Picton Property Income (LSE:PCTN) — Post AGM

0:02 Good morning, ladies and gentlemen. Welcome to the PCTN PROPERTY INCOME LTD post AGM presentation. Throughout this recorded presentation, attendees online will be in listen only mode. Questions are encouraged and could be submitted at any time via the Q and A tab that's just situated on the right hand corner of your screen. Please just simply type in your questions at any time and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, all questions submitted today will be reviewed with responses published on the investor meet company platform where it is appropriate to

0:33 do so. I'd now like to hand you over to chair, Lina Wilson. Good morning. Good morning, and, welcome, everyone. Thank you very much for joining us. We've had our AGM this morning, so we're delighted to take you through this post AGM presentation and to engage with you in the Q and A that follows that. If I could just make some introductions first of all, I'm joined this morning presenting to you will be our chief executive Michael Morris and our finance director Andrew Dewhurst. I'm delighted to see that I'm also joined by my three non executive colleagues. We have Mark Baton who chairs our audit risk committee and is also our senior independent director Richard Jones who chairs our property evaluation committee and my colleague Maria Bentley who chairs our remuneration committee We're all delighted to be here and we will be answering any questions you have after the presentation.

1:29 So first of all I'd like to pass to Michael who will take you through the presentation and as I say that will be fifteen minutes or so and then we'll go to a Q and A session. Michael. Thank you, Lina. So just very briefly, Andrew and I are gonna give a brief update, of the Picton, an introduction for those that are less familiar with the business. We're gonna talk about the markets, by way of backdrop and how that

1:58 impacts the market. Andrew's gonna talk about our year end results very briefly, recognizing that this is a sort of post AGM presentation. And I'm gonna talk a little bit more about what's been happening over the last quarter. We're gonna give a very brief summary on some of the sustainability and ESG work we've been doing this year, and then some concluding remarks, and as Lina mentioned, an opportunity for q and a thereafter. So just turning the page. Most of you know, Picton is a UK REIT established in 2005. We now have a near £900,000,000 commercial property portfolio.

2:44 We have a long term track record we're very proud of outperforming MSCI and our purpose is really about being a responsible owner of real estate helping our occupiers succeed and valuing being valued by all our stakeholders obviously including shareholders. Our business overview on the next slide just drills down into a little bit more detail. So we have net assets of $670,000,000. Our market cap is below that and we'll talk about that in a bit. Andrew will talk about our borrowings, very conservative at a minute. And in terms of the portfolio itself, a really diversified portfolio, diversified in terms of the number of occupiers and diversified across sectors. Currently we're nearly 60% in industrial warehouse logistics, 30% in offices spread across The UK and then around 10%, in retail and leisure and the other point to just mention on that slide is is the underlying sort of net yield from the portfolio is, close to 4% but there's embedded reversion upside potential, of over five and we'll talk about that in a little bit more detail, later.

4:13 So to talk about the market,

4:17 well it's been a fairly turbulent few months, in the economy. There's not a day goes by where it isn't sort of main news what's happening. And that has had some impact on the property market. And I've put up here a chart showing MSCI returns, both total returns, which are the dot, but income and capital, the two components of property returns. And you can see in July, we have seen a downward adjustment, in property values reflecting all of this uncertainty that's going on. Actually though, you know this just brings things back to May levels because we've seen some good growth during the start of the year. We've also been through a period of slightly lower investment volume, so pricing transparency is a little bit harder, than it has been.

5:16 And I'll talk about each of the sectors in turn and what's happening there. So if we look at industrial warehouse and logistics, the chart on the top right shows, notwithstanding some of these more difficult times, you know, rents still continue to rise, occupier demand still, it's good, and supply is very tight and I think that's a really important backdrop to be aware of at the minute, notwithstanding some of these, other challenges. In terms of capital growth, there has been a price correction, in industrial. It's happened particularly where yields are perhaps at their lowest, and, you know, with rising financing costs etc you know a slight outward adjustment in yields and that that shows up quite clearly in the July numbers in the bottom chart.

6:17 But I would say that you know the rental growth story that we are still seeing in our portfolio is offsetting some of that movement and our own view is this is this is a correction rather than something more more severe as perhaps you know might have been seen, you know, back in the times of, you know, global financial crisis. Looking at the office market, you can see there how much lower the rental growth has been and indeed the capital growth over the last year. There has been a bit of a correction, but not in the same way as you've seen in the industrial sector.

7:02 You know, we'll talk about it later, you know, the work we've been doing on ESG, but I think this is particularly important in this sector as people are, you know, wanting to be, well, not even necessarily wanting to be, needing to be more energy efficient in a world where energy costs are rising. We're also seeing more demand in flexible space, and that's something that we are adapting to as well. In terms of investor demand, a little bit thinner, again, on the back of perhaps a weaker market, but, values are broadly stable and I think, you know, very much driven at an asset level by quality of asset, quality of cash flow, requirement for capital expenditure, you know and again certainly in in some markets you've got residential, underpinning in terms of your values.

8:02 In terms of the retail market, again, you know, rents, we think, stabilizing, and you can see that, in the top chart, you know, we all know that retail values have gone through a marked pricing correction, you know, pre COVID and through that whole pandemic period, you know, for right units there's occupational demand we've got very limited supply of vacant retail space in our portfolio, and you know we're starting to see you know rents rising for you know the right type of assets at the minute and that's flowing through I think into capital values and you can see slightly driven by retail warehousing but nevertheless small but positive movements on the capital value side with just a much more marked correction, relative to industrial. And the way I'm looking at it is that really industrial has given back some of the very very strong gains we saw last year whereas the retail and office sectors which didn't experience that growth last year have been less impacted and I suppose to some extent, yields in the office and retail sectors are much higher and therefore slightly less sensitive to

9:33 finance market movements. So I'm going to hand over to Andrew now to talk through some of the financial numbers. Thank you, Michael. Starting with a recap of the figures for the year ending March 22. Our profit for the year was 147,000,000, which was the highest recorded profit since we launched back in 2005.

10:00 Our net assets increased over the year by 24% to $657,000,000 with earnings per share of 27 pics. Our total return for the year based on those results was 28% and our shareholder return, so that's the change in share price over the year, was 18.7%. We paid out dividends over the year of 18,400,000, and that was an increase of 23% on previous year with dividend cover healthy at a 150%. Moving on to the quarterly update, just to bring things up to date, the position at June 22, our net assets were up by around 2% to $670,000,000 for the June 30, and our net assets per share were up to 122.9p.

10:58 We've maintained the dividend for the quarter at 0.875p which equates to an annual rate of 3.5p and dividend cover for the quarter was also fully covered at 103. Moving on to the next slide, we can just give a brief summary on the capital structure side. Our total debt at the end of June was £218,000,000 and that's a loan to value of 22% on an overall basis. 98% of our debt is fixed under long term facilities which mature in 2031 and 2032. I'm gonna talk about it later, but we acquired property during the quarter and that was utilizing the extra facility that drew down Canada Life facility in the previous quarter.

11:51 And at the end of June, we still had 45,000,000 undrawn under our revolving credit facility. So moving on to the operational highlights, I'll pass back to Mike. Thank you, Andrew. So this just again is for the quarter to June. The assets will revalue then just by way of an update, you know the lettings, the leasing activity, the rent reviews, you know, 6%, 12%, 14% ahead of the March ERVs and I think that reinforces the point I was making earlier about us still seeing positive rental growth primarily in the industrial sector.

12:41 The valuation uplift was 1.9%. That's definitely lower than it has been in preceding quarters, and that reflects to some extent this repricing that I alluded to in the market and you know we certainly through the valuation process this last quarter saw you know some some small but nevertheless actual write downs on a number of assets which just sort of reflected the froth coming out of certain parts of the market. Occupancy is a little bit lower this quarter but we did buy a property in London that had void in it and you know for us it's a balance you know clearly we want to create high occupancy but buying an asset with lower occupancy you know, is an opportunity going forwards and clearly there's a there's a valuation aspect to it as well and this comes back to income and capital growth. But that was one of the primary drivers of what we hope is just a short term reduction in occupancy.

13:55 The next slide, just talks to something that we we launched, earlier this year called PICTON Swissbase and this is something that we're doing on our office assets. Not every single office asset but certainly where we've got smaller space and this is in response to, as I mentioned earlier, know in a kind of post Covid world, businesses wanting more flexibility, more certainty, perhaps around cost than the traditional real estate leasing model offered and this is all about flexible fitted and inclusive space and it's early days for us but we're very definitely getting traction here and as I say rolled out where we tend to have slightly smaller, floor plates and, therefore more SME focused businesses who want this flexibility.

15:00 Which leads quite nicely on to the building that I just alluded to in West London called Charlotte Terrace where we've bought an unbroken parade very close to Olympia which in itself is undergoing a billion pound regeneration as we speak. This block has got retail units on ground floor offices up above. It's actually listed. It's rebuilt in the early 90s behind the facade. The listing of this building means that it has preferential tax treatment, there's no business rates on vacant units so that's something that we were very mindful of.

15:45 Low rents, low capital value, we bought below the reinstatement value, the replacement cost and you know again a property where there's more flexible leasing offering is what the market wants. And we're at very early stages in the upgrading of it, but, early signs are very positive. So pleased about that. And then in on the next slide literally just announced this week, we've bought a building, in Cheltenham. You can see there again retail on Ground Floor, so Tesco's is the key retailer Ground Floor and then we've got offices up above.

16:34 Really good building next to John Lewis in the town centre refurbished and relet basically during Covid, so you know in a tricky market, so we think the rents are sensible, know and a really good income profile seven going to nine, so very attractive in this market. Good sustainability credentials, not only has this building got know b rated EPCs, it's a building that doesn't run on natural gas, it runs on electricity. So that from a sort of being carbon net zero ready is attractive too. So I'm pleased about that.

17:21 Grouping the page, our voids, there's two sort of income upsides within the business at the minute. A proportion comes through where rents are below market levels and that's principally in our industrial assets and you know us capturing the rental growth coming through and the other quite significant component is through the current vacancy I mentioned earlier we're running at 91% occupancy at the minute. And we've just put a summary of the top five voids here at the minute. Charlotte Terrace has obviously increased our vacancy short term but hopefully you can see from the pictures and there's you know details online I'm sure you know these are good quality buildings you know we are appealing to the sort of current market at the minute and you know progress I think is being made on all of those assets in terms of occupier inquiries, viewings and moving things forward. So you know good quality assets you know to be pushing that occupancy from.

18:38 A couple of slides just as a slight aside on being responsible and some of the work we've been doing particularly around sustainability. You know this isn't something that we've just sort of jumped on the bandwagon. You know this is something we've been doing for quite a long period of time within the business. We've set up a responsibility committee that oversees our progress. In the last twelve months we published our net zero pathway which, has got a target date of 2040, ten years ahead of the government targets and importantly that's a very wide scope target so including scope one, two and three emissions.

19:29 So you know we're looking at things holistically there. We've also been through a whole risk assessment

19:37 of our assets and climate change and you know this summer if ever there's one to talk about you know drought and you know some of the challenges that are that are coming through that are evident we're seeing in climate change you know that's something that's very much being on our agenda and green lease clauses you know when we started introducing green lease clauses we got a lot of pushback from occupiers who didn't get where we were coming from you know the whole conversation has moved on now and this all is helping us you know, move the portfolio. It's not going to happen overnight but move the portfolio to a much sort of greener position. And then specifically at the properties, so this is the next slide. You know, we sit here today,

20:26 you know, nearly 80% of the portfolio is rated A E A E P C, A to C EPC. You know that's a continual asset management program of upgrading the energy efficiencies of that building. We've spoken about,

20:46 you know, net zero and started to remove gas from our assets using green electricity where appropriate and you know simple things like you know no energy lighting, smart buildings, efficient building management systems all are steps in the right direction and we definitely think with this sort of rising energy costs that really, has yet to bite, you know, more and more occupiers are going to come on board and want to be involved in reducing emissions and that's really important for that scope three. Well-being, cycle storage, shower facilities, etc, you know, all important things where that are helping us actually with leasing you know this is the point of it you know actually it's what occupiers want and then biodiversity not appropriate at every asset but certainly, where where we can you know we're doing our bit there too.

21:48 We published a sustainability report probably 2.5 ago now but that's on our website and clearly has a lot more detail on this if you're interested. And then finally our pathway which I touched on

22:05 this is about reducing embodied carbon, improving energy efficiency, renewable energy at our buildings, and then we'll go to a kind of offsetting position. But with the approach that we're taking, which is it's known as an energy hierarchy, it's very much reducing our emissions rather than simply trying to, offset and I think that's really important recognizing where energy costs are. So, really I'm gonna conclude now, and and try and wrap this up. I mean, I think the starting point is it is a more difficult market. You know, economic conditions are harder, you know, and I've said, you know, it's more challenging again, it feels to us like every two or three years now, there's yet another challenge that you know, the economy has to overcome.

22:58 But our own view is that, you know, property is a robust asset class. You know there's lots of protections within the way leases are structured etc and you know we think that the market we're going into is likely to create opportunities you know, our purchase in Cheltenham for example, know at a marked discount to the original vendor expectations. It's a disciplined approach, know, very much asset driven rather than, perhaps sector hierarchy. We think that sector returns are going to converge, so we've been through a period historically where industrial has been a very strong, outperformer relative to the other sectors.

23:50 Looking forwards, that gap is going to narrow markedly and it's going to be about the underlying property fundamentals, perhaps more so than the sectors they're in.

24:05 I've hopefully demonstrated that there's significant reversionary potential in the portfolio, both in our office and in industrial assets in particular. And I think asset management, you know, team that works with Andrew and I here, you know is a team that's been with us a long time, you know delivered strong returns and this sort of de risking of this the portfolio in this sort of more uncertain time I think it's really important. Our debt as Andrew mentioned, you know 95% fixed, with a long term maturity profile most of our debt matures in two thousand and thirty one-thirty two for memory you know again, you know not having short term refinancing risk at the minute I think is a real positive and I would go back to the point that generally in the market notwithstanding you know a lot of the challenges that are out there the supply of quality

25:09 real estate is actually quite limited and it's you know more limited than you would think and that balance between supply and demand you know is what's supporting rents and indeed in in in a number of markets we're still seeing seeing rents grow and I think you know the quality of your portfolio, the quality of the assets you know will lead to know tenant retention, rising occupancy and a deep rental value growth. And I suppose finally you know we do need to recognise that PICTON shares trade on a discount to NAV. We're disappointed about that but we recognise that that's a position within the wider real estate market generally and you know clearly as a board, as a business, we're trying to do everything we can and little by little to narrow that discount and hopefully the ongoing work we do, the asset management, you know, will shine through and provide a little bit more clarity going forwards.

26:26 So I think I'm going to wrap up there and happy to take questions. Michael, that's great and Lina and Andrew as well, if I may just jump back in there and thank you very much indeed for your presentation this morning. Ladies and gentlemen, please do continue to submit your questions just by using the Q and A tab that's situated on the top right hand corner of your screen. But just while the team takes a few moments to review those questions that were submitted already, I would like to remind you that a recording of this presentation along with a copy of the slides and the published Q and A can be accessed via your investor dashboard. Lina, as you can see we have received a number of questions today so thank you to all of those on the call for taking the time to submit their questions. If I could please just hand back to you to run through that Q and A tab and where appropriate to do so if you could please just read out questions and give your response and then I'll pick up from you at the end. Thank you.

27:15 Great. Thank you very much. I can see with some of the questions coming in that Mike Michael has already mentioned some of these areas, very happy to go through them. Thank you already for submitting your questions. Perhaps we'll start with a question from Nick B. With a strong market and being well positioned in industrial, what is your sell criteria to recycle funds? Michael, you concluded with some of the sexual split that you were talking about but perhaps you could pick that up? Yeah, I mean we're continually kind of evaluating know buy, hold, sell across the portfolio. There's kind of an absolute return criteria and relative so looking where assets are positioned relative to each other but then in terms of total returns and the market as a whole.

28:06 I kind of get that the premise behind the question in terms of well industrial has done very well and actually this is now a point to consider selling. And I think that that's always the case, but you know, we still believe that taking perhaps not a short term twelve month view, but perhaps longer than that, You know, we've got a really good quality industrial portfolio and selling it is relatively easy. Being able to buy it back is remarkably difficult. So, this is just an ongoing process and you know you'll have seen the acquisitions that we've made recently, to flip it back the other way, have been in kind of retail and office sectors and that's because we think there's good value there. There's just a subtle difference between buying into a sector and selling out of it and that really is driven by the 78% round trip costs in selling selling real estate stamp duty is significant, but rest assured that we are looking kind of across sectors where where we can recycle.

29:31 Thank you very much Michael and actually kind of related to that in terms of that sexual mix we have a question from Ryan, how do you see the office market trending and how do you anticipate the mix of the portfolio changing over time? You did cover some of that both an eye to the office market particularly, and that's like to quality. Yeah, you know to just summarise the last three years, industrial has gone up, retail has gone down and offices have gone down a little bit broadly flat but stayed static. So whereas you know the previous question was about the growth that had come from the industrial sector and capturing that you know recycling perhaps made it maybe into offices retail.

30:22 Office market has been subdued for some time and you know most businesses we speak to are working in a kind of hybrid way and certainly it's taken quite a lot of time for companies to know what they want to do in this sort of hybrid world and I do think, you know demand generally is a little bit more sluggish than it was pre pandemic, but it's all about this kind of flight quality as people are moving and wanting to attract staff, retain talent, bring people back into the office, they want better quality space and so that's how we look at the office market. We don't just look at you know you know a location per se, the quality of the building, the quality of the offer and indeed the quality that could be delivered at a building is really important because you know ultimately if it's priced in and the capital expenditure gets you a really good product that people want to be in, that's not a problem but you know poorer located you know buildings that have got a lot of capex that isn't reflected in the pricing are very very dangerous I think at the minute and a bit of a value trap.

31:46 So we're cautious on the office market but for the right assets and Cheltenham is this just I think just a really good example you know we paid just over 5,000,000 for it the vendors spent nearly £3,000,000 refurbishing it you know but as they have refurbished it you know it's grade a space it's what people want at least up in COVID and it's got really strong, you know, future proofed ESG credentials as I mentioned, you know, no natural gas, good energy efficiency and that's where the market's heading and that's not strictly about prime or secondary, it's just about having the office space that the market wants in future. So we're cognizant of the risks and for the right assets we'll move forwards.

32:42 Great, thank you, thank you Michael and we have a question from Alex, Alex M, Are there any future regulatory changes and challenges facing the property industry with regards to ESG and sustainability? This board has spent quite a lot of time, Michael mentioned our recently published sustainability report, but we spent a lot of time as a board this year carefully considering our net zero targets and carefully considering the challenges. And just to reiterate what Michael said, we've gone for a target of 2040, but covering a very broad scope and really looking at the minimum possible offsetting. So, you know, that's a target that we hope that we can achieve earlier if possible, but actually there are whole number of additional challenges.

33:34 So when we discuss that, not solely the energy crisis that the whole world finds itself in and us moving away as a consequence of natural gas etc. So we have spent a lot of time on this. For us, I think there are a great deal of challenges, mostly delivered by the current economic environment, How are our suppliers looking to their energy needs and their energy costs? Also, have a new government in The UK coming in and interesting to see both candidates backtracking a little on some of this and in terms of how we'll deal with that. We have a ESG or sustainability champion of the board, Maria Bentley, also occupies that position so as a board we want to make sure that we a non executive director actually reading some of our thoughts on that and you don't have to come in Maria but would you like to come in on anything from your perspective?

34:43 Well, think I just echo what you're saying, Lina, that it has been a topic of considerable discussion, a lot of care and attention I think put into the plans outlined so far. And the team is very engaged, and that's partly my role, not only to be the champion on PSG within the board but also get more closely involved with the team and the work that it's doing on an ongoing basis. Thanks, Maria. And a part of that work is actually really keeping our eye on on all regulatory changes, just relating to sustainability, but relating to technology and planning and the like and the intersection of some of these things. So I think we will be closely keeping our eye on the new government and you know targets and what that means for us but it is a matter that's occupies a great deal of our board's time and attention.

35:39 Lina, that's great and thank you very much indeed for taking the time to address all of those questions that came in from investors today and of course if there are any further questions that are submitted today we'll make these available to you immediately after the presentation has ended for you to review and then we'll publish all those responses where it's appropriate to do so on the investor meet company platform. I will shortly redirect those on the call to provide you with their feedback, which I know is particularly important to yourself and the board. But perhaps before doing so, if I may, just ask you for a few closing comments just to wrap up with. Thank you. Hopefully, find everything interesting and informative. We're available. Michael can be contacted. And indeed, if there's anything else afterwards that you didn't get to to comment on or or have a question on, please let us know. But with that, thank you very much for joining us, and we'll end there.

36:25 Lina, that's great. And Michael, to the rest of the board as well, thank you very much indeed for updating investors today. On behalf of the management team of PICTON PROPERTY INCOME LTD, we would like to thank you for attending today's presentation, and good afternoon to you all.