Net Asset Value(s)

RNS Number : 2426M

Custodian REIT PLC

19 January 2016

 

19 January 2016

Custodian REIT plc

("Custodian REIT" or "the Company")

Unaudited Net Asset Value as at 31 December 2015 and Increase in Target Dividend

Custodian REIT (LSE: CREI), the UK commercial real estate investment company, today reports its unaudited net asset value ("NAV") as at 31 December 2015, highlights for the period from 1 October 2015 to 31 December 2015 ("the Period"), details of the portfolio acquired on 4 January 2016 and an increase in the target dividend for the year ending 31 March 2017.  

Financial highlights

·     NAV total return¹ of 1.5%

·     Proposed dividend for the Period of 1.5875p per share

·     NAV per share of 103.0p (30 September 2015: 103.0p)

·     RCF facility increased to £35m and term extended to 2020

·     £49.8m of new equity raised during the Period at average premium of 3.0% to adjusted² NAV

·     Net gearing³ of 5.1% loan-to-value (30 September 2015: 13.7%)

·     Increase in target dividend for the year ending 31 March 2017 to 6.35p per share

Portfolio highlights to 31 December 2015

·     Portfolio value of £254.0m (30 September 2015: £232.8m)

·     £1.2m (0.5%) portfolio valuation uplift

·     £19.9m invested in four acquisitions and on-going developments

·     Occupancy 97.9% (30 September 2015: 97.6%)

Acquisition of portfolio on 4 January 2016

·     Acquisition of nine properties⁴ for £55.1m

·     Net initial yield ("NIY") of 6.32%, with an expected reversionary yield of 6.89% 

·     Following acquisition, Company had net gearing of 20.7%, uncommitted facilities of £8.1m, occupancy of 97.2% and weighted average unexpired lease term to first break ("WAULT") of 6.8 years

¹ NAV movement plus dividends paid.

² Premium adjusted to deduct dividends earned but not paid post ex-dividend date.

³ Gross borrowings less unrestricted cash divided by portfolio valuation.

⁴ Representing nine of the 11 properties in the 'Target Portfolio' described in the Company's November 2015 prospectus.

Net asset value

The unaudited NAV of the Company at 31 December 2015 was £245.5 million, reflecting approximately 103.0 pence per share, in line with the NAV per share at 30 September 2015:

	Pence per share	£m
NAV at 30 September 2015	103.0	196.5
Issue of equity (net of costs)	0.0	48.5
	103.0	245.0
Valuation uplift in property portfolio	0.6	1.2
Impact of acquisition costs	(0.6)	(1.2)
Net valuation movement	0.0	0.0
Income earned for the Period	2.4	4.7
Expenses and net finance costs for the Period	(0.9)	(1.3)
Dividends paid	(1.5)	(2.9)
NAV at 31 December 2015	103.0	245.5

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 2015 and income for the Period, but does not include any provision for the interim dividend for the Period, to be paid on 31 March 2016.

In the first seven quarters' trading we have been delighted to grow the scale of the Portfolio from £95 million to £309 million (as at 4 January 2016), diversifying risk across 111 properties and 220 tenancies, while growing NAV and hitting all dividend targets, fully covered by income.

Market

Property valuation growth started in London, spread to the South-East in 2014 and took hold across regional markets in 2015.  This valuation growth has been partly due to the expectation of future rental growth, but primarily due to the extraordinary demand for commercial property investment in a supply-constrained market from overseas investors, UK institutions, open-ended retail funds, listed property companies and US and UK recovery funds.  Most of this demand has focused on large lot sizes, typically £10 million plus.  The need to commit funds to the market quickly has driven investors to pay ever higher prices for ever larger assets, and valuations have reacted accordingly.  The market can now boast close to 10 year low NIYs for large, good quality, regional assets, particularly in the office, shopping centre, retail warehouse and distribution sectors.

However, the same is not true for smaller lot sizes.  While there has been some yield compression, most can be accounted for by the prospects of rental growth, with equivalent yields remaining more stable than for larger lots and market pricing much closer to long-term averages.

Outlook

Valuation

Custodian REIT's portfolio valuation has delivered a stable equivalent yield of circa 6.75% since September 2014, demonstrating very low volatility despite a rapidly changing market.  Recent demand-driven yield compression has been concentrated on large lot sizes, particularly in central London, which is outside the Company's sphere of operations.  As we look forwards to the remainder of 2016 and beyond, we expect the value of small lot size, regional property to grow sustainably as a result of underlying rental growth, rather than simply demand-led valuation growth.

Income

Income is the lower risk component of total return, as it is secured against tenants' lease contracts.  Custodian REIT seeks to maximise shareholder returns by paying one of the highest dividends in its peer group.  This dividend is supported by low levels of gearing, with a target loan-to-value of just 25%.  The Investment Property Forum Consensus Forecast from November 2015 predicts capital value growth across the UK market in 2016 to be less than half that of 2015.  Against this backdrop, we believe a focus on income can deliver greater overall returns.

Costs

The growth of the fund has created economies of scale, with the annual management charge falling from 0.9% to 0.75% of marginal NAV above £200 million, and a dilution of the Company's fixed cost base.  These economies of scale enhance dividend cover and the Company's ability to grow future dividends.

Acquisition of portfolio

On 4 January 2016 the Company acquired nine of the 11 properties in the 'Target Portfolio' described in the Company's November 2015 prospectus (together "the Portfolio") for £55.1 million.  The Portfolio's current passing rent of £3.68 million reflects a NIY of 6.32%, with an expected reversionary yield of 6.89%. 

Between exchange and completion the Company sub-sold the remaining two properties in the 'Target Portfolio', comprising an industrial unit in Norbiton (Kingston upon Thames) and three shops with offices above in Richmond at prices of £5.8 million and £8.6 million respectively, reflecting a blended NIY of less than 5%.

Details of each property in the Portfolio are set out below:

Offices

West Malling - a modern 29,065 sq ft office situated on Kings Hill Business Park let to Regus (Maidstone West Malling) Limited (a subsidiary of Regus plc) with a WAULT of 2.2 years and a passing rent of £558,160 per annum. The property provides a modern detached two-storey office building in a prominent position with motorway links in close proximity, with an opportunity to extend the existing lease and to benefit from growing rents in the local market.

Edinburgh - a 38,956 sq ft multi-let office to the west of Causewayside, a primary arterial route into the city centre.  The offices are let to Digby Brown LLP, Megaswitch Networks Limited and Age Scotland, with a recently vacated office suite available to let, and the ground floor is let to Tesco Stores Limited and R Scott Bathrooms Limited. The WAULT is 2.2 years and passing rent is £442,193 per annum. The property underwent a comprehensive refurbishment programme in 2004 and the vacant suite offers the opportunity to enhance income and set a new rental level.

Industrial

Redditch - a 57,239 sq ft industrial/distribution unit on Ravenswood Business Park, an established distribution location approximately four miles south of the M42.  The property is let to Amco Services (International) Limited with a WAULT of 4.5 years and passing rent of £315,000 per annum.  There is a very short supply of equivalent space locally and nearby industrial development is planned or in progress, which should set new rental levels for the town.

Chepstow - the Severn Link Distribution Centre, a modern 82,078 sq ft multi-let industrial estate comprising eleven units, strategically situated on the Newhouse Farm Industrial Estate immediately adjacent to junction two of the M48.   The units are let to eight tenants with a WAULT of 1.1 years, presenting various asset management opportunities, with a passing rent of £279,628 per annum.

Warrington - two well specified industrial/warehouse units of 34,023 sq ft and 20,483 sq ft with access to junction 11 of the M62 and junction 21 of the M6.  The property is let to EAF Supply Chain Limited and Synertec Limited with a WAULT of 7.3 years and passing rent of £259,903 per annum.  Other occupiers in the vicinity include Walkers, Pepsico, Farm Foods and Mercedes Benz.  In common with the rest of the UK there is a shortage of this type of space, leading to pressure on rents and the likelihood of rental growth at rent review or lease renewal.

Retail

Portsmouth - a modern 21,490 sq ft parade of four retail units on the east side of Commercial Road in the heart of the retail centre.  The units are let to Poundland Limited, Your Phone Care Limited, Sportswift Properties Limited (a subsidiary of Card Factory plc) and Game Retail Limited with a WAULT of 3.3 years and a passing rent of £525,800 per annum. Nearby occupiers including M&S, Boots, Primark, New Look and Topshop.  Commercial Road benefits from a low vacancy rate and these units are likely to have strong appeal to tenants, should they fall vacant. 

Colchester - five shops totalling 18,977 sq ft between High Street and Trinity Square.  The units are let to Burton/Dorothy Perkins Properties Limited, Laura Ashley Limited, H Samuel Limited, Lush Retail Limited and Leeds Building Society with a WAULT of 1.9 years and a passing rent of £448,600 per annum.  There are potential opportunities to change the tenant mix and drive rents in this location.

Guildford - 8,360 sq ft of retail and uppers floors between High Street and North Street.  The 3,075 sq ft retail unit arranged over the ground floor and basement is let to Reiss Limited with an unexpired term of 1.7 years and a passing rent of £198,400 per annum. The upper floors measuring 5,285 sq ft are let to House of Fraser (Stores) Limited as storage for their adjacent retail unit with an unexpired term of 1.7 years and a passing rent of £85,083 per annum.  Guildford is a prime retail location which has prospered as the way people shop adjusts to online retailing, 'click and collect' and out of town versus the high street.  Dominant, comparison retailing centres appear to have overcome competition and continue to form an important part of the retail landscape. 

Winnersh - two modern retail warehouse units totalling 30,120 sq ft prominently situated on the southern side of Reading Road linking Wokingham and Reading.  The units are let to Wickes Building Supplies Limited with an unexpired term of 11.1 years and Pets at Home Limited with an unexpired term of 12 years, with a combined passing rent of £571,950 per annum. Both units benefit from extensive onsite car parking (141 spaces) and have an open planning permission, making them suitable for all out of town retailers and offering rental growth potential.

Following acquisition of the Portfolio, the Company has net gearing of 20.7%, occupancy of 97.2% and a WAULT of 6.8 years.  The Portfolio has increased the Company's exposure to the office sector at a time we are seeking to benefit from rental growth in this market, and has grown the share of the portfolio located in the South East.  In all other regards, the Portfolio has diversified the existing portfolio.  The Company's portfolio sector, geographic and income expiry analysis at 31 December 2015 and following acquisition of the Portfolio on 4 January 2016 is as follows:

Sector	Valuation  4 Jan 2016  £m	Valuation  31 Dec  2015  £m	Period valuation movement £m	Weighting by income 4 Jan  2016	Weighting by income 31 Dec  2015	Weighting by income 30 Sept  2015
Industrial	121.9	110.0	1.3	40%	44%	45%
Retail	86.3	58.4	(0.3)	27%	22%	25%
Other5	55.1	55.1	(0.1)	17%	20%	18%
Office	45.8	30.5	0.3	16%	14%	12%
Total	309.1	254.0	1.2	100%	100%	100%

⁵ Includes car showrooms, petrol filling stations, children's day nurseries, restaurants and hotels.

Location	Valuation  4 Jan 2016  £m	Valuation  31 Dec  2015  £m	Quarter valuation movement £m	Weighting  by income  4 Jan  2016	Weighting by income  31 Dec  2015	Weighting by income 30 Sept  2015
South-East	76.8	49.3	0.6	24%	19%	20%
West Midlands	50.2	45.7	0.0	16%	17%	14%
North-West	41.7	37.8	0.3	13%	14%	13%
North-East	27.8	27.8	(0.1)	9%	11%	12%
East Midlands	27.7	27.7	0.1	13%	15%	17%
South-West	31.7	31.7	0.2	9%	11%	10%
Scotland	25.2	16.2	0.0	8%	7%	7%
East Anglia	23.0	16.4	0.1	6%	5%	6%
Wales	5.0	1.4	0.0	2%	1%	1%
Total	309.1	254.0	1.2	100%	100%	100%

Income expiry			4 Jan 2016	31 Dec 2015	30 Sept 2015
0-1 years			8.9%	6.3%	7.5%
1-3 years			23.3%	16.8%	14.8%
3-5 years			21.3%	21.8%	23.4%
5-10 years			24.4%	29.2%	32.7%
10+ years			22.1%	25.9%	21.6%
Total			100.0%	100.0%	100.0%

Dividends

An interim dividend of 1.5 pence per share for the quarter ended 30 September 2015 was paid on 31 December 2015.  The Board expects to propose an interim dividend relating to the Period of 1.5875 pence per share.  In the absence of unforeseen circumstances, the Board intends to pay further quarterly dividends to achieve the target dividend⁶ of 6.25 pence per share for the financial year ending 31 March 2016.

Increase in target dividend

The prompt deployment of proceeds from the recent share issue and the use of flexible debt facilities to acquire the Portfolio increased gearing to 20.7% following the acquisition and enhanced expected dividend cover.  As a result, the Company has increased its target dividend⁶ for the financial year ending 31 March 2017 from 6.25 pence per share to 6.35 pence per share (a 1.6% increase), which is expected to be fully covered by net rental income.

The Company's aim is to continue to increase dividends in a sustainable way, at a rate which is fully covered by net rental income and which does not inhibit the flexibility of its investment strategy. 

⁶ 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. 

Portfolio analysis

The portfolio is split between the main commercial property sectors, in line with the Company's investment objective to maintain a suitably balanced portfolio, but with a relatively low exposure to offices and a relatively high exposure to industrial and to alternative sectors, often referred to as 'other' in property market analysis, as demonstrated in the sector weightings table below:

	Retail	Retail Warehouse	Offices	Industrial	Other
Custodian REIT	20%	7%	16%	40%	17%
IPD November 20157	19%	20%	35%	19%	7%

⁷ Source: Numis.

While deemed to be outside the core sectors of offices, 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. 

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, and we were pleased to increase exposure to the office sector through the recent portfolio acquisition.  However the 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.

Similar to the office market, supply and demand dynamics are driving rental growth in the industrial sector and returns are positive.  As industrial property is less exposed to obsolescence this sector remains a very good fit with the Company's strategy.

For details of all properties in the portfolio please see www.custodianreit.com/property/portfolio.php. 

The Company intends to maintain a WAULT across the portfolio of over five years to the first lease break or lease expiry.  This reduces the risk of not covering dividends and provides a transparent and sustainable cash flow from which to pay future dividends.  Through careful asset management comprising new lettings and lease extensions, we expect to maintain this lease profile despite the natural decrease of lease terms.

Asset management

Market conditions, which are dominated by a lack of supply of modern or 'fit for purpose' space, particularly in the office and industrial sectors, are facilitating new lettings or lease extensions which enhance income security and minimise the risk of voids.  Following acquisition of the Portfolio, the void rate across the whole portfolio is 2.8%, which is lower than peer group funds and reflective of the type of property held and our desire to maximise cash flow from the fund. 

We believe real rents are relatively low and affordable for most businesses, which is reducing the impact of rental growth on tenants. 

Security of income

One of the principal aims of the Company is to provide shareholders with well diversified, secure income.  The current portfolio comprises 111 properties and 220 tenancies, with no one tenant responsible for more than 2.75% of the rent roll.  Income is diversified by sector and geographic region and the Company's investment policy sets out guidelines on tenant quality to ensure a sustainable and secure cash flow.  Short-term lease events are closely managed to minimise the cost of void property and maximise income.  Over the next twelve months 8.9% of the rent roll is subject to lease break or expiry.  However, based on deals agreed to date, we expect at least 85% of the income subject to lease break or expiry to be retained following the next lease event.  Over the next three years 32.2% of the rent roll is subject to lease break or expiry and we are actively involved with the relevant tenants to extend leases where possible.

Financing

Equity

The Company issued 47,616,411 new ordinary shares of 1p each in the capital of the Company during the Period ("the New Shares") raising £49.8 million (before costs and expenses).  Of this, 42,466,411 New Shares were issued as part of the Placing, Open Offer and Offer for Subscription announced in the Company's November 2015 prospectus ("the Placing Shares"). 

The Placing Shares were issued on 3 December 2015 at a premium of 2.7% to the NAV per share at 30 September 2015, after adjusting NAV to recognise the dividend of 1.5 pence per share paid to shareholders on the register at the close of business on 27 November 2015.

Debt

On 13 November 2015 the Company increased its revolving credit facility ("RCF") with Lloyds Bank plc to £35 million and extended the RCF's term to expire on 13 November 2020.  The RCF attracts interest of 2.45% above three month LIBOR. 

The Company also operates a £20 million term loan with Lloyds Bank plc, which attracts interest of 1.95% above three month LIBOR and is repayable on 10 October 2019, and a £20 million term loan with Scottish Widows plc, which attracts interest fixed at 3.935% and is repayable on 14 August 2025.

- Ends -

Further information:

Further information regarding the Company can be found at the Company's website www.custodianreit.com or please contact:

Custodian Capital Limited
Richard Shepherd-Cross / Nathan Imlach / Ian Mattioli	Tel: [phone]
	www.custodiancapital.com

Numis Securities Limited
Nathan Brown / Hugh Jonathan	Tel: [phone]
	www.numis.com/funds

Camarco
Ed Gascoigne-Pees	Tel: [phone]
	www.camarco.co.uk

Notes to Editors

Custodian REIT plc is a UK real estate investment trust, which listed on the main market of the London Stock Exchange on 26 March 2014.  Its portfolio comprises properties predominantly let to institutional grade tenants on long leases throughout the UK and is characterised by small lot sizes, with individual property values of less than £7.5 million at acquisition. 

The Company offers investors the opportunity to access a diversified portfolio of UK commercial real estate through a closed-ended fund.  By targeting smaller lot size properties, the Company intends to provide investors with an attractive level of income with the potential for capital growth. 

Custodian Capital Limited is the discretionary investment manager of the Company. 

For more information visit www.custodianreit.com and www.custodiancapital.com.

Important notice

Forward looking statements: This announcement includes "forward-looking statements".  All statements other than statements of historical facts included in this announcement, including, without limitation, those regarding the Company's business strategy and plans are forward-looking statements. 

Forward-looking statements are subject to risks and uncertainties and accordingly the Company's actual future financial results and operational performance may differ materially from the results and performance expressed in, or implied by, the statements.  These factors include but are not limited to those that are described in the November 2015 prospectus.  Given these uncertainties, undue reliance should not be placed on such forward-looking statements.

These forward-looking statements speak only as at the date of this announcement.  The Company expressly disclaims any obligation or undertaking to update or revise any forward-looking statements contained herein to reflect actual results or any change in the assumptions, conditions or circumstances on which any such statements are based unless required to do so by the Financial Services and Markets Act 2000, the Financial Services Act 2012, the Listing Rules or Prospectus Rules of the Financial Conduct Authority or other applicable laws, regulations or rules. 

Certain statements have been made with reference to forecast price changes, economic conditions and the current regulatory environment.  Nothing in this announcement should be construed as a profit forecast.  Past share price performance cannot be relied on as a guide to future performance. 

 

END

 

 

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