2.6% third-quarter NAV total return

Picton Property Income 3 February 2020 Update
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Picton Property Income

2.6% third-quarter NAV total return

NAV update

Real estate

3 February 2020

Price

102.0p

Market cap

£559m

Net debt (£m) at 31 December 2019

153.4

Net LTV at 31 December 2019

22.4%

Shares in issue

547.6m

Free float

99%

Code

PCTN

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

5.2

10.0

14.6

Rel (local)

8.8

8.3

8.1

52-week high/low

102.0p

85.1p

Business description

Picton Property Income is an internally managed UK REIT that invests in a diversified portfolio of commercial property across the UK. It is total return driven with an income focus and aims to generate attractive returns through proactive management of the portfolio.

Next events

Q320 DPS paid

28 February 2020

FY20 results

Expected May 2020

Analyst

Martyn King

+44 (0)20 3077 5745

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*
(p)

DPS
(p)

EPRA NAV/
share (p)

P/NAV
(x)

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
(p)

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


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This report has been commissioned by Picton Property Income and prepared and issued by Edison, in consideration of a fee payable by Picton Property Income. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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