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Custodian REIT - Consistent income to shareholders

Published: 18:06 30 Apr 2019 AEST

Custodian REIT - Consistent income to shareholders
Net asset value update

Custodian REIT (LON:CREI) released its quarterly net asset value (NAV) update on April 30. The release shows a NAV of £426.6mln, unchanged versus December 2018, and NAV total return per share (definition in the release) of 5.9%. Occupancy remains high at 95.9%.

The property portfolio valuation is down by £5mln during the quarter at £527.7mln. This is due to a reduction in the valuation of the high street retail portfolio, which we believe is not a surprise to the market. We note that high street retail now comprises 12% of the overall portfolio weighted by income.

The release describes a subdued environment for investment activity in the UK non-residential property market, due to political uncertainties, but continued resilient economic activity supporting leasings, particularly in the Industrial market (38% of portfolio) and regional offices (11%).

Dividend - strong yield, safe yield

Custodian has announced a target dividend of 6.65p for FY March 2020e, continuing a run of dividend increases since listing in 2014. Custodian now offers a 5.8% dividend yield for FY Mar 2019, versus 3.4% for the sector, as benchmarked by the iShares UK Commercial Property ETF (LON:IUKP).

We consider Custodian's dividend to be well supported by a number of factors:

  • Dividend fully covered by net rental earnings
  • Low balance sheet gearing
  • Low portfolio concentration, with no tenant comprising more than 3.5% of rental income

We consider some of these metrics in more detail on p2.

Conclusion - quality income play

Custodian offers a high dividend yield supported by strong rental yields and a lean cost base. We argue that Custodian ranks among the safest dividend yields in the UK REIT space.

Year end Mar 31 2017 2018 Current 2020
         
Value of investment properties (£M) 415.8 528.9 572.7 631.1
Revenue from property (£M) 27.6 34.8 39.0 42.5
EPRA EPS* (GBp) 6.6 6.9 7.3 7.4
DPS (GBp) 6.35 6.45 6.55 6.65
Dividend yield 5.6% 5.7% 5.8% 5.9%
         
 

Higher dividend yield than sector peers, but also scoring very strongly on "safety"

The chart above shows the dividend progression for Custodian REIT since its first year as a listed entity.

Custodian offers a higher dividend yield than the UK REIT sector average, with 2019 dividend yield of 5.8% compared with 3.4% average for the sector, as measured by the iShares UK Commercial Property ETF.

We argue that Custodian also offers one of the most dependable dividends in the sector. The charts below compare Custodian with sector peers based on:

  • Dividend cover by net rental earnings
  • Balance sheet net gearing as measured by loan-to-value ratio

For this purpose, we have compared Custodian against some of the other high- quality diversified non-residential REITs - EPIC, SRI, PCTN, SREI, FCRE, FCPT, UKCM, RGL. Even when benchmarked against the quality names in the sector, Custodian screens favourably on these "safety" metrics.

Dividend cover
 
Source: Capital Network
Gearing
 
Source: Capital Network
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