Custodian REIT’s (CREI’s) diversified portfolio of UK commercial real estate delivered a positive total return in H120 despite challenges in the retail sector. Current-year quarterly DPS has increased by 1.5% and CREI targets a fully covered DPS of 6.65p for the year, barring unforeseen circumstances. The company targets further sustainable growth through accretive acquisitions and active management of the existing portfolio.
CREI has a balanced portfolio of regional UK commercial real estate, diversified by sector, location, tenant and lease term. It is focused on institutional quality assets but with lot sizes of less than £10m, where the investment manager believes it has a competitive advantage. Portfolio diversification is an important element of CREI’s strategy for growing income and dividends sustainably but, although diversified, the portfolio is actively positioned with a relatively high exposure to industrial, retail warehouse and alternative sectors. Management focus is on maintaining high levels of occupancy and growing income through active asset management and accretive acquisitions. Fully covered dividends paid from the IPO in 2014 to end-FY19 represent more than three-quarters of the NAV total return, a compound 6.8% pa (without assuming dividend re-investment).
H120 EPRA earnings increased 1.5% versus H119 to £13.9m and EPRA EPS was 3.4p, fully covering the aggregate quarterly DPS paid of 3.325p (+1.5%), with cover of 105%. Income was supported by a continuing good level of occupancy (95.5% at end-H120 compared with 95.9% at end-FY19) and a slightly larger average asset base. Net loan to value (LTV) was a modest 20.5% but increased to 23.2% with the early October acquisition of an eight-asset portfolio of distribution units, adding c £1.6m in annual passing rent. Reflecting market conditions, weakness in retail property values more than offset continued gains in industrial assets and asset management initiatives; end-H120 NAV per share was 104.3p (end-FY19: 107.1p). NAV total return was a positive 0.5%. We have slightly reduced our FY20e EPRA EPS (c 4%) and EPRA NAV per share (c 3%) but continue to expect full DPS cover with acquisitions leading to FY21e income growth.
CREI shares combine an attractive yield with a fully covered dividend and conservative gearing. Investor demand for the shares, trading at a premium to NAV (unlike peers), provides funding support for accretive acquisitions.