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Custodian REIT: THE INVESTMENT CASE

Custodian REIT benefits from portfolio spread across the UK

Custodian’s portfolio is weighted towards industrial sector and split between industrial, retail, office and other properties
industrial property warehouse
INVESTMENT OVERVIEW: CREI The Big Picture
Very low levels of development for 10 years have resulted in low levels of modern vacant real estate

Custodian REIT PLC (LON:CREI) pays one of the highest fully-covered dividends amongst its peer group of listed property investment companies.

On a forecast dividend of 6.55p for the year to end next March, the yield is 5.4%, while the shares trade at a premium to asset value of about 13%.

What also sets it apart from its peers, is that the trust targets properties outside London, where there is less competition, priced at less than £10mln.

WATCH: Custodian REIT enjoys another solid year with 'strong, steady returns'

“No properties inside the M25, with one or two minor exceptions,” says Richard Shepherd-Cross, managing director of the trust’s manager, Custodian Capital.

Custodian’s portfolio is weighted towards the industrial sector and split between industrial, retail, office and other properties.

Shareholder returns were strong in the year to March just ended, with NAV per share total return of 9.6% (2017: 8.5%).

Competitive property market

Shepherd-Cross says the UK commercial property market is characterised by a very tight supply of investment opportunities and strong demand.

This has led to strong competition, particularly for industrial/logistic assets and properties let on long leases.

Profits increase, portfolio value rises

The portfolio value rose to £528.9mln, from £418.5mln last year, with a total of £106.3mln invested on 20 acquisitions, one ongoing pre-let development and one significant refurbishment.

“Market demand has polarised, moving away from high street retail and focusing on industrial/logistics assets and properties let on long leases, particularly those with rents indexed to inflation.”

Very low levels of development for 10 years have resulted in low levels of modern vacant real estate.

In the regions, industrial and office rents have been growing since 2016 and while the rate of growth may be slowing there remain a large number of regional assets with latent rental growth.

Healthy rent increases

The trust settled 17 rent reviews over the past year showing increases ranging from 2% to 87% with an 18% average.

Much of the growth came from the industrial sector, with 12 rent reviews, while there were three retail rental uplifts.

So far, the trust has been largely unaffected by company voluntary arrangements (CVAs), though one Carpetright store was subject to a CVA.

Custodian’s largest tenant though represents just 3.2% of the total rent roll.

Shepherd-Cross says the trust is conscious of possible bubbles forming in certain sections of the property market but believes Custodian’s portfolio is ‘insulated from the worst excesses of market pricing’.

“The spread of income and diversification of property by sector and location that has resulted from portfolio growth stands the Company in good stead to deliver increases in fully covered dividends and to support strong shareholder total returns.”

At 120.8p, Custodian has a market value of £467mln.

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