Picton Property Income 26 September 2023
Disclosure – Non-Independent Marketing Communication
This is a non-independent marketing communication commissioned by Picton Property Income. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.
Picton Property Income (PCTN) is a diversified UK commercial property REIT with a long track record of outperforming the MSCI UK All-Property Index. It has a diversified portfolio of 49 assets with a bias towards industrial assets, which form almost 60% of the portfolio, and a relatively low exposure to retail. Regionally, the portfolio favours London and the South East.
PCTN is an internally-managed REIT and is a commercial company rather than a Chapter 15 listed investment company. CEO Michael Morris is, in effect, the lead fund manager and he has worked on PCTN since its inception in 2005, first as an external manager at ING Real Estate, and from 2012, when the team managing PCTN became employees of the trust, as CEO. He is supported by a team of ten professionals and non-executive directors with relevant experience in different aspects of property investment. In the Charges section, we discuss that PCTN is not required to produce a KID or OCF, as well as some of the practical differences in being internally managed, including how the team is aligned with shareholders. Notwithstanding the sector and regional biases, Michael and the team manage the portfolio asset by asset, rather than thematically, and put a lot of effort into understanding and servicing their occupiers’ needs.
PCTN pays a covered Dividend and has a historical yield of c.5.1%. The board prefers to pay a covered dividend rather than rely on distributable reserves, and for example was early to reduce its dividend during the pandemic, and to restore it as rental collections improved the following year.
PCTN is geared c.27% LTV (c. 37% NAV), and 95% of its debt matures in 2031 and 2032, which means there are no imminent refinancing risks. Interest rates on the vast majority of the debt are fixed, shielding it from rising debt costs. PCTN’s discount is c.31%, which is in line with comparable REITs.
The differences between an externally and an internally-managed trust can turn into a rabbit hole if one wishes, but fundamentally PCTN is still a diversified collective investment in UK commercial property assets that are actively managed by property experts, and that’s ultimately what’s going to drive performance. That said, at various points below we highlight PCTN’s internally-managed structure, as it requires a slightly different approach to reporting, for example, charges. Given its structure, PCTN is not a member of the AIC, nor is it classified in the AIC’s sectors, but it closely resembles a UK Commercial Property Trust, and this is the comparison we will use.
In the same way, the big macro factor of the day, rising interest rates, is the driver behind the decline in valuations in 2022, and the discount widening to its current level, and a change in direction here will in all likelihood be the driver of a recovery in the discount, which is in our view both an expression of the stock market’s negative sentiment to property, but also a reflection that other assets, such as government bonds, have become relatively more attractive compared to property. The discount is in no way a reflection of PCTN’s strong historical performance, beating the MSCI UK All-Property Index every year for the last ten years.
Some investors will like the subtle differences in alignment though, that internal management creates. For example, NAV performance, income growth, and outperformance of the MSCI index are key objectives that can influence the team’s remuneration, and PCTN operates a covered dividend policy. As we examine in the Portfolio section, PCTN has good reversionary potential, and any income growth could quickly be expressed in terms of dividend growth.
- Internal management creates alignment with shareholders that some investors may prefer
- Dividend is fully covered and reversionary potential could translate to dividend growth
- No immediate refinancing or debt cost risks
- A recovery in property values will, in our view, be driven by factors beyond management control
- Lower yield than some other comparable REITs, albeit dividend is fully covered
- Gearing can amplify losses as well as gains