Custodian REIT: Additional dividend signals confidence
Custodian REIT has demonstrated a high level of operational resilience through the Covid crisis in terms of absolute performance and on a relative basis compared with the UK commercial real estate sector. This is beginning to be reflected in the share price which has gained 16% year-to-date, but which still leaves Custodian at an attractive valuation offering 5.2% dividend yield (FY March 2022 estimate).
The company recently announced an additional dividend for FY March 2021 taking the total for the year to 5.0p. This announcement represents the fourth dividend increment since the level was rebased in response to Covid in April 2020, and the dividend is now back up to 75% of its pre-crisis level. The dividend is fully covered by rental income (adjusted earnings per share). We illustrate the dividend cover and trajectory on page-2.
Progress in the last quarter:
Custodian also recently reported its quarterly valuation and business summary for the period ended FY March 2021. Some of the highlights include:
- Rent collections for FY March 2021 at 91%, measured as cash collection of rents due, net of contractual deferrals
- Occupancy remaining solid at 91.5%
- Balance sheet gearing remains conservative at 24.9% loan-to-value
We argue that this performance reflects a property portfolio that provides strong rental yields and a relatively high degree of resilience:
- 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
- Exposure to segments like industrial & logistics properties and well-connected business park office space. These have been resilient during the last 12 months, and we also believe these are attractive property segments for the post-Covid environment.
Continuing to rebuild the dividend
Custodian REIT currently offers a dividend yield of 5.2% on our one-year forward forecast (March 2022e). As the market becomes more confident of the dividend’s growth trajectory from here, we believe there is potential for the yield to compress, i.e. the share price to move higher.
Valuation and conclusion
Year end Mar 31 · 2019 · 2020 · Current · 2022
Value of investment properties (£M) · 572.7 · 559.8 · 552.0 · 552.0
Gearing (LTV%) · 24.1 · 22.4 · 24.9 · 22.0
Revenue from property (£M) · 40.0 · 40.9 · 38.4 · 39.2
Underlying Op. Profit · 32.7 · 33.3 · 29.3 · 31.2
EPRA EPS (GBp) · 7.3 · 7.0 · 5.6 · 6.2
Dividend (GBp) · 6.55 · 6.65 · 5.00 · 5.20
Custodian REIT rebased its dividend in April 2020 in response to the Covid crisis. Subsequently, the company has increased its dividend in successive quarters. For the quarter to March 2021, the company announced an additional dividend over and above the normal quarterly payout, and we argue that this reflects increased confidence in the ability to continue to regrow the dividend. The following chart shows the dividend in recent quarters:
Dividend and dividend cover
Quarterly dividend payments
Source: Custodian REIT historical, Proactive Research forecasts
Another important consideration for investors is that the dividend is fully covered by rental income from properties. The following chart shows the annual dividend compared with the EPRA (European Public Real-estate Association) measure of earnings per share, which is an industry-standard measure of net rental income.
Dividend covered by rental income
Source: Custodian REIT historical, Proactive Research forecasts