Custodian REIT reports unaudited net asset value as at 31 December 2018

Custodian REIT reports unaudited net asset value as at 31 December 2018

Custodian REIT (LSE: CREI), the UK commercial real estate investment company, today reports its unaudited net asset value (“NAV”) as at 31 December 2018 and highlights for the period from 1 October 2018 to 31 December 2018 (“the Period”).


Financial highlights

  • NAV total return per share1 for the Period of 1.0%
  • Dividend per share approved for the Period of 1.6375p
  • NAV per share of 108.1p (30 September 2018: 108.6p)
  • NAV of £426.6m (30 September 2018: £427.5m)
  • Net gearing2 of 24.7% loan-to-value (30 September 2018: 20.5%)
  • Market capitalisation of £460.1m (30 September 2018: £478.1m)


Portfolio highlights

  • Portfolio value of £576.2m (30 September 2018: £547.0m)
  • £29.5m3 invested in four property acquisitions
  • £1.1m valuation increase from successful asset management initiatives
  • £1.4m further valuation decreases due to the company voluntary arrangements (“CVAs”) of Staples and Homebase occurring in the previous quarter
  • EPRA occupancy96.5%(30 September 2018: 96.9%)

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

2 Gross borrowings less unrestricted cash divided by portfolio valuation.

3 Before acquisition costs of £1.8m.

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


Net asset value

The unaudited NAV of the Company at 31 December 2018 was £426.6m, reflecting approximately 108.1p per share, a decrease of 0.5% since 30 September 2018:

Pence per share £m
NAV at 30 September 2018 108.6 427.5
Issue of equity (net of costs) 0.0 0.9
Valuation movements relating to:
 – Asset management activity 0.3 1.1
 – Other valuation movements (0.5) (1.8)
(0.2) (0.7)
Acquisition costs (0.5) (1.8)
Net valuation movement (0.7) (2.5)
Income earned for the Period 2.5 9.9
Expenses and net finance costs for the Period (0.7) (2.8)
Dividends paid5 (1.6) (6.4)
NAV at 31 December 2018 108.1 426.6

5 Dividends of 1.6375p per share were paid on shares in issue throughout the Period.

During the Period the initial costs (primarily stamp duty) of investing £29.5m (before acquisition costs) diluted NAV per share total return by 0.5p.

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 December 2018 and income for the Period but does not include any provision for the approved dividend of 1.6375p per share for the Period to be paid on 28 February 2019.

The Company completed the following investments during the Period:

  • A mixed-use property in Stratford, East London occupied by Foxton’s Estate Agents and The Incorporated Trustees of the Universal Church of the Kingdom of God for £2.1m, with a net initial yield6 (“NIY”) of 6.78% and a weighted average unexpired lease term to first break or expiry (“WAULT”) of 8.5 years;
  • A retail park in Evesham occupied by Next, M&S, Boots, Argos and Poundstretcher for £14.2m, with a NIY of 6.04% and a WAULT of 6.8 years;
  • A retail park in Weymouth occupied by B&Q, Halfords and Next for £10.8m, with a NIY of 6.97% and a WAULT of 7.8 years; and
  • A Volkswagen car dealership in Loughborough occupied by Lister Group Limited for £2.4m, with a NIY of 6.37% and a WAULT of 9.9 years.

6 Passing rent divided by property valuation plus purchaser’s costs.


Asset management

A 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 £1.1m valuation increase in the Period, primarily due to:

  • Agreeing a new 10 year lease with Next plc for an industrial unit on Eurocentral in Scotland, with annual rent increasing by 10%, which increased the valuation by £0.6m;
  • Extending the lease with MTS Logistics for an industrial unit in Coalville, with annual rent increasing by 30%, which increased valuation by £0.4m; and
  • Letting a unit on a retail park in Carlisle to The Gym Group on a 15 year lease without break, which increased the valuation by £0.1m.

Further initiatives on other properties currently under review are expected to complete during the current quarter.

The portfolio’s WAULT increased from 5.6 years at 30 September 2018 to 5.8 years, principally due to the positive impact of acquisitions with an aggregate WAULT of 7.5 years and the agreement of two new long-term leases in the quarter more than offsetting the natural 0.25 of a year’s decline due to the passage of time.


Property market

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

“Over the Period investor demand slowed as we drew closer to the expected ‘meaningful vote’ on Brexit.  The delay to the meaningful vote and current uncertainty over our future relationship with the EU is continuing to have an impact on demand, which appears to be driven more by postponement of investment decisions rather than the fear of fundamental weakness in the UK commercial property market.  Most investors are waiting for greater political certainty before settling on their investment strategies for 2019.  Notwithstanding the uncertain backdrop of Brexit there are underlying market forces that have had an impact on demand and will be likely to influence returns over the months ahead.

“The changing face of retail has perhaps had the most significant impact on the market.  There has been a sharp sell-off in those property stocks which are most exposed to retail, particularly shopping centres.  Retail property valuations have also reacted, but with few transactions there has been limited market pricing evidence to underwrite the reduced valuations.  In a rare move the Royal Institution of Chartered Surveyors (“RICS”) has instructed valuers to be “aware of the potential for significant changes in value” in retail properties and to take notice of “analysis and commentary” as well as market prices.  However, simultaneously there has been criticism from some commentators that the Q4 market reaction to retail pricing was perhaps unscientific.  Through 2019 we expect to see contrasting performance within retail, supported by Savills Research, which in its 2019 forecast selected retail as one of their two investment picks for the year, but with the qualification that retail must be either prime or dominant in its catchment area.  In short, there is little consensus in forecasts for retail with the potential for further polarisation.  The challenge for Custodian REIT is to ensure that its retail assets are part of the future retail landscape, in demand by retailers and complementary to on-line retailing.  Retailers have yet to strike the perfect balance between physical and on-line retailing, but we expect that retail stores will still form the backbone of many retailers’ strategies.

“We anticipate 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 are the key attractions.

“Industrial and logistics has continued to be property investors’ favoured asset class, demonstrating strong rental growth prospects.  This has supported further valuation growth through the quarter, with the sector having the lowest initial yields in regional markets.  Occupational demand has been strong but more crucially a lack of supply is driving rental growth, particularly for urban logistics units.  Perversely, despite the fears in retail markets, over 40% of new letting demand for logistics space has come from retailers as they re-position their property estates and supply chain.  Industrial and logistics assets remain a good fit with the Company’s strategy, but recent price inflation is limiting the opportunity to acquire properties that meet the investment mandate.  However, the strong occupier market has delivered some meaningful asset management opportunities, increasing rents, extending leases and enhancing values.

“Investment values have held up well in regional office markets as investors continue to search for relative value compared to central London offices.  Occupier demand is from a diverse range of occupiers but tends to be focused on modern or well-refurbished space which provides the flexibility required by the modern office tenant.  We remain 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, so we maintain a very selective investment strategy in the office sector.

“Across the portfolio we settled six rent reviews and agreed two new lettings during the Period which have shown a weighted average increase in rents of 12.4% (11.4% simple average).  This growth has come from a mix of open market lettings and rent reviews in industrial, other and retail warehouse properties.”


Portfolio analysis

At 31 December 2018 the Company’s property portfolio comprised 155 assets with a 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.  Slight swings in sector weightings are reflective of market pricing at any given time and the desire to maintain an opportunistic approach to acquisitions.  Sector weightings are shown below:






31 Dec 2018


Period valuation movement


Weighting by income7 31 Dec 2018 Weighting by income7 30 Sep 2018
Industrial 221.9 2.9 37% 39%
Retail warehouse 124.5 (1.8) 22% 18%
Other8 95.9 0.2 17% 17%
High street retail 73.5 (1.9) 13% 14%
Office 60.4 (0.1) 11% 12%
Total 576.2 (0.7) 100% 100%

7 Current passing rent plus ERV of vacant properties.

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

The impact of the CVAs of both Homebase and Staples have had a combined £1.4m negative but potentially temporary impact on the valuation of the retail warehouse portfolio in the Period.  Some of this negative valuation impact recognised in the Period may be recovered following the conclusion of lease re-negotiations which are underway or under consideration.

Diversification across sectors helps to remove volatility from the portfolio, as demonstrated in the last quarter, with the Industrial and Other sectors of the portfolio largely off-setting the negative impact of retail on NAV.

The Company also 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 December 2018 was as follows:






31 Dec 2018


Period valuation movement


by income9
31 Dec
by income9
30 Sep 2018
West Midlands 132.7 0.3 22% 21%
North-West 92.0 1.1 17% 17%
South-East 78.9 (2.1) 13% 13%
South-West 72.4 0.1 11% 11%
East Midlands 71.1 (0.6) 13% 14%
North-East 49.8 0.8 10% 9%
Scotland 44.8 0.3 8% 8%
Eastern 28.1 (0.5) 5% 6%
Wales 6.4 (0.1) 1% 1%
Total 576.2 (0.7) 100% 100%

9 Current passing rent plus ERV of vacant properties.

For details of all properties in the portfolio please see


Activity and pipeline

Commenting on pipeline, Richard Shepherd-Cross said:

“We are considering a pipeline of opportunities and believe there may be opportunities to make contra-cyclical acquisitions where we believe that short-term market weakness can unlock long term value for the Company.”




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;
  • 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 Investors Real Estate Finance comprising:
    • A £35m tranche repayable on 6 April 2032, attracting fixed annual interest of 3.02%; and
    • A £15m tranche repayable on 3 November 2032 attracting fixed annual interest of 3.26%.

On 14 January 2019, the Company extended the facility limit of the RCF from £35m to £45m until 30 June 2019, to provide the Company with additional capacity for property acquisitions.



An interim dividend of 1.6375p per share for the quarter ended 30 September 2018 was paid on 30 November 2018.  The Board has approved an interim dividend relating to the Period of 1.6375p per share payable on 28 February 2019 to shareholders on the register on 25 January 2019.

In the absence of unforeseen circumstances, the Board intends to pay quarterly dividends to achieve a target dividend10 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.

10 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.