As often happens following major market events, some high-quality but less familiar stocks can find themselves overly discounted in the subsequent recovery. UK property investors have been well aware of the attractions of industrial property for several years, given demand/supply dynamics and structural shifts in retail and distribution. Similarly, regional offices have benefited from limited supply, low rents and relatively high yields compared with the London market.

With the lion’s share of its portfolio dedicated to industrial and offices, Picton Property Income REIT (PCTN) appears to fall into the ‘over-discounted’ category trading at a 16% discount to NAV of 95.5p per share just announced for December 2020. This internally managed REIT has a track record of consistent outperformance, its portfolio having achieved top-quartile returns relative to the MSCI UK Quarterly Property Index over one, three, five and ten years. The gross portfolio returns have fed into an average compound NAV total return of 10% per annum in the five years to end September 2020. Remarkably in the most recent financial year impacted by covid-19 the portfolio generated a positive 3.6% return against the index return of -2.9%.

This performance has been driven by an active unconstrained approach to investing in commercial property in the UK that adapts the sector and asset weighting according to market conditions. PCTN describes it as employing an “occupier focused, opportunity led” investment strategy. “Occupier focused” refers to working closely with tenants to understand their needs, enhance occupancy, improve retention and maximise income. “Opportunity led” relates to acquisitions and disposals, as well as asset-management decisions, seeking to buy, manage and sell effectively.

Over 52% of the portfolio is invested in industrial property and 36% in offices with a regional bias. Just 11% of the portfolio remains in retail and leisure, with 7% of that in retail warehouses, which should be much less affected than traditional high-street retail given their convenience, ease of parking and ability to support online purchases through click and collect.

Although covid-19 will probably lead to some structural shift to more working from home, PCTN believes the death of the office has been grossly overstated. The management see continuing demand for quality space and believe the office environment will continue to play an important role in company culture and productivity, being a place for both concentrated work and collaboration, connection, innovation and social interaction.

Covid-19 has presented a challenging environment for commercial property but notably, since July, capital values have continued to rise in the industrial market, office values have begun to stabilise and the decline in retail has slowed. PCTN was able to post a further 3.7% NAV total return in the quarter to end December 2020 as a result of its favourable sector positioning. Rent collection remained stable at 87% compared with the same stage in the previous quarter, and the quarterly dividend has been increased a chunky 14% from the September payout, itself having risen by 12% after being temporarily reduced earlier in 2020.

The expected economic recovery in 2021 should be supported by the rapid UK vaccine rollout, and PCTN has significant potential for further earnings recovery and dividend growth. At December the net reversionary yield of 6.2% was a full 29% above the net initial yield of 4.7%, reflecting the potential reduction in vacancy and expiring lease incentives. Although the 10% vacancy rate looks relatively high, the majority relates to a small number of offices, mostly refurbishment projects including an office-to-retail conversion. These projects form an essential part of PCTN’s active asset management strategy and have contributed to the strong investment track record. The current capital programme consists of £15m over several years spread between 20 assets.

The company is conservatively financed with an LTV of only 21.3%, no immediate debt maturities and £50m of low-cost borrowing headroom. This should help give PCTN the flexibility to continue to pursue the refurbishment projects across the portfolio over the next few years, take advantage of additional acquisition opportunities at attractive prices and continue to reward shareholders.