Consistent outperformance

Picton Property Income 26 June 2017 Initiation
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Picton Property Income

Consistent outperformance

Initiation of coverage

Real estate

26 June 2017

Price

83.75p

Market cap

£452m

Net debt (£m) FY17

170.8

Shares in issue

540.1m

Free float

100%

Code

PCTN

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(1.5)

0.3

19.6

Rel (local)

(0.6)

(1.3)

2.5

52-week high/low

86.0p

57.5p

Business description

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

Next events

30 June 2017 NAV

July 2017

Analysts

Mark Cartlich

+44 (0)20 3077 5700

Julian Roberts

+44 (0)20 3077 5748

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

Picton Property Income is an internally managed property company, which has assembled a £624m portfolio diversified by sector, geography and also income concentration. Long-term performance has been strong; its portfolio has outperformed the MSCI quarterly benchmark in the last one, three, five and 10 years. It has also often exceeded its targeted geared IRRs of 10-15%. Last year’s property return of 9.9% was more than double the benchmark. Improving occupancy, rental increases and falling interest costs from debt reduction in FY17 should underpin earnings growth in FY18-19, thereby supporting the dividend yield of over 4%. Despite this track record and yield, Picton trades at a discount to the sector average P/NAV, even after the share price recovery we have seen in the last year.

Year end

Revenue (£m)

Adj EPRA EPS* (p)

DPS
(p)

EPRA NAV
(p)

P/NAV
(x)

Yield
(%)

03/16

40.8

3.68

3.30

77.2

1.09

3.9

03/17

47.9

3.80

3.30

81.8

1.02

3.9

03/18e

41.8

3.90

3.40

82.3

1.02

4.1

03/19e

42.8

4.03

3.50

82.9

1.01

4.2

Note: *EPS are normalised, excluding exceptional items.

FY17 results: REIT conversion now on the cards

Picton reported a 3% increase in adjusted FY17 EPRA EPS and a 6% rise in EPRA NAV to 81.8p. This was accompanied by an 18% fall in debt to £205m, following the repayment of the zero dividend preference shares and the sale of non-core assets, so net gearing fell to 27%. In its results statement Picton said it is likely to be in the interests of the company to convert to a UK REIT in 2018, which could potentially increase the dividend payout and yield, but we estimate would have little impact on NAV initially. It is currently an offshore investment company, so plans to put a proposal before shareholders in due course.

Forecasts: Steady growth set to continue

As a result of a steady improvement in occupancy, a limited rise in rental rates and lower financing costs following the debt reduction last year, we are forecasting a 3% increase in EPRA EPS in both FY18 and FY19. We forecast dividends to increase 3% in each year, in line with earnings growth, thereby maintaining a comfortable level of cover. NAV growth is expected to be more subdued at 0.6% in both years, as we are not forecasting any fair value gains, or disposal profits.

Valuation: A discount to peers, despite its record

The shares have performed strongly since the post-Brexit sell-off last year and now trade on a 2% premium to our FY18 forecast NAV. Despite Picton’s record of outperforming the sector over the past 10 years and its yield being in line with most of its peers, it trades at a slight discount to the average P/NAV for the sector. As Picton is an income-focused company we have valued it using a dividend discount model, which produces a fair value range of 79p to 103p.

Investment summary

Company description: Focused on total returns

Picton is an internally managed investment company, which offers diversified exposure to the UK commercial property market. It targets active management of its assets, focusing on occupiers’ needs and the opportunities to enhance value within the portfolio. This has produced consistent outperformance of the IPD benchmark at a portfolio level, partly by using gearing to enhance returns over the long term. Management believes that having an internalised management structure creates alignment with shareholders and generates economies of scale as it grows. These economies of scale are expected to enable it to reach the FTSE 250 within five years.

Financials: Solid FY17 results

Picton reported a 30% increase in FY17 income profit to £25.8m, but reported EPS fell 34% to 7.9p, owing to lower fair value gains (£15m vs £44m). Adjusted EPRA EPS were up 3% at 3.8p and the total return for the year was 10.4%. Net rental income increased 18% to £42.4m, but was boosted by £6m of other income, primarily relating to settlement of a one-off property dispute. The dividend was raised 3% to 3.4p for FY18, which was 115% covered, after adjusting for £5.3m of other income. There was also a significant reduction in net gearing to 27.4%, following debt repayment and the disposal of non-core assets.

Valuation: Trading on a discount to peers

We have compared Picton to the main mid-sized UK REITs and property companies. It trades at a small discount to the sector average, on a 3% premium to the FY17 reported NAV, despite its dividend yield being in line with most sector peers at 4%. Picton has a 10-year track record of sector outperformance, which adds further support to the NAV premium, plus the business model is focused on all sectors of the market and is diversified nationally. Conversion to a REIT could provide the catalyst to close this gap, as it may increase the dividend payout. Our dividend discount model base case uses a discount rate of 7%, a dividend growth rate of 3% and an FY18 dividend estimate of 3.4p. Using a 0.5% sensitivity in the dividend growth rate and cost of equity produces a fair value range of 79p to 103p.

Sensitivities: Mainly macro risks

Sector risk: Property is a cyclical sector, but some of the inherent cyclical risk can be mitigated by building up a large diversified portfolio, with multiple tenants, reducing vacancy risk substantially. At 6% voids were relatively low at year end, and they have already fallen to 4%, supporting an increase in occupancy in FY18-19, as key properties are let.

Macro risk: The main risk is the wider economy. The macro outlook for the UK has improved recently, with the Bank of England increasing its forecast for GDP growth for 2017 to 2%. A slight slowdown to 1.6% and 1.7% is then expected in 2018 and 2019. The Brexit process could have an impact on these forecasts and thus increase the risks for the sector in 2018-19.

Inflation and interest rates are a risk for the sector. With inflation already rising, partly due to sterling depreciation and rising oil prices, the prospect of higher interest rates becomes more imminent. Rising interest rates would have little impact on Picton initially, as only the undrawn £51m of its revolving credit facility is on a floating rate, although there would eventually be a knock-on effect on NAV, as yields increased.

Management risk: As Picton is internally managed there is some management risk. It is a relatively small team, so if a senior director were to leave they would need to be replaced.

Company description: An internally managed company

History and performance

Picton was launched in October 2005 as the ING Real Estate Income Trust in an offshore structure. On 1 June 2011 the name of the company was changed to Picton Property Income Limited and on 1 January 2012 Picton Capital was appointed as the investment manager. Picton Capital is a wholly owned subsidiary company and implements the investment policy, which is determined by the board. The main benefit of this structure is that management costs are not linked to the size of the portfolio, unlike other property investment companies. As a result, the company should benefit from rising economies of scale as it grows, which should in turn improve investor returns. We estimate an effective fee of 0.8% of NAV in FY17 (total cost ratio of c 1.2%), which is lower than companies of a similar size. Indeed, Picton only exceeded the costs under the ING structure in 2017, despite a doubling of NAV five years after taking over. It targets geared IRRs of 10-15%, which it has often exceeded. Performance has been strong, outperforming the MSCI quarterly property index in the last four years and over the past five (1.3%) and 10 years (0.7%), with the same management.

Exhibit 1: Picton’s relative performance (total NAV return)

Source: Picton Property Income data, MSCI

Strategy: Occupier focused, opportunity led

Picton’s investment objective is to provide shareholders with an attractive level of income, together with the potential for capital growth, by investing in the main UK commercial property sectors. The strategy enables Picton to create a portfolio that is diversified by sector, geography and by income concentration. Picton can thus invest both directly and indirectly across the UK. As at 31 March 2017 the company had 23% of its portfolio in Greater London, 36% in the South East and the remaining 41% in the rest of the UK. The majority of income, after operating and financing costs, is paid out to investors in quarterly dividends, which could marginally increase on REIT conversion.

Exhibit 2: Portfolio sector split Q417

Exhibit 3: Geographical split (Q417)

Source: Picton Property Income data

Source: Picton Property Income data

Exhibit 2: Portfolio sector split Q417

Source: Picton Property Income data

Exhibit 3: Geographical split (Q417)

Source: Picton Property Income data

Picton says its strategy is to be occupier focused and opportunity led, as the occupiers provide the cash flow and Picton is focused on income. However, the focus is not just on its own occupiers, but the whole occupier market. The opportunity-led part relates to being commercial when buying, managing and selling. For example, in FY17 four non-core assets were sold 41% above the March 2016 valuation. Picton also attempts to recycle capital where opportunities exist for better risk-adjusted returns. To achieve this two-pronged strategy it targets five strategic priorities:

Hands-on asset management: Picton is always trying to improve its asset base via refurbishment, higher value uses or lease restructuring. It has recently reduced the number of assets, as the complexity of its portfolio determines how many staff it needs. It believes a lot size of £10-30m produces economies of scale and means it can own most UK property assets, although it does see competition in all lot sizes. It will acquire new assets that offer income and value potential and will dispose of assets where the gains have been achieved.

Working with occupiers: The asset management team maintains direct relationships with occupiers. The idea is to invest in the space to reflect what tenants want, which it believes is the way to maintain occupancy, reduce voids and achieve rental growth. The initiatives include the ‘Picton Promise’, which includes eight commitments to quality and the tenant experience intended to raise retention rates.

Growth of recurring income: The target is to increase rental income and to secure market rent rises via active portfolio management, adding additional income from new lettings, lease renewals and re-gears. A diverse tenant base means that the rental income is relatively stable, allowing the company to cover its dividend and invest surplus cash flow in the portfolio.

Operational efficiency and expertise: Picton is an internally managed investment company. The management team of 12 permanent employees has an average of over 12 years’ experience in the commercial property sector. With just 53 assets, the asset managers can visit the properties regularly and develop strong relationships with their occupiers. Management believes this operating model has enabled it to consistently outperform the sector and should allow Picton to benefit from economies of scale as it grows.

Effective use of debt: The use of gearing increases returns to shareholders over the long term. When gearing is appropriate in the cycle, the portfolio’s income return can be improved by low, long-term fixed interest rates.

Portfolio: Overweight industrial, warehouse and logistics

Picton invests in a portfolio of UK assets, diversified by sector, geography and tenant, where it believes it can improve either income or value. It sees hundreds of millions of pounds worth of stock each quarter and is constantly reviewing opportunities in the market, but will only acquire where the property and financial fundamentals are compelling. In 2016 the company made no acquisitions. However, it undertook some portfolio restructuring, largely reducing Central London exposure and continuing to sell non-core assets. It is sector agnostic, investing in all segments of the market, but is currently underweight retail and double the benchmark in industrial. It also has to take a long-term view, as stamp duty on acquisitions is 5%.

The property portfolio, which was valued at £615m (£624m before lease incentives) at the end of March 2017, consisted of 53 assets, with approximately 350 occupiers, providing a diversified income stream, from a wide range of businesses and an average lot size of £11.8m. The largest tenant accounts for 4% of the rent roll. As discussed 40% of the portfolio is allocated to the industrial, warehouse and logistics sector, where Picton is seeing good performance and which has been resilient during recent economic and political volatility. The top 10 assets below represent 48% of the portfolio by capital value. They show Picton’s diversified national exposure and half of them are in the industrial or retail warehouse segment.

Exhibit 4: Top 10 assets as at 31 March 2017

Property

Sector

Location

Parkbury Industrial Estate, Radlett

Industrial

South East

River Way Industrial Estate, Harlow

Industrial

South East

Angel Gate Office Village, City Road, EC1

Office

London

Stanford House, Long Acre, WC2

Retail

London

50 Farringdon Road, EC1

Office

London

Shipton Way, Rushden, Northamptonshire

Industrial

East Midlands

Pembroke Court, Chatham

Office

South East

Queens Road, Sheffield

Retail Warehouse

Yorkshire & Humberside

Phase II Parc Tawe, Swansea

Retail Warehouse

Wales

Metro, Manchester

Office

North West

Source: Picton Property Income data

Picton’s top 10 occupiers come from a range of businesses and account for less than 25% of the annual rent roll. Its tenants are active in all the main UK industries from retail and manufacturing to financial services and public administration. The portfolio’s lease expiry profile shows the length of some of the leases. Half have over four years to expiry and nearly 13% are above 10 years. The average is 5.7 years to the first termination and 6.6 years to expiry.

Exhibit 5: Top 10 occupiers as at 31 March 2017

Exhibit 6: Lease expiry profile as at 31 March 2017

Source: Picton Property Income data

Source: Picton Property Income data

Exhibit 5: Top 10 occupiers as at 31 March 2017

Source: Picton Property Income data

Exhibit 6: Lease expiry profile as at 31 March 2017

Source: Picton Property Income data

Management: Internalised structure

Unlike many investment companies, Picton is unusual in that it has internalised its investment management function. It has created a wholly owned investment management subsidiary, Picton Capital, which is authorised and regulated by the Financial Conduct Authority. Picton Capital operates the group’s investment objectives, subject to the overall supervision of the board. Picton Property Income itself is managed and controlled by its board, which is based in Guernsey. The investment management team comprises 12 permanent employees and includes six real estate professionals, three qualified accountants and three support employees. The staff are incentivised by a long-term incentive share plan (LTIP), linked to total return, which creates a way of locking-in staff and alignment with shareholders.

Michael Morris, chief executive of Picton Capital Limited

Michael Morris is responsible for devising and overseeing the implementation of all aspects of the company’s investment strategy. He is also a non-executive director of Picton Property Income Limited. He has over 22 years’ experience in the UK commercial property sector, working initially in private practice, becoming a fund manager at ING Real Estate Investment Management. He was appointed to the board in October 2015, having worked with the group since launch in 2005.

Nicholas Thompson, chairman

Nicholas Thompson was formerly director and head of fund and investment management at Prudential Property Investment Management. He has served on the board as chairman since 2005. He is currently chairman of MSCI/IPD’s UK & Ireland Consultative Group, a director of the Lend Lease Retail Partnership and an independent director of the Association of Real Estate Funds. He is a fellow of the Royal Institution of Chartered Surveyors and a member of the Property Forum of the Association of Investment Companies.

Andrew Dewhirst, finance director

Andrew Dewhirst joined Picton Capital Limited as finance director in March 2011. Previously he was director of client accounting at ING Real Estate Investment Management (UK) Limited from January 2006. Prior to ING he was director of securities and property accounting at Hermes Pensions Management Limited. He has over 25 years’ experience in the real estate and financial services sector. He is an associate member of the Institute of Chartered Accountants in England and Wales and a member of the Investment Property Forum.

Property sector outlook

Investment volumes have fallen since the 2015 peak

UK commercial property recovered well after the 2008-09 crisis and recession, despite a dip in 2011, but the regions were slower to recover than London and secondary property recovered slower than prime. Indeed, total investment volumes in 2014-15 exceeded the peak years of 2004-07, with Cushman & Wakefield reporting investment of £61.5bn in 2015. Foreign investment has accounted for 45% of the total on average since 2009. Regional property investment held up well at £22.7bn in 2016, due to the higher yields on offer. Although the EU referendum increased uncertainty in the market, even before the vote, there remains opportunity in the asset class outside London.

Relative yields favour the regions

There are several ways to look at the relative attractions of regional real estate. The first is the yield gap between the regions and London. The spread remains wide on a historical basis at c 2%. At the peak of the market in 2008 it was just c 0.5%. Although this seems likely to narrow, it is not a driver of Picton’s strategy. The higher income return means that total returns do not need to be driven by capital growth, although there is the potential to see valuation gains if yields do compress.

Secondly, as the chart below shows, yield movements generally follow the London market, but they are significantly less volatile. So the regions could outperform London as the cycle turns and either way could see less of a correction. Also, regional assets, especially in smaller lot sizes, generally attract less attention from institutional and overseas investors, so there is less competition for assets and the yields have not been driven down. Finally, the regions are less negatively exposed to rising business rates and are less affected by international factors like secondary investment, the fate of financial services and the direct effects of the Brexit vote.

Exhibit 8 shows the effect of this higher return on the sector’s dividend yields, which are one of the main drivers for owning the majority of these stocks. This shows the yield spread over the 10-year gilt for the sector as a whole, and clearly the spread is wider again for the regional property sector as illustrated in Exhibit 7.

Exhibit 7: Equivalent yields – regional vs London

Exhibit 8: UK 10-year gilt and NAREIT index yields

Source: Edison Investment Research, Palace Capital

Source: Bloomberg

Exhibit 7: Equivalent yields – regional vs London

Source: Edison Investment Research, Palace Capital

Exhibit 8: UK 10-year gilt and NAREIT index yields

Source: Bloomberg

Regional occupier demand remains strong

The second factor to cover is the relative attraction of the regions to occupiers and investors. Because of limited new supply in the regions, the strength of the economic recovery, growth in employment and business relocation away from London, tenant demand has been strong. This has helped to improve rents for regional office and industrial sites. Brexit has increased uncertainty, especially in London, and appears to have led to delayed business decisions in general. However, there is a view that sterling weakness could turn out to be positive for industrial exporters and in turn support economic activity outside London, with a positive knock-on effect on regional industrial property.

CBRE predicts that records for the take-up of regional space may be broken in 2017, due to government related entities taking pre-lets in the regions, which can often exceed the normal annual demand in a city. Additionally business confidence generally is looking robust, as evidenced by manufacturing PMI data earlier in the year, which surprised on the upside. This showed all regions other than Scotland exhibiting growth.

As well as occupational demand being good, supply is very tight. There has been very little new building, especially of industrial space. For example, one estimate suggests that in order to be economically viable new mid-sized logistics and industrial developments would require rentals 15% above current levels, which is adding to pressure for rental growth.

Regional markets are thus expected to deliver higher returns in the latter stages of the cycle than London, as income is expected to drive the majority of total returns from 2017 to 2020. Also, offices and industrial property outside London should be less exposed to the knock-on effects of the Brexit vote than London or the wider retail sector.

Exhibit 9: All property total return forecasts

Source: Investment Property Forum consensus forecasts

Valuation: A small discount to peers

Sector outperformance not reflected in comparative valuations

Picton trades at a premium of 2% to our forecast FY18 NAV, which is a slight discount to the more income-orientated listed sector peers. It has traded at a discount to NAV in the past, but this was when the company’s gearing was much higher and also briefly last year following the Brexit vote. Picton also has a 10-year track record of sector outperformance, as discussed above, which adds further support to the NAV premium. This has been achieved by a variety of factors including: the experienced team, the internal management structure, the intensive asset management, a manageable portfolio and a sector-diversified portfolio. As the business model is focused on all sectors of the market and is diversified nationally, with a wide tenant base, Picton’s risk profile is reduced. In our view, this also supports the current premium to NAV.

We have compared Picton to the main mid-sized UK REITs and property companies. Picton trades at a small discount to the sector average on a 3% premium to the FY17 reported NAV, despite its dividend yield being in line with most of the sector at 4%. However, its yield could increase if it converts to REIT status. The sector’s average dividend yield is also boosted by Regional REIT, which has a yield of over 7%, without which the average would be 4.5%.

As Picton is an income focused company we have valued the company on a dividend discount model, using a cost of equity of 7%, a dividend growth rate of 3% and the declared FY18 dividend of 3.4p. Using a 0.5% sensitivity in the dividend growth rate and cost of equity this produces a fair value range of 79p to 103p, implying upside of up to 20% at the top end of the range.

Exhibit 10: Comparative valuations, FY17e

Price

Market cap

NAV

P/NAV

DPS

Dividend

(p)

(£m)

(p)

(x)

(p)

yield

Custodian REIT

117.5

407

104

1.13

6.5

5.5%

F&C Commercial Prop

148.4

1,190

137

1.08

6.0

4.0%

A&J Mucklow

502.0

407

444

1.13

22.0

4.4%

Standard Life Inv Prop

88.8

345

81

1.09

4.8

5.4%

Regional REIT

106.3

319

97

1.09

7.7

7.2%

Schroders REIT

64.8

336

64

1.01

2.5

3.9%

UK Commercial Property Trust

88.0

1,140

87

1.01

3.7

4.2%

Average

4,143

1.08

4.9%

Picton Property Income

84.3

455

81.8

1.03

3.4

4.0%

Source: Bloomberg, Edison Investment Research forecasts. Note: Prices as at 20 June 2017.

Financials

Earnings: FY17 boosted by one-off income

Picton reported a 30% increase in income profit to £25.8m in its FY17 results. Reported EPS fell 34% to 7.9p, owing to lower fair value gains (£15m vs £44m). Adjusted EPRA EPS were up 3% at 3.8p and the total return for the year was 10.4%. The total return for the fourth quarter alone was 2.8%. Net rental income increased 18% to £42.4m boosted by £6m of other income relating to a one-off property dispute that was settled. The dividend was raised 3% to 3.4p for FY18 in February, which was 144% covered, or 115% when adjusted for the £5.3m of other income.

Occupancy was 94%, but this improved to 96% post period end, as Picton completed a letting of its largest industrial void. It has also made further progress at 50 Farringdon Road, EC1, where it has now let 75% of the space, having relaunched the building in March. 96% occupancy matches the recent peak level in FY16. The best performing sector in the portfolio in the second half of FY17 was industrial, which saw robust occupational demand. Annual passing rent is currently £40m (up 4.4% like for like) and reversionary income is c £46m at 100% occupancy. This is broken down as follows: a third vacancy, a third stepped rents and a third market rent resets.

We have made the following assumptions in our forecasts:

An average 2% rental growth in industrial and 1% growth across the rest of the portfolio, which is in line with management expectations and below market inflation forecasts.

We have not assumed any acquisitions, so the portfolio size remains unchanged in FY17-18.

An improvement in occupancy to 97% in FY18-19, as the office segment’s occupancy recovers.

A slight erosion in the net rental margin, as gross rental income falls, following the disposals in FY17.

We are not assuming any fair value gains, or disposal profits.

As a result of these factors and lower financing costs after the debt reduction in FY17, we are forecasting a 3% increase in EPRA EPS in both FY18 and FY19 and a 0.6% increase in NAV/share to 82.3p and 82.9p, respectively.

Exhibit 11: Net rental income (£m)

2014

2015

2016

2017

2018e

2019e

Gross rental income

32.0

35.2

40.8

47.9

41.8

42.8

Net rental income

27.8

30.3

35.9

42.4

36.4

37.3

Net rental margin

87%

86%

88%

88%

87%

87%

Source: Picton Property Income data, Edison Investment Research forecasts

Cash flow: Comfortable dividend cover

Now the zero dividend preference shares have been paid off, the company has the scope to increase the dividend, due to the positive effect on earnings of the lower interest costs. The dividend was reduced in 2012 to reset it to be fully covered. It has been increased twice since, in 2016 and 2017, and will be reviewed regularly. We have assumed a steady increase to 3.5p in FY19 and expect it to increase as cash is deployed in additional assets. The cover target is 110-120% of EPRA EPS. Any surplus cash can therefore be reinvested in the portfolio.

Exhibit 12: Dividends and cover (£m)

2015

2016

2017

2018e

2019e

Free cash flow before investing and financing

15.6

24.0

26.8

22.7

22.1

Dividends paid

(13.1)

(17.8)

(18.0)

(18.4)

(18.9)

Cash cover

1.19

1.35

1.49

1.23

1.16

Source: Picton Property Income data, Edison Investment Research forecasts

Balance sheet: Falling debt strengthens capital structure

Picton reported an NAV of £441.9m for Q417, equating to 81.8p per share, an increase of 1.7% over Q3 and 6% for the year. This does not include a provision for the dividend. There was a 3% like-for-like increase in the property portfolio valuation to £615m, producing a valuation gain of £15m. Based on contracted net income the portfolio had a net initial yield of 5.9% (allowing for void costs) and a reversionary net yield of 6.9%.

Picton sold two central London assets in FY17 for £45m, on average 4% above the March 2016 valuation. It also sold four other non-core assets for £7m, at an average of 41% above the March valuation. The disposals were thus NAV enhancing, but partly as a result, occupancy was slightly down at 94%. The portfolio now has 53 assets with an average lot size of £11.8m. In the final quarter Picton sold a property in Bath for £2.75m and Drury Lane in Oldham for £2.2m after significant asset management. The combined transaction value of these assets was 10% ahead of the December 2016 valuation. Picton exchanged on the disposal of another two properties after year end.

Total debt was reduced 18% to £205m, following the repayment of £29m of zero dividend preference shares, saving up to £1.9m in interest charges. Net gearing was reduced to 27% from close to 35% in FY16. This is a significant change from 2013-14 when Picton had high gearing levels of over 50% and traded at a discount to NAV as a result. Rather than sell assets at the wrong point in the cycle, the company decided to reduce debt steadily over time. No further disposals are currently planned.

Exhibit 13: Debt structure (£m)

2014

2015

2016

2017

2018e

2019e

Short-term borrowings

3

1

29

1

1

1

Long-term borrowings

231

232

220

204

204

204

Total debt

234

233

250

205

205

205

Cash

32

70

23

34

28

20

Net debt

202

163

227

171

177

184

LTV

56%

43%

38%

33%

33%

32%

Net LTV

48%

30%

35%

28%

28%

29%

Source: Picton Property Income data, Edison Investment Research forecasts

Total borrowings at 31 March were £204.6m, with a weighted average interest rate of 4.2% (100% fixed) and a weighted average debt maturity profile of approximately 11.7 years. Picton now has long-term debt from Aviva and Canada Life and uses revolving credit facilities to reduce cash drag when making acquisitions. There is thus no short-term refinancing risk and no exposure to interest rate risk. The mid-cycle gearing target is 35%, but Picton feels 27-28% is a comfortable level currently. The limit is 65%, but the peak was 55% in 2013. Management’s view is that the benefits of high gearing do not offset the negative impact in a downturn.

In FY17 a second revolving credit facility was agreed with Santander, which provides future operational flexibility. The first facility has been extended and will now expire at the same time as the second, in June 2021. Picton currently has access to £51m of undrawn facilities. If drawn, interest will be charged at 175 basis points over three-month Libor, which is currently equivalent to 2.1% a year. We are not forecasting much change in debt or gearing levels in FY18-19, but management has said it would raise equity if needed for a major acquisition, to help drive growth.

Exhibit 14: Net debt and gearing (£m)

Source: Picton Property Income data, Edison Investment Research forecasts

Exhibit 15: Financial summary

Year end 31 March

£000s

2014

2015

2016

2017

2018e

2019e

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Gross rental income

31,967

35,151

40,770

47,911

41,829

42,798

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

48,203

49,320

Gross property expenses

(8,992)

(9,320)

(10,001)

(12,011)

(11,792)

(12,054)

Net rental income

 

27,757

30,342

35,922

42,387

36,411

37,266

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

34,778

35,594

Revaluation of investment properties

18,422

53,163

44,171

15,087

0

0

Profit on disposals

5,660

412

799

1,847

0

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

31,114

31,854

Net Interest

(10,868)

(10,930)

(11,417)

(10,823)

(9,578)

(9,578)

Profit Before Tax

 

37,705

69,202

65,064

43,249

21,535

22,276

Taxation

(357)

(347)

(216)

(499)

(497)

(514)

Profit After Tax

37,348

68,855

64,848

42,750

21,038

21,762

Profit After Tax (EPRA)

13,266

15,280

19,878

20,516

21,038

21,762

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

3.90

4.03

Adj EPRA EPS (p)

 

3.69

3.43

3.68

3.80

3.90

4.03

Dividend per share (p)

3.00

3.00

3.30

3.30

3.40

3.50

Dividend cover (x)

1.23

1.14

1.12

1.15

1.15

1.15

BALANCE SHEET

Fixed Assets

 

421,393

536,898

649,406

618,391

621,891

625,391

Investment properties

417,207

532,926

646,018

615,170

618,670

622,170

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

48,838

48,634

Debtors

10,527

14,019

14,649

16,077

14,246

14,576

Cash

32,352

70,092

22,759

33,883

34,591

34,058

Current Liabilities

 

(17,369)

(17,480)

(47,521)

(21,171)

(20,867)

(21,309)

Creditors/Deferred income

(14,434)

(16,468)

(18,430)

(20,067)

(19,763)

(20,205)

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)

(205,255)

(205,255)

Long term borrowings

(231,081)

(231,834)

(220,444)

(203,540)

(203,540)

(203,540)

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

444,607

447,462

Net Assets excluding goodwill and deferred tax

214,096

369,970

417,132

441,925

444,607

447,462

NAV/share (p)

56.4

68.5

77.2

81.8

82.3

82.9

EPRA NAV/share (p)

56.4

68.5

77.2

81.8

82.3

82.9

CASH FLOW

Operating Cash Flow

 

23,145

24,705

33,283

36,283

32,143

31,452

Net Interest

(8,768)

(8,695)

(8,836)

(9,211)

(9,578)

(9,578)

Tax

(394)

(369)

(426)

(232)

0

0

Net cash from investing activities

(10,838)

(61,729)

(68,123)

48,691

(3,500)

(3,500)

Ordinary dividends paid

(10,711)

(13,102)

(17,822)

(17,957)

(18,356)

(18,907)

Debt drawn/(repaid)

(1,031)

(3,191)

14,591

(46,450)

0

0

Proceeds from shares issued

18,043

100,121

0

0

0

0

Net Cash Flow

9,446

37,740

(47,333)

11,124

708

(533)

Opening cash

 

22,906

32,352

70,092

22,759

33,883

34,591

Closing cash

 

32,352

70,092

22,759

33,883

34,591

34,058

Source: Picton Property Income data, Edison Investment Research

Contact details

Revenue by geography (FY17)

Picton Capital Limited
1st Floor
28 Austin Friars
London
EC2N 2QQ
020 7628 4800
www.picton.co.uk

Contact details

Picton Capital Limited
1st Floor
28 Austin Friars
London
EC2N 2QQ
020 7628 4800
www.picton.co.uk

Revenue by geography (FY17)

Management team of Picton Capital Ltd

Chief Executive: Michael Morris

Finance Director: Andrew Dewhirst

Michael Morris is responsible for devising and overseeing the implementation of all aspects of the company’s investment strategy. He is also a non-executive director of Picton Property Income Limited.

Andrew Dewhirst joined Picton Capital Limited as finance director in March 2011. He has over 25 years’ experience in the real estate and financial services sector. He is an associate member of the Institute of Chartered Accountants in England and Wales and a member of the Investment Property Forum.

Chairman of Picton Property Income: Nicholas Thompson

Nicholas Thompson was formerly director and head of fund and investment management at Prudential Property Investment Management. He has served on the board as chairman since 2005. He is currently chairman of MSCI/IPD’s UK & Ireland Consultative Group, a director of the Lend Lease Retail Partnership and an independent director of the Association of Real Estate Funds. He is a fellow of the Royal Institution of Chartered Surveyors and a member of the Property Forum of the Association of Investment Companies.

Management team of Picton Capital Ltd

Chief Executive: Michael Morris

Michael Morris is responsible for devising and overseeing the implementation of all aspects of the company’s investment strategy. He is also a non-executive director of Picton Property Income Limited.

Finance Director: Andrew Dewhirst

Andrew Dewhirst joined Picton Capital Limited as finance director in March 2011. He has over 25 years’ experience in the real estate and financial services sector. He is an associate member of the Institute of Chartered Accountants in England and Wales and a member of the Investment Property Forum.

Chairman of Picton Property Income: Nicholas Thompson

Nicholas Thompson was formerly director and head of fund and investment management at Prudential Property Investment Management. He has served on the board as chairman since 2005. He is currently chairman of MSCI/IPD’s UK & Ireland Consultative Group, a director of the Lend Lease Retail Partnership and an independent director of the Association of Real Estate Funds. He is a fellow of the Royal Institution of Chartered Surveyors and a member of the Property Forum of the Association of Investment Companies.

Principal shareholders

(%)

Investec

18.5

Blackrock

6.2

Canaccord Genuity

4.5

Integrated Financial Arrangement

4.4

Bank of Montreal

4.3

Alliance Trust

4.2

Brewin Dolphin

3.3

Companies named in this report

Custodian REIT, F&C Commercial Property, A&J Mucklow, Standard Life Investment Property, Regional REIT, Schroders REIT, UK Commercial property Trust

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

New York, NY10017

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

New York, NY10017

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

New York, NY10017

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

New York, NY10017

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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