The third in our series of interviews with our fund managers features Richard Shepherd-Cross of Custodian Property REIT (CREI). It’s short but sweet.
This is a commercial property fund which most of our clients hold. It was bought specifically for income with long term growth potential. The share price has suffered recently, and I wanted some feedback from the manager, Richard Shepherd-Cross. Here is a record of our conversation (March 31st 2023):
ANH: The share price down again. What is the problem?
R S-C: The whole market took a hit early in the month following the trouble at SVB and Credit Suisse. This created a fear of contagion and a fear that banks would retreat from lending. While this had an impact on CREI the impact was much less than many others in the market and I would expect to see this reverse, saving any further banking distress.
ANH: What effect is the cost of borrowing on your fund, given that the fund is 20% geared?
R S-C: The cost of borrowing had an impact on property values through Q4 22 and Q1 23, but the outlook is now more optimistic, and we do not expect to see significant further falls in values as a result of interest rates. CREI has 3 out of 4 tranches of debt fixed in the medium term, so we expect limited impact on net revenue because of rising rates.
ANH :Are you worried about leases not being renewed? And what about occupancy?
R S-C: The occupational market is strong at present, and we are expecting to see occupancy improve over the next few months as asset management initiatives come to fruition.
ANH: Obviously, the interest rate rises will cut into future dividends . We are hoping that you can keep up a 6 % income yield – is that sustainable?
R S-C: We have dividends set at a sustainable level and would not expect to see a cut to the dividend in the near future. We have rental growth in the portfolio and mostly fixed rate debt, so the income return should be set fair.
ANH: Thanks Richard – that’s all most helpful. I always try to get across to clients that although the fund is currently showing a capital loss, you haven’t actually sustained a loss unless you crystallise that loss – I have no intention of advising clients to do that. We bought it for income and a 6% yield, even with banks now paying interest on deposits, the rate they are paying is broadly still only a third of what your fund is likely to yield. And longer term you should be protected from inflation – this is not the situation with cash.
R S-C: You are bang on, Andrew!