Cust Prop Inc Regulatory News (CREI)

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19 July 2016

Custodian REIT plc

("Custodian REIT" or "the Company")

Unaudited Net Asset Value as at 30 June 2016

Custodian REIT (LSE: CREI), the UK commercial real estate investment company, today reports its unaudited net asset value ("NAV") as at 30 June 2016 and highlights for the period from 1 April 2016 to 30 June 2016 ("the Period").

Financial highlights

· NAV total return1 of 2.0%

· Proposed dividend for the period of 1.5875p per share

· NAV per share of 101.9p (31 March 2016: 101.5p)

· Drawn down £45.0m 12-year fixed rate loan and repaid £20m five-year variable rate loan, incurring no early repayment fees

· Net gearing2 of 14.5% loan-to-value ("LTV") (31 March 2016: 19.2%), rising to 20.1% on completion of committed pipeline of new acquisition opportunities

· £30.5m of new equity raised during the Period at an average premium of 5.1% to adjusted3 NAV

Portfolio highlights

· Portfolio value of £339.1m (31 March 2016: £318.2m)

· £19.7m invested in five acquisitions and on-going developments

· £2.3m portfolio valuation uplift from successful asset management initiatives

· Disposal of non-core residential building for £1.2m, ahead of 31 March 2016 valuation

· £22.0m committed pipeline of new acquisitions

1 NAV movement plus dividends paid.

2 Gross borrowings less unrestricted cash divided by portfolio valuation.

3 Premium adjusted to deduct dividends earned but not paid post ex-dividend date.

Net asset value

The unaudited NAV of the Company at 30 June 2016 was £285.5 million, reflecting approximately 101.9 pence per share, an increase of 0.4% since 31 March 2016:

The NAV attributable to the ordinary shares of the Company is calculated under International Financial Reporting Standards and incorporates the independent portfolio valuation as at 30 June 2016 and income for the Period, but does not include any provision for the proposed dividend for the Period, to be paid on 30 September 2016. Following the UK's decision to leave the European Union ("EU"), financial markets have experienced significant turbulence and volatility with the potential to impact on property valuations. The Company's valuer, Lambert Smith Hampton, has prepared its valuation immediately after the outcome of the EU referendum but it was not possible to gauge its effect by reference to transactions in the marketplace. In line with the approach adopted by other valuers, Lambert Smith Hampton has therefore provided caveats to its 30 June valuation.

The Company invested £19.7 million in five acquisitions during the Period, acquiring:

· A high street retail unit in Chester let to TSB and Chesca for £2.05 million with a net initial yield ("NIY") of 5.87%;

· An industrial unit in Tamworth let to DB Schenker for £4.7 million with an expected reversionary yield of circa 7%; and

· A portfolio comprising two offices in Castle Donington and Cheadle, let to National Grid and Wienerberger respectively, and an industrial unit in Wolverhampton let to Assa Abloy, for £11.5 million, with a NIY of 8.04% and a reversionary yield of 9.63%.

Asset management

Our continuing focus on active asset management has resulted in a £2.3 million valuation increase with further initiatives expected to complete in the coming months.

Successful asset management strategies including rent reviews, new lettings, lease extensions and the retention of tenants beyond their contractual break clauses have again had a positive impact on the portfolio's valuation and weighted average unexpired lease term ("WAULT"). The Company's WAULT to the first lease break or expiry is 6.4 years.

Key asset management initiatives completed recently include:

· Arrangement of simultaneous surrender and agreement of new lease of a retail unit on High Street, Colchester to Metro Bank. The new lease secures an increase in rent from £145,000 to £200,000 and a lease term of 25 years, with a break option in year 15.

· Extending Geldard LLP's lease at Pride Park, Derby by removing a break clause with expiry now in June 2023.

· Extension of two leases at the multi-let industrial estate in Chepstow with expiries now in May 2026.

· Letting a vacant retail unit in Portsmouth.

In addition, the Company has sold a purpose-built student residential building in Lenton, Nottingham for £1.2 million. The property was sold ahead of cost and 31 March 2016 valuation and the Company intends to use the proceeds from the disposal to fund acquisitions better aligned to its stated investment strategy.

Commenting on the disposal, Richard Shepherd-Cross, Managing Director of Custodian Capital Limited (the Company's external fund manager), said:

"Due to the size and nature of use, this asset was identified as being non-core within our ongoing strategy. Over the last two years we have secured rental growth and now a profit on exit. We believe the proceeds can be reinvested to produce an enhanced income return which is a stronger fit with the balance of the portfolio and better supports dividends and future dividend growth."

Property market

Commenting on the commercial property market, Richard Shepherd-Cross said:

"Property funds have been much in the news over the last two weeks as the EU referendum vote exacerbated a change in market sentiment for commercial property, triggering the decision by most of the largest property unit trusts to put a block on redemptions, leading to a fall in share price of most listed property investment companies ("PICs"). Most PICs saw share prices move to a discount to NAV of up to 28%, followed by more recent recovery to stand at an average of 6.1% discount to NAV by 15 July. By contrast the impact on Custodian REIT's share price was minimal, maintaining a small premium to NAV over the same period.

"Custodian REIT's recent relatively stable pricing reflects a number of factors, including recognition by investors that the comparatively high, consistent income return from a regionally diverse portfolio should be unaffected by recent events and a lack of exposure to Central London property, which may prove to be more volatile in current market conditions.

"It is important to note the change in market sentiment is not exclusively the result of the UK's vote to leave the EU. PIC shares had been re-pricing and property unit trusts had been experiencing redemptions since the start of the year, as the market started to accept that the phase of excess demand driven capital growth, particularly in central London offices and residential, was at an end.

"We believe Custodian REIT's performance is more closely linked to the underlying occupational property market than to capital markets. The regional occupational markets are in good health driven in part by a lack of supply, following many years of limited development, which continues to put pressure on rents to grow and is positive for occupancy rates.

"As the recent announcement of the letting to Metro Bank in Colchester shows, we remain focused on enhancing the cash flow from the portfolio through the careful asset management of the properties. We continue to work closely with tenants to extend leases and remove short-term risk from lease expiries.

"It is the careful asset management of the portfolio and the focus on rental growth that underpin the security of the dividend, which remains fully covered by rental income. While we can never rule out some future impact on NAV as a result of falling confidence in the property market, we believe the medium-term picture for sustainable dividends is secure and there remains realistic long-term potential for NAV growth."

Activity and pipeline

In the forthcoming quarter, the Company intends to continue its asset management activities and complete on the current acquisition pipeline, with the aim of deploying debt facilities to increase gearing towards the target level of 25%.

Commenting on pipeline, Richard Shepherd-Cross said:

"Custodian REIT is currently well funded, with cash reserves and undrawn debt facilities, and we have taken advantage of market conditions to agree terms to acquire three properties following the EU referendum result, let to strong tenants and which enhance the portfolio mix. The Company remains in a strong position to capitalise on further opportunities from either forced sellers or a lack of confidence from competing buyers to make acquisitions which will enhance dividend cover and future dividend growth.

"As smaller lot-size, regional markets did not witness the price inflation which was a feature of London and large lot-sizes through 2015/16, we are not expecting the same valuation adjustments that are being mooted in prime Central London markets. Of course, it is still too early to see where market pricing settles but the stable and relatively high income credentials of commercial property will not be overlooked in a volatile, low return environment. In regional markets this will help to maintain market pricing and in Central London the weak pound may lead to continued investor interest from overseas.

"While the 'gating' of open-ended property funds might seem reminiscent of the 2008 property market crash, circumstances are somewhat different. The open-ended funds are better prepared, with larger reserves of cash and portfolios of 'liquid' assets. Listed property companies and PICs have much stronger balance sheets, with sustainable levels of gearing. We would not be surprised to see some pricing adjustment, particularly at the 'sharp end' of the market, but we are not anticipating a wholesale collapse in investment demand. This is in no small part due to the widespread availability of equity and debt both chasing reliable income in a low return environment, supported by the dynamics of the occupational market, which should lead to continued rental growth and low vacancy rates."

Financing

Equity

The Company issued 29.0 million new ordinary shares of 1 pence each in the capital of the Company during the Period ("the Shares") raising £30.5 million (before costs and expenses). The Shares were issued at an average premium of 5.1% to the NAV per share at 30 June 2016, after adjusting this NAV to recognise the dividend of 1.6625 pence per share paid on 30 June 2016 to shareholders on the register at the close of business on 6 May 2016.

Debt

The Company operates a £35 million revolving credit facility with Lloyds Bank plc, which attracts interest of 2.45% above three month LIBOR with no commitment fee and expires on 13 November 2020. The Company also operates a £20 million term loan with Scottish Widows plc, which attracts interest fixed at 3.935% and is repayable on 14 August 2025.

On 6 June 2016 the Company agreed and drew down a new £45 million term loan facility with Scottish Widows plc which attracts interest fixed at 2.987% and is repayable on 5 June 2028. The Company used the loan to repay in full a £20 million term loan with Lloyds Bank plc, which attracted interest of 1.95% above three month LIBOR, incurring no early repayment charges.

Portfolio analysis

The portfolio is split between the main commercial property sectors, in line with the Company's objective to maintain a suitably balanced investment portfolio, but with a relatively low exposure to office and a relatively high exposure to industrial and to alternative sectors, often referred to as 'other' in property market analysis, as demonstrated in the sector weightings below:

4 Includes car showrooms, petrol filling stations, children's day nurseries, restaurants and hotels.

While deemed to be outside the core sectors of office, retail and industrial the 'other' sector offers diversification of income without adding to portfolio risk, containing assets considered mainstream but which typically have not been owned by institutional investors. The 'other' sector has proved to be an out-performer over the long-term and continues to be a target for acquisitions.

Office rents are growing strongly and supply is constrained by a lack of development and the extensive conversion of secondary offices to residential making returns very attractive. However, the Company's relatively low exposure to the office sector is a long-term strategic decision rather than a short-term comment on the state of the office market. We are conscious that obsolescence can be a real cost of office ownership, which can hit cash flow and be at odds with the Company's relatively high target dividend.

Similar to the office market, occupational demand is driving rental growth in the industrial sector and returns are positive. As industrial property is less exposed to obsolescence this sector remains a very good fit with the Company's strategy.

Retail is split between high street and out-of-town retail (retail warehousing). Strong comparison retail pitches in dominant regional towns continue to show very low vacancy rates and offer stable long-term cash flow, with the opportunity for rental growth. Retail warehousing is witnessing close to record low vacancy rates as a restricted planning policy and lack of development combine with retailers' requirements to offer large format stores, free parking and 'click and collect' to consumers.

The Company operates a geographically diversified portfolio across the UK, seeking to ensure that no one area represents the majority of the portfolio. The geographic analysis of the Company's portfolio at 30 June 2016 is as follows:

For details of all properties in the portfolio please see www.custodianreit.com/property/portfolio.php.

Dividends

An interim dividend of 1.6625 pence per share for the quarter ended 31 March 2016 was paid on 30 June 2016. The Board expects to propose an interim dividend relating to the Period of 1.5875 pence per share.

In the absence of unforeseen circumstances, the Board intends to pay further quarterly dividends to achieve a target dividend5 for the year ending 31 March 2017 of 6.35 pence per share (2016: 6.25 pence per share). The Company's aim is to continue to increase dividends in a sustainable way, at a rate which is fully covered by net rental income and which does not inhibit the flexibility of its investment strategy.

5 This is a target only and not a profit forecast. There can be no assurance that the target can or will be met and it should not be taken as an indication of the Company's expected or actual future results. Accordingly, shareholders or potential investors in the Company should not place any reliance on this target in deciding whether or not to invest in the Company or assume that the Company will make any distributions at all and should decide for themselves whether or not the target dividend yield is reasonable or achievable.

- Ends -

Further information:

Further information regarding the Company can be found at the Company's website www.custodianreit.com or please contact:

Notes to Editors

Custodian REIT plc is a UK real estate investment trust, which listed on the main market of the London Stock Exchange on 26 March 2014. Its portfolio comprises properties predominantly let to institutional grade tenants on long leases throughout the UK and is characterised by small lot sizes, with individual property values of less than £7.5 million at acquisition.

The Company offers investors the opportunity to access a diversified portfolio of UK commercial real estate through a closed-ended fund. By targeting smaller lot size properties, the Company intends to provide investors with an attractive level of income with the potential for capital growth.

Custodian Capital Limited is the discretionary investment manager of the Company.

For more information visit www.custodianreit.com and www.custodiancapital.com.

Important notice

This announcement does not constitute or form part of, and should not be construed as, any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any shares in Custodian REIT plc or securities in any other entity, in any jurisdiction, including the United States, nor shall it, or any part of it, or the fact of its distribution, form the basis of, or be relied on in connection with, any contract or investment decision whatsoever, in any jurisdiction. This announcement does not constitute a recommendation regarding any securities. Neither the content of the Company's website (or any other website) nor any website accessible by hyperlinks to the Company's website (or any other website) is incorporated in, or forms part of, this announcement.

This announcement has been prepared by, and is the sole responsibility of, Custodian REIT Plc. Terms used and not defined in this announcement bear the meaning given to them in the Company's November 2015 Prospectus.

Numis is acting only for Custodian REIT Plc in connection with the matters described in this announcement and is not acting for or advising any other person, or treating any other person as its client, in relation thereto and will not be responsible to anyone other than the Company for providing the regulatory protection afforded to clients of Numis or advice to any other person in relation to the matters contained herein.

The Company is not and will not be registered under the US Investment Company Act of 1940, as amended. The Ordinary Shares have not been, nor will they be, registered under the US Securities Act of 1933, as amended or with any securities regulatory authority of any state or other jurisdiction of the United States or under the applicable securities laws of any other Excluded Territory. Subject to certain exceptions, the Ordinary Shares may not be offered or sold in the United States or any Excluded Territory or to or for the account or benefit of any national, resident or citizen of any Excluded Territory, which includes any person located in the United States. Placings under the Placing Programme and the distribution of this announcement in other jurisdictions may be restricted by law and the persons into whose possession this announcement comes should inform themselves about, and observe any such restrictions.

This announcement includes "forward-looking statements". All statements other than statements of historical facts included in this announcement, including, without limitation, those regarding the Company's business strategy and plans are forward-looking statements.

Forward-looking statements are subject to risks and uncertainties and accordingly the Company's actual future financial results and operational performance may differ materially from the results and performance expressed in, or implied by, the statements. These factors include but are not limited to those that are described in the Company's November 2015 prospectus. Given these uncertainties, undue reliance should not be placed on such forward-looking statements.

These forward-looking statements speak only as at the date of this announcement. The Company expressly disclaims any obligation or undertaking to update or revise any forward-looking statements contained herein to reflect actual results or any change in the assumptions, conditions or circumstances on which any such statements are based unless required to do so by the Financial Services and Markets Act 2000, the Financial Services Act 2012, the Listing Rules, the Disclosure Rules and Transparency Rules or the Prospectus Rules of the Financial Conduct Authority or other applicable laws, regulations or rules.

Certain statements have been made with reference to forecast price changes, economic conditions and the current regulatory environment. Nothing in this announcement should be construed as a profit forecast. Past share price performance cannot be relied on as a guide to future performance.