Good morning, and welcome to the Picton Property Income Limited Investor Presentation. Throughout this recorded presentation, investors will be in a listening mode. Questions are encouraged and can be submitted at any time via the Q and 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'd like to submit the following poll. I'd now like to hand you over to Michael Morris, CEO. Good morning, sir.
Morning, everybody, and thank you for spending some time this morning to listen to myself, Michael Morris, Chief Executive of Picton, and my colleague, Andrew Dewhirst, our Finance Director. We're here this morning to talk to our interim results, which were published earlier in the week. By way of an introduction, I'm going to just very briefly give a company overview for those of you who may not be familiar with our business. Andrew will talk to the specifics of our financial results. I will then give a market overview, an update on what's been happening on the portfolio, and then we can lead to a Q and A at the end of the presentation. So at a glance, Picton is a UK REIT that owns a diversified portfolio of commercial real estate assets.
We have nearly GBP 750 million property portfolio. We're very proud of our performance track record. Against the MSCI UK Quarterly Property Index, we've delivered upper quartile performance since launch, and actually outperformed for 10 consecutive years. In this period, and without wishing to steal too much of Andrew's thunder, we think the results are resilient, especially at recognizing some of the sort of macro challenges out there. This is supported by our long-term fixed rate borrowings. Active management has been key to the returns we've delivered. Specifically, we've been looking at repositioning some of the portfolio, and looking at alternative uses. We'll talk about that in more detail.
I think what's encouraging is the stabilization that we've seen in our own portfolio valuation, in part driven by rental growth across all sectors within the portfolio. So in terms of the underlying business, currently, we have around 60% of the portfolio allocated to industrial warehouse and logistics. Just over 30% in offices, split between London, the Southeast, and the rest of the U.K. And specifically, now what we are doing is reclassifying assets that are offices, they still sit within the office sector, but where we are advanced in terms of our alternative use strategies, and we'll talk about that in a minute. We've currently got around 10% in retail and leisure, more skewed towards out of town retail warehouse type assets.
I'd highlight that the initial yield on the portfolio is currently around 5%. That grows through set rent, it grows through re-leasing a void, and it grows through resetting rents that are paid to us today, up to market levels, to nearer 7%. I'd also reinforce the diverse nature of our occupier base, meaning that we're not reliant on any single occupier group, and it's that underlying occupier base rental income that drives the income within the business. Corporately, we have a strong balance sheet, and Andrew will talk to the detail of that in a couple of slides. So I think I'll stop there by way of an introduction and pass over to Andrew.
Thank you, Michael. Let's start with some of the key figures for the half year period. Our EPRA earnings for the six months were GBP 10 million. Overall, there was a loss of GBP 1.4 million, driven by the portfolio revaluation. The dividend cover for the six months was 105%. Our net assets were GBP 537 million. That's a decline of 1.9% from the position at March. However, our EPRA Net Disposal Value, which includes a fair value adjustment to the borrowings, was GBP 571 million, or 105 pence per share. Moving on to the income statement, the chart here shows how EPRA earnings compare to the position a year ago, in September 2022. We can see that rental income has improved compared to a year ago.
That's as a result of the full impact of new acquisitions, rental growth, and letting activity. But set against that, there are higher property expenses and operating expenses, as a result of increased inflation, compared to a year ago. Finance costs are slightly higher, and that's due to the higher interest rates that we are incurring on our revolving credit facility. Moving on to the balance sheet, the chart here shows how net assets have moved, compared to the March 2023 annual results. We spoke about the EPRA earnings of GBP 10 million, and set against that, our dividends paid of GBP 9.5 million, which gives rise to the dividend cover of 105%. The other key item there is the valuation movement, which was a like for like decrease of 1.2% over the period.
And finally, coming on to the capital structure, the borrowings. Our loan-to-value ratio at the end of September was 28%, based on GBP 227 million of drawn debt. The average interest rate on those borrowings was 3.9%, with a maturity of 7.8 years. The principal maturities are in 2031 and 2032. We have GBP 35 million available under our revolving credit facility, and finally, just to reinforce the point about fair value, the fair value adjustment at the end of September was a positive GBP 34 million, which is equivalent to GBP 0.06 per share. And now I'll pass back to Michael for a market update.
Thank you, Andrew. So, these next few slides specifically talk about the market, so they are non-Picton specific, but they are focused on the key areas where we are invested. And I think there's a number of points just to flag, really. I mean, clearly, we have been in a rising interest rate environment, and that has impacted values. And you can see the chart there shows that the sharp correction in the property market at this time last year. But equally, as we've moved through 2023, there has been a much more stable outlook. Now, that varies between sectors, and we'll talk about that specifically in a minute, but a much more stable outlook than we witnessed a year ago.
Generally in the market, investment volumes have been down, a reflection perhaps of the rising cost of debt. We have seen not only discounts in listed real estate, but we have seen some open-ended fund redemptions, even announcements of closures. We believe that that's a much smaller part of the market than it was historically, and therefore it's less likely to impact the market overall, compared with previous times. Looking at each of the sectors in turn, so these are the MSCI monthly rental growth numbers, and in terms of the industrial market, as I mentioned earlier, this is where nearly 60% of our portfolio is invested.
What you can see from the chart on the top right, very clearly, is despite some of the macro headwind, shall we say, we are still seeing positive rental growth in this sector. That is driven, as I think I've said on previous presentations, by the relative limited supply of floor space and you know a constant solid level of demand. I think it's fair to say that demand is a little bit weaker than it was two years ago. You know, that's one of the impacts of higher rates. I suppose another impact of the higher rates is a slowdown in the speculative development side in this area of the market as well. I think these are quite encouraging numbers that show resilience in this part of the market.
To many extents, as we look at the bottom chart on page 14, we see that stability that I've alluded to earlier, coming back into the market, and one of the reasons clearly for that stability is the positive occupier market. If we look at offices, and there's been quite a lot of commentary around the office sector of late, especially with companies such as WeWork, in a very high-profile position. What we have seen, chart on the top right, is positive rental growth this year, and that's perhaps surprising, recognizing some of the headlines that are out there. And our own view is that this rental growth is coming through very definitely at the top end of the market, the very best quality space, but nevertheless, it is there... and a positive factor.
What we do recognize, though, is that there are parts of the market where rents are less stable and, you know, that is impacting sentiment. And if we look at office market capital values broadly, according to MSCI, there is a weaker story there. And as I said in the heading at the top in red, you know, the increased focus on obsolescence, you know, the capital cost of upgrading space in the office sector to making it relettable, is what is impacting office values generally. Now, there's clearly devil in the detail. Plenty of good quality buildings that are leased and for which there is demand, but we do think it's right to be thinking more laterally with office assets and establishing whether a higher value or supporting value, alternative uses can be found.
We'll, we'll talk about the specifics of what we're doing in our own portfolio, later. Then, in terms of the retail market on the next page, this is currently around 10% of our portfolio. Rental growth is lower, but I think the point I would make is, it's, it's positive. It, it's not in a recovery phase, but, but we all know that the retail sector saw a marked repricing in rents in the period, you know, pre and during and immediately post-COVID. But we are starting to see, we think, some stability in rental values, which is encouraging. Not all high streets, towns across the country are equal.
There are some markets doing better than others, but I think this stability, again, it's a word I've used previously, but I think the stability here on rents is starting to come through. And again, positively, although there has been, you know, limited capital appreciation in this sector, you know, recognizing some of the macro points of the lower liquidity that I mentioned, values have remained relatively stable. And one of the attractions, certainly in this sector, currently, is the higher income component that it offers, and that's provided some stability here, certainly relative to the office sector. So now I'm gonna talk specifically about our own portfolio and some of the activity that the team has been undertaking to enhance rental income and enhance underlying valuations.
So we've seen an increase in contracted rent and estimated rental value. The activity that we've taken over the six months in terms of letting, lease renewals, and rent reviews has all provided a positive uplift and ahead of our market ERVs, which I think is encouraging. We've outperformed MSCI over the period. Occupancy is, I think, stable at a headline level, but when we strip out some of the assets that we are specifically holding vacant to convert to alternative uses, the underlying occupancy is up, which is encouraging. And where we've invested back into the portfolio, I think owning real estate is really important for long-term returns to continue to invest in your assets. Where we've invested in the portfolio in this period, it's predominantly been into our office...
Sorry, it's predominantly been into our industrial assets, and that expenditure was principally in Gloucester, Harlow and Colchester. To talk to the valuation movements across the portfolio, the top chart there shows rental growth across all three components of our portfolio. It is, you know, it's modest rental growth, but I think the fact that it is positive is encouraging. And we've seen in our own portfolio a slight uptick in the value of our industrial assets. Clearly, the office assets have gone down in value, but I would mention that that's quite markedly better than the market overall.
I think that's down to some of the initiatives that we've employed in the portfolio itself, and retail and leisure is nominally down a little bit as well, in line with the market. In terms of leasing and occupancy, at the top here, you can see that our industrial portfolio is 96% leased, with activity in Gloucester, Radlett, Warrington, for example. Our retail and leisure portfolio is also 96% leased, with activity in London and in Carlisle. And our office portfolio is where occupancy is lower, but we have had positive activity in Glasgow, Birmingham, St Albans and Colchester, for example. In terms of our vacancies, the key ones are detailed in red, towards the bottom of the page.
The observation that I would make is three out of those five assets we are proactively pursuing alternative uses on, and in respect of the other two key voids, the majority of that space literally has come back to us within a matter of weeks or months, and we are in the process of working through upgrades ahead of relettings. I've touched on this previously, trying to unlock, I suppose, both value and indeed income through pursuing alternative uses. We made an announcement just towards the end of the summer that we had agreed to sell a part vacant office building in Cardiff for student accommodation use. We are expecting that that will move forward in 2024.
It's a subject to planning transaction, and the receipts that Picton receive are dependent upon the specific planning permission that has been secured. But we think the way the transaction is structured, it supports not only the existing valuation, but with the right result on planning, we should certainly see some overage to pricing. In Angel, EC1, which is just north of the city, during the course of this period, we've managed to use something called Permitted Development Rights, to gain consent to put residential accommodation on our campus there.
And specifically following the period end and following quite extensive negotiation and indeed lobbying with the relevant local authority, we have managed to get the entire site classified as not being within an Article 4 restriction, and that certainly opens up the potential for residential across the rest of the estate. This is an asset that we are looking at reviewing whether this is disposed of in 2024, recognizing the successes we've had here.
Clearly, you know, with both Cardiff and Angel, you know, sales of these assets and we deploying the proceeds and indeed removing some of the void costs associated with holding them in their current state, will boost earnings and equally dependent on the exact pricing, you know, that is likely to have a positive NAV impact also. On one final scheme in West London, we have a planning permission submitted. We are awaiting a decision on residential there.
We haven't included that in our numbers in terms of reducing office exposure, from 31% to 26%, and nor is it included in us saying that 15% of our portfolio, or our office portfolio is being repositioned currently, because at this moment in time, that, planning permission is, you know, yet to be granted, and we have erred on the side of caution as we have, you know, explained it, to the market. This is a constant theme, but we do need to continue to make our assets greener and more efficient. We are increasingly seeing occupiers becoming, more knowledgeable and more demanding in terms of what they want from their buildings. They want to occupy more efficient buildings.
We have our own Climate Action Working Group in the business, that is tasked with implementing these initiatives. Our focus has been on starting to remove gas, in terms of the way, buildings are heated from our portfolio. We're increasing the use of solar. I think two out of the three big office, sorry, the big industrial refurbishments we did, over the period had, solar, roof panels as part of the sort of additional, renewable energy sources, and particularly, we're focused on ensuring we better understand what energy our occupiers use. And, you know, our own evidence would suggest, and I think it's, it's across the wider market, but ultimately the bulk of energy use in our portfolio comes from our occupiers and not us.
So anything we can do to enhance the debate and assist our occupiers in being more energy efficient is a good thing. We've improved the overall EPCs on our buildings. We're fully compliant with minimum energy efficiency standards, and we've been recognized by both EPRA and GRESB in terms of the work we've been doing on sustainability. So, we're reaching the end. Just to summarize, clearly the property market has been more challenged during this period. You know, this is really a reflection of the rising interest rate environment we've been in. But I think what is encouraging, and hopefully we've demonstrated, is the resilience in the occupier markets and also a more stabilized position in respect of underlying valuations. Clearly, there's devil in the detail there.
It depends on specific leasing. It depends on specific asset types, but that is definitely a trend that we have seen. We're seeing particularly growth coming through on industrial rents, and I suppose-
Mm-hmm.
-to some extent, what we are starting to see, as this market has moved forward, you know, there are, you know, more opportunities coming to the market where people perhaps may have, refinancings or redemptions, and, you know, and that's likely to, to change the deal flow. The portfolio continues to perform well. As I've mentioned, the proactive approach we're taking on some of the void, and thinking more laterally, rather than just looking to re-lease in the current climate, I think is the right course of action. We've got, significant upside, from both those void assets and capturing this additional rental growth. And as Andrew, mentioned earlier, even in this period, we've been able to grow income, at a property level, and we've got a good pipeline currently. We think we're well positioned.
We think it's a market where proactive active management is key. You know, there's a lot needing to be done in a more challenging market. Our own balance sheet, we think is in a good place. This long-term fixed rate debt is hugely helpful. It provides a real degree of certainty in our mind in terms of underlying earnings, and I think the fact that we've been able to demonstrate a fully covered dividend despite some increased costs over the period is also encouraging. So I think I would like to end there. It's now an opportunity for Q and A. I don't think you raise your hand, because that's from a previous presentation, but there's clearly an opportunity through Investor Meet Company to ask questions.
What I would just say before we start the Q and A, is that, as a business, we, separate to these results, put out an announcement last week about the possibility of, merger discussions with another, REIT called, UK Commercial Property. I'm sure most of you are aware, but as a listed business, those discussions form part of or fall under, rather, the Takeover Code, and therefore, much as it would be nice to talk in more detail about that specific announcement, I'm actually specifically precluded from, answering any questions in relation to that. So, that might be slightly frustrating, but those are the rules, and, apologies in advance. But I'm very happy to take questions, as indeed is Andrew, on any other aspects.
Michael, Andrew, thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions just by using the Q and A tab situated on the top right-hand corner of your screen. Just while the company take a few moments to review those questions submitted today, I'd like to remind you that a recording of this presentation, along with a copy of the slides and the published Q and A, can be accessed via Investor Dashboard. Michael, as you can see, we have received a number of questions throughout today's presentation. Can I please ask you to read out the questions and give responses where appropriate to do so, and I'll pick up from you at the end?
Okay. So I'm just just looking at the questions now. There are a couple of questions on consolidation, so apologies, I'm going to just as I've mentioned earlier not answer those. There's a question, first question on green initiatives, and someone's asked, you know, green initiatives and spend on our assets to make them greener is noble, but at what price to performance? And you know, renewable output isn't as strong as perhaps traditional means.
I suppose our view is that, you know, at this juncture, you know, the need to sort of improve the green credential of assets might seem a little bit that we're doing it just to say we're doing the right thing, but we are increasingly seeing more occupiers being more discerning, and they themselves are asking and wanting to occupy more efficient buildings. More efficient buildings generally leads to lower occupancy costs. Our own view is that we need to ensure to maximize the value of our assets, and maximize our leasing prospects, and maximize our retention, then our assets do need to be increasingly more efficient and greener. Our focus at the minute is very much on where we are leasing void space.
So the cost of doing those works is then directly, positively impacting the leasing prospects, hopefully through higher rents, shorter void periods, longer lease commitments. The job of greening an entire portfolio is a long-term thing. We've got a net zero commitment for 2040, but like I say, I think the key thing is ensuring that our assets remain relevant to occupiers. And we are, I think, taking quite a commercial approach in where we invest across the portfolio to make that happen. There's another question about occupancy, and I think I touched on that in the presentation. I would highlight really two headline points. One is, we have high occupancy in our industrial and retail portfolios at 96%, where it is weaker in the office portfolio.
We've made very clear plans to maximize that through maximizing the alternative use potential in the portfolio. There's also a question around the drivers in terms of share price. We do recognize today that the share price is at a discount to NAV. I think it's little comfort, but I would make the point that, you know, quite a number of listed real estate companies do trade at discounts to NAV. The focus for us is specifically on earnings, and I think I've described in the presentation some of the actions we are taking to grow earnings. The work that the team are doing to stabilize property valuations, I think is equally important. I think that will provide comfort and reassurance in the market.
And as I've explained today, you know, the position is markedly improved from 12 months ago, but the impact of a changed interest rate environment has clearly sent a shock, not only through the real estate capital markets, but far more widely than that as well. And the final point I would just mention is around investor outreach, and really making sure that investors or potential investors are fully aware of the business, what we're doing, and what we're doing to improve the current position. And there's been quite a positive push from this side, particularly coinciding with these results, to improve that investor outreach, which hopefully will also have a positive impact. So I think... Let me just check quickly. I think those wrap up the questions.
Michael, Andrew, thank you. And I think you've addressed all those questions you have from investors, and of course, the company can review all questions submitted today, and we'll publish those responses on the Investor Meet Company platform. Before redirecting investors to provide you with their feedback, which is particularly important to yourself and the company, Michael, could I please just ask you for a few closing comments?
Yes, thank you. I would just like to thank everyone for their time today. A copy of this presentation is available on our own website, and, you know, we look forward to updating the market over the course of, you know, the next quarter, next six months before our annuals in terms of the progress we're making on these initiatives. So, thank you for your time.
Michael, Andrew, thank you for updating investors today. Can I please ask investors not to close this 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, and I'm sure will be greatly valued by the company. On behalf of the management team of Picton Property Income Limited, we'd like to thank you for attending today's presentation. Good morning to you all.