Picton Property Income — Capturing rent potential in Q3

Picton Property Income (LSE: PCTN)

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Research: Real Estate

Picton Property Income — Capturing rent potential in Q3

Picton Property Income’s (PCTN’s) Q324 trading update details a range of positive leasing events that provided underpinning to income, reflected in its well-covered DPS. Together with progress on specific asset management initiatives this mitigated the impact of market-wide outward yield movements on NAV.

Martyn King

Written by

Martyn King

Director, Financials

Real Estate

Picton Property Income

Capturing rent potential in Q3

December FY24 NAV update

Real estate

31 January 2024

Price

67p

Market cap

£365m

Net debt (£m) at 31 December 2023

206.3

Net LTV at 31 December 2023

27.7%

Shares in issue

545.2m

Free float

100%

Code

GB00B0LCW208

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(3.5)

4.4

(16.9)

Rel (local)

(2.5)

(1.5)

(15.4)

52-week high/low

82.30p

61.60p

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 event

FY24 annual results

Expected 23 May 2024

Analyst

Martyn King

+44 (0)20 3077 5700

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

Picton Property Income’s (PCTN’s) Q324 trading update details a range of positive leasing events that provided underpinning to income, reflected in its well-covered DPS. Together with progress on specific asset management initiatives this mitigated the impact of market-wide outward yield movements on NAV.

Year end

Net property income (£m)

EPRA earnings* (£m)

EPRA
EPS* (p)

DPS
(p)

NAV** per share (p)

P/NAV
(x)

Yield
(%)

03/23

36.3

21.3

3.9

3.50

100

0.67

5.2

03/24e

36.6

20.5

3.8

3.50

96

0.70

5.2

03/25e

37.8

22.0

4.0

3.60

97

0.69

5.4

03/26e

39.0

23.3

4.3

3.70

98

0.69

5.5

Note: *EPRA earnings exclude revaluation gains/losses and other exceptional items. **NAV measure is net tangible assets (NTA), currently the same as IFRS NAV.

Rent uplifts support income and capital values

The Q324 DPS of 0.875p was 108% covered by EPRA earnings (H124: 105%). Leasing activity locked in some significant rental increases, all at or above estimated rental value (ERV) and/or passing rent, while overall occupancy was unchanged at 90% (or 92% adjusted for the alternative use strategies being undertaken in Cardiff and Angel Gate). MSCI monthly market data show a negative total return of 1.4% for the period including a negative capital return of 2.7%. The 1.5% like-for-like decline in Picton’s portfolio values was ahead of this, supported by asset management and continuing to benefit from a strong weighting to better-performing industrial assets (59% by value). NAV per share was 2.5% lower at 96p and, adjusted for DPS paid, the NAV total return was -1.6%. We have reduced forecast NAVs by c 2p to take account of the Q3 valuation movement and continue to assume flat valuations going forwards, with no other forecast changes.

Focused on growing income

At a portfolio level, Picton has outperformed the MSCI index in each of the past 10 years, delivering upper quartile performance since inception in 2005. This has driven strong accounting returns, averaging approximately 10% pa over the same period. Picton remains open to value creating consolidation opportunities, seeking to lever its performance record and internal management structure, but realising its strong organic growth opportunities are its focus. While portfolio rents continue to increase across all sectors, as is true of the broader market, there is a significant opportunity to close the wide (£13.2m at H1) gap between current passing rents and ERV. Active asset management plans, aimed at unlocking this, and including repurposing of selected office properties, are making good progress. With sector capital values an average 25% lower from the peak in 2022, the much-anticipated decline in interest rates should have a stabilising effect.

Valuation: Fully covered DPS with room for growth

The current annualised run rate of DPS (3.5p), which we expect to be fully covered, represents a prospective yield of 5.2%. We forecast DPS growth, fully covered, in FY25 and FY26. Meanwhile the shares trade at a 30% discount to Q324 NAV.

Further details from the trading update

We have recently published updates on Picton’s robust H124 performance in a challenging market and updated our forecasts following the closure of merger discussions with UK Commercial Property REIT (UKCM).

Exhibit 1 shows clearly how Q324 dividends were fully covered by EPRA earnings (108% adjusting for the rounding of data in the table) with property revaluation movements reducing NAV.

Exhibit 1: Quarterly NAV movements FY24 year-to-date

30-Jun-23

30-Sep-23

31-Dec-23

Pence per share

Q124

Q224

Q324

Opening NAV/EPRA NTA per share

100.4

99.4

98.5

Movement in property values

(1.0)

(1.1)

(2.5)

Net income after tax

0.8

1.0

0.9

Dividends paid

(.8)

(0.9)

(0.9)

Other

0.0

0.1

0.0

Closing NAV/EPRA NTA per share

99.4

98.5

96.0

Source: Picton Property Income

Positive leasing events during the quarter mirrored the key reversionary opportunities within the portfolio, of raising industrial rents to market levels and reducing void space in the office sector. They included:

Four rent reviews in the industrial and retail sectors, with annual rent of £2.3m, which were at an average 33% uplift to previous passing rent and a 5% premium to the H124 ERV or the ERV at the time of the review if prior.

Two leases were renewed/regeared in the industrial sector, with a combined annual rent of £0.1m, double the previous passing rent and in line with the Q324 ERV.

Five lettings in the industrial and office sectors, securing a combined annual rent of £0.5m, in line with the Q324 ERV.

Additionally, the repurposing initiative of offices at Angel Gate in London EC1 were advanced by the securing of permitted development rights on the remaining 34,000 sq ft, enabling residential use across the whole property. Picton says that it is now in the process of bringing this asset to the market for disposal in early 2024.

At end-Q323, Picton’s portfolio valuation reflected a net initial yield of 5.3% (allowing for void holding costs) compared with 5.0% at end-H124, and a reversionary yield of 7.0% (H124: 6.8%). The outward drift of yields affected all sectors but particularly offices and less so in industrials. The impact on valuation was mitigated by the income progress detailed above.

Exhibit 2: Portfolio valuation movements during Q3

Portfolio value by sector

Like-for-like change

Average equivalent yield movement in basis points

Industrials

58.9%

-1.0%

+11

o/w South East

42.0%

o/w Rest of UK

16.9%

Office

30.4%

-2.4%

+18

o/w London City & West End

7.1%

o/w Inner & Outer London

1.7%

o/w South-East

8.0%

o/w Rest of UK

8.9%

o/w Alternative use assets

4.7%

Retail & Leisure

10.7%

-1.9%

+13

o/w Retail Warehouse

6.7%

o/w High Street Rest of UK

2.4%

o/w Leisure

1.6%

Portfolio total

100.0%

-1.5%

Source: Picton Property Income

Exhibit 3: Financial summary

Year end 31 March (£m)

2022

2023

2024e

2025e

2026e

PROFIT & LOSS

Rental income

40.1

43.0

43.7

44.3

45.6

Other income

0.2

0.4

0.6

0.5

0.5

Service charge income

6.2

8.4

9.6

9.7

10.0

Revenue from properties

46.5

51.8

53.9

54.5

56.1

Property operating costs

(2.5)

(3.5)

(3.2)

(3.2)

(3.3)

Property void costs

(2.4)

(3.6)

(4.5)

(3.8)

(3.8)

Recoverable service charge costs

(6.2)

(8.4)

(9.6)

(9.7)

(10.0)

Property expenses

(11.1)

(15.6)

(17.3)

(16.7)

(17.1)

Net property income

35.4

36.3

36.6

37.8

39.0

Administrative expenses

(5.8)

(6.0)

(6.6)

(6.9)

(7.2)

Operating Profit before revaluations

29.7

30.3

30.0

30.9

31.8

Revaluation of investment properties

129.8

(110.8)

(11.6)

0.0

0.0

Profit on disposals

0.0

0.0

0.0

0.0

0.0

Operating Profit

159.5

(80.5)

18.4

30.9

31.8

Net finance expense

(8.5)

(9.0)

(9.5)

(8.9)

(8.5)

Debt repayment fee

(4.0)

Profit Before Tax

147.0

(89.5)

8.9

22.0

23.3

Taxation

0.0

0.0

0.0

0.0

0.0

Profit After Tax (IFRS)

147.0

(89.5)

8.9

22.0

23.3

Adjust for:

Investment property valuation movement

(129.8)

110.8

11.6

0.0

0.0

Profit on disposal of investment properties

(0.0)

0.0

0.0

0.0

0.0

Exceptional income /expenses

4.0

0.0

0.0

0.0

0.0

EPRA earnings

21.2

21.3

20.5

22.0

23.3

Fully diluted average Number of Shares Outstanding (m)

547.3

546.9

547.1

547.6

547.6

EPS (p)

26.93

(16.42)

1.64

4.03

4.27

EPRA EPS (p)

3.9

3.9

3.8

4.0

4.3

Dividend declared per share (p)

3.45

3.50

3.50

3.60

3.70

Dividends paid per share (p)

3.375

3.500

3.500

3.575

3.675

Dividend cover (x) EPRA EPS/DPS declared

1.13

1.12

1.08

1.12

1.15

Dividend cover (x) - paid dividends

1.15

1.12

1.08

1.14

1.19

Total return

27.9%

-13.7%

-0.6%

4.3%

4.5%

EPRA cost ratio (excluding direct vacancy costs)

19.9%

21.3%

21.8%

22.1%

22.4%

BALANCE SHEET

Non-current assets

834.4

749.8

729.8

713.0

718.7

Investment properties

830.0

746.3

726.3

709.5

715.2

Other non-current assets

4.4

3.4

3.5

3.5

3.5

Current assets

61.4

42.8

41.8

47.2

45.8

Debtors

22.9

22.7

26.1

26.1

26.1

Cash

38.5

20.1

15.8

21.1

19.7

Current Liabilities

(20.3)

(20.7)

(19.7)

(19.7)

(19.7)

Creditors/Deferred income

(19.3)

(19.6)

(18.6)

(18.6)

(18.6)

Current borrowings

(1.1)

(1.1)

(1.2)

(1.2)

(1.2)

Non-Current Liabilities

(218.4)

(224.2)

(226.8)

(212.2)

(212.5)

Non-current borrowings

(215.8)

(221.6)

(224.2)

(209.6)

(209.9)

Other non-current liabilities

(2.6)

(2.6)

(2.6)

(2.6)

(2.6)

Net assets

657.1

547.6

525.1

528.3

532.3

NAV per share (p)

120

100

96

97

98

EPRA NTA per share (p)

120

100

96

97

98

CASH FLOW

Operating cash flow

28.1

30.9

26.4

31.6

32.5

Net Interest

(8.1)

(7.9)

(9.1)

(8.6)

(8.2)

Tax

0.0

0.0

0.0

0.0

0.0

Net cash from investing activities

(33.8)

(26.8)

(4.8)

16.7

(5.7)

Ordinary dividends paid

(18.4)

(19.1)

(19.1)

(19.5)

(20.0)

Debt drawn/(repaid)

52.2

5.4

2.3

(14.9)

0.0

Net proceeds from shares issued/repurchased

(0.7)

(1.1)

0.0

0.0

0.0

Other cash flow from financing activities

(4.0)

Net cash from financing activities

29.0

(14.8)

(16.8)

(34.4)

(20.0)

Change in cash

15.2

(18.5)

(4.3)

5.4

(1.4)

Opening cash

23.4

38.5

20.1

15.8

21.1

Closing cash

38.5

20.1

15.8

21.1

19.7

Debt as per balance sheet

(216.8)

(222.8)

(225.4)

(210.8)

(211.1)

Un-amortised loan arrangement fees

(2.0)

(1.7)

(1.4)

(1.1)

(0.8)

Closing net (debt)/cash

(180.3)

(204.4)

(211.0)

(190.7)

(192.2)

Net LTV

21.2%

26.7%

28.3%

26.1%

26.1%

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


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 £60,000 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 2024 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.

New Zealand

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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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 £60,000 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 2024 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.

New Zealand

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.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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