Interim results: ammunition for major dividend rises

The 15 November interim results have led us to upgrade our profit and dividend forecasts modestly. Commercial property income is robust, and Hudson Quarter (HQ) residential profit margins are slightly ahead of expectations. The programme of the disposal of c.£30m-worth of properties that have achieved their asset management plans is progressing well. Disposals have all been ahead of book values, and cash raised is only modestly reducing rental income. HQ’s profitable sales also generate cash and potential for capital recycling, supporting dividend growth. We believe our maintained 18p dividend forecast for FY24 is the main value driver, but we are upgrading FY22 and FY23 forecasts.

• Creating potential: c.£30m-worth of disposals creates scope for recycling, enhancing income, and c.£30m cash will, in due course, return from residential sales at HQ, after repaying the bank, providing an expected project profit of minimum £6m. Cash from these two sources will accrue, with loss of income not much over £1m p.a., we estimate.
• Robust positioning: Offices and industrial property already comprise 55% of the portfolio. With HQ development completion, this is set to rise to over 70%, even prior to any potential disposals of the leisure assets. The market backdrop to regional offices remains healthy, evidenced by PCA’s new lettings.
• Returns: The portfolio’s net initial yield (NIY) is c.5.6%, with a reversionary yield at 7.3%. As HQ residential liquidates, the NIY automatically rises. This, allied to modest reinvestment, results in 20.4p FY24E EPRA EPS post-share-based and 20.8p pre-share-based. Further rises follow, as other assets’ management plans mature.
• Risks and upside: COVID-19 has fully demonstrated the difficult markets, and, indeed, many assets have short WAULTs. The regional office sector has weathered short-term turbulence. The leisure assets have long WAULTs but are now deemed non-core. Development generates cash, and hence reduces risks.
• 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. By FY24, the investment in development assets will have been liquidated profitably, and our estimates assume minimal market assistance.