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

0:01 Good morning, ladies and gentlemen, and welcome to the PCTN PROPERTY INCOME LTD investor presentation. Questions are encouraged. They can 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 and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company can review all questions submitted today and will publish our responses where it's appropriate to do so on the Investor Meet company platform. Before we begin, we would just like to submit the following poll. And if you give that your kind attention, I'm sure the company would be most grateful. And I would now like to hand you

0:32 over to CEO, Michael Morris. Michael, good morning, sir. Morning, and and thank you for the introduction, Jake. For those that don't know me, my name is Michael Morris. I'm the chief executive of PICTN. I've actually been with the group since launch. I'm Sarah Johnston. I'm the CFO at PICTN, and I joined PICTN a couple of years ago. So today, we're gonna give you a quick overview and talk through the results, give our views on the market, what's been happening in the portfolio, and then some observations and outlook with the opportunity for q and a at the end. Many of you will be aware that

1:15 with the takeover code, we are somewhat restricted on what we can say regarding the announcement of a possible offer, but we will try and be as accommodating as we can and work through that in the q and a.

1:32 So just by way of background for those that don't know PICTON, we're a diversified UK REIT focused on income and value. We have a long term track record of outperforming through that diversified approach. You can see on the chart below that track record of outperformance at a property level. We have a long term debt structure across the business and a fully aligned team, and we'll talk to some of these things through the results.

2:01 In terms of the last twelve months, I think it's been good performance recognizing the actual sort of market backdrop, UK politics, global politics, and the impact that that's had on the economy, positive total return, positive shareholder total return. At a property level, we've seen good ERV growth. And more generally, we've been adapting the portfolio, reducing office exposure, and we'll come on to all of these points in a bit more detail in a minute. So if I hand over to Sarah, she can talk you through the financial results for the year. Thank you, Michael. So I'll just start with a few highlights and then turn to a bit more detail on our NAV and earnings for the year. So overall, as Michael said, we're pleased with our results. We've delivered a good set of financial performance delivering both positive total return and positive shareholder returns.

2:51 We're reporting profit after tax of 26,000,000 or 5p per share and EPRA earnings of 4p per share, and I'll come on and explain that in more detail later on. We've paid dividends of 3.8p per share. You'll recall that we re increased our dividend by just under 3% last year, and we're pleased that we've maintained the the level of dividend cover over the twelve months. From a net asset value perspective, the net assets were down were down on last year as a result of our buyback program, but from a NAV pence per share basis, they increased by about 2%. And finally, as Michael mentioned, overall total return for the twelve months is 6.1%. Moving on to the net asset value movement, we saw an increase of 2%, which was really underpinned by a moderate but but continuing valuation increases as well as accretion through our share buyback program.

3:47 At a portfolio level, overall, the the valuations increased by point 7%. We saw fairly flat valuations over the last three to six months, but overall, point seven for the twelve months. And that's net of the capital expenditure that we've incurred on the portfolio and which we'll talk about later on in the presentation. We have seen variations across the sectors as we'd expect and and no doubt you'd expect with industrials continuing to lead a large contribution of our valuation increase and now representing nearly two thirds of our portfolio. A point of note on our retail and leisure at 4.1%, so the largest contributor in percentage terms, but not pound million terms, and that was as a result of a lease free year that we did on our hotel occupier in Carline, where we received a capital receipt of 2,400,000 in lieu of a lower rent and a longer term.

4:43 And in terms of our share buyback program, we deployed just over 17,000,000 into that program at a discount of 25%, and the accretion of that was 1p per share over the twelve months. Moving on to EPRA earnings. So EPRA earnings closed at 4p per share for the year, and we saw accretion through our share buyback program similar to the NAV. And, also, we saw stabilization of our cost base, both from a financing cost perspective and admin costs. We talk through a couple of things impacting each of our sectors and net property income, those are firstly in respect of the industrial sector. We continue to see really positive reversion coming through on the portfolio, and that was roughly 5% across the board year on year. And we'll talk to some stats on that, but we still believe that that letting and let some potential, we're seeing increases on rent reviews and new lettings, which is really positive.

5:40 Our office net property income was lower than previous year, and that's as we took back space, which is currently under refurbishment. And finally, in terms of our retail and leisure assets, there we had a couple of lease regears where, as I've mentioned, we've taken lower rents in the longer term. And, really, there, we're looking at those lease regears on a total return basis, not just solely from an income perspective.

6:05 Finally, a quick reminder on our debt. And not much has changed in the quarter or the six months. We continue to have to have an extremely strong balance sheet, a strong cash position, and there's a significant amount of value in our long term fixed rate debt structure. You can see that through our EPRA NDV, which closed at $10.07 per share, so there was another $2.02 pence increase in the NDV over the twelve month period, reflecting the higher interest rate environment and the value of our debt being fixed. In terms of loan to value, that remains conservative at 24%. It increased slightly over the three and six months as a result of the buybacks, but it's maintained at 24% over the twelve months. Our weighted average cost of debt is 3.7%, and that's clearly well below the prevailing market financing rates.

6:54 Debt maturity, just under six years. So we've got really good visibility on our financing costs going forward. Our revolving credit facility remained undrawn at year end and also throughout the period. The final slide in this section talks to capital allocation. This is something that we've talked about in previous presentations, and, really, this just sets out how our priorities looked over the year. You may recall that we started the year with a strategy to reduce our office exposure and also lower yielding assets. And as a result of that, we disposed of Stamford Building and had net proceeds of just under £35,000,000. That was reinvested predominantly into the existing portfolio and into the share buybacks.

7:41 From a portfolio reinvestment perspective, we deployed 8,800,000 into the portfolio mainly in our offices, and we'll come and talk about that in a bit more detail later. But we believe that's key in terms of increasing our occupancy and unlocking that ERV growth, which we're where we've seen just under 5% growth a year on year, and that's despite having sold one asset. We've got a further 8,000,000 committed. In terms of the share buybacks, we've seen that we've seen that accretion in the NAV and also in earnings. And the final two points here, we made one small sort of tactical investment opportunity purchasing freehold of an existing interest point 2,000,000, and we repaid some of our debt, but only to the extent that that was scheduled amortization.

8:32 Thank you. So just just give some quick observations on the market. I mean, clearly, by lots going on with UK government, UK budgets, and then we started '26 with some quite positive signals. But, clearly, what's been happening in The Middle East and impact on financial markets has obviously dampened any sort of property market sort of recovery. I think, ultimately, though, you know, base rates remain lower than they were a year ago. There's been quite a bit of volatility on longer term rates and inflation. Probably, there's an expectation that that might be slightly higher than than we've first seen. If we now turn the page and think more about how that's impacted the property market, overall for the year, you know, relatively low total returns of 6%.

9:30 You can see the highest sector was retail at eight, industrial at seven, offices being the laggard at a much lower level. But what's making up those total returns? Capital growth, rental value growth, very strong in in in the industrial sectors relative to offices, which has seen weaker capital growth. But nevertheless, some modest rental growth and in retail, lower capital growth, lower rental value growth in the other two sectors, but retail does generally offer higher initial yields, a higher income return, and it's that higher income return that has led to that overall slightly higher output to industrial. Looking at the monthly data, this rolls back twelve months. I think it's perhaps a little bit more interesting to look at just this year. The headline for this year in terms of rents is rents are up about 1% on average over the year.

10:31 Industrials being the the the the higher sector at 1.1, retail at 0.6, and offices at 0.5. So you can see positive growth but relatively modest. In terms of capital growth, well, industrial and retail delivered the same capital growth at 0.4, and office is down at naught point three, and you can probably just make out the burgundy diamonds at the bottom that show the office sector, which although those values are still trending lower, the rate of decline has reduced quite markedly compared with the sort of September, October, November of last year.

11:18 Thinking about our own portfolio now, it's a diversified portfolio. We have 300 occupiers, so really diverse cash flow. And we, as we say, we do adapt the portfolio as market conditions dictate. So a year ago, we had 64% in the industrial sector and 24% in offices, and you can see where we've reduced or added to exposure through the disposals Sarah mentioned. The portfolio does have lower occupancy at the minute. We'll talk to that in detail. We think that's very much a a cyclical occupancy point rather than structural. That leads to a slightly lower initial yield than we would like off the portfolio because of that current occupancy rate. But the reversion in yield, which obviously assumes renting up full ERV, you know, is 250 basis points higher, and I think we'll explain how we'll unlock that in later slides.

12:17 In terms of the activity, I mean, the team's been really busy despite the market. I think we did nearly 25% more transactions than in the preceding year across the portfolio. The key standout number for us is the nearly 5% improvement in rental values across the portfolio. Part of that has been driven by investment into the portfolio upgrading assets. We'll talk to that in a minute. And the undergeared property return is just under 6% with, again, the majority of that in this year coming from the income components of our portfolio, recognizing that sort of backdrop that I mentioned. In terms of industrial, the like for like increase was 1.2%.

13:05 That's before CapEx. So as Sarah mentioned, it was 1.6 after CapEx. The year fee growth was stronger in our industrial assets than elsewhere as you might expect. And as of today, there's nearly 8,000,000 of reversion between what is currently contractually

13:23 due versus current market rates. So that's going from the 23,300,000 up to 31.2. We do have slightly lower occupancy in the industrial sector than we have historically, but two of those voids make up nearly 90% of our entire industrial void, and we will explain in more detail where we are on those assets later. In offices, our asset up upgrade program has been delivering results. We have reduced exposure to this sector over the year as well.

13:58 Valuation increase of three and a half percent, but there was capital expenditure there. So the net number or office values did come off at no point 7% over the year, and that perhaps reflects some of the challenges in that sector. But overall, we saw nearly 4% ERV growth across those office assets. And, again, there's a material reversion in this element of the portfolio with the ERV of 17,600,000 being 5,300,000 higher than the current contracted rent. Our retail and leisure portfolio is a is less than £90,000,000, so it's a relatively small part of the overall portfolio. The majority of our assets are in retail warehousing, but we do have some high street sub leisure as well. Overall, the valuation increase was up 1.4%, but Sarah did mention a re geared transaction that we undertook with a pretty material capital receipt, which is why in the accounting numbers, the uplift is 4.1.

15:03 ERV growth lower than the other two sectors of 1.4%, and this element of the portfolio for us has less reversion, read potential than elsewhere in part because we're already running at a high occupancy. In terms of portfolio activity, I think we've seen good progress across all elements of portfolio, actually. So in the industrial sector, it's very much been been about capturing that reversion and transactions in Harlow, in London, around the M 25, and in The Midlands will help drive ERV growth both in terms of letting activity, refurbishment activity.

15:48 In some cases, we've surrendered space, so we've we've we've been paid to take space back early. But overall, that growth, I think, is really a positive 7% of these four key key assets as opposed to the 6% across just the industrial sector. In offices, that refurbishment program has been paying off. You know, you hear a lot today about, you know, the London and the big six centers, but we've had space in the Southeast in Colchester where we've, you know, effectively let three out of four

16:20 suites in a building. Chatham, where we surrendered space last year, have now just done two lettings. Manchester has been a bit tricky for us, but we have now just upgraded some of the space to provide fully fitted space, which hopefully will make it easier to lease. And in Milton Keynes, we've had less in success as we've upgraded the asset there. In the retail and leisure portfolio, Carlisle was the asset where we restructured with a hotel occupier. Leeds, we took a unit back, released ahead of the passing rent ahead of the RV. And in Bristol, we've restructured some leases off lower rents reflecting over renting, but moving the lease lengths out and, again, improving higher rental values than had been previously thought. And just turning to a bit more detail on our reinvestment into the portfolio. As we've mentioned, this has been an area of focus during the year. We've continued to upgrade our assets to both retain and attract occupiers, and we've spent 8,800,000 during the period.

17:22 And of that, about three quarters of that has been spent on the five projects in the chart on this slide. You'll see four of those in the office sector. So, again, that's looking to unlock that reversion and manage occupancy and also one project in Gloucester. But I think the key point of note here is that all of those CapEx projects have really been linked to either occupier retention or new lettings, and that's a really key thing that we think about when we look at allocating capital. We look at the risk on delivering on the return on cost. So trying to link that spend to these events is a really important part of the way we think about our CapEx. We've got a further 8,000,000 committed across the programs. And specifically in respect of our office assets and and clearly some of or or a key proportion of that refurbishment has been in the in the office part of the portfolio.

18:18 We're now in a place where nearly 85% of our office assets have either been fully decarbonized, and by that, I mean, they run on electric, not gas. And, also, as part of those sort of works, we've been upgrading occupier amenities, common areas, etcetera, etcetera, just to bring them up to what occupiers want today. But tied in with that, Sarah said, we have had leasing success as well. And you can see on the map there, we only have three assets now. One in Leeds and two in Scotland where they run on gas rather than electric, and I think that's a testament to the work that we've put in probably over the last five years or so to upgrade the underlying quality of assets in the portfolio.

19:05 And we'll come on to that as we talk about sort of recent leasing successes. So a bit more detail on occupancy and key voids. Occupancy at the year end was impacted by timings of key lease events during the year and across the portfolio. If we look at our historic occupancy, actually, overall at a portfolio level, our historic occupancy has been 92% compared to the 84% at the year end, and 78% of our vacancy is less than twelve months old. And if we look at that by sector, typically, the blue dots which represent retail and leisure, we typically expect to run that in mid nineties, which has been aligned at year end. In industrials, we've run at 98, 99% occupancy over the last last five years. So, clearly, at the year end, it was lower than that, and that's really as a result of the two lease events at Rushton and Radlett, which Michael will talk to. And similarly, offices, again, timings of the lease events have impacted the year end, and our refurbishment program has also meant that we're carrying slightly higher void as we refurbish the space ahead of reletting.

20:16 Yeah. And the chart at the bottom, I think, shows quite nicely the area in Hatch is is where it's been vacant for more than a year. So we have had some space in Manchester and Milton Keynes and indeed, Colchester that had had perhaps a longer void than we'd want. But equally, you know, we've had less success in all of those assets in the year. And, actually, you can see where it's not hatched. Those vacancies are really less than twelve months old. And as Sarah said, you know, we've got a refurbished space before we release it, but we we don't see any key issues with any of those assets vis a vis a releasing perspective. So moving on to Outlook, we still believe there's a significant amount of upside through re leasing the vacant space and also resetting rents to ERV.

21:07 As Michael said, the net initial yield is 4.9% and reversionary yield of seven and a half percent. So there's a big gap between those two, and we really see that in two buckets. The first one being the 8,800,000 for netting our vacant space, and the bulk of that is really in those two industrial voids that Michael talked about. And the second part of the reversion is reversion through resetting market rents, either at future rent reviews or future breaks or expiries. And you can see the chart at the top with the shades of our sectors shows that the majority of that reversion, whether it's vacancy or future resetting of rents, sits within our industrial sector, which is a really a real sector that we're very comfortable with, and there's clear evidence that we can see in our lettings of being able to unlock that reversion.

22:00 If we look at the timing of the market resetting of rents looking forward, so that 4,400,000, What does that look like? When does it come in? You can see on the chart at the bottom that, again, there's a a significant amount of that to come in in the next financial year and also concentrated on our industrial assets. So we think that's a real opportunity. There's no point having reversion embedded in the portfolio if you can't unlock it and you're tied into very long lease lengths. So we still believe this is a significant area of potential opportunity. Bringing things sort of right up to date alongside the actual annual report, we announced this morning some sort of post period end activity, and I think that's quite encouraging, especially recognizing some of the noise out there.

22:53 We do have quite a lot of interest in our vacant space. As Sarah mentioned, I think we've got 8,800,000 of void, but, actually, we've either got proposals out or are having negotiations across five out of that 8,800,000. Now there's no guarantee that every single one of those proposals made is gonna turn into an agreed letting, but I think actually just that level of interest perhaps maybe is contrary to how people might think the market is at the minute. So we're very encouraged by that. And within that 5,000,000, we've actually got, in principle, terms agreed in respect of our second largest void that came back in I think it was October last year. There's still a few finer details to work out. It's quite a big upsize for that occupier, and and there's a lot more to the transaction than just simply the property side of it.

23:51 But we are very encouraged by that so much so that we sharing that with investors today. We've done a number of lettings in the industrial and office sectors since March, 2% ahead of this March's ERV. So the fact that those terms are agreed higher than than than what the value has had in this March, I think, is encouraging. And then literally, as of yesterday, we exchanged and completed on a small asset in Cardiff, and Sarah mentioned that during the year, we bought in the freehold of something that we already owned. It was a leasehold interest that we had bought off the council many years ago, and it formed part of, if some of you know, we sold the building in Cardiff a couple of years ago, the student accommodation. It was an office asset, and we sold it to student.

24:45 We kept this asset, bought in the freehold. By buying in the freehold, we could unlock a disposal to a developer, and we've sold that for 1,200,000 at a material premium to the March valuation, which I think is encouraging. So really to wrap up, I think as both the board and as an executive, we're focused on shareholder value. I think the portfolio is well positioned. Hopefully, we've given you some encouraging signs around some of the leasing activity in the portfolio and how we might unlock that reversionary upside. The business is well structured. We've got a low LTV. We've got a good debt book.

25:31 And insofar as the strategic review is concerned, it was announced in May of a proposed offer for the business. That's not yet a formal offer for the business. And as we work that further forward, we've been engaging with stakeholders. We will do as part of this annual results progress process rather, and, obviously, there's due diligence to resolve, etcetera, through the process. So we will update the market as soon as we're able to on the progress of that. So I think I'm gonna end there, Jake. Is that good? Absolutely, guys. If I may just jump back in there. 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 right hand corner of your screen.

26:24 But just while the team take a few moments to review those questions that have been submitted already, just like to remind you that a recording of this presentation, along with a copy of the slides and the published Q and A, can all be accessed via your investor dashboard. Guys, you can see that we have received a number of questions, and thank you to all of those on the call for taking the time to submit their questions. But at this stage, guys, if I may just hand back to you to address those questions where appropriate to do so. And if I pick up from you at the end, that'd be great. Thank you. Thank you, Jake. I mean, we have had a number of questions from people, and I'd to, you know, personally thank you for submitting those questions. A number of those questions relate to the strategic review and indeed the proposed offer. I am in a position where I I can't answer them, which does sound like a cop out, but you you appreciate that we are somewhat restricted with what is in the public domain and where we are in in in the process. The takeover code prohibits sort of providing specific information. I think what I would say is that anyone that has asked a question, those questions will be shared with the board, and the board will see that shareholder feedback.

27:34 And as we move forwards, you know, that feedback will be taken on board. So I would like to thank anyone that has asked a question, but but you probably appreciate why why I'm not in a position to specifically answer. But but like I say, thank you for those comments, and we will share I will make sure they're shared with the board. But I have had one that isn't about the strategic review, so I will answer that. And that is it says to what extent is leasing demand today being driven by expansionary occupiers versus relocations and consolidations? I mean, that it's a good it's a really good question. I think, probably, there's a different answer in every single sector.

28:24 So we we see consolidation happening in offices, but people moving to better quality space, better quality locations. We equally see, you know, we've had an office occupier that moved to Colchester, and that's that's a straight expansion, you know, there in the defense sector, and and and that's driving that. In industrial, I think, you know, everyone wants to use space efficiently, but good quality space. We are seeing expansions from existing occupiers as well. I think relocations is an interesting one. I think people only really want to relocate when they need better quality space.

29:11 You know, it's expensive to move buildings. You know, it's expensive in terms of fit out. It's expensive in terms of double overheads. So I think people are doing it for business reasons. And I think when you look at some of the activity that we've had, you know, you might argue, you know, is now the right time to be doing this? And, actually, what we've seen specifically, probably in the last six months is I think people are somewhat frustrated with the macro position, be that UK politics, as I mentioned, you know, what's been going on in The Middle East. And, actually, people just need to get on and run their businesses for what they need. And, actually, it's it's really down to a local level. And, if I can move, have better space for my staff, or actually just simply need the space from a logistics perspective, then I'll go ahead and do it. So so I think we're seeing both expansion and consolidation, but it's very company specific at the minute is is my answer to that, which I hope is helpful.

30:22 Perfect, guys. If I may just jump back in there, thank you very much indeed for addressing that question. Of course, we'll supply you with all of the questions submitted today for you to review post the meeting. But, Michael, perhaps before really now, just looking to redirect those on the call to provide you with their feedback, which I know is particularly important to yourself and the company. If I could please just ask you for a few closing comments just to wrap up with, that'd be great. Well, firstly, thank you all for for joining today and taking the time to to listen to us. I should say that a copy of this presentation is on our website. There's a video on our website. And as of this morning, the full copy of our annual report and accounts is on the website if anyone wants to look into that in any more detail. I think it's fair to say that there's lots of good things going on within the business, and, you know, the team is resolutely focused in ensuring that we deliver on those shareholders alongside everything else that we have going on.

31:19 So thank you for your support, and thank you for listening. Perfect, Michael. That's great. And thank you both once again for updating investors this morning. Could I please ask investors not to close this session? You'll now be automatically redirected for the opportunity to provide your feedback in order the management team can really 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, we'd like to thank you for attending today's presentation. That now concludes today's session, so good afternoon to you all.