Custodian Reit (LON:CREI) is an income-orientated REIT focused on UK commercial property outside London. Its portfolio of 133 properties is diversified by both geography and sector, is valued at c £420m, has 98% occupancy and an LTV of just 18%.
Management’s focus is on long-term secure income, to deliver the earnings to cover a sustainable growth in dividends. Growth in NAVPS also contributes to CREI’s total return, despite the high payout ratio and regular share issues to part-fund the acquisitions. We believe the 7% premium to FY17e NAV is justified by the conservative gearing and one of the highest dividend yields in the sector.
An income-focused portfolio
CREI has built a balanced portfolio of low-volatility regional UK commercial real estate, diversified by sector, location, tenant and lease term. It is focused on lot sizes of £2-10m, where CREI believes it has a competitive advantage. It has low exposure to office, a relatively high exposure to industrial and alternative sectors and its portfolio is institutional quality in all but lot size. The net initial yield on the portfolio at H117 was 6.95%. Recent acquisitions have averaged above 7%, which should make them earnings enhancing and able to meet the 6.35p dividend target.
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