Good momentum, modest risk
The structure and investment remit of the real estate investment trust (REIT) have been proven to be resilient and position it strongly for the short- and medium-term future. The investment return emphasis is on income, which is generated from a diverse portfolio with modest capital gearing. Because Custodian Property Income REIT (CREI) is designed to focus on smaller, individual property lot sizes, it acquires at higher asset yields than the market in general. It does not need, therefore, and has not indulged in, anything more than modest capital gearing. Rents are rising, reversionary potential is stronger than for many years and dividends are rising.
- Strategy: This closed-end fund, a REIT, acquires smaller lot-size assets, across a breadth of regional, predominantly urban-centre locations. There is some active management, but no material development. By way of positioning, for some time now, it has been in the in-favour industrial and retail park segments.
- Many low-risk investment drivers: The low-risk, yet actively managed, theme is further to be seen in its tenant spread, with 59% very low risk, and this despite targeting asset acquisitions yielding 7+%. Occupancy fell to 89% in the calendar 2022 trough and is now an historic 93.5% but set to rise. Gearing is low.
- Valuation: CREI’s price to NAV from inception to 2020 traded between 102% and 115%. Since 2022, it has ranged from 75% to 95%. The sector had a difficult time; but, for CREI, this is harsh, taking into account not only the prospects but the results. In the difficult period from 2019/20 to March 2024, asset capital returns averaged -1.9% ‒ a robust, creditable outcome.
- Risks: The capital structure is sound, with 28.6% LTV post some year-end sales, but cost of debt is set to rise in 2030. Debt at end-2023/4 was £179m, a fraction over five years to maturity, and 78% of the debt is fixed at 3.4% for over five years. We like the asset class split, but, of course, trends can change.
- Investment summary: Management’s track record has positioned the REIT well, navigating market changes, Prospective dividends are now at less than 10% below the peak, growing 5% p.a. since 2021. We consider this to be a strong outcome, and is well ahead of the sector average. There is a range of drivers to rental and hence dividend growth from here, notwithstanding debt maturing in 2030.
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