Preliminary Annual Results

28 June 2016

PICTON PROPERTY INCOME LIMITED

PRELIMINARY ANNUAL RESULTS

(“PICTON” OR THE “COMPANY”)

Picton (LSE: PCTN) announces its annual results for the year ended 31 March 2016.

Strong full year results

·          Total return of 17.9% for the year

·          Increase in net assets of 12.7% to £417.1 million

·          EPRA earnings has increased by 30.1% to £19.9 million

·          Reduction in Ongoing Charges ratio by 8% to 1.1%

Continued growth in NAV, earnings and dividends

·          Increase in EPRA NAV per share of 12.7%, to 77 pence per share

·          EPRA earning per share increased by 8.3% to 3.7 pence per share

·          Dividend increased by 10% to 3.3 pence per share

·          Dividends paid of £17.8 million, with a dividend cover of 112%

Maintained focus on asset management and continued to out-perform MSCI IPD

·          Total property return of 14.3%, out-performing the MSCI IPD Quarterly Benchmark of 11.3%

·          Improved portfolio occupancy from 95% to 96%

·          15 lease renewals and re-gears retaining £2.9 million per annum, on average 2.1% above the March 2015 estimated rental value

·          35 lettings completed securing £2.3 million in additional annual income, on average 3.8% above the March 2015 estimated rental value

Ongoing investment and repositioning of portfolio

·          Invested £73.1 million in five new property assets during the year

·          Sold three assets for £9.4 million, on average 11% ahead of the March 2015 valuation

·          Over £4.4 million invested into refurbishment projects

·          19% increase in average lot size to £11.3 million

Improving debt structure

·          Net loan to value of 34.6%, with a weighted average debt maturity of 10.7 years

·          94% of debt facilities fixed with a weighted average interest rate of 4.4%

·          Post year end, entered into a new five year £27.0 million revolving credit facility

·          £37.2 million of undrawn facilities now available to meet zero dividend preference share liability

	2016	2015	2014
Total Return	17.9%	27.4%	21.6%
NAV per Share	77p	69p	56p
Earnings per Share	12.0p	15.4p	10.4p
EPRA Earnings per Share	3.7p	3.4p	3.7p
Dividend per Share	3.3p	3.0p	3.0p
Dividend Cover	112%	117%	124%
Property Assets*	£646.0m	£532.9m	£417.6m
Net Assets	£417.1m	£370.0m	£214.1m
Profit after Tax	£64.8m	£68.9m	£37.3m
EPRA Earnings	£19.9m	£15.3m	£13.3m

* Net of lease incentives

Picton Chairman, Nicholas Thompson, commented:

“Picton has again demonstrated the effectiveness of its strategy and quality of the property portfolio by delivering yet another strong set of results with a post tax profit of £64.8 million. We believe that Picton is well positioned among its peers as income becomes an increasingly sought after and important component of total returns.”

Michael Morris, Chief Executive of Picton Capital, commented:

“During the last year we have continued to strengthen the business improving operational and financial efficiency which has resulted in an 8.3% increase in EPRA earnings per share. In addition we improved occupancy, outperformed our IPD benchmark and further reshaped the portfolio. We have also recently agreed a new loan facility that reduces our overall cost of debt from October and provides flexibility in respect of our use of debt, reflecting a more uncertain political and economic backdrop.”

For further information:

Tavistock

Jeremy Carey/James Verstringhe, 020 7920 3150, [e-mail]

Picton Capital Limited

Michael Morris, 020 7011 9980, [e-mail]

The Company Secretary

Northern Trust International Fund Administration Services (Guernsey) Limited

Trafalgar Court

Les Banques

St Peter Port

Guernsey

GY1 3QL

Katie Le Page, 01481 745 001, [e-mail]

Note to Editors

Picton Property Income Limited is an income focused, property investment company listed on the London Stock Exchange. Picton can invest both directly and indirectly in commercial property across the United Kingdom.

With Net Assets of £417.1 million at 31 March 2016, the Company's objective is to provide shareholders with an attractive level of income, together with the potential for capital growth by investing in the principal commercial property sectors.  www.picton.co.uk

Chairman’s statement

Picton has produced another strong set of results, demonstrating the progress we have made over the last 12 months.

Performance

We are pleased to report a total profit of £64.8 million, attributed to an income profit of £19.9 million and capital gains of £44.9 million, which have produced a total return for the year of 17.9%. EPRA earnings per share have risen by 8.3% this year and net asset value per share is now 77 pence, an increase of 12.7%. At a portfolio level we have delivered a total property return of 14.3%, which is around 300 basis points ahead of the MSCI IPD Quarterly Benchmark.

Property performance is covered in more detail within both the Chief Executive’s Review and the Investment Manager’s Report, and I am delighted to advise that not only has the portfolio outperformed its MSCI IPD Quarterly Benchmark over 12 months, but more importantly over the four year period since we adopted our internalised management model.

Picton continues to perform well against many metrics, despite a more uncertain economic backdrop and as returns for the property market appear to be moderating after several strong years.

In line with the wider real estate equities market, our share price performance has lagged the growth in net asset value. With the EU referendum vote last week, the share price discount has widened and currently stands at 15% to the March net asset value. A primary focus of the Board is to ensure that this does not disrupt our operational progress.

We have now passed our tenth anniversary since launch and I am pleased to record that over this period we have distributed over £150 million in dividends to our shareholders and our portfolio has outperformed the MSCI IPD Quarterly Benchmark.

Portfolio Reshaping

Since March 2015, we have invested a further £73 million into the property market, through five acquisitions and have made three disposals totaling £9.4 million.

The portfolio is now valued at £655 million and is 21% larger than last year, reflecting both valuation gains and new acquisitions.

We continue to have an overweight position to the industrial, warehouse and logistics sectors, whilst at the same time remaining underweight to the underperforming retail sector. 

We have made some very good progress with the assets over the year, across all our sectors, but have been particularly encouraged by our progress at Angel Gate and also the value creation at recent acquisitions in Gloucester, Chatham and Radlett.

A key differentiator of the Picton model is the economies of scale that can be achieved through growth. By reshaping the portfolio in this way, and with the same team, these efficiencies have been evident.

Income and dividends

Our EPRA earnings, after the deduction of all corporate costs and interest payments, was £19.9 million, 30% higher than the £15.3 million recorded in 2015.

In May 2015, we increased the annual dividend payable to 3.3 pence, an increase of 10% compared with the previous rate, which had been set in 2012. Despite this increased payment, our dividend cover has remained at a healthy level of 112%, which has contributed approximately £2 million to our growth in net assets this year.

The Ongoing Charges ratio has again fallen over the year, demonstrating how our structure is able to deliver economies of scale as we continue to grow the portfolio. Over the last three years, the Ongoing Charges ratio has fallen by more than 35%.

As a Board we will continue to review the level of dividends, but are inclined, in the short term, to maintain a prudent approach in light of current macro economic and political risks.

Gearing

I have spoken previously about managing gearing through the property cycle. Gearing has again made a positive contribution to our results this year. Our level of gearing has generally been on a downward trend, as the property market has been in a broad recovery since 2012 and our successful placing programme generated new equity and a larger asset base. 

Our loan to value ratio as at 31 March 2016 was 34.6%. This has increased slightly from last year, due to the investment of the additional cash held into new acquisitions, as discussed above, but is down from 47.7% two years ago.

In addition, we have made use of our revolving credit facility to part fund a highly income accretive acquisition in the final quarter of the year. The full income benefit of this acquisition will be reflected in future results.

The Group’s zero dividend preference shares mature in October this year. We intend to repay these in full at maturity, and have recently concluded a new five year £27 million revolving credit facility, which can be used for the repayment. The new facility will provide finance at a much lower rate, and will give us greater operational flexibility. Once the zero dividend preference shares are repaid, we expect to see a marked reduction in finance costs which will improve earnings next year.

Recognition

Notwithstanding the clear financial success we have delivered this year, it is always positive for our efforts to be recognised by others. This year we have been either shortlisted or have won awards from the European Public Real Estate Association, the British Council for Offices, The Association of Investment Companies/Investment Week, FT/Investment Chronicle Wealth Awards and MSCI/IPF Investment Awards.

In particular, our strong performance over a one, two and three year horizon led to us being named Best Large Investment Trust, by Money Observer, which was particularly pleasing as this was entirely based on our financial results compared to 117 other investment companies, all larger than £300 million in terms of market capitalisation.

Shareholder engagement

We take our responsibilities to shareholders very seriously and are keen to engage with shareholders on our register throughout the year.

Our website has been upgraded during the year to make it more user friendly (via both computer and tablet) with a specific section for investors, providing more detailed information. Shareholders are also now able to sign up for email alerts to gain access to financial reports and newsletters.  Further information is available at www.picton.co.uk

In addition, we have recently undertaken an independent investor perception audit, which we have found helpful in forward planning for the business.

Legislative developments

There has been much discussion and debate in the press regarding offshore investments, and recently the UK government has announced its proposals in respect of the Base Erosion and Profit Shifting (BEPS) project. Until detailed legislation is published it is unclear to what extent these proposals may impact the Group, and indeed the real estate industry generally. Along with our advisers, we are keeping this subject under close review.

We continue to assess the efficiency of the overall corporate structure and whether conversion to a UK REIT would benefit shareholders. However we believe the current structure remains appropriate, unless and until we are able to identify clear advantages in converting.

Outlook

The referendum on membership of the EU, held last week, has dominated the news for some time and caused considerable uncertainty in financial markets. The result, for the UK to leave the European Union, is bound to cause a further period of uncertainty, and more volatility in the markets. The full implications of this vote are difficult to predict, for both the UK economy generally and the commercial property market more specifically.

We have been cautious regarding the short term and have planned accordingly. Our recently announced revolving credit facility is one example of this.

Despite this, we believe that the portfolio is well positioned, with overweight positions to the better performing office and industrial sectors. Our occupancy rate is ahead of the market, we have a diversified and stable income flow, and a well covered dividend.

I am confident that the Company is in a good position to be able to navigate through these uncertain times.

Nicholas Thompson

Chairman
27 June 2016

Chief executive’s review

Over the past year, Picton has continued to deliver against its five strategic priorities and this is set out below.

Our overall performance was again strong for the year, with a total return of 17.9%. The net asset value increased by 12.7%, our EPRA earnings per share were up by 8.3% and our Ongoing Charges ratio fell again, to 1.1%. The return from the property portfolio was 14.3%, ahead of the MSCI IPD Quarterly Benchmark for the year. The portfolio has been reshaped following a combination of non-core asset disposals and new acquisitions. This has increased the average lot size by some 70% over the last four years.

As the Chairman has already mentioned in his statement, Picton has won a number of awards this year or been recognised for the results it has achieved. This is encouraging and reflects the efforts of our relatively small, but highly dedicated, team.

We are continuing to develop our ‘occupier focused, opportunity led’ approach, not only internally, but also with our service providers. I believe this has helped to deliver the achievements set out within the Investment Manager’s Report.

Growth of net income

A close relationship with our occupiers, advisers and the markets in which we are invested is key to growing net income.

Net property income has risen by more than £5 million this year primarily reflecting the larger portfolio and improved occupancy, but also as a result of our ability to capture emergent rental growth.  

Rental growth is no longer confined to the core areas within central London, and whilst this will not have an immediate impact on income until it is captured at lease expiry or at the next rent review, in the interim it is having a positive effect on valuations.

Working with our occupiers

Within our portfolio, occupancy continues to be above that recorded by the MSCI IPD Index. We have had considerable success increasing occupancy to 96% from 95% 12 months ago.

Key to this success has been our ability to attract new occupiers while retaining existing ones through our occupier focused approach. We have, over the course of the year, worked with numerous occupiers to help them ‘right size’ their businesses and I consider that this personal approach and attention to detail is key as we continue to manage our assets effectively and improve their attractiveness to occupiers.

We are intending to communicate more regularly with our occupiers and have during the year created a specific occupier focused section on our website.

We continue to work with CBRE, our day to day Property Manager, at improving service delivery and we have a number of further initiatives that we intend to roll out during the course of the next 12 months.

Operational efficiency

As the Group’s net assets have risen again this year, by over 12% to £417 million, the structure of our team means we have been able to absorb this growth while reducing the Company’s Ongoing Charges ratio, a measure of how efficiently the business is run, by 8% from 1.2% to 1.1%.

Portfolio and asset management

Following the progress made last year, our property performance continues to be ahead of the market and our ‘hands-on’ approach has contributed to this success. We have made selective disposals over the period, crystalised historic gains and captured the value created from our asset management activity. There has been a lot of portfolio level activity this year and a comprehensive update by sector is provided within the Investment Manager’s Report.

Effective use of debt

The use of debt has further enhanced returns this year, but our intention to continue to bring the level of gearing down and to be disciplined about the risk/return profile when using debt, remains paramount.

As we have seen valuation gains across the portfolio during the year, we have also experienced a positive effect from the level of gearing, with a property return of 14% giving rise to a total return of just under 18% for the year. We continue to be mindful of the need to manage gearing effectively and to reduce it in a structured and disciplined way as we progress through the cycle.

Our current level of gearing, a reduction from 48% two years ago, remains appropriate under the circumstances. However, as highlighted a year ago, we expect returns from UK commercial property to be lower than in the past couple of years and hence the risks associated with gearing are elevated. With that in mind our aim is to reduce gearing further, and our expectation is that future asset sales will help us achieve this. We believe the correct mid-cycle gearing for Picton is around 35%.

As we look forward, our new revolving credit facilities will provide us with a greater level of operational flexibility. Once the zero dividend preference shares have been repaid later this year we expect our finance costs to reduce, which will also have a positive effect on income profit and dividend cover.

Outlook

Without wishing to be complacent, I believe that with each successive year Picton continues to get better and stronger. We are building a sustainable and profitable business and are making good progress on many fronts, which is demonstrated by the strength of our results. For us, it is not always about extracting the last penny from every transaction, but also about building relationships with our occupiers that will add value over the long term.

Although we continue to be able to access opportunistic acquisitions, we have a team that has proven that it can create value through ownership, rather than simply acting as asset aggregators, with an ‘assets under management’ mentality.

We strive to have a positive impact in the markets in which we operate and I genuinely believe despite wider uncertainties caused by the EU referendum vote, we are well positioned to develop the business.

Michael Morris
Chief Executive, Picton Capital Limited
27 June 2016

Our marketplace

Economic backdrop

The past twelve months has been an extraordinary year of political and economic uncertainty, which has led to increased risk in global financial markets.

Global economic issues have included the slowdown in growth in China, the fall in oil prices, negative interest rates and deflation in Europe. In the last few days the UK’s decision to leave the European Union has added further volatility to financial markets.

UK Economy

At this early stage, the full impact of the changes to the UK's relationship with the rest of Europe is unclear, in particular how the UK economy, financial markets and trade might be affected. In the short term, until the terms of exit are finalised, there will be no immediate change to the UK’s trading position with the EU. 

The uncertainty surrounding the EU referendum and a weakening manufacturing sector caused a slow down in the first quarter of 2016 in particular. Based on preliminary estimates UK GDP grew by 2.1% in the year to March 2016 compared to 2.4% in the year to March 2015. 

The unemployment rate at the end of April 2016 was 5.0%, down from 5.5% a year ago and at its lowest level since 2005. There were 23 million people working full time at the end of April, 304,000 more than a year earlier. Average weekly earnings in the three months to April including bonuses rose by 2.0% compared to a year earlier.

Figures from the Office of National Statistics show that CPI inflation rose by 0.3% in the year to May 2016 which is relatively unchanged from 2015, but well below the Monetary Policy Committee’s target of 2.0%.

Against this backdrop, ten year gilt yields at the end of March 2016 stood at 1.5% compared to 1.7% at the end of March 2015. The Bank of England base rate has not changed over the course of the last twelve months and remains at 0.5%.

UK Property Market

The MSCI IPD Quarterly Index shows that total return for All Property in the year to March 2016 was 11.1%, comprising of 5.9% capital growth and 4.9% income return. In terms of total return, industrial and offices were the two best performing sectors delivering almost double the returns recorded for retail.

The MSCI IPD Quarterly Index shows yields have remained relatively stable in the year. However, an improving UK economy with a strengthening occupational market from growing employment levels and a low supply of available space has helped commercial property rents rise over the course of the last twelve months. Total return figures for the period showed income return making up a bigger component of total returns.

Capital growth has slowed, growing by 5.9% in the year to March 2016 compared to 11.2% in the year to March 2015. However, rents have increased over the same period, growing by 4.0% in the year to March 2016 compared to 3.2% in the year to March 2015.

The impact of the March 2016 budget and the resultant increase in stamp duty had a negative one on one off impact in March.  Since that date the MSCI IPD monthly index recorded positive, but slower, growth in both April and May.

The MSCI IPD Index recorded an occupancy rate of 91.4% in March 2016, relatively unchanged from 91.5% in March 2015. The highest occupancy was recorded for retail at 95.3% (March 2015: 94.4%) followed by industrial at 90.7% (March 2015: 92.3%)  and offices at 86.4% (March 2015: 86.5%).

According to Property Data, investment volumes over the year remained stable but slowed down in the first quarter of 2016, possibly a reflection of the EU referendum. Total investment in the year to March 2016 totalled £65.9 billion compared to £70.0 billion in the year to March 2015. Uncertainty surrounding the outcome of the referendum resulted in investment in the first quarter of 2016 falling by 26% to £13.8 billion, compared to the first quarter in the previous year.

Official figures from the Bank of England showed total outstanding debt to commercial property at the end of March stood at £151 billion.  At the end of March 2016, net new lending to property was £1.5 billion compared to -£1.3 billion in March 2015. Lending has improved since the previous year and since February 2016 has seen a significant uplift, however figures can be inconsistent month to month, and therefore should be viewed with caution.

Whilst we expect the impact of the EU referendum to result in lower economic growth, at least in the short term, this may be offset by looser monetary policy. The Bank of England has indicated that it will take additional measures as required to protect the economy.

It is too early to assess the impact of the decision in the EU referendum on future capital values. Looking at the UK commercial property market as a whole, on average capital values still remain some 20% lower than their peak in June 2007, and only markets in London have seen capital appreciation relative to that date. This means that in many markets a lack of development activity and limited supply should be supportive of current pricing.

Market Trends

Industrial market trends

Industrial total returns were 14.3% in the year to March 2016. Returns comprised 5.4% income return and 8.6% capital growth. Rental growth in the year was 4.5%.

The supply of floor space within the industrial sector has been low for several years, which, together with strong occupier demand and positive rental growth prospects, has led to increased speculative development.

Consensus forecasts suggest that the industrial sector is expected to outperform in the medium term.

Retail market trends

Retail total returns were 7.6% in the year to March 2016. Returns comprised 5.2% income return and 2.3% capital growth. Rental growth in the year was 1.4%.

Online retailing has caused a structural shift in how people shop, which has exacerbated the oversupply of retail. Whilst London markets and other destination locations have been less affected, the performance of retail over the year has varied by geography and retail segment. Standard Retail in London and the South East and retail warehouses have performed well.

Office market trends

Office total returns were 14.8% in the year to March 2016. Returns comprised 4.2% income return and 10.2% capital growth. Rental growth in the year was 7.8%.

In London, office rental growth has slowed, although it remains at a higher level than in regional markets. Across all key regional centres, take-up has increased over the year and at the end of 2015 was above its five year average. In 2015 regional take-up grew into the double digits for five of the six main key centres. Most notable was Manchester, which was the top performer in terms of take-up.

Looking ahead, regional office rents are at a lower base compared to London, which, together with improving rental growth from growing occupier demand, is likely to result in the sub-sector outperforming.

Investment manager’s report

Introduction

The asset management team have had another successful year. We have seen a strong occupational market, which has assisted us in completing 35 lettings, pushing up our occupancy level to 96%.

Numerous active management transactions have been undertaken and these have assisted us in again outperforming the MSCI IPD Quarterly Benchmark, on a total return basis, which we have done for the last one, three and ten years.

There has been significant activity in terms of reshaping the portfolio over the year. We have acquired three modern office buildings and a city centre retail warehouse asset, as well as adding a further building at our Angel Gate holding, investing in total £73 million after costs. All were acquired on favourable terms and offer potential for future income and capital growth, some of which has already occurred as a result of our active management. In addition, we have disposed of three non-core assets for total proceeds of £9.4 million after costs, following the completion of asset management initiatives.

Our portfolio now comprises 58 assets, with around 400 occupiers, it is valued at £655 million, and the average lot size has increased to £11.3 million. As a result of the new acquisitions, and rental growth in the portfolio, the passing rent has risen to £40.4 million, up from £34.6 million a year ago, with an estimated rental value of £47.6 million.

We have set out in the following sections the principal activity in each of the sectors in which we are invested. Looking ahead we will continue to be ‘opportunity led and occupier focused’ and look forward to unlocking further active management initiatives.

Portfolio overview

As at 31 March 2016, the portfolio generated a net initial yield of 5.6% after void costs, which in rental terms reflects a current passing rent of £40.4 million per annum.

The portfolio’s total return for the year to 31 March 2016 was 14.3%, which equates to a 300 basis points out-performance relative to the MSCI IPD Quarterly Benchmark. The Picton portfolio’s overweight exposure to City offices, South East offices and South East industrials, along with the effect of active management initiatives, has helped the portfolio .

The portfolio’s capital value for the year grew by 9%. Regional office values rose by 15%, with London offices growing by 19%. Industrial values grew by 9% and retail and leisure by 1%.

Overall, like-for-like growth in the portfolio’s estimated rental values was 5% during the year to March 2016. Estimated rental values in the office sector grew by 10% over the year, predominantly driven by growth in London of 20%. Industrial estimated rental values grew by 6% with retail and leisure declining by 1%.

We have had a good year for lettings, generating an additional £2.3 million of income after incentives, the overall rent being 3.8% ahead of the March 2015 estimated rental values. As predicted last year we were able to increase the occupancy rate which currently stands at 96%. Our aim is to continue to maintain occupancy at a high level across the portfolio.

The estimated rental value (ERV) of the void portfolio is £1.9 million per annum and 50% of our void property has only been vacant for under a year.

Income retained through lease renewals and re-gears totalled £2.9 million per annum after incentives, 2% ahead of the March 2015 estimated rental values.

We have continued our strategy of re-shaping the portfolio. As a result of three disposals and five acquisitions the number of properties in the portfolio is 58 and the average lot size has increased by 19% to £11.3 million.

Our sector and geographic weightings, as at 31 March 2016, were:

	Industrial (%)	Offices (%)	Retail & Leisure (%)	Total (%)
Central & Greater London	3.3	18.9	5.3	27.5
South East	20.1	11.2	0.8	32.1
Rest of UK	12.7	8.5	19.2	40.4
Total	36.1	38.6	25.3	100.0

Outlook for the coming year

The occupational market remains robust and we expect to maintain our high occupancy level, whilst capturing rental growth as supply remains limited. Whilst we have a shorter than average lease expiry profile, we see this as a positive in a rising market. On lettings and renewals, we are able to secure longer leases locking in higher rents and creating value.

A number of our current voids are under offer and over the next 12 months our two largest lease events are at 50 Farringdon Road in London, where we are seeing strong demand, and at 180 West George Street in Glasgow, where, as predicted on purchase, we have two floors coming back in November. Our refurbishment timetable at this property will mean the building is ready to let in early 2017, when we believe there will be little competing space in the market.

Market forecasts suggest the Rest of UK offices and industrial sub-sectors are likely to be better performers on an annualised basis between 2016 and 2020. Half of our office portfolio is located outside of London, while our industrial exposure is also higher than the MSCI IPD Quarterly Benchmark, at 36% compared to 19%.

Our retail and leisure assets account for 25.3% of the portfolio, compared to the MSCI IPD Quarterly Benchmark of 50.6%. The London retail sub-sector continues to be the top performer across all asset classes and our Stanford House asset in Covent Garden accounts for 21% of our total retail and leisure exposure. The retail asset rents have mostly been rebased and we see tentative signs of rental growth, predominantly in our retail warehouse assets, coming through in the next year.

Income has become a more significant component of total returns, accounting for 44% at the end of March 2016, compared to 31% in March 2015. Capital growth as a percentage of total returns fell to 53% in March 2016 from 65% in March 2015.

The focus is on continuing the strategy of de-risking income through active management and capturing rental growth. With high occupancy levels and good demand, we believe we are in a strong position to capitalise on this throughout the portfolio.

Top ten assets

The largest assets in the portfolio as at 31 March 2016, ranked by capital value, represent just over 46% of the total portfolio valuation and are detailed below.

Asset	Acquisition Date	Property Type	Tenure	Approximate Area (sq ft)	Occupancy Rate
Parkbury Industrial Estate, Radlett	March 2014	Industrial	Freehold	336,700	97%
River Way Industrial Estate, Harlow	December 2006	Industrial	Freehold	455,000	88%
Angel Gate, City Road, London EC1	October 2005	Office	Freehold	64,500	93%
Stanford House, Long Acre, London WC2	May 2010	Retail	Freehold	19,700	100%
Boundary House, Jewry Street, London EC3	May 2006	Office	Freehold	45,000	100%
50 Farringdon Road, London EC1	October 2005	Office	Leasehold	32,000	100%
Belkin Unit, Shipton Way, Rushden	July 2014	Industrial	Leasehold	312,850	100%
Pembroke Court, Chatham	June 2015	Office	Leasehold	86,300	100%
Phase II, Parc Tawe Retail Park, Swansea	October 2005	Retail Warehouse	Leasehold	116,700	100%
Queens Road, Sheffield	August 2015	Retail Warehouse	Freehold	103,000	100%

Top ten occupiers

The top ten occupiers, based as a percentage of contracted rent, as at 31 March 2016, are summarised as follows:

Occupier	Contracted Rent (£000)	%
Belkin Limited	1,690	4.0
DHL Supply Chain Limited	1,560	3.7
B&Q Plc	1,243	2.9
Snorkel Europe Limited	1,008	2.4
The Random House Group Limited	1,000	2.4
Cadence Design Systems Limited	972	2.3
Trainline.com Limited	835	2.0
Edward Stanford Limited	785	1.8
Portal Chatham LLP	707	1.7
XMA Limited	652	1.5
Total	10,452	24.7

Longevity of income

As at 31 March 2016, based as a percentage of contracted rent, the average length of the leases to the first termination was 5.9 years. This is summarised as follows:

Years	%
Up to 5	62.0
5 to 10	24.0
10 to 15	7.4
15 to 25	5.4
25 and over	1.2
Total	100

Retention rates

Total income at risk in the portfolio fell from £4.3 million in the year to March 2015 to £2.4 million in the year to March 2016, a 43% reduction. The portfolio retained 54% of total income at risk in the year to March 2016, this comprised of 52% retention for those on lease expiry and 68% after break options.

Income concentration

There is a wide diversity of occupiers within the portfolio, as set out below, which are compared to the MSCI IPD Quarterly Benchmark by contracted rent, as at 31 March 2016.

Industry Sector	Picton (%)	Benchmark (%)
Services	27.0	20.6
Retail Trade	23.7	35.9
Financial Services	13.6	15.5
Manufacturing	13.5	8.1
Transportation, Communications	11.2	5.8
Public Administration	3.8	3.6
Wholesale Trade	3.4	4.2
Construction	1.7	0.7
Mining	0.0	0.6
Undetermined/ ineligible/ unmatched	2.1	5.0
	100	100

Source: MSCI IPD IRIS Report March 2016

Industrial portfolio

	2016	2015
Value	£236.6 million	£217.7 million
Internal Area	2,745,200 sq ft	2,736,500 sq ft
Annual Rental Income	£14.4 million	£14.2 million
Estimated Rental Value	£16.8 million	£15.9 million
Occupancy	94.2%	96.5%
Number of Assets	18	18

Property	Area (sq ft)	Freehold/ Leasehold
Units A–G2, River Way Industrial Estate, Harlow, Essex	455,000	F
Parkbury Industrial Estate, Radlett, Herts.	336,700	F
Grantham Book Services, Trent Road, Grantham, Lincs.	336,100	L
Belkin Unit, 3 Shipton Way, Rushden, Northants.	312,850	F
Vigo 250, Birtley Road, Washington, Tyne and Wear	246,800	F
Unit 3220, Magna Park, Lutterworth, Leics.	160,900	L
Lawson Mardon Buildings, Kettlestring Lane, York	157,800	F
Units 1–13 Dencora Way, Sundon Park, Luton, Beds.	127,500	L
Haynes Way, Swift Valley Industrial Estate, Rugby, Warwickshire	101,800	L
The Business Centre, Molly Millars Lane, Wokingham, Berks.	100,500	F
Lyon Business Park, Barking, Essex	98,000	F
Easter Court, Gemini Park, Warrington	81,500	F
Abbey Business Park, Mill Road, Newtownabbey, Belfast	61,700	F
Datapoint Business Centre, Cody Road, London E16	54,800	L
Nonsuch Industrial Estate, 1–25 Kiln Lane, Epsom, Surrey	41,700	L
Western Industrial Estate, Downmill Road, Bracknell, Berks.	41,500	F
Manchester Road/Drury Lane, Oldham, Lancs.	16,400	F
Magnet Trade Centre, Winnersh, Reading	13,700	F

Largest occupiers	% of total portfolio
1.   Belkin Limited	4.0
2.   DHL Supply Chain Limited	3.7
3.   Snorkel Europe Limited	2.4
4.   The Random House Group Limited	2.4
5.   XMA Limited	1.5

Occupancy in the industrial portfolio is 94.2%, a slight decrease on last year, and in total we have nine units to let. Our largest void is the 50,000 sq ft unit D in Harlow, which is currently being refurbished and will be ready to let in the summer. We are seeing strong demand for this estate, demonstrated by the fact that we have three units coming back later this year, two of which are currently under offer before the existing leases have expired.

Our second largest industrial void is unit O at Lyon Business Park, Barking, which was surrendered in an active management transaction in January 2015. The unit was under offer to a good covenant last summer but due to the prospective tenant being unable to secure planning, the letting was aborted at a late stage. The unit is now under offer at a rent ahead of that agreed last year.

Activity across the industrial portfolio included the letting of eight units at a combined rent of £0.52 million per annum, the renewal of seven leases with a combined rent of £1.2 million per annum and the surrender of two leases to facilitate active management.

We have seen rental growth of 6% across the industrial portfolio and are experiencing demand across all of our estates.

Highlights of the year

At the Group’s largest holding at Parkbury, Radlett, we surrendered a 22,000 sq ft unit and the next month re-let the space (without refurbishment) to an existing occupier on a ten year lease (no break) for £220,000 per annum with six months rent free. The letting was 20% ahead of the previous passing rent and ERV. The transaction allowed our occupier to ‘right size’ their business by staying on the estate in line with our Picton occupier promise. Three rent reviews were settled increasing the annual rent roll by £62,000, 6% ahead of ERV. One lease was renewed for a further five years, increasing the previous passing rent by 5% to £104,000 per annum, which was 3% ahead of ERV. There is currently one vacant unit out of 24, which is being refurbished.

In Harlow, DHL committed to a new ten year lease at the largest unit on the estate, subject to break, at an initial rent of £0.62 million per annum. Three months rent free was granted and the initial rent is in line with ERV. In smaller transactions we have renewed the lease at unit F2 for a further five years at a rent of £68,000 per annum, 3.5% ahead of ERV and with a four month rent free period. The September 2016 break option at Unit F3, where the passing rent is £58,000 per annum, was removed in return for a capital contribution to a power upgrade equivalent to three months rent free. The September 2016 rent review remains open and we expect an uplift. The rent review at unit A, dated February 2015, was settled at £170,000 per annum, a 16% uplift on the previous passing rent and 6% ahead of ERV.

Over the coming year we have three units with an ERV of £0.58 million per annum coming back in Harlow due to tenant break options. Due to the strong occupier demand for this estate, two of the units are already under offer with the new leases commencing the day after the break date.

At our multi-let industrial estate, Datapoint in Bromley-by-Bow, we completed two rent reviews securing a combined uplift of £68,000 per annum. The overall uplift was 25% ahead of the previous passing rent and 21% ahead of ERV. At nearby Lyon Business Park in Barking two units have been let for a combined £75,000 per annum, 13% ahead of ERV. We have two units available, both of which are refurbished and under offer.

In Epsom, at Nonsuch Industrial Estate, assisting another occupier to ‘right size’, we surrendered a lease and subsequently re-let the unit for a ten-year term, without break, at a rent of £37,000 per annum with no incentive. The new rent equates to £16 per sq ft, which is 6% ahead of ERV and sets a new tone for the estate. A further lease was renewed for a further ten years without break, increasing the previous passing rent by 29% to £40,000 per annum, which was 14% ahead of ERV. Two rent reviews were settled increasing the annual rent roll by £17,000, 13% ahead of ERV. We have one remaining unit to let.

Following completion of the refurbishment of three units at Dencora Way in Luton, we have let them all for a combined £173,000 per annum, 5% ahead of ERV. In another transaction on the estate, we removed a tenant break clause securing £54,000 per annum for another five years, at a level 11% ahead of the current ERV. A rent review was also settled increasing the annual rent roll by £16,000, 10% ahead of ERV.

At Wokingham we renewed the lease of the second largest unit on the estate, with the occupier taking a ten year lease (subject to break) at £228,000 per annum rising to £255,000 in year three with three months rent free. The initial rent is 60% ahead of ERV and sets great evidence on the estate. A rent review was settled increasing the annual rent roll and was 28% ahead of ERV. We currently have two small units to let, one of which is under offer.

Sector outlook

The de-risking of income streams will continue and strong occupational demand means we can negotiate longer leases on renewal with little or no incentive as can be seen from the transactions described above. Looking forward, we expect to maintain the high occupancy rate and continue to capture the rental growth coming through on lettings and lease events on the back of the demand and reducing supply.

Office portfolio

	2016	2015
Value	£252.1 million	£173.4 million
Internal Area	999,400 sq ft	799,800 sq ft
Annual Rental Income	£14.8 million	£10.6 million
Estimated Rental Value	£19.9 million	£14.2 million
Occupancy	95.8%	93.1%
Number of Assets	21	20

Property	Area (sq ft)	Freehold/ Leasehold
Colchester Business Park, The Crescent, Colchester, Essex	150,700	L
Pembroke Court, Chatham, Kent	86,300	L
Longcross Court, Newport Road, Cardiff	72,900	F
Metro Building, Salford, Manchester	71,000	F
Angel Gate Office Village, City Road, London EC1	64,500	F
401 Grafton Gate East, Milton Keynes, Bucks.	57,100	F
180 West George Street, Glasgow	52,000	F
Queens House, 19/29 St Vincent Place, Glasgow	50,200	F
800 Pavilion Drive, Northampton Business Park, Northampton	49,400	F
Citylink, Addiscombe Road, Croydon	48,200	F
Boundary House, Jewry Street, London EC3	45,000	F
L’Avenir, Opladen Way, Westwick, Bracknell, Berks.	41,300	F
Sentinel House, Ancells Business Park, Fleet, Hants.	33,600	F
50 Farringdon Road, London EC1	32,000	L
Waterside Park, Longshot Lane, Bracknell, Berks.	30,200	F
Waterside House, Kirkstall Road, Leeds	25,200	F
Atlas House, Third Avenue, Globe Park, Marlow, Bucks.	24,800	F
Merchants House, Crook Street, Chester	22,200	F
Trident House, 42/48 Victoria Street, St Albans, Herts.	18,900	F
1–3 Chancery Lane, London WC2	15,100	F
Marshall Building,122–124 Donegall Street, Belfast	8,700	F

Largest occupiers	% of total portfolio
1.   Cadence Design Systems Limited	2.3
2.   Trainline.com Limited	2.0
3.   Portal Chatham LLP	1.7
4.   Ricoh UK Limited	1.5
5.   BPP Holdings Limited	1.2

Occupancy in the office portfolio is 95.8%, 2.7% ahead of last year. Our largest void is an office suite in St. Albans, which is under offer, and the second largest is at Longcross Court in Cardiff where we have four suites to let, one of which is under offer. The Cardiff market has been challenging and we are pleased to see renewed occupational activity at this asset.

We let 24 suites at a combined rent of £1.5 million per annum, in line with ERV, renewed five leases with a combined rent of £344,000 per annum, 11% ahead of ERV, and surrendered six leases to facilitate active management.

The most significant activity included the acquisition of three modern office buildings for a combined price of £51 million, which are currently valued at £54 million. This growth in capital value is attributable to the early active management at Chatham and Glasgow, which is highlighted below.

We have seen total rental growth of 9.1% across the office portfolio.

Highlights of the year

Two office buildings in Chatham, Kent were acquired for £19.05 million in June 2015, reflecting a net initial yield of 8.62%. 30 and 50 Pembroke Court comprise two attractive and well specified modern buildings of 35,000 sq ft and 51,000 sq ft respectively. They are prominently positioned on an established business park located in the Chatham Maritime office district, 35 miles south east of central London. On purchase, the average weighted lease length to the earliest termination was 2.9 years. Since purchase we have completed a lease regear at one of the buildings, extending the income of £0.6 million per annum (subject to review in 2018) by a further ten years to 2028, in return for a short rent free period. Following this, we also regeared another occupier’s lease, securing a ten year term at an initial rent of £0.71 million, with 2.5% per annum compound increases for the length of the lease. No incentive was given and the initial rent is 6% ahead of ERV. We have now regeared 80% of the income from this property since acquisition and the average weighted lease length to the earliest termination is now 9.5 years.

We acquired a modern office building in Glasgow for £14.25 million in August, reflecting a net initial yield of 7.8%. 180 West George Street was constructed in 2000 and provides 52,000 sq ft of office accommodation over basement, ground and six upper floors and is located on a prime street in the heart of Glasgow's central business district. It is fully let and produces a net annual rental income of £1.18 million, equivalent to an average rent of under £23 per sq ft. Occupiers include TSB Bank, Standard Life and Michael Page and the weighted average unexpired lease term is 1.7 years. We have agreed to regear the lease of a floor, setting new evidence at £26 per sq ft, which is in line with our assumptions on purchase. Space is coming back at this property in November, as predicted on purchase, and the building is going to be fully refurbished in order to launch a Grade A product in early 2017, which we believe will be good timing due to a lack of competing space.

Metro, Trafford Road, Salford Quays, was acquired in February. The building is approximately two miles west of Manchester city centre and close to the BBC’s home at Media City. Constructed in 2008, it comprises a 71,000 sq ft office building with a BREEAM “Excellent” rating and 228 car spaces. The location, next to the Exchange Quay tram link, provides excellent connectivity to the surrounding area. The property was acquired for £17.6 million and is fully let to four tenants producing £1.15 million per annum, reflecting a net initial yield of 6.2%, rising to 8.3% in April 2017, with an average lease length of 8.3 years to expiry (5.6 years to break). It is let off a low average rent of £21.50 per sq ft, including the car parking spaces.

Continuing our ongoing consolidation strategy at Angel Gate, London EC1, the long leasehold interest at Unit 12 was acquired for £1.1 million, reflecting approximately £350 per sq ft. The unit comprises a 3,200 sq ft self-contained office which was approximately 70% occupied. The passing rent was £46,000 per annum on purchase and we have already leased the vacant space, which increased income by £24,000 per annum, effectively increasing the running yield to 6.0% on the purchase price, with a reversionary yield of 8.1%.

Also at Angel Gate, we have continued our rolling refurbishment program which has resulted in four lettings adding £466,000 per annum, 23% ahead of ERV. We have regeared a lease, securing a minimum five-year term on an unrefurbished property at £132,000 per annum, which is 9% ahead of ERV and 62% ahead of the previous passing rent. We continue to see strong demand for this scheme and have one vacant building to let where the refurbishment has just completed; it is under offer.

In terms of disposals, the sale of non-income producing land at Westlea in Swindon was completed during the year, as the final conditions following planning consent were satisfied, enabling a 15,000 sq ft foodstore and up to 70 residential units on the site. The 1.6 acre retail element of the site was sold to Aldi for £1.65 million and the remaining 4.4 acres were sold to a national housebuilder for £3.12 million. The sale of College Place, Southampton was completed for £1.5 million. The sale of this mixed use property follows the leasing of the ground floor unit at a rent of £50,000 per annum, 39% ahead of the preceding ERV. The sale price was 11% ahead of the preceding valuation.

In St. Albans we surrendered an office suite where the occupier was paying £173,000 per annum (£24.50 per sq ft). The floor is being refurbished and we have entered into an Agreement for Lease on half the space at a rent of £93,000 per annum (£28.50 per sq ft) and have strong interest in the rest of the space. During the year we also surrendered an occupier’s lease with a year to break and re-let the suite for a term of five years at £44,000 per annum, 10% ahead of both ERV and the previous passing rent.

In Fleet, the leasing transaction of 33,000 sq ft completed to a serviced office occupier, following refurbishment works undertaken by Picton, at a stepped rent rising to £400,000 per annum, plus a top up reflecting occupancy within the building. Due to the stepped rent incentive, the letting was 42% below ERV, taking the average of the rent over the first five years of the lease; however, a minimal rent free period was granted.

At Building 100, Colchester Business Park, we renewed the lease for a further ten years, subject to break, at a rent of £200,000 per annum with three months rent free. The rent is 19% ahead of ERV. There are currently three vacant offices available, one of which came back at the end of March and the other two are under offer.

Elsewhere we are pleased to confirm the following properties are now fully let:

• Citylink, Croydon where an occupier took a seven year lease, subject to break, at £104,000 per annum (10% ahead of ERV)
• 401 Grafton Gate, Milton Keynes where we let 6,500 sq ft on a ten year lease, subject to break, at £114,000 per annum (6% ahead of ERV)
• Queens House, Glasgow where six suites were let for a combined £100,000 (18% ahead of ERV)

At 50 Farringdon Road we are getting two floors back in the summer, following an occupier break option. The current passing rent is £0.84 million per annum and the occupier had a capped rent review at £1.14 million per annum (£45 per sq ft) and would have received six months rent free after the break date. The building was comprehensively refurbished five years ago and we are seeing strong demand for this mid-town location adjacent to Farringdon Station. We expect to let the space quickly for £1.4 million per annum (£55 per sq ft) with minimal expenditure.

Sector outlook

Our central London portfolio remains almost fully let, with the only void at Angel Gate, which is under offer. The floors at Farringdon Road are coming back this summer, but the building presents well and we already have interest. The regional portfolio is seeing growth in occupier demand, demonstrated by our experience in St. Albans, translating into rental growth in markets where good quality space is becoming scarce. The only other notable voids on the horizon are in a number of south east offices, but a combination of reducing supply and the advantages of attractive higher value uses are likely to create opportunities rather than be seen as a short term risk.

Retail and leisure portfolio

	2016	2015
Value	£165.9 million	£149.7 million
Internal Area	830,700 sq ft	732,300 sq ft
Annual Rental Income	£11.2 million	£9.8 million
Estimated Rental Value	£10.9 million	£9.9 million
Occupancy	99.4%	96.1%
Number of Assets	19	19
Property	Area (sq ft)	Freehold/ Leasehold
Parc Tawe, Phase II, Link Road, Swansea	116,700	L
Gloucester Retail Park, Eastern Avenue, Gloucester	112,400	F
Queens Road, Sheffield	103,000	F
62/68 Bridge Street, Peterborough	88,700	F
Strathmore Hotel, Arndale Centre, Luton, Beds.	81,600	L
Angouleme Way Retail Park, Bury, Greater Manchester	76,200	F/L
17/19 Fishergate, Preston, Lancs.	59,900	F
Regency Wharf, Broad Street, Birmingham	44,300	L
Scots Corner, High Street/Institute Road, Birmingham	30,000	F
56 Castle Street, 2/12 English Street and 12–21 St Cuthberts Lane, Carlisle, Cumbria	23,900	F
Stanford House, 12–14 Long Acre, London WC2	19,600	F
6/12 Parliament Row, Hanley, Staffs.	17,300	F
Units 1–3, 18/28 Victoria Lane, Huddersfield, West Yorks.	14,600	L
53/55/57 Broadmead, Bristol	10,500	L
72/78 Murraygate, Dundee	9,700	F
7 & 9 Warren Street, Stockport	8,700	F
78–80 Briggate, Leeds	7,700	F
2 Bath Street, Bath	4,700	F
6 Argyle Street, Bath	1,200	F

Largest occupiers	% of total portfolio
1.   B&Q Plc	2.9
Edward Stanford Limited	1.8
3.   Asda Stores Limited	1.4
4.   GLH Hotels Limited	1.2
5.   Homebase Limited	1.0

Occupancy in the retail and leisure portfolio is 99.4%, a 3.3% increase on last year. We have three small shops available in Birmingham, Carlisle and Hanley with a combined ERV of £60,000 per annum.

Three units were let during the year for a combined income of £227,500 per annum (after incentives), 2% ahead of ERV.

We have seen negative rental growth of 1% across the retail and leisure portfolio, reflecting trading conditions in this sector.

Highlights of the year

We acquired a freehold retail warehouse in Sheffield for £17.7 million, reflecting a net initial yield of 6.6%. The property is well located close to Sheffield city centre, in an established retail warehouse location and adjacent to Queens Road Retail Park. It was built in 2002 on a nine acre site, comprising a 103,000 sq ft retail warehouse with a 40,000 sq ft outdoor garden centre, builders’ yard and 460 space car park. The property is leased to B&Q Plc for a further 11.8 years at an annual rent of £1.24 million, which equates to a low overall rent of approximately £12 per sq ft and is subject to review in December 2017.

A non-core high street retail unit in Guildford was sold for £3.25 million, reflecting a net initial yield of 4.3%. The unit is leased to L’Oreal (UK) Limited, trading as Kiehl’s, for a further 4.8 years at an annual passing rent of £148,000. This price reflects a 9.2% premium to the preceding valuation and a 30% uplift from the 2010 acquisition price.

At Gloucester Retail Park, acquired in March 2015, we have secured planning under an Agreement for Lease with Pure Gym who are, in a back to back transaction, taking the Carpetright unit on a ten year lease at a rent of £140,000 per annum, 32% ahead of ERV. The surrender premium from Carpetright is covering the works to the unit and the letting sets new evidence on the park. In a separate transaction, we await planning for a drive through in the car park which is under offer to a Starbuck’s franchisee. Both lettings improve the tenant mix on the park and will drive footfall.

Following a wider repositioning exercise at Regency Wharf, Birmingham, two lettings have completed, achieving 100% occupancy. We leased the ground floor unit to Karaoke Box at a rent of £80,000 per annum and the third floor unit to Rub Smokehouse, at a rent of £70,000 per annum, both of which were in line with the preceding ERV.

We have partly settled the legal dispute in respect of the Strathmore Hotel in Luton, but are still pursuing another interested party, seeking a final settlement in respect of this issue within the next financial year.

At our former industrial holding in Oldham, which was vacant, we have entered into an Agreement to Purchase an adjoining plot of land from the Council for £80,000 to increase the car parking provision, entered into an Agreement for Lease with The Gym Limited and secured planning for a change of use. The lease completes in the early summer following works to the unit and The Gym Limited is taking a 15 year lease at £150,000 per annum. The rent secured is 52% ahead of the former ERV.

Sector outlook

The portfolio remains very well let and we expect to maintain these high occupancy levels. Rents have been rebased across the majority of the assets and we are beginning to see pockets of rental growth such as at Gloucester.

Financial review

2016 was another year of strong financial results for Picton. The total profit of nearly £65 million pushed net assets to over £417 million, an increase of over 12%. Taking into account the increased dividend paid out this year, our total return was close to 18%. Our average annual return over the last three years is more than 22%, providing evidence of the continued success of our strategy. We have strengthened the portfolio through a number of notable acquisitions, investing more than £73 million in new assets, and a further £4 million in existing assets.

As a result of this investment, we have been able to grow the income profit by 30% to nearly £20 million.

Our growth in net assets has produced further economies of scale, resulting in another fall in the Ongoing Charges ratio, down 8% compared to last year, to 1.1%.

Net asset value

The net assets of the Group rose over the year by 12.7%, to £417.1 million, driven by a total profit for the year of £64.8 million, or earnings per share of 12 pence. The EPRA net asset value rose from 69 pence to 77 pence.

The following table reconciles the net asset value calculated in accordance with International Financial Reporting Standards (IFRS) with that of the European Public Real Estate Association (EPRA).

	2016 £m	2015 £m	2014 £m
Net asset value – EPRA and IFRS	417.1	370.0	214.1
Fair value of debt	(21.8)	(19.8)	17.8
EPRA Triple Net Asset Value	395.3	350.2	231.9
Net Asset Value per share (pence)	77	69	56
EPRA Net Asset Value per share (pence)	77	69	56
EPRA Triple Net Asset Value per share (pence)	73	65	61

Income statement

Total revenue from the property portfolio was £45.9 million, an increase of 15.8% over 2015. This reflects the additional income generated from the new assets acquired in the year. Net property income, after deducting the direct expenses associated with the portfolio, was up over 18% to £35.9 million.

Operating expenses increased to £4.4 million, partly due to the impact of the market testing of staff salary rates in early 2015, but also some additional corporate level costs.

Financing costs are broadly in line with previous years, given the fixed interest rates in place on the majority of the Group’s borrowings, but with some extra costs associated with the new revolving credit facility and the zero dividend preference shares. The repayment of the ZDPs is discussed further below.

Capital gains on the portfolio were £45 million for the year, as detailed further under the Investment Properties section.

The Group is subject to UK tax on its net property income and management fees, in total £0.2 million for the year. We are monitoring the UK government’s BEPS proposals closely, and the implications for the Group if these are implemented as currently drafted, however at this stage it is too early to provide a definitive response.

The income profit for the year was £19.9 million, an increase of 30% from 2015. This, together with the capital gains, resulted in a total profit for the year of £64.8 million.

Dividends

We paid four quarterly dividends of 0.825 pence per share, totalling 3.3 pence for the year, an increase of 10% over 2015. As a result of the increase, dividend cover has fallen back to 112% for the year, but we consider this to be an appropriate level, given that a full year’s impact of the new acquisitions has yet to come through in the results. The Board will continue to monitor the level of dividends.

Investment properties

The fair value of our investment property portfolio increased to £646.0 million at 31 March 2016, up from £532.9 million in March 2015. Included within this uplift are acquisitions of £73.1 million, which are detailed in the Investment Manager’s Report, and capital expenditure across the existing portfolio of £4.4 million, enhancing the quality of the assets and space available. Three small non-core assets were disposed of, for proceeds of £9.4 million, realising £0.8 million when compared to the 2015 valuation. The overall revaluation gain was £44.2 million, representing a 9.2% like-for-like increase in the valuation of the portfolio. At 31 March 2016 the portfolio comprised 58 assets, with an average lot size of £11.3 million.

Borrowings

Total borrowings increased to £249.5 million at 31 March 2016, largely due to the draw down under the revolving credit facility to help fund the acquisition of the Salford Quays asset. Our senior loan facilities with Canada Life and Aviva remained in place, reduced only by the amortisation of the Aviva facility (£1.0 million in the year). The Group remained fully compliant with the loan covenants throughout the year.

Our 22 million zero dividend preference shares continued to roll up additional capital at an annual rate of 7.25%, £1.9 million over the year. These shares mature this year in October 2016, and it is our intention to repay them in full. With current market interest rates considerably lower than the effective ZDP rate, we expect to make a significant saving on finance costs in the future, if the current level of borrowing is maintained.

In February 2016 we made our first draw down under the Santander revolving credit facility, for £15.8 million. This facility is set at a floating rate of interest, 175 basis points above 3 month LIBOR. There remains a further £10.2 million undrawn under this facility.

We have now recently agreed a new five year revolving credit facility with Santander for £27 million, on broadly the same terms as the existing facility. In addition to potentially utilising this for the ZDP repayment, it also provides us additional financing for the future at a time when capital raising may be more constrained.

The Group’s loan to value ratio increased to 34.6% at 31 March 2016, as was expected, compared to 2015, when the Group held higher cash balances following the equity raise in the year.

The fair value of our borrowings at 31 March 2016 was £271.3 million, higher than the book amount, due to the current very low gilt rates and lower margins in the lending market.

A summary of our borrowings is set out below:

	2016	2015	2014
Total borrowings (£m)	249.5	232.8	234.0
Borrowings net of cash (£m)	226.8	162.8	201.7
Undrawn facilities (£m)	10.2	26.0	–
Loan to value ratio (%)	34.6	30.1	47.7
Weighted average interest rate (%)	4.4	4.6	4.5
Average duration (years)	10.7	12.4	13.4

Capital structure

Our equity balance remained unchanged over the year, as, along with the real estate sector generally, our share price moved to a discount to net asset value.

The Group’s net gearing ratio, using the method prescribed by the AIC, increased to 59.2%, from 48.9% a year ago.

Cash flow and liquidity

Our cash balances fell to £22.8 million at the year end, which represents a more normal position compared to 2015. Operating activities generated £24.0 million for the year, an increase from £15.6 million last year.

Andrew Dewhirst
Finance Director, Picton Capital Limited
27 June 2016

Directors’ responsibility statement in respect of the annual report and financial statements

The Directors confirm that to the best of their knowledge and belief the report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary to assess the Company’s performance, business model and strategy.

Directors’ responsibility statement under the disclosure and transparency rules 4.1.12

The Directors confirm to the best of their knowledge and belief:

·          the financial statements, prepared in accordance with International Financial Reporting Standards, as issued by the IASB, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

·          the Strategic Report includes a fair review of development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

By Order of the Board

Robert Sinclair
27 June 2016

Consolidated statement of comprehensive income

For the year ended 31 March 2016

	Notes	Income £000	Capital £000	2016 Total £000	2015 Total £000
Income
Revenue from properties	3	45,923	-	45,923	39,662
Property expenses	4	(10,001)	-	(10,001)	(9,320)
Net property income		35,922	-	35,922	30,342
Expenses
Management expenses	6	(2,901)	-	(2,901)	(2,591)
Other operating expenses	8	(1,510)	-	(1,510)	(1,194)
Total operating expenses		(4,411)	-	(4,411)	(3,785)
Operating profit before movement on investments		31,511	-	31,511	26,557
Investments
Profit on disposal of investment properties	14	-	799	799	412
Investment property valuation movements	14	-	44,171	44,171	53,163
Total profit on investments		-	44,970	44,970	53,575
Operating profit		31,511	44,970	76,481	80,132
Financing
Interest received		144	-	144	184
Interest paid	9	(11,561)	-	(11,561)	(11,114)
Total finance costs		(11,417)	-	(11,417)	(10,930)
Profit before tax		20,094	44,970	65,064	69,202
Tax	10	(216)	-	(216)	(347)
Total comprehensive income		19,878	44,970	64,848	68,855
Earnings per share
Basic and diluted	12	3.7p	8.3p	12.0p	15.4p

The total column of this statement represents the Group’s Consolidated Statement of Comprehensive Income. The supplementary income return and capital return columns are prepared under guidance published by the Association of Investment Companies. All items in the above statement derive from continuing operations.

All of the profit and total comprehensive income for the year is attributable to the equity holders of the Company.

Notes 1 to 27 form part of these consolidated financial statements.

Consolidated statement of changes in equity

For the year ended 31 March 2016

	Notes	Share Capital £000	Retained Earnings £000	Total £000
Balance as at 31 March 2014		57,192	156,904	214,096
Issue of ordinary shares		102,176	-	102,176
Issue costs of shares		(2,055)	-	(2,055)
Profit for the year		-	68,855	68,855
Dividends paid	11	-	(13,102)	(13,102)
Balance as at 31 March 2015		157,313	212,657	369,970
Issue costs of shares	20	136	-	136
Profit for the year		-	64,848	64,848
Dividends paid	11	-	(17,822)	(17,822)
Balance as at 31 March 2016		157,449	259,683	417,132

Notes 1 to 27 form part of these consolidated financial statements.

Consolidated balance sheet

As at 31 March 2016

	Notes	2016 £000	2015 £000
Non-current assets
Investment properties	14	646,018	532,926
Tangible assets		57	101
Accounts receivable	15	3,331	3,871
Total non-current assets		649,406	536,898
Current assets
Accounts receivable	15	14,649	14,019
Cash and cash equivalents	16	22,759	70,092
Total current assets		37,408	84,111
Total assets		686,814	621,009
Current liabilities
Accounts payable and accruals	17	(18,321)	(16,365)
Loans and borrowings	18	(29,091)	(1,012)
Obligations under finance leases	22	(109)	(103)
Total current liabilities		(47,521)	(17,480)
Non-current liabilities
Loans and borrowings	18	(220,444)	(231,834)
Obligations under finance leases	22	(1,717)	(1,725)
Total non-current liabilities		(222,161)	(233,559)
Total liabilities		(269,682)	(251,039)
Net assets		417,132	369,970
Equity
Share capital	20	157,449	157,313
Retained earnings		259,683	212,657
Total equity		417,132	369,970
Net asset value per share	23	77p	69p

These consolidated financial statements were approved by the Board of Directors on 27 June 2016 and signed on its behalf by:

Robert Sinclair
Director
27 June 2016

Notes 1 to 27 form part of these consolidated financial statements.

Consolidated statement of cash flows

For the year ended 31 March 2016

	Notes	2016 £000	2015 £000
Operating activities
Operating profit		76,481	80,132
Adjustments for non-cash items	21	(43,198)	(55,427)
Interest received		144	184
Interest paid		(8,980)	(8,879)
Tax paid		(426)	(369)
Cash inflows from operating activities		24,021	15,641
Investing activities
Capital expenditure on investment properties	14	(4,403)	(4,070)
Acquisition of investment properties	14	(73,084)	(62,059)
Disposal of investment properties	14	9,365	4,410
Purchase of tangible assets		(1)	(10)
Cash outflows from investing activities		(68,123)	(61,729)
Financing activities
Issue of ordinary shares		-	102,176
Issue costs of ordinary shares		-	(2,055)
Borrowings repaid		(1,011)	(2,936)
Borrowings drawn		15,800	-
Financing costs		(198)	(255)
Dividends paid	11	(17,822)	(13,102)
Cash (outflows)/ inflows from financing activities		(3,231)	83,828
Net (decrease)/ increase in cash and cash equivalents		(47,333)	37,740
Cash and cash equivalents at beginning of year		70,092	32,352
Cash and cash equivalents at end of year	16	22,759	70,092

Notes 1 to 27 form part of these consolidated financial statements.

Notes to the consolidated financial statements

For the year ended 31 March 2016

1. General information

Picton Property Income Limited (the “Company” and together with its subsidiaries the “Group”) was registered on 15 September 2005 as a closed ended Guernsey investment company. The consolidated financial statements are prepared for the year ended 31 March 2016 with comparatives for the year ended 31 March 2015.

2. Significant accounting policies

Basis of accounting

The financial statements have been prepared on a going concern basis and adopt the historical cost basis, except for the revaluation of investment properties. Historical cost is generally based on the fair value of the consideration given in exchange for the assets. The financial statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by IASB and are in compliance with the Companies (Guernsey) Law, 2008.

The Board is satisfied that the Group has sufficient financial resources available to it to meet the liability arising from the maturity of the zero dividend preference shares in October 2016. The Directors therefore have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future and continue to adopt the going concern basis in preparing the financial statements.

The financial statements are presented in pounds sterling, which is the Company’s functional currency. All financial information presented in pounds sterling has been rounded to the nearest thousand, except when otherwise indicated.

New or amended standards issued

The accounting policies adopted are consistent with those of the previous financial period, as amended to reflect the adoption of new standards, amendments and interpretations which became effective in the year as shown below.

•     Annual Improvements to IFRSs (2010-2012 Cycle)

•     Annual Improvements to IFRSs (2011-2013 Cycle)

•     IAS 19 Employee Benefits – Defined Benefit Plans: Employee Contribution

At the date of approval of these financial statements, the following standards and interpretations were in issue but not yet effective for the financial year ended 31 March 2016 and have not been adopted early:

•     IFRS 9: Financial Instruments

•     Amendments to IFRS 11: Accounting for Acquisitions of Interests in Joint Operations

•     IFRS 16: Leases

•     Amendments to IAS 1: Disclosure Initiative

•     Amendments to IAS 16: Property Plant and Equipment

•     Amendments to IAS 27: Equity Method in Separate Financial Statements

•     Amendments to IAS 28: Investments in Associates and joint Ventures

•     Amendments to IAS 38: Intangible Assets

•     Amendments to IAS 41: Agriculture

•     Annual Improvements to IFRSs (2014)

The Directors are in the process of assessing the full impact of the standards listed above but do not expect them to have a material impact on the Group’s financial statements in the year of initial application, other than on presentation and disclosure.

Use of estimates and judgements

The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making estimates about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis.

The critical estimate and assumption relate to the investment property valuations applied by the Group’s independent valuer and this is described in more detail in Note 14. Revisions to accounting estimates are recognised in the year in which the estimate is revised, if the revision affects only that year, or in the year of the revision and future years, if the revision affects both current and future years.

Critical judgements, where made, are disclosed within the relevant section of the financial statements in which such judgements have been applied. Key judgements relate to the treatment of business combinations, lease classifications, or employee benefits where different accounting policies could be applied. These are described in more detail in the accounting policy notes below, or in the relevant notes to the financial statements.

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company at the reporting date. The Group controls an entity when it is exposed to, or has right to, variable returns from its involvement with the entity and has the ability to affect these returns through its power over the entity.

Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. These financial statements include the results of the subsidiaries disclosed in Note 13. All intra-group transactions, balances, income and expenses are eliminated on consolidation.

Business combinations

The Group acquires subsidiaries that own real estate. At the time of acquisition, the Group considers whether the acquisition represents the acquisition of a business. The Group accounts for an acquisition as a business combination where an integrated set of activities is acquired in addition to the property. More specifically, the following criteria are considered:

•     The number of items of land and buildings owned by the subsidiary;

•     The extent to which significant processes are acquired and in particular the extent of ancillary services provided by the subsidiary; and

•     Whether the subsidiary has allocated its own staff to manage the property and/or to deploy any processes, including provision of all relevant administration and information to the entity’s owners.

When the acquisition of subsidiaries does not represent a business, it is accounted for as an acquisition of a group of assets and liabilities.

Goodwill on business combinations is measured as the fair value of the consideration transferred less the net recognised amount (fair value) of the identifiable assets acquired and liabilities assumed, all measured as of the acquisition date. When the excess is negative, this is recognised immediately in the Consolidated Statement of Comprehensive Income.

Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred.

Presentation of the Consolidated Statement of Comprehensive Income

In order to better reflect the activities of an investment company and in accordance with guidance issued by the AIC, supplementary information which analyses the Consolidated Statement of Comprehensive Income between items of a revenue and capital nature has been presented alongside the Consolidated Statement of Comprehensive Income.

Fair value hierarchy

The fair value measurement for the assets and liabilities are categorised into different levels in the fair value hierarchy based on the inputs to valuation techniques used. The different levels have been defined as follows:

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities that the Group can access at the measurement date.

Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3: unobservable inputs for the asset or liability.

The Group recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the transfer has occurred.

Investment properties

Freehold property held by the Group to earn income or for capital appreciation or both is classified as investment property in accordance with IAS 40 ‘Investment Property’. Property held under finance leases for similar purposes is also classified as investment property. Investment property is initially recognised at purchase cost plus directly attributable acquisition expenses. The fair value of investment property is based on a valuation by an independent valuer who holds a recognised and relevant professional qualification and who has recent experience in the location and category of the investment property being valued.

The fair value of investment properties is measured based on each property’s highest and best use from a market participant’s perspective and considers the potential uses of the property that are physically possible, legally permissible and financially feasible. The Group ensures the use of suitable qualified external valuers valuing the investment properties held by the Group.

The fair value of investment property generally involves consideration of:

•     Market evidence on comparable transactions for similar properties;

•     The actual current market for that type of property in that type of location at the reporting date and current market expectations;

•     Rental income from leases and market expectations regarding possible future lease terms;

•     Hypothetical sellers and buyers, who are reasonably informed about the current market and who are motivated, but not compelled, to transact in that market on an arm’s length basis; and

•     Investor expectations on matters such as future enhancement of rental income or market conditions.

Gains and losses arising from changes in fair value are included in the Statement of Comprehensive Income in the year in which they arise. Purchases and sales of investment property are recognised when contracts have been unconditionally exchanged and the significant risks and rewards of ownership have been transferred.

An item of investment property is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the Consolidated Statement of Comprehensive Income in the year the item is derecognised. Investment properties are not depreciated.

Realised and unrealised gains on investment properties have been presented as capital items within the Consolidated Statement of Comprehensive Income.

The loans have a first ranking mortgage over the majority of properties, see Note 14.

Leases

Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalised at the inception of the lease at the fair value of the leased property or, if lower, the present value of the minimum lease payments. Lease payments are apportioned between finance charges and a reduction of the lease liability to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to the Consolidated Statement of Comprehensive Income.

An operating lease is a lease other than a finance lease. Lease income is recognised in income on a straight-line basis over the lease term. Direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised as an expense over the lease term on the same basis as the lease income. The financial statements reflect the requirements of SIC 15, ‘Operating Leases – Incentives’ to the extent that they are material. Premiums received on the surrender of leases are recorded as income immediately if there are no relevant conditions attached to the surrender.

Cash and cash equivalents

Cash includes cash in hand and cash with banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities in three months or less and that are subject to an insignificant risk of change in value.

Income and expenses

Income and expenses are included in the Consolidated Statement of Comprehensive Income on an accruals basis. All of the Group’s income and expenses are derived from continuing operations.

Revenue is recognised to the extent that it is probable that the economic benefit will flow to the Group and the revenue can be reliably measured.

Lease incentive payments are amortised on a straight-line basis over the period from the date of lease inception to the lease end. Upon receipt of a surrender premium for the early termination of a lease, the profit, net of dilapidations and non-recoverable outgoings relating to the lease concerned, is immediately reflected in revenue from properties.

Property operating costs include the costs of professional fees on letting and other non-recoverable costs.

The income charged to occupiers for property service charges and the costs associated with such service charges are shown separately in Notes 3 and 4 to reflect that, notwithstanding this money is held on behalf of occupiers, the ultimate risk for paying and recovering these costs rests with the property owner.

Employee benefits

Defined contribution plans

A defined contribution plan is a post-employment benefit plan under which the Company pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans are recognised as an expense in the Consolidated Statement of Comprehensive Income in the periods during which services are rendered by employees.

Short-term benefits

Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided.  A liability is recognised for the amount expected to be paid under short-term cash bonus or profit-sharing plans if the Company has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

Share-based payments

The fair value of the amounts payable to employees in respect of the Deferred Bonus Scheme, which are settled in cash, is recognised as an expense with a corresponding increase in liabilities, over the period that the employees become unconditionally entitled to payment. The liability is re-measured at each reporting date and at settlement date. Any changes in the fair value of the liability are recognised as staff costs in the Consolidated Statement of Comprehensive Income.

Dividends

Dividends are recognised in the period in which they are declared.

Trade receivables

Trade receivables are stated at their nominal amount as reduced by appropriate allowances for estimated irrecoverable amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when identified.

Loans and borrowings

All loans and borrowings are initially recognised at cost, being the fair value of the consideration received net of issue costs associated with the borrowing. After initial recognition, loans and borrowings are subsequently measured at amortised cost using the effective interest method. Amortised cost is calculated by taking into account any issue costs, and any discount or premium on settlement. Gains and losses are recognised in the Consolidated Statement of Comprehensive Income when the liabilities are derecognised, as well as through the amortisation process.

Other assets and liabilities

Other assets and liabilities, including trade creditors and accruals, other debtors and creditors, and deferred rental income, are not interest bearing and are stated at their nominal value.

Share capital

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity.

Taxation

The Directors conduct the affairs of the Group such that the management and control of the Group is not exercised in the United Kingdom and that the Group does not carry on a trade in the United Kingdom. Accordingly the Group will not be liable to United Kingdom taxation on its income or capital gains arising in the United Kingdom, other than certain income deriving from a United Kingdom source.

The Group is subject to United Kingdom taxation on income arising on the investment properties after deduction of allowable debt financing costs and allowable expenses. The Group is tax exempt in Guernsey for the year ended 31 March 2016.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit before taxation reported in the Consolidated Statement of Comprehensive Income because it excludes items of income or expenses that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred income tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are measured at the tax rates that are expected to apply to the period when the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Deferred income tax assets are only recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the underlying timing differences can be deducted. As the Directors consider that the value of the property portfolio is likely to be realised by sale rather than use over time, and that no charge to Guernsey or United Kingdom taxation will arise on capital gains, no provision has been made for deferred tax on valuation uplifts.

Principles for the Consolidated Statement of Cash Flows

The Consolidated Statement of Cash Flows has been drawn up according to the indirect method, separating the cash flows from operating activities, investing activities and financing activities. The net result has been adjusted for amounts in the Consolidated Statement of Comprehensive Income and movements in the Consolidated Balance Sheet which have not resulted in cash income or expenditure in the relating period.

The cash amounts in the Consolidated Statement of Cash Flows include those assets that can be converted into cash without any restrictions and without any material risk of decreases in value as a result of the transaction. Dividends that have been paid are included in the cash flow from financing activities.

3. Revenue from properties

	2016 £000	2015 £000
Rents receivable (adjusted for lease incentives)	39,663	34,088
Surrender premiums	339	464
Dilapidation receipts	108	528
Other income	660	71
Service charge income	5,153	4,511
	45,923	39,662

Rents receivable includes lease incentives recognised of £1.2 million (2015: £1.2 million).

4. Property expenses

	2016 £000	2015 £000
Property operating expenses	3,308	2,861
Property void costs	1,540	1,948
Recoverable service charge costs	5,153	4,511
	10,001	9,320

5. Operating segments

The Board is charged with setting the Company’s investment strategy in accordance with the Company’s investment restrictions and overall objectives. The key measure of performance used by the Board to assess the Group’s performance is the total return on the Group’s net asset value. As the total return on the Group’s net asset value is calculated based on the net asset value per share calculated under IFRS as shown at the foot of the Balance Sheet, assuming dividends are re-invested, the key performance measure is that prepared under IFRS. Therefore no reconciliation is required between the measure of profit or loss used by the Board and that contained in the financial statements.

The Board have delegated the day-to-day implementation of this strategy to the Investment Manager but retain responsibility to ensure that adequate resources of the Company are directed in accordance with their decisions. The operating activities of the Investment Manager are reviewed on a regular basis to ensure compliance with the policies and legal responsibilities of the Board.

The Investment Manager has been given authority to act on behalf of the Company in certain situations. Under the terms of the Investment Management Agreement, subject to the overall supervision of the Board, the Investment Manager advises on the investment strategy of the Company, advises the Company on its borrowing policy and geared investment position, manages the investment of the Company’s short-term liquid resources, and advises on the use and management of derivatives and hedging by the Company. Whilst the Investment Manager may make operational decisions on a day-to-day basis regarding the property investments, any changes to the investment strategy or allocation decisions have to be approved by the Board, even though they may be proposed by the Investment Manager.

The Board therefore retains full responsibility for investment policy and strategy. The Investment Manager will always act under the terms of the Investment Management Agreement which cannot be changed without the approval of the Board. The Board has considered the requirements of IFRS 8 ‘Operating Segments’. The Board is of the opinion that the Group, through its subsidiary undertakings, operates in one reportable industry segment, namely real estate investment, and across one primary geographical area, namely the United Kingdom, and therefore no segmental reporting is required. The portfolio consists of 58 commercial properties, which are in the industrial, office, retail, retail warehouse, and leisure sectors.

6. Management expenses

	2016 £000	2015 £000
Staff costs	2,328	2,019
Other management costs	573	572
	2,901	2,591

The Investment Manager for the Group is Picton Capital Limited, a wholly owned subsidiary company. The above staff and other management costs are those incurred by Picton Capital Limited during the year.

7. Staff costs

	2016 £000	2015 £000
Wages and salaries	1,475	1,258
Social security costs	204	175
Other pension costs	150	125
Share-based payments	499	461
	2,328	2,019

Staff costs are those of the employees of Picton Capital Limited. Employees in the Group participate in a share-based Deferred Bonus Scheme, previously called the Long Term Incentive Plan. Awards made under the Deferred Bonus Scheme are linked to the Company’s share price and dividends paid, and normally vest after periods of two or three years. Employees must still be in the Group’s employment to receive payment on the vesting date. During the year the Group made awards of 744,444 units (2015: 719,512 units), of which 372,222 units vest on 31 March 2018 and 372,222 units vest on 31 March 2019.

The table below summarises the awards made under the Deferred Bonus Scheme to Picton Capital Limited’s staff. Employees have the option to defer the vesting date of their awards for a maximum of seven years. The units which vested at 31 March 2016 and were not deferred were paid out subsequent to the year end at a cost of £391,000 (2015: £147,000).

Vesting Date		Units at 31 March 2014	Units granted in the year	Units cancelled in the year	Units redeemed in the year	Units at 31 March 2015	Units  granted in the year	Units redeemed in the year	Units at 31 March 2016
31 March 2014		114,070	–	–	(104,100)	9,970	–	(7,050)	2,920
31 March 2015		356,695	–	(2,480)	(186,165)	168,050	–	(13,050)	155,000
31 March 2016		583,293	–	(3,232)	–	580,061	–	(502,385)	77,676
31 March 2017		310,793	359,756	(1,982)	–	668,567	–	–	668,567
31 March 2018		–	359,756	–	–	359,756	372,222	–	731,978
31 March 2019		–	–	–	–	–	372,222	–	372,222
		1,364,851	719,512	(7,694)	(290,265)	1,786,404	744,444	(522,485)	2,008,363

The emoluments of the Directors are set out in the Remuneration Report.

The Group employed 13 members of staff at 31 March 2016 (2015: 12). The average number of people employed by the Group for the year ended 31 March 2016 was 13 (2015: 12).

8. Other operating expenses

	2016 £000	2015 £000
Valuation expenses	108	87
Administrator fees	201	192
Auditor’s remuneration	142	163
Directors’ fees	224	212
Professional fees	505	382
Other expenses	330	158
	1,510	1,194

Auditor’s remuneration comprises:	2016 £000	2015 £000
Audit fees:
Audit of Group financial statements	56	56
Audit of subsidiaries’ financial statements	48	63
Audit related fees:
Review of half year financial statements	19	19
	123	138
Non-audit fees:
Additional controls testing	15	14
FCA CASS audit	4	4
Tax compliance	–	7
	19	25
	142	163

9. Interest paid

	2016 £000	2015 £000
Interest payable on loans at amortised cost	8,751	8,758
Capital additions on zero dividend preference shares	1,900	1,766
Interest on obligations under finance leases	115	115
Non-utilisation fees	169	–
Amortisation of finance costs	626	475
	11,561	11,114

The loan arrangement costs incurred to 31 March 2016 are £5,728,000 (2015: £5,728,000). These are amortised over the duration of the loans with £626,000 written off in the year ended 31 March 2016 (2015: £475,000).

10. Tax

The charge for the year is:

	2016 £000	2015 £000
Current UK income tax	235	250
Income tax adjustment to provision for prior year	(137)	(54)
	98	196
UK corporation tax	118	151
	118	151
Total tax charge	216	347

A reconciliation of the income tax charge applicable to the results at the statutory income tax rate to the charge for the year is as follows:

	2016 £000	2015 £000
Profit before taxation	65,064	69,202
Expected tax charge on ordinary activities at the standard rate of taxation of 20%	13,013	13,840
Less:
Revaluation gains not taxable	(8,994)	(10,715)
Income not taxable, including interest receivable	(215)	(138)
Expenditure not allowed for income tax purposes	696	584
Losses utilised	(129)	(102)
Capital allowances and other allowable deductions	(4,136)	(3,334)
Losses carried forward to future years	–	115
Adjustment to provision for prior years	(137)	(54)
Total income tax charge	98	196

For the year ended 31 March 2016 there was an income tax liability of £98,000 in respect of the Group (2015: £196,000) and corporation tax of £118,000 (2015: £151,000).

The Group is exempt from Guernsey taxation under the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989. A fixed fee of £1,200 per company per year is payable to the States of Guernsey in respect of this exemption. No charge to Guernsey taxation will arise on capital gains.

The Directors conduct the affairs of the Group such that the management and control of the Group is not exercised in the United Kingdom and that the Group does not carry on a trade in the United Kingdom.

The Group is subject to United Kingdom taxation on rental income arising on the investment properties after deduction of allowable debt financing costs and allowable expenses. The treatment of such costs and expenses in estimating the overall tax liability for the Group requires judgement and assumptions regarding their deductibility. The Directors have considered comparable market evidence and practice in determining the extent to which these are allowable. This is shown above as Current UK income tax. UK corporation tax relates to the corporation tax arising in respect of Picton Capital Limited.

No deferred tax asset has been recognised from unused tax losses which total £4.6 million (2015: £4.8 million) as the Group is only able to utilise the losses to offset taxable profits in certain discrete business streams, and the Directors consider that the probability of realising the benefit of these losses, except to an immaterial extent, to be low.

11. Dividends

	2016 £000	2015 £000
Declared and paid:
Interim dividend for the period ended 31 March 2014: 0.75 pence	–	2,849
Interim dividend for the period ended 30 June 2014: 0.75 pence	–	3,294
Interim dividend for the period ended 30 September 2014: 0.75 pence	–	3,294
Interim dividend for the period ended 31 December 2014: 0.75 pence	–	3,665
Interim dividend for the period ended 31 March 2015: 0.825 pence	4,455	–
Interim dividend for the period ended 30 June 2015: 0.825 pence	4,455	–
Interim dividend for the period ended 30 September 2015: 0.825 pence	4,456	–
Interim dividend for the period ended 31 December 2015: 0.825 pence	4,456	–
	17,822	13,102

The interim dividend of 0.825 pence per ordinary share in respect of the period ended 31 March 2016 has not been recognised as a liability as it was declared after the year end. A dividend of £4,455,000 was paid on 31 May 2016.

12. Earnings per share

Basic earnings per share is calculated by dividing the net profit for the year attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares in issue during the year. The following reflects the profit and share data used in the basic and diluted profit per share calculation:

	2016	2015
Net profit attributable to ordinary shareholders of the Company from continuing operations (£000)	64,848	68,855
Weighted average number of ordinary shares for basic and diluted profit per share	540,053,660	445,259,094

13. Investments in subsidiaries

The Company had the following principal subsidiaries as at 31 March 2016:

Name	Place of incorporation	Ownership proportion
Picton UK Real Estate (Property) Limited	Guernsey	100%
Picton (UK) REIT (SPV) Limited	Guernsey	100%
Picton (UK) Listed Real Estate	Guernsey	100%
Picton UK Real Estate (Property) No 2 Limited	Guernsey	100%
Picton (UK) REIT (SPV No 2) Limited	Guernsey	100%
Picton (UK) Listed Real Estate Limited	Guernsey	100%
Merbrook Business Property Unit Trust*	Jersey	100%
Merbrook Prime Retail Property Unit Trust*	Jersey	100%
Merbrook Bristol Property Unit Trust*	Jersey	100%
Picton Capital Limited	England & Wales	100%
Picton ZDP Limited	Guernsey	100%
Picton (General Partner) No 2 Limited	Guernsey	100%
Picton (General Partner) No 3 Limited	Guernsey	100%
Picton No 2 Limited Partnership	England & Wales	100%
Picton No 3 Limited Partnership	England & Wales	100%
Picton Property No 3 Limited	Guernsey	100%
Picton Finance Limited	Guernsey	100%

* (the “JPUTs”)

The results of the above entities are consolidated within the Group financial statements.

Picton UK Real Estate (Property) Limited and Picton (UK) REIT (SPV) Limited own 100% of the units in Picton (UK) Listed Real Estate, a Guernsey Unit Trust (the “GPUT”). The GPUT holds a 99.9% interest in both Picton No 2 Limited Partnership and Picton No 3 Limited Partnership.

Picton No 3 Limited Partnership owns all of the units in the JPUTs, which are each registered as Jersey Unit Trusts. During the year Merbrook Swindon Property Unit Trust was wound up following the disposal of its property assets. The Directors have approved the winding up of the three remaining JPUTs once their assets and liabilities have been distributed to Picton No 3 Limited Partnership.

14. Investment properties

The following table provides a reconciliation of the opening and closing amounts of investment properties classified as Level 3 recorded at fair value.

	2016 £000	2015 £000
Fair value at start of year	532,926	417,632
Acquisitions	73,084	62,059
Capital expenditure on investment properties	4,403	4,070
Disposals	(9,365)	(4,410)
Realised gains on disposal	799	438
Realised losses on disposal	–	(26)
Unrealised gains on investment properties	51,125	60,094
Unrealised losses on investment properties	(6,954)	(6,931)
Fair value at the end of the year	646,018	532,926
Historic cost at the end of the year	685,499	628,645

The fair value of investment properties reconciles to the appraised value as follows:

	2016 £000	2015 £000
Appraised value	654,605	540,905
Valuation of assets held under finance leases	1,731	1,155
Lease incentives held as debtors	(10,318)	(9,134)
Fair value at the end of the year	646,018	532,926

The investment properties were valued by CBRE Limited, Chartered Surveyors, as at 31 March 2016 and 31 March 2015 on the basis of fair value in accordance with the RICS Valuation – Professional Standards (2014). The total fees earned by CBRE Limited from the Group is less than 5% of their total UK revenue.

The fair value of the Group’s investment properties has been determined using an income capitalisation technique, whereby contracted and market rental values are capitalised with a market capitalisation rate. The resulting valuations are cross-checked against the equivalent yields and the fair market values per square foot derived from comparable market transactions on an arm’s length basis.

The Group’s investment properties are valued quarterly by independent valuers. The valuations are based on:

•     Information provided by the Investment Manager including rents, lease terms, revenue and capital expenditure. Such information is derived from the Investment Manager’s financial and property systems and is subject to the Group’s overall control environment.

•     Valuation models used by the valuers, including market related assumptions based on their professional judgement and market observation.

The assumptions and valuation models used by the valuers, and supporting information, are reviewed by the Investment Manager and the Board through the Property Valuation Committee. Members of the Property Valuation Committee, together with the Investment Manager, meet with the independent valuer on a quarterly basis to review the valuations and underlying assumptions, including considering current market trends and conditions, and changes from previous quarters. The Directors will also consider where circumstances at specific investment properties, such as alternate uses and issues with occupational tenants, are appropriately reflected in the valuations. The fair value of investment properties is measured based on each property’s highest and best use from a market participant’s perspective and considers the potential uses of the property that are physically possible, legally permissible and financially feasible.

As at 31 March 2016 and 31 March 2015 all of the Group’s properties are Level 3 in the fair value hierarchy as it involves use of significant inputs. There were no transfers between levels during the year. Level 3 inputs used in valuing the properties are those which are unobservable, as opposed to Level 1 (inputs from quoted prices) and Level 2 (observable inputs either directly, i.e. as prices, or indirectly, i.e. derived from prices).

Information on these significant unobservable inputs per sector of investment properties is disclosed as follows:

	2016			2015
	Offices	Industrial	Retail and Leisure	Offices	Industrial	Retail and Leisure
Appraised value (£000)	252,085	236,635	165,885	173,420	217,745	149,740
Area (sq ft, 000s)	999	2,745	831	800	2,736	732
Range of unobservable inputs:
Gross ERV (sq ft per annum)
— range	£7.57-£56.35	£3.15-£16.78	£5.24-£80.36	£7.57–£50.99	£2.98–£15.31	£5.74–£81.04
— weighted average	£29.38	£7.33	£28.75	£26.83	£6.94	£30.53
Net initial yield
— range	1.04%-18.75%	-4.75%-9.64%	3.23%-12.58%	-1.09%–25.47%	0%–10.55%	2.65%–14.47%
— weighted average	5.23%	5.61%	6.22%	5.36%	6.18%	6.00%
Reversionary yield
— range	5.05%-15.94%	5.30%-11.87%	4.25%-9.27%	5.07%–18.02%	5.68%–13.15%	4.08%–18.46%
— weighted average	7.12%	6.60%	5.78%	7.64%	6.87%	6.39%
True equivalent yield
— range	5.05%-14.73%	5.48%-10.94%	4.38%-9.53%	0%–13.13%	5.80%–12.59%	4.50%–20.05%
— weighted average	6.98%	6.67%	6.51%	7.15%	7.03%	6.93%

An increase/decrease in ERV will increase/decrease valuations, while an increase/decrease to yield decreases/increases valuations. The table below sets out the sensitivity of the valuation to changes of 50 basis points in yield.

Sector	Movement	2016 Impact on valuation	2015 Impact on valuation
Industrial	Increase of 50 basis points	Decrease of £18.0m	Decrease of £15.7m
	Decrease of 50 basis points	Increase of £21.1m	Increase of £18.2m
Office	Increase of 50 basis points	Decrease of £19.9m	Decrease of £12.5m
	Decrease of 50 basis points	Increase of 22.0m	Increase of £14.4m
Retail and Leisure	Increase of 50 basis points	Decrease of £12.5m	Decrease of £10.5m
	Decrease of 50 basis points	Increase of £14.6m	Increase of £12.3m

15. Accounts receivable

	2016 £000	2015 £000
Current
Tenant debtors (net of provisions for bad debts)	3,209	3,871
Lease incentives	10,318	9,134
Other debtors	578	388
Income tax receivable	4	–
Capitalised finance costs	540	626
	14,649	14,019
Non-current
Capitalised finance costs	3,331	3,871
	3,331	3,871
	17,980	17,890

Tenant debtors, which are generally due for settlement at the relevant quarter end, are recognised and carried at the original invoice amount less an allowance for any uncollectable amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when identified.

16. Cash and cash equivalents

	2016 £000	2015 £000
Cash at bank and in hand	20,063	16,416
Short-term deposits	2,696	53,676
	22,759	70,092

Cash at bank and in hand earns interest at floating rates based on daily bank deposit rates. Short-term deposits are made for varying periods of between one day and one month depending on the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates. The carrying amounts of these assets approximate their fair value.

17. Accounts payable and accruals

	2016 £000	2015 £000
Accruals	4,197	3,803
Deferred rental income	8,621	7,482
VAT liability	1,934	1,935
Income tax liability	–	206
Trade creditors	232	750
Other creditors	3,337	2,189
	18,321	16,365

18. Loans and borrowings

	Maturity	2016 £000	2015 £000
Current
Aviva facility	–	1,057	1,012
Zero dividend preference shares	15 October 2016	28,034	–
		29,091	1,012
Non-current
Santander revolving credit facility	25 March 2018	15,800	–
Canada Life facility	20 July 2022	33,718	33,718
Canada Life facility	24 July 2027	80,000	80,000
Aviva facility	24 July 2032	90,926	91,982
Zero dividend preference shares	15 October 2016	–	26,134
		220,444	231,834
		249,535	232,846

The Group has a loan with Canada Life Limited for £113.7 million, which is fully drawn. The loan is for a term of 15 years, with £33.7 million repayable on the tenth anniversary of drawdown. Interest is fixed at 4.08% over the life of the loan. The loan agreement has a loan to value covenant of 65% and an interest cover test of 1.75. The loan is secured over the Group’s properties held by Picton No 2 Limited Partnership and Picton UK Real Estate Trust (Property) No 2 Limited, valued at £270.5 million (2015: £256.9 million).

Additionally the Group has a term loan facility agreement with Aviva Commercial Finance Limited for £95.3 million, which was fully drawn on 24 July 2012. The loan is for a term of 20 years, with approximately one third repayable over the life of the loan in accordance with a scheduled amortisation profile. The Group has repaid £1.0 million in the year (2015: £1.0 million). Interest on the loan is fixed at 4.38% over the life of the loan. The facility has a loan to value covenant of 65% and a debt service cover ratio of 1.4. The facility is secured over the Group’s properties held by Picton No 3 Limited Partnership, Picton Property No 3 Limited and the JPUTs, valued at £229.1 million (2015: £206.4 million).

On 26 March 2015 a £26.0 million revolving credit facility was put in place with Santander Corporate & Commercial Banking for three-years. On 17 February 2016 £15.8 million was drawn down under the facility, leaving £10.2 million undrawn at year end. Interest is charged at 175 basis points over three month LIBOR and the non-utilisation fee is 70 basis points. The facility is secured over properties held by Picton (UK) REIT (SPV No 2) Limited, valued at £57.1 million (2015: £54.7 million).

The fair value of the secured loan facilities at 31 March 2016, estimated as the present value of future cash flows discounted at the market rate of interest at that date, was £243.1 million (2015: £224.9 million). The fair value of the secured loan facilities is classified as Level 2 under the hierarchy of fair value measurements.

The Group has 22,000,000 zero dividend preference shares (‘ZDPs’) in issue with a maturity date of 15 October 2016. The ZDPs accrue additional capital at a rate of 7.25% per annum, resulting in a final capital entitlement at maturity of 132.3 pence per share. The ZDPs do not receive any dividends or income distributions, and are listed on the London Stock Exchange. The ZDPs were issued by Picton ZDP Limited, a wholly owned subsidiary company.

The fair value of the zero dividend preference shares at 31 March 2016, based on the quoted market price at that date, was £28.2 million (2015: £27.7 million). The fair value of the zero dividend preference shares is classified as Level 1 under the hierarchy of fair value measurements (2015: Level 1).

There were no transfers between levels of the fair value hierarchy during the current or prior years.

The weighted average interest rate on the Group’s borrowings as at 31 March 2016 was 4.43% (2015: 4.56%).

In accordance with the AIFM Directive, information in relation to the Group’s leverage is required to be made available to investors. The Group’s maximum and average actual leverage levels at 31 March 2016 are shown below:

	Gross method	Commitment method
Maximum limit	285%	285%
Actual	157%	160%

For the purpose of the AIFM Directive, leverage is any method which increases the Group’s exposure, including the borrowing of cash and use of derivatives. It is expressed as a percentage of the Group’s exposure to its net asset value and is calculated on both a gross and commitment method.

Under the gross method, exposure represents the sum of the Group’s positions after deduction of cash balances, without taking account of any hedging or netting arrangements. Under the commitment method, exposure is calculated without the deduction of cash balances and after certain hedging and netting positions are offset against each other.

The leverage limits are set by the Board and are in line with the maximum leverage levels permitted in the Company’s Articles of Incorporation.

19. Contingencies and capital commitments

The Group has entered into contracts for the refurbishment of 13 properties with commitments outstanding at 31 March 2016 of approximately £3.3 million (2015: £3.2 million). No further obligations to construct or develop investment property or for repairs, maintenance or enhancements were in place as at 31 March 2016.

20. Share capital

	2016 £000	2015 £000
Authorised:
Unlimited number of ordinary shares of no par value	–	–
Issued and fully paid:
540,053,660 ordinary shares of no par value
(31 March 2015: 540,053,660)	–	–
Share premium	157,449	157,313

The Company issued no new ordinary shares during the year (2015: 160,183,931 shares). The issue costs of new shares in the year ended 31 March 2015 of £2.1 million included an over-accrual of £136,000 which was reversed in the current year.

Subject to the solvency test contained in the Companies (Guernsey) Law, 2008 being satisfied, ordinary shareholders are entitled to all dividends declared by the Company and to all of the Company’s assets after repayment of its borrowings and ordinary creditors. Ordinary shareholders have the right to vote at meetings of the Company. All ordinary shares carry equal voting rights.

The Directors have authority to buy back up to 14.99% of the Company’s ordinary shares in issue, subject to the annual renewal of the authority from shareholders and provided that the ZDP Share Cover for the ZDPs is not less than 3.5 times, after the proposed repurchase. Any buy back of ordinary shares will be made subject to Guernsey law, and the making and timing of any buy backs will be at the absolute discretion of the Board.

21. Adjustment for non-cash movements in the cash flow statement

	2016 £000	2015 £000
Profit on disposal of investment properties	(799)	(412)
Increase in investment property valuation	(44,171)	(53,163)
Depreciation of tangible assets	45	49
Increase in receivables	(712)	(3,764)
Increase in payables	2,439	1,863
	(43,198)	(55,427)

22. Obligations under leases

The Group has entered into a number of leases in relation to its investment properties. These leases are for fixed terms and subject to regular rent reviews. They contain no material provisions for contingent rents, renewal or purchase options nor any restrictions outside of the normal lease terms.

Finance lease obligations in respect of rents payable on leasehold properties were payable as follows:

	2016 £000	2015 £000
Future minimum payments due:
Within one year	116	116
In the second to fifth years inclusive	466	466
After five years	7,732	7,849
	8,314	8,431
Less: finance charges allocated to future periods	(6,488)	(6,603)
Present value of minimum lease payments	1,826	1,828

The present value of minimum lease payments is analysed as follows:

	2016 £000	2015 £000
Current
Within one year	109	103
	109	103
Non-current
In the second to fifth years inclusive	397	351
After five years	1,320	1,374
	1,717	1,725
	1,826	1,828

Operating leases where the group is lessor

The Group leases its investment properties under operating leases.

At the reporting date, the Group’s future income based on the unexpired lessor lease length was as follows (based on annual rentals):

	2016 £000	2015 £000
Within one year	39,556	35,617
In the second to fifth years inclusive	124,853	121,873
After five years	116,228	134,409
	280,637	291,899

The Group has entered into commercial property leases on its investment property portfolio. These properties, held under operating leases, are measured under the fair value model as the properties are held to earn rentals. The majority of these non-cancellable leases have remaining lease terms of more than five years.

23. Net asset value

The net asset value per ordinary share is based on net assets at the year end and 540,053,660 (2015: 540,053,660) ordinary shares, being the number of ordinary shares in issue at the year end.

At 31 March 2016, the Company had a net asset value per ordinary share of £0.77 (2015: £0.69).

24. Financial instruments

The Group’s financial instruments comprise cash and cash equivalents, accounts receivable, secured loans, zero dividend preference shares, obligations under finance leases and accounts payable that arise from its operations. The Group does not have exposure to any derivative financial instruments. Apart from the secured loans and the zero dividend preference shares, as disclosed in Note 18, the fair value of the financial assets and liabilities is not materially different from their carrying value in the financial statements.

Categories of financial instruments

31 March 2016	Note	Held at fair value through profit or loss £000	Financial assets and liabilities at amortised cost £000	Total £000
Financial assets
Accounts receivable	15	–	17,980	17,980
Cash and cash equivalents	16	–	22,759	22,759
		–	40,739	40,739
Financial liabilities
Loans	18	–	249,535	249,535
Obligations under finance leases	22	–	1,826	1,826
Accounts payable and accruals	17	–	18,321	18,321
		–	269,682	269,682

31 March 2015	Note	Held at fair value through profit or loss £000	Financial assets and liabilities at amortised cost £000	Total £000
Financial assets
Accounts receivable	15	–	17,890	17,890
Cash and cash equivalents	16	–	70,092	70,092
		–	87,982	87,982
Financial liabilities
Loans	18	–	232,846	232,846
Obligations under finance leases	22	–	1,828	1,828
Accounts payable and accruals	17	–	16,365	16,365
		–	251,039	251,039

25. Risk management

The Group invests in commercial properties in the United Kingdom. The following describes the risks involved and the applied risk management. The Investment Manager reports regularly both verbally and formally to the Board, and its relevant committees, to allow them to monitor and review all the risks noted below.

Capital risk management

The Group aims to manage its capital to ensure that the entities in the Group will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance. The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business.

The capital structure of the Group consists of debt, as disclosed in Note 18, cash and cash equivalents and equity attributable to equity holders of the Company, comprising issued capital, reserves and retained earnings. The Group is not subject to any external capital requirements.

The Board of Directors monitors the return on capital as well as the level of dividends to ordinary shareholders. The Group has managed its capital risk by entering into long-term loan arrangements which will enable the Group to reduce its borrowings in an orderly manner over the long-term. The Group intends to repay its zero dividend preference shares in full on the maturity date, and has a new five year revolving credit facility which can be used for this purpose but also provides greater flexibility in managing the level of borrowings.

The Group’s net debt to equity ratio at the reporting date was as follows:

	2016 £000	2015 £000
Total liabilities	269,682	251,039
Less: cash and cash equivalents	(22,759)	(70,092)
Net debt	246,923	180,947
Total equity	417,132	369,970
Net debt to equity ratio at end of year	0.59	0.49

Interest rate risk management

Interest rate risk arises on interest payable on the revolving credit facility only. The Group’s senior debt facilities have fixed interest rates over the lives of the loans and thus the Group has limited exposure to interest rate risk on the majority of its borrowings and no sensitivity is presented.

Interest rate risk

The following table sets out the carrying amount, by maturity, of the Group’s financial assets/(liabilities).

31 March 2016	Less than one year £000	1 to 5 Years £000	More than 5 years £000	Total £000
Floating
Cash and cash equivalents	22,759	–	–	22,759
Secured loan facilities	–	(15,800)	–	(15,800)
Fixed
Secured loan facilities	(1,057)	(4,718)	(199,926)	(205,701)
Zero dividend preference shares	(28,034)	–	–	(28,034)
	(6,332)	(20,518)	(199,926)	(226,776)

31 March 2015	Less than one year £000	1 to 5 Years £000	More than 5 years £000	Total £000
Floating
Cash and cash equivalents	70,092	–	–	70,092
Fixed
Secured loan facilities	(1,012)	(4,517)	(201,183)	(206,712)
Zero dividend preference shares	–	(26,134)	–	(26,134)
	69,080	(30,651)	(201,183)	(162,754)

Credit risk

The following tables detail the balances held at the reporting date that may be affected by credit risk:

31 March 2016	Note	Held at fair value through profit or loss £000	Financial assets and liabilities at amortised cost £000	Total £000
Financial assets
Tenant debtors	15	–	3,209	3,209
Cash and cash equivalents	16	–	22,759	22,759
		–	25,968	25,968

31 March 2015	Note	Held at fair value through profit or  loss £000	Financial assets and liabilities at amortised cost £000	Total £000
Financial assets
Tenant debtors	15	–	3,871	3,871
Cash and cash equivalents	16	–	70,092	70,092
		–	73,963	73,963

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group has adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral where appropriate, as a means of mitigating the risk of financial loss from defaults. The Group’s exposure and credit ratings of its counterparties are continuously monitored and the aggregate value of transactions concluded is spread amongst approved counterparties. Credit exposure is controlled by counterparty limits that are reviewed regularly.

Trade debtors consist of a large number of occupiers, spread across diverse industries and geographical areas. Ongoing credit evaluations are performed on the financial condition of trade debtors, and where appropriate, credit guarantees are acquired. The Group does not have any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. The credit risk on liquid funds is limited because the counterparties are banks with high credit ratings assigned by international credit rating agencies. Rent collection is outsourced to managing agents who report regularly on payment performance and provide the Group with intelligence on the continuing financial viability of occupiers.

A provision of £288,000 (2015: £2,049,000) exists at the year end, in relation to outstanding debtors that are considered to be impaired based on a review of individual debtor balances. The Group believes that unimpaired amounts that are overdue by more than 30 days are still collectable, based on the historic payment behaviours and extensive analyses of the underlying customers’ credit ratings. At 31 March 2016 debtors overdue by more than 30 days totalled £227,000 (2015: £2,595,000).

The carrying amount of financial assets recorded in the financial statements, net of any allowances for losses, represents the Group’s maximum exposure to credit risk. The Board continues to monitor the Group’s exposure to credit risk.

The Group has a panel of banks with which it makes deposits, based on credit ratings with set counterparty limits. The Group’s main cash balances are held with National Westminster Bank plc (“NatWest”), Santander plc (“Santander”), Nationwide International Limited (“Nationwide”) and The Royal Bank of Scotland plc (“RBS”). Bankruptcy or insolvency of the bank holding cash balances may cause the Group’s rights with respect to the cash held by them to be delayed or limited. The Group manages its risk by monitoring the credit quality of its bankers on an ongoing basis. NatWest, Santander, Nationwide and RBS are rated by all the major rating agencies. If the credit quality of these banks deteriorates, the Group would look to move the short-term deposits or cash to another bank. Procedures exist to ensure that cash balances are split between banks to minimise exposure. At 31 March 2016 and at 31 March 2015 Standard & Poor’s credit rating for Nationwide and Santander was A-1 and the Group’s remaining bankers had an A-2 rating.

There has been no change in the fair values of cash or receivables as a result of changes in credit risk in the current or prior periods, due to the actions taken to mitigate this risk, as stated above.

Liquidity risk

Ultimate responsibility for liquidity risk management rests with the Board, which has built an appropriate liquidity risk management framework for the management of the Group’s short, medium and long-term funding and liquidity management requirements. The Group manages liquidity risk by maintaining adequate reserves and loan facilities by continuously monitoring forecasts and actual cash flows and matching the maturity profiles of financial assets and liabilities. The Group has concluded on a new five year revolving credit facility to manage liquidity requirements arising from the ZDP maturity.

The table below has been drawn up based on the undiscounted contractual maturities of the financial assets/(liabilities), including interest that will accrue to maturity.

31 March 2016	Less than one year £000	1 to 5 Years £000	More than 5 years £000	Total £000
Cash	22,787	–	–	22,787
Accounts receivable	14,649	3,331	–	17,980
Finance lease liability	(116)	(466)	(1,244)	(1,826)
Fixed interest rate loans	(38,822)	(38,832)	(262,370)	(340,024)
Floating interest rate loans	(364)	(16,158)	–	(16,522)
Accounts payable and accruals	(18,321)	–	–	(18,321)
	(20,187)	(52,125)	(263,614)	(335,926)

31 March 2015	Less than one year £000	1 to 5 Years £000	More than 5 years £000	Total £000
Cash	70,180	–	–	70,180
Accounts receivable	14,019	3,871	–	17,890
Finance lease liability	(116)	(466)	(1,246)	(1,828)
Fixed interest rate loans	(9,708)	(67,945)	(272,078)	(349,731)
Accounts payable and accruals	(16,365)	–	–	(16,365)
	58,010	(64,540)	(273,324)	(279,854)

Market risk

The Group’s activities are primarily within the real estate market, exposing it to very specific industry risks.

The yields available from investments in real estate depend primarily on the amount of revenue earned and capital appreciation generated by the relevant properties as well as expenses incurred. If properties do not generate sufficient revenues to meet operating expenses, including debt service and capital expenditure, the Group’s revenue will be adversely affected.

Revenue from properties may be adversely affected by the general economic climate, local conditions such as oversupply of properties or a reduction in demand for properties in the market in which the Group operates, the attractiveness of the properties to occupiers, the quality of the management, competition from other available properties and increased operating costs (including real estate taxes).

In addition, the Group’s revenue would be adversely affected if a significant number of occupiers were unable to pay rent or its properties could not be rented on favourable terms. Certain significant expenditure associated with each equity investment in real estate (such as external financing costs, real estate taxes and maintenance costs) generally are not reduced when circumstances cause a reduction in revenue from properties. By diversifying in regions, sectors, risk categories and occupiers, the Investment Manager expects to lower the risk profile of the portfolio. The Board continues to oversee the profile of the portfolio to ensure risks are managed.

The valuation of the Group’s property assets is subject to changes in market conditions. Such changes are taken to the Consolidated Statement of Comprehensive Income and thus impact on the Group’s net result. A 5% increase or decrease in property values would increase or decrease the Group’s net result by £32.7 million (2015: £27.0 million).

Concentration risk

As discussed above, all of the Group’s investments are in the UK and therefore it is exposed to macroeconomic changes in the UK economy. Furthermore, the Group places reliance on a limited number of occupiers for its rental income, with one occupier accounting for 4.0% of the Group’s annual contracted rental income.

Currency risk

The Group has no exposure to foreign currency risk.

26. Related party transactions

The total fees earned during the year by the Directors of the Company was £223,500 (2015: £211,875). As at 31 March 2016 the Group owed £nil to the Directors (2015: £nil). The emoluments of each Director are set out in the Remuneration Report.

Picton Property Income Limited has no controlling parties.

27. Events after the balance sheet date

A dividend of £4,455,000 (0.825 pence per share) was approved by the Board on 25 April 2016 and paid on 31 May 2016.

A new five-year £27 million revolving credit facility has been entered into with Santander Corporate & Commercial Banking on 21 June 2016.

The result of the referendum on 23 June was that the UK should leave the EU. While the full impact of this result is uncertain, the Directors are considering the implications for the Group.