Picton Property Income |
Progress continues |
NAV update |
Real estate |
3 August 2017 |
Share price performance
Business description
Next events
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Picton Property Income’s 25 July NAV update showed that asset management initiatives have continued to add value through a series of new and renewed leases, as well as two asset disposals at 37% above their March 2017 valuations. Like-for-like valuations in the office and industrial sectors, representing 75% of the portfolio, rose over 2% and earnings of £5.3m gave 1.16x dividend cover, also contributing to NAV gains. Management continues to execute the strategy of investing in and actively managing a regional property portfolio to provide rising income and increasing capital value.
Year end |
Revenue (£m) |
Adj. EPRA EPS* (p) |
DPS |
EPRA NAV/ |
P/EPRA NAV |
Yield |
03/16 |
40.8 |
3.68 |
3.30 |
77.2 |
1.11 |
3.8 |
03/17 |
47.9 |
3.80 |
3.30 |
81.8 |
1.05 |
3.8 |
03/18e |
41.8 |
3.90 |
3.40 |
84.2 |
1.02 |
4.0 |
03/19e |
42.8 |
4.03 |
3.50 |
84.7 |
1.01 |
4.1 |
Note: *EPS are normalised, excluding exceptional items.
NAV update
Picton’s announcement showed that NAV rose to £452.5m or 83.8p per share in the quarter to 30 June 2017 (31 March 2017: £441.9m and 81.8p), in part due to a 1.8% like-for-like revaluation gain on the portfolio, but also with increased dividend cover (116% from 106% at 31 March 2017) from higher earnings (£5.3m vs £4.9m). A 0.85p quarterly dividend was paid and another declared, equivalent to an annual dividend of 3.4p, a 4% yield on the current share price; the quarterly total NAV return was 3.4%. The rise in NAV helped reduce net LTV to 27.0% (March 2017: 27.4%) and £51m of funds remain undrawn from the two revolving credit facilities. Combined with proceeds from two recent disposals, these provide capital for meaningful further portfolio and earnings growth.
Asset management adding value
The property portfolio increased 1.8% in value on a like-for-like basis with five lettings completed at an average of 2% above March 2017 estimated rental value (ERV), adding £0.9m to the rent roll. In addition, four re-gears and lease renewals were negotiated, adding £0.3m pa at 5% above March ERV. Occupancy was flat quarter-on-quarter at 94%, but the sales of two non-income producing assets were agreed for £9.86m, 6% above the June valuation. These were completed in the current quarter, increasing occupancy to 96%.
Valuation: Attractive dividend and capital growth
The shares have continued to perform well, gaining 2p since our initiation in June, in line with NAV growth and maintaining the c 2% premium to NAV. This remains below the peer group average of c 9%. The 4% prospective dividend yield is below the group average of 5%, which may explain some of the difference, but there may be scope 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.
Summary of announcement and estimate changes
In this section we give a synopsis of the NAV update before explaining the small changes to our estimates that result from it. Essentially, continued focus on occupiers and active asset management contributed to reductions in vacancy and increases in rental income at several assets that were already let, feeding through to higher valuations. Our estimates have changed slightly to take account of these, but our dividend assumption remains the same.
■
A 1.8% like-for-like portfolio valuation increase, the disposal of two assets for £9.86m, or £2.7m (37%) above their previous valuation, and an increase in retained earnings all contributed to a 2p increase in NAV per share, as shown in Exhibit 1.
Exhibit 1: NAV changes in the quarter to 30 June 2017
Total (£m) |
% change |
Per share (p) |
|
NAV at 31 March 2017 |
441.9 |
81.8 |
|
Movement in property value |
9.6 |
2.2 |
1.8 |
Net income for the quarter |
5.3 |
1.2 |
1.0 |
Dividends paid |
(4.6) |
(1.0) |
(0.8) |
Other |
0.3 |
0.0 |
0.0 |
NAV at 30 June 2017 |
452.5 |
2.4 |
83.8 |
Source: Picton Property Income data
■
Net LTV fell from 27.4% to 27.0%. Debt remains 100% fixed, with an average term of 11.5 years and average cost of 4.2%. The revolving credit facility due to expire in 2018 has been extended to June 2021, initially for £24m at 190bp above three-month Libor. Together the two revolving credit facilities give the company £51m of undrawn debt finance.
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The portfolio consisted of 53 assets valued at £626.5m with an average lot size of £12m at 30 June (now 51 assets worth c £617.5m or £12.1m on average). The top 10 assets by value comprised 48% (now 49%) of the portfolio and the sectoral and geographic breakdown as at 30 June is shown in Exhibit 2. Valuation growth in the quarter came from the office and industrial sectors with like-for-like increases of 2.9% and 2.1%, respectively, while the retail and leisure assets had the same valuation quarter-on-quarter. The portfolio had a net initial yield based on contracted rent of 5.8%, with a reversionary yield of 6.8% and a weighted unexpired lease term of 5.5 years.
Exhibit 2: Portfolio composition
Sector |
Value (£m) |
% of portfolio |
Value (£m) |
Location |
|
Industrial |
251.9 |
40.2% |
27.2% |
170.4 |
South East |
13.0% |
81.4 |
Rest of UK |
|||
Office |
216.8 |
34.6% |
4.3% |
26.9 |
London City + West End |
9.1% |
57.0 |
Inner and Outer London |
|||
12.3% |
77.1 |
South East |
|||
8.9% |
55.8 |
Rest of UK |
|||
Retail and Leisure |
157.9 |
25.2% |
10.3% |
64.5 |
Retail warehouse |
7.2% |
45.1 |
High Street – rest of UK |
|||
5.5% |
34.5 |
High Street – South East |
|||
2.2% |
13.8 |
Leisure |
|||
Source: Picton Property Income data
■
Asset management initiatives in the quarter included the disposal of two vacant office buildings in Bracknell for a total of £9.86m, 37% above the March valuation and 6% above the June one, which have now completed.
■
The largest office vacancy in the portfolio at 50 Farringdon Road was reduced with two suites totalling 11,900 sqft let for rent of £0.62m pa, 2% above March ERV and taking the building to 75% occupancy.
■
A lease was renewed at Angel Gate in Islington, securing a 28% increase in passing rent to £58,000 pa, in line with ERV. Two other suites in the same building are under offer and two more are being refurbished for re-leasing.
■
A lease to Standard Life at 180 West George Street in Glasgow, where a full refurbishment is underway, was renewed 4% above March ERV for £0.19m pa.
■
In the industrial portfolio the largest vacancy was let at River Way in Harlow following planning consent for change of use. The new lease has a 10-year term for £0.2m per year with RPI-linked uplifts collared and capped at 2% and 4%. Two other industrial rent reviews were settled at £0.16m pa, a 16% increase and 5% ahead of March ERV.
■
Finally, in the retail and leisure portfolio, the 152 bed Strathmore Hotel in Luton reopened after the incoming occupier, Thistle, completed a comprehensive refurbishment.
Minor changes to estimates
We have adjusted our previous estimates to include the revaluation gains reported in the quarter and for the subsequent disposals. The increase in occupancy and rental income is within the scope of our previous assumptions and because the disposals were of non-income producing assets, we have not changed our rental income estimates. Our dividend estimates are also unchanged.
Exhibit 3: Estimate changes
Revenue (£m) |
Adj. EPRA EPS (p) |
NAV/share (p) |
DPS (p) |
|||||||||
Old |
New |
% change |
Old |
New |
% change |
Old |
New |
% change |
Old |
New |
% change |
|
FY18e |
41.8 |
41.8 |
0% |
3.90 |
3.90 |
0% |
82.3 |
84.2 |
2% |
3.40 |
3.40 |
0% |
FY19e |
42.8 |
42.8 |
0% |
4.03 |
4.03 |
0% |
82.9 |
84.7 |
2% |
3.50 |
3.50 |
0% |
Source: Edison Investment Research
Valuation
Picton’s 4% dividend yield and strong performance history support a c 2% premium to EPRA NAV, while the peer group trades at an average premium of 8%. We would argue that Picton’s earnings performance and rebalancing of the portfolio towards sectors that may be more resilient to the effects of Brexit warrant a valuation closer to the average. As mentioned above, our dividend discount model still gives a valuation range of 79p to 103p using a 7% cost of equity, 3% dividend growth and a 50bp sensitivity to each.
Exhibit 4: Peer comparison
Company |
Price (p) |
Market cap (£m) |
EPRA NAV/ |
P/NAV |
DPS |
Yield |
Picton |
86.00 |
464.4 |
83.8 |
1.03 |
3.40 |
4.0% |
A&J Mucklow |
508.50 |
321.9 |
448.0 |
1.14 |
22.10 |
4.3% |
Custodian REIT |
114.50 |
402.3 |
104.3 |
1.10 |
6.50 |
5.7% |
F&C Commercial Property |
148.00 |
1,183.1 |
139.4 |
1.06 |
6.00 |
4.1% |
Regional REIT |
102.75 |
308.8 |
101.9 |
1.01 |
8.00 |
7.8% |
Schroders REIT |
62.00 |
321.5 |
64.8 |
0.96 |
2.48 |
4.0% |
Strd Life Invst Ppty Trust |
92.50 |
359.7 |
83.9 |
1.10 |
4.76 |
5.1% |
UK Commercial Ppty Trust |
91.15 |
1,1841.4 |
87.4 |
1.04 |
3.68 |
4.0% |
Average |
159.91 |
583.1 |
147.1 |
1.09 |
7.65 |
5.0% |
Source: Bloomberg data as at 2 August 2017, Edison Investment Research
Exhibit 5: Financial summary
Year end 31 March |
£000s |
2014 |
2015 |
2016 |
2017 |
2018e |
2019e |
|
PROFIT & LOSS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
Revenue |
|
|
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 |
9,600 |
0 |
||
Profit on disposals |
5,660 |
412 |
799 |
1,847 |
558 |
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 |
41,272 |
31,854 |
||
Net Interest |
(10,868) |
(10,930) |
(11,417) |
(10,823) |
(9,578) |
(9,564) |
||
Profit Before Tax |
|
37,705 |
69,202 |
65,064 |
43,249 |
31,693 |
22,289 |
|
Taxation |
(357) |
(347) |
(216) |
(499) |
(731) |
(514) |
||
Profit After Tax |
37,348 |
68,855 |
64,848 |
42,750 |
30,962 |
21,775 |
||
Profit After Tax (EPRA) |
13,266 |
15,280 |
19,878 |
20,516 |
21,038 |
21,775 |
||
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 |
5.73 |
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 |
619,831 |
623,331 |
|
Investment properties |
417,207 |
532,926 |
646,018 |
615,170 |
616,610 |
620,110 |
||
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 |
61,043 |
60,853 |
|
Debtors |
10,527 |
14,019 |
14,649 |
16,077 |
14,246 |
14,576 |
||
Cash |
32,352 |
70,092 |
22,759 |
33,883 |
46,796 |
46,276 |
||
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) |
(205,477) |
(205,477) |
|
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) |
(1,937) |
(1,937) |
||
Net Assets |
|
214,096 |
369,970 |
417,132 |
441,925 |
454,530 |
457,398 |
|
Net Assets excluding goodwill and deferred tax |
214,096 |
369,970 |
417,132 |
441,925 |
454,530 |
457,398 |
||
NAV/share (p) |
56.4 |
68.5 |
77.2 |
81.8 |
84.2 |
84.7 |
||
EPRA NAV/share (p) |
56.4 |
68.5 |
77.2 |
81.8 |
84.2 |
84.7 |
||
CASH FLOW |
||||||||
Operating Cash Flow |
|
23,145 |
24,705 |
33,283 |
36,283 |
32,688 |
31,451 |
|
Net Interest |
(8,768) |
(8,695) |
(8,836) |
(9,211) |
(9,578) |
(9,564) |
||
Tax |
(394) |
(369) |
(426) |
(232) |
0 |
0 |
||
Net cash from investing activities |
(10,838) |
(61,729) |
(68,123) |
48,691 |
8,160 |
(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 |
||
Other cash flow from financing activities |
||||||||
Net Cash Flow |
9,446 |
37,740 |
(47,333) |
11,124 |
12,913 |
(520) |
||
Opening cash |
|
22,906 |
32,352 |
70,092 |
22,759 |
33,883 |
46,796 |
|
Closing cash |
|
32,352 |
70,092 |
22,759 |
33,883 |
46,796 |
46,276 |
|
Source: Picton Property Income data, Edison Investment Research
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