TIDMPCTN
23 June 2020
PICTON PROPERTY INCOME LIMITED
("Picton", the "Company" or the "Group")
LEI: 213800RYE59K9CKR4497
Preliminary Annual Results
Picton announces its annual results for the year ending 31 March 2020.
Financial highlights
* Profit after tax of GBP22.5 million
* Net assets of GBP509 million, or 93p per share
* Total return of 4.5%
* Earnings per share of 4.1p
* Dividend cover of 105%
Strengthened balance sheet
* 14% reduction in total debt outstanding to GBP167.5 million
* Loan to value ratio reduced to 22%
* Raised GBP7 million of non-dilutive equity
* New GBP50 million revolving credit facility completed post year end
* Further tax savings as result of REIT regime
Outperforming property portfolio
* Total property return of 5.3%, outperforming MSCI UK Quarterly Property
Index of -0.5%
* Portfolio top quartile outperformance against MSCI over one, three, five
and ten years
* Like-for-like valuation increase of 1.4%
* Like-for-like rental income increase of 1.2%
* Like-for-like estimated rental value increase of 1.3%
* Occupancy at 89%
* 104 asset management transactions completed including:
* 20 rent reviews, 10% ahead of ERV
* 31 lease renewals or regears, 12% ahead of ERV
* 35 lettings or agreements to lease, 2% ahead of ERV
* Two asset disposals for GBP34.1 million, 15% ahead of March 2019 valuations
* GBP9 million invested into refurbishment projects
Responsible stewardship
* Embedded sustainability into corporate strategy, completing materiality
assessment review
* Improved portfolio EPC ratings
* Incorporated energy efficiency measures into building refurbishments
* Further developed occupier and employee engagement programmes
Balance Sheet 31 March 31 March 31 March
2020 2019 2018
Property valuation GBP665m GBP685m GBP684m
Net assets GBP509m GBP499m GBP487m
EPRA NAV per share 93p 93p 90p
Income Statement Year ended Year ended Year ended
31 March 31 March 31 March
2020 2019 2018
Profit after tax GBP22.5m GBP31.0m GBP64.2m
EPRA earnings GBP19.9m GBP22.9m GBP22.6m
Earnings per share 4.1p 5.7p 11.9p
EPRA earnings per share 3.7p 4.3p 4.2p
Total return 4.5% 6.5% 14.9%
Total shareholder return 3.6% 10.1% 4.8%
Total dividend per share 3.5p 3.5p 3.4p
Dividend cover 105% 122% 122%
Post year end and Covid-19 update
91% of March 2020 rent has been collected or is subject to agreed payment
plans, with less than 1% currently subject to write off. We are continuing to
work with our occupiers to find appropriate solutions for the balance
outstanding as the lockdown starts to ease.
Post year end, we have concluded two new lettings in line with the March 2020
ERV; four lease extensions 13% above the March 2020 ERV; and two rent reviews
22% above the March 2020 ERV. Together these transactions add GBP0.3 million to
the annualised rent roll.
In terms of pipeline, a further six lettings (including four relocations), for
a combined annual rent of GBP0.5 million, and seven lease extensions, for a
combined annual rent of GBP1 million, are agreed in principle and subject to
legal documentation.
Picton Chairman, Nicholas Thompson, commented:
"Despite the challenges posed by Brexit and latterly the Covid-19 pandemic,
these are another solid set of results from Picton, showing an increase in net
asset value and upper quartile performance against the MSCI UK Quarterly
Property Index. As well as managing the portfolio, we have also focused this
year on sustainability, embedding this into our corporate strategy. Looking
ahead, we believe the business and the portfolio is well-positioned with low
gearing, a covered dividend and access to GBP50 million through our new revolving
credit facility."
Michael Morris, Chief Executive of Picton, commented:
"This year we have invested into the portfolio, upgrading assets and have
either completed or are well progressed on several important asset management
projects that will enable us to improve occupancy and rental income across the
portfolio. As lockdown restrictions are eased and the investment market reopens
we will also be focused on future opportunities. In the meantime, we will
continue to work in a collaborative way with our occupiers to best manage
current market conditions."
This announcement contains inside information.
For further information:
Tavistock
Jeremy Carey/James Verstringhe, 020 7920 3150,
james.verstringhe@tavistock.co.uk
Picton
Michael Morris, 020 7011 9980, michael.morris@picton.co.uk
Note to Editors
Picton, established in 2005, is a UK REIT. It owns and actively manages a GBP665
million diversified UK commercial property portfolio, invested across 47 assets
and with around 350 occupiers (as at 31 March 2020). Through an occupier
focused, opportunity led approach to asset management, Picton aims to be one of
the consistently best performing diversified UK focused property companies
listed on the main market of the London Stock Exchange.
For more information please visit: www.picton.co.uk
Chairman's Statement
I am pleased to report another successful year, delivering a profit after tax
of GBP23 million, despite the uncertain political and economic backdrop created
by Brexit and the effects of the Covid-19 pandemic.
Further to the actions taken last year, we are in a strong position with low
gearing of 22%, a healthy balance sheet and over 80% of the portfolio invested
in the industrial and office sectors which have been less impacted by the
lockdown.
Throughout the year we have been operating in a UK property market
characterised by fewer investment transactions and an occupational market where
activity has slowed. Many companies were already in 'wait and see' mode
awaiting an outcome on Brexit, and have now moved into temporary lockdown as a
result of Covid-19, although Government support has helped mitigate a very
difficult situation.
Covid-19 impact and response
The defensive positioning of the Company over the last 12 months has meant that
we are in a relatively strong position and able to withstand the unprecedented
shock of the Covid-19 pandemic. We have the lowest loan to value ratio since
the inception of the business, as well as fully undrawn loan facilities
totalling GBP50 million.
Our short-term targets are focused around reducing the impact on our business
and working with our occupiers to get through this difficult situation. We
recognise both the short and longer-term effects on the business and the
importance of adapting our strategy to reflect the changing habits and needs of
our occupiers. We have achieved good rent collection figures compared to the
market and have been working with occupiers as required to help them through
this crisis. Recognising the two components of property returns are not only
income but capital performance, we believe this is also the best approach to
achieving long-term value for shareholders.
As the lockdown starts to gradually ease, our attention is turning to the
reoccupation of our buildings, the restarting of refurbishment projects and
leasing space, ensuring all of these activities are managed safely.
Performance
The property portfolio has again delivered upper quartile performance against
the MSCI UK Quarterly Property Index over the year. Likewise, our shareholder
total return for the period was in the upper quartile range compared to our
peers.
Our total return was 4.5% over the year. Whilst this is relatively modest for
Picton, it compares favourably to the negative market return, as measured by
MSCI.
EPRA earnings were lower for the year, which is in part a reflection of the
operating environment that has hindered progress with our pipeline of lettings
and refurbishments. Equally, debt reduction through asset sales to protect the
longer-term income profile has also had a short-term impact on earnings.
We are cognisant of the discount to net asset value that has emerged since the
year end and believe that there is a clear disconnect between the performance
of the Group and the share price. A focus of the Board will be to ensure that
we reduce this discount over the coming year.
Purpose and strategy
During the year, the Board has reviewed the purpose and strategy of the Group
to ensure Picton, as a UK REIT, continues to deliver attractive income and
capital returns to its shareholders over the long-term. As a result we have
redefined our purpose as:
"Through our occupier focused, opportunity led approach, we aim to be one of
the consistently best performing diversified UK REITs. To us this means being a
responsible owner of commercial real estate, helping our occupiers succeed and
being valued by all our stakeholders."
We have in place three distinct strategic pillars: Portfolio Performance,
Operational Excellence and Acting Responsibly. These will ensure we are able to
deliver on our purpose.
I think it is also important to highlight the progress we have been making on
sustainability and we have this year formally embedded this into our corporate
strategy.
Property portfolio
The outperformance of our property portfolio was driven by several factors. It
is well positioned with over 80% in the better performing industrial and office
sectors. The best performing subsector according to MSCI was South East
industrial, which is where over 35% of our portfolio is invested.
Key themes during the year were reinvestment into the portfolio and upgrading
of assets. This activity has delivered letting successes and retained occupiers
across the portfolio. We have achieved considerable success working with
existing occupiers to extend income. During the year we saw a significant
number of transactions aimed at mitigating income risk due to materialise in
2020/21. This included income with four of our largest occupiers.
We made two disposals at a healthy premium to the March 2019 valuation, which
enabled us to capture upside that had been created through asset management.
There were no acquisitions during the year.
While we have grown like-for-like passing rent over the period, we would have
liked to make further progress and have two key voids to fill: one in Rugby,
where the refurbishment completed in February, and another at Stanford Building
in Covent Garden, where the refurbishment has been delayed due to Government
lockdown restrictions. These, along with other vacancies, provide scope for us
to increase occupancy and income going forwards.
Capital structure
Our strategic approach in recent years has meant that we have entered the
Covid-19 crisis in a position of strength.
We further reduced our loan to value ratio over the course of the year through
a combination of asset sales, debt repayment and a small non-dilutive equity
raise last June.
Since the year end, we have completed a new single revolving credit facility
for an initial three-year term, replacing two existing facilities that were due
to expire in 2021. This gives the Company access to up to GBP50 million of
undrawn facilities, providing us with a lower cost of debt and even greater
headroom and flexibility.
Dividends
We are acutely aware that the provision of income is important to investors, so
our recent decision to reduce the dividend, even if temporary, was not taken
lightly. While Picton is in a much better place than most of its peers, we are
not immune to the impact that Covid-19 is having on our occupiers.
The additional flexibility that this extra headroom provides will enable us to
support our occupiers where appropriate, and will help us to protect as far as
possible both income and capital over the longer-term. This was a prudent
decision taken in the long-term interest of all our stakeholders.
Governance and Board composition
I had expected to write this report as Chairman for the last time as I was due
to retire from the Board in June of this year. Covid-19 has created all sorts
of unforeseen circumstances and my proposed successor, Nicholas Wiles, has had
to step down from the Board following his recent and unexpected appointment as
Chief Executive at PayPoint Plc, having previously been Chairman. We have
recommenced the process to find a suitable successor, but it is vitally
important in these times that continuity is provided, so at the request of the
Board I have agreed and confirmed my commitment to remain in position until a
new Chair is in place.
We have also started the process to appoint a successor for Roger Lewis,
currently Chair of the Property Valuation Committee, and we hope to be able to
make a further announcement in that regard shortly.
Outlook
Whilst our focus remains very much around short-term issues and mitigating the
impact of Covid-19, we recognise that we must also be thinking strategically
about the changing long-term trends and demand for commercial property. We
think these recent events have accelerated embedded trends in several areas,
including online retail, flexible working, digital and technological disruption
to name but a few. In addition, a growing sense of environmental impact and the
need for change has been self-evident in lockdown. We had already been
considering disruptive trends and whilst we believe the portfolio is well
positioned, this situation is evolving and continues to be kept under constant
review. I believe our purpose, strategy and business model ensure we are well
placed to respond to both the challenges and opportunities that lie ahead.
Nicholas Thompson
Chairman
Our Marketplace
Economic backdrop
For much of the year Brexit weighed heavily on the UK economy.
The lack of clarity surrounding the nature and timing of the UK's exit from the
European Union was responsible for widespread political and economic
uncertainty. Weaker productivity growth came as a result of reduced business
investment and the redirection of resources to prepare for possible Brexit
outcomes.
Despite Brexit, economic indicators remained reasonably robust. In 2019 Gross
Domestic Product (GDP) grew by 1.4%. To put this into an international context,
the G7 Major Advanced Economies had an average GDP growth of 1.6% per annum for
the group, with the UK in third place behind the USA and Canada.
For the three months leading up to March 2020, the UK's unemployment rate was
at a near record low of 3.9%, and annual growth in average weekly earnings was
2.4%. In real terms, annual pay growth has been positive since February 2018.
The 12-month Consumer Price Index (CPI) was 1.3% in December 2019, rising to
1.5% in March 2020.
Today, the Covid-19 global pandemic has changed priorities and the economic
outlook dramatically. Despite the UK easing the lockdown, social distancing
will change habits for some months to come, and uncertainty and volatility will
continue to impact the economy with potentially long-lasting consequences.
Recent data shows the dramatic impact the lockdown is having on the UK economy,
with GDP recording its weakest ever monthly decline at -20.4% in April.
Although the UK will be in recession in the second quarter of 2020 as the
lockdown eases, the magnitude of the economic impact and speed of recovery are
not easily gauged. The Office for Budget Responsibility has forecast an annual
decline of 12.8% for 2020, with unemployment rising from 4.0% to 7.3% in the
final three months of the year.
In response to the pandemic, the Bank of England dropped the bank rate twice in
March, from 0.75% to 0.25% and then again to 0.1%. The extent to which these
low interest rates can support consumer spending and jobs in the coming months
is yet to be determined.
UK property market
According to the MSCI UK Quarterly Property Index, commercial property
delivered a total return of -0.5% for the year ended March 2020. The negative
total return is attributable to the downturn experienced in the final quarter
ending March 2020. Until then, quarterly total returns were positive.
The reduction relative to last year was driven by capital value falls of -4.8%
and an income return of 4.5%. Capital growth was negative quarter-on-quarter
but worsened considerably in the three months to March 2020. By comparison, for
the year to March 2019, capital growth was 0.1% and the income return was 4.4%.
Industrial was the top performing sector for the year to March 2020, showing
good signs of rental and capital growth. The industrial sector 12-month total
return was 5.7%, comprising 1.3% capital growth and 4.3% income return.
Industrial ERV growth for the period was 2.7%, with a range of 1.7% to 4.2%
within subsectors. Capital growth ranged from -0.5% to 4.2% within subsectors.
Equivalent yields for industrial property now stand at 5.3%.
The office sector produced a total return of 3.3% for the year to March 2020,
comprising -0.5% capital growth and 3.8% income return. Whilst capital values
showed a decline in the final quarter, for the nine months to December 2019
MSCI capital growth for All Offices was 0.4%. For the year to March 2020,
central London and the South East office markets were the only subsectors to
produce positive capital growth. All Office annual rental growth was 1.4%,
ranging from 0.5% to 2.3% within subsectors. The range of capital growth by
subsector was from -3.2% to 1.8%. Equivalent yields for office property now
stand at 5.6%.
It was a very difficult year for the retail sector, with challenging trading
conditions leading to a high number of retail failures. The situation has been
significantly impacted by the Covid-19 lockdown starting in March 2020. The
retail sector produced a total return of -9.8% for the year to March 2020. This
comprised capital growth of -14.5% and income return of 5.4%. Rental values
fell -5.7% over the period and were negative across all subsectors, ranging
from -8.2% to -1.7%. Retail subsector capital growth ranged from -22.6% to
-1.0%. Equivalent yields for retail property now stand at 6.4%.
The impact of the Covid-19 pandemic is not fully reflected in the above
numbers. The MSCI UK Monthly Property Index showed for the two-month April -
May 2020 period, that overall capital values for All Property have declined
-2.9% and ERVs are down -0.6%.
For the same period, capital values in the industrial sector saw a decline of
-1.6% and ERVs grew by 0.1%. In the office sector capital values declined -2.1%
and ERVs -0.1%. The retail sector is the worst affected with capital values
showing a decline of -5.0% and ERVs down -2.0%.
According to Property Data, the total investment volume for the year to March
2020 was GBP56.5 billion, an 8.3% decrease from the year to March 2019. The
volume of investment by overseas investors in the year to March 2020 was GBP30.5
billion, accounting for 53.9% of all transactions. Illustrating the liquidity
issues within the retail sector, it had investment transactions of just GBP5.0
billion, accounting for only 8.9% of all transactions.
During the Covid-19 lockdown it has been extremely difficult to buy or sell
property and the impact on investment volumes and pricing is yet to be fully
realised. Despite lowering investment returns available elsewhere, the risk
premium attached to property looks set to increase, reflecting greater income
risk in the short-term.
Chief Executive's Review
Alongside running the business in these extraordinary market conditions, this
year we have also focused on reviewing our strategy to ensure it reflects
emerging trends.
The three key pillars of our strategy are Portfolio Performance, Operational
Excellence and Acting Responsibly. These do not dramatically change the
direction of the business, but better define our areas of focus through the
more detailed priorities and ensure we are best placed to deliver on our
purpose.
The impact of Covid-19 has in the short-term led to an almost complete shutdown
in both the commercial leasing and investment markets. This makes it harder
than usual for valuers to provide a valuation or estimates of market price when
there is no market itself.
This uncertainty has led to the suspension of open-ended property funds, and
significant volatility within listed property company shares. There is
currently a clear arbitrage between pricing listed and unlisted property
vehicles. We think there will be renewed selling pressure from these open-ended
structures when they reopen, which may in itself create opportunistic buying
opportunities for those that are well capitalised.
Looking back, the primary concern last year was about the impact of Brexit on
trade and occupational demand. The uncertainty created by the political process
led many companies to delay occupancy decisions and whilst these risks have not
yet gone away, in January we were starting to see positive signals and an
increase in occupational and investment demand following the General Election
result and the certainty that provided.
Last year we made no acquisitions and where we made disposals we used the
proceeds to repay debt and reduce our gearing. We are well positioned, with a
high exposure to industrial, warehouse and logistics, alongside the regional
office market. It is likely, however, that any prolonged lockdown will change
habits and occupational requirements. As the impact becomes clearer we will
have to ensure our portfolio approach remains relevant to maintain our track
record of outperformance.
Covid-19 response
We continue to operate effectively and all of our employees have been working
remotely since mid-March. We have not needed to furlough any members of our
team or access any form of Government support. The health and safety of our
employees, our occupiers and service providers is paramount and our actions to
date have been effective in ensuring this. This shutdown has affected our
occupiers to varying degrees, but it is encouraging to see buildings being
re-occupied, albeit in line with social distancing measures, and we are working
to establish proper protocols as the lockdown is gradually eased. Central
London, with its reliance on public transport, would appear less ready to
return to work than other parts of the UK, but a safe and steady approach is
sensible under the circumstances and this matches the feedback we are receiving
from our occupiers.
Whilst the March rent collection number stands at 82%, which is lower than last
year, we recognise that there will be a short-term impact as a result of the
lockdown. We think it is appropriate to look at individual circumstances and be
creative to protect value and also provide support to occupiers as required. We
do however have to strike the right balance between occupier and shareholder,
recognising these are difficult circumstances for all. We are fortunate to have
already established good relationships with our occupiers well ahead of this
crisis, so we have a good understanding of their business needs. We will look
at circumstances on a case-by-case basis and prioritise needs across the
portfolio. Equally, we need to find creative solutions to this problem and by
offering short-term cash flow assistance we may well be able to protect or
enhance capital values, by virtue of longer lease commitments, stepped rents or
agreeing future rent increases. The recently announced dividend reduction will
enable us to deliver the best outcomes in this regard.
Portfolio Performance
We have again continued to outperform the MSCI UK Quarterly Property Index. Our
track record now means we have outperformed that Index since inception and over
the last one, three, five and ten years. Recognising the diversified nature of
the portfolio, where there will always be outperforming and underperforming
elements, our positioning against the retail and leisure sector in favour of
industrial and regional offices has been advantageous for some time.
We have made significant progress in enhancing our assets this year. Our
refurbishment programme totalled GBP9 million, which is a substantial increase on
preceding years. We have also had considerable success working with our
occupiers, enabling them to have space that meets their needs. We have
undertaken some key transactions, extending income, de-risking our cash flow,
and these are detailed in the subsequent case studies. Although we have grown
the passing rent on a like-for-like basis, the strategy to keep gearing low
does have an impact on overall income, and with debt costs generally lower than
property yields, there is still a trade-off between capital and income returns.
It has been frustrating that we have not grown occupancy over the year, which
currently stands at 89%. Ultimately these vacancies provide a significant
element of the future income upside potential.
Against a difficult backdrop, the leasing markets have not been easy and a
number of refurbishment projects took longer to complete and consequently
delayed letting prospects. We also sold income producing assets to de-risk the
balance sheet which has had a negative impact on income and occupancy, but
equally have protected our capital position and crystallised gains.
Operational Excellence
We have undertaken and implemented several measures aimed at increasing the
efficiency within the business. During the year we introduced an asset
management system, Coyote, to better manage our assets, as well as a new IT
system. Both systems are working well as we continue to work remotely.
We have recruited a Head of Occupier Services to strengthen our property
management service delivery, a further commitment to our occupier focused
approach. We continue to have an agile and flexible business and the speed with
which we were able to adapt to remote working is testament to this.
From an income perspective our EPRA earnings are lower, reflecting activity
referred to in the Portfolio Performance section above. We have reduced our
gearing over the year, concerned about risks associated with Brexit, but this
has proved timely recognising the adverse impact of Covid-19.
Our net asset growth has been more muted than in previous years, but this is
not unexpected recognising market conditions. We believe our assets, our team
and our strategy will continue to drive our success. Growth, be that organic or
through acquisition, will be considered so long as it creates value for
shareholders.
Acting Responsibly
We have made significant progress strengthening relationships with occupiers
this year and this is borne out by the portfolio activity and projects we have
undertaken.
The work we have done this year to promote and deliver our Picton Promise -
focused on Action, Community, Technology, Support and Sustainability - has many
overlapping features and we believe our occupiers, and indeed future occupiers,
will want to work and engage with a landlord that shares similar values on not
only reducing emissions but a broader array of sustainability issues.
We provide regular shareholder updates and through Edison provide regular
updates and video interviews. Through our brokers JP Morgan, Stifel and
specifically in the regional wealth management community with Kepler, we have
regular engagement with both existing and prospective shareholders.
Whilst sustainability has been a focus of ours for many years, the introduction
of a Responsibility Committee in 2018 further integrated this within our
business model and sustainability now forms part of our corporate strategy. We
have engaged with occupiers and investors this year to review and better
understand material issues in order to progress our sustainability initiatives.
We were awarded EPRA Gold for our separate Sustainability Report last year and
we are part of GRESB.
We have maintained our company values, positive working culture and alignment
of the team throughout the year. We specifically undertook an employee survey
last year and the results of this were fed back to the Board via our
Non-Executive Director responsible for employee engagement.
Outlook
Recognising our newly defined purpose and that property returns are driven by
both income and capital, our focus is currently two-fold. In the short-term we
need to work through lockdown and help our occupiers get their businesses back
up and running. Workplace protocols, lease restructurings and financial
assistance are all aspects that will protect value for shareholders.
We are also focused on the future and how this short-term disruption may well
change future occupational requirements and consequently create opportunities.
We need to own assets where there is continued occupational demand, enabling a
growing income profile, and in turn capital appreciation.
There is significant embedded upside in the portfolio income profile from the
current occupancy level. Once markets reopen, finding occupiers for this vacant
space is an absolute priority.
Our strategy, which offers a diverse approach and allows us the flexibility to
adjust the portfolio to better performing sectors, ensures we are not
constrained to a single sector strategy, with limited ways to exit, as has been
the case for some of the REIT specialists in recent years. We continue to
manage the business through these events so we come out the other side in a
strong position. We will continue to provide updates as we make progress this
year.
Picton has low leverage and significant operational headroom against covenants.
The majority of the portfolio is invested in sectors that have been less
impacted through Covid-19, and likely to rebound more quickly. It is clear that
the digital transformation will continue apace, be that increased home working
or further spend online and our portfolio will need to continue to adapt to
these changes.
Our focus is to control what we can, manage risks and focus on future
opportunities.
Michael Morris
Chief Executive
Portfolio Review
Sector weightings
Industrial weighting 47.9%
South East 35.4%
Rest of UK 12.5%
Office weighting 33.8%
South East 17.4%
Rest of UK 12.2%
City & West End 4.2%
Retail and Leisure weighting 18.3%
Retail Warehouse 7.3%
High Street South East 5.2%
High Street Rest of UK 4.1%
Leisure 1.7%
We have had a number of considerable successes across the portfolio despite it
being such a difficult year in which to operate. We ended the year with a
like-for-like increase in the portfolio valuation, rental income and Estimated
Rental Value (ERV). We have had one of the busiest years in terms of portfolio
transactions, up 30% on the previous year.
We have invested heavily back into the portfolio enhancing the quality and
lettability of space, and we have been able to de-risk and extend our income
profile. We have further strengthened our relationships with occupiers and our
focus on our key commitments of Action, Community, Technology, Support and
Sustainability, appears increasingly helpful in light of the Covid-19 impact.
Performance
Our portfolio now comprises 47 assets, with around 350 occupiers, and is valued
at GBP664.6 million with a net initial yield of 4.9% and reversionary yield of
6.4%. Our asset allocation, with 48% in industrial, 34% in office and 18% in
retail and leisure, combined with investment disposals and transactional
activity, has enabled us again to outperform the MSCI UK Quarterly Property
Index on a total return basis over one, three, five and ten years.
Overall the like-for-like valuation was up 1.4%, with the industrial sector up
6%, offices delivering growth of 3% and retail and leisure declining -12%. This
compares with the MSCI index recording capital declines of -4.8% over the
period.
The industrial assets continue to perform better than the other sectors,
primarily due to our allocation to South East multi-let estates which account
for over 73% of our industrial exposure. In addition we have extended income
with three of our largest occupiers at three of our distribution warehouses.
Conversely, and despite active management to mitigate downside risk, our retail
assets have delivered negative returns. Pleasingly, rental transactions have
been generally very close to or higher than independent ERVs rather than
significantly below, which we understand is happening elsewhere in the market.
The overall passing rent is GBP36.2 million, an increase from the prior year of
1.2% on a like-for-like basis. This was a result of the industrial portfolio
rents growing by 6%, offset by the office and retail rents decreasing by 2% and
3% respectively. The regional offices saw growth of 1%, which was offset by
declines in London and in particular at Angel Gate, Islington which is being
adversely affected by the serviced office sector. We are countering the effect
by offering fully fitted suites and flexible leasing terms.
The March 2020 ERV of the portfolio is GBP45.2 million, with the positive growth
in the industrial sector of 4.4% and office sector of 3.5% offset by the
negative growth in the retail sector of -8.0%. We have set out the principal
activity in each of the sectors in which we are invested and believe our
strategy and proactive occupier engagement will continue to assist us in
managing the portfolio during the current business climate.
The industrial and regional office occupational markets have remained
resilient. Conversely, retail demand has not improved, and we expect it to
worsen over the next year, particularly recognising the additional impact
Covid-19 will have on occupational demand.
Activity
We have had an exceptionally good year in respect of active management
transactions. We completed 20 rent reviews, 10% ahead of ERV, 31 lease renewals
or regears, 12% ahead of ERV and 35 lettings or agreements to lease, 2% ahead
of ERV.
Two assets were sold for gross proceeds of GBP34.1 million, 15% ahead of the
March 2019 valuation. Citylink, Croydon was sold following the early surrender
of two leases, generating GBP0.6 million of additional income. The property was
sold for GBP18.2 million reflecting a net initial yield of 4.8%.
We also sold 3220 Magna Park, Lutterworth following active management where we
extended the lease by a further three years to December 2022 and settled a 2019
rent review securing an 11% uplift to GBP1 million per annum, achieving one of
the highest rents at the Park. The property was sold for GBP15.9 million
reflecting a net initial yield of 5.8%.
Both sales crystallise the upside from the active management activity and,
noting the age of the buildings and oversupply in these locations, avoid
potential future capital expenditure and extended void periods.
Over the year we have invested GBP9 million into the portfolio across 20 separate
projects. These have all been aimed at enhancing space to attract occupiers and
grow income. Whilst a number of key projects are still to be completed, we are
now well placed to attract occupiers and our refurbishment pipeline is
substantially reduced, having completed the majority of the projects.
Our largest void is Stanford Building on Long Acre in Covent Garden, accounting
for over a third of the total vacancy rate. Work on site paused due to the
lockdown and will now complete in the summer. The building will provide
best-in-class retail, office and residential accommodation.
This investment across the portfolio has enabled us to create high quality
space and help to future- proof assets from a sustainability perspective. We
have also worked with occupiers to achieve their occupational aims and thereby
create value through additional leasing or extending income.
Although no acquisitions were made, the net effect of the above is that the
average lot size of the portfolio was GBP14.1 million, in line with last year.
Outlook
If activity for most of the year was tempered by Brexit, towards the end of the
year it has been impacted by the Covid-19 pandemic and consequential lockdown
on 23 March 2020. This has led to a far more uncertain business environment and
our focus has been on delivering our Picton Promise, focusing particularly on
our commitments of Action, Community and Support to help our occupiers who need
assistance.
New requirements from potential occupiers have slowed and social distancing
measures make viewings difficult to conduct. We are, however, embracing new
technologies, creating virtual tours and thinking more laterally as to how we
can market our buildings.
Our focus remains on working with our occupiers during this period of business
uncertainty, whilst continuing to proactively manage the existing portfolio. At
31 March the portfolio has GBP9 million of reversionary upside, GBP5 million from
letting the void, GBP3 million from expiring rent free and GBP1 million from
reversionary leases.
We are seeing better demand for our industrial properties, which account for
48% of the total portfolio by value, and we believe this sector will continue
to outperform.
Businesses continue to seek best- in-class space in the office sector, hence
our investment over the year into nine buildings, and this, combined with our
flexible offering, makes our properties attractive to current and new
occupiers.
The retail and leisure sector will need to evolve, especially following the
current lockdown, but with this sector only making up 18% of our portfolio, we
will work with occupiers to ensure we can assist them where appropriate to
maintain income.
The work done over the year to lease space and extend income, together with our
portfolio weightings, has put us in a strong position to weather this storm. In
line with our occupier focused, opportunity led approach, we continue to
proactively engage with our occupiers, which we believe assists occupier
retention and adds value.
Top ten assets
The largest assets as at 31 March 2020, ranked by capital value, represent 54%
of the total portfolio valuation and are detailed below.
Assets Acquisition Property Tenure Approximate No. of Occupancy
date type area (sq occupiers rate (%)
ft)
Parkbury Industrial Estate, 03/2014 Industrial Freehold 336,700 21 100
Radlett, Herts.
River Way Industrial Estate, 12/2006 Industrial Freehold 454,800 10 98
Harlow, Essex
Angel Gate, City Road, London EC1 10/2005 Office Freehold 64,500 22 74
Stanford Building, Long Acre, 05/2010 Retail Freehold 19,700 0 0
London WC2
Tower Wharf, Cheese Lane, Bristol 08/2017 Office Freehold 70,800 5 83
50 Farringdon Road, London EC1 10/2005 Office Leasehold 31,000 5 100
Shipton Way, Rushden, Northants. 07/2014 Industrial Leasehold 312,900 1 100
Datapoint, Cody Road, London E16 05/2010 Industrial Leasehold 55,500 5 88
Lyon Business Park, Barking, 09/2013 Industrial Freehold 99,400 9 100
Essex
Colchester Business Park, 10/2005 Office Leasehold 150,700 22 99
Colchester
Top ten occupiers
The largest occupiers, based as a percentage of contracted rent, as at 31 March
2020, are as follows:
Occupier Contracted %
rent
(GBPm)
Public sector 1.7 4.3
Belkin Limited 1.7 4.2
B&Q Plc 1.2 3.1
The Random House Group Limited 1.2 3.0
Snorkel Europe Limited 1.1 2.8
XMA Limited 1.0 2.4
Portal Chatham LLP 0.8 2.0
TK Maxx 0.7 1.8
Canterbury Christ Church University 0.7 1.7
DHL Supply Chain Limited 0.6 1.5
Total 10.7 26.8
Longevity of income
As at 31 March 2020, expressed as a percentage of contracted rent, the average
length of the leases to the first termination was increased to 5.5 years (2019:
5.1 years). This is summarised as follows:
%
0 to 1 year 8.8
1 to 2 years 14.1
2 to 3 years 11.0
3 to 4 years 12.6
4 to 5 years 12.3
5 to 10 years 31.6
10 to 15 years 8.2
15 to 25 years 0.1
25 years and over 1.3
Total 100.0
Retention rates and occupancy
Over the year, total ERV at risk due to lease expiries or break options
totalled GBP6.6 million, compared to GBP6.9 million for the year to March 2019.
Excluding asset disposals, we retained 53% of total ERV at risk in the year to
March 2020. This comprised 32% on lease expiries and 21% on break options.
In addition to units at risk due to lease expiries or break options during the
year, a further GBP5.5 million of ERV was retained by either removing future
breaks or extending future lease expiries ahead of the lease event.
Occupancy has reduced slightly during the year, primarily reflecting the timing
of lease events, ongoing challenges in the retail sector and some specific
asset management surrenders we have initiated. At the year end 62% of our
vacant buildings were being refurbished, so only 38% were available to lease
immediately.
Occupancy has decreased from 90% to 89%, which is behind the MSCI IRIS
Benchmark of 93% at March 2020. On a look-through basis we have 57% of our
total void in offices, 28% in retail, primarily at a flagship store in Covent
Garden, and only 15% of our void is in industrial, reflecting the stronger
occupational market.
Industrial
Key metrics
2020 2019
Value GBP318.3m GBP312.8m
Internal area 2.6m sq ft 2.7m sq ft
Annual rental income GBP16.0m GBP16.0m
Estimated rental value GBP18.6m GBP18.7m
Occupancy 96% 98%
Number of assets 16 17
The industrial portfolio, which accounts for 48% of the portfolio, again
delivered the strongest sector performance of the year. This was the result of
active management extending income on our distribution assets, combined with
continued occupational demand for the smaller units, resulting in further
rental growth, especially in London and the South East.
Through asset management activity we have been able to capture rental growth
and extend income. This, combined with continued strength in the investment
market, has resulted in another strong year for this element of the portfolio.
On a like-for-like basis, our industrial portfolio value increased by GBP18.1
million or 6.0% to GBP318.3 million, and the annual rental income increased by GBP
0.9 million or 6.0% to GBP16.0 million. The portfolio has an average weighted
lease length of 5.1 years and GBP2.6 million of reversionary potential.
We have seen rental growth of 4.4% across the portfolio and are experiencing
demand across all of our estates. Occupancy is 96%, with the key void being our
unit in Rugby which has recently been refurbished. In respect of the multi-let
estates we only have three vacant units out of 127, one of which is under
offer.
We extended income on three of our distribution units, one of which we
subsequently sold, and we completed the refurbishment of our unit in Rugby,
which is now being marketed.
Portfolio activity
At Shipton Way, Rushden, in what would have been our largest single income risk
in 2020, we extended a lease with the existing occupier, Belkin, to facilitate
a pre-letting of the entire building to Whistl UK Limited. Whistl will take a
new ten-year lease, subject to break in 2025, at an annual rent of GBP1.6
million, in line with ERV, and become our largest single occupier from October
2020, when Belkin vacates.
At Parkbury, Radlett, we extended a lease with the largest occupier on the
estate which was due to expire in November 2020. This secures a new ten-year
reversionary lease, subject to break in 2025, with stepped rental increases to
GBP1.0 million per annum, 42% ahead of ERV. In addition, we let four units for a
combined GBP0.4 million per annum, 8% ahead of ERV, renewed one lease for GBP0.2
million per annum, 5% ahead of ERV, and settled four rent reviews achieving a GBP
0.3 million uplift in rent to GBP1 million per annum, 19% ahead of ERV.
At Trent Road, Grantham, we extended the lease that was due to expire in 2023
until 2029, subject to break in 2026, at GBP1.2 million per annum, in line with
ERV.
At 3220 Magna Park in Lutterworth, we restructured the lease and secured a
further three years term certain until an occupier break option in December
2022. As part of the same transaction, the December 2019 rent review was
settled, securing an 11% uplift to GBP1 million per annum, 6% ahead of ERV,
achieving one of the highest rents at the Park. The unit was subsequently sold
for GBP15.9 million.
At Datapoint in London E16, following the completion of a rent review, we
achieved a 98% uplift in rent to GBP0.1 million per annum, 15% ahead of ERV. Two
leases were surrendered on the estate, securing a premium of GBP0.2 million, and
were subsequently refurbished by March.
One has been let, two weeks after completion, for a minimum term of ten years
at a rent of GBP0.2 million per annum, 24% ahead of ERV and 82% ahead of the
previous passing rent. We have good interest in the other unit.
At Nonsuch Industrial Estate in Epsom, the active management strategy to
combine units resulted in a letting to Topps Tiles and we also completed three
further lettings during the period, for a combined GBP0.2 million per annum, 2%
ahead of ERV. Two leases were renewed, the passing rent increasing by 22% to a
combined GBP0.1 million per annum, 5% ahead of ERV.
Our largest void in the industrial portfolio is Swiftbox, the 99,500 sq ft unit
in Rugby, where we completed a comprehensive refurbishment in February. This is
one of the few cross-docked units available in the 'Golden Triangle' and we
expect good interest.
Outlook
The full impact of the Covid-19 pandemic remains to be seen, but Brexit
concerns have had a limited impact to date.
Demand remains strong for sub-100,000 sq ft units, with occupiers being more
discerning about the age and specification of the larger distribution units. We
see continued rental growth, albeit at a slower rate, in respect of the smaller
units especially in Greater London and the South East, where there remains a
lack of supply and a limited development pipeline. We do not expect rental
growth to come through on the larger units, due to a strong development
pipeline, although there is a short-term demand spike due to Covid-19 from
supermarkets and other retailers with increased storage requirements.
The focus going forward is the leasing of Rugby and both capturing the rental
growth on the smaller units and working proactively with our occupiers to
facilitate their business needs. We have 16 lease events in the coming year,
the overall ERV for these units is 16.5% higher than the current passing rent
of GBP0.7 million. This provides us with the opportunity to grow income further.
Office
Key metrics
2020 2019
Value GBP224.6m GBP235.0m
Internal area 0.8m sq ft 0.9m sq ft
Annual rental income GBP12.9m GBP14.2m
Estimated rental value GBP17.4m GBP18.1m
Occupancy 88% 88%
Number of assets 14 15
The office portfolio, which accounts for 34% of the portfolio, delivered the
second strongest performance of the year. This was a result of our investment
into the buildings to make them more attractive to existing and new occupiers,
combined with continued occupational demand, especially in the regions.
Through working with our occupiers and actively managing our properties, we
have been able to retain and attract occupiers, which in turn enables us to
capture rental growth, particularly in markets with a shortage of Grade A
space, such as Bristol and Milton Keynes.
On a like-for-like basis, our office portfolio value increased by GBP6.6 million
or 3.0% to GBP224.6 million, and the annual rental income decreased marginally by
GBP0.3 million or 2.2% to GBP12.9 million. The portfolio has an average weighted
lease length of 4.0 years and GBP4.5 million of reversionary potential.
Occupational demand has been stronger in the regions than in London. We have
seen rental growth of 3.5% across the portfolio and occupancy is 88%, primarily
due to key voids at Angel Gate, London and Pembroke Court, Chatham. We invested
GBP2.7 million into our office assets during the period and disposed of one
asset, detailed below.
Portfolio activity
At Tower Wharf, Bristol, following completion of works to upgrade the reception
and the installation of additional shower facilities, we agreed to upsize an
existing occupier and extended their lease which was due to expire in May 2020.
This increased their floor space by 73% and secured a new 15-year lease,
subject to break in 2030, at a rent of GBP0.5 million per annum, which was 5%
ahead of the ERV and GBP0.3 million ahead of the previous passing rent. In
addition, we moved out an occupier's break option by three years and settled a
rent review, achieving a 29% uplift to GBP0.4 million per annum, 4% ahead of ERV.
At Grafton Gate, Milton Keynes, we comprehensively refurbished the common areas
and, working with an occupier, upgraded their office, installing energy
efficient LED lighting and creating an up-to-date working environment. These
works meant the building's EPC rating improved from an E to a C,
future-proofing it in respect of the Minimum Energy Efficiency Standards. As
part of the office upgrade works, we settled a rent review, securing a 52%
uplift to GBP0.6 million per annum, 30% ahead of ERV.
At Metro, Salford Quays, where a lease event created a vacant floor, we
comprehensively refurbished the common areas for the benefit of our occupiers
and to make the building more attractive. The floor was let to HM Government
within six months of the refurbishment completing on a 20-year lease subject to
break in 2030, at GBP0.4 million per annum, which was 2% ahead of ERV.
At Waterside House, Leeds, following upgrade works, we upsized our existing
occupier, HM Government, into the whole building on a ten-year lease at a rent
of GBP0.3 million per annum, which was 16% ahead of ERV.
At Citylink, Croydon, we restructured two leases after occupiers actioned break
clauses. This resulted in an early surrender for a premium and a simultaneous
new short-term letting. The property was subsequently sold for GBP18.2 million.
Our largest office void is the office element at Stanford Building WC2 which is
classed as a retail property and is detailed in the retail section.
The offices will provide fibre-enabled Grade A accommodation with original
warehouse features, commissionaire, occupier amenities and environmental
improvements. We expect good interest due to the quality of the accommodation
on offer and size of the suites.
Occupancy remained stable over the period at 88%, with the letting activity
offset by space coming back in Chatham and London.
Outlook
Generally, the regions continue to outperform London with occupiers looking for
high specification buildings, which is why we have carried out significant
refurbishments at eight of our regional buildings, investing GBP2.5 million to
improve common areas, adding occupier amenity space and future-proofing them in
respect of sustainability.
The longer-term impact of the Covid-19 pandemic may well lead to more remote
working which is likely to change the way physical office space is used.
We have countered the impact of serviced offices by offering flexibility
through our 'rightsizing' approach as well as our high quality contemporary
space and occupier amenities, meaning our buildings remain attractive to
businesses who want control of their own space. Looking forward, we will build
on the upgrade work completed across the office portfolio to actively manage it
to attract occupiers.
We have 33 lease events in the coming year, the current ERV for these units is
13.2% higher than the current passing rent of GBP2.0 million and a 12% void. This
provides us with the opportunity to grow income further.
Retail and Leisure
Key metrics
2020 2019
Value GBP121.7m GBP137.5m
Internal area 0.8m sq ft 0.8m sq ft
Annual rental income GBP7.3m GBP7.5m
Estimated rental value GBP9.2m GBP10.0m
Occupancy 75% 77%
Number of assets 17 17
The retail and leisure portfolio, which accounts for 18% of the portfolio,
delivered the weakest performance of the year. This was a result of ongoing
changes in shopping patterns and weak occupational demand resulting in negative
rental growth in a lot of markets.
Stanford Building in Covent Garden, which has both retail and office use, is
our largest element of the retail portfolio at 28%, of the balance 40% is in
the retail warehouse sector, 22% in high street retail and 10% in hotel and
leisure assets.
Our investment into the retail parks in Bury and Swansea has enabled us to
retain and attract new occupiers.
By working with our occupiers and through active management, we have been able
to temper the declines in value over the period by extending income, letting
space and achieving rents overall very close to the ERV.
On a like-for-like basis, our retail and leisure portfolio value decreased by GBP
15.8 million or 11.5% to GBP121.7 million, and the annual rental income decreased
marginally by GBP0.2 million or 2.6% to GBP7.3 million. The portfolio has an
average weighted lease length of 8.9 years and GBP1.9 million of reversionary
potential to GBP9.2 million per annum.
Occupational demand has been weaker in the retail warehouse and restaurant
sector, with high street shops and London seeing slightly better demand. We
have seen negative rental growth of 8.0% across the portfolio and occupancy is
75%, primarily due to key voids at Stanford Building, London and Angouleme
Retail Park, Bury. We invested GBP3.3 million into the retail portfolio during
the period.
Portfolio activity
At Parc Tawe Retail Park, Swansea we carried out a comprehensive refurbishment
of the park to include new signage, modernisation of the units and
environmental improvements, for example changing to LED lighting. This has
created an improved shopping environment for customers and enabled us to
attract new occupiers. Once we completed enabling works, Lidl relocated to the
former Homebase unit and, following practical completion of refurbishment
works, we completed a new 15-year lease at their former unit to Farmfoods at a
stepped rent to GBP0.1 million per annum, 14% below ERV. We also agreed to extend
Pets at Home's lease, expiring in 2022, by a further five years and rebased
their rent to GBP0.1 million per annum from completion, a reduction of 18%, but
10% ahead of the preceding ERV. We have one unit available to lease, accounting
for 13% of the park by floor area.
At Angouleme Way Retail Park, Bury we carried out a comprehensive refurbishment
to update the park for customers and to enable us to attract new occupiers and
retain existing ones. Argos renewed on a ten-year lease at a rent of GBP0.2
million per annum, which was 16% ahead of ERV. Another unit was let to a
regional occupier on a five-year lease, subject to a break in three years, at a
stepped rent to GBP0.1 million per annum, in line with ERV. We have two units
available to lease, accounting for 40% of the park by floor area.
At the Crown & Mitre complex in Carlisle, we settled the hotel rent review,
securing a 42% uplift to GBP0.2 million per annum, 8% ahead of ERV. There is a
historic lane adjacent to the property, with small shops and local occupiers.
Working with our occupiers, we refurbished the lane to create a significantly
better environment in keeping with the Grade II property and attracting higher
footfall for our occupiers.
At Scots Corner, Birmingham we renewed HM Government's lease for a further ten
years, subject to break in 2024, at a rent of GBP0.1 million per annum, in line
with ERV. Towards the end of the year, we got two adjoining shop units back due
to insolvencies, securing a payment on one of them. These are currently being
reconfigured and one of the units is under offer.
Our largest retail void is the unit at Stanford Building WC2 where the
refurbishment of the whole building is currently underway and is due to
complete in the summer. The unit is in a prime location and provides unique
space arranged over three floors. It is the first time the unit has been
available to lease in over 100 years and we expect good interest in due course.
Outlook
The retail and leisure sector continues to undergo structural change due to
evolving shopping habits, which have resulted in an oversupply in most markets
with occupiers being able to negotiate lower rents and higher incentives. The
Covid-19 pandemic has considerably worsened the outlook, and it is likely that
a number of less resilient businesses will not survive, further increasing the
supply of floorspace.
We are working on a number of schemes where we envisage changing the use from
retail or leisure to other uses and we will resume with progressing these plans
once restrictions are lifted.
We are working with our occupiers to assist them where we can, by for example
postponing rental payments or providing upfront incentives to remove future
break options and/or extend leases. The lockdown has caused significant cash
flow issues to a lot of businesses in this sector and until shops, gyms, hotels
and restaurants are allowed to open we cannot see an improvement outside of the
supermarket sector. The full impact of the Covid-19 pandemic remains to be seen
and this reinforces our portfolio positioning.
Financial Review
In the context of uncertain and difficult market conditions, our results for
the year were positive. The total profit recorded was GBP22.5 million, compared
to GBP31.0 million for 2019, reduced due to lower valuation movements,
particularly in the final quarter of the year. Our EPRA earnings declined to GBP
19.9 million, and we maintained a covered dividend. Earnings per share were 4.1
pence overall (3.7 pence on an EPRA basis), and the total return based on these
results was 4.5% for the year.
The Covid-19 pandemic is having a significant impact on businesses throughout
the UK. For Picton, like many commercial landlords, the first tangible
consequence was on the March rent collection date. We received 82% of the rent
due, and this is discussed more fully below, along with the actions being
taken. We also experienced a decline in the portfolio valuation at the end of
March, principally on the retail assets. We expect these themes to continue
through the course of the pandemic.
Net asset value
The net assets of the Group increased to GBP509.3 million, largely following the
equity raise in the year. The chart below shows the components of this increase
over the year. The EPRA net asset value remained at 93 pence.
GBPm
March 2019 net asset value 499.4
Income profit 19.9
Valuation movement (0.9)
Profit on asset disposals 3.5
Issue of ordinary shares 7.0
Share-based awards 0.3
Purchase of shares (0.9)
Dividends paid (19.0)
March 2020 net asset value 509.3
The following table reconciles the net asset value calculated in accordance
with International Financial Reporting Standards (IFRS) with that of the
European Public Real Estate Association (EPRA).
2020 2019 2018
GBPm GBPm GBPm
Net asset value - EPRA and IFRS 509.3 499.4 487.4
Fair value of debt (29.6) (24.8) (21.1)
EPRA triple net asset value 479.7 474.6 466.3
Net asset value per share (pence) 93 93 90
EPRA net asset value per share (pence) 93 93 90
EPRA triple net asset value per share (pence) 88 88 87
Income statement
Total revenue from the property portfolio for the year was GBP45.7 million. On a
like-for-like basis, rental income on an EPRA basis has reduced compared to the
previous year. Throughout the year we have been carrying out a number of
refurbishment projects aimed at improving the quality of space at those assets
and so improving letting prospects. This is discussed further in the Portfolio
Review, but the impact on this year's results is lower net property income.
The table below sets out the rent collection statistics for the March quarter,
analysed by sector. The greatest impact, not unexpectedly, is in the retail
sector.
Rent due Industrial Office Retail Total
25 March to 1 April (%) (%) and (%)
Leisure
(%)
Collected 84 89 67 82
Moved to monthly 1 1 8 2
Deferred 6 5 8 6
Concessions agreed - 1 - -
Active management - - 4 1
Outstanding 9 4 13 9
The rent demanded on the March quarter day is in advance, up to the June 2020
quarter day. We have, however, made increased provisions against our tenant
debtors in this financial year, and this has impacted our rental income by GBP0.5
million.
Administrative expenses for the year were GBP5.6 million, so slightly lower than
the GBP5.8 million in 2019. These include the one-off costs of REIT conversion.
Realised and unrealised valuation gains on the portfolio were GBP2.6 million for
the year, lower than the gains of GBP11.3 million reported last year. This is
very much a reflection of the commercial property market, and particularly the
sentiment in the retail sector, where there have been well publicised issues of
retail failures.
Interest payable is lower this year compared to 2019, at GBP8.3 million. This
reflects a full year's saving following the Canada Life repayment in 2018, and
also the repayment of the current revolving credit facilities.
This is the first full year that we have reported as a UK REIT. All of the
profits from the property rental business are exempt from UK tax. We must, as a
REIT, distribute at least 90% of these profits to shareholders as Property
Income Distributions. Based on our initial submitted tax returns to date, we
have fully complied with this requirement. This year we have received a small
tax repayment, an adjustment arising from previous years.
EPRA earnings for the year were GBP19.9 million, lower than the GBP22.9 million
stated in 2019, principally for the reasons stated above.
Dividends
The annual dividend rate has remained at 3.5 pence, with total dividends paid
out of GBP19.0 million. Dividend cover for the full year was lower than last year
at 105%.
Following the year end we have announced a 29% reduction in the dividend rate,
which was applied to the dividend paid in May, due to the uncertainty caused by
the Covid-19 pandemic.
Investment properties
The appraised value of our investment property portfolio was GBP664.6 million at
31 March 2020, down from GBP685.3 million a year previously. This year we have
disposed of two buildings, for net proceeds of GBP33.1 million, realising a
combined gain of GBP3.5 million compared to last year's valuation. GBP8.9 million
of capital expenditure was invested back into the existing portfolio. The
overall revaluation movement was a small loss of GBP0.9 million, principally
arising in the final quarter of the year, as the impact of the Covid-19
pandemic was felt. With the reduction in investment market activity and less
evidence available, the independent valuers included a 'material uncertainty'
clause in the March valuation.
At 31 March 2020 the portfolio comprised 47 assets, with an average lot size of
GBP14.1 million.
A further analysis of capital expenditure, in accordance with EPRA Best
Practices Recommendations, is set out in the EPRA Disclosures section.
Borrowings
Total borrowings were GBP167.5 million at 31 March 2020, with the loan to value
ratio having reduced to 21.7%. The weighted average interest rate on our
borrowings has increased slightly to 4.2%, while the average loan duration is
now 9.9 years.
Our senior loan facility with Aviva reduced by the regular amortisation of GBP1.2
million in the year.
The Group remained fully compliant with the loan covenants throughout the year.
During the year we repaid all the outstanding amounts drawn under our revolving
credit facilities, leaving GBP49 million undrawn at the year end. The year-end
interest rate payable on these loans was around 2.7%.
Subsequent to the year end, we have completed a new single revolving credit
facility, replacing the two existing ones. The new GBP50 million facility is for
an initial term of three years, until May 2023, with two one-year extensions
available. Interest is payable at 150 basis points over LIBOR, which is at a
lower rate than the facilities it replaces.
Loan arrangement costs are capitalised and are amortised over the terms of the
respective loans. At 31 March 2020, the unamortised balance of these costs
across all facilities was GBP2.3 million.
The fair value of our borrowings at 31 March 2020 was GBP197.0 million, higher
than the book amount. Lending margins have remained broadly in line with the
previous year, but gilt rates have fallen in comparison.
A summary of our borrowings is set out below:
2020 2019 2018
Fixed rate loans (GBPm) 167.5 168.7 203.5
Drawn revolving facilities (GBPm) - 26.0 10.5
Total borrowings (GBPm) 167.5 194.7 214.0
Borrowings net of cash (GBPm) 143.9 169.5 182.5
Undrawn facilities (GBPm) 49.0 25.0 40.5
Loan to value ratio (%) 21.7 24.7 26.7
Weighted average interest rate (%) 4.2 4.0 4.1
Average duration (years) 9.9 9.8 10.3
Cash flow and liquidity
The cash flow from our operating activities was GBP13.5 million this year, down
from the 2019 figure. Proceeds from asset sales were used to finance the net
reduction in borrowings. Dividend payments of GBP19.0 million were made in the
year. Our cash balance at the year end stood at GBP23.6 million.
Share capital
During the year the Company issued 7,551,936 new ordinary shares of no par
value, for gross proceeds of GBP7.1 million, bringing the total shares in issue
to 547,605,596.
The Company's Employee Benefit Trust acquired a further 954,000 shares, at a
cost of GBP0.8 million, during the year to satisfy the future vesting of awards
made under the Long-term Incentive Plan, and now holds a total of 2,103,683
shares. As the Trust is consolidated into the Group's results, these shares are
effectively held in treasury and therefore have been excluded from the net
asset value and earnings per share calculations, from the date of purchase.
Andrew Dewhirst
Finance Director
22 June 2020
Principal Risks
Managing Risk
The Board recognises that there are risks and uncertainties that could have a
material impact on the Group's results.
Risk management provides a structured approach to the decision making process
such that the identified risks can be identified, measured, managed, mitigated
and reported and the uncertainty surrounding expected outcomes can be reduced.
The Board has developed a risk management policy which it reviews on a regular
basis.
The Audit and Risk Committee carries out a detailed assessment of all risks,
whether investment or operational, and considers the effectiveness of the risk
management and internal control processes.
The Executive Committee is responsible for implementing strategy within the
agreed risk management policy, as well as identifying and assessing risk in
day-to-day operational matters. The management committees support the Executive
Committee in these matters.
The small number of employees and relatively flat management structure allow
risks to be quickly identified and assessed.
The Group's risk appetite will vary over time and during the course of the
property cycle. The principal risks - those with potential to have a material
impact on performance and results - are set out below, together with mitigating
controls. The UK Corporate Governance Code requires the Board to make a
Viability Statement. This considers the Company's current position and
principal risks and uncertainties combined with an assessment of the future
prospects for the Company, in order that the Board can state that the Company
will be able to continue its operations over the period of their assessment.
The statement is set out below.
Covid-19
The current global Covid-19 pandemic is causing an unprecedented level of
disruption to the global economy. Many governments, including the UK, have
imposed lockdowns, giving rise to the closure of some businesses. It is not
clear how long the restrictions will last nor what the impact on the UK economy
will be. Some of our occupiers are facing financial difficulties and we are
working with them to find solutions that both help them and mitigates any
impact on our capital values and cash flow.
The risks associated with this pandemic fall across many of the principal risks
set out here, and in many cases increase the potential impact significantly.
There has already been an impact on the Group's cash flow, and it is considered
likely that this will continue in at least the short-term.
Picton has a diverse portfolio spread across the UK, with around 350 occupiers
in a wide range of businesses. The cash flow arising from our occupiers
underpins our business model. We are continuing to let space, although a number
of transactions have been put on hold since the pandemic began to affect the UK
economy. There are few investment transactions taking place to provide
comparable evidence for valuations, and as a result our external valuers have
added a material valuation uncertainty clause to their report as at 31 March
2020, in line with market practice.
We have considered in our Viability Statement the potential impact of various
scenarios resulting from Covid-19 on the business.
Brexit
Although the UK has now left the EU and is in the transition period, there is
still uncertainty regarding a future trading relationship. The transition
period ends on 31 December 2020 and in the absence of any agreement being
reached there could be further disruption to the UK economy.
We have considered the potential impact from a disruptive Brexit in a number of
scenarios included in our Viability Statement.
Emerging risks
During the year the Board has considered themes where emerging risks or
disrupting events may impact the business. These may arise from behavioural
changes, political or regulatory changes, advances in technology, environmental
factors, economic conditions or demographic changes. As noted above Covid-19
may also have an impact on a number of these themes. Some are already
considered to be principal risks in their own right such as the impact of
climate change, others are reviewed as part of the ongoing risk management
process.
Corporate Strategy
1
Political and economic Risk trend: Up
Risk Mitigation Commentary
Uncertainty in the UK The Board considers economic The risks around the UK
economy, whether arising from conditions and market economy have increased with
political events or uncertainty when setting the Covid-19 pandemic.
otherwise, brings risks to strategy, considering the Although there is more
the property market and to financial strategy of the certainty regarding Brexit,
occupiers' businesses. This business and in making no future deal with the EU
can result in lower investment decisions. has yet been agreed and this
shareholder returns, lower may lead to further
asset liquidity and increased uncertainty later in 2020.
occupier failure.
2
Market cycle Risk trend: Up
Risk Mitigation Commentary
The property market is The Board reviews the There may be increased
cyclical and returns can be Group's strategy and volatility in the property
volatile. There is an business objectives on a market as a result of the
ongoing risk that the regular basis and considers current economic
Company fails to react whether any change is restrictions. Official
appropriately to changing needed, in light of current forecasts indicate a
market conditions, resulting and forecast market substantial fall in UK GDP
in an adverse impact on conditions. this year. The impact of
shareholder returns. Covid-19 may also cause
businesses to review their
existing operating models
(e.g. future need for office
space).
3
Regulatory and tax Risk trend: Same
Risk Mitigation Commentary
The Group could fail to The Board and senior There are no significant
comply with legal, fiscal, management receive regular changes expected to the
health and safety or updates on relevant laws and regulatory environment in
regulatory matters which regulations. which the Group operates.
could lead to financial loss,
reputational damage or loss The Group is a member of the
of REIT status. BPF and EPRA, and management
attend industry briefings.
4
Climate change Risk trend: Up
Risk Mitigation Commentary
Failure to react to climate Sustainability is embedded Climate change is now
change could lead to the within the Group's business considered to be a principal
Group's assets becoming model and strategy. risk given its increasing
obsolete and unable to importance and the impact of
attract occupiers. All refurbishment projects real estate on the
include environmental environment.
considerations to ensure
buildings are maintained to
current standards.
Property
5
Portfolio strategy Risk trend: Up
Risk Mitigation Commentary
The Group has an The Group maintains a Continued divergence of
inappropriate portfolio diversified portfolio in returns across sectors,
strategy, as a result of poor order to minimise exposure coupled with the impact of
sector or geographical to any one geographical area Covid-19 particularly on
allocations, or holding or market sector. retail and leisure assets,
obsolete assets, leading to have increased this risk.
lower shareholder returns.
6
Investment Risk trend: Same
Risk Mitigation Commentary
Investment decisions may be The Executive Committee must There is no change to this
flawed as a result of approve all investment risk.
incorrect assumptions, poor transactions over a
research or incomplete due threshold level, and
diligence, leading to significant transactions
financial loss. require Board approval.
A formal appraisal and due
diligence process is carried
out for all potential
purchases.
A review of each acquisition
is performed within two
years of completion.
7
Asset management Risk trend: Up
Risk Mitigation Commentary
Failure to properly execute Management prepare business The importance of effective
asset business plans or poor plans for each asset which asset management has been
asset management could lead are reviewed regularly. heightened by the Covid-19
to longer void periods, pandemic and its impact on
higher occupier defaults, The Executive Committee must occupiers' businesses.
higher arrears and low approve all investment
occupier retention, all transactions over a
having an adverse impact on threshold level, and
earnings and cash flow. significant transactions
require Board approval.
Management maintain close
contact with occupiers and
have oversight of the
Group's Property Manager.
8
Valuation Risk trend: Up
Risk Mitigation Commentary
A fall in the valuation of The Group's property assets The current economic
the Group's property assets are valued quarterly by an situation could lead to
could lead to lower independent valuer with negative sentiment and see
investment returns and a oversight by the Property further falls in asset
breach of loan covenants. Valuation Committee. Market values.
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.
Operational
9
People Risk trend: Same
Risk Mitigation Commentary
The Group relies on a small The Board has a remuneration The Group has a stable and
team to implement the policy in place which aligned team in place.
strategy and run the incentivises performance and
day-to-day operations. is aligned with Significant efforts have
Failure to retain or recruit shareholders' interests. been, and will continue to
key individuals with the be made to ensure the safety
right blend of skills and There is a Non-Executive and well-being of the
experience may result in Director responsible for Group's employees through
poor decision making and employee engagement who the course of the Covid-19
underperformance. provides regular feedback to pandemic.
the Board.
Financial
10
Finance strategy Risk trend: Up
Risk Mitigation Commentary
The Group has a number of The Group's property assets Although the Group has
loan facilities to finance are valued quarterly by an headroom against its loan
its activities. Failure to independent valuer with covenants, significant falls
comply with covenants or to oversight by the Property in valuations or income
manage re-financing events Valuation Committee. Market during the current Covid-19
could lead to a funding commentary is provided crisis could lead to pressure
shortfall for operational regularly by the independent on covenants. However, a
activities. valuer. number of stress tests have
been conducted to assess the
The Board reviews financial potential risk, which the
forecasts for the Group on a Board will continue to
regular basis, including monitor.
sensitivity against
financial covenants.
The Audit and Risk Committee
considers the going concern
status of the Group
biannually.
11
Capital structure Risk trend: Up
Risk Mitigation Commentary
The Group operates a geared The Board regularly reviews Although the Group has a
capital structure, which its gearing strategy and modest level of gearing,
magnifies returns from the debt maturity profile, at falls in capital values will
portfolio, both positive and least annually, in light of be magnified by the impact
negative. An inappropriate changing market conditions. of gearing.
level of gearing relative to
the property cycle could
lead to lower investment
returns.
Viability assessment and statement
The UK Corporate Governance Code requires the Board to make a 'viability
statement' which considers the Company's current position and principal risks
and uncertainties combined with an assessment of the future prospects for the
Company, in order that the Board can state that the Company will be able to
continue its operations over the period of their assessment.
The Board conducted this review over a five-year timescale, considered to be
the most appropriate for long-term investment in commercial property. The
assessment has been undertaken taking into account the principal risks and
uncertainties faced by the Group which could impact its investment strategy,
future performance, loan covenants and liquidity.
The major risks identified were those relating to the current Covid-19 pandemic
and a disruptive Brexit and their potential impact on the UK economy and
commercial property market over the period of the assessment. In the ordinary
course of business the Board reviews a detailed financial model on a quarterly
basis, including forecast market returns. This model allows for different
assumptions regarding lease expiries, breaks and incentives. For the purposes
of the viability assessment of the Group, the model covers a five-year period
and is stress tested under various scenarios.
In the context of both the current Covid-19 pandemic and a disruptive Brexit,
the Board considered a number of scenarios around their impact on the Group's
property portfolio and financial position. These scenarios included different
levels of rent collection, occupier defaults, void periods and incentives
within the portfolio, and the consequential impact on property costs and loan
covenants. All lease events and assumptions were reviewed over the period under
the different scenarios and their impact on revenue and cash flow. Future
letting activity was assumed to be severely curtailed during the initial period
of the assessment. Significant falls in capital values were included in these
scenarios, including the potential impact on the Group's loan covenants. The
Group's long-term loan facilities are in place throughout the assessment
period, while the Board assumed that the Group would continue to have access to
its short-term facilities. The Board considered the impact of these scenarios
on its ability to continue to pay dividends at different rates over the
assessment period.
These matters were assessed over the period to 31 March 2025 and will continue
to be assessed over five-year rolling periods.
The Directors consider that the stress testing performed was sufficiently
robust that even under extreme conditions the Company remains viable.
Based on their assessment, and in the context of the Group's business model and
strategy, the Directors expect that the Group will be able to continue in
operation and meet its liabilities as they fall due over the five-year period
to 31 March 2025.
Statement of Directors' responsibilities
The Directors are responsible for preparing the Annual Report and the financial
statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each
financial year. Under that law they have elected to prepare the financial
statements in accordance with International Financial Reporting Standards, as
issued by the IASB, and applicable law.
Under company law the Directors must not approve the financial statements
unless they are satisfied that they give a true and fair view of the state of
affairs of the Company and of its profit or loss for that period.
In preparing these financial statements, the Directors are required to:
* select suitable accounting policies and then apply them consistently;
* make judgements and estimates that are reasonable, relevant and reliable;
* state whether applicable accounting standards have been followed, subject
to any material departures disclosed and explained in the financial
statements;
* assess the Group's ability to continue as a going concern, disclosing, as
applicable, matters related to going concern; and
* use the going concern basis of accounting unless they either intend to
liquidate the Group or to cease operations, or have no realistic
alternative but to do so.
The Directors are responsible for keeping proper accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that its financial statements comply with the Companies
(Guernsey) Law, 2008. They are responsible for such internal controls as they
determine are necessary to enable the preparation of the financial statements
that are free from material misstatement, whether due to fraud or error, and
have a general responsibility for taking such steps as are reasonably open to
them to safeguard the assets of the Company and to prevent and detect fraud and
other irregularities.
The Directors are responsible for the maintenance and integrity of the
corporate and financial information included on the Company's website, and for
the preparation and dissemination of financial statements. Legislation in
Guernsey governing the preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.
Directors' responsibility statement in respect of the Annual Report and
financial statements
We confirm that to the best of our knowledge:
* the financial statements, prepared in accordance with the applicable set of
accounting standards, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Group; and
* the Strategic Report includes a fair review of the development and
performance of the business and the position of the Group, together with a
description of the principal risks and uncertainties that it faces.
We consider the Annual Report and accounts, taken as a whole, are fair,
balanced and understandable and provide the information necessary for
shareholders to assess the Group's position and performance, business model and
strategy.
By Order of the Board
Andrew Dewhirst
Director
22 June 2020
Financial Statements
Consolidated statement of comprehensive income
for the year ended 31 March 2020
Notes 2020 2019
Total Total
GBP000 GBP000
Income
Revenue from properties 3 45,664 47,733
Property expenses 4 (12,027) (9,433)
33,637 38,300
Net property income
Expenses
Administrative expenses 6 (5,563) (5,842)
(5,563) (5,842)
Total operating expenses
Operating profit before movement on investments 28,074 32,458
Investments
Profit on disposal of investment properties 13 3,478 379
Investment property valuation movements 13 (882) 10,909
2,596 11,288
Total profit on investments
Operating profit 30,670 43,746
Financing
Interest received 9 38
Interest paid 8 (8,295) (9,126)
Debt prepayment fees - (3,245)
(8,286) (12,333)
Total finance costs
Profit before tax 22,384 31,413
Tax 9 124 (458)
22,508 30,955
Profit and total comprehensive income for the period
Earnings per share
Basic 11 4.1p 5.7p
Diluted 11 4.1p 5.7p
All items in the above statement derive from continuing operations.
All of the profit and total comprehensive income for the year is attributable
to the equity holders of the Company.
Notes 1 to 26 form part of these consolidated financial statements.
Consolidated statement of changes in equity
for the year ended 31 March 2020
Notes Share Retained Other Total
capital earnings reserves GBP000
GBP000 GBP000 GBP000
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)
157,449 342,252 (286) 499,415
Balance as at 31 March 2019
Profit for the year - 22,508 - 22,508
Dividends paid 10 - (19,039) - (19,039)
Issue of ordinary shares 19 7,137 - - 7,137
Issue costs of shares (186) - - (186)
Vesting of shares held in trust - (54) 54 -
Share-based awards 7 - - 292 292
Purchase of shares held in trust 7 - - (844) (844)
164,400 345,667 (784) 509,283
Balance as at 31 March 2020
Notes 1 to 26 form part of these consolidated financial statements.
Consolidated balance sheet
as at 31 March 2020
Notes 2020 2019
GBP000 GBP000
Non-current assets
Investment properties 13 654,486 676,102
Tangible assets 20 25
654,506 676,127
Total non-current assets
Current assets
Accounts receivable 14 17,601 14,309
Cash and cash equivalents 15 23,567 25,168
41,168 39,477
Total current assets
695,674 715,604
Total assets
Current liabilities
Accounts payable and accruals 16 (19,438) (22,400)
Loans and borrowings 17 (888) (833)
Obligations under leases 21 (108) (109)
(20,434) (23,342)
Total current liabilities
Non-current liabilities
Loans and borrowings 17 (164,248) (191,136)
Obligations under leases 21 (1,709) (1,711)
(165,957) (192,847)
Total non-current liabilities
(186,391) (216,189)
Total liabilities
509,283 499,415
Net assets
Equity
Share capital 19 164,400 157,449
Retained earnings 345,667 342,252
Other reserves (784) (286)
509,283 499,415
Total equity
22 93p 93p
Net asset value per share
These consolidated financial statements were approved by the Board of Directors
on 22 June 2020 and signed on its behalf by:
Andrew Dewhirst
Director
22 June 2020
Notes 1 to 26 form part of these consolidated financial statements.
Consolidated statement of cash flows
for the year ended 31 March 2020
Notes 2020 2019
GBP000 GBP000
Operating activities
Operating profit 30,670 43,746
Adjustments for non-cash items 20 (2,295) (10,918)
Interest received 9 38
Interest paid (7,952) (8,668)
Tax received/(paid) 123 (845)
(Increase)/decrease in accounts receivable (4,078) 396
(Decrease)/increase in accounts payable and accruals (2,936) 1,532
13,541 25,281
Cash inflows from operating activities
Investing activities
Capital expenditure on investment properties 13 (8,861) (1,559)
Disposal of investment properties 33,859 11,837
Purchase of tangible assets (4) (27)
24,994 10,251
Cash inflows from investing activities
Financing activities
Borrowings repaid 17 (33,204) (34,871)
Borrowings drawn 17 6,000 15,500
Debt prepayment fees - (3,245)
Issue of ordinary shares 19 7,137 -
Issue costs of ordinary shares (186) -
Purchase of shares held in trust 7 (844) (398)
Dividends paid 10 (19,039) (18,860)
(40,136) (41,874)
Cash outflows from financing activities
(1,601) (6,342)
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year 25,168 31,510
15 23,567 25,168
Cash and cash equivalents at end of year
Notes 1 to 26 form part of these consolidated financial statements.
Notes to the consolidated financial statements
for the year ended 31 March 2020
1. General information
Picton Property Income Limited (the 'Company' and together with its
subsidiaries the 'Group') was established on 15 September 2005 as a closed
ended Guernsey investment company and entered the UK REIT regime on 1 October
2018. The consolidated financial statements are prepared for the year ended 31
March 2020 with comparatives for the year ended 31 March 2019.
2. Significant accounting policies
Basis of accounting
The financial statements have been prepared on a going concern basis and adopt
the historical cost basis, except for the revaluation of investment properties.
Historical cost is generally based on the fair value of the consideration given
in exchange for the assets. The financial statements, which give a true and
fair view, are prepared in accordance with International Financial Reporting
Standards (IFRS) as issued by the IASB and are in compliance with the Companies
(Guernsey) Law, 2008.
Given the impact of the current Covid-19 pandemic on the UK economy, the
Directors have focused on assessing whether the going concern basis remains
appropriate for the preparation of the financial statements. They have reviewed
the Group's principal risks, its loan facilities, access to funding and
liquidity position and then considered a number of scenarios including
different levels of rent collection over varying timescales, and the potential
consequences on financial performance, asset values, capital projects and loan
covenants. Under all of these scenarios the Group has sufficient resources to
continue its operations, and remain within its loan covenants, for a period of
at least 12 months from the date of these financial statements.
Based on their assessment and knowledge of the portfolio and market, the
Directors have therefore continued to adopt the going concern basis in
preparing the financial statements.
The financial statements are presented in pounds sterling, which is the
Company's functional currency. All financial information presented in pounds
sterling has been rounded to the nearest thousand, except when otherwise
indicated.
New or amended standards issued
The accounting policies adopted are consistent with those of the previous
financial period, as amended to reflect the adoption of new standards,
amendments and interpretations which became effective in the year as shown
below.
* IFRS 16 Leases
The adoption of this standard has had no material effect on the consolidated
financial statements of the Group.
At the date of approval of these financial statements there are a number of new
and amended standards in issue but not yet effective for the financial year
ended 31 March 2020 and thus have not been applied by the Group.
* Amendments to IFRS 3 (Business Combinations) is effective for financial
years commencing on or after 1 January 2020. The amendment relates to
changes in the criteria for determining whether an acquisition is a
business combination or an asset acquisition. These amendments will be
applied to any future business combinations.
* Amendments to IFRS 9 (Financial Instruments) is effective for financial
years commencing on or after 1 January 2020. The amendments offer relief in
meeting the criteria for hedge accounting on the transition from LIBOR to
IBOR. The adoption of these amendments is not considered to have a material
impact on the financial statements of the Group.
* Amendments to References to the Conceptual Framework are effect for
financial years commencing on or after 1 January 2020. The adoption of
these amendments is not considered to have a material impact on the
financial statements of the Group.
* Amendments to IAS 8 (Accounting Policies, Changes in Accounting Estimates
and Errors) are also effective for financial years commencing on or after 1
January 2020. The amendment will be applied to any future changes in
Accounting Policy, Accounting Estimates or Errors.
Use of estimates and judgements
The preparation of financial statements in conformity with IFRS requires
management to make judgements, estimates and assumptions that affect the
application of policies and the reported amounts of assets, liabilities, income
and expenses. The estimates and associated assumptions are based on historical
experience and various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis of making estimates
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis.
Significant estimates
The critical estimates and assumptions relate to the investment property
valuations applied by the Group's independent valuer and this is described in
more detail in Note 13. Revisions to accounting estimates are recognised in the
year in which the estimate is revised if the revision affects only that year,
or in the year of the revision and future years if the revision affects both
current and future years.
Significant judgements
Critical judgements, where made, are disclosed within the relevant section of
the financial statements in which such judgements have been applied. Key
judgements relate to the treatment of business combinations, lease
classifications, or employee benefits where different accounting policies could
be applied. These are described in more detail in the accounting policy notes
below, or in the relevant notes to the financial statements.
Basis of consolidation
The consolidated financial statements incorporate the financial statements of
the Company and entities controlled by the Company at the reporting date. The
Group controls an entity when it is exposed to, or has rights to, variable
returns from its involvement with the entity and has the ability to affect
these returns through its power over the entity.
Subsidiaries are consolidated from the date on which control is transferred to
the Group and cease to be consolidated from the date on which control is
transferred out of the Group. These financial statements include the results of
the subsidiaries disclosed in Note 12. All intra-group transactions, balances,
income and expenses are eliminated on consolidation.
Fair value hierarchy
The fair value measurement for the assets and liabilities are categorised into
different levels in the fair value hierarchy based on the inputs to valuation
techniques used. The different levels have been defined as follows:
Level 1: quoted prices (unadjusted) in active markets for identical assets or
liabilities that the Group can access at the measurement date.
Level 2: inputs other than quoted prices included within Level 1 that are
observable for the asset or liability, either directly or indirectly.
Level 3: unobservable inputs for the asset or liability.
The Group recognises transfers between levels of the fair value hierarchy as of
the end of the reporting period during which the transfer has occurred.
Investment properties
Freehold property held by the Group to earn income or for capital appreciation,
or both, is classified as investment property in accordance with IAS 40
'Investment Property'. Property held under head leases for similar purposes is
also classified as investment property. Investment property is initially
recognised at purchase cost plus directly attributable acquisition expenses and
subsequently measured at fair value. The fair value of investment property is
based on a valuation by an independent valuer who holds a recognised and
relevant professional qualification and who has recent experience in the
location and category of the investment property being valued.
The fair value of investment properties is measured based on each property's
highest and best use from a market participant's perspective and considers the
potential uses of the property that are physically possible, legally
permissible and financially feasible.
The fair value of investment property generally involves consideration of:
* Market evidence on comparable transactions for similar properties;
* The actual current market for that type of property in that type of
location at the reporting date and current market expectations;
* Rental income from leases and market expectations regarding possible future
lease terms;
* Hypothetical sellers and buyers, who are reasonably informed about the
current market and who are motivated, but not compelled, to transact in
that market on an arm's length basis; and
* Investor expectations on matters such as future enhancement of rental
income or market conditions.
Gains and losses arising from changes in fair value are included in the
Consolidated Statement of Comprehensive Income in the year in which they arise.
Purchases and sales of investment property are recognised when contracts have
been unconditionally exchanged and the significant risks and rewards of
ownership have been transferred.
An investment property is derecognised for accounting purposes upon disposal or
when no future economic benefits are expected to arise from the continued use
of the asset. Any gain or loss arising on derecognition of the asset
(calculated as the difference between the net disposal proceeds and the
carrying amount of the item) is included in the Consolidated Statement of
Comprehensive Income in the year the asset is derecognised. Investment
properties are not depreciated.
The majority of the investment properties are charged by way of a first ranking
mortgage as security for the loans made to the Group; see Note 17.
Leases
Head leases, which transfer to the Group substantially all the risks and
benefits incidental to ownership of the leased asset, are capitalised at the
inception of the lease at the fair value of the leased asset or, if lower, the
present value of the minimum lease payments. Lease payments are apportioned
between finance charges and a reduction of the lease liability to achieve a
constant rate of interest on the remaining balance of the liability. Finance
charges are charged directly to the Consolidated Statement of Comprehensive
Income.
Lease income is recognised in income on a straight-line basis over the lease
term. Direct costs incurred in negotiating and arranging an operating lease are
added to the carrying amount of the leased asset and recognised as an expense
over the lease term on the same basis as the lease income. Premiums received on
the surrender of leases are recorded as income immediately if there are no
relevant conditions attached to the surrender.
Cash and cash equivalents
Cash includes cash in hand and cash with banks. Cash equivalents are
short-term, highly liquid investments that are readily convertible to known
amounts of cash with original maturities in three months or less and that are
subject to an insignificant risk of change in value.
Income and expenses
Income and expenses are included in the Consolidated Statement of Comprehensive
Income on an accruals basis. All of the Group's income and expenses are derived
from continuing operations.
Revenue is recognised to the extent that it is probable that the economic
benefit will flow to the Group and the revenue can be reliably measured.
Lease incentive payments are amortised on a straight-line basis over the period
from the date of lease inception to the lease end. Upon receipt of a surrender
premium for the early termination of a lease, the profit, net of dilapidations
and non-recoverable outgoings relating to the lease concerned, is immediately
reflected in revenue from properties.
Property operating costs include the costs of professional fees on letting and
other non-recoverable costs.
The income charged to occupiers for property service charges and the costs
associated with such service charges are shown separately in Notes 3 and 4 to
reflect that, notwithstanding this money is held on behalf of occupiers, the
ultimate risk for paying and recovering these costs rests with the property
owner.
Employee benefits
Defined contribution plans
A defined contribution plan is a post-employment benefit plan under which the
Company pays fixed contributions into a separate entity and will have no legal
or constructive obligation to pay further amounts. Obligations for
contributions to defined contribution pension plans are recognised as an
expense in the Consolidated Statement of Comprehensive Income in the periods
during which services are rendered by employees.
Short-term benefits
Short-term employee benefit obligations are measured on an undiscounted basis
and are expensed as the related service is provided. A liability is recognised
for the amount expected to be paid under short-term cash bonus or
profit-sharing plans if the Company has a present legal or constructive
obligation to pay this amount as a result of past service provided by the
employee and the obligation can be estimated reliably.
Share-based payments
The fair value of the amounts payable to employees in respect of the Deferred
Bonus Plan, when settled in cash, is recognised as an expense with a
corresponding increase in liabilities, over the period that the employees
become unconditionally entitled to payment. Where the awards are equity
settled, the fair value is recognised as an expense, with a corresponding
increase in equity. The liability is remeasured at each reporting date and at
settlement date. Any changes in the fair value of the liability are recognised
under the category staff costs in the Consolidated Statement of Comprehensive
Income.
The grant date fair value of awards to employees made under the Long-term
Incentive Plan is recognised as an expense, with a corresponding increase in
equity, over the vesting period of the awards. The amount recognised as an
expense is adjusted to reflect the number of awards for which the related
non-market performance conditions are expected to be met, such that the amount
ultimately recognised is based on the number of awards that meet the related
non-market performance conditions at the vesting date. For share-based payment
awards with market conditions, the grant date fair value of the share-based
awards is measured to reflect such conditions and there is no adjustment
between expected and actual outcomes.
The cost of the Company's shares held by the Employee Benefit Trust is deducted
from equity in the Group Balance Sheet. Any shares held by the Trust are not
included in the calculation of earnings or net assets per share.
Dividends
Dividends are recognised in the period in which they are declared.
Accounts receivable
Accounts receivable are stated at their nominal amount as reduced by
appropriate allowances for estimated irrecoverable amounts. The Group applies
the IFRS 9 simplified approach to measuring expected credit losses, which uses
a lifetime expected impairment provision for all applicable accounts
receivable. Bad debts are written off when identified.
Loans and borrowings
All loans and borrowings are initially recognised at cost, being the fair value
of the consideration received net of issue costs associated with the borrowing.
After initial recognition, loans and borrowings are subsequently measured at
amortised cost using the effective interest method. Amortised cost is
calculated by taking into account any issue costs, and any discount or premium
on settlement. Gains and losses are recognised in profit or loss in the
Consolidated Statement of Comprehensive Income when the liabilities are
derecognised for accounting purposes, as well as through the amortisation
process.
Assets classified as held for sale
Any investment properties on which contracts for sale have been exchanged but
which had not completed at the period end are disclosed as properties held for
sale. Investment properties included in the held for sale category continue to
be measured in accordance with the accounting policy for investment properties.
Other assets and liabilities
Other assets and liabilities, including trade creditors and accruals, trade and
other debtors and creditors, and deferred rental income, which are not interest
bearing are stated at their nominal value.
Share capital
Ordinary shares are classified as equity. Incremental costs directly
attributable to the issue of ordinary shares are recognised as a deduction from
equity.
Taxation
The Group elected to be treated as a UK REIT with effect from 1 October 2018.
The UK REIT rules exempt the profits of the Group's UK property rental business
from UK corporation and income tax. Gains on UK properties are also exempt from
tax, provided they are not held for trading. The Group is otherwise subject to
UK corporation tax.
As a REIT, the Company is required to pay Property Income Distributions equal
to at least 90% of the Group's exempted net income. To remain a UK REIT there
are a number of conditions to be met in respect of the principal company of the
Group, the Group's qualifying activity and its balance of business. The Group
continues to meet these conditions.
Principles for the Consolidated Statement of Cash Flows
The Consolidated Statement of Cash Flows has been drawn up according to the
indirect method, separating the cash flows from operating activities, investing
activities and financing activities. The net result has been adjusted for
amounts in the Consolidated Statement of Comprehensive Income and movements in
the Consolidated Balance Sheet which have not resulted in cash income or
expenditure in the relating period.
The cash amounts in the Consolidated Statement of Cash Flows include those
assets that can be converted into cash without any restrictions and without any
material risk of decreases in value as a result of the transaction.
3. Revenue from properties
2020 2019
GBP000 GBP000
Rents receivable (adjusted for lease incentives) 37,780 40,942
Surrender premiums 603 682
Dilapidation receipts 471 269
Other income 81 122
Service charge income 6,729 5,718
45,664 47,733
Rents receivable includes lease incentives recognised of GBP1.3 million (2019: GBP
0.8 million).
4. Property expenses
2020 2019
GBP000 GBP000
Property operating costs 2,293 2,342
Property void costs 3,005 1,373
Recoverable service charge costs 6,729 5,718
12,027 9,433
5. Operating segments
The Board is responsible for setting the Group's business model and strategy.
The key measure of performance used by the Board to assess the Group's
performance is the total return on the Group's net asset value. As the total
return on the Group's net asset value is calculated based on the net asset
value per share calculated under IFRS as shown at the foot of the Balance
Sheet, assuming dividends are reinvested, the key performance measure is that
prepared under IFRS. Therefore, no reconciliation is required between the
measure of profit or loss used by the Board and that contained in the financial
statements.
The Board has considered the requirements of IFRS 8 'Operating Segments'. The
Board is of the opinion that the Group, through its subsidiary undertakings,
operates in one reportable industry segment, namely real estate investment, and
across one primary geographical area, namely the United Kingdom, and therefore
no segmental reporting is required. The portfolio consists of 47 commercial
properties, which are in the industrial, office, retail and leisure sectors.
6. Administrative expenses
2020 2019
GBP000 GBP000
Director and staff costs 3,273 3,672
Auditor's remuneration 191 157
Other administrative expenses 2,099 2,013
5,563 5,842
One-off REIT conversion costs of GBP215,000 were incurred during the year ended
31 March 2019, which are included within other administrative expenses.
Auditor's remuneration comprises: 2020 2019
GBP000 GBP000
Audit fees:
Audit of Group financial statements 92 72
Audit of subsidiaries' financial statements 67 43
Audit-related fees:
Review of half-year financial statements 16 15
175 130
Non-audit fees:
Additional controls testing 16 15
Liquidators' fees - 7
Tax compliance - 5
16 27
191 157
7. Director and staff costs
2020 2019
GBP000 GBP000
Wages and salaries 1,688 1,654
Non-Executive Directors' fees 250 257
Social security costs 394 623
Other pension costs 45 48
Share-based payments - cash settled 473 727
Share-based payments - equity settled 423 363
3,273 3,672
The emoluments of the Directors are set out in detail within the Remuneration
Committee report.
Employees participate in two share-based remuneration arrangements: the
Deferred Bonus Plan and the Long-term Incentive Plan (the 'LTIP').
For all employees, a proportion of any discretionary annual bonus will be an
award under the Deferred Bonus Plan. With the exception of Executive Directors,
awards are cash settled and vest after two years. The final value of awards are
determined by the movement in the Company's share price and dividends paid over
the vesting period. For Executive Directors, awards are equity settled and also
vest after two years. On 19 June 2019 awards of 441,322 units were made which
vest in June 2021 (2019: 572,389 units). The next awards are due to be made in
June 2020 for vesting in June 2022.
The table below summarises the awards made under the Deferred Bonus Plan.
Employees have the option to defer the vesting date of their awards for a
maximum of seven years. The units which vested at 31 March 2020, and were not
deferred, were paid out subsequent to the year end at a cost of GBP210,000 (2019:
GBP925,000).
Vesting date Units Units Units Units Units Units Units Units Units
at granted cancelled redeemed in at granted cancelled redeemed at
31 March in the in the the year 31 March in the in the in the 31 March
2018 year year 2019 year year year 2020
31 March 2016 65,198 - - (65,198) - - - - -
31 March 2017 127,916 - - (127,916) - - - - -
31 March 2018 127,234 - - (127,234) - - - - -
31 March 2019 950,890 - (14,331) (936,559) - - - - -
31 March 2020 - 572,389 (7,785) - 564,604 - (2,616) (319,479) 242,509
31 March 2021 - - - - - 441,322 (2,415) - 438,907
1,271,238 572,389 (22,116) (1,256,907) 564,604 441,322 (5,031) (319,479) 681,416
The Group also has a Long-term Incentive Plan for all employees which is equity
settled. Awards are made annually and vest three years from the grant date.
Vesting is conditional on three performance metrics measured over each
three-year period. Awards to Executive Directors are also subject to a further
two-year holding period. On 19 June 2019 awards for a maximum of 878,164 shares
were granted to employees in respect of the three-year period ending on 31
March 2022. In the previous year, awards of 1,006,938 shares were made on 8
June 2018 for the period ending 31 March 2021.
The three performance metrics are:
* Total shareholder return (TSR) of Picton Property Income Limited, compared
to a comparator group of similar listed companies;
* Total property return (TPR) of the property assets held within the Group,
compared to the MSCI UK Quarterly Property Index; and
* Growth in EPRA earnings per share (EPS) of the Group.
The fair value of option grants is measured using a combination of a Monte
Carlo model for the market conditions (TSR) and a Black-Scholes model for the
non-market conditions (TPR and EPS). The fair value is recognised over the
expected vesting period. For the awards made during this year and the previous
year the main inputs and assumptions of the models, and the resulting fair
values, are:
Assumptions
Grant date 19 June 8 June 2018
2019
Share price at date of grant 95.0p 90.9p
Exercise price Nil Nil
Expected term 3 years 3 years
Risk-free rate - TSR condition 0.84% 0.83%
Share price volatility - TSR condition 18.7% 18.4%
Median volatility of comparator group - TSR condition 18.1% 18.1%
Correlation - TSR condition 27.1% 33.2%
TSR performance at grant date - TSR condition 7.5% 7.6%
Median TSR performance of comparator group at grant date - TSR 3.0% 3.1%
condition
Fair value - TSR condition (Monte Carlo method) 51.5p 42.9p
Fair value - TPR condition (Black-Scholes model) 95.0p 90.9p
Fair value - EPS condition (Black-Scholes model) 95.0p 90.9p
The Trustee of the Company's Employee Benefit Trust acquired 954,000 ordinary
shares during the year for GBP844,000 (2019: 472,000 shares for GBP398,000).
The Group employed nine members of staff at 31 March 2020 (2019: ten). The
average number of people employed by the Group for the year ended 31 March 2020
was ten (2019: 11).
8. Interest paid
2020 2019
GBP000 GBP000
Interest payable on loans at amortised cost 7,562 8,117
Interest on obligations under finance leases 114 114
Non-utilisation fees 248 220
Amortisation of finance costs 371 675
8,295 9,126
The loan arrangement costs incurred to 31 March 2020 are GBP4,534,000 (2019: GBP
4,534,000). These are amortised over the duration of the loans with GBP371,000
amortised in the year ended 31 March 2020 (2019: GBP675,000).
9. Tax
The charge for the year is:
2020 2019
GBP000 GBP000
Current UK income tax - 324
Income tax adjustment to provision for prior year (68) 25
(68) 349
Current UK corporation tax - 121
UK corporation tax adjustment to provision for prior year (56) (12)
(56) 109
Total tax (credit)/charge (124) 458
A reconciliation of the tax charge applicable to the results at the statutory
tax rate to the charge for the year is as follows:
2020 2019
GBP000 GBP000
Profit before taxation 22,384 31,413
Expected tax charge on ordinary activities at the standard rate of 4,253 6,283
taxation of 19% (2019: 20%)
Less:
UK REIT exemption on net income (3,760) (2,315)
Revaluation movement not taxable 168 (2,182)
Gains on disposal not taxable (661) (76)
Income not taxable, including interest receivable - (163)
Expenditure not allowed for tax purposes - 985
Losses utilised - (2)
Capital allowances and other allowable deductions - (2,291)
Losses carried forward to future years - 85
Total tax charge - 324
For the year ended 31 March 2020 there was an income tax credit of GBP68,000 in
respect of the Group (2019: GBP349,000 charge) and a corporation tax credit of GBP
56,000 (2019: GBP109,000 charge).
As a UK REIT, the income profits of the Group's UK property rental business are
exempt from corporation tax, as are any gains it makes from the disposal of its
properties, provided they are not held for trading. The Group is otherwise
subject to UK corporation tax at the prevailing rate.
As the principal company of the REIT, the Company is required to distribute at
least 90% of the income profits of the Group's UK property rental business.
There are a number of other conditions that are also required to be met by the
Company and the Group to maintain REIT tax status. These conditions were met in
the year and the Board intends to conduct the Group's affairs such that these
conditions continue to be met for the foreseeable future. Accordingly, deferred
tax is no longer recognised on temporary timing differences relating to the
property rental business.
The Group is exempt from Guernsey taxation under the Income Tax (Exempt Bodies)
(Guernsey) Ordinance, 1989.
10. Dividends
2020 2019
GBP000 GBP000
Declared and paid:
Interim dividend for the period ended 31 March 2018: 0.875 pence - 4,716
Interim dividend for the period ended 30 June 2018: 0.875 pence - 4,716
Interim dividend for the period ended 30 September 2018: 0.875 pence - 4,716
Interim dividend for the period ended 31 December 2018: 0.875 pence - 4,712
Interim dividend for the period ended 31 March 2019: 0.875 pence 4,712 -
Interim dividend for the period ended 30 June 2019: 0.875 pence 4,781 -
Interim dividend for the period ended 30 September 2019: 0.875 pence 4,773 -
Interim dividend for the period ended 31 December 2019: 0.875 pence 4,773 -
19,039 18,860
The interim dividend of 0.625 pence per ordinary share in respect of the period
ended 31 March 2020 has not been recognised as a liability as it was declared
after the year end. This dividend of GBP3,409,000 was paid on 29 May 2020.
11. Earnings per share
Basic and diluted earnings per share is calculated by dividing the net profit
for the year attributable to ordinary shareholders of the Company by the
weighted average number of ordinary shares in issue during the year, excluding
the average number of shares held by the Employee Benefit Trust for the year.
The diluted number of shares also reflects the contingent shares to be issued
under the Long-term Incentive Plan.
The following reflects the profit and share data used in the basic and diluted
profit per share calculation:
2020 2019
Net profit attributable to ordinary shareholders of the 22,508 30,955
Company from continuing operations (GBP000)
Weighted average number of ordinary shares for basic profit 544,192,866 538,815,550
per share
Weighted average number of ordinary shares for diluted profit 546,227,914 541,035,348
per share
12. Investments in subsidiaries
The Company had the following principal subsidiaries as at 31 March 2020 and 31
March 2019:
Name Place of Ownership
incorporation proportion
Picton UK Real Estate Trust (Property) Limited Guernsey 100%
Picton (UK) REIT (SPV) Limited Guernsey 100%
Picton (UK) Listed Real Estate Guernsey 100%
Picton UK Real Estate (Property) No 2 Limited Guernsey 100%
Picton (UK) REIT (SPV No 2) Limited Guernsey 100%
Picton Capital Limited England & Wales 100%
Picton (General Partner) No 2 Limited Guernsey 100%
Picton (General Partner) No 3 Limited Guernsey 100%
Picton No 2 Limited Partnership England & Wales 100%
Picton No 3 Limited Partnership England & Wales 100%
Picton Financing UK Limited (established on 14 February England & Wales 100%
2020)
Picton Property No 3 Limited Guernsey 100%
The results of the above entities are consolidated within the Group financial
statements.
Picton UK Real Estate Trust (Property) Limited and Picton (UK) REIT (SPV)
Limited own 100% of the units in Picton (UK) Listed Real Estate, a Guernsey
Unit Trust (the 'GPUT'). The GPUT holds a 99.9% interest in both Picton No 2
Limited Partnership and Picton No 3 Limited Partnership, the remaining balances
are held by Picton (General Partner) No 2 Limited and Picton (General Partner)
No 3 Limited respectively.
13. Investment properties
The following table provides a reconciliation of the opening and closing
amounts of investment properties classified as Level 3 recorded at fair value.
2020 2019
GBP000 GBP000
Fair value at start of year 676,102 674,524
Capital expenditure on investment properties 8,861 1,559
Disposals (33,073) (11,269)
Realised gains on disposal 3,478 379
Unrealised movement on investment properties (882) 10,909
Fair value at the end of the year 654,486 676,102
Historic cost at the end of the year 629,932 648,044
The fair value of investment properties reconciles to the appraised value as
follows:
2020 2019
GBP000 GBP000
Appraised value 664,615 685,335
Valuation of assets held under head leases 1,489 1,565
Lease incentives held as debtors (11,618) (10,798)
Fair value at the end of the year 654,486 676,102
The investment properties were valued by independent valuers, CBRE Limited,
Chartered Surveyors, as at 31 March 2020 and 31 March 2019 on the basis of fair
value in accordance with the version of the RICS Valuation - Global Standards
(incorporating the International Valuation Standards) and the UK national
supplement (the Red Book) current as at the valuation date. The total fees
earned by CBRE Limited from the Group are less than 5% of their total UK
revenue.
The fair value of the Group's investment properties has been determined using
an income capitalisation technique, whereby contracted and market rental values
are capitalised with a market capitalisation rate. The resulting valuations are
cross-checked against the equivalent yields and the fair market values per
square foot derived from comparable market transactions on an arm's length
basis.
In addition, the Group's investment properties are valued quarterly by CBRE
Limited. The valuations are based on:
Information provided by the Group including rents, lease terms, revenue and
capital expenditure. Such information is derived from the Group's financial and
property systems and is subject to the Group's overall control environment.
Valuation models used by the valuers, including market-related assumptions
based on their professional judgement and market observation.
The assumptions and valuation models used by the valuers, and supporting
information, are reviewed by senior management and the Board through the
Property Valuation Committee. Members of the Property Valuation Committee,
together with senior management, meet with the independent valuer on a
quarterly basis to review the valuations and underlying assumptions, including
considering current market trends and conditions, and changes from previous
quarters. The Board will also consider where circumstances at specific
investment properties, such as alternative uses and issues with occupational
tenants, are appropriately reflected in the valuations. The fair value of
investment properties is measured based on each property's highest and best use
from a market participant's perspective and considers the potential uses of the
property that are physically possible, legally permissible and financially
feasible.
The outbreak of Covid-19, declared by the World Health Organization as a
'Global Pandemic' on 11 March 2020, has impacted global financial markets.
Travel restrictions have been implemented by many countries. Market activity is
being impacted in many sectors. As at the valuation date, the external valuers
consider that they can attach less weight to previous market evidence for
comparison purposes, to inform opinions of value. The current response to
Covid-19 means that external valuers are faced with an unprecedented set of
circumstances on which to base a judgement. The valuations across all asset
classes are therefore reported on the basis of "material valuation uncertainty"
as per VPS 3 and VPGA 10 of the RICS Red Book Global.
Consequently, less certainty - and a higher degree of caution - should be
attached to the valuations provided than would normally be the case. The
external valuers have confirmed that the inclusion of the 'material valuation
uncertainty' declaration does not mean that valuations cannot be relied upon.
Rather, the phrase is used in order to be clear and transparent with all
parties, in a professional manner, that - in the current extraordinary
circumstances - less certainty can be attached to valuations than would
otherwise be the case.
As at 31 March 2020 and 31 March 2019 all of the Group's properties are Level 3
in the fair value hierarchy as it involves use of significant inputs. There
were no transfers between levels during the year and the prior year. Level 3
inputs used in valuing the properties are those which are unobservable, as
opposed to Level 1 (inputs from quoted prices) and Level 2 (observable inputs
either directly, i.e. as prices, or indirectly, i.e. derived from prices).
Information on these significant unobservable inputs per sector of investment
properties is disclosed as follows:
2020 2019
Office Industrial Retail Office Industrial Retail
and and
Leisure Leisure
Appraised value (GBP000) 224,620 318,330 121,665 235,035 312,790 137,510
Area (sq ft, 000s) 808 2,570 829 856 2,731 829
Range of unobservable inputs:
Gross ERV (sq ft per annum)
- range GBP11.00 to GBP3.54 to GBP GBP3.46 to GBP9.52 to GBP3.54 to GBP GBP3.88 to
GBP53.59 19.58 GBP81.77 GBP51.78 17.70 GBP84.11
- weighted average GBP27.92 GBP9.79 GBP32.13 GBP27.33 GBP8.91 GBP31.50
Net initial yield
- range 0.00% to -2.54% to -0.18% to 2.48% to 0.00% to -0.17% to
7.59% 8.16% 25.27% 8.59% 8.25% 15.36%
- weighted average 4.89% 4.63% 5.25% 5.15% 4.78% 5.11%
Reversionary yield
- range 5.47% to 4.46% to 4.36% to 5.32% to 4.60% to 4.63% to
10.80% 10.17% 11.97% 10.70% 9.99% 12.11%
- weighted average 7.04% 5.40% 6.63% 7.01% 5.55% 6.37%
True equivalent yield
- range 5.33% to 4.39% to 3.97% to 5.24% to 4.63% to 4.09% to
9.80% 9.65% 11.95% 9.49% 9.48% 10.86%
- weighted average 6.97% 5.40% 7.17% 6.88% 5.59% 6.75%
The property valuations reflect the external valuers' assessment of the impact
of Covid-19 at the valuation date. An increase/decrease in ERV will increase/
decrease valuations, while an increase/decrease to yield decreases/increases
valuations. In light of this material valuation uncertainty we have reviewed
the ranges used in assessing the impact of changes in unobservable inputs on
the fair value of the Group's property portfolio and concluded these were still
reasonable. The table below sets out the sensitivity of the valuation to
changes of 50 basis points in yield.
Sector Movement 2020 2019
Impact on valuation Impact on valuation
Industrial Increase of 50 basis Decrease of GBP29.3m Decrease of GBP28.7m
points
Decrease of 50 basis Increase of GBP36.1m Increase of GBP34.7m
points
Office Increase of 50 basis Decrease of GBP17.5m Decrease of GBP18.7m
points
Decrease of 50 basis Increase of GBP20.5m Increase of GBP21.3m
points
Retail and Leisure Increase of 50 basis Decrease of GBP10.9m Decrease of GBP12.6m
points
Decrease of 50 basis Increase of GBP13.9m Increase of GBP15.8m
points
14. Accounts receivable
2020 2019
GBP000 GBP000
Tenant debtors (net of provisions for bad debts) 5,197 2,594
Lease incentives 11,618 10,798
Other debtors 786 917
17,601 14,309
The estimated fair values of receivables are the discounted amount of the
estimated future cash flows expected to be received and the approximate of
their carrying amounts.
Amounts are considered impaired using the lifetime expected credit loss method.
Movement in the balance considered to be impaired has been included in the
Consolidated Statement of Comprehensive Income. As at 31 March 2020, tenant
debtors of GBP1,676,000 (2019: GBP918,000) were considered impaired and provided
for.
15. Cash and cash equivalents
2020 2019
GBP000 GBP000
Cash at bank and in hand 23,564 24,454
Short-term deposits 3 714
23,567 25,168
Cash at bank and in hand earns interest at floating rates based on daily bank
deposit rates. Short-term deposits are made for varying periods of between one
day and one month depending on the immediate cash requirements of the Group,
and earn interest at the respective short-term deposit rates. The carrying
amounts of these assets approximate their fair value.
16. Accounts payable and accruals
2020 2019
GBP000 GBP000
Accruals 5,263 6,596
Deferred rental income 7,817 8,381
VAT liability 1,685 1,994
Income tax liability - 57
Trade creditors 1,058 230
Other creditors 3,615 5,142
19,438 22,400
17. Loans and borrowings
Maturity 2020 2019
GBP000 GBP000
Current
Aviva facility - 1,258 1,204
Capitalised finance costs - (370) (371)
888 833
Non-current
Santander revolving credit facility 18 June - 11,500
2021
Santander revolving credit facility 20 June - 14,500
2021
Canada Life facility 24 July 80,000 80,000
2027
Aviva facility 24 July 86,207 87,465
2032
Capitalised finance costs - (1,959) (2,329)
164,248 191,136
165,136 191,969
The following table provides a reconciliation of the movement in loans and
borrowings to cash flows arising from financing activities.
2020 2019
GBP000 GBP000
Balance as at 1 April 191,969 210,664
Changes from financing cash flows
Proceeds from loans and borrowings 6,000 15,500
Repayment of loans and borrowings (33,204) (34,871)
(27,204) (19,371)
Other changes
Amortisation of financing costs 371 676
371 676
Balance as at 31 March 165,136 191,969
The Group has an GBP80 million term loan facility with Canada Life Limited which
matures in July 2027. Interest is fixed at 4.08% over the life of the loan. The
loan agreement has a loan to value covenant of 65% and an interest cover test
of 1.75. The loan is secured over the Group's properties held by Picton No 2
Limited Partnership and Picton UK Real Estate Trust (Property) No 2 Limited,
valued at GBP307.5 million (2019: GBP292.4 million).
Additionally, the Group has a GBP95.3 million term loan facility with Aviva
Commercial Finance Limited which matures in July 2032. The loan is for a term
of 20 years and was fully drawn on 24 July 2012 with approximately one-third
repayable over the life of the loan in accordance with a scheduled amortisation
profile. The Group has repaid GBP1.2 million in the year (2019: GBP1.2 million).
Interest on the loan is fixed at 4.38% over the life of the loan. The facility
has a loan to value covenant of 65% and a debt service cover ratio of 1.4. The
facility is secured over the Group's properties held by Picton No 3 Limited
Partnership and Picton Property No 3 Limited, valued at GBP189.0 million (2019: GBP
230.3 million).
As at 31 March 2020 the Group had two revolving credit facilities ('RCFs') with
Santander Corporate & Commercial Banking which expired in June 2021. In total
the Group had GBP49.0 million (2019: GBP51.0 million) available under both
facilities; there is nothing drawn down under these facilities at the year end.
Interest was payable on drawn balances at LIBOR plus margins of 175 or 190
basis points. The facilities were secured on properties held by Picton (UK)
REIT (SPV No 2) Limited and Picton (UK) Listed Real Estate, valued at GBP131.8
million (2019: GBP133.7 million). Post year end, both RCFs were cancelled and
replaced with a new GBP50.0 million RCF.
The fair value of the drawn loan facilities at 31 March 2020, estimated as the
present value of future cash flows discounted at the market rate of interest at
that date, was GBP197.0 million (2019: GBP219.5 million). The fair value of the
secured loan facilities is classified as Level 2 under the hierarchy of fair
value measurements.
There were no transfers between levels of the fair value hierarchy during the
current or prior years.
The weighted average interest rate on the Group's borrowings as at 31 March
2020 was 4.2% (2018: 4.0%).
18. Contingencies and capital commitments
The Group has entered into contracts for the refurbishment of 11 properties
with commitments outstanding at 31 March 2020 of approximately GBP4.5 million
(2019: GBP1.4 million). No further obligations to construct or develop investment
property or for repairs, maintenance or enhancements were in place as at 31
March 2020 (2019: GBPnil).
19. Share capital and other reserves
2020 2019
GBP000 GBP000
Authorised:
Unlimited number of ordinary shares of no par value - -
Issued and fully paid:
547,605,596 ordinary shares of no par value
(31 March 2019: 540,053,660) - -
Share premium 164,400 157,449
On 21 June 2019 the Company raised GBP7.1 million through the issue of 7,551,936
new ordinary shares of no par value at 94.5 pence per share. The Company now
has 547,605,596 ordinary shares in issue of no par value (31 March 2019:
540,053,660).
The balance of the Company's share premium account as at 31 March 2020 was GBP
164,400,000 (31 March 2019: GBP157,449,000).
2020 2019
Number of Number of
shares shares
Ordinary share capital 547,605,596 540,053,660
Number of shares held in Employee Benefit Trust (2,103,683) (1,542,000)
Number of ordinary shares 545,501,913 538,511,660
The fair value of awards made under the Long-term Incentive Plan is recognised
in other reserves.
Subject to the solvency test contained in the Companies (Guernsey) Law, 2008
being satisfied, ordinary shareholders are entitled to all dividends declared
by the Company and to all of the Company's assets after repayment of its
borrowings and ordinary creditors. The Trustee of the Company's Employee
Benefit Trust has waived its right to receive dividends on the 2,103,683 shares
it holds but continues to hold the right to vote. Ordinary shareholders have
the right to vote at meetings of the Company. All ordinary shares carry equal
voting rights.
The Directors have authority to buy back up to 14.99% of the Company's ordinary
shares in issue, subject to the annual renewal of the authority from
shareholders. Any buy back of ordinary shares will be made subject to Guernsey
law, and the making and timing of any buy-backs will be at the absolute
discretion of the Board.
20. Adjustment for non-cash movements in the cash flow statement
2020 2019
GBP000 GBP000
Profit on disposal of investment properties (3,478) (379)
Movement in investment property valuation 882 (10,909)
Share-based provisions 292 363
Depreciation of tangible assets 9 7
(2,295) (10,918)
21. Obligations under leases
The Group has entered into a number of head leases in relation to its
investment properties. These leases are for fixed terms and subject to regular
rent reviews. They contain no material provisions for contingent rents, renewal
or purchase options nor any restrictions outside of the normal lease terms.
Lease liabilities in respect of rents payable on leasehold properties were
payable as follows:
2020 2019
GBP000 GBP000
Future minimum payments due:
Within one year 117 117
In the second to fifth years inclusive 466 466
After five years 7,266 7,383
7,849 7,966
Less: finance charges allocated to future periods (6,032) (6,146)
Present value of minimum lease payments 1,817 1,820
The present value of minimum lease payments is analysed as follows:
2020 2019
GBP000 GBP000
Current
Within one year 108 109
108 109
Non-current
In the second to fifth years inclusive 388 392
After five years 1,321 1,319
1,709 1,711
1,817 1,820
Operating leases where the Group is lessor
The Group leases its investment properties under commercial property leases
which are held as operating leases.
At the reporting date, the Group's future income based on the unexpired lessor
lease length was as follows (based on annual rentals):
2020 2019
GBP000 GBP000
Within one year 38,296 37,497
In the second to fifth years inclusive 124,942 113,403
After five years 111,711 88,902
274,949 239,802
These properties are measured under the fair value model as the properties are
held to earn rentals. The majority of these non-cancellable leases have
remaining lease terms of more than five years.
22. Net asset value
The net asset value per share calculation uses the number of shares in issue at
the year end and excludes the actual number of shares held by the Employee
Benefit Trust at the year end; see Note 19.
23. Financial instruments
The Group's financial instruments comprise cash and cash equivalents, accounts
receivable, secured loans, obligations under head leases and accounts payable
that arise from its operations. The Group does not have exposure to any
derivative financial instruments. Apart from the secured loans, as disclosed in
Note 17, the fair value of the financial assets and liabilities is not
materially different from their carrying value in the financial statements.
Categories of financial instruments
31 March 2020 Note Held at Financial Total
fair value assets and GBP000
through liabilities
profit or at amortised
loss cost
GBP000 GBP000
Financial assets
Debtors 14 - 5,983 5,983
Cash and cash equivalents 15 - 23,567 23,567
- 29,550 29,550
Financial liabilities
Loans and borrowings 17 - 165,136 165,136
Obligations under head leases 21 - 1,817 1,817
Creditors and accruals 16 - 9,936 9,936
- 176,889 176,889
31 March 2019 Note Held at Financial Total
fair value assets and GBP000
through liabilities
profit or at amortised
loss cost
GBP000 GBP000
Financial assets
Debtors 14 - 3,511 3,511
Cash and cash equivalents 15 - 25,168 25,168
- 28,679 28,679
Financial liabilities
Loans and borrowings 17 - 191,969 191,969
Obligations under head leases 21 - 1,820 1,820
Creditors and accruals 16 - 11,968 11,968
- 205,757 205,757
24. Risk management
The Group invests in commercial properties in the United Kingdom. The following
describes the risks involved and the applied risk management. Senior management
reports regularly both verbally and formally to the Board, and its relevant
committees, to allow them to monitor and review all the risks noted below.
Capital risk management
The Group aims to manage its capital to ensure that the entities in the Group
will be able to continue as a going concern while maximising the return to
stakeholders through the optimisation of the debt and equity balance. The
Board's policy is to maintain a strong capital base so as to maintain investor,
creditor and market confidence and to sustain future development of the
business.
The capital structure of the Group consists of debt, as disclosed in Note 17,
cash and cash equivalents and equity attributable to equity holders of the
Company, comprising issued capital, reserves and retained earnings. The Group
is not subject to any external capital requirements.
The Group monitors capital on the basis of the gearing ratio. This ratio is
calculated as the principal borrowings outstanding, as detailed under Note 17,
divided by the gross assets. There is a limit of 65% as set out in the Articles
of Association of the Company. Gross assets are calculated as non-current and
current assets, as shown in the Consolidated Balance Sheet.
At the reporting date the gearing ratios were as follows:
2020 2019
GBP000 GBP000
Total borrowings 167,465 194,669
Gross assets 695,674 715,604
Gearing ratio (must not exceed 65%) 24.1% 27.2%
The Board of Directors monitors the return on capital as well as the level of
dividends to ordinary shareholders. The Group has managed its capital risk by
entering into long-term loan arrangements which will enable the Group to manage
its borrowings in an orderly manner over the long-term. The Group has two
revolving credit facilities which provide greater flexibility in managing the
level of borrowings.
The Group's net debt to equity ratio at the reporting date was as follows:
2020 2019
GBP000 GBP000
Total liabilities 186,391 216,189
Less: cash and cash equivalents (23,567) (25,168)
Net debt 162,824 191,021
Total equity 509,283 499,415
Net debt to equity ratio at end of year 0.32 0.38
Credit risk
The following tables detail the balances held at the reporting date that may be
affected by credit risk:
31 March 2020 Note Held at Financial Total
fair value assets and GBP000
through liabilities
profit or at amortised
loss cost
GBP000 GBP000
Financial assets
Tenant debtors 14 - 5,197 5,197
Cash and cash equivalents 15 - 23,567 23,567
- 28,764 28,764
31 March 2019 Note Held at Financial Total
fair value assets and GBP000
through liabilities
profit or at amortised
loss cost
GBP000 GBP000
Financial assets
Tenant debtors 14 - 2,594 2,594
Cash and cash equivalents 15 - 25,168 25,168
- 27,762 27,762
Credit risk refers to the risk that a counterparty will default on its
contractual obligations resulting in financial loss to the Group. The Group has
adopted a policy of only dealing with creditworthy counterparties and obtaining
sufficient collateral where appropriate, as a means of mitigating the risk of
financial loss from defaults. The Group's exposure and credit ratings of its
counterparties are continuously monitored and the aggregate value of
transactions concluded is spread amongst approved counterparties. Credit
exposure is controlled by counterparty limits that are reviewed regularly.
Tenant debtors consist of a large number of occupiers, spread across diverse
industries and geographical areas. Ongoing credit evaluations are performed on
the financial condition of tenant debtors and, where appropriate, credit
guarantees are acquired. Rent collection is outsourced to managing agents who
report regularly on payment performance and provide the Group with intelligence
on the continuing financial viability of occupiers. The Group does not have any
significant credit risk exposure to any single counterparty or any group of
counterparties having similar characteristics. The credit risk on liquid funds
is limited because the counterparties are banks with high credit ratings
assigned by international credit rating agencies.
The carrying amount of financial assets recorded in the financial statements,
net of any allowances for losses, represents the Group's maximum exposure to
credit risk. The Board continues to monitor the Group's exposure to credit
risk.
The Group has a panel of banks with which it makes deposits, based on credit
ratings with set counterparty limits. The Group's main cash balances are held
with National Westminster Bank plc ('NatWest'), Santander plc ('Santander'),
Nationwide International Limited ('Nationwide') and The Royal Bank of Scotland
plc ('RBS'). Insolvency or resolution of the bank holding cash balances may
cause the Group's recovery of cash held by them to be delayed or limited. The
Group manages its risk by monitoring the credit quality of its bankers on an
ongoing basis. NatWest, Santander, Nationwide and RBS are rated by all the
major rating agencies. If the credit quality of these banks deteriorates, the
Group would look to move the short-term deposits or cash to another bank.
Procedures exist to ensure that cash balances are split between banks to
minimise exposure. At 31 March 2020 and at 31 March 2019 Standard & Poor's
credit rating for the Group's bankers was A-1.
There has been no change in the fair values of cash or receivables as a result
of changes in credit risk in the current or prior periods, due to the actions
taken to mitigate this risk, as stated above.
Liquidity risk
Ultimate responsibility for liquidity risk management rests with the Board,
which has built an appropriate liquidity risk management framework for the
management of the Group's short, medium and long-term funding and liquidity
management requirements. The Group's liquidity risk is managed on an ongoing
basis by senior management and monitored on a quarterly basis by the Board by
maintaining adequate reserves and loan facilities, continuously monitoring
forecasts and actual cash flows and matching the maturity profiles of financial
assets and liabilities for a period of at least 12 months.
The table below has been drawn up based on the undiscounted contractual
maturities of the financial assets/(liabilities), including interest that will
accrue to maturity.
31 March 2020 Less than 1 to 5 More than Total
1 year years 5 years GBP000
GBP000 GBP000 GBP000
Cash and cash equivalents 23,567 - - 23,567
Debtors 5,983 - - 5,983
Capitalised finance costs 370 912 1,047 2,329
Obligations under head leases (117) (466) (7,266) (7,849)
Fixed interest rate loans (8,332) (33,329) (193,259) (234,920)
Creditors and accruals (9,936) - - (9,936)
11,535 (32,883) (199,478) (220,826)
31 March 2019 Less than 1 to 5 More than Total
1 year years 5 years GBP000
GBP000 GBP000 GBP000
Cash and cash equivalents 25,177 - - 25,177
Debtors 3,511 - - 3,511
Capitalised finance costs 371 1,062 1,267 2,700
Obligations under head leases (117) (466) (7,383) (7,966)
Fixed interest rate loans (8,332) (33,329) (201,591) (243,252)
Floating interest rate loans (360) (26,869) - (27,229)
Creditors and accruals (11,968) - - (11,968)
8,282 (59,602) (207,707) (259,027)
Market risk
The Group's activities are primarily within the real estate market, exposing it
to very specific industry risks.
The yields available from investments in real estate depend primarily on the
amount of revenue earned and capital appreciation generated by the relevant
properties as well as expenses incurred. If properties do not generate
sufficient revenues to meet operating expenses, including debt service and
capital expenditure, the Group's revenue will be adversely affected.
Revenue from properties may be adversely affected by the general economic
climate, local conditions such as oversupply of properties or a reduction in
demand for properties in the market in which the Group operates, the
attractiveness of the properties to occupiers, the quality of the management,
competition from other available properties and increased operating costs
(including real estate taxes).
In addition, the Group's revenue would be adversely affected if a significant
number of occupiers were unable to pay rent or its properties could not be
rented on favourable terms. This has increased given the Covid-19 pandemic and
the resultant effect on tenants' ability to pay rent. Certain significant
expenditure associated with each equity investment in real estate (such as
external financing costs, real estate taxes and maintenance costs) is generally
not reduced when circumstances cause a reduction in revenue from properties. By
diversifying in regions, sectors, risk categories and occupiers, senior
management expects to lower the risk profile of the portfolio. The Board
continues to oversee the profile of the portfolio to ensure risks are managed.
The valuation of the Group's property assets is subject to changes in market
conditions. Such changes are taken to the Consolidated Statement of
Comprehensive Income and thus impact on the Group's net result. A 5% increase
or decrease in property values would increase or decrease the Group's net
result by GBP33.2 million (2019: GBP34.3 million).
Interest rate risk management
Interest rate risk arises on interest payable on the revolving credit
facilities only. The Group's senior debt facilities have fixed interest rates
over the terms of the loans and thus the Group has limited exposure to interest
rate risk on the majority of its borrowings and no sensitivity is presented.
Interest rate risk
The following table sets out the carrying amount, by maturity, of the Group's
financial assets/(liabilities).
31 March 2020 Less than 1 to 5 More than Total
1 year years 5 years GBP000
GBP000 GBP000 GBP000
Floating
Cash and cash equivalents 23,567 - - 23,567
Fixed
Secured loan facilities (1,258) (5,616) (160,591) (167,465)
Obligations under leases (108) (388) (1,321) (1,817)
22,201 (6,004) (161,912) (145,715)
31 March 2019 Less than 1 to 5 More than Total
1 year years 5 years GBP000
GBP000 GBP000 GBP000
Floating
Cash and cash equivalents 25,168 - - 25,168
Secured loan facilities - (26,000) - (26,000)
Fixed
Secured loan facilities (1,204) (5,377) (160,884) (167,465)
Obligations under leases (109) (392) (1,319) (1,820)
23,855 (31,769) (162,203) (170,117)
Concentration risk
As discussed above, all of the Group's investments are in the UK and therefore
it is exposed to macroeconomic changes in the UK economy. Furthermore, the
Group has around 350 occupiers so does not place reliance on a limited number
of occupiers for its rental income, with the single largest occupier accounting
for 4.2% of the Group's annual contracted rental income.
Currency risk
The Group has no exposure to foreign currency risk.
25. Related party transactions
The total fees earned during the year by the Non-Executive Directors of the
Company amounted to GBP250,000 (2019: GBP257,000). As at 31 March 2020 the Group
owed GBPnil to the Non-Executive Directors (2019: GBPnil). 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 GBP3,409,000 (0.625 pence per share) was approved by the Board on
27 April 2020 and was paid on 29 May 2020.
On 27 May 2020 the Group entered into a new GBP50 million revolving credit
facility; this replaces the existing facilities held with Santander Corporate &
Commercial Banking which have been cancelled.
Post Balance Sheet event disclosure
The global outbreak of Covid-19 in 2020 has resulted in significant loss of
life, adversely impacted commercial activity and contributed to significant
volatility in certain equity and debt markets. The global impact of the
outbreak evolved rapidly and, on 11 March 2020, the World Health Organization
declared a pandemic. Many countries have reacted by instituting quarantines,
prohibitions on travel and the closure of offices, businesses, schools, retail
stores and other public venues. Businesses are also implementing similar
precautionary measures.
Such measures, as well as the general uncertainty surrounding the dangers and
impact of Covid-19, are creating significant disruption in supply chains and
economic activity and are having a particularly adverse impact on
transportation, hospitality, tourism, entertainment and other industries. The
impact of Covid-19 has led to significant volatility and declines in the global
public equity markets and it is uncertain how long this volatility will
continue. As Covid-19 continues to spread, the potential impacts, including a
global, regional or other economic recession, are increasingly uncertain and
difficult to assess.
The outbreak of Covid-19 and the resulting financial and economic market
uncertainty could have a significant adverse impact on the Group. Any future
impact on the Group is likely to be in connection with the assessment of the
fair value of investments and stability of rental income at future dates. At
the date of reporting it is not possible to quantify the future financial
impact of Covid-19 on the Company's investment properties or rental income with
a degree of certainty. The Board will continue to closely analyse and review
the impact of Covid-19 on the Company and will take appropriate action as
required.
ENDS
END
(END) Dow Jones Newswires
June 23, 2020 02:00 ET (06:00 GMT)
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