Custodian Property Income REIT said that property valuations had stabilised in its portfolio in the final quarter of its financial year to 31 March 2024.
Its portfolio fell in value by 4.0% on a like-for-like basis across the year to £589.1m but was flat in the first three months of 2024, which it said suggests that a turning point in sentiment and valuations has been reached.
The fall in value over the year meant that the group’s EPRA net tangible assets were down 5.9% to 93.4p.
EPRA earnings were up 3.6% to 5.8p per share, following a 5.6% growth in like-for-like contracted rental income to £43.1m.
Other highlights included:
- Estimated rental value (ERV) growth of 3.6%, with ERV now 15% ahead of passing rent
- 15 rent reviews completed during the year across all sectors at an average 23% ahead of previous passing rent, with 47 new lettings, lease renewals and lease regears completed adding £9.5m to valuation
- Occupancy increased to 91.7% during the year (2023: 90.3%), with further improvement to 93% since April 2024
- £19.0m of capital investment during the year into refurbishment and EPC improvement of offices in Leeds and Manchester and Midlands industrial units, including solar panel and electric vehicle charger installations, leading to a 21.7% increase in the ERV of the properties
- £18.2m proceeds from disposals achieved at an aggregate 8% premium to last valuation, with a further £11.3m of disposals since year end
- Net gearing remains low at 29.2% (2023: 27.4%) with 78% fixed and no expiries until August 2025
- 5.5% increase in fully covered dividends paid to shareholders during the year comprising 5.5p of ordinary dividends and a 0.3p special dividend
- 9% increase in the prospective dividend announced in May 2024 from 5.5p to 6.0p per share
Chairman’s comments
David MacLellan, chairman, said: “In my first annual results as chairman, I am very pleased to note the year to March 2024 as a significant milestone for the company, marking the 10 year anniversary since launch, and that the company once again performed well. Despite the significant challenges and changes we have all faced over the last decade, politically, economically and in terms of social volatility including COVID, Custodian Property Income REIT has grown successfully and delivered on its objectives with an over sixfold increase in the size of the portfolio, an average annual NAV total return of 5.5%, an annual average fully covered dividend of 5.9p per share and a decreasing ongoing charges ratio.
“This success has been achieved by the company’s resolute focus on being fully invested in a portfolio of below institutional lot-sized regional properties to capture the income advantages that these types of assets afford, in order to deliver enhanced income-centric total returns to institutional, wealth management and private investors.
“Looking at the year under review, the occupational market has continued to remain robust, with rental growth and falling vacancy reflected in recurring EPRA earnings per share increasing by 3.6%. This increase in earnings allowed the board to declare a special dividend in March 2024 to take the aggregate dividend for the year to 5.8p, along with announcing a 9% increase in the prospective dividend per share from 5.5p to 6.0p due to an improved outlook.
“The quarter ended 31 March 2024 saw a marginal increase in NAV due to profitable disposals on the back of flat valuations, as rental growth and falling vacancy rates started to have a positive impact. Despite stabilising valuations and the prospect of rental growth, sentiment towards listed UK commercial real estate has caused weakness and volatility in the share price. The prevailing share price implied a dividend yield of 8.3%, compared to 6.3% and 5.8% at 31 March 2023 and 2022 respectively. However, the first move down in interest rates should be the real catalyst for a positive shift in sentiment towards real estate investment, so later in 2024 could be a turning point in the market.
“The company’s portfolio is well placed to benefit from any upwards rerating in sector valuations as the economy improves. In an inflationary environment and with a lack of supply of modern, smaller regional properties we expect to see continued rental growth over the year ahead and 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 recurring earnings per share, will continue to underpin shareholder returns.”