Accretive industrial acquisition

Picton Property Income 1 October 2021 Update
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Picton Property Income

Accretive industrial acquisition

Property acquisition

Real estate

1 October 2021

Price

95.0p

Market cap

£518m

Net debt (£m) at 30 June 2021

144.7

Net LTV at 30 June 2021

20.6%

Shares in issue

545.6m

Free float

100%

Code

PCTN

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(4.0)

9.2

51.8

Rel (local)

(2.8)

8.0

22.7

52-week high/low

99.00p

59.50p

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

H122 results

November 2021

Analyst

Martyn King

+44 (0)20 3077 5745

Picton Property Income is a research client of Edison Investment Research Limited

Picton Property Income has acquired a multi-let industrial estate for £13.1m, increasing its strong weighting to this well-performing sector. Funded using its previously undrawn low-cost £50m revolving credit facility, the acquisition will be clearly accretive. The existing portfolio contains strong reversionary potential to drive income growth and Picton has continuing financial flexibility for further accretive acquisitions.

Year end

Net property income (£m)

EPRA
earnings* (£m)

EPRA
EPS* (p)

DPS**
(p)

EPRA NTA***/
share (p)

P/NTA
(x)

Yield
(%)

03/20

33.6

19.9

3.7

3.25

93

1.02

3.4

03/21

33.5

20.1

3.7

2.93

97

0.98

3.1

03/22e

33.9

20.4

3.7

3.50

103

0.93

3.7

03/23e

35.2

21.4

3.9

3.58

107

0.89

3.8

Note: *EPRA earnings excludes revaluation gains/losses and other exceptional items. **Declared basis. ***EPRA net tangible assets.

Positive spread between yield and funding costs

The acquired asset (the Madleaze Trading Estate) is located in central Gloucester, adjacent to the Gloucester Quays Retail Park and the Gloucester and Sharpness canal. It comprises 18 industrial units let to eight occupiers with two units vacant and under refurbishment for re-letting. Rents of £2.74 per sq ft are affordable and the capital value a low £44 per sq ft, well below the estimated reinstatement cost. Rental income of £0.75m pa is reflected in a net initial yield of 6.1%, expected to increase to £0.86m once the estate is fully let, and further still as rents are reset to market levels over the medium term. With funding provided from a revolving credit facility at 1.5% pa plus Libor (currently less than 1.6% in total), the acquisition is clearly accretive to earnings. LTV remains low (22% on a pro forma basis) with remaining debt headroom for further accretive acquisitions. We will review our estimates with the interim results, which we expect in early November.

Strong performance has continued in FY22

Picton made a strong start to FY22, reporting a 3.2% increase in Q122 EPRA NTA per share to 99.9p, while continuing strong rent collection supported an increase in quarterly DPS to 0.85p (Q421: 0.80p), 121% covered by EPRA earnings. EPRA NTA growth was supported by a 2.9% like-for-like valuation uplift, which continued to be led by industrial assets (54% of the portfolio) but with signs of broadening, particularly to retail warehouse assets that delivered a strong gain. The long-term performance record is also strong and, on an ungeared basis to 31 March 2021 (end-FY21), Picton’s portfolio had outperformed the MSCI UK Quarterly Property Index over one, three, five and 10 years and since inception, with a top quartile performance in each of the past six years.

Valuation: Good yield with upside to covered DPS

The annualised rate of quarterly DPS (3.4p) represents a yield of 3.7% (and slightly higher on our forecast DPS). This compares favourably with risk-free alternatives, and we expect further DPS growth in FY22 and FY23. The discount to end-Q122 EPRA NTA is c 5%, above the five-year average of 3%.

Exhibit 1: Financial summary

Year end 31 March (£m)

2017

2018

2019

2020

2021

2022e

2023e

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Rents receivable, adjusted for lease incentives

40.6

41.4

40.9

37.8

36.6

38.1

39.4

Other income

7.4

1.4

1.1

1.2

1.5

0.4

0.4

Service charge income

6.5

5.9

5.7

6.7

5.3

5.7

5.9

Revenue from properties

54.4

48.8

47.7

45.7

43.3

44.2

45.7

Property operating costs

(3.5)

(2.6)

(2.3)

(2.3)

(2.4)

(2.4)

(2.5)

Property void costs

(2.0)

(1.8)

(1.4)

(3.0)

(2.2)

(2.2)

(2.2)

Recoverable service charge costs

(6.5)

(5.9)

(5.7)

(6.7)

(5.3)

(5.7)

(5.9)

Property expenses

(12.0)

(10.3)

(9.4)

(12.0)

(9.9)

(10.3)

(10.6)

Net property income

42.4

38.4

38.3

33.6

33.5

33.9

35.2

Administrative expenses

(5.2)

(5.6)

(5.8)

(5.6)

(5.4)

(5.7)

(6.0)

Operating Profit before revaluations

37.1

32.9

32.5

28.1

28.1

28.2

29.2

Revaluation of investment properties

15.1

38.9

10.9

(0.9)

12.9

29.5

19.6

Profit on disposals

1.8

2.6

0.4

3.5

0.9

0.0

0.0

Operating Profit

54.1

74.4

43.7

30.7

41.8

57.7

48.9

Net finance expense

(10.8)

(9.7)

(9.1)

(8.3)

(8.0)

(7.8)

(7.8)

Debt repayment fee

0.0

0.0

(3.2)

Profit Before Tax

43.2

64.7

31.4

22.4

33.8

49.9

41.1

Taxation

(0.5)

(0.5)

(0.5)

0.1

0.0

0.0

0.0

Profit After Tax (IFRS)

42.8

64.2

31.0

22.5

33.8

49.9

41.1

Adjust for:

Investment property valuation movement

(15.1)

(38.9)

(10.9)

0.9

(12.9)

(29.5)

(19.6)

Profit on disposal of investment properties

(1.8)

(2.6)

(0.4)

(3.5)

(0.9)

0.0

0.0

Exceptional income /expenses

(5.3)

0.0

3.2

0.0

0.0

0.0

0.0

Profit After Tax (EPRA)

20.6

22.6

22.9

19.9

20.1

20.4

21.4

Fully diluted average Number of Shares Outstanding (m)

540.1

539.7

541.0

546.2

546.8

546.4

546.4

EPS (p)

7.92

11.89

5.75

4.14

6.20

9.15

7.52

EPRA EPS (p)

3.81

4.19

4.25

3.66

3.68

3.74

3.93

Dividend declared per share (p)

3.33

3.43

3.50

3.25

2.93

3.50

3.58

Dividends paid per share (p)

3.300

3.400

3.500

3.500

2.750

3.425

3.560

Dividend cover (x) EPRA EPS/DPS declared

115%

122%

121%

113%

126%

107%

110%

Dividend cover (x) - paid dividends

115%

122%

121%

105%

134%

109%

110%

EPRA cost ratio including direct vacancy costs)

26.1%

23.7%

22.9%

28.3%

26.9%

26.5%

26.5%

BALANCE SHEET

Fixed Assets

615.2

670.7

676.1

654.5

669.5

704.6

730.2

Investment properties

615.2

670.7

676.1

654.5

665.4

700.5

726.1

Other non-current assets

0.0

0.0

0.0

0.0

4.1

4.1

4.1

Current Assets

49.4

50.6

39.5

41.2

42.9

40.2

37.3

Debtors

15.5

19.1

14.3

17.6

19.6

19.0

18.0

Cash

33.9

31.5

25.2

23.6

23.4

21.2

19.3

Current Liabilities

(20.6)

(22.3)

(23.3)

(20.4)

(19.9)

(19.9)

(19.9)

Creditors/Deferred income

(20.1)

(21.6)

(22.5)

(19.5)

(18.9)

(18.9)

(18.9)

Short term borrowings

(0.6)

(0.7)

(0.8)

(0.9)

(0.9)

(0.9)

(0.9)

Long Term Liabilities

(202.1)

(211.7)

(192.8)

(166.0)

(164.4)

(164.8)

(165.2)

Long term borrowings

(200.3)

(210.0)

(191.1)

(164.2)

(162.7)

(163.1)

(163.5)

Other long-term liabilities

(1.7)

(1.7)

(1.7)

(1.7)

(1.7)

(1.7)

(1.7)

Net Assets

441.9

487.4

499.4

509.3

528.2

560.2

582.5

NAV/share (p)

82

90

93

93

97

103

107

Fully diluted EPRA NTA/share (p)

82

90

93

93

97

103

107

CASH FLOW

Operating Cash Flow

36.3

35.1

34.8

21.4

26.0

29.5

30.9

Net Interest

(9.2)

(9.1)

(8.6)

(7.9)

(7.5)

(7.4)

(7.4)

Tax

(0.2)

(0.3)

(0.8)

0.1

0.1

0.0

0.0

Net cash from investing activities

48.7

(17.8)

10.3

25.0

(1.3)

(5.5)

(6.0)

Ordinary dividends paid

(18.0)

(18.5)

(18.9)

(19.0)

(15.0)

(18.7)

(19.4)

Debt drawn/(repaid)

(46.5)

9.2

(22.6)

(27.2)

(1.8)

0.0

0.0

Net proceeds from shares issued/repurchased

0.0

(0.9)

(0.4)

6.1

(0.6)

0.0

0.0

Other cash flow from financing activities

Net Cash Flow

11.1

(2.4)

(6.3)

(1.6)

(0.2)

(2.1)

(1.9)

Opening cash

22.8

33.9

31.5

25.2

23.6

23.4

21.2

Closing cash

33.9

31.5

25.2

23.6

23.4

21.2

19.3

Debt as per balance sheet

(200.9)

(210.7)

(192.0)

(165.1)

(163.7)

(164.0)

(164.4)

Un-amortised loan arrangement fees

(3.7)

(3.4)

(2.7)

(2.3)

(2.6)

(2.2)

(1.8)

Closing net (debt)/cash

(170.8)

(182.5)

(169.5)

(143.9)

(142.8)

(145.0)

(146.9)

Net LTV

27.3%

26.7%

24.7%

21.7%

20.9%

20.3%

19.9%

Source: Picton Property Income historical data, Edison Investment Research forecasts


General disclaimer and copyright

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.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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 2021 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.

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

1185 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

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

1185 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

General disclaimer and copyright

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.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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 2021 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.

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

1185 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

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

1185 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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