase in supply in the near future as there is only very limited bank support for speculative development.  This supply dynamic combined with the low level of rents, in real terms, in most regional markets leads us to conclude that rental growth should remain a feature of the portfolio for the medium term.”

Activity and pipeline

Commenting on pipeline, Richard Shepherd-Cross said:

“During the Period Custodian REIT completed £31.3m of acquisitions (before acquisition costs) at an average NIY of 6.83%, demonstrating our continued confidence in the market and our ability to source high quality assets that meet the Company’s investment criteria.  Despite the competitive market our pipeline is strengthening and we have a long track record of committing available capital promptly to the property market.  We have a committed pipeline of properties under offer of £25.5m and undrawn cash and debt facilities totalling circa £65m, which will allow us to consider a number of further new acquisition opportunities.”




The Company issued 7.5m new ordinary shares of 1p each in the capital of the Company during the Period (“the New Shares”) raising £8.4m (before costs and expenses).  The New Shares were issued at an average premium of 10.0% to the unaudited NAV per share at 31 March 2017, adjusted to exclude the dividend paid on 30 June 2017.


The Company entered into an agreement with Aviva Investors Real Estate Finance (“Aviva”) on 5 April 2017 for Aviva to provide the Company with a new 15 year £50m term loan facility comprising two tranches of £35m (“Tranche 1”) and £15m (“Tranche 2”) respectively, resulting in the Company having the following agreed debt facilities:

  • 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;
  • A £45m term loan facility with Scottish Widows plc which attracts interest fixed at 2.987% and is repayable on 5 June 2028; and
  • A £50m term loan facility with Aviva comprising:
    1. Tranche 1 repayable on 6 April 2032, attracting fixed annual interest of 3.02%; and
    2. Tranche 2 repayable 15 years from drawdown attracting fixed annual interest of 1.6% over the prevailing 2032 swap rate on the date of drawdown.

At the Period end the Company had circa £65m of available funds to deploy on property acquisition opportunities, comprising £15m uncommitted cash, £35m undrawn RCF and £15m Tranche 2.


Portfolio analysis

At 30 June 2017 the Company’s property portfolio comprised 138 assets and 274 contractual tenants with a NIY of 6.82% and current passing rent of £32.8m per annum.

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 the industrial and alternative sectors, often referred to as ‘other’ in property market analysis.  Sector weightings are shown below:






30 Jun 2017


Period valuation movement


Weighting by income9 30 Jun 2017 Weighting by income9 31 Mar 2017
Industrial 198.4 2.6 44% 45%
Retail 139.5 (0.2) 30% 28%
Other10 61.9 0.2 13% 13%
Office 52.6 0.1 13% 14%
Total 452.4 2.7 100% 100%

9 Current passing rent plus ERV of vacant properties.

10 Includes car showrooms, petrol filling stations, children’s day nurseries, restaurants, gymnasiums, hotels and healthcare units.

Industrial property remains a very good fit with the Company’s strategy although investment demand is creating price inflation and limiting our opportunity to acquire properties that meet our investment mandate.  £1.6m of the £2.6m gross valuation increase in the industrial sector was driven by asset management initiatives, with occupational demand driving rental growth and generating positive returns.

Retail represents 30% of portfolio income comprising 16% high street and 14% out-of-town retail (retail warehousing).  Retail warehousing is witnessing close to record low vacancy rates as a restricted planning policy and lack of development combine with retailers’ requirements to offer large format stores, free parking and ‘click and collect’ to consumers.  These factors made retail a target sector for acquisitions throughout the Period.

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 in regional markets 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, we are conscious that 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.

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 30 June 2017 was as follows:






30 Jun 2017


Period valuation movement


by income11
30 Jun
by income11
31 Mar 2017
West Midlands 91.5 0.2 20% 20%
South-East 79.9 0.2 16% 17%
North-West 62.4 0.9 14% 15%
South-West 54.5 0.9 12% 9%
East Midlands 47.8 11% 12%
North-East 40.6 1.0 9% 9%
Scotland 38.3 (0.1) 9% 8%
Eastern 32.4 (0.4) 8% 9%
Wales 5.0 1% 1%
Total 452.4 2.7 100% 100%

11 Current passing rent plus ERV of vacant properties.

For details of all properties in the portfolio please see



An interim dividend of 1.5875p per share for the quarter ended 31 March 2017 was paid on 30 June 2017.  The Board has approved an interim dividend relating to the Period of 1.6125p per share payable on 31 August 2017 to shareholders on the register on 28 July 2017.

In the absence of unforeseen circumstances, the Board intends to pay quarterly dividends to achieve a target dividend12 per share for FY18 of 6.45p (FY17: 6.35p).  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.

12 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. 

Change of accounting policy

During the Period the classification of deferred lease incentives has been reviewed and compared with industry peers, resulting in a presentational change with no impact on total return or NAV.  These assets were previously reported as a separate receivable and deducted from the external property valuation in arriving at the reported investment properties balance.  In order to align the Company’s accounting policy with that adopted by many industry peers, these assets totaling £2.7m have been reclassified from receivables to investment properties at 31 March 2017.


Activity since the Period end


Since the Period end the Company has issued 1.3m new ordinary shares of 1p each in the capital of the Company raising £1.6m (before costs and expenses), issued at an average premium of 11.2% to the unaudited NAV per share at 31 March 2017, adjusted to exclude the dividend paid on 30 June 2017.


On 14 July 2017 the Company acquired a 42,289 sq ft car dealership in Stockport for £8.84m let to Williams on a lease expiring on 23 August 2057 with a current passing rent of £0.66m per annum, reflecting a NIY of 6.99%.