Annual Financial Report

7 June 2017

PICTON PROPERTY INCOME LIMITED

PRELIMINARY ANNUAL RESULTS

(“PICTON”, THE “COMPANY” OR THE “GROUP” )

Picton (LSE: PCTN) announces its annual results for the year ended 31 March 2017.

Positive results against an uncertain economic backdrop

·          Increase in EPRA NAV per share of 6.0%, to 82 pence per share

·          Income profit increased by 30% to £25.8 million

·          Total return of 10.4%

·          Shareholder total return of 25.6%

·          Dividend increase of 3% in February 2017 to 3.4 pence per share per annum

·          Dividend cover of 144%, or 115% prior to one-off exceptional income of £5.3 million

Stronger Balance Sheet and lower finance costs

·          Total debt reduced by 18% to £204.6 million

·          Repaid £29.1 million of 7.25% zero dividend preference shares in full

·          Net gearing reduced to 27.4% from 34.6%

·          Weighted average interest rate now 4.2% from 4.4%

·          Established new £27 million revolving credit facility

·          Access to over £50 million of committed but undrawn debt facilities

Positive valuation and income growth

·          Like-for-like valuation increase of 3.0%

·          Like-for-like passing rent at 31 March 2017 increased by 4.4% to £40.0 million

·          Like-for-like ERV growth of 3.3% with total portfolio ERV of £45.9 million

Continue to outperform MSCI IPD Quarterly Benchmark

·          Total property return of 9.9%, outperforming benchmark of 4.6%

·          Income return of 6.7%, outperforming benchmark of 4.7%

·          Total property return and income return outperformance ahead of MSCI IPD over 1, 3, 5 & 10 years

Maintained focus on asset management

·          Occupancy at 94%, ahead of the MSCI IPD Quarterly Benchmark of 93%

·          35 lettings completed securing £3.2 million of additional annual income, on average 6.9% above March 2016 ERV

·          23 lease renewals and re-gears retaining £1.2 million per annum, on average 5.7% above March 2016 ERV

Ongoing repositioning of portfolio

·          Sold two central London assets for £45 million, on average 4% above the March 2016 valuation

·          Sold four non-core assets for £7 million, on average 41% above the March 2016 valuation

·          Invested £2.8 million into refurbishment projects across portfolio

·          Increased average lot size by 4.4% to £11.8 million

	2017	2016	2015
Total Return	10.4%	17.9%	27.4%
Shareholder Total Return	25.6%	1.9%	32.3%
NAV per Share	82p	77p	69p
Earnings per Share	7.9p	12.0p	15.4p
EPRA Earnings per Share	3.8p	3.7p	3.4p
Dividends per Share	3.3p	3.3p	3.0p
Dividend Cover	144%**	112%	117%
Property Assets*	£615.2m	£646.0m	£532.9m
Net Assets	£441.9m	£417.1m	£370.0m
Profit after Tax	£42.8m	£64.8m	£68.9m
EPRA Earnings	£20.6m	£19.9m	£15.3m

* Net of lease incentives

** 115% prior to one-off income

Picton Chairman, Nicholas Thompson, commented:

“Picton has continued to deliver positive results for shareholders, with both an increase in net assets and earnings. As a result the Board was pleased to announce an increase in the covered dividend earlier this year. The Company is well placed, reflecting its current portfolio, asset allocation, reduced gearing and low void position to take advantage of opportunities that emerge.”

Michael Morris, Chief Executive of Picton Capital, commented:

“We have yet again outperformed the MSCI IPD Quarterly Benchmark, extending our long term record of outperformance over 1, 3, 5 and 10 years. Recent activity within the portfolio, both in terms of letting and disposal activity, is encouraging, improving cash flow and supporting NAV growth respectively. Looking ahead we see scope to improve income further by resetting rents to market levels, improving occupancy and capturing fixed rental uplifts in existing leases.”

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

Sam Walden, 01481 745 001, [e-mail]

Note to Editors

Picton is an income focused, property investment company listed on the London Stock Exchange.

With Net Assets of £441.9 million at 31 March 2017, 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. Picton can invest both directly and indirectly in commercial property across the United Kingdom.

 www.picton.co.uk

Chairman’s statement

In the year to 31 March 2017, I am pleased to report that Picton continued to deliver positive results for its shareholders, with a profit for the year of £43 million.

This year has not been without its challenges, with the EU referendum in June 2016 and other political events impacting sentiment and affecting property valuations. Liquidity issues within open ended property funds also led to further uncertainty. The property market has stabilised following the post-referendum hiatus, but with a general election due this week, nothing is ever certain.

During the year, we achieved our aim to lower gearing and reduce exposure to core London property markets. This has helped to improve returns, both for the overall business and within the property portfolio, which has again outperformed the market, as set out below. I am pleased to note that the Company’s share price has re-rated over the past few months and now stands at a premium to the net asset value.

While the property portfolio continues to benefit from high occupancy and stable cash flows, there is still scope to grow income by resetting rents to market levels, improving occupancy and through the contractual rental uplifts contained within existing leases.

The Company’s portfolio allocation, debt structure and asset management capabilities enable us to remain confident about our prospects.

Strategy

The Company’s investment objective is to provide investors with an attractive level of income and the potential for capital growth.  Both have been achieved in the last twelve months as shown by the performance figures detailed below.

As ever, return and risk are interlinked. During the period we sought to manage risk and have consequently reduced borrowings by some £45 million over the year.

Picton’s strategy to focus on income, on our occupiers and be opportunistic in our approach has continued. While we still have a desire to grow, the focus is on performance rather than scale.

Performance

The Company delivered a total return of 10.4% for the year, which although lower than 2016, reflects weaker capital growth within the market.

Our income profit for the year rose by 30% to £25.8 million, although this includes the exceptional income arising from the settlement of the dispute regarding our hotel asset in Luton. EPRA earnings per share, which excludes such non-recurring items, rose by 3%.

Dividend cover for the year, including the impact of the exceptional income noted above and the increased dividend from February 2017, was 144%. Excluding the exceptional income, the dividend cover remained at a healthy level of 115%.

At a portfolio level, I am particularly pleased to report that we have had another successful year and continue to outperform the MSCI IPD Quarterly Benchmark.

More important is the long-term track record being created by the team, which continues to be above the benchmark over the 1, 3, 5 and 10 year time periods as measured by MSCI IPD. Our focus on income has also helped to ensure that the portfolio’s income return is consistently in the upper quartile of the MSCI IPD Quarterly Benchmark. Further details are outlined within the Investment Manager’s Report.

Capital Structure

Picton is well positioned for any future challenges, or indeed opportunities, with modest gearing and immediate access to funds through two undrawn revolving credit facilities. Our current net gearing is 27%, down from 35% last year. During the year, we reduced the level of debt to £205 million and the average interest rate from 4.4% to 4.2%.

A significant milestone for the Company was the repayment of its 7.25% zero dividend preference shares, which were a legacy of our 2012 refinancing. We wanted to simplify our corporate structure and this repayment helps achieve that aim.

Additionally, we have put in place a second revolving credit facility, which provides further operational flexibility, and are working towards extending our other revolving credit facility which matures next year.

By repaying shorter term debt, our debt maturity profile has increased from 10.7 to 11.7 years, which remains one of the longest debt profiles within the listed real estate sector. This means on our drawn borrowings there is no short-term refinancing risk and no exposure to interest rate risk.

Our strategy is to only increase gearing on a tactical basis, if and when specific asset opportunities arise. We believe our investors would on balance prefer a larger, more liquid, and lowly geared company, so we will only seek to grow where there is a clear financial rationale and we can further take advantage of the economies of scale that our internalised structure provides.

Property Portfolio

The property portfolio has performed well and our relatively high exposure to the industrial, warehouse and logistics sectors has contributed positively. We have not made any acquisitions during the last twelve months, but we have undertaken some portfolio restructuring, which has focused on reducing our central London exposure and continuing to sell non-core assets. At the year end, the Group owned 53 assets, with an average lot size of £11.8 million, 4% higher than a year ago.  

Occupancy is at 94% and we are hopeful that this will increase in 2017, as we let more space at 50 Farringdon Road, London EC1 and elsewhere within the portfolio.

Dividends

The Company’s dividend was increased with effect from February 2017. The increase of 3% was in part a reflection of lower financing costs resulting from the activity referred to above. The Board regularly reviews the dividend level and will consider this again at the time of the interim results in November.

Corporate Structure

We have been monitoring the Government’s responses to the OECD project on Base Erosion and Profit Shifting. Recently, new legislation was introduced in the UK restricting interest deductibility for UK companies, and at the same time a consultation was launched to bring non-resident landlord companies, such as Picton, into the scope of UK corporation tax. As a result of this potential change, the Directors believe it is likely to be in the interests of the Company to convert to a UK REIT during 2018. The Company continues to examine all its options in this regard with a view to seeking any necessary shareholder approvals in due course.

During 2016, shareholders approved a new long-term incentive plan, which is for the benefit of all Picton employees. The first vesting period for this new plan does not end until 31 March 2019, but is another important part of further aligning staff interests with those of shareholders. More details of this plan are provided in the Remuneration Report. We engaged with shareholders as part of this process and are grateful for their feedback and subsequent support for all resolutions at last year’s Annual General Meeting.

We continue to welcome dialogue, engagement and feedback from shareholders generally.

Board Composition

I stated at the time of our half year results that we would start to consider recruiting an additional member to the Picton board. This process has commenced, and I hope that we will have a new Board member in place later this year. It is our intention, once the new director is in place, to appoint a new chairman of the Audit and Risk Committee in due course, as Robert Sinclair has indicated that he wishes to retire from the Board in 2018 once any potential transition to UK REIT status is complete.

Outlook

Picton is well positioned, with an engaged team and a high quality, income focused portfolio. Our approach is well suited to long-term property investment and our track record demonstrates this.

This year marks the fifth anniversary since our change to a self-managed investment company. In our view this has delivered significant benefits for shareholders. Our net assets have grown 125% or £246 million over the last five years and our net asset value per share has risen by 44%. We have made significant cost savings relative to the previous external management arrangements and have a team dedicated to Picton and aligned with its shareholders’ interests. Our MSCI IPD performance numbers, highlighted above, demonstrate this and we have added more detail about some of our key milestones within this report.

The market is stable at present, but not without risk. As ever, not all parts of the market are as positive or as attractive as others but our diversified approach enables us to focus on opportunities that will provide attractive risk adjusted returns for shareholders. We are confident that our team is more than capable of ensuring that Picton continues to deliver on its strategic objectives.

As we evolve our strategy further, we want shareholders to remain clear about what they get from an investment in Picton. Our diversified portfolio and opportunity led, occupier focused approach, is more a means than an end. Our aim is to be consistently one of the best performing diversified property investment companies listed on the main market of the London Stock Exchange.

Nicholas Thompson
Chairman
6 June 2017

Chief executive’s review

The last twelve months have not been without their challenges. The uncertainty caused by the EU referendum and consequent nervousness within the investment and occupier markets undoubtedly impacted performance. We have made progress on many fronts and have delivered strong relative property performance, which has further been enhanced by our use of debt.

Our entrepreneurial approach has enabled us to react quickly as market conditions have changed. We have put ourselves in a strong position, through our strategy of realising profits from low yielding London assets and using proceeds to repay debt.

Portfolio and Asset Management

Our outperformance against MSCI IPD is significant and we cover this in more detail further on. As I have said in previous years, there is always a balance to be struck between income and capital returns. A pure focus on income, and a lack of investment into assets, is likely to be at the expense of future capital returns and income sustainability.

We have retained our overweight position to the industrial, warehouse and logistics sector and this has again had a positive impact on our relative performance.

We have reshaped the portfolio through the sales of two central London office buildings and four smaller non-core assets. This has reduced the number of assets in the portfolio and increased the average lot size to £11.8 million.

The work of the asset management team in adding value across the portfolio is covered in more detail within the Investment Manager’s Report.

Operational Efficiency

An increase in performance related remuneration across the team has contributed to a small increase in Picton’s Ongoing Charges ratio for the year. It is worth noting that in 2012 Picton moved to an internalised management structure as part of a process to reduce ongoing costs and become more aligned with its shareholders. Since then, total management costs have averaged £2.6 million per annum, compared to £4.2 million per annum in the preceding five years under the old external management model.

Effective use of Debt

In common with other asset classes, commercial property has experienced more volatility this year and therefore the impact of gearing on returns has been both positive and negative over time. Despite an uncertain summer last year, the property market has now returned to a more stable position.

The key event for us in 2016 was the maturity of our zero dividend preference shares. Given current market conditions we believed that it was appropriate to operate with a lower level of gearing and used the proceeds from asset sales to repay these shares in full, rather than re-financing. Consequently, we have also simplified our corporate structure.

We also put in place a second revolving credit facility, which matures in 2021, and can be drawn down when required to provide the Group with additional operational flexibility.

Our net gearing now stands at 27%, with a maturity profile of 11.7 years and an average interest rate of 4.2%.

Outlook

We remain positive about the prospects for commercial property as an asset class and investment opportunity for three key reasons:

• Firstly, income drives returns. Income from real estate remains a key component of total return and is supportive of the underlying investment case relative to other asset classes;
• Secondly, although our occupiers’ businesses are naturally changing which creates different real estate requirements, we believe that most businesses will continue to need premises to operate from over the longer term. By having a well managed diversified portfolio of assets Picton can also adapt and change with these requirements; and
• Thirdly, there is the potential for a competent owner to add value in an imperfect and illiquid market when no two assets are identical, through clever buying, good management and well timed disposals.

The defensive qualities of the asset class reinforce why real estate has performed so well in recent years, even off significantly repriced levels. With most assets, there is a high residual value, which can be unlocked by pursuing alternative uses either from the buildings, or from the land itself.

One of our strengths as a team is the focus we put on getting to know our occupiers, where possible building relationships that help us to understand their businesses and property needs.

We maintain regular communication with our occupiers, keeping them up to date with matters that may affect their occupation. For example, earlier this year we provided guidance on how the changes to business rates might impact their business. Our asset managers are always available to deal with any issues relating to their properties and resolve problems. This remains very much at the heart of our Picton Promise and is something that a dedicated team can genuinely deliver.

We will continue to adopt a long term approach, with our closed ended structure, enabling us to control the timings of both acquisitions and disposals. Against a backdrop of forecast lower returns, we believe there will be subsectors of the market that continue to perform more strongly. Our role is to identify and secure these opportunities on the back of a strong balance sheet and execution track record.

Michael Morris
Chief Executive, Picton Capital Limited
6 June 2017

Our marketplace

Economic backdrop

Uncertainty surrounding economic prospects following the EU referendum continues to impact markets and the June general election has only exacerbated this. Despite this, based on preliminary GDP estimates from the Office of National Statistics, UK GDP grew by 2.0% in the year to March 2017 compared to 1.6% in the year to March 2016. However, recent data shows that UK GDP in the first quarter of 2017 slowed to 0.2% compared to the previous quarter’s 0.7%. Whilst the economy seems to have lost some momentum, it is surprisingly stronger than many had predicted.

Since the referendum vote, sterling has weakened against other currencies, which has caused the cost of imported goods to rise, which in turn is contributing to rising inflation in the UK. On the positive side, the weaker pound has had a favourable impact on exports, which is reflected in the latest Manufacturing Markit/PMI survey which showed an unexpected rise in April 2017.

Between January and March 2017, the employment rate was 74.8%, the highest level since comparable records began in 1971. While employment remains at historically high levels, a pay squeeze has led to consumers feeling less well off. The 12 month Consumer Price Index (CPI) was 2.3% in March 2017 higher than the 0.5% in March 2016. The CPI rate has been steadily increasing following a period of relatively low inflation and in the latest release for April 2017 recorded 2.7%. When compared to the average wage growth of 2.1%, in real terms, wage growth is negative. The slowdown in real wages has been reflected in retail sales volumes, which have been on a weakening trend since the end of last year. However, there are reasons to remain positive. Both high employment and low interest rates remain supportive of consumer spending, and consumer confidence, as measured by Gfk NOP, is resilient compared to historical levels. Also, the latest retail sales figures released by the Office of National Statistics were better than expected, rising by 4.0% in the year to April 2017.  As long as the squeeze on real income proves to be temporary, consumer spending should hold up.

The Markit Purchasers Managers Index (PMI), which monitors the pace of growth for the manufacturing, construction and services sector, recorded encouraging results for all three sectors in March/April 2017. The combined results of the PMI surveys imply that UK output is expected to recover over the next quarter. Encouragingly, the Governor of the Bank of England expects economic productivity and wage growth to improve in the medium term.

Current UK bond yields and interest rates continue to be supportive of growth. The Bank of England base rate was cut from 0.5% to 0.25% on 4 August 2016 and has remained unchanged since then. Ten year government bond yields are now 1.1%, down from the 1.6% recorded a year ago.

UK property market

The MSCI IPD Quarterly Index recorded a total return for All Property for the year to March 2017 of 4.6%, an income return of 4.9% and a fall of 0.3% in capital values. The industrial sector outperformed the other sectors by delivering 9.7% while retail delivered 2.8% and offices recorded 2.5%. In comparison to the previous year, MSCI IPD net initial yields have been stable across all three sectors.

By sector, retail values fell by 2.3% and offices by 1.5%. In contrast, the industrial sector recorded a rise of 4.2% and was the strongest sector in the index. Recently released data from the MSCI IPD monthly digest, showed capital growth is stronger than 12 months ago and more evenly spread across the segments with London offices showing slower growth than historically. 29 segments recorded positive capital growth and only eight recorded negative movements. This is an improvement on a year ago when only 19 segments recorded positive capital growth. In terms of overall ranking, four of the top five segments were in the industrial sector and regional retail featured for the first time as the best performing segment in the past year.

In the year to March 2017, All Property rental growth was 1.9%. The industrial sector recorded the strongest rise at 3.9% for the year to March 2017, offices rose by 1.9% and retail by 0.9%. Recently released data for the MSCI IPD monthly digest, showed rental growth is weaker than 12 months ago with Central London retail slowing significantly. 23 segments recorded positive rental growth and 16 recorded negative or nil rental growth. This is less than a year ago when 26 segments recorded positive rental growth. In terms of overall ranking three of the top five segments were in the industrial sector, the remaining two were in the office and retail sectors.

The MSCI IPD Quarterly Index recorded an occupancy rate of 92.8% in March 2017, lower than the 93.4% recorded in March 2016. The highest occupancy was recorded for retail at 95.9% (March 2016: 96.1%) followed by industrial at 93.4% (March 2016: 93.0%) and offices at 86.6% (March 2016: 89.3%).

Prevailing uncertainty surrounding the terms of the UK’s exit from the European Union has led to a lower investment volumes in the past 12 months. Property Data showed that in the year to March 2017 investment volumes fell by more than 25% from the previous year to £49.8 billion.

According to the latest figures from the Bank of England, at the end of March 2017, total outstanding debt to commercial property stood at £150 billion. Property as a percentage of total outstanding debt fell to 7.1% in March 2017 from 7.5% in March 2016.

Industrial market trends

The MSCI IPD Quarterly Digest showed industrial total returns were 9.7% in the year to March 2017 with income delivering the majority of this return at 5.3% and capital growth returning 4.2%.

Over the past year, industrial take-up has been robust, with this trend being maintained into the first quarter of the year. Furthermore, consensus forecasts suggest the sector will outperform both retail and offices over the short to medium term.

Falling levels of availability in ready-to-occupy buildings, together with resilient occupier demand will help rents to hold up. What is also particularly encouraging is that rental values in the South East and Rest of UK Industrial segments still remain favourable compared to their historical trend.

The logistics element of the industrial sector is closely linked to consumer spending and while prospects for retail spending remain uncertain, at this stage, based on forward indicators, they still remain encouraging.  Moreover, it is also worth noting that the weaker pound, as mentioned previously, has fuelled demand for industrial occupiers in the manufacturing and exporting sectors. And so, if retail sales do slow, some of this may be offset by stronger demand in these sectors.

Retail market trends

Retail total returns were 2.8% in the year to March 2017. Returns comprised 5.2% income return and a fall of 2.3% in capital values. Consensus forecasts suggest that while the retail sector faces some headwinds over the next few years, its performance will vary by segment with retail warehouses expected to perform better than high street shops.

Following a period of low confidence in the sector, the latest retail sales data from the National of Office Statistics has been strong. Sales over the past year have grown by 4.0%, and are ahead of prior estimates. The latest confidence survey from Gfk NOP also remains at higher levels compared to historical readings. While these figures are encouraging, challenges remain in the sector. The latest reading from the Office of National Statistics show that average real wage growth turned negative in April 2017, and house price growth indicators suggest prices may stall or fall going forwards. On the positive side, employment levels are encouraging. Overall, there is the possibility that consumers reduce their spending in response to less disposable income. However, this depends on inflation and real wage growth, which at this stage is uncertain.

It is worth noting that where London retail has traditionally driven returns in the sector, the latest reading from the MSCI IPD Monthly Digest suggests rental growth has started to slow in this market. In the regions, the revaluation of business rates outside of London should help reduce costs for retailers.

Office market trends

Office total returns were 2.5% in the year to March 2017. Returns comprised 4.1% income return and a fall in capital values of 1.5%. Consensus forecasts suggest that the office sector will lag behind retail and industrial. However, there will be a wide disparity in performance with returns driven by regional offices rather than London offices.

The outlook for central London offices remains uncertain following the EU referendum and its potential consequences for businesses, particularly financial services. Take-up in central London offices are still above the ten year average and a sectoral breakdown shows that 55% of take-up in the main central London submarkets came from business services, media and tech firms; compared to approximately 25% from legal and financial firms.

Regional office market prospects are more positive. Office rental levels do not look particularly high compared to their historic levels. If employment levels continue to be robust, then rents in the regions should grow. Capital growth predictions are also encouraging for the regions, with some forecasters predicting regional offices to deliver the strongest returns in the market.

Investment manager’s report

We have had another successful year whilst continuing to embrace our occupier focused and opportunity led approach.

Our asset allocation and proactive management of the portfolio, including some value accretive disposals, has enabled us to again outperform the MSCI IPD Quarterly Benchmark, on a total return basis over 1, 3, 5 and 10 years. Additionally, we have won an award for the quality of our data submitted to MSCI as part of the benchmarking process.

Our portfolio now comprises 53 assets, with over 350 occupiers and is valued at £624.4 million. As a result of leasing activity, income growth and active management, the passing rent on a like-for-like basis has increased by 4.4% to £40.0 million, with an ERV of £45.9 million.

We have completed 35 lettings securing over £3.2 million of income, 6.9% ahead of the March 2016 ERV. The year ended with occupancy at 94%, which we have already subsequently increased after the year end. Income retained through lease renewals and re-gears totalled £1.2 million, 5.7% ahead of the March 2016 estimated rental value.

Two City office buildings were sold for total proceeds of £45 million, 4% ahead of the March 2016 valuation. These sales were in line with our strategy to realise value and reduce our exposure to this market, where we believe growth prospects are weaker due to a combination of factors, including the EU referendum, business rate revaluations and high rental values. Three central London buildings have been retained: at Covent Garden, where we have residential planning consent; at Farringdon, where we have good quality space to let and which will benefit from Crossrail; and, at Angel Gate, which is highly reversionary. We have value add initiatives at all of these properties.

In addition, we have sold four smaller assets where business plans have been completed generating total proceeds of £7.0 million, 41% ahead of the March 2016 valuation. The net effect of these disposals is to have increased the average lot size to £11.8 million.

We have set out below the principal activity in each of the sectors in which we are invested. We believe our proactive approach will continue to unlock further value through active management initiatives.

Despite the EU referendum, the occupational markets remain resilient, especially in the industrial and regional office sectors and take up remains positive and this is demonstrated by more recent activity showing further occupancy improvements.  Our focus remains being exposed to areas of the market where occupational demand is likely to lead to positive rental and in turn, income growth.

In terms of wider trends affecting the markets we are operating in, we are conscious of the Government led proposals aiming to increase economic growth, wealth and employment in regions outside of London and the South East. We already have exposure in the cities of Birmingham, Bristol, Glasgow, Leeds and Manchester but during the year we reduced our London exposure and placed more reliance on our existing buildings in regional cities that we think offer interesting opportunities.

The office environment is continuing to evolve and workers increasingly require a more socially cohesive environment with informal seating areas, cafes and relaxation zones to encourage creativity, collaboration, wellbeing and enjoyment. Office providers need to adapt to these changing dynamics in order to deliver space that meets the requirements of modern businesses.

An example of where we are embracing this change is at our Angel Gate property where over the past few years we have been working to reposition it to meet modern occupier requirements. This has been achieved through the refurbishment of the office suites, the internal and external common areas and provision of onsite amenities. We have seen an increase of approximately 150% in ERV since commencing the repositioning process.

Portfolio Performance

The portfolio’s total return for the year to 31 March 2017 was 9.9%, outperforming the MSCI IPD Quarterly Benchmark, which delivered 4.6%. Our overweight position to the industrial sector and regional offices together with the active management carried out has contributed to this outperformance.

As at 31 March 2017, the portfolio generated a net initial yield of 5.9% after void costs with a reversion to 6.9%. Overall, like-for-like growth in the portfolio’s estimated rental values was 3.3% during the year to March 2017. Estimated rental values in the industrial sector grew 4.3% and by 2.9% in the office sector. The retail and leisure estimated rental values remained flat, with the exception of our London retail, which saw positive rental growth.

The portfolio’s capital value for the year grew by 3.0% on a like-for-like basis. We saw positive valuation growth in the industrial sector of 6.3% and in the office sector of 2.5%. The retail and leisure holdings, despite remaining 99% let, declined in value by 2.0% reflecting the subdued outlook in the retail sector.

The estimated rental value of the void space is £2.6 million per annum and 94% has been vacant for less than a year.

Outlook for the coming year

The occupational market remains robust in the industrial and regional office markets. The uncertainty surrounding the EU referendum and more recently the forthcoming general election has resulted in lower demand for central London offices. The retail sector is going through a fundamental change due to shopping habits evolving and the continued momentum of online retailing, meaning that retail markets continue to suffer from a structural void.

We have maintained high occupancy level and captured rental growth. Whilst we have a shorter than average lease expiry profile in the industrial and office sectors, we see this as a positive in an active market. On lettings and renewals, we are able to secure longer leases locking in higher rents and creating value.

Our two largest letting opportunities are at 50 Farringdon Road in London and at 180 West George Street in Glasgow, where a comprehensive refurbishment completes this summer. Both buildings provide high quality space in central locations and we expect to secure occupiers quickly and improve our income position.

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 as at 31 March 2017, ranked by capital value, represent just over 48% of the total portfolio valuation
and are detailed below.

	Acquisition Date	Property type	Tenure	Approximate area (sq ft)	No. of occupiers	Occupancy rate (%)
Parkbury Industrial Estate, Radlett, Herts.	03/2014	Industrial	Freehold	336,700	23	100
River Way Industrial Estate, Harlow, Essex	12/2006	Industrial	Freehold	455,000	10	93
Angel Gate, City Road, London EC1	10/2005	Office	Freehold	64,500	37	93
Stanford House, Long Acre, London WC2	05/2010	Retail	Freehold	19,700	4	100
50 Farringdon Road, London EC1	10/2005	Office	Leasehold	32,000	2	35
Belkin Unit, Shipton Way, Rushden, Northants	07/2014	Industrial	Freehold	312,850	1	100
Pembroke Court, Chatham, Kent	06/2015	Office	Leasehold	86,300	3	100
Queens Road, Sheffield	08/2015	Retail Warehouse	Freehold	103,000	1	100
Phase II, Parc Tawe Retail Park, Swansea	10/2005	Retail Warehouse	Leasehold	116,700	8	100
Metro, Salford Quays, Manchester	02/2016	Office	Freehold	71,000	4	100

Top ten occupiers

The largest occupiers, based as a percentage of contracted rent, as at 31 March 2017, are summarised as follows:

Occupier	Contracted Rent (£000)	%
Belkin Limited	1,691	4.0
DHL Supply Chain Limited	1,505	3.6
B&Q Plc	1,243	3.0
Snorkel Europe Limited	1,123	2.7
The Random House Group Limited	1,000	2.4
Cadence Design Systems Limited	972	2.3
Edward Stanford Limited	785	1.9
Portal Chatham LLP	725	1.7
XMA Limited	653	1.6
Ricoh UK Limited	640	1.5
Total	10,337	24.7

Longevity of income

As at 31 March 2017, based as a percentage of contracted rent, the average length of the leases to the first termination was 5.7 years. This is summarised as follows:

	%
0 to 1 years	7.2
1 to 2 years	16.9
2 to 3 years	13.0
3 to 4 years	15.2
4 to 5 years	10.9
5 to 10 years	23.7
10 to 15 years	9.4
15 to 25 years	2.5
25 years and over	1.2
Total	100

The average length of the leases to lease expiry is 6.6 years.

Retention rates

Over the year total income at risk due to leases expiring or break options totalled £4.3 million, compared to £2.4 million for the year to March 2016, a 77% increase.

The portfolio retained 29% of total income at risk in the year to March 2017, this comprised 21% retention for those on lease expiry and 8% after break options. Occupancy reduced during the year, but at 94% is still ahead of the MSCI IPD Quarterly Benchmark.

The retention figure is significantly lower for the year, however it includes the floors at 50 Farringdon Road becoming vacant, which creates an opportunity to increase income ahead of the capped level in the previous lease. As expected, two floors at 180 West George Street in Glasgow were returned which was envisaged on purchase and forms part of the repositioning strategy for this asset. A small office building in Bracknell fell vacant and is now being sold, with vacant possession, considerably in excess of the March 2016 valuation. If these three properties are excluded, our retention rate for the year is 76%.

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 2017.

Industry Sector	Picton  (%)	Benchmark (%)
Services	30.2	22.8
Retail Trade	22.7	36.7
Manufacturing	12.9	7.2
Financial Services	12.7	14.7
Transportation, Communications	8.8	5.4
Wholesale Trade	5.4	4.4
Public Administration	3.8	4.0
Construction	2.0	1.2
Mining	0.0	0.5
Other	1.5	3.1
	100	100

Source: MSCI IPD IRIS Report March 2017

Industrial portfolio review

The industrial portfolio delivered the strongest sector performance for the year, due to a combination of positive rental growth, a shortage of supply, limited development, yield hardening and significant asset management activity.

Values increased by 6.3% on a like-for-like basis and the rent roll increased by 5.8% to £15.3 million per annum, while reducing holding costs. The portfolio has a weighted average lease length of five years and £2.0 million of reversionary potential.

Our portfolio comprised two main asset types; strategically located distribution warehouses and light industrial units, which generally comprise multi-let estates.

The distribution warehouse portfolio totals 1.3 million sq ft in six units, let to occupiers including Belkin, DHL and The Random House Group, and remains fully income producing. The only notable activity was at our 246,800 sq ft warehouse in Washington where we secured a rental uplift of £0.1 million at the June 2016 rent review, increasing the passing rent by 11% to £1.12 million per annum, which was 12% ahead of ERV.

The multi-let portfolio, totalling 1.4 million sq ft in 131 units, is 98.6% let. We had one vacant unit in Harlow (where we completed a new letting post year end) and two small units in Belfast with a combined ERV of £20,000 per annum.

We are experiencing occupier demand across all of our estates, which is demonstrated by the 16 lettings completed during the year for a combined rent of £1.5 million, 5.8% ahead of March 2016 ERV.

Notable lettings include our largest industrial void, at Unit D River Way in Harlow. This was comprehensively refurbished and let less than three months after the works completed, to a gas provider on a ten year lease with no break at £0.35 million per annum, which is in line with March 2016 ERV.

The second largest void, at Unit O Lyon Business Park in Barking, was let to a catering firm servicing London City Airport on a ten year lease, subject to break, at £0.25 million per annum, 17% ahead of March 2016 ERV and the previous passing rent.

Seven lease renewals or regears were completed during the year, securing £0.33 million per annum, 3% ahead of March 2016 ERV. Eight rent reviews were settled, increasing the combined passing rent by £0.18 million to £1.65 million per annum which was 10% ahead of March 2016 ERV.

Break clauses were removed from two leases at Parkbury, Radlett and Datapoint, London E16, securing £0.14 million per annum for an additional five years term certain and we also actively surrendered three leases in order to facilitate re-lettings.

Several of our estates will benefit from infrastructure improvements in the short and medium term. Dencora Way in Luton will benefit from the recently completed Junction 11a on the M1, improving connectivity. Harlow Council are proposing to create a new access to River Way, Harlow alleviating traffic congestion and providing a faster link to the M11. At Parkbury in Radlett, a proposed new rail freight terminal and associated road improvements will significantly improve journey times to the M25, albeit this is a longer term project.

Investment activity

During the year, there were no acquisitions or disposals in the industrial portfolio but we secured a change of use at our asset in Oldham from industrial to leisure. This accounts for the reduction in the number of assets held within the sector.

Sector outlook

Tight supply, limited development and healthy demand across the majority of the country will continue to support rental growth, which has been positive since 2013. This sector has seen significant valuation growth over the past five years. Looking forward, we expect to see valuations stabilising, with active management and the capturing of rental growth being the main drivers of value in the short to medium term.

Our portfolio consists of good quality units in strong locations demonstrated by the current occupancy level. Over the coming year, we have 17 lease events with a passing rent of £0.84 million and an ERV of £0.94 million per annum.

Industrial portfolio key metrics

	2017	2016
Value	£250.4 million	£236.6 million
Internal Area	2,730,000 sq ft	2,745,200 sq ft
Annual Rental Income	£15.3 million	£14.4 million
Estimated Rental Value	£17.3 million	£16.8 million
Occupancy	98.6%	94.2%
Number of Assets	17	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	F
The Business Centre, Molly Millars Lane, Wokingham, Berks.	100,500	F
Lyon Business Park, Barking, Essex	99,450	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
Magnet Trade Centre, Winnersh, Reading	13,700	F

	Largest occupiers	% of total portfolio
1	Belkin Limited	4.0
2	DHL Supply Chain Limited	3.6
3	Snorkel Europe Limited	2.7
4	The Random House Group Limited	2.4
5	XMA Limited	1.6

Office portfolio review

The office portfolio delivered the second strongest sector performance for the year. This was a result of attractive sale prices being achieved in London, positive rental growth across most regional markets and significant asset management activity.

Values increased by 2.5% on a like-for-like basis and we were able to increase the rent roll by 7.0%, while reducing holding costs. The portfolio has a weighted average lease length of four years and has £3.8 million of reversionary potential.

Our portfolio comprises both single and multi-let offices, which total 925,000 sq ft in 19 assets and is 87.5% let with the largest void at 50 Farringdon Road in London. At this location, we have let 7,800 sq ft of office space to a leading multidisciplinary engineering contractor at an annual rent of £0.42 million, in line with the preceding ERV but 3% less than the March 2016 ERV. The second floor and small suites on the ground and first floors remain available to let and there is good interest. 

The second largest void is at 180 West George Street in Glasgow, which was acquired with short income in 2015 for £14.25 million, reflecting a high net initial yield of 7.8%. We were expecting on purchase to have four floors falling vacant; however, we have retained Standard Life and Michael Page on two floors at a rent of £0.34 million per annum, 8% ahead of March 2016 ERV. The two vacant floors and common areas are currently being refurbished to launch as some of the best in class space available in this market.

These two properties account for 55% of the total void across the entire portfolio and provide further opportunity to increase the rent roll. We are confident of securing occupiers in the short term.

We are seeing good demand, which is demonstrated by the 14 lettings completed during the year for a combined rent of £1.3 million, 8% ahead of March 2016 ERV.

Notable lettings in the regions include the repositioned Trident House in St. Albans, where we comprehensively refurbished one floor and secured three new occupiers at a combined rent of £0.32 million per annum, 29% ahead of March 2016 ERV. The final letting was at a rent of £37.50 per sq ft, which we believe sets a new rental level in this market.

We secured Benugo at Angel Gate, London for their Head Office at a rent of £0.15 million per annum, in line with March 2016 ERV.

12 lease renewals or regears were completed during the year, securing £0.77 million per annum, 7% ahead of March 2016 ERV. Two rent reviews were settled, increasing the combined passing rent to £80,000, 11% ahead of March 2016 ERV. We actively surrendered seven leases in order to facilitate re-lettings and sales, as detailed below.

Investment activity

Boundary House, Jewry Street, London EC3, where we completed two lettings (one following an active management surrender) achieving full occupancy, was sold in August 2016 for £27.8 million, which (including a Rights of Light settlement) was 3.3% ahead of the March 2016 valuation. The property was acquired in 2006 for £16.1 million.

The sale of 1 Chancery Lane, London WC2 completed in October 2016 realising £17.25 million and reflecting a net initial yield of 3.9%, which was 9.3% ahead of the March 2016 valuation. The property was acquired in 2005 for £9.0 million.

These sales crystallised the value created since purchase and concluded our strategy to reduce the portfolio’s central London exposure whilst capturing significant valuation gains over the last few years.

A small office building was sold in Bracknell, following the occupier vacating on lease expiry. Dilapidations of £0.4 million were secured and the building sold for £1.5 million, 23% ahead of the March 2016 valuation.

Sector outlook

The impact of the decision to leave the EU and in particular its affect on London and the financial services sector, remains uncertain. Consequently, sentiment towards London is weakening. However, it appears to be improving in the stronger regional office markets where there is a shortage of suitable space and a limited development pipeline.

We are seeing good occupational activity in the regions, with low supply in many markets and positive rental growth. By providing the best space in the local market we are maintaining good occupancy levels and capturing rental growth.

The short term opportunities are the letting of 50 Farringdon Road, London which is being marketed with good interest and 180 West George Street, Glasgow where we have already received interest. With a combined ERV of £1.4 million, the lettings will be significantly income accretive and further save void hold costs.

Over the coming year, we have 26 lease events with a passing rent of £1.9 million and an ERV of £1.7 million per annum.

Office portfolio key metrics

	2017	2016
Value	£213.9 million	£252.1 million
Internal Area	925,000 sq ft	999,400 sq ft
Annual Rental Income	£13.8 million	£14.8 million
Estimated Rental Value	£17.6 million	£19.9 million
Occupancy	87.5%	95.8%
Number of Assets	19	21

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	72,100	F
Metro, Salford Quays, 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
800 Pavilion Drive, Northampton Business Park, Northampton	49,400	F
Queens House, 19/29 St Vincent Place, Glasgow	49,400	F
Citylink, Addiscombe Road, Croydon	48,200	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 House, Kirkstall Road, Leeds	25,200	F
Atlas House, Third Avenue, Globe Park, Marlow, Bucks.	24,800	F
Merchants House, Crook Street, Chester	21,900	F
Trident House, 42/48 Victoria Street, St Albans, Herts.	18,900	F
Waterside Park, Longshot Lane, Bracknell, Berks.	18,000	F
Marshall Building,122–124 Donegall Street, Belfast	8,700	F

	Largest occupiers	% of total portfolio
1	Cadence Design Systems Limited	2.3
2	Portal Chatham LLP	1.7
3	Ricoh UK Limited	1.5
4	Canterbury Christ Church University	1.5
5	BPP Holdings Limited	1.2

Retail and leisure portfolio review

Despite positive activity during the year, as outlined below and continued high occupancy, the retail portfolio delivered the weakest sector performance, which was primarily a result of limited rental growth across the wider market.

Values decreased by 2% on a like-for-like basis and the rent roll remained static with the only notable ERV growth at Stanford House, London and Gloucester Retail Park, Gloucester. The portfolio has a weighted average lease length of just over eight years and is slightly over rented.

Our portfolio comprises 17 assets across retail warehouse parks, retail shops and two leisure assets and remains 99% let for the second year in a row. We have four small retail units available, and a restaurant in Birmingham, with a combined ERV of £0.13 million per annum.

We completed five lettings during the year for a combined rent of £0.37 million, 17% ahead of March 2016 ERV. The most notable letting was at Gloucester Retail Park, where in a back-to-back transaction we accepted the surrender of Carpetright’s lease for a premium of £0.21 million and let the unit to Pure Gym for a minimum of ten years at a rent of £0.14 million per annum, which is 32% ahead of March 2016 ERV. We believe the letting significantly improves the occupier line up and has helped us to attract Starbucks onto the park where we are currently on site developing a new unit for them.

A settlement of £5.25 million was received in relation to a dispute at the Strathmore Hotel, Luton. The existing valuation and leasing arrangements at this asset remained unchanged. The hotel is currently being comprehensively refurbished by the tenant and is due to re-open in the summer.

Four lease renewals or regears were completed during the year, securing £0.12 million per annum, 9% ahead of March 2016 ERV. At Queens House in Glasgow, an increase of over 60% on the prior passing rent was achieved on a restaurant unit securing a new rent of £0.16 million per annum, over 50% ahead of the March 2016 ERV.

Investment activity

Two small non-core retail assets in Bath were sold for a total of £3.2 million, reflecting an aggregate net initial yield of 4.7% and a 30% premium to March 2016 valuation. These assets were originally purchased with a combined value of £2.1 million as part of the Rugby REIT acquisition in 2010 and have since generated attractive income and capital returns.

Drury Lane in Oldham was sold for £2.2 million, completing the business plan for this asset. The warehouse was purchased in April 2010 for £0.4 million with an annual rent of £74,000 as part of the acquisition of Rugby REIT. During Picton’s ownership, we secured planning consent to change the use from industrial to leisure, completed a full refurbishment, acquired adjacent land for car parking and subsequently let the transformed asset to The Gym Group Limited until 2031 at an annual rent of £150,000. The sale price reflects a net initial yield of 6.4% and a 85% premium to the March 2016 external valuation. Net of the £0.5 million of costs incurred since acquisition, the asset was sold at an 130% profit.

The disposals are in line with our ongoing strategy to reshape the portfolio in favour of larger assets with greater potential for capital and income growth.

Sector outlook

Online retailing continues to challenge traditional shopping habits and in turn the demand for retail assets. Changes in the delivery of goods, such as same-day-delivery and e-lockers, are changing the retail landscape and we see that with more discerning demand from retailers.

Our portfolio is currently significantly underweight to the retail sector, compared to the MSCI IPD Quarterly Benchmark, and overweight to the industrial sector, which is more likely to be positively affected by these changing trends. The retail we do hold in the portfolio is approximately 45% invested in retail warehouses, which are expected, by consensus forecasts, to be one of the better performing segments over the medium term.

Rental levels have been static in the majority of the UK high streets and retail parks, with the exceptions being central London, busy shopping destinations in major cities and prime parks. Rents are still below their 2008 peak and it is unlikely that high street rents will recover to pre-recession levels due to an over-supply and structural changes in shopping habits. Retail warehousing is seeing a resurgence due to additional demand from leisure occupiers.

68% of our retail and leisure portfolio is invested in five assets, which are Stanford House in Covent Garden and four fully let retail warehouse parks. We believe these properties are well positioned to perform in the medium term. The remaining portfolio is well let, with values rebased and the majority of the rents reset, providing a strong income return of 8.3% from our high street portfolio.

Over the coming year we have six lease events with a passing rent of £0.36 million and an ERV of £0.27 million per annum.

Retail and Leisure portfolio key metrics

	2017	2016
Value	£160.1 million	£165.9 million
Internal Area	824,000 sq ft	830,700 sq ft
Annual Rental Income	£11.0 million	£11.2 million
Estimated Rental Value	£11.0 million	£10.9 million
Occupancy	98.8%	99.4%
Number of Assets	17	19

Property	Area (sq ft)	Freehold/ Leasehold
Parc Tawe, Phase II, Link Road, Swansea	116,700	L
Gloucester Retail Park, Eastern Avenue, Gloucester	113,900	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

	Largest occupiers	% of total portfolio
1	B&Q Plc	3.0
2	Edward Stanford Limited	1.9
3	Asda Stores Limited	1.4
4	Homebase Limited	1.1
5	Central England Co-Operative Limited	1.0

Financial review

Despite the uncertainties regarding economic and political events, we have recorded a total profit for the year of over £42 million. Our property portfolio increased on a like-for-like basis by 3.0%, giving a capital profit of nearly £17 million, while the income profit for the year was £25.8 million, an increase of 30% from the 2016 result. The income result does include some exceptional income, as stated below.

Our total return for the year based on these results was 10.4%.

Net asset value

The net assets of the Group increased to £441.9 million, which was a rise of 6.0% over the year, driven by a total profit for the year of £42.8 million, or earnings per share of 7.9 pence. The EPRA net asset value rose from 77 pence to 82 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).

	2017 £m	2016 £m	2015 £m
Net asset value – EPRA and IFRS	441.9	417.1	370.0
Fair value of debt	(24.5)	(21.8)	(19.8)
EPRA Triple Net Asset Value	417.4	395.3	350.2
Net Asset Value per share (pence)	82	77	69
EPRA Net Asset Value per share (pence)	82	77	69
EPRA Triple Net Asset Value per share (pence)	77	73	65

Income statement

Total revenue from the property portfolio was £54.4 million, an increase of 18.5% over 2016. This increase largely reflects the additional income that was received in the year from the settlement of the dispute concerning the Strathmore Hotel in Luton. Net property income, after deducting the direct expenses associated with the portfolio, was up 18% to £42.4 million.

The like-for-like change in rental income compared to the previous year, on an EPRA basis, is set out in the EPRA Disclosures on page 81.

Operating expenses increased to £5.2 million, from £4.4 million. A significant part of this increase is due to the variable elements of the Group’s remuneration policy, and reflects the strong performance this year, both the return from the property portfolio and the shareholder return.  We have established a new Long-term Incentive Plan this year, which is discussed in more detail in the Remuneration Report, and this is linked to shareholder return, property performance and EPRA earnings per share growth over three year performance periods.

Financing costs have fallen to £10.9 million from £11.6 million in 2016. This is as a result of the repayment in full of our zero dividend preference shares in October 2016. We would expect a further fall in finance costs next year as the full impact of this repayment works through into our results.

Capital gains on the portfolio were £16.9 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 £0.5 million for the year. Towards the end of last year the Government introduced new legislation covering interest deductibility for UK companies, in response to the on-going Base Erosion and Profit Shifting project. This came into effect from 1 April 2017. At the same time a consultation has been launched by the Treasury to bring non resident landlord corporations, such as Picton, into the scope of UK corporation tax. We are working with our advisers on the potential implications for the Group, but, as mentioned in the Chairman’s Statement, we believe that conversion to a UK REIT in 2018 will be in the interests of the Company.

The income profit for the year was £25.8 million, an increase of nearly 30% from 2016. This, together with the capital gains, resulted in a total profit for the year of £42.8 million.

Dividends

We increased our annual dividend rate from 3.3 pence to 3.4 pence, with effect from our February 2017 quarterly dividend, bringing the total dividend paid in this financial year to 3.325 pence. Dividend cover for the full year was 144%.

Investment properties

The fair value of our investment property portfolio was £615.2 million at 31 March 2017, lower than the £646.0 million a year previously. The main reason for the decrease were disposals in the year, principally two central London office properties, but also a number of small non-core assets. There were no acquisitions in the year, but £2.8 million of capital expenditure was incurred across the portfolio. The overall revaluation gain was £15.1 million, representing a 3.0% like-for-like increase in the valuation of the portfolio. At 31 March 2017 the portfolio comprised 53 assets, with an average lot size of £11.8 million.

A further analysis of capital expenditure, in accordance with EPRA Best Practice Recommendations, is set out in the EPRA Disclosures section on page 81.

Borrowings

Total borrowings decreased to £204.6 million at 31 March 2017, following the repayment of both the zero dividend preference shares and the outstanding balance of the revolving credit facility. As a result our loan to value ratio was 27.4% at the year end, its lowest ever reported level. The weighted average interest rate on our borrowings has also fallen and now stands at 4.2%, while the average loan duration has moved out to 11.7 years.

Our senior loan facilities with Canada Life and Aviva remained in place, reduced only by the amortisation of the Aviva facility (£1.1 million in the year). Both facilities have fixed rates of interest, so we have no exposure to future interest rate volatility on these loans. The Group remained fully compliant with the loan covenants throughout the year.

At the year end we had over £50 million of committed but undrawn facilities provided by Santander. If drawn, interest would be payable at 175 basis points over three month LIBOR, which at current LIBOR rates equates to an all-in interest cost of 2.1%. We are currently in the process of extending our initial revolving credit facility ahead of its maturity next year.

As stated above, we repaid in full our 22 million zero dividend preference shares when they matured in October 2016. As well as the on-going saving in annual finance costs, this repayment has helped to simplify the Group’s capital structure.

Loan arrangement costs are capitalised and are amortised over the terms of the respective loans. At 31 March 2017 the unamortised balance of these costs were £3.7 million.

The fair value of our borrowings at 31 March 2017 was £229.1 million, higher than the book amount. Although lending margins have tended to increase over the past year, gilt rates have continued to remain at historically low levels.

A summary of our borrowings is set out below:

	2017	2016	2015
Total borrowings (£m)	204.6	249.5	232.8
Borrowings net of cash (£m)	170.8	226.8	162.8
Undrawn facilities (£m)	53.0	10.2	26.0
Loan to value ratio (%)	27.4	34.6	30.1
Weighted average interest rate (%)	4.2	4.4	4.6
Average duration (years)	11.7	10.7	12.4

Capital structure

Our equity balance has remained unchanged over the year, but we have reduced our level of borrowings as stated above.

The Group’s net gearing ratio, using the method prescribed by the AIC, decreased to 43.6%, from 59.2% a year ago. Further details are provided in the Supplementary Disclosures section.

Cash flow and liquidity

The cash flow from our operating activities increased from £24 million to nearly £27 million this year. This, together with the asset sales of over £51 million, facilitated the repayment of the zero dividend preference shares and dividend payments. Our cash balance at the year end stood at close to £34 million.

EPRA best practices recommendations

The EPRA key performance measures for the year are set out on page 3 of the Report, with more detail provided in the EPRA Disclosures section which starts on page 80. There are further references to the Best Practices Recommendations in the Financial Review under the appropriate headings, and again more detail is provided in the EPRA Disclosures section.

Andrew Dewhirst
Finance Director, Picton Capital Limited
6 June 2017

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
6 June 2017

Consolidated statement of comprehensive income

For the year ended 31 March 2017

	Notes	Income £000	Capital £000	2017 Total £000	2016 Total £000
Income
Revenue from properties	3	54,398	-	54,398	45,923
Property expenses	4	(12,011)	-	(12,011)	(10,001)
Net property income		42,387	-	42,387	35,922
Expenses
Management expenses	6	(3,636)	-	(3,636)	(2,901)
Other operating expenses	8	(1,613)	-	(1,613)	(1,510)
Total operating expenses		(5,249)	-	(5,249)	(4,411)
Operating profit before movement on investments		37,138	-	37,138	31,511
Investments
Profit on disposal of investment properties	14	-	1,847	1,847	799
Investment property valuation movements	14	-	15,087	15,087	44,171
Total profit on investments		-	16,934	16,934	44,970
Operating profit		37,138	16,934	54,072	76,481
Financing
Interest received		62	-	62	144
Interest paid	9	(10,885)	-	(10,885)	(11,561)
Total finance costs		(10,823)	-	(10,823)	(11,417)
Profit before tax		26,315	16,934	43,249	65,064
Tax	10	(499)	-	(499)	(216)
Profit and total comprehensive income for the period		25,816	16,934	42,750	64,848
Earnings per share
Basic and diluted	12	4.8p	3.1p	7.9p	12.0p

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 2017

	Notes	Share Capital £000	Retained Earnings £000	Total £000
Balance as at 31 March 2015		157,313	212,657	369,970
Issue costs of shares		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
Profit for the year		-	42,750	42,750
Dividends paid	11	-	(17,957)	(17,957)
Balance as at 31 March 2017		157,449	284,476	441,925

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

Consolidated balance sheet

As at 31 March 2017

	Notes	2017 £000	2016 £000
Non-current assets
Investment properties	14	615,170	646,018
Tangible assets		17	57
Accounts receivable	15	3,204	3,331
Total non-current assets		618,391	649,406
Current assets
Accounts receivable	15	16,077	14,649
Cash and cash equivalents	16	33,883	22,759
Total current assets		49,960	37,408
Total assets		668,351	686,814
Current liabilities
Accounts payable and accruals	17	(19,958)	(18,321)
Loans and borrowings	18	(1,104)	(29,091)
Obligations under finance leases	22	(109)	(109)
Total current liabilities		(21,171)	(47,521)
Non-current liabilities
Loans and borrowings	18	(203,540)	(220,444)
Obligations under finance leases	22	(1,715)	(1,717)
Total non-current liabilities		(205,255)	(222,161)
Total liabilities		(226,426)	(269,682)
Net assets		441,925	417,132
Equity
Share capital	20	157,449	157,449
Retained earnings		284,476	259,683
Total equity		441,925	417,132
Net asset value per share	23	82p	77p

These consolidated financial statements were approved by the Board of Directors on 6 June 2017 and signed on its behalf by:

Robert Sinclair
Director
6 June 2017

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

Consolidated statement of cash flows

For the year ended 31 March 2017

	Notes	2017 £000	2016 £000
Operating activities
Profit for the period		54,072	76,481
Adjustments for non-cash items	21	(16,894)	(44,925)
Interest received		62	144
Interest paid		(9,273)	(8,980)
Tax paid		(232)	(426)
Increase in receivables		(2,344)	(712)
Increase in payables		1,449	2,439
Cash inflows from operating activities		26,840	24,021
Investing activities
Capital expenditure on investment properties	14	(2,819)	(4,403)
Acquisition of investment properties	14	-	(73,084)
Disposal of investment properties		51,510	9,365
Purchase of tangible assets		-	(1)
Cash inflows/(outflows) from investing activities		48,691	(68,123)
Financing activities
Borrowings repaid		(45,965)	(1,011)
Borrowings drawn		-	15,800
Financing costs		(485)	(198)
Dividends paid	11	(17,957)	(17,822)
Cash outflows from financing activities		(64,407)	(3,231)
Net increase/(decrease) in cash and cash equivalents		11,124	(47,333)
Cash and cash equivalents at beginning of year		22,759	70,092
Cash and cash equivalents at end of year	16	33,883	22,759

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

Notes to the consolidated financial statements

For the year ended 31 March 2017

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 2017 with comparatives for the year ended 31 March 2016.

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, which give a true and fair view, 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 Directors 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.

·       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 38: Intangible Assets

·       Annual Improvements to IFRSs (2014)

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 2017 and have not been adopted early:

·        IFRS 9: Financial Instruments

• IFRS 15: Revenue from Contracts with Customers

·       IFRS 16: Leases

·       Amendments to IAS 7: Disclosure Initiative

·       Amendments to IAS 12: Deferred Tax Assets for Unrealised Losses

·       Amendments to IFRS 2: Classification and Measurement of Share-based payment Transactions

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.

Significant estimates

The critical estimates and assumptions 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.

Significant judgements

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 rights 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.

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 remeasured 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.

The grant date fair value of awards to employees made under the Long-term Incentive Plan is recognised as an expense, with a corresponding increase in equity, over the vesting period of the awards. The amount recognised as an expense is adjusted to reflect the number of awards for which the related non-market performance conditions are expected to be met, such that the amount ultimately recognised is based on the number of awards that meet the related non-market performance conditions at the vesting date. For share-based payment awards with market conditions, the grant date fair value of the share-based awards is measured to reflect such conditions and there is no adjustment between expected and actual outcomes.

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 profit or loss 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. 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 2017.

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

	2017 £000	2016 £000
Rents receivable (adjusted for lease incentives)	40,555	39,663
Surrender premiums	263	339
Dilapidation receipts	1,090	108
Other income	6,003	660
Service charge income	6,487	5,153
	54,398	45,923

Rents receivable includes lease incentives recognised of £0.9 million (2016: £1.2 million).

Included within other income is the £5.3 million settlement received in respect of a dispute at the Strathmore Hotel in Luton.

4. Property expenses

	2017 £000	2016 £000
Property operating costs	3,501	3,308
Property void costs	2,023	1,540
Recoverable service charge costs	6,487	5,153
	12,011	10,001

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 reinvested, 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 has delegated the day-to-day implementation of this strategy to the Investment Manager but retains responsibility to ensure that adequate resources of the Company are directed in accordance with its 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 53 commercial properties, which are in the industrial, office, retail, retail warehouse, and leisure sectors.

6. Management expenses

	2017 £000	2016 £000
Staff costs	2,992	2,328
Other management costs	644	573
	3,636	2,901

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

	2017 £000	2016 £000
Wages and salaries	1,729	1,475
Social security costs	287	204
Other pension costs	58	150
Share-based payments	918	499
	2,992	2,328

Staff costs are those of the employees of Picton Capital Limited. Employees in the Group participate in two share-based remuneration arrangements. Awards made under the Deferred Bonus Scheme, which is cash settled, are linked to the Company’s share price and dividends paid, and, with effect from 31 March 2017, awards will vest after two years. Employees must still be in the Group’s employment on the vesting date to receive payment. During the year the Group made awards of 662,149 units (2016: 744,444 units), which vest on 31 March 2019.

During the year, the Company established a new Long-term Incentive Plan for all employees which is equity settled. Awards vest three years from the grant date and are conditional on three performance metrics measured over each three year period. On 27 January 2017, the Company made awards of 1,170,258 shares for the three year period ending on 31 March 2019.

The table below summarises the awards made under the Deferred Bonus Scheme. 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 2017 and were not deferred were paid out subsequent to the year end at a cost of £494,000 (2016: £391,000).

Vesting Date	Units  at 31 March 2015	Units granted in  the year	Units redeemed in the year	Units at 31 March 2016	Units granted in the year	Units cancelled in the year	Units redeemed in the year	Units  at 31 March 2017
31 March 2014	9,970	-	(7,050)	2,920	-	-	(2,920)	-
31 March 2015	168,050	-	(13,050)	155,000	-	-	(155,000)	-
31 March 2016	580,061	-	(502,385)	77,676	-	-	(12,478)	65,198
31 March 2017	668,567	-	-	668,567	-	(4,191)	(536,460)	127,916
31 March 2018	359,756	372,222	-	731,978	-	(5,998)	-	725,980
31 March 2019	-	372,222	-	372,222	662,149	(2,688)	-	1,031,683
	1,786,404	744,444	(522,485)	2,008,363	662,149	(12,877)	(706,858)	1,950,777

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

The Group employed 12 members of staff at 31 March 2017 (2016: 13). The average number of people employed by the Group for the year ended 31 March 2017 was 12 (2016: 13).

8. Other operating expenses

	2017 £000	2016 £000
Valuation expenses	111	108
Administrator fees	171	201
Auditor’s remuneration	145	142
Directors’ fees	206	224
Professional fees	383	505
Other expenses	430	330
Recurring costs	1,446	1,510
Restructuring costs	167	-
Exceptional costs	167	-
	1,613	1,510

Auditor’s remuneration comprises:	2017 £000	2016 £000
Audit fees:
Audit of Group financial statements	65	56
Audit of subsidiaries’ financial statements	43	48
Audit related fees:
Review of half year financial statements	14	19
	122	123
Non-audit fees:
Additional controls testing	14	15
FCA CASS audit	5	4
Tax compliance	4	–
	23	19
	145	142

9. Interest paid

	2017 £000	2016 £000
Interest payable on loans at amortised cost	8,812	8,751
Capital additions on zero dividend preference shares	1,074	1,900
Interest on obligations under finance leases	114	115
Non-utilisation fees	270	169
Amortisation of finance costs	615	626
	10,885	11,561

The loan arrangement costs incurred to 31 March 2017 are £6,213,000 (2016: £5,728,000). These are amortised over the duration of the loans with £615,000 written off in the year ended 31 March 2017 (2016: £626,000).

10. Tax

The charge for the year is:

	2017 £000	2016 £000
Current UK income tax	331	235
Income tax adjustment to provision for prior year	25	(137)
	356	98
UK corporation tax	143	118
	143	118
Total tax charge	499	216

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:

	2017 £000	2016 £000
Profit before taxation	43,249	65,064
Expected tax charge on ordinary activities at the standard rate of taxation of 20%	8,650	13,013
Less:
Revaluation gains not taxable	(3,387)	(8,994)
Income not taxable, including interest receivable	(1,223)	(215)
Expenditure not allowed for income tax purposes	552	696
Losses utilised	(179)	(129)
Capital allowances and other allowable deductions	(4,102)	(4,136)
Losses carried forward to future years	20	-
Adjustment to provision for prior years	25	(137)
Total income tax charge	356	98

For the year ended 31 March 2017 there was an income tax liability of £356,000 in respect of the Group (2016: £98,000) and corporation tax of £143,000 (2016: £118,000).

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 £4.1 million (2016: £4.6 million) as the Group is only able to utilise the losses to offset taxable profits in certain discrete business streams, and the Directors consider the probability of realising the benefit of these losses, except to an immaterial extent, to be low.

11. Dividends

	2017 £000	2016 £000
Declared and paid:
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
Interim dividend for the period ended 31 March 2016: 0.825 pence	4,455	-
Interim dividend for the period ended 30 June 2016: 0.825 pence	4,456	-
Interim dividend for the period ended 30 September 2016: 0.825 pence	4,456	-
Interim dividend for the period ended 31 December 2016: 0.85 pence	4,590	-
	17,957	17,822

The interim dividend of 0.85 pence per ordinary share in respect of the period ended 31 March 2017 has not been recognised as a liability as it was declared after the year end. A dividend of £4,590,000 was paid on 31 May 2017.

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:

	2017	2016
Net profit attributable to ordinary shareholders of the Company from continuing operations (£000)	42,750	64,848
Weighted average number of ordinary shares for basic and diluted profit per share	540,053,660	540,053,660

13. Investments in subsidiaries

The Company had the following principal subsidiaries as at 31 March 2017 and 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%
Picton Capital Limited	England & Wales	100%
Picton ZDP Limited (in liquidation)	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 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.

During the year Merbrook Business Property Unit Trust, Merbrook Bristol Property Unit Trust and Merbrook Prime Retail Property Unit Trust were wound up following their assets and liabilities being 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.

	2017 £000	2016 £000
Fair value at start of year	646,018	532,926
Acquisitions	-	73,084
Capital expenditure on investment properties	2,819	4,403
Disposals	(50,601)	(9,365)
Realised gains on disposal	2,440	799
Realised losses on disposal	(593)	–
Unrealised gains on investment properties	25,729	51,125
Unrealised losses on investment properties	(10,642)	(6,954)
Fair value at the end of the year	615,170	646,018
Historic cost at the end of the year	654,057	685,499

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

	2017 £000	2016 £000
Appraised value	624,410	654,605
Valuation of assets held under finance leases	1,680	1,731
Lease incentives held as debtors	(10,920)	(10,318)
Fair value at the end of the year	615,170	646,018

The investment properties were valued by CBRE Limited, Chartered Surveyors, as at 31 March 2017 and 31 March 2016 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 are 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 alternative 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 2017 and 31 March 2016 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:

		2017			2016
	Offices	Industrial	Retail and Leisure	Offices	Industrial	Retail and Leisure
Appraised value (£000)	213,935	250,350	160,125	252,085	236,635	165,885
Area (sq ft, 000s)	925	2,730	824	999	2,745	831
Range of unobservable inputs:
Gross ERV (sq ft per annum)
— range	£6.42 to £50.45	£3.25 to £16.85	£5.24 to £91.14	£7.57 to £56.35	£3.15 to £16.78	£5.24 to £80.36
— weighted average	£26.39	£7.76	£31.60	£29.38	£7.33	£28.75
Net initial yield
— range	0% to  16.79%	4.49% to 10.29%	3.15% to 14.23%	1.04% to 18.75%	-4.75% to 9.64%	3.23% to 12.58%
— weighted average	5.67%	5.75%	6.33%	5.23%	5.61%	6.22%
Reversionary yield
— range	5.74% to 15.39%	5.38% to 11.60%	4.77% to 23.76%	5.05% to 15.94%	5.30% to 11.87%	4.25% to 9.27%
— weighted average	7.52%	6.47%	6.89%	7.12%	6.60%	5.78%
True equivalent yield
— range	5.59% to 13.04%	5.42% to 10.87%	4.66% to 9.77%	5.05% to 14.73%	5.48% to 10.94%	4.38% to 9.53%
— weighted average	7.32%	6.57%	6.66%	6.98%	6.67%	6.51%

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	2017 Impact on valuation	2016 Impact on valuation
Industrial	Increase of 50 basis points	Decrease of £19.5m	Decrease of £18.0m
	Decrease of 50 basis points	Increase of £23.0m	Increase of £21.1m
Office	Increase of 50 basis points	Decrease of £16.0m	Decrease of £19.9m
	Decrease of 50 basis points	Increase of £18.5m	Increase of £22.0m
Retail and Leisure	Increase of 50 basis points	Decrease of £12.7m	Decrease of £12.5m
	Decrease of 50 basis points	Increase of £16.4m	Increase of £14.6m

15. Accounts receivable

	2017 £000	2016 £000
Current
Tenant debtors (net of provisions for bad debts)	4,107	3,209
Lease incentives	10,920	10,318
Other debtors	514	578
Income tax receivable	-	4
Capitalised finance costs	536	540
	16,077	14,649
Non-current
Capitalised finance costs	3,204	3,331
	3,204	3,331
	19,281	17,980

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.

16. Cash and cash equivalents

	2017 £000	2016 £000
Cash at bank and in hand	31,056	20,063
Short-term deposits	2,827	2,696
	33,883	22,759

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

	2017 £000	2016 £000
Accruals	5,092	4,197
Deferred rental income	8,590	8,621
VAT liability	2,345	1,934
Income tax liability	295	-
Trade creditors	125	232
Other creditors	3,511	3,337
	19,958	18,321

18. Loans and borrowings

	Maturity	2017 £000	2016 £000
Current
Aviva facility	-	1,104	1,057
Zero dividend preference shares	15 October 2016	-	28,034
		1,104	29,091
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	89,822	90,926
		203,540	220,444
		204,644	249,535

The Group has a loan with Canada Life Limited for £113.7 million, which is fully drawn. The loan matures in July 2027, with £33.7 million repayable in July 2022. 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 (2016: £270.5 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 £1.1 million in the year (2016: £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 and Picton Property No 3 Limited, valued at £225.2 million (2016: £229.1 million).

The Group has a £26.0 million revolving credit facility with Santander Corporate & Commercial Banking until 25 March 2018. 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 £58.9 million (2016: £57.1 million).

On 21 June 2016 an additional £27.0 million revolving credit facility was put in place with Santander Corporate & Commercial Banking for five years. Interest is also 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) Listed Real Estate, valued at £67.6 million.

The fair value of the secured loan facilities at 31 March 2017, estimated as the present value of future cash flows discounted at the market rate of interest at that date, was £229.1 million (2016: £243.1 million). The fair value of the secured loan facilities is classified as Level 2 under the hierarchy of fair value measurements.

The Group repaid in full its 22,000,000 zero dividend preference shares (‘ZDPs’) at the maturity date of 15 October 2016. The ZDPs accrued additional capital at a rate of 7.25% per annum, resulting in a final repayment of £29.1 million.

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 2017 was 4.21% (2016: 4.43%).

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 2017 are shown below:

	Gross method	Commitment method
Maximum limit	285%	285%
Actual	141%	146%

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 2017 of approximately £2.9 million (2016: £3.3 million). No further obligations to construct or develop investment property or for repairs, maintenance or enhancements were in place as at 31 March 2017.

20. Share capital

	2017 £000	2016 £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 2016: 540,053,660)	-	-
Share premium	157,449	157,449

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. 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

	2017 £000	2016 £000
Profit on disposal of investment properties	(1,847)	(799)
Movement in investment property valuation	(15,087)	(44,171)
Depreciation of tangible assets	40	45
	(16,894)	(44,925)

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:

	2017 £000	2016 £000
Future minimum payments due:
Within one year	116	116
In the second to fifth years inclusive	466	466
After five years	7,616	7,732
	8,198	8,314
Less: finance charges allocated to future periods	(6,374)	(6,488)
Present value of minimum lease payments	1,824	1,826

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

	2017 £000	2016 £000
Current
Within one year	109	109
	109	109
Non-current
In the second to fifth years inclusive	396	397
After five years	1,319	1,320
	1,715	1,717
	1,824	1,826

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):

	2017 £000	2016 £000
Within one year	40,360	39,556
In the second to fifth years inclusive	125,866	124,853
After five years	107,534	116,228
	273,760	280,637

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 (2016: 540,053,660) ordinary shares, being the number of ordinary shares in issue at the year end.

At 31 March 2017, the Company had a net asset value per ordinary share of £0.82 (2016: £0.77).

24. Financial instruments

The Group’s financial instruments comprise cash and cash equivalents, accounts receivable, secured loans, 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, 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 2017	Note	Held at fair value through profit or loss £000	Financial assets and liabilities at amortised cost £000	Total £000
Financial assets
Debtors and capitalised finance costs	15	-	8,361	8,361
Cash and cash equivalents	16	-	33,883	33,883
		-	42,244	42,244
Financial liabilities
Loans	18	-	204,644	204,644
Obligations under finance leases	22	-	1,824	1,824
Creditors and accruals	17	-	8,728	8,728
		-	215,196	215,196

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
Debtors and capitalised finance costs	15	-	7,658	7,658
Cash and cash equivalents	16	-	22,759	22,759
		-	30,417	30,417
Financial liabilities
Loans	18	-	249,535	249,535
Obligations under finance leases	22	-	1,826	1,826
Creditors and accruals	17	-	7,766	7,766
		-	259,127	259,127

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 has two revolving credit facilities which provide greater flexibility in managing the level of borrowings.

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

	2017 £000	2016 £000
Total liabilities	226,426	269,682
Less: cash and cash equivalents	(33,883)	(22,759)
Net debt	192,543	246,923
Total equity	441,925	417,132
Net debt to equity ratio at end of year	0.44	0.59

Credit risk

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

31 March 2017	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	-	4,107	4,107
Cash and cash equivalents	16	-	33,883	33,883
		-	37,990	37,990

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

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 £249,000 (2016: £288,000) 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 2017 debtors overdue by more than 30 days totalled £1,840,000 (2016: £227,000).

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 2017 and at 31 March 2016 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’s liquidity risk is managed on an ongoing basis by the Investment Manager and monitored on a quarterly basis by the Board by maintaining adequate reserves and loan facilities, continuously monitoring forecasts and actual cash flows and matching the maturity profiles of financial assets and liabilities for a period of at least twelve months.

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 2017	Less than one year £000	1 to 5 Years £000	More than 5 years £000	Total £000
Cash and cash equivalents	33,925	-	-	33,925
Debtors and capitalised finance costs	5,157	1,476	1,728	8,361
Obligations under finance leases	(116)	(466)	(1,242)	(1,824)
Fixed interest rate loans	(9,708)	(38,832)	(252,662)	(301,202)
Creditors and accruals	(8,728)	-	-	(8,728)
	20,530	(37,822)	(252,176)	(269,468)

31 March 2016	Less than one year £000	1 to 5 Years £000	More than 5 years £000	Total £000
Cash and cash equivalents	22,787	-	-	22,787
Debtors and capitalised finance costs	4,327	1,312	2,019	7,658
Obligations under finance leases	(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)
Creditors and accruals	(7,766)	-	-	(7,766)
	(19,954)	(54,144)	(261,595)	(335,693)

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 £31.2 million (2016: £32.7 million).

Interest rate risk management

Interest rate risk arises on interest payable on the revolving credit facilities 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 2017	Less than 1 year £000	1 to 5 Years £000	More than 5 years £000	Total £000
Floating
Cash and cash equivalents	33,883	-	-	33,883
Fixed
Secured loan facilities	(1,104)	(4,928)	(198,612)	(204,644)
Obligations under finance leases	(109)	(396)	(1,319)	(1,824)
	32,670	(5,324)	(199,931)	(172,585)

31 March 2016	Less than 1 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)
Obligations under finance leases	(109)	(397)	(1,320)	(1,826)
	(6,441)	(20,915)	(201,246)	(228,602)

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 amounted to £205,500 (2016: £223,500). As at 31 March 2017 the Group owed £nil to the Directors (2016: £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 £4,590,000 (0.85 pence per share) was approved by the Board on 24 April 2017 and paid on 31 May 2017.

The Group has exchanged contracts to sell two properties for proceeds of £9,861,000, with completion expected in June 2017.