Strong leasing outcomes continue to drive income growth

By in Corporate news

Custodian Property Income REIT (LSE: CREI), which seeks to deliver an enhanced income return by investing in a diversified portfolio of smaller, regional properties with strong income characteristics across the UK, today provides a trading update for the quarter ended 30 September 2024 (“Q2” or the “Quarter”).

Commenting on the trading update, Richard Shepherd-Cross, Managing Director of Custodian Capital Limited, said: “Having previously stated that we believed the market was bottoming out and with two consecutive quarters of broadly flat valuations behind us, it is pleasing to report a marginal increase in our portfolio valuation at the halfway point of the year. While one swallow does not make a summer, this does support our belief that, generally speaking, we are at the start of a gradual upwards trend. However, the importance of stock selection and proactive asset management to drive returns remains as acute as ever and the 20 plus lettings, lease renewals, re-gears and rent reviews at significant average premiums to ERV and previous rent that we have undertaken during the Quarter, as well as the sales we continue to make on terms ahead of valuation, will be supportive of future earnings and dividend cover. 

“In September we also welcomed the Financial Conduct Authority’s exemption of investment companies from PRIIPs and MiFID II regulation which previously obliged wealth managers and platforms to make disclosures about costs which were misleading and ultimately detrimental to investment performance. With the situation now being resolved and as the investment industry gradually adjusts to this change, we expect the Company’s competitive cost structure and high returns to be very attractive to new investors seeking strong returns from UK real estate.”

Highlights

Strong leasing activity continues to support rental growth and underpins fully covered dividend

  • 1.5p dividend per share approved for the Quarter, fully covered by unaudited European Public Real Estate Association (“EPRA”) earnings per share[1], in line with target of at least 6.0p for the year ending 31 March 2025 (FY24: 5.8p). This target dividend represents a 7.9% yield based on the prevailing 76p share price[2]
  • EPRA earnings per share of 1.5p for the Quarter (FY25 Q1: 1.5p)
  • During the Quarter, a 1.5% increase in like-for-like[3] passing rent and a 0.8% increase in like-for-like estimated rental value (“ERV”), driven by 1.1% like-for-like rental growth in the industrial sector, with all other sectors showing stable ERVs
  • Portfolio ERV (£49.3m) exceeds passing rent (£44.3m) by 11% (30 Jun 2024: 13%) reflecting the reversion captured and sale of vacant property undertaken during the Quarter. With approximately half of this reversion available from each of leasing events and vacancy respectively, there remains significant potential to grow rental income by capturing this at (typically) five-yearly rent reviews or on re-letting, in addition to continuing to drive rental growth through asset management and selling vacant property to developers or owner-managers
  • Leasing activity during the Quarter comprised 20 new lettings, lease renewals and regears across 12 assets as well as two rent reviews. In aggregate, these initiatives were completed in line with ERV and, for let properties, 9% above previous passing rent
  • EPRA occupancy[4] has improved to 93.5% (30 Jun 2024: 91.8%), with 2% of vacant ERV subject to refurbishment, primarily due to the sale of vacant offices in Castle Donington and £0.7m of new rent being added to the rent roll from:
    • Completing two rent reviews on industrial assets at an aggregate 33% above previous passing rent; and
    • Letting eight vacant units across five assets in the industrial, office and other sectors, in aggregate, in line with ERV.

Valuations stable across the Company’s c.£580m portfolio, with a small uptick on a like-for-like basis

  • Having remained flat during the last two quarters, the value of the Company’s portfolio of 152 assets was £582.4m, an increase of 0.5% on a like-for-like basis during the Quarter, net of £2.2m of capital expenditure
  • Q2 net asset value (“NAV”) total return per share[5] of 2.0%
  • NAV per share grew marginally by 0.4% to 93.5p (30 Jun 2024: 93.1p) with a NAV of £412.2m (30 Jun 2024: £410.3m)

Asset recycling continues to generate aggregate proceeds in excess of valuation

Since 30 June 2024 the Company has successfully disposed of three assets at an aggregate 13% premium to previous valuation, comprising:

  • Vacant offices in Castle Donington for £1.75m in line with its 30 June 2024 valuation;
  • One unit of a two-unit industrial asset in Sheffield sold to an owner-occupier for £0.55m, 10% ahead of its 30 June 2024 valuation; and
  • In October, a vacant office asset in Solihull sold to a developer for £1.4m, 33% ahead of 30 June 2024 valuation.

Proceeds from disposals have been used to reduce variable rate borrowings.

Redevelopment and refurbishment activity continues to be accretive with an expected yield on cost of c.7%

  • £2.2m of capital expenditure undertaken during the Quarter, primarily relating to the extension of an industrial building in Livingston, office refurbishments in Leeds and Manchester and an industrial refurbishment in Aberdeen. All works are expected to enhance the assets’ valuations and environmental credentials and, once let, increase rents to give a yield on cost of at least 7%, ahead of the Company’s marginal cost of borrowing
  • During the Quarter the Company generated £0.1m (Q1: £0.1m) of revenue from its owned solar panel installations, selling the clean electricity generated to tenants and exporting any surplus. In addition, new solar arrays in Norwich and Ipswich were brought into use, meaning 13 of the Company’s buildings are now generating their own electricity, with further installations planned during the remainder of the financial year
  • Weighted average energy performance certificate rating has improved to C(52) (30 Jun 2024: C(53)) with re-ratings being carried out across five assets during the Quarter

Prudent debt levels

  • Net gearing[6] was 28.6% loan-to-value as of 30 Sept 2024 (30 Jun 24: 28.8%) with property disposal proceeds during the Quarter broadly funding capital expenditure
  • £174m of drawn debt comprising £140m (80%) of fixed rate debt and £34m (20%) drawn under the Company’s revolving credit facility (“RCF”)
  • Weighted average cost of aggregate borrowings is 4.0% (30 Jun 24: 3.9%)
  • Fixed rate debt facilities have a weighted average term of 5.5 years and a weighted average cost of 3.4% offering significant medium-term interest rate risk mitigation

You can read the full update here.

[1] Profit after tax excluding net gains or losses on property divided by weighted average number of shares in issue.

[2] Price on 6 November 2024. Source: London Stock Exchange.

[3] Adjusting for property acquisitions, disposals and capital expenditure.

[4] ERV of let property divided by total portfolio ERV.

[5] NAV per share movement including dividends paid during the Quarter.

[6] Gross borrowings less cash (excluding rent deposits) divided by portfolio valuation.