22 May
2019
PICTON PROPERTY INCOME LIMITED
(“Picton”, the “Company” or the “Group”)
LEI: 213800RYE59K9CKR4497
Preliminary Annual
Results
Picton (LSE: PCTN) announces its annual results for the year
ended 31 March 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 |
Property
valuation |
£685m |
£684m |
£624m |
Net assets |
£499m |
£487m |
£442m |
EPRA NAV per
Share |
93p |
90p |
82p |
Income
Statement |
Year
ended
31 March 2019 |
Year
ended
31 March 2018 |
Year
ended
31 March 2017 |
Profit after tax |
£31.0m |
£64.2m |
£42.8m |
EPRA earnings |
£22.9m |
£22.6m |
£20.6m |
Earnings per
share |
5.7p |
11.9p |
7.9p |
EPRA earnings per
share |
4.3p |
4.2p |
3.8p |
Total return |
6.5% |
14.9% |
10.4% |
Total shareholder
return |
10.1% |
4.8% |
25.6% |
Total dividend per
share |
3.5p |
3.4p |
3.3p |
Dividend cover |
122% |
122% |
115% |
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:
Tavistock
Jeremy Carey/James Verstringhe, 020 7920 3150,
james.verstringhe@tavistock.co.uk
Picton
Michael Morris, 020 7011 9980,
michael.morris@picton.co.uk
Note to Editors
Picton 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
CHAIRMAN’S STATEMENT
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.
Performance
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%.
Strategy
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.
Property portfolio
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.
REIT conversion
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
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.
Capital structure
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.
Outlook
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.
Nicholas Thompson
Chairman
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.
Outlook
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.
Michael Morris
Chief Executive
OUR MARKETPLACE
Economic backdrop
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.
PORTFOLIO REVIEW
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.
|
Acquisition
date |
Property
type |
Tenure |
Approximate
area (sq ft) |
No. of
occupiers |
Occupancy
rate (%) |
Parkbury Industrial
Estate, Radlett, Herts. |
03/2014 |
Industrial |
Freehold |
336,700 |
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) |
% |
Belkin Limited |
1,691 |
4.2 |
Public Sector |
1,665 |
4.0 |
DHL Supply Chain
Limited |
1,505 |
3.7 |
B&Q Plc |
1,243 |
3.1 |
The Random House Group
Limited |
1,190 |
2.9 |
Snorkel Europe
Limited |
1,123 |
2.8 |
Portal Chatham LLP |
883 |
2.2 |
TK Maxx |
716 |
1.8 |
XMA Limited |
675 |
1.7 |
Canterbury Christ
Church University |
610 |
1.5 |
Total |
11,301 |
27.9 |
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 |
Total |
100.0 |
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.
Income concentration
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.
Industry sector |
Picton
(%) |
Index
(%) |
Services |
28.3 |
24.9 |
Retail Trade |
16.1 |
34.0 |
Manufacturing |
13.6 |
7.0 |
Financial Services |
13.6 |
13.7 |
Transportation, Communications |
9.8 |
6.0 |
Wholesale Trade |
8.7 |
5.6 |
Construction |
3.4 |
1.0 |
Other |
3.3 |
4.7 |
Public Administration |
3.2 |
3.1 |
|
100.0 |
100.0 |
Source: MSCI IRIS Report March
2019
INDUSTRIAL PORTFOLIO REVIEW
|
2019 |
2018 |
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 |
Occupancy |
98% |
99% |
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.
Portfolio activity
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.
Our outlook
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
|
2019 |
2018 |
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 |
Occupancy |
88% |
92% |
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.
Portfolio activity
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.
Our outlook
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
|
2019 |
2018 |
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 |
Occupancy |
77% |
97% |
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%.
Portfolio activity
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.
Our outlook
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.
FINANCIAL REVIEW
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.
|
£m |
March 2018 net asset
value |
487.3 |
Income profit |
22.9 |
Valuation movement |
10.9 |
Profit on asset
disposals |
0.4 |
Debt prepayment
fees |
(3.2) |
Share-based awards |
0.4 |
Purchase of shares |
(0.4) |
Dividends paid |
(18.9) |
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).
|
2019
£m |
2018
£m |
2017
£m |
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 |
Income statement
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
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%.
Investment properties
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.
Borrowings
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:
|
2019 |
2018 |
2017 |
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.
Share capital
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.
Andrew
Dewhirst
Finance Director
MANAGING RISK
The Board recognises that there are
risks and uncertainties that could have a material impact on the
Group’s results.
Risk management provides a structured approach to the decision
making process such that the identified risks can be 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.
Brexit
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 |
|
Corporate strategy |
|
|
1 |
Macroeconomic
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 |
2 |
Property
market
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 |
|
Property |
|
|
3 |
Portfolio
strategy
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 |
4 |
Property
investment
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. |
Same |
5 |
Asset
management
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. |
Same |
|
Operational |
|
|
6 |
Operational
failure
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. |
Same |
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. |
Same |
|
Financial |
|
|
8 |
Loan
covenants
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. |
Same |
9 |
Interest
rates
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. |
Up |
10 |
Gearing
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:
- select suitable accounting policies and then apply them
consistently;
- make judgements and estimates that are reasonable, relevant and
reliable;
- state whether applicable accounting standards have been
followed, subject to any material departures disclosed and
explained in the financial statements;
- assess the Group’s ability to continue as a going concern,
disclosing, as applicable, matters related to going concern;
and
- use the going concern basis of accounting unless they either
intend to liquidate the Group or to cease operations, or have no
realistic alternative but to do so.
The Directors are responsible for keeping proper accounting
records that are sufficient to show and explain the Company’s
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure that
its financial statements comply with the Companies (Guernsey) Law,
2008. They are responsible for such internal controls as they
determine are necessary to enable the preparation of the financial
statements that are free from material misstatement, whether due to
fraud or error, and have a general responsibility for taking such
steps as are reasonably open to them to safeguard the assets of the
Company and to prevent and detect fraud and other
irregularities.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company’s website, and for the preparation and dissemination of
financial statements. Legislation in Guernsey governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
Directors’ responsibility statement in
respect of the Annual Report and financial statements
We confirm that to the best of our knowledge:
- the financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair view
of the assets, liabilities, financial position and profit or loss
of the Group; and
- the Strategic Report includes a fair review of the development
and performance of the business and the position of the Group,
together with a description of the principal risks and
uncertainties that it faces.
We consider the annual report and accounts, taken as a whole, 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
Andrew Dewhirst
21 May 2019
Consolidated statement of
comprehensive income
for the year ended 31 March 2019
|
Notes |
|
|
2019
Total
£000 |
2018
Total
£000 |
Income |
|
|
|
|
|
Revenue from
properties |
3 |
|
|
47,733 |
48,782 |
Property expenses |
4 |
|
|
(9,433) |
(10,335) |
Net property
income |
|
|
|
38,300 |
38,447 |
Expenses |
|
|
|
|
|
Administrative
expenses |
6 |
|
|
(5,842) |
(5,566) |
Total operating
expenses |
|
|
|
(5,842) |
(5,566) |
|
|
|
|
|
|
Operating profit
before movement on investments |
|
|
|
32,458 |
32,881 |
Investments |
|
|
|
|
|
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 |
|
|
|
|
|
|
Operating
profit |
|
|
|
43,746 |
74,424 |
Financing |
|
|
|
|
|
Interest received |
|
|
|
38 |
35 |
Interest paid |
8 |
|
|
(9,126) |
(9,782) |
Debt prepayment
fees |
|
|
|
(3,245) |
- |
Total finance
costs |
|
|
|
(12,333) |
(9,747) |
|
|
|
|
|
|
Profit before
tax |
|
|
|
31,413 |
64,677 |
Tax |
9 |
|
|
(458) |
(509) |
Profit and total
comprehensive income for the period |
|
|
|
30,955 |
64,168 |
Earnings per share |
|
|
|
|
|
Basic |
11 |
|
|
5.7p |
11.9p |
Diluted |
11 |
|
|
5.7p |
11.9p |
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
|
Notes |
Share
Capital
£000 |
Retained
Earnings
£000 |
Other
Reserves
£000 |
Total
£000 |
Balance as at 31
March 2017 |
|
157,449 |
284,476 |
- |
441,925 |
Profit for the
year |
|
- |
64,168 |
- |
64,168 |
Dividends paid |
10 |
- |
(18,487) |
- |
(18,487) |
Share-based awards |
7 |
- |
- |
642 |
642 |
Purchase of shares held
in trust |
7 |
- |
- |
(893) |
(893) |
|
|
|
|
|
|
Balance as at 31
March 2018 |
|
157,449 |
330,157 |
(251) |
487,355 |
Profit for the
year |
|
- |
30,955 |
- |
30,955 |
Dividends paid |
10 |
- |
(18,860) |
- |
(18,860) |
Share-based awards |
7 |
- |
- |
363 |
363 |
Purchase of shares held
in trust |
7 |
- |
- |
(398) |
(398) |
|
|
|
|
|
|
Balance as at 31
March 2019 |
|
157,449 |
342,252 |
(286) |
499,415 |
Notes 1 to 26 form part of these consolidated financial
statements.
Consolidated balance sheet
As at 31 March
2019
|
Notes |
2019
£000 |
2018
£000 |
Non-current
assets |
|
|
|
Investment
properties |
13 |
676,102 |
670,674 |
Tangible assets |
|
25 |
5 |
Total non-current
assets |
|
676,127 |
670,679 |
|
|
|
|
Current
assets |
|
|
|
Investment properties
held for sale |
13 |
- |
3,850 |
Accounts
receivable |
14 |
14,309 |
15,273 |
Cash and cash
equivalents |
15 |
25,168 |
31,510 |
Total current
assets |
|
39,477 |
50,633 |
|
|
|
|
Total
assets |
|
715,604 |
721,312 |
|
|
|
|
Current
liabilities |
|
|
|
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) |
|
|
|
|
Non-current
liabilities |
|
|
|
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) |
|
|
|
|
Total
liabilities |
|
(216,189) |
(233,957) |
|
|
|
|
Net assets |
|
499,415 |
487,355 |
|
|
|
|
Equity |
|
|
|
Share capital |
19 |
157,449 |
157,449 |
Retained earnings |
|
342,252 |
330,157 |
Other reserves |
|
(286) |
(251) |
|
|
|
|
Total
equity |
|
499,415 |
487,355 |
|
|
|
|
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:
Andrew Dewhirst
Director
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
|
Notes |
2019
£000 |
2018
£000 |
Operating
activities |
|
|
|
Operating profit |
|
43,746 |
74,424 |
Adjustments for
non-cash items |
20 |
(10,918) |
(40,889) |
Interest received |
|
38 |
35 |
Interest paid |
|
(8,668) |
(9,160) |
Tax paid |
|
(845) |
(328) |
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 |
|
|
|
|
Investing
activities |
|
|
|
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) |
|
|
|
|
Financing
activities |
|
|
|
Borrowings repaid |
17 |
(34,871) |
(3,104) |
Borrowings drawn |
17 |
15,500 |
12,500 |
Debt prepayment
fees |
|
(3,245) |
- |
Financing costs |
|
- |
(213) |
Purchase of shares held
in trust |
7 |
(398) |
(893) |
Dividends paid |
10 |
(18,860) |
(18,487) |
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:
- IFRS 16 ‘Leases’ will result in almost all leases being
recognised on the Balance Sheet, as the distinction between
operating and finance leases will be removed. Under the new
standard, an asset (the right to use the leased item) and a
financial liability to pay rentals are recognised. Lessors will
continue to classify leases as finance and operating leases. The
Group is in the process of assessing the full impact of IFRS 16.
Once IFRS 16 is adopted, the Group will be required to account for
its current operating lease in a similar way to current finance
lease accounting. The application of the new accounting model is
expected to lead to an increase in both assets and liabilities and
impact on the timing of the expense recognition in the consolidated
statement of comprehensive income after the period of the lease.
Upon the initial adoption of IFRS 16, the opening balance of the
lease liability and corresponding right of use asset will be
adjusted as at 1 April 2019.
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.
Significant estimates
The critical estimates and assumptions relate to the investment
property valuations applied by the Group’s independent valuer and
this is described in more detail in Note 13. Revisions to
accounting estimates are recognised in the year in which the
estimate is revised if the revision affects only that year, or in
the year of the revision and future years if the revision affects
both current and future years.
Significant judgements
Critical judgements, where made, are disclosed within the
relevant section of the financial statements in which such
judgements have been applied. Key judgements relate to the
treatment of business combinations, lease classifications, or
employee benefits where different accounting policies could be
applied. These are described in more detail in the accounting
policy notes below, or in the relevant notes to the financial
statements.
Basis of consolidation
The consolidated financial statements incorporate the financial
statements of the Company and entities controlled by the Company at
the reporting date. The Group controls an entity when it is exposed
to, or has rights to, variable returns from its involvement with
the entity and has the ability to affect these returns through its
power over the entity.
Subsidiaries are consolidated from the date on which control is
transferred to the Group and cease to be consolidated from the date
on which control is transferred out of the Group. These financial
statements include the results of the subsidiaries disclosed in
Note 12. All intra-group transactions, balances, income and
expenses are eliminated on consolidation.
Fair value hierarchy
The fair value measurement for the assets and liabilities are
categorised into different levels in the fair value hierarchy based
on the inputs to valuation techniques used. The different levels
have been defined as follows:
Level 1: quoted prices (unadjusted) in active markets for
identical assets or liabilities that the Group can access at the
measurement date.
Level 2: inputs other than quoted prices included within Level 1
that are observable for the asset or liability, either directly or
indirectly.
Level 3: unobservable inputs for the asset or liability.
The Group recognises transfers between levels of the fair value
hierarchy as of the end of the reporting period during which the
transfer has occurred.
Investment properties
Freehold property held by the Group to earn income or for
capital appreciation or both is classified as investment property
in accordance with IAS 40 ‘Investment Property’. Property held
under 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.
Leases
Finance leases, which transfer to the Group substantially all
the risks and benefits incidental to ownership of the leased item,
are capitalised at the inception of the lease at the fair value of
the leased property or, if lower, the present value of the minimum
lease payments. Lease payments are apportioned between finance
charges and a reduction of the lease liability to achieve a
constant rate of interest on the remaining balance of the
liability. Finance charges are charged directly to the Consolidated
Statement of Comprehensive Income.
An operating lease is a lease other than a finance lease. Lease
income is recognised in income on a straight-line basis over the
lease term. Direct costs incurred in negotiating and arranging an
operating lease are added to the carrying amount of the leased
asset and recognised as an expense over the lease term on the same
basis as the lease income. The financial statements reflect the
requirements of SIC 15 ‘Operating Leases – Incentives’ to the
extent that they are material. Premiums received on the surrender
of leases are recorded as income immediately if there are no
relevant conditions attached to the surrender.
Cash and cash equivalents
Cash includes cash in hand and cash with banks. Cash equivalents
are short-term, highly liquid investments that are readily
convertible to known amounts of cash with original maturities in
three months or less and that are subject to an insignificant risk
of change in value.
Income and expenses
Income and expenses are included in the Consolidated Statement
of Comprehensive Income on an accruals basis. All of the Group’s
income and expenses are derived from continuing operations.
Revenue is recognised to the extent that it is probable that the
economic benefit will flow to the Group and the revenue can be
reliably measured.
Lease incentive payments are amortised on a straight-line basis
over the period from the date of lease inception to the lease end.
Upon receipt of a surrender premium for the early termination of a
lease, the profit, net of dilapidations and non-recoverable
outgoings relating to the lease concerned, is immediately reflected
in revenue from properties.
Property operating costs include the costs of professional fees
on letting and other non-recoverable costs.
The income charged to occupiers for property service charges and
the costs associated with such service charges are shown separately
in Notes 3 and 4 to reflect that, notwithstanding this money is
held on behalf of occupiers, the ultimate risk for paying and
recovering these costs rests with the property owner.
Employee benefits
Defined contribution plans
A defined contribution plan is a post-employment benefit plan
under which the Company pays fixed contributions into a separate
entity and will have no legal or constructive obligation to pay
further amounts. Obligations for contributions to defined
contribution pension plans are recognised as an expense in the
Consolidated Statement of Comprehensive Income in the periods
during which services are rendered by employees.
Short-term benefits
Short-term employee benefit obligations are measured on an
undiscounted basis and are expensed as the related service is
provided. A liability is recognised for the amount expected to
be paid under short-term cash bonus or profit-sharing plans if the
Company has a present legal or constructive obligation to pay this
amount as a result of past service provided by the employee and the
obligation can be estimated reliably.
Share-based payments
The fair value of the amounts payable to employees in respect of
the Deferred Bonus 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
Dividends are recognised in the period in which they are
declared.
Accounts receivable
Accounts receivable are stated at their nominal amount as
reduced by appropriate allowances for estimated irrecoverable
amounts. The Group applies the IFRS 9 simplified approach to
measuring expected credit losses, which uses a lifetime expected
impairment provision for all applicable accounts receivable. Bad
debts are written off when identified.
Loans and borrowings
All loans and borrowings are initially recognised at cost, being
the fair value of the consideration received net of issue costs
associated with the borrowing. After initial recognition, loans and
borrowings are subsequently measured at amortised cost using the
effective interest method. Amortised cost is calculated by taking
into account any issue costs, and any discount or premium on
settlement. Gains and losses are recognised in profit or loss in
the Consolidated Statement of Comprehensive Income when the
liabilities are derecognised, as well as through the amortisation
process.
Assets classified as held for sale
Any investment properties on which contracts for sale have been
exchanged but which had not completed at the period end are
disclosed as properties held for sale. Investment properties
included in the held for sale category continue to be measured in
accordance with the accounting policy for investment
properties.
Other assets and liabilities
Other assets and liabilities, including trade creditors and
accruals, trade and other debtors and creditors, and deferred
rental income, which are not interest bearing are stated at their
nominal value.
Share capital
Ordinary shares are classified as equity. Incremental costs
directly attributable to the issue of ordinary shares are
recognised as a deduction from equity.
Taxation
The Group elected to be treated as a UK REIT with effect from
1 October 2018. The UK REIT rules
exempt the profits of the Group’s UK property rental business from
UK corporation and income tax. Gains on UK properties are also
exempt from tax, provided they are not held for trading. The Group
is otherwise subject to UK corporation tax.
As a REIT, the Company is required to pay Property Income
Distributions equal to at least 90% of the Group’s exempted net
income. To remain a UK REIT there are a number of conditions to be
met in respect of the principal company of the Group, the Group’s
qualifying activity and its balance of business. The Group
continues to meet these conditions.
Principles for the Consolidated
Statement of Cash Flows
The Consolidated Statement of Cash Flows has been drawn up
according to the indirect method, separating the cash flows from
operating activities, investing activities and financing
activities. The net result has been adjusted for amounts in the
Consolidated Statement of Comprehensive Income and movements in the
Consolidated Balance Sheet which have not resulted in cash income
or expenditure in the relating period.
The cash amounts in the Consolidated Statement of Cash Flows
include those assets that can be converted into cash without any
restrictions and without any material risk of decreases in value as
a result of the transaction. Dividends that have been paid are
included in the cash flow from financing activities.
3. Revenue from properties
|
2019
£000 |
2018
£000 |
Rents receivable
(adjusted for lease incentives) |
40,942 |
41,412 |
Surrender premiums |
682 |
200 |
Dilapidation
receipts |
269 |
1,111 |
Other income |
122 |
132 |
Service charge
income |
5,718 |
5,927 |
|
47,733 |
48,782 |
Rents receivable includes lease incentives recognised of £0.8
million (2018: £0.2 million).
4. Property expenses
|
2019
£000 |
2018
£000 |
Property operating
costs |
2,342 |
2,578 |
Property void
costs |
1,373 |
1,830 |
Recoverable service
charge costs |
5,718 |
5,927 |
|
9,433 |
10,335 |
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
|
2019
£000 |
2018
£000 |
Director and staff
costs |
3,672 |
3,311 |
Auditor’s
remuneration |
157 |
149 |
Other administrative
expenses |
2,013 |
2,106 |
|
5,842 |
5,566 |
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
£000 |
2018
£000 |
Audit fees: |
|
|
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 |
|
130 |
122 |
Non-audit
fees: |
|
|
Additional controls
testing |
15 |
14 |
FCA CASS audit |
- |
6 |
Liquidators’ fees |
7 |
7 |
Tax compliance |
5 |
- |
|
27 |
27 |
|
157 |
149 |
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
|
2019
£000 |
2018
£000 |
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 |
|
3,672 |
3,311 |
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).
Vesting Date |
Units
at 31 March
2017 |
Units
granted
in the year |
Units
cancelled
in the year |
Units
redeemed
in the year |
Units
at 31 March
2018 |
Units
granted
in the year |
Units
cancelled
in the year |
Units
redeemed
in the year |
Units
at 31 March
2019 |
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 |
|
|
|
|
|
|
|
|
|
|
|
1,288,628 |
662,149 |
(137,342) |
(542,197) |
1,271,238 |
572,389 |
(22,116) |
(1,256,907) |
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:
- Total shareholder return (TSR) of Picton Property Income
Limited, compared to a comparator group of similar listed
companies;
- Total property return (TPR) of the property assets held within
the Group, compared to the MSCI UK Quarterly Property Index;
and
- Growth in EPRA earnings per share (EPS) of the Group.
The fair value of option grants is measured using a combination
of a Monte Carlo model for the
market conditions (TSR) and a Black-Scholes model for the
non-market conditions (TPR and EPS). The fair value is recognised
over the expected vesting period. For the awards made during this
year and the previous year the main inputs and assumptions of the
models, and the resulting fair values, are:
Assumptions |
|
|
Grant date |
8 June
2018 |
16 June
2017 |
Share price at date of
grant |
90.9p |
84.25p |
Exercise price |
Nil |
Nil |
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
|
2019
£000 |
2018
£000 |
Interest payable on
loans at amortised cost |
8,117 |
8,780 |
Interest on obligations
under finance leases |
114 |
114 |
Non-utilisation
fees |
220 |
311 |
Amortisation of finance
costs |
675 |
577 |
|
9,126 |
9,782 |
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).
9. Tax
The charge for the year is:
|
2019
£000 |
2018
£000 |
Current UK income
tax |
324 |
510 |
Income tax adjustment
to provision for prior year |
25 |
(203) |
|
349 |
307 |
Current UK corporation
tax |
121 |
195 |
UK corporation tax
adjustment to provision for prior year |
(12) |
7 |
|
109 |
202 |
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:
|
2019
£000 |
2018
£000 |
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 |
Less: |
|
|
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 |
Losses utilised |
(2) |
(33) |
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.
10. Dividends
|
2019
£000 |
2018
£000 |
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 |
- |
|
18,860 |
18,487 |
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:
|
2019 |
2018 |
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:
Name |
Place of
incorporation |
Ownership
proportion |
Picton UK Real Estate
(Property) Limited |
Guernsey |
100% |
Picton (UK) REIT (SPV)
Limited |
Guernsey |
100% |
Picton (UK) Listed Real
Estate |
Guernsey |
100% |
Picton UK Real Estate
(Property) No 2 Limited |
Guernsey |
100% |
Picton (UK) REIT (SPV
No 2) Limited |
Guernsey |
100% |
Picton Capital
Limited |
England
& Wales |
100% |
Picton (General
Partner) No 2 Limited |
Guernsey |
100% |
Picton (General
Partner) No 3 Limited |
Guernsey |
100% |
Picton No 2 Limited
Partnership |
England
& Wales |
100% |
Picton No 3 Limited
Partnership |
England
& Wales |
100% |
Picton Property No 3
Limited |
Guernsey |
100% |
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.
|
2019
£000 |
2018
£000 |
Fair value at start of
year |
674,524* |
615,170 |
Acquisitions |
- |
24,543 |
Capital expenditure on
investment properties |
1,559 |
3,553 |
Disposals |
(11,269) |
(10,285) |
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:
|
2019
£000 |
2018
£000 |
Appraised value |
685,335 |
683,800 |
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:
- Information provided by the Group including rents, lease terms,
revenue and capital expenditure. Such information is derived from
the Group’s financial and property systems and is subject to the
Group’s overall control environment.
- Valuation models used by the valuers, including market related
assumptions based on their professional judgement and market
observation.
The assumptions and valuation models used by the valuers, and
supporting information, are reviewed by senior management and the
Board through the Property Valuation Committee. Members of the
Property Valuation Committee, together with senior management, meet
with the independent valuer on a quarterly basis to review the
valuations and underlying assumptions, including considering
current market trends and conditions, and changes from previous
quarters. The 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:
|
|
2019 |
|
|
2018 |
|
|
Office |
Industrial |
Retail and
Leisure |
Office |
Industrial |
Retail and
Leisure |
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% |
|
|
|
|
|
|
|
Reversionary yield |
|
|
|
|
|
|
— 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.
Sector |
Movement |
2019
Impact on valuation |
2018
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
|
2019
£000 |
2018
£000 |
Tenant debtors (net of
provisions for bad debts) |
2,594 |
4,011 |
Lease incentives |
10,798 |
10,933 |
Other debtors |
917 |
329 |
|
14,309 |
15,273 |
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
|
2019
£000 |
2018
£000 |
Cash at bank and in
hand |
24,454 |
30,986 |
Short-term
deposits |
714 |
524 |
|
25,168 |
31,510 |
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
|
2019
£000 |
2018
£000 |
Accruals |
6,596 |
5,355 |
Deferred rental
income |
8,381 |
9,104 |
VAT liability |
1,994 |
2,243 |
Income tax
liability |
57 |
444 |
Trade creditors |
230 |
236 |
Other creditors |
5,142 |
4,089 |
|
22,400 |
21,471 |
17. Loans and borrowings
|
Maturity |
2019
£000 |
2018
£000 |
Current |
|
|
|
Aviva facility |
- |
1,204 |
1,153 |
Capitalised finance
costs |
- |
(371) |
(441) |
|
|
833 |
712 |
Non-current |
|
|
|
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) |
|
|
191,136 |
209,952 |
|
|
191,969 |
210,664 |
The following table provides a reconciliation of the movement in
loans and borrowings to cash flows arising from financing
activities.
|
2019
£000 |
2018
£000 |
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) |
Financing costs |
- |
(213) |
|
(19,371) |
9,183 |
Other
changes |
|
|
Amortisation of
financing costs |
676 |
577 |
|
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
|
2019
£000 |
2018
£000 |
Authorised: |
|
|
Unlimited number of
ordinary shares of no par value |
- |
- |
Issued and fully
paid: |
|
|
540,053,660 ordinary
shares of no par value |
|
|
(31 March 2018:
540,053,660) |
- |
- |
Share premium |
157,449 |
157,449 |
|
2019
Number of shares |
2018
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
|
2019
£000 |
2018
£000 |
Profit on disposal of
investment properties |
(379) |
(2,623) |
Movement in investment
property valuation |
(10,909) |
(38,920) |
Share-based
provisions |
363 |
642 |
Depreciation of
tangible assets |
7 |
12 |
|
(10,918) |
(40,889) |
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:
|
2019
£000 |
2018
£000 |
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 |
|
7,966 |
8,082 |
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:
|
2019
£000 |
2018
£000 |
Current |
|
|
Within one year |
109 |
109 |
|
109 |
109 |
Non-current |
|
|
In the second to fifth
years inclusive |
392 |
395 |
After five years |
1,319 |
1,318 |
|
1,711 |
1,713 |
|
1,820 |
1,822 |
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):
|
2019
£000 |
2018
£000 |
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 |
|
239,802 |
266,356 |
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
£000 |
Total
£000 |
Financial
assets |
|
|
|
|
Debtors |
14 |
- |
3,511 |
3,511 |
Cash and cash
equivalents |
15 |
- |
25,168 |
25,168 |
|
|
- |
28,679 |
28,679 |
Financial
liabilities |
|
|
|
|
Loans and
borrowings |
17 |
- |
191,969 |
191,969 |
Obligations under
finance leases |
21 |
- |
1,820 |
1,820 |
Creditors and
accruals |
16 |
- |
11,968 |
11,968 |
|
|
- |
205,757 |
205,757 |
31 March 2018 |
Note |
Held at fair value
through profit or loss £000 |
Financial
assets and liabilities at amortised cost
£000 |
Total
£000 |
Financial
assets |
|
|
|
|
Debtors |
14 |
- |
4,340 |
4,340 |
Cash and cash
equivalents |
15 |
- |
31,510 |
31,510 |
|
|
- |
35,850 |
35,850 |
Financial
liabilities |
|
|
|
|
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 |
|
|
- |
222,166 |
222,166 |
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:
|
2019
£000 |
2018
£000 |
Total borrowings |
194,669 |
214,040 |
Gross assets |
715,604 |
721,312 |
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:
|
2019
£000 |
2018
£000 |
Total liabilities |
216,189 |
233,957 |
Less: cash and cash
equivalents |
(25,168) |
(31,510) |
Net debt |
191,021 |
202,447 |
Total
equity |
499,415 |
487,355 |
Net debt to equity
ratio at end of year |
0.38 |
0.42 |
Credit risk
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
£000 |
Financial
assets and
liabilities at
amortised cost
£000 |
Total
£000 |
Financial
assets |
|
|
|
|
Tenant debtors |
14 |
- |
2,594 |
2,594 |
Cash and cash
equivalents |
15 |
- |
25,168 |
25,168 |
|
|
- |
27,762 |
27,762 |
31 March 2018 |
Note |
Held at
fair value through
profit or loss
£000 |
Financial
assets and
liabilities at
amortised cost
£000 |
Total
£000 |
Financial
assets |
|
|
|
|
Tenant debtors |
14 |
- |
4,011 |
4,011 |
Cash and cash
equivalents |
15 |
- |
31,510 |
31,510 |
|
|
- |
35,521 |
35,521 |
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.
Liquidity risk
Ultimate responsibility for liquidity risk management rests with
the Board, which has built an appropriate liquidity risk management
framework for the management of the Group’s short, medium and
long-term funding and liquidity management requirements. The
Group’s liquidity risk is managed on an ongoing basis by senior
management and monitored on a quarterly basis by the Board by
maintaining adequate reserves and loan facilities, continuously
monitoring forecasts and actual cash flows and matching the
maturity profiles of financial assets and liabilities for a period
of at least 12 months.
The table below has been drawn up based on the undiscounted
contractual maturities of the financial assets/(liabilities),
including interest that will accrue to maturity.
31 March 2019 |
Less than
1 year
£000 |
1 to 5
Years
£000 |
More than
5 years
£000 |
Total
£000 |
Cash and cash equivalents |
25,177 |
- |
- |
25,177 |
Debtors |
3,511 |
- |
- |
3,511 |
Capitalised finance costs |
371 |
1,062 |
1,267 |
2,700 |
Obligations under 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) |
|
8,282 |
(59,602) |
(201,561) |
(252,881) |
31 March 2018 |
Less than
1 year
£000 |
1 to 5
Years
£000 |
More than
5 years
£000 |
Total
£000 |
Cash and cash
equivalents |
31,522 |
- |
- |
31,522 |
Debtors |
4,340 |
- |
- |
4,340 |
Capitalised finance
costs |
441 |
1,448 |
1,487 |
3,376 |
Obligations under
finance leases |
(117) |
(466) |
(1,239) |
(1,822) |
Fixed interest rate
loans |
(9,708) |
(71,862) |
(209,924) |
(291,494) |
Floating interest rate
loans |
(254) |
(11,065) |
- |
(11,319) |
Creditors and
accruals |
(9,680) |
- |
- |
(9,680) |
|
16,544 |
(81,945) |
(209,676) |
(275,077) |
Market risk
The Group’s activities are primarily within the real estate
market, exposing it to very specific industry risks.
The yields available from investments in real estate depend
primarily on the amount of revenue earned and capital appreciation
generated by the relevant properties as well as expenses incurred.
If properties do not generate sufficient revenues to meet operating
expenses, including debt service and capital expenditure, the
Group’s revenue will be adversely affected.
Revenue from properties may be adversely affected by the general
economic climate, local conditions such as oversupply of properties
or a reduction in demand for properties in the market in which the
Group operates, the attractiveness of the properties to occupiers,
the quality of the management, competition from other available
properties and increased operating costs (including real estate
taxes).
In addition, the Group’s revenue would be adversely affected if
a significant number of occupiers were unable to pay rent or its
properties could not be rented on favourable terms. Certain
significant expenditure associated with each equity investment in
real estate (such as external financing costs, real estate taxes
and maintenance costs) 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 year
£000 |
1 to 5
Years
£000 |
More than
5 years
£000 |
Total
£000 |
Floating |
|
|
|
|
Cash and cash
equivalents |
25,168 |
- |
- |
25,168 |
Secured loan
facilities |
- |
(26,000) |
- |
(26,000) |
Fixed |
|
|
|
|
Secured loan
facilities |
(1,204) |
(5,377) |
(160,884) |
(167,465) |
Obligations under
finance leases |
(109) |
(392) |
(1,319) |
(1,820) |
|
23,855 |
(31,769) |
(162,203) |
(170,117) |
31 March 2018 |
Less than
1 year
£000 |
1 to 5
Years
£000 |
More than
5 years
£000 |
Total
£000 |
Floating |
|
|
|
|
Cash and cash
equivalents |
31,510 |
- |
- |
31,510 |
Secured loan
facilities |
- |
(10,500) |
- |
(10,500) |
Fixed |
|
|
|
|
Secured loan
facilities |
(1,153) |
(38,866) |
(163,521) |
(203,540) |
Obligations under
finance leases |
(109) |
(395) |
(1,318) |
(1,822) |
|
30,248 |
(49,761) |
(164,839) |
(184,352) |
Concentration risk
As discussed above, all of the Group’s investments are in the UK
and therefore it is exposed to macroeconomic changes in the UK
economy. Furthermore, the Group places reliance on a limited number
of occupiers for its rental income, with the single largest
occupier accounting for 4.2% of the Group’s annual contracted
rental income.
Currency risk
The Group has no exposure to foreign currency risk.
25. Related party transactions
The total fees earned during the year by the non-executive
directors of the Company amounted to £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.
END