Custodian Property Income REIT — Positive outlook for further growth

Custodian Property Income REIT (LSE: CREI)

Last close As at 07/08/2024

GBP0.78

0.30 (0.39%)

Market capitalisation

GBP345m

More on this equity

Research: Real Estate

Custodian Property Income REIT — Positive outlook for further growth

Custodian Property Income REIT (CREI) has published its Q125 NAV and trading update. With rental growth continuing, Q125 DPS (+9% vs Q124) is in line with the full year target of 6.0p and was fully covered. The dividend-driven quarterly NAV total return was 1.6%, while the share price yield is almost 8%. Property values appear to have stabilised and CREI expects a benefit from interest rate reductions.

Martyn King

Written by

Martyn King

Director, Financials

Real Estate

Custodian Property Income REIT

Positive outlook for further growth

Q125 trading update

Real estate

8 August 2024

Price

78p

Market cap

£344m

Net debt (£m) at 30 June 2024
(excluding restricted cash)

167

Net LTV as at 30 June 2024

28.8%

Shares in issue

440.9m

Free float

90%

Code

CREI

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

Business description

Custodian Property Income REIT is a London Main Market-listed REIT focused on smaller lot-size commercial properties across the UK regions outside London. It is income focused, with a commitment to pay a high but sustainable and covered dividend, with the potential for capital growth.

Analyst

Martyn King

+44 (0)20 3077 5700

Custodian Property Income REIT is a research client of Edison Investment Research Limited

Custodian Property Income REIT (CREI) has published its Q125 NAV and trading update. With rental growth continuing, Q125 DPS (+9% vs Q124) is in line with the full year target of 6.0p and was fully covered. The dividend-driven quarterly NAV total return was 1.6%, while the share price yield is almost 8%. Property values appear to have stabilised and CREI expects a benefit from interest rate reductions.

Year end

Net rental income (£m)

EPRA earnings* (£m)

EPRA
EPS* (p)

NAV/**
share (p)

DPS
(p)

P/NAV**
(x)

Yield
(%)

03/23

37.1

24.8

5.6

99.3

5.50

0.79

7.1

03/24

38.9

25.7

5.8

93.4

5.80

0.83

7.4

03/25e

40.3

27.3

6.2

94.3

6.00

0.83

7.7

03/26e

40.8

27.5

6.2

94.5

6.12

0.83

7.8

Note: *Excludes revaluation gains/losses and other exceptional items. **Defined as EPRA net tangible assets (EPRA NTA) per share.

Across much of the commercial market, especially for industrial and logistics, occupier demand remains robust, new supply restricted, and rents are increasing. Investment demand has begun to pick up from very low levels and the turn of the interest rate cycle should provide further support. MSCI data has shown three consecutive quarters of positive capital growth for the first time since 2022.

For CREI, on a like-for-like basis, Q125 passing rents increased 1.2%. On the same basis, estimated rental values (ERV) rose 1.0%, driven by the industrial sector, but with all other sectors stable. New lettings, lease renewals and rent reviews were all on average well ahead of ERV and/or previous passing rents. Portfolio ERV of £49.4m is £5.8m or 13% above passing rent of £43.6m, representing a significant opportunity for further income growth through asset management and lease events. Asset management also supports valuation and initiatives in Q125 added £0.8m to valuations, which were up 0.3% on a like-for-like basis, but down 0.1% net of capital expenditure. NAV per share fell marginally from 93.4p to 93.1p. CREI continues to invest in its portfolio to enhance environmental credentials and the attractiveness of selected assets, rent potential and valuations, with a target yield on cost of at least 7%, above the marginal cost of borrowing. £1.9m was invested in Q125, primarily relating to office refurbishments in Leeds and Manchester.

Selective property disposals, especially vacant properties, are accretive to earnings and NAV, with proceeds supporting investment in the portfolio, debt reduction and lower weighted average cost of debt. During Q125 two previously announced disposals were completed, with an aggregate value of £11.3m, 49% ahead of the end-FY23 valuation. The proceeds were used to repay more expensive variable rate borrowings, reducing average cost to 3.9% from 4.1%. 83% of borrowings are now fixed rate, at an average cost of 3.4%, with an average maturity of 5.8 years.

We have made no changes to the forecasts contained in our recent detailed review. We expect continuing growth in earnings and dividends, as the company realises organic potential. CREI obviously recognises the potential for sector consolidation to generate economies of scale and further enhance diversification and was disappointed that its proposed merger with API, supported by both boards, was unsuccessful. We expect it to remain open to further opportunities.

General disclaimer and copyright

This report has been commissioned by Custodian Property Income REIT and prepared and issued by Edison, in consideration of a fee payable by Custodian Property Income REIT. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

This report has been commissioned by Custodian Property Income REIT and prepared and issued by Edison, in consideration of a fee payable by Custodian Property Income REIT. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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