Good afternoon and welcome to the Picton Property Income Interim Results Investor Presentation. Throughout this recorded presentation, investors will be in listen-only mode. Questions are encouraged, and they can be submitted at any time by the Q&A tab that sits right in the top 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 in the meeting itself, however the company can review all the questions submitted today and publish responses when it's appropriate to do so. Before we begin, I'd like to submit the following poll, and now I'd like to hand you over to CEO Michael Morris. Good afternoon, everyone.
Good afternoon. Thank you, everyone, for joining us this afternoon. My name's Michael Morris. I'm the Chief Executive of Picton, and I've worked with the company since it launched in 2005.
I'm Saira Johnston. I'm the Chief Financial Officer at Picton. I joined earlier this year.
Thank you. So today we announced our half-year results to the end of September. This presentation is a brief snapshot around those results. So we're going to talk to the financials. We'll talk a little bit about the commercial real estate market, what's happening in the areas we're operating. We'll also talk to the portfolio, the activity that we've been undertaking, and then we'll have some concluding remarks at the end before a Q&A. So in terms of headlines, all of these things we'll talk to in a little bit more detail as we go through the presentation, but I think the headlines are that we've seen good earnings growth over the period, return to profit. Within that, we've seen positive total return from the property portfolio. We've improved occupancy, and we've been reducing our office exposure. Through that, we've been able to reduce debt.
We'll talk in a bit more detail about our debt structure. And we've also been quite heavily investing into our portfolio to upgrade space and ensure it remains relevant, well-occupied, and attractive to our occupiers. So if I hand over to Saira, she can talk to the key numbers.
Thank you, Michael. As Michael alluded to earlier in the highlights page, we are pleased with our results for the six-month period ended the 30th of September 2024. We've seen earnings growth, which is underpinned by net property income increase and lower financing costs, and both of these really are a result of our repositioning of the portfolio, looking at alternative uses for our office assets and the disposal earlier on in the period, and all of these for the first period have come through in those earnings numbers, so for the period we're reporting, an GBP 11.5 million profit with positive valuation movements that compared to a loss for the same period in the prior year of GBP 1.4 million. EPRA earnings of GBP 11.2 million or 2.1 pence per share, which is a 12% increase in respect to that period.
We've paid dividends of just over GBP 10 million, which equates to 1.85 pence per share, and have maintained a dividend cover over the six months of 111%. And this is particularly pleasing given the dividend increase which we announced in May this year. The closing balance sheet was strong. We had a strong cash position and a strong NAV, which closed at GBP 525 million or 96 pence per share. There was a marginal increase from the March year-end, but more importantly, that has stayed stable since the end of December 2023. Our net asset value or net tangible asset doesn't reflect the value of the debt in the company. And if we look at what our EPRA NDV is, that's GBP 548 million or 101 pence per share. For the six-month period, we've delivered 2.1% for our NAV total return and shareholder total return of 17.4%.
Turning to the income statement, the next slide highlights some of the key drivers behind the earnings income from the same period in the previous year. For the period six months ending September 2023, the EPRA earnings were GBP 10 million, and those increased by just under 12% to GBP 11.2 million for the six months ending September 2024. The main drivers are those of twofold. Firstly, in respect of the increase in net property income, and secondly, in respect of the reduction in our net financing costs. I'll just talk to those in turn. Firstly, net property income increased by GBP 0.2 million. Actually, if you drill down into the underlying net rental income growth, we've seen GBP 0.9 million or just over 4% increase in the underlying core portfolio.
When we talk about the core portfolio, we're excluding the assets which we hold for sale, which are the office assets which have been repositioned and for the purpose of this analysis, Angel Gate, which was sold in the period, and two additional office assets which we've earmarked for sale, Long cross in Cardiff and Charlotte Terrace in London. In addition to that rental income growth, we've also seen lower property costs as vacancy across the portfolio has reduced. We've seen strong rent collection and an increase in occupancy. If we think about our net property income by sector, we're pleased to see the percentage of industrial net property income increasing from 53% to 57%. The donut at the bottom of the bar chart highlights that and the split by sectors. We've also seen the office percentage reduce from 32% to 27%.
And all of these are as a result of the office asset repositioning and the disposal. Another point of note, the industrial assets have also shown a strong increase in terms of percentage of net property income as a result of the reversion, and the increase in that industrial rental income was over GBP 1 million for the period. Net financing costs have reduced. The interest expense has fallen with the repayment of the RCF early in the period, and that resulted in a GBP 0.4 million reduction in interest expense. In addition, we've had increased interest income, which has been as a result of the residual proceeds from Angel Gate and a higher interest rate environment. And the two of those combine to a GBP 1 million reduction in net financing costs.
Turning to the balance sheet, the key movements in terms of NAV, as I mentioned earlier, the NAV has largely remained stable from the beginning of the period to the end of the period, closing at GBP 524.8 million or 96 pence per share. The movements in the period I'll just talk to briefly. So EPRA earnings of GBP 11.2 million, which we talked through on the previous slide, dividends paid of GBP 10.1 million, the difference between those two being the dividend cover. And in addition to that, we're pleased to see that the valuations on a like-for-like basis showed an increase of 0.8%. And if we think about that across our sectors, it's the industrial sector again, which is driving that capital value growth alongside retail and leisure. Offices, we saw a decline of 1%, and we'll talk through how those compare to MSCI later on in the presentation.
Just a reminder on our capital structure, there's significant value in our long-term debt book, and we've made progress in the six months to improve this. The loan-to-value has fallen from 28% to 25%, which is a conservative level of gearing. The weighted average interest rate has fallen from 3.9% to 3.7%, and the debt maturity is over seven years, with no maturities in our long-term debt until 2023. The fair value adjustment of GBP 23 million, as I mentioned earlier, that's not reflected in our NAV, but is reflected in the net disposal value, which I alluded to earlier. The final slide in this section talks through our approach to capital allocation, and we recognize that this is increasingly important given our office repositioning strategy and the assets that we've earmarked for sale, one of those having completed in the quarter and two further assets being held for sale.
We view capital allocation in three buckets as outlined here. The first one being debt management, so we've actively managed our debt position and sought to reduce the interest cost by repaying our floating rate revolving credit facility in the period. The GBP 29.6 million, just over GBP 17 million of that was used to repay the RCF in the period. Secondly, portfolio reinvestment. We believe in reinvesting into our portfolio, and that's key to unlocking reversion, both in terms of maximizing occupancy, but also unlocking the reversion in the portfolio, as well as maximizing capital return. Lastly, we're in a position to look at new opportunities. We're seeing an increase in volumes for assets which have a return profile that are accretive to earnings. Those are the third pillar of our capital allocation.
The bottom half of the slide gives a flavor for how we see the proceeds of those office asset disposals being allocated across those three buckets.
Thank you, Saira. So the next few slides just give really a macro view on the commercial property market. And the chart that we've put on page 13 shows two things. Firstly, the black line shows how commercial property values on average have moved over the last 10 years. And the reason we chose that time series is actually over 10 years, values actually have been stable. So we've seen both a rise reflecting the lower interest rate environment, but equally a decline, particularly in the period when interest rates rose quite dramatically in 2022, beginning of 2023. So values headline sit broadly around where they were 10 years ago, but construction costs, as we probably all are aware, generally are rising and have risen perhaps more markedly in the last few years.
But the point I'm making here is that in a lot of commercial property sectors now, underlying valuations are lower than the cost of construction. And what that means is generally in a lot of markets, future supply is likely to be constrained, and those owning better quality assets, and certainly assets that the occupiers want, so that's about the location and the quality of these assets, are likely to see higher rental pressure as a result of this reducing supply or lack of new supply. And I think that's a really interesting and positive macro factor that we actually haven't seen for quite some period of time.
If we then look at the sort of occupational markets, and clearly every market is different, but I think the headline is that in the three core sectors where we invest, we are seeing rental growth, and that's really despite the backdrop of politics, elections, the hiatus around the recent budget, and even some of the uncertainty that flows from some of the news overseas. And against all of those sort of bigger macro issues, rents across all sectors, albeit at different rates, have grown. And I think that's quite encouraging. And again, reaffirms the comment I was making earlier about constrained supply and for the right assets, seeing that positive rental story. In terms of the investment markets, well, 2023 was a very skewed year. 2024 actually has seen better investment volumes generally, but equally, property to some extent has been less liquid.
Certainly, we're seeing less liquidity in the office sector this year in particular, and that's really reflected to some extent in the underlying valuation, so industrial seen the strongest capital growth over the last six months, then the retail sector reflecting the quite marked repricing that came prior, in the years prior to this, and office values have still tended to drift downwards, and part of that reflects the sort of weaker investment demand, and that in turn is impacted just by some of the leasing risk and/or capital costs that this sector is currently experiencing as people recognize that there's a need to upgrade and invest in space to meet occupier needs, so I suppose really the question then is, how does that fit with what we've been doing in our portfolio, well, the portfolio occupancy has nudged up from March.
It's at 94% if we strip out the assets held for sale. The reversionary potential in the portfolio is broadly unchanged from March despite making some disposals. And as Saira has alluded to, part of that reversion comes from vacant space and part of it from resetting rents to market levels, particularly in the industrial element of our portfolio. So the vast majority of our assets in industrial, just over a quarter in offices, although we do expect that to come down with some of the planned disposals, and 11% in retail and leisure. And that's an area that we're looking at recognizing the repricing and maybe some kind of rebalancing to that sector on a very selective basis going forward. This chart is perhaps looking a little bit further back, but we thought it might be interesting for people to just see how we've evolved our portfolio over time.
So when Picton launched, for example, we had about 20%-25% in industrial, 35% in retail, and 40% in offices. And we've been through quite a number of property cycles in the last 19 years, thinking about the GFC, Brexit, the impacts of COVID. And generally, what we've tried to do is reduce retail exposure broadly at the expense of industrial. And then more laterally, as we've already alluded to, we've been looking at reducing that office exposure further to reflect some of the challenges in that sector. This next slide, again, looking backwards a little bit more, just shows our long-term performance. This is at a property level, not with our use of debt, but at a property level relative to the wider market. This is measured by MSCI; they benchmark our assets for us.
I think the headline really is that over the last 11 years, we've outperformed the wider market, and that's demonstrated by the red diamonds on these charts. And then the question is, well, how have we outperformed over that period of time? And really, the blue bars above the line show where our sector allocation has provided positive performance. And the gold bars above the line shows where our underlying assets have performed better than the market in themselves. So that's really down to the asset contribution rather than the sector. Clearly, you want to have an element of both blue and gold above the line. Maybe not possible in every year, but I think that shows, A, a degree of consistency, that chart, and B, the importance of both having more assets in the right sectors, but actually assets that are contributing to overall performance.
Anyway, that's slightly more backward looking. In terms of the quarter, we've seen a valuation increase as Saira mentioned. We've also seen increases in our contracted rent and positive ERV growth, just under 2%. The lettings, the lease renewals, the rent reviews that we've done, on average, have been ahead of March's independent rental values. And so that's supportive, I think, generally of activity in the portfolio, but driving further forward rental growth, tying back to what I was saying earlier in the markets. We've invested just over GBP 4 million into the portfolio across 15 key projects. Some of those projects have completed, but many of them are ongoing and will flow into future quarters, and I can talk to that in a minute. Rent collection has been robust, over 99%, which is great, really.
Then a number of transactions across the industrial, office, and retail and leisure components of the portfolio, both in terms of leasing to improve that occupancy, but also in terms of extending leases, upsizing occupiers, etc. We sold a building in the City Fringe earlier in the year. That was sort of really the combination of a couple of years' hard work, getting planning permission, and eventually selling this to a residential developer. We bought the site over a period of time. We amalgamated a number of units in. Our book cost was GBP 22 million, I think, and the sale price was nearly GBP 30 million, all driven in part by being able to unlock that residential consent. I think the way office values have moved in City Fringe London, that would have been a very different story had we not been able to unlock that.
The uplift on book cost, just over 35%, and then our return from that asset relative to the wider market, about 200 basis points per annum outperformance. So that's what we've done. We've got a couple more of those types of transactions in the pipeline. The key buildings being in Cardiff, where we agreed to sell the building last year to a student developer. They were under an obligation to submit planning permission, which they did in May. They got committee approval in September. And really, we're in the process of just finalising the Section 106 agreements that need to be tied up before completion is triggered. But because of some of the progress that was made over the year, we've seen a 17% valuation uplift over the period. And again, that really reflects this repositioning piece.
In West London, we also got planning for some of the vacant space on this block. This asset is actually being marketed as we speak, so I can't go into the details of this. But I think the reality is that both of these assets we would expect to be sold by the financial year end, and then obviously we can redeploy those proceeds into either our own portfolio, as Saira mentioned, or other income-producing assets. In addition to the rental value reversion, there's some reversion coming in from vacancies in the portfolio. A third of the overall void is in the two assets I just mentioned on the previous page, so that clearly deals with quite a big chunk of that. But we've got a balance of good quality assets that need to be re-leased.
The two on the right in Gloucester literally only came back about four or five weeks ago. Some of the others are being refurbished as we speak, but all of these we think are good quality buildings, or certainly with the refurbishments that we're undertaking, will deliver that kind of space that occupiers want. In the period, we completed a number of projects. These three we just put as examples where we've, as a result of these upgrading works, we've been able to restructure leases or lease void space, so these, just by a coincidence, are in the industrial sector. We've improved the energy efficiency of these buildings. In a number of instances, we've removed gas and put solar on them, and the return on cost has been really quite strong, 110% as a minimum.
That's secured north of GBP 87 million of income, which is a 62% uplift on the previous passing rent. Now, some of that uplift will come from the market, but equally, adding this and providing this sort of better quality space definitely helps with leasing prospects. We've got a number of projects, though, that are on the go. They haven't yet completed, but again, these are slightly more focused on our office assets. It's just the timing of perhaps some of the office refurbishments take a little longer. But these are all, again, about improving facilities for occupiers, improving the energy efficiency of these buildings, and making them ready for today's marketplace. And we expect those projects to complete between December this year and March next year.
Clearly, that then puts these buildings—not all of these have void in them at the minute, but certainly puts them in the best possible place going forwards as we look to re-lease those where there is some void. Just perhaps to end on a few concluding remarks before we think about some Q&A. I think the market backdrop hopefully has come across. We are seeing some stability in valuations. It's very much asset-specific, but across our portfolio, it's been stable for now a number of quarters. In the wider market, there are some motivated sellers, perhaps if there's some redemption. It might be that there's some loan covenant issues, but certainly, we're seeing very few forced sellers at the minute. Yields, this is according to CBRE, who are our independent valuers, but there's quite a range, really, of property yields across the board.
Very wide range, depending on location and asset quality, really, from sort of prime Mayfair buildings in the low fours, all the way through to perhaps more secondary tertiary retail in the mid-teens. And that, to us, is starting to show that there's some potential for early and accretive acquisitions. And also, the point I made earlier about cost of construction is really important. And for us, it's not just about chasing yield. It's about having the right quality assets that are underpinned and have a kind of low-risk profile to them as well. So in the past six months, we've grown income and improved occupancy. We've delivered a stable portfolio valuation and invested quite heavily into our portfolio, and we see that continuing. We've reduced our office exposure, and that's enabled us to reduce financing costs.
So looking forward, as we think to the end of the financial year coming around next March, it's obviously completing these disposals, further improving occupancy and reducing those void costs. The two are interlinked. Finishing these projects to facilitate re-leasing, which will further help, and then deploying the proceeds from these disposals. And as I mentioned, there's certainly more opportunities out there going forwards. So I think I'll end there.
Perfect. Thanks very much for your presentation. Ladies and gentlemen, please do continue to submit your questions, and you can do so just by using the Q&A tab, which is situated on the top right-hand corner of your screen. But just while the company's taking a few moments through the questions that have been submitted today, I'd like to remind you that the recording of this presentation, along with a copy of the slides and the published Q&A, can be accessed via your investor dashboard. As you can see, we have received questions throughout today's presentation. If I could just hand back to you to read out those questions and give responses when it's appropriate to do so, I'll pick up from you both at the end.
Okay. So the first question is, how quickly do you anticipate capturing the reversion in the portfolio? Can you answer that one?
Yeah. So I guess we see the reversion in the portfolio in a few different buckets. I guess the first one would be the assets that we've earmarked for sale, where we have got void in the portfolio, and that makes up about a third of the existing overall void, and those sales which we've planned to do in the current financial year, redeploying those proceeds, will unlock part of that reversion, and the second two bits are dealing with the rest of the void, which, again, we've spoken to, but probably to give a flavour of the reversion in the remainder of the portfolio, where we've got passing rents that may and will revert to a higher ERV.
If we look at our average lease length or weighted average lease length, which is just under five years, we really expect those to be spread over that period of time, with roughly, I suppose, 20% coming through each year. That doesn't mean that there's going to be a day-one uplift of 20% because, really, it's driven by the underlying lease events and also the sectors that those lease events occur in.
You've got anything else to add to that?
I'm asking that. The next question is: the Bank of England have reduced base rates. Are you starting to see this come through with discussions with occupiers? I mean, I think it's fair to say occupiers, I think, have been perhaps a little more cautious in 2024 than perhaps we first thought, and that's not just about base rates, that is around perhaps change of government and other things. The more recent base rate decision was only last week, so I don't think we can draw into that too many conclusions, but I think we are seeing occupiers perhaps with a slightly more positive light. At least we know the backdrop now in which we're operating, and certainly, there's been no shortage of discussions with our team and occupiers generally in terms of looking to expand space or renew at this stage.
I think the more recent decision is likely to take a little bit of time to work through, but generally pretty positive. Okay. The next question is around capital expenditure in the portfolio and in terms of looking at that to underwrite returns for refurbishment projects. I think we showed a couple of slides earlier that showed the projects that we've recently completed. We haven't put in as yet the returns. I don't think we would do that for the future projects, but we've seen, like I say, 110% plus return on cost for those projects. That's generally the sort of order that we've been seeing for quite a number of things undertaken. That's where, in terms of the capital allocation as well, we were talking about repaying debt.
And then the next best thing, as we saw it, was investing back into our portfolio because of the, dare I say it, there's a degree of brown to green in terms of upgrading asset quality that then positively impacts rental as well.
So the question on uplift in value for the assets that have been repositioned for alternative uses and why that has not been reflected in the NAV. I think the way we see it is when we look at the values by sector, and we talked about how the capital values have moved in the six-month period. And offices, in particular, while they've decreased by 1%, actually, if those repositionings hadn't happened, that would be a more market decrease. And certainly, when we compare that to the MSCI office sector capital value movements for the half year, we've outperformed that. And part of that is in respect of those repositioned assets. And in particular, in respect of Long cross in Cardiff, where we have had the planning permission through, there's been an uplift in the period of 17% compared to the carrying value at the end of March.
So some of that uplift is being reflected in the NAV.
Yeah, and I think the only comment I would make in relation to that is that our independent valuers generally wouldn't fully reflect the value of some of those initiatives until they are completed or near being crystallized, and I think that's another point to bear in mind. We've had another couple of questions. The first one's about the dividend, asking the dividend was increased at the start of the year. How much scope and appetite there is there to increase it further in the second half? I mean, I don't think on this call we can make any sort of dividend projections, but I think we are very much focused on dividend as a positive driver, not least for discounts. We have another question about discounts to NAV and share price, so we're doing everything we can to look to be able to grow the dividend further.
And I think the portfolio activity that we've mentioned, particularly sales and redeployment of proceeds and removal of costs, are a key driver of that. And clearly, as we update the market on those disposals, consideration by the board will be given to dividend. Another question on CapEx, asking about the requirement for additional CapEx to improve EPCs. This is the energy performance certificates across the portfolio. I think, from memory, something like 81% of the portfolio is rated A to C. And that's moved up significantly from, I think it was sub-60% four or five years ago. So this improvement is an ongoing task and something that's not even going to happen over a two, three, four-year, even a five-year window. I think this is something that's going to be ongoing for a period of time.
And we generally think about the tying in EPC upgrades or just building upgrades generally with lease events and lease expiries, etc. So we don't have a sort of a global one-off figure for the entire portfolio, but we're certainly spending more on the portfolio to upgrade, not just for environmental reasons, but just reflecting the market overall. And this period, it's been GBP 4 million just over. That's nearly as much as it was for the entire last year.
Slightly over. Yeah.
Yeah, slightly over, and we expect that run rate to continue, certainly in the short term as we move those offices forward. A question on portfolio exposure. Where would we like our offices to be? I think I mentioned that we're expecting that to move to sort of low 20s by the end of the financial year. Our approach is very much sector agnostic. I think I alluded to earlier that we have got quite a low retail exposure that's benefited us for quite a period of time, but we are mindful of the stability that's coming back into that market. And maybe you'll see some of those office disposals being redeployed into quite specific. I think we can't take a blanket approach, but certainly some into that sector going forwards. Just looking through to see if there's any others that we can answer at the minute.
Let's just have a look. There's a question here on consolidation. Clearly, a number of REITs in the last six months have either sold their portfolios or been subject to takeover approaches, how we plan to achieve scale. I think we're very focused on three things at the minute: our discount, our dividend, and our diversification of the shareholder register. All of these things we think will have a positive impact. Certainly, we were seeing the benefits of that pattern in the summer period. Definitely with some of the more macro events, things have slipped back, but we're focusing on things that we can control at the minute, and that's what's been delivering that earnings growth and something that we're definitely keen to continue. I think that's the end of the questions.
Yeah.
So hopefully, we've asked everything. There were quite a few coming in there.
So if there's anything else, then let us know. But I think we're probably going to end there, Alison Gordon .
Perfect. Thank you very much for answering those questions from investors. Of course, the company can review the questions for us today, and we will publish those responses out on the Investor Meet Company platform. But just before redirecting investors to provide you with their feedback, which I know is particularly important to the company, Michael, could I just ask you for a few closing comments?
I suppose it's just really to thank everyone for their time this afternoon. Hopefully, you found that useful. We're very happy to engage with shareholders going forward, and we appreciate their support.
Thank you once again for updating investors today. Can 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 something that's greatly valued by the company. On behalf of the management team of Picton Property Income, we'd like to thank you for attending today's presentation, and good afternoon to you all.