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Research: Real Estate
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.
Picton Property Income |
Strong Q3 NAV growth and further DPS uplift |
Q321 NAV update |
Real estate |
1 February 2021 |
Share price performance
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Picton Property Income is a research client of Edison Investment Research Limited |
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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 |
EPRA |
DPS |
EPRA NAV/ |
P/NAV |
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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Research: Industrials
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.