Performance

The Company’s NAV decreased by 5.9% during the year but at an increasingly slower rate, quarter-on-quarter, as the impact of higher interest rates and investor sentiment became fully reflected in valuations.  The quarter ended 31 March 2024 recorded a marginal increase in NAV due to profitable disposals on the back of flat valuations, suggesting an improving outlook, as rental growth and falling vacancy rates start to have a positive impact.  The first move down in interest rates should be the real catalyst for a positive shift in sentiment towards real estate investment, so later in 2024 could be a turning point in the market.

By applying its institutional expertise to the sector, through high quality asset management, covenant management and portfolio construction, the Company is able to provide an institutional offering to shareholders, generating superior income and, notwithstanding recent volatility in pricing, Custodian Property Income REIT can look back over a 10 year average annual NAV total return of 5.5% driven by strong recurring earnings with fully covered dividends.

In a departure from other cycles, the valuation decreases arising from the recent rerating have been at odds with occupational market sentiment, which has remained robust.  Our management of the portfolio and the types of assets we own are focused on areas where occupational demand is strongest, allowing us to lease vacant space across all sectors and deliver rental growth.  Both rental growth and falling vacancy have been a feature of the year’s performance, discussed in more detail in the Investment Manager’s Statement, and reflected in EPRA earnings per share increasing to 5.8p for the year compared to 5.6p in the previous year. 

Despite stability in valuations and earnings, and the prospect of rental growth, sentiment towards listed UK commercial real estate has caused weakness and volatility in the share price.  The relative weakness in the share price has enhanced the Company’s dividend yield, which we believe should be highlighted as a key metric for analysts and shareholders in assessing the ‘worth’ of Custodian Property Income REIT.  The prevailing share price implied a dividend yield of 8.3%, compared to 6.3% and 5.8% at 31 March 2023 and 2022 respectively.

The Board continues to believe in the merits of the Company’s income-focused investment strategy with an emphasis on regional, below-institutional sized assets that are well-positioned to deliver rental growth.  These types of assets provide a clear yield advantage over larger properties with similar tenant profiles and allow us to generate higher income returns and capital growth for shareholders.

Dividends

The Company’s commitment to a property strategy that supports a relatively high dividend, fully covered by EPRA earnings, remains a defining characteristic.  In May 2024 the Board announced a 9% increase in the prospective dividend per share from 5.5p to 6.0p and a special dividend for the year of 0.3p per share to take the dividend for the year to 5.8p, which is testament to that commitment.

These dividend increases, which are expected to be fully covered by net rental income, reflect the improving earnings characteristics of the Company’s portfolio with recent asset management initiatives and the profitable disposal of vacant properties also increasing occupancy and crystallising rental growth.  Our Investment Manager continues to control costs tightly, while the Company’s substantially fixed-rate debt profile is keeping borrowing costs below the current market rate.  Based on the current forward interest rate curve the Board expects that the ongoing cost of the Company’s revolving credit facility will fall, improving earnings further.

The Board’s objective remains to continue to grow the dividend at a rate which is fully covered by net rental income and does not inhibit the flexibility of the Company’s investment strategy.