Custodian Property Income REIT plc (CREI) Earnings Call Transcript & Summary

Good morning and welcome to the Custodian Property Income REIT plc investor presentation. [Operator Instructions] The company may not be in a position to answer every question received in the meeting itself, however, the company can review all the questions submitted today and publish response where it's appropriate to do so. Before we begin, I'd like to submit the following poll. And I'd now like to hand you over to Richard Shepherd-Cross. Good morning to you, sir.

Good morning and welcome to this short webinar following our March 2024 quarterly trading update, which was released on the 1st of May. I'll speak for about 10 minutes. And then as you've just heard, there will be an opportunity for Q&A, so please do submit those questions, which you can do on the right-hand side of your screen. For the quarter ending 31st of March, we paid a dividend of 1.375p per share, which is an annualized 5.5p per share, which was fully covered by EPRA earnings from the period. And we are pleased to have also announced a special dividend of 0.3p per share, taking the annual dividend to 5.8p, which was also fully covered by EPRA earnings. Giving some forward guidance, we have announced a 9% increase in the prospective dividend, taking it to a target of 6p per share which is -- which, based on the prevailing share price as at the date of the announcement, offered a very attractive dividend yield of 8.1%. We've been able to increase the dividend due to the strength of the occupational market as evidenced by the rental growth and leasing activity we've enjoyed through the period. The estimated rental value of the portfolio has increased on a like-for-like basis by 0.8% since the start of the year primarily driven by the industrial and logistics sector, but we are also seeing growth coming into our retail warehouse portfolio and in our office portfolio. Across the portfolio as a whole, the estimated rental value is some 15% above the passing rent, demonstrating significant reversionary potential that can be unlocked through the closed asset management of the properties. Since the start of the year, the passing rent of the portfolio is also up by 1.7% on a like-for-like basis, and this has been the result of tenant demand for all sectors of the portfolio, a portfolio that's been curated through careful stock selection and targeted refurbishment, specifically to meet that tenant demand. Through the period, we've settled 3 rent reviews, showing an increase of some 29% over the previous rent but also 7% ahead of the independent estimated rental value, and we've agreed 13 new leases, securing GBP 1.4 million of annual rent, supporting an increase of GBP 2 million in the valuation. The strength of occupier demand has translated into an increase in occupancy from 91% to 92%, and that's forecast to improve still further to 94% upon completion of agreed transactions. The chart on the left shows the progression of rent over the next 5 years, allowing for turnover vacancy and new lease incentives and based on current independent estimates of rental value. But as we've demonstrated in the rising market that we're in, we've been agreeing rents ahead of estimated rental value. So we would hope to see this as a conservative forecast, taking rent roll from GBP 42.5 million to GBP 44.5 million. While valuations have been falling since 2022, they've been falling at a decreasing rate. And the last quarter was the first quarter since 2022 that we've seen no change, leaving our 155 property portfolio valued at GBP 589.1 million. NAV total return for the period was plus 1.6%, and that was driven by the income return. This chart shows the progression of NAV total return over the last 10 years, and it's recorded an average annual NAV total return of 5.9% per annum. We believe that net asset value is poised for a recovery with the support of the rental growth that we are seeing, which should hopefully lead to an improvement in valuations. As part of the ongoing asset management of the portfolio, we have sold properties either where we had a special purchaser or where we believe the rental growth prospects were limited. In the quarter to March, we sold an office building in Derby to an owner-occupier. We sold an industrial property in Weybridge to a local private property company and an industrial building in Milton Keynes, again to an owner-occupier, for a total of GBP 16.1 million, which represented a premium of 11% to the December valuation. And since the period end, we've sold 2 further properties both to developers, where we had secured advantageous planning permissions. And we sold those for GBP 11.3 million, some 49% ahead of the December valuations. Proceeds from these disposals will be used to reduce variable rate borrowings, which is accretive to earnings and will support the dividend increase of -- to 6p per share that we were pleased to announce. That brings this short update to a close, but there have been some questions. So let me turn to those now.

So the first question is, how is the granular portfolio of 155 assets and 300 tenancies efficiently managed? We've got a property team as you would expect. I think there's a misconception about the management of property. Managing property itself isn't that complicated. What is complicated is managing the tenants who are in the properties. And with 300 tenancies, we are not dissimilar to many other listed property companies' portfolios. They might have fewer properties, but they tend to be multi-let. And in truth, a multi-let property is much more complicated to manage than a group of single-let properties, and our portfolio is typified by single-let properties. And I think I'd also say that the proof is in the pudding. We are delivering rental growth. We're delivering enhanced earnings, and that is enabling us to increase the dividend. So we are extremely confident that we can continue to manage the portfolio efficiently. And I think we've demonstrated that over the years. The next question is why is there a strong preference for open market rent negotiation versus contractual indexation? This is a question I'm asked all the time. And on the face of it, I can see why it is that investors might take comfort from rents being linked to RPI. However, they are almost always capped at a maximum of 3%, 3.5% or sometimes 4% per annum. So over the last 2 years, those caps to RPI indexation have actually held rents back below the rate of inflation. And it's our experience that we get just as much of an uplift in open market negotiations, sometimes more than we do with indexation in a rising market, and we are in a rising market for rents. The second reason we prefer open market rents is that means our properties are always appropriately rented. They're neither overrented nor under-rented, say for the fact that we might have an upcoming rent review that's yet to settle. And that makes those properties much easier to value. So we see less volatility in the valuations as leases get shorter, which tends to be a problem for properties, where through indexation, the tenant has -- finds itself in an overrented position. And what we see is that values stay high for too long and then fall very sharply as the leases come to an end. And with the open market rent review provision, that is -- that's less inclined to happen. So the next question, which is -- dominates a lot of our thinking is, is there a road map, setting out road map, setting out the actions, time scales and costs to achieve the mandated EPC ratings? And the answer is yes, of course. That's the short answer. The longer answer is that 5 years ago, the property industry as a whole looked at the requirements that were being imposed to improve the energy performance certificates of the buildings that we manage and saw this as a real challenge because at the time, tenants weren't on board. Well, roll forward 5 years, and we're in a very different landscape. Tenants are absolutely committed to operating out of buildings with low energy performance certificates and therefore, extremely supportive of us in improving those buildings but also keen or happy to pay higher rents for those buildings with lower environmental impact, which means we get paid in higher rents for improving the environmental quality of the buildings that we manage. If we just look at some numbers, we had a weighted average energy performance certificate of 62 2 years ago, and that's 54 today. So you can see that has come down, and the lower it is, the better when we get to a weighted average of 50, and we're very close to that. That would be a weighted average EPC score of a B, which is where the regulations require us to get to by 2030. So we are extremely confident that we will meet the requirements of the legislation. We are also confident that tenants will pay higher rents to reflect the improvements we've made. So in short, we see the environmental agenda as an opportunity for shareholders, not as a cost. So the next question, are plan B growth options being considered in light of the unfortunate rejection of the merger proposal by API shareholders? There's no question. This is still a slightly open wound. We were extremely disappointed that a very small minority of API shareholders voted against the proposed merger. The reason they voted against the proposed merger was that they thought a wind-up of API would be a quicker route to cash than merging with a business where they could have seen enhanced dividends, greater liquidity and all the other benefits that we set out at the time. And those few shareholders wanted cash because they were predominantly multi-asset, open-ended fund managers who have been having calls on cash from their underlying investors for the last couple of years. I don't think it was the right decision, but we still have a very strong portfolio as evidenced by our ability to increase the dividend for the year just closed and increase the dividend for the year in prospect. So in terms of plan B, we believe there will be other corporate consolidation opportunities, and we are constantly on the lookout for those. And we have put our money where our mouth is in that regard, having acquired Drum Income Plus REIT a couple of years ago. We're certainly happy to look at other opportunities. But also, we have a long and strong track record of growth through equity issuance. And while it might feel hard to believe that listed property company shares can trade at a premium given the last 3 years that we've had to endure, if not 4 years that we've had to endure, I think we are only moments away from a recovery in the property market. Listed property securities tend to be a lead indicator. And I think we could see share prices moving on quite strongly if that recovery really becomes embedded. And when we can get the share price back to a premium to net asset value, we will certainly look at the opportunity to grow through equity issuance again. Another question centered on the API merger. Will there be further cost disclosures regarding the API merger beyond the 0.5 reported in Q3 and the 0.9 reported in Q4? We expect that, that is the length and breadth of the cost disclosures that need to be made. There were, of course, abortive costs. Happily, those abortive costs, while unpalatable, were affordable, not least through the very profitable sales that we've made recently. But if there are any other tidying up abortive costs, then they will be reported in the next quarter, but we're expecting that, that should be about it. And then the final question, would it be possible to publish the EPRA net initial yield in the quarterly reports? I think that's a very sensible proposal. It is in our annual report. I can tell you today that the EPRA topped up net initial yield. So the contractual rent, excluding rent-free periods for the portfolio, is 6.5%. And that's an important figure because unlike perhaps some of the other funds in our space, that 6.5% EPRA net initial yield sits comfortably above the prevailing cost of debt and well above our weighted average cost of debt. So our weighted average cost of debt is 4.1%, and the portfolio initial yield of 6.5%. You can see that margin, which means that debt is still accretive. Even if we were to refinance today, then that net initial yield would still be comfortably ahead of the cost of refinanced debt. So I think it's a very good point and one that we will try and take forward into future quarterly reports. So that's the end of the questions. Many thanks for your time, and I hope to see you in this format in the not too distant future.

Perfect. Richard, thanks very much for updating investors today. Could I please ask investors not to close the session as you now be automatically redirected to provide your feedback in order for the management team can better understand your views and expectations? This will only take a few moments to complete, which I'm sure would be greatly valued by Richard and the company. On behalf of the management team of Custodian Property Income REIT plc, we'd like to thank you for attending today's presentation, and good morning to you all.