Annual Financial Report

23 June 2020

PICTON PROPERTY INCOME LIMITED
(“Picton”, the “Company” or the “Group”)
LEI: 213800RYE59K9CKR4497

Preliminary Annual Results

Picton announces its annual results for the year ending 31 March 2020.
 

Financial highlights

• Profit after tax of £22.5 million
• Net assets of £509 million, or 93p per share
• Total return of 4.5%
• Earnings per share of 4.1p
• Dividend cover of 105%

Strengthened balance sheet

• 14% reduction in total debt outstanding to £167.5 million
• Loan to value ratio reduced to 22%
• Raised £7 million of non-dilutive equity
• New £50 million revolving credit facility completed post year end
• Further tax savings as result of REIT regime

Outperforming property portfolio

• Total property return of 5.3%, outperforming MSCI UK Quarterly Property Index of -0.5%
• Portfolio top quartile outperformance against MSCI over one, three, five and ten years
• Like-for-like valuation increase of 1.4%
• Like-for-like rental income increase of 1.2%
• Like-for-like estimated rental value increase of 1.3%
• Occupancy at 89%
• 104 asset management transactions completed including:

• 20 rent reviews, 10% ahead of ERV
• 31 lease renewals or regears, 12% ahead of ERV
• 35 lettings or agreements to lease, 2% ahead of ERV
• Two asset disposals for £34.1 million, 15% ahead of March 2019 valuations
• £9 million invested into refurbishment projects

Responsible stewardship

• Embedded sustainability into corporate strategy, completing materiality assessment review
• Improved portfolio EPC ratings
• Incorporated energy efficiency measures into building refurbishments
• Further developed occupier and employee engagement programmes

Balance Sheet	31 March 2020	31 March 2019	31 March 2018
Property valuation	£665m	£685m	£684m
Net assets	£509m	£499m	£487m
EPRA NAV per share	93p	93p	90p

Income Statement	Year ended 31 March 2020	Year ended 31 March 2019	Year ended 31 March 2018
Profit after tax	£22.5m	£31.0m	£64.2m
EPRA earnings	£19.9m	£22.9m	£22.6m
Earnings per share	4.1p	5.7p	11.9p
EPRA earnings per share	3.7p	4.3p	4.2p
Total return	4.5%	6.5%	14.9%
Total shareholder return	3.6%	10.1%	4.8%
Total dividend per share	3.5p	3.5p	3.4p
Dividend cover	105%	122%	122%

Post year end and Covid-19 update
91% of March 2020 rent has been collected or is subject to agreed payment plans, with less than 1% currently subject to write off. We are continuing to work with our occupiers to find appropriate solutions for the balance outstanding as the lockdown starts to ease.

Post year end, we have concluded two new lettings in line with the March 2020 ERV; four lease extensions 13% above the March 2020 ERV; and two rent reviews 22% above the March 2020 ERV. Together these transactions add £0.3 million to the annualised rent roll.

In terms of pipeline, a further six lettings (including four relocations), for a combined annual rent of £0.5 million, and seven lease extensions, for a combined annual rent of £1 million, are agreed in principle and subject to legal documentation.

Picton Chairman, Nicholas Thompson, commented:
“Despite the challenges posed by Brexit and latterly the Covid-19 pandemic, these are another solid set of results from Picton, showing an increase in net asset value and upper quartile performance against the MSCI UK Quarterly Property Index. As well as managing the portfolio, we have also focused this year on sustainability, embedding this into our corporate strategy. Looking ahead, we believe the business and the portfolio is well-positioned with low gearing, a covered dividend and access to £50 million through our new revolving credit facility.”

Michael Morris, Chief Executive of Picton, commented:
“This year we have invested into the portfolio, upgrading assets and have either completed or are well progressed on several important asset management projects that will enable us to improve occupancy and rental income across the portfolio. As lockdown restrictions are eased and the investment market reopens we will also be focused on future opportunities. In the meantime, we will continue to work in a collaborative way with our occupiers to best manage current market conditions.”

This announcement contains inside information.

For further information:
Tavistock
Jeremy Carey/James Verstringhe, 020 7920 3150, [e-mail]

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

Note to Editors
Picton, established in 2005, is a UK REIT. It owns and actively manages a £665 million diversified UK commercial property portfolio, invested across 47 assets and with around 350 occupiers (as at 31 March 2020). Through an occupier focused, opportunity led approach to asset management, Picton aims to be one of the consistently best performing diversified UK focused property companies listed on the main market of the London Stock Exchange.

For more information please visit: www.picton.co.uk

Chairman’s Statement

I am pleased to report another successful year, delivering a profit after tax of £23 million, despite the uncertain political and economic backdrop created by Brexit and the effects of the Covid-19 pandemic.

Further to the actions taken last year, we are in a strong position with low gearing of 22%, a healthy balance sheet and over 80% of the portfolio invested in the industrial and office sectors which have been less impacted by the lockdown.

Throughout the year we have been operating in a UK property market characterised by fewer investment transactions and an occupational market where activity has slowed. Many companies were already in ‘wait and see’ mode awaiting an outcome on Brexit, and have now moved into temporary lockdown as a result of Covid-19, although Government support has helped mitigate a very difficult situation.

Covid-19 impact and response
The defensive positioning of the Company over the last 12 months has meant that we are in a relatively strong position and able to withstand the unprecedented shock of the Covid-19 pandemic. We have the lowest loan to value ratio since the inception of the business, as well as fully undrawn loan facilities totalling £50 million.

Our short-term targets are focused around reducing the impact on our business and working with our occupiers to get through this difficult situation. We recognise both the short and longer-term effects on the business and the importance of adapting our strategy to reflect the changing habits and needs of our occupiers. We have achieved good rent collection figures compared to the market and have been working with occupiers as required to help them through this crisis. Recognising the two components of property returns are not only income but capital performance, we believe this is also the best approach to achieving long-term value for shareholders.

As the lockdown starts to gradually ease, our attention is turning to the reoccupation of our buildings, the restarting of refurbishment projects and leasing space, ensuring all of these activities are managed safely.

Performance
The property portfolio has again delivered upper quartile performance against the MSCI UK Quarterly Property Index over the year. Likewise, our shareholder total return for the period was in the upper quartile range compared to our peers.

Our total return was 4.5% over the year. Whilst this is relatively modest for Picton, it compares favourably to the negative market return, as measured by MSCI.

EPRA earnings were lower for the year, which is in part a reflection of the operating environment that has hindered progress with our pipeline of lettings and refurbishments. Equally, debt reduction through asset sales to protect the longer-term income profile has also had a short-term impact on earnings.

We are cognisant of the discount to net asset value that has emerged since the year end and believe that there is a clear disconnect between the performance of the Group and the share price. A focus of the Board will be to ensure that we reduce this discount over the coming year.

Purpose and strategy
During the year, the Board has reviewed the purpose and strategy of the Group to ensure Picton, as a UK REIT, continues to deliver attractive income and capital returns to its shareholders over the long-term. As a result we have redefined our purpose as:

“Through our occupier focused, opportunity led approach, we aim to be one of the consistently best performing diversified UK REITs. To us this means being a responsible owner of commercial real estate, helping our occupiers succeed and being valued by all our stakeholders.”

We have in place three distinct strategic pillars: Portfolio Performance, Operational Excellence and Acting Responsibly. These will ensure we are able to deliver on our purpose.

I think it is also important to highlight the progress we have been making on sustainability and we have this year formally embedded this into our corporate strategy.

Property portfolio
The outperformance of our property portfolio was driven by several factors. It is well positioned with over 80% in the better performing industrial and office sectors. The best performing subsector according to MSCI was South East industrial, which is where over 35% of our portfolio is invested.

Key themes during the year were reinvestment into the portfolio and upgrading of assets. This activity has delivered letting successes and retained occupiers across the portfolio. We have achieved considerable success working with existing occupiers to extend income. During the year we saw a significant number of transactions aimed at mitigating income risk due to materialise in 2020/21. This included income with four of our largest occupiers.

We made two disposals at a healthy premium to the March 2019 valuation, which enabled us to capture upside that had been created through asset management. There were no acquisitions during the year.

While we have grown like-for-like passing rent over the period, we would have liked to make further progress and have two key voids to fill: one in Rugby, where the refurbishment completed in February, and another at Stanford Building in Covent Garden, where the refurbishment has been delayed due to Government lockdown restrictions. These, along with other vacancies, provide scope for us to increase occupancy and income going forwards.

Capital structure
Our strategic approach in recent years has meant that we have entered the Covid-19 crisis in a position of strength.

We further reduced our loan to value ratio over the course of the year through a combination of asset sales, debt repayment and a small non-dilutive equity raise last June.

Since the year end, we have completed a new single revolving credit facility for an initial three-year term, replacing two existing facilities that were due to expire in 2021. This gives the Company access to up to £50 million of undrawn facilities, providing us with a lower cost of debt and even greater headroom and flexibility.

Dividends
We are acutely aware that the provision of income is important to investors, so our recent decision to reduce the dividend, even if temporary, was not taken lightly. While Picton is in a much better place than most of its peers, we are not immune to the impact that Covid-19 is having on our occupiers.

The additional flexibility that this extra headroom provides will enable us to support our occupiers where appropriate, and will help us to protect as far as possible both income and capital over the longer-term. This was a prudent decision taken in the long-term interest of all our stakeholders.

Governance and Board composition
I had expected to write this report as Chairman for the last time as I was due to retire from the Board in June of this year. Covid-19 has created all sorts of unforeseen circumstances and my proposed successor, Nicholas Wiles, has had to step down from the Board following his recent and unexpected appointment as Chief Executive at PayPoint Plc, having previously been Chairman. We have recommenced the process to find a suitable successor, but it is vitally important in these times that continuity is provided, so at the request of the Board I have agreed and confirmed my commitment to remain in position until a new Chair is in place.

We have also started the process to appoint a successor for Roger Lewis, currently Chair of the Property Valuation Committee, and we hope to be able to make a further announcement in that regard shortly.

Outlook
Whilst our focus remains very much around short-term issues and mitigating the impact of Covid-19, we recognise that we must also be thinking strategically about the changing long-term trends and demand for commercial property. We think these recent events have accelerated embedded trends in several areas, including online retail, flexible working, digital and technological disruption to name but a few. In addition, a growing sense of environmental impact and the need for change has been self-evident in lockdown. We had already been considering disruptive trends and whilst we believe the portfolio is well positioned, this situation is evolving and continues to be kept under constant review. I believe our purpose, strategy and business model ensure we are well placed to respond to both the challenges and opportunities that lie ahead.

Nicholas Thompson
Chairman

Our Marketplace

Economic backdrop
For much of the year Brexit weighed heavily on the UK economy.

The lack of clarity surrounding the nature and timing of the UK’s exit from the European Union was responsible for widespread political and economic uncertainty. Weaker productivity growth came as a result of reduced business investment and the redirection of resources to prepare for possible Brexit outcomes. 

Despite Brexit, economic indicators remained reasonably robust. In 2019 Gross Domestic Product (GDP) grew by 1.4%. To put this into an international context, the G7 Major Advanced Economies had an average GDP growth of 1.6% per annum for the group, with the UK in third place behind the USA and Canada.

For the three months leading up to March 2020, the UK’s unemployment rate was at a near record low of 3.9%, and annual growth in average weekly earnings was 2.4%. In real terms, annual pay growth has been positive since February 2018. The 12-month Consumer Price Index (CPI) was 1.3% in December 2019, rising to 1.5% in March 2020.

Today, the Covid-19 global pandemic has changed priorities and the economic outlook dramatically. Despite the UK easing the lockdown, social distancing will change habits for some months to come, and uncertainty and volatility will continue to impact the economy with potentially long-lasting consequences.

Recent data shows the dramatic impact the lockdown is having on the UK economy, with GDP recording its weakest ever monthly decline at -20.4% in April.

Although the UK will be in recession in the second quarter of 2020 as the lockdown eases, the magnitude of the economic impact and speed of recovery are not easily gauged. The Office for Budget Responsibility has forecast an annual decline of 12.8% for 2020, with unemployment rising from 4.0% to 7.3% in the final three months of the year.

In response to the pandemic, the Bank of England dropped the bank rate twice in March, from 0.75% to 0.25% and then again to 0.1%. The extent to which these low interest rates can support consumer spending and jobs in the coming months is yet to be determined.

UK property market
According to the MSCI UK Quarterly Property Index, commercial property delivered a total return of -0.5% for the year ended March 2020. The negative total return is attributable to the downturn experienced in the final quarter ending March 2020. Until then, quarterly total returns were positive.

The reduction relative to last year was driven by capital value falls of -4.8% and an income return of 4.5%. Capital growth was negative quarter-on-quarter but worsened considerably in the three months to March 2020. By comparison, for the year to March 2019, capital growth was 0.1% and the income return was 4.4%.

Industrial was the top performing sector for the year to March 2020, showing good signs of rental and capital growth. The industrial sector 12-month total return was 5.7%, comprising 1.3% capital growth and 4.3% income return. Industrial ERV growth for the period was 2.7%, with a range of 1.7% to 4.2% within subsectors. Capital growth ranged from -0.5% to 4.2% within subsectors. Equivalent yields for industrial property now stand at 5.3%.

The office sector produced a total return of 3.3% for the year to March 2020, comprising -0.5% capital growth and 3.8% income return. Whilst capital values showed a decline in the final quarter, for the nine months to December 2019 MSCI capital growth for All Offices was 0.4%. For the year to March 2020, central London and the South East office markets were the only subsectors to produce positive capital growth. All Office annual rental growth was 1.4%, ranging from 0.5% to 2.3% within subsectors. The range of capital growth by subsector was from -3.2% to 1.8%. Equivalent yields for office property now stand at 5.6%.

It was a very difficult year for the retail sector, with challenging trading conditions leading to a high number of retail failures. The situation has been significantly impacted by the Covid-19 lockdown starting in March 2020. The retail sector produced a total return of -9.8% for the year to March 2020. This comprised capital growth of -14.5% and income return of 5.4%. Rental values fell -5.7% over the period and were negative across all subsectors, ranging from -8.2% to -1.7%. Retail subsector capital growth ranged from -22.6% to -1.0%. Equivalent yields for retail property now stand at 6.4%.

The impact of the Covid-19 pandemic is not fully reflected in the above numbers. The MSCI UK Monthly Property Index showed for the two-month April – May 2020 period, that overall capital values for All Property have declined -2.9% and ERVs are down -0.6%.

For the same period, capital values in the industrial sector saw a decline of -1.6% and ERVs grew by 0.1%. In the office sector capital values declined -2.1% and ERVs -0.1%. The retail sector is the worst affected with capital values showing a decline of -5.0% and ERVs down -2.0%.

According to Property Data, the total investment volume for the year to March 2020 was £56.5 billion, an 8.3% decrease from the year to March 2019. The volume of investment by overseas investors in the year to March 2020 was £30.5 billion, accounting for 53.9% of all transactions. Illustrating the liquidity issues within the retail sector, it had investment transactions of just £5.0 billion, accounting for only 8.9% of all transactions.

During the Covid-19 lockdown it has been extremely difficult to buy or sell property and the impact on investment volumes and pricing is yet to be fully realised. Despite lowering investment returns available elsewhere, the risk premium attached to property looks set to increase, reflecting greater income risk in the short-term.

Chief Executive’s Review

Alongside running the business in these extraordinary market conditions, this year we have also focused on reviewing our strategy to ensure it reflects emerging trends.

The three key pillars of our strategy are Portfolio Performance, Operational Excellence and Acting Responsibly. These do not dramatically change the direction of the business, but better define our areas of focus through the more detailed priorities and ensure we are best placed to deliver on our purpose.

The impact of Covid-19 has in the short-term led to an almost complete shutdown in both the commercial leasing and investment markets. This makes it harder than usual for valuers to provide a valuation or estimates of market price when there is no market itself.

This uncertainty has led to the suspension of open-ended property funds, and significant volatility within listed property company shares. There is currently a clear arbitrage between pricing listed and unlisted property vehicles. We think there will be renewed selling pressure from these open-ended structures when they reopen, which may in itself create opportunistic buying opportunities for those that are well capitalised.

Looking back, the primary concern last year was about the impact of Brexit on trade and occupational demand. The uncertainty created by the political process led many companies to delay occupancy decisions and whilst these risks have not yet gone away, in January we were starting to see positive signals and an increase in occupational and investment demand following the General Election result and the certainty that provided.

Last year we made no acquisitions and where we made disposals we used the proceeds to repay debt and reduce our gearing. We are well positioned, with a high exposure to industrial, warehouse and logistics, alongside the regional office market. It is likely, however, that any prolonged lockdown will change habits and occupational requirements. As the impact becomes clearer we will have to ensure our portfolio approach remains relevant to maintain our track record of outperformance.

Covid-19 response
We continue to operate effectively and all of our employees have been working remotely since mid-March. We have not needed to furlough any members of our team or access any form of Government support. The health and safety of our employees, our occupiers and service providers is paramount and our actions to date have been effective in ensuring this. This shutdown has affected our occupiers to varying degrees, but it is encouraging to see buildings being re-occupied, albeit in line with social distancing measures, and we are working to establish proper protocols as the lockdown is gradually eased. Central London, with its reliance on public transport, would appear less ready to return to work than other parts of the UK, but a safe and steady approach is sensible under the circumstances and this matches the feedback we are receiving from our occupiers.

Whilst the March rent collection number stands at 82%, which is lower than last year, we recognise that there will be a short-term impact as a result of the lockdown. We think it is appropriate to look at individual circumstances and be creative to protect value and also provide support to occupiers as required. We do however have to strike the right balance between occupier and shareholder, recognising these are difficult circumstances for all. We are fortunate to have already established good relationships with our occupiers well ahead of this crisis, so we have a good understanding of their business needs. We will look at circumstances on a case-by-case basis and prioritise needs across the portfolio. Equally, we need to find creative solutions to this problem and by offering short-term cash flow assistance we may well be able to protect or enhance capital values, by virtue of longer lease commitments, stepped rents or agreeing future rent increases. The recently announced dividend reduction will enable us to deliver the best outcomes in this regard.

Portfolio Performance
We have again continued to outperform the MSCI UK Quarterly Property Index. Our track record now means we have outperformed that Index since inception and over the last one, three, five and ten years. Recognising the diversified nature of the portfolio, where there will always be outperforming and underperforming elements, our positioning against the retail and leisure sector in favour of industrial and regional offices has been advantageous for some time.

We have made significant progress in enhancing our assets this year. Our refurbishment programme totalled £9 million, which is a substantial increase on preceding years. We have also had considerable success working with our occupiers, enabling them to have space that meets their needs. We have undertaken some key transactions, extending income, de-risking our cash flow, and these are detailed in the subsequent case studies. Although we have grown the passing rent on a like-for-like basis, the strategy to keep gearing low does have an impact on overall income, and with debt costs generally lower than property yields, there is still a trade-off between capital and income returns.

It has been frustrating that we have not grown occupancy over the year, which currently stands at 89%. Ultimately these vacancies provide a significant element of the future income upside potential.

Against a difficult backdrop, the leasing markets have not been easy and a number of refurbishment projects took longer to complete and consequently delayed letting prospects. We also sold income producing assets to de-risk the balance sheet which has had a negative impact on income and occupancy, but equally have protected our capital position and crystallised gains.

Operational Excellence
We have undertaken and implemented several measures aimed at increasing the efficiency within the business. During the year we introduced an asset management system, Coyote, to better manage our assets, as well as a new IT system. Both systems are working well as we continue to work remotely.

We have recruited a Head of Occupier Services to strengthen our property management service delivery, a further commitment to our occupier focused approach. We continue to have an agile and flexible business and the speed with which we were able to adapt to remote working is testament to this.

From an income perspective our EPRA earnings are lower, reflecting activity referred to in the Portfolio Performance section above. We have reduced our gearing over the year, concerned about risks associated with Brexit, but this has proved timely recognising the adverse impact of Covid-19.

Our net asset growth has been more muted than in previous years, but this is not unexpected recognising market conditions. We believe our assets, our team and our strategy will continue to drive our success. Growth, be that organic or through acquisition, will be considered so long as it creates value for shareholders.

Acting Responsibly
We have made significant progress strengthening relationships with occupiers this year and this is borne out by the portfolio activity and projects we have undertaken.

The work we have done this year to promote and deliver our Picton Promise – focused on Action, Community, Technology, Support and Sustainability - has many overlapping features and we believe our occupiers, and indeed future occupiers, will want to work and engage with a landlord that shares similar values on not only reducing emissions but a broader array of sustainability issues.

We provide regular shareholder updates and through Edison provide regular updates and video interviews. Through our brokers JP Morgan, Stifel and specifically in the regional wealth management community with Kepler, we have regular engagement with both existing and prospective shareholders.

Whilst sustainability has been a focus of ours for many years, the introduction of a Responsibility Committee in 2018 further integrated this within our business model and sustainability now forms part of our corporate strategy. We have engaged with occupiers and investors this year to review and better understand material issues in order to progress our sustainability initiatives. We were awarded EPRA Gold for our separate Sustainability Report last year and we are part of GRESB.

We have maintained our company values, positive working culture and alignment of the team throughout the year. We specifically undertook an employee survey last year and the results of this were fed back to the Board via our Non-Executive Director responsible for employee engagement.

Outlook
Recognising our newly defined purpose and that property returns are driven by both income and capital, our focus is currently two-fold. In the short-term we need to work through lockdown and help our occupiers get their businesses back up and running. Workplace protocols, lease restructurings and financial assistance are all aspects that will protect value for shareholders.

We are also focused on the future and how this short-term disruption may well change future occupational requirements and consequently create opportunities. We need to own assets where there is continued occupational demand, enabling a growing income profile, and in turn capital appreciation.

There is significant embedded upside in the portfolio income profile from the current occupancy level. Once markets reopen, finding occupiers for this vacant space is an absolute priority.

Our strategy, which offers a diverse approach and allows us the flexibility to adjust the portfolio to better performing sectors, ensures we are not constrained to a single sector strategy, with limited ways to exit, as has been the case for some of the REIT specialists in recent years. We continue to manage the business through these events so we come out the other side in a strong position. We will continue to provide updates as we make progress this year.

Picton has low leverage and significant operational headroom against covenants. The majority of the portfolio is invested in sectors that have been less impacted through Covid-19, and likely to rebound more quickly. It is clear that the digital transformation will continue apace, be that increased home working or further spend online and our portfolio will need to continue to adapt to these changes.

Our focus is to control what we can, manage risks and focus on future opportunities.

Michael Morris
Chief Executive

Portfolio Review

Sector weightings

Industrial weighting	47.9%
South East	35.4%
Rest of UK	12.5%

Office weighting	33.8%
South East	17.4%
Rest of UK	12.2%
City & West End	4.2%

Retail and Leisure weighting	18.3%
Retail Warehouse	7.3%
High Street South East	5.2%
High Street Rest of UK	4.1%
Leisure	1.7%

We have had a number of considerable successes across the portfolio despite it being such a difficult year in which to operate. We ended the year with a like-for-like increase in the portfolio valuation, rental income and Estimated Rental Value (ERV). We have had one of the busiest years in terms of portfolio transactions, up 30% on the previous year.

We have invested heavily back into the portfolio enhancing the quality and lettability of space, and we have been able to de-risk and extend our income profile. We have further strengthened our relationships with occupiers and our focus on our key commitments of Action, Community, Technology, Support and Sustainability, appears increasingly helpful in light of the Covid-19 impact.

Performance
Our portfolio now comprises 47 assets, with around 350 occupiers, and is valued at £664.6 million with a net initial yield of 4.9% and reversionary yield of 6.4%. Our asset allocation, with 48% in industrial, 34% in office and 18% in retail and leisure, combined with investment disposals and transactional activity, has enabled us again to outperform the MSCI UK Quarterly Property Index on a total return basis over one, three, five and ten years.

Overall the like-for-like valuation was up 1.4%, with the industrial sector up 6%, offices delivering growth of 3% and retail and leisure declining -12%. This compares with the MSCI index recording capital declines of -4.8% over the period.

The industrial assets continue to perform better than the other sectors, primarily due to our allocation to South East multi-let estates which account for over 73% of our industrial exposure. In addition we have extended income with three of our largest occupiers at three of our distribution warehouses. Conversely, and despite active management to mitigate downside risk, our retail assets have delivered negative returns. Pleasingly, rental transactions have been generally very close to or higher than independent ERVs rather than significantly below, which we understand is happening elsewhere in the market.

The overall passing rent is £36.2 million, an increase from the prior year of 1.2% on a like-for-like basis. This was a result of the industrial portfolio rents growing by 6%, offset by the office and retail rents decreasing by 2% and 3% respectively. The regional offices saw growth of 1%, which was offset by declines in London and in particular at Angel Gate, Islington which is being adversely affected by the serviced office sector. We are countering the effect by offering fully fitted suites and flexible leasing terms.

The March 2020 ERV of the portfolio is £45.2 million, with the positive growth in the industrial sector of 4.4% and office sector of 3.5% offset by the negative growth in the retail sector of -8.0%. We have set out the principal activity in each of the sectors in which we are invested and believe our strategy and proactive occupier engagement will continue to assist us in managing the portfolio during the current business climate.

The industrial and regional office occupational markets have remained resilient. Conversely, retail demand has not improved, and we expect it to worsen over the next year, particularly recognising the additional impact Covid-19 will have on occupational demand.

Activity
We have had an exceptionally good year in respect of active management transactions. We completed 20 rent reviews, 10% ahead of ERV, 31 lease renewals or regears, 12% ahead of ERV and 35 lettings or agreements to lease, 2% ahead of ERV.

Two assets were sold for gross proceeds of £34.1 million, 15% ahead of the March 2019 valuation. Citylink, Croydon was sold following the early surrender of two leases, generating £0.6 million of additional income. The property was sold for £18.2 million reflecting a net initial yield of 4.8%.

We also sold 3220 Magna Park, Lutterworth following active management where we extended the lease by a further three years to December 2022 and settled a 2019 rent review securing an 11% uplift to £1 million per annum, achieving one of the highest rents at the Park. The property was sold for £15.9 million reflecting a net initial yield of 5.8%.

Both sales crystallise the upside from the active management activity and, noting the age of the buildings and oversupply in these locations, avoid potential future capital expenditure and extended void periods.

Over the year we have invested £9 million into the portfolio across 20 separate projects. These have all been aimed at enhancing space to attract occupiers and grow income. Whilst a number of key projects are still to be completed, we are now well placed to attract occupiers and our refurbishment pipeline is substantially reduced, having completed the majority of the projects.

Our largest void is Stanford Building on Long Acre in Covent Garden, accounting for over a third of the total vacancy rate. Work on site paused due to the lockdown and will now complete in the summer. The building will provide best-in-class retail, office and residential accommodation.

This investment across the portfolio has enabled us to create high quality space and help to future- proof assets from a sustainability perspective. We have also worked with occupiers to achieve their occupational aims and thereby create value through additional leasing or extending income.

Although no acquisitions were made, the net effect of the above is that the average lot size of the portfolio was £14.1 million, in line with last year.

Outlook
If activity for most of the year was tempered by Brexit, towards the end of the year it has been impacted by the Covid-19 pandemic and consequential lockdown on 23 March 2020. This has led to a far more uncertain business environment and our focus has been on delivering our Picton Promise, focusing particularly on our commitments of Action, Community and Support to help our occupiers who need assistance.

New requirements from potential occupiers have slowed and social distancing measures make viewings difficult to conduct. We are, however, embracing new technologies, creating virtual tours and thinking more laterally as to how we can market our buildings.

Our focus remains on working with our occupiers during this period of business uncertainty, whilst continuing to proactively manage the existing portfolio. At 31 March the portfolio has £9 million of reversionary upside, £5 million from letting the void, £3 million from expiring rent free and £1 million from reversionary leases.

We are seeing better demand for our industrial properties, which account for 48% of the total portfolio by value, and we believe this sector will continue to outperform.

Businesses continue to seek best- in-class space in the office sector, hence our investment over the year into nine buildings, and this, combined with our flexible offering, makes our properties attractive to current and new occupiers.

The retail and leisure sector will need to evolve, especially following the current lockdown, but with this sector only making up 18% of our portfolio, we will work with occupiers to ensure we can assist them where appropriate to maintain income.

The work done over the year to lease space and extend income, together with our portfolio weightings, has put us in a strong position to weather this storm. In line with our occupier focused, opportunity led approach, we continue to proactively engage with our occupiers, which we believe assists occupier retention and adds value.

Top ten assets
The largest assets as at 31 March 2020, ranked by capital value, represent 54% of the total portfolio valuation and are detailed below.

Assets	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	21	100
River Way Industrial Estate, Harlow, Essex	12/2006	Industrial	Freehold	454,800	10	98
Angel Gate, City Road, London EC1	10/2005	Office	Freehold	64,500	22	74
Stanford Building, Long Acre, London WC2	05/2010	Retail	Freehold	19,700	0	0
Tower Wharf, Cheese Lane, Bristol	08/2017	Office	Freehold	70,800	5	83
50 Farringdon Road, London EC1	10/2005	Office	Leasehold	31,000	5	100
Shipton Way, Rushden, Northants.	07/2014	Industrial	Leasehold	312,900	1	100
Datapoint, Cody Road, London E16	05/2010	Industrial	Leasehold	55,500	5	88
Lyon Business Park, Barking, Essex	09/2013	Industrial	Freehold	99,400	9	100
Colchester Business Park, Colchester	10/2005	Office	Leasehold	150,700	22	99

Top ten occupiers
The largest occupiers, based as a percentage of contracted rent, as at 31 March 2020, are as follows:
 

Occupier	Contracted rent (£m)	%
Public sector	1.7	4.3
Belkin Limited	1.7	4.2
B&Q Plc	1.2	3.1
The Random House Group Limited	1.2	3.0
Snorkel Europe Limited	1.1	2.8
XMA Limited	1.0	2.4
Portal Chatham LLP	0.8	2.0
TK Maxx	0.7	1.8
Canterbury Christ Church University	0.7	1.7
DHL Supply Chain Limited	0.6	1.5
Total	10.7	26.8

Longevity of income
As at 31 March 2020, expressed as a percentage of contracted rent, the average length of the leases to the first termination was increased to 5.5 years (2019: 5.1 years). This is summarised as follows:

	%
0 to 1 year	8.8
1 to 2 years	14.1
2 to 3 years	11.0
3 to 4 years	12.6
4 to 5 years	12.3
5 to 10 years	31.6
10 to 15 years	8.2
15 to 25 years	0.1
25 years and over	1.3
Total	100.0

Retention rates and occupancy
Over the year, total ERV at risk due to lease expiries or break options totalled £6.6 million, compared to £6.9 million for the year to March 2019.

Excluding asset disposals, we retained 53% of total ERV at risk in the year to March 2020. This comprised 32% on lease expiries and 21% on break options.

In addition to units at risk due to lease expiries or break options during the year, a further £5.5 million of ERV was retained by either removing future breaks or extending future lease expiries ahead of the lease event.

Occupancy has reduced slightly during the year, primarily reflecting the timing of lease events, ongoing challenges in the retail sector and some specific asset management surrenders we have initiated. At the year end 62% of our vacant buildings were being refurbished, so only 38% were available to lease immediately.

Occupancy has decreased from 90% to 89%, which is behind the MSCI IRIS Benchmark of 93% at March 2020. On a look-through basis we have 57% of our total void in offices, 28% in retail, primarily at a flagship store in Covent Garden, and only 15% of our void is in industrial, reflecting the stronger occupational market.

Industrial

Key metrics

	2020	2019
Value	£318.3m	£312.8m
Internal area	2.6m sq ft	2.7m sq ft
Annual rental income	£16.0m	£16.0m
Estimated rental value	£18.6m	£18.7m
Occupancy	96%	98%
Number of assets	16	17

The industrial portfolio, which accounts for 48% of the portfolio, again delivered the strongest sector performance of the year. This was the result of active management extending income on our distribution assets, combined with continued occupational demand for the smaller units, resulting in further rental growth, especially in London and the South East.

Through asset management activity we have been able to capture rental growth and extend income. This, combined with continued strength in the investment market, has resulted in another strong year for this element of the portfolio.

On a like-for-like basis, our industrial portfolio value increased by £18.1 million or 6.0% to £318.3 million, and the annual rental income increased by £0.9 million or 6.0% to £16.0 million. The portfolio has an average weighted lease length of 5.1 years and £2.6 million of reversionary potential.

We have seen rental growth of 4.4% across the portfolio and are experiencing demand across all of our estates. Occupancy is 96%, with the key void being our unit in Rugby which has recently been refurbished. In respect of the multi-let estates we only have three vacant units out of 127, one of which is under offer.

We extended income on three of our distribution units, one of which we subsequently sold, and we completed the refurbishment of our unit in Rugby, which is now being marketed.

Portfolio activity
At Shipton Way, Rushden, in what would have been our largest single income risk in 2020, we extended a lease with the existing occupier, Belkin, to facilitate a pre-letting of the entire building to Whistl UK Limited. Whistl will take a new ten-year lease, subject to break in 2025, at an annual rent of £1.6 million, in line with ERV, and become our largest single occupier from October 2020, when Belkin vacates.

At Parkbury, Radlett, we extended a lease with the largest occupier on the estate which was due to expire in November 2020. This secures a new ten-year reversionary lease, subject to break in 2025, with stepped rental increases to £1.0 million per annum, 42% ahead of ERV. In addition, we let four units for a combined £0.4 million per annum, 8% ahead of ERV, renewed one lease for £0.2 million per annum, 5% ahead of ERV, and settled four rent reviews achieving a £0.3 million uplift in rent to £1 million per annum, 19% ahead of ERV.

At Trent Road, Grantham, we extended the lease that was due to expire in 2023 until 2029, subject to break in 2026, at £1.2 million per annum, in line with ERV.

At 3220 Magna Park in Lutterworth, we restructured the lease and secured a further three years term certain until an occupier break option in December 2022. As part of the same transaction, the December 2019 rent review was settled, securing an 11% uplift to £1 million per annum, 6% ahead of ERV, achieving one of the highest rents at the Park. The unit was subsequently sold for £15.9 million.

At Datapoint in London E16, following the completion of a rent review, we achieved a 98% uplift in rent to £0.1 million per annum, 15% ahead of ERV. Two leases were surrendered on the estate, securing a premium of £0.2 million, and were subsequently refurbished by March.

One has been let, two weeks after completion, for a minimum term of ten years at a rent of £0.2 million per annum, 24% ahead of ERV and 82% ahead of the previous passing rent. We have good interest in the other unit.

At Nonsuch Industrial Estate in Epsom, the active management strategy to combine units resulted in a letting to Topps Tiles and we also completed three further lettings during the period, for a combined £0.2 million per annum, 2% ahead of ERV. Two leases were renewed, the passing rent increasing by 22% to a combined £0.1 million per annum, 5% ahead of ERV.

Our largest void in the industrial portfolio is Swiftbox, the 99,500 sq ft unit in Rugby, where we completed a comprehensive refurbishment in February. This is one of the few cross-docked units available in the ‘Golden Triangle’ and we expect good interest.

Outlook
The full impact of the Covid-19 pandemic remains to be seen, but Brexit concerns have had a limited impact to date.

Demand remains strong for sub-100,000 sq ft units, with occupiers being more discerning about the age and specification of the larger distribution units. We see continued rental growth, albeit at a slower rate, in respect of the smaller units especially in Greater London and the South East, where there remains a lack of supply and a limited development pipeline. We do not expect rental growth to come through on the larger units, due to a strong development pipeline, although there is a short-term demand spike due to Covid-19 from supermarkets and other retailers with increased storage requirements.

The focus going forward is the leasing of Rugby and both capturing the rental growth on the smaller units and working proactively with our occupiers to facilitate their business needs. We have 16 lease events in the coming year, the overall ERV for these units is 16.5% higher than the current passing rent of £0.7 million. This provides us with the opportunity to grow income further.

Office

Key metrics

	2020	2019
Value	£224.6m	£235.0m
Internal area	0.8m sq ft	0.9m sq ft
Annual rental income	£12.9m	£14.2m
Estimated rental value	£17.4m	£18.1m
Occupancy	88%	88%
Number of assets	14	15

The office portfolio, which accounts for 34% of the portfolio, delivered the second strongest performance of the year. This was a result of our investment into the buildings to make them more attractive to existing and new occupiers, combined with continued occupational demand, especially in the regions.

Through working with our occupiers and actively managing our properties, we have been able to retain and attract occupiers, which in turn enables us to capture rental growth, particularly in markets with a shortage of Grade A space, such as Bristol and Milton Keynes.

On a like-for-like basis, our office portfolio value increased by £6.6 million or 3.0% to £224.6 million, and the annual rental income decreased marginally by £0.3 million or 2.2% to £12.9 million. The portfolio has an average weighted lease length of 4.0 years and £4.5 million of reversionary potential.

Occupational demand has been stronger in the regions than in London. We have seen rental growth of 3.5% across the portfolio and occupancy is 88%, primarily due to key voids at Angel Gate, London and Pembroke Court, Chatham. We invested £2.7 million into our office assets during the period and disposed of one asset, detailed below.

Portfolio activity
At Tower Wharf, Bristol, following completion of works to upgrade the reception and the installation of additional shower facilities, we agreed to upsize an existing occupier and extended their lease which was due to expire in May 2020. This increased their floor space by 73% and secured a new 15-year lease, subject to break in 2030, at a rent of £0.5 million per annum, which was 5% ahead of the ERV and £0.3 million ahead of the previous passing rent. In addition, we moved out an occupier’s break option by three years and settled a rent review, achieving a 29% uplift to £0.4 million per annum, 4% ahead of ERV.

At Grafton Gate, Milton Keynes, we comprehensively refurbished the common areas and, working with an occupier, upgraded their office, installing energy efficient LED lighting and creating an up-to-date working environment. These works meant the building’s EPC rating improved from an E to a C, future-proofing it in respect of the Minimum Energy Efficiency Standards. As part of the office upgrade works, we settled a rent review, securing a 52% uplift to £0.6 million per annum, 30% ahead of ERV.

At Metro, Salford Quays, where a lease event created a vacant floor, we comprehensively refurbished the common areas for the benefit of our occupiers and to make the building more attractive. The floor was let to HM Government within six months of the refurbishment completing on a 20-year lease subject to break in 2030, at £0.4 million per annum, which was 2% ahead of ERV.

At Waterside House, Leeds, following upgrade works, we upsized our existing occupier, HM Government, into the whole building on a ten-year lease at a rent of £0.3 million per annum, which was 16% ahead of ERV.

At Citylink, Croydon, we restructured two leases after occupiers actioned break clauses. This resulted in an early surrender for a premium and a simultaneous new short-term letting. The property was subsequently sold for £18.2 million.

Our largest office void is the office element at Stanford Building WC2 which is classed as a retail property and is detailed in the retail section.

The offices will provide fibre-enabled Grade A accommodation with original warehouse features, commissionaire, occupier amenities and environmental improvements. We expect good interest due to the quality of the accommodation on offer and size of the suites.

Occupancy remained stable over the period at 88%, with the letting activity offset by space coming back in Chatham and London.

Outlook
Generally, the regions continue to outperform London with occupiers looking for high specification buildings, which is why we have carried out significant refurbishments at eight of our regional buildings, investing £2.5 million to improve common areas, adding occupier amenity space and future-proofing them in respect of sustainability.

The longer-term impact of the Covid-19 pandemic may well lead to more remote working which is likely to change the way physical office space is used.

We have countered the impact of serviced offices by offering flexibility through our ‘rightsizing’ approach as well as our high quality contemporary space and occupier amenities, meaning our buildings remain attractive to businesses who want control of their own space. Looking forward, we will build on the upgrade work completed across the office portfolio to actively manage it to attract occupiers.

We have 33 lease events in the coming year, the current ERV for these units is 13.2% higher than the current passing rent of £2.0 million and a 12% void. This provides us with the opportunity to grow income further.

Retail and Leisure

Key metrics

	2020	2019
Value	£121.7m	£137.5m
Internal area	0.8m sq ft	0.8m sq ft
Annual rental income	£7.3m	£7.5m
Estimated rental value	£9.2m	£10.0m
Occupancy	75%	77%
Number of assets	17	17

The retail and leisure portfolio, which accounts for 18% of the portfolio, delivered the weakest performance of the year. This was a result of ongoing changes in shopping patterns and weak occupational demand resulting in negative rental growth in a lot of markets.

Stanford Building in Covent Garden, which has both retail and office use, is our largest element of the retail portfolio at 28%, of the balance 40% is in the retail warehouse sector, 22% in high street retail and 10% in hotel and leisure assets.

Our investment into the retail parks in Bury and Swansea has enabled us to retain and attract new occupiers.

By working with our occupiers and through active management, we have been able to temper the declines in value over the period by extending income, letting space and achieving rents overall very close to the ERV.

On a like-for-like basis, our retail and leisure portfolio value decreased by £15.8 million or 11.5% to £121.7 million, and the annual rental income decreased marginally by £0.2 million or 2.6% to £7.3 million. The portfolio has an average weighted lease length of 8.9 years and £1.9 million of reversionary potential to £9.2 million per annum.

Occupational demand has been weaker in the retail warehouse and restaurant sector, with high street shops and London seeing slightly better demand. We have seen negative rental growth of 8.0% across the portfolio and occupancy is 75%, primarily due to key voids at Stanford Building, London and Angouleme Retail Park, Bury. We invested £3.3 million into the retail portfolio during the period.

Portfolio activity
At Parc Tawe Retail Park, Swansea we carried out a comprehensive refurbishment of the park to include new signage, modernisation of the units and environmental improvements, for example changing to LED lighting. This has created an improved shopping environment for customers and enabled us to attract new occupiers. Once we completed enabling works, Lidl relocated to the former Homebase unit and, following practical completion of refurbishment works, we completed a new 15-year lease at their former unit to Farmfoods at a stepped rent to £0.1 million per annum, 14% below ERV. We also agreed to extend Pets at Home’s lease, expiring in 2022, by a further five years and rebased their rent to £0.1 million per annum from completion, a reduction of 18%, but 10% ahead of the preceding ERV. We have one unit available to lease, accounting for 13% of the park by floor area.

At Angouleme Way Retail Park, Bury we carried out a comprehensive refurbishment to update the park for customers and to enable us to attract new occupiers and retain existing ones. Argos renewed on a ten-year lease at a rent of £0.2 million per annum, which was 16% ahead of ERV. Another unit was let to a regional occupier on a five-year lease, subject to a break in three years, at a stepped rent to £0.1 million per annum, in line with ERV. We have two units available to lease, accounting for 40% of the park by floor area.

At the Crown & Mitre complex in Carlisle, we settled the hotel rent review, securing a 42% uplift to £0.2 million per annum, 8% ahead of ERV. There is a historic lane adjacent to the property, with small shops and local occupiers. Working with our occupiers, we refurbished the lane to create a significantly better environment in keeping with the Grade II property and attracting higher footfall for our occupiers.

At Scots Corner, Birmingham we renewed HM Government’s lease for a further ten years, subject to break in 2024, at a rent of £0.1 million per annum, in line with ERV. Towards the end of the year, we got two adjoining shop units back due to insolvencies, securing a payment on one of them. These are currently being reconfigured and one of the units is under offer.

Our largest retail void is the unit at Stanford Building WC2 where the refurbishment of the whole building is currently underway and is due to complete in the summer. The unit is in a prime location and provides unique space arranged over three floors. It is the first time the unit has been available to lease in over 100 years and we expect good interest in due course.

Outlook

The retail and leisure sector continues to undergo structural change due to evolving shopping habits, which have resulted in an oversupply in most markets with occupiers being able to negotiate lower rents and higher incentives. The Covid-19 pandemic has considerably worsened the outlook, and it is likely that a number of less resilient businesses will not survive, further increasing the supply of floorspace.

We are working on a number of schemes where we envisage changing the use from retail or leisure to other uses and we will resume with progressing these plans once restrictions are lifted.

We are working with our occupiers to assist them where we can, by for example postponing rental payments or providing upfront incentives to remove future break options and/or extend leases. The lockdown has caused significant cash flow issues to a lot of businesses in this sector and until shops, gyms, hotels and restaurants are allowed to open we cannot see an improvement outside of the supermarket sector. The full impact of the Covid-19 pandemic remains to be seen and this reinforces our portfolio positioning.

Financial Review

In the context of uncertain and difficult market conditions, our results for the year were positive. The total profit recorded was £22.5 million, compared to £31.0 million for 2019, reduced due to lower valuation movements, particularly in the final quarter of the year. Our EPRA earnings declined to £19.9 million, and we maintained a covered dividend. Earnings per share were 4.1 pence overall (3.7 pence on an EPRA basis), and the total return based on these results was 4.5% for the year.

The Covid-19 pandemic is having a significant impact on businesses throughout the UK. For Picton, like many commercial landlords, the first tangible consequence was on the March rent collection date. We received 82% of the rent due, and this is discussed more fully below, along with the actions being taken. We also experienced a decline in the portfolio valuation at the end of March, principally on the retail assets. We expect these themes to continue through the course of the pandemic.

Net asset value
The net assets of the Group increased to £509.3 million, largely following the equity raise in the year. The chart below shows the components of this increase over the year. The EPRA net asset value remained at 93 pence.

	£m
March 2019 net asset value	499.4
Income profit	19.9
Valuation movement	(0.9)
Profit on asset disposals	3.5
Issue of ordinary shares	7.0
Share-based awards	0.3
Purchase of shares	(0.9)
Dividends paid	(19.0)
March 2020 net asset value	509.3

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).

	2020 £m	2019 £m	2018 £m
Net asset value – EPRA and IFRS	509.3	499.4	487.4
Fair value of debt	(29.6)	(24.8)	(21.1)
EPRA triple net asset value	479.7	474.6	466.3
Net asset value per share (pence)	93	93	90
EPRA net asset value per share (pence)	93	93	90
EPRA triple net asset value per share (pence)	88	88	87

Income statement
Total revenue from the property portfolio for the year was £45.7 million. On a like-for-like basis, rental income on an EPRA basis has reduced compared to the previous year. Throughout the year we have been carrying out a number of refurbishment projects aimed at improving the quality of space at those assets and so improving letting prospects. This is discussed further in the Portfolio Review, but the impact on this year’s results is lower net property income.

The table below sets out the rent collection statistics for the March quarter, analysed by sector. The greatest impact, not unexpectedly, is in the retail sector.

Rent due 25 March to 1 April	Industrial (%)	Office (%)	Retail and Leisure (%)	Total (%)
Collected	84	89	67	82
Moved to monthly	1	1	8	2
Deferred	6	5	8	6
Concessions agreed	–	1	–	–
Active management	–	–	4	1
Outstanding	9	4	13	9

The rent demanded on the March quarter day is in advance, up to the June 2020 quarter day. We have, however, made increased provisions against our tenant debtors in this financial year, and this has impacted our rental income by £0.5 million.

Administrative expenses for the year were £5.6 million, so slightly lower than the £5.8 million in 2019. These include the one-off costs of REIT conversion.

Realised and unrealised valuation gains on the portfolio were £2.6 million for the year, lower than the gains of £11.3 million reported last year. This is very much a reflection of the commercial property market, and particularly the sentiment in the retail sector, where there have been well publicised issues of retail failures.

Interest payable is lower this year compared to 2019, at £8.3 million. This reflects a full year’s saving following the Canada Life repayment in 2018, and also the repayment of the current revolving credit facilities.

This is the first full year that we have reported as a UK REIT. All of the profits from the property rental business are exempt from UK tax. We must, as a REIT, distribute at least 90% of these profits to shareholders as Property Income Distributions. Based on our initial submitted tax returns to date, we have fully complied with this requirement. This year we have received a small tax repayment, an adjustment arising from previous years.

EPRA earnings for the year were £19.9 million, lower than the £22.9 million stated in 2019, principally for the reasons stated above.

Dividends
The annual dividend rate has remained at 3.5 pence, with total dividends paid out of £19.0 million. Dividend cover for the full year was lower than last year at 105%.

Following the year end we have announced a 29% reduction in the dividend rate, which was applied to the dividend paid in May, due to the uncertainty caused by the Covid-19 pandemic.

Investment properties
The appraised value of our investment property portfolio was £664.6 million at 31 March 2020, down from £685.3 million a year previously. This year we have disposed of two buildings, for net proceeds of £33.1 million, realising a combined gain of £3.5 million compared to last year’s valuation. £8.9 million of capital expenditure was invested back into the existing portfolio. The overall revaluation movement was a small loss of £0.9 million, principally arising in the final quarter of the year, as the impact of the Covid-19 pandemic was felt. With the reduction in investment market activity and less evidence available, the independent valuers included a ‘material uncertainty’ clause in the March valuation.

At 31 March 2020 the portfolio comprised 47 assets, with an average lot size of £14.1 million.

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

Borrowings
Total borrowings were £167.5 million at 31 March 2020, with the loan to value ratio having reduced to 21.7%. The weighted average interest rate on our borrowings has increased slightly to 4.2%, while the average loan duration is now 9.9 years.

Our senior loan facility with Aviva reduced by the regular amortisation of £1.2 million in the year.

The Group remained fully compliant with the loan covenants throughout the year.

During the year we repaid all the outstanding amounts drawn under our revolving credit facilities, leaving £49 million undrawn at the year end. The year-end interest rate payable on these loans was around 2.7%.

Subsequent to the year end, we have completed a new single revolving credit facility, replacing the two existing ones. The new £50 million facility is for an initial term of three years, until May 2023, with two one-year extensions available. Interest is payable at 150 basis points over LIBOR, which is at a lower rate than the facilities it replaces.

Loan arrangement costs are capitalised and are amortised over the terms of the respective loans. At 31 March 2020, the unamortised balance of these costs across all facilities was £2.3 million.

The fair value of our borrowings at 31 March 2020 was £197.0 million, higher than the book amount. Lending margins have remained broadly in line with the previous year, but gilt rates have fallen in comparison.

A summary of our borrowings is set out below:

	2020	2019	2018
Fixed rate loans (£m)	167.5	168.7	203.5
Drawn revolving facilities (£m)	–	26.0	10.5
Total borrowings (£m)	167.5	194.7	214.0
Borrowings net of cash (£m)	143.9	169.5	182.5
Undrawn facilities (£m)	49.0	25.0	40.5
Loan to value ratio (%)	21.7	24.7	26.7
Weighted average interest rate (%)	4.2	4.0	4.1
Average duration (years)	9.9	9.8	10.3

Cash flow and liquidity
The cash flow from our operating activities was £13.5 million this year, down from the 2019 figure. Proceeds from asset sales were used to finance the net reduction in borrowings. Dividend payments of £19.0 million were made in the year. Our cash balance at the year end stood at £23.6 million.

Share capital
During the year the Company issued 7,551,936 new ordinary shares of no par value, for gross proceeds of £7.1 million, bringing the total shares in issue to 547,605,596.

The Company’s Employee Benefit Trust acquired a further 954,000 shares, at a cost of £0.8 million, during the year to satisfy the future vesting of awards made under the Long-term Incentive Plan, and now holds a total of 2,103,683 shares. As the Trust is consolidated into the Group’s results, these shares are effectively held in treasury and therefore have been excluded from the net asset value and earnings per share calculations, from the date of purchase.

Andrew Dewhirst
Finance Director
22 June 2020
 

Principal Risks

Managing Risk
The Board recognises that there are risks and uncertainties that could have a material impact on the Group’s results.

Risk management provides a structured approach to the decision making process such that the identified risks can be identified, measured, managed, mitigated and reported and the uncertainty surrounding expected outcomes can be reduced. The Board has developed a risk management policy which it reviews on a regular basis.

The Audit and Risk Committee carries out a detailed assessment of all risks, whether investment or operational, and considers the effectiveness of the risk management and internal control processes.

The Executive Committee is responsible for implementing strategy within the agreed risk management policy, as well as identifying and assessing risk in day-to-day operational matters. The management committees support the Executive Committee in these matters.

The small number of employees and relatively flat management structure allow risks to be quickly identified and assessed.

The Group’s risk appetite will vary over time and during the course of the property cycle. The principal risks – those with potential to have a material impact on performance and results – are set out below, together with mitigating controls. The UK Corporate Governance Code requires the Board to make a Viability Statement. This considers the Company’s current position and principal risks and uncertainties combined with an assessment of the future prospects for the Company, in order that the Board can state that the Company will be able to continue its operations over the period of their assessment. The statement is set out below.

Covid-19
The current global Covid-19 pandemic is causing an unprecedented level of disruption to the global economy. Many governments, including the UK, have imposed lockdowns, giving rise to the closure of some businesses. It is not clear how long the restrictions will last nor what the impact on the UK economy will be. Some of our occupiers are facing financial difficulties and we are working with them to find solutions that both help them and mitigates any impact on our capital values and cash flow.

The risks associated with this pandemic fall across many of the principal risks set out here, and in many cases increase the potential impact significantly. There has already been an impact on the Group’s cash flow, and it is considered likely that this will continue in at least the short-term.

Picton has a diverse portfolio spread across the UK, with around 350 occupiers in a wide range of businesses. The cash flow arising from our occupiers underpins our business model. We are continuing to let space, although a number of transactions have been put on hold since the pandemic began to affect the UK economy. There are few investment transactions taking place to provide comparable evidence for valuations, and as a result our external valuers have added a material valuation uncertainty clause to their report as at 31 March 2020, in line with market practice.

We have considered in our Viability Statement the potential impact of various scenarios resulting from Covid-19 on the business.

Brexit
Although the UK has now left the EU and is in the transition period, there is still uncertainty regarding a future trading relationship. The transition period ends on 31 December 2020 and in the absence of any agreement being reached there could be further disruption to the UK economy.

We have considered the potential impact from a disruptive Brexit in a number of scenarios included in our Viability Statement.

Emerging risks
During the year the Board has considered themes where emerging risks or disrupting events may impact the business. These may arise from behavioural changes, political or regulatory changes, advances in technology, environmental factors, economic conditions or demographic changes. As noted above Covid-19 may also have an impact on a number of these themes. Some are already considered to be principal risks in their own right such as the impact of climate change, others are reviewed as part of the ongoing risk management process.

Corporate Strategy

1
Political and economic		Risk trend: Up
Risk Uncertainty in the UK economy, whether arising from political events or otherwise, brings risks to the property market and to occupiers’ businesses. This can result in lower shareholder returns, lower asset liquidity and increased occupier failure.	Mitigation The Board considers economic conditions and market uncertainty when setting strategy, considering the financial strategy of the business and in making investment decisions.	Commentary The risks around the UK economy have increased with the Covid-19 pandemic. Although there is more certainty regarding Brexit, no future deal with the EU has yet been agreed and this may lead to further uncertainty later in 2020.

2
Market cycle		Risk trend: Up
Risk The property market is cyclical and returns can be volatile. There is an ongoing risk that the Company fails to react appropriately to changing market conditions, resulting in an adverse impact on shareholder returns.	Mitigation The Board reviews the Group’s strategy and business objectives on a regular basis and considers whether any change is needed, in light of current and forecast market conditions.	Commentary There may be increased volatility in the property market as a result of the current economic restrictions. Official forecasts indicate a substantial fall in UK GDP this year. The impact of Covid-19 may also cause businesses to review their existing operating models (e.g. future need for office space).

3
Regulatory and tax		Risk trend: Same
Risk The Group could fail to comply with legal, fiscal, health and safety or regulatory matters which could lead to financial loss, reputational damage or loss of REIT status.	Mitigation The Board and senior management receive regular updates on relevant laws and regulations. The Group is a member of the BPF and EPRA, and management attend industry briefings.	Commentary There are no significant changes expected to the regulatory environment in which the Group operates.

4
Climate change		Risk trend: Up
Risk Failure to react to climate change could lead to the Group’s assets becoming obsolete and unable to attract occupiers.	Mitigation Sustainability is embedded within the Group’s business model and strategy. All refurbishment projects include environmental considerations to ensure buildings are maintained to current standards.	Commentary Climate change is now considered to be a principal risk given its increasing importance and the impact of real estate on the environment.

Property

5
Portfolio strategy		Risk trend: Up
Risk The Group has an inappropriate portfolio strategy, as a result of poor sector or geographical allocations, or holding obsolete assets, leading to lower shareholder returns.	Mitigation The Group maintains a diversified portfolio in order to minimise exposure to any one geographical area or market sector.	Commentary Continued divergence of returns across sectors, coupled with the impact of Covid-19 particularly on retail and leisure assets, have increased this risk.

6
Investment		Risk trend: Same
Risk Investment decisions may be flawed as a result of incorrect assumptions, poor research or incomplete due diligence, leading to financial loss.	Mitigation The Executive Committee must approve all investment transactions over a threshold level, and significant transactions require Board approval. A formal appraisal and due diligence process is carried out for all potential purchases. A review of each acquisition is performed within two years of completion.	Commentary There is no change to this risk.

7
Asset management		Risk trend: Up
Risk Failure to properly execute asset business plans or poor asset management could lead to longer void periods, higher occupier defaults, higher arrears and low occupier retention, all having an adverse impact on earnings and cash flow.	Mitigation Management prepare business plans for each asset which are reviewed regularly. The Executive Committee must approve all investment transactions over a threshold level, and significant transactions require Board approval. Management maintain close contact with occupiers and have oversight of the Group’s Property Manager.	Commentary The importance of effective asset management has been heightened by the Covid-19 pandemic and its impact on occupiers’ businesses.

8
Valuation		Risk trend: Up
Risk A fall in the valuation of the Group’s property assets could lead to lower investment returns and a breach of loan covenants.	Mitigation The Group’s property assets are valued quarterly by an independent valuer with oversight by the Property Valuation Committee. Market commentary is provided regularly by the independent valuer. The Board reviews financial forecasts for the Group on a regular basis, including sensitivity against financial covenants.	Commentary The current economic situation could lead to negative sentiment and see further falls in asset values.

Operational

9
People		Risk trend: Same
Risk The Group relies on a small team to implement the strategy and run the day-to-day operations. Failure to retain or recruit key individuals with the right blend of skills and experience may result in poor decision making and underperformance.	Mitigation The Board has a remuneration policy in place which incentivises performance and is aligned with shareholders’ interests. There is a Non-Executive Director responsible for employee engagement who provides regular feedback to the Board.	Commentary The Group has a stable and aligned team in place. Significant efforts have been, and will continue to be made to ensure the safety and well-being of the Group’s employees through the course of the Covid-19 pandemic.

Financial

10
Finance strategy		Risk trend: Up
Risk The Group has a number of loan facilities to finance its activities. Failure to comply with covenants or to manage re-financing events could lead to a funding shortfall for operational activities.	Mitigation The Group’s property assets are valued quarterly by an independent valuer with oversight by the Property Valuation Committee. Market commentary is provided regularly by the independent valuer. The Board reviews financial forecasts for the Group on a regular basis, including sensitivity against financial covenants. The Audit and Risk Committee considers the going concern status of the Group biannually.	Commentary Although the Group has headroom against its loan covenants, significant falls in valuations or income during the current Covid-19 crisis could lead to pressure on covenants. However, a number of stress tests have been conducted to assess the potential risk, which the Board will continue to monitor.

11
Capital structure		Risk trend: Up
Risk The Group operates a geared capital structure, which magnifies returns from the portfolio, both positive and negative. An inappropriate level of gearing relative to the property cycle could lead to lower investment returns.	Mitigation The Board regularly reviews its gearing strategy and debt maturity profile, at least annually, in light of changing market conditions.	Commentary Although the Group has a modest level of gearing, falls in capital values will be magnified by the impact of gearing.

Viability assessment and statement
The UK Corporate Governance Code requires the Board to make a ‘viability statement’ which considers the Company’s current position and principal risks and uncertainties combined with an assessment of the future prospects for the Company, in order that the Board can state that the Company will be able to continue its operations over the period of their assessment.

The Board conducted this review over a five-year timescale, considered to be the most appropriate for long-term investment in commercial property. The assessment has been undertaken taking into account the principal risks and uncertainties faced by the Group which could impact its investment strategy, future performance, loan covenants and liquidity.

The major risks identified were those relating to the current Covid-19 pandemic and a disruptive Brexit and their potential impact on the UK economy and commercial property market over the period of the assessment. In the ordinary course of business the Board reviews a detailed financial model on a quarterly basis, including forecast market returns. This model allows for different assumptions regarding lease expiries, breaks and incentives. For the purposes of the viability assessment of the Group, the model covers a five-year period and is stress tested under various scenarios.

In the context of both the current Covid-19 pandemic and a disruptive Brexit, the Board considered a number of scenarios around their impact on the Group’s property portfolio and financial position. These scenarios included different levels of rent collection, occupier defaults, void periods and incentives within the portfolio, and the consequential impact on property costs and loan covenants. All lease events and assumptions were reviewed over the period under the different scenarios and their impact on revenue and cash flow. Future letting activity was assumed to be severely curtailed during the initial period of the assessment. Significant falls in capital values were included in these scenarios, including the potential impact on the Group’s loan covenants. The Group’s long-term loan facilities are in place throughout the assessment period, while the Board assumed that the Group would continue to have access to its short-term facilities. The Board considered the impact of these scenarios on its ability to continue to pay dividends at different rates over the assessment period.

These matters were assessed over the period to 31 March 2025 and will continue to be assessed over five-year rolling periods.

The Directors consider that the stress testing performed was sufficiently robust that even under extreme conditions the Company remains viable.

Based on their assessment, and in the context of the Group’s business model and strategy, the Directors expect that the Group will be able to continue in operation and meet its liabilities as they fall due over the five-year period to 31 March 2025.

Statement of Directors’ responsibilities
The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with International Financial Reporting Standards, as issued by the IASB, and applicable law.

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of its profit or loss for that period.

In preparing these financial statements, the Directors are required to:

• select suitable accounting policies and then apply them consistently;
• make judgements and estimates that are reasonable, relevant and reliable;
• state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements;
• assess the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and
• use the going concern basis of accounting unless they either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.

The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies (Guernsey) Law, 2008. They are responsible for such internal controls as they determine are necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error, and have a general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website, and for the preparation and dissemination of financial statements. Legislation in Guernsey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Directors’ responsibility statement in respect of the Annual Report and financial statements

We confirm that to the best of our knowledge:

• the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group; and
• the Strategic Report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces.

We consider the Annual Report and accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group’s position and performance, business model and strategy.

By Order of the Board

Andrew Dewhirst
Director
22 June 2020

Financial Statements
Consolidated statement of comprehensive income
for the year ended 31 March 2020

	Notes	2020 Total £000	2019 Total £000
Income
Revenue from properties	3	45,664	47,733
Property expenses	4	(12,027)	(9,433)
Net property income		33,637	38,300
Expenses
Administrative expenses	6	(5,563)	(5,842)
Total operating expenses		(5,563)	(5,842)
Operating profit before movement on investments		28,074	32,458
Investments
Profit on disposal of investment properties	13	3,478	379
Investment property valuation movements	13	(882)	10,909
Total profit on investments		2,596	11,288
Operating profit		30,670	43,746
Financing
Interest received		9	38
Interest paid	8	(8,295)	(9,126)
Debt prepayment fees		–	(3,245)
Total finance costs		(8,286)	(12,333)
Profit before tax		22,384	31,413
Tax	9	124	(458)
Profit and total comprehensive income for the period		22,508	30,955
Earnings per share
Basic	11	4.1p	5.7p
Diluted	11	4.1p	5.7p

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 26 form part of these consolidated financial statements.

Consolidated statement of changes in equity
for the year ended 31 March 2020

	Notes	Share capital £000	Retained earnings £000	Other reserves £000	Total £000
Balance as at 31 March 2018		157,449	330,157	(251)	487,355
Profit for the year		–	30,955	–	30,955
Dividends paid	10	–	(18,860)	–	(18,860)
Share-based awards	7	–	–	363	363
Purchase of shares held in trust	7	–	–	(398)	(398)
Balance as at 31 March 2019		157,449	342,252	(286)	499,415
Profit for the year		–	22,508	–	22,508
Dividends paid	10	–	(19,039)	–	(19,039)
Issue of ordinary shares	19	7,137	–	–	7,137
Issue costs of shares		(186)	–	–	(186)
Vesting of shares held in trust		–	(54)	54	–
Share-based awards	7	–	–	292	292
Purchase of shares held in trust	7	–	–	(844)	(844)
Balance as at 31 March 2020		164,400	345,667	(784)	509,283

Notes 1 to 26 form part of these consolidated financial statements.

Consolidated balance sheet
as at 31 March 2020
 

	Notes	2020 £000	2019 £000
Non-current assets
Investment properties	13	654,486	676,102
Tangible assets		20	25
Total non-current assets		654,506	676,127
Current assets
Accounts receivable	14	17,601	14,309
Cash and cash equivalents	15	23,567	25,168
Total current assets		41,168	39,477
Total assets		695,674	715,604
Current liabilities
Accounts payable and accruals	16	(19,438)	(22,400)
Loans and borrowings	17	(888)	(833)
Obligations under leases	21	(108)	(109)
Total current liabilities		(20,434)	(23,342)
Non-current liabilities
Loans and borrowings	17	(164,248)	(191,136)
Obligations under leases	21	(1,709)	(1,711)
Total non-current liabilities		(165,957)	(192,847)
Total liabilities		(186,391)	(216,189)
Net assets		509,283	499,415
Equity
Share capital	19	164,400	157,449
Retained earnings		345,667	342,252
Other reserves		(784)	(286)
Total equity		509,283	499,415
Net asset value per share	22	93p	93p

These consolidated financial statements were approved by the Board of Directors on 22 June 2020 and signed on its behalf by:

Andrew Dewhirst
Director
22 June 2020

Notes 1 to 26 form part of these consolidated financial statements.

Consolidated statement of cash flows
for the year ended 31 March 2020

	Notes	2020 £000	2019 £000
Operating activities
Operating profit		30,670	43,746
Adjustments for non-cash items	20	(2,295)	(10,918)
Interest received		9	38
Interest paid		(7,952)	(8,668)
Tax received/(paid)		123	(845)
(Increase)/decrease in accounts receivable		(4,078)	396
(Decrease)/increase in accounts payable and accruals		(2,936)	1,532
Cash inflows from operating activities		13,541	25,281
Investing activities
Capital expenditure on investment properties	13	(8,861)	(1,559)
Disposal of investment properties		33,859	11,837
Purchase of tangible assets		(4)	(27)
Cash inflows from investing activities		24,994	10,251
Financing activities
Borrowings repaid	17	(33,204)	(34,871)
Borrowings drawn	17	6,000	15,500
Debt prepayment fees		–	(3,245)
Issue of ordinary shares	19	7,137	–
Issue costs of ordinary shares		(186)	–
Purchase of shares held in trust	7	(844)	(398)
Dividends paid	10	(19,039)	(18,860)
Cash outflows from financing activities		(40,136)	(41,874)
Net decrease in cash and cash equivalents		(1,601)	(6,342)
Cash and cash equivalents at beginning of year		25,168	31,510
Cash and cash equivalents at end of year	15	23,567	25,168

Notes 1 to 26 form part of these consolidated financial statements.

Notes to the consolidated financial statements
for the year ended 31 March 2020

1. General information

Picton Property Income Limited (the ‘Company’ and together with its subsidiaries the ‘Group’) was established on 15 September 2005 as a closed ended Guernsey investment company and entered the UK REIT regime on 1 October 2018. The consolidated financial statements are prepared for the year ended 31 March 2020 with comparatives for the year ended 31 March 2019.

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 the IASB and are in compliance with the Companies (Guernsey) Law, 2008.

Given the impact of the current Covid-19 pandemic on the UK economy, the Directors have focused on assessing whether the going concern basis remains appropriate for the preparation of the financial statements. They have reviewed the Group’s principal risks, its loan facilities, access to funding and liquidity position and then considered a number of scenarios including different levels of rent collection over varying timescales, and the potential consequences on financial performance, asset values, capital projects and loan covenants. Under all of these scenarios the Group has sufficient resources to continue its operations, and remain within its loan covenants, for a period of at least 12 months from the date of these financial statements.

Based on their assessment and knowledge of the portfolio and market, the Directors have therefore continued 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.

• IFRS 16 Leases

The adoption of this standard has had no material effect on the consolidated financial statements of the Group.

At the date of approval of these financial statements there are a number of new and amended standards in issue but not yet effective for the financial year ended 31 March 2020 and thus have not been applied by the Group.

• Amendments to IFRS 3 (Business Combinations) is effective for financial years commencing on or after 1 January 2020. The amendment relates to changes in the criteria for determining whether an acquisition is a business combination or an asset acquisition. These amendments will be applied to any future business combinations.
• Amendments to IFRS 9 (Financial Instruments) is effective for financial years commencing on or after 1 January 2020. The amendments offer relief in meeting the criteria for hedge accounting on the transition from LIBOR to IBOR. The adoption of these amendments is not considered to have a material impact on the financial statements of the Group.
• Amendments to References to the Conceptual Framework are effect for financial years commencing on or after 1 January 2020. The adoption of these amendments is not considered to have a material impact on the financial statements of the Group.
• Amendments to IAS 8 (Accounting Policies, Changes in Accounting Estimates and Errors) are also effective for financial years commencing on or after 1 January 2020. The amendment will be applied to any future changes in Accounting Policy, Accounting Estimates or Errors.

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 13. 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 12. All intra-group transactions, balances, income and expenses are eliminated on consolidation.

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 head leases for similar purposes is also classified as investment property. Investment property is initially recognised at purchase cost plus directly attributable acquisition expenses and subsequently measured at fair value. 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 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 Consolidated 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 investment property is derecognised for accounting purposes 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 asset is derecognised. Investment properties are not depreciated.

The majority of the investment properties are charged by way of a first ranking mortgage as security for the loans made to the Group; see Note 17.

Leases

Head leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased asset, are capitalised at the inception of the lease at the fair value of the leased asset 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.

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. 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 Plan, when 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. Where the awards are equity settled, the fair value is recognised as an expense, with a corresponding increase in equity. The liability is remeasured at each reporting date and at settlement date. Any changes in the fair value of the liability are recognised under the category 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.

The cost of the Company’s shares held by the Employee Benefit Trust is deducted from equity in the Group Balance Sheet. Any shares held by the Trust are not included in the calculation of earnings or net assets per share.

Dividends

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

Accounts receivable

Accounts receivable are stated at their nominal amount as reduced by appropriate allowances for estimated irrecoverable amounts. The Group applies the IFRS 9 simplified approach to measuring expected credit losses, which uses a lifetime expected impairment provision for all applicable accounts receivable. 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 for accounting purposes, as well as through the amortisation process.

Assets classified as held for sale

Any investment properties on which contracts for sale have been exchanged but which had not completed at the period end are disclosed as properties held for sale. Investment properties included in the held for sale category continue to be measured in accordance with the accounting policy for investment properties.

Other assets and liabilities

Other assets and liabilities, including trade creditors and accruals, trade and other debtors and creditors, and deferred rental income, which are not interest bearing 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 Group elected to be treated as a UK REIT with effect from 1 October 2018. The UK REIT rules exempt the profits of the Group’s UK property rental business from UK corporation and income tax. Gains on UK properties are also exempt from tax, provided they are not held for trading. The Group is otherwise subject to UK corporation tax.

As a REIT, the Company is required to pay Property Income Distributions equal to at least 90% of the Group’s exempted net income. To remain a UK REIT there are a number of conditions to be met in respect of the principal company of the Group, the Group’s qualifying activity and its balance of business. The Group continues to meet these conditions.

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.

3. Revenue from properties

	2020 £000	2019 £000
Rents receivable (adjusted for lease incentives)	37,780	40,942
Surrender premiums	603	682
Dilapidation receipts	471	269
Other income	81	122
Service charge income	6,729	5,718
	45,664	47,733

Rents receivable includes lease incentives recognised of £1.3 million (2019: £0.8 million).

4. Property expenses

	2020 £000	2019 £000
Property operating costs	2,293	2,342
Property void costs	3,005	1,373
Recoverable service charge costs	6,729	5,718
	12,027	9,433

5. Operating segments

The Board is responsible for setting the Group’s business model and strategy. 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 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 47 commercial properties, which are in the industrial, office, retail and leisure sectors.

6. Administrative expenses

	2020 £000	2019 £000
Director and staff costs	3,273	3,672
Auditor’s remuneration	191	157
Other administrative expenses	2,099	2,013
	5,563	5,842

One-off REIT conversion costs of £215,000 were incurred during the year ended 31 March 2019, which are included within other administrative expenses.

Auditor’s remuneration comprises:	2020 £000	2019 £000
Audit fees:
Audit of Group financial statements	92	72
Audit of subsidiaries’ financial statements	67	43
Audit-related fees:
Review of half-year financial statements	16	15
	175	130
Non-audit fees:
Additional controls testing	16	15
Liquidators’ fees	–	7
Tax compliance	–	5
	16	27
	191	157

7. Director and staff costs

	2020 £000	2019 £000
Wages and salaries	1,688	1,654
Non-Executive Directors’ fees	250	257
Social security costs	394	623
Other pension costs	45	48
Share-based payments – cash settled	473	727
Share-based payments – equity settled	423	363
	3,273	3,672

The emoluments of the Directors are set out in detail within the Remuneration Committee report.

Employees participate in two share-based remuneration arrangements: the Deferred Bonus Plan and the Long-term Incentive Plan (the ‘LTIP’).

For all employees, a proportion of any discretionary annual bonus will be an award under the Deferred Bonus Plan. With the exception of Executive Directors, awards are cash settled and vest after two years. The final value of awards are determined by the movement in the Company’s share price and dividends paid over the vesting period. For Executive Directors, awards are equity settled and also vest after two years. On 19 June 2019 awards of 441,322 units were made which vest in June 2021 (2019: 572,389 units). The next awards are due to be made in June 2020 for vesting in June 2022.

The table below summarises the awards made under the Deferred Bonus Plan. 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 2020, and were not deferred, were paid out subsequent to the year end at a cost of £210,000 (2019: £925,000).

Vesting date	Units at 31 March 2018	Units granted in the year	Units cancelled in the year	Units redeemed in the year	Units at 31 March 2019	Units granted in the year	Units cancelled in the year	Units redeemed in the year	Units at 31 March 2020
31 March 2016	65,198	–	–	(65,198)	–	–	–	–	–
31 March 2017	127,916	–	–	(127,916)	–	–	–	–	–
31 March 2018	127,234	–	–	(127,234)	–	–	–	–	–
31 March 2019	950,890	–	(14,331)	(936,559)	–	–	–	–	–
31 March 2020	–	572,389	(7,785)	–	564,604	–	(2,616)	(319,479)	242,509
31 March 2021	–	–	–	–	–	441,322	(2,415)	–	438,907
	1,271,238	572,389	(22,116)	(1,256,907)	564,604	441,322	(5,031)	(319,479)	681,416

The Group also has a Long-term Incentive Plan for all employees which is equity settled. Awards are made annually and vest three years from the grant date. Vesting is conditional on three performance metrics measured over each three-year period. Awards to Executive Directors are also subject to a further two-year holding period. On 19 June 2019 awards for a maximum of 878,164 shares were granted to employees in respect of the three-year period ending on 31 March 2022. In the previous year, awards of 1,006,938 shares were made on 8 June 2018 for the period ending 31 March 2021.

The three performance metrics are:

• Total shareholder return (TSR) of Picton Property Income Limited, compared to a comparator group of similar listed companies;
• Total property return (TPR) of the property assets held within the Group, compared to the MSCI UK Quarterly Property Index; and
• Growth in EPRA earnings per share (EPS) of the Group.

The fair value of option grants is measured using a combination of a Monte Carlo model for the market conditions (TSR) and a Black-Scholes model for the non-market conditions (TPR and EPS). The fair value is recognised over the expected vesting period. For the awards made during this year and the previous year the main inputs and assumptions of the models, and the resulting fair values, are:

Assumptions
Grant date	19 June 2019	8 June 2018
Share price at date of grant	95.0p	90.9p
Exercise price	Nil	Nil
Expected term	3 years	3 years
Risk-free rate – TSR condition	0.84%	0.83%
Share price volatility – TSR condition	18.7%	18.4%
Median volatility of comparator group – TSR condition	18.1%	18.1%
Correlation – TSR condition	27.1%	33.2%
TSR performance at grant date – TSR condition	7.5%	7.6%
Median TSR performance of comparator group at grant date – TSR condition	3.0%	3.1%
Fair value – TSR condition (Monte Carlo method)	51.5p	42.9p
Fair value – TPR condition (Black-Scholes model)	95.0p	90.9p
Fair value – EPS condition (Black-Scholes model)	95.0p	90.9p

The Trustee of the Company’s Employee Benefit Trust acquired 954,000 ordinary shares during the year for £844,000 (2019: 472,000 shares for £398,000).

The Group employed nine members of staff at 31 March 2020 (2019: ten). The average number of people employed by the Group for the year ended 31 March 2020 was ten (2019: 11).

8. Interest paid

	2020 £000	2019 £000
Interest payable on loans at amortised cost	7,562	8,117
Interest on obligations under finance leases	114	114
Non-utilisation fees	248	220
Amortisation of finance costs	371	675
	8,295	9,126

The loan arrangement costs incurred to 31 March 2020 are £4,534,000 (2019: £4,534,000). These are amortised over the duration of the loans with £371,000 amortised in the year ended 31 March 2020 (2019: £675,000).

9. Tax

The charge for the year is:

	2020 £000	2019 £000
Current UK income tax	–	324
Income tax adjustment to provision for prior year	(68)	25
	(68)	349
Current UK corporation tax	–	121
UK corporation tax adjustment to provision for prior year	(56)	(12)
	(56)	109
Total tax (credit)/charge	(124)	458

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

	2020 £000	2019 £000
Profit before taxation	22,384	31,413
Expected tax charge on ordinary activities at the standard rate of taxation of 19% (2019: 20%)	4,253	6,283
Less:
UK REIT exemption on net income	(3,760)	(2,315)
Revaluation movement not taxable	168	(2,182)
Gains on disposal not taxable	(661)	(76)
Income not taxable, including interest receivable	–	(163)
Expenditure not allowed for tax purposes	–	985
Losses utilised	–	(2)
Capital allowances and other allowable deductions	–	(2,291)
Losses carried forward to future years	–	85
Total tax charge	–	324

For the year ended 31 March 2020 there was an income tax credit of £68,000 in respect of the Group (2019: £349,000 charge) and a corporation tax credit of £56,000 (2019: £109,000 charge).

As a UK REIT, the income profits of the Group’s UK property rental business are exempt from corporation tax, as are any gains it makes from the disposal of its properties, provided they are not held for trading. The Group is otherwise subject to UK corporation tax at the prevailing rate.

As the principal company of the REIT, the Company is required to distribute at least 90% of the income profits of the Group’s UK property rental business. There are a number of other conditions that are also required to be met by the Company and the Group to maintain REIT tax status. These conditions were met in the year and the Board intends to conduct the Group’s affairs such that these conditions continue to be met for the foreseeable future. Accordingly, deferred tax is no longer recognised on temporary timing differences relating to the property rental business.

The Group is exempt from Guernsey taxation under the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989.

10. Dividends

	2020 £000	2019 £000
Declared and paid:
Interim dividend for the period ended 31 March 2018: 0.875 pence	–	4,716
Interim dividend for the period ended 30 June 2018: 0.875 pence	–	4,716
Interim dividend for the period ended 30 September 2018: 0.875 pence	–	4,716
Interim dividend for the period ended 31 December 2018: 0.875 pence	–	4,712
Interim dividend for the period ended 31 March 2019: 0.875 pence	4,712	–
Interim dividend for the period ended 30 June 2019: 0.875 pence	4,781	–
Interim dividend for the period ended 30 September 2019: 0.875 pence	4,773	–
Interim dividend for the period ended 31 December 2019: 0.875 pence	4,773	–
	19,039	18,860

The interim dividend of 0.625 pence per ordinary share in respect of the period ended 31 March 2020 has not been recognised as a liability as it was declared after the year end. This dividend of £3,409,000 was paid on 29 May 2020.

11. Earnings per share

Basic and diluted 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, excluding the average number of shares held by the Employee Benefit Trust for the year. The diluted number of shares also reflects the contingent shares to be issued under the Long-term Incentive Plan.

The following reflects the profit and share data used in the basic and diluted profit per share calculation:

	2020	2019
Net profit attributable to ordinary shareholders of the Company from continuing operations (£000)	22,508	30,955
Weighted average number of ordinary shares for basic profit per share	544,192,866	538,815,550
Weighted average number of ordinary shares for diluted profit per share	546,227,914	541,035,348

12. Investments in subsidiaries

The Company had the following principal subsidiaries as at 31 March 2020 and 31 March 2019:

Name	Place of incorporation	Ownership proportion
Picton UK Real Estate Trust (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 Capital Limited	England & Wales	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 Financing UK Limited (established on 14 February 2020)	England & Wales	100%
Picton Property No 3 Limited	Guernsey	100%

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

Picton UK Real Estate Trust (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, the remaining balances are held by Picton (General Partner) No 2 Limited and Picton (General Partner) No 3 Limited respectively.

13. 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.

	2020 £000	2019 £000
Fair value at start of year	676,102	674,524
Capital expenditure on investment properties	8,861	1,559
Disposals	(33,073)	(11,269)
Realised gains on disposal	3,478	379
Unrealised movement on investment properties	(882)	10,909
Fair value at the end of the year	654,486	676,102
Historic cost at the end of the year	629,932	648,044

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

	2020 £000	2019 £000
Appraised value	664,615	685,335
Valuation of assets held under head leases	1,489	1,565
Lease incentives held as debtors	(11,618)	(10,798)
Fair value at the end of the year	654,486	676,102

The investment properties were valued by independent valuers, CBRE Limited, Chartered Surveyors, as at 31 March 2020 and 31 March 2019 on the basis of fair value in accordance with the version of the RICS Valuation – Global Standards (incorporating the International Valuation Standards) and the UK national supplement (the Red Book) current as at the valuation date. 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.

In addition, the Group’s investment properties are valued quarterly by CBRE Limited. The valuations are based on:

Information provided by the Group including rents, lease terms, revenue and capital expenditure. Such information is derived from the Group’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 senior management and the Board through the Property Valuation Committee. Members of the Property Valuation Committee, together with senior management, 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 Board 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.

The outbreak of Covid-19, declared by the World Health Organization as a ‘Global Pandemic’ on 11 March 2020, has impacted global financial markets. Travel restrictions have been implemented by many countries. Market activity is being impacted in many sectors. As at the valuation date, the external valuers consider that they can attach less weight to previous market evidence for comparison purposes, to inform opinions of value. The current response to Covid-19 means that external valuers are faced with an unprecedented set of circumstances on which to base a judgement. The valuations across all asset classes are therefore reported on the basis of “material valuation uncertainty” as per VPS 3 and VPGA 10 of the RICS Red Book Global.

Consequently, less certainty – and a higher degree of caution – should be attached to the valuations provided than would normally be the case. The external valuers have confirmed that the inclusion of the ‘material valuation uncertainty’ declaration does not mean that valuations cannot be relied upon. Rather, the phrase is used in order to be clear and transparent with all parties, in a professional manner, that – in the current extraordinary circumstances – less certainty can be attached to valuations than would otherwise be the case.

As at 31 March 2020 and 31 March 2019 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 and the prior 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:

	2020			2019
	Office	Industrial	Retail and Leisure	Office	Industrial	Retail and Leisure
Appraised value (£000)	224,620	318,330	121,665	235,035	312,790	137,510
Area (sq ft, 000s)	808	2,570	829	856	2,731	829
Range of unobservable inputs:
Gross ERV (sq ft per annum)
– range	£11.00 to £53.59	£3.54 to £19.58	£3.46 to £81.77	£9.52 to £51.78	£3.54 to £17.70	£3.88 to £84.11
– weighted average	£27.92	£9.79	£32.13	£27.33	£8.91	£31.50
Net initial yield
– range	0.00% to 7.59%	–2.54% to 8.16%	–0.18% to 25.27%	2.48% to 8.59%	0.00% to 8.25%	–0.17% to 15.36%
– weighted average	4.89%	4.63%	5.25%	5.15%	4.78%	5.11%
Reversionary yield
– range	5.47% to 10.80%	4.46% to 10.17%	4.36% to 11.97%	5.32% to 10.70%	4.60% to 9.99%	4.63% to 12.11%
– weighted average	7.04%	5.40%	6.63%	7.01%	5.55%	6.37%
True equivalent yield
– range	5.33% to 9.80%	4.39% to 9.65%	3.97% to 11.95%	5.24% to 9.49%	4.63% to 9.48%	4.09% to 10.86%
– weighted average	6.97%	5.40%	7.17%	6.88%	5.59%	6.75%

The property valuations reflect the external valuers’ assessment of the impact of Covid-19 at the valuation date. An increase/decrease in ERV will increase/decrease valuations, while an increase/decrease to yield decreases/increases valuations. In light of this material valuation uncertainty we have reviewed the ranges used in assessing the impact of changes in unobservable inputs on the fair value of the Group’s property portfolio and concluded these were still reasonable. The table below sets out the sensitivity of the valuation to changes of 50 basis points in yield.

Sector	Movement	2020 Impact on valuation	2019 Impact on valuation
Industrial	Increase of 50 basis points	Decrease of £29.3m	Decrease of £28.7m
	Decrease of 50 basis points	Increase of £36.1m	Increase of £34.7m
Office	Increase of 50 basis points	Decrease of £17.5m	Decrease of £18.7m
	Decrease of 50 basis points	Increase of £20.5m	Increase of £21.3m
Retail and Leisure	Increase of 50 basis points	Decrease of £10.9m	Decrease of £12.6m
	Decrease of 50 basis points	Increase of £13.9m	Increase of £15.8m

14. Accounts receivable

	2020 £000	2019 £000
Tenant debtors (net of provisions for bad debts)	5,197	2,594
Lease incentives	11,618	10,798
Other debtors	786	917
	17,601	14,309

The estimated fair values of receivables are the discounted amount of the estimated future cash flows expected to be received and the approximate of their carrying amounts.

Amounts are considered impaired using the lifetime expected credit loss method. Movement in the balance considered to be impaired has been included in the Consolidated Statement of Comprehensive Income. As at 31 March 2020, tenant debtors of £1,676,000 (2019: £918,000) were considered impaired and provided for.

15. Cash and cash equivalents

	2020 £000	2019 £000
Cash at bank and in hand	23,564	24,454
Short-term deposits	3	714
	23,567	25,168

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.

16. Accounts payable and accruals

	2020 £000	2019 £000
Accruals	5,263	6,596
Deferred rental income	7,817	8,381
VAT liability	1,685	1,994
Income tax liability	–	57
Trade creditors	1,058	230
Other creditors	3,615	5,142
	19,438	22,400

17. Loans and borrowings

	Maturity	2020 £000	2019 £000
Current
Aviva facility	–	1,258	1,204
Capitalised finance costs	–	(370)	(371)
		888	833
Non-current
Santander revolving credit facility	18 June 2021	–	11,500
Santander revolving credit facility	20 June 2021	–	14,500
Canada Life facility	24 July 2027	80,000	80,000
Aviva facility	24 July 2032	86,207	87,465
Capitalised finance costs	–	(1,959)	(2,329)
		164,248	191,136
		165,136	191,969

The following table provides a reconciliation of the movement in loans and borrowings to cash flows arising from financing activities.

	2020 £000	2019 £000
Balance as at 1 April	191,969	210,664
Changes from financing cash flows
Proceeds from loans and borrowings	6,000	15,500
Repayment of loans and borrowings	(33,204)	(34,871)
	(27,204)	(19,371)
Other changes
Amortisation of financing costs	371	676
	371	676
Balance as at 31 March	165,136	191,969

The Group has an £80 million term loan facility with Canada Life Limited which matures in July 2027. 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 £307.5 million (2019: £292.4 million).

Additionally, the Group has a £95.3 million term loan facility with Aviva Commercial Finance Limited which matures in July 2032. The loan is for a term of 20 years and was fully drawn on 24 July 2012 with approximately one-third repayable over the life of the loan in accordance with a scheduled amortisation profile. The Group has repaid £1.2 million in the year (2019: £1.2 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 £189.0 million (2019: £230.3 million).

As at 31 March 2020 the Group had two revolving credit facilities (‘RCFs’) with Santander Corporate & Commercial Banking which expired in June 2021. In total the Group had £49.0 million (2019: £51.0 million) available under both facilities; there is nothing drawn down under these facilities at the year end. Interest was payable on drawn balances at LIBOR plus margins of 175 or 190 basis points. The facilities were secured on properties held by Picton (UK) REIT (SPV No 2) Limited and Picton (UK) Listed Real Estate, valued at £131.8 million (2019: £133.7 million). Post year end, both RCFs were cancelled and replaced with a new £50.0 million RCF.

The fair value of the drawn loan facilities at 31 March 2020, estimated as the present value of future cash flows discounted at the market rate of interest at that date, was £197.0 million (2019: £219.5 million). The fair value of the secured loan facilities is classified as Level 2 under the hierarchy of fair value measurements.

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 2020 was 4.2% (2018: 4.0%).

18. Contingencies and capital commitments

The Group has entered into contracts for the refurbishment of 11 properties with commitments outstanding at 31 March 2020 of approximately £4.5 million (2019: £1.4 million). No further obligations to construct or develop investment property or for repairs, maintenance or enhancements were in place as at 31 March 2020 (2019: £nil).

19. Share capital and other reserves

	2020 £000	2019 £000
Authorised:
Unlimited number of ordinary shares of no par value	–	–
Issued and fully paid:
547,605,596 ordinary shares of no par value
(31 March 2019: 540,053,660)	–	–
Share premium	164,400	157,449

On 21 June 2019 the Company raised £7.1 million through the issue of 7,551,936 new ordinary shares of no par value at 94.5 pence per share. The Company now has 547,605,596 ordinary shares in issue of no par value (31 March 2019: 540,053,660).

The balance of the Company’s share premium account as at 31 March 2020 was £164,400,000 (31 March 2019: £157,449,000).

	2020 Number of shares	2019 Number of shares
Ordinary share capital	547,605,596	540,053,660
Number of shares held in Employee Benefit Trust	(2,103,683)	(1,542,000)
Number of ordinary shares	545,501,913	538,511,660

The fair value of awards made under the Long-term Incentive Plan is recognised in other reserves.

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. The Trustee of the Company’s Employee Benefit Trust has waived its right to receive dividends on the 2,103,683 shares it holds but continues to hold the right to vote. 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.

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

	2020 £000	2019 £000
Profit on disposal of investment properties	(3,478)	(379)
Movement in investment property valuation	882	(10,909)
Share-based provisions	292	363
Depreciation of tangible assets	9	7
	(2,295)	(10,918)

21. Obligations under leases

The Group has entered into a number of head 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.

Lease liabilities in respect of rents payable on leasehold properties were payable as follows:

	2020 £000	2019 £000
Future minimum payments due:
Within one year	117	117
In the second to fifth years inclusive	466	466
After five years	7,266	7,383
	7,849	7,966
Less: finance charges allocated to future periods	(6,032)	(6,146)
Present value of minimum lease payments	1,817	1,820

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

	2020 £000	2019 £000
Current
Within one year	108	109
	108	109
Non-current
In the second to fifth years inclusive	388	392
After five years	1,321	1,319
	1,709	1,711
	1,817	1,820

Operating leases where the Group is lessor

The Group leases its investment properties under commercial property leases which are held as 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):

	2020 £000	2019 £000
Within one year	38,296	37,497
In the second to fifth years inclusive	124,942	113,403
After five years	111,711	88,902
	274,949	239,802

These properties 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.

22. Net asset value

The net asset value per share calculation uses the number of shares in issue at the year end and excludes the actual number of shares held by the Employee Benefit Trust at the year end; see Note 19.

23. Financial instruments

The Group’s financial instruments comprise cash and cash equivalents, accounts receivable, secured loans, obligations under head 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 17, 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 2020	Note	Held at fair value through profit or loss £000	Financial assets and liabilities at amortised cost £000	Total £000
Financial assets
Debtors	14	–	5,983	5,983
Cash and cash equivalents	15	–	23,567	23,567
		–	29,550	29,550
Financial liabilities
Loans and borrowings	17	–	165,136	165,136
Obligations under head leases	21	–	1,817	1,817
Creditors and accruals	16	–	9,936	9,936
		–	176,889	176,889

31 March 2019	Note	Held at fair value through profit or loss £000	Financial assets and liabilities at amortised cost £000	Total £000
Financial assets
Debtors	14	–	3,511	3,511
Cash and cash equivalents	15	–	25,168	25,168
		–	28,679	28,679
Financial liabilities
Loans and borrowings	17	–	191,969	191,969
Obligations under head leases	21	–	1,820	1,820
Creditors and accruals	16	–	11,968	11,968
		–	205,757	205,757

24. Risk management

The Group invests in commercial properties in the United Kingdom. The following describes the risks involved and the applied risk management. Senior management 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 17, 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 Group monitors capital on the basis of the gearing ratio. This ratio is calculated as the principal borrowings outstanding, as detailed under Note 17, divided by the gross assets. There is a limit of 65% as set out in the Articles of Association of the Company. Gross assets are calculated as non-current and current assets, as shown in the Consolidated Balance Sheet.

At the reporting date the gearing ratios were as follows:

	2020 £000	2019 £000
Total borrowings	167,465	194,669
Gross assets	695,674	715,604
Gearing ratio (must not exceed 65%)	24.1%	27.2%

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 manage 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:

	2020 £000	2019 £000
Total liabilities	186,391	216,189
Less: cash and cash equivalents	(23,567)	(25,168)
Net debt	162,824	191,021
Total equity	509,283	499,415
Net debt to equity ratio at end of year	0.32	0.38

Credit risk

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

31 March 2020	Note	Held at fair value through profit or loss £000	Financial assets and liabilities at amortised cost £000	Total £000
Financial assets
Tenant debtors	14	–	5,197	5,197
Cash and cash equivalents	15	–	23,567	23,567
		–	28,764	28,764

31 March 2019	Note	Held at fair value through profit or loss £000	Financial assets and liabilities at amortised cost £000	Total £000
Financial assets
Tenant debtors	14	–	2,594	2,594
Cash and cash equivalents	15	–	25,168	25,168
		–	27,762	27,762

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.

Tenant 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 tenant debtors and, where appropriate, credit guarantees are acquired. 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. 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.

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’). Insolvency or resolution of the bank holding cash balances may cause the Group’s recovery of 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 2020 and at 31 March 2019 Standard & Poor’s credit rating for the Group’s bankers was A-1.

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 senior management 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 12 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 2020	Less than 1 year £000	1 to 5 years £000	More than 5 years £000	Total £000
Cash and cash equivalents	23,567	–	–	23,567
Debtors	5,983	–	–	5,983
Capitalised finance costs	370	912	1,047	2,329
Obligations under head leases	(117)	(466)	(7,266)	(7,849)
Fixed interest rate loans	(8,332)	(33,329)	(193,259)	(234,920)
Creditors and accruals	(9,936)	–	–	(9,936)
	11,535	(32,883)	(199,478)	(220,826)

31 March 2019	Less than 1 year £000	1 to 5 years £000	More than 5 years £000	Total £000
Cash and cash equivalents	25,177	–	–	25,177
Debtors	3,511	–	–	3,511
Capitalised finance costs	371	1,062	1,267	2,700
Obligations under head leases	(117)	(466)	(7,383)	(7,966)
Fixed interest rate loans	(8,332)	(33,329)	(201,591)	(243,252)
Floating interest rate loans	(360)	(26,869)	–	(27,229)
Creditors and accruals	(11,968)	–	–	(11,968)
	8,282	(59,602)	(207,707)	(259,027)

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. This has increased given the Covid-19 pandemic and the resultant effect on tenants’ ability to pay rent. Certain significant expenditure associated with each equity investment in real estate (such as external financing costs, real estate taxes and maintenance costs) is generally not reduced when circumstances cause a reduction in revenue from properties. By diversifying in regions, sectors, risk categories and occupiers, senior management 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 £33.2 million (2019: £34.3 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 terms 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 2020	Less than 1 year £000	1 to 5 years £000	More than 5 years £000	Total £000
Floating
Cash and cash equivalents	23,567	–	–	23,567
Fixed
Secured loan facilities	(1,258)	(5,616)	(160,591)	(167,465)
Obligations under leases	(108)	(388)	(1,321)	(1,817)
	22,201	(6,004)	(161,912)	(145,715)

31 March 2019	Less than 1 year £000	1 to 5 years £000	More than 5 years £000	Total £000
Floating
Cash and cash equivalents	25,168	–	–	25,168
Secured loan facilities	–	(26,000)	–	(26,000)
Fixed
Secured loan facilities	(1,204)	(5,377)	(160,884)	(167,465)
Obligations under leases	(109)	(392)	(1,319)	(1,820)
	23,855	(31,769)	(162,203)	(170,117)

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 has around 350 occupiers so does not place reliance on a limited number of occupiers for its rental income, with the single largest occupier accounting for 4.2% of the Group’s annual contracted rental income.

Currency risk

The Group has no exposure to foreign currency risk.

25. Related party transactions

The total fees earned during the year by the Non-Executive Directors of the Company amounted to £250,000 (2019: £257,000). As at 31 March 2020 the Group owed £nil to the Non-Executive Directors (2019: £nil). The emoluments of the Executive Directors are set out in the Remuneration Report.

Picton Property Income Limited has no controlling parties.

26. Events after the balance sheet date

A dividend of £3,409,000 (0.625 pence per share) was approved by the Board on 27 April 2020 and was paid on 29 May 2020.

On 27 May 2020 the Group entered into a new £50 million revolving credit facility; this replaces the existing facilities held with Santander Corporate & Commercial Banking which have been cancelled.

Post Balance Sheet event disclosure

The global outbreak of Covid-19 in 2020 has resulted in significant loss of life, adversely impacted commercial activity and contributed to significant volatility in certain equity and debt markets. The global impact of the outbreak evolved rapidly and, on 11 March 2020, the World Health Organization declared a pandemic. Many countries have reacted by instituting quarantines, prohibitions on travel and the closure of offices, businesses, schools, retail stores and other public venues. Businesses are also implementing similar precautionary measures.

Such measures, as well as the general uncertainty surrounding the dangers and impact of Covid-19, are creating significant disruption in supply chains and economic activity and are having a particularly adverse impact on transportation, hospitality, tourism, entertainment and other industries. The impact of Covid-19 has led to significant volatility and declines in the global public equity markets and it is uncertain how long this volatility will continue. As Covid-19 continues to spread, the potential impacts, including a global, regional or other economic recession, are increasingly uncertain and difficult to assess.

The outbreak of Covid-19 and the resulting financial and economic market uncertainty could have a significant adverse impact on the Group. Any future impact on the Group is likely to be in connection with the assessment of the fair value of investments and stability of rental income at future dates. At the date of reporting it is not possible to quantify the future financial impact of Covid-19 on the Company’s investment properties or rental income with a degree of certainty. The Board will continue to closely analyse and review the impact of Covid-19 on the Company and will take appropriate action as required.

ENDS