LON:PCTN | PICTON - PROPERTY INCOME TRUST - Placing Next Week

9th May '14 by Cuthbert C

15 comments 11919 reads

Picton is a Guernsey based, UK listed investment trust specialising in commercial property. They undertake operational management of their properties in-house.

I spotted them a year ago. I was initially attracted by the high yield on offer (seem to remember it was >7% at the time. Then I recognised the name of the Chairman as someone I worked with many years ago and for whom I had a very high regard, and that helped. Then they announced the restructuring of their debt on pretty advantageous terms which they said would provide a solid base for years to come. On the basis of all the above, I bought a modest holding at around 35p ish.

They have made steady progress over the past 12 months and are now at 60p for an increase of 60% in the year. And of course they have paid out a decent dividend which at today's share price is running >5%.

They have just announced a new placing to take place next week. They believe that the UK economy is recovering robustly and that this will drive increases in capital values and in rental incomes. They will use the funds raised to support additional borrowing with which they will extend and develop the property portfolio.

There's a zillion page prospectus with the details. I'm a little over-extended at present, so not got time to provide much in the way of a management summary here. But it's there for the looking on their web-site. And I've got a couple of analyst reports somewhere which I can e-mail to people I know on request.

I'm minded to subscribe to the placing - The strong performance over the past year means I currently have about 6% of my funds invested already and I'm considering increasing that to 10% ish.

I'm raising it here simply as a heads-up - no recommendations intended - DYOR etc etc

Unlock with Email

Unlock with Google

Already have an account?
Login here

Mancman

9th May '14

I have had a very small investment in this company since it came to the market as ING Property, and it is now considerably smaller than my original investment! I wonder whether now is a good time to be investing in property with the likelihood of albeit small interest rate rises to come, and concerns about a property bubble?

Cuthbert C

The only concerns I have heard about a property bubble relate to residential property, not to commercial. Indeed your own post implies pretty strongly that property is a long way below previous peak values, does it not?

The PCTN prospectus includes a lot of useful material on prices and rents over a long period.

My view is that there is a strong recovery in the UK which is still in its early stages but which will provide support to the whole economy. That is likely to support the profitability of tenants in commercial property and hence encourage growth in rents, reduction in voids and/or defaults and capital appreciation.

PCTN publishes quarterly valuations of its assets which provide visibility of the underlying NAV. The prospectus for the placing reports the results of an independent valuation of the property portfolio.

I am fairly comfortable about paying just a few p more than the NAV which I expect to continue rising steadily.

Commercial property is very cyclical and will inevitably plateau and then decline. But right now my judgement is that we are in the early stages of a multi-year recovery, so plateau and decline are a long way off.

My not very scientific expectation is for a total return over the next 12 months of 15-20% or more, of which 5% will be dividend.

There is something in what you say, although I doubt that a crash in the domestic property market would leave the commercial market unscathed. I also am a little sceptical about the overall UK recovery, particularly as relates to the retail sector, which looks to me to be in long term decline, or more precisely, whose need for space on the high street looks to me to be in decline. There is already talk of conversion of commercial property to housing. Given your one year timescale though it is probably a safe-ish investment,particularly since you have a lot of confidence in the management..

Manc

I think your caution is very much overblown

For one thing, Picton is not highly exposed to retail. Its portfolio break down by sector is:

Industrial 38.9%
Retail 18.3%
Office - Central/Greater London 18.8%
Office - Rest of UK 14.2%
Retail Warehouse 6.5%
Leisure 3.3%

Which is pretty well diversified.

For another thing the portfolio is not a large scale closet index tracker - it is modest in size at around £220 million.
That small size, in the hands of its highly skilled management team means they can cherry pick. They have no reason to buy fading retail properties on declining high streets.

So we have a well diversified basket of hand picked properties managed by good in-house people led by someone I hold in very high esteem. What's not to like?

Hi Tournesol,

Overblown caution eh! Picton is such a tiny percentage of my portfolio that I totally ignore it, and your post has been useful for me at least in preventing me from selling what I have. I shall continue to collect the dividends and hope that the re-rating your post implies will happen. What little funds I have at present for investment are headed for the Saga share offer!

Manc

as things stand I intend to take up my entitlement to next week's offer which implies raising my holding from 6% to 12% which is higher than I would prefer long term. My thought is to topslice back down to 8-10% within the year.

Nice thing is that any reversal should be gradual rather than sudden - so should always be time to exit gracefully.....

T

10th May '14

Thanks for sharing your thoughts on this. Picton is below 2% in my portfolio which partly explains my ignorance about it! It seems way below the radar for most investors. There is a bulletin board on ADVFN, but nobody has posted on there for over a month.

The only other property company I own is Quintain, a totally different animal with no dividend at present, which has a bigger following on these boards. It has performed well over the past year or so, and its SP is I think still below NAV. Again though it is a small holding, although bigger than Picton.

Best of luck.

AlanJenkins2

What's not to like is that they are paying out nearly all of their cashflow in dividends,while their debt has been slowly rising.

12th May '14

AlanJenkins

"...What's not to like is that they are paying out nearly all of their cashflow in dividends...."

Why is that a bad thing? Aren't they just doing exactly what it says on the tin? They seek to generate an income and provide some opportunity for capital growth. That's what they are doing.

"...Their debt has been slowly rising...."

Please elaborate on that statement. It looks wrong to me.

From the prospectus:

"...The Group refinanced the majority of its borrowings in 2012 and put in place attractive long term
fixed rate debt funding with an average interest rate of 4.5 per cent. and an average maturity of
13.4 years. These debt facilities have a range of maturity profiles with different lenders.
This financing package is 99 per cent. fixed and as such unlikely to be impacted by an increase in
interest rates in the medium term. In addition, the refinancing of the ZDP Shares in 2016, is
expected to reduce the overall cost of debt...."

18th Jun '14

As discussed previously, I elected to subscribe for my full entitlement under the recent placing, so doubled my holding.

The placing was over-subscribed so some applications were scaled back, though not my own modest allocation.

Issue price was 59p/share which was slightly higher than NAV so was not dilutive - indeed the reverse. Share price at time of writing is 62p so the price has not been harmed by the placing.

Picton issued its annual report & accounts on Monday last - June 16th - in an admirably unglossy and unillustrated format. It is written in plain English and is brimming with interesting and useful information at both the overall sector/economy level and at the level of individual properties/transactions.

I have not got time to précis the contents here - and indeed there do not seem to be many people interested enough to read anything written on this subject anyway.

Suffice it to say that my non-expert and non-technical reading of the report leaves me with the understanding that the concerns expressed earlier in this thread by other contributors - namely that debt is increasing, that dividends are being funded by borrowing and that there is undue exposure to an exposed retail sector - are all without foundation.

If you are remotely interested then I recommend you take a look for yourself.

Picton Annual Report & Accounts

Having scanned the report I feel very comfortable with my over-weight position. I'm expecting a recovery in commercial property values and in prevailing rental income levels. I expect Picton management to add value by portfolio management and judicious trading and development. I expect the additional funds raised in the placing to be invested - using appropriate levels of gearing - so as to increase the size of the portfolio and that will generate economies of scale which will reduce overhead costs as a % of the portfolio.

My previously stated expectation of 15-20% returns in the next year seem eminently achievable to me.

26th Jun '14

Article in Saturday's Telegraph which concludes that investing in unit trusts that specialise in commercial property is likely to produce 12% pa for the next few years.

The article mentions fails to mention investment trusts such as Picton. The lower costs associated with IT's vs UT's should give them a % or two advantage.

LongbeardRanger

Tournesol,

Just a quick note to say many thanks for the heads-up and detailed analysis on this one - which would not, otherwise, have been on my radar. I shall endeavour to have a look and post my thoughts. If positive, then I'll probably look to establish a small holding over the course of the next 6-12 months as I am woefully underexposed to property (net exposure of zero - though likely to climb significantly, shortly, if I can close on the house I'm looking to buy...) partly because of my sectorally bearish view of the future for retail commercial property. (I read an interesting comment recently by, I think, Howard Schultz, CEO of Starbucks, which was highly bearish for bricks and mortar retail and, therefore, for landlords of such businesses - and this thinking has informed my viewpoint on the sector generally. However, from the sounds of things Picton are the kind of outfit that shouldn't be too exposed to this trend so may well be a good vehicle for me to diversify sensibly by adding some property investment.)

EDIT: here's the quotation from Schultz:

“I firmly believe that the month of December will go down as a turning point in the overall way in which people are shopping...people spent much more time on the Web...there were clearly less people out shopping....There will be a real sea change for many, many retailers, who are going to have a hard time navigating through what I believe will not (just) be a December problem.”

I came across this, for what it's worth, in an investment update from Lindsell Train:

http://www.lindselltrain.com/~/media/Files/L/Lindsell-Train/Attachments/month/Feb/LTGEF_MR_2014-02.pdf

Gosh, is Starbucks selling coffee on the internet these days?

or do they still need premises.......

27th Jun '14

Longbeard

just reread previous comment and it has come out wrong - was not trying to be acerbic - apologies

T

PICTON - PROPERTY INCOME TRUST - placing next week

Unlock the rest of this article with a 14 day trial

About the Author

Cuthbert C

15 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...