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Custodian REIT reports fall in property value

Custodian REIT has reported a 2.2% fall in the value of its property in the first quarter of 2020.

The fall in valuation to £559.8m, which take into account a ‘material uncertainty clause‘ due to the covid-19 pandemic, was behind a 2.7% fall in the net asset value (NAV) per share to 101.6p.

Unlike some property companies the group, which owns a diverse portfolio of UK property, declared a quarterly dividend for the period – of 1.6625p per share. It has said that it will continue to make dividend payments for future quarters but at a reduced rate of at least 0.75p per share.

Rent collection

Following negotiations regarding the March quarter rent, the company said it has agreed that a number of tenants move from quarterly in advance to monthly in advance rent payments, or a deferral of the March quarter’s rent with a full recovery over the next 12-18 months. Some tenants have yet to agree a payment profile but discussions are ongoing.

The company collected 74% of rent relating to the month of April, whilst 14% has been deferred by agreement (and is therefore no longer due in April) to be paid either monthly in arrears or to be recovered through a payment plan over the next 12-18 months.

Negotiations with tenants, the group said, has led to positive asset management outcomes, including extending leases in return for rent concessions, providing short-term cash flow relief for occupiers and longer term income security for the company. Custodian REIT added that no rent had been waived or cancelled and all contractual rent remains due.

Portfolio analysis

At 31 March 2020, the company’s property portfolio comprised 161 assets with a net initial yield of 6.8%. The portfolio is weighted heavily towards the industrial sector (46% by value), which saw a 1.2% increase in value during the quarter. The group’s retail assets comprise retail warehouses (20%), which fell in value by 5.1%, and high street retail (9%), which fell by 8.2%. The value of its office portfolio, which accounts for 9% of the portfolio by value, was broadly flat falling by 0.6%.

During the quarter, the company completed several asset management initiatives including rent reviews, new lettings and lease extensions that combined resulted in a £2.9m valuation increase, which offset some of the valuation fall.

The company was, however, hit by the administration of retailer Laura Ashley, which is expected to result in lost annual contractual rent of £0.23m in total from the company’s Grantham and Colchester assets.

Financial position

Custodian REIT has a low loan-to-value (LTV) ratio of 22.4%. Its loan facilities comprise: a £50m revolving credit facility with Lloyds Bank expiring on 17 September 2022, which is currently £35m drawn; a £20m term loan with Scottish Widows (SWIP) repayable on 13 August 2025; a £45m term loan with SWIP repayable on 5 June 2028; and a £50m term loan with Aviva Investors Real Estate Finance that is repayable in 2032.

On covenants, the group has a maximum LTV of between 45% and 50%, with an overarching covenant on the company’s property portfolio of a maximum 35% LTV and interest cover requirements to exceed 250% of the facility’s quarterly interest liability.

At a portfolio level, the aggregate interest cover on borrowings was more than 600% for the quarter ended 31 March 2020. However, the company said interest cover covenants on individual facilities may come under some short-term pressure due to anticipated curtailed rental receipts. To mitigate this risk, the company has agreement in principle from its lenders to put in place pre-emptive covenant waivers on interest cover for the next two quarters in return for depositing amounts equivalent to interest payable for that period into charged accounts.

Investment manager comments

Richard Shepherd-Cross, managing director of Custodian Capital (the company’s investment manager) said: “Our response [to covid-19 pandemic] has been to prioritise protecting cash flow and to secure the balance sheet. As a result the company has withdrawn from two acquisitions of regional offices on which terms had been agreed. In addition, to address the impact of the statutory protections for commercial tenants introduced by the UK Government, the company has agreement in principle from its lenders to put in place pre-emptive covenant waivers on interest cover to provide the flexibility to collect rent in the most advantageous way for medium/long-term income security, while supporting tenants and minimising vacancies.

“It is too early to assess the long-term impact of covid-19 on the commercial property market but we believe it may accelerate pre-existing trends in the use of, and investment in, commercial property. We expect to see a further deterioration in secondary retail, an increase in demand for flexible office space (both traditional offices, fitted out and leased flexibly, as well as serviced offices) and a continuation of the growth of logistics and distribution. As always, we would expect location to be a key determinant of the future success of commercial property assets.

“In the near-term, of even more importance than the NAV derived from current valuations is the absolute focus on rent collection, future cash flow, ongoing asset management and the affordability of future dividends which are all underpinned by the company’s low ongoing charges ratio of 1.12% and low cost of debt of 3.0% (circa £4.7m interest per annum in aggregate).”

CREI : Custodian REIT reports fall in property value


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