Unaudited Net Asset Value as at 30 June 2018
Custodian REIT (LSE: CREI), the UK commercial real estate investment company, today reports its unaudited net asset value (“NAV”) as at 30 June 2018 and highlights for the period from 1 April 2018 to 30 June 2018 (“the Period”).
Financial highlights
- NAV total return per share1 for the Period of 2.0%
- Dividend per share approved for the Period of 1.6375p
- NAV per share of 107.8p (31 March 2018: 107.3p)
- NAV of £416.9m (31 March 2018: £415.2m)
- Net gearing2 of 21.0% loan-to-value (31 March 2018: 21.0%)
- Market capitalisation of £467.3m (31 March 2018: £437.1m)
Portfolio highlights
- Portfolio value of £537.4m (31 March 2018: £528.9m)
- £8.4m3 invested in two property acquisitions and one refurbishment
- £1.7m valuation increase from successful asset management initiatives
- EPRA occupancy4 96.7% (31 March 2018: 96.5%)
- £21.5m committed pipeline of investment properties under offer
- £2.3m retail unit in Stourbridge disposed of at valuation
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 £0.5m.
4 Estimated rental value (“ERV”) of let property divided by total portfolio ERV.
Net asset value
The unaudited NAV of the Company at 30 June 2018 was £416.9m, reflecting approximately 107.8pper share, an increase of 0.5% since 31 March 2018:
|
|
Pence per share |
£m |
|
|
|
|
|
NAV at 31 March 2018 |
107.3 |
415.2 |
|
|
|
|
|
Valuation movements relating to: |
|
|
|
– Asset management activity |
0.5 |
1.7 |
|
– Other valuation movements |
0.0 |
0.1 |
|
|
0.5 |
1.8 |
|
Acquisition costs |
(0.1) |
(0.5) |
|
Net valuation movement |
0.4 |
1.3 |
|
|
|
|
|
Income earned for the Period5 |
2.6 |
10.0 |
|
Expenses and net finance costs for the Period5 |
(0.9) |
(3.4) |
|
Dividends paid6 |
(1.6) |
(6.2) |
|
|
|
|
|
NAV at 30 June 2018 |
107.8 |
416.9 |
5 Including £0.8m of annual insurance premium recharged to tenants.
6 Dividends of 1.6125p per share were paid on shares in issue throughout the Period.
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 30 June2018 and income for the Period, but does not include any provision for the approved dividend for the Period, to be paid on 31 August 2018.
The Company completed the following investments during the Period:
- Acquisition of a distribution unit within Bellshill Industrial Estate, Glasgow occupied by Yodel Delivery Network for £3.7m, with a net initial yield7 (“NIY”) of 6.94% and a weighted average unexpired lease term to first break (“WAULT”) of seven years;
- Acquisition of a health and fitness centre in Lincoln occupied by Total Fitness Health Clubs for£4.3m, with a NIY of 7.64% and a WAULT of 17 years; and
- Capital expenditure of £0.4m, primarily on the ongoing refurbishment of an office building in Birmingham.
7 Passing rent divided by property valuation plus assumed purchaser's costs.
Asset management
Owning the right properties at the right time is one key element of effective portfolio management, which necessarily involves some selling from time to time to balance the portfolio. While Custodian REIT is not a trader, identifying opportunities to dispose of assets significantly ahead of valuation, or that no longer fit within the Company's investment strategy, is important. As we did not anticipate future rental growth, the Company disposed of a five-unit retail development in Stourbridge (with a WAULT of 3.5 years) in line with the 31 March 2018 valuation of £2.3m. The Company has agreed terms on two other potential disposals that fit the asset disposal criteria outlined above and are expected to complete over the coming months.
Our 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 £1.7m valuation increase in the Period, primarily due to agreeing a new 10 year lease with Teleperformance in Ashby-de-la-Zouch, with annual rent increasing by 15% to £0.5m whichincreased the valuation by £1.4m. Further initiatives on other properties currently under review are expected to complete during the current quarter.
The portfolio's WAULT was maintained at 5.9 years with the impact of lease re-gears, acquiring properties let on longer leases and disposing of a property with a short WAULT all offsetting the natural 0.25 years decline due to the passage of time over the Period. At the Company's Annual General Meeting, held on 19 July 2018, shareholders approved a change to the Company's WAULT investment objective as follows:
- Previous WAULT policy: The Company will seek to maintain a WAULT of over five years across the portfolio secured against low risk tenants and to minimise rental voids.
- New WAULT policy: The Company will seek to minimise rental voids and enhance the WAULT of the portfolio by managing lease expiries and targeting property acquisitions which will in aggregate be accretive to WAULT at the point of acquisition, on a rolling 12-month basis.
Property market
Commenting on the commercial property market, Richard Shepherd-Cross, Managing Director of Custodian Capital Limited (the Company's discretionary investment manager) said:
“Investment market activity in the second quarter of 2018 has continued unabated with institutional investors keen to deploy funds into commercial property, maintaining prevailing yields at near record lows. I believe the general consensus is that industrial is the preferred sector with retail the least favoured, but this conceals a much more complex picture where the characteristics of individual assets rather than a sector focus is ever more important.
“Strong occupational demand is resulting in rental growth and by maintaining a high level of occupancy we are able to deliver performance in the portfolio which we will seek to continue in the months ahead. Across the 17 rent reviews completed in the last 12 months we have been able to deliver 19% average rental increases. We will continue to focus on proactive asset management with our tenants on lease extensions, the removal of breaks and securing of lease renewals. We expect these initiatives to continue to enhance NAV.”
Activity and pipeline
Commenting on pipeline, Richard Shepherd-Cross said:
“We continue to hold tightly to our investment strategy and the lack of supply that is causing near record low yields has prevented us maintaining the rate of deployment we managed in 2017. Market appetite for industrial assets, and for properties let on long leases, particularly those properties with rents indexed to inflation, are all driving the strongest prices. This scenario has caused us to look to the motor trade, offices and drive-through restaurants to try to find 'value', currently with a £21.5m pipeline of properties under offer. However, these sectors are not without their risks, therefore a cautious approach to stock selection and sub-sector exposure has been paramount.”
Financing
Debt
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 facility with Scottish Widows plc which attracts interest fixed at 2.987% and is repayable on 5 June 2028; and
- A £50m term loan facility with Aviva Investors Real Estate Finance comprising:
i) A £35m tranche repayable on 6 April 2032, attracting fixed annual interest of 3.02%; and
ii) A £15m tranche repayable on 3 November 2032 attracting fixed annual interest of 3.26%.
Portfolio analysis
At 30 June 2018 the Company's property portfolio comprised 148 assets with a NIY of 6.59%.
The portfolio is split between the main commercial property sectors, in line with the Company's objective to maintain a suitably balanced investment portfolio, but with a relatively low exposure to office and a relatively high exposure to industrial and the alternative sector, often referred to as 'other' in property market analysis. Sector weightings are shown below:
|
Sector |
|
|
Valuation 30 Jun2018 £m |
Period valuation movement £m |
Weighting by income8 30 Jun2018 |
Weighting by income8 31 Mar2018 |
|
|
|
|
|
|
|
|
|
Industrial |
|
|
217.0 |
3.2 |
40% |
39% |
|
Retailwarehousing |
|
|
104.4 |
(1.1) |
20% |
20% |
|
Other9 |
|
|
84.6 |
(0.1) |
15% |
15% |
|
High street retail |
|
|
74.8 |
(0.5) |
14% |
14% |
|
Office |
|
|
56.6 |
0.3 |
11% |
12% |
|
|
|
|
|
|
|
|
|
Total |
|
|
537.4 |
1.8 |
100% |
100% |
8 Current passing rent plus ERV of vacant properties.
9 Includes car showrooms, petrol filling stations, children's day nurseries, restaurants, gymnasiums, hotels and healthcare units.
Industrial property remains a very good fit with the Company's strategy. However, investment demand in this sector has created price inflation that is limiting our opportunity to acquire properties that meet our investment mandate. £1.4m of the £3.2m gross valuation increase in the industrial sector in the Period was driven by asset management initiatives, with occupational demand driving rental growth and generating positive returns.
There is continued weakness in secondary high street retail locations, with rental levels still under pressure and a very real threat of vacancy. However, the high street is a polarised sector where many locations continue to be in demand by retailers. We have continued to rebalance the portfolio to focus on strong retail locations while working on an orderly disposal of those assets we believe are ex-growth. The current well-publicised crop of company voluntary arrangements (“CVAs”) has had little impact on the Company's portfolio to date. Although further CVAs remain a threat, set against a backdrop of very low vacancy rates in this sector, we do not feel unduly exposed to long-term void risk.
While deemed to be outside the core sectors of office, retail and industrial the 'other' sector offers diversification of income, containing assets considered mainstream but typically not owned by institutional investors. The 'other' sector has proved to be an out-performer over the long-term and continues to be a target for acquisitions.
Office rents in regional markets are still growing and supply is constrained by a lack of development and the extensive conversion of secondary offices to residential. However, we are 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.
The Company 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 30 June 2018 was as follows:
|
Location |
|
|
Valuation 30 Jun 2018 £m |
Period valuation movement £m |
Weighting |
Weighting |
|
|
|
|
|
|
|
|
|
West Midlands |
|
|
106.5 |
– |
19% |
20% |
|
North-West |
|
|
91.6 |
(0.3) |
18% |
18% |
|
South-East |
|
|
89.7 |
0.7 |
15% |
15% |
|
East Midlands |
|
|
63.0 |
2.0 |
13% |
12% |
|
South-West |
|
|
61.1 |
(0.2) |
11% |
12% |
|
Scotland |
|
|
45.3 |
(0.4) |
9% |
8% |
|
North-East |
|
|
45.1 |
0.1 |
8% |
8% |
|
Eastern |
|
|
28.6 |
(0.1) |
6% |
6% |
|
Wales |
|
|
6.5 |
– |
1% |
1% |
|
|
|
|
|
|
|
|
|
Total |
|
|
537.4 |
1.8 |
100% |
100% |
10 Current passing rent plus ERV of vacant properties.
For details of all properties in the portfolio please see www.custodianreit.com/property-portfolio.
Dividends
An interim dividend of 1.6125p per share for the quarter ended 31 March 2018 was paid on 31 May 2018. The Board has approved an interim dividend relating to the Period of 1.6375p per share payable on 31 August 2018 to shareholders on the register on 27 July 2018.
In the absence of unforeseen circumstances, the Board intends to pay quarterly dividends to achieve a target dividend11 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.
11 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.
Activity since the Period end
Disposals
On 11 July 2018 the Company disposed of a 20,424 sq ft high street retail unit in Dumfries. Gross proceeds of £1.125m were in line with the 30 June 2018 valuation.