Strong start to FY22

Picton Property Income 4 August 2021 Update
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Picton Property Income

Strong start to FY22

Quarterly update

Real estate

4 August 2021

Price

92.0p

Market cap

£502m

Net debt (£m) 30 June 2021

144.7

Net LTV at 30 June 2021

20.6%

Shares in issue

547.6m

Free float

100%

Code

PCTN

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

5.9

1.3

40.0

Rel (local)

5.5

0.2

15.5

52-week high/low

93.80p

59.50p

Business description

Picton Property Income is an internally managed UK REIT that invests in a diversified portfolio of commercial property across the UK. It is total return driven with an income focus and aims to generate attractive returns through proactive management of the portfolio.

Next events

Q122 DPS paid

31 August 2021

AGM (provisional)

17 November 2021

Analysts

Martyn King

+44 (0)20 3077 5745

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

Picton Property Income has made a strong start to FY22, reporting a 4.0% NAV total return for the three months ended 30 June 2021 (Q122), and has increased quarterly DPS by a further 6.3%. Like-for-like portfolio valuation and NAV have now grown for four consecutive quarters, reflecting sector positioning, asset management and an improving market environment. Strong reversionary potential and financial flexibility for accretive acquisitions are positive indicators for future progress.

Year end

Net property income (£m)

EPRA
earnings* (£m)

EPRA
EPS* (p)

DPS**
(p)

EPRA NTA***/
share (p)

P/NTA
(x)

Yield
(%)

03/20

33.6

19.9

3.7

3.25

93

0.99

3.5

03/21

33.5

20.1

3.7

2.93

97

0.95

3.2

03/22e

33.9

20.4

3.7

3.50

103

0.90

3.8

03/23e

35.2

21.4

3.9

3.58

107

0.86

3.9

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

Increasing our NAV forecasts

Q122 net asset value (NAV)/EPRA net tangible assets (NTA) per share increased by 3.2% to 99.9p (end-FY21: 96.8p), including a 2.9% like for like valuation increase. Stable occupancy (91%) and continuing strong rent collection support an increase in quarterly DPS to 0.85p (Q421:0.8p), an annualised 3.4p, and 121% covered by EPRA earnings. Performance continues to be led by the industrial sector (54% of the portfolio) but shows signs of broadening, with office valuations (35% of the portfolio) up modestly and even the underweight position in retail & leisure (11%) benefiting from a strong gain in retail warehouse assets. We have made no change to our EPRA earnings and DPS forecasts (FY22e modestly ahead of the current run rate), but have increased our NAV/EPRA NTA forecasts.

Building on a strong track record

The strong start to FY22 partly reflects an improved market environment, with occupiers benefiting from lockdown easing, and investment market volumes improving, but builds on Picton’s strong track record: the All Property capital return for the MSCI Monthly UK Property Index was 2.7% for the quarter. The company seeks to be one of the consistently best-performing diversified UK REITs, and on an ungeared basis to 31 March 2021 (end-FY21) it had outperformed the MSCI UK Quarterly Property Index over one, three, five and 10 years and since inception, with a top quartile performance in each of the past six years. Enhanced by moderate gearing and good cost management, EPRA NTA total return in the five years to end-FY21 was a compound annual average of 8.0% and 6.6% in FY21.

Valuation: Good yield with upside to covered DPS

Based on the increased annualised rate of quarterly DPS (3.4p), the yield is 3.7% (and slightly higher on our forecast DPS). This compares favourably with risk-free alternatives and we expect further DPS growth in FY22 and FY23. The discount to end-Q122 EPRA NTA is c 7%, above the five-year average of 3%.

Further details about the Q122 performance

Rent collection remains strong, with 94% of June quarter rents either collected (87%) or expected to be received under agreed monthly payments. This is in line with March quarter collections after the same number of days and Picton expects the collection rate to improve further in coming weeks. The March quarter collection rate stands at 95%.

Exhibit 1 shows the movement in Q122 NAV/EPRA NTA. The 3.1p per share growth included a 3.0p contribution from property revaluation gains and 0.1p of retained earnings.

Exhibit 1: Quarterly NAV/EPRA NTA movement

£m

Change

Pence per share

NAV at 31 March 2021

528.2

96.8

Movement in property values

16.5

3.1%

3.0

Net income

5.3

0.9%

0.9

Dividends paid

(4.4)

-0.8%

(0.8)

Other

0.1

0.0

NAV at 30 June 2021

545.7

3.2%

99.9

Source: Picton Property Income

Exhibit 2 shows the consistently positive total returns over the past four quarters (on an annual basis, it has had positive total returns over the past eight years), supported by recovery and growth in property valuations since early 2021 when the pandemic first hit.

Exhibit 2: NAV/EPRA NTA total returns (£m)

Q121

Q221

Q321

Q421

Q122

Opening NAV/EPRA NTA

509.3

503.2

505.9

521.0

528.2

Movement in property values

(6.9)

0.5

14.0

6.1

16.5

Equity issued

0.0

0.0

0.0

0.0

0.0

Net income after tax

4.0

6.1

4.7

5.3

5.3

Dividends paid

(3.4)

(3.4)

(3.8)

(4.4)

(4.4)

Other

0.2

(0.4)

0.2

0.2

0.1

Closing NAV/EPRA NTA

503.2

505.9

521.0

528.2

545.7

NAV/EPRA NTA total return

-0.6%

1.2%

3.8%

2.2%

4.0%

Source: Picton Property Income

Strong investment and occupational demand continued to drive industrial sector performance, with the high level of occupancy within the portfolio supporting rental growth. The six rent reviews that Picton completed in Q122 were all in the industrial sector, generating an average 21% increase against the previous passing rent. The combined annual rent of £0.5m was on average 15% above the end-FY21 estimated rental value (ERV).

As previously reported, all of the remaining office space at Stanford Building in London WC2 was let at an average rental of £80 per square foot.This was slightly (3%) below ERV but reflects a longer than average 10-year lease commitment. In general terms, Picton says demand for smaller office suites in central London remains muted but that it is seeing good demand in the regions, with space under offer at a number of buildings. At end-FY21, the reversionary income potential within Picton’s office portfolio was £5.9m (out of a total £9.0m), of which £3.4m represented void space (including the subsequently let space at Stanford Building).

The positive Q122 valuation movement in retail and leisure assets was driven by retail warehouse assets, which more than offset a slight decline in high street retail.

Exhibit 3: Portfolio split and valuation movement in Q122

Portfolio allocation

Like for like valuation change

Industrial weighting

53.9%

4.8%

o/w South East

40.6%

o/w Rest of UK

13.3%

Office weighting

35.0%

0.2%

o/w South East

10.7%

o/w Rest of UK

11.1%

o/w City & West End

13.2%

Retail & Leisure weighting

11.1%

2.3%

o/w Retail Warehouse

6.9%

o/w High Street Rest of UK

2.8%

o/w Leisure

1.4%

Total

100.0%

2.9%

Source: Picton Property Income. Note: o/w, of which.

Edison forecasts

We have made no change to our EPRA earnings forecasts, set out in detail in our June outlook note. We have also left our FY22e DPS forecast of 3.5p unchanged, which implies a further small increase in the quarterly rate of DPS before year-end. The Q122 property valuation performance was stronger than we had anticipated and our FY22 NAV/EPRA NTA per share forecast is increased from 101p to 103p, with a similar uplift in FY23 to 107p. Our forecasts do not include accretive acquisitions, although with low gearing (Q122 LTV of 20.9%) and undrawn debt capacity of £50m Picton is well placed to take advantage of opportunities that may arise.

Exhibit 4: Financial summary

Year end 31 March (£m)

2017

2018

2019

2020

2021

2022e

2023e

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Rents receivable, adjusted for lease incentives

40.6

41.4

40.9

37.8

36.6

38.1

39.4

Other income

7.4

1.4

1.1

1.2

1.5

0.4

0.4

Service charge income

6.5

5.9

5.7

6.7

5.3

5.7

5.9

Revenue from properties

54.4

48.8

47.7

45.7

43.3

44.2

45.7

Property operating costs

(3.5)

(2.6)

(2.3)

(2.3)

(2.4)

(2.4)

(2.5)

Property void costs

(2.0)

(1.8)

(1.4)

(3.0)

(2.2)

(2.2)

(2.2)

Recoverable service charge costs

(6.5)

(5.9)

(5.7)

(6.7)

(5.3)

(5.7)

(5.9)

Property expenses

(12.0)

(10.3)

(9.4)

(12.0)

(9.9)

(10.3)

(10.6)

Net property income

42.4

38.4

38.3

33.6

33.5

33.9

35.2

Administrative expenses

(5.2)

(5.6)

(5.8)

(5.6)

(5.4)

(5.7)

(6.0)

Operating Profit before revaluations

37.1

32.9

32.5

28.1

28.1

28.2

29.2

Revaluation of investment properties

15.1

38.9

10.9

(0.9)

12.9

29.5

19.6

Profit on disposals

1.8

2.6

0.4

3.5

0.9

0.0

0.0

Operating Profit

54.1

74.4

43.7

30.7

41.8

57.7

48.9

Net finance expense

(10.8)

(9.7)

(9.1)

(8.3)

(8.0)

(7.8)

(7.8)

Debt repayment fee

0.0

0.0

(3.2)

Profit Before Tax

43.2

64.7

31.4

22.4

33.8

49.9

41.1

Taxation

(0.5)

(0.5)

(0.5)

0.1

0.0

0.0

0.0

Profit After Tax (IFRS)

42.8

64.2

31.0

22.5

33.8

49.9

41.1

Adjust for:

Investment property valuation movement

(15.1)

(38.9)

(10.9)

0.9

(12.9)

(29.5)

(19.6)

Profit on disposal of investment properties

(1.8)

(2.6)

(0.4)

(3.5)

(0.9)

0.0

0.0

Exceptional income /expenses

(5.3)

0.0

3.2

0.0

0.0

0.0

0.0

Profit After Tax (EPRA)

20.6

22.6

22.9

19.9

20.1

20.4

21.4

Fully diluted average Number of Shares Outstanding (m)

540.1

539.7

541.0

546.2

546.8

546.4

546.4

EPS (p)

7.92

11.89

5.75

4.14

6.20

9.15

7.52

EPRA EPS (p)

3.81

4.19

4.25

3.66

3.68

3.74

3.93

Dividend declared per share (p)

3.33

3.43

3.50

3.25

2.93

3.50

3.58

Dividends paid per share (p)

3.300

3.400

3.500

3.500

2.750

3.425

3.560

Dividend cover (x) EPRA EPS/DPS declared

115%

122%

121%

113%

126%

107%

110%

Dividend cover (x) - paid dividends

115%

122%

121%

105%

134%

109%

110%

EPRA cost ratio including direct vacancy costs)

26.1%

23.7%

22.9%

28.3%

26.9%

26.5%

26.5%

BALANCE SHEET

Fixed Assets

615.2

670.7

676.1

654.5

669.5

704.6

730.2

Investment properties

615.2

670.7

676.1

654.5

665.4

700.5

726.1

Other non-current assets

0.0

0.0

0.0

0.0

4.1

4.1

4.1

Current Assets

49.4

50.6

39.5

41.2

42.9

40.2

37.3

Debtors

15.5

19.1

14.3

17.6

19.6

19.0

18.0

Cash

33.9

31.5

25.2

23.6

23.4

21.2

19.3

Current Liabilities

(20.6)

(22.3)

(23.3)

(20.4)

(19.9)

(19.9)

(19.9)

Creditors/Deferred income

(20.1)

(21.6)

(22.5)

(19.5)

(18.9)

(18.9)

(18.9)

Short term borrowings

(0.6)

(0.7)

(0.8)

(0.9)

(0.9)

(0.9)

(0.9)

Long Term Liabilities

(202.1)

(211.7)

(192.8)

(166.0)

(164.4)

(164.8)

(165.2)

Long term borrowings

(200.3)

(210.0)

(191.1)

(164.2)

(162.7)

(163.1)

(163.5)

Other long term liabilities

(1.7)

(1.7)

(1.7)

(1.7)

(1.7)

(1.7)

(1.7)

Net Assets

441.9

487.4

499.4

509.3

528.2

560.2

582.5

NAV/share (p)

82

90

93

93

97

103

107

Fully diluted EPRA NTA/share (p)

82

90

93

93

97

103

107

CASH FLOW

Operating Cash Flow

36.3

35.1

34.8

21.4

26.0

29.5

30.9

Net Interest

(9.2)

(9.1)

(8.6)

(7.9)

(7.5)

(7.4)

(7.4)

Tax

(0.2)

(0.3)

(0.8)

0.1

0.1

0.0

0.0

Net cash from investing activities

48.7

(17.8)

10.3

25.0

(1.3)

(5.5)

(6.0)

Ordinary dividends paid

(18.0)

(18.5)

(18.9)

(19.0)

(15.0)

(18.7)

(19.4)

Debt drawn/(repaid)

(46.5)

9.2

(22.6)

(27.2)

(1.8)

0.0

0.0

Net proceeds from shares issued/repurchased

0.0

(0.9)

(0.4)

6.1

(0.6)

0.0

0.0

Other cash flow from financing activities

Net Cash Flow

11.1

(2.4)

(6.3)

(1.6)

(0.2)

(2.1)

(1.9)

Opening cash

22.8

33.9

31.5

25.2

23.6

23.4

21.2

Closing cash

33.9

31.5

25.2

23.6

23.4

21.2

19.3

Debt as per balance sheet

(200.9)

(210.7)

(192.0)

(165.1)

(163.7)

(164.0)

(164.4)

Un-amortised loan arrangement fees

(3.7)

(3.4)

(2.7)

(2.3)

(2.6)

(2.2)

(1.8)

Closing net (debt)/cash

(170.8)

(182.5)

(169.5)

(143.9)

(142.8)

(145.0)

(146.9)

Net LTV

27.3%

26.7%

24.7%

21.7%

20.9%

20.3%

19.9%

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


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This report has been commissioned by Picton Property Income and prepared and issued by Edison, in consideration of a fee payable by Picton Property Income. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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

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

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

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General disclaimer and copyright

This report has been commissioned by Picton Property Income and prepared and issued by Edison, in consideration of a fee payable by Picton Property Income. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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

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

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

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The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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