Despite challenging market conditions, Picton’s Q121 DPS was well-covered by EPRA earnings and robust portfolio capital values. Combined with low gearing, NAV per share was just 1.3% lower versus Q420 and including DPS paid, the NAV total return was -0.6%. With encouraging rent collection data continuing and the lockdown easing, we have reinstated our estimates and look for the quarterly DPS run-rate to increase in H221.
At the reduced quarterly dividend rate of 0.625p per share, dividends declared for Q121 (c £3.4m) were 118% covered by EPRA earnings of c £4.0m. On a like-forlike basis the portfolio valuation decreased by a relatively modest 0.8% (the MSCI Monthly Digest shows a negative 3.5% capital return over the same period), benefiting from an overweight stance in the industrial and office sectors (more than 80% of the total). Combined with modest c 22% gearing the NAV performance was robust at 92.2p. Rent collection continues to be encouraging and the easing of the lockdown should support a further improvement in H221 and although a good deal of economic and market uncertainty remains, we have tentatively reinstated estimates. Our NAV forecast allows for further market-led valuation weakness. For FY22 we assume a more normal collection pattern and some capture of the significant reversionary potential embedded in the portfolio.
We anticipate an increase in the quarterly DPS run-rate in H221 to 0.75p per quarter in Q321 and Q421. Our forecast aggregate DPS for the year of 2.75p is 1.17x covered by forecast EPRA earnings and to be covered by rent receipts requires that 95% of IFRS rental income is collected. Picton has already provided £1.3m (c 30%) against unpaid rents and we assume an increase to c £2.0m by end-FY21. As the IFRS rental income is already reduced by rent receivable provisions, full cash cover is equivalent to collecting 91% of the rent roll in place at the start of FY21. Meanwhile, Picton is supported by a strong balance sheet with low levels of gearing and significant reversionary potential to increase income as recent and soon-to-be completed refurbishments are let.
The prospective FY21e yield of 4.0% (or 3.6% based on the current quarterly DPS run-rate) compares favourably with risk-free alternatives (below 0.2% for 10-year UK government debt). The more than 25% discount to Q121 EPRA NAV compares with a five-year average of 3% and anticipates capital value weakness.