Results analysis: Picton Property Income

• Self-managed REIT Picton Property Income (PCTN) has released its results for the year ending 31/03/2024. PCTN delivered a property total return of 1.6% for the year, compared to a -1.0% decline in the MSCI UK Quarterly Property Index. The valuation of the property portfolio declined though, and NAV per share fell from 100p to 96p.
• That said, PCTN has delivered top quartile property level outperformance over the nearly two-decade period since IPO in 2004.
• Dividends for the year totalled £19.1m, or 3.5p per share. Dividends of 3.5p were covered at 114%. In April a 5.7% increase in dividends was announced effective May 2024.
• PCTN has made strong progress in repositioning its portfolio away from office assets. Central London property Angel Gate was sold after the period end in April for £29.6m – 5% ahead of the valuation at the end of the 2023 calendar year. The REIT has also exchanged contracts to sell Longcross, an office building in Cardiff, to a student accommodation developer.
• The managers used £16.5m of the proceeds from the Angel Gate sale to repay funds drawn from the REIT’s RCF. This reduced the weighted average interest rate on borrowings to 3.7% from 3.9% and means that PCTN’s borrowings are now 100% fixed rate.
• The PCTN portfolio has a net initial yield of 5.2% and a reversionary yield of 7.0%. Passing rent was £44.7m, compared to an estimated rental value of £57.6m.
• PCTN Chief Executive Michael Morris said: “Our approach capitalises on real estate being an ever-evolving asset class, with buildings continually adapted, upgraded or repurposed to meet changing occupier demand. There remains significant income upside within the portfolio, whether that is captured directly at rent review or lease expiry or through the recycling of assets and reinvestment.”

Kepler View

Picton Property Income (PCTN) continues to pay a high, fully covered dividend. The 5.7% increase to dividends announced in May illustrates the portfolio’s strength and the manager’s ability to raise rents and increase earnings, despite inflationary pressures.

The team have been quick to respond to shifts in the market and manage the portfolio accordingly. In this instance that has meant shifting the portfolio away from offices and in to more in-demand areas, like logistics and industrial assets. April’s disposal of the Angel Gate asset, as well as the prospective sale of Longcross, which looks set to be achieved at a mark up to prior valuations, is proof that repurposing properties is more than just a nice, theoretical idea.

The Angel Gate disposal allowed PCTN to repay their floating rate borrowings in full. The resulting reduction in the weighted average interest rate on debt in the portfolio to 3.7% and we think the fact that this is now 100% fixed, should provide further assurance to investors that they can – despite higher rates – continue to use borrowing in such a way that it proves accretive to returns. The reduction of exposure to interest rate risk should also allay fears about the potential those borrowings had to impact returns.

It’s also worth noting that PCTN still has strong reversionary income potential of £12.8m, or 29% above the March passing rent. The largest proportion of that amount (£5.3m) comes from letting vacant space, with the remainder split between expiring rent-free periods or stepped rents (£3.9m) and properties where rent is below market value (£3.9m).

There’s no doubt that higher interest rates continue to play on investors’ minds when it comes to property. The fact PCTN trades at a c. 33% discount as at 23/05/2024 is illustrative of that. However, at a certain point you have to question what further level of assurance is required. The REIT continues to offer attractive potential upside via its wide discount and reversionary potential, without even factoring in the strength of its balance sheet and underlying portfolio.

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