Picton Property Income — Strong Q3 NAV growth and further DPS uplift

Picton Property Income (LSE: PCTN)

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Research: Real Estate

Picton Property Income — Strong Q3 NAV growth and further DPS uplift

Picton delivered a strong 3.7% NAV total return in the three months to 31 December 2020 (Q321) and with continuing strong rent collection has further increased quarterly DPS. Q321 DPS increased 14% to 0.8p (an annualised 3.2p) and EPRA NAV per share increased 3.0% to 95.5p, above our previous end-FY21 forecast, with property valuation growth driven by industrial assets that account for 52% of the total.

Martyn King

Written by

Martyn King

Director, Financials

Real Estate

Picton Property Income

Strong Q3 NAV growth and further DPS uplift

Q321 NAV update

Real estate

1 February 2021

Price

82.5p

Market cap

£434m

Net debt (£m) at 31 December 2020

143.9

Net LTV at 31 December 2020

21.3%

Shares in issue

545.6m

Free float

100%

Code

PCTN

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

5.9

33.7

(18.0)

Rel (local)

9.1

15.7

(6.4)

52-week high/low

103.0p

52.0p

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

Payment of Q321 dividend

26 February 2021

FY21 results

Expected 27 May 2021

Analysts

Martyn King

+44 (0)20 3077 5745

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

Picton delivered a strong 3.7% NAV total return in the three months to 31 December 2020 (Q321) and with continuing strong rent collection has further increased quarterly DPS. Q321 DPS increased 14% to 0.8p (an annualised 3.2p) and EPRA NAV per share increased 3.0% to 95.5p, above our previous end-FY21 forecast, with property valuation growth driven by industrial assets that account for 52% of the total.

Year end

Net property income (£m)

EPRA
earnings* (£m)

EPRA
EPS* (p)

DPS
(p)**

EPRA NAV/
share (p)

P/NAV
(x)

Yield
(%)

03/19

38.3

22.9

4.3

3.50

93

0.89

4.2%

03/20

33.6

19.9

3.7

3.25

93

0.88

3.9%

03/21e

32.7

19.6

3.6

2.93

96

0.86

3.5%

03/22e

33.9

20.4

3.7

3.50

96

0.86

4.2%

Note: *EPRA earnings excludes revaluation gains/losses and other exceptional items. **Declared basis. 3.5p paid during FY19 and FY20.

Underpinned by strong rent collection

76% of the December quarter’s rents have so far been received; 87% including agreed monthly payments. This is slightly up on the September quarter’s performance after the same number of days and is expected to improve further. The September collection rate now stands at 95% (June: 95%; March: 90%). The increase in Q321 DPS follows a 12% increase to 0.7p in Q221. H121 DPS cover was a healthy 148% (or 129% excluding non-recurring income), despite c £1.7m of provisions against outstanding rents, and remained at 122% in Q321, despite increasing DPS and a further £0.4m of provisions. The portfolio value increased by £17.5m, or 2.7% like-for-like, including £1.7m of capex. Q321 EPRA earnings of £4.7m were consistent with our full-year expectations but we have adjusted our DPS expectations to reflect the Q321 increase and our full-year NAV expectations.

Strong reversionary potential

The Q321 portfolio performance continues Picton’s outperformance of the MSCI benchmark index (over one, three, five and 10 years) and is continuing to benefit from active asset management and a strong overweighting of the better-performing industrial and regional office sectors, with a significant underweighting of retail and leisure (now just under 12% of the total). There remains a significant opportunity to grow income and support capital values, highlighted by the c £8.5m gap (23%) between the estimated market rental value at full occupancy passing rent of £36.8m at end-H121. Void reduction represents £4.4m of the upside potential, substantially represented by a small number of key completed refurbishments, only partly built into our forecasts. Gearing is low (Q321 LTV 21.3%) and £50m of low-cost borrowing headroom is available to support accretive acquisitions.

Valuation: Good yield with upside in covered DPS

The prospective yield continues to compare favourably with risk-free alternatives (c 0.3% for 10-year UK government debt) and we expect further DPS growth. The 14% discount to Q321 EPRA NAV compares with a five-year average of 3% and anticipates capital value weakness.

Further details

Positive NAV total return accelerated in Q321

NAV total return remained positive during H121 (0.7%) despite the impact of the COVID-19 pandemic and the 3.7% total return in Q321 lifts the total in the first nine months of FY21 to 4.4%.

Portfolio performance

During Q321, the value of Picton’s portfolio increased from £648.9m to £654.5m. The previously announced £4.0m sale of a retail property in Peterborough completed in the quarter, at a 30% premium to the end-FY20 valuation, and capital expenditure of £1.7m was incurred. Including the capex, the portfolio increased by £17.5m or 2.7% on a like-for-like basis (2.4% excluding capex).

Exhibit 1: Q321 portfolio allocation and performance

Portfolio allocation

Like-for-like valuation change

Industrial

52.4%

7.9%

South East

39.4%

Rest of UK

13.0%

Office

36.4%

-2.5%

London City and West End

8.7%

Inner and outer London

5.1%

South East

11.1%

Rest of UK

11.5%

Retail and leisure

11.2%

-2.5%

Retail warehouse

6.7%

High street – rest of UK

3.0%

Leisure

1.5%

Total portfolio

100.0%

2.7%

Source: Picton Property Income

The strong performance in industrial reflects ongoing high occupancy, proven rental growth and continuing investor demand. Lower office valuations reflect more muted investor demand, despite the leasing progress. Retail and leisure continues to see weak investment demand in the face of COVID-19, although retail warehousing was less affected than high-street retail.

Quarterly capital growth for the MSCI Monthly UK Property Index (All Property) was 0.8% and the total return was 2.1%.

DPS recovery backed by rent collection and asset management

At 3.2p, the annualised rate of quarterly dividends has substantially recovered from the 3.5p paid in FY20. In April 2020, the quarterly rate was reduced from 0.875p to 0.625p, reflecting the high level of uncertainty as the pandemic took hold, but with better-than-expected rent collection, successful asset management and leasing progress this was increased by 12% to 0.7p in respect of Q221.The strong level of dividend cover by EPRA earnings (although it will be lower on a cash-collected basis) and similar operational developments underpin the further 14% increase, to 0.8p, in Q321. During the quarter, six lettings were completed, all in the office sector, 4% ahead of the end-September estimated rental value (ERV), adding a combined £0.7m to annualised rents. An additional six lease renewals and two rent reviews were completed, accounting for £0.7m of combined annual rent, at an average 15% above the previous passing rent and 2% ahead of the September ERV. Overall portfolio occupancy held steady at 90% on an EPRA basis.

Increasing DPS and NAV forecasts for FY21

Q321 EPRA earnings of £4.7m (Q221: £6.1m included £1.3m of non-recurring other income) is consistent with our H221 expectation of £9.5m, set out in detail in our December Outlook note, which we leave unchanged. We now assume 0.8p of DPS in Q421 (previously 0.7p in both Q321 and Q421) and continue to forecast a further increase in FY22. On a declared basis, we now expect aggregate FY21 DPS to amount to 2.925p.

The Q321 property valuation performance was well ahead of our assumptions and, assuming a flat performance in Q421, our end-FY21 EPRA NAV per share forecast increases to 96p from 93p and feeds through into subsequent years.

Exhibit 2: Quarterly NAV performance

Q420

Q121

Q221

Q321

£m unless stated otherwise

31-Mar-20

30-Jun-20

30-Sep-20

31-Dec-20

Opening NAV

519.1

509.3

503.2

505.9

Movement in property values

(9.4)

(6.9)

0.5

14.0

Equity issued

0.0

0.0

0.0

0.0

Net income after tax (EPRA earnings)

4.2

4.0

6.1

4.7

Dividends paid

(4.7)

(3.4)

(3.4)

(3.8)

Other

0.1

0.2

(0.5)

0.2

Closing NAV

509.3

503.2

505.9

521.0

Closing NAV per share (p)

93.4p

92.2p

92.7p

95.5p

Source: Picton Property Income

Exhibit 3: Financial summary

Year end 31 March

£m

2016

2017

2018

2019

2020

2021e

2022e

2023e

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Rents receivable, adjusted for lease incentives

39.7

40.6

41.4

40.9

37.8

36.0

38.4

39.4

Other income

1.1

7.4

1.4

1.1

1.2

1.4

0.4

0.4

Service charge income

5.2

6.5

5.9

5.7

6.7

5.7

6.1

6.3

Revenue from properties

 

 

45.9

54.4

48.8

47.7

45.7

43.1

45.0

46.1

Property operating costs

(3.3)

(3.5)

(2.6)

(2.3)

(2.3)

(1.9)

(2.3)

(2.2)

Property void costs

(1.5)

(2.0)

(1.8)

(1.4)

(3.0)

(2.8)

(2.6)

(2.4)

Recoverable service charge costs

(5.2)

(6.5)

(5.9)

(5.7)

(6.7)

(5.7)

(6.1)

(6.3)

Property expenses

(10.0)

(12.0)

(10.3)

(9.4)

(12.0)

(10.4)

(11.1)

(10.9)

Net property income

 

 

35.9

42.4

38.4

38.3

33.6

32.7

33.9

35.2

Administrative expenses

(4.4)

(5.2)

(5.6)

(5.8)

(5.6)

(5.1)

(5.7)

(6.0)

Operating Profit before revaluations

 

 

31.5

37.1

32.9

32.5

28.1

27.7

28.3

29.2

Revaluation of investment properties

44.2

15.1

38.9

10.9

(0.9)

8.1

0.0

10.0

Profit on disposals

0.8

1.8

2.6

0.4

3.5

0.0

0.0

0.0

Operating Profit

76.5

54.1

74.4

43.7

30.7

35.8

28.3

39.2

Net finance expense

(11.4)

(10.8)

(9.7)

(9.1)

(8.3)

(8.0)

(7.8)

(7.8)

Debt repayment fee

0.0

0.0

0.0

(3.2)

Profit Before Tax

 

 

65.1

43.2

64.7

31.4

22.4

27.7

20.4

31.4

Taxation

(0.2)

(0.5)

(0.5)

(0.5)

0.1

0.0

0.0

0.0

Profit After Tax (IFRS)

64.8

42.8

64.2

31.0

22.5

27.7

20.4

31.4

Adjust for:

Investment property valuation movement

(44.2)

(15.1)

(38.9)

(10.9)

0.9

(8.1)

0.0

(10.0)

Profit on disposal of investment properties

(0.8)

(1.8)

(2.6)

(0.4)

(3.5)

0.0

0.0

0.0

Exceptional income /expenses

0.0

(5.3)

0.0

3.2

0.0

0.0

0.0

0.0

Profit After Tax (EPRA)

19.9

20.6

22.6

22.9

19.9

19.6

20.4

21.4

Fully diluted average Number of Shares Outstanding (m)

540.1

540.1

539.7

541.0

546.2

547.1

547.1

547.1

EPS (p)

 

 

12.01

7.92

11.89

5.75

4.14

5.08

3.74

5.75

EPRA EPS (p)

 

 

3.68

3.81

4.19

4.25

3.66

3.60

3.74

3.92

Dividend declared per share (p)

 

 

3.30

3.33

3.43

3.50

3.25

2.93

3.50

3.58

Dividends paid per share (p)

 

 

3.300

3.300

3.400

3.500

3.500

2.750

3.425

3.560

Dividend cover (x) EPRA EPS/DPS declared

112%

115%

122%

121%

113%

123%

107%

109%

Dividend cover (x) - paid dividends

112%

115%

122%

121%

105%

131%

109%

110%

EPRA cost ratio including direct vacancy costs)

22.8%

26.1%

23.7%

22.9%

28.3%

26.7%

27.1%

26.4%

BALANCE SHEET

Fixed Assets

 

 

649.4

615.2

670.7

676.1

654.5

664.2

670.2

686.2

Investment properties

646.0

615.2

670.7

676.1

654.5

664.2

670.2

686.2

Other non-current assets

3.4

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Current Assets

 

 

37.4

49.4

50.6

39.5

41.2

42.2

38.8

35.6

Debtors

14.6

15.5

19.1

14.3

17.6

21.0

19.0

18.0

Cash

22.8

33.9

31.5

25.2

23.6

21.2

19.8

17.6

Current Liabilities

 

 

(47.5)

(20.6)

(22.3)

(23.3)

(20.4)

(19.2)

(19.2)

(19.2)

Creditors/Deferred income

(18.4)

(20.1)

(21.6)

(22.5)

(19.5)

(18.4)

(18.4)

(18.4)

Short term borrowings

(29.1)

(0.6)

(0.7)

(0.8)

(0.9)

(0.8)

(0.8)

(0.8)

Long Term Liabilities

 

 

(222.2)

(202.1)

(211.7)

(192.8)

(166.0)

(165.2)

(165.5)

(165.9)

Long term borrowings

(220.4)

(200.3)

(210.0)

(191.1)

(164.2)

(163.5)

(163.8)

(164.2)

Other long term liabilities

(1.7)

(1.7)

(1.7)

(1.7)

(1.7)

(1.7)

(1.7)

(1.7)

Net Assets

 

 

417.1

441.9

487.4

499.4

509.3

522.0

524.2

536.7

NAV/share (p)

77

82

90

93

93

96

96

98

Fully diluted EPRA NAV/share (p)

77

82

90

93

93

96

96

98

CASH FLOW

Operating Cash Flow

 

 

33.3

36.3

35.1

34.8

21.4

23.5

30.8

30.7

Net Interest

(8.8)

(9.2)

(9.1)

(8.6)

(7.9)

(7.6)

(7.5)

(7.5)

Tax

(0.4)

(0.2)

(0.3)

(0.8)

0.1

0.1

0.0

0.0

Net cash from investing activities

(68.1)

48.7

(17.8)

10.3

25.0

(1.6)

(6.0)

(6.0)

Ordinary dividends paid

(17.8)

(18.0)

(18.5)

(18.9)

(19.0)

(15.0)

(18.7)

(19.4)

Debt drawn/(repaid)

14.6

(46.5)

9.2

(22.6)

(27.2)

(1.2)

0.0

0.0

Net proceeds from shares issued/repurchased

0.0

0.0

(0.9)

(0.4)

6.1

(0.6)

0.0

0.0

Other cash flow from financing activities

Net Cash Flow

(47.3)

11.1

(2.4)

(6.3)

(1.6)

(2.4)

(1.4)

(2.2)

Opening cash

 

 

70.1

22.8

33.9

31.5

25.2

23.6

21.2

19.8

Closing cash

 

 

22.8

33.9

31.5

25.2

23.6

21.2

19.8

17.6

Debt as per balance sheet

(249.5)

(200.9)

(210.7)

(192.0)

(165.1)

(164.3)

(164.7)

(165.0)

Un-amortised loan arrangement fees

0.0

(3.7)

(3.4)

(2.7)

(2.3)

(2.6)

(2.2)

(1.8)

Closing net (debt)/cash

 

 

(226.8)

(170.8)

(182.5)

(169.5)

(143.9)

(145.7)

(147.1)

(149.2)

Net LTV

34.6%

27.3%

26.7%

24.7%

21.7%

21.6%

21.6%

21.4%

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


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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.

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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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Renewi — On track for FY expectations

A Q3 update reaffirmed Renewi’s existing FY21 expectations, with an underlying mix modestly more in favour of Commercial activities offsetting a slower than planned ramp up of thermally treated soil shipments. Cash generation appears to have been very good in Q3 and, despite some outflow in Q4, the year-end net debt position could well be below our current projection. This reassuring update confirms the resilience of waste stream activities with full-year and strategic aspirations maintained.

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