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Research: Real Estate
A recent update by Picton Property Income provided details of key leasing events across all sectors. This was followed by a debt refinancing that enhances the maturity profile, provides additional long-term, fixed-rate funding and reduces the average cost of debt. These are both positive indicators for financial performance but, with results for the year to March 2022 due for release next month, we will review our estimates at that time.
Picton Property Income |
Positive leasing events and refinancing |
Company update |
Real estate |
4 April 2022 |
Share price performance
Business description
Next events
Analyst
Picton Property Income is a research client of Edison Investment Research Limited |
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A recent update by Picton Property Income provided details of key leasing events across all sectors. This was followed by a debt refinancing that enhances the maturity profile, provides additional long-term, fixed-rate funding and reduces the average cost of debt. These are both positive indicators for financial performance but, with results for the year to March 2022 due for release next month, we will review our estimates at that time.
Year end |
Net property income (£m) |
EPRA earnings* (£m) |
EPRA |
DPS |
NAV*** per share (p) |
P/NAV*** |
Yield |
03/20 |
33.6 |
19.9 |
3.7 |
3.25 |
93 |
1.05 |
3.3% |
03/21 |
33.5 |
20.1 |
3.7 |
2.93 |
97 |
1.02 |
3.0% |
03/22e |
35.0 |
21.5 |
3.9 |
3.45 |
114 |
0.86 |
3.5% |
03/23e |
35.8 |
21.9 |
4.0 |
3.60 |
117 |
0.84 |
3.7% |
Note: *EPRA earnings exclude revaluation gains/losses and other exceptional items. **Declared basis. ***NAV measure is net tangible assets (NTA).
Positive indicators for performance
Details of the leasing events and refinancing can be found in this report. The former includes new lettings and lease extensions, all at above estimated rental value (ERV), contributing to an increase in occupancy to 92% (91% at end-Q322) and reduction in void costs. Picton anticipates a positive valuation impact. Meanwhile, rent collection remains strong and for the December quarter now stands above 99%. The additional long-term, fixed-rate debt provided by the refinancing will initially repay substantially all floating rate borrowings that were drawn from the revolving credit facility (RCF) to fund recent acquisitions, and provide additional resources to fund identified acquisitions and capital projects. Undrawn funds under the RCF will provide flexibility to take advantage of further growth opportunities when identified. The average cost of drawn debt is reduced from 4.1% to 3.7%, with a modest reduction of 0.8p in Q322 NAV per share to a pro forma 112.0p.
Organic and acquisition-led opportunities
Picton’s strong multi-year financial and operational performance has benefited from active asset management, including investment in the portfolio and sector positioning. Capex aims to enhance the quality, sustainability and occupier appeal of assets, born out by progress with leasing available space. Despite this progress, a strong organic growth opportunity remains, reflected in the c £9m H122 gap between passing rent and ERV. Low gearing (pro forma LTV of c 22% following the refinancing) and now £65m available for investment provides an opportunity for further accretive acquisitions. Picton has also expressed its interest in exploiting its strong performance record and scalable internalised structure to engage in sector consolidation, where there is an opportunity to create additional value.
Valuation: Good yield with growth potential
At 0.875p per quarter, the annualised rate of DPS of 3.5p represents a prospective yield of 3.6% with a good potential for further DPS growth. Meanwhile, the shares trade at a c 12% discount to the pro forma end-Q322 EPRA NAV of 112.0p, wider than the five-year average discount of c 3% and a peak premium of c 10%.
Further details
Refinancing adds to debt capacity at lower average cost and with increased duration
Of the two long-term, fixed-rate facilities (with Canada Life and Aviva), the Canada Life facility has been extended from £80m to £129m. The new £49m tranche is priced at 3.25% and the cost of the original £80m tranche has been reduced to a similar level from 4.1%, a reduction of c 20%. The new tranche has a maturity date of July 2031 and the maturity of the original tranche has been extended by four years to the same date. Out of the proceeds, the £31m1 that had been recently drawn from the shorter-term, floating rate NatWest RCF has been substantially repaid, although the entire £50m facility remains available to the company. As a result, total debt facilities have increased to £264m, with £219m drawn, of which £214m is fixed for an average 10 years. The weighted average cost of the drawn debt is 3.7% compared with 4.1% previously.
The RCF has been used to fund recent investments including the October 2021 acquisition of Madleaze Trading Estate in central Gloucester for £13.1m and in February 2022 the adjacent Mill Place Trading Estate for £10.4m. The acquisition prices of each reflected a net initial yield of 6.1% with significant reversionary potential.
Exhibit 1: Summary of increased debt portfolio
Canada Life |
Aviva |
NatWest RCF |
|
Amount drawn |
£129m |
£85m |
£50m |
Undrawn |
Fully drawn |
Fully drawn |
£5m |
Maturity |
Jul-31 |
Jul-32 |
01/05/2024 |
Interest rate |
3.25% |
4.38% |
Libor +1.5% |
Commitment fee |
N/A |
N/A |
0.60% |
Source: Picton Property Income, Edison Investment Research
The interest saving on the original £80m tranche of the Canada life facility is £0.7m pa. Allowing for the additional £49m of fixed-rate borrowing, RCF repayment and RCF commitment fees, annualised finance costs increase by c £0.4m. Reflecting the still relatively low level of market rates, at H122 the fair value of Picton’s £165m fixed-rate debt at the time was c £200m, although this will have narrowed since as market rates have begun to increase. The redemption fee to reset the interest rate on the £80m tranche is £4m, equivalent to a modest 0.8p reduction in the end-Q322 EPRA NTA per share of 112.8p.
Positive leasing activity
At the extensively refurbished Stanford Building in Long Acre in Covent Garden, where the office accommodation had already been let, the ground and basement retail units have been let to an international fashion retailer for 10 years, subject to break, commencing in May. The rent of £0.5m pa is 22% ahead of the March 2021 ERV2 and the incentive package is less than one year’s rent. This was Picton’s largest retail sector void and we estimate that its retail sector assets are now very close to being fully occupied (H122: 91%).
Externally assessed estimated rental value.
Within the industrial sector, the Swiftbox distribution centre in Rugby has been let for 10 years, subject to break. Following an extensive refurbishment, the unit was let on a short lease at the height of the pandemic and Picton was able to commence the new long-term lease the day after the previous occupant vacated. The new agreed rent of £0.7m pa is 11% ahead of both the previous passing rent and the March 2021 ERV.
At the 180 West George Street, Glasgow office building, one of the two vacant floors has been let to an engineering consultancy, subject to break, at an agreed rent of £0.2m pa, 28% of the March 2021 ERV. Also in the office sector, at 50 Farringdon Road, EC1, following a heating and cooling system upgrade that increased the energy performance certificate (EPC) rating from D to B, a lease due to expire later this year has been extended, retaining £0.6m pa of rental income at 2% ahead of the March 2021 ERV.
Exhibit 2: Financial summary
Year end 31 March (£m) |
2018 |
2019 |
2020 |
2021 |
2022e |
2023e |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
|
PROFIT & LOSS |
||||||
Rents receivable, adjusted for lease incentives |
41.4 |
40.9 |
37.8 |
36.6 |
39.2 |
40.2 |
Other income |
1.4 |
1.1 |
1.2 |
1.5 |
0.3 |
0.3 |
Service charge income |
5.9 |
5.7 |
6.7 |
5.3 |
5.5 |
5.6 |
Revenue from properties |
48.8 |
47.7 |
45.7 |
43.3 |
45.0 |
46.1 |
Property operating costs |
(2.6) |
(2.3) |
(2.3) |
(2.4) |
(2.5) |
(2.7) |
Property void costs |
(1.8) |
(1.4) |
(3.0) |
(2.2) |
(1.9) |
(2.0) |
Recoverable service charge costs |
(5.9) |
(5.7) |
(6.7) |
(5.3) |
(5.5) |
(5.6) |
Property expenses |
(10.3) |
(9.4) |
(12.0) |
(9.9) |
(10.0) |
(10.3) |
Net property income |
38.4 |
38.3 |
33.6 |
33.5 |
35.0 |
35.8 |
Administrative expenses |
(5.6) |
(5.8) |
(5.6) |
(5.4) |
(5.6) |
(6.0) |
Operating Profit before revaluations |
32.9 |
32.5 |
28.1 |
28.1 |
29.4 |
29.9 |
Revaluation of investment properties |
38.9 |
10.9 |
(0.9) |
12.9 |
92.0 |
12.7 |
Profit on disposals |
2.6 |
0.4 |
3.5 |
0.9 |
0.0 |
0.0 |
Operating Profit |
74.4 |
43.7 |
30.7 |
41.8 |
121.5 |
42.6 |
Net finance expense |
(9.7) |
(9.1) |
(8.3) |
(8.0) |
(8.0) |
(8.0) |
Debt repayment fee |
0.0 |
(3.2) |
||||
Profit Before Tax |
64.7 |
31.4 |
22.4 |
33.8 |
113.5 |
34.6 |
Taxation |
(0.5) |
(0.5) |
0.1 |
0.0 |
0.0 |
0.0 |
Profit After Tax (IFRS) |
64.2 |
31.0 |
22.5 |
33.8 |
113.5 |
34.6 |
Adjust for: |
||||||
Investment property valuation movement |
(38.9) |
(10.9) |
0.9 |
(12.9) |
(92.0) |
(12.7) |
Profit on disposal of investment properties |
(2.6) |
(0.4) |
(3.5) |
(0.9) |
(0.0) |
0.0 |
Exceptional income /expenses |
0.0 |
3.2 |
0.0 |
0.0 |
0.0 |
0.0 |
Profit After Tax (EPRA) |
22.6 |
22.9 |
19.9 |
20.1 |
21.5 |
21.9 |
Fully diluted average Number of Shares Outstanding (m) |
539.7 |
541.0 |
546.2 |
546.8 |
546.8 |
546.3 |
EPS (p) |
11.89 |
5.75 |
4.14 |
6.20 |
20.80 |
6.34 |
EPRA EPS (p) |
4.19 |
4.25 |
3.66 |
3.68 |
3.94 |
4.01 |
Dividend declared per share (p) |
3.43 |
3.50 |
3.25 |
2.93 |
3.45 |
3.60 |
Dividends paid per share (p) |
3.400 |
3.500 |
3.500 |
2.750 |
3.375 |
3.575 |
Dividend cover (x) EPRA EPS/DPS declared |
122% |
121% |
113% |
126% |
114% |
111% |
Dividend cover (x) - paid dividends |
122% |
121% |
105% |
134% |
117% |
112% |
EPRA cost ratio including direct vacancy costs) |
23.7% |
22.9% |
28.3% |
26.9% |
25.3% |
26.0% |
BALANCE SHEET |
||||||
Fixed Assets |
670.7 |
676.1 |
654.5 |
669.5 |
782.5 |
802.9 |
Investment properties |
670.7 |
676.1 |
654.5 |
665.4 |
778.0 |
798.4 |
Other non-current assets |
0.0 |
0.0 |
0.0 |
4.1 |
4.5 |
4.5 |
Current Assets |
50.6 |
39.5 |
41.2 |
42.9 |
39.6 |
35.3 |
Debtors |
19.1 |
14.3 |
17.6 |
19.6 |
19.0 |
18.0 |
Cash |
31.5 |
25.2 |
23.6 |
23.4 |
20.6 |
17.3 |
Current Liabilities |
(22.3) |
(23.3) |
(20.4) |
(19.9) |
(20.0) |
(20.0) |
Creditors/Deferred income |
(21.6) |
(22.5) |
(19.5) |
(18.9) |
(19.1) |
(19.1) |
Short term borrowings |
(0.7) |
(0.8) |
(0.9) |
(0.9) |
(1.0) |
(1.0) |
Long Term Liabilities |
(211.7) |
(192.8) |
(166.0) |
(164.4) |
(178.1) |
(178.5) |
Long term borrowings |
(210.0) |
(191.1) |
(164.2) |
(162.7) |
(176.4) |
(176.8) |
Other long-term liabilities |
(1.7) |
(1.7) |
(1.7) |
(1.7) |
(1.7) |
(1.7) |
Net Assets |
487.4 |
499.4 |
509.3 |
528.2 |
623.9 |
639.7 |
NAV/share (p) |
90 |
93 |
93 |
97 |
114 |
117 |
Fully diluted EPRA NTA/share (p) |
90 |
93 |
93 |
97 |
114 |
117 |
CASH FLOW |
||||||
Operating Cash Flow |
35.1 |
34.8 |
21.4 |
26.0 |
30.9 |
31.6 |
Net Interest |
(9.1) |
(8.6) |
(7.9) |
(7.5) |
(7.5) |
(7.6) |
Tax |
(0.3) |
(0.8) |
0.1 |
0.1 |
0.0 |
0.0 |
Net cash from investing activities |
(17.8) |
10.3 |
25.0 |
(1.3) |
(20.5) |
(7.8) |
Ordinary dividends paid |
(18.5) |
(18.9) |
(19.0) |
(15.0) |
(18.4) |
(19.5) |
Debt drawn/(repaid) |
9.2 |
(22.6) |
(27.2) |
(1.8) |
13.3 |
0.0 |
Net proceeds from shares issued/repurchased |
(0.9) |
(0.4) |
6.1 |
(0.6) |
(0.5) |
0.0 |
Other cash flow from financing activities |
||||||
Net Cash Flow |
(2.4) |
(6.3) |
(1.6) |
(0.2) |
(2.7) |
(3.3) |
Opening cash |
33.9 |
31.5 |
25.2 |
23.6 |
23.4 |
20.6 |
Closing cash |
31.5 |
25.2 |
23.6 |
23.4 |
20.6 |
17.3 |
Debt as per balance sheet |
(210.7) |
(192.0) |
(165.1) |
(163.7) |
(177.4) |
(177.7) |
Un-amortised loan arrangement fees |
(3.4) |
(2.7) |
(2.3) |
(2.6) |
(2.2) |
(1.8) |
Closing net (debt)/cash |
(182.5) |
(169.5) |
(143.9) |
(142.8) |
(158.9) |
(162.3) |
Net LTV |
26.7% |
24.7% |
21.7% |
20.9% |
20.1% |
20.0% |
Source: Picton Property Income historical data, Edison Investment Research forecasts
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Research: Real Estate
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