Picton Property Income (LSE:PCTN) — Post AGM Investor Presentation

0:01 Good morning, ladies and gentlemen, and welcome to the Picton PROPERTY INCOME LTD Post AGM Investor Presentation. Throughout this recorded presentation, attendees will be in listen only mode. Questions are encouraged and could be submitted at any time using the Q and A tab The company may not be in a position to answer every question received during the meeting itself. However, company can review your questions submitted today, and we'll publish any response on the Investor Meet company platform. Before we start and before I hand over to Chair, Lina Wilson, we'd like to play a short video prepared by the company, especially for those who are new to the company.

2:26 I'd now like to hand over to chair, Lina Wilson. Good morning. Thank you very much, and good morning, everyone. Thank you so much for joining us. I hope you find the video informative. And just to let you know, you can also find that on our website. So moving along this morning, we held our AGM, and we are delighted to take you through the presentation from our AGM and engage with you on any q and a's following that. First of all, I'd like to just make some introductions. Joined this morning and will be presenting to you this morning are our chief executive, Michael Morris, and our finance director, Andrew Dewhurst. I'm also joined by my three other nonexecutive colleagues, Mark Banton, who chairs our audit and risk committee, and he's also our senior independent director, Richard Jones, who chairs our portfolio evaluations committee, and Maria Bentley, who chairs our remuneration committee.

3:22 We really are all delighted to, be here and for you all to join us this morning, and we'd also like to answer any questions you have after the presentation. But before that, I'd like to hand you over to Michael, who will take you through our presentation for the next fifteen minutes or so, and that will be followed by our Q and A session. Over to you, Michael. Thank you, Lina. Good morning, everyone. So just very quickly, I'm gonna give a brief overview, although you've seen the the video, so we'll talk briefly to that. I thought it would be useful to provide an up to date market overview of what has been happening, you know, in the last twelve months in the property market.

4:09 Andrew and I are then going to talk through the annual results for last year, very high level, but obviously, the AGM that we've just had relates to that set of results. We're gonna talk through some of the ESG things we've been doing. And then bringing things perhaps a little bit more up to date, our annual results to March, but as a as a company, we report quarterly. So that was most recently done just before the start of the summer, and we're gonna provide a short update on that before we conclude.

4:50 So in terms of PICTON at a glance, you know, our property portfolio now is just under 800,000,000. It's a diversified portfolio. It's a diversified approach. That diversified approach, we believe, is one of the reasons for our consistent outperformance against MSCI. And the presentation, you know, looking at March's year to March's results just highlight, you know, against a really quite challenging backdrop, you know, a resilient operational performance portfolio outperforming the game. The fact that we have got a defensive capital structure in the way our debt is positioned, and Andrew will talk to that, and also progress around adapting assets, specifically around sustainability issues, which are definitely coming more to the fore.

5:53 On the next page, you'll see the portfolio is weighted to industrial warehouse and logistics. We've also got just under a third in the office sector, and I'll talk specifically about some of the things we're doing in that sector later on. And then the smallest proportion of the portfolio is in retail, retail warehousing and leisure. As at today sorry, Mark, back one. As at today, the net assets of the company are just over 540,000,000, but our market cap is well below that. And that's something that that we're not comfortable with, but we do recognize that there's a the changing interest rate environment has affected property stocks, discounts to net asset value are prevalent, and we will talk through some of the initiatives we're working through at the minute to try and unlock that.

6:58 The other points I just mentioned on that slide is around the reversionary potential in the portfolio. That principally comes through vacancy and or resetting rents that are being paid relative to market rents. And I'd also highlight the sort of diversity of cash flow through our occupier base, which again, I think is is important in the market that we're in. So if we move now just more generally to talk about the market as a whole and, you know, being blunt, it has been a tough year. A year ago, you know, ten year bonds were close to 3%, they're now closer to 4.5%.

7:44 And that's clearly had an impact on asset pricing generally. And you can see here from the chart the movement in

7:55 yields, in MSCI yields and indeed capital movements over the period. Some sectors were sharper to correct and some sectors have rebounded stronger. And I'll talk in a minute about the individual sectors and how they've performed.

8:17 So turning the page to the industrial sector. The first thing I think to note, which is the chart on the top right, is the consistency still of rental growth in the industrial sector. And whilst I would say demand is slightly weaker than it was, nevertheless, it remains and rents are still moving forwards. And I think it's against that backdrop that the industrial market has recovered from that sort of shock repricing that came through nearly a year ago. And you can see that on the bottom chart there, you know, broadly seeing some stability in industrial capital values now.

9:13 In the office market on the next slide. In the office market, rental growth has been more muted and less consistent, and I'm sure you will have seen and perhaps read in the press, you know, something in terms of a polarization between occupiers as they're sort of coming back post COVID wanting better quality, more flexible space. So that's where the rental growth has been. Equally, in more secondhand space, demand has been weaker.

9:59 And the combination of that slightly weaker demand and ongoing costs, particularly, you know, as we've seen rise rising energy bills, void costs, and capital expenditure, you know, that's definitely added negative sentiment to the market, which is why you can see on the bottom chart a more muted recovery from that pricing correction. And in fact, of the three sectors at the minute, offices is the one that is struggling the most in terms of capital demand, capital growth. And what we've done, which is a slight aside, but I think the important factor is as you think about real estate is not not looking at it in a siloed way.

10:51 And, you know, we will talk about it in a minute. The the alternative uses, you know, the offices can be used for that that can support values, that can provide a way out where demand is weaker. And then finally, to just talk to to to retail and to some extent leisure.

11:15 There are clearly still challenges in the retail market and you can see the very wide dispersion of rental growth across subsectors over the last few quarters. Broadly, the trend has been flat, but there have been pockets where we have seen some rental growth, but equally in other markets, you know, it's falling. And you will have heard headlines, you know, such as, you know, the administration of Wilco, you know, and that's gonna lead to store closures, more supply of floor space in the high streets. And so this is a sector where we're still very cautious about rental growth prospects, especially against this sort of rising interest rate impact on disposable income position.

12:13 Having said that, because retail as a sector repriced so heavily in in the many years before COVID and, in fact, during COVID, actually, it hasn't been as badly affected from a capital perspective in the last twelve months. So, yes, there was a correction, but, actually, the rebound or the correction wasn't as strong and the rebound has come a bit quicker. Not not perhaps similar to industrial, but perhaps for different reasons. So I think it's fair to say that these are difficult markets. It's not straightforward, and the interest rate environment is clearly key going forwards.

13:01 But there are things, you know, as an owner of real estate that one can do to mitigate the position, and we'll talk through those in a minute. So if I hand over to Andrew. Thank you, Michael. We'll start with just some of the headline figures for the year ended 03/31/2023. Our net assets at the end of the year were 548,000,000, which was equivalent to a 100 pips per share. We paid an overall loss of 90,000,000 for the year, and that was very much driven by valuation movements over the year. But our EPRA income, which is EPRA earnings, sorry, which is the recurring income, net income from the portfolio was stable at 21,000,000 for the year.

13:52 We paid dividends of 19,000,000, which was 4% higher than in 2022, and we had dividend cover for the whole year of 112%. Moving on to the capital structure.

14:09 At the end of March, we had total debt of $224,000,000 which was a loan to value of 27%. 95% of our debt was fixed with maturities in 2031 and 2032. The fair value of the debt for the year end was some 23,000,000 less than the book value, and that gives rise to a higher EPRA net disposal value of 105p, so higher than the reported net assets. And at the year end, we had 38,000,000 of undrawn facilities under our revolving credit facility. We'll move on now to the portfolio overview. Yeah. So just at a headline level, you know, the portfolio performed well relative to the market, notwithstanding the market as a whole as a whole was very difficult.

15:03 The reason for that was less valuation impact than the market as a whole, and we were able to grow rental values, contracted rent, and passing rents. And all these factors mitigated wider market declines. Occupancy has reduced. And

15:29 in part, that's down to some of the specific asset management initiatives we're looking at in relation to alternative uses that I've already alluded to. A number of properties were acquired during the year generally with a mixed use theme. Looking operationally back to last year, I think the key thing is that there was good activity despite what was going on in the capital markets. So if we turn the page, you can see, you know, the lettings, the lease renewals, the rent reviews, they're all were above ERV, and that's really capturing and proving that rental growth that we alluded to

16:19 initially. And it's this point that happens, I think, quite often, you know, is that the occupational markets can be more resilient than than perhaps the investment markets give credit for. And we also continued this theme, which is not new, but the point that, you know, we see investing into assets as a really important long term way to create value. And so upgrading assets using lease events to improve the quality of space not only protects assets for the future, but also provides a way in which we can enhance rental value and indeed capital value.

17:07 Rent collection over the year was over 99%. So, you know, a very different picture to the pre preceding year where there was still, you know, the impacts of COVID being felt.

17:21 On the next slide, we touch on the the vacancy in the portfolio. To be fair, most of our vacancy in the portfolio is in the office sector. So, you know, that ties back to what I was saying about a, you know, a stickier market at the minute. And I think what's important, certainly, in respect of our three current largest voids in the portfolio, we are actually pursuing alternative use strategies at all three of these assets. Not not completely and not on all parts of those assets, but the fact that we're looking at alternative uses that, you know, are a, in our view, easier way to unlock that reversion, be that through

18:18 a change of use, be it through an asset disposal, reinvestment into other assets. That's what we're looking at as opposed to just simply pursuing a pure, you know, office leasing strategy on on those assets. And really this ties in with the next slide where we put and have set out three sort of trends that we see. We set these out a couple of months ago, and they haven't changed. You know, I think the way the market is at the minute, these themes still very much continue. So, you know, we've been through a year where we've seen quite high rises, you know, in energy costs, you know, occupiers are increasingly realizing the costs of, you know, cooling and heating buildings.

19:18 It's, you know, come to the full with these rises in energy costs. So anything as a landlord you can do to improve the efficiency and and by definition reduce the occupiers' ongoing running costs is well received. So for us, focusing on that on our refurbishment is key. We brought someone specifically in the into the team this year to help manage that process and, you know, the workload that we've we've got going on. And Andrew will talk about some of the specifics we're doing in a bit. The point about occupational markets and rental growth and in the industrial sector, I think is really important because, you know, that is a way in which we are going to continue to unlock value from the portfolio.

20:15 And, you know, consistently, you know, we have beaten valuer estimates on transactions we've done, and I think that is encouraging.

20:27 And then finally, this point about the office sector. We introduced something called SwiftSpace last year to offer a more flexible leasing solution, particularly on smaller suites in response to the market. But this point about alternative uses and where we're looking at, you know, it might be residential, it might be student, it might be hotel. You know, there are a number of options available. We're not in a position today to to unlock those, you know, these things aren't done overnight. We've made announcements to the market around some of the residential consents that we've got at Angel in particular.

21:15 But I would hope as we move into the towards the end of the year as a company, we will be able to announce further progress on these specific initiatives. So if I hand over now to Andrew, he can just tie back to some of the responsible business we've been doing. You, Michael. First of all, just looking at sort of the environmental focus across the portfolio. We've continued to seek to improve our EPC ratings. And at the end of March, we had 76% rated A to C. We're continuing to decarbonize the portfolio. We've taken gas supplies out for the three assets, and we have been looking at installing solar.

22:06 We've installed solar across five properties and got another three being implemented at the moment. The vast majority of our leases are green leases now, 97% last year. And moving on to the next page, this gives a bit of a flavor of the occupier engagement or the stakeholder engagement that we carried out over the year. We carried out occupied surveys, particularly with an emphasis on sustainability matters. We've set up a climate action working group to help oversee progress against our net zero pathway, and we've carried out an assessment of climate related risks across the portfolio so we're able to report in line with TCFD.

22:54 Moving on now to bring things a little bit more up to date with a quarterly update to the June 30. First of all, on the financial side, our net assets then in June were $542,000,000 That was a decrease of 1.1% over the quarter to 99.4 p. Total return for the quarter, very flat minus 0.2%. We maintained an interim dividend of 0.875 for the quarter. Dividend cover for the quarter was a little bit lower at 96%, but we fully expect that to be fully covered going forward. Loan to value stayed very much the same at 27%. And now Michael is going to give a quick update on the portfolio.

23:43 Yes. And I think perhaps on the next slide, the valuation movement, although negative, was the smallest negative movement we've seen, you know, really since the sort of, you know, trust debacle of of of last year. So there's definitely it feels like, you know, the the worst of that repricing has happened, although, you know, it's clear that that we're not out of the woods yet, so to speak, as a sector. And I think that came through in perhaps some of the comments I made about the market generally. Lease regears though, 18% ahead of the previous passing rent, 3% ahead of ERV, lettings 5% ahead of ERV, rent reviews 24% above previous passing rents.

24:42 So there's lots of good data points to prove this resilience in the occupational markets that I've referred to earlier. And, you know, we're always a bit nervous just about using one quarter's data and extrapolating extrapolating from one. But I think what what this quarter's results show is, you know, more of the theme from the preceding year and and that sort of leveling off around the price correction. Occupancy was 90, but this ties back, as I've just said, to the alternative use strategies we're we're we're looking at. You know, in order to deliver an alternative use, you've got to create the space to do it. And so we've surrendered space, etcetera, and that ties in with that.

25:32 So just really to end on an outlook slide before we go to Q and A. As I've said, more generally, these are more difficult markets and certainly in real estate, there is reduced investment trading activity and and lower demand at the minute, you know, primarily driven by higher interest rates and, you know, the wider macro picture. Certainly, we see in the short term industrial and retail perhaps being a little bit more resilient, but I think it's quite difficult to generalize because there are clearly pockets, you know, and as we think about retail, you know, exposure to specific retailers might lead to, you know, challenges going forward. So I think it's very much around stock selection.

26:34 And, you know, that's something that we've been very focused on. In in terms of our own business, Andrew's referred to our conservative balance sheet and our long term fixed rate debt. And that really, I think, is very helpful to provide some degree of earnings stability. We know the view from inflation and rising costs, but certainly, you know, the biggest line item, which is our debt cost, is is is, you know, it you know, almost all fixed. The asset managers are very much focused on capturing this reversion that I alluded to at the beginning. You know, the majority of that's coming through vacancy, but actually, you know, this resetting of rents to market rents is key as well. And, you know, we've seen that in the last quarter and we will continue with that.

27:35 The alternative use piece I've mentioned and we hope to be able to make some announcements later this year on that. And I think these things tie in with, you know, growing income and looking at trying to narrow our discount. It's it's quite a challenge. You know, the sector as a whole is on some very wide discounts. So we're we're in a position where a lot of companies in real estate at the minute have a discount piece, but but but it's uppermost in our minds. And our feeling is that that the things we do within the portfolio will start to come to fruition and show investors that the strategy is working in terms of growing income, and we hope showing some stability on the capital side.

28:29 We're very much focused on diversified approach. We think that provides real strength to the business, you know, and as a team maintaining our long term track record is absolutely key. So thank you. Thank you, Michael. Thank you, Andrew, for the presentation. Much appreciated. We'll now open the floor to questions starting with the presubmitted questions on the platform, and feel feel free to add in any other questions. We've got Michael, Andrew, and also the rest of the board to answer as appropriate. So I can see that we have one already from Sam. And, Michael, you did cover some of this. Maybe if you go back to Sam's question for me, please, there. Thank you. And Sam says, can you give us your opinion on the property market and interest rates over the next six months or so? You did cover some of that, Michael, but maybe just some additional comments.

29:29 Yes. So, I mean, I suppose, really, the the way to answer that question is to start with interest rates because that leads to the property market. So re really, what happens with interest rates is being watched closely, I think, by everyone in the property sector and indeed, I I assume, in other capital markets as well. But I think the broad view is that we're we're likely to see quite a subdued property market. This point about limited liquidity and clearly, you know, debt costs have risen quite significantly in the last twelve months.

30:18 So, you know, demand is is is weaker, volumes are less, and as a result, you know, the data points around valuation are perhaps a little bit a bit thinner. So, you know, what that, in my view, leads to is, you know, probably more of the same, which is a sort of broadly flat market, but where you have specific lease events for both better and worse. So let's just come up with an example. You have a building that's let to Wilco, which we don't, but let's just use that as an example. You have a building let to Wilco. They go into administration.

31:05 We're seeing values fall. You know, you have a building where the occupier vacates. Again, you're seeing values on a downward trajectory. The counter is if there is the asset management activity, you know, leasing events, rent reviews, whatever, that that act in a positive direction, we we may see some upside. So all eyes really are on on interest rates and, you know, property financing. But I don't think I mean, if you'd asked me this question a year ago, who would have said that we would have seen the volatility that we did in the then coming coming weeks? But I think we're in for a more stable, dare I say, slightly unexciting market on on on the capital capital side.

31:59 Thanks, Michael. And sticking with capital and capital allocation, question from Chris about the call given the calls in assets and portfolio and the undervalued share price, would you consider share buybacks as part of the capital allocation policy? Maybe Andrew, you can come in there? Yes. Thank you, Lina. I think share buybacks is always something that we keep under review, but and I think it's something that we would consider, but I think it's it's not something we would want to see as the only answer to looking at the biscuit. Yeah. I would as if that is what I would have said. So, yeah, completely agree to that. It's it's it's an option, but only only one Yeah. One in the one tool in the box.

32:53 Actually, it's been an interesting kind of change of of use as something the board has been discussing very recently. And, Michael, we have a question on from Andrew on what valuation uplifts are possible arising from a change of in use to residential. Yes. Can you So sorry. Can you just keep going? In in terms of specifics, you know, I I I'm not able in a presentation like this to talk about specific specific uplifts on our assets. I think that would be inappropriate at this stage. But, you know, what I think is worth just highlighting is that different assets in different sectors broadly have differing capital value rates per square foot.

33:54 And in some markets, residential is more valuable than offices. In some markets, you know, retail might be more valuable than offices. And in different cycles, that may that may change. So, you know, we're looking at these alternative use strategies on our own assets, not all for the same alternative use. We're looking at different uses in different markets reflecting demand, but we would expect we would expect those alternative uses to be accretive to the business.

34:40 And if we can achieve those alternative leases, recycle the capital, know, as Andrew's mentioned, buying back in is an option. Repaying debt is an option. Reinvestment of proceeds is an option into income producing assets. So so there are a number of options available to us at a moment in time. What we need to do is is deliver on those asset management activities first. Great. Thank you very much. And staying on another question from Nicholas. What is the current contracted rent? What percentage of rent either breaks or expires over the next couple of years?

35:30 So let me just look at the numbers. I think we did cover that in the presentation, certainly some of our appendices. Yeah. So the rental income, and we'll add this to the q and a subsequently, but the rental income from memory is around 40,000,000 per annum. 43. And we have a sort of an average unexpired term on the portfolio just under five years. So we have a sort of a steady stream. You know, this is just part of how it works of of space coming back every year. The majority of our portfolio is industrial, as I explained in the sector allocation.

36:25 And what we're seeing particularly in that sector is where we do get space back or lease expires. We're seeing rental uplifts coming through rather than vacancy because occupiers are staying and there's embedded reversion. It's the space in the office sector where the the breaks and the expires are perhaps a bit more one needs to be more wary of, and that's why we're looking at that alternative uses. So the exact numbers will will add on to the response, but but we don't see anything in the next two years looking forwards, anything outside of what I'd call ordinary course or what we've had for the last sort of fifteen years.

37:13 Thanks, Michael. A very interesting question from another Michael. Are you seeing a greater number of potential reinvestment opportunities as a result of broader market conditions? So that's the first part of that. And then secondly, would you consider investment outside The UK? Maybe I'll I'll start with the the latter part of that. I mean, Andrew talked about relationships with our our occupiers. That's easier to do when we can get them in The UK. We're in UK, small but perfectly formed outfits, so we do stay very close, and that'd be much more difficult outside The UK. So it isn't something that the board has actively discussed as part of our strategy.

37:58 But Michael, again, do you want to talk about reinvestment opportunities generally? Yes. So I think there are more opportunities coming to the market. I think we are starting to see signs of certain property owners having, you know, refinancing issues and, you know, assets being brought forward as a result of that. I don't think it's anything like what happened in o eight, o nine, but there's definitely you know, we're we're hearing opportunities there. For us, it's a balance because, you know, as we're currently structured, more more opportunities, you know, equals probably use of debt or recycling assets. And I think what we want to do is is move forward with some of the the opportunities, the asset management piece, and and deliver those.

39:03 And then clearly, at that point, we can we can look at reinvestments. But, you know, reinvestments doesn't just have to be real estate. You know, there are other options available in terms of the balance sheet that we can we can can think about. Thank you very much, Michael. Another question from Andrew, I think for Andrew, but staying on the financial side. Can you provide some details on why EPRA earnings fell in the quarter, June 30? You did cover some of that, Andrew. As you see, debt costs are relatively well hedged, and the headline portfolio occupancy does not seem to have fallen significantly from March 31 to June 30. So just wondering what is driving the fall in earnings. I think it's very difficult to read trends into a single quarter.

39:52 There are one off costs and income events each quarter, and these can contribute to EPRA earnings falling or rising within a particular quarter. So in the June quarter, there were one or two additional costs that we incurred, which are not recurring, and so we don't expect them to come through in future quarters. And occupancy did fall slightly from 91 to 90. So that's had a consequential impact as well. But certainly, going forward, we don't expect to have an uncovered dividend. Thank you. A question from another Andrew. I I think, yeah, you you definitely get a question if your name's Andrew today. A number of mergers in the REIT sector designed to reduce discounts, but also raise market caps, combined entities, which make them more attractive to wealth managers while reducing cost per share.

40:48 Is the current climate not an excellent opportunity to participate in this activity? So maybe I'll start with that. I mean, we we have made no secret of the fact that we can see that that kind of consolidation you're talking about, and we definitely have ambition for PCTN to scale appropriately and scale in a way that creates value for our shareholders. So that is something still very much to the forefront of our mind and activity that we are constantly looking for opportunities in, but in a way that scales appropriately and is in the interests of creating value for our shareholders. Anyone like to add to that, or does that pretty much cover it?

41:37 I think that covers it. I think the answer is sorry. The answer is yes. But it's about the right transaction that works for the company. And then I think the final question that I can see is similarly, have you been engaging with peers about consolidation? And that's from Christopher. Obviously, we would never be able to talk about anything specific in a public forum like this, but I hope my previous answer gives you insight to the fact that this is an ambition we have to scale appropriately in in the interest of the right creating right value for our shareholders. So I think I can't see any more on my screen. So I think with that, we thank you very much indeed for your attendance today. Thanks.

42:26 We hope you find the presentation useful. As I said at the beginning, it is up on our website. We thank you for your questions, and please feel free to contact Michael and the team and engage with us if you have any further questions following today. So on behalf of everybody, thank you very much indeed. That's great. To the Board of PCTN PROPERTY INCOME, thank you very much indeed for your time this morning. Can I please ask investors not to close this session as we're now automatically redirect you for the opportunity to provide your feedback in order the Board can really better understand your views and expectations? This will only take a few moments to complete, but I'm sure will be greatly valued by the company. On behalf of the board of PICTON PROPERTY INCOME, we'd like to thank you very much indeed for attending this morning's presentation.

43:11 I wish you all a very good morning. Thank you.