Real estate investment trust Custodian Property Income (LON:CREI) revealed it had acquired a second portfolio of privately-owned property assets. The part-share, part-cash deal brings in a highly complementary group of assets with ‘value creation potential’.
Second private portfolio acquisition
Custodian, which invests in a diversified portfolio of smaller, regional properties with strong incomes, announced it had acquired an £11 million portfolio. The assets were previously owned by eight separate syndicated property vehicles managed by Lincoln Property Services.
The company is paying for the acquisition through the isue of 10.6 million new shares and £0.4 million of cash. By taking payment in shares, the sellers maintain an ongoing interest in the assets without triggering tax on the disposal.
Primarily located in the East Midlands, the portfolio has an average lot size of £1.4 million and generates an annual passing rent of £0.8 million. That equates to a net initial yield of 6.7%, although with rent reviews the reversionary yield rises to 7.2%.
The list of occupiers includes National Co-op, Home Bargains and Costa Coffee. Together these three tenants account for around £0.63 million of the current annual rent or 80% of the total.
Positive momentum
Custodian CEO Richard Shepherd-Cross said the acquisition demonstrated the ‘positive momentum’ of the fs strategy. By focusing on smaller-lot assets, the trust is able to offer a genuine structural solution to investors and owners looking for liquidity.
‘This innovative approach is particularly important as we seek to grow against a challenging capital markets backdrop’, said Shepherd-Cross. ‘We believe many UK property syndicates face the same structural challenges: liquidity, succession and the growing burden of compliance, and the listed REIT structure offers the most effective solution to retain their investment exposure to UK property.’
As we said when Custodian revealed its share-based first portfolio acquisition, this is an innovative solution to the challenges within the sector. Owners want to raise funds or sell for succession reasons, but don’t necessarily want to give up their entire interest.
By taking shares, they pass management of the assets to professionals and share in the upside without triggering a tax liability. Meanwhile, Custodian gets a high-quality, complementary portfolio which can grow EPS and improve dividend cover as the portfolio reversion is captured, while keeping net gearing within its target range.
Why the shares still trade at a 19% discount to NAV (net asset value) remains a mystery to us. Buyers and sellers have no problem paying NAV for the right assets, and Custodian is continually improving the mix. The ProLogis bid for SEGRO (LON:SGRO) means no property company is unbiddable.
