- Custodian Property Income REIT plc 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 maintained its dividend growth 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 ccc, we continue to view the stock as significantly undervalued.
Interims
On 14th December 2022, the company announced its 2022 interim results.
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 the revaluation of investment property, the company swung to a net loss of £14.09mm (H1 FY21: £48.07mm).
Driven mainly by new investments, cash decreased by 59% to £4.77mm from six months earlier (FY21: £11.62mm). To help finance the new investments, net current liabilities decreased by 67% to £7.58mm from six months earlier (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 the investment property revaluation (£62.39mm), net cash flows from operating activities decreased by 22% to £12.08mm (H1 FY21: £15.56mm). Mainly due to purchase of investment property (£52.82mm vs. £12.21mm), net cash flows from investing activities moved to negative £46.61mm (H1 FY21: £22.79mm). Net cash flows from financing activities moved to £27.68mm (H1 FY21: negative £5.13mm), driven by increased borrowings (net borrowing difference of £32.87mm).
The company aims to deliver a high income return, by investing in a diversified portfolio of smaller regional properties in the UK.
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 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.
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?
| 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. |
| 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. |
| 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 (%) | 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):
- The discount rate (the default multiple is 6.04%);
- The dividend growth rate (the default multiple is 1.57%); and
- 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.
| 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.
| 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%.
| 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 |
| 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 |
| 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 |
| 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 |