Picton Property Income Limited Annual Report 2017

FY2017 Annual Report · Picton Property Income Limited

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Picton property income limited
Annual Report 2017

25189.02 – 17 July 2017 12:13 PM – Proof 2

Who we are
Picton Property Income Limited is an
award winning property investment
company which invests in commercial
property throughout the United Kingdom.

Our property portfolio currently consists of 53 assets
and is invested in the industrial, office, retail, retail
warehouse and leisure sectors. These assets generate
a rental income stream from a diverse range of over
350 occupiers in a wide range of businesses.

We are total return driven with an income bias.

What we do
We aim to generate attractive returns for our
shareholders from the proactive management of our
portfolio. We invest in assets where we believe there
are opportunities to enhance either income or value
and this is primarily achieved by providing space that
meets our occupiers’ requirements.

We have delivered consistent outperformance due
to our team culture, work ethic and expertise. With a
strong cash flow underpinning our business strategy,
we have an occupier focused, opportunity led
approach.

We aim to be one of the consistently best performing
diversified property investment companies listed on
the main market of the London Stock Exchange.

Front Cover Image:
Metro Building, Greater Manchester

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Portfolio key facts

Number of Assets

Area

4.5 million sq ft

£624.4 million

Value

Occupancy

94%

Net initial yield

5.9%

Reversionary yield

6.9%

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Welcome to our
2017 annual report

Why invest

We offer diversified exposure to the UK commercial
property market.

We actively manage our assets with an occupier
focused and opportunity led approach.

We operate a covered dividend policy,
allowing us to invest back into

the portfolio.

We have established a consistent
track record of outperformance.

Our management team is
aligned with shareholders.

Visit us online at
www.picton.co.uk and see
our Year in Review

What
makes us
different

We are internally managed, unlike
many traditional investment
companies. We have an
experienced and dedicated team
of 12 who are focused entirely on
Picton and its success.

Through growth we are able to achieve
economies of scale, which in turn will
enhance returns to our shareholders.

Read more about Our Business
Model on page 12

Portfolio Allocation

Sector %

Industrial

40.1

South East 26.9
Rest of UK 13.2

Ofﬁce 34.3

South East 21.4
Rest of UK 8.7
City & West End 4.2

Retail & Leisure 25.6

10.4

Retail warehouse
High Street - Rest of UK
High Street - South East

7.4

5.6

Leisure 2.2

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Chief
executive’s
review

Read more information in this Report

Visit www.picton.co.uk for more details

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Stock code: PCTNStrategic Report

Picton Property Income Limited
Annual Report 2017

www.picton.co.uk

2017 highlights

“ The Company’s
investment objective is to
provide investors with an
attractive level of income
and the potential for
capital growth. Both have
been achieved in the last
twelve months as shown
by the performance
figures.”

Read more in the Chairman’s Statement
on pages 6 to 8

Read more in the Chief Executive’s Review
on pages 24 to 25

Positive results
against an uncertain
economic backdrop

Stronger balance
Sheet and lower
finance costs

• Increase in EPRA NAV per share of

• Total debt reduced by 18% to

6.0%, to 82 pence per share

£204.6 million

• Income profit increased by 30% to

£25.8 million

• Repaid £29.1 million of 7.25% zero
dividend preference shares in full

• Total return of 10.4%

• Net gearing reduced to 27.4% from

• Shareholder total return of 25.6%

• Dividend increase of 3% in February
2017 to 3.4 pence per share per
annum

• Dividend cover of 144%, or 115%
prior to one-off exceptional income
of £5.3 million

34.6%

• Weighted average interest rate now

4.2% from 4.4%

• Established new £27 million revolving

credit facility

• Access to over £50 million of

committed but undrawn debt facilities

Positive valuation
and income growth

Maintained focus on
asset management

• Like-for-like valuation increase of 3.0%

• Like-for-like passing rent at

31 March 2017 increased by 4.4% to
£40.0 million

• Like-for-like ERV growth of 3.3% with
total portfolio ERV of £45.9 million

• Occupancy at 94%, ahead of the
MSCI IPD Quarterly Benchmark
of 93%

• 35 lettings completed securing £3.2

million of additional annual income, on
average 6.9% above March 2016 ERV

• 23 lease renewals and re-gears

retaining £1.2 million per annum, on
average 5.7% above March 2016 ERV

Continue to
outperform MSCI IPD
quarterly benchmark

Ongoing
repositioning of
portfolio

• Total property return of 9.9%,

outperforming benchmark of 4.6%

• Income return of 6.7%, outperforming

benchmark of 4.7%

• Total property return and income

return outperformance ahead of MSCI
IPD over 1, 3, 5 & 10 years

• Sold two central London assets for

£45 million, on average 4% above the
March 2016 valuation

• Sold four non-core assets for £7

million, on average 41% above the
March 2016 valuation

• Invested £2.8 million into refurbishment

projects across portfolio

• Increased average lot size by 4.4% to

£11.8 million

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Stock code: PCTN

Strategic Report

NAV per Share (p)

Earnings per Share (p)

Dividends per Share (p)

82p

2017 82
2016 77
2015 69

7.9p

2017 7.9
2016 12.0
2015 15.4

3.3p

2017 3.3
2016 3.3
2015 3.0

Net Assets (£m)

Profit after Tax (£m)

Dividend Cover (%)

£441.9m

£42.8m

144%

2017 441.9
2016 417.1
2015 370.0

2017 42.8
2016 64.8
2015 68.9

2017 144**
2016 112
2015 117

** 115% prior to one-off income

Property Assets* (£m)

Total Return (%)

Shareholder Total Return (%)

£615.2m

10.4%

25.6%

2017 615.2
2016 646.0
2015 532.9

* net of lease incentives

2017 10.4
2016 17.9
2015 27.4

2017 25.6
2016 1.9
2015 32.3

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EPRA measures

EPRA performance measures (EPM)
The European Public Real Estate Association’s (EPRA) mission is to promote, develop and
represent the European public real estate sector. As an EPRA member, Picton fully supports the
EPRA Best Practices Recommendations which recognise the six key performance measures, as

detailed above. Further disclosures and supporting calculations, including sustainability measures, can be found on pages
97 to 103. We have also highlighted other specific EPRA metrics throughout the Report.

EPRA Earnings:
A key measure of a company’s underlying operating results and
an indication of the extent to which current dividend payments
are supported by earnings.

EPRA NAV:
Makes adjustments to IFRS NAV to provide stakeholders with
the most relevant information on the fair value of the assets
and liabilities within a true real estate investment company
with long-term investment strategy.

EPRA NNNAV:
Makes adjustments to EPRA NAV to provide stakeholders
with the most relevant information on the current fair value
of all the assets and liabilities within a real estate company.

EPRA Cost Ratios:
A ratio to enable meaningful measurement of the changes in a
company’s operating costs as a percentage of rental income.

EPRA Net Initial Yield and
‘topped-up’ Net Initial Yield:
A comparable measure for portfolio valuations. This
measure should make it easier for investors to judge for
themselves how the valuation of a portfolio compares with
others. The EPRA NIY is based on the passing rents at
the balance sheet date, the EPRA ‘topped-up’ NIY also
includes rents where there are unexpired lease incentives
at the balance sheet date.

EPRA Vacancy Rate:
A “pure” (%) measure of investment property space that is
vacant, based on ERV.

Alternative performance measures
We use a number of alternative performance measures (‘APMs’) when reporting on the performance of
the business and its financial position. These do not always have a standard meaning and may not be
comparable to those used by other entities. However, we will use industry standard measures and
terminology where possible.

In common with many other listed property investment companies we report the EPRA performance
measures, as stated above. We have reported these for a number of years in order to provide a
consistent comparison with similar companies. In the Other Information section we provide more
detailed information and reconciliations to IFRS where appropriate.

Our key performance indicators include three of the key EPRA measures but also total
return, total property return, property income return, total shareholder return, loan to
value ratio and ongoing charges. The definition of these measures, and the rationale for
their use, is set out in the Key Performance Indicators section.

Other APMs are set out in the Supplementary Disclosures section of the Report.

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Picton Property Income LimitedAnnual Report 2017www.picton.co.ukEPRA NAV per Share (p)

EPRA Earnings (£m)

EPRA Earnings per Share (p)

82p

2017 82
2016 77
2015 69

£20.6m

3.8p

2017 20.6
2016 19.9
2015 15.3

2017 3.8
2016 3.7
2015 3.4

EPRA NNNAV per Share (p)

EPRA Cost Ratio1 (%)

EPRA Cost Ratio2 (%)

77p

2017 77
2016 73
2015 65

26.1%

2017 26.1
2016 22.8
2015 24.9

1. Including direct vacancy costs

21.1%

2017 21.1
2016 18.9
2015 19.1
2. Excluding direct vacancy costs

EPRA Net Initial Yield (%)

5.9%

2017 5.9
2016 5.6
2015 5.9

EPRA ‘topped-up’ Net Initial Yield
(%)

6.3%

2017 6.3
2016 6.2
2015 6.5

EPRA Vacancy Rate (%)

5.8%

2017 5.8
2016 3.9
2015 4.8

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Stock code: PCTNStrategic Report

Chairman’s statement
NICHOLAS THOMPSON

“ Our aim is to be
consistently one of
the best performing
diversified property
investment companies
listed on the main market
of the London Stock
Exchange.”

NAV per Share (p)

2017 82
2016 77
2015 69

Total Profit

£42.8m

Net Assets

£441.9m

Dividend Cover*

115%

* Excluding exceptional income

In the year to 31 March 2017, I am pleased to
report that Picton continued to deliver positive
results for its shareholders, with a profit for the
year of £43 million.

This year has not been without its challenges, with the EU referendum in June 2016 and other
political events impacting sentiment and affecting property valuations. Liquidity issues within open
ended property funds also led to further uncertainty. The property market has stabilised following
the post-referendum hiatus, but with a general election due this week, nothing is ever certain.

During the year, we achieved our aim to lower gearing and reduce exposure to core London
property markets. This has helped to improve returns, both for the overall business and within the
property portfolio, which has again outperformed the market, as set out below. I am pleased to
note that the Company’s share price has re-rated over the past few months and now stands at a
premium to the net asset value.

While the property portfolio continues to benefit from high occupancy and stable cash flows,
there is still scope to grow income by resetting rents to market levels, improving occupancy and
through the contractual rental uplifts contained within existing leases.

The Company’s portfolio allocation, debt structure and asset management capabilities enable us
to remain confident about our prospects.

Strategy
The Company’s investment objective is to provide investors with an attractive level of income and
the potential for capital growth. Both have been achieved in the last 12 months as shown by the
performance figures detailed below.

As ever, return and risk are interlinked. During the period we sought to manage risk and have
consequently reduced borrowings by some £45 million over the year.

Picton’s strategy to focus on income, on our occupiers and be opportunistic in our approach has
continued. While we still have a desire to grow, the focus is on performance rather than scale.

Performance
The Company delivered a total return of 10.4% for the year, which although lower than 2016,
reflects weaker capital growth within the market.

Our income profit for the year rose by 30% to £25.8 million, although this includes the exceptional
income arising from the settlement of the dispute regarding our hotel asset in Luton. EPRA
earnings per share, which excludes such non-recurring items, rose by 3%.

Dividend cover for the year, including the impact of the exceptional income noted above and
the increased dividend from February 2017, was 144%. Excluding the exceptional income, the
dividend cover remained at a healthy level of 115%.

At a portfolio level, I am particularly pleased to report that we have had another successful year
and continue to outperform the MSCI IPD Quarterly Benchmark.

More important is the long-term track record being created by the team, which continues to
be above the benchmark over the one, three, five and ten year time periods as measured by
MSCI IPD. Our focus on income has also helped to ensure that the portfolio’s income return
is consistently in the upper quartile of the MSCI IPD Quarterly Benchmark. Further details are
outlined within the Investment Manager’s Report.

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Picton Property Income LimitedAnnual Report 2017www.picton.co.ukProperty portfolio
The property portfolio has performed well
and our relatively high exposure to the
industrial, warehouse and logistics sectors has
contributed positively. We have not made any
acquisitions during the last 12 months, but we
have undertaken some portfolio restructuring,
which has focused on reducing our central
London exposure and continuing to sell non-
core assets. At the year end, the Group owned
53 assets, with an average lot size of £11.8
million, 4% higher than a year ago.

Occupancy is at 94% and we are hopeful that
this will increase in 2017, as we let more space
at 50 Farringdon Road, London EC1 and
elsewhere within the portfolio.

Dividends
The Company’s dividend was increased with
effect from February 2017. The increase of 3%
was in part a reflection of lower financing costs
resulting from the activity referred to above.
The Board regularly reviews the dividend level
and will consider this again at the time of the
interim results in November.

Corporate structure
We have been monitoring the Government’s
responses to the OECD project on Base
Erosion and Profit Shifting. Recently, new
legislation was introduced in the UK restricting
interest deductibility for UK companies, and at
the same time a consultation was launched to
bring non-resident landlord companies, such
as Picton, into the scope of UK corporation
tax. As a result of this potential change, the
Directors believe it is likely to be in the interests
of the Company to convert to a UK REIT
during 2018.

The Company continues to examine all its
options in this regard with a view to seeking any
necessary shareholder approval in due course.

During 2016, shareholders approved a new
long-term incentive plan, which is for the
benefit of all Picton employees. The first
vesting period for this new plan does not end
until 31 March 2019, but is another important
part of further aligning staff interests with those
of shareholders. More details of this plan are
provided in the Remuneration Report. We
engaged with shareholders as part of this
process and are grateful for their feedback and
subsequent support for all resolutions at last
year’s Annual General Meeting.

We continue to welcome dialogue, engagement
and feedback from shareholders generally.

Capital structure
Picton is well positioned for any future
challenges, or indeed opportunities, with
modest gearing and immediate access to
funds through two undrawn revolving credit
facilities. Our current net gearing is 27%,
down from 35% last year. During the year, we
reduced the level of debt to £205 million and
the average interest rate from 4.4% to 4.2%.

A significant milestone for the Company was
the repayment of its 7.25% zero dividend
preference shares, which were a legacy of our
2012 refinancing. We wanted to simplify our
corporate structure and this repayment helps
achieve that aim.

Additionally, we have put in place a second
revolving credit facility, which provides further
operational flexibility, and are working towards
extending our other revolving credit facility
which matures next year.

By repaying shorter term debt, our debt
maturity profile has increased from 10.7 to
11.7 years, which remains one of the longest
debt profiles within the listed real estate sector.
This means on our drawn borrowings there is
no short-term refinancing risk and no exposure
to interest rate risk.

Our strategy is to only increase gearing on
a tactical basis, if and when specific asset
opportunities arise. We believe our investors
would on balance prefer a larger, more liquid,
and lowly geared company, so we will only
seek to grow where there is a clear financial
rationale and we can further take advantage
of the economies of scale that our internalised
structure provides.

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Stock code: PCTNStrategic ReportChairman’s statement
CONTINUED

The market is stable at present, but not
without risk. As ever, not all parts of the
market are as positive or as attractive as
others but our diversified approach enables
us to focus on opportunities that will
provide attractive risk adjusted returns for
shareholders. We are confident that our team
is more than capable of ensuring that Picton
continues to deliver on its strategic objectives.

As we evolve our strategy further, we want
shareholders to remain clear about what
they get from an investment in Picton. Our
diversified portfolio and opportunity led,
occupier focused approach, is more a means
than an end. Our aim is to be consistently one
of the best performing diversified property
investment companies listed on the main
market of the London Stock Exchange.

Nicholas Thompson
Chairman

6 June 2017

Board composition
I stated at the time of our half year results
that we would start to consider recruiting an
additional member to the Picton board. This
process has commenced, and I hope that
we will have a new Board member in place
later this year. It is our intention, once the
new Director is in place, to appoint a new
chairman of the Audit and Risk Committee in
due course, as Robert Sinclair has indicated
that he wishes to retire from the Board in
2018 once any potential transition to UK REIT
status is complete.

Outlook
Picton is well positioned, with an engaged
team and a high quality, income focused
portfolio. Our approach is well suited to
long-term property investment and our track
record demonstrates this.

This year marks the fifth anniversary since
our change to a self-managed investment
company. In our view this has delivered
significant benefits for shareholders. Our net
assets have grown 125% or £246 million
over the last five years and our net asset
value per share has risen by 44%. We have
made significant cost savings relative to the
previous external management arrangements
and have a team dedicated to Picton and
aligned with its shareholders’ interests. Our
MSCI IPD performance numbers, highlighted
above, demonstrate this and we have added
more detail about some of our key milestones
within this report.

25189.02 – 17 July 2017 12:13 PM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukOur marketplace

“ The MSCI IPD Quarterly
Index recorded a total
return for All Property
for the year to March
2017 of 4.6%, an income
return of 4.9% and a fall
of 0.3% in capital values.”

All Property Sector Returns 2017 (%)

Industrial 9.7
Office

2.5

Retail & Leisure 2.8

MSCI IPD All Property
Total Return (%)

2017 4.6
2016 11.1
2015 17.1

MSCI IPD Capital Value Growth

-0.3%

MSCI IPD Rental Growth

1.9%

MSCI IPD Occupancy

92.8%

Economic backdrop
Uncertainty surrounding economic prospects following the EU referendum continues to impact
markets and the June general election has only exacerbated this. Despite this, based on
preliminary GDP estimates from the Office of National Statistics, UK GDP grew by 2.0% in the
year to March 2017 compared to 1.6% in the year to March 2016. However, recent data shows
that UK GDP in the first quarter of 2017 slowed to 0.2% compared to the previous quarter’s
0.7%. Whilst the economy seems to have lost some momentum, it is surprisingly stronger than
many had predicted.

Since the referendum vote, sterling has weakened against other currencies, which has caused
the cost of imported goods to rise, which in turn is contributing to rising inflation in the UK. On
the positive side, the weaker pound has had a favourable impact on exports, which is reflected
in the latest Manufacturing Markit/PMI survey which showed an unexpected rise in April 2017.

Between January and March 2017, the employment rate was 74.8%, the highest level since
comparable records began in 1971. While employment remains at historically high levels, a pay
squeeze has led to consumers feeling less well off. The 12 month Consumer Price Index (CPI)
was 2.3% in March 2017, higher than the 0.5% in March 2016. The CPI rate has been steadily
increasing following a period of relatively low inflation and in the latest release for April 2017
recorded 2.7%. When compared to the average wage growth of 2.1%, in real terms, wage
growth is negative. The slowdown in real wages has been reflected in retail sales volumes,
which have been on a weakening trend since the end of last year. However, there are reasons
to remain positive. Both high employment and low interest rates remain supportive of consumer
spending, and consumer confidence, as measured by Gfk NOP, is resilient compared to
historical levels. Also, the latest retail sales figures released by the Office of National Statistics
were better than expected, rising by 4.0% in the year to April 2017. As long as the squeeze on
real income proves to be temporary, consumer spending should hold up.

The Markit Purchasers Managers Index (PMI), which monitors the pace of growth for the
manufacturing, construction and services sector, recorded encouraging results for all three
sectors in March/April 2017. The combined results of the PMI surveys imply that UK output is
expected to recover over the next quarter. Encouragingly, the Governor of the Bank of England
expects economic productivity and wage growth to improve in the medium term.

Current UK bond yields and interest rates continue to be supportive of growth. The Bank
of England base rate was cut from 0.5% to 0.25% on 4 August 2016 and has remained
unchanged since then. Ten year government bond yields are now 1.1%, down from the 1.6%
recorded a year ago.

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Stock code: PCTNStrategic ReportOur marketplace
Continued

The MSCI IPD Quarterly Index recorded an
occupancy rate of 92.8% in March 2017,
lower than the 93.4% recorded in March
2016. The highest occupancy was recorded
for retail at 95.9% (March 2016: 96.1%)
followed by industrial at 93.4% (March
2016: 93.0%) and offices at 86.6% (March
2016: 89.3%).

Prevailing uncertainty surrounding the terms
of the UK’s exit from the European Union has
led to lower investment volumes in the past
12 months. Property Data showed that in the
year to March 2017 investment volumes fell
by more than 25% from the previous year to
£49.8 billion.

According to the latest figures from the Bank
of England, at the end of March 2017, total
outstanding debt to commercial property
stood at £150 billion. Property
as a percentage of total outstanding debt fell
to 7.1% in March 2017 from 7.5% in
March 2016.

UK property market
The MSCI IPD Quarterly Index recorded a
total return for All Property for the year to
March 2017 of 4.6%, an income return of
4.9% and a fall of 0.3% in capital values.
The industrial sector outperformed the
other sectors by delivering 9.7% while retail
delivered 2.8% and offices recorded 2.5%. In
comparison to the previous year, MSCI IPD
net initial yields have been stable across all
three sectors.

By sector, retail values fell by 2.3% and
offices by 1.5%. In contrast, the industrial
sector recorded a rise of 4.2% and was
the strongest sector in the index. Recently
released data from the MSCI IPD monthly
digest showed capital growth is stronger
than 12 months ago and more evenly spread
across the segments, with London offices
showing slower growth than historically. 29
segments recorded positive capital growth
and only eight recorded negative movements.
This is an improvement on a year ago when
only 19 segments recorded positive capital
growth. In terms of overall ranking, four of
the top five segments were in the industrial
sector, and regional retail featured for the first
time as the best performing segment in the
past year.

In the year to March 2017, All Property rental
growth was 1.9%. The industrial sector
recorded the strongest rise at 3.9% for the
year to March 2017, offices rose by 1.9%
and retail by 0.9%. Recently released data for
the MSCI IPD monthly digest showed rental
growth is weaker than 12 months ago with
Central London retail slowing significantly.
23 segments recorded positive rental growth
and 16 recorded negative or nil rental
growth. This is less than a year ago when 26
segments recorded positive rental growth. In
terms of overall ranking, three of the top
five segments were in the industrial sector, the
remaining two were in the office and
retail sectors.

25189.02 – 17 July 2017 12:13 PM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukIndustrial
market trends

Office
Market Trends

Retail
market Trends

Read more in the Investment Manager’s Report on pages 28 to 39

25189.02 – 17 July 2017 12:13 PM – Proof 2

Stock code: PCTNStrategic ReportThe MSCI IPD Quarterly Digest showed industrial total returns were 9.7% in the year to March 2017 with income delivering the majority of this return at 5.3% and capital growth returning 4.2%. Over the past year, industrial take-up has been robust, with this trend being maintained into the first quarter of the year. Furthermore, consensus forecasts suggest the sector will outperform both retail and offices over the short to medium term. Falling levels of availability in ready-to-occupy buildings, together with resilient occupier demand will help rents to hold up. What is also particularly encouraging is that rental values in the South East and Rest of UK Industrial segments still remain favourable compared to their historical trend. The logistics element of the industrial sector is closely linked to consumer spending and while prospects for retail spending remain uncertain, at this stage, based on forward indicators, they still remain encouraging. Moreover, it is also worth noting that the weaker pound, as mentioned previously, has fuelled demand for industrial occupiers in the manufacturing and exporting sectors. And so, if retail sales do slow, some of this may be offset by stronger demand in these sectors.Retail total returns were 2.8% in the year to March 2017. Returns comprised 5.2% income return and a fall of 2.3% in capital values. Consensus forecasts suggest that while the retail sector faces some headwinds over the next few years, its performance will vary by segment with retail warehouses expected to perform better than high street shops.Following a period of low confidence in the sector, the latest retail sales data from the Office for National Statistics has been strong. Sales over the past year have grown by 4.0%, and are ahead of prior estimates. The latest confidence survey from Gfk NOP also remains at higher levels compared to historical readings. While these figures are encouraging, challenges remain in the sector. The latest reading from the Office for National Statistics shows that average real wage growth turned negative in April 2017, and house price growth indicators suggest prices may stall or fall going forwards. On the positive side, employment levels are encouraging. Overall, there is the possibility that consumers reduce their spending in response to less disposable income. However, this depends on inflation and real wage growth, which at this stage is uncertain. It is worth noting that where London retail has traditionally driven returns in the sector, the latest reading from the MSCI IPD Monthly Digest suggests rental growth has started to slow in this market. In the regions, the revaluation of business rates outside of London should help reduce costs for retailers.Office total returns were 2.5% in the year to March 2017. Returns comprised 4.1% income return and a fall in capital values of 1.5%. Consensus forecasts suggest that the office sector will lag behind retail and industrial. However, there will be a wide disparity in performance with returns driven by regional offices rather than London offices.The outlook for central London offices remains uncertain following the EU referendum and its potential consequences for businesses, particularly financial services. Take-up in central London offices is still above the ten year average and a sectoral breakdown shows that 55% of take-up in the main central London submarkets came from business services, media and tech firms, compared to approximately 25% from legal and financial firms.Regional office market prospects are more positive. Office rental levels do not look particularly high compared to their historic levels. If employment levels continue to be robust, then rents in the regions should grow. Capital growth predictions are also encouraging for the regions, with some forecasters predicting regional offices to deliver the strongest returns in the market. Our business model

We invest in
commercial property
across the United
Kingdom and aim to
generate attractive
returns for our
shareholders from the
proactive management
of our portfolio. We
invest in assets where
we believe there
are opportunities to
enhance either income
or value.

Our property portfolio currently consists of 53
assets and is invested in the industrial, office,
retail, retail warehouse and leisure sectors.
These assets generate a rental income
stream from a diverse range of more than 350
occupiers in a wide range of businesses.

After deducting operational and financing
costs, the majority is then paid out as
dividends to our shareholders and the
remaining balance is retained and can be
invested back into the portfolio.

Read more in Our Strategy in Action
on pages 16 to 23

i n g a diverse portf

e
s
i
t
r
e
p
x
e

f
o

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Picton

ortun i t y l e d

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ble recurrin g i n c o m e

Depth of expertise
Our investment management team has
on average 12 years of experience in
commercial property and is focused on
achieving success for Picton.

Creating a diverse
portfolio
We have established a portfolio that is
diversified across sectors and spread
throughout the UK. Although income
focused, we will consider opportunities
where we can increase either income or
value over the medium term.

Stable recurring
income
Our diverse occupier base generates
a stable income stream, which we aim to
grow through active management
and capturing market rental uplifts.
We maintain a covered dividend policy,
which provides cash flow, allowing us
to reinvest funds back into the portfolio.

Asset management
We have a dedicated asset management
team with an occupier focused,
opportunity led approach. We aim to
create space that meets our occupiers’
needs and so maintain our ongoing high
levels of occupancy across the portfolio.

Delivering long term shareholder value
Our business model gives us the flexibility to adapt to changing market conditions and so deliver
value to our shareholders through the property cycle and over the long-term.

25189.02 – 17 July 2017 12:13 PM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.uk

Five years of picton

In 2012, Picton became an internally managed investment company,
having changed its name from ING UK Real Estate Income Trust Limited.
We look back on some of the key achievements since then.

You can read more online about
Our History at: www.picton.co.uk

Corporate achievements

£120m

Raised £120 million
of new equity

13.3%

Total return over
five years of 13.3%
per annum

22.0%

Shareholder total
return over five years
of 22.0% per annum

Numerous awards
won or shortlisted –
EPRA, MSCI, Investors
Chronicle, Money
Observer, Investment
Week, BCO

Alignment of staff
with shareholders
through incentive
schemes

27.4%

Reduction in
gearing from
48.3% to 27.4%

£50m

More debt flexibility with
revolving credit facilities
in place giving access to
over £50 million

£2.6m

Management costs
have averaged £2.6
million per annum since
internalisation, compared
with £4.2 million previously

£452m

Increase in market
capitalisation from
£142 million to
£452 million

Property achievements

94%

Increased occupancy
from 91% to 94%

Repositioned portfolio
disposing of 20 assets for
£111 million and acquiring
13 assets for £180 million

Outperformed
MSCI IPD Quarterly
Benchmark over
1, 3, 5 and 10 years

£624.4m

Increase in portfolio
from £414.5 million
to £624.4 million

£11.8m

Increased the average
lot size from £6.7 million
to £11.8 million

25189.02 – 17 July 2017 12:13 PM – Proof 2

Stock code: PCTNStrategic ReportOur strategy

The Company’s investment objective is to provide shareholders with an
attractive level of income, with the potential for capital growth.

Our strategy is to hold a property portfolio with a strong income bias and manage the assets in order to maximise the potential for both income and,
where appropriate, capital growth. This is achieved through, amongst other things, improving the quality of space, extending the income profile and
exploring the potential to create value through refurbishment, change of use or redevelopment.

In addition, we look to recycle capital by investing in opportunities that provide better risk adjusted returns. We are opportunity led as we are able to
invest across sectors and locations within the UK. Equally, understanding and meeting the needs of new and existing occupiers is paramount.

Our five key strategic priorities

Strategic priority

Progress this year

Growth of
net income

We aim to grow net income.
Our aim is to add additional annual income from new lettings, lease
renewals, rent reviews and re-gears. We also strive to reduce the portfolio
voids by attracting new occupiers, and by investing in our assets to make
them attractive to occupiers, which helps to generate rental growth.

Net property income has grown by 18% this
year to over £42 million.

Working
with our
occupiers

We maintain regular communication with our occupiers.
By doing this, we understand their needs and can work to meet their
requirements. Our successful occupier focused initiatives include the
‘Picton Promise’ – eight commitments to quality and service that underpin
our occupier experience. We believe that these initiatives maintain
occupancy and improve retention rates.

Our occupancy is 94%, this remains ahead
of the MSCI IPD Quarterly Benchmark which
was 93.1% at March 2017.

Operational
efficiency

Picton is an internally managed investment company.
Unlike many investment companies Picton is internally managed with a
dedicated team of 12 staff. We believe this is an efficient operating model
and allows Picton to benefit from economies of scale as it grows.

Although our operating costs have risen this
year, this is largely the result of the alignment
in variable remuneration with property
performance and shareholder returns.

Portfolio
and asset
management

Active asset management is core to our approach.
We seek to enhance the value of our assets through active management.

We will also look to acquire new assets that offer the potential to
enhance income and value, whilst disposing of assets that we believe will
contribute less in terms of performance.

The capital value of our portfolio has
increased by 3% on a like-for-like basis. We
have reduced our central London exposure
and disposed of non-core assets.

Effective use
of debt

Over the long term we believe that effective use of gearing will
increase returns to shareholders.
The income return from the portfolio will be enhanced by the low, long-
term fixed interest rates in place on our borrowings. We review our level of
gearing regularly to adapt to changing market conditions.

Although our gearing is still making a
positive contribution to returns, we have
reduced the overall level of borrowing within
the Group which we believe is appropriate in
the current market.

25189.02 – 17 July 2017 12:13 PM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukPictured: Queen’s House, Glasgow

25189.02 – 17 July 2017 12:13 PM – Proof 2

Stock code: PCTNStrategic ReportStrategy in action
Reshaping OUR PORTFOLIO

During the year we have
continued to reshape
the portfolio, not only
reducing our core
London exposure, but
also recycling capital, in
particular from smaller
assets, in order to further
concentrate the portfolio.

Our average lot size has increased by 76% in
the five years post internalisation.

This year, we passed a milestone, being
seven years since the acquisition of Rugby
Estates Investment Trust Plc and its portfolio
of 34 properties. Since that time we have
sold 27 assets as business plans have been
completed and realised in excess of £30
million through disposals.

The remaining seven assets are valued at £66
million, higher than the original purchase price
for the entire portfolio in 2010 of £62 million.

Strategy in action

Portfolio and
asset management

Operational
Efficiency

Growth of net income

Portfolio Average Lot Size (£m)

Retained properties
We have retained seven properties where
we identified opportunities for enhancing
valuation or income through our asset
management skills.

Stanford House in Covent Garden is a
prime retail property with planning secured
for a residential scheme on the upper
parts. 78-80 Briggate in Leeds, which is
well located opposite the Victoria Quarter,
is let to Starbucks and Dune and has
active management potential.

We have seen significant rental growth at
our multi-let estates in Bromley-by-Bow
and Epsom, where we have attracted
occupiers such as Arriva, Edmundson
Electrical, MGN and Toolstation.

The three final properties are considerably
smaller and we are executing our business
plans.

Sold properties
We have sold 27 of the former Rugby
assets. These were mainly smaller assets
where we had completed our business
plans and are able to realise gains through
disposal.

The proceeds were then re-cycled into
investment in new and existing properties
where more attractive returns could be
sought, thereby improving the quality of
the overall portfolio.

Valuation increase

104%

Retained Property:
Stanford House, London WC2

2017 11.8
2016 11.3
2015 9.5
2014 7.4
2013 6.2
2012 6.7

Number of Assets

2017 53
2016 58
2015 57
2014 57
2013 62
2012 62

25189.02 – 17 July 2017 12:13 PM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukIncrease in ERV

29%

Retained Property:
Datapoint, London E16

Valuation increase

76%

Retained Property:
Nonsuch Industrial Estate - Epsom

Occupancy maintained

100%

Retained Property:
78-80 Briggate, Leeds

Profit on disposal

33%

Compared to the original acquisition
cost, the average gain on disposal
of the sold properties is 33%.

Average lot size

£1.1million

The average lot size of the sold
properties is £1.1 million.

25189.02 – 17 July 2017 12:13 PM – Proof 2

Stock code: PCTNStrategic ReportStrategy in action

Industrial

Lyon business park

Barking

Repositioning our asset to meet
occupier needs
Lyon Business Park is a prominent, well located multi-let distribution and
warehouse scheme in east London, adjacent to the A13 and close to the
A406 North Circular Road and equidistant from central London and the M25. It
comprises 12 units purpose built in the early 1990s, totalling 99,450 sq ft. Two
larger distribution units represent 72% of the floor space, with ten small business
units comprising the remainder.

Following a surrender of one of the distribution units, where the occupier paid a
premium of £0.3 million plus dilapidations, we refurbished the unit during the year
and leased it to an airline catering company servicing London City Airport on a ten
year lease, with a break, at a rent of £0.25 million per annum with three months
rent free. This transaction was 17% ahead of March 2016 ERV and the previous
passing rent.

We worked with another occupier to expand into an adjacent unit, in line with the
Picton Promise to help occupiers to ‘right size’ their business space. These lettings
and two further lease renewals means the estate is fully let and the income is
currently 107% higher than on 31 March 2016, with the valuation having increased
by 29% over the same period.

Strategy in action

Portfolio and
asset management

Key property details

Increase in Value

29%

Number of Occupiers

Size

99,450 sq ft

Working with our occupiers

Growth of net income

Annual Rent

£0.84m

Year Built

1990

EPC Rating

25189.02 – 17 July 2017 12:13 PM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.uk25189.02 – 17 July 2017 12:13 PM – Proof 2

Stock code: PCTNStrategic ReportStrategy in action

Office

Trident house

St albans

Providing space in a strong
occupational market
Trident House comprises an 18,900 sq ft multi-let office building built in the 1980s
with 50 parking spaces. It is located in the centre of St. Albans, close to the railway
station with frequent services to central London.

We accepted a lease surrender of the first floor, with the occupier paying
a premium equivalent to the full liability under the lease. The floor was
comprehensively refurbished and split into two 3,500 sq ft suites.

Both suites were let within two months of completion of the works at a combined
rent of £0.21 million per annum, 15% ahead of March 2016 ERV and 23% ahead
of the previous passing rent. Subsequently we pre-let a 2,900 sq ft suite on the
second floor prior to the existing lease expiring.

Key property details

These lettings represent record rents in St. Albans, with the final letting being at
£37.50 per sq ft.

The building is now fully let and the income is 86% higher than on 31 March 2016
with the valuation having increased by 24% over the same period.

Strategy in action

Portfolio and
asset management

Working with our occupiers

Growth of net income

Increase in Value

24%

Number of Occupiers

Size

18,900 sq ft

Annual Rent

£0.4m

Year Built

1985

EPC Rating

25189.02 – 17 July 2017 12:13 PM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.uk25189.02 – 17 July 2017 12:13 PM – Proof 2

Stock code: PCTNStrategic ReportStrategy in action
Strategy in action

Retail and leisure

Drury lane

Oldham

creating value through
change of use
In 2010, Picton acquired, as part of a portfolio, a 16,400 sq ft warehouse in
Oldham, previously used as a builders’ merchants. The building was leased to a
national trade retailer at £74,000 per annum who was not in occupation.

Planning consent was obtained to convert the unit into a gym and a small adjacent
piece of land was acquired to increase the size of the car park.

On lease expiry the unit was then comprehensively refurbished and during the
year let on a 15 year lease to The Gym Group at an annual rent of £0.15 million
per annum.

The property was subsequently sold for £2.2 million, reflecting a net initial yield of
6.4% and an 85% premium to the March 2016 external valuation. Net of the £0.5
million of costs incurred since acquisition, the asset was sold at a 130% profit.

Strategy in action

Portfolio and
asset management

25189.02 – 17 July 2017 12:13 PM – Proof 2

Key property details

Increase in Value

130%

Number of Occupiers

Size

16,400 sq ft

Annual Rent

£0.15m

Year Built

1985

EPC Rating

Picton Property Income LimitedAnnual Report 2017www.picton.co.uk25189.02 – 17 July 2017 12:13 PM – Proof 2

Stock code: PCTNStrategic ReportChief executive’s review
MICHAEL MORRIS

The last 12 months have not been without their
challenges. The uncertainty caused by the
EU referendum and consequent nervousness
within the investment and occupier markets
undoubtedly impacted performance.

We have made progress on many fronts and have delivered strong relative property
performance, which has further been enhanced by our use of debt.

Our entrepreneurial approach has enabled us to react quickly as market conditions have
changed. We have put ourselves in a strong position, through our strategy of realising profits
from low yielding London assets and using proceeds to repay debt.

Portfolio and asset management
Our outperformance against MSCI IPD is significant and we cover this in more detail further on.
As I have said in previous years, there is always a balance to be struck between income and
capital returns. A pure focus on income, and a lack of investment into assets, is likely to be at
the expense of future capital returns and income sustainability.

We have retained our overweight position to the industrial, warehouse and logistics sector and
this has again had a positive impact on our relative performance.

We have reshaped the portfolio through the sales of two central London office buildings and
four smaller non-core assets. This has reduced the number of assets in the portfolio and
increased the average lot size to £11.8 million.

The work of the asset management team in adding value across the portfolio is covered in more
detail within the Investment Manager’s Report.

Operational efficiency
An increase in performance related remuneration across the team has contributed to a small
increase in Picton’s Ongoing Charges ratio for the year. It is worth noting that in 2012 Picton
moved to an internalised management structure as part of a process to reduce ongoing costs
and become more aligned with its shareholders. Since then, total management costs have
averaged £2.6 million per annum, compared to £4.2 million per annum in the preceding five
years under the old external management model.

Effective use of debt
In common with other asset classes, commercial property has experienced more volatility this
year and therefore the impact of gearing on returns has been both positive and negative over
time. Despite an uncertain summer last year, the property market has now returned to a more
stable position.

The key event for us in 2016 was the maturity of our zero dividend preference shares. Given
current market conditions we believed that it was appropriate to operate with a lower level of
gearing and used the proceeds from asset sales to repay these shares in full, rather than re-
financing. Consequently, we have also simplified our corporate structure.

We also put in place a second revolving credit facility, which matures in 2021, and can be
drawn down when required to provide the Group with additional operational flexibility.

Our net gearing now stands at 27%, with a maturity profile of 11.7 years and an average
interest rate of 4.2%.

“We have reshaped the
portfolio through the sales
of two central London
office buildings and four
smaller non-core assets.
This has reduced the
number of assets in the
portfolio and increased
the average lot size to
£11.8 million.”

Total Property Return (%)

2017 9.9
2016 14.3
2015 19.0

Property Income Return (%)

2017 6.7
2016 6.0
2015 6.1

Total Return

10.4%

Total Property Return

9.9%

Earnings per Share

7.9p

25189.02 – 17 July 2017 12:13 PM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.uk25189.02 – 17 July 2017 12:13 PM – Proof 2Stock code: PCTNStrategic Report25OutlookWe remain positive about the prospects for commercial property as an asset class and investment opportunity for three key reasons: • Firstly, income drives returns. Income from real estate remains a key component of total return and is supportive of the underlying investment case relative to other asset classes; • Secondly, although our occupiers’ businesses are naturally changing which creates different real estate requirements, we believe that most businesses will continue to need premises to operate from over the longer term. By having a well managed diversified portfolio of assets Picton can also adapt and change with these requirements; and• Thirdly, there is the potential for a competent owner to add value in an imperfect and illiquid market when no two assets are identical, through clever buying, good management and well timed disposals. The defensive qualities of the asset class reinforce why real estate has performed so well in recent years, even off significantly repriced levels. With most assets, there is a high residual value, which can be unlocked by pursuing alternative uses either from the buildings, or from the land itself. One of our strengths as a team is the focus we put on getting to know our occupiers, where possible building relationships that help us to understand their businesses and property needs. We maintain regular communication with our occupiers, keeping them up to date with matters that may affect their occupation. For example, earlier this year we provided guidance on how the changes to business rates might impact their business. Our asset managers are always available to deal with any issues relating to their properties and resolve problems. on hand to advise, sort out a problem or help where possible. This remains very much at the heart of our Picton Promise and is something that a dedicated team can genuinely deliver.We will continue to adopt a long-term approach, with our closed ended structure, enabling us to control the timings of both acquisitions and disposals. Against a backdrop of forecast lower returns, we believe there will be subsectors of the market that continue to perform more strongly. Our role is to identify and secure these opportunities on the back of a strong balance sheet and execution track record.Michael MorrisChief Executive, Picton Capital Limited6 June 2017Picton Property AR2017 Front.indd 2517/07/2017 17:22:04Key performance indicators

The following key
performance indicators
are considered to be
the most appropriate
for measuring how
successful the
business has been in
meeting its strategic
objectives.

The key performance indicators are also
used in setting the variable element of
remuneration for the Picton Capital team.
The Remuneration Committee considers
the key performance indicators for the
year in determining annual bonus awards,
as is set out in the Remuneration Report.
The performance metrics used in the new
Long-term Incentive Plan are EPRA earnings
per share, total property return and total
shareholder return. These were selected
as those key performance indicators most
appropriate to setting long-term targets with
alignment to shareholders.

LTIP condition

Read more in the Remuneration Report
on pages 64 to 66

Our Five Strategic Priorities

Growth of net income

Working with our occupiers

Operational efficiency

Portfolio and asset management

EPRA Net Asset Value per Share (p)

2017 82
2016 77
2015 69
2014 56
2013 49

Why we use this indicator
The net asset value per share, calculated in
accordance with EPRA, measures the value
of shareholders’ equity in the business.

Our Performance in 2017
The EPRA NAV per share has continued to
grow despite challenging market conditions.

Strategic link

Linking our
performance
to EPRA best
practices
recommendations
We have a range of key performance
indicators that we use to measure
the performance and success of
the business. We consider that
industry standard measures, such as
those calculated by MSCI IPD, are
appropriate to use alongside certain
EPRA measures and others that are
relevant to our business.

In this regard, we consider that the
EPRA net asset value per share,
earnings per share and vacancy rate
are the most appropriate measures to
use in assessing our performance.

EPRA Vacancy Rate (%)

EPRA Earnings per Share (p)

2017 5.8%
2016 3.9%
2015 4.8%
2014 8.7%
2013 12.4%

2017 3.8
2016 3.7
2015 3.4
2014 3.7
2013 4.3

Why we use this indicator
The vacancy rate measures the amount of
vacant space in the portfolio at the end of
each financial period.

Our Performance in 2017
The EPRA vacancy rate has risen due to
lease expiries over the course of the year,
most notably at Farringdon Road. The
vacancy rate is still below the MSCI IPD
Quarterly Benchmark vacancy rate of 6.9%.

Why we use this indicator
The earnings per share, calculated in
accordance with EPRA, which seeks to
exclude exceptional items, measures the
operational profit generated by the business
that is attributable to our shareholders.

The growth in EPRA earnings per share is
one of the metrics used for the Long-term
Incentive Plan.

Our Performance in 2017
EPRA earnings per share continues to rise
due to rental growth and additional income
generated through active management.

Strategic link

LTIP condition

Effective use of debt

Strategic link

25189.02 – 17 July 2017 12:13 PM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukTotal Return (%)

Total Property Return (%)

Property Income Return (%)

2017 10.4
2016 17.9
2015 27.4
2014 21.6
2013 (7.6)

2017 9.9
2016 14.3
2015 19.0
2014 14.0
2013 (0.7)

2017 6.7
2016 6.0
2015 6.1
2014 7.1
2013 7.0

Why we use this indicator
The total return measures the performance
of the Group based on its published
results. It is the change in the Group’s net
asset value, calculated in accordance with
IFRS, over the year, plus dividends paid.

Our Performance in 2017
The increase in net income and modest
valuation gains has delivered double digit
returns for the year.

Strategic link

Why we use this indicator
The Property Income Return, as calculated
by MSCI IPD, is the ungeared income
return of the portfolio.

Our Performance in 2017
With our portfolio biased towards income
generation, this is an important indicator.
The income return for the year of 6.7% was
ahead of the MSCI IPD Quarterly Benchmark
of 4.7%, and we have also outperformed on a
three, five and ten year basis.

Strategic link

Why we use this indicator
The Total Property Return is the combined
ungeared income and capital return from our
property portfolio for the year, as calculated
by MSCI IPD.

Our Total Property Return relative to the
MSCI IPD Quarterly Benchmark is a Long-
term Incentive Plan metric.

Our Performance in 2017
For the fourth year running we have
outperformed the MSCI IPD Quarterly
Benchmark, delivering a return of 9.9%
compared to the MSCI IPD Quarterly
Benchmark return of 4.6% for the year, and we
have also outperformed on
a three, five and ten year basis.

Strategic link

LTIP condition

Total Shareholder Return (%)

Loan to Value Ratio (%)

Ongoing Charges (%)

2017 25.6
2016 1.9
2015 32.3
2014 50.2
2013 6.2

2017 27.4
2016 34.6
2015 30.1
2014 47.7
2013 54.5

2017 1.2
2016 1.1
2015 1.2
2014 1.7
2013 1.7

Why we use this indicator
The loan to value ratio is total Group
borrowings, net of cash, as a percentage
of the total portfolio value. See the
Supplementary Disclosures section for
further details.

Our Performance in 2017
Proceeds from asset disposals were used to
repay borrowings and this has resulted in a
lower loan to value ratio.

Strategic link

Why we use this indicator
The Total Shareholder Return measures
the change in our share price over the year
plus dividends paid. This is the return seen
by investors on their shareholdings.

Our Total Shareholder Return relative to
a bespoke comparator group is the final
performance metric used in the Long-term
Incentive Plan.

Our Performance in 2017
The positive movement in the share price,
reflecting a move from a discount to a
premium share price rating, has generated a
positive 25.6% return to investors.

Strategic link

LTIP condition

Why we use this indicator
The Ongoing Charges ratio represents the
annual running costs of the Group. It is
the proportion of recurring operating costs
(management and other operating expenses) to
the average net asset value. The above figures
exclude property operating costs, as the Board
considers that these are not recurring in nature,
nor are they a measure of how efficiently the
business is run.

The Supplementary Disclosures section provides

further analysis of the Ongoing Charges ratio.

Our Performance in 2017
The Ongoing Charges ratio has risen this
year. Operating costs are higher, due
principally to the variable elements of staff
costs, which are linked to the performance
of the property portfolio and the increase in
share price.

Strategic link

25189.02 – 17 July 2017 12:13 PM – Proof 2

Stock code: PCTNStrategic ReportInvestment manager’s report
Picton capital limited

We have had another successful year whilst
continuing to embrace our occupier focused and
opportunity led approach.

Our asset allocation and proactive management of the portfolio, including some value accretive
disposals, has enabled us to again outperform the MSCI IPD Quarterly Benchmark, on a total
return basis over one, three, five and ten years. Additionally, we have won an award for the
quality of our data submitted to MSCI as part of the benchmarking process.

Our portfolio now comprises 53 assets, with over 350 occupiers and is valued at £624.4 million.
As a result of leasing activity, income growth and active management, the passing rent on a
like-for-like basis has increased by 4.4% to £40.0 million, with an ERV of £45.9 million.

We have completed 35 lettings securing over £3.2 million of income, 6.9% ahead of the March
2016 ERV. The year ended with occupancy at 94%, which we have already subsequently
increased after the year end. Income retained through lease renewals and re-gears totalled £1.2
million, 5.7% ahead of the March 2016 estimated rental value.

Two City office buildings were sold for total proceeds of £45 million, 4% ahead of the March
2016 valuation. These sales were in line with our strategy to realise value and reduce our
exposure to this market, where we believe growth prospects are weaker due to a combination
of factors, including the EU referendum, business rate revaluations and high rental values. Three
central London buildings have been retained: at Covent Garden, where we have residential
planning consent; at Farringdon, where we have good quality space to let and which will benefit
from Crossrail; and, at Angel Gate, which is highly reversionary. We have value add initiatives at
all of these properties.

In addition, we have sold four smaller assets where business plans have been completed
generating total proceeds of £7.0 million, 41% ahead of the March 2016 valuation. The net
effect of these disposals is to have increased the average lot size to £11.8 million.

“ Our portfolio now
comprises 53 assets,
with over 350 occupiers
and is valued at £624.4
million. As a result of
leasing activity, income
growth and active
management, the
passing rent on a like-for-
like basis has increased
by 4.4% to £40.0 million,
with an estimated rental
value of £45.9 million.”

Occupancy

94%

Average Lot Size

£11.8m

Estimated Rental Value

£45.9m

Pictured: Queen’s House, Glasgow

25189.02 – 17 July 2017 12:13 PM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukWe have set out below the principal activity in
each of the sectors in which we are invested.
We believe our proactive approach will
continue to unlock further value through active
management initiatives.

Despite the EU referendum, the occupational
markets remain resilient, especially in the
industrial and regional office sectors and take-
up remains positive which is demonstrated
by more recent activity showing further
occupancy improvements. Our focus remains
being exposed to areas of the market where
occupational demand is likely to lead to
positive rental and, in turn, income growth.

In terms of wider trends affecting the markets
we are operating in, we are conscious of the
Government led proposals aiming to increase
economic growth, wealth and employment
in regions outside of London and the South
East. We already have exposure in the cities
of Birmingham, Bristol, Glasgow, Leeds
and Manchester but during the year we
reduced our London exposure and placed
more reliance on our existing buildings in
regional cities that we think offer interesting
opportunities.

The office environment is continuing to evolve
and workers increasingly require a more
socially cohesive environment with informal
seating areas, cafés and relaxation zones
to encourage creativity, collaboration, well-
being and enjoyment. Office providers need to
adapt to these changing dynamics in order to
deliver space that meets the requirements of
modern businesses.

An example of where we are embracing this
change is at our Angel Gate property where
over the past few years we have been working
to reposition it to meet modern occupier
requirements. This has been achieved through
the refurbishment of the office suites, the
internal and external common areas and
provision of onsite amenities. We have seen an
increase of approximately 150% in ERV since
commencing the repositioning process.

Portfolio
performance
The portfolio’s total return for the year to
31 March 2017 was 9.9%, outperforming
the MSCI IPD Quarterly Benchmark, which
delivered 4.6%. Our overweight position to the
industrial sector and regional offices together
with the active management carried out has
contributed to this outperformance.

As at 31 March 2017, the portfolio generated
a net initial yield of 5.9% after void costs
with a reversion to 6.9%. Overall, like-for-like
growth in the portfolio’s estimated rental values
was 3.3% during the year to March 2017.
Estimated rental values in the industrial sector
grew 4.3% and by 2.9% in the office sector.
The retail and leisure estimated rental values
remained flat, with the exception of our London
retail, which saw positive rental growth.

The portfolio’s capital value for the year grew
by 3.0% on a like-for-like basis. We saw
positive valuation growth in the industrial sector
of 6.3% and in the office sector of 2.5%. The
retail and leisure holdings, despite remaining
99% let, declined in value by 2.0% reflecting
the subdued outlook in the retail sector.

The estimated rental value of the void space
is £2.6 million per annum and 94% has been
vacant for less than a year.

25189.02 – 17 July 2017 12:13 PM – Proof 2

Stock code: PCTNStrategic ReportInvestment manager’s report
CONTINUED

Outlook for
the coming year
The occupational market remains robust in
the industrial and regional office markets. The
uncertainty surrounding the EU referendum
and more recently the forthcoming general
election has resulted in lower demand for
central London offices. The retail sector is going
through a fundamental change due to shopping
habits evolving and the continued momentum
of online retailing, meaning that retail markets
continue to suffer from a structural void.

We have maintained a high occupancy level
and captured rental growth. Whilst we have a
shorter than average lease expiry profile in the
industrial and office sectors, we see this as a
positive in an active market. On lettings and
renewals, we are able to secure longer leases
locking in higher rents and creating value.

Our two largest letting opportunities are
at 50 Farringdon Road in London and at
180 West George Street in Glasgow, where a
comprehensive refurbishment completes this
summer. Both buildings provide high quality
space in central locations and we expect to
secure occupiers quickly and improve our
income position.

The focus is on continuing the strategy of de-
risking income through active management and
capturing rental growth. With high occupancy
levels and good demand, we believe we
are in a strong position to capitalise on this
throughout the portfolio.

Jay Cable
Head of Asset Management,
Picton Capital Limited

Fraser D’Arcy
Investment Director,
Picton Capital Limited

6 June 2017

Sector split (%)

Industrial 40.1

Office

34.3

Retail & Leisure 25.6

Portfolio Allocation (%)

Sector %

Industrial

40.1

South East 26.9
Rest of UK 13.2

Ofﬁce 34.3

South East 21.4
Rest of UK 8.7
City & West End 4.2

Retail & Leisure 25.6

10.4

Retail warehouse
High Street - Rest of UK
High Street - South East

7.4

5.6

Leisure 2.2

25189.02 – 17 July 2017 12:13 PM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukOur locations
We own a geographically diverse portfolio of
assets located across the UK, but with a bias
towards the south east.

Key to map:

Industrial

Office

Retail and Leisure

Number of Assets

Portfolio Value

Floor Area

2016: 58

£624.4m

4.5m sq ft

2016: £646.0m

2016: 4.6m sq ft

25189.02 – 17 July 2017 12:13 PM – Proof 2

Stock code: PCTNStrategic ReportPicton Property Income Limited
Annual Report 2017

www.picton.co.uk

Investment manager’s report
CONTINUED

Longevity of income
As at 31 March 2017, based as a percentage
of contracted rent, the average length of the
leases to the first termination was 5.7 years.
This is summarised as follows:

0 to 1 years

1 to 2 years

2 to 3 years

3 to 4 years

4 to 5 years

5 to 10 years

10 to 15 years

15 to 25 years

25 years and over

7.2%

16.9%

13.0%

15.2%

10.9%

23.7%

9.4%

2.5%

1.2%

The average length of the leases
to lease expiry is 6.6 years.

Top ten occupiers
The largest occupiers, based as a percentage of contracted rent, as at 31 March 2017, are
summarised as follows:

Occupier

Belkin Limited

DHL Supply Chain Limited

B&Q Plc

Snorkel Europe Limited

The Random House Group Limited

Cadence Design Systems Limited

Edward Stanford Limited

Portal Chatham LLP

XMA Limited

10. Ricoh UK Limited

Total

Contracted Rent (£000)

1,691

1,505

1,243

1,123

1,000

972

785

725

653

640

4.0

3.6

3.0

2.7

2.4

2.3

1.9

1.7

1.6

1.5

10,337

24.7

Retention rates
Over the year total income at risk due to leases expiring or break options totalled £4.3
million, compared to £2.4 million for the year to March 2016, a 77% increase.

The portfolio retained 29% of total income at risk in the year to March 2017; this comprised
21% retention for those on lease expiry and 8% after break options. Occupancy reduced
during the year, but at 94% is still ahead of the MSCI IPD Quarterly Benchmark.

The retention figure is significantly lower for the year; however, it includes the floors at 50
Farringdon Road becoming vacant, which creates an opportunity to increase income ahead
of the capped level in the previous lease. As expected, two floors at 180 West George
Street in Glasgow were returned which was envisaged on purchase and forms part of the
repositioning strategy for this asset. A small office building in Bracknell fell vacant and is now
being sold, with vacant possession, considerably in excess of the March 2016 valuation. If
these three properties are excluded, our retention rate for the year is 76%.

Income concentration
There is a wide diversity of occupiers within the portfolio, as set out below, which are
compared to the MSCI IPD Quarterly Benchmark by contracted rent, as at 31 March 2017.

Industry Sector

Services

Retail Trade

Manufacturing

Financial Services

Transportation, Communications

Wholesale Trade

Public Administration

Construction

Mining

Other

Source: MSCI IPD IRIS Report March 2017

Picton (%)

Benchmark (%)

30.2

22.7

12.9

12.7

8.8

5.4

3.8

2.0

0.0

1.5

100

22.8

36.7

7.2

14.7

5.4

4.4

4.0

1.2

0.5

3.1

100

25189.02 17 July 2017 12:13 PM Proof 1

Stock code: PCTN

Strategic Report

Top ten assets
The largest assets as at 31 March 2017, ranked by capital value, represent just over 48% of the total portfolio valuation and are detailed below.

01. PARKBURY
INDUSTRIAL ESTATE,
RADLETT, HERTS

Acquisition date

Property type

Tenure

03/2014

Industrial

Freehold

Approx. area (sq ft)

336,700

No. of occupiers

Occupancy rate (%)

100

02. RIVER WAY
INDUSTRIAL ESTATE,
HARLOW, ESSEX

Acquisition date

Property type

Tenure

12/2006

Industrial

Freehold

Approx. area (sq ft)

455,000

No. of occupiers

Occupancy rate (%)

03. ANGEL GATE,
CITY ROAD, LONDON EC1

Acquisition date

Property type

Tenure

10/2005

Office

Freehold

04. STANFORD HOUSE,
LONG ACRE, LONDON WC2

Acquisition date

Property type

Tenure

05/2010

Retail

Freehold

Approx. area (sq ft)

64,500

Approx. area (sq ft)

19,700

No. of occupiers

Occupancy rate (%)

No. of occupiers

Occupancy rate (%)

100

05. 50 FARRINGDON
ROAD, LONDON EC1

Acquisition date

Property type

Tenure

10/2005

Office

Leasehold

Approx. area (sq ft)

32,000

No. of occupiers

Occupancy rate (%)

08. QUEENS ROAD,
SHEFFIELD

Acquisition date

Property type

Tenure

08/2015

Retail

Freehold

Approx. area (sq ft)

103,000

No. of occupiers

Occupancy rate (%)

100

06. BELKIN UNIT,
SHIPTON WAY, RUSHDEN,
NORTHANTS

Acquisition date

Property type

Tenure

07/2014

Industrial

Freehold

Approx. area (sq ft)

312,850

No. of occupiers

Occupancy rate (%)

100

07. PEMBROKE COURT,
CHATHAM, KENT

Acquisition date

Property type

Tenure

06/2015

Office

Leasehold

Approx. area (sq ft)

86,300

No. of occupiers

Occupancy rate (%)

100

09. PHASE II, PARC TAWE
RETAIL PARK, SWANSEA

Acquisition date

Property type

10/2005

Retail

10. METRO, SALFORD
QUAYS, MANCHESTER

Acquisition date

Property type

02/2016

Office

Freehold

Tenure

Leasehold

Tenure

Approx. area (sq ft)

116,700

Approx. area (sq ft)

71,000

No. of occupiers

Occupancy rate (%)

100

No. of occupiers

Occupancy rate (%)

100

Investment manager’s report
INDUSTRIAL PORTFOLIO REVIEW

Investment activity
During the year, there were no acquisitions
or disposals in the industrial portfolio but
we secured a change of use at our asset
in Oldham from industrial to leisure. This
accounts for the reduction in the number of
assets held within the sector.

Sector outlook
Tight supply, limited development and healthy
demand across the majority of the country
will continue to support rental growth, which
has been positive since 2013. This sector has
seen significant valuation growth over the past
five years. Looking forward, we expect to see
valuations stabilising, with active management
and the capturing of rental growth being
the main drivers of value in the short to
medium term.

Our portfolio consists of good quality units in
strong locations demonstrated by the current
occupancy level. Over the coming year, we
have 17 lease events with a passing rent
of £0.84 million and an ERV of £0.94 million
per annum.

The industrial portfolio delivered the strongest
sector performance for the year, due to a
combination of positive rental growth, a
shortage of supply, limited development, yield
hardening and significant asset management
activity.

Values increased by 6.3% on a like-for-like
basis and the rent roll increased by 5.8%
to £15.3 million per annum, while reducing
holding costs. The portfolio has a weighted
average lease length of five years and £2.0
million of reversionary potential.

Our portfolio comprised two main asset types:
strategically located distribution warehouses
and light industrial units, which generally
comprise multi-let estates.

The distribution warehouse portfolio totals
1.3 million sq ft in six units, let to occupiers
including Belkin, DHL and The Random House
Group, and remains fully income producing.
The only notable activity was at our 246,800
sq ft warehouse in Washington where we
secured a rental uplift of £0.1 million at the
June 2016 rent review, increasing the passing
rent by 11% to £1.12 million per annum, which
was 12% ahead of ERV.

The multi-let portfolio, totalling 1.4 million sq ft
in 131 units, is 98.6% let. We had one vacant
unit in Harlow (where we completed a new
letting post year end) and two small units
in Belfast with a combined ERV of £20,000
per annum.

We are experiencing occupier demand across
all of our estates, which is demonstrated by
the 16 lettings completed during the year for a
combined rent of £1.5 million, 5.8% ahead of
the March 2016 ERV.

Notable lettings include our largest industrial
void, at Unit D River Way in Harlow. This was
comprehensively refurbished and let less than
three months after the works completed, to a
gas provider on a ten year lease with no break
at £0.35 million per annum, which is in line
with the March 2016 ERV.

The second largest void, at Unit O Lyon
Business Park in Barking, was let to a catering
firm servicing London City Airport on a ten year
lease, subject to break, at £0.25 million per
annum, 17% ahead of the March 2016 ERV
and the previous passing rent.

Seven lease renewals or re-gears were
completed during the year, securing £0.33
million per annum, 3% ahead of the March
2016 ERV. Eight rent reviews were settled,
increasing the combined passing rent by £0.18
million to £1.65 million per annum which was
10% ahead of the March 2016 ERV.

Break clauses were removed from two leases
at Parkbury, Radlett and Datapoint, London
E16, securing £0.14 million per annum for an
additional five years term certain and we also
actively surrendered three leases in order to
facilitate re-lettings.

Several of our estates will benefit from
infrastructure improvements in the short and
medium term. Dencora Way in Luton will
benefit from the recently completed Junction
11a on the M1, improving connectivity.
Harlow Council are proposing to create a new
access to River Way, Harlow alleviating traffic
congestion and providing a faster link
to the M11. At Parkbury in Radlett, a proposed
new rail freight terminal and associated
road improvements will significantly improve
journey times to the M25, albeit this is a longer
term project.

25189.02 – 17 July 2017 12:13 PM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukIndustrial portfolio key metrics

Value

Internal Area

Annual Rental Income

Estimated Rental Value

Occupancy

Number of Assets

Property

Units A–G2, River Way Industrial Estate, Harlow, Essex

Parkbury Industrial Estate, Radlett, Herts.

Grantham Book Services, Trent Road, Grantham, Lincs.

Belkin Unit, 3 Shipton Way, Rushden, Northants.

Vigo 250, Birtley Road, Washington, Tyne and Wear

Unit 3220, Magna Park, Lutterworth, Leics.

Lawson Mardon Buildings, Kettlestring Lane, York

Units 1–13 Dencora Way, Sundon Park, Luton, Beds.

Haynes Way, Swift Valley Industrial Estate, Rugby, Warwickshire

The Business Centre, Molly Millars Lane, Wokingham, Berks.

Lyon Business Park, Barking, Essex

Easter Court, Gemini Park, Warrington

Abbey Business Park, Mill Road, Newtownabbey, Belfast

Datapoint Business Centre, Cody Road, London E16

Nonsuch Industrial Estate, 1–25 Kiln Lane, Epsom, Surrey

Western Industrial Estate, Downmill Road, Bracknell, Berks.

Magnet Trade Centre, Winnersh, Reading

Largest occupiers

Belkin Limited

DHL Supply Chain Limited

Snorkel Europe Limited

The Random House Group Limited

XMA Limited

25189.02 – 17 July 2017 12:13 PM – Proof 2

2017

2016

£250.4 million

£236.6 million

2,730,000 sq ft

2,745,200 sq ft

£15.3 million

£14.4 million

£17.3 million

£16.8 million

98.6%

94.2%

Area
(sq ft)

Freehold/
Leasehold

455,000

336,700

336,100

312,850

246,800

160,900

157,800

127,500

101,800

100,500

99,450

81,500

61,700

54,800

41,700

41,500

13,700

% of total
portfolio

4.0

3.6

2.7

2.4

1.6

Stock code: PCTNStrategic ReportInvestment manager’s report
OFFICE PORTFOLIO REVIEW

Sector outlook
The impact of the decision to leave the
EU, and in particular its effect on London
and the financial services sector, remains
uncertain. Consequently, sentiment towards
London is weakening. However, it appears
to be improving in the stronger regional office
markets where there is a shortage of suitable
space and a limited development pipeline.

We are seeing good occupational activity in
the regions, with low supply in many markets
and positive rental growth. By providing
the best space in the local market we are
maintaining good occupancy levels and
capturing rental growth.

The short-term opportunities are the letting
of 50 Farringdon Road, London which is
being marketed with good interest and 180
West George Street, Glasgow where we have
already received interest. With a combined
ERV of £1.4 million, the lettings will be
significantly income accretive and further save
void hold costs.

Over the coming year, we have 26 lease events
with a passing rent of £1.9 million and an
ERV of £1.7 million per annum.

The office portfolio delivered the second
strongest sector performance for the year.
This was a result of attractive sale prices being
achieved in London, positive rental growth
across most regional markets and significant
asset management activity.

Values increased by 2.5% on a like-for-like
basis and we were able to increase the rent
roll by 7.0%, while reducing holding costs.
The portfolio has a weighted average lease
length of four years and has £3.8 million of
reversionary potential.

Notable lettings in the regions include the
repositioned Trident House in St. Albans,
where we comprehensively refurbished one
floor and secured three new occupiers at a
combined rent of £0.32 million per annum,
29% ahead of the March 2016 ERV. The
final letting was at a rent of £37.50 per sq ft,
which we believe sets a new rental level in
this market.

We secured Benugo at Angel Gate, London
for their head office at a rent of £0.15 million
per annum, in line with the March 2016 ERV.

Our portfolio comprises both single and
multi-let offices, which total 925,000 sq ft in
19 assets and is 87.5% let with the largest
void at 50 Farringdon Road in London. At
this location, we have let 7,800 sq ft of office
space to a leading multidisciplinary engineering
contractor at an annual rent of £0.42 million,
in line with the preceding ERV but 3% less
than the March 2016 ERV. The second floor
and small suites on the ground and first floors
remain available to let and there is good
interest.

The second largest void is at 180 West George
Street in Glasgow, which was acquired with
short income in 2015 for £14.25 million,
reflecting a high net initial yield of 7.8%. We
were expecting on purchase to have four
floors falling vacant; however, we have retained
Standard Life and Michael Page on two floors
at a rent of £0.34 million per annum, 8%
ahead of the March 2016 ERV. The two vacant
floors and common areas are currently being
refurbished to launch as some of the best in
class space available in this market.

These two properties account for 55% of
the total void across the entire portfolio and
provide further opportunity to increase the rent
roll. We are confident of securing occupiers in
the short term.

We are seeing good demand, which is
demonstrated by the 14 lettings completed
during the year for a combined rent of £1.3
million, 8% ahead of the March 2016 ERV.

12 lease renewals or re-gears were completed
during the year, securing £0.77 million per
annum, 7% ahead of the March 2016 ERV.
Two rent reviews were settled, increasing
the combined passing rent to £80,000, 11%
ahead of the March 2016 ERV. We actively
surrendered seven leases in order to facilitate
re-lettings and sales, as detailed below.

Investment activity
Boundary House, Jewry Street, London
EC3, where we completed two lettings (one
following an active management surrender)
achieving full occupancy, was sold in August
2016 for £27.8 million, which (including a
Rights of Light settlement) was 3.3% ahead of
the March 2016 valuation. The property was
acquired in 2006 for £16.1 million.

The sale of 1 Chancery Lane, London WC2
completed in October 2016 realising £17.25
million and reflecting a net initial yield of 3.9%,
which was 9.3% ahead of the March 2016
valuation. The property was acquired in 2005
for £9.0 million.

These sales crystallised the value created
since purchase and concluded our strategy to
reduce the portfolio’s central London exposure
whilst capturing significant valuation gains over
the last few years.

A small office building was sold in Bracknell,
following the occupier vacating on lease expiry.
Dilapidations of £0.4 million were secured and
the building sold for £1.5 million, 23% ahead
of the March 2016 valuation.

25189.02 – 17 July 2017 12:13 PM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukOffice portfolio key metrics

Value

Internal Area

Annual Rental Income

Estimated Rental Value

Occupancy

Number of Assets

Property

Colchester Business Park, The Crescent, Colchester, Essex

Pembroke Court, Chatham, Kent

Longcross Court, Newport Road, Cardiff

Metro, Salford Quays, Manchester

Angel Gate Office Village, City Road, London EC1

401 Grafton Gate East, Milton Keynes, Bucks.

180 West George Street, Glasgow

800 Pavilion Drive, Northampton Business Park, Northampton

Queens House, 19/29 St Vincent Place, Glasgow

Citylink, Addiscombe Road, Croydon

L’Avenir, Opladen Way, Westwick, Bracknell, Berks.

Sentinel House, Ancells Business Park, Fleet, Hants.

50 Farringdon Road, London EC1

Waterside House, Kirkstall Road, Leeds

Atlas House, Third Avenue, Globe Park, Marlow, Bucks.

Merchants House, Crook Street, Chester

Trident House, 42/48 Victoria Street, St Albans, Herts.

Waterside Park, Longshot Lane, Bracknell, Berks.

Marshall Building,122–124 Donegall Street, Belfast

Largest occupiers

Cadence Design Systems Limited

Portal Chatham LLP

Ricoh UK Limited

Canterbury Christ Church University

BPP Holdings Limited

25189.02 – 17 July 2017 12:13 PM – Proof 2

2017

2016

£213.9 million £252.1 million

925,000 sq ft 999,400 sq ft

£13.8 million

£14.8 million

£17.6 million

£19.9 million

87.5%

95.8%

Area
(sq ft)

Freehold/
Leasehold

150,700

86,300

72,100

71,000

64,500

57,100

52,000

49,400

48,200

41,300

33,600

32,000

25,200

24,800

21,900

18,900

18,000

8,700

% of total
portfolio

2.3

1.7

1.5

1.2

Stock code: PCTNStrategic ReportInvestment manager’s report
RETAIL AND LEISURE PORTFOLIO REVIEW

Investment activity
Two small non-core retail assets in Bath
were sold for a total of £3.2 million, reflecting
an aggregate net initial yield of 4.7% and a
30% premium to the March 2016 valuation.
These assets were originally purchased with
a combined value of £2.1 million as part of
the Rugby REIT acquisition in 2010 and have
since generated attractive income and capital
returns.

Drury Lane in Oldham was sold for £2.2
million, completing the business plan
for this asset. The warehouse was purchased
in April 2010 for £0.4 million with an annual
rent of £74,000 as part of the acquisition of
Rugby REIT. During Picton’s ownership, we
secured planning consent to change the use
from industrial to leisure, completed a full
refurbishment, acquired adjacent land for car
parking and subsequently let the transformed
asset to The Gym Group Limited until 2031
at an annual rent of £150,000. The sale price
reflects a net initial yield of 6.4% and a 85%
premium to the March 2016 external valuation.
Net of the £0.5 million of costs incurred
since acquisition, the asset was sold at an
130% profit.

The disposals are in line with our ongoing
strategy to reshape the portfolio in favour of
larger assets with greater potential for capital
and income growth.

Sector outlook
Online retailing continues to challenge
traditional shopping habits and in turn
the demand for retail assets. Changes in
the delivery of goods, such as same-day
delivery and e-lockers, are changing the
retail landscape and we see that with more
discerning demand from retailers.

Our portfolio is currently significantly
underweight to the retail sector, compared
to the MSCI IPD Quarterly Benchmark, and
overweight to the industrial sector, which is
more likely to be positively affected by these
changing trends. The retail we do hold in the
portfolio is approximately 45% invested in
retail warehouses, which are expected, by
consensus forecasts, to be one of the better
performing segments over the medium term.

Rental levels have been static in the majority
of the UK high streets and retail parks, with
the exceptions being central London, busy
shopping destinations in major cities and
prime parks. Rents are still below their 2008
peak and it is unlikely that high street rents
will recover to pre-recession levels due to
an over-supply and structural changes in
shopping habits. Retail warehousing is seeing
a resurgence due to additional demand from
leisure occupiers.

68% of our retail and leisure portfolio is
invested in five assets, which are Stanford
House in Covent Garden and four fully let retail
warehouse parks. We believe these properties
are well positioned to perform in the medium
term. The remaining portfolio is well let, with
values rebased and the majority of the rents
reset, providing a strong income return of 8.3%
from our high street portfolio.

Over the coming year we have six lease events
with a passing rent of £0.36 million and an
ERV of £0.27 million per annum.

Despite positive activity during the year, as
outlined below, and continued high occupancy,
the retail portfolio delivered the weakest sector
performance, which was primarily a result of
limited rental growth across the wider market.

Values decreased by 2% on a like-for-like
basis and the rent roll remained static with
the only notable ERV growth at Stanford
House, London and Gloucester Retail Park,
Gloucester. The portfolio has a weighted
average lease length of just over eight years
and is slightly over rented.

Our portfolio comprises 17 assets across retail
warehouse parks, retail shops and two leisure
assets and remains 99% let for the second
year in a row. We have four small retail units
available, and a restaurant in Birmingham, with
a combined ERV of £0.13 million per annum.

We completed five lettings during the year for
a combined rent of £0.37 million, 17% ahead
of the March 2016 ERV. The most notable
letting was at Gloucester Retail Park, where in
a back-to-back transaction we accepted the
surrender of Carpetright’s lease for a premium
of £0.21 million and let the unit to Pure Gym
for a minimum of ten years at a rent of £0.14
million per annum, which is 32% ahead of
the March 2016 ERV. We believe the letting
significantly improves the occupier line up and
has helped us to attract Starbucks onto the
park where we are currently on site developing
a new unit for them.

A settlement of £5.25 million was received
in relation to a dispute at the Strathmore
Hotel, Luton. The existing valuation and
leasing arrangements at this asset remained
unchanged. The hotel is currently being
comprehensively refurbished by the tenant
and is due to re-open in the summer.

Four lease renewals or re-gears were
completed during the year, securing £0.12
million per annum, 9% ahead of the March
2016 ERV. At Queens House in Glasgow, an
increase of over 60% on the prior passing rent
was achieved on a restaurant unit securing a
new rent of £0.16 million per annum, over 50%
ahead of the March 2016 ERV.

25189.02 – 17 July 2017 12:13 PM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukRetail and leisure portfolio key metrics

Value

Internal Area

Annual Rental Income

Estimated Rental Value

Occupancy

Number of Assets

Property

Parc Tawe, Phase II, Link Road, Swansea

Gloucester Retail Park, Eastern Avenue, Gloucester

Queens Road, Sheffield

62/68 Bridge Street, Peterborough

Strathmore Hotel, Arndale Centre, Luton, Beds.

Angouleme Way Retail Park, Bury, Greater Manchester

17/19 Fishergate, Preston, Lancs.

Regency Wharf, Broad Street, Birmingham

Scots Corner, High Street/Institute Road, Birmingham

56 Castle Street, 2/12 English Street and 12–21 St Cuthberts Lane, Carlisle, Cumbria

Stanford House, 12–14 Long Acre, London WC2

6/12 Parliament Row, Hanley, Staffs.

Units 1–3, 18/28 Victoria Lane, Huddersfield, West Yorks.

53/55/57 Broadmead, Bristol

72/78 Murraygate, Dundee

7 & 9 Warren Street, Stockport

78–80 Briggate, Leeds

Largest occupiers

B&Q Plc

Edward Stanford Limited

Asda Stores Limited

Homebase Limited

Central England Co-operative Limited

25189.02 – 17 July 2017 12:13 PM – Proof 2

2017

2016

£160.1 million £165.9 million

824,000 sq ft

830,700 sq ft

£11.0 million

£11.2 million

£11.0 million

£10.9 million

98.8%

99.4%

Area
(sq ft)

Freehold/
Leasehold

116,700

113,900

103,000

88,700

81,600

76,200

59,900

44,300

30,000

23,900

19,600

17,300

14,600

10,500

9,700

8,700

7,700

F/L

% of total
portfolio

3.0

1.9

1.4

1.1

1.0

Stock code: PCTNStrategic ReportFinancial review
Andrew dewhirst

“The net assets of the
Group increased to £441.9
million, which was a rise
of 6.0% over the year,
driven by a total profit for
the year of £42.8 million,
or earnings per share of
7.9 pence. The EPRA net
asset value rose from 77
pence to 82 pence.”

Despite the uncertainties regarding economic
and political events, we have recorded a total
profit for the year of over £42 million.

Our property portfolio increased on a like-for-like basis by 3.0%, giving a capital profit of nearly
£17 million, while the income profit for the year was £25.8 million, an increase of 30% from the
2016 result. The income result does include some exceptional income, as stated below.

Our total return for the year based on these results was 10.4%.

Net asset value
The net assets of the Group increased to £441.9 million, which was a rise of 6.0% over the
year, driven by a total profit for the year of £42.8 million, or earnings per share of 7.9 pence. The
EPRA net asset value rose from 77 pence to 82 pence.

Net asset value – EPRA and IFRS

Fair value of debt

EPRA Triple Net Asset Value

Net Asset Value per share (pence)

EPRA Net Asset Value per share (pence)

EPRA Triple Net Asset Value per share
(pence)

2017
£m

441.9

(24.5)

417.4

2016
£m

417.1

(21.8)

395.3

2015
£m

370.0

(19.8)

350.2

Income statement
Total revenue from the property portfolio was £54.4 million, an increase of 18.5% over 2016.
This increase largely reflects the additional income that was received in the year from the
settlement of the dispute concerning the Strathmore Hotel in Luton. Net property income, after
deducting the direct expenses associated with the portfolio, was up 18% to £42.4 million.

The like-for-like change in rental income compared to the previous year, on an EPRA basis, is
set out in the EPRA Disclosures on page 99.

Operating expenses increased to £5.2 million, from £4.4 million. A significant part of this
increase is due to the variable elements of the Group’s remuneration policy, and reflects the
strong performance this year, both the return from the property portfolio and the shareholder
return. We have established a new Long-term Incentive Plan this year, which is discussed
in more detail in the Remuneration Report, and this is linked to shareholder return, property
performance and EPRA earnings per share growth over three year performance periods.

Financing costs have fallen to £10.9 million from £11.6 million in 2016. This is as a result of
the repayment in full of our zero dividend preference shares in October 2016. We would expect
a further fall in finance costs next year as the full impact of this repayment works through into
our results.

The table opposite reconciles
the net asset value calculated in
accordance with International Financial
Reporting Standards (IFRS) with that
of the European Public Real Estate
Association (EPRA).

Total Revenue

£54.4m

Dividend

3.3p

Property Assets

£615.2m

25189.02 – 17 July 2017 12:13 PM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.uk25189.02 – 17 July 2017 12:13 PM – Proof 2Stock code: PCTNStrategic Report41Capital gains on the portfolio were £16.9 million for the year, as detailed further under the Investment Properties section.The Group is subject to UK tax on its net property income and management fees, in total £0.5 million for the year. Towards the end of last year the Government introduced new legislation covering interest deductibility for UK companies, in response to the ongoing Base Erosion and Profit Shifting project. This came into effect from 1 April 2017. At the same time a consultation has been launched by the Treasury to bring non resident landlord corporations, such as Picton, into the scope of UK corporation tax. We are working with our advisers on the potential implications for the Group, but, as mentioned in the Chairman’s Statement, we believe that conversion to a UK REIT in 2018 will be in the interests of the Company.The income profit for the year was £25.8 million, an increase of nearly 30% from 2016. This, together with the capital gains, resulted in a total profit for the year of £42.8 million.DividendsWe increased our annual dividend rate from 3.3 pence to 3.4 pence, with effect from our February 2017 quarterly dividend, bringing the total dividend paid in this financial year to 3.325 pence. Dividend cover for the full year was 144%.Investment propertiesThe fair value of our investment property portfolio was £615.2 million at 31 March 2017, lower than the £646.0 million a year previously. The main reason for the decrease was disposals in the year, principally two central London office properties, but also a number of small non-core assets. There were no acquisitions in the year, but £2.8 million of capital expenditure was incurred across the portfolio. The overall revaluation gain was £15.1 million, representing a 3.0% like-for-like increase in the valuation of the portfolio. At 31 March 2017 the portfolio comprised 53 assets, with an average lot size of £11.8 million.A further analysis of capital expenditure, in accordance with EPRA Best Practice Recommendations, is set out in the EPRA Disclosures section on page 99.EPRA best practices recommendationsThe EPRA key performance measures for the year are set out on page 5 of the Report, with more detail provided in the EPRA Disclosures section which starts on page 97. There are further references to the Best Practices Recommendations in the Financial Review under the appropriate headings, and again more detail is provided in the EPRA Disclosures section.Picton Property AR2017 Front.indd 4117/07/2017 17:22:33Financial review
Continued

Borrowings
Total borrowings decreased to £204.6 million at 31 March 2017, following the repayment of
both the zero dividend preference shares and the outstanding balance of the revolving credit
facility. As a result our loan to value ratio was 27.4% at the year end, its lowest ever reported
level. The weighted average interest rate on our borrowings has also fallen and now stands at
4.2%, while the average loan duration has moved out to 11.7 years.

Our senior loan facilities with Canada Life and Aviva remained in place, reduced only by the
amortisation of the Aviva facility (£1.1 million in the year). Both facilities have fixed rates of
interest, so we have no exposure to future interest rate volatility on these loans. The Group
remained fully compliant with the loan covenants throughout the year.

At the year end we had over £50 million of committed but undrawn facilities provided by
Santander. If drawn, interest would be payable at 175 basis points over three month LIBOR,
which at current LIBOR rates equates to an all-in interest cost of 2.1%. We are currently in the
process of extending our initial revolving credit facility ahead of its maturity next year.

As stated above, we repaid in full our 22 million zero dividend preference shares when they
matured in October 2016. As well as the ongoing saving in annual finance costs, this repayment
has helped to simplify the Group’s capital structure.

Loan arrangement costs are capitalised and are amortised over the terms of the respective
loans. At 31 March 2017 the unamortised balance of these costs were £3.7 million.

The fair value of our borrowings at 31 March 2017 was £229.1 million, higher than the book
amount. Although lending margins have tended to increase over the past year, gilt rates have
continued to remain at historically low levels.

A summary of our borrowings is set out below:

Total borrowings (£m)

Borrowings net of cash (£m)

Undrawn facilities (£m)

Loan to value ratio (%)

Weighted average interest rate (%)

Average duration (years)

2017

204.6

170.8

53.0

27.4

4.2

11.7

2016

249.5

226.8

10.2

34.6

4.4

10.7

2015

232.8

162.8

26.0

30.1

4.6

12.4

Capital structure
Our equity balance has remained unchanged over the year, but we have reduced our level of
borrowings as stated above.

The Group’s net gearing ratio, using the method prescribed by the AIC, decreased to 43.6%,
from 59.2% a year ago. Further details are provided in the Supplementary Disclosures section.

Cash flow and liquidity
The cash flow from our operating activities increased from £24 million to nearly £27 million this
year. This, together with the asset sales of over £51 million, facilitated the repayment of the zero
dividend preference shares and dividend payments. Our cash balance at the year end stood at
close to £34 million.

Andrew Dewhirst
Finance Director
Picton Capital Limited

6 June 2017

25189.02 – 17 July 2017 12:13 PM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukManaging risk

The Board recognises that there are risks and
uncertainties that could have a material impact
on our results.

Risk management provides a structured approach to the decision making process such that the
identified risks can be mitigated and the uncertainty surrounding expected outcomes can be
reduced. The Board has developed a risk management policy which it reviews on a regular basis.
The Audit and Risk Committee carries out a detailed assessment of all risks, whether investment
or operational, and considers the effectiveness of the risk management and internal control
processes. The Group’s risk appetite will vary over time and during the course of the property
cycle. The principal risks – those with potential to have a material impact on performance and
results – are set out on the following pages, together with mitigating controls. The matrix below
illustrates the assessment of the impact and likelihood of each of the principal risks.

The 2014 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. This
statement is set out in the Directors’ Report.

Principal risk

Trend

1. Macroeconomic

Property market

Portfolio allocation

Property investment

Active management

Property management

People

Tax and regulation

9. Health and safety

10. Property valuation

11. Loan covenants

12.

Interest rates

13. Gearing

14. Liquidity

h
g
i
H

d
o
o
h
i
l
e
k
i
L

w
o
L

Low

Impact

High

25189.02 – 17 July 2017 12:13 PM – Proof 2

Stock code: PCTNStrategic ReportManaging risk
CONTINUED

Risk and Impact

Mitigation

Risk Trend

Corporate Strategy and Performance

1. Macroeconomic conditions and future political events

(whilst uncertain in outcome) bring risks to the property
market generally and to the businesses of our occupiers.

The Board considers economic conditions and the
uncertainty regarding political events when setting strategy
and in making investment decisions.

The level of uncertainty in financial markets has
remained high following the political and economic
events of the last year.

2. The property market is cyclical and returns can be volatile.

Failure to react appropriately to changing market conditions
could have a significant impact on our results.

The Board reviews the Group’s strategy on a regular basis
and considers whether any change is needed, in light of
current market conditions and forecast changes.

3. Returns can vary significantly between different

geographical areas and sectors. Our properties could
underperform as a result of a poor portfolio strategy.

Investment and Property Management

4. Decisions to buy or sell assets based on incorrect

assumptions, poor research or incomplete due diligence
could result in lower investment returns.

5. Active management initiatives or capital expenditure

decisions do not enhance values due to flawed analysis or
assumptions.

6. Poor asset management can lead to long void periods,

low occupier retention, high occupier arrears and
defaults, and cash flow problems.

Operational

7. A failure to attract and retain employees of a suitable

calibre to manage our affairs could lead to poor
shareholder returns.

We have implemented a new Long-Term Incentive Plan
for the investment management team based on three
year performance conditions.

8. We could fail to anticipate legal, fiscal or regulatory
changes, which may lead to an adverse financial or
regulatory impact.

The UK government has commenced a consultation process
on bringing companies such as Picton into the scope of UK
corporation tax.

9. Health and safety management processes could fail, leading

to financial or reputational loss.

We maintain a diversified portfolio in order to minimise
exposure to any one geographical area or market sector.

The Investment Manager prepares business plans for each
asset on an annual basis. All investment decisions are made
by the Board following a formal appraisal and due diligence
process.

All asset management and investment decisions are subject
to a formal internal review process with clear authority limits.

Our asset managers are focused on income generation and
maintain close contact with occupiers to ensure their space
requirements are understood and addressed proactively.
Creditworthiness checks of potential occupiers are carried
out prior to letting.

We have a remuneration policy in place which incentivises
performance and is aligned to our results. The Board
commissions independent reviews of market remuneration
to ensure salary levels are competitive.

We have appointed professional advisers to consider the
implications of potential tax changes and advise on possible
courses of action. We also receive regular updates in
relevant laws and regulations.

The Group’s property manager is required to carry out all
necessary health and safety checks, and is subject to the
oversight of the Investment Manager.

25189.02 – 17 July 2017 12:13 PM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukRisk and Impact

Financial

Mitigation

Risk Trend

10. The assumptions used in the valuation of property assets

include many external factors, including prevailing
economic conditions. In adverse conditions there can be a
reduction in property values leading to a fall in the Group’s
net asset value and potentially failure to meet financing
covenants.

11. A fall in our investment property values could lead to a

breach of our loan covenants, and leave the Group without
sufficient long-term funding.

12. An increase in interest rates could lead to a fall in our

earnings.

13. We operate a geared capital structure, which will magnify
returns from the property portfolio, both positively and
negatively. An inappropriate level of gearing for the property
cycle could lead to lower investment returns.

14. Fluctuations in cash flows from operating activities

can have a detrimental impact on debt servicing, asset
management initiatives and shareholder returns.

We maintain detailed forecasts of our property portfolio,
which are subject to regular scenario testing. In this way
we will be able to react to expected changes in economic
conditions in a timely manner.

Covenant headroom and sensitivity to forecast asset values
are regularly monitored by the Board.

We have entered into long-term fixed interest rate loans
on the majority of our facilities and hence have reasonable
certainty over interest cost for the foreseeable future.

We have a gearing strategy in place and the Board
regularly reviews property market forecasts, so that it is
able to amend its strategy in the light of changing market
conditions. Our current strategy is to reduce the level of
gearing as the property cycle progresses.

Cash flow forecasts are regularly prepared and reviewed
by the Board to ensure sufficient cash resources are
available to meet the operating needs of the business.
Debt covenants are continually monitored and reported
to the Board.

Risk Trend key

Increase in risk

Decrease in risk

No change in risk

25189.02 – 17 July 2017 12:13 PM – Proof 2

Stock code: PCTNStrategic ReportBeing responsible

The Board is
responsible for
setting the values and
standards of the Group,
including leadership
on environmental and
social issues.

Diversity

Board

Men 5

Women 0

Investment
management
team

Men 7

Women 4

Total

Men 12

Women 4

Why this is important to us
We have in place a framework for conducting business in a way that makes a positive
contribution to society, whilst minimising any negative impacts on people and the
environment.

One of our key priorities is to work with our occupiers, so that we can understand their
needs and aim to meet their current and future requirements. We will use our expertise
in asset management to provide modern flexible space that is safe, clean and energy
efficient. We believe that it is important for all of the stakeholders in the business that
sustainability is integral to all of our activities. In this way we can constantly strive to reduce
the environmental burdens from our business.

Our people
Fairness and equality
We value the contributions made by all of
our employees and believe that a diverse
workforce is key to maximising business
effectiveness. We aim to select, recruit,
develop and promote the very best people
and are committed to creating a workplace
where everyone is treated with dignity and
respect, and where individual difference is
valued.

This is accomplished by:

Performance and development
We aim to provide a business environment
that inspires our employees and encourages
them to realise their full potential by giving
them access to development and training
opportunities.

This is attained through the following key
principles:

• Development should be continuous;
employees should always be actively
seeking to improve performance

• Ensuring equal opportunities in the

recruitment process

• Regular investment of time in learning is
seen as an essential part of working life

• Paying fair and competitive salaries and
having reasonable family and well-being
policies

• Being opposed to any form of less

favourable treatment, whether through
direct or indirect discrimination, harassment
or victimisation, accorded to employees
and applicants for employment on the
grounds of sex, sexual orientation, marital
or parental status, disability, race, religious
beliefs, age, ethnic or national origin, or any
other protected characteristic.

Employee alignment
Unlike traditional investment companies
we have a dedicated internal investment
management team whose entire focus is
on creating long-term value for our
shareholders. Our employees are fully aligned
through our remuneration policy, ensuring that
outperformance is suitably recognised in both
annual bonus and Long-term Incentive Plan
awards.

Diversity
We recognise the benefits of diversity and
the value this brings to the Group. We aim to
maintain the right blend of skills, experience
and knowledge in the Board and investment
management team.

• Development needs are met by a mix
of activities, which include internal and
external training courses, structured ‘on
the job’ work experience and through
interaction with professional colleagues.

Health and well-being
Health and well-being is critical to the
business, both within the property portfolio
and also within the office environment.

Our commitment to providing a safe
and healthy working environment for
all employees is achieved by:

• Adhering to the appropriate health

and safety standards

• Providing a working environment that

enables employees to work effectively
and free from unnecessary anxiety, stress
and fear

• Offering private health benefits to

all employees

• Ensuring employees can report

inappropriate behaviour or concerns
through the whistleblowing policy

• Having appropriate family friendly policies.

25189.02 – 17 July 2017 12:13 PM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukCharity and local communities
We continue to support a variety of charities, principally through The Funding Network, whose
aim is to achieve long-term social change.

The Funding Network enables individuals to join together to support social change projects.
They are the UK’s first public open giving forum and have been described as the ‘Dragons’
Den’ for charities. They have raised over £10 million for over 1,400 diverse local, national and
international projects.

For the year ended 31 March 2017 the Group made charitable donations totalling £9,000.

Our employees are encouraged to play a positive role in community activities and individual
charitable fundraising is supported through the process of ‘matched giving’.

Our environment
It is recognised that commercial and residential buildings in the UK are a key source of
emissions and that as a responsible landlord we have a duty to control and reduce the
environmental impact of our assets. We continue to assess the environmental performance
of our portfolio through our consultants at CBRE who engage with property managers and
occupiers to implement sustainability improvements at each asset.

Sustainability initiatives have been incorporated into all maintenance schedules, including:
replacing conventional light bulbs with LEDs in common areas, installing motion sensitive
lighting and optimising plant equipment and building management systems to reduce energy
consumption.

Our 50kWp solar panel array at one of our multi-let office buildings, 401 Grafton Gate in Milton
Keynes, has now been operational for over a year and is in line with forecasted savings. This is
reducing our carbon footprint and providing cheaper electricity from a renewable source to the
occupiers of the building. We continue to explore further opportunities in the renewables sector
as a way of reducing our environmental impact.

At one of our key sites in London, 50 Farringdon Road, we have deployed an Asset Analytics
tool to measure the energy use throughout the different pieces of plant equipment. The tool is
in its infancy but has already highlighted equipment that is running inefficiently. This tool coupled
with in-depth energy audits identifies the most efficient means of reducing energy consumption
while delivering value to the occupiers. The recommendations made through these operations
will be assessed with a view to implementation over the next year. If the Asset Analytics tool
proves to be successful at reducing emissions, we will look to deploy it at further sites across
our portfolio.

The UK has pledged to reduce carbon emissions from 1990 levels by 57% in 2030. In addition,
on 1 April 2018 the Minimum Energy Efficiency Standards will change and new leases on
properties will require Energy Performance Certificates (EPCs) at a minimum of an E rating
or better. This will therefore have a significant impact on the marketability and rental growth
prospects for buildings which have lower EPC ratings.

Our EPC risk project mitigates the risk posed under the Minimum Energy Performance
Standards that come into force from April 2018. During 2016 we successfully reduced our F
and G assets to 1.2% of the portfolio through numerous measures including: energy efficiency
improvements, sales and conducting new EPCs. Corrective measures have been identified for
all remaining assets with an F or G rating and will be integrated into the asset business plans
before April 2018 in order to achieve the appropriate improved ratings.

Bede is a local community charity based in
Southwark. Its aim is to support local people
in creating better lives for themselves, their
families and their communities.

In December two members of the Picton
team spent a day helping at the Bede
Christmas Fair.

LOW RES

25189.02 – 17 July 2017 12:13 PM – Proof 2

Stock code: PCTNStrategic ReportBeing responsible
CONTINUED

This year, we have rolled out a tenant
engagement programme, covering 60%
of the tenanted floor area. The programme
aims to collect tenant data so that we can
fully understand the energy efficiency of our
portfolio while also offering our tenants advice
and support on how they can reduce their
carbon emissions. We have currently seen
30% of contacted tenants actively engage in
the programme.

Our absolute carbon emissions have
increased this year, due to increased
consumption, improved methodology,
increased scope and fluctuations in
occupancy. This year we are aiming to reduce
both absolute and like-for-like emissions
through the identification and implementation
of further energy efficiency measures across
the portfolio.

In the workplace it is our policy to:

• Constantly strive to reduce the amount of

paper used

• Encourage employees to use public

transport where possible to reduce CO2
emissions

• Pick products wisely such as using

recycled paper and avoiding disposable or
non-biodegradable items

• Recycle by offering accessible recycling

bins in the office

• Use energy-efficient products and

appliances and reduce consumption where
possible

Reporting against EPRA
sustainability best practice
We report our overall energy, greenhouse gas, water and waste usage by sector. In the EPRA
Disclosures section we have disclosed the absolute and intensity performance measures as set out
by the EPRA Sustainability Best Practice Recommendations, and we have also provided further
commentary in that section around the measures and the results for the year. For the first time we
have started collecting tenant consumption data to increase the scope of our reporting and allow
us to report whole building consumption. These steps allow the Group to identify and target key
impact areas across the portfolio, contributing to better management of the overall environmental
performance and to formulate indicator targets to track sustainability performance.

The following measures are set out in the EPRA Disclosures section towards the end of the Report:

Issue Type

Energy

Greenhouse gas emissions

Water

Waste

Sustainability Performance Measure

Total electricity consumption
Like-for-like total electricity consumption
Total fuel consumption
Like-for-like total fuel consumption
Building energy intensity

Total direct GHG emissions
Total indirect GHG emissions
Like-for-like total direct GHG emissions
Like-for-like total indirect GHG emissions
GHG intensity from building energy

Total water consumption
Like-for-like total water consumption
Building water intensity

Total weight of waste by disposal route
Like-for-like total weight of waste by disposal route

Business travel

Total business travel emissions

There is no district heating or cooling consumption within the portfolio and so there is nothing to
report against these sustainability measures.

One asset within the portfolio, Angel Gate Office Village, has a sustainability certification (ISO 14001),
while our most recent acquisition, Metro in Salford Quays, has a BREEAM ‘Excellent’ rating, giving an
overall level of certification of 3.6% across the portfolio.

25189.02 – 17 July 2017 12:13 PM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.uk-3%

reduction in like-for-like emissions from
purchased energy for own use

83%

of Scope 2 emissions from
renewable sources

Key initiatives

We continue to improve the coverage and
accuracy of our carbon footprint.

Installation of AMR meters at multi-let sites

Inclusion of new reporting metrics, such
as tenant consumption

Greenhouse gas emissions
We have measured our greenhouse gas (GHG) footprint for the fourth time for the 2017 annual
report, building on the recommendations given last year. Our GHG emissions for the calendar year
2016 totalled 17,423 tCO2e. The table below shows this separated by scope, as provisioned in the
GHG Protocol. Picton’s GHG inventory has been compiled using an operational control approach
with a greater emphasis in 2016 of obtaining tenant controlled consumption data. This along with
an improved methodology has resulted in an increase in our emissions.

Emission source

GHG Scope

Combustion of fuel and
operation of facilities
Electricity, heat, steam
and cooling purchased
for own use
Business travel
Occupier data
Office premises
Landlord water and
treatment
Landlord waste

Total

3
3
3

2016

Absolute
GHG
emissions
(tCO2e)

GHG
Intensity
(tCO2e/m²)

2015

Absolute
GHG
emissions
(tCO2e)

GHG
Intensity
(tCO2e/m²)

1,503

0.015

994

0.005

4,655

0.023

4,342

0.022

8
11,149
12

17,423

N/A
N/A
N/A

0.000

0.001

0.039

8
N/A
N/A

N/A

5,354

N/A
N/A
N/A

0.000

N/A

0.012

This year we significantly improved the coverage and accuracy of our carbon footprint. Our GHG
emissions for the year 2016 were 17,423 tCO2e. This uplift on our 2015 figure is explained by the
inclusion for the first time of new purchases (180 West George Street and Metro, Salford Quays),
the inclusion of occupier consumption data and some increases in site emissions.

Scope 1
Scope 1 emissions account for 1,503 tCO2e,
which is an increase of 52% from 2015. This
is due to the acquisition of 180 West George
Street in late 2015 and some increases
in occupancy across our remaining sites.
Excluding the impact of new acquisitions, the
like-for-like consumption has also increased
by 27%. This is due to the impact of Stanford
House (which accounts for a third of this
increase) where gas fired chillers were repaired
in 2015 and were fully operational for the first
time in 2016.

Scope 2
Like-for-like emissions decreased by 3% year
on year but there was an absolute increase
of 7% in Scope 2 emissions from 2015 to
4,655 tCO2e.

This increase is largely due to the inclusion
of emissions from Metro, Salford Quays,
Manchester (acquired during 2016). The new
site is a significant consumer as it is the third
largest office in the portfolio by floor area. A
0.4% reduction of our overall energy intensity
ratio across all Scope 2 emissions year on year
demonstrates our portfolio continues to become
more sustainable and run more efficiently.

83% of our Scope 2 emissions are from
renewable sources.

Scope 3
Scope 3 emissions account for 11,265 tCO2e,
which is a significant increase from 2015 due to
including new reporting metrics such as tenant
consumption and home office consumption.

Methodology
In order to express our annual emissions in
relation to the growth of our business, and
to negate the effects of acquisitions and
disposals, we report GHG emissions intensity
measurements, in tonnes of CO2 per square
metre of property floor area (tCO2e/m²).

We have calculated and reported our
emissions in line with the GHG Protocol
Corporate Accounting and Reporting Standard
(revised edition). We count a supply as actual
if more than half the year has had actual or
customer reads. In 2016, 45% of supplies
were estimated but these supplies counted
for less than 4% of the total GHG emissions in
2016. This shows that a majority of the data
collected is from reliable sources. During the
last year a programme has been deployed by
the CBRE asset services team to install AMR
meters at multi-let sites. This programme will
continue over the next year and will provide
ever increasing clarity on the consumption
throughout our portfolio.

25189.02 – 17 July 2017 12:13 PM – Proof 2

Stock code: PCTNStrategic ReportPictured: Queens Road, Sheffield

25189.02 – 17 July 2017 12:13 PM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukChairman’s introduction
NICHOLAS THOMPSON

The Board is
committed to
maintaining a
high standard of
corporate governance
and transparency
throughout the
business.

Read more about our Audit and Risk
Committee on pages 59 to 61

Read more in our Remuneration Report on
pages 64 to 66

As a member of the Association of Investment Companies, we comply with the AIC Code,
which ensures the Group meets its obligations under the UK Corporate Governance Code.

I stated at the time of our half year results that we would start to consider recruiting an
additional member to the Picton Board. This process has commenced, and I hope that we will
have a new Board member in place later this year. It is our intention, once the new Director
is in place, to appoint a new chairman of the Audit and Risk Committee in due course, as
Robert Sinclair has indicated that he wishes to retire from the Board in 2018 once any potential
transition to UK REIT status is complete.

This year we have implemented a new long-term incentive plan for the management team. We
believe that this new arrangement provides greater alignment with the Company’s shareholders.
The initial awards under this plan were made at the start of 2017, and further details on this are
provided in the following Remuneration Report.

As a Board we recognise the importance of good corporate governance and aim to be open
and transparent in our dealings with shareholders. We encourage involvement with industry
bodies, and a number of the Directors actively participate with the AIC in both Guernsey and
the UK.

I would like to thank shareholders for their support in passing all of the resolutions presented at
last year’s Annual General Meeting.

Nicholas Thompson
Chairman
6 June 2017

25189.02 – 17 July 2017 12:13 PM – Proof 2

Stock code: PCTNGovernanceStock code: PCTNBoard of directors

With a breadth and
depth of experience
across property and
fund management,
our Board leads
with integrity and
transparency.

1. Nicholas thompson
Chairman

2. Robert sinclair
Chairman of the audit
and risk committee

Age 68, was formerly Director and Head
of Fund and Investment Management
at Prudential Property Investment
Management and has served on the
Board as Chairman since 2005. He is
currently Chairman of MSCI IPD’s UK &
Ireland Consultative Group, a director
of the Lend Lease Retail Partnership
and an independent director of the
Association of Real Estate Funds. He
is a Fellow of the Royal Institution of
Chartered Surveyors and a member of
the Property Forum of the Association of
Investment Companies.

Age 67, is Managing Director of the
Guernsey based Artemis Group and a
director of a number of investment fund
management companies and investment
funds associated with clients of that
Group. He has served on the Board
since 2005. Robert is Chairman of
Schroder Oriental Income Fund Limited,
a director of Sirius Real Estate Limited,
a director of Chariot Oil & Gas Limited,
a director of EF Realisation Limited
and a director of Rainbow Rare Earths
Limited. He is a Fellow of the Institute of
Chartered Accountants in England and
Wales, and a member of the Institute of
Chartered Accountants of Scotland.

25189.02 – 17 July 2017 12:13 PM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukPicton Property Income LimitedAnnual Report 2017www.picton.co.uk3. Roger lewis
Chairman of the property
valuation committee

4. Vic holmes
Chairman of the
remuneration committee

5. Michael morris

Age 69, has extensive experience in
the property sector, most recently as
a director of Berkeley Group Holdings
Plc for over 15 years, the last eight of
which were as Chairman, a position
from which he retired at the end of
July 2007. He subsequently acted as a
consultant to the Berkeley Group and
is currently a non-executive director of
three Jersey based subsidiaries of the
Berkeley Group. Prior to this, he was
UK Group Chief Executive Officer of
Crest Nicholson Group PLC from 1983
to 1991. He is also currently a director
of Grand Harbour Marina Plc (Malta),
of Camper and Nicholsons Marina
Investments Limited and of Cambian
Global Timberland Limited. He was
appointed to the Board in 2010.

Age 60, was Chief Executive of Northern
Trust’s businesses in the Channel
Islands until he retired from full-time
employment in November 2011. He
joined the Board on 1 January 2013.
He serves as a director for a number of
companies involved in the funds sector,
for groups such as Permira, Ashmore,
DBAG, and GAM. He is also Chairman of
Generali Worldwide Insurance Company
Limited, a director of Next Energy
Solar Fund Limited and Chairman of
Highbridge Multi-Strategy Fund Limited
(both London listed companies),
and was Chairman of the Guernsey
Investment Funds Association from
April 2013 until April 2015. He is a
Fellow of the Association of Chartered
Certified Accountants.

Michael, age 44, has over 23 years’
experience in the UK commercial
property sector and was appointed to
the Board on 1 October 2015. He has
worked with the Group since launch in
2005 and is also Chief Executive of its
UK investment management subsidiary,
Picton Capital Limited. Within this role he
is responsible for the Group’s Investment
Management operation, overseeing the
implementation of all aspects of the
Company’s investment strategy. Prior
to this, he worked in private practice,
then becoming a Senior Director and
Fund Manager at ING Real Estate
Investment Management (UK) Limited.
He is a member of the Investment
Property Forum and sits on both the
Property & Infrastructure Forum of the
Association of Investment Companies
and the CPD steering committee of the
Investment Property Forum. He has also
obtained the Investment Management
Certificate and the IPF Diploma in
Property Investment.

25189.02 – 17 July 2017 12:13 PM – Proof 2

Stock code: PCTNGovernanceStock code: PCTNInvestment management team

25189.02 – 17 July 2017 12:13 PM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukPicton Property Income LimitedAnnual Report 2017www.picton.co.ukThe investment management team at Picton Capital Limited comprises
12 permanent employees, and includes five real estate professionals, four
qualified accountants and three further support employees.

10. Adam green
Senior accountant
Adam is a Senior Accountant joining from
Invista Real Estate in January 2012. He is
a member of the Association of Chartered
Certified Accountants and has completed
the IPF Introduction to Property Investment
module.

11. Sarah barnes
Office manager
Sarah is responsible for the day-to-day
management of the office and oversees all
aspects of administration within the Company.
She joined in June 2014 and has completed
the IPF Introduction to Property Investment
module.

12. Melissa ricardo
TEAM SECRETARY
Melissa joined in January 2017 and provides
administration support to the team.

1. Michael morris
Chief executive
Michael, age 44, is Chief Executive and is
responsible for devising and overseeing
the implementation of all aspects of the
Company’s investment strategy. He is also
a non-executive Director of Picton Property
Income Limited.

2. Andrew dewhirst
Finance director
Andrew, age 57, joined as Finance Director
in March 2011. Previously he was Director
of Client Accounting at ING Real Estate
Investment Management (UK) Limited, a
role he had held since January 2006. At
ING he was responsible for the accounting
and administration of all the UK real estate
vehicles and separate client accounts. He has
over 25 years’ experience in the real estate
and financial services sector. Andrew is an
associate member of the Institute of Chartered
Accountants in England and Wales and a
member of the Investment Property Forum.

3. Jay cable
Director
Jay, age 39, is Head of Asset Management.
In this role he is responsible for overseeing
all asset management activities in respect of
the Group’s property portfolio. Formerly he
was Director at ING Real Estate Investment
Management (UK) Limited, and has worked
with the Group since it launched in 2005. He
has over 17 years of real estate experience
and is a member of the Royal Institution of
Chartered Surveyors and of the Investment
Property Forum.

4. Fraser d’Arcy
Investment director
Fraser, age 41, joined as Investment Director
in January 2013 and is primarily responsible
for transactional activity within the portfolio
to manage effective recycling of capital.
Previously he was an Investment Surveyor at
Threadneedle Property Investments Limited
from 2006. He has 17 years of investment
experience in UK real estate, is a Member of
the Royal Institution of Chartered Surveyors,
has obtained the Investment Management
Certificate and is a member of the Investment
Property Forum.

5. Tim hamlin
Senior asset manager
Tim is a Senior Asset Manager and a
member of the Royal Institution of Chartered
Surveyors and has obtained the Investment
Management Certificate. He is responsible for
the formulation and implementation of asset
level business plans in line with the overall
portfolio strategy. He has ten years of real
estate experience and eight years working with
the Group’s portfolio.

6. Matthew barker
Asset manager
Matthew joined as an Asset Manager in
August 2014 from JLL. He is a member of the
Royal Institution of Chartered Surveyors and
is responsible for the asset management and
performance of the property portfolio.

7. Sonya kapur
RESEARCH ANALYST
Sonya is responsible for all aspects of analysis
and research within the Company and also
contributes to investment strategy. She joined
in January 2012 and has ten years of real
estate research experience. Previously she
worked at BNP Paribas Real Estate as an
investment analyst. Sonya has the IPF Diploma
in Property Investment and is a committee
member of the IPF Research steering group.

8. James forman
Financial controller
James is the Financial Controller. In this
role he is responsible for all the accounting
and financial reporting for the Group. He
has worked with the Group since 2005 and
has 17 years’ experience in the real estate
sector. James is a Fellow of the Association of
Chartered Certified Accountants.

9. Sheryl bates
MARKETING &
COMMUNICATIONS MANGER
Sheryl joined in June 2017, focusing on
marketing and communications. Previously
Sheryl worked in marketing, investor
relations and finance roles at AXA Investment
Managers, Permira and Barclays. She qualified
as a Chartered Accountant with Deloitte.

25189.02 – 17 July 2017 12:13 PM – Proof 2

Stock code: PCTNGovernanceStock code: PCTNCorporate governance report

As a member of
the Association of
Investment Companies
(“AIC”), the Company
has been reporting
against the principles
and recommendations
of the AIC Code of
Corporate Governance
(the “AIC Code”) and
the accompanying AIC
Corporate Governance
Guide for Investment
Companies (the “AIC
Guide”). In these
financial statements,
the Company is
reporting against
the February 2015
AIC Code and AIC
Guide which take into
account updates made
to the UK Corporate
Governance Code in
September 2014.

The Board has considered the principles
and recommendations of the AIC Code by
reference to the AIC Guide. The AIC Code,
as explained by the AIC Guide, addresses
all the principles set out in the UK Corporate
Governance Code (the “UK Code”), as
well as setting out additional principles
and recommendations on issues that are
of specific relevance to the Company. The
Financial Reporting Council has confirmed
that, by following the AIC Guide, investment
company boards should fully meet their
obligations in relation to the UK Code.

The Board considers that reporting against
the principles and recommendations of the
AIC Code, and by reference to the AIC Guide
(which incorporates the UK Code), will provide
better information to shareholders.

Except as disclosed below, the Company
has complied throughout the year with the
recommendations of the AIC Code and the
relevant provisions of the UK Code.

By complying with the AIC Code and the
UK Code, the Board considers that it is in
compliance with the provisions of the Code
of Corporate Governance published by the
Guernsey Financial Services Commission.

The board
The Board retains full responsibility for
the direction and control of the Company,
including investment policy and strategy,
dividend policy and gearing. The Board
meets regularly, normally quarterly, and more
frequently if necessary.

The Board has delegated responsibility for
operational matters under an Investment
Management Agreement to its Investment
Manager, Picton Capital Limited.

Composition
The Company is led and controlled by a
Board composed of non-executive Directors,
all of whom have wide experience. With
the exception of Michael Morris, who is the
Chief Executive of the Group’s Investment
Manager, all Directors are also considered to
be independent. Although two members of
the Board have now served for more than a
term of nine years, they are considered to be
independent in character and judgement.

In making any new appointment the Board will
consider a number of factors, but principally
the skills and experience that will be relevant
to the specific role and that will complement
the existing Board members.

The Articles of Association stipulate that all
new Directors shall retire at their first Annual
General Meeting and offer themselves for
reappointment. One-third, or the number
nearest to but not exceeding one-third, of the
Directors shall retire and offer themselves for
re-appointment at each subsequent Annual
General Meeting.

The Board considers that the length of time
each Director, including the Chairman, serves
on the Board should not be limited and
therefore has not set a finite tenure policy.
However, the Board has determined that any
Director who has served for more than nine
years will offer themselves for reappointment
on an annual basis. The Board believes that
it is in the shareholders’ best interests for
the Chairman to be the point of contact for
all matters relating to the governance of the
Company and as such has not appointed a
senior independent non-executive Director.

Alternative
investment fund
manager’s directive
This Directive is European legislation which
creates an EU-wide framework for regulating
an Alternate Investment Fund Manager
(AIFM). The Group’s activities fall within the
scope of the Directive and the Board has
determined that the Company itself will act as
AIFM for these purposes.

Non-mainstream
pooled investments
The Company currently conducts its affairs
so that its shares can be recommended
by independent financial advisers to retail
investors in accordance with the FCA’s
rules in relation to non-mainstream pooled
investments, and intends to continue to
do so for the foreseeable future.

Committees
The Board has established four Committees:
Audit and Risk, Remuneration, Property
Valuation, and Nominations. The terms of
reference for these Committees are available
on the Company’s website. Given Michael
Morris’s position as Chief Executive of the
Company’s Investment Manager, the Board
has agreed that he will not serve on any of the
Board Committees.

25189.02 – 17 July 2017 12:13 PM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukPicton Property Income LimitedAnnual Report 2017www.picton.co.ukAttendance at board and committee meetings

Board
(4 meetings)

Audit and Risk
(3 meetings)

Remuneration
(2 meetings)

Property Valuation
(4 meetings)

Nominations
(2 meetings)

Nicholas Thompson
Robert Sinclair
Roger Lewis
Vic Holmes
Michael Morris

–

The above meetings were the scheduled Board and Committee meetings. Additional meetings were held to deal with other matters as required and
are not included above.

Relations with
shareholders
In conjunction with the Board, the
Administrator keeps under review the register
of members of the Company. All shareholders
are encouraged to participate in the
Company’s Annual General Meeting.

All Directors normally attend the Annual
General Meeting, at which shareholders
have the opportunity to ask questions and
discuss matters with the Directors and senior
management. Investors are able to direct any
questions for the Board via the Secretary.

The Chairman regularly attends analyst
meetings and is available to meet investors if
requested. The outcome of these meetings
is communicated to the rest of the Board.

Evaluation
The performance of the Board and its
Committees is evaluated on an annual basis.
This is carried out by external consultants
every three years and internally by the
Directors for intervening years. The latest
external evaluation was performed in August
2014, by Trust Associates, who have carried
out previous external evaluations. An internal
evaluation was carried out in February
2017, using questionnaires prepared by the
Company’s Administrator. The evaluation
addressed all aspects of the running of
the Board.

Internal control and
risk management
The Directors acknowledge that they are
responsible for establishing and maintaining
the Group’s system of internal controls and
reviewing its effectiveness. Internal control
systems are designed to manage rather
than eliminate the failure to achieve business
objectives and can only provide reasonable,
and not absolute, assurance against material
misstatement or loss. They have therefore
established an ongoing process designed
to meet the particular needs of the Group in
managing the risks to which it is exposed,
consistent with the guidance provided by the
Turnbull Committee. Such review procedures
have been in place throughout the full financial
year, and up to the date of the approval of the
financial statements, and the Board is satisfied
with their effectiveness.

This process involves a review by the Board
of the control environment within the Group’s
service providers to ensure that the Group’s
requirements are met.

The Group does not have an internal
audit function. Following the change to
internalised management, and given the
scale of the Group’s operations, the Board
has determined that a separate internal audit
function is unnecessary and that additional
procedures carried out by the external auditor
in conjunction with the audit of the Group’s
accounts will provide the Board with sufficient
assurance regarding the internal control
systems in place. The Board continues to
place reliance on the Administrator’s internal
control systems.

These systems are designed to ensure
effective and efficient operations, internal
control and compliance with laws and
regulations. In establishing the systems
of internal control, regard is paid to the
materiality of relevant risks, the likelihood of
costs being incurred and costs of control. It
follows, therefore, that the systems of internal
control can only provide reasonable, but not
absolute, assurance against the risk of material
misstatement or loss.

The effectiveness of the internal control
systems is reviewed annually by the Board and
the Audit and Risk Committee. The Audit and
Risk Committee has a discussion annually with
the auditor to ensure that there are no issues
of concern in relation to the audit opinion on
the financial statements and, if necessary,
representatives of the Investment Manager
would be excluded from that discussion.

25189.02 – 17 July 2017 12:13 PM – Proof 2

Stock code: PCTNGovernanceStock code: PCTNNominations committee report
NICHOLAS THOMPSON

The Nominations
Committee is chaired
by Nicholas Thompson.
The other members of
the Committee are Vic
Holmes, Robert Sinclair
and Roger Lewis.

Terms of reference
The Committee’s terms of reference include consideration of the following issues:

• Review and make recommendations regarding the size and composition of the Board;

• Consider and make recommendations regarding succession planning for the Board and

senior management;

• Identify and nominate candidates to fill Board vacancies as they arise;

• Review the results of the Board evaluation relating to composition;

• Review the time requirements for Directors; and

• Recommend the membership of Board Committees.

Activity
The Committee met twice during the year ended 31 March 2017 and considered the
following matters:

• Succession planning for the Board; and

• Appointment of recruitment consultants.

Succession planning
The Board has not set a finite tenure policy, as it does not believe that the length of time each
Director serves should be limited; however, it has determined that all Directors who have served
more than nine years will offer themselves for re-appointment annually.

During the year the Committee further considered succession planning, which was part of
the Board evaluation process. Robert Sinclair, who has served on the Board since the
Company’s launch in 2005, has indicated that he wishes to retire from the Board in 2018. The
process to appoint a new Director has started, with the appointment of consultants to identify
suitable candidates.

25189.02 – 17 July 2017 12:13 PM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukPicton Property Income LimitedAnnual Report 2017www.picton.co.ukAudit and risk committee report
ROBERT SINCLAIR

The Audit and Risk
Committee is chaired
by Robert Sinclair.
The other members
of the Committee are
Nicholas Thompson,
Roger Lewis and Vic
Holmes. Meetings
of the Audit and
Risk Committee
are attended by the
Finance Director of
Picton Capital Limited
and other members of
the finance team, and
the external auditor.
The external auditor is
given the opportunity
to discuss matters
without management
presence.

Terms of reference
The Committee’s terms of reference include consideration of the following issues:

• Financial reporting, including significant accounting judgements and accounting policies;

• Adoption of the Group’s Risk Management Policy;

• Monitoring and evaluating the risks relating to the Group;

• Evaluation of the Group’s risk profile and risk appetite, and whether these are aligned with its

investment objectives;

• Internal controls and risk management systems;

• Ensuring that key risks are being effectively measured, managed and mitigated;

• The Group’s relationship with the external auditor, including effectiveness and independence;

• Internal audit and the programme of controls testing; and

• Reporting responsibilities.

Activity
The Audit and Risk Committee met three times during the year ended 31 March 2017 and
considered the following matters:

• External audit strategy and plan;

• Audit and accounting issues of significance;

• The Annual and Interim Reports of the Group;

• Reports from the external auditor;

• The Group’s Risk Management Policy

• The effectiveness of the audit process and the independence of KPMG Channel

Islands Limited;

• Review of the Risk Matrix and mitigating controls; and

• Stock Exchange announcements.

25189.02 – 17 July 2017 12:13 PM – Proof 2

Stock code: PCTNGovernanceStock code: PCTNAudit and risk committee report
CONTINUED

Financial reporting
and significant
reporting matters
The Committee considers all financial
information published in the annual and
half-year financial statements and considers
accounting policies adopted by the Group,
presentation and disclosure of the financial
information and the key judgements made
by management in preparing the financial
statements.

The Directors are responsible for preparing
the Annual Report. At the request of the
Board, the Committee considered whether
the 2017 Annual Report was fair, balanced
and understandable and whether it provided
the necessary information for shareholders to
assess the Group’s performance, business
model and strategy.

The key area of judgement that the Committee
considered in reviewing the financial
statements was the valuation of the Group’s
investment properties.

The valuation is conducted on a quarterly
basis by independent valuers, and is subject to
oversight by the Property Valuation Committee.
It is a key component of the annual and half
year financial statements and is inherently
subjective, requiring significant judgement.
Members of the Property Valuation Committee,
together with the Investment Manager, meet
with the independent valuer on a quarterly
basis to review the valuations and underlying
assumptions, including the year end valuation
process. The Chairman of the Property
Valuation Committee reported to the Audit
and Risk Committee at its meeting in May
2017 and confirmed that the following matters
had been considered in discussions with the
independent valuers:

• Property market conditions;

• Yields on properties within the portfolio;

• Letting activity and vacant properties;

• Covenant strength and lease lengths;

• Estimated rental values; and

• Comparable market evidence.

The Audit and Risk Committee reviewed
the report from the Chairman of the
Property Valuation Committee including
the assumptions applied to the valuation
and considered their appropriateness, as
well as considering current market trends
and conditions, and valuation movements
compared to previous quarters. The
Committee considered the valuation and
agreed that this was appropriate for the
financial statements. The Committee was
satisfied that the 2017 Annual Report is fair,
balanced and understandable and included
the necessary information as set out above,
and it has confirmed this to the Board.

Risk management
policy
The Committee has considered and adopted
a Risk Management Policy for the Group.

The purpose of the Risk Management Policy
is to strengthen the proper management of
risks through proactive risk identification, risk
management, and risk acceptance pertaining
to all activities undertaken by the Group. The
Risk Management Policy is intended to:

• Ensure that major risks are reported to the

Board for review and acceptance;

• Result in the management of those risks

that may significantly affect the pursuit of the
stated strategic goals and objectives;

• Embed a culture of evaluation and identifying
risks at multiple levels within the Group; and

• Meet legal and regulatory requirements.

Internal controls
The Board is responsible for the Company’s
internal control system and for reviewing its
effectiveness. It has therefore established a
process designed to meet the particular needs
of the Company in managing the risks to which
it is exposed.

As part of this process, a risk matrix has
been prepared that identifies the Company’s
key functions and the individual activities
undertaken within those functions. From
this, the Board has identified the Company’s
principal risks and the controls employed to
manage those risks. These are reviewed at
each Audit and Risk Committee meeting. Also
the Committee has agreed a programme of
additional controls testing which is carried
out by the external auditor, in order to provide
the Board with comfort that the controls are
operating as intended and have been in place
throughout the year. The Board also monitors
the investment performance of the Company
against its objectives and receives reports from
the Investment Manager and Administrator
each quarter on their activities. The Committee
has received and reviewed a copy of CBRE
Limited’s Real Estate Accounting Services
– Service Organisation Control Report as at
31 December 2016, prepared in accordance
with International Standard on Assurance
Engagements 3402, in respect of property
management accounting services provided
to Picton Capital Limited.

Given the scale of the Group’s operations,
the Board has determined that a separate
internal audit function is unnecessary and
that additional procedures carried out by the
external auditor in conjunction with the audit
of the Group’s accounts will provide the Board
with sufficient assurance regarding the internal
control systems in place.

Independence
of auditor
It is the policy of the Group that non-audit
work will not be awarded to the external
auditor if there is a risk their independence
may be conflicted. The Committee monitors
the level of fees incurred for non-audit
services to ensure that this is not material,
and obtains confirmation, where appropriate,
that separate personnel are involved in any
non-audit services provided to the Group.
The Committee must approve in advance all
non-audit assignments to be carried out by the
external auditor.

25189.02 – 17 July 2017 12:13 PM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukPicton Property Income LimitedAnnual Report 2017www.picton.co.ukIn evaluating KPMG Channel Islands Limited
the Committee completed its assessment
of the external auditor for the financial
period under review. It has satisfied itself
as to their qualifications and expertise and
remains confident that their objectivity and
independence are not in any way impaired by
reason of the non-audit services which they
provide to the Group.

KPMG Channel Islands Limited have been
auditor to the Group since the year ended
31 December 2009 following a tender process
in July 2009. The current audit engagement
partner, Neale Jehan, has now served five years
and will be rotated following the 2017 audit.
The Committee recommends that KPMG
Channel Islands Limited are recommended
for reappointment at the next Annual
General Meeting.

Robert Sinclair
Chairman of the Audit and Risk Committee

6 June 2017

The fees payable to the Group’s auditor and its
member firms are as follows:

Audit fees
Interim review
fees
Non-audit fees

31 March
2017
£000
108

31 March
2016
£000
104

14
23

145

19
19

142

The non-audit fees include £14,000 for
additional controls testing and £4,000 for tax
services, carried out by KPMG Channel Islands
Limited, and £5,000 in respect of the Picton
Capital Limited FCA CASS review, carried out
by KPMG LLP.

Annual auditor
assessment
On an annual basis, the Committee assesses
the qualifications, expertise and independence
of the Group’s external auditor, as well as the
effectiveness of the audit process. It does this
through discussion and enquiry with senior
management, review of a detailed assessment
questionnaire and confirmation from the
external auditor. The Committee also considers
the external audit plan, setting out the auditor’s
assessment of the key audit risk areas and
reporting received from the external auditor
in respect of both the half year and year end
reports and accounts.

As part of the review of auditor independence
and effectiveness, KPMG Channel Islands
Limited has confirmed that:

• They have internal procedures in place to

identify any aspects of non-audit work which
could compromise their role as auditor and
to ensure the objectivity of the audit report;

• The total fees paid by the Group during the
year do not represent a material part of their
total fee income; and

• They consider that they have maintained
their independence throughout the year.

25189.02 – 17 July 2017 12:13 PM – Proof 2

Stock code: PCTNGovernanceStock code: PCTNProperty valuation
committee report ROGER LEWIS

The Property Valuation
Committee is chaired
by Roger Lewis. The
other members of the
Committee are Nicholas
Thompson, Robert
Sinclair and Vic Holmes.

Terms of reference
The Committee shall review the quarterly valuation reports produced by the independent
valuers before their submission to the Board, looking in particular at:

• Significant adjustments from previous quarters;

• Individual property valuations;

• Commentary from the Investment Manager;

• Significant issues that should be raised with the Investment Manager;

• Material and unexplained movements in the Company’s net asset value;

• Compliance with applicable standards and guidelines;

• Reviewing findings or recommendations of the valuers; and

• The appointment, remuneration and removal of the Company’s valuers, making such

recommendations to the Board as appropriate.

Activity
The Committee met four times during the year ended 31 March 2017. Members of the Property
Valuation Committee, together with the Investment Manager, met with the independent valuer
each quarter to review the valuations and considered the following matters:

• Property market conditions and trends;

• Movements compared to previous quarters;

• Yields on properties within the portfolio;

• Letting activity and vacant properties;

• Covenant strength and lease lengths;

• Estimated rental values; and

• Comparable market evidence.

The Committee was satisfied with the valuation process throughout the year.

Appointment of valuer
CBRE Limited was appointed as sole external valuer to the Group, effective from 31 March
2013, and carries out a valuation of the Group’s property assets each quarter, the results of
which are incorporated into the Group’s half year and annual financial statements, and the
quarterly net asset statements.

25189.02 – 17 July 2017 12:13 PM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukPicton Property Income LimitedAnnual Report 2017www.picton.co.ukThe Directors
Picton Property Income Limited
PO Box 255
Trafalgar Court
Les Banques
St Peter Port
Guernsey
GY1 3QL

6 June 2017

Dear Sirs

Picton property portfolio
— valuation as at 31 march 2017
In accordance with the terms of our appointment as External Valuers to Picton Property Income Limited, we have valued
the freehold and leasehold properties in which the Fund has an interest as at 31 March 2017, for accounting purposes.
Our valuations have been prepared on the basis of ‘Fair Value’ in accordance with the RICS Valuation – Professional
Standards, January 2014. We confirm that the “Fair Value” reported above, for the purpose of financial reporting under
International Financial Reporting Standards (IFRS) and UK Generally Accepted Accounting Practice (UK GAAP), is
effectively the same as “Market Value”.

On the basis, assumptions, terms and conditions as set out within our Valuation Report dated 31 March 2017, we are
of the opinion that the aggregate values of the properties we value in the Picton investment property portfolio, as at 31
March 2017, is £624,410,000 (SIX HUNDRED AND TWENTY FOUR MILLION FOUR HUNDRED AND TEN THOUSAND
POUNDS), exclusive of VAT.

Our opinion of Market Value was derived using comparable recent market transactions on arm’s length terms.

The total fees, including the fee for this assignment, earned by CBRE Ltd (or other companies forming part of the
same group of companies within the UK) from the Addressee (or other companies forming part of the same group of
companies) are less than 5.0% of the total UK revenues.

This letter is for the use only of the party to whom it is addressed for the specific purpose set out herein and no
responsibility is accepted to any third party for the whole or any part of its contents.

Yours faithfully

Nick Knight MRICS
Executive Director
RICS Registered Valuer
For and on behalf of CBRE Limited

www.cbre.co.uk
Registered in England No 3536032 Registered Office
St Martin’s Court 10 Paternoster Row London EC4M 6HP
CBRE Limited is regulated by the RICS and is an appointed representative of CBRE Indirect
Investments Service Limited which is authorised and regulated by the Financial Conduct Authority.

25189.02 – 17 July 2017 12:13 PM – Proof 2

Stock code: PCTNGovernanceStock code: PCTNRemuneration report
VIC HOLMES

The Remuneration
Committee is chaired
by Vic Holmes. The
other members of
the Committee are
Nicholas Thompson,
Roger Lewis and
Robert Sinclair.

Terms of reference
The Committee will consider the following matters:

• Appointment of, and setting the terms of reference for, any remuneration consultants;

• Setting and reviewing remuneration levels for the Directors, within the limit set by

the Company’s Articles of Association;

• Recommending remuneration policies to the Board for Directors and senior management of

Picton Capital Limited; and

• Reviewing remuneration trends across the sector.

Activity
The Committee met twice during the year ended 31 March 2017 and considered
the following matters:

• Annual remuneration review and bonus awards for Picton Capital Limited employees;

• Benchmark market levels of salary and benefits applicable to Picton Capital employees;

• Appointment of external consultants to advise on the design and implementation of

a new long-term incentive plan;

• Consideration of detailed proposals for the long-term incentive plan including suitable

performance conditions; and

• Establishment of an employee benefit trust and the appointment of its trustee.

Remuneration policy
The objective of the Group’s remuneration policy is to have a simple and transparent
remuneration structure aligned with the Group’s strategy.

The Group aims to provide a remuneration package which will retain Directors and
management who possess the skills and experience necessary to manage the Group and
maximise shareholder value on a long-term basis. The remuneration policy aims to incentivise
management by rewarding performance through enhanced shareholder value.

Directors receive an annual fee as set out below. The independent Directors will not receive
share options or other performance related elements.

The Committee has determined the remuneration policy for the management and staff
of Picton Capital Limited following independent advice from external advisers.

25189.02 – 17 July 2017 12:13 PM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukPicton Property Income LimitedAnnual Report 2017www.picton.co.ukPicton capital
limited remuneration
The Group’s Investment Manager employed 12 staff as at 31 March
2017 (2016: 13 staff).

The policy and components of current remuneration set by the
Committee in respect of Picton Capital Limited Directors and staff are as
follows:

Base salary
Base salaries are based on market data provided by the
Company’s independent advisers. Base salaries are reviewed
annually on 1 April.

Pension
The Group makes contributions for eligible employees into a Group
personal pension plan to a maximum of 10% of base salary. Further
contributions to a maximum of 5% will be paid by the Group if
matched by additional voluntary contributions by the employee. The
Directors of Picton Capital Limited receive a salary supplement of
15% of base salary in lieu of company pension contributions.

Annual bonus
A discretionary annual cash bonus may be awarded to recognise
individual performance. An award will take into account three
factors: the performance of the Group, the property portfolio
return and the individual’s performance. Bonus payments are not
pensionable.

Deferred bonus scheme
A share-based deferred bonus scheme has been established that
aligns remuneration with that of shareholders. An award will take
into account three factors: the performance of the Group, the
property portfolio return and the individual’s performance. Deferred
bonus awards are not pensionable. Any award under the scheme
is linked to both share price movement and dividend distributions.
Awards will normally vest in two years.

Long-term incentive plan
An equity settled long-term incentive plan (LTIP) was established in
the year following approval from shareholders. All employees are
eligible for awards on an annual basis. With the exception of the
initial awards, awards are normally made within six weeks of the
announcement of the Company’s annual results. Awards will vest
in three years, and are subject to three performance conditions
being met.

Other benefits
These include private medical insurance and life cover.

Terms of employment
The terms of appointment of the independent Directors are documented
in letters of appointment. They have a six month notice period and their
appointment would terminate without compensation if not re-elected at
the Annual General Meeting. The independent Directors have no service
contracts or interests in any material contracts with the Group.

Directors’ fees
All of the Directors of the Company are non-executive. The fees of the
independent Directors are recommended by the Board. Michael Morris
does not receive a fee as a Director of the Company but is remunerated
in his capacity as Chief Executive of Picton Capital Limited. The level
of Directors’ fees was independently reviewed in September 2014 by
Deloitte LLP against a benchmark group of similar companies. The new
rates became effective on 1 January 2015, and will next be reviewed
after three years.

Chairman

Chairman of the Audit and Risk Committee

Chairman of the Property Valuation Committee

Chairman of the Remuneration Committee

Director

Annual rate
£

82,500

43,000

40,000

36,000

The total fees earned by each Director for the year ended 31 March
2017 were as follows:

Nicholas Thompson

Robert Sinclair

Roger Lewis

Vic Holmes

Trevor Ash

Michael Morris

31 March
2017
£

31 March
2016
£

82,500

43,000

40,000

–

82,500

43,000

40,000

18,000

–

205,500

223,500

No additional fees were earned above the annual expected time
commitment for the year ended 31 March 2017. The Company’s Articles
set an annual limit of £300,000 for Directors’ remuneration.

The remuneration earned by Michael Morris, as Chief Executive of Picton
Capital Limited, for the year ended 31 March 2017 was as follows:

Basic salary

Annual bonus

Company pension contributions

Salary supplement (in lieu of pension
contributions)

Deferred bonus scheme awards

31 March
2017
£

227,000

114,700

–

34,050

242,143

617,893

31 March
2016
£

220,000

95,000

37,400

–

175,925

528,325

Michael Morris also was granted a contingent share award under the
Long-term Incentive Plan of 358,791 shares.

25189.02 – 17 July 2017 12:13 PM – Proof 2

Stock code: PCTNGovernanceStock code: PCTNRemuneration report
CONTINUED

During the year the Committee considered the design and
implementation of a new long-term incentive plan (LTIP) for Picton
Capital Limited employees. The proposals were approved at the Annual
General Meeting on 30 November 2016, following a consultation with a
number of major shareholders. The LTIP will increase alignment between
the investment management team and investors, by linking remuneration
to long-term financial targets. The plan will be based on three year
periods, with three performance metrics measured over each period.
These metrics are:

Share ownership
Directors and employees are encouraged to maintain a shareholding
in the Company’s shares to provide alignment with investors, although
in the case of Picton Capital Limited staff, alignment is also achieved
through awards under the Deferred Bonus Scheme.

The numbers of shares beneficially held by each Director and senior
management (including spouses), as at 31 March 2017, were as follows:

• Total shareholder return, compared to a bespoke comparator group

Directors

Nicholas Thompson*

Robert Sinclair

Roger Lewis

Vic Holmes

Michael Morris†

Senior management

Andrew Dewhirst

Jay Cable

Fraser D’Arcy ††

31 March
2017

31 March
2016

215,000

200,000

15,000

600,000

530,000

27,214

53,596

27,214

53,596

31 March
2017

31 March
2016

24,000

20,000

9,505

8,687

9,505

8,687

* Includes 81,634 shares held by Mrs Elizabeth Thompson
† Includes 28,596 shares held by Mrs Joanne Morris
†† Held by Mrs Rebecca D’Arcy

The Directors of Picton Capital Limited (Michael Morris and senior
management, as above) also hold units in the Deferred Bonus Scheme.
At 31 March 2017 the number of units that had been awarded to
Picton Capital Limited Directors and yet to vest was 1,530,718
(2016: 1,583,685).

Vic Holmes
Chairman of the Remuneration Committee

6 June 2017

of similar listed property companies;

• Total property return, compared to the MSCI IPD Quarterly

Benchmark; and

• Growth in EPRA earnings.

Awards will only vest if minimum threshold levels are met, increasing to
a maximum for exceptional performance against all three metrics. Initial
awards were made on 27 January 2017 in respect of the three year
period from 1 April 2016 to 31 March 2019. Awards will subsequently
be made annually, once the Company’s annual results have been
announced. The next awards, for the period from 1 April 2017 to 31
March 2020, will be made within six weeks of the announcement
of this year’s results.

In considering the salary and bonus review for 2017, the Committee
reviewed relevant market data as well as the key performance indicators
for the year in relation to individual and team objectives set at the start
of the year. In conclusion, the Committee determined that there would
be no increase in base salaries from 1 April 2016 (2016: 6.0%) and an
overall bonus pool of 102% of base salaries (2016: 94%).

For the year ended 31 March 2017, the Committee agreed that bonuses
awarded to Picton Capital staff would total £537,000 payable on 28
April 2017 (2016: £458,000) and £555,000 in Deferred Bonus Scheme
awards (2016: £519,000). The Deferred Bonus Scheme awards were
made at the prevailing share price, and equate to 662,000 units, which
vest on 31 March 2019. The cost to the Group of awards made is
spread over the vesting periods in accordance with its accounting policy.
The accrued cost at 31 March 2017 was £1,177,000 (2016: £971,000).
A summary of the awards made to Picton Capital Limited staff is set out
in Note 7 to the financial statements.

On 27 January 2017 the Committee agreed the initial awards made
under the Long-term Incentive Plan. These were in respect of the three
year performance period from 1 April 2016 to 31 March 2019, and are
conditional on the three metrics set out above. The initial awards were
for a total of 1,170,258 shares, of which 872,036 were awarded to the
Directors of Picton Capital Limited.

25189.02 – 17 July 2017 12:13 PM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukPicton Property Income LimitedAnnual Report 2017www.picton.co.ukDirectors’ report

The Directors of Picton
Property Income
Limited present the
Annual Report and
audited financial
statements for the year
ended 31 March 2017.

The Company is
a closed ended
investment company
and is registered under
the provisions of the
Companies (Guernsey)
Law, 2008.

Principal activity
The principal activity of the Group is property
investment with the objective of providing
shareholders with an attractive level of income
together with the potential for capital growth,
by investing in a diversified UK commercial
property portfolio.

With effect from 29 October 2008, the
Company became regulated under the
Protection of Investors (Bailiwick of Guernsey)
Law, 1987 (as amended). Under this
regulation, the Company was deemed to
be authorised by the Guernsey Financial
Services Commission.

Results and dividends
The results for the year are set out in the
Consolidated Statement of Comprehensive
Income. As set out in Note 11 to the
consolidated financial statements, the
Company has paid four interim dividends,
three of 0.825 pence per share and one of
0.85 pence per share, making a total dividend
for the year ended 31 March 2017 of 3.325
pence per share (2016: 3.3 pence).

Directors and
directors’ interests
The Directors of the Company who served
throughout the year are set out on page 40.

The Directors’ interests in the shares of the
Company as at 31 March 2017 are set out in
the Remuneration Report.

Listings
The Company is listed on the main market of
the London Stock Exchange.

Share capital
The issued share capital of the Company
as at 31 March 2017 was 540,053,660
(2017: 540,053,660) ordinary shares of no
par value.

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 this
authority from shareholders. Any buy-back
of ordinary shares is, and will be, made
subject to Guernsey law, and the making and
timing of any buy-backs are at the absolute
discretion of the Board.

Statement of
going concern
The Group’s business activities, together with
the factors affecting performance, investment
activities and future development are set out
in the Strategic Report. The financial position
of the Group, including its liquidity position,
borrowing facilities and debt maturity profile,
is set out in the Financial Review and in the
consolidated financial statements.

The Directors have a reasonable expectation
that the Group has adequate resources to
continue in operational existence for the
foreseeable future. Therefore, they continue
to adopt the going concern basis in preparing
the financial statements.

Viability assessment
and statement
The 2014 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 as relevant to the
viability assessment were those relating to
a downturn in the UK commercial property
market and the resultant impact on the
valuation of the property portfolio, the
level of rental income receivable and the
subsequent effect on cash resources and
financial covenants. The Board took into
account the illiquid nature of the Company’s
property assets, the existence of long-term
borrowings, the effects of significant falls in
valuations and rental income on the ability to
remain within financial covenants, maintain
dividend payments and retain investors.
These matters were assessed over the period
to 31 March 2022, and will continue to be
assessed over five year rolling periods.

25189.02 – 17 July 2017 12:13 PM – Proof 2

Stock code: PCTNGovernanceStock code: PCTNDirectors’
responsibility
statement in respect
of the annual
report and financial
statements
The Directors confirm that to the best of their
knowledge and belief the report and accounts,
taken as a whole, is fair, balanced and
understandable and provides the information
necessary to assess the Company’s
performance, business model and strategy.

Directors’
responsibility
statement under
the disclosure and
transparency rules
4.1.12
The Directors confirm to the best of their
knowledge and belief:

• the financial statements, prepared in

accordance with International Financial
Reporting Standards, as issued by the
IASB, give a true and fair view of the assets,
liabilities, financial position and profit or
loss of the Company and the undertakings
included in the consolidation taken as a
whole; and

• the Strategic Report includes a fair review
of development and performance of the
business and the position of the Company
and the undertakings included in the
consolidation taken as a whole, together
with a description of the principal risks and
uncertainties that they face.

By Order of the Board

Robert Sinclair

6 June 2017

Directors’ report
CONTINUED

In the ordinary course of business the Board
reviews a detailed financial model on a
quarterly basis, including forecast market
returns. This model uses prudent assumptions
regarding lease expiries, breaks and incentives.
For the purposes of the viability assessment
of the Group, the model has been adjusted to
cover a five year period and is stress tested
with a number of scenarios. These include
significant falls in capital values (in line with
previous market conditions), pessimistic
assumptions around lease breaks and expiries,
increased void periods and incentives, and
increases in tenant defaults. The Directors
consider that the stress testing performed was
sufficiently robust that even under extreme
conditions the Company remains viable.

Based on their assessment, and in the context
of the Group’s business model and strategy,
the Directors expect that the Group will be able
to continue in operation and meet its liabilities
as they fall due over the five year period to
31 March 2022.

Substantial
shareholdings
Based on notifications received and on
information provided by the Company’s
brokers, the Company understands the
following shareholders held a beneficial interest
of 3% or more of the Company’s issued share
capital as at 22 May 2017.

% of
issued
share
capital

Investec Wealth & Investment Limited

16.4

Alliance Trust Savings Limited

Canaccord Genuity Wealth
Management

Transact Nominees Limited

Mattioli Woods Plc

Brewin Dolphin Limited

BlackRock Inc.

5.4

5.1

4.2

3.6

3.5

3.4

Disclosure of
information to
auditor
The Directors who held office at the date of
approval of this Directors’ Report confirm
that, so far as they are each aware, there is
no relevant audit information of which the
Company’s auditor is unaware; and each
Director has taken all the steps that he ought
to have taken as a Director to make himself
aware of any relevant audit information and to
establish that the Company’s auditor is aware
of that information.

Auditor
KPMG Channel Islands Limited (the “Auditor”)
has expressed its willingness to continue
in office as the Company’s auditor and a
resolution proposing its reappointment will be
submitted at the Annual General Meeting.

Statement of
directors’
responsibilities
The Directors are responsible for preparing the
Directors’ 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.

The financial statements are required by law
to give a true and fair view of the state of affairs
of the Company and of the profit or loss of
the Company 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 and prudent;

• state whether applicable accounting

standards have been followed, subject
to any material departures disclosed and
explained in the financial statements; and

• prepare the financial statements on
the going concern basis unless it is
inappropriate to presume that the Company
will continue in business.

The Directors are responsible for keeping
proper accounting records which disclose with
reasonable accuracy at any time the financial
position of the Company and to enable them to
ensure that the financial statements comply with
the Companies (Guernsey) Law, 2008. They
have 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.

25189.02 – 17 July 2017 12:13 PM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukPicton Property Income LimitedAnnual Report 2017www.picton.co.ukFinancial
Statements

Independent Auditor’s Report

Consolidated Statement of
Comprehensive Income

Consolidated Statement of
Changes in Equity

Consolidated Balance Sheet

Consolidated Statement
of Cash Flows

Notes to the Consolidated
Financial Statements

25189.02 – 17 July 2017 12:13 PM – Proof 2

Stock code: PCTNFinancial StatementsStock code: PCTNPicton Property Income Limited

www.picton.co.uk

Independent auditor’s report
To the members of picton property income limited

Opinions and conclusions arising from our audit

1. Our opinion on the Group financial statements is unmodified
We have audited the Group financial statements (the “financial statements”) of Picton Property Income Limited (the “Company”) and its
subsidiaries (together, the “Group”) for the year ended 31 March 2017 which comprise the consolidated statement of comprehensive
income, the consolidated statement of changes in equity, the consolidated balance sheet, the consolidated statement of cash flows and
the related notes. In our opinion the financial statements:

• give a true and fair view of the state of the Group’s affairs as at 31 March 2017 and of its profit and total comprehensive income for

the year then ended;

• have been properly prepared in accordance with International Financial Reporting Standards; and

• comply with the Companies (Guernsey) Law, 2008.

Overview

Materiality
Group financial statements as a whole

£6.68m (2016: £6.46m) 1% (2016: 1% of Total Assets)

Coverage

100% (2016: 100% of Total Assets

Risk of material misstatement vs 2016

Recurring risks

Valuation of investment property

25189.02 – 17 July 2017 10:59 AM – Proof 2

Financial Statements

2. Our assessment of risks of material misstatement
The risks of material misstatement detailed in this section of this report are those risks that we have deemed, in our professional
judgement, to have had the greatest effect on: the overall audit strategy; the allocation of resources in our audit; and directing the
efforts of the engagement team. Our audit procedures relating to these risks were designed in the context of our audit of the financial
statements as a whole. Our opinion on the financial statements is not modified with respect to any of these risks, and we do not express
an opinion on these individual risks.

In arriving at our audit opinion above on the financial statements, the risk of material misstatement that had the greatest effect on our
audit, was as follows:

The risk

Our response

Valuation of investment property
Investment property £615 million; 2016:
£646 million

Refer to pages 59-61 of the Audit
and Risk Committee Report, Note 2
significant accounting policies and Note
14 Investment Property disclosures.

The Group’s investment property
portfolio accounted for 92% of the
Group’s total assets as at 31 March
2017. The fair value of the investment
property portfolio at 31 March 2017
was assessed by the Property
Valuation Committee and approved
by the Board of Directors based on
independent valuations prepared by
the Group’s external property valuer.

As highlighted in the Audit and Risk
Committee Report, the valuation of the
Group’s investment property portfolio,
given it represents the majority of the
total assets of the Group and requires
the use of significant judgement and
subjective assumptions, is a significant
area of our audit.

Procedures to address this audit risk
included those listed below:

Controls evaluation
We tested the design, implementation and
operating effectiveness of certain controls
over the valuation including the review and
approval by the Board of Directors and
the capture and recording of information
contained in the lease database for
investment properties.

Evaluating Group’s external property valuer
We assessed the competence, capabilities
and objectivity of the valuer. We also
assessed the independence of the valuer by
considering the scope of their work and the
terms of their engagement.

Evaluating inputs used in the valuations
We assessed the valuations prepared by
the external property valuer by evaluating
the appropriateness of the valuation
methodologies and assumptions used,
including undertaking discussions on key
findings with the external valuer with the
assistance of our own Real Estate specialist
to challenge the valuations based on market
information and knowledge.

We also compared a sample of key inputs
to the valuation such as annual rental,
occupancy and tenancy contracts for
consistency with other audit findings and
observable market evidence.

Consideration of accounting policies
We also considered the Group’s investment
property valuation policies and their
application as described in the notes to the
financial statements for compliance with
International Financial Reporting Standards
in addition to the adequacy of disclosures
in Note 14 in relation to the fair value of the
investment properties.

25189.02 – 17 July 2017 10:59 AM – Proof 2

Picton Property Income Limited

www.picton.co.uk

Independent auditor’s report
To the members of picton property income limited continued

Total assets

£668.35m

(2016: £686.81m)

3. Our application of materiality and an
overview of the scope of our audit
Materiality for the financial statements as a whole was set at £6.68 million determined
with reference to a benchmark of Group Total Assets of £668.35 million, of which it
represents approximately 1% (2016: approximately 1%).

Total assets

Group materiality

Whole financial statements materiality:
£6.68m (2016: £6.46m)

We reported to the Audit Committee any corrected or uncorrected identified
misstatements exceeding £334,150, in addition to other identified misstatements that
warranted reporting on qualitative grounds.

Our assessment of materiality has informed our identification of significant risks of
material misstatement and the associated audit procedures performed in those areas as
detailed above.

The Group audit team performed the audit of the Group as if it was a single operating
entity based on the aggregated set of financial information for the Group. The audit was
performed using the materiality levels set out above and covered 100% of total Group
revenue, Group profit before taxation, total Group assets and total Group liabilities.

Whilst the audit process is designed to provide reasonable assurance of identifying
material misstatements or omissions it is not guaranteed to do so. Rather we plan the
audit to determine the extent of testing needed to reduce to an appropriately low level
the probability that the aggregate of uncorrected and undetected misstatements does
not exceed materiality for the financial statements as a whole. This testing requires us
to conduct significant depth of work on a broad range of assets, liabilities, income and
expense as well as devoting significant time of the most experienced members of the
audit team, in particular the Responsible Individual, to subjective areas of the accounting
and reporting process.

4. We have nothing to report on the
disclosures of principal risks
Based on the knowledge we acquired during our audit, we have nothing material to add
or draw attention to in relation to:

• the directors’ Viability Assessment and Statement on page 67-68, concerning the

principal risks, their management, and, based on that, the directors’ assessment and
expectations of the Company’s continuing in operation over the 5 years to 31 March
2022; or

• the disclosures in Note 2 of the financial statements concerning the use of the going

concern basis of accounting.

7272

25189.02 17 July 2017 10:59 AM Proof 2

Financial Statements

5. We have nothing to
report in respect of the
matters on which we are
required to report by
exception
Under International Standards on Auditing (‘ISAs’) (UK
and Ireland) we are required to report to you if, based
on the knowledge we acquired during our audit, we
have identified other information in the Annual Report
that contains a material inconsistency with either that
knowledge or the financial statements, a material
misstatement of fact, or that is otherwise misleading.

In particular, we are required to report to you if:

• we have identified material inconsistencies between
the knowledge we acquired during our audit and
the directors’ statement that they consider that
the Annual Report and financial statements taken
as a whole is fair, balanced and understandable
and provides the information necessary for
shareholders to assess the Group’s position and
performance, business model and strategy; or

• the Report of the Audit Committee does not

appropriately address matters communicated by
us to the Audit Committee.

Under the Companies (Guernsey) Law, 2008, we are
required to report to you if, in our opinion:

• the Company has not kept proper accounting

records; or

• the financial statements are not in agreement with

the accounting records; or

• we have not received all the information and

explanations, which to the best of our knowledge
and beliefs are necessary for the purposes of our
audit.

Under the Listing Rules we are required to review
the part of the Corporate Governance Statement
on page 56 relating to the company’s compliance
with the eleven provisions of the 2014 UK Corporate
Governance Code specified for our review.

We have nothing to report in respect of the above
responsibilities.

Scope and responsibilities

6. The purpose of this
report and restrictions
on its use by persons
other than the Company’s
members as a body
This report is made solely to the Company’s
members, as a body, in accordance with section
262 of the Companies (Guernsey) Law, 2008 and,
in respect of any further matters on which we have
agreed to report, on terms we have agreed with
the Company. Our audit work has been undertaken
so that we might state to the Company’s members
those matters we are required to state to them in
an auditor’s report and for no other purpose. To the
fullest extent permitted by law, we do not accept
or assume responsibility to anyone other than the
Company and the Company’s members, as a body,
for our audit work, for this report, or for the opinions
we have formed.

7. Respective
responsibilities of
directors and auditor
As explained more fully in the Directors’
Responsibilities Statement set out on page 68, the
directors are responsible for the preparation of the
financial statements and for being satisfied that they
give a true and fair view. Our responsibility is to audit,
and express an opinion on, the financial statements
in accordance with applicable law and ISAs (UK and
Ireland). Those standards require us to comply with
the UK Ethical Standards for Auditors.

A description of the scope of an audit of financial
statements is provided on the Financial Reporting
Council’s website at
www.frc.org.uk/auditscopeukprivate.

Neale D Jehan
for and on behalf of KPMG Channel Islands Limited
Chartered Accountants and Recognised Auditors

Glategny Court
Glategny Esplanade
St Peter Port
Guernsey
GY1 1WR

6 June 2017

25189.02 – 17 July 2017 10:59 AM – Proof 2

Consolidated statement of
comprehensive income
FOR THE YEAR ENDED 31 MARCH 2017

Income
Revenue from properties
Property expenses
Net property income

Expenses

Management expenses
Other operating expenses
Total operating expenses

Operating profit before movement on investments

Investments

Profit on disposal of investment properties
Investment property valuation movements
Total profit on investments

Operating profit

Financing

Interest received
Interest paid
Total finance costs

Profit before tax
Tax
Profit and total comprehensive income for the period
Earnings per share

Basic and diluted

Income
£000

54,398
(12,011)

42,387

(3,636)
(1,613)

(5,249)

37,138

Capital
£000

-
-

2017
Total
£000

54,398
(12,011)

42,387

(3,636)
(1,613)

(5,249)

2016
Total
£000

45,923
(10,001)

35,922

(2,901)
(1,510)

(4,411)

37,138

31,511

-
-

1,847
15,087

16,934

1,847
15,087

16,934

799
44,171

44,970

37,138

16,934

54,072

76,481

62
(10,885)

(10,823)

26,315
(499)
25,816

-
-

16,934
-
16,934

62
(10,885)

(10,823)

43,249
(499)
42,750

144
(11,561)

(11,417)

65,064
(216)
64,848

4.8p

3.1p

7.9p

12.0p

Notes

3
4

6
8

14
14

The “Total” column of this statement represents the Group’s Consolidated Statement of Comprehensive Income. The supplementary income return
and capital return columns are prepared under guidance published by the Association of Investment Companies. All items in the above statement
derive from continuing operations.

All of the profit and total comprehensive income for the year is attributable to the equity holders of the Company.

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

25189.02 – 17 July 2017 10:59 AM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukPicton Property Income LimitedAnnual Report 2017www.picton.co.ukConsolidated statement of changes
in equity
FOR THE YEAR ENDED 31 MARCH 2017

Balance as at 31 March 2015
Issue costs of shares
Profit for the year
Dividends paid

Balance as at 31 March 2016
Profit for the year
Dividends paid

Balance as at 31 March 2017

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

Notes

Share
Capital
£000
157,313
136
-
-

157,449
-
-

Retained
Earnings
£000
212,657
-
64,848
(17,822)

259,683
42,750
(17,957)

Total
£000
369,970
136
64,848
(17,822)

417,132
42,750
(17,957)

157,449

284,476

441,925

25189.02 – 17 July 2017 10:59 AM – Proof 2

Stock code: PCTNFinancial StatementsStock code: PCTNConsolidated balance sheet
AS AT 31 MARCH 2017

Non-current assets

Investment properties
Tangible assets
Accounts receivable
Total non-current assets

Current assets

Accounts receivable
Cash and cash equivalents
Total current assets

Total assets

Current liabilities

Accounts payable and accruals
Loans and borrowings
Obligations under finance leases
Total current liabilities

Non-current liabilities

Loans and borrowings
Obligations under finance leases
Total non-current liabilities

Total liabilities

Net assets

Equity

Share capital
Retained earnings

Total equity

Net asset value per share

Notes

2017
£000

2016
£000

15
16

17
18
22

18
22

615,170
17
3,204

618,391

16,077
33,883

49,960

646,018
57
3,331

649,406

14,649
22,759

37,408

668,351

686,814

(19,958)
(1,104)
(109)

(21,171)

(18,321)
(29,091)
(109)

(47,521)

(203,540)
(1,715)

(205,255)

(220,444)
(1,717)

(222,161)

(226,426)

(269,682)

441,925

417,132

157,449
284,476

157,449
259,683

441,925

417,132

82p

77p

These consolidated financial statements were approved by the Board of Directors on 6 June 2017 and signed on its behalf by:

Robert Sinclair
Director

6 June 2017

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

25189.02 – 17 July 2017 10:59 AM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukPicton Property Income LimitedAnnual Report 2017www.picton.co.ukConsolidated statement of cash flows
FOR THE YEAR ENDED 31 MARCH 2017

Operating activities

Profit for the period
Adjustments for non-cash items
Interest received
Interest paid
Tax paid
Increase in receivables
Increase in payables

Cash inflows from operating activities

Investing activities

Capital expenditure on investment properties
Acquisition of investment properties
Disposal of investment properties
Purchase of tangible assets
Cash inflows/(outflows) from investing activities

Financing activities

Borrowings repaid
Borrowings drawn
Financing costs
Dividends paid
Cash outflows from financing activities

Net increase/(decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of year

Notes

14
14

2017
£000

2016
£000

54,072
(16,894)
62
(9,273)
(232)
(2,344)

1,449

26,840

(2,819)
-
51,510
-

48,691

(45,965)
-
(485)
(17,957)

(64,407)

76,481
(44,925)
144
(8,980)
(426)
(712)

2,439

24,021

(4,403)
(73,084)
9,365
(1)

(68,123)

(1,011)
15,800
(198)
(17,822)

(3,231)

11,124

(47,333)

22,759

70,092

Cash and cash equivalents at end of year

33,883

22,759

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

25189.02 – 17 July 2017 10:59 AM – Proof 2

Stock code: PCTNFinancial StatementsStock code: PCTNNotes to the consolidated financial
statements
FOR THE YEAR ENDED 31 MARCH 2017

1. General information
Picton Property Income Limited (the “Company” and together with its subsidiaries the “Group”) was registered on 15 September 2005 as a closed
ended Guernsey investment company. The consolidated financial statements are prepared for the year ended 31 March 2017 with comparatives for
the year ended 31 March 2016.

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

The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future
and continue to adopt the going concern basis in preparing the financial statements.

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

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

• Amendments to IAS 1: Disclosure Initiative

• Amendments to IAS 16: Property, Plant and Equipment

• Amendments to IAS 27: Equity Method in Separate Financial Statements

• Amendments to IAS 38: Intangible Assets

• Annual Improvements to IFRSs (2014)

At the date of approval of these financial statements, the following standards and interpretations were in issue but not yet effective for the financial
year ended 31 March 2017 and have not been adopted early:

• IFRS 9: Financial Instruments

• IFRS 15: Revenue from Contracts with Customers

• IFRS 16: Leases

• Amendments to IAS 7: Disclosure Initiative

• Amendments to IAS 12: Deferred Tax Assets for Unrealised Losses

• Amendments to IFRS 2: Classification and Measurement of Share-based Payment Transactions

The Directors are in the process of assessing the full impact of the standards listed above but do not expect them to have a material impact on the
Group’s financial statements in the year of initial application, other than on presentation and disclosure.

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 14. 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.

25189.02 – 17 July 2017 10:59 AM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukPicton Property Income LimitedAnnual Report 2017www.picton.co.ukBasis 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 13. All intra-group
transactions, balances, income and expenses are eliminated on consolidation.

Presentation of the Consolidated Statement of Comprehensive Income
In order to better reflect the activities of an investment company and in accordance with guidance issued by the AIC, supplementary information
which analyses the Consolidated Statement of Comprehensive Income between items of a revenue and capital nature has been presented alongside
the Consolidated Statement of Comprehensive Income.

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

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

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

Level 3: unobservable inputs for the asset or liability.

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

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

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

The fair value of investment property generally involves consideration of:

• Market evidence on comparable transactions for similar properties;

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

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

• Hypothetical sellers and buyers, who are reasonably informed about the current market and who are motivated, but not compelled, to transact in

that market on an arm’s length basis; and

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

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

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

Realised and unrealised gains on investment properties have been presented as capital items within the Consolidated Statement of Comprehensive
Income.

The loans have a first ranking mortgage over the majority of properties; see Note 14.

25189.02 – 17 July 2017 10:59 AM – Proof 2

Stock code: PCTNFinancial StatementsStock code: PCTNNotes to the consolidated financial
statements
CONTINUED

2. Significant accounting policies continued
Leases
Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the
inception of the lease at the fair value of the leased property or, if lower, the present value of the minimum lease payments. Lease payments are
apportioned between finance charges and a reduction of the lease liability to achieve a constant rate of interest on the remaining balance of the
liability. Finance charges are charged directly to the Consolidated Statement of Comprehensive Income.

An operating lease is a lease other than a finance lease. Lease income is recognised in income on a straight-line basis over the lease term. Direct
costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised as an expense
over the lease term on the same basis as the lease income. The financial statements reflect the requirements of SIC 15 ‘Operating Leases –
Incentives’ to the extent that they are material. Premiums received on the surrender of leases are recorded as income immediately if there are no
relevant conditions attached to the surrender.

Cash and cash equivalents
Cash includes cash in hand and cash with banks. Cash equivalents are short-term, highly liquid investments that are readily convertible to known
amounts of cash with original maturities in three months or less and that are subject to an insignificant risk of change in value.

Income and expenses
Income and expenses are included in the Consolidated Statement of Comprehensive Income on an accruals basis. All of the Group’s income and
expenses are derived from continuing operations.

Revenue is recognised to the extent that it is probable that the economic benefit will flow to the Group and the revenue can be reliably measured.

Lease incentive payments are amortised on a straight-line basis over the period from the date of lease inception to the lease end. Upon receipt of a
surrender premium for the early termination of a lease, the profit, net of dilapidations and non-recoverable outgoings relating to the lease concerned,
is immediately reflected in revenue from properties.

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

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

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

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

Share-based payments
The fair value of the amounts payable to employees in respect of the Deferred Bonus Scheme, which are settled in cash, is recognised as an
expense with a corresponding increase in liabilities, over the period that the employees become unconditionally entitled to payment. The liability
is remeasured at each reporting date and at settlement date. Any changes in the fair value of the liability are recognised as staff costs in the
Consolidated Statement of Comprehensive Income.

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

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

Trade receivables
Trade receivables are stated at their nominal amount as reduced by appropriate allowances for estimated irrecoverable amounts. An estimate for
doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when identified.

25189.02 – 17 July 2017 10:59 AM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukPicton Property Income LimitedAnnual Report 2017www.picton.co.ukLoans and borrowings
All loans and borrowings are initially recognised at cost, being the fair value of the consideration received net of issue costs associated with
the borrowing. After initial recognition, loans and borrowings are subsequently measured at amortised cost using the effective interest method.
Amortised cost is calculated by taking into account any issue costs, and any discount or premium on settlement. Gains and losses are recognised
in profit or loss in the Consolidated Statement of Comprehensive Income when the liabilities are derecognised, as well as through the amortisation
process.

Other assets and liabilities
Other assets and liabilities, including trade creditors and accruals, other debtors and creditors, and deferred rental income, are not interest bearing
and 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 Directors conduct the affairs of the Group such that the management and control of the Group is not exercised in the United Kingdom and that
the Group does not carry on a trade in the United Kingdom.

The Group is subject to United Kingdom taxation on income arising on the investment properties after deduction of allowable debt financing costs
and allowable expenses. The Group is tax exempt in Guernsey for the year ended 31 March 2017.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit before taxation reported in the Consolidated
Statement of Comprehensive Income because it excludes items of income or expenses that are taxable or deductible in other years and it further
excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or
substantively enacted by the balance sheet date.

Deferred income tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets
and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are measured at the tax rates that are
expected to apply to the period when the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at
the balance sheet date. Deferred income tax assets are only recognised if it is considered more likely than not that there will be suitable profits from
which the future reversal of the underlying timing differences can be deducted. As the Directors consider that the value of the property portfolio is
likely to be realised by sale rather than use over time, and that no charge to Guernsey or United Kingdom taxation will arise on capital gains, no
provision has been made for deferred tax on valuation uplifts.

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

The cash amounts in the Consolidated Statement of Cash Flows include those assets that can be converted into cash without any restrictions
and without any material risk of decreases in value as a result of the transaction. Dividends that have been paid are included in the cash flow from
financing activities.

3. Revenue from properties

Rents receivable (adjusted for lease incentives)
Surrender premiums
Dilapidation receipts
Other income
Service charge income

Rents receivable includes lease incentives recognised of £0.9 million (2016: £1.2 million).

Included within other income is the £5.3 million settlement received in respect of a dispute at the Strathmore Hotel in Luton.

2017
£000
40,555
263
1,090
6,003
6,487

54,398

2016
£000
39,663
339
108
660
5,153

45,923

25189.02 – 17 July 2017 10:59 AM – Proof 2

Stock code: PCTNFinancial StatementsStock code: PCTNNotes to the consolidated financial
statements
CONTINUED

4. Property expenses

Property operating costs

Property void costs

Recoverable service charge costs

2017
£000
3,501

2,023

6,487

2016
£000
3,308

1,540

5,153

12,011

10,001

5. Operating segments
The Board is charged with setting the Company’s investment strategy in accordance with the Company’s investment restrictions and overall
objectives. 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 delegated the day-to-day implementation of this strategy to the Investment Manager but retains responsibility to ensure that
adequate resources of the Company are directed in accordance with its decisions. The operating activities of the Investment Manager are reviewed
on a regular basis to ensure compliance with the policies and legal responsibilities of the Board.

The Investment Manager has been given authority to act on behalf of the Company in certain situations. Under the terms of the Investment
Management Agreement, subject to the overall supervision of the Board, the Investment Manager advises on the investment strategy of the
Company, advises the Company on its borrowing policy and geared investment position, manages the investment of the Company’s short-term
liquid resources, and advises on the use and management of derivatives and hedging by the Company. Whilst the Investment Manager may make
operational decisions on a day-to-day basis regarding the property investments, any changes to the investment strategy or allocation decisions have
to be approved by the Board, even though they may be proposed by the Investment Manager.

The Board therefore retains full responsibility for investment policy and strategy. The Investment Manager will always act under the terms of the
Investment Management Agreement, which cannot be changed without the approval of the Board. 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 53 commercial properties, which are in the industrial, office, retail, retail warehouse, and leisure sectors.

6. Management expenses

Staff costs
Other management costs

2017
£000
2,992
644

3,636

2016
£000
2,328

573

2,901

The Investment Manager for the Group is Picton Capital Limited, a wholly owned subsidiary company. The above staff and other management costs
are those incurred by Picton Capital Limited during the year.

7. Staff costs

Wages and salaries
Social security costs
Other pension costs
Share-based payments

2017
£000
1,729
287
58

918

2,992

2016
£000
1,475
204
150

499

2,328

Staff costs are those of the employees of Picton Capital Limited. Employees in the Group participate in two share-based remuneration
arrangements. Awards made under the Deferred Bonus Scheme, which is cash settled, are linked to the Company’s share price and dividends paid,
and, with effect from 31 March 2017, awards will vest after two years. Employees must still be in the Group’s employment on the vesting date to
receive payment. During the year the Group made awards of 662,149 units (2016: 744,444 units), which vest on 31 March 2019.

25189.02 – 17 July 2017 10:59 AM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukPicton Property Income LimitedAnnual Report 2017www.picton.co.ukDuring the year, the Company established a new Long-Term Incentive Plan for all employees which is equity settled. Awards vest three years from
the grant date and are conditional on three performance metrics measured over each three-year period. On 27 January 2017, the Company made
awards of 1,170,258 shares for the three-year period ending on 31 March 2019.

The table below summarises the awards made under the Deferred Bonus Scheme. 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 2017 and were not deferred were paid out subsequent to the year end
at a cost of £494,000 (2016: £391,000).

Vesting Date

31 March 2014
31 March 2015
31 March 2016
31 March 2017
31 March 2018
31 March 2019

Units
at 31 March
2015
9,970
168,050
580,061
668,567
359,756

Units
granted in
the year
-
-
-
-
372,222

Units
redeemed
in the year
(7,050)
(13,050)
(502,385)
-
-

Units
at 31 March
2016
2,920
155,000
77,676
668,567
731,978

372,222

1,786,404

744,444

(522,485)

2,008,363

Units
granted
in the year
-
-
-
-
-

662,149

Units
cancelled
in the year
-
-
-
(4,191)
(5,998)

(2,688)

Units
redeemed
in the year
(2,920)
(155,000)
(12,478)
(536,460)
-

Units
at 31
March
2017
-
-
65,198
127,916
725,980

1,031,683

(12,877)

(706,858)

1,950,777

The emoluments of the Directors are set out in the Remuneration Report.

The Group employed 12 members of staff at 31 March 2017 (2016: 13). The average number of people employed by the Group for the year ended
31 March 2017 was 12 (2016: 13).

8. Other operating expenses

Valuation expenses
Administrator fees
Auditor’s remuneration
Directors’ fees
Professional fees
Other expenses

Recurring costs

Restructuring costs

Exceptional costs

Auditor’s remuneration comprises:

Audit fees:
Audit of Group financial statements
Audit of subsidiaries’ financial statements
Audit related fees:
Review of half year financial statements

Non-audit fees:
Additional controls testing
FCA CASS audit
Tax compliance

25189.02 – 17 July 2017 10:59 AM – Proof 2

2017
£000
111
171
145
206
383

430

1,446

167

1,613

2017
£000

65
43

14
122

14
5

145

2016
£000
108
201
142
224
505

330

1,510

2016
£000

56
48

19
123

15
4

–

142

Stock code: PCTNFinancial StatementsStock code: PCTNNotes to the consolidated financial
statements
CONTINUED

9. Interest paid

Interest payable on loans at amortised cost
Capital additions on zero dividend preference shares
Interest on obligations under finance leases
Non-utilisation fees
Amortisation of finance costs

2017
£000
8,812
1,074
114
270

615

2016
£000
8,751
1,900
115
169

626

10,885

11,561

The loan arrangement costs incurred to 31 March 2017 are £6,213,000 (2016: £5,728,000). These are amortised over the duration of the loans with
£615,000 written off in the year ended 31 March 2017 (2016: £626,000).

10. Tax
The charge for the year is:

Current UK income tax
Income tax adjustment to provision for prior year

UK corporation tax

Total tax charge

2017
£000
331
25

356

143

499

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

Profit before taxation

Expected tax charge on ordinary activities at the standard rate of taxation of 20%

Less:
Revaluation gains not taxable
Income not taxable, including interest receivable
Expenditure not allowed for income tax purposes
Losses utilised
Capital allowances and other allowable deductions
Losses carried forward to future years
Adjustment to provision for prior years

Total income tax charge

2017
£000

43,249

8,650

(3,387)
(1,223)
552
(179)
(4,102)
20

356

2016
£000
235

(137)

118

216

2016
£000

65,064

13,013

(8,994)
(215)
696
(129)
(4,136)
–

(137)

For the year ended 31 March 2017 there was an income tax liability of £356,000 in respect of the Group (2016: £98,000) and corporation tax of
£143,000 (2016: £118,000).

The Group is exempt from Guernsey taxation under the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989. A fixed fee of £1,200 per
company per year is payable to the States of Guernsey in respect of this exemption. No charge to Guernsey taxation will arise on capital gains.

The Directors conduct the affairs of the Group such that the management and control of the Group is not exercised in the United Kingdom and that
the Group does not carry on a trade in the United Kingdom.

The Group is subject to United Kingdom taxation on rental income arising on the investment properties after deduction of allowable debt financing
costs and allowable expenses. The treatment of such costs and expenses in estimating the overall tax liability for the Group requires judgement
and assumptions regarding their deductibility. The Directors have considered comparable market evidence and practice in determining the extent
to which these are allowable. This is shown above as current UK income tax. UK corporation tax relates to the corporation tax arising in respect of
Picton Capital Limited.

25189.02 – 17 July 2017 10:59 AM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukPicton Property Income LimitedAnnual Report 2017www.picton.co.ukNo deferred tax asset has been recognised from unused tax losses which total £4.1 million (2016: £4.6 million) as the Group is only able to utilise the
losses to offset taxable profits in certain discrete business streams, and the Directors consider the probability of realising the benefit of these losses,
except to an immaterial extent, to be low.

11. Dividends

Declared and paid:

Interim dividend for the period ended 31 March 2015: 0.825 pence
Interim dividend for the period ended 30 June 2015: 0.825 pence
Interim dividend for the period ended 30 September 2015: 0.825 pence
Interim dividend for the period ended 31 December 2015: 0.825 pence
Interim dividend for the period ended 31 March 2016: 0.825 pence
Interim dividend for the period ended 30 June 2016: 0.825 pence
Interim dividend for the period ended 30 September 2016: 0.825 pence
Interim dividend for the period ended 31 December 2016: 0.85 pence

2017
£000

-
-
-
-
4,455
4,456
4,456
4,590

2016
£000

4,455
4,455
4,456
4,456
-
-
-
-

17,957

17,822

The interim dividend of 0.85 pence per ordinary share in respect of the period ended 31 March 2017 has not been recognised as a liability as it was
declared after the year end. A dividend of £4,590,000 was paid on 31 May 2017.

12. Earnings per share
Basic 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. The following reflects the profit and share data used in the basic and diluted profit per
share calculation:

Net profit attributable to ordinary shareholders of the Company from continuing operations (£000)

Weighted average number of ordinary shares for basic and diluted profit per share

13. Investments in subsidiaries
The Company had the following principal subsidiaries as at 31 March 2017 and 31 March 2016:

Name

Picton UK Real Estate (Property) Limited
Picton (UK) REIT (SPV) Limited
Picton (UK) Listed Real Estate
Picton UK Real Estate (Property) No 2 Limited
Picton (UK) REIT (SPV No 2) Limited
Picton (UK) Listed Real Estate Limited
Picton Capital Limited
Picton ZDP Limited (in liquidation)
Picton (General Partner) No 2 Limited
Picton (General Partner) No 3 Limited
Picton No 2 Limited Partnership
Picton No 3 Limited Partnership
Picton Property No 3 Limited
Picton Finance Limited

2017

42,750

2016
64,848

540,053,660

Place of
incorporation
Guernsey
Guernsey
Guernsey
Guernsey
Guernsey
Guernsey
England & Wales
Guernsey
Guernsey
Guernsey
England & Wales
England & Wales
Guernsey

Guernsey

Ownership
proportion
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%

100%

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

Picton UK Real Estate (Property) Limited and Picton (UK) REIT (SPV) Limited own 100% of the units in Picton (UK) Listed Real Estate, a Guernsey
Unit Trust (the “GPUT”). The GPUT holds a 99.9% interest in both Picton No 2 Limited Partnership and Picton No 3 Limited Partnership.

During the year Merbrook Business Property Unit Trust, Merbrook Bristol Property Unit Trust and Merbrook Prime Retail Property Unit Trust were
wound up following their assets and liabilities being distributed to Picton No 3 Limited Partnership.

25189.02 – 17 July 2017 10:59 AM – Proof 2

Stock code: PCTNFinancial StatementsStock code: PCTNNotes to the consolidated financial
statements
CONTINUED

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

Fair value at start of year
Acquisitions
Capital expenditure on investment properties
Disposals
Realised gains on disposal
Realised losses on disposal
Unrealised gains on investment properties
Unrealised losses on investment properties
Fair value at the end of the year

2017
£000
646,018
-
2,819
(50,601)
2,440
(593)
25,729
(10,642)
615,170

2016
£000
532,926
73,084
4,403
(9,365)
799
–
51,125
(6,954)
646,018

Historic cost at the end of the year

654,057

685,499

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

Appraised value
Valuation of assets held under finance leases
Lease incentives held as debtors
Fair value at the end of the year

2017
£000
624,410
1,680
(10,920)
615,170

2016
£000
654,605
1,731
(10,318)
646,018

The investment properties were valued by CBRE Limited, Chartered Surveyors, as at 31 March 2017 and 31 March 2016 on the basis of fair value
in accordance with the RICS Valuation – Professional Standards (2014). The total fees earned by CBRE Limited from the Group are less than 5% of
their total UK revenue.

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

The Group’s investment properties are valued quarterly by independent valuers. The valuations are based on:

• Information provided by the Investment Manager including rents, lease terms, revenue and capital expenditure. Such information is derived from

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

As at 31 March 2017 and 31 March 2016 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. 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).

25189.02 – 17 July 2017 10:59 AM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukPicton Property Income LimitedAnnual Report 2017www.picton.co.ukInformation on these significant unobservable inputs per sector of investment properties is disclosed as follows:

Appraised value (£000)
Area (sq ft, 000s)

Range of unobservable inputs:

Gross ERV (sq ft per annum)

— range

— weighted average

Net initial yield

— range

— weighted average

Reversionary yield

— range

— weighted average

True equivalent yield

— range

2017

Industrial
250,350
2,730

Offices
213,935
925

Retail and
Leisure
160,125
824

Offices
252,085
999

2016

Industrial
236,635
2,745

Retail and
Leisure
165,885
831

£6.42 to
£50.45
£26.39

£3.25 to
£16.85
£7.76

£5.24 to
£91.14
£31.60

£7.57 to
£56.35
£29.38

£3.15 to
£16.78
£7.33

£5.24 to
£80.36
£28.75

0% to
16.79%
5.67%

4.49% to
10.29%
5.75%

3.15% to
14.23%
6.33%

1.04% to
18.75%
5.23%

-4.75% to
9.64%
5.61%

3.23% to
12.58%
6.22%

5.74% to
15.39%
7.52%

5.38% to
11.60%
6.47%

4.77% to
23.76%
6.89%

5.05% to
15.94%
7.12%

5.30% to
11.87%
6.60%

4.25% to
9.27%
5.78%

5.59% to
13.04%

5.42% to
10.87%

4.66% to
9.77%

5.05% to
14.73%

5.48% to
10.94%

4.38% to
9.53%

— weighted average

7.32%

6.57%

6.66%

6.98%

6.67%

6.51%

An increase/decrease in ERV will increase/decrease valuations, while an increase/decrease to yield decreases/increases valuations. The table below
sets out the sensitivity of the valuation to changes of 50 basis points in yield.

Sector
Industrial

Office

Retail and Leisure

Movement
Increase of 50 basis points
Decrease of 50 basis points
Increase of 50 basis points
Decrease of 50 basis points
Increase of 50 basis points
Decrease of 50 basis points

2017
Impact on valuation
Decrease of £19.5m
Increase of £23.0m
Decrease of £16.0m
Increase of £18.5m
Decrease of £12.7m
Increase of £16.4m

2016
Impact on valuation
Decrease of £18.0m
Increase of £21.1m
Decrease of £19.9m
Increase of £22.0m
Decrease of £12.5m
Increase of £14.6m

25189.02 – 17 July 2017 10:59 AM – Proof 2

Stock code: PCTNFinancial StatementsStock code: PCTNNotes to the consolidated financial
statements
CONTINUED

15. Accounts receivable

Current

Tenant debtors (net of provisions for bad debts)
Lease incentives
Other debtors
Income tax receivable
Capitalised finance costs

Non-current

Capitalised finance costs

2017
£000

2016
£000

4,107
10,920
514
-
536
16,077

3,204

19,281

3,209
10,318
578
4
540
14,649

3,331

17,980

Tenant debtors, which are generally due for settlement at the relevant quarter end, are recognised and carried at the original invoice amount less an
allowance for any uncollectable amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable.

16. Cash and cash equivalents

Cash at bank and in hand
Short-term deposits

2017
£000
31,056
2,827

33,883

2016
£000
20,063

2,696

22,759

Cash at bank and in hand earns interest at floating rates based on daily bank deposit rates. Short-term deposits are made for varying periods of
between one day and one month depending on the immediate cash requirements of the Group, and earn interest at the respective short-term
deposit rates. The carrying amounts of these assets approximate their fair value.

17. Accounts payable and accruals

Accruals
Deferred rental income
VAT liability
Income tax liability
Trade creditors
Other creditors

2017
£000
5,092
8,590
2,345
295
125
3,511

2016
£000
4,197
8,621
1,934
-
232
3,337

19,958

18,321

25189.02 – 17 July 2017 10:59 AM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukPicton Property Income LimitedAnnual Report 2017www.picton.co.uk18. Loans and borrowings

Current
Aviva facility
Zero dividend preference shares

Non-current
Santander revolving credit facility
Canada Life facility
Canada Life facility
Aviva facility

Maturity

-
15 October 2016

25 March 2018
20 July 2022
24 July 2027
24 July 2032

2017
£000

1,104
-
1,104

-
33,718
80,000
89,822

203,540

204,644

2016
£000

1,057
28,034
29,091

15,800
33,718
80,000
90,926

220,444

249,535

The Group has a loan with Canada Life Limited for £113.7 million, which is fully drawn. The loan matures in July 2027, with £33.7 million repayable
in July 2022. 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 £270.5 million (2016: £270.5 million).

Additionally the Group has a term loan facility agreement with Aviva Commercial Finance Limited for £95.3 million, which was fully drawn on 24 July
2012. The loan is for a term of 20 years, with approximately one third repayable over the life of the loan in accordance with a scheduled amortisation
profile. The Group has repaid £1.1 million in the year (2016: £1.0 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 £225.2 million (2016: £229.1 million).

The Group has a £26.0 million revolving credit facility with Santander Corporate & Commercial Banking until 25 March 2018. Interest is charged at
175 basis points over three-month LIBOR and the non-utilisation fee is 70 basis points. The facility is secured over properties held by Picton (UK)
REIT (SPV No 2) Limited, valued at £58.9 million (2016: £57.1 million).

On 21 June 2016 an additional £27.0 million revolving credit facility was put in place with Santander Corporate & Commercial Banking for five
years. Interest is also charged at 175 basis points over three-month LIBOR and the non-utilisation fee is 70 basis points. The facility is secured over
properties held by Picton (UK) Listed Real Estate, valued at £67.6 million.

The fair value of the secured loan facilities at 31 March 2017, estimated as the present value of future cash flows discounted at the market rate of
interest at that date, was £229.1 million (2016: £243.1 million). The fair value of the secured loan facilities is classified as Level 2 under the hierarchy
of fair value measurements.

The Group repaid in full its 22,000,000 zero dividend preference shares (‘ZDPs’) at the maturity date of 15 October 2016. The ZDPs accrued
additional capital at a rate of 7.25% per annum, resulting in a final repayment of £29.1 million.

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 2017 was 4.21% (2016: 4.43%).

In accordance with the AIFM Directive, information in relation to the Group’s leverage is required to be made available to investors. The Group’s
maximum and average actual leverage levels at 31 March 2017 are shown below:

Maximum limit

Actual

Gross
method
285%

141%

Commitment
method
285%

146%

For the purpose of the AIFM Directive, leverage is any method which increases the Group’s exposure, including the borrowing of cash and use of
derivatives. It is expressed as a percentage of the Group’s exposure to its net asset value and is calculated on both a gross and commitment method.

25189.02 – 17 July 2017 10:59 AM – Proof 2

Stock code: PCTNFinancial StatementsStock code: PCTNNotes to the consolidated financial
statements
CONTINUED

18. Loans and borrowings continued
Under the gross method, exposure represents the sum of the Group’s positions after deduction of cash balances, without taking account of any
hedging or netting arrangements. Under the commitment method, exposure is calculated without the deduction of cash balances and after certain
hedging and netting positions are offset against each other.

The leverage limits are set by the Board and are in line with the maximum leverage levels permitted in the Company’s Articles of Incorporation.

19. Contingencies and capital commitments
The Group has entered into contracts for the refurbishment of 13 properties with commitments outstanding at 31 March 2017 of approximately
£2.9 million (2016: £3.3 million). No further obligations to construct or develop investment property or for repairs, maintenance or enhancements
were in place as at 31 March 2017.

20. Share capital

Authorised:

Unlimited number of ordinary shares of no par value
Issued and fully paid:

540,053,660 ordinary shares of no par value
(31 March 2016: 540,053,660)

Share premium

2017
£000

2016
£000

157,449

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. Ordinary shareholders have
the right to vote at meetings of the Company. All ordinary shares carry equal voting rights.

The Directors have authority to buy back up to 14.99% of the Company’s ordinary shares in issue, subject to the annual renewal of the authority
from shareholders. Any buy-back of ordinary shares will be made subject to Guernsey law, and the making and timing of any buy-backs will be at
the absolute discretion of the Board.

21. Adjustment for non-cash movements in the cash flow statement

Profit on disposal of investment properties
Movement in investment property valuation
Depreciation of tangible assets

2017
£000
(1,847)
(15,087)
40

(16,894)

2016
£000
(799)
(44,171)
45

(44,925)

25189.02 – 17 July 2017 10:59 AM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukPicton Property Income LimitedAnnual Report 2017www.picton.co.uk22. Obligations under leases
The Group has entered into a number of leases in relation to its investment properties. These leases are for fixed terms and subject to regular rent
reviews. They contain no material provisions for contingent rents, renewal or purchase options nor any restrictions outside of the normal lease terms.

Finance lease obligations in respect of rents payable on leasehold properties were payable as follows:

Future minimum payments due:
Within one year
In the second to fifth years inclusive
After five years

Less: finance charges allocated to future periods

Present value of minimum lease payments

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

Current

Within one year

Non-current

In the second to fifth years inclusive

After five years

2017
£000

116
466

7,616

8,198

(6,374)

1,824

2017
£000

109

396

1,319

1,715

1,824

2016
£000

116
466

7,732

8,314

(6,488)

1,826

2016
£000

109

397

1,320

1,717

1,826

Operating leases where the Group is lessor
The Group leases its investment properties under operating leases.

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

Within one year
In the second to fifth years inclusive
After five years

2017
£000
40,360
125,866
107,534

273,760

2016
£000
39,556
124,853
116,228

280,637

The Group has entered into commercial property leases on its investment property portfolio. These properties, held under operating leases, are
measured under the fair value model as the properties are held to earn rentals. The majority of these non-cancellable leases have remaining lease
terms of more than five years.

25189.02 – 17 July 2017 10:59 AM – Proof 2

Stock code: PCTNFinancial StatementsStock code: PCTNNotes to the consolidated financial
statements
CONTINUED

23. Net asset value
The net asset value per ordinary share is based on net assets at the year end and 540,053,660 (2016: 540,053,660) ordinary shares, being the
number of ordinary shares in issue at the year end.

At 31 March 2017, the Company had a net asset value per ordinary share of £0.82 (2016: £0.77).

24. Financial instruments
The Group’s financial instruments comprise cash and cash equivalents, accounts receivable, secured loans, obligations under finance leases
and accounts payable that arise from its operations. The Group does not have exposure to any derivative financial instruments. Apart from the
secured loans, as disclosed in Note 18, the fair value of the financial assets and liabilities is not materially different from their carrying value in the
financial statements.

Categories of financial instruments

31 March 2017

Financial assets

Debtors and capitalised finance costs
Cash and cash equivalents

Financial liabilities

Loans
Obligations under finance leases
Creditors and accruals

31 March 2016

Financial assets

Debtors and capitalised finance costs

Cash and cash equivalents

Financial liabilities

Loans
Obligations under finance leases
Creditors and accruals

Held at
fair value
through
profit or loss
£000

Note

Financial
assets and
liabilities at
amortised
cost
£000

15
16

18
22

-
-

Held at fair
value through
profit or loss
£000

Note

18
22

-
-

8,361
33,883

42,244

204,644
1,824

8,728

215,196

Financial
assets and
liabilities at
amortised
cost
£000

7,658

22,759

30,417

249,535
1,826

7,766

259,127

Total
£000

8,361
33,883

42,244

204,644
1,824

8,728

215,196

Total
£000

7,658

22,759

30,417

249,535
1,826

7,766

259,127

25189.02 – 17 July 2017 10:59 AM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukPicton Property Income LimitedAnnual Report 2017www.picton.co.uk25. Risk management
The Group invests in commercial properties in the United Kingdom. The following describes the risks involved and the applied risk management. The
Investment Manager 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 18, cash and cash equivalents and equity attributable to equity holders of
the Company, comprising issued capital, reserves and retained earnings. The Group is not subject to any external capital requirements.

The 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 reduce 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:

Total liabilities
Less: cash and cash equivalents

Net debt

Total equity

Net debt to equity ratio at end of year

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

2017
£000
226,426

(33,883)

192,543

441,925

0.44

2016
£000
269,682

(22,759)

246,923

417,132

0.59

31 March 2017

Financial assets

Tenant debtors
Cash and cash equivalents

31 March 2016

Financial assets

Tenant debtors
Cash and cash equivalents

Held at
fair value
through
profit or loss
£000

Financial
assets and
liabilities at
amortised
cost
£000

-
-

4,107
33,883

37,990

Held at
fair value
through
profit or loss
£000

Financial
assets and
liabilities at
amortised
cost
£000

3,209

22,759

25,968

Note

Total
£000

4,107
33,883

37,990

Total
£000

3,209

22,759

25,968

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.

25189.02 – 17 July 2017 10:59 AM – Proof 2

Stock code: PCTNFinancial StatementsStock code: PCTNNotes to the consolidated financial
statements
CONTINUED

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

A provision of £249,000 (2016: £288,000) exists at the year end, in relation to outstanding debtors that are considered to be impaired based on a
review of individual debtor balances. The Group believes that unimpaired amounts that are overdue by more than 30 days are still collectable, based
on the historic payment behaviours and extensive analyses of the underlying customers’ credit ratings. At 31 March 2017 debtors overdue by more
than 30 days totalled £1,840,000 (2016: £227,000).

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”). Bankruptcy or insolvency of the bank holding cash balances may cause the Group’s rights with respect to the 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 2017 and at 31 March 2016 Standard & Poor’s credit rating for Nationwide and Santander was A-1 and the Group’s
remaining bankers had an A-2 rating.

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

Liquidity risk
Ultimate responsibility for liquidity risk management rests with the Board, which has built an appropriate liquidity risk management framework for the
management of the Group’s short, medium and long-term funding and liquidity management requirements. The Group’s liquidity risk is managed on
an ongoing basis by the Investment Manager 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 2017
Cash and cash equivalents
Debtors and capitalised finance costs
Obligations under finance leases
Fixed interest rate loans
Creditors and accruals

31 March 2016
Cash and cash equivalents
Debtors and capitalised finance costs
Obligations under finance leases
Fixed interest rate loans
Floating interest rate loans
Creditors and accruals

Less than
one year
£000
33,925
5,157
(116)
(9,708)

(8,728)

20,530

Less than
one year
£000
22,787
4,327
(116)
(38,822)
(364)

(7,766)

(19,954)

1 to 5
Years
£000
-
1,476
(466)
(38,832)

More than
5 years
£000
-
1,728
(1,242)
(252,662)

Total
£000

33,925
8,361
(1,824)
(301,202)

(8,728)

(37,822)

(252,176)

(269,468)

1 to 5
Years
£000
–
1,312
(466)
(38,832)
(16,158)

–

More than
5 years
£000
–
2,019
(1,244)
(262,370)
–

–

Total
£000
22,787
7,658
(1,826)
(340,024)
(16,522)

(7,766)

(54,144)

(261,595)

(335,693)

25189.02 – 17 July 2017 10:59 AM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukPicton Property Income LimitedAnnual Report 2017www.picton.co.ukMarket risk
The Group’s activities are primarily within the real estate market, exposing it to very specific industry risks.

The yields available from investments in real estate depend primarily on the amount of revenue earned and capital appreciation generated by the
relevant properties as well as expenses incurred. If properties do not generate sufficient revenues to meet operating expenses, including debt service
and capital expenditure, the Group’s revenue will be adversely affected.

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

In addition, the Group’s revenue would be adversely affected if a significant number of occupiers were unable to pay rent or its properties could
not be rented on favourable terms. Certain significant expenditure associated with each equity investment in real estate (such as external financing
costs, real estate taxes and maintenance costs) generally are not reduced when circumstances cause a reduction in revenue from properties. By
diversifying in regions, sectors, risk categories and occupiers, the Investment Manager 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 £31.2 million (2016: £32.7 million).

Interest rate risk management
Interest rate risk arises on interest payable on the revolving credit facilities only. The Group’s senior debt facilities have fixed interest rates over the
lives of the loans and thus the Group has limited exposure to interest rate risk on the majority of its borrowings and no sensitivity is presented.

Interest rate risk
The following table sets out the carrying amount, by maturity, of the Group’s financial assets/(liabilities).

31 March 2017

Floating

Cash and cash equivalents

Fixed

Secured loan facilities
Obligations under finance leases

31 March 2016

Floating

Cash and cash equivalents

Secured loan facilities

Fixed

Secured loan facilities
Zero dividend preference shares
Obligations under finance leases

Less than
1 year
£000

1 to 5
Years
£000

More than
5 years
£000

Total
£000

33,883

(1,104)
(109)

32,670

Less than
1 year
£000

(4,928)
(396)

(5,324)

1 to 5
Years
£000

(198,612)
(1,319)

(199,931)

More than
5 years
£000

(204,644)
(1,824)

(172,585)

Total
£000

22,759

(15,800)

22,759

(15,800)

(1,057)
(28,034)
(109)

(6,441)

(4,718)
-
(397)

(20,915)

(199,926)
-
(1,320)

(201,246)

(205,701)
(28,034)
(1,826)

(228,602)

25189.02 – 17 July 2017 10:59 AM – Proof 2

Stock code: PCTNFinancial StatementsStock code: PCTNPicton Property Income Limited
Picton Property Income Limited
Annual Report 2017
Annual Report 2017

www.picton.co.uk
www.picton.co.uk

Notes to the consolidated financial
statements
CONTINUED

25. Risk management continued
Concentration risk
As discussed above, all of the Group’s investments are in the UK and therefore it is exposed to macroeconomic changes in the UK economy.
Furthermore, the Group places reliance on a limited number of occupiers for its rental income, with one occupier accounting for 4.0% of the Group’s
annual contracted rental income.

Currency risk
The Group has no exposure to foreign currency risk.

26. Related party transactions
The total fees earned during the year by the Directors of the Company amounted to £205,500 (2016: £223,500). As at 31 March 2017 the Group
owed £nil to the Directors (2016: £nil). The emoluments of each Director are set out in the Remuneration Report.

Picton Property Income Limited has no controlling parties.

27. Events after the balance sheet date
A dividend of £4,590,000 (0.85 pence per share) was approved by the Board on 24 April 2017 and paid on 31 May 2017.

The Group has exchanged contracts to sell two properties for proceeds of £9,861,000, with completion expected in June 2017.

25189.02 – 17 July 2017 10:59 AM – Proof 2

Stock code: PCTN
Stock code: PCTN

Other Information

EPRA disclosures (unaudited)

The European Public Real Estate Association (EPRA) is the industry body representing listed companies in the real estate sector. EPRA publishes
Best Practice Recommendations (BPR) to establish consistent reporting by European property companies. Further information on the EPRA BPR
can be found at www.epra.com.

EPRA earnings per share
EPRA Earnings represents the earnings from core operational activities, excluding investment property revaluations and gains/losses on asset
disposals. It demonstrates the extent to which dividend payments are underpinned by recurring operational activities.

Profit for the year after taxation
Exclude:
Investment property valuation movement
Gains on disposal of investment properties
Exceptional income

EPRA earnings

Weighted average number of shares in issue (000s)

EPRA earnings per share

2017
£000
42,750

(15,087)
(1,847)
(5,250)

20,566

2016
£000
64,848

(44,171)
(799)
-

19,878

2015
£000
68,855

(53,163)
(412)
-

15,280

540,054

445,259

3.8p

3.7p

3.4p

EPRA NAV per share
The EPRA Net Asset Value highlights the fair value of net assets on an ongoing, long-term basis. It excludes assets and liabilities that are not
expected to crystallise in normal circumstances such as the fair value of financial derivatives and deferred taxes on property valuation surpluses.

Balance sheet net assets
Fair value of financial instruments
Deferred tax

EPRA NAV

Shares in issue (000s)

EPRA NAV per share

2017
£000
441,925
-
-

441,925

540,054

82p

EPRA NNNAV per share
The EPRA Triple Net Asset Value includes the fair value adjustments in respect of all material balance sheet items.

EPRA NAV
Fair value of debt
Deferred tax

EPRA NNNAV

Shares in issue (000s)

EPRA NNNAV per share

2017
£000
441,925
(24,475)
-

417,450

540,054

77p

2016
£000
417,132
-
-

417,132

540,054

77p

2016
£000
417,132
(21,807)
-

395,325

540,054

73p

2015
£000
369,970
-
-

369,970

540,054

69p

2015
£000
369,970
(19,781)
-

350,189

540,054

65p

25189.02 – 17 July 2017 10:59 AM – Proof 2

EPRA disclosures (unaudited)
CONTINUED

EPRA net initial yield (NIY)
EPRA NIY is calculated as the annualised rental income based on the cash rents passing at the balance sheet date, less non-recoverable property
operating expenses, divided by the gross market valuation of the properties.

Investment property valuation
Allowance for estimated purchasers’ costs

Gross up property portfolio valuation

Annualised cash passing rental income
Property outgoings

Annualised net rents

EPRA Net Initial Yield

2017
£000
624,410

42,362

666,772

39,998

(911)

39,087

5.9%

2016
£000
654,605

2015
£000
540,904

44,478

31,629

699,083

572,533

40,365

(957)

34,580

(1,026)

39,408

33,554

5.6%

5.9%

EPRA “topped-up” net initial yield
The EPRA “topped-up” NIY is calculated by making an adjustment to the EPRA NIY in respect of the expiration of rent free periods (or other
unexpired lease incentives such as discounted rent periods and step rents).

EPRA NIY annualised net rents
Annualised cash rent that will apply at expiry of lease incentives

Topped-up annualised net rents

EPRA “topped-up” NIY

2017
£000
39,087

2,633

41,720

6.3%

2016
£000
39,408

3,947

43,355

2015
£000
33,554

3,724

37,278

6.2%

6.5%

EPRA vacancy rate
EPRA Vacancy Rate is the estimated rental value (ERV) of vacant space divided by the ERV of the whole property, expressed as a percentage.

Annualised potential rental value of vacant premises
Annualised potential rental value for the complete property portfolio

EPRA Vacancy Rate

EPRA cost ratio
EPRA Cost Ratio reflects the overheads and operating costs as a percentage of the gross rental income.

Property operating costs
Property void costs
Management expenses
Other operating expenses
Less:
Ground rent costs

EPRA costs (including direct vacancy costs)

Property void costs

EPRA costs (excluding direct vacancy costs)
Gross rental income
Less ground rent costs

Gross rental income

EPRA Cost Ratio (including direct vacancy costs)

EPRA Cost Ratio (excluding direct vacancy costs)

25189.02 – 17 July 2017 10:59 AM – Proof 2

2017
£000
2,647

45,887

5.8%

2017
£000
3,501
2,023
3,636
1,613

(239)
10,534

(2,023)

8,511
40,555

(239)

40,316

26.1%

21.1%

2016
£000
1,867

2015
£000
1,920

47,596

40,013

3.9%

4.8%

2016
£000
3,308
1,540
2,901
1,510

(259)

9,000

(1,540)

7,460
39,663

2015
£000
2,861
1,948
2,591
1,194

(159)

8,435

(1,948)

6,487
34,088

(259)

(159)

39,404

33,929

22.8%

18.9%

24.9%

19.1%

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukPicton Property Income LimitedAnnual Report 2017www.picton.co.ukCapital expenditure
The table below sets out the capital expenditure incurred over the financial year, in accordance with EPRA Best Practices Recommendations.

Acquisitions
Development
Like-for-like portfolio

Other

Total capital expenditure

2017
£000
-
-
2,819

2,819

2016
£000
-
-
4,403

4,403

Like-for-like rental growth
The table below sets out the like-for-like rental growth of the portfolio, by sector, in accordance with EPRA Best Practices Recommendations.

Like-for-like rental income
Properties acquired
Properties sold

Offices

Industrial

Retail and Leisure

Total

2017
£000
10,100
3,647

813

14,560

2016
£000
9,755
2,036

1,644

2017
£000
14,972
-

2016
£000
14,757
-

2017
£000
9,617
1,243

163

13,435

14,972

14,757

11,023

2016
£000
10,414
811

246

11,471

2017
£000
34,689
4,890

976

40,555

2016
£000
34,926
2,847

1,890

39,663

EPRA sustainability reporting
The Group’s sustainability data reported below is for the year ended 31 December 2016, with comparatives for the year ended 31 December 2015.

Energy
Electricity and gas consumption has increased by 20% and 52% respectively during 2016 compared to 2015. This is largely due to the acquisitions
of Metro, Salford Quays and 180 West George Street, Glasgow, increased occupancy rates and some increases in consumption. Intensity ratios
are in line with what is expected from the different portfolio types, with offices occupying 17 out of the top 18 highest intensity buildings within the
portfolio. 83% of our electricity consumption is renewably sourced through our main energy supplier.

A number of energy efficiency initiatives have been implemented during 2016, including new LED lighting, the asset analytics tool at 50 Farringdon
Road and a mechanical plant replacement at 180 West George Street. We would therefore expect to see a reduction in absolute consumption
during 2017 as further energy efficiency measures are implemented and disposed site consumption are realised.

Like-for-like data analysis is conducted at a site level and only included where a site has data in full for 2015 and 2016. We have therefore not
included any acquired or disposed sites during the 2015-2016 periods. Gloucester Retail Park has seen an increase in consumption due to car park
lighting works, with eight metal halide fittings being repaired and a two hour increased run time per day. The largest office location increase is at
Longcross Court, Cardiff which saw a new half hourly supply added to the site in mid-2015. The new supply went ahead to ensure that the current
network cables could accommodate for an additional 500,000 kWh load on an annual basis. As a result of this increased load, the capacity of the
supply also changed from 120kVA to 550kVA to accommodate the new substation. Four new occupiers moved into the property during 2016,
tenanting previously vacant space. At Stanford House there were issues with the gas fired chillers being repaired in 2015. These were fixed and have
been running more consistently during 2016 resulting in an increase in consumption of 143%. We therefore expect 2017 to provide a more stable
consumption profile for the portfolio.

The table below sets out the total energy consumption from the Group’s portfolio by sector.

Sector
Industrial
Office
Retail and Leisure

Total

Total energy
consumption
from
electricity
(kWh)
219,003
9,875,422

Total energy
consumption
from fuels
(kWh)
32,408
7,393,221

1,203,944

744,580

11,298,369

8,170,209

Building
energy
intensity
(kWh/m²/
year)
2.64
115.91

46.17

93.46

Where data was unavailable, emissions were estimated by prorating the daily consumption calculated from available information. Estimated data
accounts for 3.9% of electricity data and 3.5% of gas data.

The table below sets out the like-for-like energy consumption by sector, and the change from the previous year.

25189.02 – 17 July 2017 10:59 AM – Proof 2

Stock code: PCTNOther InformationStock code: PCTNEPRA disclosures (unaudited)
CONTINUED

Sector
Industrial
Office
Retail and Leisure

Total

Electricity consumption (kWh)
2016
210,866
6,164,309
1,203,944

2015
113,415
6,318,466
535,483

7,579,119

6,967,364

Change
86%
-2%
125%

Fuel consumption (kWh)

2016
8,344
5,156,823
744,580

5,909,747

2015
7,279
4,330,820
306,214

4,644,313

Change
15%
19%
143%

27%

GHG Emissions
Although our total emissions have risen, our Scope 2 emission intensity reduced by 0.4%, indicating that our existing portfolio is more efficient. For
the second year running our like-for-like indirect emissions have also reduced due to changes in emission factors. It is our aim over the coming years
to couple this reduction with like-for-like consumption so that we see a double benefit.

The table below sets out the Group’s direct and indirect greenhouse gas (GHG) emissions by sector.

Sector

Industrial
Office
Retail and Leisure

Total

Total direct
emissions
(tCO2e)
5.96
1,360.33

Total indirect
emissions
(tCO2e)
90.24
4,069.17

137.00

496.09

1,503.29

4,655.49

GHG
emissions
intensity
(kgCO2e/m²/
year)

0.00
0.06

0.02

0.03

Note: Scope 1 and 2. Where data was unavailable, emissions were estimated by prorating the daily rate of consumption calculated from available
information. Estimated data accounts for 3.5% of emissions.

The table below sets out the Group’s like-for-like direct and indirect greenhouse gas emissions by sector.

Sector
Industrial
Office
Retail and Leisure

Total

Direct emissions (tCO2e)

Indirect emissions (tCO2e)

2016
2
949
137

1,088

2015
1
799
57

857

Change
14%
19%
143%

27%

2016
87
2,540
496

3,123

2015
52
2,920
248

3,220

Change
66%
-13%
100%

-3%

Water
Tenanted water data is analysed and reported in its own section under Scope 3 emissions. We have completed a more comprehensive analysis of
our water supplies during 2016 and as such the increase in data coverage has been used in the like-for-like comparisons. We have also improved
the reporting methodology to include emissions from water treatment which has not been included prior to 2016.

Increases have been seen across the portfolio due to a robust data collection process. We would expect the like-for-like comparisons to level out
during 2017. As water is a small percentage of our overall emissions, there has been greater emphasis placed on reducing emissions from other
sources. As we obtain a more robust like-for-like data set, we will be able to establish a concrete baseline to set targets on.

100

25189.02 – 17 July 2017 10:59 AM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukPicton Property Income LimitedAnnual Report 2017www.picton.co.ukThe table below sets out the Group’s water withdrawal by source.

Sector
Industrial
Office
Retail and Leisure

Total

Total water
withdrawn by
source
(m3)
1,808
55,838
55

Building
water
intensity
(m3/m²/year)
0.32
0.68
0.02

57,701

0.57

Where data was unavailable, consumption has been estimated by prorating the daily rate of consumption calculated from available information.
Estimated data accounts for 4.2% of water consumption.

The following table sets out the Group’s like-for-like total water consumption by sector.

Sector
Industrial
Office
Retail and Leisure

Total

Water withdrawn (m3)

2016
-
46,201
50

46,251

2015
-
23,192
73

23,265

Change
-
99%
-32%

99%

Waste
We continue to monitor our waste supplies using the successful methodology change in 2015, where we obtain waste data direct from the
suppliers. We are still awaiting confirmation from the supplier of total consumption levels at Regency Wharf and have left 2015 data unchanged. We
expect the data to arrive shortly and will update our records when the data arrives, providing it passes an internal audit check.

The like-for-like waste volume has decreased by 17%, with percentage of waste to landfill falling by 43%. Longcross Court in Cardiff has seen key
reductions in reporting of waste going to recycling and landfill disposal, due to data coming directly from the council rather than estimating through
number of bins collected per week.

The following table sets out the Group’s waste by disposal route.

Sector
Industrial
Office
Retail and Leisure

Total

Proportion of waste by
disposal route (%)

Recycling
(kg)
–
151,832
265,000

416,832

46%

Composting
(kg)
–
3,800
-

3,800

Recovery
(kg)
–
40,639
-

40,639

Incineration
(kg)
–
86,215
261,000

347,215

Landfill
(kg)
–
90,543
-

90,543

39%

10%

Other
(kg)
–
-
-

Total
(kg)
–
373,029
526,000

899,029

100%

Where data was unavailable, waste weights have been estimated by prorating available information or using last year’s data using intensity ratios.
Proportion of waste by disposal route was calculated using proportions of actual data available.

25189.02 – 17 July 2017 10:59 AM – Proof 2

101

Stock code: PCTNOther InformationStock code: PCTNEPRA disclosures (unaudited)
CONTINUED

The table below sets out the Group’s like-for-like weight of waste by disposal route.

Recycling

Composting

Recovery

Incineration

Landfill

Total

Office
Retail and Leisure

Office

Retail and Leisure

Office
Retail and Leisure

Office

Retail and Leisure

Office
Retail and Leisure

2016

140,434
265,000

405,434

3,800
-

3,800

40,639

78,787
261,000

339,787

90,543

354,203
526,000

880,203

2015

260,331
265,000

525,331

21,434
–

21,434

90,045
261,000

351,045

158,548

530,358
526,000

1,056,358

Change

-46%
0%

-23%

-82%
-

-82%

-13%
0%

-3%

-43%

-33%
0%

-17%

Business Travel
The below tables relate to Picton employees and their expensed mileage via car, air and train. We have conducted a more in-depth study on our
business travel emissions and as a result have changed our emissions calculation methodology. For a fair analysis we have switched to distances
as the crow flies, resulting in an impartial assessment between journeys. The calculation methodology has been back-dated to the 2015 data set to
allow for a like-for-like comparison between the different transportation methods.

An extra 6,019 km were travelled by Picton employees across all transport types in 2016 compared to 2015. This was mainly due to new
acquisitions in the portfolio. The increase will have a minimal impact on our Group’s overall emissions but should continue to be monitored to see if
the trend continues.

The table below sets out the Scope 3 business travel emissions for Picton Directors and employees.

Total kgCO2e
emissions
2.40
3.61

Total distance
(km)
12,743
24,525

1.73

7.74

35,362

72,630

Car
Air

Train

All transport

102

25189.02 – 17 July 2017 10:59 AM – Proof 2

Picton Property Income LimitedAnnual Report 2017www.picton.co.ukPicton Property Income LimitedAnnual Report 2017www.picton.co.ukAustin Friars
This is the first year the Group have reported on consumption data from our office premises at Austin Friars, where Picton Capital is based. While
the emissions are a small proportion of our overall emissions, we feel it is important to provide a complete view of our emissions. Through tracking
these office emissions and setting a benchmark, it will allow us to track our consumption and explore potential energy efficiency projects. There is no
reliable data for the gas and waste contracts and they are not under our control; therefore they have not been included.

The table below sets out the total energy consumption from the Group’s office premises.

Supply

Electricity
Water

Total

2016
Consumption
(kWh & m3)

29,343
105

GHG
emissions
(tCO2e)
12.09
0.11

12.20

Occupier consumption
This is the first reporting year where we have tried to collect occupier data, in an effort to move towards reporting whole building consumption and
recognising the landlord-tenant split in energy. Due to this being the first year reporting occupier consumption, there is a limited data set and we are
looking to put procedures in place to improve the quality of data moving forward. For instance, waste has been excluded due to unreliable data sets,
the data collection moving forward will implement clearer instructions on the type of information we require.

We contacted over 20% of tenants, covering 60% of the tenanted floor area, with a response rate of 30%. Industrial units were the most frequent
respondent, accounting for 70% of the total responses. Ahead of the 2017 reporting year, we will look to create whole building breakdowns for key
sites in the portfolio with the aim of having 100% coverage across our entire portfolio.

The table below sets out tenant consumption data for 2016 by property type.

Industrial
Office
Retail and Leisure

Total consumption

2016
Electricity
(kWh)
18,447,945
696,095
2,173,670

2016
Gas
(kWh)
11,244,946
-
1,291,044

21,317,710

12,535,990

2016
Water
(m3)
53,914
-
1,754

55,668

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Stock code: PCTNOther InformationStock code: PCTNSupplementary disclosures (unaudited)

Ongoing charges
The Ongoing Charges ratio is based on historical information and provides shareholders with an indication of the likely level of cost that will be
incurred in managing the Group. The Association of Investment Companies (AIC) is the trade body for closed-ended investment companies. The
AIC recommended methodology for calculating the Ongoing Charges ratio uses the annual recurring operational expenses as a percentage of the
average net asset value over the period.

Property expenses
Management expenses
Other operating expenses
Recurring operational expenses

Average Net Asset Value over the year

Ongoing Charges

Ongoing Charges (excluding property expenses)

2017
£000
5,524
3,636
1,446
10,606

2016
£000

4,848
2,901
1,510
9,259

2015
£000

4,809
2,591
1,194
8,594

429,546

400,415

304,546

2.5%

1.2%

2.3%

1.1%

2.8%

1.2%

Loan to value
The loan to value (LTV) is calculated by taking the Group’s total borrowings, net of cash, as a percentage of the total portfolio value.

Total borrowings
Less:
Cash and cash equivalents

Total net borrowings

Investment property valuation

Loan to value

2017
£000
204,644

(33,883)

170,761

624,410

27.4%

2016
£000
249,535

(22,759)

226,776

654,605

34.6%

Gearing
Using the method recommended by the AIC, Gearing is calculated by dividing the Group’s total assets, less cash, by shareholders’ funds.

Total assets
Less:
Cash and cash equivalents

Total equity

Gearing

2017
£000
668,351

(33,883)

634,468

441,925

43.6%

2016
£000
686,814

(22,759)

664,055

417,132

59.2%

2015
£000
232,846

(70,092)

162,754

540,905

30.1%

2015
£000
621,009

(70,092)

550,917

369,970

48.9%

104

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Picton Property Income LimitedAnnual Report 2017www.picton.co.ukPicton Property Income LimitedAnnual Report 2017www.picton.co.ukProperty portfolio

Properties valued in excess of £30 million

Properties valued between £5 million and £10 million

• Parkbury Industrial Estate, Radlett, Herts.

• 62/68 Bridge Street, Peterborough

• Units A-G2, River Way Industrial Estate, Harlow, Essex

• Regency Wharf, Broad Street, Birmingham

• Angel Gate Office Village, City Road, London EC1

• Trident House, 42/48 Victoria Street, St Albans, Herts.

• Stanford House, 12-14 Long Acre, London WC2

• Lawson Mardon Buildings, Kettlestring Lane, York

Properties valued between £25 million and £30 million

• 50 Farringdon Road, London EC1

Properties valued between £20 million and £25 million

• Belkin Unit, 3 Shipton Way, Rushden, Northants.

• 30 & 50 Pembroke Court, Chatham, Kent

Properties valued between £15 million and £20 million

• B&Q, Queens Road, Sheffield

• Parc Tawe, Phase II, Link Road, Swansea

• Metro Building, Salford Quays, Manchester

• Colchester Business Park, The Crescent, Colchester, Essex

• Citylink, Addiscombe Road, Croydon

• Gloucester Retail Park, Eastern Avenue, Gloucester

Properties valued between £10 million and £15 million

• Unit 3220, Magna Park, Lutterworth, Leics.

• Angouleme Way Retail Park, Bury, Greater Manchester

• Lyon Business Park, Barking, Essex

• 180 West George Street, Glasgow

• Grantham Book Services, Trent Road, Grantham, Lincs.

• 401 Grafton Gate East, Milton Keynes, Bucks.

• The Business Centre, Molly Millars Lane, Wokingham, Berks.

• Units 1-13 Dencora Way, Sundon Park, Luton, Beds.

• Datapoint Business Centre, Cody Road, London E16

• Nonsuch Industrial Estate, 1-25 Kiln Lane, Epsom, Surrey

• Vigo 250, Birtley Road, Washington, Tyne and Wear

• 56 Castle Street, 2/12 English Street and 12-21 St Cuthberts Lane,

Carlisle, Cumbria

• Queens House, 19/29 St Vincent Place, Glasgow

• Longcross Court, Newport Road, Cardiff

• Easter Court, Gemini Park, Warrington

• 53/55/57 Broadmead, Bristol

• Western Industrial Estate, Downmill Road, Bracknell, Berks.

• Haynes Way, Swift Valley Industrial Estate, Rugby, Warwickshire

• Scots Corner, High Street/Institute Road, Birmingham

• 78-80 Briggate, Leeds

• Strathmore Hotel, Arndale Centre, Luton, Beds.

• L’Avenir, Opladen Way, Westwick, Bracknell, Berks.

• 800 Pavilion Drive, Northampton Business Park, Northampton

• Atlas House, Third Avenue, Globe Park, Marlow, Bucks.

Properties valued under £5 million

• Sentinel House, Ancells Business Park, Fleet, Hants.

• 17/19 Fishergate, Preston, Lancs.

• Merchants House, Crook Street, Chester

• Units 1-3, 18/28 Victoria Lane, Huddersfield, West Yorks.

• 72/78 Murraygate, Dundee

• 7 & 9 Warren Street, Stockport

• Waterside Park, Longshot Lane, Bracknell, Berks.

• Abbey Business Park, Mill Road, Newtownabbey, Belfast

• Magnet Trade Centre, Winnersh, Reading

• Waterside House, Kirkstall Road, Leeds

• 6/12 Parliament Row, Hanley, Staffs.

• Marshall Building,122-124 Donegall Street, Belfast

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Stock code: PCTNOther InformationStock code: PCTNFive year financial summary

Income Statements
Net property income
Management expenses
Other operating expenses
Exceptional costs

Net finance costs
Income profit before tax
Tax
Income profit
Property gains and losses
Financing gains and losses
Profit/loss after tax
Dividends paid

Balance Sheets
Investment properties
Borrowings
Other assets and liabilities
Net assets

Net asset value per share (pence)
EPRA net asset value per share (pence)
Earnings per share (pence)
Dividends per share (pence)
Dividend cover (%)
Share price (pence)

All figures are in £ million unless otherwise stated.

2017

42.3
(3.6)
(1.4)
(0.2)
37.1
(10.8)
26.3
(0.5)
25.8
17.0
-
42.8
18.0

2017

615.2
(204.6)
31.3
441.9

82
82
7.9
3.3
144

83.8

2016

2015

2014

2013

35.9
(2.9)
(1.5)
-
31.5
(11.4)
20.1
(0.2)
19.9
44.9
-
64.8
17.8

30.3
(2.6)
(1.2)
-
26.5
(10.9)
15.6
(0.3)
15.3
53.6
-
68.9
13.1

27.7
(2.1)
(1.1)
-
24.5
(10.9)
13.6
(0.4)
13.2
24.1
-
37.3
10.7

29.8
(1.7)
(1.4)
(0.2)
26.5
(11.5)
15.0
(0.3)
14.7
(30.9)
1.6
(14.6)
12.1

2016

2015

2014

2013

646.0
(249.5)
20.6
417.1

77
77
12.0
3.3
112

69.8

532.9
(232.8)
69.9
370.0

69
69
15.4
3.0
117

71.8

417.6
(234.0)
30.5
214.1

56
56
10.4
3.0
124

56.8

382.7
(233.4)
20.1
169.4

49
49
(4.2)
3.5
122

40.0

106

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Picton Property Income LimitedAnnual Report 2017www.picton.co.ukPicton Property Income LimitedAnnual Report 2017www.picton.co.ukGlossary

AIC

AIFMD

Association of Investment Companies.

Alternative Investment Fund Managers Directive.

Annual Rental Income

Cash rents passing at the Balance Sheet date.

CIPS

Contracted rent

Chartered Institute of Purchasing and Supply.

The contracted gross rent receivable which becomes payable after all the occupier incentives in the letting
have expired.

DTR

Disclosure and Transparency Rules, issued by the United Kingdom Listing Authority.

Dividend cover

Income profit after tax divided by dividends paid.

Earnings per share (EPS)

Profit for the period attributable to equity shareholders divided by the average number of shares in issue
during the period.

EPC

EPRA

Energy performance certificate.

European Public Real Estate Association, the industry body representing listed companies in the real estate sector.

Estimated rental value (ERV)

The external valuers’ opinion as to the open market rent which, on the date of the valuation, could reasonably
be expected to be obtained on a new letting or rent review of a property.

Fair value

The estimated amount for which a property should exchange on the valuation date between a willing buyer
and a willing seller in an arm’s length transaction after the proper marketing and where parties had each acted
knowledgeably, prudently and without compulsion.

Fair value movement

An accounting adjustment to change the book value of an asset or liability to its fair value.

FRI lease

Group

IASB

IFRS

A lease which imposes full repairing and insuring obligations on the tenant, relieving the landlord from all liability
for the cost of insurance and repairs.

Picton Property Income Limited and its subsidiaries.

International Accounting Standards Board.

International Financial Reporting Standards.

Property Income return

The ungeared income return of the portfolio as calculated by MSCI IPD.

Initial yield

Lease incentives

MSCI IPD

NAV

Annual cash rents receivable (net of head rents and the cost of vacancy), as a percentage of gross property
value, as provided by the Group’s external valuers. Rents receivable following the expiry of rent-free periods
are not included.

Incentives offered to occupiers to enter into a lease. Typically this will be an initial rent-free period, or a cash
contribution to fit-out. Under accounting rules the value of the lease incentives is amortised through the
Income Statement on a straight-line basis until the lease expiry.

MSCI Investment Property Databank. An organisation supplying independent market indices and portfolio
benchmarks to the property industry.

Net Asset Value is the equity attributable to shareholders calculated under IFRS.

Ongoing Charges ratio

Total operating expenses, excluding one-off costs, as a percentage of the average net asset value over the
period, as defined by the AIC.

Over-rented

PMI

Rack-rented

Space where the passing rent is above the ERV.

Purchasing Managers Indexes.

Space where the passing rent is the same as the ERV.

Reversionary yield

The estimated rental value as a percentage of the gross property value.

Total property return

Combined ungeared income and capital return from the property portfolio.

Total return

Measures the performance of the Group based on its published results.

Total shareholder return

Measures the change in share price over the year plus dividends paid.

Weighted average
debt maturity

Each tranche of Group debt is multiplied by the remaining period to its maturity and the result is divided by
total Group debt in issue at the period end.

Weighted average interest rate

The Group loan interest per annum at the period end, divided by total Group debt in issue at the period end.

Weighted average lease term The average lease term remaining to first break, or expiry, across the portfolio weighted by contracted rental income.

ZDP

Zero dividend preference share.

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Stock code: PCTNOther InformationStock code: PCTNPicton Property Income Limited
Annual Report 2017

www.picton.co.uk

Shareholder information

Media
Tavistock Communications
1 Cornhill
London
EC3V 3ND

T: 020 7920 3150
E: jcarey@tavistock.co.uk

Solicitors
As to English law
Norton Rose Fulbright LLP
3 More London Riverside
London
SE1 2AQ

As to English property law
DLA Piper UK LLP
India Buildings
Water Street
Liverpool
L2 0NH

As to Guernsey law
Carey Olsen
PO Box 98
Carey House
Les Banques
St Peter Port
Guernsey
GY1 4BZ

Property valuers
CBRE Limited
Henrietta House
Henrietta Place
London
W1G 0NB

Tax adviser
Deloitte LLP
Hill House
1 Little New Street
London
EC4A 3TR

Directors
Nicholas Thompson (Chairman)
Vic Holmes
Roger Lewis
Michael Morris
Robert Sinclair

Registered office
PO Box 255
Trafalgar Court
Les Banques
St Peter Port
Guernsey
GY1 3QL
Registered Number: 43673

Administrator and Secretary
Northern Trust International Fund Administration
Services (Guernsey) Limited
PO Box 255, Trafalgar Court
Les Banques
St Peter Port
Guernsey
GY1 3QL

T: 01481 745001
E: team_picton@ntrs.com

Investment manager
Picton Capital Limited
28 Austin Friars
London
EC2N 2QQ

T: 020 7628 4800
E: enquiries@picton.co.uk

Registrar
Computershare Investor Services (Guernsey) Limited
NatWest House
Le Truchot
St Peter Port
Guernsey
GY1 1WD

Corporate brokers
JP Morgan Securities Limited
25 Bank Street
London
E14 5JP

Stifel Nicolaus Europe Limited
150 Cheapside
London
EC2V 6ET

Auditor
KPMG Channel Islands Limited
Glategny Court
Glategny Esplanade
St Peter Port
Guernsey
GY1 1WR

108

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Picton Property Income LimitedAnnual Report 2017www.picton.co.ukPicton Property Income LimitedAnnual Report 2017www.picton.co.ukOther Information

Financial calendar

Annual Results announced

Annual Results posted to shareholders

7 June 2017

25 July 2017

June 2017 NAV announcement

July 2017 (provisional)

Annual General Meeting

November 2017 (provisional)

2017 Half Year Results to be announced

November 2017 (provisional)

December 2017 NAV announcement

January 2018 (provisional)

Dividend Payment Dates

August/November/February/May

Shareholder enquiries
All enquiries relating to holdings in Picton Property Income Limited,
including notification of change of address, queries regarding dividend/
interest payments or the loss of a certificate, should be addressed to the
Company’s registrars.

Website
The Company has a corporate website which holds, amongst other
information, a copy of our latest annual report and accounts, a list of
properties held by the Group and copies of all press announcements
released over the last five years.

You can see more about us at
www.picton.co.uk

25189.02 – 17 July 2017 12:13 PM – Proof 2

Stock code: PCTNGovernanceStock code: PCTNStock code: PCTNPicton property income limited
Trafalgar Court
Les Banques
St Peter Port
Guernsey
GY1 3QL

T: 01481 745001
www.picton.co.uk

25189.02 – 17 July 2017 12:13 PM – Proof 2