Trading update and COVID-related dividend cut

FY20 results are due to be reported in June. PCA’s 2 April trading update stated FY20 results to be broadly in line with previous estimates. Loan-to-value (LTV) at 30 September 2019 stood at 34%; we expect this to increase to 37% as at March year-end, allowing for the drawdown at the York Hudson Quarter (HQ) development. With robust finances, PCA can weather COVID-related storms, including passing this quarter's dividend. A rent shortfall in FY21 looks likely. None of the diverse positive characteristics of the portfolio are negated. Indeed, we see scope for EPRA earnings to recover to the 19p per share historical dividend level once the HQ development has completed and funds have been redeployed into income-accretive acquisitions.

• FY20 results: 1H20 was in line with expectations. The 2 April trading update stated that FY20 will be announced broadly in line. However, quarter day rents for most real estate companies have proven a challenge. We explore the current trading, resilience versus risks and the strategy of the REIT in this document.
• Robust balance sheet: Year-end debt seems likely to remain at a conservative level below 40% LTV. Gross cash equates to around nine months’ rent. Covenant strain appears entirely manageable. On average, rents would fall 40% before problems are triggered. Minor individual adjustments might be needed in some scenarios.
• 30% of this quarter’s rents are late: With over 200 tenants, the strain of COVID-19 is impossible to avoid in the current year. In this report, we set out our rationale for expecting strong recovery immediately the COVID-19 shock dissipates. This includes a route map to 19p EPRA EPS, even if rents reduce slightly.
• The valuation reflects short-term problems: We do not expect the balance sheet to have difficulties weathering storms, even if lasting two quarters. Additionally, in our view, the ability to boost ongoing EPRA EPS post completion of the HQ development illustrates strong valuation upside potential.
• Risks and upside: As we wrote in last year’s research, “the normal risks of real estate apply.” COVID-19 has fully demonstrated this, unfortunately. PCA has created a solid craft in which to navigate troubled waters. Once the trouble subsides, the REIT will exit intact and with its strategy well placed to benefit from strong and progressive income.