Picton Property Income — Strong Q322 returns and dividend increase

Picton Property Income (LSE: PCTN)

Last close As at 20/06/2024

GBP0.67

0.50 (0.75%)

Market capitalisation

GBP368m

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Research: Real Estate

Picton Property Income — Strong Q322 returns and dividend increase

Picton Property Income has increased the rate of quarterly DPS by 2.9% in respect of the three months ended 31 December 2021 (Q322), restoring the annualised rate to pre-pandemic levels. Including strong growth in NAV and adjusted for DPS paid, the Q322 NAV total return was 8.2% and is now more than 19% in the year to date.

Martyn King

Written by

Martyn King

Director, Financials

Real Estate

Picton Property Income

Strong Q322 returns and dividend increase

Q322 NAV and dividend update

Real estate

31 January 2022

Price

106p

Market cap

£579m

Net debt (£m) as at 31 December 2021

164.5

Net LTV as at 31 December 2021

20.8%

Shares in issue

546.1m

Free float

100%

Code

PCTN

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

5.4

5.6

30.1

Rel (local)

5.7

4.4

15.1

52-week high/low

106p

80p

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

Q322 DPS paid

28 February 2022

Analyst

Martyn King

+44 (0)20 3077 5745

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

Picton Property Income has increased the rate of quarterly DPS by 2.9% in respect of the three months ended 31 December 2021 (Q322), restoring the annualised rate to pre-pandemic levels. Including strong growth in NAV and adjusted for DPS paid, the Q322 NAV total return was 8.2% and is now more than 19% in the year to date.

Year end

Net property income (£m)

EPRA earnings* (£m)

EPRA
EPS* (p)

DPS
(p)**

NAV*** per share (p)

P/NAV***
(x)

Yield
(%)

03/20

33.6

19.9

3.7

3.25

93

1.14

3.1%

03/21

33.5

20.1

3.7

2.93

97

1.09

2.8%

03/22e

35.0

21.5

3.9

3.45

114

0.93

3.3%

03/23e

35.8

21.9

4.0

3.60

117

0.90

3.4%

Note: *EPRA earnings exclude revaluation gains/losses and other exceptional items. **Declared basis. ***NAV measure is net tangible assets (NTA).

Increasing our NAV forecasts

Q322 DPS of 0.875p represents an annualised rate of 3.5p per share, the annualised rate in place until Q420 when the pandemic struck. With rent collection strong and EPRA earnings robust, Q322 DPS cover was 115%. NAV per share increased by 7.4% to 112.8p, reflecting strong property revaluation gains and, mirroring a buoyant UK commercial property market during the final quarter of 2021, Picton generated a 6.0% like-for-like increase. While the strong overweighting of industrial assets (now c 58% of the portfolio value) continues to drive capital growth, performance has begun to broaden across sectors. Picton’s retail assets increased in value, driven by a focus on retail warehouses. We have increased our NAV per share forecasts, expecting further but more modest uplifts in Q422 and into FY23, but otherwise make no changes.

Organic and acquisition-led growth potential

Financial and operational performance continues to benefit from active asset management, including investment in the portfolio and sector positioning. Capex aims to enhance the quality, sustainability and occupier appeal of assets. The organic growth opportunity remains strong and the c £9m gap between passing rent and estimated rental value (ERV) at end H122 is unlikely to have changed materially. Low gearing (LTV of 20.8%) and £33m of undrawn low-cost flexible borrowing provides an opportunity for 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

The annualised rate of DPS represents a prospective yield of 3.3% with a good potential for further DPS growth. This continues to compare favourably with risk-free alternatives (the 10-year gilt yield remains low at c 1.25%). The price/end-Q322 EPRA NAV is c 0.93x, which is below the five-year average of c 0.97x and a peak of c 1.1x.

Further details

The 8.2% Q322 NAV total return was the strongest quarter in the year to date and takes the NAV total return in the first nine months of the year to 19.1%. NAV total return has been positive in each of the five years ending 31 March 2021 (end-FY21) despite the impact of the pandemic, with an average annual return of 8.0%.

Exhibit 1: Consistently positive total returns through FY22 to date

Q122

Q222

Q322

First 9 months of FY22

30-Jun-21

30-Sep-21

31-Dec-21

Opening NAV per share (p)

96.8

99.9

105.0

96.8

Closing NAV per share (p)

99.9

105.0

112.8

112.8

DPS paid (p)

0.80

0.85

0.85

2.5

NAV total return

4.0%

6.0%

8.2%

19.1%

Source: Picton Property Income data, Edison Investment Research

The Q322 NAV movement was driven by revaluation gains with an additional modest uplift from retained earnings.

Exhibit 2: Reconciliation of Q322 NAV movement

£m

Movement

Pence per share

NAV at 30 September 2021

573.6

105.0

Movement in property values

41.5

7.2%

7.6

Net income after tax for the period

5.4

1.0%

1.0

Dividends paid

(4.6)

-0.8%

(0.8)

Other

(0.2)

0.0

NAV at 31 December 2021

615.7

7.4%

112.8

Source: Picton Property Income

The increase in the value of the property portfolio includes £2.6m of capital expenditure and a 6.0% like-for-like uplift.

Exhibit 3: Portfolio weighting and like-for-like valuation movement

Sector

Portfolio allocation

Like for like change

Industrials

58.2%

10.4%

South East

43.0%

Rest of UK

15.2%

Offices

31.1%

-0.6%

London City & West End

7.4%

Inner & Outer London

4.1%

South East

9.7%

Rest of UK

9.9%

Retail & leisure

10.7%

3.3%

Retail Warehouse

6.8%

High Street - Resy of UK

2.4%

Leisure

1.5%

Total

100.0%

6.0%

Source: Picton Property Income

Positive momentum in the UK commercial property market continued through the final quarter of 2021 (for Picton, Q322). By sector, Picton’s capital value movements broadly match the overall sector trends1 with continued strong investment and occupational demand in the industrial sector again leading to further very positive performance and a capital value uplift of 10.4% during the quarter. The South East multi-let market in particular, where more than 70% of Picton’s industrial portfolio is located, continues to benefit from a supply-demand imbalance, supporting rental and capital growth.

  The MSCI Monthly UK Property Index shows an all property capital return of 6.6% in the quarter to 31 December 2021 comprising industrial 12.5%; Office 1.7%; and Retail 4.0%. Including income the total return was 7.8%. Compared with its benchmark MSCI UK Quarterly Property Index, Picton has generated above index income returns and total property returns on an ungeared basis over the one, three, five, seven and 10 years (to 30 September 2021). Performance has been top quartile compared with the more than 200 portfolios that comprise the benchmark in each of the seven years ended 30 September 2021.

Picton’s office valuations decreased by 0.6% like-for-like overall, with a more marked decline in London. The company notes that investment in the office portfolio over the past few years has ensured the buildings are of good quality, and should meet occupiers’ requirements. The majority of the vacant office space is ready to be leased and this represents a significant income opportunity. At H122 void reduction in the office sector represented a £2.7m uplift potential for Picton.2

  Across the whole portfolio, the reversionary upside potential at H122 was c £9.0m of which void reduction accounted for c £3.5m and lease reversion to market rents and lease incentive run-off the balance.

Having been hard hit during the pandemic there are clear signs of improvement in the retail and leisure sector, although it is highly variable across sub-sectors and retail warehousing continues to drive performance. Picton’s retail warehouse portfolio is fully leased, off low overall rents, and increased in value by 5.0% on a like-for-like basis over the quarter. The high street portfolio declined marginally by 1.0% like-for-like, including the benefit from securing two new occupiers.

Portfolio occupancy at end-Q322 was 91% compared with 93% at end-Q222, with the reduction representing space returned in the office and industrial sectors.

Forecasts and valuation

Net earnings excluding revaluation gains of £5.4m in Q322 and the increase in quarterly DPS are consistent with our FY22 forecasts, set out in detail in our November update note. Q322 capital growth and NAV were well ahead of our assumptions and we have increased our NAV forecasts for FY22 with a follow through to FY23.

The increased quarterly run rate of DPS (3.5p) represents a 3.3% prospective yield, although we forecast further dividend growth in FY23. The P/NAV per share (Q322: 112.8p) of 0.93x is below the five-year average of c 0.97x and the high of c 1.1x.

Exhibit 4 shows a summary performance and valuation comparison of Picton and what we consider to be its closest diversified income-oriented peers. Over 12 months, Picton’s share price performance is slightly ahead of the group average and the broad UK property sector and UK equity market. Picton shares trade on a lower yield than the group average while its P/NTA is above average. The factors that support this valuation include the company’s 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 4: Peer valuation and price performance comparison

Price
(p)

Market cap
(£m)

P/NAV
(x)*

Trailing yield (%)**

Share price performance

1 month

3 months

12 months

From 12M high

AEW REIT

115

182

1.01

7.0

2%

7%

34%

-6%

BMO Real Estate Investments

92

221

0.76

4.0

7%

8%

29%

-5%

BMO Commercial Property Trust

116

870

0.86

3.6

10%

13%

48%

-2%

Circle Property

203

58

0.74

1.7

-5%

-6%

14%

-12%

Custodian

106

467

1.00

4.7

0%

9%

14%

-2%

Ediston Property

86

181

0.96

5.2

0%

12%

27%

-3%

LondonMetric

265

2591

1.24

3.3

-7%

1%

16%

-8%

McKay Securities

223

202

0.69

3.8

-1%

2%

10%

-9%

Palace Capital

252

117

0.70

4.7

-5%

4%

29%

-13%

Regional REIT

90

466

0.91

7.0

-4%

3%

11%

-6%

Schroder REIT

55

268

0.83

4.9

2%

9%

37%

-4%

Standard Life Investment Property

82

326

0.88

4.6

1%

12%

41%

-2%

Average

0.88

4.5

0%

6%

26%

-6%

Picton

106

580

0.94

3.2

4%

9%

28%

-1%

UK property sector index

1,911

-5%

2%

22%

-6%

UK equity market index

4,183

-1%

1%

15%

-3%

Source: Company data, Refinitiv prices as at 28 January 2022. Note: *Based on last reported EPRA NAV/NTA. **Based on trailing 12-month DPS declared.

Exhibit 5: 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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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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