Accretive reinvestment

Picton Property Income 17 August 2017 Update
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Picton Property Income

Accretive reinvestment

Acquisition

Real estate

15 August 2017

Price

85p

Market cap

£459m

Net debt (£m) at 30 June 2017

171.5

Shares in issue

540.1m

Free float

100%

Code

PCTN

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

2.7

0.0

24.5

Rel (local)

2.7

0.9

16.1

52-week high/low

86.0p

66.8p

Business description

Picton Property Income is an internally managed investment company that invests in commercial property across the UK. The investment objective is to provide investors with an attractive level of income and the potential for capital growth.

Next events

September 2017 NAV

October 2017

H117 results

November 2017

Analysts

Martyn King

+44 (0)20 3077 5745

Julian Roberts

+44 (0)20 3077 5748

Andrew Mitchell

+44 (0)20 3681 2500

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

Picton’s strategic objective is to grow both its asset base and income stream. It actively manages its portfolio and during FY17 and the early months of the current year completed the sale of £62m of non-core assets at prices above book value, reducing central London office exposure and reducing debt. The £23.15m acquisition of a Grade A office building in Bristol with significant potential from the letting of recently refurbished vacant space and rent reversion, meets the company’s strategic objectives and further rebalances the portfolio geographically. We have increased our EPRA EPS estimates by c 1% for FY18 and c 4% for FY19.

Year end

Revenue (£m)

EPRA EPS*
(p)

DPS
(p)

EPRA NAV/share
(p)

P/EPRA NAV
(x)

Yield
(%)

03/16

40.8

3.68

3.30

77.2

1.10

3.9

03/17

47.9

3.81

3.30

81.8

1.04

3.9

03/18e

42.5

3.94

3.40

84.2

1.01

4.0

03/19e

44.0

4.18

3.50

84.9

1.00

4.1

Note: *EPS are normalised, excluding exceptional items.

Diversified asset and income growth

Picton has acquired a Grade A office building located in Bristol’s city centre for £23.15m. Known as Tower Wharf, the building provides 70,664 sqft of office accommodation, 64% occupied by four tenants with an average lease length of 5.2 years (2.8 years to first break). The remaining vacant space is fully refurbished and available to let into an improving occupational market. With continuing high take-up and limited new supply the market for Grade A office space in Bristol city centre has continued to tighten and Picton sees significant reversionary potential in addition to letting vacant space.

Immediately accretive with significant upside

The consideration has been met partly out of cash resources and partly by drawing £12.5m on one of the two revolving credit facilities which will slightly lower the average cost of debt and increase LTV to just below 30%. The purchase price represents a net initial yield of 3.6% which managements expects to grow to 7.5% with new leasing and rent reversion. Although average occupancy will fall slightly from 96% to 94%, the transaction is immediately accretive of earnings, adding c £0.3m on annual basis and increasing dividend cover by c 2%. Although ahead of our FY19 assumptions, once fully let, management expects the additional earnings to reach £1.4m and increase dividend cover by 8%.

Valuation: Improving dividend prospects

Picton’s 2% premium to NAV remains below the peer group average of c 6% and while the 4% prospective dividend yield is below the group average of 5%, improving dividend prospects suggest potential for the premium to rise closer to the average. With no changes to the assumptions in our dividend discount model (see our initiation note), which we use as a sense check, the fair value range produced by our model remains 79p to 103p.

Accretive reinvestment

Tight supply in the Bristol city centre office market

Colliers International estimates that through a combination of strong take-up and little new supply availability of office space in Bristol city centre is at its lowest level since before the global financial crisis. They estimate that Grade A availability declined by 12% in Q217 compared with Q1, and that 95% of all Grade A space is let. Q2 city centre take-up is estimated by Colliers at 142,000 sqft, 12% up on Q117, and while the H117 total of 268,000 sqft is below the level of H116, 2016 take-up was exceptionally strong (at 783,000 sqft) and 29% above the five-year average. The H117 total is just 6% below the five-year average and more broadly based with a significant increase in the number of transactions and a decline in the average transaction size. There is no new Grade A space due to complete until 2018, expected to add just over 200,000 sqft, while 170,000 sqft of refurbished space is expected to become available in 2017. Colliers expects continuing demand from the professional services, technology and service office sectors which given the tightness of supply, seems a positive indicator for rents.

Estimate changes and valuation

Having recently increased our NAV estimates (Progress continues) to take account of the 25 July NAV statement, we now add the accretive impact expected from the Tower Wharf acquisition. We have assumed that the current 64% occupancy of Tower Wharf will increase to 75% by the end of FY18 and 90% by the end of FY19. We have further assumed only a modest 2% increase in average rent per sqft from FY18 to FY19 which is materially below the reversionary potential identified by management (to more than £26 per sqft compared with the current average passing rent of £19.65) and is a potential source of additional upside to our forecasts. Our current assumptions take the end FY19 run rate of gross rents to c £1.2m or c £1.0m net of void costs, still some way short of the £1.6m (net of void costs) that management anticipates from occupancy improvement and rent reversion. Our estimated dividend cover (excluding valuation increases and realised gains on disposal) increases from 115% to 116%, broadly consistent with the 2% improvement that management estimates on a full year basis. For FY19 our estimated dividend cover increases from 115% to 119%, although for now we have made no changes to our dividend forecasts. As noted above, management sees potential for dividend cover to be enhanced by 8% over time.

Exhibit 1: Estimate changes

Revenue (£m)

Adj. EPRA EPS (p)

EPRA NAV/share (p)

DPS (p)

Old

New

% change

Old

New

% change

Old

New

% change

Old

New

% change

FY18e

41.8

42.5

1.6%

3.90

3.94

1.1%

84.2

84.2

0.0%

3.40

3.40

0.0%

FY19e

42.8

44.0

2.8%

4.03

4.18

3.7%

84.7

84.9

0.3%

3.50

3.50

0.0%

Source: Edison Investment Research

We have previously noted Picton’s smaller (c 2%) premium to NAV compared with peers (c 6%) and although its prospective yield of c 4% is below the peer average of c 5.0% improving dividend growth prospects are a positive indicator for potential revaluation. Our dividend discount model gives a valuation potential within the range of 79p to 103p assuming a 7% cost of equity and 3.0% dividend growth rate and applying a 50bp sensitivity to each.

Exhibit 2: Financial summary

Year end 31 March

£'000s

2014

2015

2016

2017

2018e

2019e

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

31,967

35,151

40,770

47,911

42,487

43,981

Service charge income

4,782

4,511

5,153

6,487

6,374

6,522

Total revenue

 

 

36,749

39,662

45,923

54,398

48,861

50,503

Gross property expenses

(8,992)

(9,320)

(10,001)

(12,011)

(12,059)

(12,284)

Net rental income

 

 

27,757

30,342

35,922

42,387

36,803

38,219

Administrative expenses

(1,139)

(1,194)

(1,510)

(1,613)

(1,634)

(1,672)

Operating Profit before revaluations

 

 

26,618

29,148

34,412

40,774

35,169

36,548

Revaluation of investment properties

18,422

53,163

44,171

15,087

9,600

0

Profit on disposals

5,660

412

799

1,847

588

0

Management expenses

(2,127)

(2,591)

(2,901)

(3,636)

(3,664)

(3,740)

Operating Profit

48,573

80,132

76,481

54,072

41,693

32,807

Net Interest

(10,868)

(10,930)

(11,417)

(10,823)

(9,706)

(9,734)

Profit Before Tax

 

 

37,705

69,202

65,064

43,249

31,987

23,074

Taxation

(357)

(347)

(216)

(499)

(731)

(514)

Profit After Tax

37,348

68,855

64,848

42,750

31,256

22,560

Profit After Tax (EPRA)

13,266

15,280

19,878

20,566

21,300

22,560

Average Number of Shares Outstanding (m)

359.9

445.3

540.1

540.1

540.1

540.1

EPS (p)

 

 

10.38

15.46

12.01

7.92

5.79

4.18

Adj EPRA EPS (p)

 

 

3.69

3.43

3.68

3.81

3.94

4.18

Dividends paid per share (p)

 

 

3.0

3.0

3.3

3.3

3.4

3.5

Dividend cover (x)

1.23

1.14

1.12

1.15

1.16

1.19

BALANCE SHEET

Fixed Assets

 

 

421,393

536,898

649,406

618,391

642,941

646,441

Investment properties

417,207

532,926

646,018

615,170

639,720

643,220

Other non-current assets

4,186

3,972

3,388

3,221

3,221

3,221

Current Assets

 

 

42,879

84,111

37,408

49,960

50,648

51,778

Debtors

10,527

14,019

14,649

16,077

14,397

15,141

Cash

32,352

70,092

22,759

33,883

36,250

36,636

Current Liabilities

 

 

(17,369)

(17,480)

(47,521)

(21,171)

(21,014)

(21,852)

Creditors/Deferred income

(14,434)

(16,468)

(18,430)

(20,067)

(19,910)

(20,748)

Short term borrowings

(2,935)

(1,012)

(29,091)

(1,104)

(1,104)

(1,104)

Long Term Liabilities

 

 

(232,807)

(233,559)

(222,161)

(205,255)

(217,755)

(217,755)

Long term borrowings

(231,081)

(231,834)

(220,444)

(203,540)

(216,040)

(216,040)

Other long term liabilities

(1,726)

(1,725)

(1,717)

(1,715)

(1,715)

(1,715)

Net Assets

 

 

214,096

369,970

417,132

441,925

454,819

458,612

Net Assets excluding goodwill and deferred tax

 

 

214,096

369,970

417,132

441,925

454,819

458,612

NAV/share (p)

56.4

68.5

77.2

81.8

84.2

84.9

EPRA NAV/share (p)

56.4

68.5

77.2

81.8

84.2

84.9

CASH FLOW

Operating Cash Flow

 

 

23,145

24,705

33,283

36,283

33,616

32,900

Net Interest

(8,768)

(8,695)

(8,836)

(9,211)

(9,706)

(9,734)

Tax

(394)

(369)

(426)

(232)

(731)

(514)

Net cash from investing activities

(10,838)

(61,729)

(68,123)

48,691

(14,950)

(3,500)

Ordinary dividends paid

(10,711)

(13,102)

(17,822)

(17,957)

(18,361)

(18,766)

Debt drawn/(repaid)

(1,031)

(3,191)

14,591

(46,450)

12,500

0

Proceeds from shares issued

18,043

100,121

0

0

0

0

Other cash flow from financing activities

Net Cash Flow

9,446

37,740

(47,333)

11,124

2,367

386

Opening cash

 

 

22,906

32,352

70,092

22,759

33,883

36,250

Closing cash

 

 

32,352

70,092

22,759

33,883

36,250

36,636

Closing debt

(234,016)

(232,846)

(249,535)

(204,644)

(217,144)

(217,144)

Closing net (debt)/cash

 

 

(201,664)

(162,754)

(226,776)

(170,761)

(180,894)

(180,508)

Source: Picton, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Picton Property Income and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, 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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Picton Property Income and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, 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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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