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235. Bull, Bear & Beyond – Custodian Property Income REIT: executive interview
1 Plays2 seconds ago
In this interview, Richard Shepherd-Cross, the fund manager of Custodian Property Income REIT (CREI), discusses the company’s strong performance in FY26, his positive view on the commercial property market and the progress being made with CREI’s growth strategy. With rental growth having broadened across all sectors in the past year and yields having stabilised, Richard feels that commercial real estate is ‘only just coming off the bottom of the cycle and is a great buy’. While consolidation in the listed commercial real estate sector continues, he points to a similar trend among private companies, for which CREI’s diversified, smaller lot-size strategy is well suited. The acquisitions of three private company portfolios in the past year have been immediately earnings accretive and have helped to build scale, and Richard sees good potential for further transactions.
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About ‘Bull, Bear & Beyond’
Bull, Bear & Beyond': features candid conversations with senior executives and from our own team of experts from across industries, exploring strategy, innovation, and the opportunities shaping their markets and 60-second pieces are a compressed summary of content designed to convey our message in a single, easily shareable hit.
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Edison covers 50+ investment trusts, read about them here: https://www.edisongroup.com/equities/investment-companies/
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Transcript
Introduction to Richard Shepherd Cross
00:00:08
Speaker
I'm Martin King. I'm property analyst at Edison Investment Research, and I'm joined by Richard Shepherd Cross, who's fund manager for custodian property income REIT. Welcome back, Richard.
00:00:18
Speaker
Thanks very much for having me. You're welcome. um Look, Richard, Custodian has just published its latest set of annual results. But rather rather than go down in the weeds of of too many numbers, I'd like to step back a bit.
00:00:32
Speaker
It was the second strong year of performance in a row. If you take the the change in the NAV and the dividends you've been paying, it's a return of more than 20% over that two-year period.
00:00:43
Speaker
Could you maybe talk to to what's been happening consistently over that period?
Rental Growth Across Sectors
00:00:48
Speaker
I think there is a very simple answer to that, and it's rental growth. um We have seen ah rental growth in our portfolio for a number of years now.
00:01:00
Speaker
um This year, um for the first year in a few, we've seen rental growth in all sectors. Yes, also in offices and in high street retail. And that's a turnaround from perhaps last year when office rents were still declining and retail rents were reaching the bottom.
00:01:18
Speaker
This year, we've seen positive um rental growth progression in all sectors, still being led by industrial and logistics, 4.1% rental growth in that sector in our portfolio, um being chased hard by retail warehousing, advertising retail parks, where we've seen 2.6% rental growth.
00:01:40
Speaker
and And none of this should be a surprise. Real estate is an income investment. The values are based on um capitalizing an income stream. And when that income stream starts to rise, all things being equal, then values rise on the back of it.
00:01:55
Speaker
And if you do for a moment, get into the weeds and and consider that straight line relationship between underlying rental growth and their house at value performance.
NAV Growth and Rental Impact
00:02:09
Speaker
Rentroll grew by 3.4% in the year. NAV per share growth 3.7%. So you can see that very straight line relationship.
00:02:19
Speaker
And I think it's worth saying um that we have all lived through in the last 15 to 20 years periods when we have seen extraordinary growth in real estate values. And that growth has been driven by yield compression.
00:02:36
Speaker
And real estate yields are in is inextricably linked to the gilt yield. And I don't think we're going to see those long-term gilt yields falling. And if we don't see that, we won't see that yield compression.
00:02:49
Speaker
But that doesn't mean we won't see growth because we will see growth based on that underlying rent roll growing. So that's the that is the simplest answer. I know I've made a long answer out of a simple response, but just worth understanding the the drivers.
00:03:06
Speaker
Okay, great. Look, we'll come back to how that might be changing. The world is changing day
Custodian's Growth Strategy
00:03:12
Speaker
by day. um But first, yet the other thing that stood out in the in the last year is the progress you've made with your growth strategy. Could you maybe talk about that and and also that progress?
00:03:22
Speaker
Yeah, well, I think we've all seen over the last a few years a lot of consolidation in public markets, but the opportunity that consolidation um creates is not is not exclusively the preserve of public markets. So we've been doing the same in private markets. We've acquired three private property companies, sort of 64 million um added to the portfolio.
00:03:49
Speaker
um And of course, with every transaction, there are two sides to the equation. What's in it for us and what's in it for the private property company that is sold to us.
00:04:00
Speaker
From our perspective, We think this is a great time to buy real estate. we We feel like we're at the bottom of the cycle and the the comments I made about um high street rents and office rents having turned the corner and moved into a growth phase ah really supports that view.
00:04:21
Speaker
um If we look at our valuations, they've been growing since September 2024. So we've had 18 years of of sometimes quite marginal but steady positive growth.
00:04:34
Speaker
This is a great time to buy real estate. And we can secure portfolios um through corporate acquisition in a very efficient way. We don't have to pay stamp duty land tax because we're buying the share capital of the company. um We perhaps don't have to wring out every last penny in the price we pay for these assets because from the vendor's perspective,
00:05:01
Speaker
There are enormous tax advantages um and broader advantages that I'm happy to go into um that make ah the sale of their property company in an all share transaction a compelling exit.
00:05:17
Speaker
We think there are tens of dozens of opportunities out there that would would fit the bill. And we feel unusually well placed amongst our peer group to take advantage of those
Future of Consolidation and Growth
00:05:29
Speaker
opportunities. Why?
00:05:30
Speaker
Because our portfolio is built up of smaller, regional, diverse assets just the sort of assets that are typically held in private property companies.
00:05:43
Speaker
They would be less well suited to some of our larger um peers who perhaps have a more sort of institutional um lot size portfolio. So I'd say watch this space. I think you should expect to see um more consolidation of private property companies in the year ahead.
00:06:02
Speaker
I think you should see further rental growth. And I hope that leads both to valuation growth and continued recovery in our share price.
Market Recovery and Geopolitical Impact
00:06:12
Speaker
Richard, it's good to hear you say this is ah a great time to buy real estate, ah because as I said before, things have changed a lot over the last six months. If we picked up the newspaper at the start of the year and and read today's headlines, we had quite a shock. um So do you want to just expand on that bullish view a bit more?
00:06:32
Speaker
no Well, um I think the property market has been straining at the leash to recover for two years now. um Last year, we were held back by, firstly, Liberation Day and then the budget that weighed heavily on people's um ah optimistic outlook.
00:06:52
Speaker
ah But from November, ah so for following the budget from November last year until the end of February, um in common with most listed stocks, we saw our share price really move on quite meaningfully. um It grew 12% that period.
00:07:09
Speaker
In the month of March, the first month of the war in Iran, we we lost all of that. That full 12% recovery was reversed. Since the end of the first month, we've we've seen all of that 12% again.
00:07:24
Speaker
Now, is that because people are starting to learn to live with the chaos and look through all the geopolitical and, and let's face it, much closer to home political noise and identify the um positivity that is coming through you from ah rental growth that is driving performance, which is where we started this conversation?
00:07:51
Speaker
What's going to happen
Real Estate as Inflation Hedge
00:07:52
Speaker
next? because I don't know the answer to that. um Someone much wiser than me said recently, if you if you are waiting for the chaos to end before you invest, you'll have a long wait.
00:08:03
Speaker
And actually, when you think back through the trials and tribulations of um politics, geopolitics and the economy over the last 10 years, there has rarely been um a nice steady time to invest.
00:08:21
Speaker
But real estate is a great asset to own in inflationary times. Real assets um that have the ability to grow um underlying rents protect the value of that pound invested over time. And I think we are have been living through and will continue to live through inflationary times as a result of the challenges in ah the wider world and our own economy.
00:08:49
Speaker
And in that inflationary time, I think that many investors will look um to to real estate as that good hedge against inflation. Okay. and you started, Richard, you said that this is all about rent growth, income
Dividend Strategy and Financial Balancing
00:09:03
Speaker
and dividends. ah What should we be expecting from custodians?
00:09:07
Speaker
If you ah look back at um our past performance, which I know is no guaranteed future of performance, but I think what it demonstrates is the attitude of us as a manager and our board, where there has been capacity to increase dividends,
00:09:25
Speaker
on a sustainable basis, we have always done that. And if we look through the last four years, we've had um earnings per share growth for the last four years consecutively, and our dividends have gone from 5.5 pence to 5.8 pence to 6 pence, and we've committed to a minimum of 6 pence dividend for the year ahead.
00:09:49
Speaker
um Of course, as we look forward, um despite all the um positivity around rents growing, we also have to acknowledge that there is a very realistic chance that the cost of debt is going to increase over time.
00:10:03
Speaker
Our current cost of weighted average cost of debt is 4.1%. Variable rate debt today around about 5.6%. And we have to balance the competing pressures of increasing cost of debt against um growing earnings ah before we can say with conviction that we can grow dividends on a sustainable basis.
00:10:27
Speaker
But as I said before, where we've had capacity to do that in the past, the board have taken that decision. So rather than stick your neck out now, let's you know maintain an attractive position sustainable dividend, and if there's more to go for, great.
00:10:42
Speaker
Well said. Thank you very much for joining us. Thank you.