Annual Financial Results

5 June 2018

PICTON PROPERTY INCOME LIMITED
 (“Picton”, the “Company” or the “Group”)

LEI: 213800RYE59K9CKR4497

Preliminary Annual Results

Picton (LSE: PCTN) announces its annual results for the year ended 31 March 2018.

Strong financial results

•           Total profit after tax increased by 50% to £64.2 million
•           Net assets increased to £487.4 million, from £441.9 million
•           Increase in EPRA NAV per share of 10.5%, to 90 pence per share
•           Total return of 14.9%

Increase in earnings and dividends

•           Increase in earnings per share to 11.9p from 7.9p
•           Increase in EPRA earnings per share of 10.1% to 4.2p from 3.8p
•           Dividend increase of 3% in February 2018 to 3.5 pence per share per annum
•           Dividends paid of £18.5 million with dividend cover of 122%

Lower financing costs and greater flexibility

•           Annual financing costs reduced by £1.1 million
•           Extended £24 million revolving credit facility until June 2021
•           Loan to value ratio reduced to 26.7% from 27.4%

Growing occupancy and portfolio outperformance

•           Total property return of 13.0%, outperforming MSCI IPD Quarterly Benchmark of 10.1%
•           Total property return and income return outperformance ahead of MSCI IPD over 1, 3, 5 and 10 years
•           Increased occupancy to 96%, ahead of the MSCI IPD Quarterly Benchmark of 93%

Portfolio activity

•           Like-for-like valuation increase of 6.5%
•           Like-for-like passing rent increased by 3.9%
•           Like-for-like ERV growth of 2.4% with total portfolio ERV of £47.9 million
•           One property acquisition of £23.2 million and three non-core disposals for £10.4 million
•           Invested £3.6 million into refurbishment projects to enhance the portfolio

	2018	2017	2016
Profit after Tax	£64.2m	£42.8m	£64.8m
Earnings per Share	11.9p	7.9p	12.0p
Total Return	14.9%	10.4%	17.9%
Property Valuation	£683.8m	£624.4m	£654.6m
Net Assets	£487.4m	£441.9m	£417.1m
NAV per Share	90p	82p	77p
EPRA Earnings	£22.6m	£20.6m	£19.9m
EPRA Earnings per Share	4.2p	3.8p	3.7p
Dividends per Share	3.4p	3.3p	3.3p
Dividend Cover	122%	115%*	112%
Shareholder Total Return	4.8%	25.6%	1.9%

* 144% including one-off income

Picton Chairman, Nicholas Thompson, commented:

“We have had another successful year delivering against our strategy, achieving a total return of 14.9% and growing the Company’s covered dividend for the third consecutive year. With a clear business strategy in place to ensure that we build on our track record and continue to deliver for shareholders, we believe Picton is in an excellent position as it prepares to enter the UK REIT regime later this year.”

Michael Morris, Chief Executive of Picton Capital, commented:

“Our occupier focused, opportunity led approach has enabled Picton to make significant progress this year with further growth in rental income and EPRA earnings. We have reduced our financing costs and Loan-to-Value ratio while maintaining the portfolio bias towards the better performing industrial and office sectors. We believe the Company is well positioned for any potential opportunities and challenges in the forthcoming year.” 

This announcement contains inside information.

For further information:

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

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

The Company Secretary
Northern Trust International Fund Administration Services (Guernsey) Limited
Trafalgar Court
Les Banques
St Peter Port
Guernsey
GY1 3QL

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

Note to Editors

Picton is a property investment company established in 2005.  It owns and actively manages a £684 million diversified UK commercial portfolio, invested across 51 assets and with around 360 occupiers (as at 31 March 2018). 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

Our latest financial results to March 2018 show that Picton has had another successful year.

Net assets have grown by over 10% to £487 million and profit after tax compared to the previous year increased 50% to £64 million.  The Group’s net asset value per share was 90 pence at the year end and earnings per share rose to 12 pence. 

These results reflect successes at the portfolio level, combined with the positive impact of gearing.  We have continued to deliver against our strategy, grow our dividend and performed ahead of the recognised industry benchmark indices.

Strategy

Income is the key component of the property sector’s total return. As an investment company, our investment objective is to deliver an attractive level of income, with the potential for capital growth. Over the last 12 months we have achieved this with a focus on increasing occupancy, growing income and improving our asset base.

We have made progress on the preparatory work ahead of our conversion to a UK Real Estate Investment Trust (REIT) and have provided more detail about this further on. This change of status and the associated efficiencies it brings emphasises our commitment to being one of the consistently best performing diversified UK focused property companies listed on the main market of the London Stock Exchange.

Performance

Over the financial year, the Company delivered a total return of 14.9%, which is considerably higher than the preceding year and reflects improved conditions within the property market.

At a portfolio level, we continue to outperform the MSCI IPD Quarterly Benchmark. Our track record of outperformance now extends over one, three, five and ten years. In April, MSCI IPD introduced an award for Best Listed Fund which Picton won for achieving the best relative ungeared performance against its Benchmark.

Furthermore, in recognition of the Company’s track record and performance, we are delighted to have received awards from Citywire, Money Observer, FT Advisor, Investment Week, and Moneywise over the course of the year. Additionally, EPRA (the European Public Real Estate Association) awarded Picton with Gold and Silver Awards for last year’s Annual Report within the financial and sustainability reporting categories respectively.

Our total shareholder return was more muted at 4.8%, which was partly a reflection of the strong return of over 25% in the preceding financial year. This is a feature of listed property companies, where it is not uncommon over the short-term for share price and net asset value to be uncorrelated.

Capital Structure

Our current loan to value ratio is 27%, a slightly lower level to last year, despite using some of our revolving credit facility to purchase the new Bristol asset.

We are focused on continuing to strengthen the Balance Sheet and our intention is to reduce gearing further over the next 12 months through selective asset sales.

Property Portfolio

We have seen good valuation growth across the portfolio, primarily in the industrial and office sectors. The portfolio value has increased by 10% to £684 million, more detail on which is provided in the Investment Manager’s Report. We have only made a few selective disposals and one acquisition over the year but these have contributed positively to performance.

Equally pleasing is that we were able to increase occupancy in our portfolio to 96%, up from 94% a year ago, and also increase the average lot size which now stands at £13.4 million, up by 14% over the period. 

REIT conversion

At the time of our last Half Year Report, I advised that we were awaiting an announcement of new legislation in the UK regarding the taxation of non-resident landlord companies such as Picton. Six months later and there are now two new pieces of legislation being introduced that will impact Picton. The first is that non-resident landlord companies will be brought into the scope of UK corporation tax, from 1 April 2020. The result of this is that we would expect our liability to UK tax to increase significantly from that date. Additionally, from 1 April 2019, capital gains made by a non-resident on the disposal of commercial property will be subject to UK tax.

Therefore, any disposals the Company makes from its portfolio after that date will be taxed, consequently reducing shareholder returns. I have stated previously that we were preparing plans to convert to a UK REIT in the event of tax changes adversely affecting Picton, and these have now been finalised. We will shortly be issuing a circular to shareholders with our detailed proposals, including a number of resolutions to be voted on at a General Meeting in July.

In summary, we wish to enter the REIT regime on 1 October this year, after becoming tax resident in the UK, which is a condition of entry. There will be some changes proposed to the articles of the Company to facilitate the REIT conversion. At the same time we are proposing to transfer our technical listing status from an investment company to a commercial company, which we believe is more appropriate for Picton and is consistent with the vast majority of internally managed UK REITs. As a result there will be changes to the way the Company is managed once we are based in the UK, including having a business strategy rather than an investment objective. We will no longer have an investment management subsidiary but will be managed through a traditional board structure with an executive function. However, our investment approach and portfolio strategy will remain very similar.

We have set out, separately within this report, a ‘Question and Answer’ section on the proposed changes, and within the Governance section there is also more detail regarding management changes and the role of the Board. We believe that these changes represent an important step in the evolution of the Company and recommend their approval by shareholders.

Dividends

I am pleased to report that in each of the last three financial years we have increased our dividend, most recently by 3% in February 2018. During this year we paid dividends to shareholders of £18.5 million, an increase of 3% compared to last year, with dividend cover of 122%.

We have continued to maintain a covered dividend throughout the year, in line with our strategy and enabling reinvestment back into the portfolio. Once we are in the UK REIT regime, we will review our dividend level in light of prevailing market conditions.

Governance and Board Composition

The Board takes matters of governance extremely seriously and has provided more detail in the Governance section. We believe investors benefit from the rigour applied to listed companies generally and the governance and reporting structures we have developed at Picton.

This year we will be bringing our Annual General Meeting forward to September. We expect this to be the last one held in Guernsey. As a UK REIT, General Meetings will be held in the UK, strengthening the link between the Company and its shareholders.

During the year Mark Batten was appointed as a non-executive director and will become Chair of the Audit and Risk Committee in July.

Robert Sinclair, the current Chair of this Committee, will, as previously announced, retire in September. On behalf of all his colleagues here at Picton I would like to thank him for his dedicated service to the Company since its launch in 2005.

As part of our transition to a UK REIT, Vic Holmes will also retire from the Board in September this year. Vic, who is currently Chair of the Remuneration Committee, has been with Picton since 2013 and, equally, I would like to thank him for his service and contribution during his tenure. We are currently in the process of selecting a suitable replacement for this role and expect to have made an appointment within the next few months.

Also, as we bring management and control to the UK, Michael Morris, who is currently a non-executive director, will become Chief Executive, with effect from 1 October 2018. At the same time, Andrew Dewhirst will join the Board as Finance Director. 

Outlook

We maintain a positive outlook for a number of reasons.  From a top-down perspective, the portfolio remains well positioned with its overweight industrial, underweight retail bias. Our ability to invest across geographies and sectors within the UK and reshape the portfolio according to market conditions, is beneficial and, as the results have shown, can deliver attractive returns.

Looking at the portfolio in detail, occupancy is at a high level and we have a number of exciting initiatives planned that should further enhance our asset base and grow income, capturing the inherent reversionary potential.

Subject to shareholder approval, we will be converting to a UK REIT alongside which we will be simplifying our corporate structure, with a view to improving efficiency and profitability.

Notwithstanding the risks associated with current economic conditions and the Brexit transition in particular, we believe these are exciting times for the Company. We want to build on our track record and continue to deliver efficiencies for shareholders as we grow. We have a clear business strategy, and we are confident that this will enable Picton to flourish within the UK REIT regime.

Nicholas Thompson

Chairman
4 June 2018

Chief Executive’s review

Our focus over the last 12 months has been to ensure we achieve our strategic priorities and prepare for the changes required as Picton becomes a UK REIT.

By way of background, while the UK commercial property market has delivered positive capital growth every month over the financial year, there has been a very obvious variation in returns between sectors. This was particularly evident in the divergence between the strong industrial markets, where we are overweight, and the weaker retail market, where we have an underweight position. 

We have delivered growth in both net asset value and at a portfolio level, which has again generated returns ahead of the MSCI IPD Quarterly Benchmark. The Investment Manager’s Report provides more detail on the various property transactions completed during the year.

In terms of strategic priorities, I have set out our progress below.

Growing net income

In total, net property income moved from £42.4 million in 2017 to £38.4 million in 2018. However, in 2017 we received £5.3 million of exceptional income in respect of our Luton hotel asset. Excluding this, net property income grew by 3% in 2018.

Working with our occupiers

This is at the heart of our occupier focused, opportunity led approach.  We have included several case studies that demonstrate this approach in action and again there is more detail within the Investment Manager’s Report.

Working closely with our occupiers to help to expand or contract as their businesses evolve is very much part of what we do and a reflection of this is the increase in occupancy that we have achieved during the year. 

We have started to roll out occupier satisfaction surveys to occupiers at our multi-let assets.

We have introduced tougher key performance indicators with our principal service providers, including our managing agents, to continue to improve service delivery. We will make further progress with this initiative in the coming year.

We also encourage the use of our meeting rooms for our occupiers based in the regions who occasionally need meeting room space in London. 

Operational efficiency

Over the year our ongoing charges ratio reduced by 5%, from 1.2% to 1.1%. 

This reflects our focus on operational efficiency and more importantly the benefits of our internalised management model, meaning that our cost base is not directly linked to the value of the assets.

A significant proportion of the management cost is performance based and aligned with shareholders’ interests through both deferred bonus awards and our Long-term Incentive Plan. The management costs this year include a proportion of expected future awards, arising from outperformance to date.

Portfolio and asset management

We continue to have success within the portfolio, in particular with our industrial and office assets, which have shown double digit returns.

Our retail portfolio has not been without its challenges, and seen modest declines reflecting the difficulties faced by a number of high street retailers. As a diversified investment company this element reflects the smallest part of our portfolio and our exposure is significantly lower than the wider market, further contributing to our outperformance against the MSCI IPD Quarterly Benchmark.

Effective use of debt

We have been focused in recent years on the gradual reduction of debt within the Group.  Clearly there is a risk/return trade off in this strategy, but we feel it is appropriate as we move through the property cycle.

Tactically, we used one of our revolving credit facilities to partly finance the acquisition in Bristol and we will continue to approach the use of debt on this basis as and when compelling investment opportunities arise.

Notwithstanding the drawdown under our revolving credit facility, our loan to value ratio has reduced slightly to 26.7% at the year end, which is well within the operational headroom afforded by our lending criteria.

Outlook

While we have to be cognisant of macro issues, at Picton our focus is very much at an asset and indeed occupier level. Enhancing space and improving our income profile can have a positive impact and this is where the property market differs from other asset classes; the ability to manage our assets.

Our business model has embedded longevity throughout the various property cycles as we continually reposition the portfolio towards better growth assets. While single digit forecast consensus returns are more pessimistic, more than ever the devil is in the detail. The industrial sector, where we have greatest exposure, still looks to be the outperformer, and retail, where we have very low relative exposure, would appear to be the reverse. We are continually having to make value judgements around reward and risk, and to this end we intend to be more cautious in our use of debt in the short-term. We are fortunate to now have in place undrawn debt facilities that we can use tactically if we can secure attractively priced opportunities.

Entering the REIT regime later this year will provide a further operational boost and represents a positive evolution of the Picton business. Recognising our track record, approach and the team’s abilities I believe we are well placed to continue to achieve our aim of being one of the consistently best performing diversified UK focused property companies listed on the main market of the London Stock Exchange.

Michael Morris
Chief Executive, Picton Capital Limited
4 June 2018

Our marketplace

Economic backdrop

The UK economy grew by 1.8% in 2017. That was considerably better than the consensus forecast, made at the beginning of last year, that economic growth would slow to just 1.2%. On the face of it, last year’s growth performance would seem to suggest that the fears about the adverse economic impact of the uncertainty generated by the Brexit negotiations have been overstated. Nevertheless, provisional estimates show that the recovery may have stalled – economic output only rose by 0.1% during the first quarter of 2018, compared to quarterly growth of 0.4% and 0.5% in the two previous quarters. As a result, fears about the durability of the recovery have resurfaced in recent weeks.

However, there is good reason to believe that March’s heavy snowfall exaggerated any underlying softness in activity in the early stages of the year. The recent weakness was concentrated in the construction sector where output fell by more than 3% during the quarter. By contrast, the 0.3% quarter-on-quarter rise in services output was only marginally smaller than in the previous quarter, while at 0.7% quarter-on-quarter, growth in industrial production was stronger than the average 0.5% quarter-on-quarter increase seen last year. Experience suggests that output lost to adverse weather tends to be made up in subsequent months and quarters.

In any case, the news flow has not all been in one direction. Another drag on the economy over the past year has been the squeeze on households’ real wages. Yet there is clear evidence that inflation is easing, as the upwards pressure from the jump in import prices, triggered by the fall in the pound following the EU referendum, fades. Headline CPI inflation dropped to 2.5% in March, down from 3% as recently as January. Importantly, that took inflation back below the rate of average earnings growth, which stood at 2.8% on the latest figures. That suggests a recovery in real wages is now on the cards and that the disappointing GDP data for the first quarter has not set the tone for the remainder of the year.

So too, do the latest figures from the labour market. The employment rate has climbed to the highest levels on record in the early stages of 2018. With the number of unfilled job vacancies showing few signs of easing, and the unemployment rate at just 4.2% in February, reports of skills shortages are growing. That should ensure that the recent strengthening in average earnings growth is sustained, supporting consumer spending. It should also give companies a further incentive to invest, providing another boost to economic growth. 

Admittedly, prior to the release of the weak GDP data for the first quarter, another rate rise in May had seemed almost certain. But in the event, the MPC chose to keep rates on hold, preferring to wait for confirmation that the slowdown was mainly weather-driven before tightening monetary policy further. But it still seems to be a question of when rather than whether interest rates will rise. For now, however, risk-free rates continue to support property valuations – for the past four months 10-year gilt yields have hovered in a narrow range of 1.4% to 1.6%, but driven lower by concerns about the political situation in Italy and Spain, they slipped back below 1.3% in the final week of May.

UK property market

According to the MSCI IPD Quarterly Index, UK commercial property delivered a total return of 10% in the year to March 2018. That was more than double the 4.6% return seen in the preceding year when the market was still shaking off the drop in values that followed the UK’s surprise vote for Brexit in June 2016. The improvement in returns was delivered by stronger capital value growth. After falling by 0.3% in the four quarters to March 2017, the past year has seen values rise by 5%, driven by the combination of a 2% uplift in rental values and a drop in property yields of just under 30 basis points. At 4.9% and 4.8% respectively, there was little change in the income return.

By sector, industrial property was again the star performer. Over the past year, industrial capital values have risen by 14.4%, helping to generate a total return of 19.9%. Hotels, where values rose by 9.2% and total returns were 14.1%, ranked next. Meanwhile, despite a marked slowdown in the key central London markets, office capital values rose by 3.4% and total returns were 7.7%. Offices, therefore, continued to outperform the retail sector, where values rose by just 1% and total returns were 6.2%.

At 2%, rental value growth at the All-Property level was almost identical to the 1.9% growth recorded this time last year. But rental value growth by sector has diverged over the past year. Industrial rental values led the way, rising by 5.3%. That compares to growth of 3.9% year-on-year in March 2017. The pace of rental value growth in the hotel sector also improved to 2.2%, double the rate reported this time last year. Meanwhile, at just 0.9%, rental value growth in the retail sector was unchanged. But it slowed, from 1.9% to 1.1%, in the office sector.

On a quarter-on-quarter basis, both the MSCI Monthly and Quarterly Indices report that the pace of rental and capital value growth has eased over the first three months of 2018. Consistent with that, investment market activity has got off to a weak start. In the first three months of 2018, properties with a combined value of £11.7 billion changed hands, a figure that was 16% lower than the £13.9 billion total reported in the first quarter of 2017. That said, the drop in the number of deals has been even larger than the drop in value terms. There is no evidence that this weakness has been driven disproportionately by overseas investors. Taken together, these factors tend to suggest that a lack of opportunity, rather than a shift in investor sentiment, is behind the transactional slowdown.

Moreover, retail aside, the market is characterised by fairly low levels of vacancy. Both office and industrial development pipelines are also modest. With no realistic prospect of an imminent recession, and interest rate rises set to be slow and moderate, it is no surprise that the IPF consensus predicts that capital values will mark time over the next five years.

Industrial market trends

The 19.9% total return delivered by industrial property in the year to March 2018 was heavily reliant on a 14.4% rise in capital values. Of that, more than 9 percentage points was accounted for by falling yields. While that could be seen as a sign of an overheating market, industrial fundamentals appear solid.

For a start, a healthy global economy and an exchange rate that is more competitive than it has been for some time have provided a strong platform for export-oriented manufacturing firms. In addition, the ever growing penetration of online activity and the growth of cloud-based computing has generated further demand for logistics space and data centres.

That demand is also coming up against limited supply. According to survey data from the RICS, the industrial sector is the only segment of the market where development starts are rising. Yet the same survey reports that availability continues to deteriorate at a steady pace, implying that developers are struggling to keep up with demand.

The net result is that rental value growth in the industrial sector has reached 5.3%, a 17 year high, and that has given investors the confidence to bid down yields. Of course, no market can deliver 20% annual returns for long – at least not on a sustainable basis. But there are grounds for thinking that the recent strength of the industrial sector is part of a structural repricing, rather than an unsustainable boom.

Office market trends

A reversal of the post-referendum dip in capital values also explains the strengthening in office total returns, which rose from 2.5% in the year to March 2017 to 7.7% in March 2018. Capital value growth was between 3% and 4% in both the City and the West End, as well as in the South East and the remaining regional markets. But the superior income return for Rest of UK offices helped them to deliver the strongest total returns of 9.1%. West End offices were weakest with a return of 6.5%.

Occupier market conditions are mixed. For example, take-up in central London has been patchy but, viewed on a 12 month moving-average basis, was 15% higher than a 15 year average in the first quarter. With the exception of the South East, where there has been a marked softening, take-up in the main regional city markets has been solid. Agents also report that development pipelines in the nine largest regional city markets are typically equivalent to one year of take-up or less. Meanwhile, vacancy rates in both London and the main South East markets are below the levels that have signalled rental correction in the past.

Even so, the gains already seen mean that rental values in London and the South East are starting to look expensive, which may explain why rental growth in central London has stalled over the past year. By contrast, there are few grounds to believe that regional office rental values are approaching a ceiling. 

Retail market trends

At 6.2%, retail total returns in the year to March 2018 were a distinct improvement on the 2.8% return seen in the year to March 2017. That was driven by a stronger performance from capital values. But at just 1% and 0.9% respectively, capital value and rental value growth were both still relatively subdued.

Admittedly the retail market is heavily polarised. That can be seen from the fact that MSCI reported that 11.9% of retail units were vacant in the first quarter, but that only 4.1% of potential rent was lost to vacancy, implying that demand at the top end of the market is comparatively healthy. Similarly, central London shops delivered a return of 12% over the past year, supported by an 8.5% rise in capital values. By contrast, shopping centres, the weakest market segment, suffered a 3.4% fall in values and returned just 1.2%.

There has been little good news for the retail sector since the start of the year and retail sales volumes contracted by 0.4% quarter-on-quarter. Several high profile names have ceased trading, others have announced restructurings or are rumoured to be considering Company Voluntary Agreements (CVAs) to reduce their rent bills. That said, the drop in inflation and the recovery in real incomes that now appears to be underway should provide some relief for the sector over the remainder of this year and next. But without a strong and sustained rebound in occupier demand, the overhang of surplus space is likely to limit the upside for retail returns.

MSCI IPD All Property total return

10.0%

MSCI IPD capital value growth

5.0%

MSCI IPD rental growth

2.0%

MSCI IPD occupancy

92.7%

Source: MSCI IPD Quarterly Index

Investment manager’s report

We have had another successful year with our occupier focused and opportunity led approach.

Our asset allocation and proactive management of the portfolio, including value accretive investment activity, have enabled us to again outperform the MSCI IPD Quarterly Benchmark on a total return basis over one, three, five and ten years. For the third year running, we have won the MSCI IPD data quality award for our submissions as part of this benchmarking process.

Our portfolio now comprises 51 assets, with over 360 occupiers and is valued at £683.8 million. As a result of leasing activity and active management, the passing rent is now £41.4 million, increasing by 3.9% on a like-for-like basis and the estimated rental value (ERV) of the portfolio is £47.9 million, growing by 2.4% on a like-for-like basis.

We have completed 24 lettings securing over £2.1 million of income, 3.7% ahead of the March 2017 ERV. We have grown occupancy by 2% over the year to 96%, which is particularly pleasing and in line with our desire to maintain higher than benchmark occupancy. We completed 20 lease renewals and re-gears retaining over £1.9 million of income, 14.3% ahead of the March 2017 ERV.

One acquisition was made during the year for £23.2 million and three non-core assets were sold for proceeds of £10.4 million, 37% ahead of the March 2017 valuation. The net effect of these transactions is that the average lot size has increased by 14% to £13.4 million.

We have set out below the principal activity in each of the sectors in which we are invested and believe our strategy and proactive occupier engagement will continue to unlock further value.

The occupier markets have remained resilient, especially in the industrial and regional office sectors, where we have seen good demand further improving our occupancy figures. Central London has seen a slight weakening of demand which has resulted in incentives increasing.

There has been well publicised disruption in the retail and leisure sector, which is primarily a result of changing shopping habits, increased occupational costs, due to business rates, and the impact of the living wage. We expect this situation to continue, especially in the mid-range sector, which will increase supply, noting that the budget sector is still expanding. We have a low weighting to the sector with high occupancy, well located units and mostly rebased rents. We see opportunity to create value in the medium-term through active management while maintaining a high income return.

In terms of wider trends affecting the markets we are operating in, the Minimum Energy Efficiency Standards (MEES) regulations became effective on 1 April 2018 in England and Wales. From this date it will be illegal to renew or grant new tenancies at properties that have F or G EPC ratings and from 2023 the scope of the regulations increases to include existing leases. We identified this risk a number of years ago and now have 99% of EPCs that are compliant, with remaining assets having action plans in place. We were also pleased to be on the steering group for the IPF Research document: Costing Energy Efficiency Improvements in Existing Commercial Buildings 2017, which was published in November and is a key industry publication looking at the value of a broad range of energy efficiency measures to upgrade the energy performance of buildings and strategies to reflect current market standards.

The changes to how businesses use space with a focus on flexibility, staff amenities and connectivity continue to have an impact on the office market. Our occupier focus means we work with our occupiers to ‘right size’ their space, as shown in some of the examples below in the sector updates. Over the year we have continued to proactively engage with our occupiers and have recently introduced occupier surveys, in addition to our quarterly occupier newsletter. We have had a good response to date and will be rolling out this initiative across the portfolio over the coming year.

Examples of how we are increasing occupier amenities include at 50 Farringdon Road, EC1 where we are looking to install a roof terrace for the use of the occupiers, and at Longcross Court, Cardiff, where the planned refurbishment includes occupier amenity areas. We are also planning to increase bicycle storage and shower facilities across the portfolio, trial an initiative which encourages occupiers to use stairs and, with sustainability in mind, we are installing bee hives on the roof of Queens House in Glasgow - this was an initiative that got strong support following one recent occupier survey.

We realise connectivity is of crucial importance to all business and our aim is to continue to improve the connectivity across the portfolio. Over the year we have been working with WiredScore, an international connectivity rating system, to improve connectivity in ten of our office buildings. We were pleased to have the first building in Scotland to be Wired Certified at 180 West George Street in Glasgow which secured a gold certification. This means the building is recognised for leading its class in internet infrastructure and superior internet connectivity.

Portfolio Performance

The portfolio’s total return for the year to 31 March 2018 was 13.0%, outperforming the MSCI IPD Quarterly Benchmark, which delivered 10.1%. Our continued overweight position to the industrial sector and regional offices, together with the active management carried out, has contributed to this outperformance.

As at 31 March 2018, the portfolio generated a net initial yield of 5.5% after void costs with a reversion to 6.6%. The portfolio’s valuation for the year grew by 6.5% on a like-for-like basis. We saw positive valuation growth in the industrial sector of 12.6% and in the office sector of 6.1%. The retail and leisure holdings, despite remaining 97% let, declined in value by 2.3% reflecting the subdued outlook in the retail sector.

Overall, like-for-like growth in the portfolio’s estimated rental values was 2.4% during the year to March 2018. Estimated rental values in the industrial sector grew 3.7% and by 3.6% in the office sector. The retail and leisure estimated rental values declined by 1.5%, with the retail warehouse element remaining flat.

The estimated rental value of the void space is £2.0 million per annum, with four properties accounting for over half the void. Our largest letting opportunity is at 180 West George Street in Glasgow, a market which is seeing improving activity levels. The building presents exceptionally well and we expect to secure occupiers and enhance our income position.

Outlook for the coming year

Our outlook has not fundamentally changed since last year, with strong occupational demand in the industrial and regional office markets set to continue with rents rising. Continuing issues around Brexit have resulted in ongoing uncertainty for central London offices with rents remaining static or decreasing slightly, and incentives moving out.

The retail and leisure sector has had some well publicised failures recently and we see this set to continue in the mid-market sector on the back of increased costs and changing shopping habits. We do not see the retail and leisure sector rebounding in the short-term, hence our underweight position, however there are opportunities on an asset-by-asset basis.

Our portfolio strategy remains unchanged, the de-risking of income through active management and capturing rental growth is our key focus. We believe we remain well placed to grow income and add further value to the portfolio.

Portfolio allocation

The sector weightings, as at 31 March 2018, are detailed below.

Sector	%
Industrial	41.2
South East	28.6
Rest of UK	12.6
Offices	35.9
South East	19.4
Rest of UK	12.4
City & West End	4.1
Retail and Leisure	22.9
Retail Warehouse	9.5
High Street - Rest of UK	6.1
High Street - South East	5.3
Leisure	2.0
Total	100.0

Top ten assets

The largest assets as at 31 March 2018, ranked by capital value, represent 49% of the total portfolio valuation and are detailed below.

	Acquisition Date	Property type	Tenure	Approximate area (sq ft)	No. of occupiers	Occupancy rate (%)
Parkbury Industrial Estate, Radlett, Herts.	03/2014	Industrial	Freehold	336,700	23	100
River Way Industrial Estate, Harlow, Essex	12/2006	Industrial	Freehold	454,800	11	100
Angel Gate, City Road, London EC1	10/2005	Office	Freehold	64,500	26	91
Stanford House, Long Acre, London WC2	05/2010	Retail	Freehold	19,700	3	98
50 Farringdon Road, London EC1	10/2005	Office	Leasehold	31,000	5	87
Tower Wharf, Cheese Lane, Bristol	08/2017	Office	Freehold	70,800	6	91
Belkin Unit, Shipton Way, Rushden, Northants.	07/2014	Industrial	Leasehold	312,900	1	100
30 & 50 Pembroke Court, Chatham, Kent	06/2015	Office	Leasehold	86,300	3	100
Colchester Business Park, Colchester	10/2005	Office	Leasehold	150,700	21	98
Metro, Salford Quays, Manchester	02/2016	Office	Freehold	71,000	4	100

Top ten occupiers

The largest occupiers, based as a percentage of contracted rent, as at 31 March 2018, are summarised as follows:

Occupier	Contracted Rent (£000)	%
Belkin Limited	1,691	3.8
Public Sector	1,608	3.6
DHL Supply Chain Limited	1,505	3.4
B&Q Plc	1,244	2.8
Snorkel Europe Limited	1,123	2.5
The Random House Group Limited	1,000	2.2
Portal Chatham LLP	883	2.0
Edward Stanford Limited	785	1.8
TK Maxx	716	1.6
XMA Limited	675	1.5
Total	11,230	25.2

Longevity of income

As at 31 March 2018, based as a percentage of contracted rent, the average length of the leases to the first termination was 5.2 years. This is summarised as follows:

	%
0 to 1 years	13.8
1 to 2 years	13.8
2 to 3 years	15.5
3 to 4 years	11.6
4 to 5 years	12.0
5 to 10 years	22.8
10 to 15 years	7.0
15 to 25 years	2.3
25 years and over	1.2
Total	100.0

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

Retention rates

Over the year total income at risk due to lease expiries or break options totalled £3.2 million, compared to £4.3 million for the year to March 2017, a 26% decrease.

Excluding asset disposals, we retained 63% of total income at risk in the year to March 2018, this comprised 55% on lease expiries and 79% on break options. Occupancy increased during the year, from 94% to 96% which is ahead of the MSCI IPD Quarterly Benchmark. Picton has always had a shorter than benchmark income profile, which we have seen as positive as it allowed us to actively manage the portfolio to enhance income and value. Over the past four years we have consistently maintained occupancy around 95%, and where occupiers have vacated we have been able to lease space quickly.

In the next three years we have £19.2 million of income at risk due to lease expiries or break options, with a 7.6% reversion to ERV. 38% of the expiries are in the industrial sector, 41% in the office sector and 21% in the retail sector. Over 50% of the lease events are in the South East and London.

Our occupier focus means we know what our occupiers’ requirements are and through this knowledge we can work with them to extend income early and look to ‘right size’ businesses as demonstrated in the portfolio sector review.

Income concentration

There is a wide diversity of occupiers within the portfolio, as set out below, which are compared to the MSCI IPD Quarterly Benchmark by contracted rent, as at 31 March 2018.

Industry Sector	Picton  (%)	Benchmark (%)
Services	30.4	23.6
Retail Trade	20.3	33.2
Manufacturing	13.1	7.7
Financial Services	12.1	14.6
Transportation, Communications	8.7	6.3
Wholesale Trade	8.9	6.3
Public Administration	2.3	3.7
Construction	2.5	0.9
Other	1.7	3.7
	100.0	100.0

Source: MSCI IPD IRIS Report March 2018

Industrial portfolio review

	2018	2017
Value	£281.9 million	£250.4 million
Internal Area	2,731,000 sq ft	2,730,000 sq ft
Annual Rental Income	£15.6 million	£15.3 million
Estimated Rental Value	£18.0 million	£17.3 million
Occupancy	99.3%	98.6%
Number of Assets	17	17

The industrial portfolio again delivered the strongest sector performance for the year. This was a result of active management capturing rental growth, the ‘right sizing’ of occupiers, extending leases and continued strength within the investment market.

Our industrial portfolio value increased by £31.5 million or 12.6%, and the annual rental income increased by £0.3 million or 2.2%. The portfolio has an average weighted lease length of 4.8 years and £2.4 million of reversionary potential.

Occupational demand remains strong, especially in London and the South East. We have seen rental growth of 3.7% across the portfolio and are experiencing demand across all of our estates. Occupancy is 99.3%, with only four vacant units out of 133, three of which are under offer.

Portfolio activity

In York, and working with our occupiers, we surrendered a 137,000 sq ft unit for a premium of £0.29 million and in a back-to-back transaction re-let the unit, increasing the longevity of income by eight years, at a stepped rent to £0.55 million per annum 10% ahead of ERV.

At River Way in Harlow, and following completion of the refurbishment and receipt of planning consent for a change of use, a unit was let securing a minimum ten year term certain at a rent of £0.2 million per annum, in line with ERV, with uplifts collared and capped at 2% and 4% respectively, compounded annually. We renewed a further lease on the estate, with the occupier committing to a new five year lease, subject to break, at an initial rent of £0.18 million per annum. Three months rent free was granted after the break option and the rent was 10% ahead of ERV.

At Datapoint, London E16, again working with our occupiers, we accepted a lease surrender of a unit, with the occupier paying a premium equivalent to the full remaining liability under the lease. The unit was marketed in its existing condition and a new occupier secured within four months on a ten year lease at a rent of £0.20 million per annum, 16% ahead of ERV and 55% ahead of the previous passing rent. In another transaction, we removed a 2019 break option in return for one month’s rent free, securing a further five years at a passing rent of £0.27 million per annum which is subject to review in 2019.

At Dencora Way in Luton we renewed a lease for a further five years, subject to break, at a stepped rent to £0.11 million per annum, 18% ahead of the previous passing rent and 6% above ERV. Two rent reviews were settled increasing the annual rent roll by £0.02 million per annum, 3% ahead of ERV. We have been able to capture rental growth arising from the improved location and close proximity to the new junction 11a on the M1.

At Lyon Business Park in Barking, we achieved a 33% uplift in rent following completion of a rent review. The uplift was £0.1 million per annum. We currently have one vacant unit, which is under offer.

In Warrington, at Easter Court, we surrendered two leases, facilitating two new lettings for a combined £0.09 million per annum, 7% ahead of ERV. At the same time we removed an October 2017 occupier break option securing income until 2022 and increased the passing rent, 7% ahead of ERV.

Activity across the industrial portfolio included the letting of eight units at a combined rent of £0.5 million per annum and the surrender of five leases to facilitate active management. Five leases were renewed or regeared securing £0.9 million per annum and 13 rent reviews agreed, securing an additional £0.26 million per annum of income.

We continually have lease events across our portfolio and there are 24 in the coming year. This provides potential to grow income further with the ERV some 19% higher than the current passing rent.

Investment activity

During the year, there were no acquisitions or disposals in the industrial portfolio.

Sector outlook

Occupational demand remains robust across the country and we see no sign of that reducing in the short-term primarily due to a lack of supply, meaning we are seeing good rental growth especially on the multi-let estates.

Looking forward, we believe we can maintain a high occupancy level with active management, growing rents and facilitating our occupiers’ business growth.

For us, the short-term opportunities are the letting of the 101,800 sq ft unit in Rugby, which comes back in December. The unit is in a strong location close to the M1 and M6 motorways and is one of only a few cross docked buildings in the locality. We expect to achieve a 15% uplift on the current passing rent to £0.6 million per annum.

Office portfolio review

	2018	2017
Value	£245.5 million	£213.9 million
Internal Area	928,000 sq ft	925,000 sq ft
Annual Rental Income	£15.0 million	£13.8 million
Estimated Rental Value	£19.1 million	£17.6 million
Occupancy	91.9%	87.5%
Number of Assets	17	19

The office portfolio delivered the second strongest sector performance of the year. This reflected specific transactional activity across the portfolio as detailed below, as well as strong investment demand supporting pricing, particularly in the regional markets.

Values increased by £12.5 million or 6.1% and we were able to increase the rent roll, on a like-for-like basis, by £1.4 million or 11%. The portfolio has an average weighted lease length of four years and £4.1 million of reversionary potential.

Occupational demand remains strong in the regions, but within our own portfolio a slight weakening of demand in London has resulted in incentives increasing, reinforcing our decision to reduce central London office exposure in 2016. We have seen rental growth of 3.6% across the portfolio and occupancy is 91.9%.

Portfolio activity

Notable lettings occurred at 50 Farringdon Road in London, where we secured three new occupiers at a combined rent of £0.8 million per annum, 2% ahead of ERV. The final first floor suite of 3,900 sq ft is under offer. A rent review was settled on a further suite, increasing the passing rent by 70% to £0.19 million per annum, 26% ahead of ERV. We are planning to install a roof terrace at the property in the coming year, providing further occupier amenity.

At 180 West George Street in Glasgow, the refurbishment of two floors, together with the common areas, was completed with the building providing some of the best quality space available in Glasgow’s central business district. The building was the first in Scotland to be awarded a gold WiredScore connectivity rating, confirming the building’s digital infrastructure and connectivity is of a very good standard. This property accounts for 21% of the total portfolio void and provides further opportunity to increase the rent roll.

At Building 200, Colchester Business Park, we renewed the lease for a further ten years, subject to break, at a rent of £0.53 million per annum with three months rent free. The rent is 34% ahead of ERV. The property is currently 98% let and we have seen strong rental growth over the period of 19%.

In Fleet, we removed occupier break options which were due in 2021, improving the longevity of income to 2025 at a headline rent of £0.4 million per annum subject to review in 2020.

During the year we let 11 suites at a combined rent of £1.5 million per annum, 3% ahead of ERV, renewed 12 leases with a combined rent of £1 million per annum, 20% ahead of ERV and surrendered two leases to facilitate active management. Two rent reviews were agreed, increasing the passing rent by £0.1 million per annum, 4% ahead of ERV.

Investment activity

We acquired a Grade A office building in Bristol for £23.2 million, reflecting a net initial yield of 3.6% due to 36% (by floor area) being vacant. It is situated in a prominent position on the waterfront, and equidistant to both Temple Meads station and the Cabot Circus shopping district. Constructed in 2005 to a BREEAM “Excellent” rating, the building provides 70,800 square feet of office accommodation arranged over ground and five upper floors, with car parking in the basement.

As anticipated, within just over four months of the purchase we completed two new leases for a combined 19,100 sq ft, taking the overall occupancy of the building to 91%. The fourth floor has been let to Integreon, a business support company, and the fifth floor has been let to the advertising agency, McCann. The lettings were for a combined annual rent of £0.54 million, equivalent to £28.50 per sq ft and 4% ahead of the September ERV. As at March 2018 the property’s valuation reflected a 15% uplift relative to the acquisition price.

In Belfast and Bracknell, in three separate transactions, we sold buildings with vacant possession for a combined consideration of £10.4 million, 37% ahead of valuation. On all three assets we had taken income to lease expiry and due to the risk associated with refurbishment and re-letting compared to the premium achievable for vacant possession, we sold the properties for either owner occupation or residential development.

Sector outlook

Sentiment towards London has weakened slightly and the impact of Brexit, particularly its effect on the financial service sector, remains uncertain.

Conversely, the regional office market has seen good demand with low supply in many markets resulting in rental growth, as demonstrated at Tower Wharf in Bristol and Colchester Business Park.

Within our portfolio, the short-term opportunities include the letting of 180 West George Street, which is being marketed, and the repositioning and letting of Longcross Court in Cardiff.

In line with preceding years, we have 30 lease events primarily in the regions in the coming year. These provide us with the opportunity to grow income further with the ERV some 12% higher than the current passing rent.

Retail and leisure portfolio review

	2018	2017
Value	£156.4 million	£160.1 million
Internal Area	829,000 sq ft	824,000 sq ft
Annual Rental Income	£10.7 million	£11.0 million
Estimated Rental Value	£10.8 million	£11.0 million
Occupancy	97.0%	98.8%
Number of Assets	17	17

The retail and leisure portfolio delivered our weakest sector performance over the year, which was primarily a result of limited rental growth and the negative impact of the tough trading conditions which have been well publicised recently. This is the smallest component of the portfolio, reflecting our underweight position and more cautious outlook for the sector.

Values decreased by 2.3%, the rent roll decreased by £0.3 million per annum or 2.1%, and the portfolio has an average weighted lease length of 7.5 years with passing rent at market level.

Despite the headwinds in the sector, occupancy in the retail and leisure portfolio remained high at 97%, with 2% intentionally vacant due to ongoing active management at Stanford House, London WC2 and Angouleme Retail Park, Bury. We have seen negative rental growth of 1.5% across the portfolio, primarily from our high street assets.

Portfolio activity

During the year occupancy remained high, limiting the scope to enhance income through re-leasing. However we undertook a number of transactions which had a positive impact, thereby offsetting some of the wider negative movements.

The development of a new drive-through unit at Gloucester Retail Park, trading as Starbucks, was completed resulting in a letting on a ten year lease at £60,000 per annum. The unit is trading well and has attracted further footfall to the park.

The Crown & Mitre complex in Carlisle is now fully let, having expanded an occupier into an adjoining unit and securing a new ten year lease at a rent of £66,000 per annum, 1% ahead of ERV.

We renewed two leases at Scots Corner in Kings Heath, Birmingham for a combined rent of £53,450 per annum, 16% ahead of ERV. At the same property two rent reviews were settled increasing the annual rent roll by 19% to £66,800 per annum, 7% ahead of ERV. This is a good example of where we are seeing rental growth off rebased rental levels set five years ago.

The 152 bedroom hotel in Luton reopened during the year following a comprehensive refurbishment undertaken by the incoming occupier and we understand it is trading well.

We have 14 lease events in the coming year. These provide us with the opportunity to grow income further with the ERV some 7% higher than the current passing rent.

Investment activity

There were no acquisitions or disposals in the retail and leisure portfolio during the year.

Sector outlook

Retail and leisure represents 23% of the portfolio by value, significantly less than the MSCI IPD Quarterly Benchmark, and the portfolio generates a high income yield of 6.3%. With 65% of the retail and leisure portfolio in the more resilient central London and retail warehousing sectors, and a high street portfolio off rebased values and rents we see a good opportunity to be able to create value through active management in the medium-term although this will, as expected, result in a short-term dip in the occupancy rate.

Looking forward, the short-term opportunities include the repositioning of Stanford House in Covent Garden where we expect to secure vacant possession later in the year, the letting of our Peterborough unit which was effected by the Company Voluntary Arrangement of New Look who vacate later this year, and the letting of our unit in Preston which comes back in early 2019. There is also the modernisation and repositioning of Angouleme Retail Park in Bury where a number of leases are due to expire and we are looking to move occupiers to facilitate the amalgamation of units to satisfy demand.

Financial review

Our results for the year are again very strong. The total profit recorded was £64.2 million, a 50% increase compared to 2017. Our EPRA earnings increased by £2 million to £22.6 million, and we again increased our dividend during the year, having maintained a high dividend cover. Earnings per share increased to 11.9 pence overall (4.2 pence on an EPRA basis), and the total return based on these results was 14.9% for the year.

Net asset value

The net assets of the Group increased to £487.4 million, which was a rise of 10.3% over the year. The chart below shows the components of this increase over the year. The EPRA net asset value rose from 82 pence to 90 pence.

	£m
March 2017 net asset value	441.9
Income profit	22.6
Valuation movement	38.9
Profit on asset disposals	2.7
Share based awards	0.6
Purchase of shares	(0.9)
Dividends paid	(18.4)
March 2018 net asset value	487.4

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).

	2018 £m	2017 £m	2016 £m
Net asset value – EPRA and IFRS	487.4	441.9	417.1
Fair value of debt	(21.1)	(24.5)	(21.8)
EPRA Triple Net Asset Value	466.3	417.4	395.3
Net Asset Value per share (pence)	90	82	77
EPRA Net Asset Value per share (pence)	90	82	77
EPRA Triple Net Asset Value per share (pence)	87	77	73

Income statement

Total revenue from the property portfolio for the year was £48.8 million. Although less than the 2017 result of £54.4 million, the previous year included some exceptional income relating to our hotel in Luton. On a like-for-like basis, rental income increased by 5% compared to the previous year, on an EPRA basis.

Operating expenses for the year were £5.6 million, compared to £5.2 million in 2017. This is mainly due to advisory and legal fees incurred to date for the potential conversion to a UK REIT, and other one-off corporate level costs.

Financing costs have again fallen this year, to £9.8 million. The zero dividend preference shares were repaid in full in October 2016 and this is the first full year without any finance charge from those shares.

Capital gains on the portfolio were £41.5 million for the year, as detailed further under the Investment Properties section.

The Group currently pays UK income tax on its net rental income, after deductions. Its estimated UK tax liability for this year is £0.5 million, in line with 2017. Following REIT conversion we expect this tax liability to be reduced to zero, as the bulk of the Group’s activities will fall within the REIT exemption. Conversely, if the Company did not join the REIT regime, we would expect the Group’s tax liability to increase significantly from 1 April 2020, when it falls within the new UK corporation tax rules.

The income profit for the year was £22.6 million, less than the £25.8 million in 2017, but as noted above that included the exceptional income received.

Dividends

We increased our annual dividend rate from 3.4 pence to 3.5 pence, with effect from our February 2018 quarterly dividend, bringing the total dividend paid in this financial year to 3.425 pence. Dividend cover for the full year was 122%.

Investment properties

The appraised value of our investment property portfolio was £683.8 million at 31 March 2018, up from £624.4 million a year previously. This year we have made one significant acquisition, Tower Wharf in Bristol, and have disposed of three small non-core assets. A further £3.6 million of capital expenditure was invested back into the existing portfolio. The overall revaluation gain was £38.9 million, representing a 6.5% like-for-like increase in the valuation of the portfolio, double the gain of last year. At 31 March 2018 the portfolio comprised 51 assets, with an average lot size of £13.4 million.

Borrowings

Total borrowings increased to £214.0 million at 31 March 2018, as a result of the drawdown made under our revolving credit facility to partly fund the purchase of Tower Wharf. Despite this, the loan to value ratio has reduced over the year, to 26.7%, due to the valuation increases noted above. The weighted average interest rate on our borrowings has reduced slightly to 4.1%, while the average loan duration is now 10.3 years.

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

During the year we extended the first of our two revolving credit facilities, which was due to expire in March 2018, for three further years until June 2021, which is now coterminus with the second facility. As a result, some of the covenant tests were amended, and the overall facility amount amended to £24 million. Taking into account the £10.5 million we currently have drawn, we have £40.5 million of undrawn facilities.

Loan arrangement costs are capitalised and are amortised over the terms of the respective loans. At 31 March 2018, the unamortised balance of these costs across all facilities were £3.4 million.

The fair value of our borrowings at 31 March 2018 was £235.1 million, higher than the book amount. Gilt rates, although still low, have increased compared to a year ago, while lending margins have moved in slightly.

A summary of our borrowings is set out below:

	2018	2017	2016
Fixed rate loans (£m)	203.5	204.6	249.5
Drawn revolving facilities (£m)	10.5	-	-
Total borrowings (£m)	214.0	204.6	249.5
Borrowings net of cash (£m)	182.5	170.8	226.8
Undrawn facilities (£m)	40.5	53.0	10.2
Loan to value ratio (%)	26.7	27.4	34.6
Weighted average interest rate (%)	4.1	4.2	4.4
Average duration (years)	10.3	11.7	10.7

Cash flow and liquidity

The cash flow from our operating activities was £25.6 million this year, slightly down from 2017 but that year included some £5.3 million of exceptional income. After dividend payments of £18.5 million, the surplus funds from operations were invested back into the portfolio and used to reduce borrowings. Our cash balance at the year end stood at £31.5 million.

Share capital

There were no changes in share capital during the year.

The Company’s Employee Benefit Trust acquired 1,070,000 shares, at a cost of £0.9 million, during the year to satisfy the future vesting of awards made under the Long-term Incentive Plan. 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, Picton Capital Limited

4 June 2018

Managing risk

The Board recognises that there are risks and uncertainties that could have a material impact on our results.

Risk management provides a structured approach to the decision making process such that the identified risks can be mitigated 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 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 on the following pages, together with mitigating controls.

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. This statement is set out in the Directors’ Report.

Risk and Impact	Mitigation	Risk Trend	Connected KPIs
Corporate Strategy
1.  Economic uncertainty, arising from political events or otherwise, brings risks to the property market generally and to occupiers’ business.	The Board reviews the Group’s strategy and business objectives on a regular basis and considers whether any change is needed, in the light of current and forecast market conditions.	Same	Total return EPRA net asset value
2.  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 returns.	The Board reviews the Group’s strategy and business objectives on a regular basis and considers whether any change is needed, in the light of current and forecast market conditions.	Same	Total property return Property income return EPRA vacancy rate
Property
3. The Group has an inappropriate portfolio strategy, as a result of poor sector or geographical allocations, or holding obsolete assets.	The Group maintains a diversified portfolio in order to minimise exposure to any one geographical area or market sector.	Same	Total property return Property income return EPRA vacancy rate
4.  Investment decisions may be flawed as a result of incorrect assumptions, poor research or incomplete due diligence.	All investment decisions are made by the Board following a formal appraisal and due diligence process.	Same	Total property return Property income return
5.  Failure to properly execute asset business plans or poor asset management could lead to longer void periods, higher tenant defaults, higher arrears and low tenant retention, all having an adverse impact on earnings and cash flow.	The Group has business plans for each asset which are reviewed regularly. The Investment Manager has oversight of the Property Manager and maintains close contact with occupiers.	Same	Total property return Property income return EPRA earnings per share
Operational
6.  The Group could suffer damage to its reputation as a result of potential operational failures, such as a breach of regulations, losing key personnel, incorrect financial reports or health and safety breaches.	The Board has a remuneration policy in place which incentivises performance and is aligned with shareholders’ interests. The Group’s Property Manager is required to ensure compliance with current health and safety legislation, with oversight by the Investment Manager. All financial reports are subject to internal and Board review prior to release.	Same	Total return EPRA earnings per share
Risk and Impact	Mitigation	Risk Trend	Connected KPIs
7.  The Group could fail to properly anticipate legal, fiscal or regulatory changes which could lead to financial loss.	The Board and senior management receive regular updates in relevant laws and regulations. The Group is a member of the BPF, EPRA and the AIC, and management attend industry briefings.	Same	EPRA earnings per share Ongoing charges
Financial
8.  A significant fall in the Group’s property valuations or rental income could lead to a breach of financial covenants, leaving the Group with insufficient long-term funding.	The Board reviews financial forecasts for the Group on a regular basis, including sensitivity against financial covenants. The Audit and Risk Committee consider the Going Concern status of the Group bi-annually.	Same	Loan to value ratio
9.  An adverse movement in interest rates could lead to increased Group costs and a greater likelihood of tenant default.	The Group has fixed rates of interest on the majority of its long-term borrowings. The credit quality of new and existing occupiers is continually reviewed.	Up	EPRA earnings per share
10.  The Group operates a geared capital structure, which magnifies returns from the portfolio. An inappropriate level of gearing relative to the property cycle could lead to poor investment returns.	The Board regularly reviews its gearing strategy, at least annually, in the light of changing market conditions.	Same	Total return EPRA earnings per share

Viability assessment and statement

The 2016 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 as relevant to the viability assessment were those relating to a downturn in the UK commercial property market and the resultant impact on the valuation of the property portfolio, the level of rental income receivable and the subsequent effect on cash resources and financial covenants. The Board took into account the illiquid nature of the Company’s property assets, the existence of long-term borrowings, the effects of significant falls in valuations and rental income on the ability to remain within financial covenants, maintain dividend payments and retain investors. These matters were assessed over the period to 31 March 2023, and will continue to be assessed over five year rolling periods.

In the ordinary course of business the Board reviews a detailed financial model on a quarterly basis, including forecast market returns. This model uses prudent assumptions regarding lease expiries, breaks and incentives. For the purposes of the viability assessment of the Group, the model has been adjusted to cover a five year period and is stress tested with a number of scenarios. These include significant falls in capital values (in line with previous market conditions), pessimistic assumptions around lease breaks and expiries, increased void periods and incentives, and increases in tenant defaults. 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 2023.

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 is 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, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy.

By Order of the Board

Vic Holmes
4 June 2018

Consolidated statement of comprehensive income
for the year ended 31 March 2018

	Notes	Income £000	Capital £000	2018 Total £000	2017 Total £000
Income
Revenue from properties	3	48,782	-	48,782	54,398
Property expenses	4	(10,335)	-	(10,335)	(12,011)
Net property income		38,447	-	38,447	42,387
Expenses
Management expenses	6	(3,652)	-	(3,652)	(3,636)
Other operating expenses	8	(1,914)	-	(1,914)	(1,613)
Total operating expenses		(5,566)	-	(5,566)	(5,249)
Operating profit before movement on investments		32,881	-	32,881	37,138
Investments
Profit on disposal of investment properties	14	-	2,623	2,623	1,847
Investment property valuation movements	14	-	38,920	38,920	15,087
Total profit on investments		-	41,543	41,543	16,934
Operating profit		32,881	41,543	74,424	54,072
Financing
Interest received		35	-	35	62
Interest paid	9	(9,782)	-	(9,782)	(10,885)
Total finance costs		(9,747)	-	(9,747)	(10,823)
Profit before tax		23,134	41,543	64,677	43,249
Tax	10	(509)	-	(509)	(499)
Profit and total comprehensive income for the period		22,625	41,543	64,168	42,750
Earnings per share
Basic	12	4.2p	7.7p	11.9p	7.9p
Diluted	12	4.2p	7.7p	11.9p	7.9p

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

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

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

Consolidated statement of changes in equity
for the year ended 31 March 2018

	Notes	Share Capital £000	Retained Earnings £000	Other Reserves £000	Total £000
Balance as at 31 March 2016		157,449	259,683	-	417,132
Profit for the year		-	42,750	-	42,750
Dividends paid	11	-	(17,957)	-	(17,957)
Balance as at 31 March 2017		157,449	284,476	-	441,925
Profit for the year		-	64,168	-	64,168
Dividends paid	11	-	(18,487)	-	(18,487)
Share based awards	7	-	-	642	642
Purchase of shares held in trust	7	-	-	(893)	(893)
Balance as at 31 March 2018		157,449	330,157	(251)	487,355

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

Consolidated balance sheet
As at 31 March 2018

	Notes	2018 £000	2017 £000
Non-current assets
Investment properties	14	670,674	615,170
Tangible assets		5	17
Total non-current assets		670,679	615,187
Current assets
Investment properties held for sale	14	3,850	-
Accounts receivable	15	15,273	15,541
Cash and cash equivalents	16	31,510	33,883
Total current assets		50,633	49,424
Total assets		721,312	664,611
Current liabilities
Accounts payable and accruals	17	(21,471)	(19,958)
Loans and borrowings	18	(712)	(568)
Obligations under finance leases	22	(109)	(109)
Total current liabilities		(22,292)	(20,635)
Non-current liabilities
Loans and borrowings	18	(209,952)	(200,336)
Obligations under finance leases	22	(1,713)	(1,715)
Total non-current liabilities		(211,665)	(202,051)
Total liabilities		(233,957)	(222,686)
Net assets		487,355	441,925
Equity
Share capital	20	157,449	157,449
Retained earnings		330,157	284,476
Other reserves		(251)	-
Total equity		487,355	441,925
Net asset value per share	23	90p	82p

These consolidated financial statements were approved by the Board of Directors on 4 June 2018 and signed on its behalf by:

Vic Holmes
Director
4 June 2018

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

Consolidated statement of cash flows
for the year ended 31 March 2018

	Notes	2018 £000	2017 £000
Operating activities
Profit for the period		74,424	54,072
Adjustments for non-cash items	21	(40,889)	(16,894)
Interest received		35	62
Interest paid		(9,160)	(9,273)
Tax paid		(328)	(232)
Decrease/(increase) in accounts receivable		267	(2,344)
Increase in accounts payable and accruals		1,286	1,449
Cash inflows from operating activities		25,635	26,840
Investing activities
Capital expenditure on investment properties	14	(3,553)	(2,819)
Acquisition of investment properties	14	(24,543)	-
Disposal of investment properties		10,285	51,510
Cash (outflows)/inflows from investing activities		(17,811)	48,691
Financing activities
Borrowings repaid		(3,104)	(45,965)
Borrowings drawn		12,500	-
Financing costs		(213)	(485)
Purchase of shares held in trust	7	(893)	-
Dividends paid	11	(18,487)	(17,957)
Cash outflows from financing activities		(10,197)	(64,407)
Net (decrease)/increase in cash and cash equivalents		(2,373)	11,124
Cash and cash equivalents at beginning of year		33,883	22,759
Cash and cash equivalents at end of year	16	31,510	33,883

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

Notes to the consolidated financial statements
for the year ended 31 March 2018

1. General information

Picton Property Income Limited (the “Company” and together with its subsidiaries the “Group”) was registered on 15 September 2005 as a closed ended Guernsey investment company. The consolidated financial statements are prepared for the year ended 31 March 2018 with comparatives for the year ended 31 March 2017.

2. Significant accounting policies

Basis of accounting

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

The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future and continue to adopt the going concern basis in preparing the financial statements.

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

New or amended standards issued

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

·       Amendments to IAS 7: Disclosure Initiative

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

·       Annual improvements to IFRSs 2014-2016 cycle

The adoption of these standards have 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 2018 and thus have not been applied by the Group. None of these are expected to have a significant effect on the consolidated financial statements of the Group, except the following set out below:

• IFRS 9: ‘Financial Instruments’ replaces the guidance in IAS 39 that relates to the classification and measurement of financial instruments. The standard contains two primary measurement categories for financial assets: amortised cost and fair value. The basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset. The standard also adds new requirements to address the impairment of financial assets and means that a loss event will no longer need to occur before an impairment allowance is recognised. For financial liabilities, IFRS 9 largely carries forward without substantive amendment from IAS 39. The main change is that, in cases where the fair value option is taken for financial liabilities, the part of a fair value change due to an entity’s own credit risk is recorded in other comprehensive income rather than in profit or loss. The standard introduces new requirements for hedge accounting that align hedge accounting more closely with risk management and establishes a more principles-based approach to hedge accounting. The Group has assessed the full impact of IFRS 9 and it does not consider that this standard would have any material impact on the Group’s financial statements as presented for the current year.

• IFRS 15: ‘Revenue from Contracts’ specifies how revenue is recognised when or as an entity transfers control of goods or services to a customer. It also provides for the reporting of useful information on an entity’s contracts with customers. The Group notes lease contracts within the scope of IAS 17 ‘Leases’ are excluded from the scope of IFRS 15. Rental income derived from operating leases is therefore outside the scope of IFRS 15. The Group does not have any non lease income in place at 31 March 2018 that it believes meet these specific criteria but will review again in advance of implementing IFRS 15.

• IFRS 16: ‘Leases’ will result in almost all leases being recognised on the Balance Sheet, as the distinction between operating and finance leases will be removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognised. Lessors will continue to classify leases as finance and operating leases. The Group has assessed the full impact of IFRS 16 and it does not anticipate currently that this standard would have any material impact on the Group’s financial statements as presented for the current year.

• Amendments to IFRS 2: ‘Classification and Measurement of Share-based payment Transactions’ covers three accounting areas: measurement of cash-settled share-based payments, classification of share-based payments settled net of tax withholdings, and accounting for a modification of a share-based payment from cash-settled to equity-settled. The new arrangements could affect the classification and/or measurement of these arrangements and potentially the timing and amount of expense recognised for new and outstanding awards. The Group has assessed the full impact of this amendment to IFRS 2 and it does not currently anticipate that it would have any material impact on the Group’s financial statements as presented for the current year.

There are no other IFRSs or IFRIC interpretations that are not yet effective that would be expected to have a material impact on the Group.

Use of estimates and judgements

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

Significant estimates

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

Significant judgements

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

Basis of consolidation

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

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

Presentation of the Consolidated Statement of Comprehensive Income

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

Fair value hierarchy

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

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

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

Level 3: unobservable inputs for the asset or liability.

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

Investment properties

Freehold property held by the Group to earn income or for capital appreciation or both is classified as investment property in accordance with IAS 40 ‘Investment Property’. Property held under finance leases for similar purposes is also classified as investment property. Investment property is initially recognised at purchase cost plus directly attributable acquisition expenses 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 Group ensures the use of suitable qualified external valuers valuing the investment properties held by the Group.

The fair value of investment property generally involves consideration of:

·       Market evidence on comparable transactions for similar properties;

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

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

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

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

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

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

Realised and unrealised gains or losses on investment properties have been presented as capital items within the Consolidated Statement of Comprehensive Income in accordance with the guidance published by the AIC.

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

Leases

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

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

Cash and cash equivalents

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

Income and expenses

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

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

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

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

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

Employee benefits

Defined contribution plans

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

Short-term benefits

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

Share-based payments

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

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

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. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when identified.

Loans and borrowings

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

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, are not interest bearing and are stated at their nominal value.

Share capital

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

Taxation

The Directors conduct the affairs of the Group such that the management and control of the Group is not exercised in the United Kingdom and that the Group does not carry on a trade in the United Kingdom. The Group is subject to United Kingdom taxation on income arising on the investment properties after deduction of allowable debt financing costs and allowable expenses. The Group is tax exempt in Guernsey for the year ended 31 March 2018.

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

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

Principles for the Consolidated Statement of Cash Flows

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

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

Reclassification of comparative amounts

Certain comparative amounts in the Consolidated Balance sheet have been reclassified to conform with the current year’s presentation. The reclassification does not affect the previously reported profit and total comprehensive income or net asset value.

3. Revenue from properties

	2018 £000	2017 £000
Rents receivable (adjusted for lease incentives)	41,412	40,555
Surrender premiums	200	263
Dilapidation receipts	1,111	1,090
Other income	132	6,003
Service charge income	5,927	6,487
	48,782	54,398

Rents receivable includes lease incentives recognised of £0.2 million (2017: £0.9 million).

In the year ended 31 March 2017, other income included a £5.3 million settlement received in respect of a dispute at the Hotel in Luton.

4. Property expenses

	2018 £000	2017 £000
Property operating costs	2,578	3,501
Property void costs	1,830	2,023
Recoverable service charge costs	5,927	6,487
	10,335	12,011

5. Operating segments

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

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

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

The Board therefore retains full responsibility for investment policy and strategy. The Investment Manager will always act under the terms of the Investment Management Agreement, which cannot be changed without the approval of the Board. The Board has considered the requirements of IFRS 8 ‘Operating Segments’. The Board is of the opinion that the Group, through its subsidiary undertakings, operates in one reportable industry segment, namely real estate investment, and across one primary geographical area, namely the United Kingdom, and therefore no segmental reporting is required. The portfolio consists of 51 commercial properties, which are in the industrial, office, retail and leisure sectors.

6. Management expenses

	2018 £000	2017 £000
Staff costs	3,079	2,992
Other management costs	573	644
	3,652	3,636

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

7. Staff costs

	2018 £000	2017 £000
Wages and salaries	1,667	1,729
Social security costs	276	287
Other pension costs	50	58
Share-based payments – cash settled	620	742
Share-based payments – equity settled	466	176
	3,079	2,992

Staff costs are those of the employees of Picton Capital Limited. Employees in the Group participate in two share-based remuneration arrangements. Awards made under the Deferred Bonus Scheme, which are cash settled, are linked to the Company’s share price and dividends paid, and awards will vest after two years. Employees must still be in the Group’s employment on the vesting date to receive payment. During the year the Group made awards of 572,389 units (2017: 662,149 units), which vest on 31 March 2020.

The table below summarises the awards made under the Deferred Bonus Scheme. Employees have the option to defer the vesting date of their awards for a maximum of seven years. The units which vested at 31 March 2018, and were not deferred, were paid out subsequent to the year end at a cost of £508,000 (2017: £494,000).

Vesting Date	Units at 31 March 2016	Units granted in the year	Units cancelled in the year	Units redeemed in the year	Units  at 31 March 2017	Units granted in the year	Units cancelled in the year	Units redeemed in the year	Units  at 31 March 2018
31 March 2014	2,920	-	-	(2,920)	-	-	-	-	-
31 March 2015	155,000	-	-	(155,000)	-	-	-	-	-
31 March 2016	77,676	-	-	(12,478)	65,198	-	-	-	65,198
31 March 2017	668,567	-	(4,191)	(536,460)	127,916	-	-	-	127,916
31 March 2018	731,978	-	(5,998)	-	725,980	-	(56,549)	(542,197)	127,234
31 March 2019	372,222	662,149	(2,688)	-	1,031,683	-	(80,793)	-	950,890
31 March 2020	-	-	-	-	-	572,389	-	-	572,389
	2,008,363	662,149	(12,877)	(706,858)	1,950,777	572,389	(137,342)	(542,197)	1,843,627

The Company also has a Long-term Incentive Plan (the “LTIP”) for all employees which is equity settled. Awards vest three years from the grant date and are conditional on three performance metrics measured over each three year period. On 16 June 2017, the Company made awards of 1,036,895 shares for the three year period ending on 31 March 2020. In the previous year awards of 1,170,258 shares were made on 27 January 2017 for the period ending 31 March 2019.

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 Picton Property Income Limited Group, compared to the MSCI IPD Quarterly Benchmark; and
• Growth in EPRA earnings per share (EPS) of the Picton Property Income Limited 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	16 June 2017	27 Jan 2017
Share price at date of grant	84.25p	79.75p
Exercise price	Nil	Nil
Expected term	3 years	2.3 years
Risk free rate – TSR condition	0.21%	0.29%
Share price volatility – TSR condition	18.3%	19.8%
Median volatility of comparator group – TSR condition	16.1%	17.0%
Correlation – TSR condition	35.0%	37.4%
TSR performance at grant date – TSR condition	3.3%	17.9%
Median TSR performance of comparator group at grant date – TSR condition	7.0%	6.1%
Fair value – TSR condition (Monte Carlo method)	31.98p	55.72p
Fair value – TPR condition (Black Scholes model)	84.25p	79.75p
Fair value – EPS condition (Black Scholes model)	84.25p	79.75p

The Trustee of the Company’s Employee Benefit Trust acquired 1,070,000 ordinary shares during the year for £893,000 (2017: nil).

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

The Group employed 10 members of staff at 31 March 2018 (2017: 12). The average number of people employed by the Group for the year ended 31 March 2018 was 12 (2017: 12).

8. Other operating expenses

	2018 £000	2017 £000
Valuation expenses	116	111
Administrator fees	148	171
Auditor’s remuneration	149	145
Directors’ fees	232	206
Professional fees	250	383
Other expenses	712	430
Recurring costs	1,607	1,446
REIT conversion and restructuring costs	307	-
Restructuring costs	-	167
Exceptional costs	307	167
	1,914	1,613

Auditor’s remuneration comprises:	2018 £000	2017 £000
Audit fees:
Audit of Group financial statements	65	65
Audit of subsidiaries’ financial statements	43	43
Audit related fees:
Review of half year financial statements	14	14
	122	122
Non-audit fees:
Additional controls testing	14	14
FCA CASS audit	6	5
Liquidators fees	7	-
Tax compliance	-	4
	27	23
	149	145

Liquidators fees incurred to 31 March 2018 were in connection with the liquidation of Picton ZDP Limited.

9. Interest paid

	2018 £000	2017 £000
Interest payable on loans at amortised cost	8,780	8,812
Capital additions on zero dividend preference shares	-	1,074
Interest on obligations under finance leases	114	114
Non-utilisation fees	311	269
Amortisation of finance costs	577	616
	9,782	10,885

The loan arrangement costs incurred to 31 March 2018 are £5,244,000 (2017: £6,213,000). These are amortised over the duration of the loans with £577,000 amortised in the year ended 31 March 2018 (2017: £616,000).

10. Tax

The charge for the year is:

	2018 £000	2017 £000
Current UK income tax	510	331
Income tax adjustment to provision for prior year	(203)	25
	307	356
Current UK corporation tax	195	143
UK corporation tax adjustment to provision for prior year	7	-
	202	143
Total tax charge	509	499

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

	2018 £000	2017 £000
Profit before taxation	64,677	43,249
Expected tax charge on ordinary activities at the standard rate of taxation of 20%	12,935	8,650
Less:
Revaluation gains not taxable	(7,784)	(3,387)
Gains on disposal not taxable	(525)	-
Income not taxable, including interest receivable	(152)	(1,223)
Expenditure not allowed for income tax purposes	404	552
Losses utilised	(33)	(179)
Capital allowances and other allowable deductions	(4,498)	(4,102)
Losses carried forward to future years	163	20
Adjustment to provision for prior years	(203)	25
Total income tax charge	307	356

For the year ended 31 March 2018 there was an income tax liability of £307,000 in respect of the Group (2017: £356,000) and corporation tax of £202,000 (2017: £143,000).

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

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

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

No deferred tax asset has been recognised from unused tax losses which total £4.9 million (2017: £4.1 million) as the Group is only able to utilise the losses to offset taxable profits in certain discrete business streams, and the Directors consider the probability of realising the benefit of these losses, except to an immaterial extent, to be low.

11. Dividends

	2018 £000	2017 £000
Declared and paid:
Interim dividend for the period ended 31 March 2016: 0.825 pence	-	4,455
Interim dividend for the period ended 30 June 2016: 0.825 pence	-	4,456
Interim dividend for the period ended 30 September 2016: 0.825 pence	-	4,456
Interim dividend for the period ended 31 December 2016: 0.85 pence	-	4,590
Interim dividend for the period ended 31 March 2017: 0.85 pence	4,590	-
Interim dividend for the period ended 30 June 2017: 0.85 pence	4,590	-
Interim dividend for the period ended 30 September 2017: 0.85 pence	4,591	-
Interim dividend for the period ended 31 December 2017: 0.875 pence	4,716	-
	18,487	17,957

The interim dividend of 0.875 pence per ordinary share in respect of the period ended 31 March 2018 has not been recognised as a liability as it was declared after the year end. A dividend of £4,716,000 was paid on 31 May 2018.

12. 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:

	2018	2017
Net profit attributable to ordinary shareholders of the Company from continuing operations (£000)	64,168	42,750
Weighted average number of ordinary shares for basic profit per share	539,734,126	540,053,660
Weighted average number of ordinary shares for diluted profit per share	539,738,613	540,053,660

13. Investments in subsidiaries

The Company had the following principal subsidiaries as at 31 March 2018 and 31 March 2017:

Name	Place of incorporation	Ownership proportion
Picton UK Real Estate (Property) Limited	Guernsey	100%
Picton (UK) REIT (SPV) Limited	Guernsey	100%
Picton (UK) Listed Real Estate	Guernsey	100%
Picton UK Real Estate (Property) No 2 Limited	Guernsey	100%
Picton (UK) REIT (SPV No 2) Limited	Guernsey	100%
Picton 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 Property No 3 Limited	Guernsey	100%
Picton Finance Limited	Guernsey	100%

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

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

During the year Picton ZDP Limited was liquidated following the repayment of the zero dividend preference shares in the prior year.

14. Investment properties

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

	2018 £000	2017 £000
Fair value at start of year	615,170	646,018
Acquisitions	24,543	-
Capital expenditure on investment properties	3,553	2,819
Disposals	(10,285)	(50,601)
Realised gains on disposal	2,655	2,440
Realised losses on disposal	(32)	(593)
Unrealised gains on investment properties	49,664	25,729
Unrealised losses on investment properties	(10,744)	(10,642)
Transfer to assets classified as held for sale	(3,850)	-
Fair value at the end of the year	670,674	615,170
Historic cost at the end of the year	660,263	654,057

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

	2018 £000	2017 £000
Appraised value	683,800	624,410
Valuation of assets held under finance leases	1,657	1,680
Lease incentives held as debtors	(10,933)	(10,920)
Assets classified as held for sale	(3,850)	-
Fair value at the end of the year	670,674	615,170

As at 31 March 2018 contracts had been exchanged to sell Merchants House in Chester so this asset has been classified as an asset held for sale. The sale is due to complete in June 2018. As at 31 March 2017 there were no assets classified as held for sale.

The investment properties were valued by CBRE Limited, Chartered Surveyors, as at 31 March 2018 and 31 March 2017 on the basis of fair value in accordance with the RICS Valuation – Global Standards 2017 which incorporate the International Valuation Standards and the RICS valuation - Professional Standards UK January 2014 (Revised April 2015). The total fees earned by CBRE Limited from the Group are less than 5% of their total UK revenue.

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

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

• Information provided by the Investment Manager including rents, lease terms, revenue and capital expenditure. Such information is derived from the Investment Manager’s financial and property systems and is subject to the Group’s overall control environment.
• Valuation models used by the valuers, including market related assumptions based on their professional judgement and market observation.

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

As at 31 March 2018 and 31 March 2017 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:

		2018			2017
	Office	Industrial	Retail and Leisure	Office	Industrial	Retail and Leisure
Appraised value (£000)	245,500	281,855	156,445	213,935	250,350	160,125
Area (sq ft, 000s)	928	2,731	829	925	2,730	824
Range of unobservable inputs:
Gross ERV (sq ft per annum)
— range	£9.52 to £52.65	£3.25 to £17.21	£5.19 to £91.14	£6.42 to £50.45	£3.25 to £16.85	£5.24 to £91.14
— weighted average	£26.96	£8.24	£32.73	£26.39	£7.76	£31.60
Net initial yield
— range	2.32% to 11.46%	1.29% to 9.08%	3.01% to 19.90%	0% to  16.79%	4.49% to 10.29%	3.15% to 14.23%
— weighted average	5.29%	5.19%	6.32%	5.67%	5.75%	6.33%
Reversionary yield
— range	5.52% to 13.70%	4.93% to 10.12%	4.55% to 10.95%	5.74% to 15.39%	5.38% to 11.60%	4.77% to 23.76%
— weighted average	7.14%	5.94%	6.52%	7.52%	6.47%	6.89%
True equivalent yield
— range	5.46% to 11.71%	5.00% to 9.48%	4.37% to 10.35%	5.59% to 13.04%	5.42% to 10.87%	4.66% to 9.77%
— weighted average	7.05%	5.98%	6.60%	7.32%	6.57%	6.66%

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

Sector	Movement	2018 Impact on valuation	2017 Impact on valuation
Industrial	Increase of 50 basis points	Decrease of £24.2m	Decrease of £19.5m
	Decrease of 50 basis points	Increase of £29.0m	Increase of £23.0m
Office	Increase of 50 basis points	Decrease of £18.8m	Decrease of £16.0m
	Decrease of 50 basis points	Increase of £21.8m	Increase of £18.5m
Retail and Leisure	Increase of 50 basis points	Decrease of £13.2m	Decrease of £12.7m
	Decrease of 50 basis points	Increase of £17.0m	Increase of £16.4m

15. Accounts receivable

	2018 £000	2017 £000
Tenant debtors (net of provisions for bad debts)	4,011	4,107
Lease incentives	10,933	10,920
Other debtors	329	514
	15,273	15,541

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

16. Cash and cash equivalents

	2018 £000	2017 £000
Cash at bank and in hand	30,986	31,056
Short-term deposits	524	2,827
	31,510	33,883

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

17. Accounts payable and accruals

	2018 £000	2017 £000
Accruals	5,355	5,092
Deferred rental income	9,104	8,590
VAT liability	2,243	2,345
Income tax liability	444	295
Trade creditors	236	125
Other creditors	4,089	3,511
	21,471	19,958

18. Loans and borrowings

	Maturity	2018 £000	2017 £000
Current
Aviva facility	-	1,153	1,104
Capitalised finance costs	-	(441)	(536)
		712	568
Non-current
Santander revolving credit facility	18 June 2021	10,500	-
Canada Life facility	20 July 2022	33,718	33,718
Canada Life facility	24 July 2027	80,000	80,000
Aviva facility	24 July 2032	88,669	89,822
Capitalised finance costs	-	(2,935)	(3,204)
		209,952	200,336
		210,664	200,904

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

	2018 £000	2017 £000
Balance as at 1 April	200,904	245,664
Changes from financing cash flows
Proceeds from loans and borrowings	12,500	-
Repayment of loans and borrowings	(3,104)	(45,965)
Financing costs	(213)	(485)
	9,183	(46,450)
Other changes
Accrued additional capital on zero dividend preference shares (“ZDPs”)	-	1,074
Amortisation of financing costs	577	616
	577	1,690
Balance as at 31 March	210,664	200,904

The Group has a loan with Canada Life Limited for £113.7 million, which is fully drawn. The loan matures in July 2027, with £33.7 million repayable in July 2022. Interest is fixed at 4.08% over the life of the loan. The loan agreement has a loan to value covenant of 65% and an interest cover test of 1.75. The loan is secured over the Group’s properties held by Picton No 2 Limited Partnership and Picton UK Real Estate Trust (Property) No 2 Limited, valued at £289.8 million (2017: £270.5 million).

Additionally the Group has a term loan facility agreement with Aviva Commercial Finance Limited for £95.3 million, which was fully drawn on 24 July 2012. The loan is for a term of 20 years, with approximately one third repayable over the life of the loan in accordance with a scheduled amortisation profile. The Group has repaid £1.1 million in the year (2017: £1.1 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 £232.4 million (2017: £225.2 million).

The Group has two revolving credit facilities (“RCFs”) with Santander Corporate & Commercial Banking. The facility that had a maturity date of 2018 was extended during the year and now expires at the same time as the second RCF, in June 2021. The extended RCF is initially for £24 million, and once drawn, interest is charged at 190 basis points over 3 month LIBOR. In total the Group has £51.0 million available under both facilities, of which £10.5 million was drawn down at year end.

The ZDPs were fully repaid in the year ended 31 March 2017.

The fair value of the drawn loan facilities at 31 March 2018, estimated as the present value of future cash flows discounted at the market rate of interest at that date, was £235.1 million (2017: £229.1 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 2018 was 4.1% (2017: 4.2%).

In accordance with the AIFM Directive, information in relation to the Group’s leverage is required to be made available to investors. The Group’s maximum and average actual leverage levels at 31 March 2018 are shown below:

	Gross method	Commitment method
Maximum limit	285%	285%
Actual	140%	144%

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

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

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

19. Contingencies and capital commitments

The Group has not entered into any refurbishment contracts and no further obligations to construct or develop investment property or for repairs, maintenance or enhancements were in place as at 31 March 2018 (2017: £2.9 million).

20. Share capital and other reserves

	2018 £000	2017 £000
Authorised:
Unlimited number of ordinary shares of no par value	-	-
Issued and fully paid:
540,053,660 ordinary shares of no par value
(31 March 2017: 540,053,660)	-	-
Share premium	157,449	157,449

	2018 Number of shares	2017 Number of shares
Ordinary share capital	540,053,660	540,053,660
Number of shares held in Employee Benefit Trust	(1,070,000)	-
Number of ordinary shares	538,983,660	540,053,660

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 1,070,000 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.

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

	2018 £000	2017 £000
Profit on disposal of investment properties	(2,623)	(1,847)
Movement in investment property valuation	(38,920)	(15,087)
Share based provisions	642	-
Depreciation of tangible assets	12	40
	(40,889)	(16,894)

22. Obligations under leases

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

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

	2018 £000	2017 £000
Future minimum payments due:
Within one year	117	116
In the second to fifth years inclusive	466	466
After five years	7,499	7,616
	8,082	8,198
Less: finance charges allocated to future periods	(6,260)	(6,374)
Present value of minimum lease payments	1,822	1,824

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

	2018 £000	2017 £000
Current
Within one year	109	109
	109	109
Non-current
In the second to fifth years inclusive	395	396
After five years	1,318	1,319
	1,713	1,715
	1,822	1,824

Operating leases where the Group is lessor

The Group leases its investment properties under operating leases.

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

	2018 £000	2017 £000
Within one year	41,083	40,360
In the second to fifth years inclusive	125,186	125,866
After five years	100,087	107,534
	266,356	273,760

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

23. Net asset value

The net asset value per 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 20.

24. Financial instruments

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

Categories of financial instruments

31 March 2018	Note	Held at fair value through profit or loss £000	Financial assets and liabilities at amortised cost £000	Total £000
Financial assets
Debtors	15	-	4,340	4,340
Cash and cash equivalents	16	-	31,510	31,510
		-	35,850	35,850
Financial liabilities
Loans and borrowings	18	-	210,664	210,664
Obligations under finance leases	22	-	1,822	1,822
Creditors and accruals	17	-	9,680	9,680
		-	222,166	222,166

31 March 2017	Note	Held at fair value through profit or loss £000	Financial assets and liabilities at amortised cost £000	Total £000
Financial assets
Debtors	15	-	4,621	4,621
Cash and cash equivalents	16	-	33,883	33,883
		-	38,504	38,504
Financial liabilities
Loans and borrowings	18	-	200,904	200,904
Obligations under finance leases	22	-	1,824	1,824
Creditors and accruals	17	-	8,728	8,728
		-	211,456	211,456

25. Risk management

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

Capital risk management

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

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

The Group monitors capital on the basis of the gearing ratio. This ratio is calculated as the principal borrowings outstanding, as detailed under Note 18, 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:

	2018 £000	2017 £000
Total borrowings	214,040	204,644
Gross assets	721,312	664,611
Gearing ratio (must not exceed 65%)	29.7%	30.8%

The Board of Directors monitors the return on capital as well as the level of dividends to ordinary shareholders. The Group has managed its capital risk by entering into long-term loan arrangements which will enable the Group to reduce its borrowings in an orderly manner over the long-term. The Group has two revolving credit facilities which provide greater flexibility in managing the level of borrowings.

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

	2018 £000	2017 £000
Total liabilities	233,957	222,686
Less: cash and cash equivalents	(31,510)	(33,883)
Net debt	202,447	188,803
Total equity	487,355	441,925
Net debt to equity ratio at end of year	0.42	0.43

Credit risk

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

31 March 2018	Note	Held at fair value through profit or loss £000	Financial assets and liabilities at amortised cost £000	Total £000
Financial assets
Tenant debtors	15	-	4,011	4,011
Cash and cash equivalents	16	-	31,510	31,510
		-	35,521	35,521

31 March 2017	Note	Held at fair value through profit or loss £000	Financial assets and liabilities at amortised cost £000	Total £000
Financial assets
Tenant debtors	15	-	4,107	4,107
Cash and cash equivalents	16	-	33,883	33,883
		-	37,990	37,990

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

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

A provision of £384,000 (2017: £249,000) exists at the year end, in relation to outstanding debtors that are considered to be impaired based on a review of individual debtor balances. The Group believes that unimpaired amounts that are overdue by more than 30 days are still collectable, based on the historic payment behaviours and extensive analyses of the underlying customers’ credit ratings. At 31 March 2018 debtors overdue by more than 30 days totalled £1,094,000 (2017: £1,840,000).

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

The Group has a panel of banks with which it makes deposits, based on credit ratings with set counterparty limits. The Group’s main cash balances are held with National Westminster Bank plc (“NatWest”), Santander plc (“Santander”), Nationwide International Limited (“Nationwide”) and The Royal Bank of Scotland plc (“RBS”). Insolvency of the bank holding cash balances may cause the Group’s rights with respect to the cash held by them to be delayed or limited. The Group manages its risk by monitoring the credit quality of its bankers on an ongoing basis. NatWest, Santander, Nationwide and RBS are rated by all the major rating agencies. If the credit quality of these banks deteriorates, the Group would look to move the short-term deposits or cash to another bank. Procedures exist to ensure that cash balances are split between banks to minimise exposure. At 31 March 2018 and at 31 March 2017 Standard & Poor’s credit rating for Nationwide and Santander was A-1 and the Group’s remaining bankers had an A-2 rating.

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

Liquidity risk

Ultimate responsibility for liquidity risk management rests with the Board, which has built an appropriate liquidity risk management framework for the management of the Group’s short, medium and long-term funding and liquidity management requirements. The Group’s liquidity risk is managed on an ongoing basis by the Investment Manager and monitored on a quarterly basis by the Board by maintaining adequate reserves and loan facilities, continuously monitoring forecasts and actual cash flows and matching the maturity profiles of financial assets and liabilities for a period of at least twelve months.

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

31 March 2018	Less than one year £000	1 to 5 Years £000	More than 5 years £000	Total £000
Cash and cash equivalents	31,522	-	-	31,522
Debtors	4,340	-	-	4,340
Capitalised finance costs	441	1,448	1,487	3,376
Obligations under finance leases	(117)	(466)	(1,239)	(1,822)
Fixed interest rate loans	(9,708)	(71,862)	(209,924)	(291,494)
Floating interest rate loans	(254)	(11,065)	-	(11,319)
Creditors and accruals	(9,680)	-	-	(9,680)
	16,544	(81,945)	(209,676)	(275,077)

31 March 2017	Less than one year £000	1 to 5 Years £000	More than 5 years £000	Total £000
Cash and cash equivalents	33,925	-	-	33,925
Debtors	4,621	-	-	4,621
Capitalised finance costs	536	1,476	1,728	3,740
Obligations under finance leases	(116)	(466)	(1,242)	(1,824)
Fixed interest rate loans	(9,708)	(38,832)	(252,662)	(301,202)
Creditors and accruals	(8,728)	-	-	(8,728)
	20,530	(37,822)	(252,176)	(269,468)

Market risk

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

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

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

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

The valuation of the Group’s property assets is subject to changes in market conditions. Such changes are taken to the Consolidated Statement of Comprehensive Income and thus impact on the Group’s net result. A 5% increase or decrease in property values would increase or decrease the Group’s net result by £34.2 million (2017: £31.2 million).

Interest rate risk management

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

Interest rate risk

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

31 March 2018	Less than 1 year £000	1 to 5 Years £000	More than 5 years £000	Total £000
Floating
Cash and cash equivalents	31,510	-	-	31,510
Secured loan facilities	-	(10,500)	-	(10,500)
Fixed
Secured loan facilities	(1,153)	(38,866)	(163,521)	(203,540)
Obligations under finance leases	(109)	(395)	(1,318)	(1,822)
	30,248	(49,761)	(164,839)	(184,352)

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

Concentration risk

As discussed above, all of the Group’s investments are in the UK and therefore it is exposed to macroeconomic changes in the UK economy. Furthermore, the Group places reliance on a limited number of occupiers for its rental income, with one occupier accounting for 3.8% of the Group’s annual contracted rental income.

Currency risk

The Group has no exposure to foreign currency risk.

26. Related party transactions

The total fees earned during the year by the Directors of the Company amounted to £232,000 (2017: £205,500). As at 31 March 2018 the Group owed £nil to the Directors (2017: £nil). The emoluments of each Director are set out in the Remuneration Report.

Picton Property Income Limited has no controlling parties.

27. Events after the balance sheet date

A dividend of £4,716,000 (0.875 pence per share) was approved by the Board on 23 April 2018 and paid on 31 May 2018.