Custodian REIT - Dividend raise

Custodian REIT has released its quarterly valuation update and dividend announcement for the period ended Dec 31 (the third quarter of Custodian’s financial year). The release shows a stabilisation in the portfolio value, with NAV per share +1.3% during the quarter. This was driven by strength in the Industrial property portfolio offsetting some continued mark-downs in the other segments.

More importantly, the company reported a strong level of rent collection, with 96% receipt of rent due in the quarter, net of deferrals. We present some detail of the rent collection on page two. This is particularly important because Custodian is a commercial property income fund with an emphasis on delivering dividends to shareholders and an objective of paying a dividend which is fully covered by rental income. The dividend was raised for Q3.

The dividend

Custodian announced a dividend of 1.25p for the quarter ended December, an increase of 19% versus the previous quarter. The company rebased its dividend downward in April 2020 in response to the Covid crisis, lockdowns, and government measures limiting rent enforcement on commercial tenants. In the event, the impact of these measures appears to have been less severe than initially expected, and Custodian has now increased the dividend twice from its rebased level. The company is targeting a dividend of at least 5.0p for FY Mar 2022e.

The latest two quarters have exhibited strong rent collection and increases in the dividend. We argue that the current level of dividend is secure and offers potential for further increases going forward. Our confidence is underpinned by factors including:

• A diverse portfolio in terms of regions and property sectors, and low exposure to high street retail (now 10% of the portfolio by income)
• The “small lot” strategy, which offers high rental yields and low exposure to individual tenants without impacting asset quality compared to larger lots
• Low balance sheet gearing, with an LTV ratio of 24%