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Custodian Property Income REIT plc: Interim Results: Difference between revisions

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* Custodian Property Income REIT plc announced its 2022 interim results.
* Custodian Property Income REIT plc, the UK-focused commercial real estate investment company, has made two announcements since we last reported on the company on 28th November 2022 (i.e. less than three weeks ago).
* The company aims to deliver a high income return, by investing in a diversified portfolio of smaller regional properties in the UK.
*For us, the key highlight of the announcements is that the company has grown its dividends in the six months ended 30th September 2022, relative to the comparable period a year earlier, in-line with our expectations (of 10%).
 
*Accordingly, we have maintained our forecasts.  
*With the shares currently trading at 91.70p per share, we estimate that the expected return of an investment in Custodian Property Income REIT Plc over the next five-years is 62%, which equates to an annual return of 10.2%. In other words, an £100,000 investment in the company is expected to return £162,000 in five-years from now.
*Assuming that a suitable return level in the five years is 50%, then an investment in the company is considered to be a 'suitable' one.
== Interims ==
On 14th December 2022, the company announced its 2022 interim results.<ref>https://www.investegate.co.uk/custodian-property-income-reit/eqs/interim-results/20221214070021EKITI/</ref>


For the six months ended 30th September 2022, revenue increased by 10.64% to £22.30mm (H1 FY21: £20.15mm), driven by income that is rechargeable to tenants. Adjusting for the rechargeable income, revenue increased by 1.67% to £19.59mm (H1 FY21: £19.27mm), entirely generated from rental income from the company's investment properties. As a result of a revaluation of investment property, the company swung to a net loss of £14.09mm (H1 FY21: positive £48.07mm).


== Interims ==
Mainly driven by new investments, cash decreased by 59% to £4.77mm from six months earlier (FY21: £11.62mm). Following the investment acquisitions, net current liabilities decreased by 67% to £7.58mm (FY21: £23.10mm) and net debt increased by 37% to £171.83mm from six months earlier (FY21: £124.99mm). All-in-all, net assets decreased by 4.97% to £501.43mm (FY21: £527.64mm).


* On 14th December 2022, the company announced its 2022 interim results.
After adjusting for investment property revaluations (£62.39mm), net cash flows from operating activities decreased by 22% to £12.08mm (H1 FY21: £15.56mm). Mainly due to the purchase of investment properties (£52.82mm vs. £12.21mm), net cash flows from investing activities moved to negative £46.61mm (H1 FY21: positive £22.79mm). Net cash flows from financing activities moved to £27.68mm (H1 FY21: negative £5.13mm), driven by increased borrowings (the net borrowing difference between the periods is £32.87mm).
*Profit and loss
**Revenue increase by 10.64% to £22.30mm (H1 FY21: £20.15mm).
**The company swung to a net loss of £14.09mm (H1 FY21: £48.07mm), driven by the revaluation of investment property.
*Balance sheet
**Cash decreased by 59% to £4.77mm from six months earlier (FY21: £11.62mm).
**Net current liabilities decreased by 67% to £7.58mm from six months earlier (FY21: £23.10mm).
**Net debt increased by 37% to £171.83mm from six months earlier (FY21: £124.99mm).
**Net assets decreased by 4.97% to £501.43mm (FY21: £527.64mm).
*Cash flow
**Operations
**Investing
**Financing
*
*


In comparison to the same period a year earlier, dividend increased by 10% to 2.75p per share (H1 FY21: 2.5p), and we note that they are fully covered by earnings (103%). The company reiterated that its target dividend amount for the financial year (i.e. 12-months ending 31 March 2023) is 5.5p or more, which equates to a 4.76% or more increase on a year earlier.


EPRA earnings, which is intended to provide a common baseline measure for performance that is relevant to investors in investment property companies<ref>EPRA Earnings is a measure of the underlying operating performance of an investment property company excluding fair value gains, investment property disposals and limited other items that are not considered to be part of the core activity of an investment property company. It has its basis firmly in IFRS earnings (operational earnings) with limited specific adjustments. It therefore does provide a measure of recurring income, but does not, for example, exclude ‘exceptional’ items that are part of IFRS earnings. EPRA Earnings is intended to provide a common baseline measure for performance that is relevant to investors in investment property companies. To ensure that all adjustments reflect the net result to the parent company’s shareholders taxes and minority interests in respect of all adjustments are also taken out.</ref>, decreased by 6.7% to 2.8p per share (H1 2021: 3.0p), mainly due to administrative cost inflation, rising interest rates and additional ESG compliance costs.


Fixed rate agreed debt facilities increased from 61% to 74%, significantly mitigating interest rate risk. The company's loan-to-value (LTV) increased to 25.5% as at 30th September 2022, and decreased by 1.5 percentage points to 24.0% post period end. We note that the LTV is in-line with that the targets detailed in the company's investment policy, which is maximum value of no more than 35% and medium-term net gearing target of 25%. The weighted average term of drawn debt is 6.3 years, the average cost of debt is 3.5% and there is no debt facilities maturing until September 2024.


== Name change ==
== 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.
On the 7th December 2022, the company 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.<ref>https://www.investegate.co.uk/custodian-reit-plc--crei-/eqs/change-of-name/20221207070007ERINE/</ref>


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


== Financials ==
== Financials ==
In light of the announcements, we have maintained our forecasts, which can be found by clicking here.
In light of the announcements, we have maintained our forecasts, which can be found by clicking [https://www.proactiveinvestors.co.uk/companies/news/999566/custodian-reit-plc-the-6-yield-and-nav-discount-is-an-opportunity-999566.html here].


== Risks ==
== 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'.
As with any investment, investing in Custodian Property Income REIT carries a level of risk. Overall, based on the company's market beta<ref>Research shows that an investment has two main types of risks: 1) non-systematic and 2) systematic. Systematic risk is the risk related to the overall market, and non-systematic risk is the risk that's specific to an individual investment. Evidence shows that taking on non-systematic risk is inefficient, and it's, therefore, best to eliminate it; and in most cases, elimination is fairy easy to do [by holding a diversified portfolio of investments (i.e. around 15 investments)]. Accordingly, when assessing the riskiness of an investment, it’s best to look at the systematic risk only (i.e. ignore the non-systematic risk). A key measure of systematic risk is beta, and a main way to determine the riskiness of an investment is to compare the beta of the investment with the beta of the market, which is 1.</ref> (i.e. 0.426), the degree of risk associated with an investment in Custodian Property Income REIT 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.
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. In addition, here, we have assumed that for an investment to be considered 'low' risk, it must have a beta value of 0.5 or less. Further information about the beta ratings can be found in the appendix section of this report.


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.
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.
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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.
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? ====
==== What's the expected return of an investment in Custodian Property Income REIT 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.
Accordingly, we estimate that the expected return of an investment in Custodian Property Income REIT Plc over the next five-years is 62%, which equates to an annual return of 10.2%. In other words, an £100,000 investment in the company is expected to return £162,000 in five-years 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.
Assuming that a suitable return level in the five years is 60% and Custodian Property Income REIT Plc achieves its expected return level (of 62%), then an investment in the company is considered to be a 'suitable' one.


==== What are the assumptions used to estimate the return figure? ====
==== What are the assumptions used to estimate the return figure? ====
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|Which valuation model do you want to use?
|Which valuation model do you want to use?
|Discounted cash flow
|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.
|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<ref>Demirakos et al., 2010; Gleason et al., 2013.</ref>, 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?
|Which type of discounted cash flow model do you want to use?
|Dividend discount model
|Dividend discount model
|The dividend discount model (DDM) is one of the most common discounted cash flow models.
|As a UK real estate investment trust (REIT), the company is legally required to distribute 90% of its income to shareholders (within 12-months of the end of the accounting period).<ref>https://www.pwc.co.uk/services/tax/insights/uk-reits-attractive-vehicle-uk-property-investment/reit-conditions.html#distribution</ref><ref>However, neither exempt gains, nor profits from the residual business income have to be distributed.</ref> Accordingly, we suggest using the dividend discount model (DDM), which is one of the most common discounted cash flow models.
|-
|-
|How many distinct stage of growth do you want to use?
|How many distinct stage of growth do you want to use?
|One stage
|One stage
|For simplicity, we have used the one stage pattern here.
|For simplicity, we have used the one stage pattern here.
|-
|What is the expected lifespan of the business?
|Perpetual
|Again, for simplicity, we have assumed that the business continues forever.
|-
|-
|What is the expected constant growth rate in dividends?
|What is the expected constant growth rate in dividends?
|3%
|1.57%
|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%.
|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. Since the company's inception (i.e. eight years ago), the median dividend of the company is 1.57%. Further information about the company's dividend pay-outs can be found in the appendix section of this report.
|-
|-
|Which forecasts to use for the one-year ahead expected dividend amount?
|Which financial forecasts to use?
|Proactive Investors
|Proactive Investors
|Here, we have used the forecasts of Proactive Investors.
|Here, we have used the forecasts of Proactive Investors.
|-
|-
|What is the required return on equity?
|What is the required return on equity?
|7%
|5.73%
|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.
|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?
|What's the current value of the company?
|108.9 pence per share
|91.70 pence per share
|As at 12th December 2022, the current value of Primary Health Properties Plc is 108.9p per share.
|As at 16th December 2022, the current value of Custodian Property Income REIT plc is 97.70p per share.<ref>https://www.londonstockexchange.com/stock/CREI/custodian-property-income-reit-plc/company-page</ref>
|-
|Which time period do you want to use to estimate the expected return?
|Between now and five years time
|Research suggests that following a market crash, the average amount of time it takes for the price of a stock market to return to its pre-crash level (i.e. the recovery period) is at least three years.<ref>https://www.newyorkfed.org/mediabrary/media/medialibrary/media/research/staff_reports/research_papers/9809.pdf</ref> Accordingly, we suggest that to account for general market cyclicity, it's best to estimate the expected return of the company between now and five years time.
|}
|}
{| class="wikitable"
{| class="wikitable"
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|Risk-free rate (%)
|Risk-free rate (%)
|3.488%
|3.488%
|Here, the risk free rate is the US 30 year treasury bond, and is calculated as at 12th December 2022.
|Here, the risk free rate is the US 30 year treasury bond, and is calculated as at 16th December 2022.<ref>https://www.marketwatch.com/investing/bond/tmubmusd30y?countrycode=bx</ref> Research suggests that for the risk-free rate, it's best to use one that has the same or similar maturity to the estimated remaining lifespan of the company. Here, we have assumed that the estimated lifespan of the company is perpetual, so we have used the longest maturity, which is 30 years.
|-
|-
|Beta
|Beta
|0.426
|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.
|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.
|-
|-
|Equity risk premium (%)
|Equity risk premium (%)
|6.00
|5.26
|Here, the equity risk premium is in relation to the global region, and is calculated as at 1st January 2022 (<nowiki>https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html</nowiki>).
|Here, the equity risk premium is in relation to the global region, and is calculated as at 1st January 2022.<ref>https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html</ref> Research suggests that for the region of equity risk premium, it's best to use one that is the same or similar to the region of the beta market portfolio. Here, the region of the beta market portfolio is the world/global, so we have used the world/global region for the equity risk premium.
|-
|-
|Cost of equity (%)
|Cost of equity (%)
|6.04%
|5.73%
|Cost of equity = Risk-free rate + Beta x Equity risk premium.
|Cost of equity = Risk-free rate + Beta x Equity risk premium.
|}
|}
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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):
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):


# The discount rate (the default multiple is 6.04%);
# The discount rate (the default multiple is 5.73%);
# The dividend growth rate (the default multiple is 1.57%); and
#The 12-month ahead dividend per share forecast (the default forecast is 5.56 pence per share); and
# The dividend per share forecast (the default forecast is 5.56 pence per share).
# The dividend growth rate (the default multiple is 1.57%).


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.
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.
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|-
|-
|Discount rate
|Discount rate
|
|15%
|
|62%
|
|177%
|-
|-
|Dividend per share
|Dividend per share
|
|14%
|
|62%
|
|111%
|-
|-
|Growth rate
|Growth rate
|
|46%
|
|62%
|
|83%
|}
|}


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=== Peers ===
=== Peers ===
The peers have been determined by Bloomberg's algorithm, and fall into the 'ccc' classification and 'ccc' industry.
The peers have been determined by Bloomberg's algorithm, and fall into the 'ccc' classification and 'ccc' industry. We note that Custodian Property Income REIT plc's yield and interest cover are in-line with its peers (6.02% vs. 6.02% and 5.12x vs. 5.12x). The company's debt-to-capital amount is around 5.25 percentage points lower than its peers (20.57% vs. 25.82%).
{| class="wikitable"
{| class="wikitable"
|+Peers
|+Peers
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!Interest cover (x)
!Interest cover (x)
!Total debt/total capital
!Total debt/total capital
!Adjusted beta
|-
|-
|Custodian Property Income Re
|Custodian Property Income REIT plc
|United Kingdom
|United Kingdom
|495.07M
|495.07M
Line 157: Line 162:
|5.12
|5.12
|20.57%
|20.57%
|0.4230
|-
|-
|Prs Reit Plc/The
|Prs Reit Plc/The
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| --
| --
|35.16%
|35.16%
|0.598
|-
|-
|Regional Reit Ltd
|Regional Reit Ltd
Line 173: Line 180:
| --
| --
|44.34%
|44.34%
|0.838
|-
|-
|Triple Point Social Housing
|Triple Point Social Housing
|
|United Kingdom
|325.50M
|325.50M
|<nowiki>--</nowiki>
|<nowiki>--</nowiki>
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| --
| --
|37.23%
|37.23%
|0.633
|-
|-
|Abrdn Property Income Trust
|Abrdn Property Income Trust
|
|United Kingdom
|273.84M
|273.84M
|<nowiki>--</nowiki>
|<nowiki>--</nowiki>
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| --
| --
|21.63%
|21.63%
|0.478
|-
|-
|Schroder Real Estate Investm
|Schroder Real Estate Investment Trust
|
|United Kingdom
|268.02M
|268.02M
|<nowiki>--</nowiki>
|<nowiki>--</nowiki>
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| --
| --
|30.56%
|30.56%
|0.700
|-
|-
|Uk Commercial Property Reit
|Uk Commercial Property Reit
Line 205: Line 216:
|41.73
|41.73
|0.00%
|0.00%
|0.562
|-
|-
|Workspace Group Plc
|Workspace Group Plc
Line 213: Line 225:
|2.98
|2.98
|25.82%
|25.82%
|1.006
|-
|-
|Lxi Reit Plc
|Lxi Reit Plc
Line 221: Line 234:
| --
| --
|15.58%
|15.58%
|0.615
|-
|-
|Derwent London Plc
|Derwent London Plc
Line 229: Line 243:
|3.79
|3.79
|21.95%
|21.95%
|-
|0.814
|Nextensa
|
|514.41M
|<nowiki>--</nowiki>
|5.17%
|5.76
|54.35%
|}
|}


=== Dividends ===
=== Dividends ===
Since the company's inception (i.e. eight years), the median dividend of the company is 1.57%.
Since the company's inception (i.e. eight years ago), the median dividend of the company is 1.57%, and the mean is 0.78%. We note that if the dividend grows in the current financial year (i.e. the year ending 31st March 2023) in-line with our forecast (i.e. 4.76%), then the median will increase to 1.59% and the mean to 1.28%. We note that if the company had grown its dividend at a constant/fixed rate during that period, then the rate would be 3.64%.  
{| class="wikitable"
{| class="wikitable"
|+Dividends
|+Declared Custodian Property Income REIT plc dividends
!
!
!Q1
!Q1
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|}
|}


 
=== Financial statements ===
{| class="wikitable"
{| class="wikitable"
|+Condensed consolidated statement of comprehensive income
|+Condensed consolidated statement of comprehensive income
!
!
!Unaudited
!Unaudited 6 months to 30th September 2022
 
!Unaudited 6 months to 30th September 2021
6 months
!Audited 12 months to 31st March 2022
 
to 30 Sept 2022
!Unaudited
 
6 months
 
to 30 Sept 2021
!Audited
 
12 months
 
to 31 Mar
 
2022
|-
|-
|
|
Line 361: Line 354:
|£000
|£000
|-
|-
|
|'''Revenue'''
|
|'''22,296'''
|
|'''20,152'''
|
|'''39,891'''
|-
|Revenue
|22,296
|20,152
|39,891
|-
|
|
|
|
|-
|-
|Investment management fee
|Investment management fee
Line 407: Line 390:
|(356)
|(356)
|(776)
|(776)
|-
|
|
|
|
|-
|-
|Expenses
|Expenses
Line 418: Line 396:
|(9,812)
|(9,812)
|-
|-
|'''Operating profit before financing and revaluation of investment property'''
|
|
'''15,324'''
|
|
'''15,011'''
|
|
|
'''30,079'''
|-
|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
|Unrealised (losses)/gains on revaluation of investment property: relating to gross property revaluations
Line 464: Line 432:
|97,073
|97,073
|-
|-
|
|'''Operating (loss)/profit before financing'''
|
|'''(11,127)'''
|
|'''50,417'''
|
|'''127,152'''
|-
|Operating (loss)/profit before financing
|(11,127)
|50,417
|127,152
|-
|
|
|
|
|-
|-
|Finance income
|Finance income
Line 494: Line 452:
|(4,827)
|(4,827)
|-
|-
|
|'''(Loss)/profit before tax'''
|
|'''(14,087)'''
|
|'''48,070'''
|
|'''122,325'''
|-
|(Loss)/profit before tax
|(14,087)
|48,070
|122,325
|-
|
|
|
|
|-
|-
|Income tax
|Income tax
Line 514: Line 462:
|<nowiki>-</nowiki>
|<nowiki>-</nowiki>
|-
|-
|'''(Loss)/profit and total comprehensive (expense)/income for the Period, net of tax'''
|
|
'''(14,087)'''
|
|
'''48,070'''
|
|
|
'''122,325'''
|-
|(Loss)/profit and total comprehensive (expense)/income for the Period, net of tax
|
(14,087)
|
48,070
|
122,325
|-
|
|
|
|
|-
|-
|Attributable to:
|Attributable to:
Line 541: Line 479:
|48,070
|48,070
|122,325
|122,325
|-
|
|
|
|
|-
|-
|Earnings per ordinary share:
|Earnings per ordinary share:
Line 562: Line 495:
|5.9
|5.9
|}
|}


{| class="wikitable"
{| class="wikitable"
|+Condensed consolidated statement of financial position
|+Condensed consolidated statement of financial position
!
!
!Unaudited
!Unaudited 30th September 2022
 
!Unaudited 30th September 2021
30 Sept
!Audited 31st March 2022
 
2022
!Unaudited
 
30 Sept
 
2021
!Audited
 
31 Mar
 
2022
|-
|-
|
|
Line 587: Line 507:
|£000
|£000
|£000
|£000
|-
|
|
|
|
|-
|-
|Non–current assets
|Non–current assets
Line 608: Line 523:
|<nowiki>-</nowiki>
|<nowiki>-</nowiki>
|-
|-
|
|'''Total non-current assets'''
|
|'''686,170'''
|
|'''565,279'''
|
|'''665,186'''
|-
|Total non-current assets
|686,170
|565,279
|665,186
|-
|
|
|
|
|-
|-
|Current assets
|Current assets
Line 638: Line 543:
|11,624
|11,624
|-
|-
|
|'''Total current assets'''
|
|'''10,784'''
|
|'''43,591'''
|
|'''16,825'''
|-
|Total current assets
|10,784
|43,591
|16,825
|-
|-
|
|'''Total assets'''
|
|'''696,954'''
|
|'''608,870'''
|
|'''682,011'''
|-
|Total assets
|696,954
|608,870
|682,011
|-
|
|
|
|
|-
|-
|Equity
|Equity
Line 688: Line 578:
|253,330
|253,330
|-
|-
|'''Total equity attributable to equity holders of the Company'''
|
|
'''501,426'''
|
|
'''445,869'''
|
|
|
'''527,640'''
|-
|Total equity attributable to equity holders of the Company
|
501,426
|
445,869
|
527,640
|-
|
|
|
|
|-
|-
|Non-current liabilities
|Non-current liabilities
Line 721: Line 601:
|570
|570
|-
|-
|
|'''Total non-current liabilities'''
|
|'''177,166'''
|
|'''146,284'''
|
|'''114,453'''
|-
|Total non-current liabilities
|177,166
|146,284
|114,453
|-
|
|
|
|
|-
|-
|Current liabilities
|Current liabilities
Line 756: Line 626:
|7,408
|7,408
|-
|-
|
|'''Total current liabilities'''
|
|'''18,362'''
|
|'''16,717'''
|
|'''39,918'''
|-
|-
|Total current liabilities
|'''Total liabilities'''
|18,362
|'''195,528'''
|16,717
|'''163,001'''
|39,918
|'''154,371'''
|-
|
|
|
|
|-
|Total liabilities
|195,528
|163,001
|154,371
|-
|
|
|
|
|-
|-
|Total equity and liabilities
|Total equity and liabilities
Line 789: Line 644:
|+Condensed consolidated statement of cash flows
|+Condensed consolidated statement of cash flows
!
!
!Unaudited
!Unaudited 6 months to 30th September 2022
 
!Unaudited 6 months to 30th September 2021
6 months
!Audited 12 months to 31st March 2022
 
to 30 Sept 2022
!Unaudited
 
6 months
 
to 30 Sept 2021
!Audited
 
12 months
 
to 31 Mar
 
2022
|-
|-
|
|
Line 811: Line 652:
|£000
|£000
|£000
|£000
|-
|
|
|
|
|-
|-
|Operating activities
|Operating activities
Line 856: Line 692:
|<nowiki>-</nowiki>
|<nowiki>-</nowiki>
|<nowiki>-</nowiki>
|<nowiki>-</nowiki>
|-
|
|
|
|
|-
|-
|Cash flows from operating activities before changes in working capital and provisions
|Cash flows from operating activities before changes in working capital and provisions
Line 869: Line 700:
|
|
28,974
28,974
|-
|
|
|
|
|-
|-
|(Increase)/decrease in trade and other receivables
|(Increase)/decrease in trade and other receivables
Line 884: Line 710:
|3,913
|3,913
|1,702
|1,702
|-
|
|
|
|
|-
|-
|Cash generated from operations
|Cash generated from operations
Line 894: Line 715:
|3,462
|3,462
|35,299
|35,299
|-
|
|
|
|
|-
|-
|Interest and other finance charges
|Interest and other finance charges
Line 906: Line 722:
|-
|-
|
|
Net cash flows from operating activities
'''Net cash flows from operating activities'''
|12,078
|'''12,078'''
|15,560
|'''15,560'''
|
28,136
|-
|
|
|
|
|
'''28,136'''
|-
|-
|Investing activities
|Investing activities
Line 952: Line 763:
|(479)
|(479)
|-
|-
|
|'''Net cash flows from/(used in) investing activities'''
|
|'''(46,613)'''
|
|'''22,786'''
|
|'''26,608'''
|-
|Net cash flows from/(used in) investing activities
|(46,613)
|22,786
|26,608
|-
|
|
|
|
|-
|-
|Financing activities
|Financing activities
Line 1,002: Line 803:
|(24,191)
|(24,191)
|-
|-
|
|'''Net cash flows (used in)/from financing activities'''
|
|'''27,676'''
|
|'''(5,127)'''
|
|'''(48,874)'''
|-
|Net cash flows (used in)/from financing activities
|27,676
|(5,127)
|(48,874)
|-
|
|
|
|
|-
|-
|
|
Line 1,039: Line 830:
|37,139
|37,139
|11,624
|11,624
|}
== Risk rating ==
{| class="wikitable"
|+ Risk rating
|-
! Rating !! Beta
|-
| style="background: green; color: white;" |Low || style="background: green; color: white;" |Equal to or below 0.5
|-
| style="background: orange; color: white;" |Medium || style="background: orange; color: white;" |Between 0.5 and 1.5
|-
| style="background: red; color: white;" |High || style="background: red; color: white;" |Equal to or above 1.5
|}
|}


== References and notes ==
== References and notes ==

Latest revision as of 16:13, 20 January 2023

  • Custodian Property Income REIT plc, the UK-focused commercial real estate investment company, has made two announcements since we last reported on the company on 28th November 2022 (i.e. less than three weeks ago).
  • For us, the key highlight of the announcements is that the company has grown its dividends in the six months ended 30th September 2022, relative to the comparable period a year earlier, in-line with our expectations (of 10%).
  • Accordingly, we have maintained our forecasts.
  • With the shares currently trading at 91.70p per share, we estimate that the expected return of an investment in Custodian Property Income REIT Plc over the next five-years is 62%, which equates to an annual return of 10.2%. In other words, an £100,000 investment in the company is expected to return £162,000 in five-years from now.
  • Assuming that a suitable return level in the five years is 50%, then an investment in the company is considered to be a 'suitable' one.

InterimsEdit

On 14th December 2022, the company announced its 2022 interim results.[1]

For the six months ended 30th September 2022, revenue increased by 10.64% to £22.30mm (H1 FY21: £20.15mm), driven by income that is rechargeable to tenants. Adjusting for the rechargeable income, revenue increased by 1.67% to £19.59mm (H1 FY21: £19.27mm), entirely generated from rental income from the company's investment properties. As a result of a revaluation of investment property, the company swung to a net loss of £14.09mm (H1 FY21: positive £48.07mm).

Mainly driven by new investments, cash decreased by 59% to £4.77mm from six months earlier (FY21: £11.62mm). Following the investment acquisitions, net current liabilities decreased by 67% to £7.58mm (FY21: £23.10mm) and net debt increased by 37% to £171.83mm from six months earlier (FY21: £124.99mm). All-in-all, net assets decreased by 4.97% to £501.43mm (FY21: £527.64mm).

After adjusting for investment property revaluations (£62.39mm), net cash flows from operating activities decreased by 22% to £12.08mm (H1 FY21: £15.56mm). Mainly due to the purchase of investment properties (£52.82mm vs. £12.21mm), net cash flows from investing activities moved to negative £46.61mm (H1 FY21: positive £22.79mm). Net cash flows from financing activities moved to £27.68mm (H1 FY21: negative £5.13mm), driven by increased borrowings (the net borrowing difference between the periods is £32.87mm).

In comparison to the same period a year earlier, dividend increased by 10% to 2.75p per share (H1 FY21: 2.5p), and we note that they are fully covered by earnings (103%). The company reiterated that its target dividend amount for the financial year (i.e. 12-months ending 31 March 2023) is 5.5p or more, which equates to a 4.76% or more increase on a year earlier.

EPRA earnings, which is intended to provide a common baseline measure for performance that is relevant to investors in investment property companies[2], decreased by 6.7% to 2.8p per share (H1 2021: 3.0p), mainly due to administrative cost inflation, rising interest rates and additional ESG compliance costs.

Fixed rate agreed debt facilities increased from 61% to 74%, significantly mitigating interest rate risk. The company's loan-to-value (LTV) increased to 25.5% as at 30th September 2022, and decreased by 1.5 percentage points to 24.0% post period end. We note that the LTV is in-line with that the targets detailed in the company's investment policy, which is maximum value of no more than 35% and medium-term net gearing target of 25%. The weighted average term of drawn debt is 6.3 years, the average cost of debt is 3.5% and there is no debt facilities maturing until September 2024.

Name changeEdit

On the 7th December 2022, the company 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.[3]

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

FinancialsEdit

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

RisksEdit

As with any investment, investing in Custodian Property Income REIT carries a level of risk. Overall, based on the company's market beta[4] (i.e. 0.426), the degree of risk associated with an investment in Custodian Property Income REIT 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. In addition, here, we have assumed that for an investment to be considered 'low' risk, it must have a beta value of 0.5 or less. Further information about the beta ratings can be found in the appendix section of this report.

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.

ValuationEdit

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 Custodian Property Income REIT using the absolute valuation approach?Edit

Accordingly, we estimate that the expected return of an investment in Custodian Property Income REIT Plc over the next five-years is 62%, which equates to an annual return of 10.2%. In other words, an £100,000 investment in the company is expected to return £162,000 in five-years 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 five years is 60% and Custodian Property Income REIT Plc achieves its expected return level (of 62%), then an investment in the company is considered to be a 'suitable' one.

What are the assumptions used to estimate the return figure?Edit

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/most accurate is the absolute valuation approach[5], 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 As a UK real estate investment trust (REIT), the company is legally required to distribute 90% of its income to shareholders (within 12-months of the end of the accounting period).[6][7] Accordingly, we suggest using the dividend discount model (DDM), which 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 lifespan of the business? Perpetual Again, for simplicity, we have assumed that the business continues forever.
What is the expected constant growth rate in dividends? 1.57% 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. Since the company's inception (i.e. eight years ago), the median dividend of the company is 1.57%. Further information about the company's dividend pay-outs can be found in the appendix section of this report.
Which financial forecasts to use? Proactive Investors Here, we have used the forecasts of Proactive Investors.
What is the required return on equity? 5.73% 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? 91.70 pence per share As at 16th December 2022, the current value of Custodian Property Income REIT plc is 97.70p per share.[8]
Which time period do you want to use to estimate the expected return? Between now and five years time Research suggests that following a market crash, the average amount of time it takes for the price of a stock market to return to its pre-crash level (i.e. the recovery period) is at least three years.[9] Accordingly, we suggest that to account for general market cyclicity, it's best to estimate the expected return of the company between now and five years time.
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 16th December 2022.[10] Research suggests that for the risk-free rate, it's best to use one that has the same or similar maturity to the estimated remaining lifespan of the company. Here, we have assumed that the estimated lifespan of the company is perpetual, so we have used the longest maturity, which is 30 years.
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, and because valuation is forward looking, it is logical to adjust the raw beta so it more accurately predicts a future beta.
Equity risk premium (%) 5.26 Here, the equity risk premium is in relation to the global region, and is calculated as at 1st January 2022.[11] Research suggests that for the region of equity risk premium, it's best to use one that is the same or similar to the region of the beta market portfolio. Here, the region of the beta market portfolio is the world/global, so we have used the world/global region for the equity risk premium.
Cost of equity (%) 5.73% Cost of equity = Risk-free rate + Beta x Equity risk premium.

Sensitive analysisEdit

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 5.73%);
  2. The 12-month ahead dividend per share forecast (the default forecast is 5.56 pence per share); and
  3. The dividend growth rate (the default multiple is 1.57%).

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 15% 62% 177%
Dividend per share 14% 62% 111%
Growth rate 46% 62% 83%

AppendixEdit

PeersEdit

The peers have been determined by Bloomberg's algorithm, and fall into the 'ccc' classification and 'ccc' industry. We note that Custodian Property Income REIT plc's yield and interest cover are in-line with its peers (6.02% vs. 6.02% and 5.12x vs. 5.12x). The company's debt-to-capital amount is around 5.25 percentage points lower than its peers (20.57% vs. 25.82%).

Peers
Company name Primary exchange Market capitalisation (USD) BF P/FFO Yield (%) Interest cover (x) Total debt/total capital Adjusted beta
Custodian Property Income REIT plc United Kingdom 495.07M -- 6.02% 5.12 20.57% 0.4230
Prs Reit Plc/The United Kingdom 577.62M -- 4.67% -- 35.16% 0.598
Regional Reit Ltd United Kingdom 381.88M -- 11.05% -- 44.34% 0.838
Triple Point Social Housing United Kingdom 325.50M -- 8.21% -- 37.23% 0.633
Abrdn Property Income Trust United Kingdom 273.84M -- 6.85% -- 21.63% 0.478
Schroder Real Estate Investment Trust United Kingdom 268.02M -- 7.12% -- 30.56% 0.700
Uk Commercial Property Reit United Kingdom 973.35M -- 8.49% 41.73 0.00% 0.562
Workspace Group Plc United Kingdom 1.01B -- 4.99% 2.98 25.82% 1.006
Lxi Reit Plc United Kingdom 2.49B -- 5.21% -- 15.58% 0.615
Derwent London Plc United Kingdom 3.32B 19.4x 3.22% 3.79 21.95% 0.814

DividendsEdit

Since the company's inception (i.e. eight years ago), the median dividend of the company is 1.57%, and the mean is 0.78%. We note that if the dividend grows in the current financial year (i.e. the year ending 31st March 2023) in-line with our forecast (i.e. 4.76%), then the median will increase to 1.59% and the mean to 1.28%. We note that if the company had grown its dividend at a constant/fixed rate during that period, then the rate would be 3.64%.

Declared Custodian Property Income REIT plc 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

Financial statementsEdit

Condensed consolidated statement of comprehensive income
Unaudited 6 months to 30th September 2022 Unaudited 6 months to 30th September 2021 Audited 12 months to 31st March 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 30th September 2022 Unaudited 30th September 2021 Audited 31st March 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 30th September 2022 Unaudited 6 months to 30th September 2021 Audited 12 months to 31st March 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

Risk ratingEdit

Risk rating
Rating Beta
Low Equal to or below 0.5
Medium Between 0.5 and 1.5
High Equal to or above 1.5

References and notesEdit

  1. ↑ https://www.investegate.co.uk/custodian-property-income-reit/eqs/interim-results/20221214070021EKITI/
  2. ↑ EPRA Earnings is a measure of the underlying operating performance of an investment property company excluding fair value gains, investment property disposals and limited other items that are not considered to be part of the core activity of an investment property company. It has its basis firmly in IFRS earnings (operational earnings) with limited specific adjustments. It therefore does provide a measure of recurring income, but does not, for example, exclude ‘exceptional’ items that are part of IFRS earnings. EPRA Earnings is intended to provide a common baseline measure for performance that is relevant to investors in investment property companies. To ensure that all adjustments reflect the net result to the parent company’s shareholders taxes and minority interests in respect of all adjustments are also taken out.
  3. ↑ https://www.investegate.co.uk/custodian-reit-plc--crei-/eqs/change-of-name/20221207070007ERINE/
  4. ↑ Research shows that an investment has two main types of risks: 1) non-systematic and 2) systematic. Systematic risk is the risk related to the overall market, and non-systematic risk is the risk that's specific to an individual investment. Evidence shows that taking on non-systematic risk is inefficient, and it's, therefore, best to eliminate it; and in most cases, elimination is fairy easy to do [by holding a diversified portfolio of investments (i.e. around 15 investments)]. Accordingly, when assessing the riskiness of an investment, it’s best to look at the systematic risk only (i.e. ignore the non-systematic risk). A key measure of systematic risk is beta, and a main way to determine the riskiness of an investment is to compare the beta of the investment with the beta of the market, which is 1.
  5. ↑ Demirakos et al., 2010; Gleason et al., 2013.
  6. ↑ https://www.pwc.co.uk/services/tax/insights/uk-reits-attractive-vehicle-uk-property-investment/reit-conditions.html#distribution
  7. ↑ However, neither exempt gains, nor profits from the residual business income have to be distributed.
  8. ↑ https://www.londonstockexchange.com/stock/CREI/custodian-property-income-reit-plc/company-page
  9. ↑ https://www.newyorkfed.org/mediabrary/media/medialibrary/media/research/staff_reports/research_papers/9809.pdf
  10. ↑ https://www.marketwatch.com/investing/bond/tmubmusd30y?countrycode=bx
  11. ↑ https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html
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