Safety Pays

Written by Ed Stacey


Custodian REIT PLC (LON:CREI) issued its quarterly NAV (net asset value) update for the three months ended September 30,  on October 23. The company reported a NAV total return per share of 2.3% for the period (NAV increase plus dividend approved), and a reduction in net gearing to 20.5% loan-to-value, from 21.0% on June 30. Custodian acquired five new properties during the period with net initial yields of between 6.38% and 9.79%. More details are on p2.


In pence-per-share terms, the NAV increased by 0.8p during the quarter. This represents an increase of 3.7p or 3.5% over the 12 months from September 2017. Furthermore, the company has maintained a target dividend per share of 6.55p to March 2019 up from 6.45p delivered in FY March 2018.

This has been achieved in spite of some macro pressures during the quarter, notably in the retail space where CVAs (company voluntary agreements) have affected many landlords, including some impact to Custodian; however, the resilient performance of the portfolio overall highlights some of the key strengths of Custodian’s strategy – diversity in terms of geography and property type, and low tenant concentration with the top five tenants representing only 11.5% of income.


We believe that Custodian REIT offers one of the most secure dividends in the sector. This is underpinned by low balance sheet gearing, a high weighted average unexpired least time  (WAULT) of 5.6 years, and a dividend consistently fully covered by earnings from rental income. We presented further details of these attributes in our report “Custodian REIT – Strong returns, strong foundations, May 29 2018”.

The shares currently offer a forward-looking dividend yield of 5.4% and have exhibited impressive low volatility in recent months. We believe that Custodian REIT represents a haven in volatile market conditions due to its stable cash generation and distribution to shareholders.

The table above summarises the NAV movement during the quarter.

The company reported an impact from CVA arrangements in the retail warehouse space, which contributed £3.2mln of the total £3.7mln negative move in “other valuation movements”. The line item “Asset management activity” includes rent reviews, new lettings, lease extensions and the retention of tenants beyond their contractual break clauses, and contributed a £2.2mln positive. In addition, the company generated £9.7mln in property income and £4.3m in capital gains on disposals, leading to an overall NAV increase of £10.6m or 0.8p per share.

The next table summarises the property acquisitions during the three months.

Net initial yield (NIY) is a measure of rental returns on investment, and the high level of NIY on the new acquisitions is an important indicator that Custodian is still able to identify investments with suitably high returns. The typical portfolio NIY for UK commercial property real estate investment trusts (REITs) is around 4-6%, whereas Custodian has a portfolio NIY of 6.6%, and the recent acquisitions actually have an even higher NIY.

In our report “Custodian REIT – Strong returns, strong foundations, May 29, 2018” we demonstrated that Custodian benefits from a focus on high yielding segments of the commercial property market, and in particular from a focus on small lot sizes, meaning principally below £10mln. These properties are overlooked by many REITs and institutional investors, and typically achieve a 20% yield premium according to industry data, i.e. if big units are delivering 5.5% rental yields then equivalent smaller units can achieve 6.6%, for example. We argue that the high rental yields are the key driver of Custodian’s ability to deliver a strong dividend yield without taking on higher risks such as higher balance sheet leverage.





Proactive Research is a trading name of Proactive Investors Limited which is regulated and authorised by the Financial Conduct Authority (FCA) under firm registration number 559082. This document is published by Proactive Research and its contents have not been approved as a financial promotion by Proactive Investors Limited or any other FCA authorised person. This communication is made on the basis of the 'journalist exemption' provide for in Article 20 of The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 and having regard to the FCA Rules, and in particular PERG 8.12.

This communication has been commissioned and paid for by Custodian REIT and prepared and issued by Proactive Research for publication. All information used in the preparation of this communication has been compiled from publicly available sources that we believe to be reliable, however, we cannot, and do not, guarantee the accuracy or completeness of this communication.

The information and opinions expressed in this communication were produced by Proactive Research as at the date of writing and are subject to change without notice. This communication is intended for information purposes only and does not constitute an offer, recommendation, solicitation, inducement or an invitation by, or on behalf of, Proactive Research to make any investments whatsoever. Opinions of and commentary by the authors reflect their current views, but not necessarily of other affiliates of Proactive Research or any other third party. Services and/or products mentioned in this communication may not be suitable for all recipients and may not be available in all countries.

This communication has been prepared without taking account of the objectives, financial situation or needs of any particular investor. Before entering into any transaction, investors should consider the suitability of the transaction to their individual circumstance and objectives. Any investment or other decision should only be made by an investor after a thorough reading of the relevant product term sheet, subscription agreement, information memorandum, prospectus or other offering document relating to the issue of securities or other financial instruments.

Nothing in this communication constitutes investment, legal accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate for individual circumstances or otherwise constitutes a personal recommendation for any specific investor. Proactive Research recommends that investors independently assess with an appropriately qualified professional adviser, the specific financial risks as well as legal, regulatory, credit, tax and accounting consequences.

Past performance is not a reliable indicator of future results. Performance forecasts are not a reliable indicator of future performance. The investor may not get back the amount invested or may be required to pay more.

Although the information and date in this communication are obtained from sources believed to be reliable, no representation is made that such information is accurate or complete. Proactive Research, its affiliates and subsidiaries do not accept liability for loss arising from the use of this communication. This communication is not directed to any person in any jurisdiction where, by reason of that person's nationality, residence or otherwise, such communications are prohibited.

This communication may contain information obtained from third parties, including ratings from rating agencies such as Standard & Poor's, Moody's, Fitch and other similar rating agencies. Reproduction and distribution of third-party content in any form is prohibited except with the prior written consent of the related third-party. Credit ratings are statements of opinion and are not statements of fact or recommendations to purchase, hold or sell securities. Such credit ratings do not address the market value of securities or the suitability of securities for investment purposes, and should not be relied upon as investment advice.

Persons dealing with Proactive Research or members of the Proactive Investors Limited group outside the UK are not covered by the rules and regulations made for the protection of investors in the UK.

Notwithstanding the foregoing, where this communication constitutes a financial promotion issued in the UK that is not exempt under the Financial Services and Markets Act 2000 or the Orders made thereunder or the rules of the FCA, it is issued or approved for distribution in the UK by Proactive Investors Limited.

Latest Research