Philip Green is "not a very nice person", Richard Shepherd-Cross, manager of the real estate investment trust Custodian Reit (LSE: CREI) told Citywire earlier this month. Custodian was one of the landlords that voted against his retail group Arcadia's ultimately successful company voluntary arrangement (CVA) proposal a few weeks ago. These arrangements give indebted companies time to restructure debts, and often involve forced rent reductions, which is bad news for their landlords.
More and more retailers have had to resort to CVAs in recent years, prompting accusations that they're using the mechanism merely to duck out of rental responsibilities. Indeed, "CVAs used to be the last roll of the dice, a compromise with creditors to save the business," says Shepherd-Cross. "There was shame in it. Now... people think it's clever financial planning."
Custodian invests in commercial properties across the UK. Its net asset value per share total return how much of the value of assets has some from income for the year to the end of March 2019 was 5.9%, down from 9.6% in 2018. This fall can partly be explained by the initial costs (primarily stamp duty) of buying 11 new properties. However, the fund saw £5.3m knocked off the value of its portfolio as a result of CVAs.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Since the end of the accounting year another CVA has been proposed by Cotswold Outdoor; this comes on top of Arcadia's. However, Custodian says it added £6.4m to the value of the portfolio over the year through rent reviews, new lettings and lease extensions.
Shepherd-Cross acknowledges the "continued weakness" in what he calls "secondary high-street retail locations", with rental levels "still under pressure" and "a very real threat of vacancy". The fund will continue to rebalance the portfolio to focus on stronger high-street retail locations while working on an "orderly disposal" of assets it no longer sees as being good prospects.
Beyond the high street
Another benefit to this strategy is that it means the fund has low exposure to any one individual tenant. Where the fund lets a single property to a single tenant, that tenancy only makes up a small part of its portfolio.
The fund has "performed strongly" in recent years, delivering a total shareholder return of 10% a year over the last three years, notes Capital. It has also experienced lower volatility than the wider Reit sector or the stockmarket.
Custodian's shares "combine an attractive yield, a good level of dividend cover and conservative gearing", adds research group Edison. Investors' demand for the shares, which trade at a premium to net asset value unlike its peers provides funding for acquisitions, which combined with rental growth "is a positive indicator for future returns". The fund yields 5.5%, and is worth a look for those interested in buying a diversified commercial property Reit.
