Good afternoon, and welcome to the Picton Property Income Limited Annual 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 using the Q&A tab situated on the right-hand corner of your screen. 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 publish responses where it is appropriate to do so. Before we begin, I would like to submit the following poll, and I would now like to hand you over to CEO, Michael Morris. Good afternoon to you.
Hello there, and good afternoon, everybody. My name is Michael Morris. I'm the Chief Executive of Picton Property Income. I've been with the business since launch, and I'm here joined by Saira Johnston, our Chief, new CFO.
So I'm Saira Johnston. I joined the Picton board on the first of April, and I'm delighted to have joined the team here at Picton. I've been a shareholder of Picton for a number of years, so I've been watching Picton from the outside, and I'm really looking forward to working with the team and Michael. I've worked in the property industry for a number of years in the listed space.
So today, we thought we'd provide a snapshot highlight of our results. Saira will talk specifically to the financials. We're gonna give some thoughts on the UK commercial marketplace, what's been going on within our own portfolio, and some thoughts around our own earnings growth and opportunities in the market generally. So I think the headlines really, you know, we're actually quite pleased with these results, recognizing the market backdrop in which we were operating in. We've been able to grow EPRA earnings. We've continued to outperform the market in terms of underlying property performance.
We've been able to grow passing rent, rental value in the portfolio, and specifically at the year-end, we still had reversionary potential 29% higher than the current passing rent from our portfolio. We have long-term valuable debt structure, and actually, although these are year-end results to March, we've actually seen quite a lot of good portfolio activity at post-year-end. The culmination of that being the dividend increase we announced that is effective this month. And really, the presentation is gonna talk to each of these themes in more detail. But if I hand over now to Saira, she can talk to the specific results.
Thank you, Michael. Before I start, I should say that the numbers in the presentation are to the to or at the 31st of March, unless stated otherwise. Turning to the headlines of the annual results, we're really pleased to have grown earnings, EPRA earnings this year, in spite of the backdrop of inflation, higher interest rates, and a weaker economic backdrop. The year end closed with a net asset valuation of GBP 524 million, or 96 pence per share, a 4% reduction during the year. We were pleased to see that net assets stayed stable during the last quarter of our financial year. In terms of earnings, EPRA earnings increased to GBP 21.7 million, or 4 pence per share, a 2% increase in the year.
And overall, we'll be reporting a loss for the year of GBP 4.8 million as a result of the negative valuation movements during the year. Lastly, we've paid GBP 19.1 million of dividends, as 4 quarterly dividends amounting to GBP 0.035 per share, and we've retained a healthy dividend cover at 114%. Moving on to look at what are the drivers of our EPRA earnings growth and the income statement, the slide in front of you shows a chart of the drivers and key components of EPRA earnings between March 2023 and March 2024. I apologize, there's a lot of detail on this slide, but it is needed in order to understand how the earnings have grown over the period.
The primary driver to the earnings growth has been the property net rental income, which has grown 4.5% during the year. In terms of property income itself, that has grown by GBP 1.7 million, and around GBP 1 million of that is attributable to our industrial portfolio, which comprises about 60% of our overall portfolio. We've seen positive lease events in two of our top ten occupiers at Grantham and Harlow, and new rental evidence at Radlett, our largest asset. We'll come on to talk about some of these in a bit more detail in the portfolio review. In terms of other property income, we've had a number of lease events during the year, which has given rise to surrender and other income, dilapidations income.
These are a bit lumpy, but actually, with the leasing activity and lease events in the portfolio, there are always some of these that come about each year. In terms of property expenses, there has been an increase in void costs during the year, as we've kept some of our assets intentionally vacant due to a change of use for those assets, and we'll talk about these later. But overall, we've managed to manage the property operating expenses, and they've increased GBP 0.1 million during the year. From a costs and admin perspective, there's been a number of admin costs that were non-recurring that have been reflected in the year-end. Those relate to company secretarial costs in relation to bringing that function in-house, CFO transition costs, and corporate activity.
In terms of other admin costs, I think it's fair to say that Picton hasn't been immune to inflation, and we've invested in the resource in-house, particularly in respect of our asset management team and sustainability initiatives. Lastly, in terms of financing costs, the net financing costs have remained stable during the year, with the increase on the floating rate debt being offset by interest income during the period. In terms of the net asset value movement, we've talked through a lot of the drivers of these in the EPRA earnings slide before. The other key component is the valuation decrease during the year. The portfolio valuation closed at GBP 745 million, which was a 3% decrease during the year.
If we compare that to the MSCI benchmark for the year, it's a positive, it's a positive relative to that, which showed a 5.5% negative movement overall. The percentages that we've shown there per sector reflect what we have seen in the year. So our industrial portfolio has remained flat during the year. Offices are down 8%, and retail and leisure, down 2%. And just worth noting again, that our portfolio is heavily weighted to industrials. Turning to our capital structure, Picton has a very valuable long-term debt structure. The loan-to-value was 28% at the year-end, with a weighted average interest cost of 3.9%, well below the prevailing market rates, and with long maturities, with the long-term debt maturities not until 2031.
Worth noting that, that value in the debt book is also shown through the difference between the EPRA NDV and the EPRA NTA of GBP 0.05 per share. A final point worth mentioning is that post quarter end, following a sale of one of our office assets, we have repaid our floating rate revolving credit facility in full.
So I'm going to just talk more, more generally now about the wider market and the context in which Picton has been operating. So there are some common themes. Clearly, what's going on worldwide, even at home with UK politics, the rise in interest rates, you know, have really dominated the last 6-12 months. And we have seen across the whole market a repricing over that period in terms of capital values. I think the headline, though, is that occupier markets have been remarkably resilient in the face of all that. And you know, we will talk specifically about rental growth in the next couple of slides.
In terms of what this has led to, is actually it's led to broadly pricing for commercial real estate being below its cost of construction. That's quite unusual, and certainly it means that this is going to limit supply going forward. The economics of redevelopment, certainly for commercial floor space, look quite difficult at the minute. And that tight supply, I think, is a really important factor. Demographics, technology, sustainability, these are themes that are well embedded and here to stay. And as I think specifically, you know, our own sense is that industrial values are stabilizing. You know, this point about lack of supply remains, and we're seeing rental growth across pretty much all the markets in which we're invested.
Offices has undoubtedly been impacted by changing working habits, and indeed, a requirement for, from occupiers for both flexibility and in turn, greener, higher quality space. And that, that's reduced reduced demand, and certainly reduced it for poorer quality assets. And I think that's where the repositioning of that that type of product will gather pace in future years. And I've got specifically a slide in a minute on the office market, and what we're doing ourselves to address some of the dynamics there. And then, in terms of retail and leisure, I think we all know that rents in these sectors saw quite a reduction, not just before COVID, but during and post-COVID.
I think actually, you know, we saw at the beginning of the year, chains like Body Shop, and before that, Wilko go into administration. So there are... I wouldn't say it's easy in the retail market, but our own sense is that values here have stabilized now after a long period of resetting. So just looking in more detail about my comment of resilient occupier markets. I mean, the table at the top shows that actually last year, on average, industrial rents grew 6.5%, office rents grew 3%, and retail, only 1%. And as I said earlier, I think the office rental growth probably more skewed to the newer, better quality space.
But nevertheless, this is a period where all sectors seeing positive growth, and it has been a number of years since that's happened. Capital values adjusted to the higher interest rate environment. I think specifically on offices, there was another layer to that in terms of the capital expenditure, and maybe void assumptions that valuers were applying to office asset values to reflect changing occupier demand, and that's why office values reduced more than in the other two sectors. But if you think back to Saira's slide a minute ago, our industrial portfolio performed in line with the market. Our office portfolio outperformed, as did our retail, and I think some of that is down to the underlying activity that we've been doing in our portfolio that has mitigated downside risk.
The next slides talk to our own portfolio, and specifically, to the activity that the team has been undertaking during the year to help drive income and values and take the business forward. As a snapshot, the portfolio is valued at nearly GBP 750 million. We've got nearly 50 assets and 400 occupiers, so a very diverse cash flow underpinning the rental income within the business. The initial yield on the portfolio is nearly 5.25%, and the reversionary potential, that's if the portfolio was leased at today's market rents, is closer to 7%. That's where this 29% reversion that Saira mentioned earlier comes from.
Nearly 60% of our portfolio is industrial, 30% in offices, of which nearly a quarter of that is being repurposed for alternative uses. Then we've got 11% in retail and leisure, the majority of which is in retail warehouse assets. I mentioned earlier that our portfolio had outperformed over the year. We delivered a positive total return of 1.6 when the market was -1. We increased passing rent and estimated rental value over the period. We repositioned assets with GBP 36 million worth of disposals agreed prior to the year end, one of which has completed, and we'll talk about those assets, specifically, in more detail earlier.
We put in a quote here from the property director at Lush, talking about you know, the cooperation, proactivity, and the way Picton operates in terms of being occupier-focused. And I think you know, the work that the team do here is testament to the the occupier retention that we've had, and also helping us to unlock value within the portfolio. So all of the activity in the year culminated in you know, 28 lettings, 31 lease renewals, rent reviews. We invested GBP 4.5 million upgrading the portfolio.
Some of these are more cosmetic enhancements to our buildings, some of which are involving improving, you know, the plant, machinery, air conditioning, installing solar, et cetera, but all of which, making buildings more appealing to occupiers in the sort of current marketplace. Rent collection over the year was 99%, and there are quite a number of transactions across the country, and equally, across all of our areas of our portfolio, be it industrial, office, or retail, that supported rental value growth. Saira mentioned the reversionary upside in the portfolio, some of which we collected and achieved during the year. Specifically, we increased the contracted rent by 11%, the ERV of this element of the portfolio grew by 3%.
We've included a couple of examples, a distribution warehouse in Grantham and another industrial unit in Harlow, in Essex, where we've increased the rent on both of those two transactions by, you know, over 40%, and I think that's really shows how, you know, ultimately you're capturing that embedded upside in the portfolio. Specifically on offices, and I touched on this earlier, you know, clearly, offices have been repriced, and as I mentioned earlier, the CapEx costs of upgrading offices to bring them up to sort of green standards is clearly more than in the industrial sector in particular. But actually, we're seeing a positive growth for better space. Generally, we're seeing increasing physical use of offices as less people attending to work from home.
I think offices are physically easier to reposition than perhaps in the retail sector, where we saw quite large value changes over the last 10 years, as it was actually quite difficult to unlock repositioning. And the other thing is just generally, you know, the values of these assets generally comes from a lower base, and therefore is more correlated with alternative use values. And our own experience has been that where we have sold assets for alternative uses, that's actually provided upside potential rather than downside.
We've introduced something, probably about 18 months ago, called SwiftSpace, so that's where we can lease property in a more flexible way, if needed, and also, as a program of engagement as our office buildings, we have, Picton app , that we can use to engage directly with users of our buildings, and host, events or promotions, which generally goes down well with staff, and is a, you know, a reason to be engaged and on-site rather than working from home. The box at the bottom just talks to, the portfolio, 85% occupancy, so a lot of our buildings are, being well used. Our EPC ratings are close to 90%, which actually is pretty high.
That's not to say that we won't be making further improvements, but we're already coming from a good base in terms of the quality of the space. And at the minute, we've got about 57% of our office void that is being upgraded or likely to be upgraded this year. And then, 23%, which will be repurposed, and we're at various stages of that. Which really leads on to a number of transactions that we've been doing, and really, you know, have or really demonstrate, I suppose, our strategy to look to recycle capital in the office sector, where we think there's better value, alternative uses. You know, this obviously has the impact of reducing our office exposure also.
So I'm not gonna go into the detail of all of these transactions, but in London, we secured planning consent for a residential use on an office complex. We marketed that at the start of the year, and we sold it, not in this financial year just gone, but in the new financial year. In Cardiff, we've agreed to sell a building to a student developer. It's a subject to planning transaction. Planning permission is due to be submitted next month, with a decision later in the financial year. Colchester is a building where actually we're not needing to sell it, but actually, it's yet again a case where we can reuse office space for alternative uses, and we put a medical user into this particular building.
Because they have a quite bespoke fit-out, it meant that we didn't need to refurbish the building prior to their occupation, so clearly for us, that was attractive, 'cause there were less capital costs. And we've also got another building in London, where we've applied for planning for residential also. We're awaiting a decision. We would've ideally liked it by now, but, planning authorities can sometimes be perhaps slower than one might like, but a decision is expected, this summer. Investing into our buildings, as previously mentioned, we've invested GBP 4.5 million into the portfolio. This is about improving the quality of the underlying assets, thinking about refurbishment in a sustainable way.
We continue to, for the majority of the leases we complete with new occupiers, have green lease clauses in those, to ensure that they're operated in a green and efficient way. And generally, as a business, we're looking to reduce emissions across the whole portfolio. That's generally the removal of gas, improving the efficiency of our buildings, but clearly today, generally, occupiers want more efficient buildings anyway, anyway. So really, it's about pivoting the portfolio to ensure that the quality meets underlying occupational demand. And there's a couple of examples in Fleet, in Hampshire, and Warrington in the Northwest, where we've not only improved the quality of the buildings, but that's enabled us to re-lease and get good rents, or indeed extend income and aid occupier retention.
... So the last couple of slides in the presentation today are going to cover a little bit on the outlook and how we see the reversion that Michael's talked about in the portfolio, coming into play, and a few concluding remarks. So if we think about what the key drivers are for earnings growth, what we've set out here is the earnings, or the rental bridge from the passing net rent at the end of March to the ERV, at the end of March 2024. And this really is the, is the sort of 28.9% reversionary impact that we've mentioned earlier in the slide.
We've already seen that reversion coming through in the results at the end of March 2024, and if you look at the chart in front of you, we're already contracted on another GBP 3.9 million of rent- frees and set rent. If we look at the rental income on the vacancies and the assets held for sale, which Michael's talked about already, we've dealt with a portion of the vacancy across the portfolio in the office sector, with Angel Gate having completed post-year-end and Longc ross exchanged due to sell, we hope, in the next financial year. It's worth noting that those assets held for sale have allowed us to reduce our financing costs.
So we sold those assets and we've repaid our expensive revolving credit facility at 6.8%, and we repaid that in full during the quarter. We've now got 100% fixed long-term debt, and all of those things have allowed us to drive earnings growth going forward. If we look at the residual vacancy in the portfolio, we already see pleasing activity post-year-end in terms of the discussions that we have with underlying potential occupiers, and subject to contract, we have agreed terms of GBP 0.9 million of that vacancy within two months of the year end. Turning to the rest of the reversion, we are also seeing positive evidence on the discussions there with occupiers across GBP 2.5 million pounds of rent, those representing a 14% uplift on the current passing.
Those really set out the drivers for rental growth and how those will equate to earnings growth over the short and medium term, and a combination of all those events have been the driver for the increased dividend, which we announced last month, of 5.7%, which is effective from this month.
So in summary, I think it's clear that there is a very definite embedded reversion in the portfolio, and it's also clear that we are unlocking that reversion in the form of both higher income and indeed higher reversion. Some of that higher reversion is also coming through the investment into our portfolio to ensure our assets remain relevant to today's occupier market and well leased. We have had good progress, specifically on two key assets, in terms of pursuing alternative use strategies, but there is more work to do, and clearly we are waiting planning decisions to take those to the next stage.
In terms of our business, we are a small team, but actually 100% focused on Picton and fully aligned with shareholders in the way that the team is remunerated. We have long-term debt in place well below market rates, which has real, I think, hidden value in the business. We've got a good track record since launch, and I think the reason that it's such a good long-term track record is that we've been able to adapt as the underlying market has adapted also. And I don't see that changing, actually. I think opportunities in the short term exist across multiple sectors, recognizing the repricing that's happened in recent years.
I think it's important to just recognize, though, the listed market and the environment that we're operating in. There has been significant corporate activity in the last 12 months. And we've seen quite a lot of consolidation, strategic reviews, takeovers, et cetera. And this clearly is driven by the discount that persists across the sector, which, you know, is clearly something that we're not comfortable with, but we have to recognize the wider environment. We still believe that scale is important, not only in terms of investor relevance, but also recognizing our internally managed model. There are clear economies of scale benefits that shareholders would see, were, you know, were there to be a bigger Picton.
We were disappointed, most of you know that we had conversations with another listed REIT at the end of the last calendar year. We were disappointed that those weren't able to be taken forward, as we think there was good, clear, positive rationale for that. But we accept that, we move on. And, you know, we're more than happy to explore other options that are in shareholder interests. We're clearly mindful of the discount, and recognizing that in thinking about capital allocation, particularly in terms of new opportunities, and the disconnect between NAV and market price, and I think it speaks volumes that, you know, the disposal proceeds that came in last month from our office sale went straight to the repayment of debt and reduction of financing costs.
Well, I think that's a good place to end. I'm going to now do the questions.
Yep. Michael, Saira, thank you very much indeed for your presentation. Ladies and gentlemen, please do continue to submit your questions using the Q&A tab situated in the top right corner of your screen. While the company take a few moments to review those questions submitted today, I would like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A, can be accessed via Investor Dashboard. And Michael, Saira, as you can see, we have received several questions throughout today's presentation. If I may now hand back to you and kindly ask you to read out the questions, give responses where appropriate to do so, and I'll pick up from you at the end.
So perhaps we'll first pick up the question posted: What are the key criteria for capital allocation on assets, asset disposals and acquisitions? So I think in terms of asset disposals, I think that during the last year, we have, as Michael's already explained, repositioned our office assets and looked at maximizing the value of those disposals, alongside reducing the sector weighting to industrials, and that alongside a strategy to manage our gearing levels, and reduce and repay our expensive revolving credit facility. So in terms of disposals, I think that's something that we have been mindful of and achieved. We've set out the other office assets which are in the pipeline, either exchanged or in planning, to maximize value from alternative use.
In terms of acquisitions, we do have cash on the balance sheet, and at the moment, we're in a position where we believe we're fortunate, that we don't have to repay any further expensive debt. And we are prioritizing capital to look at investing in our, in our portfolio in the short term and as part of our, our results, talking to, to shareholders.
Yeah. Yeah, and I think probably the thing I would just say is that we are mindful of, you know, the share price discount as we think about capital allocation, so that's clearly an area to consider. Investing into the portfolio is absolutely, I think, a key priority in reducing debt. But I think this is gonna be a good period for us to properly engage with shareholders and get their thoughts and their views. But we don't have any immediate plans, for example, to increase gearing, to be buying assets in the market. Notwithstanding that we do see opportunities out there, I think we have to think about the wider context at the moment.
Yeah.
So the next question is around trends in the office market and our strategy to increase occupancy. I'm gonna answer that quite quickly, because I think we've touched on it in the presentation, but simply, we're upgrading certain assets and disposing of certain low-yielding non-income producing assets. And that will undoubtedly not just drive the reversion through leasing, but drive the reversion through capital recycling. I've had another question about our conversations with UK Commercial, that was mentioned in the presentation, about costs. I think the answer is that the Takeover Code requires any company in these transactions to pay their own costs, no one can reimburse you for costs. Those are the specifics of the Takeover Code rules.
I think the point being, while we did incur some costs, and no one wants to incur any, but that's the reality of doing business. I think we managed to mitigate those at a very early stage in the transaction, rather than incur significant costs. I know others have gone further down the line, and not been successful and incurred large, large fees. And we were, we were in a good place, from that perspective, I think, despite the obvious outcome. There's another question about consolidation, as discounts remain. I think that is very definitely possible. I think I heard today around another competitor company that, another REIT, where there's interest and offers expressed or interest expressed in possible consolidation.
So I think that's a factor of the state of the market currently. But yes, I mean, that's probably the case across many sectors at the minute. And then there's a question as to how realistic is it to turn some offices into residential space? I mean, I think this is really about the specifics of individual buildings, and it clearly isn't possible to turn all offices into residential. You probably wouldn't get planning, and not all offices physically suit it. But it clearly is possible to do this. And you know, very clearly, we've just demonstrated three specific buildings of ours, where we're doing this, you know, right now, in real time.
And, you know, the final point I would make about offices is that, you know, that our portfolio occupancy, you know, give or take, is, you know, is 80-85%, depending on what date you cut it. So actually, we've got a lot of, the vast, vast majority of our offices are fully occupied and utilized and income producing. And, you know, there just is no need to turn those into residential space. It wouldn't make sense. So I think it's about as you stock pick, and this is something that we always think about in the way that we invest, is thinking about, well, what are your downside risks? And what are the ways to pivot and reposition your assets? Because space isn't static over time.
You know, if you have good buildings, they are often repurposed, you know, be it, you know, now, in 50 years' time, in 100 years' time. You know, this, the building we're in at the minute is 100 years old, and it's had multiple uses during its 100-year life, you know? So, I think, I think that's the key. It's the type of product that you've got and the location. If it's in the right place, then it can be converted easier. And then there's another question about slide 24, which was the slide that showed the reversionary potential. Someone's asked: How long will it take to capture the reversionary potential?
Yeah. So we, we've looked at the timings of the reversion and looked at rent review dates, break dates, and expiry dates, and done some analysis in the background, looking at the timings of those. And I think a broad brush assumption is our expectation is for about 20% of that to come in in the next 12 months. Obviously, that is dependent on the underlying lease events. And, but that's our expectation, which we don't think is out of line when you look at our vault, which is just over four years, and how that would play out over the next 12 to 18 months.
That's great, Saira and Michael. Thank you for addressing all those questions for investors today. Of course, the company can review all questions submitted today, and we will publish those responses on the Investor Meet Company platform. But before we direct any investors to provide with their feedback, which is particularly important to the company, Michael, could I please ask you for a few closing comments?
Really, just to say thank you to everyone that has dialed in today to listen to us. This presentation, I think, is available on Investor Meet Company, but within the next few days, you know, our full annual report will be available on the Picton website and the presentation also. If anyone has any specific questions, then they're more than happy for them to reach out to us directly.
Michael, Saira, thank you once again for updating investors today. Could I please ask investors not to close this session, as you will now be automatically redirected to provide your feedback in order that the board can better understand your views and expectations? This will only take a few moments to complete and I'm sure will be greatly valued by the company. On behalf of the management team of Picton Property Income Limited, we would like to thank you for attending today's presentation, and good afternoon to you all.