Picton Property Income (LSE:PCTN) — Full Year Results

0:01 Good morning, and welcome to the PCTN PROPERTY INCOME LTD Full Year Results Investor Presentation. Throughout this recorded presentation, investors will be in listen only mode. Questions are encouraged and can be submitted at any time by the Q and A tab situated in the right corner of your screen. Just simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll.

0:28 And I'd now like to hand you over to Michael Morris, CEO. Good morning, sir. Morning, and thank you for that introduction. My name is Michael Morris. I'm the chief executive of PCTN. I've worked with the group since it was launched in 2005. And joining me is Andrew, our finance director. Morning. The two of us are going to take you through a short slide deck. We're going to briefly talk to our annual results. We're going to give an overview on the market, what we've been doing with the company and our portfolio, a short outlook and then the opportunity for Q and A, as Alessandro said, at the end.

1:27 So for those of you that haven't come across PCTN before, we're a UK REIT. We have a diversified portfolio of commercial assets worth just under £800,000,000. Our purpose is to be a responsible owner of commercial real estate, helping our occupiers succeed and being valued by all our stakeholders, including shareholders. We have a particularly good record of MSCI outperformance. This year, we outperformed the quarterly index, and that's now a ten consecutive year track record. And, actually, our longer term performance, which we're particularly proud of, shows upper quartile performance all the way back to our launch in 2005.

2:23 It's without doubt been a difficult twelve months. The rising interest rate environment has not been helpful to the property sector. But in a snapshot, we've shown resilient operational performance. The portfolio has done well. I think the financing arrangements that we have have shown their defensive qualities. Andrew will talk to those in a minute. And quite a work quite a bit of work has gone on as a business just improving the property portfolio generally, but also from a sustainability perspective, which I think is becoming increase increasingly relevant. We'll talk to all of those things in a minute.

3:07 On the next slide is just a snapshot of our portfolio. The majority of it is in the industrial warehouse and logistics sector. We have about a third in the office sector and currently around 11% in retail and leisure with the majority of that in the retail warehouse sector. I won't go through all the stats on the right hand side. This slide deck will be available afterwards. And if I now hand over to Andrew, he can talk specifically about our financial results. Thank you, Michael. Just starting with some headline figures for the year.

3:54 Our net assets at the end of March were GBP $548,000,000, so that's GBP 100 per share. The overall loss of 90,000,000 for the year was driven by the negative valuation movements, which are obviously part of the P and L. Within that, our EPRA earnings were stable compared to the previous year at £21,000,000 and we paid out £19,000,000 in dividends, which is 4% higher than the previous year, and that's with dividend cover of 112%. Moving on to the income statement. This chart shows how the EPRA earnings, so that's excluding the capital movements, has moved compared to the previous year.

4:40 And the first item we can see is rental income was up nearly 3,000,000. That's as a result of new acquisitions and also asset management activity. That increase was largely offset by higher property costs, and that's up due to a lower occupancy in the year and also the impact of inflation on on all our costs. Financing costs were a little bit higher. That's because the interest rate on our variable revolving credit facility facility has increased during the year, but that's mitigated to some extent by our refinancing that took place in March 22.

5:21 Moving on to the balance sheet. This chart shows how net assets have moved over the year compared to March 22. We've spoken about the EPRA earnings of CHF 21,000,000. Then there's the valuation movement. That's a like for like decrease in valuation of the year of 12%. And finally, there's dividends paid as mentioned at CHF 19,000,000 with a cover of 112%. Finally, a look at our capital structure. Our drawn debt at the end of March was $224,000,000. That's a loan to value ratio of 27%. 95% of our borrowings are fixed with maturities in 2031 and 2032. And the next point just shows the value in our borrowings. The fair value of our debt is £23,000,000 less than the book value, and that makes our extra NBV 5p a share higher than the IFRS net assets.

6:23 And at the end of March, we had £38,000,000 undrawn under our revolving credit And now I'll pass back to Michael, who's going to talk about the market. Thank you, Andrew. So Andrew has given our results there positioned against a particularly challenging market. Political instability, inflation, rising interest rates, rising gilt yields have all impacted property pricing across all sectors. I'll talk to each in a minute. The chart at the bottom shows and puts last year into context. So the year to March 2022 was a record positive year, and almost all of that was undone in the year to March 2023.

7:20 In fact, in October last year, so immediately after the mini budget, MSCI recorded the fastest monthly downward correction on record. Our own view is the market is more transparent than it was even back in o eight, o nine. And I think the point where we we feel more positive is although this was quite a quick sharp correction, we have started to see some stability in asset values as we've moved into 2023. So I think, you know, just getting or or not wanting to get mixed up between the speed of correction and the underlying scale of it. And and part of that is, I think, you know, the market is in a better place. We'll talk about occupational market resilience.

8:13 I think companies are in a better place less leverage, and the same for the banking sector. So very different position to o eight, o nine.

8:26 So just to give a a quick proceed. In the market as a whole last year, total returns were minus just under 13%. It was the industrial sector that saw the sharpest movement in values, and that clearly flew flowed through to total returns, then offices, then retail. All sectors were affected, and in fact, is is a reversal, I suppose, of what we saw in the preceding year where we saw very strong gains coming through in the industrial sector. The chart the top chart on on the right, I just draw your attention to, actually, all sectors recorded positive rental growth. So despite all this sort of macroeconomic noise, for want of a better expression, all sectors saw positive rental growth to a greater or lesser extent.

9:34 And interestingly, retail, which was the best performing subsector, really reflected the fact that that particular part of the market had been repriced heavily heavily in preceding years. And therefore, as we went into this rising rate environment, higher yields on retail property had had a less adverse impact. So looking at each of the sectors in a bit more detail in terms of where we're invested, The chart on the top right shows you very clearly the underlying strength of the occupational market in the industrial sector. Although perhaps some of the larger occupiers, certainly, we saw during COVID, you know, a very big sort of ecommerce boom in industrial, you know, that that subsided.

10:27 Nevertheless, demand is good and rental growth is also good continuing really across geography throughout The UK. The occupation the investment market rather, which is the bottom chart, that shows that correction that I referred to earlier in the aftermath of the mini budget, but it also shows that stability just coming back into the market. And I think as investors have thought about the the limited supply, the good demand, the rising rent characteristics, the lower obsolescence in this sector, it seemed quite a quite a turnaround in in twelve months.

11:15 And that chart chart demonstrates it. In the office sector, this has been a still a slightly trickier market. Demand not not fully recovered really post COVID, quite a polarized market, you know, the very best space attracting good interest. But but remember, the very best space is only a very small proportion of the market as a whole. You can see this is on the same scale as the previous chart, so you can see the rental growth there, but at a much, much more modest level. And you can also see, actually, capital growth hasn't yet turned positive in the monthly index. We're still seeing some valuation slippage.

12:03 And I think in part, you know, rising costs, rising capital expenditure, office as a sector generally has more CapEx. That's feeding through into valuations, and we've not yet seen that turnaround in that sector. I will come on to what we're doing about that in a minute. And then in the retail sector, again, same scale rental growth, pretty flat to be fair, a bit hit and miss. But having said that, that is a much improved position on twelve, twenty four months ago. So just to see some stability in rents, I think, is a very positive thing for this this sector as a whole. Still oversupply, but that stability on rents, if you've got the right asset types, I think, is is a a very encouraging sign.

13:04 And you can see there on the capital side, and I've mentioned previously, the higher yielding component provided a degree of defensiveness. We saw less declines over the the twelve month period and, again, just starting to see some stability creeping back into asset values.

13:24 So the next few slides are just to talk about our own portfolio and what we've been doing, a, to deliver the results that Andrew alluded to, b, in light of what's been going on in the wider market. So our overall total property return was just under minus nine compared with MSCI, as I mentioned earlier, minus 13. Why did we outperform? Well, we outperformed because the valuation of our assets performed better than the market as a whole. And why did the valuation of our assets perform better than the market as a whole? And that was really driven by the rental growth, the occupational story, what we were doing to our portfolio to drive rents ahead of the market, and I'll talk about that in a minute. What we saw was just under 3% increase in our contracted rent and just under 10% increase in the passing rent.

14:31 Occupancy dipped a bit partly down to things going on in the portfolio, partly down to the fact that it was a more tricky market last year,

14:42 and we made some relatively modest acquisitions in a range of mixed uses, so office, industrial, and retail, and I'll talk to that in a minute. I won't go through all of these points, but quite a lot of activity throughout the year. You know, if you think about it, it was the first full year when we were out of COVID restrictions. So quite a bit of leasing activity, regearing, rent views, and all of those

15:18 pieces of the jigsaw, so to speak, reinforced the rising rent story across the portfolio. We also invested back into the portfolio. It was just over 6,000,000 last year. Really, you know, making sure that you have a portfolio that meets current occupational demand is really important. And I suppose I would tally the the costs of some of those refurbishments against the the lettings that were well ahead of ERV. And I think that that's an important factor to note. And, again, rent collection last year, first year outside of the pandemic, and rent collection up above 99%.

16:08 I've put a chart in here on a number of sort of key themes that I thought, excuse me, would be relevant and worth talking through. The first is, you know, we are in an inflationary environment that is leading to to rising costs, not just in real estate, but but but across lots of sectors. And also that's leading to increased void holding costs. So, you know, we've been in a really fortunate position. Andrew mentioned our fixed rate debt insulates us from perhaps one of the biggest potential rising costs, but but there's still a sort of operational property piece to that. And we've also been

16:50 doing more work as we refurbish our buildings to make sure that they are, you know, fit for purpose looking forward. So, you know, we've been removing gas using electric. Solar is something that we've started to roll out, you know, further improving, you know, the sustainability credentials of our buildings. And I think that's really important against the backdrop of of rising energy costs. You know, occupiers are becoming ever increasingly aware about the energy efficiency of their buildings. And from a a p and l perspective, you know, want to be in efficient buildings because that's gonna reduce their occupational costs.

17:36 Rental growth in the industrial sector, I touched on this when I talked about the market. We saw 18% growth in our industrial ERVs over the year, a particularly good year and driven by a lot of activity very clearly proving what the what rents were achievable on our estates. And because we own quite a lot of multilet estates, there was a lot of activity coming through to support that. And I've mentioned a couple of examples there, Radlett and Warrington, but but it was happening at other assets as well. And this, I suppose, just reinforces, you know, our view of of this sector generally, and there are other benefits around depreciation, you know, solar rollout that I think suit this sector.

18:36 I've also used the phrase that office sector demand is inconsistent. I think part of this is a, dare I said, a COVID hangover, you know, flexible working working patterns disrupted with, you know, trade and tube strikes, etcetera. We've adapted to that employing something called SwiftSpace, which is a more flexible leasing offer. We're only really doing this in the office sector, but I think it's an important important part of what we offer because the market has changed and is demanding that flexibility. And the other point that I alluded to earlier is that we are, for some of our assets, now looking and exploring higher value alternative uses.

19:28 So we've got three projects on the go at the minute, all in slightly different stages of progression. Two in London where we're looking at residential use and one in Cardiff where we're exploring more purpose built student accommodation type route.

19:52 I've got a couple of slides just on each element of our portfolio. Again, I won't go into too much detail, but our industrial portfolio is 95% leased. This part of our portfolio offers the most reversionary upside, the most upside from our current passing rents. And you can see in the blue box there, you know, again, plenty of transactions proving driving that rental growth. In the office sector, again, it's about providing good quality space. It's providing flexibility if that's where the market is. This is where our occupancy is lower, and this is why we're looking at these alternative uses to kind of address and improve occupancy.

20:45 But there were positive signs, you know, transactions that we did in London, in Essex, and even up in Scotland showing that there is demand and that we can get good rents. But as I mentioned a slide or two ago, that demand is inconsistent, and that that's the slight challenge with the sector as a whole at the minute.

21:10 And then on the retail portfolio, again, running high occupancy here, 94%. I've touched on the fact that rents are stabilizing. You know, clearly, is is thin and there is oversupply. But but, again, retailers are looking to go to, you know, proven locations, you know, where there is already a good retailer mix. And, you know, we think for the right assets, you know, they don't need repurposing, and they have a future as retail. And and we've done a number of things this year where we've again, in this sector, it's a small part of our portfolio, but but been able to move rents forward, which, you know, is a different place to where we were a couple of years ago.

22:10 Over to Andrew as head of our responsibility committee. Thank you, Michael. The next couple of slides just give a bit of an indication of some of the work that we've been carrying out on the sustainability front. But first of just to note that this year, within our annual report, we combined all our sustainability reporting into that document, which we think better reflects the integration of sustainability into our business model. So just looking at some of the things that have taken place across the portfolio, we've continued to improve our EPC ratings. They now have 76% rated A to C. We've as mentioned, we've started to install solar at a number of properties at five this year with another three under underway.

23:01 We've continued to decarbonize the portfolio, taking gas out of a further three properties and the vast majority of our leases now contain green clauses. Just looking at some of the other aspects of sustainability, stakeholder engagement, we carried out occupier surveys at our office and industrial properties, particularly with a sustainability theme. On the governance side, we've set up a climate action working group to help oversee the progress against our net zero pathway. We've carried out an assessment of climate related risks, and we're working through that in our asset business plans.

23:47 We've improved our GRESB rating over the year, which we're which we're very pleased about. I will now pass back to Michael, who's gonna summarize and and yeah. Thank you, Andrew. So a very quick counter through there. I think the headlines really are that, you know, we are starting to see some stability to asset values after that, you know, quite heavy shock last year. I think it's, you know, without doubt proven that the occupational markets have been been particularly resilient, and that comes across. You can see that in our own portfolio. And also, you know, a couple of years back, we saw a very wide divergence between different sectors and how they performed.

24:39 We we saw last year a convergence of returns, although there's still diversity. And, again, I think this year, you know, that convergence is likely to get closer still. In terms of our own business, notwithstanding what's going on generally, we think we're in pretty good shape. Our capital structure, our low leverage, our fixed date debt, and indeed our long term debt puts us in a very good position and provides real earnings stability. There's still a lot of upside embedded in the portfolio, partly down to the fact that occupancy is at 91%, partly down to where we're invested and the rents that are being paid to us versus the market levels, and there's some detail on that chart on the page.

25:30 For us, growing that income and, I suppose, from a share price perspective, you know, doing the things that will help improve the investor rating, improve the share price in particular is a is a key focus. And and, really, I suppose, you know, I mentioned right at the beginning, we've got a good long term historic track track record. You know, that's something that really drives the team as we look forwards, you know, wanting to ensure that we maintain that track record. And, you know, that that's the area of focus for the business as a whole. So I think I'm gonna end there and very happy to take questions on what we've either said or or anything else.

26:22 Michael, Andrew, thank you very much for your presentation. If I may, I'll just bring your cameras up. Ladies and gentlemen, please do continue to submit your questions just by using the q and a tab, which is situated on the top right hand corner of your screen. But just while the company take a few moments to review those questions submitted today, I'd like to remind you that recording of this presentation along with a copy of the slides and the published q and a can be accessed via your investor dashboard. As you can see, we received a number of questions throughout today's presentation. And, Mike, if I could just ask you to read out those questions and give responses to what is appropriate to do so, I'll pick up from you at the end. Okay. Thank you. So I've got a question here about will we be developing the alternative uses at our assets?

27:10 I think the answer really is on an asset by asset basis, and it depends on the scale of what's involved at each asset. So just by way of an example, the building that we're in at the minute has, you know, retail on Ground Floor, offices up above, but it does have residential on the top floor. As part of a bigger mixed use scheme, I think that's something that that we could do. Where, however, you know, you're looking at very big redevelopments and certainly some of those projects could become more involved and more significant, I think it's more likely that we would either work with or or sell to specialist developers, and that would in turn enable us to sort of reinvest proceeds into other income producing opportunities.

28:20 The next question is what's my view on the property market over the next twelve months and where interest rates will be? Always good to be asked about interest rates because I'm sure there are many people in the world far more qualified than a humble surveyor to have a view on interest rates. But, I mean, clearly, inflation figures out last week certainly were perceived as being unhelpful for interest rates in the short term. I suppose, you know, I think that the full effect of the rate rises that we've seen so far haven't perhaps properly been felt, and and I think there's a lag to come.

29:07 And I think when they are felt, you know, that that will make life a little trickier. And and, hopefully, we do start to see rates if they're not coming down this year well into next. And I think, you know, our view on the market is one of occupational resilience. But, actually, in terms of capital appreciation, I think we do need to see a slightly more favorable interest rate environment than than than it currently looks. And I suppose to some extent, that is why, you know, almost all real estate companies, you know, trade at discounts to NAV because the perception around the interest rate environment is not favorable.

29:59 So, you know, I'm I'm I'm broadly optimistic, but I think what what what happens, you know, with the MPC and, you know, as we look at swap rates, gilt yields, you know, that that's something that we're watching very closely. So, yeah, hopefully, that gives a flavor of our our thinking. Someone's asked, are you looking to consolidate, and do you believe the sector needs it? I suppose if I answer the last part of that question first, I think I think it is good for the sector to grow and and for underlying in, you know, investor companies to be bigger. I think that's important because I think coverage is important.

31:02 I think liquidity is important. I think it's clear that the sort of financial service sector is consolidating, and therefore, you know, investors are getting bigger and and demanding larger vehicles. And I think the other thing that's really important about consolidation is that by combining, you can get economies of scale, you know, that you know, it's whether it's real estate or any other sector, you know, that that there's an overlap and an overlap of costs and, you know, stripping that out, you know, feeds through to the bottom line, which is a good thing for shareholders.

31:47 So that answers, do I think the sector needs it? Are we are we looking to? Yeah. I mean, we've said previously that we think it's a good thing, and we would like to be part of a consolidation story. We have a strong long term track record, and the feedback that we get from our shareholders is that they would like us to be bigger. But, you know, we're not the only people that are trying to get bigger either. So it's, you know, not an easy marketplace to do those sorts of deals, but, you know, rest assured that if we are able to and we think they're good transactions for shareholders, then we will, you know, look at them very closely.

32:43 And then I've had another question perhaps on a similar vein. I don't know if everyone on this call knows, but there was a company another investment company called CT Property Trust, I think it was, that was taken over last year. And someone said, you know, do do we think more of those things will occur, and have there been any informal discussions this end? I I I do think similar type transactions will happen. And in terms of informal discussions, I mean, we don't publicly say, you know, what discussions we're in and with whom.

33:30 You know, as a PLC company, that's not something that we're able to do. But, hopefully, my previous answer just provided a bit of color to that. So I think I might have answered all of the questions. Is that Yes. Michael, yeah, thank you very much for that. I think you've actually addressed all the questions from investors. And, of course, the company will review your questions submitted today, and we'll publish those responses on the investor meet company platform. But just before providing invest just before we direct investors to provide you with their feedback, which I know is particularly important to yourself, could I just ask you for a few closing comments? Yeah. Just, you know, to thank everyone for their time today.

34:15 Hopefully, the presentation was self explanatory. It's available online later. If anyone's got any specific follow ups, then please reach out to me or via IMC. But, yes, thank you all for your time. Michael, Andrew, thanks once again for updating investors today. Could I please ask investors not to close the session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations? This will only take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of PICTON PROPERTY INCOME LTD, we'd like to thank you for attending today's presentation, and good morning to you all.