Custodian REIT: Full-year results and general update
Custodian REIT (LON:CREI) has released full-year results to March 31, 2020, including an update on trading post-period-end. The company notes that 70% of rents for the quarter ending June have been collected, with a further 12% covered by contractually agreed payment plans. We believe this is in line with market expectations and significantly better than some peers group, especially those with a bigger focus on retail properties.
Balance sheet net gearing remains at a moderate level at 22.4% as at March 31, 2020. The debt covenants stipulate less than 35% net gearing, and more than 250% interest cover, versus more than 600% achieved on a portfolio-wide basis in the quarter to March 2020. This would appear to leave headroom. Within the overall capital structure, there are individual debt facilities whose covenants could have come under pressure due to current market conditions, and these have been addressed by agreed covenant waivers vis-à-vis interest cover.
Total net asset value return per share (an industry-standard metric) was a positive 1.1% for the year, comprised of 6.2% dividends versus 5.1% capital value decrease.
The dividend
In order to maintain a healthy level of dividend cover Custodian announced on April 9th that it intends to re-base its dividend to 0.75p per share (minimum) for Q1 and Q2 of the new financial year, versus 1.6625p per quarter over the last year. In the latest release, Custodian reiterated those Q1 and Q2 dividends, and noted that the board hopes to restore the dividend to a level “akin to previous years”. In our view, investors should regard the rebased dividend as a floor level from which the company will aim to rapidly rebuild.
Fy results to March 31
Many stocks within the UK REIT space have come under considerable pressure YTD, particularly those that have adopted more aggressive strategies, higher leverage, and/or a more concentrated portfolio. However, the asset class continues to offer the potential for solid returns for investors. We note that rental income yields are currently at the widest spread on record compared to base interest rates.
Custodian has been among the strongest performing UK REITs in recent years (and YTD) and we argue that this performance remains well-supported by:
- A diverse property portfolio in terms of property sectors and geographies
- A focus on properties with high rental yields
- Low operating costs and low balance sheet gearing
We present an overview of the portfolio on p2.
Investment conclusion
Year end Mar 31 · 2017 · 2018 · 2019 · 2020
Value of investment properties (£M) · 415.8 · 528.9 · 572.7 · 559.8
EPRA EPS (GBp) · 6.6 · 6.9 · 7.3 · 7.0
The portfolio reflects a strategy emphasising risk mitigation, with the following characteristics:
- Always acquiring properties with a high rental yield. Avoiding chasing “hot” segments of the market which offer compressed rental yields.
- In commercial real-estate terminology, the company follows a “core", or "core plus” strategy; seeking properties that are in good condition requiring minimal work, with quality tenants, and in well-established commercial locations.
- Maintaining a well-diversified portfolio in terms of property types and regions.
In the earnings release, Custodian notes that valuations have held up relatively well in the industrial and office spaces arenas. There has been more pressure in the retail space, although somewhat less so in the out-of-town retail warehouse space. Custodian’s tenants in retail warehouse are predominantly value retailers and homeware/DIY, many of whom have remained open during lockdown, or been among the early re-openers.
We argue that Custodian REIT’s property portfolio is relative well insulated against the current crisis. Combined with the company’s low balance sheet gearing, we believe that these characteristics will allow Custodian to trade through the downturn, continue to generate cashflows, and begin to re-grow the dividend from its re-based level.