Preliminary Annual Results

27 May 2021

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

Picton announces its annual results for the year ending 31 March 2021.

Resilient financial performance

– Profit after tax of £33.8 million, an increase of over 50% on the prior year results (2020: £22.5 million)

– Net assets of £528 million, or 97p per share, an increase of 3.7% (2020: £509 million or 93p per share)

– Earnings per share of 6.2p (2020: 4.1p)

– Total return of 6.6% (2020: 4.5%)

– Received 92% of rental income over the financial year, with a further 1% deferred

– Combined reduction of 6% in property, operating and finance costs over the year

– Total dividends paid of £15.0 million with dividend cover of 134% (2020: £19.0 million and 105%)

– Loan to value ratio reduced to 21% with significant headroom against loan covenants (2020: 22%)

– New £50 million revolving credit facility completed

Outperforming property portfolio

– Total property return of 7.3%, outperforming MSCI UK Quarterly Property Index of 1.2%

– Upper quartile outperformance against MSCI over one, three, five and ten years and since inception

– Well positioned portfolio comprising Industrial 53%, Office 36%, Retail and Leisure 11%

– Like-for-like valuation increase of 3.2%

– Like-for-like increase in passing rent of 1.9%

– Like-for-like estimated rental value increase of 1.1%

– One retail asset disposal for £4.0 million, 30% ahead of March 2020 valuation

Improving occupancy through asset management

– Increased occupancy to 91% (2020: 89%)

– Occupier retention of 88%

– 90 asset management transactions completed including:

17 rent reviews, 7% ahead of ERV

30 lease renewals or regears, 10% ahead of ERV

25 lettings or agreements to lease, 3% ahead of ERV

– £5 million invested into asset refurbishment and repositioning projects

Supporting our stakeholders

– Provided assistance to over 90 occupiers during the Covid-19 pandemic

– Increased dividends twice during the year, with payments almost back to pre-pandemic levels

– Reduction in property running costs to assist our occupiers

– Improvement in annual GRESB score achieving two Green star status

– Pathway to net zero carbon to be in place by March 2022

Balance sheet	31 March 2021	31 March 2020	31 March 2019
Property valuation	£682m	£665m	£685m
Net assets	£528m	£509m	£499m
EPRA net tangible assets per share	97p	93p	93p

Income statement	Year ended 31 March 2021	Year ended 31 March 2020	Year ended 31 March 2019
Profit after tax	£33.8m	£22.5m	£31.0m
EPRA earnings	£20.1m	£19.9m	£22.9m
Earnings per share	6.2p	4.1p	5.7p
EPRA earnings per share	3.7p	3.7p	4.3p
Total return	6.6%	4.5%	6.5%
Total shareholder return	0.0%	3.6%	10.1%
Total dividends per share	2.8p	3.5p	3.5p
Dividend cover	134%	105%	122%

Picton Chair, Lena Wilson CBE, commented:

“These results show an improvement on the preceding year and underline the resilience of the business, despite the obvious challenges. Our current dividend is 91% of pre-pandemic levels and our focus is now firmly fixed on the future as lockdown measures continue to ease and the economic recovery gathers pace. This is an exciting time to have joined Picton and I look forward to working with the team to develop the business from such a solid base.”

Chief Executive of Picton, Michael Morris, commented:

“We have increased occupancy and continued to deliver upper quartile returns, whilst supporting our occupiers through an incredibly difficult period. We believe this year has demonstrated more than ever the importance of achieving sustainable investor returns by balancing the needs of our occupiers whilst creating long-term shareholder value. We intend to continue building on the strong base we have established by investing in the portfolio to further grow occupancy and income as we emerge from the pandemic.”

This announcement contains inside information.

For further information:

Tavistock
Jeremy Carey/James Verstringhe, 020 7920 3150, james.verstringhe@tavistock.co.uk

Picton
Michael Morris, 020 7011 9980, michael.morris@picton.co.uk

Note to Editors

Picton, established in 2005, is a UK REIT. It owns and actively manages a £682 million diversified UK commercial property portfolio, invested across 46 assets and with around 350 occupiers (as at 31 March 2021). 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

Chair’s Statement

This has been an unprecedented year, with significant disruption to businesses, livelihoods, family and day-to-day life.

During the year, we have remained focused on our three strategic pillars of Portfolio Performance, Operational Excellence and Acting Responsibly. As such, it gives me pleasure to be able to report that the business is in good shape, delivering a profit for the year of £34 million, an increase of over 50% compared with the preceding year.

This has been achieved during a period where we have also provided significant assistance and support to help our occupiers cope with the disruption caused by the Covid-19 pandemic. This demonstrates the strength of our business model, our position entering the pandemic and our hands-on approach which has even led to growing occupancy over the year.

Performance

We delivered a total return of 6.6% over the year driven by portfolio growth in the latter half of the year. We have maintained our EPRA earnings despite being impacted by lower rent collection during the year, and have offset this with additional income generated through asset management transactions and a reduction in finance, property and operating costs.

At a property level, the portfolio has again outperformed the MSCI UK Quarterly Property Index continuing our track record of upper quartile outperformance which spans the period since inception.

Our share price has been more volatile over the period but has responded well to the increases in dividend that we have announced through the year. The share price still does not fully reflect the net asset value of the business, but is currently in a better position than for many of our real estate peers.

Property portfolio

The outperformance at a property level has been driven by our exposure to the industrial sector, which now accounts for 53% of the portfolio. Also, our retail and leisure exposure has reduced, now accounting for only 11%. The combination of these two factors has been helpful alongside some key lettings and retaining many occupiers at or prior to lease-end.

Broadly, rent collection for the year stands at 92% of income demanded, and we expect this to continue to rise, but have made appropriate provisions to reflect the likelihood of not making a full recovery.

Capital structure

We are conservatively positioned with a Group loan to value ratio of 21%. We have £50 million available through our revolving credit facility and assuming the economic recovery strengthens we will be seeking to deploy this, at least in part during the forthcoming year. We recognise that the current market cost of debt is lower than our own and where opportunities arise to reduce this on attractive terms, they will be pursued.

Governance

We continue to maintain strong corporate governance and during the year several changes to the Board have been made including my own appointment as Chair and that of Richard Jones as Chair of the Property Valuation Committee. I would like to thank my predecessor, Nicholas Thompson, for his years of service and similarly Roger Lewis who also stood down in the year.

Despite not being able to meet physically due to the constraints of lockdown, I am pleased to have been able to spend time virtually with the Picton team and a number of larger shareholders. I look forward to continuing open and constructive engagement as we return to some degree of normality.

Dividends

Our initial response to the pandemic was to introduce a more conservative distribution policy, recognising the uncertainty around the severity and impact of the pandemic on our cash flow.

Since then, and based on robust performance, we have been able to increase the dividend in both November and February such that the current distribution is 91% of pre-pandemic levels. We will continue to work hard to further improve occupancy and income in order to get back to pre-pandemic levels, hopefully during the forthcoming year.

Sustainability

We continue to make good progress on multiple fronts in respect of sustainability issues and during the year we joined the Better Buildings Partnership, a collaboration of the UK’s leading commercial property owners. Our focus for the coming year will be on establishing our pathway to achieving net zero carbon. We are mindful of the need to do this in a way that benefits all our stakeholders.

During the year we celebrated our fifteenth anniversary by supporting grassroots charities, helping support the work they do in this particularly difficult period.

Outlook

It is clear that we are well positioned and have built up an impressive track record over the years. What is more important is that this is maintained, and that we can innovate and position the business to ensure that we capture the positive opportunities that are likely to arise following this long period of disruption.

Thankfully there is now light at the end of the tunnel, but we are mindful of the changing landscape and longer-term impacts that the pandemic might have on both the economy and how real estate is used. Along with my fellow Board members, I am excited about the potential ahead.

Lena Wilson CBE
Chair
26 May 2021

Our Marketplace

Since the Covid-19 pandemic took hold its effects have been far reaching and dramatic; however, the UK Government’s comprehensive stimulus package has helped to protect livelihoods and provided much-needed support for households and businesses.

Economic backdrop

The UK’s vaccination programme has been one of the most well-executed globally. We are close to restrictions being fully lifted and there is a much-anticipated economic recovery starting to emerge. During the year the UK left the European Union, however there remain several matters to be resolved, such as financial passporting rights. Pending any major Brexit-related disruption or problematic new coronavirus variants, the outlook for the UK economy looks considerably brighter than it did this time last year.

During 2020, GDP contracted by -9.8%, marking the largest annual fall in UK GDP on record. The largest quarterly fall was during the second quarter of 2020 following the first and strictest period of lockdown. Thankfully, a double dip recession was avoided.

To mitigate the impact of the pandemic and stimulate the economy, there has been a large response both in terms of UK Government policy and measures introduced by the Bank of England, including the furlough scheme, business rates relief, a ban on commercial evictions, record ultra-low interest rates (0.1% since March 2020) and Quantitative Easing. In stark contrast to previous periods of recession, average house prices in the UK rose 7.7% during 2020, largely thanks to the stamp duty holiday, which has been extended in part until September 2021.

The UK unemployment rate hit a five-year peak of 5.1% in November 2020, 1.3% higher than a year earlier. The furlough and self-employed support schemes were extended to September 2021 and this plus the easing of restrictions is hoped will keep a lid on rising unemployment.

The annual percentage change in the consumer price index has been at or below 1% since April 2020 and in March 2021 stood at 0.7%.

In March 2021 retail sales rose higher than pre-pandemic levels, even before non-essential shops reopened. Online retail reached a record proportion of total retail sales in January 2021 of 36.4%, as consumers were restricted from using physical stores. Of course, whilst some retail sectors have struggled, others have thrived. As people were confined to their local area, businesses still able to trade benefitted from this additional footfall at the expense of retailers situated at transport hubs or in central business districts. Many companies with an established online offering had a strong year.

Many households were fortunate to see income levels maintained and outgoings reduced, contributing to a record increase in the household savings ratio, which reached a peak of 25.9% in the second quarter of 2020. As restrictions are eased and retail and leisure businesses reopen, it is expected that this elevated savings ratio will contribute to an economic recovery.

The recovery has begun to gather pace. It is anticipated that healthy consumer spending and interest rates staying lower for longer will contribute to a rapid rebound in the second half of 2021. The Office for Budget Responsibility has forecast GDP growth of 4.0% for 2021 and a recovery to pre-pandemic levels by mid-2022.

UK property market

According to the MSCI UK Quarterly Property Index, commercial property delivered a total return of 1.2% for the year ended March 2021, which compares to -0.4% for the year ending March 2020. The increase on last year was a result of a smaller decline in capital values; capital growth was -3.2% in the year to March 2021, better than the -4.7% recorded for the previous year. The income return was 4.5%, the same as the preceding year.

The industrial sector had a strong year and was the top performing sector for the fifth consecutive year. The industrial total return for the year ending March 2021 was 14.3%, with capital growth at a three-year high at 9.6% and an income return of 4.3%. Industrial ERV growth for the period was 2.8%, with a sub-sector range of 2.2% to 3.8%. Capital growth ranged from 6.1% to 13.0% within sub-sectors. Equivalent yields for industrial property now stand at 5.0% (March 2020: 5.3%).

The office sector faced a degree of uncertainty this year, as the success of working from home has provoked thought over future office space requirements for many occupiers. The office sector produced a total return of -0.8% for the year to March 2021, comprising -4.5% capital growth and 3.8% income return. All Office annual rental growth was -1.0% ranging from -2.1% to 1.2% within sub-sectors. Office capital growth was negative across all sub-sectors, ranging from -6.7% to -1.7%. Equivalent yields for office property now stand at 5.8% (March 2020: 5.6%).

It was an extraordinarily challenging time for the retail sector, with three national lockdowns resulting in the closure of all non-essential shops for much of the year. Months of lost trading and dramatically reduced footfall due to Covid-19 exacerbated an already tough environment for retailers, which has led to a high number of CVAs and administrations during the year. The retail sector produced a total return of -8.1% for the year to March 2021. This comprised capital growth of -12.9% and income return of 5.5%. Rental values fell -9.0% over the period and were negative across all sub-sectors, ranging from -20.1% to -1.4%. Retail sub-sector capital growth ranged from -27.4% to 3.6%. Supermarkets were the only retail sub-sector to record positive capital growth. Equivalent yields for retail property now stand at 6.7% (March 2020: 6.4%).

According to Property Data, the total investment volume for the year to March 2021 was £41.5 billion, a -28% decrease on the year to March 2020. The volume of investment by overseas investors in the year to March 2021 was £19.5 billion, accounting for 47% of all transactions.

When looking at average returns at the All Property level, the year to March 2021 was disappointing but not surprising given the plight some sectors faced during the pandemic. However as always, the devil is in the detail as there was a marked range of returns across sectors. At the March 2021 year end the difference between the highest and lowest performing sectors has never been more polarised. There are risks and heightened uncertainty to navigate but also opportunity and optimism regarding the speed and strength of recovery in the latter half of 2021. Low interest rates and low returns from Government bond yields make investment into well-let commercial property with a secure income stream an attractive proposition.

Chief Executive’s Review

Despite the challenges of this year, we have been able to successfully navigate the disruption caused by the Covid-19 pandemic and deliver positive results which highlight the strength and resilience of the business.

It has probably been one of the hardest 12-month periods in which to operate, and few could have foreseen the scale and extent of the disruption caused by lockdown rules. As a team, we have worked remotely for the whole year and have only all been able to meet in person on one socially distanced occasion. The team has pulled together incredibly well and we have been able to run the business effectively, helped to some extent by our small size and nimble approach. We have not made redundancies, furloughed any employees or needed any form of Government support.

We have supported our occupiers this year and provided help where needed. This has required a delicate balance, but to have achieved the financial results we have, whilst simultaneously supporting so many of our occupiers throughout the year, is an accomplishment we are particularly proud of. Set out below is a summary of our performance against our strategic priorities. Almost all our key performance indicators show progress against the previous year.

Portfolio Performance

We have continued to outperform the MSCI UK Quarterly Property Index and have delivered upper quartile performance for the sixth consecutive year. Over the year we ranked 24 out of the 232 portfolios in the MSCI benchmark and over the longer-term have ranked 15 out of 99 portfolios over the 15 years since inception.

Despite the impact of lower rent collection, we have been able to grow income across the portfolio on a like-for-like basis through letting and asset management activity, which has generated additional income. We have had to think creatively around some of the occupier assistance that we have given this year. Despite having a short-term impact on income, this has delivered longer-term value for our investors. Examples of this are where leases have been extended, rent reviews have been agreed in advance or longer-term payment plans have been put in place. Pleasingly, the contractual passing rent and ERV of the portfolio have both grown during the year.

We have continued to improve the portfolio and reposition assets. As we upgrade space we are also thinking about the quality of accommodation from a wellbeing and environmental perspective. These are both themes that have become increasingly relevant during lockdown. We have converted retail to office premises and have obtained planning consent to convert leisure into offices, for a project that is due to complete this year. This will further help to reduce our overall retail and leisure exposure, which now stands at only 11%.

Operational Excellence

Our portfolio positioning and conservative gearing mean that we were in a strong position entering this crisis. At an early stage, we took the prudent but difficult decision to reduce the dividend, because at that time it was not clear how damaging the impact of lockdown restrictions would prove to be across our occupiers’ businesses and to our financial performance.

Over the year, we have received 92% of the rents due and this led us to partially restore the dividend in November 2020 and then in February 2021, such that the current dividend is 91% of the pre-pandemic level. We maintained a covered dividend throughout the year with our EPRA earnings remaining stable relative to last year, an outcome that was less certain 12 months ago.

We have been able to reduce costs, both our own operating costs and also for our occupiers, particularly in offices which were not fully occupied. As we have grown occupancy during the year, this has further helped to reduce costs. Finance costs are lower, following the repayment of our revolving credit facilities at the end of last year, and further debt amortisation this year. Administrative expenses are also lower and by relocating to a former retail void within the portfolio there will be further savings in the future.

We are mindful that growth will deliver benefits through the economies of scale embedded within our internalised model. Whilst we have sought to acquire assets this year, the investment market has been disrupted with lower investment volumes.

We made one disposal during the year and no acquisitions, despite considering a number of opportunities as investment markets opened up in the latter part of 2020.

Acting Responsibly

This is at the heart of what we do, but there has never been a year when our occupiers have needed more support. In many instances, they have not been able to fully utilise our buildings. Our occupier focused approach and commitment through the Picton Promise of - Action, Community, Technology, Support and Sustainability, has never resonated so loudly.

In total over the year we have provided some form of support to nearly one third of our occupiers. The team has dealt with all occupiers personally, agreeing bespoke solutions depending on the occupier, the type of asset and lease terms. A very small proportion of our occupiers have not paid and refused to engage, but until the Government moratorium on recovery of rent arrears ends, these discussions will be postponed until a later date.

For the year we wrote off £1.6 million of debts, and increased the provision against occupier debtors by £0.2 million, with the total provision at 31 March 2021 standing at £1.6 million. Of the occupiers we have helped, the level of assistance has varied, from allowing a more flexible payment plan, generally in the form of monthly rather than quarterly payments, to instances where we have agreed some form of short-term rent write-off. In some cases, these reductions have been tied into future events, e.g. future rent reviews, lease breaks and extensions or, where there has been no conditionality, based on need. We have tried to be fair in our approach and would hope that our longer-term view will be recognised in future relationships.

Our Responsibility Committee has made good progress on sustainability matters and has identified clear targets for material issues. During the year we joined the Better Buildings Partnership and our focus now is on our commitment to becoming net zero carbon.

As mentioned previously, the team has worked incredibly hard this year under difficult circumstances. I would hope that despite our physical remoteness we have been able to maintain the culture and values that underpin our business. We have been there for employees when needed and our employee engagement feedback supports this. Our recent move to Stanford Building significantly improves the quality of our workspace and we will see the full benefit of this once lockdown restrictions ease. Similarly we have engaged with shareholders virtually and have discussed activity and progress throughout the year in conjunction with our brokers and corporate advisers. We continue to maintain an ‘open door’ policy and aim to be as transparent as possible in the way we communicate.

Outlook

Our portfolio structure, conservative gearing and potential to grow income and value through leasing activity put us in a strong position looking forward. We have invested in the portfolio in recent years, upgrading the quality of accommodation, giving us confidence in our ability to let it.

The pandemic and its impact are sadly not completely behind us, and there are likely to be more hurdles to overcome. The impacts of the unwinding of Government support, the continued efficacy of the vaccine and speed in which we return to normal, including tourism, travel and even the daily commute to the office, are still not clear.

We will continue to create opportunities from our existing portfolio and more widely as the UK gradually returns to life as normal and lockdown conditions ease.

Michael Morris
Chief Executive
26 May 2021

Portfolio Review

Industrial weighting	53%
South East	40%
Rest of UK	13%

Office weighting	36%
South East	16%
Rest of UK	11%
City & West End	9%

Retail and Leisure weighting	11%
Retail Warehouse	7%
High Street Rest of UK	3%
Leisure	1%

Through engaging proactively with our occupiers, we have had success in managing the portfolio despite the many challenges caused by the Covid-19 pandemic.

We ended the year with like-for-like increases in the portfolio valuation, passing rent and estimated rental value (ERV). It has been another busy year in terms of portfolio transactions, despite the national lockdowns, with the number completed close to that of the previous year.

We have continued to invest in the portfolio, repositioning assets and enhancing the quality and lettability of space, resulting in an increase in occupancy over the period to 91%, up from 89% in the prior year.

Our relationships with our occupiers have been fundamental during the year, and we have been able to help where required.

We are guided by our Picton Promise of Action, Community, Technology, Support and Sustainability, all key commitments which have assisted our occupiers during the pandemic.

Performance

Our portfolio now comprises 46 assets, with around 350 occupiers, and is valued at £682 million with a net initial yield of 4.8% and a reversionary yield of 6.3%. Our asset allocation, with 53% in industrial, 36% in office and 11% in retail and leisure, combined with an investment disposal and transactional activity, has enabled us to deliver upper quartile performance and outperform the MSCI UK Quarterly Property Index over the year.

Overall, the like-for-like valuation was up 3.2%, with the industrial sector up 13%, offices declining by -5% and retail and leisure declining by -9%. This compares with the MSCI UK Quarterly Property Index recording capital value declines of -3.2% over the period.

The overall portfolio passing rent is £36.5 million, an increase from the prior year of 2% on a like-for-like basis. This was a result of the industrial portfolio rents growing by 6%, office rents growing by 2%, being offset by retail and leisure rents decreasing by -7%. Regional offices saw rental growth of 3%, offset by declines in London of -2%, which was more severely affected by the working from home guidance and a reluctance to travel on public transport.

The March 2021 ERV of the portfolio is £45.4 million, an increase from the prior year of 1% on a like-for-like basis. Positive growth in the industrial sector of 4% was offset by the negative growth in the retail sector of -3%, while the office portfolio was static over the period with increases in the regions offset by London.

We have set out the principal activity in each of the sectors in which we are invested and believe our strategy and proactive occupier engagement will continue to assist us in managing the portfolio during the current business climate.

The industrial sector has been the least affected by the Covid-19 pandemic, with strong occupational demand outstripping supply, especially in London and the South East where 75% of our portfolio is located. Investment demand has been strong with multiple buyers for well-located assets, which combined with a lack of stock has driven up pricing.

The office sector was significantly affected by the working from home guidance and although all our offices remained open and Covid-19 compliant, building occupancy was significantly reduced. The change in working patterns has made businesses reflect on their future office strategy and during the year demand was subdued. We are however, now seeing some encouraging signs that the market is improving following the news that vaccination is proving effective, with the number of enquiries and lettings going under offer steadily increasing, albeit from a low base. Against this background, we have had letting success and we have succeeded in retaining occupiers.

The retail and leisure sector has been hit hard by the forced closures, resulting in a number of well-known businesses disappearing from the high street. Government measures halting action to pursue arrears have exacerbated the problem, with some occupiers purposefully not paying. Occupier demand has been muted, with retail vacancies, especially on the high street and in shopping centres, increasing substantially. Despite this, we have been able to work with our occupiers and have fortunately not had many insolvencies, and in the majority of cases, we have been able to mitigate these.

We believe the portfolio is well placed in respect of our sector allocations and, combined with the quality of our assets, we will be able to continue to drive performance going forward.

Activity

We have had another good year in respect of active management transactions. We completed 17 rent reviews, 7% ahead of ERV, 30 lease renewals or regears, 10% ahead of ERV and 25 lettings or agreements to lease, 3% ahead of ERV. One retail asset was sold for gross proceeds of £4.0 million, 30% ahead of the March 2020 valuation.

Over the year we have invested £5.0 million into the portfolio across ten key projects. These have all been aimed at enhancing space to attract occupiers, improve sustainability credentials and grow income. Major projects are currently underway at Regency Wharf, Birmingham, where we are converting leisure space to offices, and at Longcross, Cardiff, where we are carrying out a comprehensive refurbishment to update the office building.

Our largest void is Stanford Building on Long Acre in Covent Garden, London, accounting for over a quarter of the total. The refurbishment was completed during the period. We were pleased to welcome our first occupier to the second floor and we have moved into the first floor, following an expiry of our lease in the City. This move has allowed us to reduce costs and provided us with flexibility going forward.

We are continually focused on futureproofing assets from a sustainability perspective, which has resulted in an improvement in our EPCs with 92% now rated D and above.

The average lot size of the portfolio is £14.8 million, 5% ahead of last year.

Retention rates and occupancy

Over the year, total ERV at risk due to lease expiries or break options totalled £6.6 million, consistent with the year to March 2020.

Excluding asset disposals, we retained 88% of total ERV at risk in the year to March 2021. Of leases that were due to expire during the year, 93% of ERV was retained. Of leases that had a break clause in the year, 67% of ERV was retained.

In addition, a further £4.2 million of ERV was retained by either removing future breaks or extending future lease expiries ahead of the lease event.

Occupancy has increased during the year from 89% to 91%, which is slightly behind the MSCI UK Quarterly Property Index of 92% at March 2021. The increase primarily reflects the success of the refurbishment programme in 2020, meaning we were able to attract new occupiers and that occupancy increased in all sectors of the portfolio. At the year-end, over half of our vacant buildings were being refurbished and with the rest available to let and being actively marketed.

Of our total void of £4.0 million by ERV, 85% is in offices, 14% is in retail and only 1% is in industrial.

Outlook

The impact of the pandemic and consequent lockdowns has led to a very uncertain operating environment.

We have been able to adapt to the ‘new normal’ and although occupational requirements have, outside the industrial sector, been far more muted, we have secured new occupiers. We have achieved this through embracing new technologies, creating virtual tours, and thinking more laterally as to how we can market our buildings with social distancing measures in place.

Our focus remains on working with our occupiers and this year has shown more than any the importance of our long-standing relationships and the benefit of our approach. This has enabled us to navigate through these uncertain times and to end the year in a positive position. As at 31 March 2021 the portfolio had £9 million of reversionary income potential, £4 million from letting the vacant space, £3 million from expiring rent- free periods and £2 million where the passing rent is below market level.

Demand for our industrial properties remains robust as proven by our high occupancy and growing ERVs. With this sector accounting for 53% of the total portfolio by value, we believe it will continue to contribute strongly to our outperformance.

Business activity is beginning to pick up in the office sector where 36% of our portfolio is allocated, and we have attractive refurbished space in which we have increasing interest. We believe there is pent-up demand, especially in the regions, and this will come through as the year progresses with demand focusing on flexible Grade A space. In addition, we are now offering fitted space, ready to occupy, which we believe is where the market is heading in respect of smaller suites, especially in London.

The retail and leisure sector has been severely affected by the Covid-19 pandemic; however, we are more positive about retail warehousing which makes up 60% of our retail allocation. We have succeeded in letting retail warehouse units during the year at our two parks which were refurbished in 2020 and have strong interest in our last remaining retail warehouse void. Our high street portfolio is over 90% leased and we have no shopping centre exposure.

We remain in a strong position with advantageous portfolio weightings, good quality assets and a proven occupier focused approach. Looking forward, we remain focused on continuing to grow occupancy and income, engaging with our occupiers and investing further into our assets.

Jay Cable
Senior Director and Head of Asset Management
26 May 2021

Longevity of income

As at 31 March 2021, expressed as a percentage of contracted rent, the average length of the leases to the first termination was 4.9 years (2020: 5.5 years). This is summarised as follows:

	%
0 to 1 year	11.9
1 to 2 years	13.8
2 to 3 years	13.5
3 to 4 years	13.6
4 to 5 years	18.9
5 to 10 years	20.0
10 to 15 years	6.9
15 to 25 years	0.1
25 years and over	1.3
Total	100.0

Top ten assets

The largest assets as at 31 March 2021, ranked by capital value, represent 55% of the total portfolio valuation and are detailed below.

Assets	Acquisition date	Property type	Tenure	Approximate area (sq ft)	No. of occupiers	Occupancy rate (%)
Parkbury Industrial Estate, Radlett, Herts.	03/2014	Industrial	Freehold	343,800	21	100
River Way Industrial Estate, Harlow, Essex	12/2006	Industrial	Freehold	454,800	10	100
Angel Gate, City Road, London EC1	10/2005	Office	Freehold	64,600	20	68
Stanford Building, Long Acre, London WC2	05/2010	Office	Freehold	20,100	2	33
Datapoint, Cody Road, London E16	05/2010	Industrial	Leasehold	55,100	6	100
Tower Wharf, Cheese Lane, Bristol	08/2017	Office	Freehold	70,600	5	83
Shipton Way, Rushden, Northants.	07/2014	Industrial	Leasehold*	312,900	1	100
50 Farringdon Road, London EC1	10/2005	Office	Leasehold*	31,300	4	100
Lyon Business Park, Barking, Essex	09/2013	Industrial	Freehold	99,400	9	100
Colchester Business Park, Colchester	10/2005	Office	Leasehold	150,700	22	97

*Denotes leasehold interest in excess of 950 years.

Top ten occupiers

The largest occupiers, based as a percentage of contracted rent, as at 31 March 2021, are as follows:

Occupier	Contracted rent (£m)	%
Public sector	2.1	5.0
Whistl UK Limited	1.6	3.9
B&Q Plc	1.2	3.0
The Random House Group Limited	1.2	2.8
Snorkel Europe Limited	1.2	2.8
XMA Limited	1.0	2.3
Portal Chatham LLP	0.8	1.9
DHL Supply Chain Limited	0.8	1.9
Canterbury Christ Church University	0.7	1.6
PA Consulting Services Limited	0.6	1.5
Total	11.2	26.7

Industrial sector

Key metrics

	2021	2020
Value	£360.7m	£318.3m
Internal area	2.6m sq ft	2.6m sq ft
Annual rental income	£16.9m	£16.0m
Estimated rental value	£19.3m	£18.6m
Occupancy	100%	96%
Number of assets	16	16

The industrial sector, which accounts for 53% of the portfolio, again had the strongest sector performance of the year producing double digit returns.

This was a result of the portfolio being almost fully let, active management extending income, securing rental uplifts and continued strong occupational demand for the smaller units, which resulted in further rental growth, especially in London and the South East. This, combined with continued strength in the investment market, has resulted in another strong year for this element of the portfolio.

On a like-for-like basis, our industrial portfolio value increased by £42.4 million or 13.3% to £360.7 million, and the annual rental income increased by £0.9 million or 5.6% to £16.9 million. The portfolio has an average weighted lease length of 4.3 years and £2.4 million of reversionary potential.

We have seen ERV growth of 3.9% across the portfolio and are experiencing demand across all of our estates. Occupancy is 99.8%, with the only void being one small unit in Wokingham which has recently been refurbished.

Portfolio activity

Swiftbox, Rugby, was our largest void at the beginning of the year. Following completion of the refurbishment, we leased the entire 99,500 sq ft distribution unit to UPS, on a 12-month lease, with the option to extend for up to a further six months. UPS has taken up the option, so the lease now expires in March 2022. The letting immediately generated an annual income of £0.6 million, which was 4% ahead of ERV.

At Parkbury, Radlett, we have driven income though active management. Two rent reviews were agreed, increasing the passing rent by 25%, one lease was renewed for a further 15 years, subject to break, at a rent 35% ahead of the previous passing rent and we extended a lease by five years to 2031, securing £0.3 million per annum.

At Vigo 250, Washington, we were pleased to be able to provide cash flow assistance as an incentive and settle the June 2021 rent review, securing a 5% uplift to £1.2 million per annum, 12% ahead of ERV.

At River Way, Harlow, we restructured a lease and secured longer income until March 2023. As part of the same transaction, the August 2021 rent review was brought forward to January 2021 and settled, securing a 27% uplift to £0.8 million per annum, 27% ahead of ERV. Two further rent reviews were agreed, increasing the passing rent by 11%, one lease was renewed for a further five years, at a rent 15% ahead of the previous passing rent, and two units were leased for a combined £0.2 million per annum, in line with ERV.

At Datapoint in London E16, following the completion of a rent review, we achieved a 68% uplift in rent to £0.4 million per annum, 24% ahead of ERV. One unit was leased for a minimum term of five years at a rent of £0.1 million per annum, 7% ahead of ERV.

At Sundon Business Park, Luton, following the completion of a rent review, we achieved a 57% uplift in rent to £0.1 million per annum, 11% ahead of ERV. Three leases were renewed, the passing rent increasing by 47% to a combined £0.3 million per annum, 10% ahead of ERV.

Outlook

The Covid-19 pandemic has had a limited impact on the industrial sector, with strong demand, low vacancy rates and increasing rents, especially in respect of the smaller multi-let estates. Where occupiers have been affected by the pandemic, we have been able to work with most of them to resolve the position, and if needed, usually these units are easily re-let.

We do not anticipate a slowdown in demand, and combined with limited stock availability we expect continued rental growth, especially in respect of the smaller units in Greater London and the South East, where there remains a lack of supply and a limited development pipeline. We do not expect rental growth to come through on the larger units to the same extent, due to the development pipeline, and the ability for occupiers to build bespoke space.

The focus going forward is to maintain high occupancy, continue to capture rental growth, and work proactively with our occupiers to unlock asset management transactions. We have 24 lease events forecast for the coming year, and the overall ERV for these units is 23% higher than the current passing rent of £2.2 million. This provides us with the opportunity to grow income and value further.

Office sector

Key metrics

	2021	2020
Value	£245.4m	£259.1m
Internal area	0.8m sq ft	0.8m sq ft
Annual rental income	£13.1m	£12.9m
Estimated rental value	£19.0m	£19.0m
Occupancy	82%	81%
Number of assets	15	15

*The 2020 figures have been restated to reflect Stanford Building now reclassified as an office.

The office sector, which accounts for 36% of the portfolio, delivered the second strongest performance of the year, with the regions outperforming London.

With limited occupational demand due to the Covid-19 pandemic, our focus has been occupier retention and marketing our vacant properties using virtual tours and socially distanced viewings.

We have been able to lease space in a difficult market, securing £1.1 million of income, and have worked with our occupiers to extend income and surrender leases where we can secure a premium and immediately re-lease the space.

On a like-for-like basis, our office portfolio value declined by £13.8 million or -5.3% to £245.4 million; however, the annual rental income increased marginally by £0.3 million or 2.0% to £13.1 million. The portfolio has an average weighted lease length of 3.5 years and £5.9 million of reversionary potential.

Although occupational demand has been muted, it has been stronger in the regions than in London. The ERV of the portfolio has remained static over the year, with declines in London of -2.9% being offset by increases in the regions of 0.9%. We invested £4.1 million into our office assets during the period and completed key projects, including at Tower Wharf, Bristol, 50 Pembroke Court, Chatham, and Stanford Building, London. We have had letting success at all three buildings.

On a like-for-like basis, occupancy has increased over the period to 82%.

Portfolio activity

At Grafton Gate, Milton Keynes, which was comprehensively refurbished last year, we retained two occupiers on lease expiry. Four leases were renewed, enabling us to increase the passing rent by 29% to a combined £0.6 million per annum, 11% ahead of ERV.

At Tower Wharf, Bristol, we were pleased to welcome a new occupier to part of the first floor on a ten-year lease subject to break, at a rent of £0.2 million per annum, marginally below ERV. We also agreed the letting of the whole fourth floor to a new occupier, with the vacating occupier paying a premium of £0.2 million to facilitate the transaction. We currently have two suites available, which are being refurbished. The common areas were comprehensively refurbished last year, and we believe there is occupational demand which will come through as the year progresses.

At 50 Pembroke Court, Chatham, we comprehensively refurbished a vacant floor with the majority of the cost being covered by the outgoing occupier’s dilapidations. The floor has been split with a third let to the Government on a ten-year lease, subject to break, at £0.1 million per annum, which is in line with ERV.

At 50 Farringdon Road, London we surrendered a suite and immediately re-let it to an existing occupier who required expansion space at a rent of £0.2 million per annum, in line with ERV. The transaction met both occupiers’ requirements and potentially will allow us to enter into a longer lease in due course. In another transaction, we removed an occupier’s 2022 break option securing £0.2 million per annum, which is subject to review, until 2027 and in return provided the occupier with a rent-free incentive, which assisted their cashflow during the Covid-19 pandemic.

Our largest office void is Stanford Building, London. We completed the refurbishment and enhanced the value of the office floors and obtained planning to convert the first floor from ancillary retail to office space. We have relocated to this floor, which provides a great working environment. We were pleased to welcome a new occupier to the second floor on a five-year lease, subject to break, 5% ahead of ERV.

Outlook

Working from home as a result of the Covid-19 pandemic has caused a huge amount of business uncertainty; however, this is beginning to ease and the initial reaction of businesses thinking of disposing space is now being reconsidered.

We believe the flight to quality has been accelerated by the pandemic, with businesses wanting to provide best-in-class space to attract their staff back to the office. Sustainability is also now a key factor in choosing a building and older stock, where the capital expenditure required to upgrade is prohibitive, will be converted to other uses.

The regions have outperformed London, primarily we believe due to people not wanting to commute on public transport. We can see a push to get people back to the office later this year, with companies embracing a more flexible policy in respect of working from home.

We have invested £9.7 million into our office portfolio over the last three years, creating high quality contemporary space and occupier amenities, meaning our buildings remain attractive to occupiers.

We have 36 lease events forecast for the coming year, with the current ERV for these units being 1.8% higher than the current passing rent of £2.5 million and an 18% void, with an ERV of £3.4 million, providing us with the opportunity to significantly grow income and value.

Retail and Leisure sector

Key metrics

	2021	2020
Value	£76.3m	£87.2m
Internal area	0.7m sq ft	0.8m sq ft
Annual rental income	£6.4m	£7.3m
Estimated rental value	£7.1m	£7.6m
Occupancy	92%	91%
Number of assets	15	16

*The 2020 figures have been restated to reflect Stanford Building now reclassified as an office.

The retail and leisure sector, which accounts for 11% of the portfolio, delivered the weakest performance of the year.

The Covid-19 pandemic and subsequent lockdowns have had a severe effect on an already weak bricks and mortar retail and leisure market, with changing shopping habits accelerating the demand for warehouse space.

Against this tough backdrop, we had success at our retail warehouse parks which account for 60% of our retail and leisure portfolio. Retail warehousing has been more resilient due to the ability of shoppers to be able to park and the size of the units being better suited to social distancing.

On a like-for-like basis, our retail and leisure portfolio value decreased by £7.8 million or -9.3% to £76.3 million, and the annual rental income decreased by £0.5 million or -7.0% to £6.4 million. The portfolio has an average weighted lease length of 9.0 years and £0.6 million of reversionary potential to £7.1 million per annum.

The retail parks in Bury and Swansea were comprehensively refurbished in 2020 and this has helped us to attract new occupiers and grow the passing rent on the retail warehouse portfolio by 1.3%, with only one vacant unit at year end in which we already have interest.

We have also worked with a number of our occupiers to extend leases in exchange for upfront incentives. Smaller independent retailers have been supported over the year to ensure they are ready to reopen, and we avoid the costs associated with vacant units.

Occupational demand was very weak over the year, with vacancy rates increasing as retailers exited leases on expiries and breaks and multi-national retailers such as Debenhams and Arcadia Group disappeared from the high street, further increasing the number of vacant shops. Correspondingly, rental values have declined and retailers with requirements have more choice and can negotiate substantial incentives.

We have seen negative ERV growth of -2.8% across the portfolio; however, pleasingly we have been able to increase occupancy, on a like-for-like basis, during this difficult period to 92%. We invested £0.6 million into the retail portfolio during the period to improve space and facilitate lettings.

Portfolio activity

At Parc Tawe Retail Park, Swansea, over half of our retailers remained open during the lockdowns as they were classed as essential retailers. Both Xercise4Less and Poundstretcher were subject to insolvency proceedings; however, we were able to mitigate the effect by securing JD Gyms and Deichmann Shoes as new occupiers, with a 13% reduction in the passing rent and both of whom have refurbished the units. The one vacant unit, at the end of a terrace, has been put under offer via an Agreement for Lease to the Government, subject to planning, who are taking a new five-year lease, subject to a break in three years, at a rent of £0.1 million per annum, in line with ERV. This means the park is fully let with 70% of the income secured for over five years and three leases benefitting from fixed rental increases.

At Angouleme Way Retail Park, Bury, we assisted an occupier by removing a 2022 break option in return for a rent-free incentive, securing income until 2024. Another unit was let to JYSK on a ten-year lease, subject to a break in five years, at a rent of £0.1 million per annum, in line with ERV. We have one unit available to lease, accounting for 21% of the park by floor area in which we have interest.

At Briggate, Leeds, where we have two high street retail properties, we extended both leases in return for a reduced rent securing income until 2026. The combined rent was reduced by 38% to £0.2 million per annum, which is still 33% ahead of ERV.

At Fishergate, Preston, following a comprehensive refurbishment we let the entire first floor to Slaters Menswear on a new ten-year lease, subject to a break at year five, at £0.1 million per annum which is in-line with ERV. The property is now fully leased with JD Sports and Tessuti on the ground floor.

Bridge Street, Peterborough, was sold in December. The property comprises two retail units, with one let to TK Maxx who are vacating in June 2021 and the other vacant and previously occupied by New Look. The asset was sold for £4.0 million, 30% ahead of valuation.

Our largest retail void is the unit within Stanford Building, London, (now reclassified as an office), which has been refurbished and is being marketed. The unit is in a prime Covent Garden location and provides unique space arranged over two floors. We have had some interest, but expect better terms as the lockdown eases.

Outlook

The retail and leisure sector has undergone a severe structural change, which has been accelerated by the Covid-19 pandemic. There is an oversupply of floorspace, especially in the shopping centre and high street sub-sectors. Demand will be there for prime well-configured space, with secondary units being unable to attract occupiers. This stock will have to be repurposed and planning law has changed to make this easier; however, with such a severe oversupply we cannot see the position changing in the short-term.

We are however more positive about the retail warehouse sector, where we have 60% of our retail and leisure weighting. We have been successful in securing new occupiers over the year and our parks have remained busy. Valuations, which have moved down over the past few years, are now stabilising.

With the lockdown ending and most retail and leisure having re-opened, improving consumer confidence will give businesses the help they need to start recovering.

Financial Review

This financial year has been unparalleled as a result of the Covid-19 pandemic, with UK GDP declining by -9.8% in 2020, the largest fall on record.

Many sectors of the economy have been badly disrupted by the lockdowns and other restrictions, particularly retail, leisure and travel. We have not been immune to this, but have been fortunate in having limited exposure to the more badly hit retail and leisure sectors. Our results for the year are very positive in the context of the backdrop in which we have been operating.

The total profit for the year was £33.8 million, which is higher than both 2020 and 2019. Our EPRA earnings increased to £20.1 million. Earnings per share were 6.2 pence overall (3.7 pence on an EPRA basis), and the total return based on these results was 6.6% for the year.

Net asset value

The net assets of the Group increased to £528.2 million, or 97 pence per share, which was a rise of 3.7% over the year. The chart below shows the components of this increase.

	£m
March 2020 net asset value	509.3
Income profit	20.1
Valuation movement	12.8
Profit on asset disposals	0.9
Share-based awards	0.7
Purchase of shares	(0.6)
Dividends paid	(15.0)
March 2021 net asset value	528.2

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).

	2021 £m	2020 £m	2019 £m
Net asset value – IFRS and EPRA NTA	528.2	509.3	499.4
Fair value of debt	(21.0)	(29.6)	(24.8)
EPRA NDV asset value	507.2	479.7	474.6

Net asset value per share (pence)	97	93	93
EPRA net tangible asset value per share (pence)	97	93	93
EPRA net disposal value per share (pence)	93	88	88

Income statement

As noted above our EPRA earnings for the year have increased compared to 2020, rising 0.6% to £20.1 million. Within that, property revenue has reduced as expected during the pandemic, but there have been savings in both property costs and administrative expenses, and finance costs are also lower.

Total revenue from the property portfolio for the year was £43.3 million. Rental income, at £36.6 million, was lower by 3.2% compared to 2020, which was due to asset disposals and additional provisions made against income as a result of the pandemic despite an increase in occupancy. On a like-for-like basis, rental income increased marginally by 0.2% compared to the previous year, on an EPRA basis.

Rent collection over the year has held up well, but the variations between different business sectors have been quite apparent. Our policy of engaging with occupiers from an early stage has been beneficial, and the amount of rent concessions that we have granted has been limited, at only 4% of rent due over the year. The table below sets out a summary of our rent collection over the last year.

Rent due 25 March 2020 to 24 March 2021	Industrial (%)	Office (%)	Retail and Leisure (%)	Total (%)
Collected	91	97	85	92
Deferred	1	–	4	1
Concessions agreed	4	2	8	4
Outstanding	4	1	3	3

Property void costs reduced by 27% to £2.2 million, reflecting both the increase in occupancy over the year and the lower service charge costs attributable to vacant units.

Administrative expenses for the year were £5.4 million, again lower than the previous year, by 3%. Savings were made against a number of corporate level costs.

Interest costs are also lower this year at £8.0 million, due to the loan repayments that we made towards the end of the last financial year. There were no drawdowns made under the new revolving credit facility.

Capital gains on the portfolio were £13.7 million for the year, with positive valuation movements during the year. There was divergence across the sectors, with the industrial assets showing significant gains, while retail and leisure assets were more adversely impacted by the pandemic. One disposal was made during the year, realising a 30% gain compared to the March 2020 valuation.

The total profit for the year was £33.8 million, up over 50% compared with 2020.

Dividends

At the start of the pandemic, in common with many other property companies, we reviewed the level of our dividend and concluded that a prudent approach was appropriate, reducing the May 2020 dividend by 29%. We maintained this lower rate for two quarters and have subsequently increased it twice, initially by 12% and then by a further 14%, so that the dividend is now at 91% of the pre-pandemic level, as rent collection rates have remained robust. The dividend for the year was 2.75 pence per share, with total dividends paid out of £15.0 million. Dividend cover for the full year was 134%.

Investment properties

The appraised value of our investment property portfolio was £682.4 million at 31 March 2021, up from £664.6 million a year previously. This year we have disposed of one small retail property, for net proceeds of £3.9 million, realising a gain of £0.9 million compared to last year’s valuation. Our programme of capital expenditure has continued, with £5.0 million invested back into the portfolio. The main project undertaken was at Stanford Building in London WC2, where a full refurbishment has now completed. The overall revaluation movement across the portfolio was a gain of £12.8 million.

At 31 March 2021 the portfolio comprised 46 assets, with an average lot size of £14.8 million.

Borrowings

Total borrowings are now £166.2 million at 31 March 2021, with the loan to value ratio having reduced further to 20.9%. The weighted average interest rate on our borrowings is 4.2%, while the average loan duration is now 8.9 years.

Our senior loan facility with Aviva reduced by the regular amortisation, £1.3 million in the year.

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

During the year we completed a new single revolving credit facility with NatWest, replacing the two existing ones. The new £50 million facility is for an initial term of three years, until May 2023, with two one-year extensions available. Interest is currently payable at 150 basis points over LIBOR. We are currently undrawn under this facility.

The fair value of our borrowings at 31 March 2021 was £187.2 million, higher than the book amount. Lending margins have remained broadly in line with the previous year, but gilt rates have fallen in comparison.

A summary of our borrowings is set out below:

	2021	2020	2019
Fixed rate loans (£m)	166.2	167.5	168.7
Drawn revolving facilities (£m)	–	–	26.0
Total borrowings (£m)	166.2	167.5	194.7
Borrowings net of cash (£m)	142.8	143.9	169.5
Undrawn facilities (£m)	50.0	49.0	25.0
Loan to value ratio (%)	20.9	21.7	24.7
Weighted average interest rate (%)	4.2	4.2	4.0
Average duration (years)	8.9	9.9	9.8

Cash flow and liquidity

The cash flow from our operating activities was £18.6 million this year, ahead of 2020. We invested £5.0 million into the portfolio, largely offset by £3.9 million raised from the asset disposal. The lower dividends paid also helped to maintain cash. Our cash balance at the year-end stood at £23.4 million, very close to the balance at 2020.

Share capital

No new ordinary shares were issued during the year.

The Company’s Employee Benefit Trust acquired a further 958,000 shares, at a cost of £0.6 million, or 67 pence per share, during the year. This was to satisfy the future vesting of awards made under the Long-term Incentive Plan and Deferred Bonus Plan, and now holds a total of 2,052,269 shares. As the Trust is consolidated into the Group’s results these shares are effectively held in treasury and therefore have been excluded from the net asset value and earnings per share calculations, from the date of purchase.

Andrew Dewhirst
Finance Director
26 May 2021

Principal Risks

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

Risk management provides a structured approach to the decision making process such that the identified risks can be 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 Executive Committee is responsible for implementing strategy within the agreed risk management policy, as well as identifying and assessing risk in day-to-day operational matters. The management committees support the Executive Committee in these matters. The small number of employees and relatively flat management structure allow risks to be quickly identified and assessed. The Group’s risk appetite will vary over time and during the course of the property cycle. The principal risks – those with potential to have a material impact on performance and results – are set out below, together with mitigating controls.

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

Our Covid-19 response

The global Covid-19 pandemic has caused an unprecedented level of disruption to economies globally. Restrictions have been in place to varying extents since the start of the pandemic in March 2020. Some sectors of the economy have been more severely impacted, particularly retail, leisure and tourism. However, since the start of the year the vaccine programme has gathered pace and there is a planned route to easing restrictions and opening up the economy.

The risks associated with the pandemic have impacted many of the principal and emerging risks set out here. There has been an impact on the Group’s rent collection and cash flow, although this has been less significant than originally envisaged.

We have a diverse portfolio spread across the UK, with around 350 occupiers in a wide range of businesses. The cash flow arising from our occupiers underpins our business model. We are continuing to let space, although the number of transactions has reduced since the pandemic began. The material uncertainty clause, introduced by our valuers in March 2020, was subsequently removed.

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

Brexit

A new trading agreement was put in place with the EU at the end of 2020, ahead of the end of the transition arrangement, removing much of the uncertainty around this event.

Emerging risks

During the year the Board has considered themes where emerging risks or disrupting events may impact the business. These may rise from behavioural changes, political or regulatory changes, advances in technology, environmental factors, economic conditions or demographic changes. Some are already considered to be principal risks in their own right such as the impact of climate change, while others are reviewed as part of the ongoing risk management process.

The principal emerging risks have been identified to be:

– the impact of climate change;

– the ongoing effects of the Covid-19 pandemic on the economy and the property market, and potential legacy impacts on unemployment, inflation and Government borrowing;

– potential changes in the office market as businesses re-assess their needs in the light of flexible working;

– structural changes in the retail market, with the increasing prevalence of online retailing and the oversupply of physical space;

– the impact of technology giving rise to rapid changes in occupiers’ businesses, and consequently on their space requirements;

– legislative and regulatory changes can bring risks to the commercial property market, such as changes to planning regulations or in the application of business rates.

Corporate Strategy

1
Political and economic			Risk trend

Risk Uncertainty in the UK economy, whether arising from political events or otherwise, brings risks to the property market and to occupiers’ businesses. This can result in lower shareholder returns, lower asset liquidity and increased occupier failure.	Mitigation The Board considers economic conditions and market uncertainty when setting strategy, considering the financial strategy of the business and in making investment decisions.	Commentary The impact of the pandemic in 2020 saw the largest ever contraction in UK GDP. A further decline occurred in the first quarter of 2021, with GDP contracting -1.5% to stand at -8.7% below the pre-pandemic level. With the rollout of the vaccine continuing, a rebound is forecast during the latter part of 2021, although with the risk of inflationary pressure.	Down
2
Market cycle			Risk trend

Risk The property market is cyclical and returns can be volatile. There is an ongoing risk that the Company fails to react appropriately to changing market conditions, resulting in an adverse impact on shareholder returns.	Mitigation The Board reviews the Group’s strategy and business objectives on a regular basis and considers whether any change is needed, in light of current and forecast market conditions.	Commentary It is likely that uncertainty in the property market will decline as restrictions ease.	Down
3
Regulatory and tax			Risk trend

Risk The Group could fail to comply with legal, fiscal, health and safety or regulatory matters which could lead to financial loss, reputational damage or loss of REIT status.	Mitigation The Board and senior management receive regular updates on relevant laws and regulations. The Group is a member of the BPF and EPRA, and management attend industry briefings.	Commentary There are no significant changes expected to the regulatory environment in which the Group operates.	Same
4
Climate change			Risk trend

Risk Failure to react to climate change could lead to the Group’s assets becoming obsolete and unable to attract occupiers.	Mitigation Sustainability is embedded within the Group’s business model and strategy. We are committed to developing our pathway to carbon net zero over the course of the coming year. All refurbishment projects consider environmental impact and where possible seek improvements.	Commentary There is an increasing momentum to the issue of addressing climate change. Investors are putting a greater emphasis on ESG credentials and occupiers are seeking more sustainable buildings.	Up

Property

5
Portfolio strategy			Risk trend

Risk The Group has an inappropriate portfolio strategy, as a result of poor sector or geographical allocations, or holding obsolete assets, leading to lower shareholder returns.	Mitigation The Group maintains a diversified portfolio in order to minimise exposure to any one geographical area or market sector.	Commentary The pandemic continues to impact many occupiers’ businesses, particularly in the retail and leisure sectors. The longer-term impact of home working on the office sector is also unclear. The divergence of returns seen previously across sectors is expected to continue.	Same
6
Investment			Risk trend

Risk Investment decisions may be flawed as a result of incorrect assumptions, poor research or incomplete due diligence, leading to financial loss.	Mitigation The Executive Committee must approve all investment transactions over a threshold level, and significant transactions require Board approval. A formal appraisal and due diligence process is carried out for all potential purchases. A review of each acquisition is performed within two years of completion.	Commentary There is no change to this risk.	Same
7
Asset management			Risk trend

Risk Failure to properly execute asset business plans or poor asset management could lead to longer void periods, higher occupier defaults, higher arrears and low occupier retention, all having an adverse impact on earnings and cash flow.	Mitigation Management prepare business plans for each asset which are reviewed regularly. The Executive Committee must approve all investment transactions over a threshold level, and significant transactions require Board approval. Management maintain close contact with occupiers and have oversight of the Group’s Property Manager.	Commentary Effective asset management continues to be key, engaging with occupiers to provide appropriate solutions while maintaining cash flow and occupancy.	Same
8
Valuation			Risk trend

Risk A fall in the valuation of the Group’s property assets could lead to lower investment returns and a breach of loan covenants.	Mitigation The Group’s property assets are valued quarterly by an independent valuer with oversight by the Property Valuation Committee. Market commentary is provided regularly by the independent valuer. The Board reviews financial forecasts for the Group on a regular basis, including sensitivity and adequate headroom against financial covenants.	Commentary Although there is still some economic uncertainty, valuations are more stable with improved market evidence. Valuers have removed the material uncertainty clause that was introduced at the start of the pandemic.	Same

Operational

9
People			Risk trend

Risk The Group relies on a small team to implement the strategy and run the day-to-day operations. Failure to retain or recruit key individuals with the right blend of skills and experience may result in poor decision making and underperformance.	Mitigation The Board has a remuneration policy in place which incentivises performance and is aligned with shareholders’ interests. There is a Non-Executive Director responsible for employee engagement who provides regular feedback to the Board.	Commentary No employees were furloughed during the pandemic. The team has continued to work effectively from home, although a gradual return to the office is envisaged. Feedback from the employee engagement survey was positive.	Same

Financial

10
Finance strategy			Risk trend

Risk The Group has a number of loan facilities to finance its activities. Failure to comply with covenants or to manage refinancing events could lead to a funding shortfall for operational activities.	Mitigation The Group’s property assets are valued quarterly by an independent valuer with oversight by the Property Valuation Committee. Market commentary is provided regularly by the independent valuer. The Board reviews financial forecasts for the Group on a regular basis, including sensitivity against financial covenants. The Audit and Risk Committee considers the going concern status of the Group biannually.	Commentary The Group has significant headroom against its loan covenants. No additional borrowing has been incurred during the pandemic, and the Group’s revolving credit facility remains undrawn.	Down
11
Capital structure			Risk trend

Risk The Group operates a geared capital structure, which magnifies returns from the portfolio, both positive and negative. An inappropriate level of gearing relative to the property cycle could lead to lower investment returns.	Mitigation The Board regularly reviews its gearing strategy and debt maturity profile, at least annually, in light of changing market conditions.	Commentary The Group’s gearing level has remained relatively low during the pandemic, and property values have been stable, reducing this risk.	Down

Viability assessment and statement

The UK Corporate Governance Code requires the Board to make a ‘viability statement’ which considers the Company’s current position and principal and emerging 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 and emerging risks and uncertainties faced by the Group which could impact its investment strategy, future performance, loan covenants and liquidity.

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

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

These matters were assessed over the period to 31 March 2026 and will continue to be assessed over five-year rolling periods.

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

Based on their assessment, and in the context of the Group’s business model and strategy, the Directors expect that the Group will be able to continue in operation and meet its liabilities as they fall due over the five-year period to 31 March 2026.

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 are required 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 and Company’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 the Company or to cease operations, or have no realistic alternative but to do so.

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

– the Strategic Report includes a fair review of the development and performance of the business and the position of the Issuer, together with a description of the principal risks and uncertainties that they face.

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

By Order of the Board
Andrew Dewhirst
26 May 2021

Financial Statements

Consolidated statement of comprehensive income
for the year ended 31 March 2021

	Notes	2021 Total £000	2020 Total £000
Income
Revenue from properties	3	43,331	45,664
Property expenses	4	(9,877)	(12,027)

Net property income		33,454	33,637

Expenses
Administrative expenses	6	(5,388)	(5,563)

Total operating expenses		(5,388)	(5,563)

Operating profit before movement on investments		28,066	28,074

Investments
Profit on disposal of investment properties	13	868	3,478
Investment property valuation movements	13	12,861	(882)

Total profit on investments		13,729	2,596

Operating profit		41,795	30,670

Financing
Interest received		5	9
Interest paid	8	(7,999)	(8,295)

Total finance costs		(7,994)	(8,286)

Profit before tax		33,801	22,384
Tax	9	–	124

Profit and total comprehensive income for the period		33,801	22,508

Earnings per share
Basic	11	6.2p	4.1p
Diluted	11	6.2p	4.1p

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 2021

	Notes	Share capital £000	Retained earnings £000	Other reserves £000	Total £000
Balance as at 31 March 2019		157,449	342,252	(286)	499,415
Profit for the year		–	22,508	–	22,508
Dividends paid	10	–	(19,039)	–	(19,039)
Issue of ordinary shares	20	7,137	–	–	7,137
Issue costs of shares		(186)	–	–	(186)
Vesting of shares held in trust		–	(54)	54	–
Share-based awards	7	–	–	292	292
Purchase of shares held in trust	7	–	–	(844)	(844)

Balance as at 31 March 2020		164,400	345,667	(784)	509,283
Profit for the year		–	33,801	–	33,801
Dividends paid	10	–	(15,002)	–	(15,002)
Share-based awards	7	–	–	758	758
Purchase of shares held in trust	7	–	–	(643)	(643)

Balance as at 31 March 2021		164,400	364,466	(669)	528,197

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

Consolidated balance sheet
as at 31 March 2021

	Notes	2021 £000	2020 £000
Non-current assets
Investment properties	13	665,418	654,486
Property, plant and equipment	14	4,111	20

Total non-current assets		669,529	654,506

Current assets
Accounts receivable	15	19,584	17,601
Cash and cash equivalents	16	23,358	23,567

Total current assets		42,942	41,168

Total assets		712,471	695,674

Current liabilities
Accounts payable and accruals	17	(18,805)	(19,438)
Loans and borrowings	18	(944)	(888)
Obligations under leases	22	(107)	(108)

Total current liabilities		(19,856)	(20,434)

Non-current liabilities
Loans and borrowings	18	(162,711)	(164,248)
Obligations under leases	22	(1,707)	(1,709)

Total non-current liabilities		(164,418)	(165,957)

Total liabilities		(184,274)	(186,391)

Net assets		528,197	509,283

Equity
Share capital	20	164,400	164,400
Retained earnings		364,466	345,667
Other reserves		(669)	(784)

Total equity		528,197	509,283

Net asset value per share	23	97p	93p

These consolidated financial statements were approved by the Board of Directors on 26 May 2021 and signed on its behalf by:

Andrew Dewhirst
Director
26 May 2021

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

Consolidated statement of cash flows
for the year ended 31 March 2021

	Notes	2021 £000	2020 £000
Operating activities
Operating profit		41,795	30,670
Adjustments for non-cash items	21	(12,964)	(2,295)
Interest received		5	9
Interest paid		(7,515)	(7,952)
Tax received		56	123
Increase in accounts receivable		(1,983)	(4,078)
Decrease in accounts payable and accruals		(825)	(2,936)

Cash inflows from operating activities		18,569	13,541

Investing activities
Capital expenditure on investment properties	13	(4,961)	(8,861)
Disposal of investment properties		3,928	33,859
Purchase of tangible assets		(268)	(4)

Cash (outflows)/inflows from investing activities		(1,301)	24,994

Financing activities
Borrowings repaid	18	(1,258)	(33,204)
Borrowings drawn	18	–	6,000
Financing costs	18	(574)	–
Issue of ordinary shares	20	–	7,137
Issue costs of ordinary shares		–	(186)
Purchase of shares held in trust	7	(643)	(844)
Dividends paid	10	(15,002)	(19,039)

Cash outflows from financing activities		(17,477)	(40,136)

Net decrease in cash and cash equivalents		(209)	(1,601)
Cash and cash equivalents at beginning of year		23,567	25,168

Cash and cash equivalents at end of year	16	23,358	23,567

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

Notes to the consolidated financial statements

for the year ended 31 March 2021

1. General information

Picton Property Income Limited (the ‘Company’ and together with its subsidiaries the ‘Group’) was established on 15 September 2005 as a closed ended Guernsey domiciled investment company and entered the UK REIT regime on 1 October 2018. The consolidated financial statements are prepared for the year ended 31 March 2021 with comparatives for the year ended 31 March 2020.

2. Significant accounting policies

Basis of accounting

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

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

Based on their assessment and knowledge of the portfolio and market, the Directors have therefore continued to adopt the going concern basis in preparing the financial statements.

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

New or amended standards issued

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

– Business Combinations, Amendments to IFRS 3

– Interest Rate Benchmark Reform, Amendments to IFRS 9, IAS 39 and IFRS 7

– Definition of Material, Amendments to IAS 1 and IAS 8

The adoption of these standards has had no material effect on the consolidated financial statements of the Group.

At the date of approval of these financial statements there are a number of new and amended standards in issue but not yet effective for the financial year ended 31 March 2021 and thus have not been applied by the Group.

– Interest Rate Benchmark Reform – Phase 2

– Onerous Contracts – Cost of fulfilling a Contract (Amendments to IAS 37)

– Classification of liabilities as current or non-current (Amendments to IAS 1)

– Annual Improvements to IFRS Standards 2018-2020

The adoption of these new and amended standards, together with any other IFRSs or IFRIC interpretations that are not yet effective, are not expected to have a material impact on the financial statements of 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 judgements and estimates

Judgements made by management in the application of IFRSs that have a significant effect on the financial statements and major sources of estimation uncertainty are disclosed in Note 13.

The critical estimates and assumptions relate to the investment property and owner-occupied property valuations applied by the Group’s independent valuer. 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.

Basis of consolidation

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

Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. These financial statements include the results of the subsidiaries disclosed in Note 12. All intra-group transactions, balances, income and expenses are eliminated on consolidation.

Fair value hierarchy

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

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

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

Level 3: unobservable inputs for the asset or liability.

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

Investment properties

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

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

The fair value of investment property generally involves consideration of:

– Market evidence on comparable transactions for similar properties;

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

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

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

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

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

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

The majority of the investment properties are charged by way of a first ranking mortgage as security for the loans made to the Group; see Note 18.

Property, plant and equipment

Owner-occupied property

Owner-occupied property is stated at its revalued amount, which is determined in the same manner as investment property. It is depreciated over its remaining useful life (40 years) with the depreciation included in administrative expenses. On revaluation, any accumulated depreciation is eliminated against the gross carrying amount of the property concerned, and the net amount restated to the revalued amount. Subsequent depreciation charges are adjusted based on the revalued amount. Any difference between the depreciation charge on the revalued amount and that which would have been charged under historic cost is transferred between the revaluation reserve and retained earnings as the property is utilised. Any gain arising on this remeasurement is recognised in profit or loss to the extent that it reverses a previous impairment loss on the specific property, with any remaining gain recognised in other comprehensive income and presented in the revaluation reserve. Any loss is recognised in profit or loss. However, to the extent that an amount is included in the revaluation surplus for that property, the loss is recognised in other comprehensive income and reduces the revaluation surplus within equity.

Plant and equipment

Plant and equipment is depreciated on a straight-line basis over the estimated useful lives of each item of plant and equipment. The estimated useful lives are between three and five years.

Leases

Where investment properties are held under operating leases, the leasehold interest is classified as if it were held under a finance lease, which is recognised at its fair value on the balance sheet, within the investment property carrying value. Upon initial recognition, a corresponding liability is included as a finance lease liability. Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability so as to produce a constant periodic rate of interest on the remaining finance lease liability. Contingent rent payable, being the difference between the rent currently payable and the minimum lease payments when the lease liability was originally calculated, are charged as expenses within property expenditure in the years in which they are payable.

Lease income arises from operating leases granted to tenants. An operating lease is a lease other than a finance lease. A finance lease is one whereby substantially all the risks and rewards of ownership are passed to the lessee. Lease income is recognised as income on a straight-line basis over the lease term. Direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised as an expense over the lease term on the same basis as the lease income. Premiums received on the surrender of leases are recorded as income immediately on surrender 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.

Lease incentive payments are amortised on a straight-line basis over the period from the date of lease inception to the end of the lease term and presented within accounts receivable. Lease incentives granted are recognised as a reduction of the total rental income, over the term of the lease. Upon receipt of a surrender premium for the early termination of a lease, the profit, net of dilapidations and non-recoverable outgoings relating to the lease concerned, is immediately reflected in revenue from properties.

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

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

Employee benefits

Defined contribution plans

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

Short-term benefits

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

Share-based payments

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

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

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

Dividends

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

Accounts receivable

Accounts receivable are stated at their nominal amount as reduced by appropriate allowances for estimated irrecoverable amounts. The Group applies the IFRS 9 simplified approach to measuring expected credit losses, which uses a lifetime expected impairment provision for all applicable accounts receivable. Bad debts are written off when identified.

Loans and borrowings

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

Assets classified as held for sale

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

Other assets and liabilities

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

Share capital

Ordinary shares are classified as equity.

Revaluation reserve

Any surplus or deficit arising from the revaluation of owner-occupied property is taken to the revaluation reserve.

Taxation

The Group elected to be treated as a UK REIT with effect from 1 October 2018. The UK REIT rules exempt the profits of the Group’s UK property rental business from UK corporation and income tax. Gains on UK properties are also exempt from tax, provided they are not held for trading. The Group is otherwise subject to UK corporation tax.

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

Principles for the Consolidated Statement of Cash Flows

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

The cash amounts in the Consolidated Statement of Cash Flows include those assets that can be converted into cash without any restrictions and without any material risk of decreases in value as a result of the transaction.

3. Revenue from properties

	2021 £000	2020 £000
Rents receivable (adjusted for lease incentives)	36,558	37,780
Surrender premiums	202	603
Dilapidation receipts	1,195	471
Other income	82	81
Service charge income	5,294	6,729
	43,331	45,664

Rents receivable have been adjusted for lease incentives recognised of £2.0 million (2020: £1.3 million).

4. Property expenses

	2021 £000	2020 £000
Property operating costs	2,384	2,293
Property void costs	2,199	3,005
Recoverable service charge costs	5,294	6,729
	9,877	12,027

5. Operating segments

The Board is responsible for setting the Group’s strategy and business model. The key measure of performance used by the Board to assess the Group’s performance is the total return of 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 Consolidated Balance Sheet, assuming dividends are reinvested, the key performance measure is that prepared under IFRS. Therefore, no reconciliation is required between the measure of profit or loss used by the Board and that contained in the financial statements.

The Board has considered the requirements of IFRS 8 ‘Operating Segments’. The Board is of the opinion that the Group, through its subsidiary undertakings, operates in one reportable industry segment, namely real estate investment, and across one primary geographical area, namely the United Kingdom, and therefore no segmental reporting is required. The portfolio consists of 46 commercial properties, which are in the industrial, office, retail and leisure sectors.

6. Administrative expenses

	2021 £000	2020 £000
Director and staff costs	3,219	3,273
Auditor’s remuneration	206	191
Other administrative expenses	1,963	2,099
	5,388	5,563

Auditor’s remuneration comprises:	2021 £000	2020 £000
Audit fees:
Audit of Group financial statements	92	92
Audit of subsidiaries’ financial statements	82	67

Audit-related fees:
Review of half-year financial statements	16	16
	190	175
Non-audit fees:
Additional controls testing	16	16
	16	16
	206	191

7. Director and staff costs

	2021 £000	2020 £000
Wages and salaries	1,724	1,688
Non-Executive Directors’ fees	250	250
Social security costs	358	394
Other pension costs	28	45
Share-based payments – cash settled	166	473
Share-based payments – equity settled	693	423
	3,219	3,273

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

For all employees, a proportion of any discretionary annual bonus will be an award under the Deferred Bonus Plan. With the exception of Executive Directors, awards are cash settled and vest after two years. The final value of awards is determined by the movement in the Company’s share price and dividends paid over the vesting period. For Executive Directors, awards are equity settled and also vest after two years. On 29 June 2020 awards of 599,534 notional shares were made which vest in June 2022 (2020: 441,322 notional shares). The next awards are due to be made in June 2021 for vesting in June 2023.

The table below summarises the awards made under the Deferred Bonus Plan. Employees have the option to defer the vesting date of their awards for a maximum of seven years.

Vesting date	Units at 31 March 2019	Units granted in the year	Units cancelled in the year	Units redeemed in the year	Units at 31 March 2020	Units granted in the year	Units cancelled in the year	Units redeemed in the year	Units at 31 March 2021
31 March 2020	564,604	–	(2,616)	(319,479)	242,509	–	–	(242,509)	–
19 June 2021	–	441,322	(2,415)	–	438,907	–	–	–	438,907
29 June 2022	–	–	–	–	–	599,534	–	–	599,534
	564,604	441,322	(5,031)	(319,479)	681,416	599,534	–	(242,509)	1,038,441

The Group also has a Long-term Incentive Plan for all employees which is equity settled. Awards are made annually and vest three years from the grant date. Vesting is conditional on three performance metrics measured over each three-year period. Awards to Executive Directors are also subject to a further two-year holding period. On 29 June 2020 awards for a maximum of 860,740 shares were granted to employees in respect of the three-year period ending on 31 March 2023. In the previous year, awards of 878,164 shares were made on 19 June 2019 for the period ending 31 March 2022.

The three performance metrics are:

– Total shareholder return (TSR) of Picton Property Income Limited, compared to a comparator group of similar listed companies;

– Total property return (TPR) of the property assets held within the Group, compared to the MSCI UK Quarterly Property Index; and

– Growth in EPRA earnings per share (EPS) of the Group.

The fair value of share 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	29 June 2020	19 June 2019
Share price at date of grant	68.4p	95.0p
Exercise price	Nil	Nil
Expected term	3 years	3 years
Risk-free rate – TSR condition	(0.05)%	0.84%
Share price volatility – TSR condition	24.2%	18.7%
Median volatility of comparator group – TSR condition	24.5%	18.1%
Correlation – TSR condition	37.8%	27.1%
TSR performance at grant date – TSR condition	(11.4)%	7.5%
Median TSR performance of comparator group at grant date – TSR condition	(10.7)%	3.0%
Fair value – TSR condition (Monte Carlo method)	26.7p	51.5p
Fair value – TPR condition (Black-Scholes model)	68.4p	95.0p
Fair value – EPS condition (Black-Scholes model)	68.4p	95.0p

The Trustee of the Company’s Employee Benefit Trust acquired 958,000 ordinary shares during the year for £643,000 (2020: 954,000 shares for £844,000).

The Group employed ten members of staff at 31 March 2021 (2020: nine). The average number of people employed by the Group for the year ended 31 March 2021 was nine (2020: ten).

8. Interest paid

	2021 £000	2020 £000
Interest payable on loans	7,574	7,933
Interest on obligations under finance leases	114	114
Non-utilisation fees	311	248
	7,999	8,295

The loan arrangement costs incurred to 31 March 2021 are £4,590,000 (2020: £4,534,000). These are amortised over the duration of the loans with £531,000 amortised in the year ended 31 March 2021 and included in interest payable on loans (2020: £371,000).

9. Tax

The charge for the year is:

	2021 £000	2020 £000
Tax expense in year	–	–
Tax adjustment to provision for prior year	–	(124)
Total tax charge/(credit)	–	(124)

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

	2021 £000	2020 £000
Profit before taxation	33,801	22,384
Expected tax charge on ordinary activities at the standard rate of taxation of 19% (2020: 19%)	6,422	4,253
Less:
UK REIT exemption on net income	(3,813)	(3,760)
Revaluation movement not taxable	(2,444)	168
Gains on disposal not taxable	(165)	(661)
Total tax charge	–	–

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

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

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

10. Dividends

	2021 £000	2020 £000
Declared and paid:
Interim dividend for the period ended 31 March 2019: 0.875 pence	–	4,712
Interim dividend for the period ended 30 June 2019: 0.875 pence	–	4,781
Interim dividend for the period ended 30 September 2019: 0.875 pence	–	4,773
Interim dividend for the period ended 31 December 2019: 0.875 pence	–	4,773
Interim dividend for the period ended 31 March 2020: 0.625 pence	3,409	–
Interim dividend for the period ended 30 June 2020: 0.625 pence	3,410	–
Interim dividend for the period ended 30 September 2020: 0.7 pence	3,819	–
Interim dividend for the period ended 31 December 2020: 0.8 pence	4,364	–
	15,002	19,039

The interim dividend of 0.8 pence per ordinary share in respect of the period ended 31 March 2021 has not been recognised as a liability as it was declared after the year end. This dividend of £4,364,000 will be paid on 28 May 2021.

11. Earnings per share

Basic and diluted earnings per share is calculated by dividing the net profit for the year attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares in issue during the year, excluding the average number of shares held by the Employee Benefit Trust for the year. The diluted number of shares also reflects the contingent shares to be issued under the Long-term Incentive Plan.

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

	2021	2020
Net profit attributable to ordinary shareholders of the Company from continuing operations (£000)	33,801	22,508
Weighted average number of ordinary shares for basic profit per share	545,590,722	544,192,866
Weighted average number of ordinary shares for diluted profit per share	546,793,381	546,227,914

12. Investments in subsidiaries

The Company had the following principal subsidiaries as at 31 March 2021 and 31 March 2020:

Name	Place of incorporation	Ownership proportion
Picton UK Real Estate Trust (Property) Limited	Guernsey	100%
Picton (UK) REIT (SPV) Limited	Guernsey	100%
Picton (UK) Listed Real Estate	Guernsey	100%
Picton UK Real Estate (Property) No 2 Limited	Guernsey	100%
Picton (UK) REIT (SPV No 2) Limited	Guernsey	100%
Picton Capital Limited	England & Wales	100%
Picton (General Partner) No 2 Limited	Guernsey	100%
Picton (General Partner) No 3 Limited	Guernsey	100%
Picton No 2 Limited Partnership	England & Wales	100%
Picton No 3 Limited Partnership	England & Wales	100%
Picton Financing UK Limited	England & Wales	100%
Picton Property No 3 Limited	Guernsey	100%

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

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

13. Investment properties

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

	2021 £000	2020 £000
Fair value at start of year	654,486	676,102
Capital expenditure on investment properties	4,961	8,861
Disposals	(3,928)	(33,073)
Transfer to owner-occupied property	(3,830)	–
Realised gains on disposal	868	3,478
Unrealised movement on investment properties	12,861	(882)
Fair value at the end of the year	665,418	654,486
Historic cost at the end of the year	625,359	629,932

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

	2021 £000	2020 £000
Appraised value	682,410	664,615
Valuation of assets held under head leases	1,313	1,489
Owner-occupied property	(3,830)	–
Lease incentives held as debtors	(14,475)	(11,618)
Fair value at the end of the year	665,418	654,486

The investment properties were valued by independent valuers, CBRE Limited, Chartered Surveyors, as at 31 March 2021 and 31 March 2020 on the basis of fair value in accordance with the version of the RICS Valuation – Global Standards (incorporating the International Valuation Standards) and the UK national supplement (the Red Book) current as at the valuation date. The total fees earned by CBRE Limited from the Group are less than 5% of their total UK revenue.

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

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

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

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

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

The outbreak of Covid-19, declared by the World Health Organization as a ‘global pandemic’ on 11 March 2020, has had a significant impact on many aspects of daily life and the global economy – with some real estate markets having experienced lower levels of transactional activity and liquidity. Travel restrictions are in place and lockdowns have been applied both nationally and at a local level. Whilst restrictions are currently being eased in the UK, following the successful rollout of the vaccination programme local lockdowns may continue to be deployed as necessary and the emergence of significant further outbreaks or a ‘further wave’ is possible.

The pandemic and the measures taken to tackle Covid-19 continue to affect economies and real estate markets globally. Nevertheless, as at the valuation date some property markets have started to function again, with transaction volumes and properties on the market returning to levels where in general an adequate quantum of market evidence exists upon which to base opinions of value. Accordingly, and in contrast to the year ended 31 March 2020, the valuation is not reported as being subject to ‘material valuation uncertainty’ as defined by VPS 3 and VPGA 10 of the RICS Valuation – Global Standards.

As at 31 March 2021 and 31 March 2020 all of the Group’s properties, including owner-occupied property, are Level 3 in the fair value hierarchy as it involves use of significant judgement. 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:

	2021			2020
	Office	Industrial	Retail and Leisure	Office	Industrial	Retail and Leisure
Appraised value (£000)	245,385	360,740	76,285	224,620	318,330	121,665
Area (sq ft, 000s)	828	2,570	706	808	2,570	829
Range of unobservable inputs:
Gross ERV (sq ft per annum)
– range	£11.00 to £78.05	£3.75 to £21.18	£3.46 to £29.65	£11.00 to £53.59	£3.54 to £19.58	£3.46 to £81.77
– weighted average	£34.10	£10.39	£11.84	£27.92	£9.79	£32.13
Net initial yield
– range	0.00% to 7.98%	2.79% to 7.63%	3.07% to 29.58%	0.00% to 7.59%	–2.54% to 8.16%	–0.18% to 25.27%
– weighted average	4.35%	4.38%	7.64%	4.89%	4.63%	5.25%
Reversionary yield
– range	4.34% to 10.83%	3.68% to 8.59%	7.01% to 26.95%	5.47% to 10.80%	4.46% to 10.17%	4.36% to 11.97%
– weighted average	7.02%	4.97%	7.95%	7.04%	5.40%	6.63%
True equivalent yield
– range	4.42% to 9.95%	3.73% to 8.39%	7.80% to 14.03%	5.33% to 9.80%	4.39% to 9.65%	3.97% to 11.95%
– weighted average	6.82%	5.02%	8.99%	6.97%	5.40%	7.17%

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

Sector	Movement	2021 Impact on valuation	2020 Impact on valuation
Industrial	Increase of 50 basis points	Decrease of £36.3m	Decrease of £29.3m
	Decrease of 50 basis points	Increase of £45.4m	Increase of £36.1m
Office	Increase of 50 basis points	Decrease of £20.3m	Decrease of £17.5m
	Decrease of 50 basis points	Increase of £24.5m	Increase of £20.5m
Retail and Leisure	Increase of 50 basis points	Decrease of £5.2m	Decrease of £10.9m
	Decrease of 50 basis points	Increase of £6.7m	Increase of £13.9m

14. Property, plant and equipment

Property, plant and equipment principally comprises the fair value of owner-occupied property. On 11 March 2021 the Group moved to premises at one of its own buildings. The fair value of these premises is based on the appraised value at 31 March 2021 which approximates to the fair value at 11 March 2021. Consequently there has been no transfer to revaluation reserve for the year.

15. Accounts receivable

	2021 £000	2020 £000
Tenant debtors (net of provisions for bad debts)	4,326	5,197
Lease incentives	14,475	11,618
Other debtors	783	786
	19,584	17,601

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

Amounts are considered impaired using the lifetime expected credit loss method. Movement in the balance considered to be impaired has been included in the Consolidated Statement of Comprehensive Income. As at 31 March 2021, tenant debtors of £1,874,000 (2020: £1,676,000) were considered impaired and provided for.

16. Cash and cash equivalents

	2021 £000	2020 £000
Cash at bank and in hand	23,353	23,564
Short-term deposits	5	3
	23,358	23,567

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

	2021 £000	2020 £000
Accruals	4,496	5,263
Deferred rental income	7,596	7,817
VAT liability	1,780	1,685
Trade creditors	596	1,058
Other creditors	4,337	3,615
	18,805	19,438

18. Loans and borrowings

	Maturity	2021 £000	2020 £000
Current
Aviva facility	–	1,314	1,258
Capitalised finance costs	–	(370)	(370)
		944	888

Non-current
Canada Life facility	24 July 2027	80,000	80,000
Aviva facility	24 July 2032	84,894	86,207
Capitalised finance costs	–	(2,183)	(1,959)
		162,711	164,248
		163,655	165,136

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

	2021 £000	2020 £000
Balance as at 1 April	165,136	191,969

Changes from financing cash flows
Proceeds from loans and borrowings	–	6,000
Repayment of loans and borrowings	(1,258)	(33,204)
Financing costs paid	(574)	–
	(1,832)	(27,204)
Other changes
Amortisation of financing costs	531	371
Accrued financing costs	(180)	–
	351	371
Balance as at 31 March	163,655	165,136

The Group has an £80 million term loan facility with Canada Life Limited which matures in July 2027. Interest is fixed at 4.08% over the life of the loan. The loan agreement has a loan to value covenant of 65% and an interest cover test of 1.75. The loan is secured over the Group’s properties held by Picton No 2 Limited Partnership and Picton UK Real Estate Trust (Property) No 2 Limited, valued at £330.0 million (2020: £307.5 million).

Additionally, the Group has a £95.3 million term loan facility with Aviva Commercial Finance Limited which matures in July 2032. The loan is for a term of 20 years and was fully drawn on 24 July 2012 with approximately one-third repayable over the life of the loan in accordance with a scheduled amortisation profile. The Group has repaid £1.3 million in the year (2020: £1.2 million). Interest on the loan is fixed at 4.38% over the life of the loan. The facility has a loan to value covenant of 65% and a debt service cover ratio of 1.4. The facility is secured over the Group’s properties held by Picton No 3 Limited Partnership and Picton Property No 3 Limited, valued at £184.9 million (2020: £189.0 million).

In May 2020 the Group entered into a new £50 million revolving credit facility (‘RCF’) with National Westminster Bank Plc; this replaces the facilities held with Santander Corporate & Commercial Banking which have been cancelled. The new facility is for an initial term of three years with the option of two, one-year extensions. Currently undrawn, the RCF will incur interest at 150 basis points over LIBOR on drawn balances and an undrawn commitment fee of 60 basis points. The facility is secured on properties held by Picton UK Real Estate Trust (Property) Limited, valued at £131.7 million.

The fair value of the drawn loan facilities at 31 March 2021, estimated as the present value of future cash flows discounted at the market rate of interest at that date, was £187.2 million (2020: £197.0 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 2021 was 4.2% (2020: 4.2%).

19. Contingencies and capital commitments

The Group has entered into contracts for the refurbishment of 11 properties with commitments outstanding at 31 March 2021 of approximately £6.7 million (2020: £4.5 million). No further obligations to construct or develop investment property or for repairs, maintenance or enhancements were in place as at 31 March 2021 (2020: £nil).

20. Share capital and other reserves

	2021 £000	2020 £000
Authorised:
Unlimited number of ordinary shares of no par value	–	–

Issued and fully paid:
547,605,596 ordinary shares of no par value
(31 March 2020: 547,605,596)	–	–
Share premium	164,400	164,400

The Company has 547,605,596 ordinary shares in issue of no par value (2020: 547,605,596).

On 21 June 2019 the Company raised £7.1 million through the issue of 7,551,936 new ordinary share of no par value at 94.5 pence per share. No new ordinary shares were issued during the year ended 31 March 2021.

	2021 Number of shares	2020 Number of shares
Ordinary share capital	547,605,596	547,605,596
Number of shares held in Employee Benefit Trust	(2,052,269)	(2,103,683)
Number of ordinary shares	545,553,327	545,501,913

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

Subject to the solvency test contained in the Companies (Guernsey) Law, 2008 being satisfied, ordinary shareholders are entitled to all dividends declared by the Company and to all of the Company’s assets after repayment of its borrowings and ordinary creditors. The Trustee of the Company’s Employee Benefit Trust has waived its right to receive dividends on the 2,052,269 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

	2021 £000	2020 £000
Profit on disposal of investment properties	(868)	(3,478)
Movement in investment property valuation	(12,861)	882
Share-based provisions	758	292
Depreciation of tangible assets	7	9
	(12,964)	(2,295)

22. Obligations under leases

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

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

	2021 £000	2020 £000
Future minimum payments due:
Within one year	116	117
In the second to fifth years inclusive	466	466
After five years	7,150	7,266
	7,732	7,849
Less: finance charges allocated to future periods	(5,918)	(6,032)
Present value of minimum lease payments	1,814	1,817

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

	2021 £000	2020 £000
Current
Within one year	107	108
	107	108

Non-current
In the second to fifth years inclusive	379	388
After five years	1,328	1,321
	1,707	1,709
	1,814	1,817

Operating leases where the Group is lessor

The Group leases its investment properties under commercial property leases which are held as operating leases.

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

	2021 £000	2020 £000
Within one year	37,744	38,296
One to two years	33,954	35,665
Two to three years	32,008	32,356
Three to four years	27,937	30,342
Four to five years	23,235	26,322
After five years	91,294	111,711
	246,172	274,692

These properties are measured under the fair value model as the properties are held to earn rentals. Commercial property leases typically have lease terms between five and ten years and include clauses to enable periodic upward revision of the rental charge according to prevailing market conditions. Some leases contain options to break before the end of the lease term.

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 head leases and accounts payable that arise from its operations. The Group does not have exposure to any derivative financial instruments. Apart from the secured loans, as disclosed in Note 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 2021	Note	Held at fair value through profit or loss £000	Financial assets and liabilities at amortised cost £000	Total £000
Financial assets
Debtors	15	–	5,109	5,109
Cash and cash equivalents	16	–	23,358	23,358
		–	28,467	28,467

Financial liabilities
Loans and borrowings	18	–	163,655	163,655
Obligations under head leases	22	–	1,814	1,814
Creditors and accruals	17	–	9,429	9,429
		–	174,898	174,898

31 March 2020	Note	Held at fair value through profit or loss £000	Financial assets and liabilities at amortised cost £000	Total £000
Financial assets
Debtors	15	–	5,983	5,983
Cash and cash equivalents	16	–	23,567	23,567
		–	29,550	29,550

Financial liabilities
Loans and borrowings	18	–	165,136	165,136
Obligations under head leases	22	–	1,817	1,817
Creditors and accruals	17	–	9,936	9,936
		–	176,889	176,889

25. Risk management

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

Capital risk management

The Group aims to manage its capital to ensure that the entities in the Group will be able to continue as a going concern while maximising the return to stakeholders through optimising its capital structure. 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 its 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:

	2021 £000	2020 £000
Total borrowings	166,208	167,465
Gross assets	712,471	695,674
Gearing ratio (must not exceed 65%)	23.3%	24.1%

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

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

	2021 £000	2020 £000
Total liabilities	184,274	186,391
Less: cash and cash equivalents	(23,358)	(23,567)
Net debt	160,916	162,824
Total equity	528,197	509,283
Net debt to equity ratio at end of year	0.30	0.32

Credit risk

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

31 March 2021	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	–	4,326	4,326
Cash and cash equivalents	16	–	23,358	23,358
		–	27,684	27,684

31 March 2020	Note	Held at fair value through profit or loss £000	Financial assets and liabilities at amortised cost £000	Total £000
Financial assets
Tenant debtors	15	–	5,197	5,197
Cash and cash equivalents	16	–	23,567	23,567
		–	28,764	28,764

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.

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

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

The Group has a panel of banks with which it makes deposits, based on credit ratings with set counterparty limits that are reviewed regularly. The Group’s main cash balances are held with National Westminster Bank plc (‘NatWest’), Santander plc (‘Santander’), Nationwide International Limited (‘Nationwide’) and The Royal Bank of Scotland plc (‘RBS’). Insolvency or resolution of the bank holding cash balances may cause the Group’s recovery of cash held by them to be delayed or limited. The Group manages its risk by monitoring the credit quality of its bankers on an ongoing basis. NatWest, Santander, Nationwide and RBS are rated by all the major rating agencies. If the credit quality of these banks deteriorates, the Group would look to move the short-term deposits or cash to another bank. Procedures exist to ensure that cash balances are split between banks to minimise exposure. At 31 March 2021 and at 31 March 2020 Standard & Poor’s short-term credit rating for the Group’s bankers was A-1.

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

Liquidity risk

Ultimate responsibility for liquidity risk management rests with the Board, which has built an appropriate liquidity risk management framework for the management of the Group’s short, medium and long-term funding and liquidity management requirements. The Group’s liquidity risk is managed on an ongoing basis by senior management and monitored on a quarterly basis by the Board by maintaining adequate reserves and loan facilities, continuously monitoring forecasts and actual cash flows and matching the maturity profiles of financial assets and liabilities for a period of at least 12 months.

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

31 March 2021	Less than 1 year £000	1 to 5 years £000	More than 5 years £000	Total £000
Cash and cash equivalents	23,358	–	–	23,358
Debtors	5,109	–	–	5,109
Capitalised finance costs	370	1,355	828	2,553
Obligations under head leases	(116)	(466)	(7,150)	(7,732)
Fixed interest rate loans	(8,332)	(33,329)	(184,927)	(226,588)
Floating interest rate loans	(300)	(346)	–	(646)
Creditors and accruals	(9,429)	–	–	(9,429)
	10,660	(32,786)	(191,249)	(213,375)

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

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 operating performance will be adversely affected.

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

In addition, the Group’s revenue would be adversely affected if a significant number of occupiers were unable to pay rent or its properties could not be rented on favourable terms. This risk has increased given the Covid-19 pandemic and the resultant effect on occupiers’ ability to pay rent. Certain significant expenditure associated with each equity investment in real estate (such as external financing costs, real estate taxes and maintenance costs) is generally not reduced when circumstances cause a reduction in revenue from properties. By diversifying in regions, sectors, risk categories and occupiers, senior management expects to mitigate the risk profile of the portfolio effectively. 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 £34.1 million (2020: £33.2 million).

Interest rate risk management

Interest rate risk arises on interest payable on the revolving credit facility only. The Group’s senior debt facilities have fixed interest rates over the terms of the loans and the revolving credit facility is currently undrawn, 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 2021	Less than 1 year £000	1 to 5 years £000	More than 5 years £000	Total £000
Floating
Cash and cash equivalents	23,358	–	–	23,358

Fixed
Secured loan facilities	(1,314)	(5,867)	(159,027)	(166,208)
Obligations under leases	(107)	(379)	(1,328)	(1,814)
	21,937	(6,246)	(160,355)	(144,664)

31 March 2020	Less than 1 year £000	1 to 5 years £000	More than 5 years £000	Total £000
Floating
Cash and cash equivalents	23,567	–	–	23,567

Fixed
Secured loan facilities	(1,258)	(5,616)	(160,591)	(167,465)
Obligations under leases	(108)	(388)	(1,321)	(1,817)
	22,201	(6,004)	(161,912)	(145,715)

Concentration risk

As discussed above, all of the Group’s investments are in the UK and therefore it is exposed to macroeconomic changes in the UK economy. Furthermore, the Group has around 350 occupiers so does not place reliance on a limited number of occupiers for its rental income, with the single largest occupier accounting for 5.0% of the Group’s annual contracted rental income.

Currency risk

The Group has no exposure to foreign currency risk.

26. Related party transactions

The total fees earned during the year by the Non-Executive Directors of the Company amounted to £250,000 (2020: £250,000). As at 31 March 2021 the Group owed £nil to the Non-Executive Directors (2020: £nil).

Picton Property Income Limited has no controlling parties.

27. Events after the balance sheet date

A dividend of £4,364,000 (0.8 pence per share) was approved by the Board on 29 April 2021 and was paid on 28 May 2021.

The revolving credit facility held with National Westminster Bank Plc has been extended by a further 12 months to May 2024.

END

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