Dividend recovery ahead of expectations

March 2021 annual results were ahead of our expectations; notably, rent was £17.3m vs. our estimated £16.4m. FY20 rent stood at £18.3m, excluding a lease surrender premium, and there have been net disposals (modest in quantum and at premiums to book values) since FY20, further highlighting the good rental outcome. The dividend payout was 10.5p (vs. 10.0p estimated). While we are not raising our FY22 rent or profit estimates, we raise our FY22E dividend from 11.0p to 12.0p. New leases have been signed at above estimated rental (market) value (ERV) and the two leisure assets benefit both from long leases and from new leases signed on vacated space.

• Unlocking value: Strategy and asset management have both been strong for PCA in FY21. Regional office and industrial are the two largest sectors by rent and they collected 95% and 98%, respectively, in FY21. Group average was 95% with the lowest (leisure) a respectable 91%.
• Hudson Quarter: Within a good UK-wide housing market, this in itself is a strong site. Development assets comprise £59.6m, or 21% of the total. It is important to keep in mind that these produce no income and generate non-EPRA profits. We estimate £8.5m total site profits, a 50% ungeared cash return.
• Returns: Total FY21 property return was 1.0%, vs. 1.2% MSCI benchmark, but this understates the rise in value in residential development and is within a three-year outperformance of 4% vs. benchmark. The portfolio reversionary potential is evidenced by the new leases, 14% ahead of estimated rental value.
• Risks and upside: COVID-19 has fully demonstrated the difficult markets and, indeed, many assets have short WAULTs. The regional office sector has good prospects, notwithstanding the short-term turbulence. The leisure assets have long WAULTs. Development reduces risks through cash generation.
• Investment case: The market has not fully given benefit for the “total return” strategy. PCA increases net tangible assets (NTA) by proactive action: development and asset management. Our forward NTA assumes no market-led uplifts. This has meant assets invested in non-income yielding property. By FY24, this unwinds and, even so, our FY24E assumes minimal help from the market on void reductions.