Interim results on track – upside clear in FY’22

1H’21 results cover the depths of the initial market impact of COVID-19. We note the 4.7% fall in EPRA NTA and the effect of the dividend rebasing announced some months prior. There are no negative surprises. The focus on regional offices is a positive. There are other positives that we consider to be important, namely the ongoing contractual performance of the leisure asset tenants and lengthening of leases there, and the continuing encouraging residential sales (and small letting) at the mixed-use development of PCA’s newly created Hudson Quarter, York. Here, we see just one of PCA’s initiatives to unlock value and deliver attractive returns.

• 1H’21 results: Rental income fell 7% (vs. 1H’20) ‒ a level we see as the low point. There was a £7.2m IFRS loss, taking EPRA NTA/share to 347p. Adjusted EPS fell to 7.3%, down 14% vs. 1H’20. This excludes both the one-off £2.85m early lease surrender cash income in 1H’20 and modest share scheme impact.
• Robust strategy: Regional offices’ (43% of assets) returns have exceeded London’s in every year since 2016, and are clearly set to continue to do so. The development assets are set to show a 50% cash-on-cash return in calendar 2021. PCA’s asset management and capital recycling strategy work.
• Valuation reflects short-term problems: We do not expect the balance sheet to have difficulties weathering storms, particularly as a result of proven strong tenant performance in 1H’21 and the £60m Hudson Quarter WIP unwind. These illustrate the strong underpinning and the near-term valuation upside.
• Risks and upside: COVID-19 has fully demonstrated the market difficulties 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, and good tenants in close touch and up to date on rent.
• Investment case: Major NAV and profit advances are highly visible for FY’22. With the completion of the Hudson Quarter, York development, significant profits are generated in apartment sales. These are cash-backed, but – standard accounting practice – not included in EPRA profits. For this reason, NAV per share jumps nearly 20p. Regional offices and industrial are good sectors.