Custodian Property Income REIT plc: Final results for the year ended 31 March 2023

15 June 2023

Custodian Property Income REIT plc

(“the Company” or “Custodian Property Income REIT”)

Final results for the year ended 31 March 2023

Custodian Property Income REIT (LSE: CREI), which seeks to deliver an enhanced income return by investing in a diversified portfolio of smaller regional, core/core-plus properties across the UK, today announces its final results for the year ended 31 March 2023. 

Commenting on the final results, David Hunter, Chairman of Custodian Property Income REIT, said:

“Our strategy of investing in smaller, regional, core/core-plus property demonstrated its relative resilience and defensive qualities this year as the market corrected to the new interest rate environment, with the Company’s portfolio experiencing a 11.8% like-for-like decline in valuations compared to a 17% market decrease. 

“Since the year end we are beginning to see some optimism returning to real estate markets following six months of economic turbulence.  Valuations appear to have largely stabilised and the Company saw a return to a positive quarterly NAV total return per share in Q4. 

“Recurring (EPRA) earnings per share of 5.6p for the year compares to 5.9p in 2022 and 5.6p in 2021.  While capital valuations have fluctuated, the underlying occupational property market has remained strong, maintaining relatively stable income returns.

“Capturing rental growth to support earnings is a key focus of the Investment Manager in the coming year.  In an inflationary environment and with a lack of supply of modern, smaller regional properties we expect to see continued rental growth.  It will be this growth in income that is likely to form the greater component of total return over the next phase of the property market and we believe that Custodian Property Income REIT’s strong income yielding portfolio, supported by higher-than-peer group EPRA earnings, will underpin shareholder returns.”

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Custodian Property Income REIT plc Annual Report and Accounts 2023

Custodian Property Income REIT plc (“Custodian Property Income REIT” or “the Company”) is a UK real estate investment trust (“REIT”) which seeks to deliver an enhanced income return by investing in a diversified portfolio of smaller, regional, core/core-plus properties let to predominantly institutional grade tenants across the UK.

Property highlights

Financial highlights and performance summary

*Alternative performance measures - the Company reports alternative performance measures (“APMs”) to assist stakeholders in assessing performance alongside the Company’s results on a statutory basis, set out above.  APMs are among the key performance indicators used by the Board to assess the Company’s performance and are used by research analysts covering the Company.  The Company uses APMs based upon the EPRA Best Practice Recommendations Reporting Framework which is widely recognised and used by public real estate companies.  Certain other APMs may not be directly comparable with other companies’ adjusted measures and APMs are not intended to be a substitute for, or superior to, any IFRS measures of performance.  Supporting calculations for APMs and reconciliations between APMs and their IFRS equivalents are set out in Note 22.

Business model and strategy

Purpose

Custodian Property Income REIT offers investors the opportunity to access a diversified portfolio of UK commercial real estate through a closed-ended fund.  The Company seeks to provide investors with an attractive level of income and the potential for capital growth from a portfolio with strong environmental credentials, becoming the REIT of choice for private and institutional investors seeking high and stable dividends from well-diversified UK real estate.

The Board also recognises the importance of stakeholder interests and keeps these at the forefront of business and strategic decisions, ensuring the Company:

• Understands and meets the needs of its occupiers, owning fit for purpose properties with strong environmental credentials in the right locations which comply with necessary safety regulations;

• Protects and improves its stable cash flows with long-term planning and decision making, implementing its policy of paying sustainable dividends fully covered by recurring earnings and securing the Company’s future; and

• Adopts a responsible approach to communities and the environment, actively seeking ways to minimise the Company’s impact on climate change and providing the real estate fabric of the economy, giving employers a place of business.

Investment Policy

The Company’s investment policy[16] is summarised below:

• To invest in a diverse portfolio of UK commercial real estate, principally characterised by individual property values of less than £15m at acquisition[17].
• The property portfolio should be diversified by sector, location, tenant and lease term, with a maximum weighting to any one property sector or geographic region of 50%.
• To acquire modern buildings or those considered fit for purpose by occupiers, focusing on areas with:

• High residual values;
• Strong local economies; and
• An imbalance between supply and demand.

• No one tenant or property should account for more than 10% of the rent roll at the time of purchase, except for:

• Governmental bodies or departments; or
• Single tenants rated by Dun & Bradstreet as having a credit risk score worse than two[18], where exposure may not exceed 5% of the rent roll.

• The Company will not undertake speculative development, except for the refurbishment or redevelopment of existing holdings, but may invest in forward funding agreements where the Company may acquire pre-let development land and construct investment property with the intention of owning the completed development.
• The Company may use gearing provided that the maximum loan-to-value (“LTV”) shall not exceed 35%, with a medium-term net gearing target of 25% LTV.

The Board reviews the Company’s investment objectives at least annually to ensure they remain appropriate to the market in which the Company operates and in the best interests of shareholders.

Differentiated property strategy

The Company’s portfolio is focused on smaller, regional, core/core-plus assets which helps achieve our target of high and stable dividends from well-diversified real estate by offering:

• An enhanced yield on acquisition – with no need to sacrifice quality of property/location/tenant or environmental performance for income and with a greater share of value in ‘bricks and mortar’;
• Greater diversification – spreading risk across more assets, locations and tenants and offering more stable cash flows; and
• A higher income component of total return – driving out-performance with forecastable and predictable returns.

Success in achieving the Company’s performance and ESG objectives is, in part, measured by performance against key performance indicators set out in detail in the Financial review and ESG Committee reports respectively.  The Principal risks and uncertainties section of the Strategic Report sets out potential risks in achieving the Company’s objectives.

Richard Shepherd-Cross, Investment Manager, commented: "Our smaller-lot specialism has consistently delivered significantly higher yields without exposing shareholders to additional risk”.

Growth strategy

The Board is committed to seeking further growth in the Company to increase the liquidity of its shares and reduce ongoing charges.  Our growth strategy involves:

• Organic growth through share issuance at a premium to NAV;
• Broadening the Company’s shareholder base, particularly through further penetration into online platforms;
• Becoming the natural choice for private clients and wealth managers seeking to invest in UK real estate;
• Taking market share from failing open-ended funds; and
• Strategic property portfolio acquisitions and corporate consolidation.

The Board ensures that property fundamentals are central to all decisions.