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Custodian Property Income REIT plc: Third quarter trading update shows rental growth supporting fully covered dividends
Custodian Property Income REIT plc (CREI)
7 February 2024
Custodian Property Income REIT plc
(“Custodian Property Income REIT” or “the Company”)
Third quarter trading update shows rental growth supporting fully covered dividends
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 31 December 2023 (“Q3” or the “Quarter”).
Leasing activity continues to support rental growth and underpin fully covered dividends
Redevelopment and refurbishment of existing assets continues to be accretive with an expected yield on cost above average cost of borrowing
Prudent debt levels
Net asset value
The Company’s unaudited NAV at 31 December 2023 decreased to £411.2m, or approximately 93.3p per share, a decrease of 2.6p (-2.7%) since 30 September 2023:
The unaudited NAV attributable to the ordinary shares of the Company is calculated under International Financial Reporting Standards and incorporates the independent portfolio valuation at 31 December 2023 and net income for the Quarter. The movement in unaudited NAV reflects the payment of an interim dividend of 1.375p per share during the Quarter, but as usual this does not include any provision for the approved dividend of 1.375p per share for the Quarter to be paid on 29 February 2024.
The Company’s unaudited NAV at 31 December 2023 is 0.4p below the Company’s unaudited rolled-forward NAV at 31 December 2023 as per the combined circular and prospectus associated with the recommended all-share merger with abrdn Property Income Trust Limited, announced on 1 February 2024. The difference reflected movements in the Company’s capital expenditure, lease incentives and acquisition costs during the Quarter.
Investment Manager’s commentary
UK property market
2023 saw rising interest rates, weak investor sentiment and low transaction volumes. This was in contrast to occupier demand which delivered rental growth and has further improved the reversionary potential in Custodian Property Income REIT’s portfolio, which is now greater than it was at the start of 2023.
Investor sentiment towards real estate appears to have been closely correlated with the expected trajectory of interest rates, as determined by inflation data. Consensus opinion and the interest rate forward curve suggest that the next move for interest rates will be down, with the potential for a number of base rate cuts in late 2024 and into 2025, subject of course to an improving geopolitical environment. This should be positive for real estate investors and occupiers.
Asset management
Over the 12 months to 31 December 2023 the passing rent of the Company’s portfolio has grown by c.3% to £43.4m and ERV has grown from £48.4m to £50.1m, an increase of c.3.5%, demonstrating the continued prospects for strong rental performance which will support earnings and the companies aim of paying fully covered dividends.
The Investment Manager has remained focused on active asset management during the Quarter, completing four rent reviews at an aggregate 21% increase in annual rent from £1.1m to £1.4m, and regearing four leases which secured £0.5m of annual rent. These initiatives increased property capital value by £1.0m. The new leases had a weighted average unexpired term to first break or expiry (“WAULT”) of five years, with the overall portfolio WAULT remaining at 4.8 years.
Details of these asset management initiatives are shown below:
Rent reviews
New leases
Since the Quarter end the Company has completed seven further asset management initiatives, including:
Since the Quarter end the Company has also settled the following rent reviews at an aggregate 29% ahead of previous passing rent with:
Disposals
Acknowledging the higher cost of variable rate debt, of which the company currently has £50m drawn under its Lloyds Bank revolving credit facility (“RCF”), steps have been taken to advance a number of property sales, where special purchasers can unlock prices ahead of valuation, but more importantly ahead of the cost of the RCF, in order to enhance earnings per share.
During the Quarter a children’s day nursery in Chesham was sold for £0.55m at valuation.
Since the Quarter end, an industrial unit in Milton Keynes and an office building on Pride Park, Derby have been sold for an aggregate £10.1m. Two further properties in Redhill (former car dealership) and Castle Donington (offices), which are both vacant, are under offer to sell for an aggregate £4.4m. These disposals are expected to complete during the quarter ending 31 March 2024 and proceeds are expected to be used to reduce variable rate borrowings.
Fully covered dividend
The Company paid an interim dividend of 1.375p per share on 30 November 2023 relating to the quarter ended 30 September 2023. The Board has approved an interim dividend per share of 1.375p for the Quarter, fully covered by EPRA earnings, payable on 29 February 2024. The Board is targeting aggregate dividends per share[9] of at least 5.5p for the year ending 31 March 2024. The Board’s objective is to grow the dividend on a sustainable basis, at a rate which is fully covered by net rental income and does not inhibit the flexibility of the Company’s investment strategy.
Borrowings
On 10 November 2023 the Company and Lloyds Banking Group agreed to extend the RCF for a term of three years, with options to extend the term by a further year on each of the first and second anniversaries of the renewal. The RCF includes an ‘accordion’ option with the facility limit initially set at £50m, which can be increased up to £75m subject to Lloyds’ consent. The headline rates of annual interest now include a LIBOR transition fee previously applied separately, increasing by 12bps to between 1.62% and 1.92% above SONIA, determined by reference to the prevailing LTV ratio. As a result there is no change to the aggregate margin from the renewal.
At 31 December 2023 the Company had £190.0m of debt drawn at an aggregate weighted average cost of 4.3% with no expiries until August 2025 and diversified across a range of lenders. This debt comprised:
At 31 December 2023 the Company’s borrowing facilities are:
Variable rate borrowing
Fixed rate borrowing
Each facility has a discrete security pool, comprising a number of individual properties, over which the relevant lender has security and covenants:
At 31 December 2023 the portfolio is split between the main commercial property sectors, in line with the Company’s objective to maintain a suitably balanced investment portfolio. Sector weightings are shown below:
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