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Custodian REIT - sustained income to investors

Custodian REIT - sustained income to investors
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Custodian REIT (LON:CREI) is a strong dividend paying UK REIT (real estate investment trust), managing a diverse portfolio of non-residential properties. The company continues to pursue a low-churn buy-and-hold rental income focused strategy. We summarise some recent developments.

Click here to watch Ed's comments on Custodian REIT's refinancing and acquisition

In October 2019, Custodian announced the acquisition of a portfolio of eight distribution warehouses under a sale and leaseback deal with Menzies Distribution Limited. Key points:

  • Net initial yield (NIY) of 6.4%, broadly in line with Custodian’s existing portfolio. NIY is an industry standard measure of rental yield.
  • Natural fit with Custodian’s existing industrial portfolio (industrial = 40% of the overall portfolio by value).
  • Weighted average unexpired lease time (WAULT) of 8.8 years, above the average for the existing portfolio. WAULT is an industry standard measure of lease longevity.
  • The acquisition is a “corporate” acquisition, meaning Custodian is acquiring a subsidiary of Menzies that holds the assets. This type of deal tends to be efficient in terms of acquisition costs.

In September 2019 Custodian agreed with Lloyds Bank to increase the total funds available under the company’s revolving credit facility from £35 million to £50 million for a term of three years, with an option to extend the term by a further two years subject to Lloyds Bank's agreement, and a reduction in the rate of annual interest to between 1.5% and 1.8% (from 2.45%) above three-month LIBOR - the London inter-bank offer rate. This agreement provides visibility on further funding for Custodian, as well as the reduced interest cost.

On p2 we present a reminder of some of the portfolio metrics that support Custodian’s ability to maintain its progressive dividend policy, and we argue that recent developments align well with this objective.

Consistent strategy - prioritise dividends

The Menzies acquisition has been the only property acquisition that Custodian has undertaken in the current calendar year. The company stated in its 31 July update that there is strong buyer demand for properties with low-risk tenants and long leases, and this demand is leading to unattractive prices and therefore low available rental yields. Custodian requires high and secure rental yields to continue to sustain and grow its dividend. We believe that investors should welcome the company’s conservatism in refraining from acquisitions this year – income to shareholders is the top priority, not portfolio expansion.

We also note that the acquisition takes balance sheet gearing up to 23.1%, which is still within the company’s target level of 25%. On p2 we present an update of one of our favoured measures of risk-reward in the REIT space – dividend yield compared with balance sheet gearing. We argue that Custodian offers investors a premium level of dividend compared to its risk profile.

Year end Mar 31 2018 2019 Current 2021
Value of investment properties (£M) 528.9 572.7 595.7 615.7
Revenue from property (£M) 34.8 40.0 41.6 43.8
EPRA EPS (GBp) 6.9 7.3 7.3 7.6
DPS (GBp) 6.5 6.6 6.7 6.8
Dividend yield 5.5% 5.6% 5.7% 5.7%
Dividend yield versus LTV ratio
Source: Proactive Research

The chart shows that on this measure, Custodian is among the best (bottom right direction) in class. We note that we could also have included some of the very large UK listed property names – British Land, Shaftesbury, Great Portland Estates, etc. We leave it to the reader to verify that Custodian screens even better if we expand the peer group to include the very large caps.

Quick facts: Custodian REIT

Price: 89.8 GBX

Market: LSE
Market Cap: £377.05 m


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