19 April 2016
Custodian REIT: NAV and Intention to issue equity
Custodian REIT today reports its unaudited net asset value (“NAV”) as at 31 March 2016, highlights for the period from 1 January 2016 to 31 March 2016 (“the Period”) and its intention to issue equity.
1 NAV movement plus dividends paid.
Net asset value
The unaudited NAV of the Company at 31 March 2016 was £255.1 million, reflecting approximately 101.5 pence per share, a decrease of 1.5% since 31 December 2015:
The NAV attributable to the ordinary shares of the Company is calculated under International Financial Reporting Standards and incorporates the independent portfolio valuation as at 31 March 2016 and income for the Period, but does not include any provision for the proposed dividend for the Period, to be paid on 30 June 2016.
The Company invested £66.1 million in 11 acquisitions during the Period, its most significant quarter’s activity since IPO in 2014, acquiring:
These acquisitions incurred costs of £3.4 million reducing NAV by 1.4 pence per share, but increased the Company’s rent roll by 19.4% at an aggregate NIY of 6.5%, enhancing dividend cover while maintaining the quality of property and security of income in line with our investment strategy.
On 1 April 2016 the headline rate of SDLT for commercial property increased from 4% to 5%, with relief for smaller properties via a new SDLT-free band up to £0.15 million and a 2% band from £0.15 million to £0.25 million, replacing the previous flat rate. As a result, the increase in headline rate only impacts transactions above £1.05 million and then on a sliding scale as lot-size increases.
The Company’s focus on properties with lot-sizes up to £7.5 million has partially insulated it against the one-off impact these changes have had on valuations, with its average lot size of £2.9 million seeing a valuation decrease of 0.25%. To put this into context, the costs of acquiring a £3 million property have increased by 0.61% and a £10 million property by 0.85%, and valuations are expected to adjust accordingly across the property market this quarter.
Outside of recent SDLT changes, a 1.1% rise in vacancy following the determination of a tenant’s lease at expiry in Edinburgh resulted in a £1.0 million valuation decrease, which was more than offset by a £1.3 million uplift from asset management activities during the Period. The recently vacated office space in Edinburgh is being actively remarketed. Rental growth is in evidence in Edinburgh and marketing advice suggests a new letting could set an increased headline rent for the building. Proposals to refurbish the reception area should also have a positive impact on rental level and assist in attracting a new tenant.
Successful asset management strategies including rent reviews, new lettings, lease extensions and the retention of tenants beyond their contractual break clauses have all helped to minimise the impact of the SDLT changes. Key asset management initiatives completed recently include:
Other completed initiatives include:
The Company intends to maintain a weighted average unexpired lease term of over five years to the first lease break or lease expiry across the portfolio. Through successful asset management activities and acquiring long leases at Banbury and Perth, the expiry profile has improved with income expiring within five years falling from 53.5% at 4 January 2016 to 48.1% at 31 March 2016, as follows:
Commenting on the commercial property market, Richard Shepherd-Cross, Managing Director of Custodian Capital Limited (the Company’s external fund manager), said:
Activity and pipeline
In the forthcoming quarter, the Company intends to continue its asset management activities and complete on the current acquisition pipeline, with the aim of deploying debt facilities to increase gearing towards the target level of 25%.
Commenting on pipeline, Richard Shepherd-Cross said:
Intention to issue equity
In response to continued investor demand, a pipeline of attractive investment opportunities and the prevailing market conditions, the Board today announces that the Company is intending to raise additional equity capital through the issue of new ordinary shares (“the New Shares”) by way of a placing (“the Placing”). The Placing price of 104.9 pence at per New Share represents a premium of 5% to the ex-dividend unaudited NAV per share at 31 March 2016 of 101.5 pence. The Company’s existing Placing Programme set out in the Company’s November 2015 prospectus will remain in place until its expiry on 3 November 2016.
Qualified investors (as defined in section 86(7) of the Financial Services and Markets Act 2000 (as amended)) are invited to apply for New Shares by contacting Numis Securities Limited (“Numis”) on the contact details below. The decision to allot New Shares to any qualified investor shall be at the absolute discretion of the Company and Numis.
Reasons for the Placing and use of proceeds
Completion of the committed acquisition pipeline will increase loan-to-value to 20.6%, compared to target gearing of 25.0% loan-to-value, leaving limited headroom for further investment. The net proceeds of the Placing are expected to be used first to repay an element of the £26 million currently drawn under the Company’s revolving credit facility (“RCF”) at 31 March 2016. The remaining net proceeds are then expected to be used to acquire additional UK commercial real estate that can further diversify the portfolio and enhance income yield, such that the Placing is in Shareholders’ interests. Net proceeds are expected to be fully invested within three to six months after admission of the New Shares, depending on the amount of net proceeds of the Placing.
Announcement of unaudited NAV as at 31 March 2016, Placing opens: 7.00 a.m. 19 April 2016
The Company issued 12.82 million new ordinary shares of 1 pence each in the capital of the Company during the Period (“the Shares”) raising £13.7 million (before costs and expenses). The Shares were issued at an average premium of 5.0% to the NAV per share at 31 December 2015, after adjusting this NAV to recognise the dividend of 1.5875 pence per share paid on 31 March 2016 to shareholders on the register at the close of business on 5 February 2016.
The Company operates a £35 million RCF with Lloyds Bank plc, which attracts interest of 2.45% above three month LIBOR with no commitment fee and expires on 13 November 2020. The Company also operates a £20 million term loan with Lloyds Bank plc (“the Term Loan”), which attracts interest of 1.95% above three month LIBOR and is repayable on 10 October 2019, and a £20 million term loan with Scottish Widows plc, which attracts interest fixed at 3.935% and is repayable on 14 August 2025.
Heads of Terms have been agreed for Scottish Widows plc to provide the Company with a new £45 million term loan facility (“the New Loan”), repayable 12 years from drawdown at a fixed rate of interest. The Company intends to use £20 million of proceeds from the New Loan to repay the Term Loan, with the remaining proceeds used to repay an element of the £26 million currently drawn under the RCF at 31 March 2016.
The portfolio consists of 112 assets, with 228 tenancies and a NIY of 6.88%.
The portfolio is split between the main commercial property sectors, in line with the Company’s objective to maintain a suitably balanced investment portfolio, but with a relatively low exposure to office and a relatively high exposure to industrial and to alternative sectors, often referred to as ‘other’ in property market analysis, as demonstrated in the sector weightings below:
While deemed to be outside the core sectors of office, retail and industrial the ‘other’ sector offers diversification of income without adding to portfolio risk, containing assets considered mainstream but which typically have not been owned by institutional investors. The ‘other’ sector has proved to be an out-performer over the long-term and continues to be a target for acquisitions.
Office rents are growing strongly and supply is constrained by a lack of development and the extensive conversion of secondary offices to residential making returns very attractive. We were pleased to increase exposure to the office sector through the recent portfolio acquisition. However, the Company’s relatively low exposure to the office sector is a long-term strategic decision rather than a short-term comment on the state of the office market. We are conscious that obsolescence can be a real cost of office ownership, which can hit cash flow and be at odds with the Company’s relatively high target dividend.
Similar to the office market, occupational demand is driving rental growth in the industrial sector and returns are positive. As industrial property is less exposed to obsolescence this sector remains a very good fit with the Company’s strategy.
Retail is split between high street and out-of-town retail (retail warehousing). Strong comparison retail pitches in dominant regional towns continue to show very low vacancy rates and offer stable long-term cash flow, with the opportunity for rental growth. Retail warehousing is witnessing close to record low vacancy rates as a restricted planning policy and lack of development combine with retailers’ requirements to offer large format stores, free parking and ‘click and collect’ to consumers.
The Company operates a geographically diversified portfolio across the UK, seeking to ensure that no one area represents the majority of the portfolio. The geographic analysis of the Company’s portfolio at 31 March 2016 is as follows:
For details of all properties in the portfolio please see www.custodianreit.com/property/portfolio.php.
An interim dividend of 1.5875 pence per share for the quarter ended 31 December 2015 was paid on 31 March 2016. The Board expects to propose an interim dividend relating to the Period of 1.6625 pence per share to achieve the target dividend9 of 6.25 pence per share for the financial year ended 31 March 2016, which is expected to be fully covered by net rental income.
In the absence of unforeseen circumstances, the Board intends to pay further quarterly dividends to achieve a target dividend9 of 6.35 pence per share for the financial year ending 31 March 2017. The Company’s aim is to continue to increase dividends in a sustainable way, at a rate which is fully covered by net rental income and which does not inhibit the flexibility of its investment strategy.
9 This is a target only and not a profit forecast. There can be no assurance that the target can or will be met and it should not be taken as an indication of the Company’s expected or actual future results. Accordingly, shareholders or potential investors in the Company should not place any reliance on this target in deciding whether or not to invest in the Company or assume that the Company will make any distributions at all and should decide for themselves whether or not the target dividend yield is reasonable or achievable.
This announcement does not constitute or form part of, and should not be construed as, any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any shares in Custodian REIT plc or securities in any other entity, in any jurisdiction, including the United States, nor shall it, or any part of it, or the fact of its distribution, form the basis of, or be relied on in connection with, any contract or investment decision whatsoever, in any jurisdiction. This announcement does not constitute a recommendation regarding any securities. Neither the content of the Company’s website (or any other website) nor any website accessible by hyperlinks to the Company’s website (or any other website) is incorporated in, or forms part of, this announcement.
This announcement has been prepared by, and is the sole responsibility of, Custodian REIT Plc. Terms used and not defined in this announcement bear the meaning given to them in the Company’s November 2015 Prospectus.
Numis is acting only for Custodian REIT Plc in connection with the matters described in this announcement and is not acting for or advising any other person, or treating any other person as its client, in relation thereto and will not be responsible to anyone other than the Company for providing the regulatory protection afforded to clients of Numis or advice to any other person in relation to the matters contained herein.
The Company is not and will not be registered under the US Investment Company Act of 1940, as amended. The Ordinary Shares have not been, nor will they be, registered under the US Securities Act of 1933, as amended or with any securities regulatory authority of any state or other jurisdiction of the United States or under the applicable securities laws of any other Excluded Territory. Subject to certain exceptions, the Ordinary Shares may not be offered or sold in the United States or any Excluded Territory or to or for the account or benefit of any national, resident or citizen of any Excluded Territory, which includes any person located in the United States. Placings under the Placing Programme and the distribution of this announcement in other jurisdictions may be restricted by law and the persons into whose possession this announcement comes should inform themselves about, and observe any such restrictions.
This announcement includes “forward-looking statements”. All statements other than statements of historical facts included in this announcement, including, without limitation, those regarding the Company’s business strategy and plans are forward-looking statements.
Forward-looking statements are subject to risks and uncertainties and accordingly the Company’s actual future financial results and operational performance may differ materially from the results and performance expressed in, or implied by, the statements. These factors include but are not limited to those that are described in the Company’s November 2015 prospectus. Given these uncertainties, undue reliance should not be placed on such forward-looking statements.
These forward-looking statements speak only as at the date of this announcement. The Company expressly disclaims any obligation or undertaking to update or revise any forward-looking statements contained herein to reflect actual results or any change in the assumptions, conditions or circumstances on which any such statements are based unless required to do so by the Financial Services and Markets Act 2000, the Financial Services Act 2012, the Listing Rules, the Disclosure Rules and Transparency Rules or the Prospectus Rules of the Financial Conduct Authority or other applicable laws, regulations or rules.
Certain statements have been made with reference to forecast price changes, economic conditions and the current regulatory environment. Nothing in this announcement should be construed as a profit forecast. Past share price performance cannot be relied on as a guide to future performance.
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