Picton Property Income |
COVID-19 punctuated a positive Q420 |
Trading update |
Real estate |
16 April 2020 |
Share price performance
Business description
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Analyst
Picton Property Income is a research client of Edison Investment Research Limited |
Picton Property Income has provided an update on its further progress in the three months ended 31 March 2020 (Q420), as well as the impact of COVID-19 and its response to this. The company enters a period of acute economic and sector uncertainty with a strong and liquid balance sheet, and material internal asset management opportunities to support income and capital values.
Year end |
Net property income (£m) |
EPRA earnings* (£m) |
EPRA |
DPS |
EPRA NAV/ |
P/NAV |
Yield |
03/18 |
38.4 |
22.6 |
4.2 |
3.43 |
90 |
0.83 |
4.6 |
03/19 |
38.3 |
22.9 |
4.3 |
3.50 |
93 |
0.81 |
4.7 |
03/20e |
34.5 |
20.6 |
3.8 |
3.50 |
93 |
0.81 |
4.7 |
Note: *EPRA earnings excludes revaluation gains/losses and other exceptional items.
Little change to our FY20 expectations
Q420 began well with positive leasing activity driving achieved rental growth, refurbishment completions, and opportunistic disposals locking in valuation gains. The COVID-19-induced lockdown came too late to materially affect Q420 rent collection but, in common with peers, Picton has seen a subsequent slowdown as tenants seek to protect their cash flows. Collection performance to date is robust and the company is working closely with its occupiers to optimise rent collection and provide support where this is appropriate. The balance sheet is strong with modest 22% gearing, good liquidity and undrawn debt. We have made no material change to our FY20 underlying earnings forecast but have slightly trimmed forecast EPRA NAV per share from 95p to 93p. In line with the normal timetable, the board will consider the Q420 DPS towards the end of April and says it will assess the prevailing circumstances at that time in making its decision. We assume an unchanged Q420 DPS of 0.875p per share, fully covered by our forecast EPRA earnings. Reflecting economic and sector uncertainty, we have temporarily withdrawn our FY21 estimates.
Positive sector positioning and reversionary potential
Although the portfolio is diversified to manage income risks, an overweight position in industrial and regional office property, where fundamentals are stronger, and a significant underweighting of the more challenging retail and leisure sectors (with no shopping centre exposure) continued to support portfolio performance in Q420. In combination with asset management-driven gains, the external property valuation declined only modestly. The gap between estimated rental value at full occupancy (ERV) and the current level of passing rent, substantially the result of refurbishment projects, continues to represent a significant opportunity to support future income and capital values irrespective of future market conditions.
Valuation: Total return with sustainable income focus
Based on our unchanged forecast for the FY20 DPS, which we expect to be fully covered by EPRA earnings, Picton’s shares now yield almost 5% and a significant discount to FY20e EPRA NAV per share (c 20%) has opened up.
Further details on the Q420 update
Picton owns and actively manages a £665m diversified portfolio of commercial property across the UK comprising 47 assets let to c 350 occupiers. The portfolio is managed for total returns but with a strong income focus and through its occupier-focused, opportunity-led approach, the company aims to be one of the consistently best-performing diversified UK-focused property companies listed on the London Stock Exchange (LSE). A strong weighting to industrial and regional office assets (82% by value) and significant underweighting of retail and leisure assets (no shopping centre exposure) continues to support property returns, maintaining the long-term track record of outperformance versus the MSCI Quarterly Property Index on an ungeared basis, over one, three, five and 10 years to 30 September 2019.
Refurbishment and leasing activity continued in Q420
A total of nine new lettings were completed in Q420 at an average 3.5% above the December 2019 ERV, three leases were renewed/extended (at an average 7.1% above ERV) and four rent reviews were concluded (at an average 12.6% above ERV).
The main transactions included the three regional office lettings that were announced in March 2020, adding £0.9m of annual rental income, at or above ERV. Despite a challenging retail sector, Picton re-let the former Lidl unit in Swansea to Farmfoods and extended its lease with Pets at Home by five years. In Greater London, an industrial unit was let post-refurbishment work at 9.5% ahead of ERV.
In total, seven refurbishment projects were completed in the quarter, representing an investment of £3.7m, with the main project completion at the Rugby distribution centre.
Robust portfolio valuation
Adjusting for the January 2020 disposal of a distribution warehouse in Lutterworth, Leicestershire, for £15.9m (1% ahead of the December 2019 valuation and reflecting a 5.8% net initial yield), the overall portfolio valuation decreased by 0.8% in the quarter to £665m. Allowing for capex in the period, the decline was 1.3%. As has become industry-wide practice, the independent valuation is subject to a material uncertainty clause reflecting the difficulty in assessing the impact of the COVID-19 pandemic in the absence of a representative level of market transactions. On a sector basis, the robust portfolio performance reflects the continued overweighting of industrial and office properties and underweighting of retail & leisure, as well the positive impact of asset management initiatives in the period. It is our expectation that this outcome will compare favourably with the MSCI Quarterly Property Index when this becomes available later this month.
Exhibit 1: Summary of valuation move in three months to 31 March 2020 (Q420)
Valuation movement |
Portfolio weighting |
|
Industrial, warehouse & logistics |
-0.3% |
47.9% |
Office |
-0.2% |
33.8% |
Retail & leisure |
-2.9% |
18.3% |
Source: Picton Property Income
Rental collection
The COVID-19-induced lockdown came too late to materially affect Q420 but, in common with peers, Picton has seen a subsequent slowdown in rent collection. Around 95% of Picton’s rents are billed in England and Wales and following the most recent rent quarter (due) day on 25 March 2020, the company had received 71% of the rent due by 7 April 2020. Including some rent deposit offset, this rate increased to 72% and increased further to 80% including short-term monthly payment plans agreed with a number of tenants. Rent in Scotland and Northern Ireland is next due in May 2020.
Picton is working closely with its occupiers to optimise rent collection and provide support where this is appropriate to assist them through the current uncertainties, while minimising the impact on the company’s cash flows and capital values.
Strong balance sheet position with good liquidity
Following the January 2020 disposal, Picton repaid all of its drawings under its flexible revolving credit facility, or RCF (£19.0m drawn at H120). We estimate end-Q420 drawn debt (including unamortised loan arrangement fees) of £167.5m and, allowing for the £23m of cash indicated by the company, the LTV is a modest c 22%. The remaining drawn debt is all fixed rate with the first maturity in 2027. Picton estimates that on average rental income or asset values would need to fall by more than 40% for there to be any impact on covenants and that it is in any case in constant dialogue with its lenders, who remain fully supportive of the company. With none of the RCF drawn, Picton has access to £49.0m of undrawn borrowing facilities in addition to the positive cash balance.
Most current capital projects have been suspended until site access can be obtained, including at the Stanford Building in Covent Garden where the refurbishment is nearing completion (H120 ERV £1.6m). The company anticipates that it will take a further eight weeks to reach practical completion once work recommences.
Financials and valuation
We expect results for the year ended 31 March 2020 (FY20) to be published in June. We have made no material adjustments to our FY20 underlying earnings forecast other than to factor in the January disposal. However, although the Q420 portfolio valuation was robust, as a result of the COVID-19 impact it was below (c £9m) our expectations that were set following the interim results and supported by the Q320 NAV update. This feeds through into a modestly lower forecast FY20 fully diluted EPRA NAV per share of 95p (previously 94p).
Given the high level of economic and sector uncertainty, we have temporarily removed our FY21 forecasts.
Dividend decision yet to be taken
Picton has declared and paid three quarterly dividends of 0.875p per share. A decision on the Q4 DPS is normally taken towards the end of April and Picton says that it will assess the prevailing circumstances at that time before making a further announcement.
Our FY20 forecast assumes payment of the Q420 DPS at an unchanged 0.875p per share at a cash cost of £4.8m and this is fully covered by our forecast FY20 EPRA earnings.
Valuation
Picton shares now yield almost 5% and trade at a significant discount to FY20e EPRA NAV per share (0.81x). Uncertainty as to the extent and duration of the economic impacts of the COVID-19 pandemic makes it difficult to predict the level of near-term income earnings and capital values on both a company and sector level. Picton benefits from a well-positioned but diversified portfolio, a strong balance sheet and liquidity position, and an experienced management team with a strong track record of property-level returns versus the sector benchmark.
Exhibit 2: Financial summary
Year end 31 March |
£'000s |
2016 |
2017 |
2018 |
2019 |
2020e |
|
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
|||
PROFIT & LOSS |
|||||||
Rents receivable, adjusted for lease incentives |
39,663 |
40,555 |
41,412 |
40,942 |
38,550 |
||
Other income |
1,107 |
7,356 |
1,443 |
1,073 |
1,658 |
||
Service charge income |
5,153 |
6,487 |
5,927 |
5,718 |
6,172 |
||
Revenue from properties |
|
|
45,923 |
54,398 |
48,782 |
47,733 |
46,380 |
Property operating costs |
(3,308) |
(3,501) |
(2,578) |
(2,342) |
(2,592) |
||
Property void costs |
(1,540) |
(2,023) |
(1,830) |
(1,373) |
(3,076) |
||
Recoverable service charge costs |
(5,153) |
(6,487) |
(5,927) |
(5,718) |
(6,172) |
||
Property expenses |
(10,001) |
(12,011) |
(10,335) |
(9,433) |
(11,840) |
||
Net property income |
|
|
35,922 |
42,387 |
38,447 |
38,300 |
34,540 |
Administrative expenses |
(4,411) |
(5,249) |
(5,566) |
(5,842) |
(5,800) |
||
Operating Profit before revaluations |
|
|
31,511 |
37,138 |
32,881 |
32,458 |
28,739 |
Revaluation of investment properties |
44,171 |
15,087 |
38,920 |
10,909 |
2,841 |
||
Profit on disposals |
799 |
1,847 |
2,623 |
379 |
373 |
||
Operating Profit |
76,481 |
54,072 |
74,424 |
43,746 |
31,953 |
||
Net finance expense |
(11,417) |
(10,823) |
(9,747) |
(9,088) |
(8,239) |
||
Debt repayment fee |
(3,245) |
||||||
Profit Before Tax |
|
|
65,064 |
43,249 |
64,677 |
31,413 |
23,714 |
Taxation |
(216) |
(499) |
(509) |
(458) |
68 |
||
Profit After Tax (IFRS) |
64,848 |
42,750 |
64,168 |
30,955 |
23,782 |
||
Adjust for: |
|||||||
Investment property valuation movement |
(44,171) |
(15,087) |
(38,920) |
(10,909) |
(2,841) |
||
Profit on disposal of investment properties |
(799) |
(1,847) |
(2,623) |
(379) |
(373) |
||
Exceptional income /expenses |
0 |
(5,250) |
0 |
3,245 |
0 |
||
Profit After Tax (EPRA) |
19,878 |
20,566 |
22,625 |
22,912 |
20,568 |
||
Fully diluted average Number of Shares Outstanding (m) |
540.1 |
540.1 |
539.7 |
541.0 |
546.3 |
||
EPS (p) |
|
|
12.01 |
7.92 |
11.89 |
5.75 |
4.37 |
EPRA EPS (p) |
|
|
3.68 |
3.81 |
4.19 |
4.25 |
3.78 |
Dividends declared per share (p) |
|
|
3.300 |
3.325 |
3.425 |
3.500 |
3.500 |
Dividend cover (x) |
112% |
115% |
122% |
121% |
108% |
||
EPRA cost ratio including direct vacancy costs) |
22.8% |
26.1% |
23.7% |
22.9% |
29.4% |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
649,406 |
615,187 |
670,679 |
676,127 |
655,004 |
Investment properties |
646,018 |
615,170 |
670,674 |
676,102 |
654,981 |
||
Other non-current assets |
3,388 |
17 |
5 |
25 |
23 |
||
Current Assets |
|
|
37,408 |
49,424 |
50,633 |
39,477 |
42,537 |
Debtors |
14,649 |
15,541 |
19,123 |
14,309 |
19,583 |
||
Cash |
22,759 |
33,883 |
31,510 |
25,168 |
22,953 |
||
Current Liabilities |
|
|
(47,521) |
(20,635) |
(22,292) |
(23,342) |
(21,392) |
Creditors/Deferred income |
(18,430) |
(20,067) |
(21,580) |
(22,509) |
(20,559) |
||
Short term borrowings |
(29,091) |
(568) |
(712) |
(833) |
(833) |
||
Long Term Liabilities |
|
|
(222,161) |
(202,051) |
(211,665) |
(192,847) |
(166,031) |
Long term borrowings |
(220,444) |
(200,336) |
(209,952) |
(191,136) |
(164,316) |
||
Other long term liabilities |
(1,717) |
(1,715) |
(1,713) |
(1,711) |
(1,715) |
||
Net Assets |
|
|
417,132 |
441,925 |
487,355 |
499,415 |
510,118 |
Net Assets excluding goodwill and deferred tax |
|
|
417,132 |
441,925 |
487,355 |
499,415 |
510,118 |
NAV/share (p) |
77 |
82 |
90 |
93 |
94 |
||
Fully diluted EPRA NAV/share (p) |
77 |
82 |
90 |
93 |
93 |
||
CASH FLOW |
|||||||
Operating Cash Flow |
|
|
33,283 |
36,283 |
35,088 |
34,756 |
21,497 |
Net Interest |
(8,836) |
(9,211) |
(9,125) |
(8,630) |
(7,892) |
||
Tax |
(426) |
(232) |
(328) |
(845) |
11 |
||
Net cash from investing activities |
(68,123) |
48,691 |
(17,811) |
10,251 |
24,329 |
||
Ordinary dividends paid |
(17,822) |
(17,957) |
(18,487) |
(18,860) |
(19,076) |
||
Debt drawn/(repaid) |
14,591 |
(46,450) |
9,183 |
(22,616) |
(27,190) |
||
Net proceeds from shares issued/repurchased |
0 |
0 |
(893) |
(398) |
6,107 |
||
Other cash flow from financing activities |
|||||||
Net Cash Flow |
(47,333) |
11,124 |
(2,373) |
(6,342) |
(2,215) |
||
Opening cash |
|
|
70,092 |
22,759 |
33,883 |
31,510 |
25,168 |
Closing cash |
|
|
22,759 |
33,883 |
31,510 |
25,168 |
22,953 |
Debt as per balance sheet |
(249,535) |
(200,904) |
(210,664) |
(191,969) |
(165,149) |
||
Un-amortised loan arrangement fees |
0 |
(3,740) |
(3,376) |
(2,700) |
(2,330) |
||
Closing net (debt)/cash |
|
|
(226,776) |
(170,761) |
(182,530) |
(169,501) |
(144,526) |
Net LTV |
34.6% |
27.3% |
26.7% |
24.7% |
21.8% |
Source: Picton Property Income data, Edison Investment Research forecasts
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