London, May 21
22 May 2019
PICTON PROPERTY INCOME LIMITED
(“Picton”, the “Company” or the “Group”)
Preliminary Annual Results
Picton (LSE: PCTN) announces its annual results for the year ended 31 March 2019.
Positive financial results despite economic uncertainty
Profit after tax of £31 million
Increase in net assets of 2.5%, to £499 million, or 93p per share
Total return of 6.5%
Strong dividend cover supported by earnings
Earnings per share of 5.7p
Increased EPRA earnings to £22.9 million, or 4.3p per share
Paid dividends of £18.9 million, or 3.5p per share
Dividend cover of 122%
Improved balance sheet and operational flexibility
9% reduction in total debt outstanding to £194.7 million
Net saving of £1.1 million in annual finance costs
Further reduction in loan to value ratio to below 25%
Debt restructured to provide operational flexibility
Outperforming property portfolio
Total property return of 7.5%, outperforming MSCI UK Quarterly Property Index of 4.6%
Portfolio outperformance against MSCI over one, three, five and ten years
Like-for-like valuation increase of 1.8%
Like-for-like rental value change of -0.2%
Occupancy of 90%
Two asset disposals for £12.0 million, 9.7% ahead of March 2018 valuations
£1.6 million invested in refurbishment projects
Conversion to UK REIT
Entered UK REIT regime on 1 October 2018
Tax savings for six-month period following conversion
|Balance Sheet||31 March 2019||31 March 2018||31 March 2017|
|EPRA NAV per Share||93p||90p||82p|
|Income Statement||Year ended
31 March 2019
31 March 2018
31 March 2017
|Profit after tax||£31.0m||£64.2m||£42.8m|
|Earnings per share||5.7p||11.9p||7.9p|
|EPRA earnings per share||4.3p||4.2p||3.8p|
|Total shareholder return||10.1%||4.8%||25.6%|
|Total dividend per share||3.5p||3.4p||3.3p|
Picton Chairman, Nicholas Thompson, commented:
“We’ve delivered another set of positive results against an uncertain economic backdrop, generating a total shareholder return of more than 10%. We’ve also completed several important structural changes and these have contributed to the growth in our asset base, reduced debt and ensured a smooth transition to becoming a UK REIT.”
Michael Morris, Chief Executive of Picton, commented:
“Our portfolio structure and proactive approach to asset management has enabled us to continue outperforming the MSCI UK Quarterly Property Index and build further on our long-term track record. Looking ahead to the rest of this year, we will remain focused on growing income through lease restructuring, improving occupancy and other identified asset management projects.”
This announcement contains inside information.
For further information:
Jeremy Carey/James Verstringhe, 020 7920 3150, firstname.lastname@example.org
Michael Morris, 020 7011 9980, email@example.com
Note to Editors
Picton is a property investment company established in 2005. It owns and actively manages a £685 million diversified UK commercial property portfolio, invested across 49 assets and with around 350 occupiers (as at 31 March 2019). 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
For the year ended 31 March 2019, I am pleased to report Picton delivered a profit after tax of £31 million, demonstrating further progress despite a more challenging economic backdrop. Our net assets rose by 2.5% to £499 million, equating to 93 pence per share. EPRA earnings were £23 million or 4.3 pence per share, reflecting a modest improvement against last year.
This has been a significant year for the Company as Picton became a UK REIT and changed its listing status from an investment to a commercial company.
We delivered a total return of 6.5% and, while lower than last year, this reflects weaker growth in the commercial property market generally.
At the portfolio level, we continued our long-term track record of outperformance against the MSCI UK Quarterly Property Index over one, three, five and ten years. The ungeared return from the property portfolio was 7.5% compared to the Index of 4.6%.
Our vison remains to be one of the consistently best performing diversified UK focused property companies listed on the London Stock Exchange. Our strategic aims, as set out further in the Report, are in place to help us meet this ambition.
We continue to favour an unconstrained approach to our portfolio, enabling us to enter or exit sectors, subsectors or assets as market conditions change. We also recognise the benefit of having a diverse occupier base and corresponding diversity of income.
Further recognition of our achievements this year were award wins from MSCI/IPF - Best Listed Fund and at the Investment Company of the Year Awards and Investment Trust Awards, amongst others. While the investment company structure has many advantages, particularly for real estate, our decision to be a commercial company, reflecting our internalised structure, has delivered several benefits. We have been able to streamline the way we operate, put in place new reporting lines to increase accountability and improve efficiency.
Our property portfolio continues to remain biased towards the industrial, warehouse and logistics sector and this undoubtedly drove performance during the year. Conversely, while our retail exposure is limited, with no exposure to shopping centres, it has been a drag on performance and difficult to remain insulated from the disruption that is happening in the wider market. In many instances, retail business models are stretched and the continued growth of online retailing is leading to a re-evaluation of physical property needs and is adversely affecting pricing.
We had a number of key lease events during the year, which meant our occupancy at the year end was lower than 12 months ago. This was not unexpected and remains a key area of focus in the forthcoming year. The fact that we were able to deliver positive growth in net assets despite this reflects the defensive nature of the portfolio.
We have exciting projects planned over the coming year which will further improve the quality of the portfolio. These asset management initiatives include upgrading and repositioning space, conversion to higher value uses and enhancing the external fabric to help maintain and attract new occupiers. Whilst the capital outlay for these initiatives is approximately £15 million, they are expected to deliver higher occupancy, rental income and capital values.
Our transition to a UK REIT in October 2018 was successfully completed and in February 2019 the Company paid its first dividend in the form of a Property Income Distribution, or PID.
One of the reasons we became a REIT was the forthcoming changes to the tax treatment of offshore companies and our results show the benefit of lower taxation since October. This will have a further positive impact in next year’s results when over a full year. Over the longer term we expect that, as a UK REIT, we will have a more diversified and potentially greater international representation in our shareholder register. This, in turn, should be positive for both liquidity and share price rating.
Dividends paid during the year were 2% higher than in the preceding year with dividend cover of 122%. Given market conditions, the Board believes it is sensible to maintain the current dividend rate until we have crystalised a further increase in earnings.
Governance and Board composition
As part of our transition to a REIT and change in listing status, there have been a number of changes at Board level. Michael Morris has become Chief Executive and Andrew Dewhirst has joined the Board as Finance Director. Maria Bentley joined the Board in October as a non-executive director and Chair of the Remuneration Committee.
We are now focused on the next stage of board succession planning, as both Roger Lewis and I intend to stand down now that REIT conversion is complete. We expect this will be achieved within the next 12 months, ensuring a seamless transfer and maintaining corporate knowledge at Board level. Maria Bentley has additionally become Chair of the Nomination Committee and Mark Batten has become the Senior Independent Director. We have appointed external consultants to undertake a thorough search process which we intend to conclude during the course of the year.
Additionally, we have also undertaken an external evaluation of the Board, which has been a helpful exercise in defining the qualities that we are looking for and have been able to incorporate this feedback into the process.
Our strategy over preceding years to reduce our gearing has proved to be prescient. We are cognisant that in the short-term we need to remain cautious with our use of debt, while at the same time ensuring that we are able to take advantage of opportunities should they arise.
We were able to reduce our loan to value ratio (LTV) over the year from 27% to below 25%. In July, we reduced our overall borrowings through the early repayment of some of our more expensive debt, due for maturity in 2022. This was principally funded from the proceeds of asset sales but also through the use of our lower cost, revolving credit facilities, which has had a positive effect on earnings and contributed to the lower LTV.
With regard to our planned expenditure, the Company is likely to commit to many of these initiatives over the next 12 months with funding provided from a combination of existing debt facilities, selective asset sales or new equity, dependent upon market conditions.
The uncertainty around Brexit looks set to continue for some time and parts of the property market are likely to remain challenging until there is clarity. By its very nature uncertainty leads to delayed decision making; the reduced investment transaction volumes and lower returns are a reflection of this.
We believe the current portfolio and modest gearing means that Picton is in a good position. With the potential rental value of the portfolio some £9 million ahead of the current passing rent, there is significant upside to be captured through leasing our vacant space, lease restructuring and proactive asset management. We also continue to seek new investment opportunities which will further enhance our portfolio.
Now we are a UK REIT, we need to take advantage of this structure. With our opportunistic approach we will continue to look at ways to grow Picton, though always with a focus on performance and the economies of scale that can be achieved through growth. Our desire is to continue to build on our long-term track record and to ensure that Picton, with its new Board, is best placed to achieve this.
CHIEF EXECUTIVE’S REVIEW
The economic uncertainty as a result of the Brexit process has been increasingly apparent over the last 12 months. It has not been helpful to the real estate sector, nor more widely to the occupational markets. Despite this, overall the property market held up well, with the MSCI UK Quarterly Property Index showing a total return of 4.6%.
The industrial sector has been the most resilient and the retail sector the least, suffering a marked deterioration as retailers struggle with rising costs and the impact of online competition. The CVA and pre-pack administration processes have become more widespread, enabling retailers to relinquish lease obligations, which have, in turn, accelerated the downward movement in rental and capital values.
Against this backdrop our portfolio performed well, as we continued to manage our assets effectively. We remain cautious in our use of debt, and with more limited transactional activity, we continue to evaluate ways in which we can invest in our assets, enhance the accommodation and in turn the income and valuation potential.
Occupier focused and opportunity led
Our occupier focused approach remains at the forefront of what we do. Enhancing occupancy and retention, thereby mitigating void risk, is key. Through this process we are continually looking at options to improve our income profile and extend it where possible.
We have also spent time redefining our Picton Promise for occupiers, focused on key commitments including Action, Support, Sustainability, Technology and Community, all of which we believe have relevance and importance to our occupiers in this evolving working environment. We look forward to seeing the impact of this as it is rolled out during 2019.
Buy, manage and sell effectively
Transactional activity during the year was muted, reflecting the slowdown in investment activity and the availability of suitable opportunities. With a desire to maintain a prudent approach to gearing, no acquisitions were made during the period. In the wider market, it has been clear that a number of open ended funds had selling pressure and in the retail sector, in particular, there has been limited investor appetite.
We were opportunistic in making two disposals, coincidentally both to local authority purchasers, which reflected a combined 10% premium to their valuation at March 2018 and more than 45% to their valuation at March 2017, capturing the upside from earlier asset management initiatives.
While no acquisitions were made in the year, we think there may well be greater buying opportunities as we move through 2019 and into 2020. As ever stock selection remains key and identifying intrinsic value is paramount.
Focus on income and total return
We delivered a positive income return and capital growth from the portfolio during the year. Our conservative use of debt also had a positive impact.
Cash flow remains hugely important and this is reflected in our income focus. An additional £1.1 million of other income was secured in the year in addition to rental income. This primarily came through asset management events where we chose to surrender leases ahead of expiry, in most instances to enable refurbishment and upgrading of space.
Despite our diversified occupier base and low exposure to the retail sector we were not immune to occupier failures. In one notable example the Homebase unit in Swansea has been successfully re-let and is further detailed in this report.
Creating space occupiers need
We continue to invest in our assets, improving the quality of space and ensuring that it meets occupier demand. The timing of lease events was such that there were only a handful of key refurbishment projects undertaken during the year. Additional work was done to plan schemes for this coming year and beyond. In this market, it is more important than ever to have the right space that will attract high-quality occupiers and minimise vacancies.
The last 12 months have seen the marked deterioration of trading conditions for retailers and the well documented difficulties for long-established companies such as Debenhams, Homebase, New Look and House of Fraser to name but a few. These have impacted either directly or indirectly on all owners of commercial real estate operating in this sector.
Our occupancy has reduced during the year and now stands at 90%. This is, we expect, a short-term position and is driven by the timing of lease events. The major void, accounting for over a third of total portfolio vacancy, is a property in Covent Garden, a well known and busy location. This became vacant during the year ahead of a planned refurbishment and re-leasing programme. We are fortunate that because this is a Grade II listed asset, there is no empty rates liability. We are actively managing this to achieve an optimum outcome and already have leasing interest.
Managing our capital structure through the cycle
Debt was repaid during the year, partly using asset sale proceeds, which reduced overall borrowings by some £19 million. We have drawn down from our revolving credit facilities during the year, which proved a useful way of managing our cash flow position, ensuring an efficient use of the balance sheet and allowing us to adopt a more flexible approach to debt levels as market conditions change.
Effective and efficient operational model
We were able to have a positive impact on earnings through corporate efficiencies, such as our REIT conversion, which is expected to save more than £0.7 million in tax per annum relative to last year. This also needs to be viewed in the context of future tax changes which will impact offshore companies – if we had not converted, our tax liabilities would have been much greater. The full benefit of this change will be fully reflected in next year’s results.
Culture and alignment
We are fortunate to have a strong team at Picton and our culture is key in ensuring the team works well. We are guided by our shared vision and values and all of our staff are aligned with shareholders through our deferred bonus scheme and also our Long-term Incentive Plan. The 2016 LTIP awards will vest this year and staff will benefit from the success that we have delivered for shareholders over the preceding three years.
Our focus will be on growing occupancy and income. We are aiming to create further value through investing in our assets and restructuring leases, either to capture higher rents or to provide greater income security. We expect this to underpin our progressive dividend policy and ensure we continue to be well placed to deliver on our vision of consistent outperformance.
The UK economy grew by 1.4% in 2018, the lowest annual growth since 2012. This slowdown in economic activity reflects the continued uncertainty surrounding Brexit, a theme which was prevalent throughout 2018. With the UK Government extending Article 50 beyond the original 29 March 2019 Brexit date, this is likely to continue in the short-term.
Putting the UK in context of the G7 Major Advanced Economies, this compares to an average GDP growth of 2.1% per annum for the group, ranking the UK in fifth place behind the United States, Canada, Germany and France.
In the 2019 Spring Statement, the Office of Budget Responsibility downgraded the forecast for 2019 GDP growth to 1.2% per annum. However UK GDP growth for the first quarter of 2019 is estimated at 0.5%, an increase on the 0.2% recorded for the fourth quarter of 2018.
Aside from Brexit, 2018 was a year notable for retailer woes and Company Voluntary Arrangements (CVAs). The growing proportion of consumers choosing to shop online, coupled with the impact of business rates and the rising UK Living Wage, left profit margins squeezed for retailers operating from physical stores.
On a more positive note, in March 2019 the unemployment rate stood at 3.8%, the lowest level since 1974. In nominal terms, average total weekly earnings increased by 3.3% in the year to March 2019. Significantly, this is above inflation for the first time since 2015. In March 2019 RPI and CPI inflation stood at 2.4% and 1.9% respectively, having slowed since the end of last year.
This, coupled with low interest rates, is helpful to the economy and in particular consumer spending. The Office for National Statistics reported an uptick in retail sales in March, with a quarter-on-quarter increase of 1.6% in the first quarter of 2019.
UK property market
According to the MSCI UK Quarterly Property Index, commercial property delivered a total return of 4.6% for the year ended March 2019.
The reduction relative to last year was driven by capital growth of only 0.1% and an income return of 4.4%. This compares to 5.3% capital growth and 4.6% income return for the year to March 2018.
Critically, all these market averages do not illustrate the polarisation between sectors and subsectors. In the last 18 months there has been a complete reversal in the hierarchy of equivalent yields for the office, industrial and retail sectors, reflecting underlying occupational conditions.
Industrial was the top performing sector for the year to March 2019, achieving a total return of 13.8%, comprising 9.1% capital growth and 4.3% income return. Industrial ERV growth for the period was 4.2%, with a range of 2.7% to 7.0% within subsectors. Capital growth ranged from 6.5% to 14.1% within subsectors. Equivalent yields for industrial property now stand at 5.3%.
The office sector produced a total return of 5.9% for the year to March 2019, comprising 2.0% capital growth and 3.8% income return, with the South East and regional office market total returns outperforming central and outer London. All office annual ERV growth was 1.0%, ranging from -0.8% to 3.2% within subsectors. The range of capital growth by subsector was from 0.0% to 6.0%. Equivalent yields for office property now stand at 5.6%.
The retail sector produced a negative total return of -2.6% for the year to March 2019. This comprised capital growth of -7.3% and income return of 5.0%. Rental values fell -3.2% over the period and were negative across all subsectors, ranging from -8.3% to -0.1%. Retail subsector capital growth ranged from -16.5% to 0.5%. Equivalent yields for retail property now stand at 5.8%.
It is unsurprising that there has been a reduction in investment activity in this time of political uncertainty. According to Property Data, the total investment volume for the year to March 2019 was £59.5 billion, a 9.6% decrease on the £65.8 billion recorded in the year to March 2018. The volume of investment by overseas investors in the year to March 2019 was £27.3 billion, accounting for 46.0% of all transactions. Illustrating the liquidity issues within the retail sector, the volume of investment transactions in this sector was just £5.3 billion, down 34.3% on the year to March 2018.
Our asset allocation, with 46% in industrial, 34% in office and 20% in retail and leisure sectors, combined with proactive active management, has enabled us to again outperform the MSCI UK Quarterly Property Index on a total return basis over one, three, five and ten years.
Our portfolio now comprises 49 assets, with around 350 occupiers and is valued at £685.3 million with a net initial yield of 5.0% and reversionary yield of 6.3%. Overall the like-for-like valuation was up 1.8% with the industrial sector up 11%, offices delivering growth of 0.2% and retail and leisure declining 12%.
Our portfolio has become increasingly polarised with our industrial assets performing better, in part reflecting our allocation to South East multi-let estates which account for over 70% of our industrial exposure. Conversely, our retail assets have underperformed, primarily due to the specific timing of lease events and the impact of certain retailer failures.
The overall passing rent is £37.7 million, a decrease from the prior year of 6.8% on a like-for-like basis. Part of this however was due to the surrender of 11 leases, where we received a combined premium in excess of £0.7 million, and where the previous passing rent was on average 13% below the estimated rental value (ERV).
The ERV of the portfolio remains at £46.8 million, with the positive growth in the industrial sector of 4.3% to £18.7 million being offset by negative growth in the retail sector of 7.4% to £10.0 million and the office portfolio ERV remaining constant at £18.1 million. 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 unlock further value.
The industrial and office sector occupational markets have remained resilient, conversely retail demand has weakened considerably resulting in oversupply and significant decreases in ERVs.
We have completed 24 lettings, securing over £1.3 million of income, 1.7% ahead of the March 2018 ERV. We completed 17 lease renewals and re-gears retaining over £1.9 million of income, 1.6% ahead of the March 2018 ERV.
No acquisitions were made during the year and two assets were sold for £12.0 million, 9.7% ahead of the March 2018 valuation. Both buildings were sold to local authorities. The Merchants House, Chester sale was due to concerns of a potential Compulsory Purchase Order being put in place and at 800 Pavilion Drive, Northampton the occupier had not actioned their break, giving us the opportunity to sell the building for a premium to valuation and de-risk a future potential void in a weak occupational market. The net effect of these transactions is that the average lot size of the portfolio has increased by 4.3% to £14 million.
Our focus remains on proactively managing the existing portfolio, where there are numerous opportunities to create further value through extending income, refurbishing buildings and leasing vacant space, helping us to capture the £9.1 million of reversionary potential.
The reinvestment into the portfolio has been ongoing through the year and will continue into next year, with value accretive refurbishment of vacant space and modernisation schemes identified at ten properties, with smaller refurbishment projects happening elsewhere. All of the projects have the simple aim of creating best in class space to attract or retain occupiers and increase ERVs.
The industrial portfolio, accounting for 46% of the total portfolio by value, continues to perform strongly and with a number of large lease events over the next 12 to 24 months we are actively engaged with occupiers discussing regears. We do not see any signs of the rental growth slowing and this will be a key driver of performance alongside extending income over the next year.
The office sector continues to evolve with businesses wanting best in class space for their staff with flexibility to expand and contract. We continue to invest into our offices, and recently completed the refurbishment of Atlas House in Marlow, creating high quality office and amenity space and an enclosed garden for our occupiers.
Occupancy has reduced by 6% over the year to 90%, which is a result of active management surrenders, lease events towards the end of the year and occupier failures. Our largest void is Stanford House on Long Acre in Covent Garden, accounting for over a third of the total vacancy rate. This is a flagship store and it will be comprehensively refurbished during the year to provide best in class retail, office and residential accommodation. We already have occupational interest in the retail space.
While occupancy has reduced, particularly over the last quarter, we have a strong refurbishment pipeline and have good occupier interest. We anticipate occupancy remaining around 90% during the year and then increasing from the end of the year into 2020.
Occupier failures, while in the short-term will decrease occupancy and increase void costs, can unlock opportunities to add value. There were eight failures across the portfolio with a combined passing rent and ERV of £1.2 million. Three of the properties have been re-let, two are under offer, two properties remain with the administrator to mitigate void costs and we have occupational interest in the remaining property.
In line with our occupier focused opportunity led approach, we continue to proactively engage with our occupiers which we believe assists occupier retention and adds demonstrable value.
Top ten assets
The largest assets as at 31 March 2019, ranked by capital value, represent 50% of the total portfolio valuation and are detailed below.
area (sq ft)
|No. of occupiers||Occupancy
|Parkbury Industrial Estate, Radlett, Herts.||03/2014||Industrial||Freehold||336,700||20||93|
|River Way Industrial Estate, Harlow, Essex||12/2006||Industrial||Freehold||454,800||11||100|
|Angel Gate, City Road, London EC1||10/2005||Office||Freehold||64,500||30||93|
|Stanford House, Long Acre, London WC2||05/2010||Retail||Freehold||19,700||0||0|
|50 Farringdon Road, London EC1||10/2005||Office||Leasehold||31,000||5||100|
|Tower Wharf, Cheese Lane, Bristol||08/2017||Office||Freehold||70,800||5||72|
|Belkin Unit, Shipton Way, Rushden, Northants.||07/2014||Industrial||Leasehold||312,900||1||100|
|30 & 50 Pembroke Court, Chatham, Kent||06/2015||Office||Leasehold||86,300||3||100|
|Colchester Business Park, Colchester||10/2005||Office||Leasehold||150,700||24||99|
|Lyon Business Park, Barking, Essex||09/2013||Industrial||Freehold||99,400||8||96|
Top ten occupiers
The largest occupiers, based as a percentage of contracted rent, as at 31 March 2019, are summarised as follows:
|Occupier||Contracted rent (£000)||%|
|DHL Supply Chain Limited||1,505||3.7|
|The Random House Group Limited||1,190||2.9|
|Snorkel Europe Limited||1,123||2.8|
|Portal Chatham LLP||883||2.2|
|Canterbury Christ Church University||610||1.5|
Longevity of income
As at 31 March 2019, expressed as a percentage of contracted rent, the average length of the leases to the first termination was 5.1 years. This is summarised as follows:
|0 to 1 years||13.6|
|1 to 2 years||16.8|
|2 to 3 years||14.8|
|3 to 4 years||11.3|
|4 to 5 years||9.7|
|5 to 10 years||25.2|
|10 to 15 years||5.2|
|15 to 25 years||2.1|
|25 years and over||1.3|
Retention rates and occupancy
Over the year total ERV at risk due to lease expiries or break options totalled £6.9 million, compared to £3.1 million for the year to March 2018.
Excluding asset disposals, we retained 49% of total ERV at risk in the year to March 2019. This comprised 27% on lease expiries and 22% on break options. It is worth noting that despite a total of £3.5 million of ERV vacating during the year, half relates to Stanford House in London’s Covent Garden, a property which is currently undergoing full refurbishment.
In addition to units at risk due to lease expiries or break options during the year, a further £1.8 million of ERV was retained by either removing future breaks or extending future lease expiries ahead of the lease event.
Occupancy has reduced during the year, primarily reflecting the timing of lease events, some challenges in the retail sector and some specific asset management surrenders we have initiated.
Occupancy has decreased from 96% to 90%, which is behind the MSCI IRIS Benchmark of 92.9% at March 2019. On a look through basis we have 60% of our total void in offices, 32% in retail, primarily at a flagship store in Covent Garden, and only 8% of our void is in industrial, reflecting the stronger occupational market.
There is a wide diversity of occupiers within the portfolio, as set out below, which are compared to the MSCI Quarterly Index by contracted rent, as at 31 March 2019.
Source: MSCI IRIS Report March 2019
INDUSTRIAL PORTFOLIO REVIEW
|Value||£312.8 million||£281.9 million|
|Internal Area||2,731,000 sq ft||2,731,000 sq ft|
|Annual Rental Income||£16.0 million||£15.6 million|
|Estimated Rental Value||£18.7 million||£18.0 million|
|Number of Assets||17||17|
The industrial portfolio again delivered the strongest sector performance of the year. This was a result of tight supply, limited development and continued occupational demand resulting in further rental growth, especially in smaller units in the South East. Through asset management activity we have been able to capture rental growth in this market. This, combined with continued strength in the investment market, has resulted in another strong year for our portfolio.
On a like-for-like basis, our industrial portfolio value increased by £30.9 million or 11% to £312.8 million, and the annual rental income increased by £0.4 million or 2.6% to £16.0 million. The portfolio has an average weighted lease length of 4.5 years and £2.7 million of reversionary potential to £18.7 million per annum.
Occupational demand remains strong, especially in London and the South East. We have seen rental growth of 4.3% across the portfolio and are experiencing demand across all of our estates. Occupancy is 98% with only seven vacant units out of 133, four of which are under offer. Our six distribution units, totalling 1.3 million sq ft, remained fully let during the period.
Our largest single uplift on a rent review was on the distribution unit in Grantham, where we achieved a 19% uplift or £0.2 million per annum, 9% ahead of ERV, the new passing rent being £1.2 million per annum.
At Parkbury in Radlett, our largest estate, we surrendered a lease of a unit securing a full dilapidations payment. We then re-let the unit in less than two months in its existing condition securing a minimum five-year term at an initial rent of £0.1 million per annum, which is 34% ahead of the previous passing rent and 13% ahead of ERV. The adjoining unit became vacant on lease expiry and was pre-let securing a minimum five-year term at an initial rent of £0.1 million per annum, which was 43% ahead of the previous passing rent and 9% ahead of ERV. We renewed two leases, one for 10 years and the other for five years, at a combined rent of £0.3 million per annum, 39% ahead of the previous passing rent and 10% above ERV. A rent review was settled increasing the annual rent roll by £25,000 per annum, 10% ahead of ERV. We currently have three vacant units, one of which is under offer.
At Datapoint in London E16, following the completion of two rent reviews, we achieved a 57% uplift in rent. The uplift was £65,000 per annum. We have agreed to surrender a lease on the estate later in the year, as there is very strong demand and we believe we can move the rental tone on considerably with a new letting.
At Nonsuch Industrial Estate in Epsom, working with our occupiers, we chose to surrender two leases so we can move occupiers around on the estate and satisfy demand from occupiers who require double units. This active management strategy is ongoing. Three units were let during the period, for a combined £71,000 per annum, in line with ERV. Four rent reviews were settled, the passing rent increasing to a combined £0.1 million per annum, 5% ahead of ERV. We currently have two vacant units, one of which is under offer.
At units in Bracknell and York, both of which had lease events in 2020, we put in place two reversionary leases for a further eight and ten years respectively, extending income and securing a combined £0.3 million rent per annum, which is subject to review next year.
At Dencora Way in Luton, we renewed three leases for a further five years, subject to break, at a combined rent of £0.2 million per annum, 37% ahead of the previous passing rent and in line with ERV.
We extended the lease of Haynes Way, Rugby until the summer, due to Brexit related storage requirements, securing a one off payment of £0.4 million. This is one of the few cross-docked 100,000 sq ft units available in the ‘Golden Triangle’ and we expect to secure an occupier quickly post refurbishment.
As part of our office campus at Colchester Business Park, we own a 30,000 sq ft industrial unit. We achieved a 32% uplift in rent following completion of a rent review. The uplift was £47,000 per annum, 36% ahead of ERV, the new passing rent being £0.2 million per annum.
Demand remains strong across the country, which is translating into strong rental growth especially in Greater London and the South East where we have 95% of our multi-let estates by value. We believe this demand will be maintained in the short-term, especially on the multi-let estates, where there is a lack of supply and a limited development pipeline.
Looking forward, active management will facilitate the capturing of rental growth as we continue to work proactively with our occupiers to facilitate their business needs. Occupancy will reduce slightly through the middle of the year, primarily due to the Rugby unit mentioned above.
We have 25 lease events in the coming year, the overall ERV for these units is higher than the current passing rent of £1.9 million. This provides us with the opportunity to grow income further.
OFFICE PORTFOLIO REVIEW
|Value||£235.0 million||£245.5 million|
|Internal Area||856,000 sq ft||928,000 sq ft|
|Annual Rental Income||£14.2 million||£15.0 million|
|Estimated Rental Value||£18.1 million||£19.1 million|
|Number of Assets||15||17|
On a like-for-like basis, our office portfolio value increased by £0.4 million or 0.2% to £235.0 million, and the annual rental income on a like-for-like basis remained constant at £14.2 million. The portfolio has an average weighted lease length of 3.4 years and £3.9 million of reversionary potential to £18.1 million per annum.
Occupational demand has been stronger in the regions than in London where rental growth was slightly negative. The ERV has remained constant over the year and occupancy is at 88% with key voids at Tower Wharf in Bristol, 180 West George Street in Glasgow and Metro in Salford. There were six active management surrenders over the year with a combined ERV of £0.9 million per annum, which is 28% ahead of the previous passing rent.
Our most significant letting was at 180 West George Street, Glasgow, where we let a floor generating income of £0.2 million per annum, 1% ahead of ERV. During the period we received a floor back on lease expiry, which is being refurbished.
Working with an occupier, we moved their break option out by a year, securing £0.2 million per annum, to allow them to finalise their business strategy which may mean they remain in the building as opposed to having vacated on the earlier break. We currently have two floors available, providing grade A space in Glasgow’s central business district.
We have had success in London and the final suite was let at 50 Farringdon Road to an existing occupier for £0.2 million per annum, 5% ahead of ERV and the building is now fully let. We agreed with the same occupier to move the break option in their existing lease, securing five-year term certain on both suites. The transaction is a good example of our occupier focused approach, which enabled us to work with our existing occupier and retain them in the building.
In a back-to-back transaction, we surrendered a lease at Trident House in St. Albans that had a break in September 2019, whilst securing a new occupier on a five-year lease at a rent of £0.1 million per annum in line with ERV. We renewed a lease for a further five years at a rent of £45,000 per annum, 40% ahead of the previous passing rent and 12% ahead of ERV. We recently got two small suites back and these have been refurbished and are being marketed.
We chose to accept an early surrender of a suite at Tower Wharf in Bristol, which expired in September 2019, to enable early refurbishment. The occupier paid Picton 50% of all outgoings to the expiry date plus 100% of our dilapidations claim. The suite is now being marketed and we expect to secure a 40% uplift on the previous passing rent.
At Colchester Business Park, we surrendered three leases, upsizing one occupier into a larger unit to satisfy their business requirements, which demonstrates our commitment to working with our occupiers. Four units were let during the period, for a combined £76,000 per annum, 3% ahead of ERV. One rent review was settled, increasing the annual rent roll by £0.1 million per annum, 5% ahead of ERV. The property is currently 99% let.
Queens House in Glasgow provides 30 small contemporary suites in a listed building. During the year, we let three suites for a combined £64,000 per annum, 29% ahead of ERV and renewed one lease for a minimum of three years, 38% ahead of ERV.
The position is largely unchanged from last year, with a slightly weaker occupational market in London and good demand in the regions, although this is micro-location specific with occupiers looking for high specification buildings. While we have seen some impact and business caution from Brexit, this has been to date limited in the occupational market.
While we see the continued rise of co-working providers within the traditional office sector, by offering flexibility through our ‘right sizing’ approach, good quality contemporary space and occupier amenities, our buildings remain attractive to businesses who want control of their own space.
Looking forward, we will continue to upgrade our buildings through the installation of occupier amenity space, good connectivity, healthy living ideas such as cycle provision and showers and with a committed focus to continually improve the sustainability credentials of our properties, which is important to us and our occupiers. The office accommodation at our retail property in Covent Garden accounts for the largest office void, which will be comprehensively refurbished this year to offer best in class space over three floors of this listed building. The second largest void is at Tower Wharf in Bristol, where we surrendered a floor, and already have interest.
We have significant reversionary potential from enhancing occupancy, with the majority of the void in Grade A buildings. Additionally, we have 35 lease events in the coming year, the overall ERV for these units is higher than the current passing rent of £2.7 million.
RETAIL AND LEISURE PORTFOLIO REVIEW
|Value||£137.5 million||£156.4 million|
|Internal Area||829,000 sq ft||829,000 sq ft|
|Annual Rental Income||£7.5 million||£10.7 million|
|Estimated Rental Value||£10.0 million||£10.8 million|
|Number of Assets||17||17|
The retail and leisure portfolio is the smallest component by value accounting for 20% of our portfolio. It delivered the weakest sector performance, which was a result of ongoing challenges in this sector, adverse sentiment and weakening rental levels.
Our retail and leisure portfolio value decreased by £18.9 million or 12.1% to £137.5 million, and the annual rental income decreased by £3.2 million or 30% to £7.5 million. 39% of the decrease in annual rental income relates to Stanford House in Covent Garden which will be comprehensively refurbished this year as detailed below. The portfolio has an average weighted lease length of 9.2 years and £2.5 million of reversionary potential to £10.0 million per annum.
Occupational demand is weak, especially outside London and the South East. We have seen negative rental growth of 7.4% across the portfolio and increasing incentives. Occupancy is 77% with 74% of the void at Stanford House, 12% retail warehouse and 14% high street shops and leisure. Excluding the office element at Stanford House, occupancy is 85%.
It has been a difficult year in the retail sector. We have had some success, but we also had retail failures with six properties being affected either through a Company Voluntary Arrangement (CVA) or administration / liquidation. This has provided opportunity in some cases, as outlined below, but in others it means we have a letting void with associated costs which has meant our overall occupancy is lower than expected.
At our property in Fishergate, Preston we pre-let the ground floor to JD Sports on a new ten-year lease, subject to a break, at a rent of £0.2 million. We intend on putting the property back into repair using the dilapidations monies and already have strong interest in the first floor from another retailer.
At Angouleme Retail Park in Bury, we agreed to remove TK Maxx’s 2020 break option in return for six months rent free, securing £0.3 million per annum, 13% ahead of ERV, for a further four years. We have two available units on the park following the expiry of long leases, one of which is under offer, and we are planning a refurbishment this year to reposition the park and help re-lease the remaining unit.
Two new occupiers were secured at Kings Heath in Birmingham, achieving 100% occupancy at the property. The combined rent is £69,000 per annum, which is in line with ERV, with minimal incentives. In Carlisle we pre-let a small shop, with the new occupier moving in the day after the previous lease expired on a new ten-year lease, subject to break, 19% ahead of ERV.
A good example of our proactive asset management resulting in a positive outcome after a retail failure is Homebase, which entered into a CVA in August 2018. Homebase had proposed to reduce the passing rent by 90% if they remained in occupation at Parc Tawe in Swansea. Rather than agree to the proposed terms, we chose to serve a notice to secure vacant possession of the unit. At the same time, we negotiated the release of a restrictive covenant to allow additional food retailing on the park.
This allowed us to enter into an Agreement to Lease with one of our existing occupiers Lidl, upsizing them by 255% by taking the entire 35,500 sq ft previously occupied by Homebase. Following enabling works by Picton, Lidl will take a 20-year lease, with a break after 15 years, at an annual rent of £0.4 million, in line with ERV. The lease is subject to five yearly RPI based rent reviews capped at 2% per annum. Lidl will continue to trade from its existing unit, paying £0.1 million per annum, until the enabling works and fit out have been completed towards the end of the year.
During the year we secured vacant possession of Stanford House and will be undertaking a comprehensive refurbishment of both the retail and offices elements, the project is due to complete in December.
At Regency Wharf in Birmingham, which is currently a leisure scheme, we are exploring the option to convert the vacant accommodation to office use, where we expect to significantly increase both the income and current ERV. This project will be ongoing throughout the coming year.
The retail and leisure market is undergoing a structural change impacted by online competition, with a number of retailers struggling in this evolving market. This has resulted in oversupply in most markets, with occupiers requiring space being able to demand lower rents and higher incentives.
As demonstrated above, we have been proactive in attracting new retailers, retaining existing ones and finding opportunities through change of use.
We are also undertaking repositioning exercises at retail warehouse parks in Bury and Swansea in order to attract new occupiers to the two vacant retail warehouse units; one of these is under offer.
Looking ahead, we have seven lease events in the coming year, the overall ERV for these units is higher than the current passing rent of £0.5 million. The biggest short-term opportunity is the refurbishment and re-letting of Stanford House.
In the context of more difficult market conditions, our results for the year were positive. The total profit recorded was £31.0 million, compared to £64.2 million for 2018, but this is largely due to lower valuation movements over the year. Our EPRA earnings increased to £22.9 million from £22.6 million, and we maintained a high dividend cover. Earnings per share were 5.7 pence overall (4.3 pence on an EPRA basis), and the total return based on these results was 6.5% for the year.
Net asset value
The net assets of the Group increased to £499.4 million, which was a rise of 2.5% over the year. The chart below shows the components of this increase over the year. The EPRA net asset value rose from 90 pence to 93 pence.
|March 2018 net asset value||487.3|
|Profit on asset disposals||0.4|
|Debt prepayment fees||(3.2)|
|Purchase of shares||(0.4)|
|March 2019 net asset value||499.4|
The following table reconciles the net asset value calculated in accordance with International Financial Reporting Standards (IFRS) with that of the European Public Real Estate Association (EPRA).
|Net asset value – EPRA and IFRS||499.4||487.3||441.9|
|Fair value of debt||(24.8)||(21.1)||(24.5)|
|EPRA triple net asset value||474.6||466.2||417.4|
|Net asset value per share (pence)||93||90||82|
|EPRA net asset value per share (pence)||93||90||82|
|EPRA triple net asset value per share (pence)||88||87||77|
Total revenue from the property portfolio for the year was £47.7 million. On a like-for-like basis, rental income decreased by 0.4% compared to the previous year, on an EPRA basis. The reasons for the small decline have been discussed within the portfolio review section, but is mainly due to the timing of lease expiries and asset management surrender activity.
Administrative expenses for the year were £5.8 million, broadly in line with the £5.6 million in 2018, and include the one-off costs of REIT conversion. This year we have re-presented such operating costs of the business, previously, as an investment company, we distinguished management expenses (incurred through Picton Capital, the investment management subsidiary) and other operating costs.
As discussed below, during the year we made an early repayment of a tranche of one of our fixed rate loan facilities. As a result, interest payable has reduced this year, to £9.1 million, and there will be ongoing annual savings of around £1 million.
Realised and unrealised gains on the portfolio were £11.3 million for the year, significantly lower than the overall gains of £41.5 million reported last year. This is very much a reflection of the commercial property market, and particularly the sentiment in the retail sector, where there have been well publicised issues of retail failures.
The Company converted to a UK REIT on 1 October 2018. From that date profits from our property rental business are exempt from UK tax. For the first half of the year however Picton was still subject to UK taxation as a non-resident landlord, and we have included a tax provision of £0.5 million for that period. This gives an indication of the likely savings that the Group will benefit from now it has joined the REIT regime.
Dividends paid during the year were £18.9 million, 2% higher than the preceding year. Dividend cover for the full year was in line with last year at 122%.
The appraised value of our investment property portfolio was £685.3 million at 31 March 2019, up from £683.8 million a year previously. This year we have not made any acquisitions, but have disposed of two regional office buildings, for net proceeds of £11.3 million, realising a combined gain of £0.4 million compared to last year’s valuation. A further £1.6 million of capital expenditure was invested back into the existing portfolio. The overall revaluation gain was £10.9 million, representing a 1.8% like-for-like increase in the valuation of the portfolio.
At 31 March 2019 the portfolio comprised 49 assets, with an average lot size of £14.0 million.
Further analysis of capital expenditure, in accordance with EPRA Best Practice Recommendations, is set out in the EPRA Disclosures section.
During the year we repaid a £33.7 million tranche of our Canada Life facility, originally due for repayment in 2022. This was financed partly through proceeds from asset sales and also from drawing down under one of our lower cost revolving credit facilities. In the short-term we expect this will save over £1 million per annum in finance costs, but we have also removed a number of restrictive covenants from the facility, which has increased the flexibility we have under this loan. This refinancing included a prepayment fee of £3.2 million.
Total borrowings are now £194.7 million at 31 March 2019, with the loan to value ratio having reduced to 24.7% from 26.7%. The weighted average interest rate on our borrowings has reduced slightly to 4.0% from 4.1%, while the average loan duration is now 9.8 years.
Our other senior loan facility with Aviva reduced by the regular amortisation of £1.2 million in the year.
The Group remained fully compliant with its loan covenants throughout the year.
Our two revolving credit facilities remain in place until 2021. During the year we made a drawdown of £15.5 million so now have drawn £26 million in total, leaving £25 million undrawn. The current interest rate payable on these loans is around 2.6%.
Loan arrangement costs are capitalised and are amortised over the terms of the respective loans. At 31 March 2019, the unamortised balance of these costs across all facilities were £2.7 million.
The fair value of our borrowings at 31 March 2019 was £219.5 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:
|Fixed rate loans (£m)||168.7||203.5||204.6|
|Drawn revolving facilities (£m)||26.0||10.5||-|
|Total borrowings (£m)||194.7||214.0||204.6|
|Borrowings net of cash (£m)||169.5||182.5||170.8|
|Undrawn facilities (£m)||25.0||40.5||53.0|
|Loan to value ratio (%)||24.7||26.7||27.4|
|Weighted average interest rate (%)||4.0||4.1||4.2|
|Average duration (years)||9.8||10.3||11.7|
Cash flow and liquidity
The cash flow from our operating activities was £25.3 million this year, closely in line with the 2018 figure. Proceeds from asset sales were used to finance the net reduction in borrowings. Dividend payments of £18.9 million were made in the year. Our cash balance at the year end stood at £25.2 million.
There were no changes in share capital during the year.
The Company’s Employee Benefit Trust acquired a further 472,000 shares during the year, at a cost of £0.4 million, to satisfy the potential future vesting of awards made under the Long-term Incentive Plan, and now holds a total of 1,542,000 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.
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 on the following pages, together with mitigating controls. The matrix below illustrates the assessment of the impact and likelihood of each of the principal risks.
The UK Corporate Governance Code requires the Board to make a viability statement. This considers the Company’s current position and principal risks and uncertainties combined with an assessment of the future prospects for the Company, in order that the Board can state that the Company will be able to continue its operations over the period of their assessment. The statement is set out in the Directors’ Report.
Since the result of the referendum in June 2016 to leave the EU there has been increased economic and political uncertainty. This has been heightened in the last few months as the original leaving date of 29 March 2019 has passed and there is now an extension to 31 October 2019 in which to agree the terms of withdrawal.
We have considered in our Viability Statement the potential impact of various scenarios on the business including the impact of Brexit.
Picton has a diverse portfolio spread across the UK, with around 350 occupiers in a wide range of businesses. The cash flow arising from our occupiers underpins our business model. Although there are geographical and sectoral variations, we are continuing to see demand for our properties and are continuing to let space on average at ERV. We have limited exposure to financial services occupiers, or central London offices, both potentially adversely impacted by a disruptive Brexit. To date we have not seen a significant impact from Brexit on our operational activity.
Uncertainty, potentially arising from Brexit, is leading to lower investment volumes generally. However the value of the Picton portfolio has continued to rise consistently since the referendum result, albeit that there are significant variations between sectors. We have considered the impact of any future decline in property values. We have considerable headroom within our lending covenants, with values having to fall by on average more than 40% before these are reached.
|Risk and impact||Mitigation||Risk trend|
Economic uncertainty, arising from political events or otherwise, brings risks to the property market generally and to occupiers’ businesses. This can result in lower shareholder returns, lower asset liquidity and increased occupier failure.
|The Board considers economic conditions and market uncertainty when setting strategy and in making investment decisions.||Same|
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.
|The Board reviews the Group’s strategy and business objectives on a regular basis and considers whether any change is needed, in the light of current and forecast market conditions.||Same|
Running an inappropriate portfolio strategy, as a result of poor sector or geographical allocations, or holding obsolete assets, leading to lower shareholder returns.
|The Group maintains a diversified portfolio in order to minimise exposure to any one geographical area or market sector.||Same|
Investment decisions may be flawed as a result of incorrect assumptions, poor research or incomplete due diligence, leading to financial loss.
|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.
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.
|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.
Damage to reputation as a result of potential operational failures, such as a breach of regulations, losing key personnel, incorrect financial reports or health and safety breaches.
|The Board has a remuneration policy in place which incentivises performance and is aligned with shareholders’ interests.
The Group’s Property Manager is required to ensure compliance with current health and safety legislation, with oversight by management.
All financial reports are subject to senior management and Board review prior to release.
|7||Regulatory & legal changes
Failure to properly anticipate legal, fiscal or regulatory changes which could lead to financial loss or loss of REIT status.
|The Board and senior management receive regular updates in relevant laws and regulations.
The Group is a member of the BPF and EPRA, and management attend industry briefings.
A significant fall in property valuations or rental income could lead to a breach of financial covenants, leaving insufficient long-term funding.
|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 consider the Going Concern status of the Group bi-annually.
An adverse movement in interest rates could lead to increased costs and a greater likelihood of occupier default.
|The Group has fixed rates of interest on the majority of its long-term borrowings.
The credit quality of new and existing occupiers is continually reviewed.
Operate a geared capital structure, which magnifies returns from the portfolio. An inappropriate level of gearing relative to the property cycle could lead to lower investment returns.
|The Board regularly reviews its gearing strategy and debt maturity profile, at least annually, in the light of changing market conditions.||Same|
Viability assessment and statement
The 2016 UK Corporate Governance Code requires the Board to make a ‘viability statement’ which considers the Company’s current position and principal risks and uncertainties combined with an assessment of the future prospects for the Company, in order that the Board can state that the Company will be able to continue its operations over the period of their assessment.
The Board conducted this review over a five-year timescale. The Board considered this timescale to be the most appropriate having regard to the Group’s unexpired lease profile and the duration of its external loan facilities. The assessment has been undertaken, taking into account the principal risks and uncertainties faced by the Group which could impact its investment strategy, future performance, loan covenants and liquidity. This assessment included the potential impact of Brexit on the Group’s operations.
The major risks identified as relevant to the viability assessment were those relating to a downturn in the UK commercial property market and the resultant impact on the valuation of the property portfolio, the level of rental income receivable and the subsequent effect on cash resources and financial covenants. The Board took into account the illiquid nature of the Company’s property assets, the existence of long-term borrowings, the effects of significant falls in valuations and rental income on the ability to remain within financial covenants, maintain dividend payments and retain investors. These matters were assessed over the period to 31 March 2024, and will continue to be assessed over five-year rolling periods.
In the ordinary course of business the Board reviews a detailed financial model on a quarterly basis, including forecast market returns. This model uses prudent assumptions regarding lease expiries, breaks and incentives. For the purposes of the viability assessment of the Group, the model has been adjusted to cover a five-year period and is stress tested with a number of scenarios. These include significant falls in capital values (in line with previous market conditions), pessimistic assumptions around lease breaks and expiries, increased void periods and incentives, and increases in occupier defaults. The Directors consider that the stress testing performed was sufficiently robust that even under extreme conditions the Company remains viable.
Based on their assessment, and in the context of the Group’s business model and strategy, the Directors expect that the Group will be able to continue in operation and meet its liabilities as they fall due over the five-year period to 31 March 2024.
Statement of directors’ responsibilities
The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with International Financial Reporting Standards, as issued by the IASB, and applicable law.
Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of its profit or loss for that period.
In preparing these financial statements, the Directors are required to:
The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies (Guernsey) Law, 2008. They are responsible for such internal controls as they determine are necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error, and have a general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website, and for the preparation and dissemination of financial statements. Legislation in Guernsey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Directors’ responsibility statement in respect of the Annual Report and financial statements
We confirm that to the best of our knowledge:
We consider the annual report and accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy.
By Order of the Board
21 May 2019
Consolidated statement of comprehensive income
for the year ended 31 March 2019
|Revenue from properties||3||47,733||48,782|
|Net property income||38,300||38,447|
|Total operating expenses||(5,842)||(5,566)|
|Operating profit before movement on investments||32,458||32,881|
|Profit on disposal of investment properties||13||379||2,623|
|Investment property valuation movements||13||10,909||38,920|
|Total profit on investments||11,288||41,543|
|Debt prepayment fees||(3,245)||-|
|Total finance costs||(12,333)||(9,747)|
|Profit before tax||31,413||64,677|
|Profit and total comprehensive income for the period||30,955||64,168|
Earnings per share
All items in the above statement derive from continuing operations.
All of the profit and total comprehensive income for the year is attributable to the equity holders of the Company.
Notes 1 to 26 form part of these consolidated financial statements.
Consolidated statement of changes in equity
for the year ended 31 March 2019
|Balance as at 31 March 2017||157,449||284,476||-||441,925|
|Profit for the year||-||64,168||-||64,168|
|Purchase of shares held in trust||7||-||-||(893)||(893)|
|Balance as at 31 March 2018||157,449||330,157||(251)||487,355|
|Profit for the year||-||30,955||-||30,955|
|Purchase of shares held in trust||7||-||-||(398)||(398)|
|Balance as at 31 March 2019||157,449||342,252||(286)||499,415|
Notes 1 to 26 form part of these consolidated financial statements.
Consolidated balance sheet
As at 31 March 2019
|Total non-current assets||676,127||670,679|
|Investment properties held for sale||13||-||3,850|
|Cash and cash equivalents||15||25,168||31,510|
|Total current assets||39,477||50,633|
|Accounts payable and accruals||16||(22,400)||(21,471)|
|Loans and borrowings||17||(833)||(712)|
|Obligations under finance leases||21||(109)||(109)|
|Total current liabilities||(23,342)||(22,292)|
|Loans and borrowings||17||(191,136)||(209,952)|
|Obligations under finance leases||21||(1,711)||(1,713)|
|Total non-current liabilities||(192,847)||(211,665)|
|Net asset value per share||22||93p||90p|
These consolidated financial statements were approved by the Board of Directors on 21 May 2019 and signed on its behalf by:
21 May 2019
Notes 1 to 26 form part of these consolidated financial statements.
Consolidated statement of cash flows
for the year ended 31 March 2019
|Adjustments for non-cash items||20||(10,918)||(40,889)|
|Decrease in accounts receivable||396||267|
|Increase in accounts payable and accruals||1,532||1,286|
|Cash inflows from operating activities||25,281||25,635|
|Capital expenditure on investment properties||13||(1,559)||(3,553)|
|Acquisition of investment properties||13||-||(24,543)|
|Disposal of investment properties||11,837||10,285|
|Purchase of tangible assets||(27)||-|
|Cash inflows/(outflows) from investing activities||10,251||(17,811)|
|Debt prepayment fees||(3,245)||-|
|Purchase of shares held in trust||7||(398)||(893)|
|Cash outflows from financing activities||(41,874)||(10,197)|
|Net decrease in cash and cash equivalents||(6,342)||(2,373)|
|Cash and cash equivalents at beginning of year||31,510||33,883|
|Cash and cash equivalents at end of year||15||25,168||31,510|
Notes 1 to 26 form part of these consolidated financial statements.
Notes to the consolidated financial statements
for the year ended 31 March 2019
1. General information
Picton Property Income Limited (the “Company” and together with its subsidiaries the “Group”) was established on 15 September 2005 as a closed ended Guernsey investment company and entered the UK REIT regime on 1 October 2018. The consolidated financial statements are prepared for the year ended 31 March 2019 with comparatives for the year ended 31 March 2018.
2. Significant accounting policies
Basis of accounting
The financial statements have been prepared on a going concern basis and adopt the historical cost basis, except for the revaluation of investment properties. Historical cost is generally based on the fair value of the consideration given in exchange for the assets. The financial statements, which give a true and fair view, are prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by IASB and are in compliance with the Companies (Guernsey) Law, 2008.
The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future and continue to adopt the going concern basis in preparing the financial statements.
The financial statements are presented in pounds sterling, which is the Company’s functional currency. All financial information presented in pounds sterling has been rounded to the nearest thousand, except when otherwise indicated.
New or amended standards issued
The accounting policies adopted are consistent with those of the previous financial period, as amended to reflect the adoption of new standards, amendments and interpretations which became effective in the year as shown below.
·IFRS 15 Revenue from Contracts with Customers
·IFRS 9 Financial Instruments
·Amendments to IFRS 2: Classification and Measurement of Share-based Payment Transactions
·Amendment to IAS 40: Transfer of Investment Property
·Annual improvements to IFRSs 2014-2016 cycle – amendments to IFRS 1 and IAS 28
The adoption of these standards has had no material effect on the consolidated financial statements of the Group.
IFRS 9 Financial Instruments replaces IAS 39 Financial Instruments: Recognition and Measurement. It makes changes to classification and measurement of financial assets and introduces an “expected credit loss” model for impairment of financial assets.
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 2019 and thus have not been applied by the Group. None of these are expected to have an effect on the consolidated financial statements of the Group, except the following set out below:
There are a number of other changes to Accounting Standards effective from 1 January 2019 onwards but no material impact is expected on the Group.
Use of estimates and judgements
The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making estimates about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis.
The critical estimates and assumptions relate to the investment property valuations applied by the Group’s independent valuer and this is described in more detail in Note 13. Revisions to accounting estimates are recognised in the year in which the estimate is revised if the revision affects only that year, or in the year of the revision and future years if the revision affects both current and future years.
Critical judgements, where made, are disclosed within the relevant section of the financial statements in which such judgements have been applied. Key judgements relate to the treatment of business combinations, lease classifications, or employee benefits where different accounting policies could be applied. These are described in more detail in the accounting policy notes below, or in the relevant notes to the financial statements.
Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company at the reporting date. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect these returns through its power over the entity.
Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. These financial statements include the results of the subsidiaries disclosed in Note 12. All intra-group transactions, balances, income and expenses are eliminated on consolidation.
Fair value hierarchy
The fair value measurement for the assets and liabilities are categorised into different levels in the fair value hierarchy based on the inputs to valuation techniques used. The different levels have been defined as follows:
Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities that the Group can access at the measurement date.
Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3: unobservable inputs for the asset or liability.
The Group recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the transfer has occurred.
Freehold property held by the Group to earn income or for capital appreciation or both is classified as investment property in accordance with IAS 40 ‘Investment Property’. Property held under finance leases for similar purposes is also classified as investment property. Investment property is initially recognised at purchase cost plus directly attributable acquisition expenses and subsequently measured at fair value. The fair value of investment property is based on a valuation by an independent valuer who holds a recognised and relevant professional qualification and who has recent experience in the location and category of the investment property being valued.
The fair value of investment properties is measured based on each property’s highest and best use from a market participant’s perspective and considers the potential uses of the property that are physically possible, legally permissible and financially feasible. The Group ensures the use of suitable qualified external valuers valuing the investment properties held by the Group.
The fair value of investment property generally involves consideration of:
·Market evidence on comparable transactions for similar properties;
·The actual current market for that type of property in that type of location at the reporting date and current market expectations;
·Rental income from leases and market expectations regarding possible future lease terms;
·Hypothetical sellers and buyers, who are reasonably informed about the current market and who are motivated, but not compelled, to transact in that market on an arm’s length basis; and
·Investor expectations on matters such as future enhancement of rental income or market conditions.
Gains and losses arising from changes in fair value are included in the 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 item of investment property is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the Consolidated Statement of Comprehensive Income in the year the item is derecognised. Investment properties are not depreciated.
The loans have a first ranking mortgage over the majority of properties; see Note 17.
Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased property or, if lower, the present value of the minimum lease payments. Lease payments are apportioned between finance charges and a reduction of the lease liability to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to the Consolidated Statement of Comprehensive Income.
An operating lease is a lease other than a finance lease. Lease income is recognised in income on a straight-line basis over the lease term. Direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised as an expense over the lease term on the same basis as the lease income. The financial statements reflect the requirements of SIC 15 ‘Operating Leases – Incentives’ to the extent that they are material. Premiums received on the surrender of leases are recorded as income immediately if there are no relevant conditions attached to the surrender.
Cash and cash equivalents
Cash includes cash in hand and cash with banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash with original maturities in three months or less and that are subject to an insignificant risk of change in value.
Income and expenses
Income and expenses are included in the Consolidated Statement of Comprehensive Income on an accruals basis. All of the Group’s income and expenses are derived from continuing operations.
Revenue is recognised to the extent that it is probable that the economic benefit will flow to the Group and the revenue can be reliably measured.
Lease incentive payments are amortised on a straight-line basis over the period from the date of lease inception to the lease end. Upon receipt of a surrender premium for the early termination of a lease, the profit, net of dilapidations and non-recoverable outgoings relating to the lease concerned, is immediately reflected in revenue from properties.
Property operating costs include the costs of professional fees on letting and other non-recoverable costs.
The income charged to occupiers for property service charges and the costs associated with such service charges are shown separately in Notes 3 and 4 to reflect that, notwithstanding this money is held on behalf of occupiers, the ultimate risk for paying and recovering these costs rests with the property owner.
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 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.
The fair value of the amounts payable to employees in respect of the Deferred Bonus Plan, which are settled in cash, is recognised as an expense with a corresponding increase in liabilities, over the period that the employees become unconditionally entitled to payment. The liability is remeasured at each reporting date and at settlement date. Any changes in the fair value of the liability are recognised as staff costs in the Consolidated Statement of Comprehensive Income.
The grant date fair value of awards to employees made under the Long-term Incentive Plan is recognised as an expense, with a corresponding increase in equity, over the vesting period of the awards. The amount recognised as an expense is adjusted to reflect the number of awards for which the related non-market performance conditions are expected to be met, such that the amount ultimately recognised is based on the number of awards that meet the related non-market performance conditions at the vesting date. For share-based payment awards with market conditions, the grant date fair value of the share-based awards is measured to reflect such conditions and there is no adjustment between expected and actual outcomes.
The cost of the Company’s shares held by the Employee Benefit Trust is deducted from equity in the Group Balance Sheet. Any shares held by the Trust are not included in the calculation of earnings or net assets per share.
Dividends are recognised in the period in which they are declared.
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, as well as through the amortisation process.
Assets classified as held for sale
Any investment properties on which contracts for sale have been exchanged but which had not completed at the period end are disclosed as properties held for sale. Investment properties included in the held for sale category continue to be measured in accordance with the accounting policy for investment properties.
Other assets and liabilities
Other assets and liabilities, including trade creditors and accruals, trade and other debtors and creditors, and deferred rental income, which are not interest bearing are stated at their nominal value.
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity.
The Group elected to be treated as a UK REIT with effect from 1 October 2018. The UK REIT rules exempt the profits of the Group’s UK property rental business from UK corporation and income tax. Gains on UK properties are also exempt from tax, provided they are not held for trading. The Group is otherwise subject to UK corporation tax.
As a REIT, the Company is required to pay Property Income Distributions equal to at least 90% of the Group’s exempted net income. To remain a UK REIT there are a number of conditions to be met in respect of the principal company of the Group, the Group’s qualifying activity and its balance of business. The Group continues to meet these conditions.
Principles for the Consolidated Statement of Cash Flows
The Consolidated Statement of Cash Flows has been drawn up according to the indirect method, separating the cash flows from operating activities, investing activities and financing activities. The net result has been adjusted for amounts in the Consolidated Statement of Comprehensive Income and movements in the Consolidated Balance Sheet which have not resulted in cash income or expenditure in the relating period.
The cash amounts in the Consolidated Statement of Cash Flows include those assets that can be converted into cash without any restrictions and without any material risk of decreases in value as a result of the transaction. Dividends that have been paid are included in the cash flow from financing activities.
3. Revenue from properties
|Rents receivable (adjusted for lease incentives)||40,942||41,412|
|Service charge income||5,718||5,927|
Rents receivable includes lease incentives recognised of £0.8 million (2018: £0.2 million).
4. Property expenses
|Property operating costs||2,342||2,578|
|Property void costs||1,373||1,830|
|Recoverable service charge costs||5,718||5,927|
5. Operating segments
The Board is responsible for setting the Group’s business model and strategy. The key measure of performance used by the Board to assess the Group’s performance is the total return on the Group’s net asset value. As the total return on the Group’s net asset value is calculated based on the net asset value per share calculated under IFRS as shown at the foot of the Balance Sheet, assuming dividends are reinvested, the key performance measure is that prepared under IFRS. Therefore, no reconciliation is required between the measure of profit or loss used by the Board and that contained in the financial statements.
The Board has considered the requirements of IFRS 8 ‘Operating Segments’. The Board is of the opinion that the Group, through its subsidiary undertakings, operates in one reportable industry segment, namely real estate investment, and across one primary geographical area, namely the United Kingdom, and therefore no segmental reporting is required. The portfolio consists of 49 commercial properties, which are in the industrial, office, retail and leisure sectors.
6. Administrative expenses
|Director and staff costs||3,672||3,311|
|Other administrative expenses||2,013||2,106|
One off REIT conversion costs of £215,000 were incurred during the year ended 31 March 2019, which are included within other administrative expenses (2018: £307,000).
|Auditor’s remuneration comprises:||2019
|Audit of Group financial statements||72||65|
|Audit of subsidiaries’ financial statements||43||43|
|Audit related fees:|
|Review of half year financial statements||15||14|
|Additional controls testing||15||14|
|FCA CASS audit||-||6|
Liquidators’ fees incurred to 31 March 2019 were in connection with the members’ voluntary liquidation of Picton (UK) Listed Real Estate Limited.
7. Director and staff costs
|Wages and salaries||1,654||1,667|
|Non-executive directors’ fees||257||232|
|Social security costs||623||276|
|Other pension costs||48||50|
|Share-based payments – cash settled||727||620|
|Share-based payments – equity settled||363||466|
The emoluments of the Directors are set out in detail within the Remuneration Committee report.
Employees participate in two share-based remuneration arrangements: the Deferred Bonus Plan and the Long-term Incentive Plan (the “LTIP”).
For all employees a proportion of any discretionary annual bonus will be an award under the Deferred Bonus Plan. With the exception of executive Directors, awards are cash settled and vest after two years. The final value of awards are determined by the movement in the Company’s share price and dividends paid over the vesting period. For executive Directors awards made after 1 April 2019 are equity settled and also vest after two years. On 1 April 2018 awards of 572,389 units were made which vest on 31 March 2020 (2018: 662,149 units). The next awards will be made in June 2019 for vesting on 31 March 2021.
The table below summarises the awards made under the Deferred Bonus Plan. Employees have the option to defer the vesting date of their awards for a maximum of seven years. The units which vested at 31 March 2019, and were not deferred, were paid out subsequent to the year end at a cost of £925,000 (2018: £508,000).
at 31 March
in the year
in the year
in the year
at 31 March
in the year
in the year
in the year
at 31 March
|31 March 2016||65,198||-||-||-||65,198||-||-||(65,198)||-|
|31 March 2017||127,916||-||-||-||127,916||-||-||(127,916)||-|
|31 March 2018||725,980||-||(56,549)||(542,197)||127,234||-||-||(127,234)||-|
|31 March 2019||369,534||662,149||(80,793)||-||950,890||-||(14,331)||(936,559)||-|
|31 March 2020||-||-||-||-||-||572,389||(7,785)||-||564,604|
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 8 June 2018 awards for a maximum of 1,006,938 shares were granted to employees in respect of the three year period ending on 31 March 2021. In the previous year awards of 1,036,938 shares were made on 16 June 2017 for the period ending 31 March 2020.
The three performance metrics are:
The fair value of option grants is measured using a combination of a Monte Carlo model for the market conditions (TSR) and a Black-Scholes model for the non-market conditions (TPR and EPS). The fair value is recognised over the expected vesting period. For the awards made during this year and the previous year the main inputs and assumptions of the models, and the resulting fair values, are:
|Grant date||8 June 2018||16 June 2017|
|Share price at date of grant||90.9p||84.25p|
|Expected term||3 years||3 years|
|Risk free rate – TSR condition||0.83%||0.21%|
|Share price volatility – TSR condition||18.4%||18.3%|
|Median volatility of comparator group – TSR condition||18.1%||16.1%|
|Correlation – TSR condition||33.2%||35.0%|
|TSR performance at grant date – TSR condition||7.6%||3.3%|
|Median TSR performance of comparator group at grant date – TSR condition||3.1%||7.0%|
|Fair value – TSR condition (Monte Carlo method)||42.9p||31.98p|
|Fair value – TPR condition (Black-Scholes model)||90.9p||84.25p|
|Fair value – EPS condition (Black-Scholes model)||90.9p||84.25p|
The Trustee of the Company’s Employee Benefit Trust acquired 472,000 ordinary shares during the year for £398,000 (2018: 1,070,000 shares for £893,000).
The Group employed ten members of staff at 31 March 2019 (2018: ten). The average number of people employed by the Group for the year ended 31 March 2019 was 11 (2018: 12).
8. Interest paid
|Interest payable on loans at amortised cost||8,117||8,780|
|Interest on obligations under finance leases||114||114|
|Amortisation of finance costs||675||577|
The loan arrangement costs incurred to 31 March 2019 are £4,534,000 (2018: £5,244,000). These are amortised over the duration of the loans with £675,000 amortised in the year ended 31 March 2019 (2018: £577,000).
The charge for the year is:
|Current UK income tax||324||510|
|Income tax adjustment to provision for prior year||25||(203)|
|Current UK corporation tax||121||195|
|UK corporation tax adjustment to provision for prior year||(12)||7|
|Total tax charge||458||509|
A reconciliation of the income tax charge applicable to the results at the statutory income tax rate to the charge for the year is as follows:
|Profit before taxation||31,413||64,677|
|Expected tax charge on ordinary activities at the standard rate of taxation of 20%||6,283||12,935|
|UK REIT exemption on net income and gains||(2,315)||-|
|Revaluation gains not taxable||(2,182)||(7,784)|
|Gains on disposal not taxable||(76)||(525)|
|Income not taxable, including interest receivable||(163)||(152)|
|Expenditure not allowed for income tax purposes||985||404|
|Capital allowances and other allowable deductions||(2,291)||(4,498)|
|Losses carried forward to future years||85||163|
|Adjustment to provision for prior years||25||(203)|
|Total income tax charge||349||307|
For the year ended 31 March 2019 there was an income tax liability of £349,000 in respect of the Group (2018: £307,000) and corporation tax of £109,000 (2018: £202,000).
The Group migrated tax residence to the UK and elected to be treated as a UK Real Estate Investment Trust (REIT) with effect from 1 October 2018. 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 also require 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.
|Declared and paid:|
|Interim dividend for the period ended 31 March 2017: 0.85 pence||-||4,590|
|Interim dividend for the period ended 30 June 2017: 0.85 pence||-||4,590|
|Interim dividend for the period ended 30 September 2017: 0.85 pence||-||4,591|
|Interim dividend for the period ended 31 December 2017: 0.875 pence||-||4,716|
|Interim dividend for the period ended 31 March 2018: 0.875 pence||4,716||-|
|Interim dividend for the period ended 30 June 2018: 0.875 pence||4,716||-|
|Interim dividend for the period ended 30 September 2018: 0.875 pence||4,716||-|
|Interim dividend for the period ended 31 December 2018: 0.875 pence||4,712||-|
The interim dividend of 0.875 pence per ordinary share in respect of the period ended 31 March 2019 has not been recognised as a liability as it was declared after the year end. A dividend of £4,712,000 will be paid on 31 May 2019.
11. Earnings per share
Basic & 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:
|Net profit attributable to ordinary shareholders of the Company from continuing operations (£000)||30,955||64,168|
|Weighted average number of ordinary shares for basic profit per share||538,815,550||539,734,126|
|Weighted average number of ordinary shares for diluted profit per share||541,035,348||539,738,613|
12. Investments in subsidiaries
The Company had the following principal subsidiaries as at 31 March 2019 and 31 March 2018:
|Picton UK Real Estate (Property) Limited||Guernsey||100%|
|Picton (UK) REIT (SPV) Limited||Guernsey||100%|
|Picton (UK) Listed Real Estate||Guernsey||100%|
|Picton UK Real Estate (Property) No 2 Limited||Guernsey||100%|
|Picton (UK) REIT (SPV No 2) Limited||Guernsey||100%|
|Picton Capital Limited||England & Wales||100%|
|Picton (General Partner) No 2 Limited||Guernsey||100%|
|Picton (General Partner) No 3 Limited||Guernsey||100%|
|Picton No 2 Limited Partnership||England & Wales||100%|
|Picton No 3 Limited Partnership||England & Wales||100%|
|Picton Property No 3 Limited||Guernsey||100%|
The results of the above entities are consolidated within the Group financial statements.
Picton UK Real Estate (Property) Limited and Picton (UK) REIT (SPV) Limited own 100% of the units in Picton (UK) Listed Real Estate, a Guernsey Unit Trust (the “GPUT”). The GPUT holds a 99.9% interest in both Picton No 2 Limited Partnership and Picton No 3 Limited Partnership, the remaining balances are held by Picton (General Partner) No.2 Limited and Picton (General Partner) No.3 Limited respectively.
During the year Picton Finance Limited was wound up as a solvent liquidation.
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.
|Fair value at start of year||674,524*||615,170|
|Capital expenditure on investment properties||1,559||3,553|
|Realised gains on disposal||406||2,655|
|Realised losses on disposal||(27)||(32)|
|Unrealised gains on investment properties||35,178||49,664|
|Unrealised losses on investment properties||(24,269)||(10,744)|
|Transfer to assets classified as held for sale||-||(3,850)|
|Fair value at the end of the year||676,102||670,674|
|Historic cost at the end of the year||648,044||660,263|
*Includes assets classified as held for sale at year end.
The fair value of investment properties reconciles to the appraised value as follows:
|Valuation of assets held under finance leases||1,565||1,657|
|Lease incentives held as debtors||(10,798)||(10,933)|
|Assets classified as held for sale||-||(3,850)|
|Fair value at the end of the year||676,102||670,674|
The investment properties were valued by CBRE Limited, Chartered Surveyors, as at 31 March 2019 and 31 March 2018 on the basis of fair value in accordance with the RICS Valuation – Global Standards 2017 which incorporate the International Valuation Standards and the UK national supplement 2018. The total fees earned by CBRE Limited from the Group are less than 5% of their total UK revenue.
The fair value of the Group’s investment properties has been determined using an income capitalisation technique, whereby contracted and market rental values are capitalised with a market capitalisation rate. The resulting valuations are cross-checked against the equivalent yields and the fair market values per square foot derived from comparable market transactions on an arm’s length basis.
The Group’s investment properties are valued quarterly by independent valuers, CBRE Limited. The valuations are based on:
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 Directors will also consider where circumstances at specific investment properties, such as alternative uses and issues with occupational tenants, are appropriately reflected in the valuations. The fair value of investment properties is measured based on each property’s highest and best use from a market participant’s perspective and considers the potential uses of the property that are physically possible, legally permissible and financially feasible.
As at 31 March 2019 and 31 March 2018 all of the Group’s properties are Level 3 in the fair value hierarchy as it involves use of significant inputs. There were no transfers between levels during the year and the prior year. Level 3 inputs used in valuing the properties are those which are unobservable, as opposed to Level 1 (inputs from quoted prices) and Level 2 (observable inputs either directly, i.e. as prices, or indirectly, i.e. derived from prices).
Information on these significant unobservable inputs per sector of investment properties is disclosed as follows:
|Appraised value (£000)||235,035||312,790||137,510||245,500||281,855||156,445|
|Area (sq ft, 000s)||856||2,731||829||928||2,731||829|
|Range of unobservable inputs:|
|Gross ERV (sq ft per annum)|
|— range||£9.52 to £51.78||£3.54 to £17.70||£3.88 to £84.11||£9.52 to £52.65||£3.25 to £17.21||£5.19 to £91.14|
|— weighted average||£27.33||£8.91||£31.50||£26.96||£8.24||£32.73|
|Net initial yield|
|— range||2.48% to 8.59%||0.00% to 8.25%||-0.17% to 15.36%||2.32% to 11.46%||1.29% to 9.08%||3.01% to 19.90%|
|— weighted average||5.15%||4.78%||5.11%||5.29%||5.19%||6.32%|
|— range||5.32% to 10.70%||4.60% to 9.99%||4.63% to 12.11%||5.52% to 13.70%||4.93% to 10.12%||4.55% to 10.95%|
|— weighted average||7.01%||5.55%||6.37%||7.14%||5.94%||6.52%|
|True equivalent yield|
|— range||5.24% to 9.49%||4.63% to 9.48%||4.09% to 10.86%||5.46% to 11.71%||5.00% to 9.48%||4.37% to 10.35%|
|— weighted average||6.88%||5.59%||6.75%||7.05%||5.98%||6.60%|
An increase/decrease in ERV will increase/decrease valuations, while an increase/decrease to yield decreases/increases valuations. The table below sets out the sensitivity of the valuation to changes of 50 basis points in yield.
Impact on valuation
Impact on valuation
|Industrial||Increase of 50 basis points||Decrease of £28.7m||Decrease of £24.2m|
|Decrease of 50 basis points||Increase of £34.7m||Increase of £29.0m|
|Office||Increase of 50 basis points||Decrease of £18.7m||Decrease of £18.8m|
|Decrease of 50 basis points||Increase of £21.3m||Increase of £21.8m|
|Retail and Leisure||Increase of 50 basis points||Decrease of £12.6m||Decrease of £13.2m|
|Decrease of 50 basis points||Increase of £15.8m||Increase of £17.0m|
14. Accounts receivable
|Tenant debtors (net of provisions for bad debts)||2,594||4,011|
The estimated fair values of receivables are the discounted amount of the estimated future cash flows expected to be received and the approximate of their carrying amounts.
Amounts are considered impaired using the lifetime expected credit loss method. Movement in the balance considered to be impaired has been included in the Consolidated Statement of Comprehensive Income. As at 31 March 2019, Trade debtors of £918,000 (2018: £384,000) were considered impaired and provided for.
15. Cash and cash equivalents
|Cash at bank and in hand||24,454||30,986|
Cash at bank and in hand earns interest at floating rates based on daily bank deposit rates. Short-term deposits are made for varying periods of between one day and one month depending on the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates. The carrying amounts of these assets approximate their fair value.
16. Accounts payable and accruals
|Deferred rental income||8,381||9,104|
|Income tax liability||57||444|
17. Loans and borrowings
|Capitalised finance costs||-||(371)||(441)|
|Santander revolving credit facility||18 June 2021||11,500||10,500|
|Santander revolving credit facility||20 June 2021||14,500||-|
|Canada Life facility||-||-||33,718|
|Canada Life facility||24 July 2027||80,000||80,000|
|Aviva facility||24 July 2032||87,465||88,669|
|Capitalised finance costs||-||(2,329)||(2,935)|
The following table provides a reconciliation of the movement in loans and borrowings to cash flows arising from financing activities.
|Balance as at 1 April||210,664||200,904|
|Changes from financing cash flows|
|Proceeds from loans and borrowings||15,500||12,500|
|Repayment of loans and borrowings||(34,871)||(3,104)|
|Amortisation of financing costs||676||577|
|Balance as at 31 March||191,969||210,664|
The Group has a loan with Canada Life Limited for £80 million 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 £292.4 million (2018: £289.8 million).
On 20 July 2018 the Group repaid £33.7 million of debt under the Canada Life facility incurring an early repayment charge of £3.2 million.
Additionally, the Group has a term loan facility agreement with Aviva Commercial Finance Limited for £95.3 million, which was fully drawn on 24 July 2012. The loan is for a term of 20 years, with approximately one-third repayable over the life of the loan in accordance with a scheduled amortisation profile. The Group has repaid £1.2 million in the year (2018: £1.1 million). Interest on the loan is fixed at 4.38% over the life of the loan. The facility has a loan to value covenant of 65% and a debt service cover ratio of 1.4. The facility is secured over the Group’s properties held by Picton No 3 Limited Partnership and Picton Property No 3 Limited, valued at £230.3 million (2018: £232.4 million).
The Group has two revolving credit facilities (“RCFs”) with Santander Corporate & Commercial Banking which expire in June 2021. In total the Group has £51.0 million available under both facilities, of which £26.0 million has been drawn down at year end. Interest is payable on drawn balances at LIBOR plus margins of 175 or 190 basis points. The facilities are secured on properties held by Picton (UK) REIT (SPV No 2) Limited and Picton (UK) Listed Real Estate, valued at £133.7 million (2018: £132.7 million).
The fair value of the drawn loan facilities at 31 March 2019, estimated as the present value of future cash flows discounted at the market rate of interest at that date, was £219.5 million (2018: £235.1 million). The fair value of the secured loan facilities is classified as Level 2 under the hierarchy of fair value measurements.
There were no transfers between levels of the fair value hierarchy during the current or prior years.
The weighted average interest rate on the Group’s borrowings as at 31 March 2019 was 4.0% (2018: 4.1%).
18. Contingencies and capital commitments
The Group has entered into contracts for the refurbishment of five properties with commitments outstanding at 31 March 2019 of approximately £1.4 million (2018: £nil). No further obligations to construct or develop investment property or for repairs, maintenance or enhancements were in place as at 31 March 2019 (2018: £nil).
19. Share capital and other reserves
|Unlimited number of ordinary shares of no par value||-||-|
|Issued and fully paid:|
|540,053,660 ordinary shares of no par value|
|(31 March 2018: 540,053,660)||-||-|
Number of shares
Number of shares
|Ordinary share capital||540,053,660||540,053,660|
|Number of shares held in Employee Benefit Trust||(1,542,000)||(1,070,000)|
|Number of ordinary shares||538,511,660||538,983,660|
The fair value of awards made under the Long-term Incentive Plan is recognised in other reserves.
Subject to the solvency test contained in the Companies (Guernsey) Law, 2008 being satisfied, ordinary shareholders are entitled to all dividends declared by the Company and to all of the Company’s assets after repayment of its borrowings and ordinary creditors. The Trustee of the Company’s Employee Benefit Trust has waived its right to receive dividends on the 1,542,000 shares it holds but continues to hold the right to vote. Ordinary shareholders have the right to vote at meetings of the Company. All ordinary shares carry equal voting rights.
The Directors have authority to buy back up to 14.99% of the Company’s ordinary shares in issue, subject to the annual renewal of the authority from shareholders. Any buy back of ordinary shares will be made subject to Guernsey law, and the making and timing of any buy-backs will be at the absolute discretion of the Board.
20. Adjustment for non-cash movements in the cash flow statement
|Profit on disposal of investment properties||(379)||(2,623)|
|Movement in investment property valuation||(10,909)||(38,920)|
|Depreciation of tangible assets||7||12|
21. Obligations under leases
The Group has entered into a number of leases in relation to its investment properties. These leases are for fixed terms and subject to regular rent reviews. They contain no material provisions for contingent rents, renewal or purchase options nor any restrictions outside of the normal lease terms.
Finance lease obligations in respect of rents payable on leasehold properties were payable as follows:
|Future minimum payments due:|
|Within one year||117||117|
|In the second to fifth years inclusive||466||466|
|After five years||7,383||7,499|
|Less: finance charges allocated to future periods||(6,146)||(6,260)|
|Present value of minimum lease payments||1,820||1,822|
The present value of minimum lease payments is analysed as follows:
|Within one year||109||109|
|In the second to fifth years inclusive||392||395|
|After five years||1,319||1,318|
Operating leases where the Group is lessor
The Group leases its investment properties under operating leases.
At the reporting date, the Group’s future income based on the unexpired lessor lease length was as follows (based on annual rentals):
|Within one year||37,497||41,083|
|In the second to fifth years inclusive||113,403||125,186|
|After five years||88,902||100,087|
The Group has entered into commercial property leases on its investment property portfolio. These properties, held under operating leases, are measured under the fair value model as the properties are held to earn rentals. The majority of these non-cancellable leases have remaining lease terms of more than five years.
22. Net asset value
The net asset value per share calculation uses the number of shares in issue at the year end and excludes the actual number of shares held by the Employee Benefit Trust at the year end; see Note 19.
23. Financial instruments
The Group’s financial instruments comprise cash and cash equivalents, accounts receivable, secured loans, obligations under finance leases and accounts payable that arise from its operations. The Group does not have exposure to any derivative financial instruments. Apart from the secured loans, as disclosed in Note 17, the fair value of the financial assets and liabilities is not materially different from their carrying value in the financial statements.
Categories of financial instruments
|31 March 2019||Note||Held at fair value through profit or loss £000||Financial assets and liabilities at amortised cost
|Cash and cash equivalents||15||-||25,168||25,168|
|Loans and borrowings||17||-||191,969||191,969|
|Obligations under finance leases||21||-||1,820||1,820|
|Creditors and accruals||16||-||11,968||11,968|
|31 March 2018||Note||Held at fair value through profit or loss £000||Financial
assets and liabilities at amortised cost
|Cash and cash equivalents||15||-||31,510||31,510|
|Loans and borrowings||17||-||210,664||210,664|
|Obligations under finance leases||21||-||1,822||1,822|
|Creditors and accruals||16||-||9,680||9,680|
24. Risk management
The Group invests in commercial properties in the United Kingdom. The following describes the risks involved and the applied risk management. Senior management reports regularly both verbally and formally to the Board, and its relevant committees, to allow them to monitor and review all the risks noted below.
Capital risk management
The Group aims to manage its capital to ensure that the entities in the Group will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance. The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business.
The capital structure of the Group consists of debt, as disclosed in Note 17, cash and cash equivalents and equity attributable to equity holders of the Company, comprising issued capital, reserves and retained earnings. The Group is not subject to any external capital requirements.
The Group monitors capital on the basis of the gearing ratio. This ratio is calculated as the principal borrowings outstanding, as detailed under Note 17, divided by the gross assets. There is a limit of 65% as set out in the Articles of Association of the Company. Gross assets are calculated as non-current and current assets, as shown in the Consolidated Balance Sheet.
At the reporting date the gearing ratios were as follows:
|Gearing ratio (must not exceed 65%)||27.2%||29.7%|
The Board of Directors monitors the return on capital as well as the level of dividends to ordinary shareholders. The Group has managed its capital risk by entering into long-term loan arrangements which will enable the Group to manage its borrowings in an orderly manner over the long-term. The Group has two revolving credit facilities which provide greater flexibility in managing the level of borrowings.
The Group’s net debt to equity ratio at the reporting date was as follows:
|Less: cash and cash equivalents||(25,168)||(31,510)|
|Net debt to equity ratio at end of year||0.38||0.42|
The following tables detail the balances held at the reporting date that may be affected by credit risk:
|31 March 2019||Note||Held at
fair value through
profit or loss
|Cash and cash equivalents||15||-||25,168||25,168|
|31 March 2018||Note||Held at
fair value through
profit or loss
|Cash and cash equivalents||15||-||31,510||31,510|
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group has adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral where appropriate, as a means of mitigating the risk of financial loss from defaults. The Group’s exposure and credit ratings of its counterparties are continuously monitored and the aggregate value of transactions concluded is spread amongst approved counterparties. Credit exposure is controlled by counterparty limits that are reviewed regularly.
Trade debtors consist of a large number of occupiers, spread across diverse industries and geographical areas. Ongoing credit evaluations are performed on the financial condition of trade debtors and, where appropriate, credit guarantees are acquired. The Group does not have any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. The credit risk on liquid funds is limited because the counterparties are banks with high credit ratings assigned by international credit rating agencies. Rent collection is outsourced to managing agents who report regularly on payment performance and provide the Group with intelligence on the continuing financial viability of occupiers.
The carrying amount of financial assets recorded in the financial statements, net of any allowances for losses, represents the Group’s maximum exposure to credit risk. The Board continues to monitor the Group’s exposure to credit risk.
The Group has a panel of banks with which it makes deposits, based on credit ratings with set counterparty limits. The Group’s main cash balances are held with National Westminster Bank plc (“NatWest”), Santander plc (“Santander”), Nationwide International Limited (“Nationwide”) and The Royal Bank of Scotland plc (“RBS”). Insolvency or resolution of the bank holding cash balances may cause the Group’s recovery of cash held by them to be delayed or limited. The Group manages its risk by monitoring the credit quality of its bankers on an ongoing basis. NatWest, Santander, Nationwide and RBS are rated by all the major rating agencies. If the credit quality of these banks deteriorates, the Group would look to move the short-term deposits or cash to another bank. Procedures exist to ensure that cash balances are split between banks to minimise exposure. At 31 March 2019 and at 31 March 2018 Standard & Poor’s credit rating for Nationwide and Santander was A-1 and the Group’s remaining bankers had an A-2 rating.
There has been no change in the fair values of cash or receivables as a result of changes in credit risk in the current or prior periods, due to the actions taken to mitigate this risk, as stated above.
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 2019||Less than
|1 to 5
|Cash and cash equivalents||25,177||-||-||25,177|
|Capitalised finance costs||371||1,062||1,267||2,700|
|Obligations under finance leases||(117)||(466)||(1,237)||(1,820)|
|Fixed interest rate loans||(8,332)||(33,329)||(201,591)||(243,252)|
|Floating interest rate loans||(360)||(26,869)||-||(27,229)|
|Creditors and accruals||(11,968)||-||-||(11,968)|
|31 March 2018||Less than
|1 to 5
|Cash and cash equivalents||31,522||-||-||31,522|
|Capitalised finance costs||441||1,448||1,487||3,376|
|Obligations under finance leases||(117)||(466)||(1,239)||(1,822)|
|Fixed interest rate loans||(9,708)||(71,862)||(209,924)||(291,494)|
|Floating interest rate loans||(254)||(11,065)||-||(11,319)|
|Creditors and accruals||(9,680)||-||-||(9,680)|
The Group’s activities are primarily within the real estate market, exposing it to very specific industry risks.
The yields available from investments in real estate depend primarily on the amount of revenue earned and capital appreciation generated by the relevant properties as well as expenses incurred. If properties do not generate sufficient revenues to meet operating expenses, including debt service and capital expenditure, the Group’s revenue will be adversely affected.
Revenue from properties may be adversely affected by the general economic climate, local conditions such as oversupply of properties or a reduction in demand for properties in the market in which the Group operates, the attractiveness of the properties to occupiers, the quality of the management, competition from other available properties and increased operating costs (including real estate taxes).
In addition, the Group’s revenue would be adversely affected if a significant number of occupiers were unable to pay rent or its properties could not be rented on favourable terms. Certain significant expenditure associated with each equity investment in real estate (such as external financing costs, real estate taxes and maintenance costs) is generally not reduced when circumstances cause a reduction in revenue from properties. By diversifying in regions, sectors, risk categories and occupiers, senior management expects to lower the risk profile of the portfolio. The Board continues to oversee the profile of the portfolio to ensure risks are managed.
The valuation of the Group’s property assets is subject to changes in market conditions. Such changes are taken to the Consolidated Statement of Comprehensive Income and thus impact on the Group’s net result. A 5% increase or decrease in property values would increase or decrease the Group’s net result by £34.3 million (2018: £34.2 million).
Interest rate risk management
Interest rate risk arises on interest payable on the revolving credit facilities only. The Group’s senior debt facilities have fixed interest rates over the lives of the loans and thus the Group has limited exposure to interest rate risk on the majority of its borrowings and no sensitivity is presented.
Interest rate risk
The following table sets out the carrying amount, by maturity, of the Group’s financial assets/(liabilities).
|31 March 2019||Less than
|1 to 5
|Cash and cash equivalents||25,168||-||-||25,168|
|Secured loan facilities||-||(26,000)||-||(26,000)|
|Secured loan facilities||(1,204)||(5,377)||(160,884)||(167,465)|
|Obligations under finance leases||(109)||(392)||(1,319)||(1,820)|
|31 March 2018||Less than
|1 to 5
|Cash and cash equivalents||31,510||-||-||31,510|
|Secured loan facilities||-||(10,500)||-||(10,500)|
|Secured loan facilities||(1,153)||(38,866)||(163,521)||(203,540)|
|Obligations under finance leases||(109)||(395)||(1,318)||(1,822)|
As discussed above, all of the Group’s investments are in the UK and therefore it is exposed to macroeconomic changes in the UK economy. Furthermore, the Group places reliance on a limited number of occupiers for its rental income, with the single largest occupier accounting for 4.2% of the Group’s annual contracted rental income.
The Group has no exposure to foreign currency risk.
25. Related party transactions
The total fees earned during the year by the non-executive directors of the Company amounted to £257,000 (2018: £232,000). As at 31 March 2019 the Group owed £nil to the non-executive directors (2018: £nil). The emoluments of the executive directors are set out in the Remuneration Report.
Picton Property Income Limited has no controlling parties.
26. Events after the balance sheet date
A dividend of £4,712,000 (0.875 pence per share) was approved by the Board on 25 April 2019 and will be paid on 31 May 2019.