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187. Bull, Bear & Beyond – Custodian Property Income REIT: executive interview
12 Plays13 days ago
In this interview, Richard Shepherd-Cross, fund manager of Custodian Property Income REIT (CREI), discusses the £36m corporate acquisition of a highly complementary, diversified family owned portfolio, its second such transaction in the past nine months. The acquisition provides a further demonstration of CREI’s ability to effectively marry its investment strategy and listed REIT structure to facilitate the corporate acquisition of family property companies using majority-share consideration. The transaction delivers immediate earnings enhancement, improved dividend cover and offers the potential for value creation through asset and portfolio management opportunities. It is also a further step in CREI’s strategy to increase scale through selective portfolio acquisitions.
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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.
About Edison:
Edison is a content-led IR business. We believe quality investment content should inform all investors, not just brokers. Our mission: engage and build bigger, better-informed investor audiences for our clients.
Edison covers 50+ investment trusts, read about them here: https://www.edisongroup.com/equities/investment-companies/
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Transcript
Introduction and Discussion Setup
00:00:06
Speaker
I'm Martin King, property analyst at Edison Investment Research, and I'm joined by Richard Shepard Cross, who's fund manager for Custodian Property Income Trust. Good morning, Richard. Good morning. We're here to talk about your latest corporate acquisition. What can you tell us?
Majority Share Acquisition of Grove Court Properties
00:00:22
Speaker
ah Yes, I'm very pleased to announce that we have just completed the acquisition of Grove Court Properties. This was a um majority share um acquisition. So it was funded. um The £35.9 million pound portfolio was funded with 24.1 million shares issued and nine million of cash um It's added um a very compelling ah portfolio to our existing 175 property portfolio, further adding to diversification.
00:01:01
Speaker
The portfolio has um a net initial yield, property yield of 6.8%. That's a creature to earnings. It comes across with 25% gearing, mirroring the gearing we have already. So we still sit at 26% loan to value across custodian property income REIT.
Growth and Tax Efficiency Benefits
00:01:22
Speaker
um and a really exciting way to grow the portfolio. Thank you. And this is the second corporate acquisition you've made in ah the last few months. Can you talk about the attractions of those, apart from immediate earnings accretion, the attraction of those, but also not only to custodian, but to the sellers?
00:01:43
Speaker
ah Yes, I mean, I think it's really important to um to acknowledge that, as with all transactions, it works for both the buyer and it works for
Navigating Market Challenges and Rental Growth
00:01:53
Speaker
the seller. It works for us because at a time when it is difficult to issue new shares while we are trading at a 11 percent discount to net asset value,
00:02:03
Speaker
um making growth um very challenging. We are able to grow by entering into all share transactions um and corporate transactions.
00:02:16
Speaker
So Merlin Properties we acquired ah last year and Growth Properties we've we've announced we completed on Friday last week.
00:02:28
Speaker
And we think it's a great time to buy real estate. We think that the recovery in values is well underway. um The rental growth potential, which is the real driver of of performance,
00:02:40
Speaker
um is is very um promising in this portfolio. So the more assets that we can buy when there's rental growth, then the more we can deliver earnings growth to our shareholders.
00:02:53
Speaker
So clearly, from our perspective, this is a great deal. So the question that you quite rightly raised is what makes it attractive to the
Tax Efficiency and Inheritance Benefits
00:03:02
Speaker
vendor? And why didn't they just sell for cash?
00:03:05
Speaker
I'll paint a picture. And I think this is a picture that um is replicated many dozens of times across the country and across the property market.
00:03:16
Speaker
Family property companies typically built up over one, maybe two generations. um have long-term holdings that are pregnant with very significant um capital gains.
00:03:30
Speaker
And if the um family were to sell those properties for cash, they would have to settle um corporation tax on that that chargeable gain.
00:03:40
Speaker
They then have to dividend the money out of the company or wind up the company. All of that is time like takes a lot of time, is very expensive and not very tax efficient. By selling to a real estate investment trust, which doesn't pay corporation tax,
00:04:00
Speaker
the chargeable gain in the family property company gets extinguished as soon as that company joins our REIT group. That means we can pay gross price for the assets of the company. We don't have to make an allowance for the chargeable gain that we would have to settle if we were a taxpaying entity ah from buying the shares in the corporate vehicle.
00:04:25
Speaker
So straight away, the vendor um is ahead because that charge will gain doesn't have to be settled. As a corporate transaction, there's no stamp duty land tax.
00:04:38
Speaker
So there is a significant stamp duty saving. And in many cases, the shareholders of the family property company can get holdover relief for transferring um from shares in the a family company into shares in custodian property income REIT. So while that personal CGT liability isn't extinguished, it is held over and doesn't have to be settled.
00:05:09
Speaker
So this means that a family can um exit um fully gross of tax into shares in custodian property income REIT which means that they can get the maximum possible dividend.
Portfolio Management and Long-term Investment
00:05:28
Speaker
These opportunities come about very often when there is a succession issue. One generation trying to pass assets down to the next. Now, the nature of a generational shift is that there are probably more people in the younger generation than they are in the older generation, and therefore trying to find a single member of the family to take on the management of the portfolio, even if they had the interest, and very often they don't.
00:05:58
Speaker
um That's very challenging. And you have a increasingly disparate group of family members who all want to go in a slightly different way.
00:06:09
Speaker
By completing an all share transaction with us, we are now managing the portfolio. The family then have an equitably divisible, and this is really important, an equitably divisible asset in shares and custodian property income reach that they can pass down through the generations.
00:06:29
Speaker
It's really difficult to equitably divide a property portfolio, particularly when you are dividing it amongst um a generation who may not want to manage those assets.
00:06:42
Speaker
And by converting it ah into shares in a larger trading property company or the listed property company, you also diversify the income base. So more stable um income returns.
00:06:58
Speaker
They are fully managed income returns because we're managing the portfolio. And you also provide liquidity because our shares are traded on the on the main market.
00:07:12
Speaker
So it is really a ah yeah ah genuinely symbiotic relationship. And we, of course, get the benefit of a new and substantial shareholder who have for many years been invested directly in commercial property. They're now invested indirectly through custodian property income REIT.
00:07:34
Speaker
And they've shown their true covers. They are long term investors in real estate and they hold it for income.
Future Acquisition Strategies
00:07:40
Speaker
Should we expect more deals like this? i think I think you should. i mean, we are we are very actively looking at a pipeline of opportunities.
00:07:49
Speaker
And I think as the message gets out into the market a little bit more, then we are likely to see um further opportunity.
00:08:00
Speaker
It doesn't work for everyone. Some people do want cash. And in the case of Grove Court Properties, we give them 25% cash as part of the consideration. And that worked for their particular needs at the time.
00:08:14
Speaker
ah But I think um I would definitely say watch this space. We're very active. And we've done two of these transactions, completed two of these transactions.
00:08:25
Speaker
And we think there's there's there's plenty more to go at. Great. Thanks very much, Richard. Thank you.