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 £22.5 million
- Net assets of £509 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 £167.5 million
- Loan to value ratio reduced to 22%
- Raised £7 million of non-dilutive equity
- New £50 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 £34.1 million, 15% ahead of
March 2019 valuations
- £9 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
2020 |
31
March
2019 |
31
March
2018 |
Property valuation |
£665m |
£685m |
£684m |
Net assets |
£509m |
£499m |
£487m |
EPRA NAV per share |
93p |
93p |
90p |
Income
Statement |
Year
ended
31 March
2020 |
Year
ended
31 March
2019 |
Year
ended
31 March
2018 |
Profit after tax |
£22.5m |
£31.0m |
£64.2m |
EPRA earnings |
£19.9m |
£22.9m |
£22.6m |
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
£0.3 million to the annualised rent roll.
In terms of pipeline, a further six lettings (including four
relocations), for a combined annual rent of £0.5 million, and seven
lease extensions, for a combined annual rent of £1 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 £50 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 £665 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 £23 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 £50 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 £50 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 £56.5 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 £30.5 billion,
accounting for 53.9% of all transactions. Illustrating the
liquidity issues within the retail sector, it had investment
transactions of just £5.0 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 £9 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 £664.6 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 £36.2 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 £45.2 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 £34.1 million, 15%
ahead of the March 2019 valuation.
Citylink, Croydon was sold following the early surrender of two
leases, generating £0.6 million of additional income. The property
was sold for £18.2 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 £1 million per annum, achieving
one of the highest rents at the Park. The property was sold for
£15.9 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 £9 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 £14.1 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 £9
million of reversionary upside, £5 million from letting the void,
£3 million from expiring rent free and £1 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 date |
Property type |
Tenure |
Approximate area (sq ft) |
No. of
occupiers |
Occupancy rate (%) |
Parkbury Industrial
Estate, Radlett, Herts. |
03/2014 |
Industrial |
Freehold |
336,700 |
21 |
100 |
River Way Industrial
Estate, Harlow, Essex |
12/2006 |
Industrial |
Freehold |
454,800 |
10 |
98 |
Angel Gate, City Road,
London EC1 |
10/2005 |
Office |
Freehold |
64,500 |
22 |
74 |
Stanford Building, Long
Acre, London WC2 |
05/2010 |
Retail |
Freehold |
19,700 |
0 |
0 |
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, Essex |
09/2013 |
Industrial |
Freehold |
99,400 |
9 |
100 |
Colchester Business
Park, Colchester |
10/2005 |
Office |
Leasehold |
150,700 |
22 |
99 |
Top ten occupiers
The largest occupiers, based as a percentage of contracted rent, as
at 31 March 2020, are as follows:
Occupier |
Contracted rent
(£m) |
% |
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 £6.6 million, compared to £6.9 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 £5.5 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 |
£318.3m |
£312.8m |
Internal area |
2.6m
sq ft |
2.7m sq
ft |
Annual rental
income |
£16.0m |
£16.0m |
Estimated rental
value |
£18.6m |
£18.7m |
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 £18.1 million or 6.0% to £318.3 million, and the
annual rental income increased by £0.9 million or 6.0% to £16.0
million. The portfolio has an average weighted lease length of 5.1
years and £2.6 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 £1.6 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 £1.0 million per annum, 42% ahead of ERV. In addition,
we let four units for a combined £0.4 million per annum, 8% ahead
of ERV, renewed one lease for £0.2 million per annum, 5% ahead of
ERV, and settled four rent reviews achieving a £0.3 million uplift
in rent to £1 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 £1.2
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 £1
million per annum, 6% ahead of ERV, achieving one of the highest
rents at the Park. The unit was subsequently sold for £15.9
million.
At Datapoint in London E16,
following the completion of a rent review, we achieved a 98% uplift
in rent to £0.1 million per annum, 15% ahead of ERV. Two leases
were surrendered on the estate, securing a premium of £0.2 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 £0.2 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 £0.2 million per annum, 2% ahead of ERV. Two leases were
renewed, the passing rent increasing by 22% to a combined £0.1
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 £0.7 million. This provides us with the
opportunity to grow income further.
Office
Key metrics
|
2020 |
2019 |
Value |
£224.6m |
£235.0m |
Internal area |
0.8m
sq ft |
0.9m sq
ft |
Annual rental
income |
£12.9m |
£14.2m |
Estimated rental
value |
£17.4m |
£18.1m |
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 £6.6 million or 3.0% to £224.6 million, and the annual rental
income decreased marginally by £0.3 million or 2.2% to £12.9
million. The portfolio has an average weighted lease length of 4.0
years and £4.5 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 £2.7 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 £0.5 million per annum, which was 5% ahead of
the ERV and £0.3 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 £0.4 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 £0.6 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 £0.4 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 £0.3 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 £18.2 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 £2.5 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 £2.0
million and a 12% void. This provides us with the opportunity to
grow income further.
Retail and Leisure
Key metrics
|
2020 |
2019 |
Value |
£121.7m |
£137.5m |
Internal area |
0.8m
sq ft |
0.8m sq
ft |
Annual rental
income |
£7.3m |
£7.5m |
Estimated rental
value |
£9.2m |
£10.0m |
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 £15.8 million or 11.5% to £121.7 million, and the
annual rental income decreased marginally by £0.2 million or 2.6%
to £7.3 million. The portfolio has an average weighted lease length
of 8.9 years and £1.9 million of reversionary potential to £9.2
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 £3.3 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 £0.1 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 £0.1 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 £0.2 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 £0.1 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 £0.2 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 £0.1 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
£22.5 million, compared to £31.0 million for 2019, reduced due to
lower valuation movements, particularly in the final quarter of the
year. Our EPRA earnings declined to £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 £509.3 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.
|
£m |
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
£m |
2019
£m |
2018
£m |
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 £45.7
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
25 March to 1 April |
Industrial
(%) |
Office
(%) |
Retail and
Leisure
(%) |
Total
(%) |
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
£0.5 million.
Administrative expenses for the year were £5.6 million, so
slightly lower than the £5.8 million in 2019. These include the
one-off costs of REIT conversion.
Realised and unrealised valuation gains on the portfolio were
£2.6 million for the year, lower than the gains of £11.3 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 £8.3
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 £19.9 million, lower than the
£22.9 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 £19.0 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 £664.6
million at 31 March 2020, down from
£685.3 million a year previously. This year we have disposed of two
buildings, for net proceeds of £33.1 million, realising a combined
gain of £3.5 million compared to last year’s valuation. £8.9
million of capital expenditure was invested back into the existing
portfolio. The overall revaluation movement was a small loss of
£0.9 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 £14.1 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 £167.5 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 £1.2 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 £49 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
£50 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 £2.3 million.
The fair value of our borrowings at 31
March 2020 was £197.0 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
(£m) |
167.5 |
168.7 |
203.5 |
Drawn revolving
facilities (£m) |
– |
26.0 |
10.5 |
Total borrowings
(£m) |
167.5 |
194.7 |
214.0 |
Borrowings net of cash
(£m) |
143.9 |
169.5 |
182.5 |
Undrawn facilities
(£m) |
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 £13.5 million this
year, down from the 2019 figure. Proceeds from asset sales were
used to finance the net reduction in borrowings. Dividend payments
of £19.0 million were made in the year. Our cash balance at the
year end stood at £23.6 million.
Share capital
During the year the Company issued 7,551,936 new ordinary shares of
no par value, for gross proceeds of £7.1 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 £0.8 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
Uncertainty in the UK economy, whether arising from political
events or otherwise, brings risks to the property market and to
occupiers’ businesses. This can result in lower shareholder
returns, lower asset liquidity and increased occupier
failure. |
Mitigation
The Board considers economic conditions and market uncertainty when
setting strategy, considering the financial strategy of the
business and in making investment decisions. |
Commentary
The risks around the UK economy have increased with the Covid-19
pandemic. Although there is more certainty regarding Brexit, no
future deal with the EU has yet been agreed and this may lead to
further uncertainty later in 2020. |
2 |
Market
cycle |
|
Risk trend:
Up |
Risk
The property market is cyclical and returns can be volatile.
There is an ongoing risk that the Company fails to react
appropriately to changing market conditions, resulting in an
adverse impact on shareholder returns. |
Mitigation
The Board reviews the Group’s strategy and business objectives on a
regular basis and considers whether any change is needed, in light
of current and forecast market conditions. |
Commentary
There may be increased volatility in the property market as a
result of the current economic restrictions. Official forecasts
indicate a substantial fall in UK GDP this year. The impact of
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
The Group could fail to comply with legal, fiscal, health and
safety or regulatory matters which could lead to financial loss,
reputational damage or loss of REIT status. |
Mitigation
The Board and senior management receive regular updates on relevant
laws and regulations.
The Group is a member of the BPF and EPRA, and management attend
industry briefings. |
Commentary
There are no significant changes expected to the regulatory
environment in which the Group operates. |
4 |
Climate
change |
|
Risk trend:
Up |
Risk
Failure to react to climate change could lead to the Group’s
assets becoming obsolete and unable to attract occupiers. |
Mitigation
Sustainability is embedded within the Group’s business model and
strategy.
All refurbishment projects include environmental considerations to
ensure buildings are maintained to current standards. |
Commentary
Climate change is now considered to be a principal risk given its
increasing importance and the impact of real estate on the
environment. |
Property
5 |
Portfolio
strategy |
|
Risk trend:
Up |
Risk
The Group has an inappropriate portfolio strategy, as a result
of poor sector or geographical allocations, or holding obsolete
assets, leading to lower shareholder returns. |
Mitigation
The Group maintains a diversified portfolio in order to minimise
exposure to any one geographical area or market sector. |
Commentary
Continued divergence of returns across sectors, coupled with the
impact of Covid-19 particularly on retail and leisure assets, have
increased this risk. |
6 |
Investment |
|
Risk trend:
Same |
Risk
Investment decisions may be flawed as a result of incorrect
assumptions, poor research or incomplete due diligence, leading to
financial loss. |
Mitigation
The Executive Committee must approve all investment transactions
over a threshold level, and significant transactions require Board
approval.
A formal appraisal and due diligence process is carried out for all
potential purchases.
A review of each acquisition is performed within two years of
completion. |
Commentary
There is no change to this risk. |
7 |
Asset
management |
|
Risk trend:
Up |
Risk
Failure to properly execute asset business plans or poor asset
management could lead to longer void periods, higher occupier
defaults, higher arrears and low occupier retention, all having an
adverse impact on earnings and cash flow. |
Mitigation
Management prepare business plans for each asset which are reviewed
regularly.
The Executive Committee must approve all investment transactions
over a threshold level, and significant transactions require Board
approval.
Management maintain close contact with occupiers and have oversight
of the Group’s Property Manager. |
Commentary
The importance of effective asset management has been heightened by
the Covid-19 pandemic and its impact on occupiers’ businesses. |
8 |
Valuation |
|
Risk trend:
Up |
Risk
A fall in the valuation of the Group’s property assets could
lead to lower investment returns and a breach of loan
covenants. |
Mitigation
The Group’s property assets are valued quarterly by an independent
valuer with oversight by the Property Valuation Committee. Market
commentary is provided regularly by the independent valuer.
The Board reviews financial forecasts for the Group on a regular
basis, including sensitivity against financial covenants. |
Commentary
The current economic situation could lead to negative sentiment and
see further falls in asset values. |
Operational
9 |
People |
|
Risk trend:
Same |
Risk
The Group relies on a small team to implement the strategy and
run the day-to-day operations. Failure to retain or recruit key
individuals with the right blend of skills and experience may
result in poor decision making and underperformance. |
Mitigation
The Board has a remuneration policy in place which incentivises
performance and is aligned with shareholders’ interests.
There is a Non-Executive Director responsible for employee
engagement who provides regular feedback to the Board. |
Commentary
The Group has a stable and aligned team in place.
Significant efforts have been, and will continue to be made to
ensure the safety and well-being of the Group’s employees through
the course of the Covid-19 pandemic. |
Financial
10 |
Finance
strategy |
|
Risk trend:
Up |
Risk
The Group has a number of loan facilities to finance its
activities. Failure to comply with covenants or to manage
re-financing events could lead to a funding shortfall for
operational activities. |
Mitigation
The Group’s property assets are valued quarterly by an independent
valuer with oversight by the Property Valuation Committee. Market
commentary is provided regularly by the independent valuer.
The Board reviews financial forecasts for the Group on a regular
basis, including sensitivity against financial covenants.
The Audit and Risk Committee considers the going concern status of
the Group biannually. |
Commentary
Although the Group has headroom against its loan covenants,
significant falls in valuations or income during the current
Covid-19 crisis could lead to pressure on covenants. However, a
number of stress tests have been conducted to assess the potential
risk, which the Board will continue to monitor. |
11 |
Capital
structure |
|
Risk trend:
Up |
Risk
The Group operates a geared capital structure, which magnifies
returns from the portfolio, both positive and negative. An
inappropriate level of gearing relative to the property cycle could
lead to lower investment returns. |
Mitigation
The Board regularly reviews its gearing strategy and debt maturity
profile, at least annually, in light of changing market
conditions. |
Commentary
Although the Group has a modest level of gearing, falls in capital
values will be magnified by the impact of gearing. |
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
Total
£000 |
2019
Total
£000 |
Income |
|
|
|
Revenue from
properties |
3 |
45,664 |
47,733 |
Property expenses |
4 |
(12,027) |
(9,433) |
Net property income |
|
33,637 |
38,300 |
|
|
|
|
Expenses |
|
|
|
Administrative
expenses |
6 |
(5,563) |
(5,842) |
Total operating expenses |
|
(5,563) |
(5,842) |
|
|
|
|
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 |
Total profit on investments |
|
2,596 |
11,288 |
|
|
|
|
Operating
profit |
|
30,670 |
43,746 |
|
|
|
|
Financing |
|
|
|
Interest received |
|
9 |
38 |
Interest paid |
8 |
(8,295) |
(9,126) |
Debt prepayment
fees |
|
– |
(3,245) |
Total finance costs |
|
(8,286) |
(12,333) |
|
|
|
|
Profit before
tax |
|
22,384 |
31,413 |
Tax |
9 |
124 |
(458) |
Profit and total comprehensive income for the
period |
|
22,508 |
30,955 |
|
|
|
|
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
capital
£000 |
Retained
earnings
£000 |
Other
reserves
£000 |
Total
£000 |
Balance as at 31
March 2018 |
|
157,449 |
330,157 |
(251) |
487,355 |
Profit for the
year |
|
– |
30,955 |
– |
30,955 |
Dividends paid |
10 |
– |
(18,860) |
– |
(18,860) |
Share-based awards |
7 |
– |
– |
363 |
363 |
Purchase of shares held
in trust |
7 |
– |
– |
(398) |
(398) |
Balance as at 31 March 2019 |
|
157,449 |
342,252 |
(286) |
499,415 |
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) |
Balance as at 31 March 2020 |
|
164,400 |
345,667 |
(784) |
509,283 |
Notes 1 to 26 form part of these consolidated financial
statements.
Consolidated balance sheet
as at 31 March 2020
|
Notes |
2020
£000 |
2019
£000 |
Non-current
assets |
|
|
|
Investment
properties |
13 |
654,486 |
676,102 |
Tangible assets |
|
20 |
25 |
Total non-current assets |
|
654,506 |
676,127 |
Current assets |
|
|
|
Accounts
receivable |
14 |
17,601 |
14,309 |
Cash and cash
equivalents |
15 |
23,567 |
25,168 |
Total current assets |
|
41,168 |
39,477 |
Total assets |
|
695,674 |
715,604 |
Current liabilities |
|
|
|
Accounts payable and
accruals |
16 |
(19,438) |
(22,400) |
Loans and
borrowings |
17 |
(888) |
(833) |
Obligations under
leases |
21 |
(108) |
(109) |
Total current liabilities |
|
(20,434) |
(23,342) |
Non-current liabilities |
|
|
|
Loans and
borrowings |
17 |
(164,248) |
(191,136) |
Obligations under
leases |
21 |
(1,709) |
(1,711) |
Total non-current liabilities |
|
(165,957) |
(192,847) |
Total liabilities |
|
(186,391) |
(216,189) |
Net assets |
|
509,283 |
499,415 |
Equity |
|
|
|
Share capital |
19 |
164,400 |
157,449 |
Retained earnings |
|
345,667 |
342,252 |
Other reserves |
|
(784) |
(286) |
Total equity |
|
509,283 |
499,415 |
Net asset value per share |
22 |
93p |
93p |
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
£000 |
2019
£000 |
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 |
Cash inflows from operating activities |
|
13,541 |
25,281 |
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) |
Cash inflows from investing activities |
|
24,994 |
10,251 |
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) |
Cash outflows from financing activities |
|
(40,136) |
(41,874) |
Net decrease in cash and cash equivalents |
|
(1,601) |
(6,342) |
Cash and cash
equivalents at beginning of year |
|
25,168 |
31,510 |
Cash and cash equivalents at end of year |
15 |
23,567 |
25,168 |
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.
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
£000 |
2019
£000 |
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 £1.3
million (2019: £0.8 million).
4. Property expenses
|
2020
£000 |
2019
£000 |
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
£000 |
2019
£000 |
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 £215,000 were incurred during
the year ended 31 March 2019, which
are included within other administrative expenses.
Auditor’s remuneration
comprises: |
2020
£000 |
2019
£000 |
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
£000 |
2019
£000 |
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
£210,000 (2019: £925,000).
Vesting date |
Units
at 31 March 2018 |
Units
granted in the year |
Units
cancelled in the year |
Units
redeemed in the year |
Units
at 31 March 2019 |
Units
granted in the year |
Units
cancelled in the year |
Units
redeemed in the year |
Units
at 31 March 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
2019 |
8 June
2018 |
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 condition |
3.0% |
3.1% |
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 £844,000 (2019: 472,000
shares for £398,000).
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
£000 |
2019
£000 |
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 £4,534,000 (2019: £4,534,000). These are
amortised over the duration of the loans with £371,000 amortised in
the year ended 31 March 2020 (2019:
£675,000).
9. Tax
The charge for the year is:
|
2020
£000 |
2019
£000 |
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
£000 |
2019
£000 |
Profit before
taxation |
22,384 |
31,413 |
Expected tax charge on
ordinary activities at the standard rate of taxation of 19% (2019:
20%) |
4,253 |
6,283 |
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 £68,000 in respect of the Group
(2019: £349,000 charge) and a corporation tax credit of £56,000
(2019: £109,000 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
£000 |
2019
£000 |
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 £3,409,000 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 Company from continuing operations
(£000) |
22,508 |
30,955 |
Weighted average number
of ordinary shares for basic profit per share |
544,192,866 |
538,815,550 |
Weighted average number
of ordinary shares for diluted profit per share |
546,227,914 |
541,035,348 |
12. Investments in subsidiaries
The Company had the following principal subsidiaries as at
31 March 2020 and 31 March 2019:
Name |
Place
of
incorporation |
Ownership
proportion |
Picton UK Real Estate
Trust (Property) Limited |
Guernsey |
100% |
Picton (UK) REIT (SPV)
Limited |
Guernsey |
100% |
Picton (UK) Listed Real
Estate |
Guernsey |
100% |
Picton UK Real Estate
(Property) No 2 Limited |
Guernsey |
100% |
Picton (UK) REIT (SPV
No 2) Limited |
Guernsey |
100% |
Picton Capital
Limited |
England
& Wales |
100% |
Picton (General
Partner) No 2 Limited |
Guernsey |
100% |
Picton (General
Partner) No 3 Limited |
Guernsey |
100% |
Picton No 2 Limited
Partnership |
England
& Wales |
100% |
Picton No 3 Limited
Partnership |
England
& Wales |
100% |
Picton Financing UK
Limited (established on 14 February 2020) |
England
& Wales |
100% |
Picton Property No 3
Limited |
Guernsey |
100% |
The results of the above entities are consolidated within the
Group financial statements.
Picton UK Real Estate Trust (Property) Limited and Picton (UK)
REIT (SPV) Limited own 100% of the units in Picton (UK) Listed Real
Estate, a Guernsey Unit Trust (the ‘GPUT’). The GPUT holds a 99.9%
interest in both Picton No 2 Limited Partnership and Picton No 3
Limited Partnership, the remaining balances are held by Picton
(General Partner) No 2 Limited and Picton (General Partner) No 3
Limited respectively.
13. Investment properties
The following table provides a reconciliation of the opening and
closing amounts of investment properties classified as Level 3
recorded at fair value.
|
2020
£000 |
2019
£000 |
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
£000 |
2019
£000 |
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
and Leisure |
Office |
Industrial |
Retail and
Leisure |
Appraised value
(£000) |
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 |
£11.00
to £53.59 |
£3.54
to £19.58 |
£3.46
to £81.77 |
£9.52 to
£51.78 |
£3.54 to
£17.70 |
£3.88 to
£84.11 |
– weighted average |
£27.92 |
£9.79 |
£32.13 |
£27.33 |
£8.91 |
£31.50 |
Net initial
yield |
|
|
|
|
|
|
– range |
0.00%
to 7.59% |
–2.54%
to 8.16% |
–0.18%
to 25.27% |
2.48% to
8.59% |
0.00% to
8.25% |
–0.17% to
15.36% |
– weighted average |
4.89% |
4.63% |
5.25% |
5.15% |
4.78% |
5.11% |
Reversionary
yield |
|
|
|
|
|
|
– range |
5.47%
to 10.80% |
4.46%
to 10.17% |
4.36%
to 11.97% |
5.32% to
10.70% |
4.60% to
9.99% |
4.63% to
12.11% |
– weighted average |
7.04% |
5.40% |
6.63% |
7.01% |
5.55% |
6.37% |
True equivalent
yield |
|
|
|
|
|
|
– range |
5.33%
to 9.80% |
4.39%
to 9.65% |
3.97%
to 11.95% |
5.24% to
9.49% |
4.63% to
9.48% |
4.09% to
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
Impact on valuation |
2019
Impact on valuation |
Industrial |
Increase
of 50 basis points |
Decrease of £29.3m |
Decrease
of £28.7m |
|
Decrease
of 50 basis points |
Increase of £36.1m |
Increase
of £34.7m |
Office |
Increase
of 50 basis points |
Decrease of £17.5m |
Decrease
of £18.7m |
|
Decrease
of 50 basis points |
Increase of £20.5m |
Increase
of £21.3m |
Retail and Leisure |
Increase
of 50 basis points |
Decrease of £10.9m |
Decrease
of £12.6m |
|
Decrease
of 50 basis points |
Increase of £13.9m |
Increase
of £15.8m |
14. Accounts receivable
|
2020
£000 |
2019
£000 |
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 £1,676,000 (2019: £918,000) were
considered impaired and provided for.
15. Cash and cash equivalents
|
2020
£000 |
2019
£000 |
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
£000 |
2019
£000 |
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
£000 |
2019
£000 |
Current |
|
|
|
Aviva facility |
– |
1,258 |
1,204 |
Capitalised finance
costs |
– |
(370) |
(371) |
|
|
888 |
833 |
Non-current |
|
|
|
Santander revolving
credit facility |
18 June
2021 |
– |
11,500 |
Santander revolving
credit facility |
20 June
2021 |
– |
14,500 |
Canada Life
facility |
24 July
2027 |
80,000 |
80,000 |
Aviva facility |
24 July
2032 |
86,207 |
87,465 |
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
£000 |
2019
£000 |
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 £80 million term loan facility with Canada Life
Limited which matures in July 2027.
Interest is fixed at 4.08% over the life of the loan. The loan
agreement has a loan to value covenant of 65% and an interest cover
test of 1.75. The loan is secured over the Group’s properties held
by Picton No 2 Limited Partnership and Picton UK Real Estate Trust
(Property) No 2 Limited, valued at £307.5 million (2019: £292.4
million).
Additionally, the Group has a £95.3 million term loan facility
with Aviva Commercial Finance Limited which matures in July 2032. The loan is for a term of 20 years and
was fully drawn on 24 July 2012 with
approximately one-third repayable over the life of the loan in
accordance with a scheduled amortisation profile. The Group has
repaid £1.2 million in the year (2019: £1.2 million). Interest on
the loan is fixed at 4.38% over the life of the loan. The facility
has a loan to value covenant of 65% and a debt service cover ratio
of 1.4. The facility is secured over the Group’s properties held by
Picton No 3 Limited Partnership and Picton Property No 3 Limited,
valued at £189.0 million (2019: £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 £49.0 million
(2019: £51.0 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 £131.8 million (2019: £133.7 million). Post year
end, both RCFs were cancelled and replaced with a new £50.0 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 £197.0 million (2019: £219.5 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 £4.5 million
(2019: £1.4 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: £nil).
19. Share capital and other
reserves
|
2020
£000 |
2019
£000 |
Authorised: |
|
|
Unlimited number of
ordinary shares of no par value |
– |
– |
Issued and fully paid: |
|
|
547,605,596 ordinary
shares of no par value |
|
|
(31 March 2019:
540,053,660) |
– |
– |
Share premium |
164,400 |
157,449 |
On 21 June 2019 the Company raised
£7.1 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 £164,400,000
(31 March 2019: £157,449,000).
|
2020
Number of shares |
2019
Number of 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
£000 |
2019
£000 |
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
£000 |
2019
£000 |
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
£000 |
2019
£000 |
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
£000 |
2019
£000 |
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
fair value through profit or loss
£000 |
Financial assets and liabilities at amortised cost
£000 |
Total
£000 |
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
fair value through profit or loss
£000 |
Financial
assets and liabilities at amortised cost
£000 |
Total
£000 |
Financial
assets |
|
|
|
|
Debtors |
14 |
– |
3,511 |
3,511 |
Cash and cash
equivalents |
15 |
– |
25,168 |
25,168 |
|
|
– |
28,679 |
28,679 |
Financial liabilities |
|
|
|
|
Loans and
borrowings |
17 |
– |
191,969 |
191,969 |
Obligations under 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
£000 |
2019
£000 |
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
£000 |
2019
£000 |
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
fair value through profit or loss
£000 |
Financial assets and liabilities at amortised cost
£000 |
Total
£000 |
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
fair value through
profit or
loss
£000 |
Financial
assets and liabilities at amortised cost
£000 |
Total
£000 |
Financial
assets |
|
|
|
|
Tenant debtors |
14 |
– |
2,594 |
2,594 |
Cash and cash
equivalents |
15 |
– |
25,168 |
25,168 |
|
|
– |
27,762 |
27,762 |
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 year
£000 |
1 to
5
years
£000 |
More
than
5 years
£000 |
Total
£000 |
Cash and cash
equivalents |
23,567 |
– |
– |
23,567 |
Debtors |
5,983 |
– |
– |
5,983 |
Capitalised finance
costs |
370 |
912 |
1,047 |
2,329 |
Obligations under head
leases |
(117) |
(466) |
(7,266) |
(7,849) |
Fixed interest rate
loans |
(8,332) |
(33,329) |
(193,259) |
(234,920) |
Creditors and
accruals |
(9,936) |
– |
– |
(9,936) |
|
11,535 |
(32,883) |
(199,478) |
(220,826) |
31 March 2019 |
Less
than
1 year
£000 |
1 to
5
years
£000 |
More
than
5 years
£000 |
Total
£000 |
Cash and cash
equivalents |
25,177 |
– |
– |
25,177 |
Debtors |
3,511 |
– |
– |
3,511 |
Capitalised finance
costs |
371 |
1,062 |
1,267 |
2,700 |
Obligations under 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 £33.2
million (2019: £34.3 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 year
£000 |
1 to
5
years
£000 |
More
than
5 years
£000 |
Total
£000 |
Floating |
|
|
|
|
Cash and cash
equivalents |
23,567 |
– |
– |
23,567 |
Fixed |
|
|
|
|
Secured loan
facilities |
(1,258) |
(5,616) |
(160,591) |
(167,465) |
Obligations under
leases |
(108) |
(388) |
(1,321) |
(1,817) |
|
22,201 |
(6,004) |
(161,912) |
(145,715) |
31 March 2019 |
Less
than
1 year
£000 |
1 to
5
years
£000 |
More
than
5 years
£000 |
Total
£000 |
Floating |
|
|
|
|
Cash and cash
equivalents |
25,168 |
– |
– |
25,168 |
Secured loan
facilities |
– |
(26,000) |
– |
(26,000) |
Fixed |
|
|
|
|
Secured loan
facilities |
(1,204) |
(5,377) |
(160,884) |
(167,465) |
Obligations under
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 £250,000 (2019: £257,000). As
at 31 March 2020 the Group owed £nil
to the Non-Executive Directors (2019: £nil). The emoluments of the
Executive Directors are set out in the Remuneration Report.
Picton Property Income Limited has no controlling parties.
26. Events after the balance sheet
date
A dividend of £3,409,000 (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 £50 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