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Investment Trust Insider: deep discount opportunity - how Picton Property got on a road to recovery
by James Carthew on Oct 23, 2012 at 00:01
I thought it might be interesting to have a look at a fund at the other end of the risk spectrum. Picton Property Income (until June 2011 known as ING UK Real Estate) has had an eventful history and has just managed to shore up its finances with a new zero dividend preference share issue.
The original launch in 2005 raised £305 million of equity. The fund then borrowed £200 million and acquired a £491 million property portfolio, around 40% of which was offices, 20% each in industrial and retail and the balance in retail warehouses and pubs.
Geographically there was a low weighting to London compared to other property funds. Gearing at launch was 39% of gross assets and the directors planned it would not exceed 50%. The management fees were stepped but based on gross assets and the initial yield was expected to be 6.25%.
In November 2008 the board cut the dividend, properties were sold to enable £82 million of debt to be repaid and, in February 2009 the debt was restructured and various covenants were amended, including an extension of the loan-to-value to 60%.
The dividend was now supposed to be covered 1.25x but its profit and loss and balance sheet continued to deteriorate as the property market fell.
The board knew they had to cut overheads. In August 2009 the management fee arrangements were changed, with a fee on net assets rather than gross assets, saving around £1 million a year.
What I find hard to understand, given the precarious nature of the balance sheet, is why the company continued to pay out uncovered dividends, thereby eating into its capital. The board seem to have accepted this is not sustainable, however, and the dividend will probably be cut.
During 2010, ING commenced a review of its property management business and the board decided to internalise the management contract. The process took a year to complete and cost £1.1 million. The company now has 10 employees.
I would like to see more information on their long-term incentive programme but the company reckons it will save £600,000 a year.
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