Custodian Property Income REIT acquires €26m property portfolio

Custodian Property Income REIT (CREI) has acquired a £22.1 mln (€26.2 mln) property portfolio from a family-owned company in a tax-efficient, all-stock transaction. 

Eurocentral - Custodian Property Income REIT

The diversified portfolio consists of 28 smaller regional UK properties worth £19.4 mln (€23.0 mln) and £2.7 mln (€3.2 mln) of newly built residential units expected to be sold soon. 
The acquired portfolio, mostly located in the East Midlands, consists of properties averaging £0.7 mln (€0.8 mln) in value, producing £1.7 mln (€2.0 mln) in annual rent at a yield of approximately 8.1% and a 99% occupancy rate. Consistent with the company's current holdings, industrial properties make up 46% of the portfolio's income. The remaining income comes from a balanced mix of well-situated offices and retail spaces, including both high street and retail park locations.
The ten largest properties in the portfolio generate approximately 75% of its total rent and value. The top 15 tenants contribute 50% of the contracted rent, with no single tenant representing more than 5% of the overall rental income, indicating good tenant diversification.
This acquisition, immediately boosting CREI's earnings, aligns with its strategy of investing in diversified, income-generating properties. CREI enhances its portfolio and lowers its debt ratios, while the sellers receive CREI shares, maintaining an ownership stake. CREI's management team has identified opportunities to increase the portfolio's value through active management and improvements.
CREI is purchasing Merlin Properties Limited by issuing approximately 22.9 million new shares upfront, based on a net asset value exchange. An additional 1.7 million shares will be issued within six months after the deal's final accounting. This total share issuance represents about 5.6% of CREI's existing shares.
Commenting on the transaction, Richard Shepherd-Cross, managing director of Custodian Capital, the company’s Investment Manager, said: “We have been clear that a key element of our strategy is to seek opportunities to scale the business through corporate and/or portfolio acquisitions. In an environment where current market conditions make further capital raisings through the stock market challenging, this strategic transaction via an all-share acquisition on an adjusted NAV-for-NAV basis allows us to circumnavigate that issue and continue to grow.  In addition to enhancing earnings per share and decreasing net gearing, the transaction provides us with a portfolio that is both a strong fit with our income-focused strategy and highly complementary to our existing property portfolio, augmenting our regional, industrial bias and adding further diversification by tenant.”
David MacLellan, chairman of Custodian Property Income REIT, commented: "I am confident the transaction will benefit both our new and existing shareholders, delivering increased earnings and supporting a fully covered dividend.  The property portfolios of each company are highly complementary and will further enhance tenant diversification, offering defensiveness of income to help mitigate against downside risk, as well as reducing our ongoing charges ratio."
Hubert Lynch, founder director of Merlin Properties Limited, added: “Operating the Merlin portfolio, which our family has compiled and managed over the last 40 years, has become increasingly demanding in today’s complex environment. We have undertaken the transaction in a tax-efficient manner to ensure our family’s continued exposure to property investment both currently and for future generations through a professionally managed fund with a strong track record.”
Merlin Properties is debt-free, and after the anticipated sale of its residential units (worth about £2.7 mln), the acquisition will reduce CREI's loan-to-value ratio from 27.1% to 25.8%. Upon closing the deal, Merlin's board will step down, but its property manager, Rob Field, will join Custodian Capital.
Merlin's portfolio complements CREI's existing strategy, focusing on smaller, diverse properties in similar sectors and locations. The deal is expected to improve earnings, dividend coverage, and tenant diversity, while also reducing operating costs and debt. CREI also anticipates creating additional value through active portfolio management.