5 December 2024 Custodian Property Income REIT plc (“Custodian Property Income REIT” or “the Company”) Interim Results Active management of diversified portfolio underpins earnings growth and fully covered dividend Custodian Property Income REIT (LSE: CREI), which seeks an enhanced income return by investing in a diversified portfolio of smaller, regional properties with strong income characteristics across the UK, today reports its interim results for the six months ended 30 September 2024 (“the Period”). Commenting on the results, David MacLellan, Chairman of Custodian Property Income REIT, said: “The Company’s diversified strategy and strong focus on income has served to deliver relatively stable returns against a background of improving sentiment towards commercial property investment. For the six months to 30 September 2024 share price total return was 8.8%, although investment company share prices have weakened since the Period end, and NAV total return was 3.6% with a fully covered dividend providing a significant and defensive component of total returns. “I was pleased to be able to announce that dividends per share of 3.0p (2023: 2.75p) have been declared relating for the six months to 30 September 2024. The Board expects to continue to pay quarterly dividends per share of 1.5p to achieve a fully covered target dividend per share for the year ending 31 March 2025 of no less than 6.0p. “While the economic and political picture is still uncertain, the outlook for 2025 is very much brighter for real estate than at the same time in both of the last two years. The indicators of an imminent but gradual recovery in capital values strongly outweigh the risks of continued malaise. Valuations have been flat, and slightly up since December 2023, while vacancy rates have continued to fall, and both passing rent as well as estimate rental values have improved, with private equity becoming increasingly active in the sector. Furthermore, The Bank of England has cut interest rates twice and the listed real estate sector has seen ratings improve as share prices narrow the discount to net asset value. “Against this backdrop, Custodian Property Income REIT continues to provide shareholders with an income focused investment opportunity, with earnings supporting a fully covered dividend, on top of which there is now the real prospect of a recovery in valuations to enhance total return. We continue to look for opportunities to grow the Company through corporate acquisitions while at the same time expect to progress selective and profitable disposals to further reduce our revolving debt.”
Asset management driving income growth EPRA earnings per share for the Period increased 3.4% to 3.0p (2023: 2.9p) due to an improvement in occupancy and growth in income generated from PV. Target dividend per share for the year ended 31 March 2024 of not less than 6.0p, 100% covered in H1, in line with the Company’s policy of paying fully covered dividends. Leasing activity during the Period comprised 29 new lettings, lease renewals and regears across 19 assets. Five rent reviews at an aggregate 43% above previous passing rent added £0.4m of new rent, with eight vacant units let across five assets in the industrial, office and other sectors, in aggregate, in line with ERV, adding £0.7m of new rent. Robust balance sheet Fixed rate agreed debt facilities represent 80% of total drawn debt, significantly mitigating interest rate risk and maintaining a beneficial margin between the 4.0% aggregate cost of debt and the income returns the property portfolio continues to generate. NAV per share 93.6p (31 March 2024: 93.4p). Valuations stable with portfolio management driving long term returns Strong occupational demand and asset management improved occupancy and drove a 0.4% like-for-like increase in portfolio valuation to £582.4m (31 March 2024: £589.1m). £13.7m of disposal proceeds were generated from the sale of four assets at a 39% premium to pre-offer valuation. £4.7m was invested in the refurbishment of existing assets and installation of solar panels which is expected to both enhance the assets’ valuations and environmental credentials and, once let, increase rents, delivering a yield on cost of more than 7%, ahead of the Company’s marginal cost of borrowing. 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 – Managing Director Ed Moore – Finance Director Ian Mattioli MBE DL – Chairman | Tel: +44 (0)116 240 8740 www.custodiancapital.com |
| Deutsche Numis | |
| Hugh Jonathan/George Shiel | Tel: +44 (0)20 7260 1000 |
| | www.numiscorp.com |
Property highlights
| | 30 Sept 2024 £m | Comments |
| | | |
| Portfolio value | 582.4 | 31 March 2024: £589.1m, 30 September 2023: £609.8m |
| Property valuation increases: | 1.7 | Representing a 0.4% like-for-like increase, explained further in the Investment Manager’s report |
| | | |
| Capital investment | 4.7 | Primarily comprising: £1.7m refurbishing offices in Manchester and Leeds £1.2m refurbishing and extending an industrial unit in Livingstone £0.6m invested installing solar panels at various sites £0.5m refurbishing an industrial unit in Aberdeen |
| | | |
| Disposal proceeds | 13.7 | At an aggregate 39% premium to pre-offer valuation comprising: £9.0m vacant industrial unit in Warrington £2.3m vacant former car showroom in Redhill £1.8m vacant offices in Castle Donington £0.6m industrial unit in Sheffield |
| | | |
| Disposal proceeds since the Period[1] end | 1.4 | Vacant offices in Solihull, 33% ahead of pre-offer valuation |
Financial highlights and performance summary
| | 6 months ended | 6 months ended | 12 months ended | |
| | 30 Sept 2024 | 30 Sept 2023 | 31 Mar 2024 | Comments |
| Returns | | | | |
| EPRA[2] earnings per share[3] | 3.0p | 2.9p | 5.8p | The impact of improvement in occupancy and increase in income from solar panels have exceeded cost inflation |
| Basic and diluted earnings per share[4] | 3.4p | (0.6p) | (0.3p) | Current period profit reflects stable valuations |
| Profit/(loss) before tax (£m) | 14.9 | (2.7) | (1.5) |
| Dividends per share[5] | 3.0p | 2.75p | 5.8p | Target dividend per share for the year ended 31 March 2025 of not less than 6.0p, in line with the Company’s policy of paying fully covered dividends |
| Dividend cover[6] | 100% | 107% | 101% |
| NAV total return per share[7] | 3.6% | (0.7%) | (0.4%) | 3.4% dividends paid and a 0.2% capital increase |
| Share price total return[8] | 8.8% | (4.4%) | (2.6%) | Share price increased from 81.4p to 85.4p during the Period |
| | | | | |
| Capital values | | | | |
| NAV and EPRA NTA[9] (£m) | 412.7 | 422.8 | 411.8 | NAV increased during the Period due to £1.2m of valuation increases |
| NAV per share and NTA per share | 93.6 | 95.9p | 93.4p |
| Borrowings | | | | |
| Net gearing[10] | 28.5% | 29.6% | 29.2% | Decreased due to disposal proceeds exceeding capital expenditure and valuations increasing during the Period |
| Weighted average cost of drawn debt facilities | 4.0% | 4.2% | 4.1% | Majority fixed rate debt insulating the Company from high base rate |
| | | | | |
| Costs | | | | |
| Ongoing charges ratio (“OCR”) excluding direct property expenses[11] | 1.28% | 1.23% | 1.24% | Fixed cost inflation exceeding rate of valuation increases |
| | | | | |
| Environmental | | | | |
| Weighted average energy performance certificate (“EPC”) rating[12] | C (52) | C (56) | C (53) | EPCs updated across 11 properties demonstrating continuing improvements in the environmental performance of the portfolio |
The Company presents alternative performance measures (“APMs”) to assist stakeholders in assessing performance alongside the Company’s results on a statutory basis. APMs are among the key performance indicators used by the Board to assess the Company’s performance and are used by research analysts covering the Company. The Company uses APMs based upon the EPRA Best Practice Recommendations Reporting Framework which is widely recognised and used by public real estate companies. Certain other APMs may not be directly comparable with other companies’ adjusted measures, and APMs are not intended to be a substitute for, or superior to, any IFRS measures of performance. Supporting calculations for APMs and reconciliations between APMs and their IFRS equivalents are set out in Note 19. Business model and strategy Purpose Custodian Property Income REIT offers investors the opportunity to access a diversified portfolio of UK commercial real estate through a closed-ended fund. The Company seeks to provide investors with an attractive level of income and the potential for capital growth, with a focus on improving the environmental credentials of the portfolio, to become the REIT of choice for private and institutional investors seeking high and stable dividends from well-diversified UK real estate. Stakeholder interests The Board recognises the importance of stakeholder interests and keeps these at the forefront of business and strategic decisions, ensuring the Company: Understands and meets the needs of its occupiers, owning fit for purpose properties with a focus on environmental credentials in the right locations which comply with safety regulations; Protects and improves its stable cash flows with long-term planning and decision making, implementing its policy of paying maintainable dividends fully covered by recurring earnings and securing the Company’s future; and Adopts a responsible approach to communities and the environment, actively seeking ways to minimise the Company’s impact on climate change and providing the real estate fabric of the economy, giving employers a place of business. Investment Policy The Company’s investment policy
[13] is summarised below: To invest in a diverse portfolio of UK commercial real estate, principally characterised by smaller, regional, core/core-plus properties that provide enhanced income; The property portfolio should be diversified by sector, location, tenant and lease term, with a maximum weighting to any one property sector or geographic region of 50%; To acquire modern buildings or those considered fit for purpose by occupiers, focusing on areas with: High residual values; Strong local economies; and An imbalance between supply and demand; No one tenant or property should account for more than 10% of the rent roll at the time of purchase, except for: Governmental bodies or departments; or Single tenants rated by Dun & Bradstreet as having a credit risk score worse than two
[14], where exposure may not exceed 5% of the rent roll; Not to undertake speculative development, except for the refurbishment or redevelopment of existing holdings; and The Company may use gearing provided that the maximum loan-to-value (“LTV”) shall not exceed 35%, with a medium-term net gearing target of 25% LTV. The Board reviews the Company’s investment objectives at least annually to ensure they remain appropriate to the market in which the Company operates and in the best interests of shareholders. Differentiated property strategy The Company’s portfolio is focused on smaller, regional, core/core-plus assets which helps achieve our target of high and stable dividends from well-diversified real estate by offering: An enhanced yield on acquisition – with no need to sacrifice quality of property, location, tenant or environmental performance for income and with a greater share of value in ‘bricks and mortar’; Greater diversification – spreading risk across more assets, locations and tenants and offering more stable cash flows; and A higher income component of total return – driving out-performance with forecastable and predictable returns. Richard Shepherd-Cross, Managing Director of the Company’s discretionary investment manager, commented: "Our smaller-lot specialism has consistently delivered significantly higher yields without exposing shareholders to additional risk”.
| Sector | Weighting by income
30 September 2024 | | | | | Industrial | 41% | | Retail warehouse | 22% | | Office | 16% | | Other | 14% | | High street retail | 7% |
| | Location | Weighting
by income
30 September 2024 | | | | | West Midlands | 20% | | North-West | 19% | | East Midlands | 13% | | South-East | 11% | | Scotland | 13% | | South-West | 10% | | North-East | 9% | | Eastern | 4% | | Wales | 1% |
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Our environmental, social and governance (“ESG”) objectives Improving the energy performance of our buildings - investing in carbon reducing technology, infrastructure and onsite renewables and ensuring redevelopments are completed to high environmental standards which are essential to the future leasing prospects and valuation of each property Reducing energy usage and emissions - liaising closely with our tenants to gather and analyse data on the environmental performance of our properties to identify areas for improvement Achieving positive social outcomes and supporting local communities - engaging constructively with tenants and local government to ensure we support the wider community through local economic and environmental plans and strategies and playing our part in providing the real estate fabric of the economy, giving employers safe places of business that promote tenant well-being Understanding environmental risks and opportunities - allowing the Board to maintain appropriate governance structures to ensure the Investment Manager is appropriately mitigating risks and maximising opportunities Complying with all requirements and reporting in line with best practice where appropriate - exposing the Company to public scrutiny and communicating our targets, activities and initiatives to stakeholders
Investment Manager Custodian Capital Limited (“the Investment Manager”) is appointed under an investment management agreement (“IMA”) to provide property management and administrative services to the Company. Richard Shepherd-Cross is Managing Director of the Investment Manager. Richard has 30 years’ experience in commercial property, qualifying as a Chartered Surveyor in 1996 and until 2008 worked for JLL, latterly running its national portfolio investment team. Richard established Custodian Capital Limited as the Property Fund Management subsidiary of Mattioli Woods plc (“Mattioli Woods”) and in 2014 was instrumental in the launch of Custodian Property Income REIT from Mattioli Woods’ syndicated property portfolio and its 1,200 investors. Following the successful IPO of the Company, Richard has overseen the growth of the Company to its current property portfolio of c.£600m. Richard is supported by the Investment Manager’s other key personnel: Ed Moore - Finance Director and Alex Nix - Assistant Investment Manager, along with a team of five other surveyors and four accountants. Chairman’s statement Custodian Property Income REIT’s strategy is to invest in a diversified portfolio which, at 30 September 2024, comprised 152 properties geographically spread throughout the UK and across a diverse range of sectors, with a portfolio yielding 6.9%
[15] (31 March 2014: 6.6%). With an average property value of c.£4m and no one tenant per property accounting for more than 1.75% of the Company’s rent roll, property specific risk and tenant default risk are significantly mitigated. This diversified strategy and strong focus on income has served to deliver relatively stable returns against a background of improving sentiment towards commercial property investment. For the six months to 30 September 2024 share price total return was 8.8%, although investment company share prices have weakened since the Period end, and NAV total return was 3.6% with a fully covered dividend providing a significant and defensive component of total returns. The Company’s weighted average cost of debt has remained at c. 4.0% and earnings have been resilient with EPRA EPS of 3.0p (2023: 2.9p) for the Period primarily due to occupancy increasing since 31 March 2024 from 91.7% to 93.5%. The rent roll has grown from £43.1m at 31 March 2024 to £44.3m, or 2.7% on a like-for-like basis and the like-for-like estimated rental value (“ERV”) of the portfolio has increased by £0.9m to £49.3m during the Period, providing a reversionary potential of 11%. Dividends In line with the Company’s objective to be the REIT of choice for institutional and private investors seeking high and stable dividends from well diversified UK commercial real estate, I was pleased to announce dividends per share of 3.0p (2023: 2.75p) relating to the six months to 30 September 2024. The Board expects to continue to pay quarterly dividends per share of 1.5p to achieve a fully covered target dividend per share for the year ending 31 March 2025 of no less than 6.0p. The Board acknowledges the importance of income for shareholders and its objective remains to grow the dividend at a rate which is fully covered by net rental income and does not inhibit the flexibility of the Company’s investment strategy. Portfolio During the Period, and since the Period end, the Company has generated sale proceeds £15.1m which have allowed the Company to continue to invest in accretive asset improvements and solar panel installations whilst reducing the drawn revolving credit facility to support net earnings. The Company’s property investment strategy, which targets smaller regional properties, often provides strategic options to re-lease or to sell at lease expiry. This optionality exists because there is an active owner-occupier market for smaller regional properties, which is much less the case for larger assets. As a result, four of the five disposals since 31 March 2024 were vacant buildings sold ahead of investment value to owner-occupiers or developers, with one vacant building currently being marketed to sell for partial redevelopment. Concluding sales without foregoing rental income is strongly positive to earnings. Net asset value The NAV of the Company at 30 September 2024 was £412.7m, approximately 93.6p per share:
| | | | Pence per share | £m |
| | | | | |
| NAV at 31 March 2024 | | | 93.4 | 411.8 |
| | | | | |
| Valuation increases and depreciation | | | 0.4 | 1.6 |
| Profit on disposal | | | - | 0.1 |
| Net gains on investment property | | | 0.4 | 1.7 |
| | | | | |
| EPRA earnings | | | 3.0 | 13.2 |
| Quarterly interim dividends paid during the Period | | | (2.9) | (12.7) |
| | | | | |
| | | | | |
| Special dividend, paid during the Period, relating to FY24 | | | (0.3) | (1.3) |
| | | | | |
| NAV at 30 September 2024 | | | 93.6 | 412.7 |
Borrowings The Company’s net gearing decreased from 29.2% LTV at 31 March 2024 to 28.5% during the Period. The proportion of the Company’s drawn debt facilities with a fixed rate of interest was 80% at 30 September 2024 (31 March 2024: 78%), significantly mitigating interest rate risk for the Company and maintaining a beneficial margin between the weighted average cost of debt of 4.0% (31 March 2024: 4.1%) and income returns from the property portfolio. The Company’s debt is summarised in Note 14. Cost disclosure exemption We welcome the Financial Conduct Authority’s recent exemption of investment companies (including REITs) from the Packaged Retail and Insurance-based Investment Products (“PRIIPs”) and Markets in Financial Instruments Directive II (“MiFID II”) regulation. Since 2018 this regulation has obliged wealth managers and platforms to make cost disclosures to clients that were ‘fundamentally misleading’
[16] by being presented as being borne by investors despite actually being incurred by the Company and included within reported investment performance. Exacerbated by more recent Consumer Duty regulations these cost disclosures, which also result in investment companies’ management costs appearing spuriously more expensive than alternative structures, are likely to have curtailed investment demand for the Company’s shares over the last six years. As the investment industry gradually adjusts to this change, we expect the Company’s competitive cost structure and high returns to be very attractive to new investors seeking strong returns from UK real estate. Board changes On 6 November 2024 Ian Mattioli MBE DL stepped down from the Board to focus on capitalising on the market opportunity in UK wealth management in his role as Chief Executive Officer of Mattioli Woods Limited (“Mattioli Woods”), following its recent transition to private ownership. The Board has high regard for Ian's insight and expertise and thanks him for his invaluable contribution as founding director of the Company since its establishment in 2014. Ian and his family are expected to remain major, long-term shareholders in the Company and he is expected to continue to serve a valuable role for the Company in his capacity as chair of Custodian Capital and as a member of its Investment Committee. Also on 6 November 2024 Nathan Imlach, who is currently Chief Strategic Adviser to Mattioli Woods focusing on acquisitions and contributing to its future direction, was appointed as a new Non-Executive Director of the Company for a transition period up until no later than the end of 2025. Following that transition period the Company’s board will become fully independent from the Company’s Investment Manager. Nathan is currently Senior Independent Director of Mortgage Advice Bureau (Holdings) plc. He is a chartered accountant, holds the ICAEW’s Corporate Finance qualification and is a Chartered Fellow of the Chartered Institute for Securities and Investment. Nathan was previously Chief Financial Officer of Mattioli Woods, Company Secretary of Custodian Property Income REIT and a director of Custodian Capital Limited. Nathan also played a key role in establishing the Company in 2014 and will bring a valuable perspective to the Board prior to its transition to being fully independent. Diversity Our policy on board diversity is summarised in the Annual Report. The Company follows the AIC Corporate Governance Code and, from the start of 2026, expects to meet the FCA’s ‘comply or explain’ target for 40% female Board representation. Custodian Property Income REIT is an investment company with no Executive Directors and a small Board compared to equivalent size listed trading companies. The Board welcomes the gender and ethnic diversity offered by the Investment Management team working with the Company.
ESG The Company has made further pleasing progress implementing its environmental policy during the Period, improving its weighted average EPC score from C (53) to C (52) due to completing refurbishments. The Board was pleased to publish its Asset Management and Sustainability report in June which is available at:
custodianreit.com/environmental-social-and-governance-esg/ This report contains details of the Company’s asset management initiatives with a clear focus on their impact on ESG, including case studies of recent positive steps taken to improve the environmental performance of the portfolio. Outlook While the economic and political picture is still uncertain, the outlook for 2025 is very much brighter for real estate than at the same time in both of the last two years. The indicators of an imminent but gradual recovery in capital values strongly outweigh the risks of continued malaise. Valuations have been flat, and slightly up since December 2023, while vacancy rates have continued to fall, and both passing rent as well as estimate rental values have improved, with private equity becoming increasingly active in the sector. Furthermore, The Bank of England has cut interest rates twice and the listed real estate sector has seen ratings improve as share prices narrow the discount to NAV. Against this backdrop, Custodian Property Income REIT continues to provide shareholders with an income focused investment opportunity, with earnings supporting a fully covered dividend, on top of which there is now the real prospects of a recovery in valuations to enhance total return. We continue to look for opportunities to grow the Company through corporate acquisitions while at the same time expect to progress selective and profitable disposals to further reduce our revolving debt. David MacLellan Chairman 4 December 2024 Investment Manager’s report Property market After a period of stabilisation, the trajectory of valuations in 2024 appears to be turning, with two consecutive broadly flat quarters followed by a 0.5% like-for-like increase in the quarter ended 30 September 2024. This profile is consistent with our strongly held view that market values have now bottomed out and the prevailing trend is gradually upwards, supported by falling interest rates and the continued strength of the occupier markets, which should also deliver rental growth. Market research published by Savills shows rental growth in the three main commercial property sectors: Industrial and logistics still lead the growth tables, albeit the rate of rental growth is slowing; office rents are showing growth, but this is both property and location specific; and retail has returned to growth after five years of falling rental values. In the retail sector, it is likely that out-of-town retail will show the greatest rental growth potential, given the heavily restricted supply and low vacancy rate, but prime high street rents are also expected to witness modest growth. So, while the scene is set for stronger total returns, principally driven by income and income growth, the direct property market has not fully reacted to this potential, as demonstrated by relatively flat valuations. In the indirect market we have seen significant corporate activity, often led by private equity, and a narrowing of discounts to NAV. Both private equity activity and advancing share prices are lead indicators of a recovering direct market. It is disappointing to see publicly owned real estate being sold into private hands at this point in the cycle, but we believe it is still possible to access attractive income returns with the prospect of capital growth from listed UK real estate. Strong recent leasing activity demonstrates the resilience of Custodian Property Income REIT’s well-diversified investment portfolio. 29 new leases/lease renewals across 19 properties with £2.4m of annual rent have been signed during the Period. £1.1m of new rent has been added to the rent roll from: Completing five rent reviews on industrial assets at an aggregate 43% above previous passing rent adding £0.4m of new rent; and Letting eight vacant units across five assets in the industrial, office and other sectors, in aggregate, in line with ERV, adding £0.7m of new rent. EPRA occupancy
[17] has improved to 93.5% (31 Mar 2024: 91.7%) due to the new lettings above and the sale of vacant units in Warrington, Redhill and Castle Donington. Property portfolio performance
| | 30 Sept 2024 | 30 Sept 2023 | 31 Mar 2024 |
| Property portfolio value | £582.4m | £609.8m | £589.1m |
| Separate tenancies | 338 | 336 | 335 |
| EPRA occupancy rate | 93.5% | 91.5% | 91.7% |
| Assets | 152 | 159 | 155 |
| Weighted average unexpired lease term to first break or expiry (“WAULT”) | 4.9yrs | 4.8yrs | 4.9yrs |
| EPRA topped-up net initial yield (“NIY”) | 6.9% | 6.4% | 6.6% |
| Weighted average EPC rating | C (52) | C (56) | C (53) |
The property portfolio is split between the main commercial property sectors in line with the Company’s objective to maintain a suitably balanced investment portfolio. The Company has a relatively low exposure to office and high street retail combined with a relatively high exposure to industrial and to alternative sectors, often referred to as ‘other’ in property market analysis. The current sector weightings are:
