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Custodian Reit battles ‘not nice’ Philip Green over Arcadia CVA

12 June 2019

Landlords vote today on whether to accept rent cuts from Green's Arcadia Group or force it into administration. Custodian's Richard Shepherd-Cross is taking a hard line, believing company voluntary arrangements (CVAs) are 'massively misused'.

Custodian (CREI) real estate investment trust (Reit) voted against billionaire tycoon Philip Green’s plan to enter into a company voluntary arrangement (CVA) as his Arcadia retail group owes it £140,000.

It is one of many landlords that have opposed Green’s plan for a CVA for his struggling Arcadia group, which owns Topshop, Miss Selfridge, and Wallis among others. The rebellion by landlords has seen Green ask landlords to agree to rent cuts of between 25% and 50% rather than the 30% to 70% he originally asked for.

The deal would also mean the closure of 48 stores and the loss of around 1,000 jobs. Landlords will be asked to vote again today and if the deal is not passed, Arcadia is likely to enter into administration.

Richard Shepherd-Cross, fund manager of Custodian Reit, criticised Green's approach. ‘CVAs used to be the last roll of the dice, a compromise with creditors to save the business. There was shame in it,’ he said. ‘Now it is a badge of honour, people think it’s clever financial planning.’

Describing Green as ‘not a very nice person’, Shepherd-Cross said CVAs were only detrimental to landlords as creditors and bank loan interest were paid in full during the process.

He said if a company had agreed to pay rent of £100,000 on a store for the next five years, the landlord would not be able to put in a claim for £500,000.

‘They take into account the net present value, which would [for example] reduce the future value to £350,000 and then they reduce that by 25% because they can as it’s a future claim and not an outstanding debt,’ he said.

‘All trade creditors will vote through this deal…and the landlords’ combined interest will be less than [creditors] so they will be outvoted.’

Custodian is battling to retrieve thousands of pounds from Arcadia, to cover the cost of putting right a property that the group had previously been tenants in. 

The trust put in a ‘dilapidation claim’ after the end of an Arcadia lease to restore a property after the group failed to do so.

Shepherd-Cross said Green’s group had said it would pay for it once the work had been agreed and completed, but Arcadia has so far refused to pay the £140,000 bill.

‘The culture of the organisation is set at the top and it permeates down,’ said Shepherd-Cross. ‘We had two properties rented to Arcadia.’

Custodian voted against Arcadia’s CVA as he said Green, who has faced calls to strip him of his knighthood, ‘is threatening administration either way’.

‘We either have a CVA with Green [in charge of Arcadia] or administration where administrators take over. We’d rather have the administrators than him,’ he said.

Arcadia had not replied to a request for comment at the time of going to press. 

Shepherd-Cross said CVAs were ‘massively misused’ and it meant that many pensioners were losing out as pension funds typically invest in real estate investment trusts as a way of generating steady income.

There has been a huge up-tick in the number of CVAs being issued and in the year to 31 March a total of 2,500 retail units were affected by them leading to falling rents.

Shepherd-Cross said tenants should approach landlords if they were struggling with rents rather than push for a CVA that forces rent cuts.

‘In the world we live in you hear all the time that landlords are bad and tenants are good but landlords do not set the rental prices, tenants do – they compete over each other to get the best pitches.’

Retail makes up 13% of the Custodian portfolio and Shepherd-Cross said he had no plans to sell any of the assets in this sector.

‘I would not want to get rid [of retail] because it’s not the right market,’ he said. ‘We have an income focus and if we start to sell out then we are giving away a lot of income that cannot be replaced.’

He added that five units have been hit by CVAs but the retailers are still in place and ‘wanting to trade just at lower rents’.

While it is still too early to buy back into retail property, the story around it ‘is not as bleak as people say’, said Shepherd-Cross.

‘You would assume that people are not going to the shops ever again,’ he said. ‘But retail is getting serious about combining its physical stores with their online offerings.’

While problem retail has been grabbing the property investment headlines, Shepherd-Cross said there is another area that is a potential issue: speculative development in ‘big box’ logistics of warehouse of over 100,000 square feet.

He said developers jumped into big box developments around two-and-a-half years ago and all their plots will come to fruition at the same time.   

‘When you are building speculatively, you increase supply…and that will put a limit on rental growth.

‘The prices people are paying for it now are so high there has to be more downside risk than upside potential.’

Full-year results to the end of March highlight a tricky 12 months with total returns on net assets slipping to 5.9% from 9.6% in the previous year. The capital value of the property portfolio slipped 0.2% with 6.1% coming from income. Dividends rose 1.5% to 6.55p covered 110% by EPRA earnings per share of 7.3p, up from 6.9p. The company is targeting a further 1.5% rise in pay-outs to 6.65p this year.

At 117.8p yesterday the shares stood on a near 12% premium over estimated net asset value per share of 105.5p, according to Morningstar, and offered a yield of 5.5%.

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