Picton Property Income — Income is now the driver of returns

Picton Property Income (LSE: PCTN)

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Research: Real Estate

Picton Property Income — Income is now the driver of returns

Positive leasing activity and rental growth drove Picton Property Income’s H123 income returns, softening the impact of weaker market-wide property values and continuing its long track record of property outperformance versus the index. Significant opportunities for further growth in income and fully covered DPS are protected by 95% of drawn debt being fixed rate. Low gearing provides protection against further weakness in property values and NAV.

Martyn King

Written by

Martyn King

Director, Financials

Real Estate

Picton Property Income

Income is now the driver of returns

Post-H123 update

Real estate

7 December 2022

Price

84p

Market cap

£458m

Net debt (£m) at 30 September 2022

205.4

Net LTV (%) at 30 September 2022

24.1%

Shares in issue

545.2m

Free float

100%

Code

PCTN

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.9)

(1.9)

(14.9)

Rel (local)

(5.5)

(4.5)

(14.9)

52-week high/low

106p

72p

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

FY23 period-end

31 March 2022

Analyst

Martyn King

+44 (0)20 3077 5745

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

Positive leasing activity and rental growth drove Picton Property Income’s H123 income returns, softening the impact of weaker market-wide property values and continuing its long track record of property outperformance versus the index. Significant opportunities for further growth in income and fully covered DPS are protected by 95% of drawn debt being fixed rate. Low gearing provides protection against further weakness in property values and NAV.

Year end

Net property
income (£m)

EPRA
earnings*(£m)

EPRA
EPS* (p)

DPS
declared (p)

NAV** per share (p)

P/NAV
(x)

Yield
(%)

03/21

33.5

20.1

3.7

2.93

97

0.87

3.5

03/22

35.4

21.2

3.9

3.45

120

0.70

4.1

03/23e

36.5

21.0

3.9

3.50

101

0.83

4.2

03/24e

38.0

21.6

4.0

3.60

101

0.83

4.3

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

Robust EPRA earnings but NAV lower

Robust H123 results were supported by firm occupier demand, with new lets, renewals and rent reviews completed at or above estimated rental value (ERV). Passing rent increased 3% on a like-for-like basis and ERV by 5%, although occupancy was lower (90% vs 93% at end-FY22), in part due to acquisitions. EPRA earnings were stable at £10.7m, covering DPS 112%. Mirroring market-wide trends, mitigated by leasing gains, portfolio valuations reduced by 1.9%. The portfolio total return was -0.2%, ahead of the MSCI UK Quarterly Property Index return (-1.3%) as it has been over one, three, five and 10 years and since inception. EPRA NTA per share was 3.2% lower at 117p and including DPS paid of -1.75p (+6%) the total accounting return was a negative 1.7%. In an uncertain and challenging economic environment, we have cautiously reduced forecast EPRA earnings (by 2% in FY23 and 5% in FY24) and have deferred any increase in current quarterly DPS until FY24. We allow for an additional 10% decline in property values by end-FY23 (yield +0.6pp to 4.8%), reducing FY23e and FY24e NAV by c 22% and 24% respectively.

Continuing opportunities to grow income

Picton is total return driven with an income focus. It has successfully generated attractive returns through proactive management of its portfolio, investing in assets where it believes there are opportunities to enhance income and value. Most of its recurring income is distributed via fully covered DPS while retaining surplus cash for reinvestment back into the portfolio. While we expect further adjustment of property values to increased bond yields, asset management opportunities remain strong. The existing portfolio contains significant organic growth potential with a c £13m gap between passing rent and ERV. More than £5m relates to the letting of mostly refurbished assets, an opportunity to grow income and support valuations.

Valuation: DPS fully covered with surplus for growth

The current annualised rate of DPS (3.5p) represents a prospective yield of 4.2% and we forecast further growth, fully covered in FY24. The FY23e P/NAV is c 0.83x, which is below the five-year average of c 0.94x and a peak of c 1.1x.

Income is now the driver of returns

As described in detail in our June Outlook note, Picton’s strategy is total return driven with an income focus. It aims to generate attractive returns through pro-active management of its portfolio, investing in assets where it believes there are opportunities to enhance income and/or value. Its dividend policy is to distribute most of the recurring income earnings to shareholders via quarterly dividends, maintaining full cover, and generating surplus cash for reinvestment back into the portfolio. The company’s aim is to be one of the consistently best-performing diversified UK real estate investment trusts (REITs).

After a long period of rising property values, interrupted for a time during the pandemic, rising bond yields, economic and political uncertainty, and sharp reduction in investment demand for UK commercial property, this reversed in Q223 despite many sectors reporting good occupier demand and increasing rents. Although low transactional activity provides limited evidence as to where values may settle, yields continued to widen in October, and we expect this to continue.

In common with the sector, Picton’s across-the-cycle income return has been much more stable than the capital return. Successful asset management is thus key to sustainably enhancing total return, driving further income growth and supporting valuation.

Exhibit 1: Income provides a relatively more stable bedrock to performance

Source: Picton Property Income data, Edison Investment Research

Good leasing progress reflects robust occupational demand

Picton observes continuing robust occupational demand in the industrial sector, with good quality offices still attracting occupiers, and stable occupier conditions in the retail warehouse and prime high street markets. This is also reflected in rental growth, with ERV growth of 9% in the company’s industrial portfolio and 1% in offices, while retail and leisure ERV declined 1%.

During H123, 12 new lettings were completed, securing annualised income of £0.5m, in line with March ERV; five leases were renewed/regeared retaining £0.3m pa of income, 49% ahead of previous passing rent and 25% above ERV; and eight reviews were completed, securing a £0.1m pa uplift in income, 1% ahead of ERV.

In addition, Picton reported a current pipeline1 of 12 new lettings, totalling £1m pa, agreed subject to contract.

  As at 9 November 2022.

Including c £0.9m of additional income from acquisitions (see below) and an uplift from the expiry of rent free periods, passing rent increased to £40.7m pa (end-FY22: £38.7m). The like-for-like increase was 3%. The portfolio ERV increased to £53.8m (end-FY22: £49.8m), including a like-for-like increase of 5%. End-H123 occupancy of 90% was down from 93% at end-FY22. Around a third of this resulted from acquisitions (with strong asset management potential), discussed below, while ERV growth on some vacant space was also a factor.2

  EPRA occupancy is defined as the ERV of occupied space as a percentage of total ERV. The capture of rent reversion through lease renewals or lease incentive run-offs would increase rent roll without necessarily changing EPRA occupancy.

Significant further potential to organically grow income

ERV is significantly (£13.1m or 32%) above annualised passing rent of £40.7m (+3% like-for-like). Void reduction represents £5.4m of the potential upside, with the balance coming from rent-free run-offs and stepped up rents (c £5.1m) and the potential to increase existing rents to market levels at lease expiry (c £2.7m).

By sector, the greatest potential is within the industrial and office sectors. With occupancy close to full in the industrial sector, the upside is from reversion to market rents (which continue to increase), while in the office sector, considerable upside remains from void reduction. Across the portfolio, the five largest voids account for £3.1m of ERV, or more than 50% of the total.

Exhibit 2: Estimated reversionary income potential by sector at end-H123

£m unless stated otherwise

Passing rent

ERV

Occupancy

Reversion

Total

Void reduction

Other*

Industrial

18.3

25.6

95%

7.3

1.2

6.1

Office

15.0

21.3

83%

6.3

3.7

2.6

Retail and leisure

7.4

6.9

94%

(0.4)

0.5

(0.9)

40.7

53.8

90%

13.1

5.4

7.8

Source: Picton Property Income data and Edison Investment Research estimates. Note: Columns may not total due to rounding. *Includes £2.7m of rent-free ‘run-off’, £2.4m of stepped-up rents and £2.7m upside from contracted rents to market rents.

At 90%, EPRA occupancy is c 3pp below the five- and 10-year averages and c 6pp below recent peaks. The majority of the current void in the portfolio is relatively recent in origin rather than ‘stubborn’. Around 50% arose in this calendar year and a further 30% in calendar 2021. In part this relates to units becoming available during the pandemic that have subsequently been refurbished to enhance letting prospects.

The industrial vacancy represents just six units, four of which became available this year. All the units are either recently refurbished or where work has commenced on site, while occupier demand remains robust.

Occupier demand in the office sector is not as strong as for industrial, with a focus on quality. The flexible lease offering, SwiftSpace, has been introduced to the majority of remaining office vacancy, providing shorter-term leasing opportunities (typically two years with rolling six-month break options) to provide immediate income, with the potential to convert to more traditional leases (typically five years) over time. The SwiftSpace proposition has already helped to grow occupancy on smaller units with seven lettings across five assets.

Within retail & leisure, the retail warehouse portfolio is fully leased and there are two vacant high street shops, both under offer. The predominantly leisure asset at Regency Wharf in Birmingham includes a fully refurbished office element for which Picton has occupier interest that it is progressing.

Recent acquisitions are yet to fully contribute

Early in H123 (May), Picton completed the acquisition of Charlotte Terrace, a mixed-use property in Hammersmith, London, for £13.7m. It is located close to Olympia, which is currently undergoing a £1bn redevelopment to deliver a new creative district and enhance the area. The annual rental income on purchase of £0.5m pa reflected a modest net initial yield (NIY) of 3.3% off a low capital value, well below replacement cost. The company expects this to rise to over £1.1m pa once the remaining units are leased, reflecting a yield of 8%. A first letting has already been secured and, to improve office occupancy further, additional space is being upgraded for the rolling out of SwiftSpace, Picton’s flexible lease offering.

The acquisition of a second mixed-use property in Cheltenham, for £5.3m, was completed in August. It is well-located within Cheltenham’s pedestrianised town centre, adjacent to John Lewis, and, having been comprehensively refurbished in 2020, benefits from good environmental credentials. It is leased to four occupiers with an average lease length of 12 years to expiry and eight years to break. The annual rental income at acquisition was £0.4m, reflecting an NIY of 7.2%, and with most leases containing fixed rental uplifts this will increase to £0.5m pa by 2026, an NIY of 9.0%.

Picton has available debt capital resources of £38m with which it could selectively take advantage of further acquisition opportunities that may arise, particularly where vendors may be under pressure to realise liquidity. However, given the current level of uncertainty and volatility of debt markets, we have not forecast this.

Mostly fixed-rate borrowing provides interest rate protection to income

Picton’s balance sheet is strong and substantially protected against further interest rate increases, and gearing is moderate. Of total debt facilities of £263m, £225m was drawn at end-H123 (95% of which fixed rate), reflected in a net loan to value ratio of 24.1%. Other than the partly drawn revolving credit facility (RCF), which matures in May 2025, the earliest significant re-financing event is in July 2031. All loan covenants continue to be met, with significant headroom, while a further £80m of uncharged assets provide additional flexibility. This should remain the case despite the increase in LTV to around 28% reflected in our forecasts, due to an assumed further weakening in property values.

Following a late-FY22 debt refinancing, both the company’s long-term credit facilities are fixed rate with a blended average cost of 3.7% and a blended average maturity of more than nine years. A shorter-term, floating rate RCF of £50m, providing flexibility to take advantage of further growth opportunities when identified, was c £12m drawn at end-H123 with £38m available to the company.

Exhibit 3: Summary of debt portfolio

Lender

Canada Life

Aviva

NatWest RCF

Amount drawn

£129m

£84.2m

£11.9m

Undrawn

Fully drawn

Fully drawn

£38.1m

Maturity

Jul-31

Jul-32

May-25

Interest rate

Fixed 3.25%

Fixed 4.38%

SONIA +1.5%

Commitment fee

N/A

N/A

0.60%

LTV covenant

65%

65%

55%

Interest cover covenant

1.75x

N/A

2.5x

Debt service cover ratio covenant

N/A

1.4x

N/A

Source: Picton Property Income, as at 30 September 2022

Picton’s minimal exposure to further interest rate rises would increase if it utilises undrawn funds available from the RCF. The Bank of England base rate (increased on 3 November to 3.0% from 2.25%) is closely tracked by SONIA, the reference rate for variable rate borrowing. Money market expectations for the future development of SONIA/base rate, reflected in the SONIA swap curve, have been volatile, indicating a peak of 4.5–6.0% by the middle of 2023 before steadily declining towards a long-term level of 3–4%. Current rates are at the lower end of this range. Our forecasts reflect an average SONIA rate of c 4.0% through FY24, with little impact on borrowing costs. At this level of SONIA, the cost of further drawing from the RCF would be c 4.9% (the 1.5% facility margin, less 0.6% commitment fee on undrawn balances, plus the SONIA benchmark), but would increase if interest rates continued to increase. Given the level of uncertainty that exists, we expect Picton to proceed cautiously and selectively with respect to further investment.

Property values are repricing because of rising bond yields

Like-for-like portfolio valuations reduced by 1.9% in H123, having increased by 1.9% in Q123 (and by 21% in FY22) and the EPRA NIY widened slightly to 4.2% versus 4.1% at end-FY22.

With a weaker demand-supply balance, rising bond yields and limited market transactions, there is much uncertainty about future capital values, despite many sectors reporting good occupier demand and increasing rents. This is particularly the case for industrial/logistical assets, which saw the largest pull back in quarterly valuation, after exceptionally strong past growth, despite continuing firm occupier demand, constrained supply and rising rents. The office and retail sectors have seen relatively stable capital returns in the year-to-date but were also negatively affected by yield widening in Q223. The performance of Picton’s portfolio broadly mirrors these market-wide trends and in such an environment the benefits of a diversified investment approach are clear. Market-wide valuation pressure has continued since September, and in our forecasts we have assumed that the portfolio’s valuation falls by 10% from the 30 September 2022 level by year-end, reflected in a 60 basis point widening of the NIY, including a positive impact from leasing. For FY24 we have assumed no further valuation movement, positive or negative.

Exhibit 4: H123 portfolio split and like-for-like valuation changes

Portfolio allocation

Valuation

Like-for-like valuation change

Industrial weighting

58.0%

£494.5m

-3.0%

o/w South East

42.1%

-3.2%

o/w Rest of UK

15.9%

-2.5%

Office weighting

31.6%

£269.0m

-0.5%

o/w London City & West End

7.1%

-0.5%

o/w inner & outer London

5.4%

-1.5%

o/w South-East

8.8%

-2.1%

o/w Rest of UK

10.3%

1.5%

Retail & Leisure weighting

10.4%

£88.4m

-0.1%

o/w Retail Warehouse

6.8%

0.6%

o/w High Street Rest of UK

2.1%

-3.6%

o/w Leisure

1.5%

2.1%

Total

100.0%

£851.9m

-1.9%

Source: Picton Property Income

Consistently positive portfolio returns

Although valuation yield tightening has been the significant driver of capital growth in recent years, asset management also contributes. Investment to reposition and improve properties, enhancing their attractiveness to occupiers and income potential, also contributes to capital growth and we expect this to continue. At the portfolio level. driven by positive asset management and portfolio positioning, the company has a strong, long-term track record of outperformance versus the MSCI Quarterly Property Index, over one, three, five and 10 years and since inception. It also produced an upper-quartile index performance over three, five and 10 years and since inception. This continued in a challenging H123 environment, with Picton’s ungeared portfolio total return of -0.2% outperforming the index return of -1.3%. Its income return of 2.1% was 0.2% ahead of the index.

Exhibit 6 also demonstrates the relative stability of property income returns over the longer term.

Exhibit 5: Total property return versus index*

Exhibit 6: Property income return versus index*

Source: Picton Property Income, MSCI. Note: Data to 30 September 2022. *Annualised percentage returns.

Source: Picton Property Income, MSCI. Note: Data to 30 September 2022. *Annualised percentage returns.

Exhibit 5: Total property return versus index*

Source: Picton Property Income, MSCI. Note: Data to 30 September 2022. *Annualised percentage returns.

Exhibit 6: Property income return versus index*

Source: Picton Property Income, MSCI. Note: Data to 30 September 2022. *Annualised percentage returns.

Our estimate changes are driven by a market-wide softening of property values

The changes to our headline EPRA earnings and DPS forecasts are modest compared with the balance sheet impact of widening property yields.

Our forecast EPRA earnings are c 2% lower in FY23 and c 5% lower in FY24 compared with those last published, comprising:

slightly higher gross rental income, including a positive impact from leasing and acquisitions, more than offset by higher non-recoverable property costs, significantly driven by inflationary pressure; and

slightly higher net interest costs, the result of borrowing drawn to fund acquisitions and the impact of higher market interest rates on the floating rate debt.

Reflecting the level of financial market and economic uncertainty, we have adopted a slightly more cautious stance on DPS growth, deferring an increase in quarterly DPS until Q124, with a slightly smaller uplift to maintain a strong level of DPS cover.

Our forecasts for FY23 and FY24 EPRA NTA per share are c 22% and c 24% lower, respectively, at around 101p in each year (end-FY22: 120p).

Exhibit 7: Forecast revisions

£m

Forecast

Previous forecast

Change

FY23e

FY24e

FY23e

FY24e

FY23e

FY24e

FY23e

FY24e

Gross rental income

42.0

43.3

41.6

42.9

0.3

0.4

0.8%

0.8%

Other income

0.5

0.5

0.5

0.5

(0.0)

0.0

-5.4%

0.0%

Non-recoverable property costs

(6.0)

(5.7)

(5.1)

(4.8)

(0.9)

(0.9)

17.4%

19.3%

Net rental income

36.5

38.0

37.1

38.6

(0.6)

(0.6)

-1.6%

-1.5%

Administrative expenses

(6.0)

(6.6)

(6.2)

(6.6)

0.1

0.0

-2.1%

0.0%

Net interest

(9.4)

(9.8)

(9.3)

(9.3)

(0.1)

(0.5)

0.9%

5.4%

EPRA earnings

21.0

21.6

21.6

22.7

(0.5)

(1.1)

-2.5%

-4.7%

Realised & unrealised property gains/(losses)

(108.5)

0.0

48.7

15.5

(157.1)

(15.5)

IFRS earnings

(87.4)

21.6

70.3

38.1

(157.7)

(16.5)

EPRA EPS (p)

3.9

4.0

4.0

4.2

(0.1)

(0.2)

-2.4%

-4.6%

IFRS EPS (p)

(16.0)

4.0

12.9

7.0

(28.9)

(3.0)

DPS declared (p)

3.5

3.6

3.6

3.7

(0.1)

(0.1)

-2.8%

-1.6%

Dividend cover (x)

1.10

1.10

1.10

1.13

EPRA NTA per share (p)

100.9

101.4

129.9

133.3

(28.9)

(31.9)

-22.3%

-23.9%

EPRA NTA total return

-13.3%

4.1%

10.8%

5.5%

LTV

28.4%

28.4%

23.4%

24.0%

Source: Edison Investment Research

Additional to our forecasts, each 1% fall/increase in the end-FY23 portfolio value would reduce FY23e EPRA NTA per share by c 1.4%.

Income returns will be the near-term driver

Over the past 10 and a half years Picton’s aggregate accounting total return3 has been 161.0%, or an average 9.6% pa. Reflecting the total return investment strategy, dividend returns have contributed around one-third of total return and capital growth around two-thirds.

  The change in NAV in the period adjusted for dividends paid but not reinvested.

H123 total return was a negative 1.7% as property valuations weakened. We expect DPS to increase in FY24 while capital values weaken further, generating a dividend return of 2.9% and 3.3% in FY23 and FY24, respectively, but total returns of -16.2% and +0.5%.

Exhibit 8: 10-year accounting total return history

Year ending 31 March

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

H123

Cumulative 10-year

Opening NAV per share (p)

58

49

56

69

77

82

90

93

93

97

120

58

Closing NAV per share (p)

49

56

69

77

82

90

93

93

97

120

117

117

DPS paid (p)

3.5

3.0

3.3

3.3

3.3

3.4

3.5

3.5

2.8

3.4

1.8

34.7

Dividend return

6.0%

6.1%

5.9%

4.8%

4.3%

4.2%

3.9%

3.8%

2.9%

3.5%

1.5%

59.8%

Capital return

-15.4%

14.9%

21.6%

12.7%

5.9%

10.5%

2.6%

0.7%

3.7%

24.4%

-3.1%

101.2%

NAV total return

-9.4%

21.0%

27.4%

17.6%

10.2%

14.7%

6.4%

4.4%

6.6%

27.9%

-1.7%

161.0%

Average annual total return

9.6%

Source: Picton Property Income data, Edison Investment Research

Interim results in more detail

H123 EPRA earnings of £10.7m were broadly stable, a little below H122 (£10.9m) and a little ahead of H222 (£10.3m). The overall IFRS loss of £10.4m reflected negative valuation movements of £21.1m (positive gains of £43.0m in H122 and £86.8m in H222). The drivers behind this result include:

Rental income increased by 6% year-on-year to £20.9m, primarily reflecting the new acquisitions made over the last year and was also ahead of H222 (£20.4m).

Property expenses also increased, primarily affected by inflationary pressures and increasing void costs (end-H123 occupancy 90% vs 93% at end-H122 and end-FY22).

Net property income increased 2.6% versus H122 to £18.1m and was also ahead of H222 (£17.8m).

Administrative expenses for the period were £0.2m higher than in H122, at £2.9m. With inflation impacts well controlled, this was a similar level to H222.

Finance costs were £4.5m, a similar level to H222. The March 2022 re-financing reduced both the average cost of drawn debt and the amount drawn.

EPRA EPS of 2.0p covered DPS declared of 1.75p by 1.12x.

EPRA NTA was 3.2% lower than at end-FY22 but remained c 11% above the H122 level.

The loan to value ratio was higher, reflecting property acquisition, but remains at a moderate level of 24.1% (end-FY22: 21.2%).

Exhibit 9: Summary of H123 financial performance

£m unless stated otherwise

H123

H122

H123/H122

FY22

Rental income

20.9

19.7

6.0%

40.1

Other income

0.2

0.2

0.2

Net property operating costs

(1.5)

(1.3)

17.8%

(2.5)

Void costs

(1.5)

(0.9)

60.5%

(2.4)

Net property income

18.1

17.6

2.6%

35.4

Total operating expenses

(2.9)

(2.7)

7.4%

(5.8)

Net finance expense

(4.5)

(3.9)

13.3%

(8.5)

EPRA earnings

10.7

10.9

-2.5%

21.2

Debt prepayment fees

0.0

0.0

(4.0)

Profit on disposal of investment property

0.0

0.0

0.0

Investment property valuation movements

(21.1)

43.0

129.8

IFRS net profit/(loss)

(10.4)

53.9

147.0

EPRA EPS (p)

2.0

2.0

-2.4%

3.9

IFRS EPS (p)

(1.9)

10.0

26.9

DPS declared (p)

1.75

1.70

2.9%

3.45

DPS paid (p)

1.75

1.65

3.38

Dividend cover

1.12

1.21

1.15

Net assets, IFRS & EPRA (£m)

636.4

573.6

657.1

NAV per share, IFRS & EPRA (p)

117

105

120

NAV total return

-1.7%

10.2%

27.9%

Carried value of investment properties

831.3

726.0

830.0

Net LTV

24.1%

21.9%

21.2%

Source: Picton Property Income data, Edison Investment Research

Valuation

At the current annualised rate of quarterly DPS of 3.5p, Picton’s FY23e yield is 4.2%. Meanwhile, the shares trade at a c 23% discount to the Q223 NAV per share of 117p and a 17% discount to our FY23 forecast NAV per share of 101p. The five-year average discount of c 6% is significantly affected by the pandemic and, more recently, the market’s derating of the sector due to rising bond yields and economic concerns. As recently as 12 months ago, the shares were trading at a small premium.

Exhibit 10: Five-year dividend yield (%)

Exhibit 11: Five-year price to NAV (x)

Source: company data, Refinitiv prices

Compared with those companies that we consider to be its closest diversified income-oriented peers, Picton’s share price performance is above the peer group average and the broad UK property index over one year and three years. The sector has underperformed the UK equity index over the same periods. Based on 12-month trailing DPS declared, Picton shares trade on a lower yield than the group average, which in part reflects its strategy of balancing sustainable dividends with the capital requirements of active management, as well as relatively low gearing. Picton’s P/NAV is above the peer average, which we attribute to its strong track record of property level performance, the future income and valuation growth potential embedded in its portfolio, and its strong balance sheet with relatively modest gearing.

Exhibit 12: Peer group comparison

Price (p)

Market cap. (£m)

P/NAV* (x)*

Trailing yield (%)**

Share price performance

1 month

3 months

12 months

3 years

AEW REIT

99

157

0.81

6.0

10%

-5%

-12%

8%

Balanced Commercial Property Trust

93

653

0.67

5.0

-1%

-3%

-9%

-18%

CT Property Trust

72

168

0.59

5.5

1%

-14%

-14%

-12%

Circle Property

224

65

0.82

3.1

7%

-5%

10%

9%

Custodian

93

408

0.81

5.9

4%

-8%

-6%

-18%

Ediston Property

62

132

0.66

8.0

-2%

-13%

-19%

-30%

LondonMetric

181

1778

0.69

5.2

-2%

-13%

-34%

-22%

Palace Capital

214

94

0.55

6.5

1%

-18%

-24%

-26%

Regional REIT

60

307

0.61

11.1

-7%

-10%

-35%

-45%

Schroder REIT

46

224

0.61

6.8

-2%

-4%

-11%

-16%

abrdn Property Income Trust

57

217

0.54

7.0

5%

-18%

-25%

-37%

UK Commercial Property REIT

59

765

0.58

8.8

-6%

-11%

-22%

-28%

Average

0.66

6.6

1%

-10%

-17%

-20%

Picton

84

462

0.72

4.1

-3%

2%

-16%

-8%

UK property sector index

1,350

2%

-10%

-32%

-29%

UK equity market index

4,114

3%

3%

-2%

2%

Source: Company data, Refinitiv prices at 6 December 2022. Note: *Based on last reported EPRA NAV/NTA. **Based on trailing 12-month DPS declared.

Exhibit 13: Financial summary

Year end 31 March (£m)

2020

2021

2022

2023e

2024e

PROFIT & LOSS

Rental income

37.8

36.6

40.1

42.0

43.3

Other income

1.2

1.5

0.2

0.5

0.5

Service charge income

6.7

5.3

6.2

8.0

8.3

Revenue from properties

45.7

43.3

46.5

50.5

52.0

Property operating costs

(2.3)

(2.4)

(2.5)

(3.0)

(3.0)

Property void costs

(3.0)

(2.2)

(2.4)

(3.0)

(2.7)

Recoverable service charge costs

(6.7)

(5.3)

(6.2)

(8.0)

(8.3)

Property expenses

(12.0)

(9.9)

(11.1)

(14.0)

(14.0)

Net property income

33.6

33.5

35.4

36.5

38.0

Administrative expenses

(5.6)

(5.4)

(5.8)

(6.0)

(6.6)

Operating Profit before revaluations

28.1

28.1

29.7

30.5

31.4

Revaluation of investment properties

(0.9)

12.9

129.8

(108.5)

0.0

Profit on disposals

3.5

0.9

0.0

0.0

0.0

Operating Profit

30.7

41.8

159.5

(78.0)

31.4

Net finance expense

(8.3)

(8.0)

(8.5)

(9.4)

(9.8)

Debt repayment fee

(4.0)

Profit Before Tax

22.4

33.8

147.0

(-87.4)

21.6

Taxation

0.1

0.0

0.0

0.0

0.0

Profit After Tax (IFRS)

22.5

33.8

147.0

(87.4)

21.6

Adjust for:

Investment property valuation movement

0.9

(12.9)

(129.8)

108.5

0.0

Profit on disposal of investment properties

(3.5)

(0.9)

(0.0)

0.0

0.0

Exceptional income /expenses

0.0

0.0

4.0

0.0

0.0

EPRA earnings

19.9

20.1

21.2

21.0

21.6

Fully diluted average Number of Shares Outstanding (m)

546.2

546.8

547.3

545.4

545.2

EPS (p)

4.14

6.20

26.93

(16.03)

3.96

EPRA EPS (p)

3.66

3.68

3.88

3.86

3.96

Dividend declared per share (p)

3.25

2.93

3.45

3.50

3.60

Dividends paid per share (p)

3.500

2.750

3.375

3.500

3.575

Dividend cover (x) EPRA EPS/DPS declared

1.13

1.26

1.13

1.10

1.10

Dividend cover (x) - paid dividends

1.05

1.34

1.15

1.10

1.11

Total return

4.4%

6.6%

27.9%

-13.3%

4.1%

EPRA cost ratio (including direct vacancy costs)

28.3%

26.9%

26.0%

28.1%

28.0%

BALANCE SHEET

Non-current assets

654.5

669.5

834.4

751.6

757.5

Investment properties

654.5

665.4

830.0

747.2

753.2

Other non-current assets

0.0

4.1

4.4

4.3

4.3

Current assets

41.2

42.9

61.4

44.3

42.0

Debtors

17.6

19.6

22.9

26.2

26.2

Cash

23.6

23.4

38.5

18.1

15.8

Current liabilities

(20.4)

(19.9)

(20.3)

(20.4)

(20.4)

Creditors/Deferred income

(19.5)

(18.9)

(19.3)

(19.3)

(19.3)

Current borrowings

(0.9)

(0.9)

(1.1)

(1.1)

(1.1)

Non-current liabilities

(166.0)

(164.4)

(218.4)

(225.2)

(226.1)

Non-current borrowings

(164.2)

(162.7)

(215.8)

(222.7)

(223.6)

Other non-current liabilities

(1.7)

(1.7)

(2.6)

(2.6)

(2.6)

Net assets

509.3

528.2

657.1

550.2

553.0

NAV per share (p)

93

97

120

101

101

EPRA NTA per share (p)

93

97

120

101

101

CASH FLOW

27.3

32.1

Operating Cash Flow

21.4

26.0

28.1

(8.0)

(8.9)

Net Interest

(7.9)

(7.5)

(8.1)

0.0

0.0

Tax

0.1

0.1

0.0

(25.7)

(6.0)

Net cash from investing activities

25.0

(1.3)

(33.8)

(19.1)

(19.5)

Ordinary dividends paid

(19.0)

(15.0)

(18.4)

6.1

0.0

Debt drawn/(repaid)

(27.2)

(1.8)

52.2

(1.1)

0.0

Net proceeds from shares issued/repurchased

6.1

(0.6)

(0.7)

Other cash flow from financing activities

(4.0)

Net cash from financing activities

(40.1)

(17.5)

29.0

(14.1)

(19.5)

Change in cash

(1.6)

(0.2)

15.2

(20.5)

(2.3)

Opening cash

25.2

23.6

23.4

38.5

18.1

Closing cash

23.6

23.4

38.5

18.1

15.8

Debt as per balance sheet

(165.1)

(163.7)

(216.8)

(223.8)

(224.7)

Un-amortised loan arrangement fees

(2.3)

(2.6)

(2.0)

(1.4)

(0.5)

Closing net (debt)/cash

(143.9)

(142.8)

(180.3)

(207.1)

(209.4)

Net LTV

21.7%

20.9%

21.2%

28.4%

28.4%

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 £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.

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Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

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United Kingdom

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New York +1 646 653 7026

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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

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Level 4, Office 1205

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NSW 2000, Australia

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 2022 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

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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.

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

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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In its release of 21 November, KEFI announced the formal approval of the updated finance plan by all the Tulu Kapi syndicate contractors, investors and lenders. Financing continues to be almost entirely at the project or subsidiary level and is consistent with previous guidance. The detailed breakdown of the sources and uses of the US$320m project funding will be detailed at the time of signing definitive documentation, but we have a reasonable understanding based on our detailed modelling and management guidance (see Exhibit 2). An important feature is that nearly all of KEFI’s equity contribution is arranged with regional investors who convert into KEFI shares in years 3–4 (FY26 onwards), which (a) avoids unnecessary dilution and (b) provides major regional investors with an opportunity to avoid the devaluation of locally retained earnings. The balance of equity requirements, if any, will be dealt with in H123 after the signing of definitive agreements at year-end.

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