Custodian Property Income REIT plc: Interim Results

• Custodian Property Income REIT plc announced its 2022 interim results.
• The company aims to deliver a high income return, by investing in a diversified portfolio of smaller regional properties in the UK.

Interims

• On 14th December 2022, the company announced its 2022 interim results.
• Profit and loss
• Balance sheet
• Cash flow

Name change

On the 7th December 2022, the company has announced that to better reflect the main objective/mission of the company, it has changed its name to Custodian Property Income REIT plc, from Custodian REIT plc.

The objective of the company is to generate income returns for shareholders.

Financials

In light of the announcements, we have maintained our forecasts, which can be found by clicking here.

Risks

As with any investment, investing in Custodian Property Income REIT carries a level of risk. Overall, based on the company's market beta (i.e. 0.426), the degree of risk associated with an investment in Primary Health Properties is relatively 'low'.

Here, to estimate the adjusted beta, we used the iShares MSCI World ETF to represent the market portfolio; and in terms of the time period and frequency of observations, we used five years of monthly data (i.e. 60 observations in total), which is supported by a study and is the most common choice. The beta value in a future period has been found to be on average closer to the mean value of 1.0, and because valuation is forward looking, it is logical to adjust the raw beta so it more accurately predicts a future beta.

For us, currently, the biggest risk to the valuation of the company relates to macro-economic factors, in particular unexpected and sudden changes in inflation and interest rates movements.

Valuation

Research suggests that in terms of estimating the expected return of an investment over a period of 12-months or more, the approach that is more/most accurate is the absolute valuation approach, so that's the approach that we suggest using to determine the estimated value of the company.

What's the expected return of an investment in Primary Health Properties using the absolute valuation approach?

Accordingly, we estimate that the expected return of an investment in Custodian Property Income REIT Plc over the next 12-months is 59%. In other words, an £100,000 investment in the company is expected to return £159,000 in 12-months from now. The assumptions used to estimate the return figure can be found in the table below.

Assuming that a suitable return level in the 12 months is 10% and Custodian Property Income REIT Plc achieves its expected return level (of ccc%), then an investment in the company is considered to be a 'suitable' one.

What are the assumptions used to estimate the return figure?

Key inputs

Description	Value	Commentary
Which valuation model do you want to use?	Discounted cash flow	Research suggests that in terms of estimating the expected return of an investment over a period of 12-months or more, the approach that is more accurate is the absolute valuation approach, so that's the approach that we suggest using to determine the estimated value of the company.
Which type of discounted cash flow model do you want to use?	Dividend discount model	The dividend discount model (DDM) is one of the most common discounted cash flow models.
How many distinct stage of growth do you want to use?	One stage	For simplicity, we have used the one stage pattern here.
What is the expected constant growth rate in dividends?	3%	We note that the gross domestic product (GDP) growth rate in the last 20 years (2001 to 2022) is around 3% per year for the global economy, and around 2.25% for the United Kingdom. Over the last 10 years, the median dividend growth rate of the company is 2.78% and the mean is 3.47%.
Which forecasts to use for the one-year ahead expected dividend amount?	Proactive Investors	Here, we have used the forecasts of Proactive Investors.
What is the required return on equity?	7%	For estimating the required return on equity, we used the Capital Asset Pricing Model (CAPM), which provides an economically grounded and relatively objective procedure for required return estimation, and, therefore, it has been widely used in valuation. The calculation of the required return on equity (and the reasons behind the calculation) can be found in the table below.
What's the current value of the company?	108.9 pence per share	As at 12th December 2022, the current value of Primary Health Properties Plc is 108.9p per share.

Cost of equity (%)

Input	Input value	Additional information
Risk-free rate (%)	3.488%	Here, the risk free rate is the US 30 year treasury bond, and is calculated as at 12th December 2022.
Beta	0.426	Here, to estimate the adjusted beta, we used the iShares MSCI World ETF to represent the market portfolio; and in terms of the time period and frequency of observations, we used five years of monthly data (i.e. 60 observations in total), which is supported by a study and is the most common choice. The beta value in a future period has been found to be on average closer to the mean value of 1.0, the beta of an average-systematic-risk security, than to the value of the raw beta; because valuation is forward looking, it is logical to adjust the raw beta so it more accurately predicts a future beta.
Equity risk premium (%)	6.00	Here, the equity risk premium is in relation to the global region, and is calculated as at 1st January 2022 (https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html).
Cost of equity (%)	6.04%	Cost of equity = Risk-free rate + Beta x Equity risk premium.

Sensitive analysis

The three main inputs that result in the greatest change in the expected return of the Custodian Property Income REIT Plc investment are, in order of importance (from highest to lowest):

1. The discount rate (the default multiple is 6.04%);
2. The dividend growth rate (the default multiple is 1.57%); and
3. The dividend per share forecast (the default forecast is 5.56 pence per share).

The impact of a 30% change in those main inputs to the expected return of the Custodian Property Income REIT Plc investment is shown in the table below.

Custodian Property Income REIT investment expected return sensitive analysis

Main input	30% worse	Unchanged	30% better
Discount rate
Dividend per share
Growth rate

Appendix

Peers

The peers have been determined by Bloomberg's algorithm, and fall into the 'ccc' classification and 'ccc' industry.

Peers

Company name	Primary exchange	Market capitalisation (USD)	BF P/FFO	Yield (%)	Interest cover (x)	Total debt/total capital
Custodian Property Income Re	United Kingdom	495.07M	--	6.02%	5.12	20.57%
Prs Reit Plc/The	United Kingdom	577.62M	--	4.67%	--	35.16%
Regional Reit Ltd	United Kingdom	381.88M	--	11.05%	--	44.34%
Triple Point Social Housing		325.50M	--	8.21%	--	37.23%
Abrdn Property Income Trust		273.84M	--	6.85%	--	21.63%
Schroder Real Estate Investm		268.02M	--	7.12%	--	30.56%
Uk Commercial Property Reit	United Kingdom	973.35M	--	8.49%	41.73	0.00%
Workspace Group Plc	United Kingdom	1.01B	--	4.99%	2.98	25.82%
Lxi Reit Plc	United Kingdom	2.49B	--	5.21%	--	15.58%
Derwent London Plc	United Kingdom	3.32B	19.4x	3.22%	3.79	21.95%
Nextensa		514.41M	--	5.17%	5.76	54.35%

Dividends

Since the company's inception (i.e. eight years), the median dividend of the company is 1.57%.

Dividends

	Q1	Q2	Q3	Q4		Total	Growth (%)
2023	1.375	1.375				2.75
2022	1.25	1.25	1.375	1.375		5.25	5.00%
2021	0.95	1.05	1.25	1.25	0.50	5	-24.81%
2020	1.6625	1.6625	1.6625	1.6625		6.65	1.53%
2019	1.6375	1.6375	1.6375	1.6375		6.55	1.55%
2018	1.6125	1.6125	1.6125	1.6125		6.45	1.57%
2017	1.5875	1.5875	1.5875	1.5875		6.35	1.60%
2016	1.50	1.50	1.5875	1.6625		6.25	19.05%
2015	1.25	1.25	1.25	1.5		5.25

Condensed consolidated statement of comprehensive income

	Unaudited 6 months to 30 Sept 2022	Unaudited 6 months to 30 Sept 2021	Audited 12 months to 31 Mar 2022
	£000	£000	£000
Revenue	22,296	20,152	39,891
Investment management fee	(2,086)	(1,788)	(3,854)
Operating expenses of rental property rechargeable to tenants	(2,704)	(882)	(852)
Operating expenses of rental property directly incurred	(1,127)	(1,708)	(3,422)
Professional fees	(428)	(262)	(617)
Directors’ fees	(167)	(145)	(291)
Administrative expenses	(460)	(356)	(776)
Expenses	(6,972)	(5,141)	(9,812)
Operating profit before financing and revaluation of investment property	15,324	15,011	30,079
Unrealised (losses)/gains on revaluation of investment property: relating to gross property revaluations	(27,742)	32,310	93,977
Unrealised (losses)/gains on revaluation of investment property: relating to acquisition costs	(3,404)	(1,069)	(2,273)
Net valuation (decrease)/increase	(31,146)	31,241	91,704
Profit on disposal of investment property	4,695	4,165	5,369
Net (losses)/profit on investment property	(26,451)	35,406	97,073
Operating (loss)/profit before financing	(11,127)	50,417	127,152
Finance income	-	-	-
Finance costs	(2,960)	(2,347)	(4,827)
Net finance costs	(2,960)	(2,347)	(4,827)
(Loss)/profit before tax	(14,087)	48,070	122,325
Income tax	-	-	-
(Loss)/profit and total comprehensive (expense)/income for the Period, net of tax	(14,087)	48,070	122,325
Attributable to:
Owners of the Company	(14,087)	48,070	122,325
Earnings per ordinary share:
Basic and diluted (p)	(3.2)	11.4	28.5
EPRA (p)	2.8	3.0	5.9

Condensed consolidated statement of financial position

	Unaudited 30 Sept 2022	Unaudited 30 Sept 2021	Audited 31 Mar 2022
	£000	£000	£000
Non–current assets
Investment property	685,423	565,279	665,186
Property, plant and equipment	747	-	-
Total non-current assets	686,170	565,279	665,186
Current assets
Trade and other receivables	6,019	6,452	5,201
Cash and cash equivalents	4,765	37,139	11,624
Total current assets	10,784	43,591	16,825
Total assets	696,954	608,870	682,011
Equity
Issued capital	4,409	4,206	4,409
Share premium	250,970	251,015	250,970
Merger reserve	18,931	-	18,931
Retained earnings	227,116	190,648	253,330
Total equity attributable to equity holders of the Company	501,426	445,869	527,640
Non-current liabilities
Borrowings	176,596	145,713	113,883
Other payables	570	571	570
Total non-current liabilities	177,166	146,284	114,453
Current liabilities
Borrowings	-	-	22,727
Trade and other payables	10,702	10,098	9,783
Deferred income	7,660	6,619	7,408
Total current liabilities	18,362	16,717	39,918
Total liabilities	195,528	163,001	154,371
Total equity and liabilities	696,954	608,870	682,011

Condensed consolidated statement of cash flows

	Unaudited 6 months to 30 Sept 2022	Unaudited 6 months to 30 Sept 2021	Audited 12 months to 31 Mar 2022
	£000	£000	£000
Operating activities
(Loss)/profit for the Period	(14,087)	48,070	122,325
Net finance costs	2,960	2,347	4,827
Net revaluation loss/(profit)	31,146	(31,241)	(91,704)
Profit on disposal of investment property	(4,695)	(4,165)	(5,369)
Impact of lease incentives	(832)	(741)	(1,112)
Amortisation	4	4	7
Depreciation	8	-	-
Cash flows from operating activities before changes in working capital and provisions	14,504	14,274	28,974
(Increase)/decrease in trade and other receivables	(818)	(451)	1,923
Increase in trade and other payables	1,169	3,913	1,702
Cash generated from operations	351	3,462	35,299
Interest and other finance charges	(2,777)	(2,176)	(4,463)
Net cash flows from operating activities	12,078	15,560	28,136
Investing activities
Purchase of investment property	(52,818)	(12,217)	(21,529)
Purchase of property, plant and equipment	(755)	-	-
Capital expenditure	(4,455)	(1,803)	(3,515)
Acquisition costs	(3,404)	(1,069)	(2,272)
Proceeds from the disposal of investment property	14,899	38,299	54,403
Costs of disposal of investment property	(80)	(424)	(479)
Net cash flows from/(used in) investing activities	(46,613)	22,786	26,608
Financing activities
Proceeds from the issue of share capital	-	558	558
Costs of the issue of share capital	-	(5)	(51)
New borrowings	63,000	7,000	-
New borrowings origination costs	(437)	(62)	-
Repayment of borrowings	(22,760)	-	(25,057)
Dividends paid	(12,127)	(12,618)	(24,191)
Net cash flows (used in)/from financing activities	27,676	(5,127)	(48,874)
Net (decrease)/increase in cash and cash equivalents	(6,859)	33,219	6,003
Cash acquired through the acquisition of DRUM REIT	-	-	1,701
Cash and cash equivalents at start of the Period	11,624	3,920	3,920
Cash and cash equivalents at end of the Period	4,765	37,139	11,624