Picton Property Income |
2.6% third-quarter NAV total return |
NAV update |
Real estate |
3 February 2020 |
Share price performance
Business description
Next events
Analyst
Picton Property Income is a research client of Edison Investment Research Limited |
Picton produced a strong 2.6% NAV total return in Q320, with a good property portfolio performance driven by key asset management transactions and portfolio positioning (more than 80% in the well-performing industrial and office sectors). Dividend cover remains strong and increased during the quarter. Moderate gearing and significant potential to increase income by leasing refurbished space at completion are positive indicators for future performance.
Year end |
Net property income (£m) |
EPRA earnings* (£m) |
EPRA EPS* |
DPS |
EPRA NAV/ |
P/NAV |
Yield |
03/18 |
38.4 |
22.6 |
4.2 |
3.43 |
90 |
1.13 |
3.4 |
03/19 |
38.3 |
22.9 |
4.3 |
3.50 |
93 |
1.10 |
3.4 |
03/20e |
34.8 |
20.8 |
3.8 |
3.50 |
95 |
1.07 |
3.4 |
03/21e |
36.8 |
23.1 |
4.2 |
3.50 |
96 |
1.06 |
3.4 |
Note: *EPRA earnings excludes revaluation gains/losses and other exceptional items.
Returns driven by asset management and positioning
The Q320 total return of 2.6% comprised a 1.7% increase in EPRA NAV per share and DPS paid of 0.875p. Q320 DPS cover increased to 114% (H120: 107%), benefiting from achieved rental growth. Like for like portfolio valuation growth of 1.4% compares favourably with the 1.0% quarterly decline registered by the MSCI Monthly Index. The previously reported sale of an office building in Croydon contributed to a reduction in LTV to 22.4% and the £15.9m sale of a distribution warehouse in January 2020 will have reduced this further, leaving the company well placed to seize acquisition opportunities. We have increased forecast EPRA NAV by 1p in each of FY20 and FY21, but although Q320 recurring net income was stronger than implied by our forecast, we have left this unchanged, assuming reinvestment of the January sales proceeds with some lag.
Reversionary potential supports growth prospects
Portfolio performance continues to benefit from an overweight position in industrial and regional office property, where positive returns continue reflect a favourable occupational supply-demand balance, and a significant underweighting of retail and leisure (with no shopping centre exposure), where rents and capital values remain under pressure. There is evidence that market conditions have improved since the December general election as political uncertainty has diminished. The gap between estimated rental value at full occupancy (ERV) and the current level of passing rent continues to represent a significant opportunity to grow income and capital values, and completion of current refurbishment projects and subsequent leasing represents a significant share of this opportunity.
Valuation: Total return with sustainable income focus
Picton shares have risen since the UK general election but continue to offer a current yield of 3.5%. Although the company has a strong income focus, its dividend yield is lower than the peer average, reflecting a fully covered position that provides scope to reinvest in the portfolio in ways designed to support occupancy and income growth, with the specific goal of enhancing long-term total return.
Further details on the Q320 update
Exhibit 1 shows a summary of the Q320 NAV movement. The release can be found in full at www.picton.co.uk.
Exhibit 1: Summary of Q320 NAV movement
£m |
Movement |
Pence per share |
|
NAV at 30 September 2019 |
510.7 |
93.6 |
|
Movement in property values |
7.7 |
1.5% |
1.4 |
Net income after tax for the period |
5.5 |
1.1% |
1 |
Dividends paid |
(4.8) |
-0.9% |
(0.8) |
NAV at 31 December 2019 |
519.1 |
1.7% |
95.2 |
Source: Picton Property Income
Strong valuation performance
The 1.4% like for like weighted increase in portfolio values during the quarter was driven by gains in industrial and office assets (more than 80% of the portfolio). The industrial valuations were particularly strong and the 3.2% like for like increase was well ahead of the 0.7% quarterly capital value growth for the MSCI Monthly Index. The 1.4% like for like valuation change in Picton’s office portfolio was driven by regional office assets and was also ahead of the MSCI Index (0.3%), while the 3.0% like for like decline in Picton’s retail assets was below the 4.4% decline registered by the MSCI Index.
Industrial valuations supported by asset management
The strong capital performance of Picton’s industrial portfolio compared with the wider market reflected the three significant asset management transactions disclosed in early January 2020, all in the industrial, warehouse and logistics sector. The transactions extended leases with three of the company’s largest occupiers and secured £3.8m pa of income with an average combined headline rental 8% above ERV and 7% above the previous passing rent.
Nine completed new lettings across the portfolio as a whole during Q320 were on average 3% ahead of the H120 ERV, with a combined annual rent of £0.5m.
Significant reversionary potential remains
A continuing large gap between ERV and current passing rent represents a significant opportunity to lift income from the existing portfolio. At the end of H120 the ERV at full occupancy was £9.4m or 25% above the passing rent of £37.9m. £5.8m of this upside potential represented void reduction and 79% of this related to assets under refurbishment. With the Q320 occupancy rate unchanged versus H120 (88%), the completion of current refurbishment projects and subsequent leasing has the potential to significantly drive future income growth.
Financial flexibility for acquisition growth
Picton’s moderate level of gearing and the availability of flexible debt funding under its revolving credit facilities (RCF) provide the resources to take advantage of acquisition opportunities that may emerge. The occupational and investment markets appear to have a somewhat firmer tone since the UK general election in December, but it is anticipated that many open-ended property funds will remain under pressure to dispose of assets. During Q320 the company completed the previously reported sale of an office building in Croydon for £18.2m and repaid £11.8m of debt. It ended the quarter with £31.5m available under the RCF and held cash balances of £21.9m.
Since the end of Q320 Picton has disposed of 3220 Magna Park, a 160k sq ft distribution warehouse in Lutterworth, Leicestershire, let to DHL, for £15.9m. The sale price reflects a net initial yield of 5.8% and represents a 4% uplift to the September 2019 valuation following a successful lease restructure during the summer. The lease restructure secured a further three-year lease term until a tenant break option in December 2022, while at the same time settling a rent review and securing an 11% uplift to £1m pa, one of the highest rents in Magna Park. In the short term the proceeds will be recycled to repay revolving credit facilities and provide funding for planned asset management initiatives.
Financials and valuation update
The Q320 valuation result (£7.7m) was ahead of our forecast for the whole of the second half of FY20, set out in detail in our interim results note. As a result, we have increased our assumption for the year accordingly, assuming a further £1.0m uplift in Q4. This has a positive impact on forecast FY20 NAV (increased by 1p per share to 95p with a similar knock-on impact in FY21) and slightly lowers forecast LTV.
Q320 recurring (EPRA) net income of £5.5m and DPS cover (1.14x) was slightly ahead of our H220 forecast run rate (£10.7m EPRA earnings for H220 as a whole and 1.11x H220 DPS cover) but we have left our income forecasts unchanged for now. We expect Picton to seek opportunities to reinvest the £15.9m proceeds from the Magna Park disposal but until this occurs income will be slightly reduced.
Picton has a strong focus on income and pays fully covered quarterly dividends that currently annualise at 3.5p per share (a prospective yield of 3.5% at the current share price), while continuing to invest in the portfolio to support future income growth.
In Exhibit 2 we show Picton’s NAV total return performance (change in NAV plus dividends paid) over the five-year period from IPO to 31 March 2019. Without assuming reinvestment of dividends, the aggregate NAV total return over the period was c 94% or a compound annual average 14.2%. The increase in our forecast for FY20 capital growth, driven by the Q320 result, increases our expected NAV total return for FY20 to 6.6% from 5.4% previously. We continue to believe that our FY21 forecast has been struck cautiously, reflecting an expectation that the economic and market environment is unlikely to be as supportive as it has been over the past five years while assuming a relatively modest capture of the upside potential within the Picton portfolio. Over FY20 and FY21 our forecasts imply a compound annual average return of 5.6%, two-thirds derived from well-covered DPS payments. Even on this cautious basis of forecasting there remains a material uplift compared with risk-free returns (the 10-year UK gilt yield is little more than 0.5%).
Exhibit 2: Historical and forecast EPRA NAV total returns
Reported |
Cumulative FY15–19 |
Forecast |
Cumulative FY20–21e |
||||||
Year ending 31 March |
FY15 |
FY16 |
FY17 |
FY18 |
FY19 |
FY20 |
FY21 |
||
Opening EPRA NAV per share (p) |
56 |
69 |
77 |
82 |
90 |
56 |
93 |
95 |
93 |
Closing EPRA NAV per share (p) |
69 |
77 |
82 |
90 |
93 |
93 |
95 |
96 |
96 |
DPS paid (p) |
3.00 |
3.30 |
3.30 |
3.40 |
3.50 |
17 |
3.50 |
3.50 |
7.00 |
EPRA NAV total return |
26.9% |
17.6% |
10.2% |
14.7% |
6.4% |
93.8% |
6.6% |
4.7% |
11.4% |
Compound annual total return |
14.2% |
5.6% |
Source: Picton Property Income data, Edison Investment Research forecasts
In Exhibit 3 we show a summary performance and valuation comparison of Picton and what we consider to be its closest diversified income-oriented peers. Picton shares have risen more strongly than the peer group since the UK general election in December and performance is ahead of the peer group over three and 12 months. The valuation comparison is based on last-reported EPRA NAV per share and trailing 12-month DPS declared. On this basis the Picton yield is below the peer average and the P/NAV slightly above. We believe the outperformance of Picton shares and the share price rating reflect the company’s strong track record of property level performance, the future income and valuation growth potential embedded in its portfolio, its good level of dividend cover and relatively modest gearing.
Exhibit 3: Peer group comparison
Price |
Market cap. (£m) |
P/NAV * (x) |
Yield** (%) |
Share price performance |
||||
1 month |
3 months |
12 months |
From 12M high |
|||||
Ediston Property |
86 |
181 |
0.79 |
6.7 |
-4% |
-3% |
-15% |
-22% |
BMO Real Estate Investments |
86 |
207 |
0.83 |
5.8 |
2% |
0% |
-4% |
-10% |
BMO Commercial Property Trust |
112 |
895 |
0.84 |
5.4 |
-3% |
-5% |
-14% |
-14% |
Custodian |
114 |
469 |
1.09 |
5.8 |
0% |
-1% |
-1% |
-6% |
Regional REIT |
117 |
504 |
1.02 |
7.0 |
3% |
11% |
15% |
-1% |
Schroder REIT |
53 |
275 |
0.78 |
4.9 |
-4% |
-4% |
-9% |
-11% |
Standard Life Investment Property |
97 |
393 |
1.06 |
4.9 |
6% |
10% |
6% |
-1% |
Average |
0.91 |
5.8 |
0% |
1% |
-3% |
-9% |
||
Picton |
101 |
554 |
1.08 |
3.5 |
4% |
9% |
14% |
-6% |
UK property index |
1,909 |
3.6 |
-2% |
4% |
13% |
-3% |
||
UK stock market index |
4,102 |
4.5 |
-2% |
3% |
7% |
-4% |
Source: Company data, Refinitiv, Edison Investment Research. Note: *Last reported EPRA NAV per share. **Trailing 12-month DPS declared. Prices at 30 January 2020.
Exhibit 4: Financial summary
Year end 31 March |
£'000s |
2016 |
2017 |
2018 |
2019 |
2020e |
2021e |
|
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
|||
PROFIT & LOSS |
||||||||
Rents receivable, adjusted for lease incentives |
39,663 |
40,555 |
41,412 |
40,942 |
38,833 |
40,509 |
||
Other income |
1,107 |
7,356 |
1,443 |
1,073 |
1,658 |
1,000 |
||
Service charge income |
5,153 |
6,487 |
5,927 |
5,718 |
6,172 |
6,000 |
||
Revenue from properties |
|
|
45,923 |
54,398 |
48,782 |
47,733 |
46,663 |
47,509 |
Property operating costs |
(3,308) |
(3,501) |
(2,578) |
(2,342) |
(2,592) |
(2,500) |
||
Property void costs |
(1,540) |
(2,023) |
(1,830) |
(1,373) |
(3,076) |
(2,200) |
||
Recoverable service charge costs |
(5,153) |
(6,487) |
(5,927) |
(5,718) |
(6,172) |
(6,000) |
||
Property expenses |
(10,001) |
(12,011) |
(10,335) |
(9,433) |
(11,840) |
(10,700) |
||
Net property income |
|
|
35,922 |
42,387 |
38,447 |
38,300 |
34,823 |
36,809 |
Administrative expenses |
(4,411) |
(5,249) |
(5,566) |
(5,842) |
(5,800) |
(5,945) |
||
Operating Profit before revaluations |
|
|
31,511 |
37,138 |
32,881 |
32,458 |
29,023 |
30,864 |
Revaluation of investment properties |
44,171 |
15,087 |
38,920 |
10,909 |
13,041 |
1,832 |
||
Profit on disposals |
799 |
1,847 |
2,623 |
379 |
0 |
0 |
||
Operating Profit |
76,481 |
54,072 |
74,424 |
43,746 |
42,064 |
32,696 |
||
Net finance expense |
(11,417) |
(10,823) |
(9,747) |
(9,088) |
(8,246) |
(7,783) |
||
Debt repayment fee |
(3,245) |
|||||||
Profit Before Tax |
|
|
65,064 |
43,249 |
64,677 |
31,413 |
33,818 |
24,913 |
Taxation |
(216) |
(499) |
(509) |
(458) |
68 |
0 |
||
Profit After Tax (IFRS) |
64,848 |
42,750 |
64,168 |
30,955 |
33,886 |
24,913 |
||
Adjust for: |
||||||||
Investment property valuation movement |
(44,171) |
(15,087) |
(38,920) |
(10,909) |
(13,041) |
(1,832) |
||
Profit on disposal of investment properties |
(799) |
(1,847) |
(2,623) |
(379) |
0 |
0 |
||
Exceptional income /expenses |
0 |
(5,250) |
0 |
3,245 |
0 |
0 |
||
Profit After Tax (EPRA) |
19,878 |
20,566 |
22,625 |
22,912 |
20,845 |
23,082 |
||
Fully diluted average Number of Shares Outstanding (m) |
540.1 |
540.1 |
539.7 |
541.0 |
546.3 |
547.6 |
||
EPS (p) |
|
|
12.01 |
7.92 |
11.89 |
5.75 |
6.23 |
4.57 |
EPRA EPS (p) |
|
|
3.68 |
3.81 |
4.19 |
4.25 |
3.83 |
4.23 |
Dividends declared per share (p) |
|
|
3.300 |
3.325 |
3.425 |
3.500 |
3.500 |
3.500 |
Dividend cover (x) |
112% |
115% |
122% |
121% |
109% |
120% |
||
EPRA cost ratio including direct vacancy costs) |
22.8% |
26.1% |
23.7% |
22.9% |
29.1% |
25.9% |
||
BALANCE SHEET |
||||||||
Fixed Assets |
|
|
649,406 |
615,187 |
670,679 |
676,127 |
679,731 |
689,563 |
Investment properties |
646,018 |
615,170 |
670,674 |
676,102 |
679,708 |
689,540 |
||
Other non-current assets |
3,388 |
17 |
5 |
25 |
23 |
23 |
||
Current Assets |
|
|
37,408 |
49,424 |
50,633 |
39,477 |
29,196 |
26,459 |
Debtors |
14,649 |
15,541 |
19,123 |
14,309 |
14,091 |
15,077 |
||
Cash |
22,759 |
33,883 |
31,510 |
25,168 |
15,104 |
11,383 |
||
Current Liabilities |
|
|
(47,521) |
(20,635) |
(22,292) |
(23,342) |
(22,079) |
(23,557) |
Creditors/Deferred income |
(18,430) |
(20,067) |
(21,580) |
(22,509) |
(21,246) |
(22,724) |
||
Short term borrowings |
(29,091) |
(568) |
(712) |
(833) |
(833) |
(833) |
||
Long Term Liabilities |
|
|
(222,161) |
(202,051) |
(211,665) |
(192,847) |
(166,626) |
(166,996) |
Long term borrowings |
(220,444) |
(200,336) |
(209,952) |
(191,136) |
(164,911) |
(165,281) |
||
Other long term liabilities |
(1,717) |
(1,715) |
(1,713) |
(1,711) |
(1,715) |
(1,715) |
||
Net Assets |
|
|
417,132 |
441,925 |
487,355 |
499,415 |
520,222 |
525,469 |
Net Assets excluding goodwill and deferred tax |
|
|
417,132 |
441,925 |
487,355 |
499,415 |
520,222 |
525,469 |
NAV/share (p) |
77 |
82 |
90 |
93 |
95 |
96 |
||
Fully diluted EPRA NAV/share (p) |
77 |
82 |
90 |
93 |
95 |
96 |
||
CASH FLOW |
||||||||
Operating Cash Flow |
|
|
33,283 |
36,283 |
35,088 |
34,756 |
27,959 |
30,865 |
Net Interest |
(8,836) |
(9,211) |
(9,125) |
(8,630) |
(7,899) |
(7,413) |
||
Tax |
(426) |
(232) |
(328) |
(845) |
11 |
0 |
||
Net cash from investing activities |
(68,123) |
48,691 |
(17,811) |
10,251 |
9,429 |
(8,008) |
||
Ordinary dividends paid |
(17,822) |
(17,957) |
(18,487) |
(18,860) |
(19,076) |
(19,166) |
||
Debt drawn/(repaid) |
14,591 |
(46,450) |
9,183 |
(22,616) |
(26,595) |
0 |
||
Net proceeds from shares issued/repurchased |
0 |
0 |
(893) |
(398) |
6,107 |
0 |
||
Other cash flow from financing activities |
||||||||
Net Cash Flow |
(47,333) |
11,124 |
(2,373) |
(6,342) |
(10,064) |
(3,722) |
||
Opening cash |
|
|
70,092 |
22,759 |
33,883 |
31,510 |
25,168 |
15,104 |
Closing cash |
|
|
22,759 |
33,883 |
31,510 |
25,168 |
15,104 |
11,383 |
Debt as per balance sheet |
(249,535) |
(200,904) |
(210,664) |
(191,969) |
(165,744) |
(166,114) |
||
Un-amortised loan arrangement fees |
0 |
(3,740) |
(3,376) |
(2,700) |
(2,330) |
(1,960) |
||
Closing net (debt)/cash |
|
|
(226,776) |
(170,761) |
(182,530) |
(169,501) |
(152,970) |
(156,691) |
Net LTV |
34.6% |
27.3% |
26.7% |
24.7% |
22.2% |
22.4% |
Source: Picton Property Income data, Edison Investment Research forecasts
|
|