6 December 2018

 

 

Custodian REIT plc

 

(“Custodian REIT” or “the Company”)

 

Interim Results

 

Custodian REIT (LSE: CREI), the UK commercial real estate investment company, today reports its interim results for the six months ended 30 September 2018 (“the Period”).

 

Financial highlights and performance

 

• NAV per share total return[1] of 4.3% (2017: 4.2%)
• Basic and diluted earnings per share[2] up 13% to 4.3p (2017: 3.8p)
• EPRA[3] earnings per share[4] of 3.5p (2017: 3.4p)
• Portfolio value of £547.0m (2017: £474.3m)
• Profit before tax up 26% to £16.6m (2017: £13.2m)
• £8.4m[5] of new equity raised at an average premium of 13.2% to dividend adjusted NAV
• Dividends of 3.275p per share paid and approved for the Period
• £27.7m[6] invested in seven acquisitions, one development and one refurbishment
• £3.9m valuation uplift from successful asset management initiatives
• £3.5m valuation decrease due to company voluntary arrangements (“CVAs”)
• £1.4m net valuation decrease[7]
• £4.3m profit on disposal of three properties for an aggregate consideration of £15.4m
• EPRA occupancy[8] 96.9% (2017: 96.7%)

	Unaudited 6 months to  30 Sept 2018	Unaudited 6 months to  30 Sept 2017	Audited 12 months to 31 Mar 2018
Total return
NAV per share total return	4.3%	4.2%	9.6%
Share price total return[9]	10.3%	5.3%	6.7%
Capital values
NAV (£m)	427.5	378.6	415.2
NAV per share (p)	108.6	104.9	107.3
Share price (p)	121.4	114.8	113.0
Portfolio value (£m)	547.0	474.3	528.9
Market capitalisation (£m)	478.1	414.1	437.1
Premium to NAV per share	11.8%	9.4%	5.3%
Net gearing[10]	20.5%	19.7%	21.0%

 

Alternative performance measures, including EPRA Best Practice Recommendations, are used to assess the Company's performance.  Explanations as to why alternative performance measures give valuable further insight into the Company's performance are given in the Company's Annual Report.  Supporting calculations for alternative performance measures and reconciliations between non-statutory performance measures and their IFRS equivalents are set out in the 'Additional disclosures' section of the interim financial statements.

 

David Hunter, Chairman of Custodian REIT, said:

 

“I am pleased to report another successful period of positive shareholder returns and cautious investment in a market where value can still be found with a disciplined approach to deployment.  We continue to target growth to realise the potential economies of scale offered by the Company's relatively fixed administrative cost base and tiered annual management charge.

 

“The Board and Investment Manager are closely monitoring the potential impact of evolving trends in the UK retail industryand 'Brexit' on commercial property markets.  Our role is to look beyond the media coverage to weigh up dispassionately the associated risks, which often create opportunity, and we expect proactive asset management will continue to drive performance in the portfolio, as rental growth at lease renewal or rent review remains robust.  We also expect occupational demand, combined with a limited supply of new development, to maintain low vacancy rates across our regional portfolio.

 

“We are well placed to meet our target of paying further quarterly dividends, fully covered by net income, to achieve an annual dividend for the year of 6.55p per share, and remain committed to both growing the dividend on a sustainable basisand delivering capital value growth for our shareholders over the long-term.”

 

Further information

 

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

 

Custodian Capital Limited
Richard Shepherd-Cross / Nathan Imlach / Ian Mattioli MBE	Tel: +44 (0)116 240 8740
	www.custodiancapital.com

 

Numis Securities Limited
Hugh Jonathan/Nathan Brown	Tel: +44 (0)20 7260 1000
	www.numiscorp.com

 

Camarco
Ed Gascoigne-Pees	Tel: +44 (0)20 3757 4984
	www.camarco.co.uk

 

Chairman's statement

 

I am pleased to report the Company delivered further positive returns for the six months ended 30 September 2018.  Earnings per share increased by 13% to 4.3p (2017: 3.8p) and the property portfolio increased through the investment of £27.7m in seven acquisitions, one refurbishment and one development.  This expansion was funded by £8.4m raised fromthe issue of new shares and through the Company's existing debt facilities.  We continue to target growth to realise the potential economies of scale offered by the Company's relatively fixed administrative cost base and the reducing scale of management charges.  The Company continues to adhere to its investment policy and seeks to maintain the quality of both properties and income.

 

At the same time as growing the portfolio, we have continued to pay fully covered dividends in line with target and we have minimised 'cash drag' on the issue of new shares by taking advantage of the flexibility offered by the Company's £35m revolving credit facility.

 

The successful deployment of new monies on the acquisition of high quality regional assets at an average net initial yield[11]of 7.2% supports our objective to deliver strong income returns from a portfolio principally of sub £10m lots in strong, regional markets.

 

The Company's share price performance has allowed the Board to issue equity at an average premium of 13.2% above dividend adjusted NAV, more than covering the costs of issue and deployment.

 

Market

 

During the Period we have taken a cautious approach to acquisitions in a market where, in general, industrial values are increasing and certain retail asset values are decreasing, with little clarity on where they will settle.  The Company has stuck firmly to its investment strategy of deploying its available resources into the right property assets and disposed of two weaker retail assets to improve the quality of the Company's retail portfolio.  Property market conditions have restricted our ability to acquire properties that meet our strategy at a sufficient rate to satisfy demand for new equity issuance.  As a resultnew issuance has been limited which, in turn, has seen the Company's shares trade at a premium well ahead of most of our peers.

 

The Board and the Investment Manager follow closely the evolving trends in the UK retail industry, and its impact on commercial property markets.  Our role is to look beyond the media coverage to weigh up dispassionately the risks in asector which often creates opportunity through a sweeping market reaction, and we believe the current retail environment is no different.  Since the Period end we have acquired £25.0m of retail warehousing and £2.1m of high street retail at a significant discount to recent market pricing.  These properties have been carefully selected with strong underlying attributes, are leased at affordable rents to tenants with sustainable business models and which trade strongly from those locations.

 

Net asset value

 

The Company delivered NAV per share total return of 4.3% for the Period, where the initial costs (primarily stamp duty) of investing £27.7m in property acquisitions, one development and one refurbishment diluted NAV per share total return by circa 0.4p, partially offset by raising £8.3m from the issue of new equity (net of costs), which added 0.2p per share.

 

			Pence per share	£m
NAV at 31 March 2018			107.3	415.2
Issue of equity (net of costs)			0.2	8.3
			107.5	423.5
Valuation movements relating to:
–          Asset management activity			1.0	3.9
–          Other valuation movements			(0.9)	(3.7)
Gross valuation increase			0.1	0.2
Impact of acquisition costs			(0.4)	(1.6)
Net valuation decrease			(0.3)	(1.4)
Profit on disposal of investment property			1.1	4.3
Net gain on investment property			0.8	2.9
Income			5.0	19.6
Expenses and net finance costs			(1.5)	(5.9)
Dividends paid[12]			(3.2)	(12.6)
NAV at 30 September 2018			108.6	427.5

 

Activity during the Period also centred on pro-active asset management, which generated a £3.9m valuation uplift.  However, these gains were largely offset by a £3.5m valuation decrease due to the CVAs of Homebase, Office Outlet (formerly Staples) and Carpetright impacting the Company's units in Leighton Buzzard, Milton Keynes and Grantham respectively.

 

Share price

 

Share price total return for the first half of the financial year was 10.3%, with a closing price of 121.4p per share on 30 September 2018 representing a 11.8% premium to NAV.  During the Period the Company shares traded consistently at a premium to NAV with low volatility offering shareholders stable returns.  I believe the increasing, but still relatively stable premium to NAV, has been a function of strong demand for closed-ended property funds, the increasing daily liquidity of the Company's shares, the Company's regional property investment strategy, focused asset management and the attractive level of income offered by the Company's dividend policy.

 

Issue of new ordinary shares

 

The Company issued 7.0m new shares during the Period at an average premium to the prevailing dividend adjusted NAV of 13.2%.  These issues have been accretive to NAV with positive investor demand for the Company's shares a testament to the successful implementation of our strategy to date.

 

At the Annual General Meeting (“AGM”) of the Company held on 19 July 2018, shareholders voted to limit the authority to issue new shares with pre-emption rights disapplied to a maximum of 10% of the Company's issued share capital (“Limit”).  The Board had proposed a Limit of 20% in line with the 2017 changes to the EU Prospectus Directive, which increased the maximum proportion of the Company's issued share capital that can be issued over a 12-month period on a non-pre-emptive basis before the Company is required to publish a prospectus from 10% to 20%.

 

The Pre-Emption Group's Statement of Principles on Disapplying Pre-emption Rights, however, continues to support a Limit of 10%.  Accordingly, 26.0m votes against a Limit of 20% were received, representing 47.4% of votes cast but only 7.4% of eligible votes, largely from shareholders following institutional proxy voting adviser recommendations which typically followthe Pre-emption Group's guidance.

 

In the Board's opinion, a Limit of 20% is justified to continue the Company's programme of tap issuance, allowing the Company to fund suitable property acquisitions in a cost-efficient manner by avoiding the significant costs of publishing a prospectus.

 

The Board believes that growing the Company efficiently is in the best interests of all shareholders as it reduces the Company's ongoing charges, diversifies income and increases share liquidity.

 

Due to the votes against a 20% Limit only representing 7.4% of eligible votes, and based on feedback from Shareholders since the 2018 AGM, the Board currently expects to request approval for a 20% Limit at the 2019 AGM.

 

Borrowings

 

As at 30 September 2018 net gearing equated to 20.5% LTV.  The Board's strategy is to:

 

• Increase debt facilities in line with portfolio growth targeting net gearing of 25% LTV;
• Facilitate expansion of the portfolio to take advantage of expected rental growth and reduce ongoing charges; and
• Reduce shareholders' exposure to risk by:

        Taking advantage of low interest rates to secure long-term, fixed rate borrowing; and

        Managing the weighted average maturity (“WAM”) of the Company's debt facilities.

 

The Company operates the following debt facilities:

 

• A £35m revolving credit facility 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 Real Estate Investors comprising:

a)      £35m Tranche 1 repayable on 6 April 2032 attracting fixed annual interest of 3.02%; and

b)      £15m Tranche 2 repayable on 3 November 2032 attracting fixed annual interest of 3.26%.

 

The weighted average cost of the Company's agreed debt facilities is 3.1% (2017: 3.1%) with a WAM of 9 years (2017: 10 years) and 77% (2017: 77%) of the Company's debt facilities are at a fixed rate of interest, significantly mitigating interest rate risk.

 

Investment Manager

 

The Board is pleased with the Investment Manager's performance, particularly the timely deployment of new monies on high quality assets, securing the earnings required to fully cover the target dividend.

 

The Investment Manager is appointed under an investment management agreement (“IMA”) to provide property management and administrative services to the Company.  Fees payable to the Investment Manager are set out in Note 16.

 

Dividends

 

Income is a major component of total return.  The Company paid dividends totalling 3.25p per share during the six-month Period, all classified as property income distributions, comprising interim dividends of 1.6125p per share and 1.6375p per share relating to the quarters ended 31 March 2018 and 30 June 2018 respectively.

 

The Board has approved an interim dividend of 1.6375p per share for the quarter ended 30 September 2018 which was paid on 30 November 2018.  In the absence of unforeseen circumstances the Board believes the Company is well placed to meet its target[13] of paying further quarterly dividends, fully covered by income, to achieve an annual dividend 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.

 

Outlook

 

Notwithstanding our cautious approach to investment in the current market we believe that value can still be found with a disciplined approach to deployment.  The strength of the occupational market and softening yields for prime retail warehouse assets let to blue chip tenants both represent exciting opportunities, discussed more fully in the Investment Manager's report.  Rental growth at lease renewal and rent review remains robust.  We expect proactive asset management and rental growth will continue to drive performance in the portfolio and are confident we can maintain occupancy levels, which in turn will sustain our policy of paying a growing and fully-covered dividend to shareholders.

 

While we can never rule out some future impact on NAV as a result of falling confidence in the property market or general economic and political turbulence, we believe our strategy of securing sustainable income will support future dividends through any medium-term market volatility and deliver capital growth for shareholders over the long-term.

 

David Hunter

Chairman

5 December 2018