Safety Pays

Writen 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.




Important – Please read this information: This report has been commissioned by Custodian REIT and prepared and issued by Capital Network for publication globally. 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. Opinions contained in this report represent those of the research department of Capital Network at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. Capital Network does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Capital Network’s solicitation to effect, or attempt to effect, any transaction in a security. This document is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided 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. Capital Network has a restrictive policy relating to personal dealing. Capital Network 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 Capital Network may have a position in any or related securities mentioned in this report. Capital Network or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 Capital Network within the meaning of the FAA (ie 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. To the maximum extent permitted by law, Capital Network, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication.

Latest Research