Picton property income limited
Annual Report 2018
In this year’s report
Business Overview
2018 Highlights ––––––––––––––––––––––––––––– 02
Picton at a Glance ––––––––––––––––––––––––––– 04
Chairman’s Statement –––––––––––––––––––––––– 06
Strategic Report
Our Marketplace –––––––––––––––––––––––––––––12
Our Business Model ––––––––––––––––––––––––––15
Our Investment Strategy ––––––––––––––––––––––16
Working with Our Occupiers ––––––––––––––––––18
Investing in Our Properties ––––––––––––––––––––20
Repositioning the Portfolio –––––––––––––––––––––22
Chief Executive’s Review ––––––––––––––––––––––24
Changes to Our Business Model ––––––––––––––––27
Q&A – REIT Conversion –––––––––––––––––––––––28
Key Performance Indicators –––––––––––––––––––30
Investment Manager’s Report ––––––––––––––––––32
Financial Review –––––––––––––––––––––––––––––44
Managing Risk ––––––––––––––––––––––––––––––47
Being Responsible –––––––––––––––––––––––––––50
Governance
Chairman’s Introduction –––––––––––––––––––––– 56
Board of Directors –––––––––––––––––––––––––– 58
Our Team –––––––––––––––––––––––––––––––––– 60
Corporate Governance Report –––––––––––––––– 62
Nominations Committee Report ––––––––––––––– 64
Audit and Risk Committee Report ––––––––––––– 66
Property Valuation Committee Report –––––––––– 68
Remuneration Report ––––––––––––––––––––––– 70
Directors’ Report ––––––––––––––––––––––––––– 82
Financial Statements
Independent Auditor’s Report ––––––––––––––––– 86
Consolidated Statement
of Comprehensive Income ––––––––––––––––––– 90
Consolidated Statement
of Changes in Equity –––––––––––––––––––––––– 91
Consolidated Balance Sheet –––––––––––––––––– 92
Consolidated Statement of Cash Flows –––––––– 93
Notes to the Consolidated Financial Statements – 94
Additional Information
EPRA Disclosures ––––––––––––––––––––––––– 116
Supplementary Disclosures –––––––––––––––––– 127
Property Portfolio –––––––––––––––––––––––––– 128
Five Year Financial Summary –––––––––––––––– 129
Glossary ––––––––––––––––––––––––––––––––– 130
Financial Calendar ––––––––––––––––––––––––– 131
Shareholder Information –––––––––––––––––––– 132
Make sure you read this
page 04
Picton at a Glance
IN D U
%
9
.
2
2
E
R
U
R
T
S
I A L 41.2%
O
F
FIC
ES 35.9%
S
I
E
RETAIL & L
page 06
Chairman’s Statement
page 16
Our Investment Strategy in Action
page 28
Q&A - REIT Conversion
Announcement of
2018 annual results
Annual General
Meeting
Issue 2018 Annual
Report and circular
to shareholders
Extraordinary
General Meeting to
approve proposed
changes
Company moves
tax residency to the
UK and applies for
REIT status
Company enters
REIT regime
June
July
August
September
October
November
December
REIT
CONVERSION
page 32
Investment Manager’s Report
BELKIN LIMITED
3.8% PUBLIC SECTOR
3.6%
DHL SUPPLY CHAIN
LIMITED
3.4%
B&Q PLC
2.8%
SNORKEL
EUROPE LIMITED
2.5%
PORTAL
CHATHAM
LLP
2.0%
THE RANDOM
HOUSE GROUP
LIMITED
EDWARD
STANFORD
LIMITED
2.2%
1.8%
TK MAXX
1.6%
XMA LIMITED
1.5%
Welcome to
Who we are
Picton Property Income Limited is an award winning
investment company which invests in commercial
property throughout the United Kingdom.
Our diversified property portfolio currently consists
of 51 assets and is invested in the industrial, office,
retail and leisure sectors. These assets generate a
rental income stream from over 360 occupiers across
a wide range of businesses.
RENTAL INCOME
41.4m
£
OCCUPIERS
360
OCCUPANCY
96%
Occupier focused
What makes us differentWe are internally managed, unlike many traditional investment companies. We have an experienced, aligned and dedicated team who are focused entirely on Picton and its success.Through growth we are also able to achieve economies of scale, which in turn will enhance returns to our shareholders. Our 2018 annual report
PORTFOLIO VALUE
683.8m
£
Why invest
NUMBER OF ASSETS
51
1 We offer diversified exposure to the UK
commercial property market.
2 We actively manage our assets with an
occupier focused and opportunity led approach.
3 We operate a covered dividend policy,
allowing us to invest back into the portfolio.
4 We have established a consistent track
record of outperformance.
5 Our management team is aligned
with shareholders’ interests.
AREA
4.5m
square feet
Opportunity led
What we doWe are total return driven with an income bias 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 and this is primarily achieved by providing space that meets occupiers’ requirements.Through our occupier focused, opportunity led approach to asset management we aim to be one of the consistently best performing diversified UK focused property companies listed on the main market of the London Stock Exchange.
2018 highlights
NAV PER SHARE
PROFIT AFTER TAX
90p
77
82
90
2016 2017 2018
TOTAL RETURN
14.9%
17.9
14.9
10.4
2016 2017 2018
STRONG FINANCIAL RESULTS
■ Total profit after tax increased
by 50% to £64.2 million
■ Net assets increased to
£487.4 million, from £441.9 million
■ Increase in EPRA NAV per share
of 10.5%, to 90 pence per share
■ Total return of 14.9%
£64.2m
64.8
64.2
42.8
2016 2017 2018
LOWER FINANCING COSTS
AND GREATER FLEXIBILITY
■ Annual financing costs reduced
by £1.1 million
■ Extended £24 million revolving
credit facility until June 2021
■ Loan to value ratio reduced to
26.7% from 27.4%
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 recognises
the key performance measures, as
detailed opposite. Further disclosures
and supporting calculations, including
sustainability measures, can be found
on pages 116 to 126. We have also
highlighted other specific EPRA
metrics throughout the Report.
02
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 companies we report the EPRA
performance measures, as stated opposite. We have reported these for a number
of years in order to provide a consistent comparison with similar companies. In the
Other Information section of this Report 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.
Picton Property Income Limited Annual Report 2018 *144% including one-off income
DIVIDEND COVER
122%
112
115*
122
NET ASSETS
2016 2017 2018
GROWING OCCUPANCY
AND PORTFOLIO
OUTPERFORMANCE
■ Total property return of 13.0%,
outperforming MSCI IPD Quarterly
Benchmark of 10.1%
■ Total property return and income
return outperformance ahead of
MSCI IPD over 1, 3, 5 and 10 years
■ Increased occupancy to 96%,
ahead of the MSCI IPD Quarterly
Benchmark of 93%
TOTAL SHAREHOLDER
RETURN
4.8%
£487.4m
417.1 441.9
487.4
2016 2017 2018
PORTFOLIO ACTIVITY
■ Like-for-like valuation increase
of 6.5%
■ Like-for-like passing rent
increased by 3.9%
■ Like-for-like ERV growth of 2.4%
with total portfolio ERV of
£47.9 million
■ One property acquisition of
£23.2 million and three non-core
disposals for £10.4 million
■ Invested £3.6 million into
refurbishment projects to
enhance the portfolio
25.6
PROPERTY VALUATION
1.9
4.8
2016 2017 2018
£683.8m
DIVIDENDS PER SHARE
3.4p
3.3
3.3
3.4
2016 2017 2018
INCREASE IN EARNINGS
AND DIVIDENDS
■ Increase in earnings per share to
11.9p from 7.9p
■ Increase in EPRA earnings per
share of 10.1% to 4.2p from 3.8p
■ Dividend increase of 3% in
February 2018 to 3.5 pence
per share per annum
■ Dividends paid of £18.5 million
with dividend cover of 122%
EARNINGS PER SHARE
11.9p
12.0
11.9
7.9
2016 2017 2018
EPRA NAV
PER SHARE
EPRA NNNAV
PER SHARE
EPRA EARNINGS
PER SHARE
90p
87p
4.2p
2017 82p
2016 77p
2017 77p
2016 73p
2017 3.8p
2016 3.7p
654.6 624.4 683.8
2016 2017 2018
EPRA EARNINGS
EPRA COST
RATIO1
EPRA COST
RATIO2
EPRA NET INITIAL
YIELD
EPRA ‘TOPPED-UP’
NET INITIAL YIELD
EPRA VACANCY
RATE
£22.6m
23.7%
19.2%
5.5%
5.9%
4.2%
2017 £20.6m
2016 £19.9m
2017 26.1%
2016 22.8%
2017 21.1%
2016 18.9%
2017 5.9%
2016 5.6%
2017 6.3%
2016 6.2%
2017 5.8%
2016 3.9%
1 Including direct vacancy costs
2 Excluding direct vacancy costs
03
Business Overview
Picton at a glance
Portfolio allocation
We own a geographically diverse portfolio of assets located
across the UK, but with a bias towards the South East.
IN D U
%
9
.
2
2
E
R
U
R
T
S
I A L 41.2%
O
F
FIC
ES 35.9%
S
I
E
RETAIL & L
Industrial 41.2%
South East
Rest of UK
Offices 35.9%
South East
Rest of UK
City & West End
Retail & Leisure 22.9%
Retail Warehouse
High Street-Rest of UK
High Street-South East
Leisure
%
28.6
12.6
19.4
12.4
4.1
9.5
6.1
5.3
2.0
04
Picton Property Income Limited Annual Report 2018
Corporate statistics
As at 31 March 2018
NET ASSETS
MARKET
CAPITALISATION
DIVIDEND YIELD
LOAN TO VALUE
BORROWINGS
ONGOING
CHARGES
£487m £454m
4.2%
27%
£214m
1.1%
Our top ten occupiers
The largest occupiers, based as a percentage of contracted
rent, as at 31 March 2018, are as follows:
BELKIN LIMITED
3.8% PUBLIC SECTOR
3.6%
DHL SUPPLY CHAIN
LIMITED
3.4%
B&Q PLC
2.8%
SNORKEL
EUROPE LIMITED
2.5%
PORTAL
CHATHAM LLP
TK MAXX
2.0%
1.6%
THE RANDOM
HOUSE GROUP
LIMITED
EDWARD
STANFORD
LIMITED
2.2%
1.8%
XMA LIMITED
1.5%
Portfolio statistics
As at 31 March 2018
OCCUPANCY
96%
NUMBER
OF ASSETS
51
AREA
NET INITIAL YIELD
REVERSIONARY
YIELD
VALUE
4.5m
square feet
5.5% 6.6%
683.8m
£
05
Business Overview Chairman’s statement
Nicholas thompson
Our latest financial results to
March 2018 show that Picton
has had another successful year.
Net assets have grown by over 10% to
£487 million and profit after tax compared
to the previous year increased 50% to
£64 million. The Group’s net asset value
per share was 90 pence at the year end
and earnings per share rose to 12 pence.
These results reflect successes at the
portfolio level, combined with the positive
impact of gearing. We have continued
to deliver against our strategy, grow our
dividend and performed ahead of the
recognised industry benchmark indices.
Strategy
Income is the key component of the
property sector’s total return. As an
investment company, our investment
objective is to deliver an attractive level
of income, with the potential for capital
growth. Over the last 12 months we have
achieved this with a focus on increasing
occupancy, growing income and improving
our asset base.
We have made progress on the
preparatory work ahead of our conversion
to a UK Real Estate Investment Trust
(REIT) and have provided more detail
about this further on. This change of status
and the associated efficiencies it brings
emphasises our commitment to being
one of the consistently best performing
diversified UK focused property companies
listed on the main market of the London
Stock Exchange.
“
We have continued to deliver
against our strategy, grow our
dividend and performed ahead
of the recognised industry
benchmark indices.
“
06
Picton Property Income Limited Annual Report 2018 Capital Structure
Our current loan to value ratio is 27%,
a slightly lower level to last year, despite
using some of our revolving credit facility
to purchase the new Bristol asset.
We are focused on continuing to
strengthen the Balance Sheet and our
intention is to reduce gearing further over
the next 12 months through selective
asset sales.
Property Portfolio
We have seen good valuation growth
across the portfolio, primarily in the industrial
and office sectors. The portfolio value has
increased by 10% to £684 million, more
detail on which is provided in the Investment
Manager’s Report. We have only made a
few selective disposals and one acquisition
over the year but these have contributed
positively to performance.
Equally pleasing is that we were able to
increase occupancy in our portfolio to
96%, up from 94% a year ago, and also
increase the average lot size which now
stands at £13.4 million, up by 14% over
the period.
Performance
Over the financial year, the Company
delivered a total return of 14.9%, which
is considerably higher than the preceding
year and reflects improved conditions
within the property market.
At a portfolio level, we continue to
outperform the MSCI IPD Quarterly
Benchmark. Our track record of
outperformance now extends over one,
three, five and ten years. In April, MSCI
IPD introduced an award for Best Listed
Fund which Picton won for achieving
the best relative ungeared performance
against its Benchmark.
Furthermore, in recognition of
the Company’s track record and
performance, we are delighted to have
received awards from Citywire, Money
Observer, FT Advisor, Investment Week,
and Moneywise over the course of the
year. Additionally, EPRA (the European
Public Real Estate Association) awarded
Picton with Gold and Silver Awards
for last year’s Annual Report within the
financial and sustainability reporting
categories respectively.
Our total shareholder return was more
muted at 4.8%, which was partly a
reflection of the strong return of over
25% in the preceding financial year. This
is a feature of listed property companies,
where it is not uncommon over the short-
term for share price and net asset value to
be uncorrelated.
TOTAL PROFIT
£64.2m
NET ASSETS
£487.4m
NAV PER SHARE
90p
EARNINGS
PER SHARE
12p
07
Business Overview REIT Conversion
At the time of our last Half Year Report,
I advised that we were awaiting an
announcement of new legislation in the
UK regarding the taxation of non-resident
landlord companies such as Picton. Six
months later and there are now two new
pieces of legislation being introduced
that will impact Picton. The first is that
non-resident landlord companies will be
brought into the scope of UK corporation
tax, from 1 April 2020. The result of this
is that we would expect our liability to UK
tax to increase significantly from that date.
Additionally, from 1 April 2019, capital
gains made by a non-resident on the
disposal of commercial property will be
subject to UK tax.
Therefore, any disposals the Company
makes from its portfolio after that date
will be taxed, consequently reducing
shareholder returns. I have stated
previously that we were preparing plans
to convert to a UK REIT in the event of tax
changes adversely affecting Picton, and
these have now been finalised. We will
shortly be issuing a circular to shareholders
with our detailed proposals, including a
number of resolutions to be voted on at a
General Meeting in July.
In summary, we wish to enter the REIT
regime on 1 October this year, after
becoming tax resident in the UK, which
is a condition of entry. There will be some
changes proposed to the articles of the
Company to facilitate the REIT conversion.
At the same time we are proposing to
transfer our technical listing status from
an investment company to a commercial
company, which we believe is more
appropriate for Picton and is consistent
with the vast majority of internally
managed UK REITs. As a result there will
be changes to the way the Company is
managed once we are based in the UK,
including having a business strategy rather
than an investment objective. We will no
longer have an investment management
subsidiary but will be managed through
a traditional board structure with an
executive function. However, our
investment approach and portfolio strategy
will remain very similar.
We have set out, separately within this
report, a ‘Question and Answer’ section
on the proposed changes, and within the
Governance section there is also more
detail regarding management changes and
the role of the Board. We believe that these
changes represent an important step in the
evolution of the Company and recommend
their approval by shareholders.
Dividends
I am pleased to report that in each of the
last three financial years we have increased
our dividend, most recently by 3% in
February 2018. During this year we paid
dividends to shareholders of £18.5 million,
an increase of 3% compared to last year,
with dividend cover of 122%.
We have continued to maintain a covered
dividend throughout the year, in line with
our strategy and enabling reinvestment
back into the portfolio. Once we are in
the UK REIT regime, we will review our
dividend level in light of prevailing market
conditions.
“
I am pleased to report that
in each of the last three
financial years we have
increased our dividend,
most recently by 3%.
“
DIVIDEND COVER
122%
DIVIDENDS TO
SHAREHOLDERS
£18.5m
08
Picton Property Income Limited Annual Report 2018 Chairman’s statement continued
Governance and
Board Composition
The Board takes matters of governance
extremely seriously and has provided more
detail in the Governance section.
We believe investors benefit from the
rigour applied to listed companies
generally and the governance and
reporting structures we have developed
at Picton.
Outlook
We maintain a positive outlook for a number
of reasons. From a top-down perspective,
the portfolio remains well positioned with
its overweight industrial, underweight
retail bias. Our ability to invest across
geographies and sectors within the UK and
reshape the portfolio according to market
conditions is beneficial and, as the results
have shown, can deliver attractive returns.
Looking at the portfolio in detail,
occupancy is at a high level and we have
a number of exciting initiatives planned
that should further enhance our asset base
and grow income, capturing the inherent
reversionary potential.
Subject to shareholder approval, we will
be converting to a UK REIT alongside
which we will be simplifying our corporate
structure, with a view to improving
efficiency and profitability.
Notwithstanding the risks associated with
current economic conditions and the Brexit
transition in particular, we believe these are
exciting times for the Company. We want
to build on our track record and continue
to deliver efficiencies for shareholders
as we grow. We have a clear business
strategy, and we are confident that this
will enable Picton to flourish within the UK
REIT regime.
Nicholas Thompson
Chairman
4 June 2018
This year we will be bringing our Annual
General Meeting forward to September.
We expect this to be the last one held in
Guernsey. As a UK REIT, General Meetings
will be held in the UK, strengthening
the link between the Company and its
shareholders.
During the year Mark Batten was
appointed as a non-executive director and
will become Chair of the Audit and Risk
Committee in July.
Robert Sinclair, the current Chair of this
Committee, will, as previously announced,
retire in September. On behalf of all his
colleagues here at Picton I would like to
thank him for his dedicated service to the
Company since its launch in 2005.
As part of our transition to a UK REIT,
Vic Holmes will also retire from the Board in
September this year. Vic, who is currently
Chair of the Remuneration Committee, has
been with Picton since 2013 and, equally,
I would like to thank him for his service
and contribution during his tenure. We
are currently in the process of selecting
a suitable replacement for this role and
expect to have made an appointment
within the next few months.
Also, as we bring management and control
to the UK, Michael Morris, who is currently
a non-executive director, will become
Chief Executive, with effect from 1 October
2018. At the same time, Andrew Dewhirst
will join the Board as Finance Director.
09
Business Overview
Parkbury Industrial Estate, Radlett
Strategic report
Our Marketplace
Our Business Model
Our Investment Strategy
Working with Our Occupiers
Investing in Our Properties
Repositioning the Portfolio
Chief Executive’s Review
Changes to Our Business Model
Q&A – REIT Conversion
Key Performance Indicators
Investment Manager’s Report
Financial Review
Managing Risk
Being Responsible
12
15
16
18
20
22
24
27
28
30
32
44
47
50
Our marketplace
Economic backdrop
The UK economy grew by
1.8% in 2017. That was
considerably better than the
consensus forecast, made
at the beginning of last year,
that economic growth would
slow to just 1.2%.
On the face of it, last year’s growth
performance would seem to suggest that
the fears about the adverse economic
impact of the uncertainty generated by the
Brexit negotiations have been overstated.
Nevertheless, provisional estimates show
that the recovery may have stalled –
economic output only rose by 0.1% during
the first quarter of 2018, compared to
quarterly growth of 0.4% and 0.5% in the
two previous quarters. As a result, fears
about the durability of the recovery have
resurfaced in recent weeks.
However, there is good reason to believe
that March’s heavy snowfall exaggerated
any underlying softness in activity in
the early stages of the year. The recent
weakness was concentrated in the
construction sector where output fell
by more than 3% during the quarter. By
contrast, the 0.3% quarter-on-quarter
rise in services output was only marginally
smaller than in the previous quarter, while
at 0.7% quarter-on-quarter, growth in
industrial production was stronger than the
average 0.5% quarter-on-quarter increase
seen last year. Experience suggests that
output lost to adverse weather tends to
be made up in subsequent months
and quarters.
In any case, the news flow has not all
been in one direction. Another drag on
the economy over the past year has been
the squeeze on households’ real wages.
Yet there is clear evidence that inflation is
easing, as the upwards pressure from the
jump in import prices, triggered by the fall
in the pound following the EU referendum,
fades. Headline CPI inflation dropped to
2.5% in March, down from 3% as recently
as January. Importantly, that took inflation
back below the rate of average earnings
growth, which stood at 2.8% on the latest
figures. That suggests a recovery in real
wages is now on the cards and that the
disappointing GDP data for the first quarter
has not set the tone for the remainder of
the year.
So too do the latest figures from the labour
market. The employment rate has climbed
to the highest levels on record in the early
stages of 2018. With the number of unfilled
job vacancies showing few signs of easing,
and the unemployment rate at just 4.2%
in February, reports of skills shortages
are growing. That should ensure that the
recent strengthening in average earnings
growth is sustained, supporting consumer
spending. It should also give companies
a further incentive to invest, providing
another boost to economic growth.
Admittedly, prior to the release of the weak
GDP data for the first quarter, another rate
rise in May had seemed almost certain. But
in the event, the MPC chose to keep rates
on hold, preferring to wait for confirmation
that the slowdown was mainly weather-
driven before tightening monetary policy
further. But it still seems to be a question
of when rather than whether interest rates
will rise. For now, however, risk-free rates
continue to support property valuations –
for the past four months 10-year gilt yields
have hovered in a narrow range of 1.4% to
1.6% but driven lower by concerns about
the political situation in Italy and Spain,
they slipped back below 1.3% in the final
week of May.
12
Picton Property Income Limited Annual Report 2018 On a quarter-on-quarter basis, both the
MSCI IPD Monthly and Quarterly Indices
report that the pace of rental and capital
value growth has eased over the first three
months of 2018. Consistent with that,
investment market activity has got off to
a weak start. In the first three months
of 2018, properties with a combined
value of £11.7 billion changed hands, a
figure that was 16% lower than the £13.9
billion total reported in the first quarter of
2017. That said, the drop in the number
of deals has been even larger than the
drop in value terms. There is no evidence
that this weakness has been driven
disproportionately by overseas investors.
Taken together, these factors tend to
suggest that a lack of opportunity, rather
than a shift in investor sentiment, is behind
the transactional slowdown.
Moreover, retail aside, the market is
characterised by fairly low levels of vacancy.
Both office and industrial development
pipelines are also modest. With no realistic
prospect of an imminent recession, and
interest rate rises set to be slow and
moderate, it is no surprise that the IPF
consensus predicts that capital values will
mark time over the next five years.
UK property market
According to the MSCI IPD Quarterly Index,
UK commercial property delivered a total
return of 10% in the year to March 2018.
That was more than double the 4.6% return
seen in the preceding year when the market
was still shaking off the drop in values that
followed the UK’s surprise vote for Brexit in
June 2016. The improvement in returns was
delivered by stronger capital value growth.
After falling by 0.3% in the four quarters to
March 2017, the past year has seen values
rise by 5%, driven by the combination of
a 2% uplift in rental values and a drop in
property yields of just under 30 basis points.
At 4.9% and 4.8% respectively, there was
little change in the income return.
By sector, industrial property was again
the star performer. Over the past year,
industrial capital values have risen by
14.4%, helping to generate a total return of
19.9%. Hotels, where values rose by 9.2%
and total returns were 14.1%, ranked next.
Meanwhile, despite a marked slowdown
in the key central London markets, office
capital values rose by 3.4% and total
returns were 7.7%. Offices, therefore,
continued to outperform the retail sector,
where values rose by just 1% and total
returns were 6.2%.
At 2%, rental value growth at the All-
Property level was almost identical to
the 1.9% growth recorded this time last
year. But rental value growth by sector
has diverged over the past year. Industrial
rental values led the way, rising by 5.3%.
That compares to growth of 3.9% year-
on-year in March 2017. The pace of
rental value growth in the hotel sector
also improved to 2.2%, double the rate
reported this time last year. Meanwhile, at
just 0.9%, rental value growth in the retail
sector was unchanged. But it slowed, from
1.9% to 1.1%, in the office sector.
MSCI IPD
ALL PROPERTY
TOTAL RETURN
10.0%
MSCI IPD CAPITAL
VALUE GROWTH
5.0%
MSCI IPD RENTAL
GROWTH
2.0%
MSCI IPD
OCCUPANCY
92.7%
Source: MSCI IPD Quarterly Index
13
Strategic Report Industrial market
trends
The 19.9% total return delivered by
industrial property in the year to March
2018 was heavily reliant on a 14.4% rise
in capital values. Of that, more than
9 percentage points was accounted for by
falling yields. While that could be seen as
a sign of an overheating market, industrial
fundamentals appear solid.
For a start, a healthy global economy and
an exchange rate that is more competitive
than it has been for some time, have
provided a strong platform for export-
oriented manufacturing firms. In addition,
the ever growing penetration of online
activity and the growth of cloud-based
computing has generated further demand
for logistics space and data centres.
That demand is also coming up against
limited supply. According to survey data from
the RICS, the industrial sector is the only
segment of the market where development
starts are rising. Yet the same survey reports
that availability continues to deteriorate at a
steady pace, implying that developers are
struggling to keep up with demand.
The net result is that rental value growth in
the industrial sector has reached 5.3%, a
17-year high, and that has given investors
the confidence to bid down yields. Of course,
no market can deliver 20% annual returns
for long – at least not on a sustainable basis.
But there are grounds for thinking that the
recent strength of the industrial sector is
part of a structural repricing, rather than an
unsustainable boom.
Office market trends
A reversal of the post-referendum
dip in capital values also explains the
strengthening in office total returns, which
rose from 2.5% in the year to March 2017,
to 7.7% in March 2018. Capital value
growth was between 3% and 4% in both
the City and the West End, as well as in
the South East and the remaining regional
markets. But the superior income return for
Rest of UK offices helped them to deliver
the strongest total returns of 9.1%.
West End offices were weakest with
a return of 6.5%.
Occupier market conditions are mixed. For
example, take-up in central London has been
patchy but, viewed on a 12-month moving-
average basis, was 15% higher than a
15-year average in the first quarter.
With the exception of the South East, where
there has been a marked softening, take-up in
the main regional city markets has been solid.
Agents also report that development pipelines
in the nine largest regional city markets are
typically equivalent to one year of take-up
or less. Meanwhile, vacancy rates in both
London and the main South East markets
are below the levels that have signalled rental
correction in the past.
Even so, the gains already seen mean that
rental values in London and the South
East are starting to look expensive, which
may explain why rental growth in central
London has stalled over the past year.
By contrast, there are few grounds to
believe that regional office rental values are
approaching a ceiling.
Retail market trends
At 6.2%, retail total returns in the year to
March 2018 were a distinct improvement
on the 2.8% return seen in the year to
March 2017. That was driven by a stronger
performance from capital values. But at
just 1% and 0.9% respectively, capital
value and rental value growth were both
still relatively subdued.
Admittedly the retail market is heavily
polarised. That can be seen from the fact
that MSCI IPD reported that 11.9% of retail
units were vacant in the first quarter, but
that only 4.1% of potential rent was lost
to vacancy, implying that demand at the
top end of the market is comparatively
healthy. Similarly, central London shops
delivered a return of 12% over the past year,
supported by an 8.5% rise in capital values.
By contrast, shopping centres, the weakest
market segment, suffered a 3.4% fall in
values and returned just 1.2%.
There has been little good news for the
retail sector since the start of the year and
retail sales volumes contracted by 0.4%
quarter-on-quarter. Several high profile
names have ceased trading, others have
announced restructurings or are rumoured
to be considering Company Voluntary
Agreements (CVAs) to reduce their rent
bills. That said, the drop in inflation and the
recovery in real incomes that now appears
to be underway, should provide some relief
for the sector over the remainder of this
year and next. But without a strong and
sustained rebound in occupier demand, the
overhang of surplus space is likely to limit
the upside for retail returns.
INDUSTRIAL
TOTAL RETURN
19.9%
OFFICES
TOTAL RETURN
7.7%
RETAIL
TOTAL RETURN
6.2%
14
Picton Property Income Limited Annual Report 2018
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 income and/or value.
Our property portfolio currently consists of
51 assets and is invested in the industrial,
office, retail and leisure sectors. These assets
generate a rental income stream from more
than 360 occupiers across a wide range
of businesses. After deducting operational
and financing costs, the majority of this
income is then paid out as dividends to our
shareholders and the remaining balance is
retained and can be invested back into
the portfolio.
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.
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Depth of Expertise
We have a team that has significant
experience across the UK commercial
property market.
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.
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.
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.
15
Strategic Report
Our investment strategy
As an investment company
our 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
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 and occupier focused in our approach.
We invest across sectors and locations within the UK, understanding and meeting
the needs of new and existing occupiers.
Our five key strategic priorities
Growth of net income
STRATEGIC PRIORITY
PROGRESS THIS YEAR
CONNECTED KPIs
We aim to grow net income.
Our aim is to grow annual income
from new lettings, lease renewals, rent
reviews and re-gears. We also strive
to reduce portfolio voids by attracting
new occupiers, and by investing in
our assets to make them attractive to
occupiers, and help generate rental
growth.
Rental income received over the year
grew by £0.9 million, and with rising
occupancy, property costs reduced by
£1.1 million.
Property Income Return
Total Property Return
Total Return
EPRA Earnings per Share
Working with our occupiers
STRATEGIC PRIORITY
PROGRESS THIS YEAR
CONNECTED KPIs
Our occupancy rate increased from
94% to 96% this year, and remains
ahead of the MSCI IPD Quarterly
Benchmark. We have significantly
improved our retention rate this year,
retaining 63% of income at risk due to
lease expiries or break options.
EPRA Vacancy Rate
Property Income Return
Total Property Return
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 help to maintain occupancy
and improve retention rates.
16
Picton Property Income Limited Annual Report 2018 Operational efficiency
STRATEGIC PRIORITY
PROGRESS THIS YEAR
CONNECTED KPIs
Picton is an internally managed
investment company.
Unlike many investment companies
Picton is internally managed with a
dedicated team. We believe this is an
efficient operating model and allows
Picton to benefit from economies of
scale as it grows.
Management expenses have remained
in line with 2017 at £3.6 million, and
therefore our Ongoing Charges ratio has
fallen, demonstrating the economies of
scale being achieved.
Ongoing Charges
Total Return
Portfolio and asset management
STRATEGIC PRIORITY
PROGRESS THIS YEAR
CONNECTED KPIs
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, while disposing of
assets that we believe will contribute
less in terms of performance.
The capital value of our portfolio has
increased by 6.5% on a like-for-like
basis. The acquisition of Tower Wharf
in Bristol during the year is an example
of where we have been able to enhance
both value and income. Three non-
income producing assets have been
sold during the year.
Total Property Return
Total Return
EPRA Net Asset Value
per Share
Effective use of debt
STRATEGIC PRIORITY
PROGRESS THIS YEAR
CONNECTED KPIs
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 long-term
fixed interest rates in place on our
borrowings. We review our level of
gearing and cost of debt regularly to
adapt to changing market conditions.
Having gearing in place has again
enhanced both the income and total
returns for the year. We intend to
use gearing on a tactical basis, as
evidenced by drawing down on our
revolving credit facility to partly finance
the new acquisition in Bristol.
Loan to Value Ratio
Total Return
17
Strategic Report Working with our occupiers
TOTAL
OCCUPANCY
2012
91%
TOTAL
OCCUPANCY
2018
96%
The key to our success in improving occupancy has been our
ability to attract new occupiers while working with and retaining
existing ones through our occupier focused approach. This
personal hands-on approach and attention to detail is vital
as we manage our assets and improve their attractiveness to
occupiers. We believe this will improve occupier retention and
mitigate risk to our income profile.
GREATER
LONDON
MULTI-LET
INDUSTRIAL
ESTATE
london e16
Datapoint comprises seven
modern warehouse units
totalling 54,900 sq ft, located
approximately six miles east of
central London, within easy
reach of the A11, A12 and
A13 arterial routes.
NUMBER OF
OCCUPIERS
7
INCREASE IN ERV
SIZE
16%
54,900
square
feet
INCREASE
IN VALUE
26%
18
We engaged with an occupier who wanted to leave and
was willing to pay the equivalent of their full liability under
the lease to surrender. The unit was marketed in its existing
condition without any works being undertaken.
The unit was let within four months of completion of the
surrender on a ten year lease at a rent of £0.20 million per
annum, 16% ahead of the March 2017 ERV and 55% ahead
of the previous passing rent.
In another transaction, we removed a December 2019 break
option in return for a one month rent free period, securing
the occupier for a further five years at a passing rent of £0.27
million per annum which is subject to review in 2019.
The property is fully let and the ERV is 16% higher than at
31 March 2017, with the valuation having increased by 26%
over the same period.
Picton Property Income Limited Annual Report 2018 SOUTH EAST
OFFICE PARK
Colchester
Colchester Business Park is
an established business park
constructed in the early 1990s.
It comprises 150,700 sq ft of
office accommodation just to
the south of the A12.
NUMBER OF
OCCUPIERS
21
SIZE
150,700
square
feet
INCREASE IN ERV
We engaged our largest occupier, Essex County Council, in
advance of their September 2018 lease expiry, to establish
terms for a renewal of their lease. Following negotiations,
we completed an early renewal securing a further ten years,
subject to break, at an annual rent of £0.53 million, 34%
ahead of ERV and 26% ahead of the previous passing rent.
During the year we completed four further transactions at a
total annual rent of £0.1 million, 8% ahead of ERV and 19%
ahead of the previous passing rent.
19%
The property is currently 98% let with the ERV 19% higher
than at 31 March 2017, and the valuation having increased
by 25% over the same period.
INCREASE
IN VALUE
25%
19
Strategic Report Investing in our properties
CAPITAL
INVESTMENT 2012
CAPITAL
INVESTMENT 2018
£7m
£28m
We invest back into our properties, ensuring they remain modern
and provide space businesses want to occupy. This will enable us
to grow income, improve occupier retention, mitigate void periods
and enhance value. Our strategy reflects value creation over the
short, medium and long-term.
SOUTH WEST
RETAIL
WAREHOUSE
PARK
Gloucester
Gloucester Retail Park comprises
five units of a combined
113,900 sq ft. The property
is located on the established
retailing area of Eastern Avenue,
approximately two miles from
the city centre.
SIZE
113,900
square
feet
NUMBER OF
OCCUPIERS
INCREASE IN
RENT ROLL
5
15%
INCREASE IN VALUE
10%
20
During the year, we completed the development of a new
drive-through unit which was pre-let to Starbucks on a ten
year lease. The addition of an established national operator
to the park has increased footfall and completed our plans
at the time of purchase to modernise the property and to
improve the aesthetics and end user experience.
At the same time, we resurfaced the car park and improved
the visibility of the retail park with the installation of new
occupier signage.
The property is now fully let and we have increased the
valuation by 10% over the year.
Picton Property Income Limited Annual Report 2018 Wokingham
The Business Centre on Molly
Millar’s Lane comprises of twelve
multi-let warehouse units totalling
100,800 sq ft. The property is
located within easy reach of the
M3 and M4 motorways in an area
with limited supply and good
demographics.
SOUTH EAST
MULTI-LET
INDUSTRIAL
ESTATE
NUMBER OF
OCCUPIERS
12
SIZE
100,800
square
feet
INCREASE IN VALUE
15%
BEFORE
AFTER
We have repositioned this estate, enhancing the external
appearance to give it a more contemporary feel.
Our primary objective was to compete with newer units
elsewhere, increase income and add value by attracting
new occupiers to the estate. The comprehensive external
refurbishment enabled us to let the final vacant unit at a rent
62% ahead of the previous passing rent.
The property is fully let and the estimated rental value (ERV)
is 7% higher than at 31 March 2017 with the valuation
having increased by 15% over the same period.
INCREASE IN ERV
7%
21
Strategic Report
Repositioning the portfolio
PROPERTY
ASSETS 2012
PROPERTY
ASSETS 2018
£414m
£684m
We repositioned and enhanced the portfolio through strategic
acquisitions and disposals improving the income and risk profile.
We sold three non-core and non-income producing assets and
acquired a multi-let regional office building.
Bristol
Tower Wharf is a 70,800 sq ft
Grade A office building with
a BREEAM “Excellent” rating
located in central Bristol within
easy reach of both Temple
Meads station and the main
shopping district.
SOUTH WEST
OFFICE
ACQUISITION
PURCHASE PRICE
£23.2m
INCREASE IN
OCCUPANCY
28%
INCREASE IN
VALUE
15%
22
Having identified the continuing strength of Bristol’s
occupational market, a lack of available Grade A office space
and a constrained development pipeline, we acquired the
property off market in August 2017 for £23.2 million.
On purchase the property was let to four occupiers at an
average passing rent of only £19.65 per sq ft. There was a
further 25,400 sq ft of vacant space, providing the opportunity
to add value through letting and thereby establishing higher
rents within the building.
As anticipated, we quickly completed new leases for a
combined 19,100 sq ft, with the fourth floor let to Integreon,
a business support company, and the fifth floor let to the
advertising agency, McCann.
The lettings were for a combined annual rent of £0.54 million,
equivalent to £28.50 per sq ft, 4% ahead of the ERV on
purchase. Only one small suite now remains available.
As at March 2018 the property has seen a 15% uplift in
valuation since acquisition.
Picton Property Income Limited Annual Report 2018 ASSETS IN 2012
ASSETS IN 2018
62
51
Bracknell
L’Avenir was a 41,300 sq ft
office building located to the
south of Bracknell town centre
with 184 car parking spaces on
a site of 1.87 acres.
SOUTH EAST
OFFICE
DISPOSAL
SIZE
SALE PRICE
PREMIUM TO
VALUATION
41,300
square
feet
£8.1m
48%
In contrast to Bristol, the office market in Bracknell
remains difficult, with limited occupier demand
coupled with an over supply of available and
competing space. It was considered that this
would be further exacerbated going forward by
changes in planning legislation relating to permitted
development, bringing an end to the conversion of
offices to residential in many parts of the town.
As the property was providing a high level of
income from a strong covenant, we waited until
lease expiry before selling the property to a
residential developer, maximising proceeds and
mitigating future capital expenditure.
We disposed of this property in July 2017 for £8.05
million reflecting a 48% premium to the March
2017 valuation.
23
Strategic Report Chief executive’s review
Michael morris
Our focus over the last 12
months has been to ensure we
achieve our strategic priorities
and prepare for the changes
required as Picton becomes
a UK REIT.
By way of background, while the UK
commercial property market has delivered
positive capital growth every month over
the financial year, there has been a very
obvious variation in returns between
sectors. This was particularly evident in the
divergence between the strong industrial
markets, where we are overweight, and the
weaker retail market, where we have an
underweight position.
We have delivered growth in both net asset
value and at a portfolio level, which has
again generated returns ahead of the MSCI
IPD Quarterly Benchmark. The Investment
Manager’s Report provides more detail
on the various property transactions
completed during the year.
In terms of strategic priorities, I have set
out our progress here.
Growing net income
In total, net property income moved from
£42.4 million in 2017 to £38.4 million in
2018. However, in 2017 we received £5.3
million of exceptional income in respect of
our Luton hotel asset. Excluding this, net
property income grew by 3% in 2018.
“
We have delivered growth
in both net asset value and at
a portfolio level, which has
again generated returns
ahead of the MSCI IPD
Quarterly Benchmark.
“
24
Picton Property Income Limited Annual Report 2018 Portfolio and asset management
We continue to have success within the
portfolio, in particular with our industrial
and office assets, which have shown
double digit returns.
Our retail portfolio has not been without
its challenges, and seen modest declines
reflecting the difficulties faced by a number
of high street retailers. As a diversified
investment company this element reflects
the smallest part of our portfolio and our
exposure is significantly lower than the
wider market, further contributing to our
outperformance against the MSCI IPD
Quarterly Benchmark.
Effective use of debt
We have been focused in recent years
on the gradual reduction of debt within
the Group. Clearly there is a risk/return
trade off in this strategy, but we feel it
is appropriate as we move through the
property cycle.
Tactically, we used one of our revolving
credit facilities to partly finance the
acquisition in Bristol and we will continue
to approach the use of debt on this basis
as and when compelling investment
opportunities arise.
Notwithstanding the drawdown under
our revolving credit facility, our loan to
value ratio has reduced slightly to 26.7%
at the year end, which is well within the
operational headroom afforded by our
lending criteria.
Working with our occupiers
This is at the heart of our occupier
focused, opportunity led approach.
We have included several case studies
that demonstrate this approach in action
and again there is more detail within the
Investment Manager’s Report.
Working closely with our occupiers to help
to expand or contract as their businesses
evolve is very much part of what we do
and a reflection of this is the increase in
occupancy that we have achieved during
the year.
We have started to roll out occupier
satisfaction surveys to occupiers at our
multi-let assets.
We have introduced tougher key
performance indicators with our principal
service providers, including our managing
agents, to continue to improve service
delivery. We will make further progress with
this initiative in the coming year.
We also encourage the use of our meeting
rooms for our occupiers based in the
regions who occasionally need meeting
room space in London.
Operational efficiency
Over the year our ongoing charges ratio
reduced by 5%, from 1.2% to 1.1%.
This reflects our focus on operational
efficiency and more importantly the
benefits of our internalised management
model, meaning that our cost base is not
directly linked to the value of the assets.
A significant proportion of the management
cost is performance based and aligned
with shareholders’ interests through both
deferred bonus awards and our Long-term
Incentive Plan. The management costs
this year include a proportion of expected
future awards, arising from outperformance
to date.
TOTAL PROPERTY
RETURN
13%
PROPERTY
INCOME RETURN
6%
EARNINGS
PER SHARE
12p
25
Strategic Report Outlook
While we have to be cognisant of macro
issues, at Picton our focus is very much
at an asset and indeed occupier level.
Enhancing space and improving our
income profile can have a positive impact
and this is where the property market
differs from other asset classes; the ability
to manage our assets.
Our business model has embedded
longevity throughout the various property
cycles as we continually reposition the
portfolio towards better growth assets.
While single digit forecast consensus
returns are more pessimistic, more than
ever the devil is in the detail. The industrial
sector, where we have greatest exposure
still looks to be the outperformer and
retail where we have very low relative
exposure would appear to be the reverse.
We are continually having to make value
judgements around reward and risk, and to
this end we intend to be more cautious in
our use of debt in the short-term. We are
fortunate to now have in place undrawn
debt facilities that we can use tactically if we
can secure attractively priced opportunities.
Entering the REIT regime later this year will
provide a further operational boost and
represents a positive evolution of the Picton
business. Recognising our track record,
approach and the team’s abilities, I believe
we are well placed to continue to achieve
our aim of being one of the consistently
best performing diversified UK focused
property companies listed on the main
market of the London Stock Exchange.
Michael Morris
Chief Executive,
Picton Capital Limited
4 June 2018
“
Our focus is very much
at an asset and indeed
occupier level.
“
26
Picton Property Income Limited Annual Report 2018 Changes to our business model
“
Picton aims to be one
of the consistently best
performing diversified
UK focused property
companies listed on
the London Stock
Exchange.
“
Our business strategy
As we have been preparing for UK REIT conversion we have
been updating our business objectives, strategic aims and
business model. This is to provide clarity on who we are and
what we aim to achieve for shareholders, staff, service providers
and occupiers. We have therefore clarified our future business
model and strategy as a UK REIT as set out below.
Our vision
Picton aims to be one of the
consistently best performing diversified
UK focused property companies listed
on the London Stock Exchange.
Our strategic aims
Our strategic aims, which are designed to meet our strategy and vision,
are as follows:
Be occupier focused and opportunity led in the way we approach
the proactive management of our portfolio
Our strategy to
achieve this vision
We will own and manage a portfolio
of properties that outperforms the
MSCI IPD Quarterly Benchmark and
provides a stable income stream.
We will adapt our capital structure
as necessary to achieve enhanced
returns including the effective use
of debt.
Buy, manage and sell effectively to enhance value and income
over the short, medium and long-term
Focus on both income and total return and look at ways to
reduce and manage risk
Work with our occupiers to create space that they need,
provide a service they value and so deliver high occupancy
Have a flexible and efficient capital structure and manage our
debt profile through the property cycle
Ensure we run an effective and efficient operational model
Have the right culture that enables Picton to achieve its
strategic aims
Align all staff with shareholders’ interests through an appropriately
structured remuneration policy
27
Strategic Report Q&A
REIT conversion
“
By becoming a REIT
Picton will benefit from
an established tax
exempt regime and
will be able to maintain
or enhance shareholder
returns.
“
Why are we planning
to convert to a REIT?
In November 2017 the UK government
announced changes to the taxation of
non-resident companies, bringing them
into the scope of UK corporation tax with
effect from 1 April 2020, and also taxing
gains made by non-residents on the
disposal of UK commercial properties (both
directly and indirectly) from 1 April 2019.
Both changes are likely to have an adverse
impact on the tax liability of Picton, and on
shareholder returns.
The UK REIT regime was introduced in
2006, and is a tax efficient structure for
UK tax resident listed companies investing
in real estate. A company within the REIT
regime is exempt from UK tax on income
or gains arising from its property rental
business, subject to meeting certain
conditions.
By becoming a REIT, Picton will benefit
from an established tax exempt regime
which should enhance shareholder returns.
What other benefits are there in
being a REIT?
REITs are a recognised ‘brand’
internationally which helps to attract a
wider investor base. By becoming a REIT,
Picton expects to benefit from increased
liquidity in its shares.
Currently, Picton does have some UK tax
on its activities and, as a REIT, this tax is
expected to reduce to a minimal amount.
What changes will there
be to dividends?
We will continue to pay dividends on a
quarterly basis, on the same dates: at
the end of February, May, August and
November each year.
As a REIT, each dividend will potentially
comprise two parts – a normal dividend
and a Property Income Distribution (PID).
The PID, which is expected to comprise
the majority of each dividend, is paid from
the net income profits of the REIT’s tax
exempt rental business and there is a
requirement to distribute at least 90% of
this income on an annual basis. Subject to
some exceptions (including ISAs), PIDs are
subject to withholding tax at the basic rate
of income tax, currently 20%. The balance
of any dividend will be paid as normal, and
there is no withholding tax on this element.
What are the conditions of
being a REIT?
There are a number of conditions which a
REIT must meet in order to be eligible for
and to remain in the regime.
A key condition is that a REIT must be
solely tax resident in the UK. To meet this
we intend to hold all of our Board meetings
and AGMs in the UK, from October this
year, bringing management and control to
the UK.
There are other conditions that must
be met, such as the distribution to
shareholders of at least 90% of the net
income profits from the tax exempt
property business each year (the PID).
These will be set out in more detail in the
forthcoming circular but we believe that
we will be able to satisfy them all, once tax
resident in the UK.
Our history
2006
Increase in the
Company’s property
assets, including a
£125 million portfolio
purchase
Disposal of a portfolio of
public houses, to a pub
operating company, at a
significant profit
2005
The Company
was successfully
launched as ING UK
Real Estate Income
Trust Limited on
the London Stock
Exchange
2009
Restructuring of
the Company’s
securitised debt
successfully
completed
2010
Acquisition of Rugby
Estates Investment
Trust plc by the
Company
Decision taken
to internalise
the Company’s
management
2011
Name changed to
Picton Property
Income Limited
2005
2006
2007
2008
2009
2010
2011
28
Picton Property Income Limited Annual Report 2018 What is the Listing Category and
why is it significant?
The listing category of a company is how
a company is classified on the London
Stock Exchange. There are different
rules and obligations according to which
listing category a company falls under.
For a company with a Premium listing
(the highest regulatory standard) there are
three categories – commercial companies,
closed ended investment funds and open
ended investment companies.
An investment company must have a
defined investment policy and must
manage its assets in accordance with
that policy and any restrictions in place.
A commercial company does not have
any such policy, giving more flexibility,
but shareholders have the protection of
Class Tests.
Why does the Board want to
change Picton’s listing category?
When Picton was first established in
2005 it was classified as a closed ended
investment fund, and still is. Since then we
have become internally managed, which is
unusual for an investment company, and
now we believe it is in the best interests
of the Company to move onshore and
become a UK REIT with management
and control in the UK. The overwhelming
majority of internally managed UK REITs
are classified as commercial companies,
and Picton will fall within this group,
making peer group comparison easier
for investors.
What will change if Picton becomes
a commercial company?
Our business strategy will remain broadly
the same. We will continue to own and
manage a diversified commercial property
portfolio across the UK, and maintain
our occupier focused and opportunity
led approach. Internally, we will operate
slightly differently. We will no longer have
an investment management subsidiary.
Instead the day-to-day running of the
business will be carried out by the
executive team, headed by the Chief
Executive, under authority delegated by
the Board. This will improve transparency
and accountability of the executive function
for shareholders.
Countdown to reit conversion 2018
Announcement of
2018 annual results
Annual General
Meeting
Issue 2018 Annual
Report and circular
to shareholders
Extraordinary
General Meeting to
approve proposed
changes
Company moves tax
residency to the UK
and applies for REIT
status
Company enters
REIT regime
June
July
August
September
October
November
December
REIT
CONVERSION
2013
New equity raised
to fund property
acquisitions
2012
Became self-
managed investment
company
Re-financed loan
facilities with two
new lenders
2015
Increase in dividend
Highest reported
profit and total return
since 2006
New website
launched and
branding refreshed
2016
Won Investment
Company of the Year
Award (Property)
Reduced exposure to
central London offices
Repaid zero dividend
preference shares
2017
Won Money Observer
Awards – Best
Property Trust UK
Outperformed
MSCI IPD Quarterly
Benchmark over 1, 3,
5 and 10 years
Increase in dividend
2018
REIT Conversion
2012
2013
2014
2015
2016
2017
2018
29
Strategic Report Key performance
indicators
Epra
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 Company.
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.
The following key performance
indicators are considered to
be the most appropriate for
measuring how successful the
Company 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
Limited 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 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 and to aligning with
shareholders’ interests.
LTIP condition
EPRA VACANCY RATE
(%)
Our Five Strategic Priorities
Growth of net income
5.8
3.9
4.2
Working with our occupiers
2016 2017 2018
Operational efficiency
Portfolio and asset management
Effective use of debt
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 2018
The EPRA vacancy rate has fallen
over the year, as a result of significant
letting activity taking place at a
number of properties. The vacancy
rate is below the MSCI IPD Quarterly
Benchmark vacancy rate of 7.1%.
Strategic link ■ ■ ■
30
EPRA NET ASSET
VALUE PER SHARE
(PENCE)
77
82
90
2016 2017 2018
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 2018
The EPRA NAV per share has
grown by 10% over the year.
Strategic link ■ ■
EPRA EARNINGS PER
SHARE (PENCE)
3.7
3.8
4.2
2016 2017 2018
Why we use this indicator
The earnings per share, calculated in
accordance with EPRA, represents
the earnings from core operational
activities and excludes investment
property revaluations, gains/losses on
asset disposals and any exceptional
items. It 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 2018
EPRA earnings per share has increased
this year due to the growth in rental
income through the lettings achieved
and the reduction in finance costs.
Strategic link ■ ■
LTIP condition
Picton Property Income Limited Annual Report 2018 TOTAL RETURN (%)
17.9
14.9
10.4
2016 2017 2018
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 2018
Stronger valuation gains this year,
together with a growth in income,
have contributed to the improved
return for the year.
Strategic link ■ ■ ■ ■
TOTAL SHAREHOLDER
RETURN (%)
25.6
1.9
4.8
2016 2017 2018
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 2018
Compared to 2017, the movement in
our share price over the year has been
relatively flat but an overall positive
return has been achieved. However,
since the year end we have seen
the share price discount narrow with
shares now trading close to the net
asset value per share.
TOTAL PROPERTY
RETURN (%)
14.3
13.0
9.9
2016 2017 2018
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 2018
For the fifth year running we have
outperformed the MSCI IPD Quarterly
Benchmark, delivering a return of 13.0%
compared to the MSCI IPD Quarterly
Benchmark return of 10.1% for the year,
and we have also outperformed on a
three, five and ten year basis.
Strategic link ■ ■ ■
LTIP condition
LOAN TO VALUE
RATIO (%)
34.6
27.4
26.7
2016 2017 2018
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. This is a recognised measure
of the Company’s level of borrowings.
See the Supplementary Disclosures
section for further details.
Our Performance in 2018
The loan to value ratio has continued
to reduce this year, as the portfolio
values have risen.
Strategic link ■ ■ ■
LTIP condition
Strategic link ■
PROPERTY INCOME
RETURN (%)
6.7
6.0
6.0
2016 2017 2018
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 2018
With our portfolio biased towards
income generation, this is an important
indicator. The income return for the
year of 6.0% was ahead of the MSCI
IPD Quarterly Benchmark of 4.6%,
and we have also outperformed on a
three, five and ten year basis.
Strategic link ■ ■ ■
ONGOING CHARGES
(%)
1.2
1.1
1.1
2016 2017 2018
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 2018
The Ongoing Charges ratio has fallen
back to 1.1% this year. Operating
costs are largely unchanged from
2017, compared to an increasing
net asset value.
Strategic link ■
31
Strategic Report Investment manager’s report
We have had another successful
year with our occupier focused
and opportunity led approach.
Our asset allocation and proactive
management of the portfolio, including value
accretive investment activity, have enabled
us to again outperform the MSCI IPD
Quarterly Benchmark on a total return basis
over one, three, five and ten years. For the
third year running, we have won the MSCI
IPD data quality award for our submissions
as part of this benchmarking process.
Our portfolio now comprises 51 assets,
with over 360 occupiers and is valued
at £683.8 million. As a result of leasing
activity and active management, the
passing rent is now £41.4 million,
increasing by 3.9% on a like-for-like basis
and the estimated rental value (ERV) of the
portfolio is £47.9 million, growing by 2.4%
on a like-for-like basis.
We have completed 24 lettings securing
over £2.1 million of income, 3.7% ahead
of the March 2017 ERV. We have grown
occupancy by 2% over the year to 96%,
which is particularly pleasing and in line
with our desire to maintain higher than
benchmark occupancy. We completed 20
lease renewals and re-gears retaining over
£1.9 million of income, 14.3% ahead of the
March 2017 ERV.
One acquisition was made during the year
for £23.2 million and three non-core assets
were sold for proceeds of £10.4 million,
37% ahead of the March 2017 valuation.
The net effect of these transactions is that
the average lot size has increased by 14%
to £13.4 million.
We have set out the principal activity
in each of the sectors in which we are
invested and believe our strategy and
proactive occupier engagement will
continue to unlock further value.
“
We have completed
24 lettings securing over
£2.1 million of income,
3.7% ahead of the March
2017 ERV.
“
32
Picton Property Income Limited Annual Report 2018 The occupier markets have remained
resilient, especially in the industrial and
regional office sectors, where we have
seen good demand further improving our
occupancy figures. Central London has
seen a slight weakening of demand which
has resulted in incentives increasing.
There has been well publicised disruption
in the retail and leisure sector, which is
primarily a result of changing shopping
habits, increased occupational costs,
due to business rates, and the impact of
the living wage. We expect this situation
to continue, especially in the mid-range
sector, which will increase supply, noting
that the budget sector is still expanding.
We have a low weighting to the sector
with high occupancy, well located units
and mostly rebased rents. We see
opportunity to create value in the medium-
term through active management while
maintaining a high income return.
In terms of wider trends affecting the
markets we are operating in, the Minimum
Energy Efficiency Standards (MEES)
regulations became effective on 1 April
2018 in England and Wales. From this
date it will be illegal to renew or grant new
tenancies at properties that have F or G
EPC ratings and from 2023 the scope
of the regulations increases to include
existing leases. We identified this risk a
number of years ago and now have 99%
of EPCs that are compliant, with remaining
assets having action plans in place. We
were also pleased to be on the steering
group for the IPF Research document:
Costing Energy Efficiency Improvements
in Existing Commercial Buildings 2017,
which was published in November and
is a key industry publication looking at
the value of a broad range of energy
efficiency measures to upgrade the energy
performance of buildings and strategies to
reflect current market standards.
The changes to how businesses use space
with a focus on flexibility, staff amenities
and connectivity continue to have an
impact on the office market. Our occupier
focus means we work with our occupiers
to ‘right size’ their space, as shown
in some of the examples in the sector
updates. Over the year we have continued
to proactively engage with our occupiers
and have recently introduced occupier
surveys, in addition to our quarterly
occupier newsletter. We have had a good
response to date and will be rolling out
this initiative across the portfolio over the
coming year.
Examples of how we are increasing
occupier amenities include at 50
Farringdon Road, EC1 where we are
looking to install a roof terrace for the
use of the occupiers, and at Longcross
Court, Cardiff, where the planned
refurbishment includes occupier amenity
areas. We are also planning to increase
bicycle storage and shower facilities
across the portfolio, trial an initiative which
encourages occupiers to use stairs and,
with sustainability in mind, we are installing
bee hives on the roof of Queens House
in Glasgow – this was an initiative that
got strong support following one recent
occupier survey.
We realise connectivity is of crucial
importance to all business and our aim is
to continue to improve the connectivity
across the portfolio. Over the year we
have been working with WiredScore, an
international connectivity rating system,
to improve connectivity in ten of our
office buildings. We were pleased
to have the first building in Scotland to
be Wired Certified at 180 West George
Street in Glasgow which secured a gold
certification. This means the building
is recognised for leading its class in
internet infrastructure and superior
internet connectivity.
ESTIMATED RENTAL
VALUE
£47.9m
OCCUPANCY
96%
AVERAGE LOT SIZE
£13.4m
33
Strategic Report Portfolio Performance
The portfolio’s total return for the year to
31 March 2018 was 13.0%, outperforming
the MSCI IPD Quarterly Benchmark,
which delivered 10.1%. Our continued
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 2018, the portfolio
generated a net initial yield of 5.5% after
void costs with a reversion to 6.6%. The
portfolio’s valuation for the year grew by
6.5% on a like-for-like basis. We saw
positive valuation growth in the industrial
sector of 12.6% and in the office sector
of 6.1%. The retail and leisure holdings,
despite remaining 97% let, declined in
value by 2.3% reflecting the subdued
outlook in the retail sector.
Overall, like-for-like growth in the
portfolio’s estimated rental values was
2.4% during the year to March 2018.
Estimated rental values in the industrial
sector grew by 3.7% and by 3.6% in
the office sector. The retail and leisure
estimated rental values declined by
1.5%, with the retail warehouse element
remaining flat.
The estimated rental value of the void
space is £2.0 million per annum, with four
properties accounting for over half the
void. Our largest letting opportunity is at
180 West George Street in Glasgow, a
market which is seeing improving activity
levels. The building presents exceptionally
well and we expect to secure occupiers
and enhance our income position.
Outlook for the coming year
Our outlook has not fundamentally
changed since last year, with strong
occupational demand in the industrial and
regional office markets set to continue
with rents rising. Continuing issues around
Brexit have resulted in ongoing uncertainty
for central London offices with rents
remaining static or decreasing slightly, and
incentives moving out.
The retail and leisure sector has had some
well publicised failures recently and we
see this set to continue in the mid-market
sector on the back of increased costs and
changing shopping habits. We do not see
the retail and leisure sector rebounding
in the short-term, hence our underweight
position, however there are opportunities
on an asset-by-asset basis.
Our portfolio strategy remains unchanged,
the de-risking of income through active
management and capturing rental growth
is our key focus. We believe we remain
well placed to grow income and add
further value to the portfolio.
Jay Cable
Head of Asset Management,
Picton Capital Limited
Fraser D’Arcy
Investment Director,
Picton Capital Limited
4 June 2018
34
Picton Property Income Limited Annual Report 2018 Investment manager’s report continued
Top ten assets
The largest assets as at 31 March
2018, ranked by capital value,
represent 49% of the
total portfolio valuation.
PARKBURY INDUSTRIAL
ESTATE
Radlett, Herts.
Acquisition date
Property type
Tenure
Approx area (sq. ft) 336,700
No of occupiers
23
Occupancy rate (%) 100
03/2014
Industrial
Freehold
RIVER WAY
INDUSTRIAL ESTATE
Harlow, Essex
Acquisition date
Property type
Tenure
Approx area (sq. ft) 454,800
No of occupiers
Occupancy rate (%) 100
12/2006
Industrial
Freehold
11
1
ANGEL GATE
City Road, London EC1
Acquisition date
10/2005
Property type
Office
Tenure
Freehold
Approx area (sq. ft) 64,500
No of occupiers
26
Occupancy rate (%) 91
STANFORD HOUSE
Long Acre, London WC2
Acquisition date
Property type
Tenure
Approx area (sq. ft) 19,700
No of occupiers
Occupancy rate (%) 98
05/2010
Retail
Freehold
3
2
3
4
50 FARRINGDON ROAD
London EC1
Acquisition date
Property type
Tenure
Approx area (sq. ft) 31,000
No of occupiers
Occupancy rate (%) 87
10/2005
Office
Leasehold
5
TOWER WHARF
Cheese Lane, Bristol
Acquisition date
Property type
Tenure
Approx area (sq. ft) 70,800
No of occupiers
Occupancy rate (%) 91
08/2017
Office
Freehold
6
5
6
BELKIN UNIT
Shipton Way
Rushden, Northants.
Acquisition date
Property type
Tenure
Approx area (sq. ft) 312,900
No of occupiers
Occupancy rate (%) 100
07/2014
Industrial
Leasehold
1
30 & 50 PEMBROKE
COURT
Chatham, Kent
Acquisition date
Property type
Tenure
Approx area (sq. ft) 86,300
No of occupiers
Occupancy rate (%) 100
3
06/2015
Office
Leasehold
COLCHESTER
BUSINESS PARK
Colchester
Acquisition date
Property type
Tenure
Approx area (sq. ft) 150,700
No of occupiers
Occupancy rate (%) 98
10/2005
Office
Leasehold
21
7
8
9
METRO
Salford Quays,
Manchester
Acquisition date
Property type
Tenure
Approx area (sq. ft) 71,000
No of occupiers
Occupancy rate (%) 100
4
02/2016
Office
Freehold
10
35
Strategic Report Our top ten occupiers
The largest occupiers, based as a percentage
of contracted rent, as at 31 March 2018,
are as follows:
BELKIN LIMITED
£1.7m
3.8%
PUBLIC SECTOR
£1.6m
3.6%
DHL SUPPLY
CHAIN LIMITED
£1.5m
3.4%
B&Q PLC
£1.2m
2.8%
SNORKEL
EUROPE LIMITED
£1.1m
2.5%
PORTAL
CHATHAM LLP
£0.9m
2.0%
TK MAXX
£0.7m
1.6%
THE RANDOM
HOUSE GROUP
LIMITED
EDWARD
STANFORD
LIMITED
£1.0m
2.2%
£0.8m
1.8%
XMA LIMITED
£0.7m
1.5%
£11.2m
25% of total contracted rent
Longevity of income
As at 31 March 2018, based as a percentage of contracted rent,
the average length of the leases to the first termination was 5.2 years.
22.8%
THE AVERAGE
LENGTH OF THE
LEASES TO LEASE
EXPIRY
6.6
years
15.5%
13.8%
13.8%
11.6%
12.0%
0-1 years
1-2 years
2-3 years
3-4 years
4-5 years 5-10 years 10-15 years 15-25 years
25+ years
7.0%
2.3%
1.2%
36
Picton Property Income Limited Annual Report 2018
Investment manager’s report continued
Retention rates
Over the year total income at
risk due to lease expiries or
break options totalled
£3.2 million, compared to
£4.3 million for the year to
March 2017, a 26% decrease.
Excluding asset disposals, we retained
63% of total income at risk in the year
to March 2018. This comprised 55% on
lease expiries and 79% on break options.
Occupancy increased during the year,
from 94% to 96% which is ahead of the
MSCI IPD Quarterly Benchmark.
Picton has always had a shorter than
benchmark income profile, which we have
seen as positive as it allowed us to actively
manage the portfolio to enhance income
and value. Over the past four years we
have consistently maintained occupancy
around 95%, and where occupiers have
vacated we have been able to lease
space quickly.
In the next three years we have £19.2 million
of income at risk due to lease expiries or
break options, with a 7.6% reversion to
ERV. 38% of the expiries are in the industrial
sector, 41% in the office sector and 21%
in the retail sector. Over 50% of the lease
events are in the South East and London.
Our occupier focus means we know what
our occupiers’ requirements are and
through this knowledge, we can work with
them to extend income early and look to
‘right size’ businesses as demonstrated in
the portfolio sector review.
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 2018.
33.2
30.4
23.6
20.3
OCCUPANCY 2017
94%
OCCUPANCY 2018
96%
■ Picton
■ Benchmark
13.1
14.6
12.1
7.7
8.7
8.9
6.3
6.3
%
3.7
2.3
2.5
0.9
3.7
1.7
Services
Retail Trade
Manufacturing
Financial
Services
Transportation,
Communications
Wholesale
Trade
Public
Administration
Construction
Other
Source: MSCI IPD IRIS Report March 2018
37
Strategic Report Industrial portfolio review
The industrial portfolio again
delivered the strongest sector
performance for the year.
This was a result of active
management capturing rental
growth, the ‘right sizing’ of
occupiers, extending leases
and continued strength within
the investment market.
2017
VALUE
£250.4m
AREA
2,730,000
sq ft
ANNUAL
RENTAL
INCOME
£15.3m
EST RENTAL
VALUE
£17.3m
OCCUPANCY
98.6%
NO. OF
ASSETS
17
2018
VALUE
281.9m
£
AREA
2,731,000
square
feet
ANNUAL RENTAL
INCOME
15.6m
£
ESTIMATED
RENTAL VALUE
18.0m
£
OCCUPANCY
99.3%
NUMBER
OF ASSETS
17
Our industrial portfolio value increased by
£31.5 million or 12.6%, and the annual
rental income increased by £0.3 million
or 2.2%. The portfolio has an average
weighted lease length of 4.8 years and
£2.4 million of reversionary potential.
Occupational demand remains strong,
especially in London and the South East.
We have seen rental growth of 3.7% across
the portfolio and are experiencing demand
across all of our estates. Occupancy is
99.3%, with only four vacant units out of
133, three of which are under offer.
Portfolio activity
In York, and working with our occupiers,
we surrendered a 137,000 sq ft unit for a
premium of £0.29 million and in a back-to-
back transaction re-let the unit, increasing
the longevity of income by eight years, at
a stepped rent to £0.55 million per annum
10% ahead of ERV.
At River Way in Harlow, and following
completion of the refurbishment and receipt
of planning consent for a change of use, a
unit was let securing a minimum ten year
term certain at a rent of £0.2 million per
annum, in line with ERV, with uplifts collared
and capped at 2% and 4% respectively,
compounded annually. We renewed a
further lease on the estate, with the occupier
committing to a new five year lease, subject
to break, at an initial rent of £0.18 million per
annum. Three months rent free was granted
after the break option and the rent was 10%
ahead of ERV.
At Datapoint, London E16, again working
with our occupiers, we accepted a lease
surrender of a unit, with the occupier paying
a premium equivalent to the full remaining
liability under the lease. The unit was
marketed in its existing condition and a new
occupier secured within four months on a
ten year lease at a rent of £0.20 million per
annum, 16% ahead of ERV and 55% ahead
of the previous passing rent. In another
transaction, we removed a 2019 break
option in return for one month’s rent free,
securing a further five years at a passing
rent of £0.27 million per annum which is
subject to review in 2019.
At Dencora Way in Luton we renewed a
lease for a further five years, subject to
break, at a stepped rent to £0.11 million
per annum, 18% ahead of the previous
passing rent and 6% above ERV. Two rent
reviews were settled increasing the annual
rent roll by £0.02 million per annum, 3%
ahead of ERV. We have been able to
capture rental growth arising from the
improved location and close proximity to
the new junction 11a on the M1.
At Lyon Business Park in Barking, we
achieved a 33% uplift in rent following
completion of a rent review. The uplift was
£0.1 million per annum. We currently have
one vacant unit, which is under offer.
In Warrington, at Easter Court, we
surrendered two leases, facilitating two
new lettings for a combined £0.09 million
per annum, 7% ahead of ERV. At the
same time we removed an October 2017
occupier break option securing income
until 2022 and increased the passing rent,
7% ahead of ERV.
Activity across the industrial portfolio
included the letting of eight units at a
combined rent of £0.5 million per annum
and the surrender of five leases to facilitate
active management. Five leases were
renewed or regeared securing £0.9 million
per annum and 13 rent reviews agreed,
securing an additional £0.26 million per
annum of income.
We continually have lease events across
our portfolio and there are 24 in the
coming year. This provides potential to
grow income further with the ERV some
19% higher than the current passing rent.
Investment activity
During the year, there were no acquisitions
or disposals in the industrial portfolio.
Sector outlook
Occupational demand remains robust
across the country and we see no sign of
that reducing in the short-term primarily
due to a lack of supply, meaning we are
seeing good rental growth especially on
the multi-let estates.
Looking forward, we believe we can
maintain a high occupancy level with active
management, growing rents and facilitating
our occupiers’ business growth.
For us, the short-term opportunities are
the letting of the 101,800 sq ft unit in
Rugby, which comes back in December.
The unit is in a strong location close to
the M1 and M6 motorways and is one of
only a few cross docked buildings in the
locality. We expect to achieve a 15% uplift
on the current passing rent to £0.6 million
per annum.
38
Picton Property Income Limited Annual Report 2018 Investment manager’s report continued
LARGEST OCCUPIERS
1
BELKIN LIMITED
2
DHL SUPPLY
CHAIN LIMITED
3
SNORKEL
EUROPE LIMITED
4
THE RANDOM
HOUSE GROUP
LIMITED
5
XMA LIMITED
3.8%
3.4%
2.5%
2.2%
1.5%
% OF TOTAL PORTFOLIO
KEY
Property
Area (sq ft)
Freehold/
Leasehold
Abbey
Business Park
Mill Road
Newtownabbey
Belfast
61,700
F
Vigo 250
Birtley Road
Washington
Tyne and Wear
246,800
F
Easter Court
Europa Boulevard
Warrington
Unit 1 & 2
Kettlestring Lane
York
81,500
F
157,800
F
Unit 3220
Magna Park
Lutterworth
Leics.
160,900
L
Grantham Book
Services
Trent Road
Grantham
Lincs.
336,100
L
Premier Foods
Unit
Rugby
Warwickshire
101,800
F
Belkin Unit
Shipton Way
Rushden
Northants.
312,900
L
Sundon Business
Park
Dencora Way
Luton
Beds.
127,800
L
The Business
Centre
Molly Millars Lane
Wokingham
Berks.
100,800
F
Unit 1 & 2 Western
Industrial Estate
Downmill Road
Bracknell
Berks.
41,200
F
Parkbury
Industrial Estate
Radlett
Herts.
336,700
F
Magnet Trade
Centre
6 Kingstreet Lane
Winnersh
Reading
13,700
F
Nonsuch
Industrial Estate
Kiln Lane
Epsom
Surrey
41,700
L
Lyon
Business Park
Barking
Essex
99,400
F
River Way
Industrial Estate
Harlow
Essex
454,800
F
39
Datapoint Cody Road London E1654,900 LStrategic Report
Office portfolio review
The office portfolio delivered
the second strongest sector
performance of the year. This
reflected specific transactional
activity across the portfolio
as detailed below, as well as
strong investment demand
supporting pricing, particularly
in the regional markets.
2017
VALUE
£213.9m
AREA
925,000
sq ft
ANNUAL
RENTAL
INCOME
£13.8m
EST RENTAL
VALUE
£17.6m
OCCUPANCY
87.5%
NO. OF
ASSETS
19
2018
VALUE
245.5m
£
AREA
928,000
square
feet
ANNUAL RENTAL
INCOME
15.0m
£
ESTIMATED
RENTAL VALUE
19.1m
£
OCCUPANCY
91.9%
NUMBER
OF ASSETS
17
Values increased by £12.5 million or 6.1%
and we were able to increase the rent
roll, on a like-for-like basis, by £1.4 million
or 11%. The portfolio has an average
weighted lease length of four years and
£4.1 million of reversionary potential.
Occupational demand remains strong in
the regions, but within our own portfolio
a slight weakening of demand in London
has resulted in incentives increasing,
reinforcing our decision to reduce central
London office exposure in 2016. We have
seen rental growth of 3.6% across the
portfolio and occupancy is 91.9%.
Portfolio activity
Notable lettings occurred at 50 Farringdon
Road in London, where we secured three
new occupiers at a combined rent of
£0.8 million per annum, 2% ahead of ERV.
The final first floor suite of 3,900 sq ft is
under offer. A rent review was settled on
a further suite, increasing the passing rent
by 70% to £0.19 million per annum, 26%
ahead of ERV. We are planning to install a
roof terrace at the property in the coming
year, providing further occupier amenity.
At 180 West George Street in Glasgow,
the refurbishment of two floors, together
with the common areas, was completed
with the building providing some of the
best quality space available in Glasgow’s
central business district. The building was
the first in Scotland to be awarded a gold
WiredScore connectivity rating, confirming
the building’s digital infrastructure and
connectivity is of a very good standard.
This property accounts for 21% of the
total portfolio void and provides further
opportunity to increase the rent roll.
At Building 200, Colchester Business Park,
we renewed the lease for a further ten
years, subject to break, at a rent of
£0.53 million per annum with three months
rent free. The rent is 34% ahead of ERV.
The property is currently 98% let and we
have seen strong rental growth over the
period of 19%.
In Fleet, we removed occupier break
options which were due in 2021,
improving the longevity of income to
2025 at a headline rent of £0.4 million
per annum subject to review in 2020.
During the year we let 11 suites at a
combined rent of £1.5 million per annum,
3% ahead of ERV, renewed 12 leases with
a combined rent of £1 million per annum,
20% ahead of ERV and surrendered two
leases to facilitate active management.
Two rent reviews were agreed, increasing
the passing rent by £0.1 million per
annum, 4% ahead of ERV.
Investment activity
We acquired a Grade A office building
in Bristol for £23.2 million, reflecting a
net initial yield of 3.6% due to 36% (by
floor area) being vacant. It is situated in
a prominent position on the waterfront,
and equidistant to both Temple Meads
station and the Cabot Circus shopping
district. Constructed in 2005 to a
BREEAM “Excellent” rating, the building
provides 70,800 square feet of office
accommodation arranged over ground and
five upper floors, with car parking in the
basement.
As anticipated, within just over four
months of the purchase we completed
two new leases for a combined
19,100 sq ft, taking the overall occupancy
of the building to 91%. The fourth floor has
been let to Integreon, a business support
company, and the fifth floor has been let
to the advertising agency, McCann. The
lettings were for a combined annual rent
of £0.54 million, equivalent to £28.50 per
sq ft and 4% ahead of the September
ERV. As at March 2018 the property’s
valuation reflected a 15% uplift relative to
the acquisition price.
In Belfast and Bracknell, in three separate
transactions, we sold buildings with
vacant possession for a combined
consideration of £10.4 million, 37% ahead
of valuation. On all three assets we had
taken income to lease expiry and due to
the risk associated with refurbishment
and re-letting compared to the premium
achievable for vacant possession, we sold
the properties for either owner occupation
or residential development.
Sector outlook
Sentiment towards London has weakened
slightly and the impact of Brexit,
particularly its effect on the financial
services sector, remains uncertain.
Conversely, the regional office market has
seen good demand with low supply in
many markets resulting in rental growth,
as demonstrated at Tower Wharf in Bristol
and Colchester Business Park.
Within our portfolio, the short-term
opportunities include the letting of 180
West George Street, which is being
marketed, and the repositioning and letting
of Longcross Court in Cardiff.
In line with preceding years, we have 30
lease events primarily in the regions in the
coming year. These provide us with the
opportunity to grow income further with
the ERV some 12% higher than the current
passing rent.
40
Picton Property Income Limited Annual Report 2018 Investment manager’s report continued
LARGEST OCCUPIERS
1
PUBLIC
SECTOR
2
PORTAL
CHATHAM LLP
3
RICOH UK
LIMITED
4
CANTERBURY
CHRIST CHURCH
UNIVERSITY
5
BPP HOLDINGS
LIMITED
2.5%
2.0%
1.4%
1.4%
1.2%
% OF TOTAL PORTFOLIO
KEY
Property
Area (sq ft)
Freehold/
Leasehold
180 West
George Street
Glasgow
52,100
F
Queens House
St Vincent Place
Glasgow
49,400
F
Metro
Salford Quays
Manchester
71,000
F
Merchants House
Crook Street
Chester
21,900
F
Waterside House
Kirkstall Road
Leeds
25,200
F
Northampton
Business Park
800 Pavilion Drive
Northampton
49,400
F
Trident House
Victoria Street
St Albans
Herts.
19,000
F
50 Farringdon
Road
London EC1
31,000
L
Atlas House
Third Avenue
Marlow
Bucks.
25,400
F
Longcross Court
Newport Road
Cardiff
72,100
F
401 Grafton
Gate East
Milton Keynes
Bucks.
57,100
F
Tower Wharf
Cheese Lane
Bristol
70,800
F
Citylink
Addiscombe Road
Croydon
48,200
F
Sentinel House
Harvest Crescent
Fleet
Hants.
33,500
F
Colchester
Business Park
The Crescent
Colchester
Essex
150,700
L
30 & 50
Pembroke Court
Chatham
Kent
86,300
L
41
Angel Gate City Road London EC164,500 FStrategic Report Retail and leisure portfolio review
The retail and leisure portfolio
delivered our weakest sector
performance over the year,
which was primarily a result of
limited rental growth and the
negative impact of the tough
trading conditions which have
been well publicised recently.
2017
VALUE
£160.1m
AREA
824,000
sq ft
ANNUAL
RENTAL
INCOME
£11.0m
EST RENTAL
VALUE
£11.0m
OCCUPANCY
98.8%
NO. OF
ASSETS
17
2018
VALUE
156.4m
£
INTERNAL AREA
829,000
square
feet
ANNUAL RENTAL
INCOME
10.7m
£
ESTIMATED
RENTAL VALUE
10.8m
£
OCCUPANCY
97.0%
NUMBER
OF ASSETS
17
This is the smallest component of the
portfolio, reflecting our underweight
position and more cautious outlook for
the sector.
We have 14 lease events in the coming
year. These provide us with the opportunity
to grow income further with the ERV some
7% higher than the current passing rent.
Investment activity
There were no acquisitions or disposals
in the retail and leisure portfolio during
the year.
Sector outlook
Retail and leisure represents 23% of the
portfolio by value, significantly less than
the MSCI IPD Quarterly Benchmark, and
the portfolio generates a high income
yield of 6.3%. With 65% of the retail
and leisure portfolio in the more resilient
central London and retail warehousing
sectors, and a high street portfolio off
rebased values and rents we see a
good opportunity to be able to create
value through active management in
the medium-term although this will, as
expected, result in a short-term dip in the
occupancy rate.
Looking forward, the short-term
opportunities include the repositioning of
Stanford House in Covent Garden where we
expect to secure vacant possession later
in the year, the letting of our Peterborough
unit which was effected by the Company
Voluntary Arrangement of New Look who
vacate later this year, and the letting of our
unit in Preston which comes back in early
2019. There is also the modernisation and
repositioning of Angouleme Retail Park in
Bury where a number of leases are due
to expire and we are looking to move
occupiers to facilitate the amalgamation of
units to satisfy demand.
Values decreased by 2.3%, the rent roll
decreased by £0.3 million per annum or
2.1%, and the portfolio has an average
weighted lease length of 7.5 years with
passing rent at market level.
Despite the headwinds in the sector,
occupancy in the retail and leisure
portfolio remained high at 97%, with 2%
intentionally vacant due to ongoing active
management at Stanford House, London
WC2 and Angouleme Retail Park, Bury.
We have seen negative rental growth of
1.5% across the portfolio, primarily from
our high street assets.
Portfolio activity
During the year occupancy remained high,
limiting the scope to enhance income
through re-leasing. However we undertook
a number of transactions which had a
positive impact, thereby offsetting some of
the wider negative movements.
The development of a new drive-through
unit at Gloucester Retail Park, trading as
Starbucks, was completed resulting in a
letting on a ten year lease at £60,000 per
annum. The unit is trading well and has
attracted further footfall to the park.
The Crown & Mitre complex in Carlisle is
now fully let, having expanded an occupier
into an adjoining unit and securing a new
ten year lease at a rent of £66,000 per
annum, 1% ahead of ERV.
We renewed two leases at Scots Corner
in Kings Heath, Birmingham for a
combined rent of £53,450 per annum,
16% ahead of ERV. At the same property
two rent reviews were settled increasing
the annual rent roll by 19% to £66,800 per
annum, 7% ahead of ERV. This is a good
example of where we are seeing rental
growth off rebased rental levels set five
years ago.
The 152 bedroom hotel in Luton reopened
during the year following a comprehensive
refurbishment undertaken by the incoming
occupier and we understand it is trading well.
42
Picton Property Income Limited Annual Report 2018 Investment manager’s report continued
LARGEST OCCUPIERS
1
B&Q PLC
2
EDWARD
STANFORD
LIMITED
3
TK MAXX
4
ASDA STORES
LIMITED
5
GLH HOTELS
LIMITED
2.8%
1.8%
1.6%
1.3%
1.2%
% OF TOTAL PORTFOLIO
KEY
Property
Area (sq ft)
Freehold/
Leasehold
Crown & Mitre
Complex
English Street
Carlisle, Cumbria
23,800
F
17–19 Fishergate
Preston
Lancs.
Queens Road
Sheffield
59,900
F
105,600
F
7–9
Warren Street
Stockport
8,700
F
6–12
Parliament Row
Hanley
Staffs.
17,300
F
72–78
Murraygate
Dundee
9,700
F
Angouleme
Retail Park
George Street
Bury, Greater
Manchester
76,200
F/L
18–28
Victoria Lane
Huddersfield
West Yorks.
14,600
L
78–80 Briggate
Leeds
7,700
F
Regency Wharf
Broad Street
Birmingham
44,300
L
Scots Corner
High Street
Kings Heath
Birmingham
30,000
F
Parc Tawe
North Retail Park
Link Road
Swansea
116,700
L
Gloucester
Retail Park
Eastern Avenue
Gloucester
113,900
F
53–57
Broadmead
Bristol
10,400
L
62–68
Bridge Street
Peterborough
88,700
F
Thistle Express
The Mall
Luton
Beds.
81,600
F/L
43
Stanford House Long Acre London WC219,600 FStrategic Report
Financial review
Andrew Dewhirst
Our results for the year are again
very strong. The total profit
recorded was £64.2 million,
a 50% increase compared
to 2017. Our EPRA earnings
increased by £2 million to
£22.6 million, and we again
increased our dividend during
the year, having maintained a
high dividend cover. Earnings
per share increased to
11.9 pence overall (4.2 pence
on an EPRA basis), and the total
return based on these results
was 14.9% for the year.
Net asset value
The net assets of the Group increased to
£487.4 million, which was a rise of 10.3%
over the year. The chart below shows the
components of this increase over the year.
The EPRA net asset value rose from
82 pence to 90 pence.
2.7
0.6
38.9
(0.9)
(18.4)
487.4
Our results for the
year are again very
strong. The total
profit recorded was
£64.2 million, a 50%
increase compared
to 2017.
“
“
44
22.6
441.9
£m
Income Valuation
movement
Net asset
value
March
2017
on
asset
disposals
Share
based
awards
Purchase
of
shares
Dividends
paid
Net asset
value
March
2018
Picton Property Income Limited Annual Report 2018
The following table reconciles the net asset value calculated in accordance with
International Financial Reporting Standards (IFRS) with that of the European Public Real
Estate Association (EPRA).
Net asset value – EPRA and IFRS
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)
2018
£m
487.4
2017
£m
2016
£m
441.9
417.1
(21.1)
(24.5)
(21.8)
466.3
417.4
395.3
90
90
87
82
82
77
77
77
73
EPRA best practices
recommendations
The EPRA key performance measures for the
year are set out on page 3 of the Report, with
more detail provided in the EPRA Disclosures
section which starts on page 116.
Income statement
Total revenue from the property portfolio
for the year was £48.8 million. Although less
than the 2017 result of £54.4 million, the
previous year included some exceptional
income relating to our hotel in Luton.
On a like-for-like basis, rental income
increased by 5% compared to the previous
year, on an EPRA basis. This is set out in
the EPRA Disclosures section.
Operating expenses for the year were
£5.6 million, compared to £5.2 million in
2017. This is mainly due to advisory and
legal fees incurred to date for the potential
conversion to a UK REIT, and other one-off
corporate level costs.
Financing costs have again fallen this year,
to £9.8 million. The zero dividend preference
shares were repaid in full in October 2016
and this is the first full year without any
finance charge from those shares.
Capital gains on the portfolio were
£41.5 million for the year, as detailed further
under the Investment Properties section.
The Company’s plans to convert to a UK
REIT, and the potential benefits, are set out
in the Report. The Group currently pays UK
income tax on its net rental income, after
deductions. Its estimated UK tax liability for
this year is £0.5 million, in line with 2017.
Following REIT conversion we expect this
tax liability to be reduced to zero, as the
bulk of the Group’s activities will fall within
the REIT exemption. Conversely, if the
Company did not join the REIT regime,
we would expect the Group’s tax liability
to increase significantly from 1 April 2020,
when it falls within the new UK corporation
tax rules.
The income profit for the year was
£22.6 million, less than the £25.8 million
in 2017, but as noted above that included
the exceptional income received.
Dividends
We increased our annual dividend rate from
3.4 pence to 3.5 pence, with effect from our
February 2018 quarterly dividend, bringing
the total dividend paid in this financial year
to 3.425 pence. Dividend cover for the full
year was 122%.
Investment properties
The appraised value of our investment
property portfolio was £683.8 million at
31 March 2018, up from £624.4 million a
year previously. This year we have made
one significant acquisition, Tower Wharf in
Bristol, and have disposed of three small
non-core assets. A further £3.6 million of
capital expenditure was invested back into
the existing portfolio. The overall revaluation
gain was £38.9 million, representing a 6.5%
like-for-like increase in the valuation of the
portfolio, double the gain of last year.
At 31 March 2018 the portfolio comprised
51 assets, with an average lot size of
£13.4 million.
A further analysis of capital expenditure,
in accordance with EPRA Best Practice
Recommendations, is set out in the EPRA
Disclosures section.
45
Strategic Report Borrowings
Total borrowings increased to £214.0 million
at 31 March 2018, as a result of the drawdown
made under our revolving credit facility to partly
fund the purchase of Tower Wharf. Despite this,
the loan to value ratio has reduced over the
year, to 26.7%, due to the valuation increases
noted above. The weighted average interest
rate on our borrowings has reduced slightly to
4.1%, while the average loan duration is now
10.3 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.
The Group remained fully compliant with
the loan covenants throughout the year.
During the year we extended the first of
our two revolving credit facilities, which
was due to expire in March 2018, for three
further years until June 2021, which is
now coterminous with the second facility.
As a result, some of the covenant tests
were amended, and the overall facility
amount amended to £24 million. Taking
into account the £10.5 million we currently
have drawn, we have £40.5 million of
undrawn facilities.
Loan arrangement costs are capitalised
and are amortised over the terms of the
respective loans. At 31 March 2018, the
unamortised balance of these costs across
all facilities were £3.4 million.
The fair value of our borrowings at 31 March
2018 was £235.1 million, higher than the book
amount. Gilt rates, although still low, have
increased compared to a year ago,
while lending margins have moved in slightly.
A summary of our borrowings is set out below:
Fixed rate loans (£m)
203.5
204.6
249.5
2018
2017
2016
Drawn revolving facilities (£m)
Total borrowings (£m)
Borrowings net of cash (£m)
Undrawn facilities (£m)
Loan to value ratio (%)
Weighted average interest rate (%)
Average duration (years)
10.5
214.0
182.5
40.5
26.7
4.1
10.3
–
–
204.6
249.5
170.8
226.8
53.0
27.4
4.2
11.7
10.2
34.6
4.4
10.7
Cash flow and liquidity
The cash flow from our operating activities
was £25.6 million this year, slightly down
from 2017 but that year included some
£5.3 million of exceptional income. After
dividend payments of £18.5 million, the
surplus funds from operations were
invested back into the portfolio and used to
reduce borrowings. Our cash balance at the
year end stood at £31.5 million.
Share capital
There were no changes in share capital
during the year.
The Company’s Employee Benefit Trust
acquired 1,070,000 shares, at a cost of
£0.9 million, during the year to satisfy the
future vesting of awards made under the
Long-term Incentive Plan. As the Trust is
consolidated into the Group’s results these
shares are effectively held in treasury and
therefore have been excluded from the
net asset value and earnings per share
calculations, from the date of purchase.
Andrew Dewhirst
Finance Director,
Picton Capital Limited
4 June 2018
46
Picton Property Income Limited Annual Report 2018 Managing risk
The Board recognises that there
are risks and uncertainties that
could have a material impact on
our results.
The UK Corporate Governance Code
requires the Board to make a ‘viability
statement’ which considers the
Company’s current position and principal
risks and uncertainties combined with an
assessment of the future prospects for
the Company, in order that the Board can
state that the Company will be able to
continue its operations over the period of
their assessment. This statement is set out
in the Directors’ Report.
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.
Principal risk
Trend
1
2
3
4
5
6
7
8
9
Macroeconomic ➔
Property market ➔
Portfolio strategy ➔
Property
investment
Asset
management
Operational
failure
Regulatory and
legal changes
Loan
covenants
Interest rates
10
Gearing
➔
➔
➔
➔
➔
➔
➔
H
G
H
I
I
M
U
D
E
M
W
O
L
T
C
A
P
M
I
I
L
A
T
N
E
T
O
P
6
8
10
7
9
1
3
4
2
5
LOW
MEDIUM
HIGH
LIKELIHOOD AFTER MITIGATION
47
Strategic Report
Corporate strategy
1
RISK AND IMPACT
MITIGATION
Economic uncertainty, arising from
political events or otherwise, brings
risks to the property market generally
and to occupiers’ business.
The Board considers economic
conditions and market uncertainty
when setting strategy and in making
investment decisions.
Trend
➔
CONNECTED KPIs
Total Return
EPRA Net Asset Value
2
RISK AND IMPACT
MITIGATION
The property market is cyclical and
returns can be volatile. There is an
ongoing risk that the Company fails to
react appropriately to changing market
conditions, resulting in an adverse
impact on returns.
The Board reviews the Group’s
strategy and business objectives
on a regular basis and considers
whether any change is needed, in
the light of current and forecast market
conditions.
Trend
➔
CONNECTED KPIs
Total Property Return
Property Income Return
EPRA Vacancy Rate
Property
3
RISK AND IMPACT
MITIGATION
The Group has an inappropriate
portfolio strategy, as a result of poor
sector or geographical allocations, or
holding obsolete assets.
The Group maintains a diversified
portfolio in order to minimise exposure
to any one geographical area or
market sector.
The Board considers longer term
market trends when reviewing strategy.
Trend
➔
CONNECTED KPIs
Total Property Return
Property Income Return
EPRA Vacancy Rate
4
RISK AND IMPACT
MITIGATION
Investment decisions may be flawed
as a result of incorrect assumptions,
poor research or incomplete due
diligence.
All investment decisions are made by
the Board following a formal appraisal
and due diligence process.
Trend
➔
CONNECTED KPIs
Total Property Return
Property Income Return
5
RISK AND IMPACT
MITIGATION
Failure to properly execute asset
business plans or poor asset
management could lead to longer
void periods, higher occupier defaults,
higher arrears and low occupier
retention, all having an adverse impact
on earnings and cash flow.
The Group has business plans for
each asset which are reviewed
regularly.
The Investment Manager has oversight
of the Property Manager and maintains
close contact with occupiers.
Trend
➔
CONNECTED KPIs
Total Property Return
Property Income Return
EPRA Earnings per Share
48
Picton Property Income Limited Annual Report 2018 Managing risk continued
Operational
6
RISK AND IMPACT
The Group could suffer damage to
its reputation as a result of potential
operational failures, such as a breach
of regulations, losing key personnel,
incorrect financial reports or health
and safety breaches.
Trend
➔
CONNECTED KPIs
Total Return
EPRA Earnings per Share
MITIGATION
The Board has a remuneration policy in
place which incentivises performance
and is aligned with shareholders.
The Group’s Property Manager is
required to ensure compliance with
current health and safety legislation, with
oversight by the Investment Manager.
All financial reports are subject to internal
and Board review prior to release.
7
RISK AND IMPACT
MITIGATION
The Group could fail to properly anticipate
legal, fiscal or regulatory changes which
could lead to financial loss.
The Board and senior management
receive regular updates in relevant
laws and regulations.
Trend
➔
CONNECTED KPIs
EPRA Earnings per Share
Ongoing Charges
The Group is a member of the BPF,
EPRA and the AIC, and management
attend industry briefings.
The Group has external professional
advisers who monitor compliance with
relevant laws and regulations.
Financial
8
RISK AND IMPACT
MITIGATION
A significant fall in the Group’s
property valuations or rental income
could lead to a breach of financial
covenants, leaving the Group with
insufficient long-term funding.
The Board reviews financial forecasts
for the Group on a regular basis,
including sensitivity against financial
covenants.
The Audit and Risk Committee
consider the Going Concern status of
the Group bi-annually.
Trend
➔
CONNECTED KPIs
Loan to Value Ratio
9
RISK AND IMPACT
MITIGATION
An adverse movement in interest rates
could lead to increased Group costs
and a greater likelihood of occupier
default.
The Group has fixed rates of interest
on the majority of its long-term
borrowings.
The credit quality of new and existing
occupiers is continually reviewed.
Trend
➔
CONNECTED KPIs
EPRA Earnings per Share
10
RISK AND IMPACT
MITIGATION
The Group operates a geared capital
structure, which magnifies returns
from the portfolio. An inappropriate
level of gearing relative to the property
cycle could lead to poor investment
returns.
The Board regularly reviews its gearing
strategy, at least annually, in the light of
changing market conditions.
Trend
➔
CONNECTED KPIs
Total Return
EPRA Earnings per Share
49
Strategic Report Being responsible
The Board is responsible for setting the values and standards of the Group,
including leadership on environmental and social issues.
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 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 be
integral to all of our activities. In this way
we can constantly strive to reduce our
environmental impact.
Our people
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 within the
Board and investment management team.
The number of men and women employed
by the Group at 31 March 2018 were:
BOARD
6 men
INVESTMENT
MANAGEMENT TEAM
7 men 2 women
TOTAL
13 men 2 women
50
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:
■ Ensuring equal opportunities in the
recruitment process
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
■ Having fair and competitive salaries
■ Offering private health benefits to all
and benefits
employees
■ Having appropriate family and well-
■ Ensuring employees can report
inappropriate behaviour or concerns
through the whistleblowing policy
■ Having appropriate family friendly
policies
Charity 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 1,500 diverse local,
national and international projects.
For the year ended 31 March 2018 the Group
made charitable donations totalling £6,000.
Our employees are encouraged to play a
positive role in community activities and
individual charitable fundraising is supported
through the process of ‘matched giving’.
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.
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
■ Regular investment of time in learning
is seen as an essential part of working
life
■ 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.
All of the Group’s employees have a formal
performance appraisal on an annual basis,
together with a mid-year review of their
progress against objectives set at the start
of the year.
Picton Property Income Limited Annual Report 2018
The environment
It is recognised that commercial 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.
Our sustainability reporting is for the
year ended 31 December 2017, with
comparatives for the year ended
31 December 2016.
This year we have continued to improve
the coverage and accuracy of our carbon
footprint. Our Scope 1 and 2 GHG
emissions for 2017 were 4,555.93 tCO2e.
We have increased the coverage of our
Scope 3 emissions by obtaining more
occupier data, covering 47% of occupier
controlled space. There have been five
disposals during 2017 with one new
acquisition, of Tower Wharf, Bristol. This
new site is the fifth largest office in the
portfolio and is BREEAM “Excellent” rated.
Energy & GHG Emissions
We have had a very successful year in
reducing our like for-like-utility consumption
with a 19% (electricity) and 27% (fuel)
reduction. Due to the continuing shift to
low carbon electricity generation nationally,
there have been greater savings seen
in terms of GHG emissions. Like-for-like
emissions have fallen 45% (electricity)
and 37% (natural gas). Electricity data
was collected at all 34 sites (28 out of
34 for like-for-like data) where we have
operational control, with six sites being
excluded from like-for-like data due to
acquisitions or disposals. Natural gas
data was collated at all 21 sites (16 out
of 21 for like-for-like data) where we have
operational control and there is a natural
gas supply, with five sites excluded from
like-for-like data due to acquisitions
or disposals.
We have installed Asset IQ at 50 Farringdon
Road. Asset IQ is a tool which analyses
each meter’s usage to identify inefficiencies
in plant and equipment run hours. At
Farringdon Road we have seen a 45%
reduction in electricity and natural gas
usage following its implementation.
Due to this success, we have also recently
implemented it at 180 West George
Street and have further roll outs planned.
Waterside House, Leeds, Colchester
Business Park and Citylink, Croydon have
all undergone LED upgrades, helping to
deliver more than a 10% reduction in energy
use during 2017. We continue to work hard
on the accuracy of our energy data, with
less than 5% of our consumption estimated
in 2017. In addition to the installation of
Automatic Meter Readings (AMRs), 94%
(electricity) and 96% (natural gas) of our
consumption is renewably sourced through
our main energy suppliers.
Environmental initiatives
Our 50kWp solar panel array at 401 Grafton
Gate has completed its second year,
increasing production by 2.8% by generating
44,028 kWh. This energy production is fed
back to the occupiers to provide them with
lower electricity costs. The panels have
produced a total of 86,882 kWh, which has
saved 30.54 tCO2e; the equivalent of 1,022
incandescent lamps switched to LEDs.
Our EPC risk project has mitigated the risk
posed under the Minimum Energy Efficiency
Standards (MEES) that came into force from
April 2018. We now have 99% of EPCs that
are compliant, with action plans in place for
the remaining assets. We have worked on
several energy efficiency projects across
the portfolio during 2017 and are currently
looking to update our existing EPCs which
expire in 2018.
Picton recognises the importance of being
transparent on Environmental, Social
and Governance (ESG) issues with our
stakeholders, so they can make informed
decisions. We continue to report in line
with EPRA, expanding the scope of our
reporting and improving our score year-on-
year. To increase our transparency efforts,
we have started reporting to GRESB (The
Global ESG Benchmark) with 2018 being
our second response year. We used our
first year to benchmark where we are in the
market and where we must improve. Over
the last year, we have put several initiatives
in place to improve our score including:
improving data collection, implementing
policies and enhancing the accuracy
of data.
TOWER WHARF
BREEAM
‘EXCELLENT’
RATED
FARRINGDON ROAD
REDUCED GAS AND
ELECTRICITY BY
45%
GRAFTON GATE
SOLAR PANELS
PRODUCTION
INCREASE BY
2.8%
51
Strategic Report We are always looking for ways to do more
for the community and our occupiers. We
have recently approved the installation
of bee hives at one of our sites as we
understand the important role pollinators
play within the ecosystems upon which we
all rely. They will also provide an opportunity
to educate our occupiers and the local
community about the importance of bee
species, while honey produced can be sold
to raise money for charities.
Working with the CBRE Energy &
Sustainability team, we are developing
a programme to provide a greater level
of data collection, engagement with
occupiers and protection for Picton
against future market risks.
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.
The following measures are set out in the EPRA Disclosures
section towards the end of the Report:
ENERGY
Sustainability Performance Measure
Total electricity consumption
Like-for-like total electricity consumption
Total fuel consumption
Like-for-like total fuel consumption
Building energy intensity
GREENHOUSE
GAS EMISSIONS
Sustainability Performance Measure
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
WATER
Sustainability Performance Measure
Total water consumption
Like-for-like total water consumption
Building water intensity
WASTE
BUSINESS TRAVEL
Sustainability Performance Measure
Sustainability Performance Measure
Total weight of waste by disposal route
Like-for-like total weight of waste by
disposal route
Total business travel emissions
52
Picton Property Income Limited Annual Report 2018 Being responsible continued
Greenhouse gas emissions
The table below provides our GHG emissions covering the last three years. Where it states “N/A”, this is because data was not
previously collected, calculated or available. We believe it provides a clear demonstration of how the Group’s reporting has evolved
since 2013.
2017
2016
2015
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
1
2
3
3
3
3
3
Absolute GHG
emissions
(tCO2e)
1,251
3,305
7
9,566
13
53
21
14,216
GHG Intensity
(tCO2e/m²)
0.006
0.015
N/A
0.005
N/A
0.001
0.000
0.032
Absolute GHG
emissions
(tCO2e)
1,503
4,655
8
9,536
12
61
35
15,799
GHG Intensity
(tCO2e/m²)
0.015
0.022
N/A
N/A
N/A
0.000
0.001
0.040
Absolute GHG
emissions
(tCO2e)
994
GHG Intensity
(tCO2e/m²)
0.005
4,342
0.022
8
N/A
N/A
10
N/A
5,354
N/A
N/A
N/A
0.000
N/A
0.012
We continue to work hard on improving the coverage and accuracy of our carbon footprint. For 2017, our GHG emissions were
14,216 tCO2e. This is a 10% reduction on our 2016 figure with significant improvements in our Scope 1 and 2 emission reductions.
Scope 1
Scope 1 emissions account for 1,251 tCO2e
of our total emissions, which is a decrease
of 17% from 2016. This is due to the
implementation of energy efficiency measures,
an increase in data quality and the disposal
of sites in 2017. Excluding the impact of
acquisitions and disposals, like-for-like scope
1 emissions have decreased by 27%. This
is largely due to Stanford House where new
gas fired chillers provided the first year of
comparable like-for-like data.
Scope 2
Scope 2 emissions account for 3,305 tCO2e,
which is a decrease of 29% from 2016.
Scope 2 emissions make up a bulk of our
emissions which we can directly control,
so it is positive to see like-for-like emissions
decreasing by 19% compared to 2016.
50 Farringdon Road has seen a 45%
drop in utilities following the installation
of Asset IQ, with further sites planned for
roll out. There has been an AMR roll out
across the portfolio which is providing
a greater accuracy of data, allowing for
a 94% accuracy of Scope 2 emissions.
Our performance on Scope 2 emissions
demonstrates that our portfolio continues
to become more sustainable and
run more efficiently.
Scope 3
Scope 3 emissions account for 9,653 tCO2e,
which is consistent with the 2016 reporting
figure. We have expanded our scope slightly
on occupier data collection, covering 47%
of the floor area while also including waste
data collection for the first time. Business
travel, water and waste disposal have all seen
reductions through several targeted efforts but
our focus still lies with reducing our Scope 1
and 2 emissions as a priority.
Methodology
We have reported on all the emission
sources required under the core
requirements of EPRA’s ‘Best Practices
Recommendations on Sustainability
Reporting’ 2017, and have voluntarily
disclosed business travel, occupier and
own premises consumption (Scope 3)
emissions. An operational control approach
has been adopted and all of our properties
are included. Figures presented are
absolute for utility and waste consumption
and relate only to landlord-obtained utilities
and waste removal. Occupier-obtained
consumption is included where possible.
We have calculated and reported our
emissions in line with the GHG Protocol
Corporate Accounting and Reporting
Standard (revised edition) and used emission
factors from UK Government’s GHG
Conversion Factors for Company Reporting
2017. Where data was unavailable in kg or
tonnes for waste, we used average volumes
to convert to tonnes.
Intensity measurements are based on
the individual property’s Gross Internal
Area (GIA), regardless of the specific area
served by the supply. This is an accurate
way of covering 95% of our consumption
but will be less useful for our industrial
vacant units; due to the comparatively
low consumption and large floor areas
typically associated with vacant industrial
units. We are continually improving the
reporting process so that we can continue
producing increasingly useful normalisation
and intensity metrics.
Picton has continued to voluntarily report
on Scope 3 vehicle emissions. Vehicle
emissions were calculated using Picton’s
vehicle expenses reports and the vehicle
emission factors from the UK Government
GHG Conversion Factors for Company
Reporting 2017. We have included
occupier and own premises consumption
within the Scope 3 emissions, using
emission factors from UK Government’s
GHG Conversion Factors for Company
Reporting 2017.
53
Strategic Report Pembroke Court, Chatham
Governance
Chairman’s Introduction
Board of Directors
Our Team
Corporate Governance Report
Nominations Committee Report
Audit and Risk Committee Report
Property Valuation Committee Report
Remuneration Report
Directors’ Report
56
58
60
62
64
66
68
70
82
Chairman’s introduction
Nicholas thompson
“
The proposals to enter the
UK REIT regime and the
change in the listing status
of the Company, and the
rationale for these, are set
out both within this Report
and the shareholder circular
issued separately.
“
56
Picton Property Income Limited Annual Report 2018 Dear Shareholder
I am pleased to introduce our
2018 Corporate Governance Report.
As I have discussed earlier, 2018 marks
an important year in the evolution of this
business, and there are some significant
implications for the governance of the
Company which are set out in this section
of the Annual Report.
The proposals to enter the UK REIT regime
and the change in the listing status of the
Company, and the rationale for these, are
set out both within this Report and the
shareholder circular issued separately. If
the changes are approved and we are no
longer an investment company then the
internal governance of the Company will
be amended to reflect the new status.
I am pleased to welcome Mark Batten to
the Board. Mark will take over as Chairman
of the Audit and Risk Committee this year,
as Robert Sinclair will be stepping down
from the Board. I would like to record
our appreciation for the outstanding
contribution that Robert has made to the
business during his long tenure on
the Board.
Vic Holmes has notified us that he intends
to step down from the Board prior to the
Company moving its management to the
UK, and again I would like to record our
appreciation for all that he has done for the
Company over the last five years.
The Board will remain fully responsible
for the strategy and direction of the
Company. Its aim is to create and deliver
long-term value for shareholders, and,
as a commercial company, this will be
through the business strategy set by the
Board rather than the current investment
policy. The Chief Executive will have
authority delegated to him to run the
business on a day-to-day basis, with a
clear division of responsibilities between
him and the Board. This will replace
the existing investment management
arrangements with Picton Capital Limited.
The composition of the Board has
been considered by the Nominations
Committee, and some more detail around
this is included in their report for the year.
Our Board Committee structure will be
unchanged, with clear terms of reference.
However, we intend to establish an
Executive Committee, to support the
Chief Executive in the running of the
business. This Committee will comprise
the Chief Executive and other members
of senior management and will be
accountable to the Board in delivering
the business strategy.
In addition, I am pleased to announce that
Andrew Dewhirst, currently the Finance
Director of Picton Capital Limited, has
agreed to join the Board from 1 October
and together with Michael Morris will be
the Executive Directors.
The work of the Remuneration Committee
this year has included the review of a new
remuneration policy, to include executive
directors. We intend to operate this
new policy for 2018/19, and it will
be put to shareholders at this year’s
Annual General Meeting.
As a Board we remain committed to the
principles of good corporate governance
and aim to be clear and transparent in
our dealings with shareholders. Should
our proposals to become a UK REIT
be approved, we intend to hold future
Annual General Meetings in the UK, and
I look forward to further engagement with
shareholders then.
Nicholas Thompson
Chairman
4 June 2018
57
Governance Nicholas Thompson
Chairman
Age 69, 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 and
Infrastructure Forum of the Association of
Investment Companies.
Robert Sinclair
Chairman of the Audit
and Risk Committee
Age 68, 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 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.
Roger Lewis
Chairman of the Property
Valuation Committee
Age 70, 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.
58
Board of directorsWith a breadth and depth of experience across property and fund management, our Board leads with integrity and transparency.Picton Property Income Limited Annual Report 2018 Mark Batten
Age 61, was a partner in
PricewaterhouseCoopers LLP for over
25 years, specialising in structuring and
restructuring transactions predominantly
in financial services and real estate. He is
currently on the board of, amongst others,
the Brompton and Harefield Hospital
Foundation Trust and a senior adviser to
UK Government Investments, an arm of
HM Treasury. He is an Associate of the
Institute of Chartered Accountants
in England and Wales and was appointed
to the Board on 1 October 2017.
Vic Holmes
Chairman of the
Remuneration Committee
Age 61, 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 Morris
Age 45, was appointed to the Board
on 1 October 2015 and has over 24
years’ experience in the UK commercial
property sector. 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, 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 the AIC’s
Property and Infrastructure Forum.
He has also obtained the Investment
Management Certificate and the IPF
Diploma in Property Investment.
59
Governance Andrew Dewhirst
Finance Director
Andrew, age 58, 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.
Michael Morris
Chief Executive
Michael, age 45, is Chief
Executive and is also a non-
executive Director of Picton
Property Income Limited. He
is responsible for devising and
overseeing the implementation
of all aspects of the Company’s
investment strategy.
Fraser D’Arcy
Investment Director
Fraser, age 42, 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 18 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.
Jay Cable
Director
Jay, age 40, 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 18 years of
real estate experience and is a
member of the Royal Institution
of Chartered Surveyors and of
the Investment Property Forum.
60
Our teamThe investment management team at Picton Capital Limited comprises 10 permanent employees, and includes five real estate professionals, three qualified accountants and two further support employees.Picton Property Income Limited Annual Report 2018 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.
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.
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 18 years’
experience in the real estate
sector. James is a Fellow of
the Association of Chartered
Certified Accountants.
Melissa Ricardo
Team Secretary
Melissa joined in January 2017
and provides administration
support to the team.
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 assists with accounting
and financial reporting
for the Group.
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.
61
Governance Corporate
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 July 2016
AIC Code and AIC Guide which
take into account updates
made to the UK Corporate
Governance Code in April 2016.
The Board retains full
responsibility for the
direction and control of
the Company, including
investment policy and
strategy, dividend
policy and gearing.
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.
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
reappointment 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.
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.
62
Picton Property Income Limited Annual Report 2018 Board
(4 meetings)
Audit and Risk
(2 meetings)
Remuneration
(3 meetings)
Property Valuation
(4 meetings)
Nominations
(4 meetings)
Attendance at Board and Committee meetings
Nicholas Thompson
Robert Sinclair
Roger Lewis
Vic Holmes
Michael Morris
Mark Batten
4
4
3
4
4
2
2
2
2
2
–
1
3
3
2
3
–
2
4
4
4
3
–
1
4
4
3
4
–
2
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. Mark Batten joined the Board on 1 October 2017 and has attended both Board meetings since then.
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 next external evaluation will
be carried out later this year, by Trust
Associates, who have carried out previous
external evaluations. The previous internal
evaluation was carried out in February
2017, using questionnaires prepared by
the Company’s Administrator.
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.
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.
63
Governance Nominations
committee report
Nicholas thompson
The Nominations Committee
is chaired by Nicholas
Thompson. The other
members of the Committee
are Vic Holmes, Robert
Sinclair, Roger Lewis and
Mark Batten.
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 four times during
the year ended 31 March 2018 and
considered the following matters:
■ The selection process for the
appointment of a new director to replace
Robert Sinclair;
■ The appointment of external consultants
to compile a list of candidates;
■ The formation of a working group of the
Committee to manage the recruitment
process and work with the consultants;
■ Consideration of the final shortlist of
candidates and a final recommendation:
■ Future composition of the Board; and
■ Succession planning.
The role of the Committee is to consider
the size, structure and composition of
the Board to ensure that it has the right
balance of skills, knowledge, experience
and diversity to carry out its duties and
provide effective leadership. 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 Committee ensures that the
appointment process is formal, rigorous
and transparent.
As has been explained earlier in this
Report, we will be bringing forward to
shareholders proposals to enter the
UK REIT regime from 1 October 2018.
Linked with this, we are also proposing to
change the listing status of the Company
from that of an investment company to a
commercial company, which is in keeping
with most internally managed UK REITs
and will be consistent with executive
management being exercised by the
Board in the UK. Assuming these changes
are approved, we will move to a more
traditional Board structure comprising
executive and non-executive directors.
The role of the
Committee is to consider
the size, structure and
composition of the Board
to ensure that it has the
right balance of skills,
knowledge, experience
and diversity to carry out
its duties.
64
Picton Property Income Limited Annual Report 2018 We believe that the
Board should comprise
both executive
and non-executive
directors. We consider
that this will improve
the accountability
of the executives to
shareholders.
Appointment of new
non-executive director
During the year the Committee focused
on the selection and appointment of a
new director to replace Robert Sinclair,
who intends to retire from the Board
during 2018. We appointed independent
executive search consultants Heidrick
& Struggles and provided them with
a detailed description of the role and
the capabilities required for it. The
consultants prepared a list of potential
candidates, both male and female, which
was assessed by the Committee for
suitability to the role. This long list of five
candidates met initially with the Chairman
of the Committee and following this a
final shortlist of three candidates were
interviewed initially by the Chairman,
and subsequently by a panel comprising
two Directors and a member of senior
management. The whole Committee then
considered the feedback from both stages
before recommending to the Board that
Mark Batten be appointed.
Board composition
As stated above, with management
and control of the Company in the
UK, we believe that the Board should
comprise both executive and non-
executive directors. We consider that
this will improve the accountability of
the executives to shareholders. In the
Corporate Governance report we have set
out how the Board and its Committees
will operate under the proposed changes.
Michael Morris, already on the Board as a
non-executive, will become an executive
director and the Group’s Chief Executive.
Furthermore, we propose to appoint
Andrew Dewhirst, currently the Finance
Director of Picton Capital Limited, to the
Board as an executive director.
Robert Sinclair will retire from the Board
this year and will not put himself forward
for re-election at the forthcoming Annual
General Meeting. Mark Batten will take
over as Chairman of the Audit and Risk
Committee once this year’s annual audit
has been completed.
Vic Holmes has notified the Board that he
intends to step down as a Director prior
to the Company moving its management
to the UK. The Committee has prepared
a specification of the role, which will
include Chairman of the Remuneration
Committee, and has appointed Heidrick
& Struggles to assist with the selection
process. The Committee intends to make
a recommendation to the Board regarding
a new appointment before the end of
September 2018.
Tenure
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.
Diversity policy
The Company is committed to treating
all employees equally and considers all
aspects of diversity, including gender,
when considering recruitment at any
level of the business. We aim to maintain
the right blend of skills, experience and
knowledge in the Board and investment
management team. The Company
recognises the benefits of diversity but
the Board does not consider that diversity
quotas are appropriate in determining
its composition. All candidates are
considered on merit.
Nicholas Thompson
Chairman of the Nominations Committee
4 June 2018
65
Governance Audit 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, Vic Holmes
and Mark Batten.
Robert Sinclair has confirmed that he
will be retiring from the Board this year.
Mark Batten will take over as chairman
of the Audit and Risk Committee from
then. Meetings of the Audit and Risk
Committee are attended by the Finance
Director of Picton Capital Limited and
another member 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 twice
during the year ended 31 March 2018 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;
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 2018 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 2018 and
confirmed that the following matters had
been considered in discussions with the
independent valuers:
■ Review of the Risk Matrix and mitigating
■ Property market conditions;
controls; and
■ Stock Exchange announcements.
■ Yields on properties within the portfolio;
■ Letting activity and vacant properties;
■ Covenant strength and lease lengths;
■ Estimated rental values; and
■ Comparable market evidence.
66
Picton Property Income Limited Annual Report 2018 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 2018 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 2017, prepared in
accordance with International Standard on
Assurance Engagements 3402, in respect
of property management accounting
services provided to Picton Capital
Limited.
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.
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.
The fees payable to the Group’s auditor
and its member firms are as follows:
Audit fees
Interim
review fees
Non-audit
fees
2018
£000
108
14
27
2017
£000
108
14
23
149
145
The non-audit fees include £14,000 for
additional controls testing and £7,000
for liquidation fees, carried out by KPMG
Channel Islands Limited, and £6,000 in
respect of the Picton Capital Limited FCA
CASS review, carried out by KPMG LLP.
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.
In 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, Deborah Smith, took
over this role for this year’s audit from
Neale Jehan, who had previously served
five years as audit partner.
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
4 June 2018
67
Governance Property 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, Vic Holmes
and Mark Batten.
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;
Activity
The Committee met four times during the
year ended 31 March 2018. 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;
■ Significant issues that should be raised
■ Yields on properties within the portfolio;
with the Investment Manager;
■ Letting activity and vacant properties;
■ Material and unexplained movements in
■ Covenant strength and lease lengths;
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.
CBRE Limited was
appointed as the external
valuer to the Group,
effective from 31 March
2013, and carries out a
valuation of the Group’s
property assets each
quarter.
■ Estimated rental values; and
■ Comparable market evidence.
The Committee was satisfied with the
valuation process throughout the year.
External valuer
CBRE Limited was appointed as the
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.
Roger Lewis
Chairman of Property Valuation Committee
4 June 2018
68
Picton Property Income Limited Annual Report 2018 The Directors
Picton Property Income Limited
PO Box 255
Trafalgar Court
Les Banques
St Peter Port
Guernsey
GY1 3QL
23 April 2018
Dear Sirs
Picton property portfolio — valuation as at 31 March 2018
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 2018, for accounting purposes. Our valuations
have been prepared on the basis of ‘Fair Value’ in accordance with the RICS Valuation
– Global Standards 2017 which incorporate the International Valuation Standards
and RICS valuation - Professional Standards UK January 2014 (Revised April 2015).
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 16 April 2018, we are of the opinion that the aggregate values of the
properties we value in the Picton investment property portfolio, as at 31 March 2018,
is £683,800,000 (SIX HUNDRED AND EIGHTY THREE MILLION EIGHT HUNDRED
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 Limited (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) is less
than 5.0% of their 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
69
Governance Remuneration report
Vic holmes
The Remuneration Committee
is chaired by Vic Holmes.
The other members of the
Committee are Nicholas
Thompson, Mark Batten,
Roger Lewis and
Robert Sinclair.
Terms of reference
The Committee shall consider the following
matters:
■ Appointment of, and setting the terms
of reference for, any remuneration
consultants;
■ Recommending remuneration levels
for the non-executive Directors
to the Board;
■ Recommending remuneration policies
to the Board for Directors and senior
management of Picton Capital
Limited; and
■ Reviewing remuneration trends across
the sector.
If shareholders approve proposals for the
Company to enter the UK REIT regime,
these terms of reference will be reviewed
to ensure they are appropriate for a Board
structure comprising both executive and
non-executive directors.
Advisers
During the year, Deloitte LLP has provided
independent advice in relation to non-
executive director fee levels, share
valuations, share plan administration
and remuneration implications of UK
REIT conversion. Total fees for the year
were £16,968. Deloitte LLP is a founding
member of the Remuneration Consultants
Group and, as such, voluntarily operates
under the code of conduct in relation to
executive remuneration consulting in the
UK. In addition Deloitte also provided
taxation services and advice to the
Company during the year. The Committee
has reviewed the nature of this additional
advice and is satisfied that it does not
compromise the independence of the
advice that it has received.
Dear Shareholders
On behalf of the Board, I am pleased to
introduce the Remuneration Committee
report for the year ended 31 March 2018.
This report represents a transition period
in the evolution of the Company. As
has been explained earlier in the Annual
Report, we will be bringing forward to
shareholders proposals to enter the UK
REIT regime from 1 October 2018, and,
linked with this, to change the listing
status of the Company from that of an
investment company to a commercial
company, which is in keeping with most
internally managed UK REITs. Subject to
these changes being approved, we will
move to a more traditional Board structure
comprising executive and non-executive
directors. With this in mind, the Committee
has prepared and the Board has approved
a new directors’ remuneration policy which
will be put to shareholders at the Annual
General Meeting. As a Guernsey registered
company we intend to comply voluntarily
with the relevant UK regulations regarding
executive remuneration in order to provide
transparency to our shareholders.
This report therefore comprises three
sections:
■ This introductory letter;
■ The proposed new Directors’
Remuneration policy; and
■ The Annual Report on Remuneration for
the year ended 31 March 2018.
The Committee met three times during the
year and set out here is a summary
of its activity.
70
Picton Property Income Limited Annual Report 2018 Picton Capital Limited salary
review and bonus awards
The financial results for the year were
very strong. The overall profit for the
year was £64 million, giving a total
return of nearly 15%, an improvement
on last year’s figures of £43 million
and 10% respectively. The property
portfolio outperformed the IPD Quarterly
Benchmark for the year and also over
longer time periods. Our EPRA earnings
per share grew by 10% compared to last
year, to 4.2 pence per share.
The Committee considered the salary
review and annual bonuses for the
investment management team for
2018 and received an independent
benchmarking report covering all of the
roles within the team. The Committee also
took into account the key performance
indicators for the year and individual and
team objectives set at the start of the year.
In conclusion, the Committee agreed that
there would be an average increase in
base salaries of 6.6% from 1 April 2018
(2017: nil), and that the overall annual
bonus awards for this team (including the
Deferred Bonus element) would be 110%
of base salaries (2017: 102%).
For the year ended 31 March 2018, the
Committee agreed that annual bonuses
awarded to Picton Capital staff would
total £550,000 payable on 30 April
2018 (2017: £537,000) and £483,000 in
Deferred Bonus Scheme awards (2017:
£555,000). The Deferred Bonus Scheme
awards were made at the prevailing share
price, and equate to 572,000 units, which
vest on 31 March 2020. The cost to the
Group of awards made is spread over
the vesting periods in accordance with its
accounting policy. The accrued cost of
the Deferred Bonus Scheme at 31 March
2018 was £1,304,000 (2017: £1,177,000).
A summary of the awards made to Picton
Capital Limited staff is set out in Note 7 to
the financial statements.
Long-term Incentive Plan
This year the Committee considered
and recommended the second round of
awards under the Long-term Incentive
Plan, awarded in June 2017. The LTIP
provides the link between the
long-term success of the Company and
the remuneration of the management
As a Guernsey registered
company we intend
to comply voluntarily
with the relevant UK
regulations regarding
executive remuneration
in order to provide
transparency to
our shareholders.
team. The awards are conditional on
achieving three performance metrics
measured over the three year period from
1 April 2017 to 31 March 2020. These
metrics are:
■ Total shareholder return measured
against a bespoke comparator group of
similar companies;
■ Total property return measured against
the MSCI IPD Quarterly Benchmark; and
■ Growth in EPRA earnings per share
compared to absolute targets.
The Committee reviewed both the
performance conditions and the
comparator group and recommended that
these remained unchanged for the
2017 awards.
Awards totalling 1,036,895 shares were
made to the investment management
team following the Committee’s
recommendation. These awards will
vest in 2020 subject to meeting the
performance conditions.
Remuneration policy
As stated above, the Committee has
considered a new remuneration policy for
Directors. Although the Board currently
only comprises non-executive directors,
the Committee agreed that, ahead of
the Company potentially moving its
management to the UK, it should prepare
a remuneration policy which extends
to executive directors in the interests of
transparency for shareholders. In particular
we have considered a new framework for
determining annual variable remuneration
for executives, and this is set out in the
new policy, which was independently
reviewed by Deloitte.
71
Governance In preparing the policy the Committee
has received a benchmarking report
comparing the remuneration levels of its
senior management to other similar real
estate companies. As basic salaries are
low relative to market the Committee has
concluded that variable remuneration
potential for any newly appointed
executive director would be set at a level
to ensure that the total remuneration
package for executive directors is
competitive but with a greater emphasis
on performance related elements.
Implementation of policy
Should the proposals to move central
management to the UK be approved,
we intend to apply the new policy for the
newly appointed executive directors, and
report against that policy in next year’s
Annual Report.
For the annual bonus awards in respect
of the year ended 31 March 2019, 54%
of the maximum award potential would be
based equally on three financial metrics.
These are:
■ Total Property Return (TPR);
■ Growth in EPRA earnings per share; and
■ Total Return (TR)
The remaining 46% of the maximum
award potential would be based on
a mixture of corporate and personal
measures. These measures are aligned
with the Company’s annual objectives.
All targets are commercially sensitive and
in the view of the Committee would not
induce excessive risk taking. They would
be disclosed in next year’s Annual Report
to the extent that they are no longer
commercially sensitive at that time.
The Committee intends that up to 50% of
each executive director’s annual bonus will
be paid in shares and deferred for a period
of two years. This represents a change
from previous practice whereby deferral
was into units in the Deferred Bonus
Scheme with settlement in cash.
The Committee will make Long-term
Incentive Plan awards to all employees
following the publication of its 31 March
2018 results. These awards will be for the
three year performance period from 1 April
2018 to 31 March 2021. The performance
conditions and targets for these awards
will be unchanged from those applied to
the 2017 awards, as set out later
in this report.
As the Company has no executive
directors at the date of this report, the
Committee has not set out an illustration
of the application of the policy for the year
ended 31 March 2019.
Non-executive fee review
Historically we have appointed
independent consultants to review the
level of non-executive directors’ fees on
a regular basis, usually every three years.
The last independent review took place in
2014, and the Committee considered that
it was appropriate to carry out a further
review this year. The Committee appointed
Deloitte to compare the current level of
fees against a benchmark group of similar
companies, both internally and externally
managed. Following the review the
Committee recommended the following
new fees rates should apply, as from
1 January 2018.
Chairman
Chairman of the
Audit and Risk Committee
Chairman of the
Property Valuation Committee
Chairman of the
Remuneration Committee
Director
New annual rate
from 1 January
2018 (£)
Annual rate until
31 December
2017 (£)
98,000
47,500
45,000
45,000
40,000
82,500
43,000
40,000
40,000
36,000
As a Committee, we are committed to ongoing dialogue with our shareholders.
We hope to receive your support for our proposed new Remuneration Policy at the
forthcoming Annual General Meeting.
Vic Holmes
Chairman of the Remuneration Committee
4 June 2018
72
Picton Property Income Limited Annual Report 2018
Remuneration report continued
Directors’ 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 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 Directors by rewarding performance
through enhanced shareholder value.
As the Company has no executive directors at the date of this report, the
Committee has not set out an illustration of the application of the policy for
the year ended 31 March 2019.
Executive Directors’ Remuneration Policy Table
BASE SALARY
Purpose
A base salary to attract and retain executives of appropriate quality to deliver the
Group’s strategy.
Operation Basic salaries are normally reviewed annually with changes effective on 1 April. When
setting base salaries the Committee will consider relevant market data, as well as the
scope of the role and the individual’s skills and experience.
Maximum No absolute maximum has been set for executive Director base salaries.
Any annual increase in salaries is set at the discretion of the Remuneration Committee
taking into account the factors stated in this table and the following principles:
■ Salaries would typically be increased at a rate consistent with the average employee
salary increase.
■ Larger increases may be considered appropriate in certain circumstances (including,
but not limited to, a change in an individual’s responsibilities or in the scale of their role
or in the size and complexity of the Group).
■ Larger increases may also be considered appropriate if a Director has been initially
appointed to the Board at a lower than typical salary.
Performance measures None
Clawback None
PENSION
Purpose
Part of competitive remuneration package.
Operation
The Company has established defined contribution pension arrangements for all
employees. For executive directors the Company pays a monthly salary supplement in
lieu of Company pension contributions.
Maximum The salary supplement is set at 15% of base salary.
Performance measures None
Clawback None
BENEFITS
Purpose
Part of competitive remuneration package.
Operation
This principally comprises:
• Private medical insurance
• Life assurance
• Permanent health insurance
The Committee may agree to provide other benefits as it considers appropriate.
Maximum Benefits are provided at market rates.
Performance measures None
Clawback None
73
Governance
ANNUAL BONUS
Purpose
A short-term incentive to reward executive directors on meeting the Company’s annual
financial and strategic targets and on their personal performance.
Operation
The Committee may determine that up to 50% of the annual bonus will be paid in the
Company’s shares and deferred for two years. Dividend equivalents will be paid at the
end of the deferral period in cash.
Maximum The maximum bonus will be 175% of base salary.
Performance measures
The annual bonus is based on a range of one-year financial, strategic and individual
targets set by the Committee at the beginning of each year. The weightings will also
be determined annually to ensure alignment with the Company’s strategic priorities
although at least 50% of the award will be assessed on corporate financial measures.
For corporate financial measures, 50% of the maximum bonus opportunity
will be payable for on target performance and, if applicable, up to 25% for
threshold performance.
Clawback Malus and clawback provisions apply.
LONG-TERM INCENTIVE PLAN
Purpose
A long term incentive plan to align executives’ interests with those of shareholders and
to promote the long-term success of the Company.
Operation
Awards are granted annually in the form of a conditional share award or nil cost option.
Awards will normally vest at the end of a three year period subject to meeting the
performance conditions and continuing employment.
The Remuneration Committee may award dividend equivalents on awards that vest and
may also apply a holding period of a further two years to vested awards.
Maximum Annual awards with a maximum value of up to 150% of base salary may be made
Performance measures
There will initially be three performance conditions each measured over a three year
performance period. Each condition will be equally weighted, but the Committee has the
flexibility to vary this.
For threshold levels of performance 25% of the award vests, rising to 100% for
maximum performance.
Clawback Malus and clawback provisions apply.
SHAREHOLDING GUIDELINES
Purpose
To align executive directors with the interests of shareholders.
Operation
Executive directors are expected to build up and thereafter maintain a minimum
shareholding equivalent to 200% of basic salary.
Maximum Not applicable
Performance measures Not applicable
Clawback Not applicable
74
Picton Property Income Limited Annual Report 2018 Remuneration report continued
Non-executive Directors Policy Table
FEES
Purpose
To provide competitive director fees.
Operation
Annual fee for the Chairman, and annual base fees for other non-executives.
Additional fees for those directors with additional responsibilities chairing a Board
Committee. All fees will be payable quarterly in arrears in cash.
Fees will usually be reviewed independently every three years.
The independent non-executive Directors are not eligible to receive share options or
other performance related elements, or receive any other benefits other than where
travel to the Company’s registered office is recognised as taxable benefit in which case
a non-executive may receive the grossed-up costs of travel as a benefit. Non-executive
Directors are entitled to reimbursement of reasonable expenses.
Maximum The Company’s Articles set an annual limit for the non-executive Directors’ remuneration
of £300,000.
Performance measures None
Clawback None
Notes
1) The Committee may amend or substitute any
performance condition(s) if one or more events occur which
cause it to determine that an amended or substituted
performance condition would be more appropriate, provided
that any such amended or substituted performance
condition would not be materially less difficult to satisfy
than the original condition (in its opinion). The Committee
may adjust the calculation of performance targets and
vesting outcomes (for instance for material acquisitions,
disposals or investments and events not foreseen at the
time the targets were set) to ensure they remain a fair
reflection of performance over the relevant period. The
Committee also retains discretion to make downward or
upward adjustments resulting from the application of the
performance measures if it considers that the outcomes are
not a fair and accurate reflection of business performance.
In the event that the Committee was to make an adjustment
of this sort, a full explanation would be provided in the next
Remuneration Report.
2) Performance measures – annual bonus. The annual
bonus measures are reviewed annually and chosen
to focus executive rewards on delivery of key financial
targets for the forthcoming year as well as key strategic or
operational goals relevant to an individual. Specific targets
for bonus measures are set at the start of each year by the
Remuneration Committee based on a range of relevant
reference points, including, for Group financial targets,
the Company’s business plan and are designed to be
appropriately stretching.
3) The Committee may amend the terms of awards granted
under the share schemes referred to above in accordance
with the rules of the relevant plans.
4) Performance measures – LTIP. The LTIP performance
measures will be chosen to provide alignment with
our longer-term strategy of growing the business in a
sustainable manner that will be in the best interests of
shareholders and other key stakeholders in the Company.
Targets are considered ahead of each grant of LTIP awards
by the Remuneration Committee taking into account
relevant external and internal reference points and are
designed to be appropriately stretching.
5) The Committee reserves the right to make any
remuneration payments and/or payments for loss of
office (including exercising any discretions available to it
in connection with such payments) notwithstanding that
they are not in line with the policy set out above where
the terms of the payment were agreed (i) before the policy
set out above came into effect or (ii) at a time when the
relevant individual was not a Director of the Company and,
in the opinion of the Committee, the payment was not in
consideration for the individual becoming a Director of
the Company. For these purposes “payments” includes
the Committee satisfying awards of variable remuneration
and, in relation to an award over shares, the terms of the
payment are “agreed” at the time the award is granted.
6) The Committee may make minor amendments to the
Remuneration Policy for regulatory, exchange control, tax or
administrative purposes or to take account of a change in
legislation, without obtaining shareholder approval
for that amendment.
75
Governance Service contracts
Executive directors will have service
contracts, comprising the remuneration
elements set out within this policy. There
will be no fixed length of service but the
contracts can be terminated by either
party by giving the other notice in writing
for a period not exceeding 12 months. In
the event of the appointment of executive
directors full details of service contracts
will be disclosed in next year’s
Annual Report.
On termination the applicable payments
for each element of remuneration is
set out below.
The executive service contracts will be
available for inspection at the Company’s
registered office.
Letters of appointment
Each independent non-executive Director
has a letter of appointment which sets out
the terms and conditions. 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.
Recruitment
The remuneration package for a new
executive Director would follow, as far
as practicable, the above Policy Table.
Salaries would reflect the skills and
experience of the individual, and may be
set at a level to allow progression and
performance in the role. The structure of
the variable remuneration elements would
reflect those in the Policy Table. However
the Committee may flex the balance
between annual and long-term incentives
and the measures used to assess
performance. If appropriate, different
measures and targets may be applied
to a new appointment’s annual bonus in
their year of joining. Variable pay would be
subject to the maximums set out
in the Policy Table.
Where an executive Director is an
internal promotion, the normal policy
is that any legacy arrangements would
be honoured in line with the original
terms and conditions. Similarly, if an
executive Director is appointed following
the Company’s acquisition of or merger
with another company, legacy terms and
conditions would be honoured.
Remuneration arrangements for a
new non-executive director would be
consistent with the above Policy.
The Committee may agree to make
compensatory payments for any
remuneration arrangements subject to
forfeit on leaving a previous employer.
This would be considered for each specific
case, taking into account any relevant
factors relating to the recruitment. There
is no limit on such payments, but the
Committee would not intend to pay more
than the commercial value forfeited. If
necessary, the Committee may grant such
awards under Listing Rule 9.4.2 R.
Policy for other employees
Remuneration for other employees
broadly follows the same principles as for
executive Directors. A significant element
of remuneration is linked to performance
measures. All employees currently
participate in the Long-term Incentive Plan,
and in the annual bonus. The weighting
of individual and corporate measures are
dependent on an individual’s role.
The Committee does not formally consult
with employees when determining
executive Director pay. However, the
Committee is kept informed of general
management decisions made in relation
to employee pay and is conscious of
the importance of ensuring that its pay
decisions for executive Directors are
regarded as fair and reasonable within
the business.
Policy for payment on loss of office
On cessation of employment of an
executive director the Committee will
honour any contractual arrangements
in place. The Committee may make any
other payments in connection with loss of
office in discharge of legal obligations or by
way of a compromise or settlement of any
claim arising. This may include reasonable
amounts for outplacement assistance and
professional or legal advice.
The Committee may, at its discretion,
make an annual bonus payment for the
year of cessation depending on the reason
for leaving. The Committee will take into
consideration appropriate performance
measures which may include the
individual’s performance and contribution
during the year, and the Group’s financial
results. The bonus would usually be time
pro-rated and may be settled
wholly in cash.
The treatment of outstanding deferred
bonus and Long-term Incentive Plan
awards will be governed by the relevant
plan rules. In both cases unvested awards
will normally lapse unless the participant
is determined to be a good leaver. The
vesting date for a good leaver’s awards
will normally be the original vesting date,
but the Committee has the flexibility
to determine that awards may vest
at an earlier date. The Committee’s
determination of the extent to which a
good leaver’s LTIP awards should vest
will take into account the extent to which
performance conditions are met either at
the date of cessation of employment or
the end of the original performance period
and, unless the Committee determines
otherwise, will be adjusted on a time pro-
rated basis. Where an individual leaves
after the vesting date but before the end
of any holding period, they will retain their
LTIP awards unless summarily dismissed.
Consideration of shareholder views
We consulted with major shareholders in
advance of the introduction of the Long-
term Incentive Plan in November 2016,
and amended the terms of the proposed
plan as a result of feedback received. We
welcome any shareholder feedback on the
remuneration policy being proposed at this
year’s Annual General Meeting.
76
Picton Property Income Limited Annual Report 2018 Remuneration report continued
Annual report on remuneration
Total remuneration for the year
All of the current Directors of the Company are non-executive. 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 table below sets out the total remuneration receivable by each of the Directors who held office during the year to
31 March 2018, with a comparison to the previous financial year.
Nicholas Thompson
Robert Sinclair
Roger Lewis
Vic Holmes
Mark Batten
Michael Morris
31 March
2018
£
31 March
2017
£
86,375
44,125
41,250
41,250
19,000
–
82,500
43,000
40,000
40,000
–
–
232,000
205,500
The table below shows the remuneration earned by Michael Morris, as Chief Executive of Picton Capital Limited, for the
year ended 31 March 2018.
31 March
2018
£
31 March
2017
£
Basic salary
Salary supplement (in lieu of pension contributions)
Annual bonus awarded – cash element
Annual bonus awarded – deferred element
Long-term Incentive Plan – equity settled
227,000
227,000
34,050
135,135
165,165
160,489
34,050
114,700
171,600
54,006
721,839
601,356
Michael Morris’s bonus for the year ended 31 March 2018 was determined by the Committee taking into account
the key performance indicators and his individual objectives set for the year. If shareholders approve proposals for
the Company to enter the UK REIT regime, the Company will move to a more traditional Board structure comprising
executive and non-executive directors and, as a consequence, next year’s Remuneration Report will contain full
retrospective details of how the executive directors’ annual bonuses for the year ended 31 March 2019
were determined.
The above deferred element of the annual bonus acquired 195,925 units in the Deferred Bonus Scheme
(2017: 204,896 units) as set out on the next page.
The above Long-term Incentive Plan figures represent the amounts charged to the Income Statement in the year based
on the initial fair values of the outstanding awards and the estimated likelihood of the awards vesting.
77
Governance
Michael Morris has the following outstanding units in the Deferred Bonus Scheme:
Date of award
Vesting date
Unit value
on date of
grant
Units at 1
April 2017
Units granted
in year
Units vested
in year
Units at 31
March 2018
1 April 2015
31 March 2018
71.75p
112,892
1 April 2016
31 March 2018
69.75p
116,129
1 April 2016
31 March 2019
69.75p
116,129
1 April 2017
31 March 2019
83.75p
204,896
-
-
-
-
1 April 2018
31 March 2020
84.30p
-
195,925
(112,892)
(116,129)
-
-
-
550,046
195,925
(229,021)
-
-
116,129
204,896
195,925
516,950
The units which vested in the year were subsequently paid out after the year end in cash for £214,387.
Long-term Incentive Plan
On 16 June 2017 Michael Morris was awarded a conditional share award in relation to his role as Chief Executive of
Picton Capital Limited, as follows:
Number of
shares
Basis
(% of salary)
Face value
per share (£))
Award face
value (£)
Performance period
Threshold
vesting
334,150
125%
0.84917
283,750
1 April 2017 to 31 March 2020
25%
The face value is based on a weighted average price per share, being the average of the closing share prices over the
three business days immediately preceding the award date. Awards will vest after three years subject to continued
service and the achievement of the performance conditions set out opposite.
Michael Morris has been granted the following outstanding awards under the Long-term Incentive Plan.
Date of grant
Performance
period
Market
value on
date of
grant
At 1 April
2017
Granted
in year
Vested
in year
At 31
March 2018
27 January 2017
16 June 2017
1 April 2016
to 31 March 2019
1 April 2017
to 31 March 2020
79.085p
358,791
-
84.917p
-
334,150
358,791
334,150
-
-
-
358,791
334,150
692,941
78
Picton Property Income Limited Annual Report 2018 Remuneration report continued
PERFORMANCE CONDITION
VESTING LEVEL
Total Shareholder Return (TSR) to exceed the median TSR of
a bespoke comparator group of similar companies over the
performance period
TSR is less than the median
TSR is equal to the median
0%
25%
TSR is between the median and the upper quartile ranked company in
the comparator group
Pro rata on a straight line basis
between 25% and 100%
TSR is equal to or above the upper quartile ranked company in the
comparator group
100%
Total Property Return (TPR) to exceed the median return of the
MSCI IPD Quarterly Benchmark over the performance period
TPR is less than the median
TPR is equal to the median
0%
25%
TPR is between the median and the upper quartile ranked fund in the
Benchmark
Pro rata on a straight line basis
between 25% and 100%
TPR is equal to or above the upper quartile ranked fund in the
Benchmark
100%
Growth in EPRA earnings per share (EPS) over the
performance period
EPS growth is less than 3% per annum
EPS growth is equal to 3% per annum
EPS growth is between 3% and 9% per annum
0%
25%
Pro rata on a straight line basis
between 25% and 100%
EPS growth is above 9% per annum
100%
Any LTIP vesting will also be subject to the Remuneration Committee confirming that, in its assessment, the vesting
outturn was achieved within an acceptable risk profile
No LTIP awards vested during the year ended 31 March 2018.
79
Governance 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. A formal shareholding guideline will apply to any executive director as set out in the
Remuneration Policy.
The numbers of shares beneficially held by each Director and senior management (including connected persons),
as at 31 March 2018 are shown in the tables below:
Nicholas Thompson *
Robert Sinclair
Roger Lewis
Vic Holmes
Michael Morris*
Mark Batten
Senior management
Andrew Dewhirst
Jay Cable
Fraser D’Arcy*
31 March 2018
31 March 2017
215,000
15,000
600,000
27,214
53,596
-
215,000
15,000
600,000
27,214
53,596
-
31 March 2018
31 March 2017
28,500
9,505
8,687
24,000
9,505
8,687
*Includes shares held by a connected person
There have been no changes in these shareholdings between the year-end and the date of this report.
Payments to past directors or payments for loss of office
There were no payments to past Directors or payments for loss of office to Directors during the year ended
31 March 2018.
Historical total shareholder return performance
The graph below shows the Company’s total shareholder return (TSR) since 2009 as represented by share price growth
with dividends reinvested, against the FTSE All Share Index and the FTSE EPRA NAREIT UK Index. As the Company
currently has no Chief Executive, there is no comparative pay data for this period.
650
600
550
500
450
400
350
300
250
200
150
100
50
80
9
0
0
2
n
a
J
9
0
0
2
l
u
J
0
1
0
2
n
a
J
0
1
0
2
l
u
J
1
1
0
2
n
a
J
1
1
0
2
l
u
J
2
1
0
2
n
a
J
2
1
0
2
l
u
J
3
1
0
2
n
a
J
3
1
0
2
l
u
J
4
1
0
2
n
a
J
4
1
0
2
l
u
J
5
1
0
2
n
a
J
5
1
0
2
l
u
J
6
1
0
2
n
a
J
6
1
0
2
l
u
J
7
1
0
2
n
a
J
Picton
FTSE EPRA NAREIT UK
FTSE All Share
Picton Property Income Limited Annual Report 2018
Remuneration report continued
Percentage change in remuneration of the Chief Executive
As the Company currently has no Chief Executive, this report does not contain a comparison of changes in the level of
Chief Executive remuneration and of employee remuneration.
Relative importance of spend on pay
The table below shows the expenditure and percentage change on staff costs compared to other key
financial indicators.
Staff costs1
Dividends2
EPRA earnings3
1 See Note 7 to the Consolidated Financial Statements
2 See Note 11 to the Consolidated Financial Statements
3 See EPRA Disclosures section of the Report
31 March 2018
£000
31 March 2017
£000
% change
3,079
18,487
22,625
2,992
17,957
20,566
3%
3%
10%
Statement of voting at the last Annual General Meeting
At the Annual General Meeting held on 8 November 2017 the Remuneration Report was approved by shareholders
representing 22% of the issued share capital of the Company.
For
Against
Withheld
Vic Holmes
Chairman of the Remuneration Committee
4 June 2018
Votes cast
121,333,412
59,440
-
121,392,852
%
99.95
0.05
-
100.0
81
Governance Directors’ report
The Directors of Picton
Property Income Limited
present the Annual Report
and audited financial
statements for the year ended
31 March 2018.
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 0.85 pence per
share and one of 0.875 pence per share,
making a total dividend for the year ended
31 March 2018 of 3.425 pence per share
(2017: 3.325 pence).
Directors
The Directors of the Company who
served throughout the year are set out
on page 58.
The Directors’ interests in the shares of the
Company as at 31 March 2018 are set out
in the Remuneration Report.
Listing
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 2018 was 540,053,660
(2017: 540,053,660) ordinary shares of
no par value, including 1,070,000 ordinary
shares which were acquired during the
year by the Trustee of the Company’s
Employee Benefit Trust (2017: nil).
The Directors have authority to buy back
up to 14.99% of the Company’s ordinary
shares in issue, subject to the renewal of
this authority from shareholders at each
Annual General Meeting. 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. No
ordinary shares were purchased under this
authority during the year.
At the 2017 Annual General Meeting
shareholders gave the Directors authority
to issue up to 54,005,366 shares (being
10% of the Company’s issued share
capital as at 6 October 2017) without
having to first offer those shares to existing
shareholders. No ordinary shares have
been issued under this authority during the
year. This authority expires at this year’s
Annual General Meeting and a resolution
will be proposed for its renewal.
Shares held in the
Employee Benefit Trust
The Trustee of the Picton Property Income
Limited Long-term Incentive Plan holds
1,070,000 ordinary shares in the Company
in trust to satisfy awards made under the
Long-term Incentive Plan. The Trustee has
waived its right to receive dividends on
these shares.
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 2016 UK Corporate Governance
Code requires the Board to make a
‘viability statement’ which considers the
Company’s current position and principal
risks and uncertainties combined with an
assessment of the future prospects for
the Company, in order that the Board can
state that the Company will be able to
continue its operations over the period of
their assessment.
The Board conducted this review over a
five year timescale, 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 2023, and will continue to be
assessed over five year rolling periods.
In the ordinary course of business the
Board reviews a detailed financial model
on a quarterly basis, including forecast
market returns. This model uses prudent
assumptions regarding lease expiries,
breaks and incentives. For the purposes
of the viability assessment of the Group,
the model has been adjusted to cover a
five year period and is stress tested with
a number of scenarios. These include
significant falls in capital values (in line with
previous market conditions), pessimistic
assumptions around lease breaks and
expiries, increased void periods and
incentives, and increases in occupier
defaults. The Directors consider that the
stress testing performed was sufficiently
robust that even under extreme conditions
the Company remains viable.
82
Picton Property Income Limited Annual Report 2018 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 2023.
Alternative Investment Fund
Managers Directive
The Group’s activities currently fall
within the scope of this Directive, with
the Company acting as the Alternative
Investment Fund Manager (AIFM).
If the Company’s proposals to change
its technical listing status to that of a
commercial company, as set out in the
Chairman’s Statement, are approved, the
Group will no longer be subject to this
legislation.
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.
If the Company’s proposals to convert to
a UK REIT are approved, it will be exempt
from these rules.
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 15 May 2018.
% of issued
share capital
Investec Wealth & Investment
Limited
16.1
Alliance Trust Savings Limited
Mattioli Woods Plc
Canaccord Genuity Wealth
Management
BlackRock Inc.
Smith & Williamson Investment
Management
Brooks MacDonald Asset
Management
The Vanguard Group Inc.
Brewin Dolphin Limited
Transact Nominees Limited
6.8
5.4
5.3
3.8
3.4
3.3
3.3
3.3
3.1
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 Annual Report and the financial
statements in accordance with applicable
law and regulations.
Company law requires the Directors to
prepare financial statements for each
financial year. Under that law they have
elected to prepare the financial statements
in accordance with International Financial
Reporting Standards, as issued by the
IASB, and applicable law.
Under company law the Directors must
not approve the financial statements
unless they are satisfied that they give a
true and fair view of the state of affairs of
the Company and of its profit or loss for
that period.
The Directors are responsible for
keeping proper accounting records that
are sufficient to show and explain the
Company’s transactions and disclose
with reasonable accuracy at any time
the financial position of the Company
and enable them to ensure that its
financial statements comply with the
Companies (Guernsey) Law, 2008. They
are responsible for such internal controls
as they determine are necessary to enable
the preparation of the financial statements
that are free from material misstatement,
whether due to fraud or error, and have
a general responsibility for taking such
steps as are reasonably open to them
to safeguard the assets of the Company
and to prevent and detect fraud and
other irregularities.
The Directors are responsible for
the maintenance and integrity of the
corporate and financial information
included on the Company’s website, and
for the preparation and dissemination
of financial statements. Legislation in
Guernsey governing the preparation and
dissemination of financial statements may
differ from legislation in other jurisdictions.
Directors’ responsibility statement
in respect of the annual report and
financial statements
We confirm that to the best of our
knowledge:
■
the financial statements, prepared in
accordance with the applicable set of
accounting standards, give a true and
fair view of the assets, liabilities, financial
position and profit or loss of the Group;
and
In preparing these financial statements, the
Directors are required to:
■
■
select suitable accounting policies and
then apply them consistently;
■ make judgements and estimates that
are reasonable, relevant and reliable;
■
■
state whether applicable accounting
standards have been followed, subject
to any material departures disclosed and
explained in the financial statements;
assess the Group’s ability to
continue as a going concern, disclosing,
as applicable, matters related to going
concern; and
■ use the going concern basis of
accounting unless they either intend
to liquidate the Group or to cease
operations, or have no realistic
alternative but to do so.
the Strategic Report includes a
fair review of the development and
performance of the business and the
position of the Group, together with a
description of the principal risks and
uncertainties that it faces.
We consider the annual report and
accounts, taken as a whole, is fair,
balanced and understandable and
provides the information necessary for
shareholders to assess the Group’s
position and performance, business model
and strategy.
By Order of the Board
Vic Holmes
4 June 2018
83
Governance River Way Industrial Estate, Harlow
Financial
statements
86
Independent Auditor’s Report
Consolidated Statement
of Comprehensive Income
Consolidated Statement
of Changes in Equity
Consolidated Balance Sheet
92
Consolidated Statement of Cash Flows 93
Notes to the Consolidated
Financial Statements
90
94
91
Independent
auditor’s report
To the members of
picton property income limited
Key Audit Matters:
our assessment of the risks
of material misstatement
Key audit matters are those matters that, in our
professional judgement, were of most significance
in the audit of the Financial Statements and include
the most significant assessed risks of material
misstatement (whether or not due to fraud)
identified by us, including those which had the
greatest effect on: the overall audit strategy; the
allocation of resources in the audit; and directing
the efforts of the engagement team. These matters
were addressed in the context of our audit of the
Financial Statements as a whole, and in forming our
opinion thereon, and we do not provide a separate
opinion on these matters. In arriving at our audit
opinion above, the key audit matter was as follows
(unchanged from 2017):
Valuation of investment
properties
£670.7 million
(2017: £615.2 million)
Refer to pages 66 and 67 of the Audit and Risk
Committee Report, Note 2 Significant Accounting
Policies and Note 14 Investment Properties.
Our opinion is unmodified
We have audited the consolidated financial
statements (the “Financial Statements”) of Picton
Property Income Limited (the “Company”) and
its subsidiaries (together, the “Group”), which
comprise the consolidated balance sheet as at
31 March 2018, the consolidated statements of
comprehensive income, changes in equity and cash
flows for the year then ended, and notes, comprising
significant accounting policies and other explanatory
information.
In our opinion, the accompanying financial
statements:
■ give a true and fair view of the financial position
of the Group as at 31 March 2018, and of the
Group’s financial performance and the Group’s
cash flows for the year then ended;
■ are prepared in accordance with International
Financial Reporting Standards (IFRS); and
■ comply with the Companies (Guernsey)
Law, 2008.
Basis for Opinion
We conducted our audit in accordance with
International Standards on Auditing (UK) (ISAs
(UK)) and applicable law. Our responsibilities are
described below. We have fulfilled our ethical
responsibilities under, and are independent of the
Company and Group in accordance with, UK ethical
requirements including FRC Ethical Standards as
applied to listed entities. We believe that the audit
evidence we have obtained is a sufficient and
appropriate basis for our opinion.
86
Picton Property Income Limited Annual Report 2018 Independent
auditor’s report
To the members of
picton property income limited
The risk
Basis
The Group’s investment property portfolio accounted
for 93% (2017: 92%) of the Group’s total assets
as at 31 March 2018. The fair value of investment
properties at 31 March 2018 was assessed by the
Board of Directors based on independent valuations
prepared by the Group’s external property valuer
(the “Valuer”).
Risk
As highlighted in the Audit and Risk Committee
Report, the valuation of the Group’s investment
property portfolio is a significant area of our audit
given that it represents the majority of the total assets
of the Group and requires the use of significant
judgements and subjective assumptions.
Our response
Our audit procedures included:
Control evaluation:
We assessed 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 experts engaged by
management:
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 assumptions and inputs used in
the valuation:
With the assistance of our own Real Estate valuation
specialist we assessed the valuations prepared by
the Valuer by evaluating the appropriateness of the
valuation methodologies and assumptions used,
including undertaking discussions on key findings
with the Valuer and challenging the valuations based
on market information and knowledge.
We also compared a sample of key inputs to the
valuations such as annual rent, occupancy and
tenancy contracts for consistency with other
audit findings.
Assessing disclosures:
We also considered the Group's investment
properties valuation policies and their application as
described in the notes to the Financial Statements
for compliance with IFRS in addition to the adequacy
of disclosures in Note 14 in relation to fair value of
the investment properties.
87
Financial Statements Our application of
materiality and an overview
of the scope of our audit
We have nothing to report
on the other information in
the Annual Report
Materiality for the Financial Statements as a whole
was set at £7.0 million, determined with reference to
a benchmark of Group Total Assets of £721.3 million
of which it represents approximately 1% (2017: 1%).
We reported to the Audit and Risk Committee any
corrected or uncorrected identified misstatements
exceeding £350,000, in addition to other identified
misstatements that warranted reporting on
qualitative grounds.
Our audit of the Group was undertaken to the
materiality level specified above, which has informed
our identification of significant risks of material
misstatement and the associated audit procedures
performed in those areas as detailed above.
The Group team performed the audit of the Group
as if it was a single aggregated set of financial
information. The audit was performed using the
materiality level set out above and covered 100% of
total Group revenue, total Group profit before tax,
and total Group assets and liabilities.
We have nothing to report
on going concern
We are required to report to you if we have anything
material to add or draw attention to in relation to
the Directors’ statement in Note 2 to the Financial
Statements on the use of the going concern basis of
accounting with no material uncertainties that may
cast significant doubt over the Group’s use of that
basis for a period of at least twelve months from the
date of approval of the Financial Statements. We
have nothing to report in this respect.
The Directors are responsible for the other
information presented in the Annual Report together
with the Financial Statements. Our opinion on the
Financial Statements does not cover the other
information and we do not express an audit opinion
or any form of assurance conclusion thereon.
Our responsibility is to read the other information
and, in doing so, consider whether, based on our
Financial Statements audit work, the information
therein is materially misstated or inconsistent with
the Financial Statements or our audit knowledge.
Based solely on that work we have not identified
material misstatements in the other information.
Disclosures of principal risks
and longer-term viability
Based on the knowledge we acquired during our
financial statements audit, we have nothing material
to add or draw attention to in relation to:
■ the Directors’ confirmation within the viability
assessment and statement (pages 82 and 83) that
they have carried out a robust assessment of the
principal risks facing the Group, including those
that would threaten its business model, future
performance, solvency or liquidity;
■ the Principal Risks disclosures describing these
risks and explaining how they are being managed
or mitigated; and
■ the Directors’ explanation in the viability
assessment and statement (pages 82 and 83) as
to how they have assessed the prospects of the
Group, over what period they have done so and
why they consider that period to be appropriate,
and their statement as to whether they have a
reasonable expectation that the Group will be able
to continue in operation and meet its liabilities as
they fall due over the period of their assessment,
including any related disclosures drawing attention
to any necessary qualifications or assumptions.
88
Picton Property Income Limited Annual Report 2018 Independent auditor’s report continued
Corporate governance
disclosures
We are required to report to you if:
■ we have identified material inconsistencies between
the knowledge we acquired during our financial
statements 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 section of the annual report describing the
work of the Audit and Risk Committee does not
appropriately address matters communicated by us
to the Audit and Risk Committee.
We are required to report to you if the Corporate
Governance Statement does not properly disclose a
departure from the eleven provisions of the 2016 UK
Corporate Governance Code specified by the Listing
Rules for our review.
We have nothing to report to you in these respects.
We have nothing to report
on other matters on which
we are required to report by
exception
We have nothing to report in respect of the following
matters where the Companies (Guernsey) Law, 2008
requires us 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 belief are necessary for the purpose
of our audit.
Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out
on page 83, the Directors are responsible for: the
preparation of the Financial Statements including
being satisfied that they give a true and fair view;
such internal control as they determine is necessary
to enable the preparation of financial statements
that are free from material misstatement, whether
due to fraud or error; assessing the Group’s ability
to continue as a going concern, disclosing, as
applicable, matters related to going concern; and
using the going concern basis of accounting unless
they either intend to liquidate the Group or to cease
operations, or have no realistic alternative
but to do so.
Auditor’s responsibilities
Our objectives are to obtain reasonable assurance
about whether the Financial Statements as a whole
are free from material misstatement, whether due
to fraud or error, and to issue our opinion in an
auditor’s report. Reasonable assurance is a high
level of assurance, but does not guarantee that
an audit conducted in accordance with ISAs (UK)
will always detect a material misstatement when
it exists. Misstatements can arise from fraud or
error and are considered material if, individually or
in aggregate, they could reasonably be expected to
influence the economic decisions of users taken on
the basis of the Financial Statements.
A fuller description of our responsibilities is
provided on the FRC’s website at
www.frc.org.uk/auditorsresponsibilities.
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. 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.
Deborah Smith
For and on behalf of KPMG Channel Islands Limited
Chartered Accountants and Recognised Auditors,
Guernsey
4 June 2018
89
Financial Statements Consolidated statement
of comprehensive income
for the year ended 31 March 2018
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
Diluted
Income
£000
48,782
(10,335)
38,447
(3,652)
(1,914)
(5,566)
32,881
Capital
£000
–
–
–
–
–
–
–
2018
Total
£000
48,782
(10,335)
38,447
(3,652)
(1,914)
(5,566)
2017
Total
£000
54,398
(12,011)
42,387
(3,636)
(1,613)
(5,249)
32,881
37,138
–
–
–
2,623
38,920
41,543
2,623
38,920
41,543
1,847
15,087
16,934
32,881
41,543
74,424
54,072
35
(9,782)
(9,747)
23,134
(509)
22,625
–
–
–
41,543
–
41,543
35
(9,782)
(9,747)
64,677
(509)
64,168
62
(10,885)
(10,823)
43,249
(499)
42,750
4.2p
4.2p
7.7p
7.7p
11.9p
11.9p
7.9p
7.9p
Notes
3
4
6
8
14
14
9
10
12
12
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 “AIC”. 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.
90
Picton Property Income Limited Annual Report 2018 Consolidated statement
of changes in equity
for the year ended 31 March 2018
Balance as at 31 March 2016
Profit for the year
Dividends paid
Balance as at 31 March 2017
Profit for the year
Dividends paid
Share-based awards
Purchase of shares held in trust
Share
Capital
£000
157,449
–
–
157,449
–
–
–
–
Retained
Earnings
£000
259,683
42,750
(17,957)
284,476
64,168
(18,487)
–
–
Other
Reserves
£000
–
–
–
–
–
–
642
(893)
Total
£000
417,132
42,750
(17,957)
441,925
64,168
(18,487)
642
(893)
Notes
11
11
7
7
Balance as at 31 March 2018
157,449
330,157
(251)
487,355
Notes 1 to 27 form part of these consolidated financial statements.
91
Financial Statements Consolidated balance sheet
As at 31 March 2018
Non-current assets
Investment properties
Tangible assets
Total non-current assets
Current assets
Investment properties held for sale
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
Other reserves
Total equity
Notes
14
14
15
16
17
18
22
18
22
20
2018
£000
670,674
5
670,679
3,850
15,273
31,510
50,633
2017
£000
615,170
17
615,187
–
15,541
33,883
49,424
721,312
664,611
(21,471)
(712)
(109)
(22,292)
(19,958)
(568)
(109)
(20,635)
(209,952)
(1,713)
(211,665)
(200,336)
(1,715)
(202,051)
(233,957)
(222,686)
487,355
441,925
157,449
330,157
(251)
157,449
284,476
–
487,355
441,925
Net asset value per share
23
90p
82p
These consolidated financial statements were approved by the Board of Directors on 4 June 2018 and signed on its behalf by:
Vic Holmes
Director
4 June 2018
Notes 1 to 27 form part of these consolidated financial statements.
92
Picton Property Income Limited Annual Report 2018 Consolidated statement of cash flows
for the year ended 31 March 2018
Operating activities
Profit for the period
Adjustments for non-cash items
Interest received
Interest paid
Tax paid
Decrease/(increase) in accounts receivable
Increase in accounts payable and accruals
Cash inflows from operating activities
Investing activities
Capital expenditure on investment properties
Acquisition of investment properties
Disposal of investment properties
Cash (outflows)/inflows from investing activities
Financing activities
Borrowings repaid
Borrowings drawn
Financing costs
Purchase of shares held in trust
Dividends paid
Cash outflows from financing activities
Notes
21
14
14
7
11
2018
£000
74,424
(40,889)
35
(9,160)
(328)
267
1,286
25,635
(3,553)
(24,543)
10,285
(17,811)
(3,104)
12,500
(213)
(893)
(18,487)
(10,197)
2017
£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)
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
(2,373)
11,124
33,883
22,759
Cash and cash equivalents at end of year
16
31,510
33,883
Notes 1 to 27 form part of these consolidated financial statements.
93
Financial Statements Notes to the consolidated
financial statements
for the year ended 31 March 2018
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 2018 with
comparatives for the year ended 31 March 2017.
2. Significant accounting policies
Basis of accounting
The financial statements have been prepared on a going concern basis and adopt the historical cost basis, except for the revaluation of
investment properties. Historical cost is generally based on the fair value of the consideration given in exchange for the assets. The financial
statements, which give a true and fair view, are prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued
by IASB and are in compliance with the Companies (Guernsey) Law, 2008.
The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable
future and continue to adopt the going concern basis in preparing the financial statements.
The financial statements are presented in pounds sterling, which is the Company’s functional currency. All financial information presented in
pounds sterling has been rounded to the nearest thousand, except when otherwise indicated.
New or amended standards issued
The accounting policies adopted are consistent with those of the previous financial period, as amended to reflect the adoption of new
standards, amendments and interpretations which became effective in the year as shown below.
■ Amendments to IAS 7: Disclosure Initiative
■ Amendments to IAS 12: Deferred Tax Assets for Unrealised Losses
■ Annual improvements to IFRSs 2014-2016 cycle
The adoption of these standards have had no material effect on the consolidated financial statements of the Group.
At the date of approval of these financial statements there are a number of new and amended standards in issue but not yet effective for the
financial year ended 31 March 2018 and thus have not been applied by the Group. None of these are expected to have a significant effect
on the consolidated financial statements of the Group, except the following set out below:
■ IFRS 9: ‘Financial Instruments’ replaces the guidance in IAS 39 that relates to the classification and measurement of financial
instruments. The standard contains two primary measurement categories for financial assets: amortised cost and fair value. The
basis of classification depends on the entity’s business model and the contractual cash flow characteristics of the financial asset.
The standard also adds new requirements to address the impairment of financial assets and means that a loss event will no
longer need to occur before an impairment allowance is recognised. For financial liabilities, IFRS 9 largely carries forward without
substantive amendment from IAS 39. The main change is that, in cases where the fair value option is taken for financial liabilities,
the part of a fair value change due to an entity’s own credit risk is recorded in other comprehensive income rather than in profit
or loss. The standard introduces new requirements for hedge accounting that align hedge accounting more closely with risk
management and establishes a more principles-based approach to hedge accounting. The Group has assessed the full impact
of IFRS 9 and it does not currently anticipate that this standard will have any material impact on the Group’s financial statements
as presented for the current year.
■ IFRS 15: ‘Revenue from Contracts’ specifies how revenue is recognised when or as an entity transfers control of goods or
services to a customer. It also provides for the reporting of useful information on an entity’s contracts with customers. The Group
notes lease contracts within the scope of IAS 17 ‘Leases’ are excluded from the scope of IFRS 15. Rental income derived from
operating leases is therefore outside the scope of IFRS 15. The Group does not have any contracts in place at 31 March 2018
that it believes meet these specific criteria, but will review again in advance of implementing IFRS 15.
■ IFRS 16: ‘Leases’ will result in almost all leases being recognised on the Balance Sheet, as the distinction between operating
and finance leases will be removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to
pay rentals are recognised. Lessors will continue to classify leases as finance and operating leases. The Group has assessed the
full impact of IFRS 16 and it does not anticipate currently that this standard will have any material impact on the Group’s financial
statements as presented for the current year.
■ Amendments to IFRS 2: ‘Classification and Measurement of Share-based payment Transactions’ covers three accounting areas:
measurement of cash-settled share-based payments, classification of share-based payments settled net of tax withholdings,
and accounting for a modification of a share-based payment from cash-settled to equity-settled. The new arrangements
could affect the classification and/or measurement of these arrangements and potentially the timing and amount of expense
recognised for new and outstanding awards. The Group has assessed the full impact of this amendment to IFRS 2 and it does
not currently anticipate that it will have any material impact on the Group’s financial statements as presented for the current year.
94
Picton Property Income Limited Annual Report 2018 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.
Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company at the
reporting date. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and
has the ability to affect these returns through its power over the entity.
Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on
which control is transferred out of the Group. These financial statements include the results of the subsidiaries disclosed in Note 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 and subsequently measured at
fair value. The fair value of investment property is based on a valuation by an independent valuer who holds a recognised and relevant
professional qualification and who has recent experience in the location and category of the investment property being valued.
The fair value of investment properties is measured based on each property’s highest and best use from a market participant’s perspective
and considers the potential uses of the property that are physically possible, legally permissible and financially feasible. The Group ensures
the use of suitable qualified external valuers valuing the investment properties held by the Group.
95
Financial Statements 2. Significant accounting policies continued
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 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 or losses on investment properties have been presented as capital items within the Consolidated Statement
of Comprehensive Income in accordance with the guidance published by the AIC.
The loans have a first ranking mortgage over the majority of properties; see Note 14.
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.
96
Picton Property Income Limited Annual Report 2018 Notes to the consolidated financial statements continued
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.
The cost of the Company’s shares held by the Employee Benefit Trust is deducted from equity in the Group Balance Sheet. Any shares held
by the Trust are not included in the calculation of earnings or net assets per share.
Dividends
Dividends are recognised in the period in which they are declared.
Accounts receivable
Accounts receivable are stated at their nominal amount as reduced by appropriate allowances for estimated irrecoverable amounts. An
estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when identified.
Loans and borrowings
All loans and borrowings are initially recognised at cost, being the fair value of the consideration received net of issue costs associated
with the borrowing. After initial recognition, loans and borrowings are subsequently measured at amortised cost using the effective interest
method. Amortised cost is calculated by taking into account any issue costs, and any discount or premium on settlement. Gains and losses
are recognised in profit or loss in the Consolidated Statement of Comprehensive Income when the liabilities are derecognised, as well as
through the amortisation process.
Assets classified as held for sale
Any investment properties on which contracts for sale have been exchanged but which had not completed at the period end are disclosed
as properties held for sale. Investment properties included in the held for sale category continue to be measured in accordance with the
accounting policy for investment properties.
Other assets and liabilities
Other assets and liabilities, including trade creditors and accruals, trade and other debtors and creditors, and deferred rental income, 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 2018.
97
Financial Statements 2. Significant accounting policies continued
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.
Reclassification of comparative amounts
Certain comparative amounts in the Consolidated Balance Sheet have been reclassified to conform with the current year’s presentation. The
reclassification does not affect the previously reported profit and total comprehensive income or net asset value.
3. Revenue from properties
Rents receivable (adjusted for lease incentives)
Surrender premiums
Dilapidation receipts
Other income
Service charge income
2018
£000
41,412
200
1,111
132
5,927
48,782
2017
£000
40,555
263
1,090
6,003
6,487
54,398
Rents receivable includes lease incentives recognised of £0.2 million (2017: £0.9 million).
In the year ended 31 March 2017, other income included a £5.3 million settlement received in respect of a dispute at the hotel in Luton.
4. Property expenses
Property operating costs
Property void costs
Recoverable service charge costs
2018
£000
2,578
1,830
5,927
10,335
2017
£000
3,501
2,023
6,487
12,011
98
Picton Property Income Limited Annual Report 2018 Notes to the consolidated financial statements continued
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. While 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 51 commercial properties, which are in the industrial, office, retail
and leisure sectors.
6. Management expenses
Staff costs
Other management costs
2018
£000
3,079
573
3,652
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 – cash settled
Share-based payments – equity settled
2018
£000
1,667
276
50
620
466
3,079
2017
£000
2,992
644
3,636
2017
£000
1,729
287
58
742
176
2,992
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 are cash settled, are linked to the Company’s share price and
dividends paid, and 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 572,389 units (2017: 662,149 units), which vest on 31 March 2020.
99
Financial Statements 7. Staff costs continued
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 2018, and were not deferred, were paid out subsequent to
the year end at a cost of £508,000 (2017: £494,000).
Vesting Date
31 March 2014
31 March 2015
31 March 2016
31 March 2017
31 March 2018
31 March 2019
31 March 2020
Units at
31 March
2016
2,920
155,000
77,676
668,567
731,978
372,222
–
2,008,363
Units
granted
in the year
–
–
–
–
–
662,149
–
662,149
Units
cancelled
in the year
–
–
–
(4,191)
(5,998)
(2,688)
–
(12,877)
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
–
(706,858) 1,950,777
Units
granted
in the year
–
–
–
–
–
–
572,389
572,389
Units
cancelled
in the year
–
–
–
–
(56,549)
(80,793)
–
(137,342)
Units
redeemed
in the year
–
–
–
–
(542,197)
–
–
(542,197)
Units at
31 March
2018
–
–
65,198
127,916
127,234
950,890
572,389
1,843,627
The Company also has a Long-term Incentive Plan (the “LTIP”) 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 16 June 2017, the Company made
awards of 1,036,895 shares for the three year period ending on 31 March 2020. In the previous year awards of 1,170,258 shares were
made on 27 January 2017 for the period ending 31 March 2019.
The three performance metrics are:
■ Total shareholder return (TSR) of Picton Property Income Limited, compared to a comparator group of similar listed companies;
■ Total property return (TPR) of the property assets held within the Picton Property Income Limited Group, compared to the MSCI
IPD Quarterly Benchmark; and
■ Growth in EPRA earnings per share (EPS) of the Picton Property Income Limited Group.
The fair value of option grants is measured using a combination of a Monte Carlo model for the market conditions (TSR) and a Black-
Scholes model for the non-market conditions (TPR and EPS). The fair value is recognised over the expected vesting period. For the awards
made during this year and the previous year the main inputs and assumptions of the models, and the resulting fair values, are:
Assumptions
Grant date
Share price at date of grant
Exercise price
Expected term
Risk free rate – TSR condition
Share price volatility – TSR condition
Median volatility of comparator group – TSR condition
Correlation – TSR condition
TSR performance at grant date – TSR condition
Median TSR performance of comparator group at grant date – TSR condition
Fair value – TSR condition (Monte Carlo method)
Fair value – TPR condition (Black Scholes model)
Fair value – EPS condition (Black Scholes model)
16 June
2017
27 January
2017
84.25p
Nil
3 years
0.21%
18.3%
16.1%
35.0%
3.3%
7.0%
31.98p
84.25p
84.25p
79.75p
Nil
2.3 years
0.29%
19.8%
17.0%
37.4%
17.9%
6.1%
55.72p
79.75p
79.75p
The Trustee of the Company’s Employee Benefit Trust acquired 1,070,000 ordinary shares during the year for £893,000 (2017: nil).
The emoluments of the Directors are set out in the Remuneration Report.
The Group employed 10 members of staff at 31 March 2018 (2017: 12). The average number of people employed by the Group for the year
ended 31 March 2018 was 12 (2017: 12).
100
Picton Property Income Limited Annual Report 2018 Notes to the consolidated financial statements continued
8. Other operating expenses
Valuation expenses
Administrator fees
Auditor’s remuneration
Directors’ fees
Professional fees
Other expenses
Recurring costs
REIT conversion and restructuring 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
Liquidators’ fees
Tax compliance
Liquidators’ fees incurred to 31 March 2018 were in connection with the liquidation of Picton ZDP Limited.
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
2018
£000
116
148
149
232
250
712
1,607
307
–
307
1,914
2018
£000
65
43
14
122
14
6
7
–
27
149
2018
£000
8,780
–
114
311
577
9,782
2017
£000
111
171
145
206
383
430
1,446
–
167
167
1,613
2017
£000
65
43
14
122
14
5
–
4
23
145
2017
£000
8,812
1,074
114
269
616
10,885
The loan arrangement costs incurred to 31 March 2018 are £5,244,000 (2017: £6,213,000). These are amortised over the duration of the
loans with £577,000 amortised in the year ended 31 March 2018 (2017: £616,000).
101
Financial Statements 10. Tax
The charge for the year is:
Current UK income tax
Income tax adjustment to provision for prior year
Current UK corporation tax
UK corporation tax adjustment to provision for prior year
Total tax charge
2018
£000
510
(203)
307
195
7
202
509
2017
£000
331
25
356
143
–
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
Gains on disposal 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
2018
£000
64,677
12,935
(7,784)
(525)
(152)
404
(33)
(4,498)
163
(203)
307
2017
£000
43,249
8,650
(3,387)
–
(1,223)
552
(179)
(4,102)
20
25
356
For the year ended 31 March 2018 there was an income tax liability of £307,000 in respect of the Group (2017: £356,000) and corporation
tax of £202,000 (2017: £143,000).
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.
No deferred tax asset has been recognised from unused tax losses which total £4.9 million (2017: £4.1 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.
102
Picton Property Income Limited Annual Report 2018 Notes to the consolidated financial statements continued
11. Dividends
Declared and paid:
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
Interim dividend for the period ended 31 March 2017: 0.85 pence
Interim dividend for the period ended 30 June 2017: 0.85 pence
Interim dividend for the period ended 30 September 2017: 0.85 pence
Interim dividend for the period ended 31 December 2017: 0.875 pence
2018
£000
–
–
–
–
4,590
4,590
4,591
4,716
18,487
2017
£000
4,455
4,456
4,456
4,590
–
–
–
–
17,957
The interim dividend of 0.875 pence per ordinary share in respect of the period ended 31 March 2018 has not been recognised as a liability
as it was declared after the year end. A dividend of £4,716,000 was paid on 31 May 2018.
12. Earnings per share
Basic & diluted earnings per share is calculated by dividing the net profit for the year attributable to ordinary shareholders of the Company
by the weighted average number of ordinary shares in issue during the year, excluding the average number of shares held by the Employee
Benefit Trust for the year. The diluted number of shares also reflects the contingent shares to be issued under the Long Term Incentive
Plan.
The following reflects the profit and share data used in the basic and diluted profit per share calculation:
Net profit attributable to ordinary shareholders of the Company from continuing operations (£000)
Weighted average number of ordinary shares for basic profit per share
Weighted average number of ordinary shares for diluted profit per share
13. Investments in subsidiaries
The Company had the following principal subsidiaries as at 31 March 2018 and 31 March 2017:
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 Capital Limited
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
2018
64,168
539,734,126
539,738,613
2017
42,750
540,053,660
540,053,660
Place of
incorporation
Guernsey
Guernsey
Guernsey
Guernsey
Guernsey
England & Wales
Guernsey
Guernsey
England & Wales
England & Wales
Guernsey
Guernsey
Ownership
proportion
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, the remaining balances are held by Picton (General Partner) No. 2 Limited and Picton (General Partner) No. 3 Limited respectively.
During the year Picton ZDP Limited was liquidated following the repayment of the zero dividend preference shares in the prior year.
103
Financial Statements 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
Transfer to assets classified as held for sale
Fair value at the end of the year
2018
£000
615,170
24,543
3,553
(10,285)
2,655
(32)
49,664
(10,744)
(3,850)
670,674
2017
£000
646,018
–
2,819
(50,601)
2,440
(593)
25,729
(10,642)
–
615,170
Historic cost at the end of the year
660,263
654,057
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
Assets classified as held for sale
Fair value at the end of the year
2018
£000
683,800
1,657
(10,933)
(3,850)
670,674
2017
£000
624,410
1,680
(10,920)
–
615,170
As at 31 March 2018 contracts had been exchanged to sell Merchants House in Chester so this asset has been classified as an asset held
for sale. The sale is due to complete in June 2018. As at 31 March 2017 there were no assets classified as held for sale.
The investment properties were valued by CBRE Limited, Chartered Surveyors, as at 31 March 2018 and 31 March 2017 on the basis of
fair value in accordance with the RICS Valuation – Global Standards 2017 which incorporate the International Valuation Standards and the
RICS valuation - Professional Standards UK January 2014 (Revised April 2015). The total fees earned by CBRE Limited from the Group are
less than 5% of their total UK revenue.
The fair value of the Group’s investment properties has been determined using an income capitalisation technique, whereby contracted
and market rental values are capitalised with a market capitalisation rate. The resulting valuations are cross-checked against the equivalent
yields and the fair market values per square foot derived from comparable market transactions on an arm’s length basis.
The Group’s investment properties are valued quarterly by independent valuers, CBRE Limited. The valuations are based on:
■ Information provided by the 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.
104
Picton Property Income Limited Annual Report 2018 Notes to the consolidated financial statements continued
As at 31 March 2018 and 31 March 2017 all of the Group’s properties are Level 3 in the fair value hierarchy as it involves use of significant
inputs. There were no transfers between levels during the year and the prior year. Level 3 inputs used in valuing the properties are those
which are unobservable, as opposed to Level 1 (inputs from quoted prices) and Level 2 (observable inputs either directly, i.e. as prices, or
indirectly, i.e. derived from prices).
Information on these significant unobservable inputs per sector of investment properties is disclosed as follows:
Appraised value (£000)
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
— weighted average
2018
Industrial
281,855
2,731
Office
245,500
928
Retail and
Leisure
156,445
829
Office
213,935
925
2017
Industrial
250,350
2,730
Retail and
Leisure
160,125
824
£9.52 to
£52.65
£26.96
£3.25 to
£17.21
£8.24
£5.19 to
£91.14
£32.73
£6.42 to
£50.45
£26.39
£3.25 to
£16.85
£7.76
£5.24 to
£91.14
£31.60
2.32% to
11.46%
5.29%
1.29% to
9.08%
5.19%
3.01% to
19.90%
6.32%
0% to
16.79%
5.67%
4.49% to
10.29%
5.75%
3.15% to
14.23%
6.33%
5.52% to
13.70%
7.14%
4.93% to
10.12%
5.94%
4.55% to
10.95%
6.52%
5.74% to
15.39%
7.52%
5.38% to
11.60%
6.47%
4.77% to
23.76%
6.89%
5.46% to
11.71%
7.05%
5.00% to
9.48%
5.98%
4.37% to
10.35%
6.60%
5.59% to
13.04%
7.32%
5.42% to
10.87%
6.57%
4.66% to
9.77%
6.66%
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
2018
Impact on valuation
Decrease of £24.2m
Increase of £29.0m
Decrease of £18.8m
Increase of £21.8m
Decrease of £13.2m
Increase of £17.0m
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
105
Financial Statements 15. Accounts receivable
Tenant debtors (net of provisions for bad debts)
Lease incentives
Other debtors
2018
£000
4,011
10,933
329
15,273
2017
£000
4,107
10,920
514
15,541
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
2018
£000
30,986
524
31,510
2017
£000
31,056
2,827
33,883
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
2018
£000
5,355
9,104
2,243
444
236
4,089
21,471
2017
£000
5,092
8,590
2,345
295
125
3,511
19,958
Accruals
Deferred rental income
VAT liability
Income tax liability
Trade creditors
Other creditors
106
Picton Property Income Limited Annual Report 2018 Notes to the consolidated financial statements continued
18. Loans and borrowings
Current
Aviva facility
Capitalised finance costs
Non-current
Santander revolving credit facility
Canada Life facility
Canada Life facility
Aviva facility
Capitalised finance costs
Maturity
–
–
18 June 2021
20 July 2022
24 July 2027
24 July 2032
–
2018
£000
1,153
(441)
712
10,500
33,718
80,000
88,669
(2,935)
209,952
210,664
2017
£000
1,104
(536)
568
–
33,718
80,000
89,822
(3,204)
200,336
200,904
The following table provides a reconciliation of the movement in loans and borrowings to cash flows arising from financing activities.
Balance as at 1 April
Changes from financing cash flows
Proceeds from loans and borrowings
Repayment of loans and borrowings
Financing costs
Other changes
Accrued additional capital on zero dividend preference shares (“ZDPs”)
Amortisation of financing costs
Balance as at 31 March
2018
£000
200,904
12,500
(3,104)
(213)
9,183
–
577
577
210,664
2017
£000
245,664
–
(45,965)
(485)
(46,450)
1,074
616
1,690
200,904
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 £289.8 million (2017: £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 (2017: £1.1 million). Interest on the loan is fixed at 4.38% over
the life of the loan. The facility has a loan to value covenant of 65% and a debt service cover ratio of 1.4. The facility is secured over the
Group’s properties held by Picton No 3 Limited Partnership and Picton Property No 3 Limited, valued at £232.4 million
(2017: £225.2 million).
The Group has two revolving credit facilities (“RCFs”) with Santander Corporate & Commercial Banking. The facility that had a maturity date
of 2018 was extended during the year and now expires at the same time as the second RCF, in June 2021. The extended RCF is initially
for £24 million, and once drawn, interest is charged at 190 basis points over 3 month LIBOR. In total the Group has £51.0 million available
under both facilities, of which £10.5 million was drawn down at year end.
The ZDPs were fully repaid in the year ended 31 March 2017.
The fair value of the drawn loan facilities at 31 March 2018, estimated as the present value of future cash flows discounted at the market
rate of interest at that date, was £235.1 million (2017: £229.1 million). The fair value of the secured loan facilities is classified as Level 2
under the hierarchy of fair value measurements.
There were no transfers between levels of the fair value hierarchy during the current or prior years.
The weighted average interest rate on the Group’s borrowings as at 31 March 2018 was 4.1% (2017: 4.2%).
107
Financial Statements 18. Loans and borrowings continued
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 2018 are shown below:
Maximum limit
Actual
Gross
method
285%
140%
Commitment
method
285%
144%
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.
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 not entered into any refurbishment contracts and no further obligations to construct or develop investment property or for
repairs, maintenance or enhancements were in place as at 31 March 2018 (2017: £2.9 million).
20. Share capital and other reserves
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 2017: 540,053,660)
Share premium
Ordinary share capital
Number of shares held in Employee Benefit Trust
Number of ordinary shares
2018
£000
–
2017
£000
–
–
157,449
–
157,449
2018
Number of
shares
2017
Number of
shares
540,053,660 540,053,660
–
538,983,660 540,053,660
(1,070,000)
The fair value of awards made under the Long Term Incentive Plan is recognised in other reserves.
Subject to the solvency test contained in the Companies (Guernsey) Law, 2008 being satisfied, ordinary shareholders are entitled to all
dividends declared by the Company and to all of the Company’s assets after repayment of its borrowings and ordinary creditors. The
Trustee of the Company’s Employee Benefit Trust has waived its right to receive dividends on the 1,070,000 shares it holds. 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
Share-based provisions
Depreciation of tangible assets
108
2018
£000
(2,623)
(38,920)
642
12
(40,889)
2017
£000
(1,847)
(15,087)
–
40
(16,894)
Picton Property Income Limited Annual Report 2018 Notes to the consolidated financial statements continued
22. 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
2018
£000
117
466
7,499
8,082
(6,260)
1,822
2018
£000
109
109
395
1,318
1,713
1,822
2017
£000
116
466
7,616
8,198
(6,374)
1,824
2017
£000
109
109
396
1,319
1,715
1,824
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
2018
£000
41,083
125,186
100,087
266,356
2017
£000
40,360
125,866
107,534
273,760
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.
23. Net asset value
The net asset value per share calculation uses the number of shares in issue at the year end and excludes the actual number of shares held
by the Employee Benefit Trust at the year end, see Note 20.
109
Financial Statements 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 2018
Financial assets
Debtors
Cash and cash equivalents
Financial liabilities
Loans and borrowings
Obligations under finance leases
Creditors and accruals
31 March 2017
Financial assets
Debtors
Cash and cash equivalents
Financial liabilities
Loans and borrowings
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
17
Note
15
16
18
22
17
–
–
–
–
–
–
–
4,340
31,510
35,850
210,664
1,822
9,680
222,166
Held at
fair value
through
profit or loss
£000
Financial
assets and
liabilities at
amortised
cost
£000
–
–
–
–
–
–
–
4,621
33,883
38,504
200,904
1,824
8,728
211,456
Total
£000
4,340
31,510
35,850
210,664
1,822
9,680
222,166
Total
£000
4,621
33,883
38,504
200,904
1,824
8,728
211,456
25. 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 Group monitors capital on the basis of the gearing ratio. This ratio is calculated as the principal borrowings outstanding, as detailed
under Note 18, divided by the gross assets. There is a limit of 65% as set out in the Articles of Association of the Company. Gross assets
are calculated as non-current and current assets, as shown in the Consolidated Balance Sheet.
110
Picton Property Income Limited Annual Report 2018 Notes to the consolidated financial statements continued
At the reporting date the gearing ratios were as follows:
Total borrowings
Gross assets
Gearing ratio (must not exceed 65%)
2018
£000
214,040
721,312
29.7%
2017
£000
204,644
664,611
30.8%
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:
2018
£000
233,957
(31,510)
202,447
487,355
0.42
2017
£000
222,686
(33,883)
188,803
441,925
0.43
31 March 2018
Financial assets
Tenant debtors
Cash and cash equivalents
31 March 2017
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
–
–
–
4,011
31,510
35,521
Held at
fair value
through
profit or loss
£000
Financial
assets and
liabilities at
amortised
cost
£000
–
–
–
4,107
33,883
37,990
Note
15
16
Note
15
16
Total
£000
4,011
31,510
35,521
Total
£000
4,107
33,883
37,990
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The
Group has adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral where appropriate, as a
means of mitigating the risk of financial loss from defaults. The Group’s exposure and credit ratings of its counterparties are continuously
monitored and the aggregate value of transactions concluded is spread amongst approved counterparties. Credit exposure is controlled by
counterparty limits that are reviewed regularly.
Trade debtors consist of a large number of occupiers, spread across diverse industries and geographical areas. Ongoing credit evaluations
are performed on the financial condition of trade debtors and, where appropriate, credit guarantees are acquired. The Group does not have
any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. The credit risk
on liquid funds is limited because the counterparties are banks with high credit ratings assigned by international credit rating agencies. Rent
collection is outsourced to managing agents who report regularly on payment performance and provide the Group with intelligence on the
continuing financial viability of occupiers.
A provision of £384,000 (2017: £249,000) 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
2018 debtors overdue by more than 30 days totalled £1,094,000 (2017: £1,840,000).
111
Financial Statements 25. Risk management continued
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 2018 and at 31 March 2017 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 twelve 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 2018
Cash and cash equivalents
Debtors
Capitalised finance costs
Obligations under finance leases
Fixed interest rate loans
Floating interest rate loans
Creditors and accruals
31 March 20 17
Cash and cash equivalents
Debtors
Capitalised finance costs
Obligations under finance leases
Fixed interest rate loans
Creditors and accruals
Less than
one year
£000
31,522
4,340
441
(117)
(9,708)
(254)
(9,680)
16,544
Less than
one year
£000
33,925
4,621
536
(116)
(9,708)
(8,728)
20,530
1 to 5
Years
£000
–
–
1,448
(466)
(71,862)
(11,065)
–
(81,945)
1 to 5
Years
£000
–
–
1,476
(466)
(38,832)
–
(37,822)
More than
5 years
£000
–
–
1,487
(1,239)
(209,924)
–
–
(209,676)
More than
5 years
£000
–
–
1,728
(1,242)
(252,662)
–
(252,176)
Total
£000
31,522
4,340
3,376
(1,822)
(291,494)
(11,319)
(9,680)
(275,077)
Total
£000
33,925
4,621
3,740
(1,824)
(301,202)
(8,728)
(269,468)
Market risk
The Group’s activities are primarily within the real estate market, exposing it to very specific industry risks.
The yields available from investments in real estate depend primarily on the amount of revenue earned and capital appreciation generated
by the relevant properties as well as expenses incurred. If properties do not generate sufficient revenues to meet operating expenses,
including debt service and capital expenditure, the Group’s revenue will be adversely affected.
Revenue from properties may be adversely affected by the general economic climate, local conditions such as oversupply of properties or a
reduction in demand for properties in the market in which the Group operates, the attractiveness of the properties to occupiers, the quality
of the management, competition from other available properties and increased operating costs (including real estate taxes).
112
Picton Property Income Limited Annual Report 2018 Notes to the consolidated financial statements continued
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 £34.2 million (2017: £31.2 million).
Interest rate risk management
Interest rate risk arises on interest payable on the revolving credit facilities only. The Group’s senior debt facilities have fixed interest rates
over the lives of the loans and thus the Group has limited exposure to interest rate risk on the majority of its borrowings and no sensitivity
is presented.
Interest rate risk
The following table sets out the carrying amount, by maturity, of the Group’s financial assets/(liabilities).
31 March 2018
Floating
Cash and cash equivalents
Secured loan facilities
Fixed
Secured loan facilities
Obligations under finance leases
31 March 2017
Floating
Cash and cash equivalents
Fixed
Secured loan facilities
Obligations under finance leases
Less than
1 year
£000
1 to 5
Years
£000
More than
5 years
£000
Total
£000
31,510
–
(1,153)
(109)
30,248
–
(10,500)
(38,866)
(395)
(49,761)
–
–
31,510
(10,500)
(163,521)
(1,318)
(164,839)
(203,540)
(1,822)
(184,352)
Less than
1 year
£000
1 to 5
Years
£000
More than
5 years
£000
Total
£000
33,883
(1,104)
(109)
32,670
–
–
33,883
(4,928)
(396)
(5,324)
(198,612)
(1,319)
(199,931)
(204,644)
(1,824)
(172,585)
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
3.8% 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 £232,000 (2017: £205,500). As at 31 March 2018 the
Group owed £nil to the Directors (2017: £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 £4,716,000 (0.875 pence per share) was approved by the Board on 23 April 2018 and paid on 31 May 2018.
113
Financial Statements
Belkin Unit, Shipton Way, Rushden
Additional
information
EPRA Disclosures
Supplementary Disclosures
Property Portfolio
Five Year Financial Summary
Glossary
Financial Calendar
Shareholder Information
116
127
128
129
130
131
132
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
2018
£000
64,168
(38,920)
(2,623)
–
22,625
539,734
4.2p
2017
£000
42,750
(15,087)
(1,847)
(5,250)
20,566
540,054
3.8p
2016
£000
64,848
(44,171)
(799)
–
19,878
540,054
3.7p
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
2018
£000
487,355
–
–
487,355
538,984
90p
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
2018
£000
487,355
(21,106)
–
466,249
538,984
87p
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
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
116
2018
£000
683,800
46,197
729,997
41,360
(1,327)
40,033
5.5%
2017
£000
624,410
42,362
666,772
39,998
(911)
39,087
5.9%
2016
£000
654,605
44,478
699,083
40,365
(957)
39,408
5.6%
Picton Property Income Limited Annual Report 2018 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
2018
£000
40,033
3,160
43,193
5.9%
2017
£000
39,087
2,633
41,720
6.3%
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
2018
£000
1,995
47,854
4.2%
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)
2018
£000
2,578
1,830
3,652
1,914
(217)
9,757
(1,830)
7,927
41,412
(217)
41,195
23.7%
19.2%
Capital 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
2,647
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%
2018
£000
–
–
3,553
–
3,553
2016
£000
39,408
3,947
43,355
6.2%
2016
£000
1,867
47,596
3.9%
2016
£000
3,308
1,540
2,901
1,510
(259)
9,000
(1,540)
7,460
39,663
(259)
39,404
22.8%
18.9%
2017
£000
–
–
2,819
–
2,819
117
Additional Information 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
2018
£000
2017
£000
2018
£000
2017
£000
2018
£000
2017
£000
2018
£000
2017
£000
13,740
12,633
15,990
14,972
10,758
10,860
40,488
38,465
691
233
14,664
–
1,927
14,560
–
–
15,990
–
–
14,972
–
–
10,758
–
163
11,023
691
233
41,412
–
2,090
40,555
EPRA sustainability reporting
This section outlines our energy, GHG emissions, water, waste, business travel and own premises consumption. We report in line
with the EPRA Sustainability Best Practice Recommendations. The Group’s sustainability data reported below is for the year ended
31 December 2017, with comparatives for the year ended 31 December 2016.
Organisational boundaries and coverage
There were a total of 56 properties, including disposals, within the portfolio during 2017. We had operational control at 34 of these
sites. Under each table we have identified how many properties are being reported and any reasoning as to why a property has
been omitted from the sample.
During 2017, we disposed of five sites, spread throughout the year. We had operational control over three of these sites, with data
included in the absolute energy and carbon emissions. We have also acquired one new site, Tower Wharf, Bristol which is our
fifth largest office. We expect this site to have a significant impact on absolute consumption figures in 2018 as it was acquired in
August 2017.
We are endeavouring to report occupier energy, water and waste data on all occupier controlled sites. Occupier data is split out per
unit rather than at site level to provide accurate areas (GIA). Occupier data is provided under its own section as to not confuse it
with landlord controlled sites and is reported under Scope 3 emissions.
Normalisation
We have used kWh/m2/year to normalise data where applicable. This is the most consistent normalisation metric across the whole
portfolio. Normalisation metrics have been clearly stated under each applicable table with any anomalies addressed. During the like-
for-like analysis, we have removed any acquired or disposed site which does not cover the full 2016 and 2017 reporting periods to
ensure reliable comparisons. We currently have been unable to remove vacant units from our like-for-like comparisons but note that
this will have a minimal impact on comparisons. It is estimated that less than 5% of our consumption is through vacant units.
Energy
We have had a very successful year in reducing our like-for-like electricity and natural gas consumption, recording a 19% reduction
in electricity consumption and 27% reduction in natural gas consumption. Like-for-like electricity data was collated at 28 of 34 sites
where we have operational control, with six sites being excluded due to acquisition/disposals. Like-for-like natural gas data was
collated at 16 of 21 sites where we have operational control, with five sites being excluded due to acquisition/disposals. We have
implemented several energy efficiency measures mainly focusing on LED installations for electricity and plant refurbishments for
natural gas.
Asset IQ has been one of the major success stories in reducing electricity and natural gas at 50 Farringdon Road, seeing a 45%
drop in both utilities. Asset IQ identifies inefficiencies in plant and equipment run hours by analysing each meter’s usage in real time.
Due to the success at this site, we have recently implemented the tool at 180 West George Street, Glasgow with further planned roll
outs during 2018 and beyond.
Key sites which have gone through LED upgrades include: Waterside House, Leeds, Colchester Business Park and Citylink,
Croydon. The projects have all helped deliver over a 10% reduction in energy use during 2017. We will continue to look for
opportunities for further upgrades during 2018 and beyond to ensure our buildings are operating as efficiently as possible.
We have been working hard to improve the accuracy of our energy data, with less than 5% of our consumption considered as
estimated. Part of the reduction in consumption is the elimination of estimated date by installing AMRs. This upgrade of our meters
is part of our policy of moving all electricity and natural gas supplies onto one main supplier for each utility type. In addition to the
meter upgrades, 94% (electricity) and 96% (natural gas) of our consumption is renewably sourced; all remaining supplies are moving
across to our main energy suppliers as and when they come back within our control.
118
Picton Property Income Limited Annual Report 2018 EPRA disclosures (unaudited) continued
We have seen a 25% reduction in building utility intensity due to the number of energy efficiency projects, improved metering and
the occupier engagement actions we carried out during 2017.
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)
57,272
8,603,260
739,699
9,400,231
Electricity
from
renewable
sources
(%)
30%
96%
79%
94%
Total energy
consumption
from fuels
(kWh)
16,543
6,519,755
257,706
6,794,004
Fuel from
renewable
sources
(%)
1%
96%
100%
96%
Building
energy
intensity
(kWh/m²/
year)
0.69
99.89
28.28
74.26
1. The above data covers 34 out of 34 sites for electricity and 21 out of 21 sites for natural gas. Occupier consumption is included
where the landlord controls the energy contract. Any data from occupier controlled contracts has been excluded and is outlined
in the occupier consumption section.
2. Where data was unavailable, consumption was estimated by prorating the daily rate of consumption calculated from the
available information. Of the total electricity consumption 4.0% is estimated, and 6.2% of fuel consumption is estimated.
3. Each site’s whole floor area has been used to calculate intensities even if a site only has a vacant unit supply. Vacant units
represent roughly 2.3% of total consumption across the portfolio, predominantly located in industrial sites.
The table below sets out the like-for-like energy consumption by sector, and the change from the previous year.
Sector
Industrial
Office
Retail and Leisure
Total
Electricity consumption (kWh)
2017
57,272
6,973,797
589,893
7,620,962
2016
219,002
7,996,210
1,201,022
9,416,234
Change
-74%
-13%
-51%
-19%
Fuel consumption (kWh)
2017
14,751
5,308,872
256,864
5,580,487
2016
15,982
6,881,039
744,580
7,641,601
Change
-8%
-23%
-66%
-27%
1. For electricity consumption, the data covers 28 out of 34 sites and for fuel consumption the data covers 16 out of 21 sites
where the landlord controls the supplies. Some landlord supplies include occupier consumption where the landlord controls the
energy contract. Any data from occupier controlled contracts has been excluded and is outlined in the occupier consumption
section.
2. Where data was unavailable, consumption was estimated by prorating the daily rate of consumption calculated from the
available information. Of the like-for-like electricity consumption 3.8% is estimated and for fuel 4.0% is estimated.
3. Sites have been excluded from like-for-like comparison if they were not in Picton’s ownership for the entire 2016 and 2017
period. Vacant units have been included but only represent roughly 0.2% of total consumption across the portfolio predominantly
located in industrial sites. Offices provide the clearest like-for-like consumption due to the consistency of meter information and
make up 95% of total like-for-like consumption.
119
Additional Information GHG Emissions
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)
3.05
1,200.67
47.46
1,251.18
Total indirect
emissions
(tCO2e)
20.14
3,024.57
260.04
3,304.75
GHG
emissions
intensity
(tCO2e/m²/
year)
–
0.05
0.01
0.02
1. The above data covers 34 out of 34 sites where the landlord controls the supplies which in some cases include occupier
consumption where the landlord controls the energy contract. Any data from occupier controlled contracts has been excluded
and is outlined in the occupier consumption section.
2. Where data was unavailable, consumption was estimated by prorating the daily rate of consumption calculated from the
available information. Of the total direct emissions 6.2% are estimated and 4.0% of indirect emissions are estimated.
3. We have used tCO2e /m2/year as the most appropriate intensity measurement given its consistency across sites compared to
other intensity measures such as number of employees.
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)
2017
3
978
47
1,028
2016
3
1,266
137
1,406
Change
-8%
-23%
-65%
-27%
Indirect emissions (tCO2e)
2017
20
2,452
207
2,679
2016
90
3,295
495
3,880
Change
-78%
-26%
-58%
-31%
1. For direct emissions, the data covers 16 out of 21 sites and indirect emissions 28 out of 34, where the landlord controls the
supplies. Some landlord supplies include tenant consumption where the landlord controls the energy contract. Any data from
occupier controlled contracts has been excluded and is outlined in the occupier consumption section.
2. Where data was unavailable, consumption was estimated by prorating the daily rate of consumption calculated from the
available information. Of the like-for-like emissions, 4.0% of total direct emissions was estimated and 3.8% of indirect emissions
was estimated.
3. Sites have been excluded if they were not in Picton’s ownership for the entire 2016 and 2017 period. Vacant units have been
included but only represent roughly 0.2% of total consumption across the portfolio predominantly located in industrial sites.
Offices provide the clearest like-for-like consumption due to the consistency of meter information and make up 95% of total
like-for-like consumption.
120
Picton Property Income Limited Annual Report 2018 EPRA disclosures (unaudited) continued
Water
We have continued our methodology for water data collection in 2017, which was adopted in 2016. This provides the first year
of reliable like-for-like comparisons; covering 13 of the 19 sites where we collect water data. Six sites were removed due to being
acquired or disposed during the reporting year, with the remaining sites removed due to no landlord water supply.
Initiatives put in place to try to reduce water usage across our portfolio have resulted in a 20% reduction in like-for-like water
consumption. Unfortunately, due to the timings of invoices, there is a high-level estimation level which currently sits at 38%. We are
looking at ways we can improve on our data accuracy in this area.
The table below sets out the Group’s water withdrawal by source.
Sector
Industrial
Office
Retail and Leisure
Total
Total water
withdrawn
by source
(m³)
1,834
47,941
166
49,941
Building
water
intensity
(m³/m²/year)
0.32
0.56
0.08
0.52
1. The above data covers 19 out of 19 sites where the landlord controls the supplies which in some cases include tenant
consumption where the landlord controls the water contract. Any data from occupier controlled contracts has been excluded
and is outlined in the occupier consumption section. Where data was unavailable, consumption was estimated by prorating the
daily rate of consumption calculated from the available information. Of the total water consumption 38% is estimated. This is due
to an issue with water bills at one key site which has been resolved for future reporting.
2. Consumption data is based off invoice readings with initial readings taken from last year’s report where possible, to mitigate
double counting of data.
3. Caution should be taken when using the intensity indicators as occupier-obtained water consumption is not included in the
above calculations and the whole property area (m2) was used as the denominator.
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)
2017
1,834
36,513
34
38,381
2016
1,808
46,212
50
48,070
Change
1%
-21%
-31%
-20%
1. The above data covers 13 out of 19 sites where the landlord controls the supplies.. Some landlord supplies include occupier
consumption where the landlord controls the water contract. Any data from occupier controlled contracts has been excluded
and is outlined in the occupier consumption section. Where data was unavailable, consumption was estimated by prorating the
daily rate of consumption calculated from the available information. Of the total water consumption 38% is estimated. This is due
to an issue with water bills at one key site which has been resolved for future reporting.
2. Consumption data is based off invoice readings with final readings taken from last year’s report where possible, to mitigate
double counting of data.
3. Sites have been excluded if they were not in Picton’s ownership for the entire 2016 and 2017 period.
121
Additional Information Waste
We continue to monitor our waste production and following on from the successful methodology change in 2015 we have managed
to obtain complete waste data direct from suppliers. Therefore none of waste data has been estimated, with ten out of 14 sites
included in the like-for-like comparison. The remaining sites have been excluded due to not having full coverage over both reporting
years or no landlord waste collections.
We have migrated several of our sites to a new waste service provider which has reduced the amount of waste to landfill. This has
resulted in a 53% drop in like-for-like comparisons with landfill waste only accounting for 7% of the total waste treatment. Waste
production is significantly down on a like-for-like basis with a reduction of 20% across the portfolio. We continue to work with
occupiers to implement measures were possible to encourage recycling and lowering the amount of waste we produce.
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
(%)
Hazardous
(kg)
–
–
Recycling
(kg)
–
113,910
Composting
(kg)
–
3,900
Recovery
(kg)
–
57,265
Incineration
(kg)
–
35,588
–
–
193,000
306,910
–
3,900
–
57,265
193,409
228,997
Landfill
(kg)
–
44,421
–
44,421
Other
(kg)
–
–
–
–
Total
(kg)
–
255,084
386,409
641,493
0%
48%
1%
9%
35%
7%
0%
100%
1. The above data covers 14 out of 14 sites where the landlord controls the supplies which in some cases include occupier
consumption where the landlord controls the waste contract. Any data from occupier controlled contracts has been excluded
and is outlined in the occupier consumption section. Waste information is obtained directly from waste providers where it has
been identified that there is a waste contract under Picton’s name.
2. 0% of waste data was estimated.
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
Office
Retail and Leisure
2017
99,544
193,000
292,544
3,900
–
3,900
56,135
–
56,135
35,588
193,409
228,997
20,162
–
20,162
215,329
386,409
601,738
2016
58,806
265,000
323,806
3,800
–
3,800
40,639
–
40,639
76,577
261,000
337,577
42,583
–
42,583
222,405
526,000
748,405
Change
69%
-27%
-10%
3%
3%
38%
–
38%
-54%
-26%
-32%
-53%
–
-53%
-3%
-27%
-20%
1. The above data covers 10 of the 14 sites where the landlord controls the supplies. In some cases occupier waste consumption
was included where the landlord controls the waste contract. Any data from occupier controlled contracts has been excluded
and is outlined in the occupier consumption section. Waste information is obtained directly from waste providers where it has
been identified that there is a waste contract under Picton’s name.
2. 0% of waste data was estimated.
3. Sites have been excluded if they were not in Picton’s ownership for the entire 2016 and 2017 period.
122
Picton Property Income Limited Annual Report 2018 EPRA disclosures (unaudited) continued
Building certification
Sector
Industrial
Office
Retail and Leisure
Total
Green building
certification
(%/m2)
0%
25%
0%
5%
1. The above data covers 51 out of 51 sites, excluding disposed sites. This means that data includes fully occupier controlled sites
and sites which were acquired during the 2017 reporting year.
2. Calculations are based off total floor areas for each site which has a certification.
3. Angel Gate has ISO 14001 and Green Apple awards.
4. Metro Centre, Salford has a BREEAM Excellent rating.
5. Tower Wharf, Bristol has a BREEAM Excellent rating.
Portfolio EPC coverage
Sector
Industrial
Office
Retail and Leisure
Total
Proportion of EPCs by rating (%)
A
–
–
1
1
0%
B
2
9
4
15
4%
C
48
79
27
154
38%
D
60
81
25
166
40%
E
24
18
16
58
14%
F
1
–
2
3
1%
G Exempt
1
1
6
–
–
2
3
7
2%
1%
Total
137
193
77
407
100%
1. The above data covers 51 out of 56 sites as disposed sites during 2017 have not been included.
2. Calculations are based on the number of units, therefore an EPC covering multiple units would be counted multiple times due to
it being applicable to multiple occupiers.
3. Two F/G rated EPCs have not been lodged but are included in the F/G rating calculation as we know that is the correct
EPC rating.
Business Travel
This is the third year we have reported on Picton Directors and employees expensed mileage via car, air and train. For a fair analysis,
we report distances as the crow flies, resulting in an impartial assessment between journeys.
Due to the nature of our business and the importance of face to face meetings and conducting property inspections, business travel
will continue to be a key part of our operations. However, we look to cut down on journeys were applicable, through combining site
visits and removing non-essential journeys. We have seen a 17% reduction in mileage across all transport types. There has been a
slightly smaller decline in emissions, but it is still positive to see a reduction in the emissions from our business travel.
The table below sets out the Scope 3 business travel emissions for Picton Directors and employees.
Transport type
Car
Air
Train
All transport
Total
distance
2017
(km)
12,115
23,498
25,015
60,629
Total
distance
2016
(km) Change (%)
-5%
-4%
-29%
-17%
12,743
24,525
35,362
72,629
1. The above data covers 100% of Picton’s business travel expenses for 2017.
2. If distances were not provided, they were calculated by using “as the crow flies” distances to try to ensure consistency
between routes.
123
Additional Information Transport type
Car
Air
Train
All transport
Total
emissions
2017
( tCO2e )
2.21
3.32
1.17
6.70
Total
emissions
2016
( tCO2e ) Change (%)
-8%
-9%
-48%
-13%
2.40
3.61
1.73
7.74
1. The above data covers 100% of Picton’s business travel expenses for 2017.
2. If distances were not provided, they were calculated by using “as the crow flies” distances to try to ensure consistency
between routes.
Austin Friars
This is the second year the Group has reported on electricity and water consumption data from our office premises at Austin
Friars. 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.
The tables below set out the total energy consumption and associated emissions from the Group’s office premises, while also
providing a like-for-like comparison with 2016 data.
Supply
Electricity
Water
Supply
Electricity
Water
Total
2017
Consumption
(kWh & m3)
145
35,180
2016
Consumption
(kWh & m3)
105
29,343
Total
emissions
2017
(tCO2e)
0.15
12.37
12.52
Total
emissions
2016
(tCO2e)
0.11
12.09
12.20
1. The above data covers 100% of Picton’s occupied office consumption for 2017.
2. Data is based off invoiced consumption which has been estimated. Total consumption for the site is then apportioned based on
floor area occupancy of each tenant in the building.
Occupier consumption
We recognise that occupier consumption is an important part of the energy consumption at sites where we do not have operational
control. As such our occupier engagement programme is designed to work with occupiers to help them reduce their consumption,
and in turn improve the transparency of our reporting. This is the second reporting year where we have collected occupier data,
moving towards reporting whole building consumption and understanding the landlord-tenant split in energy consumption. As this
is only the second year reporting occupier consumption, there is still a limited data set which we are looking to expand year on year.
We have successfully collected waste data in a more reliable format and therefore have begun reporting on occupier waste data
from 2017.
We have had a small improvement in occupier data collection percentages with 47% of occupier controlled floor area covered,
compared to 43% in 2016. We continue to collect occupier data ahead of our GRESB submission, so this figure is expected to
improve in future reporting. Like-for-like comparisons allow us to approach occupiers regarding their consumption if we see any
abnormalities. There has been greater inconsistency with the water data collection, which is partly skewing like-for-like figures. We
continue to look for new ways to collect more accurate occupier data.
124
Picton Property Income Limited Annual Report 2018 EPRA disclosures (unaudited) continued
The tables below set out occupier consumption data by property type.
Absolute
Occupier
Data
Electricity
2017
(kWh)
Absolute
Occupier
Data
Electricity
2016
(kWh)
15,446,156
15,629,875
722,233
696,095
2,900,809
2,173,670
19,069,198
18,499,640
Absolute
Occupier
Data Natural
Gas
2017
(kWh)
Absolute
Occupier
Data Natural
Gas
2016
(kWh)
11,262,610
8,817,928
15,882
–
3,336,836
1,291,044
14,615,328
10,108,972
Change
(%)
-1%
4%
33%
3%
Absolute
Occupier
Data Water
2017
(m3)
Absolute
Occupier
Data Water
2016
(m3)
17,114
1,667
12,749
31,530
48,731
–
1,754
50,485
Absolute
Occupier
Data Waste
2017
(tonnes)
Absolute
Occupier
Data Waste
2016
(tonnes)
717
86
62
865
N/A
N/A
N/A
Change
(%)
-65%
–
627%
-38%
Change
(%)
28%
–
158%
45%
Change
(%)
–
–
–
Industrial
Office
Retail and Leisure
Total Consumption
Industrial
Office
Retail and Leisure
Total Consumption
1. The above data is based on the number of units due to not all occupiers providing consumption figures at each site. 2016 saw
23 out of 226 occupiers provide consumption data, covering 43% of occupier controlled demises. 2017 saw 27 out of 226
occupiers provide consumption data, covering 47% of occupier controlled demises.
2. Waste data has only been reported in 2017 due to inconsistencies in the data provided by occupiers during the 2016 data
collection process.
3. As these areas are occupier controlled, we have no control as to whether consumption increases or decreases. However, we do
work with occupiers where possible to help them reduce their energy consumption.
125
Additional Information The table below sets out the like-for-like occupier consumption data for 2017 by property type.
Occupier
Data
Electricity
2017
(kWh)
Occupier
Data
Electricity
2016
(kWh)
Change
(%)
Occupier
Data
Natural
Gas
2017
(kWh)
Occupier
Data
Natural
Gas
2016
(kWh)
Occupier
Data
Water
2017
(m3)
Occupier
Data
Water
2016
(m3)
Change
(%)
14,884,127 13,640,483
9% 9,832,254
8,169,321
20%
11,104
40,554
Industrial
Office
Retail and Leisure
1,364,643
2,166,744
-37% 1,309,655
1,291,044
–
–
–
–
–
–
1%
–
–
1,586
1,754
Total Consumption 16,248,770 15,807,227
3% 11,141,909
9,460,365
18%
12,690
42,308
Change
(%)
-73%
–
-10%
-70%
1. The above data is based on the number of units due to not all occupiers providing consumption figures at each site. Like-for-like
data includes information on 15 out of 226 occupiers with all remaining units being excluded due to not having a complete data
set for both years.
2. As waste data has only been reported in 2017 due to inconsistencies in the data provided by occupiers during the 2016 data
collection process, it has been excluded from the like-for-like analysis.
3. As these areas are occupier controlled, we have no control as to whether consumption increases or decreases. However, we do
work with occupiers where possible to help them reduce their energy use.
126
Picton Property Income Limited Annual Report 2018 Supplementary 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)
2018
£000
4,408
3,652
1,607
9,667
470,252
2.1%
1.1%
2017
£000
5,524
3,636
1,446
10,606
429,546
2.5%
1.2%
2016
£000
4,848
2,901
1,510
9,259
400,415
2.3%
1.1%
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
2018
£000
214,040
(31,510)
182,530
683,800
26.7%
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
2018
£000
721,312
(31,510)
689,802
487,355
41.5%
2017
£000
664,611
(33,883)
630,728
441,925
42.7%
2016
£000
686,814
(22,759)
664,055
417,132
59.2%
127
Additional Information Property portfolio
Properties valued in excess
of £30 million
■ Parkbury Industrial Estate,
Radlett, Herts.
■ River Way Industrial Estate,
River Way, Harlow, Essex
■ Angel Gate, City Road, London EC1
■ Stanford House, Long Acre,
London WC2
Properties valued between
£25 million and £30 million
■ 50 Farringdon Road, London EC1
■ Tower Wharf, Cheese Lane, Bristol
Properties valued between £20
million and £25 million
■ Belkin Unit, Express Business Park,
Shipton Way, Rushden, Northants.
■ 30 & 50 Pembroke Court,
Chatham, Kent
■ Colchester Business Park,
The Crescent, Colchester, Essex
Properties valued between
£15 million and £20 million
■ B&Q, Queens Road, Sheffield
Properties valued between
£10 million and £15 million
■ Unit 3220, Magna Park, Lutterworth, Leics.
■ Parc Tawe North Retail Park,
■ Angouleme Retail Park, George Street,
Link Road, Swansea
Bury, Greater Manchester
■ Metro, Salford Quays, Manchester
■ 180 West George Street, Glasgow
■ Citylink, Addiscombe Road,
■ Grantham Book Services, Trent Road, Grantham, Lincs.
Croydon
■ Gloucester Retail Park,
Eastern Avenue, Gloucester
■ 401 Grafton Gate East, Milton Keynes, Bucks.
■ The Business Centre, Molly Millars Lane,
Wokingham, Berks.
■ Lyon Business Park, Barking, Essex
■ Sundon Business Park, Dencora Way, Luton, Beds.
Properties valued between
£5 million and £10 million
■ 62-68 Bridge Street, Peterborough
■ Regency Wharf, Broad Street, Birmingham
■ Trident House, Victoria Street, St Albans, Herts.
■ Unit 1 & 2, Kettlestring Lane, York
■ Crown & Mitre Complex, English Street, Carlisle, Cumbria
■ Queens House, St Vincent Place, Glasgow
■ Longcross Court, Newport Road, Cardiff
■ Easter Court, Europa Boulevard, Warrington
■ 53-57 Broadmead, Bristol
■ Unit 1 & 2, Western Industrial Estate, Downmill Road,
Bracknell, Berks.
■ Premier Foods Unit, Haynes Way, Rugby, Warwickshire
■ Scots Corner, High Street, Kings Heath, Birmingham
■ 78-80 Briggate, Leeds
■ Thistle Express, The Mall, Luton, Beds.
■ 800 Pavilion Drive, Northampton Business Park, Northampton
■ Sentinel House, Harvest Crescent, Fleet, Hants.
■ Datapoint, Cody Road, London E16
■ Nonsuch Industrial Estate, Kiln Lane, Epsom, Surrey
■ Vigo 250, Birtley Road, Washington, Tyne and Wear
Properties valued under £5 million
■ Atlas House, Third Avenue, Marlow, Bucks.
■ 17-19 Fishergate, Preston, Lancs.
■ Merchants House, Crook Street, Chester
■ 18-28 Victoria Lane, Huddersfield, West Yorks.
■ 72-78 Murraygate, Dundee
■ 7-9 Warren Street, Stockport
■ Abbey Business Park, Mill Road, Newtownabbey, Belfast
■ Magnet Trade Centre, 6 Kingstreet Lane, Winnersh,
Reading
■ Waterside House, Kirkstall Road, Leeds
■ 6-12 Parliament Row, Hanley, Staffs.
128
Picton Property Income Limited Annual Report 2018
Five 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
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.
2018
2017
2016
2015
2014
38.5
(3.7)
(1.6)
(0.3)
32.9
(9.7)
23.2
(0.5)
22.7
41.5
64.2
18.5
2018
670.7
(214.0)
30.7
487.4
90
90
11.9
3.4
122
84.3
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
35.9
(2.9)
(1.5)
–
31.5
(11.4)
20.1
(0.2)
19.9
44.9
64.8
17.8
2016
646.0
(249.5)
20.6
417.1
77
77
12.0
3.3
112
69.8
30.3
(2.6)
(1.2)
–
26.5
(10.9)
15.6
(0.3)
15.3
53.6
68.9
13.1
2015
532.9
(232.8)
69.9
370.0
69
69
15.4
3.0
117
71.8
27.7
(2.1)
(1.1)
–
24.5
(10.9)
13.6
(0.4)
13.2
24.1
37.3
10.7
2014
417.6
(234.0)
30.5
214.1
56
56
10.4
3.0
124
56.8
129
Additional Information Glossary
AIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Association of Investment Companies.
AIFMD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Alternative Investment Fund Managers Directive.
Annual Rental Income . . . . . . . . . . . . . . . . . . Cash rents passing at the Balance Sheet date.
Contracted rent . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Energy Performance Certificate.
EPRA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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.
Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Picton Property Income Limited and its subsidiaries.
IASB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International Accounting Standards Board.
IFRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International Financial Reporting Standards.
Property Income return . . . . . . . . . . . . . . . . . The ungeared income return of the portfolio as calculated by MSCI IPD.
Initial yield. . . . . . . . . . . . . . . . . . . . . . . . . . . . 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.
Lease incentives. . . . . . . . . . . . . . . . . . . . . . . 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 IPD . . . . . . . . . . . . . . . . . . . . . . . . . . . . MSCI Investment Property Databank. An organisation supplying independent market
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . indices and portfolio benchmarks to the property industry.
NAV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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. . . . . . . . . . . . . . . . . . . . . . . . . . . Space where the passing rent is above the ERV.
Rack-rented . . . . . . . . . . . . . . . . . . . . . . . . . . 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.
130
Picton Property Income Limited Annual Report 2018
Financial calendar
June 2018 NAV
announcement
25 July 2018 (provisional)
Annual Results
announced
5 June 2018
Annual Results
posted to shareholders
27 June 2018
Annual General Meeting
13 September 2018
2018 Half Year Results
to be announced
December 2018
NAV announcement
November 2018
(provisional)
January 2019 (provisional)
Dividend Payment Dates
August
November
February
May
131
Additional Information Shareholder information
Investment Manager
Picton Capital Limited
28 Austin Friars
London
EC2N 2QQ
Media
Tavistock Communications
1 Cornhill
London
EC3V 3ND
T: 020 7628 4800
E: enquiries@picton.co.uk
T: 020 7920 3150
E: jcarey@tavistock.co.uk
Tax Adviser
Deloitte LLP
Hill House
1 Little New Street
London
EC4A 3TR
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
Walker House
Exchange Flags
Liverpool
L2 3YL
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
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.
www.picton.co.uk
Directors
Nicholas Thompson
(Chairman)
Mark Batten
(appointed 1 October 2017)
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
Registrar
Computershare Investor
Services (Guernsey) Limited
1st Floor, Tudor House
Le Bordage
St Peter Port
Guernsey
GY1 1BD
T: 0370 707 4040
E: info@computershare.co.je
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
Corporate Brokers
JP Morgan
Securities Limited
25 Bank Street
London
E14 5JP
Stifel Nicolaus
Europe Limited
150 Cheapside
London
EC2V 6ET
Independent Auditor
KPMG Channel Islands
Limited
Glategny Court
Glategny Esplanade
St Peter Port
Guernsey
GY1 1WR
132
Picton Property Income Limited Annual Report 2018 Occupier focused
opportunity led
Picton property income limited
Trafalgar Court
Les Banques
St Peter Port
Guernsey
GY1 3QL
01481 745001
www.picton.co.uk