Picton Property Income Limited
Annual Report 2020

Plain-text annual report

P i c t o n P r o p e r t y I n c o m e L i m i t e d A n n u a l R e p o r t 2 0 2 0 Occupier focused, Opportunity led. Picton Property Income Limited Annual Report 2020 P i c t o n P r o p e r t y I n c o m e L i m i t e d A n n u a l R e p o r t 2 0 2 0 Business Overview Welcome Welcome to our 2020 Annual Report Driven by our occupier focused, opportunity led approach, we acquire, create and manage buildings for a wide range of commercial occupiers. By applying insight, agility and a personalised service, we provide attractive, well-located spaces to help our occupiers succeed. Contents Business Overview Welcome 2020 Highlights Picton at a Glance Chairman’s Statement Strategic Report Business Model Our Marketplace Our Strategy Chief Executive’s Review Key Performance Indicators Portfolio Review Financial Review Principal Risks Being Responsible Section 172 Companies Act 2006 Statement Governance Chairman’s Introduction Board of Directors Our Team Corporate Governance Report Nomination Committee Report Audit and Risk Committee Report Remuneration Report Property Valuation Committee Report Directors’ Report 2 4 6 8 10 14 16 24 28 38 41 46 52 54 56 58 60 64 66 69 84 85 Financial Statements Independent Auditor’s Report Consolidated Statement of Comprehensive Income Consolidated Statement ofChangesin Equity Consolidated Balance Sheet Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements Additional Information Supplementary Disclosures Property Portfolio Five Year Financial Summary Glossary Financial Calendar Shareholder Information 88 91 92 93 94 95 112 116 117 118 119 120 Visit our website www.picton.co.uk Investment Rationale 1 2 3 Opportunity for income and capital growth. Diversified exposure to the UK commercial property market. Established a track record of outperformance. As an asset class, UK commercial property is known for its stable income characteristics, which over the long-term have been shown to deliver over 70% of its total return. Property is also considered cyclical, correlated with economic growth, and there is the potential for capital appreciation as well as income growth. Ourdiversifiedpropertyportfolio consists of 47 assets in the industrial,office,retailandleisure sectors, generating income from around 350 occupiers across a wide range of businesses. We are total return driven with an income bias and have outperformed the MSCI UK Quarterly Property Index delivering upperquartilereturnsoverone, three,fiveandtenyears. 4 5 6 Our occupier focused, opportunity led approach ensures we actively manage our assets, maintain high occupancy and create the space our occupiers need. Our asset management team has a hands-on approach and maintains a close relationship with our occupiers. Our experience, knowledge and personalised service ensures we provide attractive, well-located spaces to help our occupiers’ businesses succeed. Our business model ensures we have the flexibility to adapt to changing market conditions. Our in-depth understanding of the UK commercial property market enables us to identify and source value across different sectors and geographies and reposition our portfolio through the property cycle. We operate a covered dividend policy, allowing us to invest back into the portfolio. Our responsible approach to business. We have a responsible and ethical approach to business and sustainability is embedded in our corporate strategy. Visit our website for more information on why to invest www.picton.co.uk 1 Picton Property Income Limited Annual Report 2020Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewBusiness Overview 2020 Highlights Highlights Financial highlights ӱ Profitaftertaxof£22.5million ӱ Netassetsof£509million,or93ppershare ӱ Total return of 4.5% ӱ Earnings per share of 4.1p ӱ Dividend cover of 105% Strengthened balance sheet ӱ 14% reduction in total debt outstanding to£167.5million ӱ Loan to value ratio reduced to 22% ӱ Raised£7millionofnon-dilutiveequity ӱ New£50millionrevolvingcreditfacility completed post year end Outperforming property portfolio ӱ Total property return of 5.3%, outperforming MSCI UK Quarterly Property Index of -0.5% ӱ Portfoliotopquartileoutperformance againstMSCIoverone,three,fiveandtenyears ӱ Like-for-like valuation increase of 1.4% ӱ Like-for-like rental income increase of 1.2% ӱ Like-for-like estimated rental value increase of 1.3% ӱ Occupancy at 89% ӱ 104 asset management transactions completed including: – 20 rent reviews – 10% ahead of ERV – 31 lease renewals or regears – 12% ahead of ERV ӱ Further tax savings as result of REIT regime – 35 lettings or agreements to lease – 2% ahead of ERV ӱ Twoassetdisposalsfor£34.1million,15% ahead of March 2019 valuations ӱ £9millioninvestedintorefurbishmentprojects Responsible stewardship ӱ Embedded sustainability into corporate strategy, completing materiality assessment review ӱ Improved portfolio EPC ratings ӱ Incorporatedenergyefficiencymeasuresinto building refurbishments ӱ Further developed occupier and employee engagement programmes 2 Picton Property Income Limited Annual Report 202093p NAV per share (2019: 93p) (2018: 90p) £23m Profit after tax (2019:£31m) (2018:£64m) £509m Net assets (2019:£499m) (2018:£487m) 4.1p 3.5p Earnings per share (2019: 5.7p) (2018: 11.9p) Dividends per share (2019: 3.5p) (2018: 3.4p) 105% Dividend cover (2019: 122%) (2018: 122%) £665m Property valuation (2019:£685m) (2018:£684m) 4.5% Total return (2019: 6.5%) (2018: 14.9%) 3.6% Total shareholder return (2019: 10.1%) (2018: 4.8%) EPRA measures 93p EPRA NAV per share (2019: 93p) (2018: 90p) 4.8% EPRA net initial yield (2019: 4.9%) (2018: 5.5%) 88p EPRA NNNAV per share (2019: 88p) (2018: 87p) 5.4% EPRA ‘topped-up’ net initial yield (2019: 5.3%) (2018: 5.9%) £19.9m 3.7p EPRA earnings (2019:£22.9m) (2018:£22.6m) 28.3% EPRA cost ratio1 (2019: 22.9%) (2018: 23.7%) EPRA earnings per share (2019: 4.3p) (2018: 4.2p) 20.2% EPRA cost ratio2 (2019: 19.5%) (2018: 19.2%) 11.5% EPRA vacancy rate (2019: 10.3%) (2018: 4.2%) 1 Including direct vacancy costs 2 Excluding direct vacancy costs The European Public Real Estate Association’s (EPRA) mission is to promote, develop and represent the European public real estate sector. As an EPRA member, Picton fully supports the EPRA Best Practices Recommendations which recognise the key performance measures, as detailed above. We have also highlightedotherspecificEPRA metrics throughout the Report. Read more on pages 112–114 Alternative performance measures We use a number of alternative performance measures (APMs) when reporting on the performance ofthebusinessanditsfinancial 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 above. We have reported these for a number of years in order to provide a consistent comparison with similar companies. In the Additional 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, cost ratio, occupier retention rate, EPC ratings and employeesatisfaction.Thedefinition of these measures, and the rationale for their use, is set out in the Key Performance Indicators section. 3 Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewPicton Property Income Limited Annual Report 2020Business Overview Picton at a Glance Occupier focused, Opportunity led. We are an award winning Real Estate Investment Trust (REIT) investing in UK commercial property. Our diversified property portfolio consists of 47 assets with over 80% invested in the industrial and office sectors. Weacquire,createandmanage buildings for around 350 commercial occupiers across a wide range of businesses. By applying insight, agility and a personalised service, we provide attractive, well-located spaces to help our occupiers’ businesses succeed and in turn enhance value for our shareholders. We have a long-term track record and have outperformed the MSCI UK Quarterly Property Index producingupperquartilereturns overone,three,fiveandtenyears. Our purpose Through our occupier focused, opportunity led approach, we aim to be one of the consistently best performingdiversifiedUKREITs. To us this means being a responsible owner of commercial real estate, helping our occupiers succeed and being valued by all our stakeholders. Our values Principled We are professional, diligent and strategic. Demonstrated through our transparent reporting, occupier focused approach, alignment with shareholders, delivery of our Picton Promise and commitment to sustainability and positive environmental initiatives. Perceptive We are insightful, thoughtful and intuitive. Demonstrated through our long-term track record, our gearing strategy, diverse sector allocation and engagement with our occupiers. Progressive We are forward-thinking, enterprising, and continually advancing. Demonstrated through our culture, work ethic and proactivity. Industrial weighting 48% South East Rest of UK Office weighting 34% 35.4% 12.5% South East Rest of UK City & West End 17.4% 12.2% 4.2% Retail and Leisure weighting 18% Retail Warehouse High Street South East High Street Rest of UK Leisure 7.3% 5.2% 4.1% 1.7% Read more on pages 32-33 Read more on pages 34–35 Read more on pages 36–37 4 Picton Property Income Limited Annual Report 2020Corporate statistics Portfolio statistics 3.9% Dividend yield 1.1% Cost ratio 22% Loan to value £509m Net assets £485m Market capitalisation £168m Borrowings Top five occupiers Occupier Public sector Belkin Limited B&Q Plc The Random House Group Limited Snorkel Europe Limited Top five assets Assets Parkbury Industrial Estate, Radlett, Herts. River Way Industrial Estate, Harlow, Essex Angel Gate, City Road, London EC1 Stanford Building, Long Acre, London WC2 Tower Wharf, Cheese Lane, Bristol Awards Citywire Investment Trust Awards – Winner 2019, 2018, 2017 Moneywise Investment Trust Awards – 2018 MSCI UK Property Investment Awards – 2018 47 4.2m sq ft Number of assets Area £665m Value 89% Occupancy 4.9% Net initial yield 6.4% Reversionary yield Contracted rent (£m) % of total contracted rent 1.7 1.7 1.2 1.2 1.1 6.9 Property type Industrial Industrial Office Retail Office 4.3 4.2 3.1 3.0 2.8 17.4 Capital value (£m) >40 >40 30–40 30–40 20–30 Investment Company of the Year Awards – Property Winner 2018, 2017, 2016 Money Observer Trust Awards – Best Property Trust Winner 2018, 2017, 2016 EPRA Gold Awards – Financial Reporting – 2019, 2018, 2017, 2016, 2015 Sustainability Reporting – 2019 5 Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewPicton Property Income Limited Annual Report 2020Business Overview Chairman’s Statement An encouraging year of strategic progress and achievement. I am pleased to report another successful year, delivering a profit after tax of £23 million, despite the uncertain political and economic backdrop created by Brexit and the effects of the Covid-19 pandemic. Further to the actions taken last year, we are in a strong position with low gearing of 22%, a healthy balance sheet and over 80% of the portfolio investedintheindustrialandoffice sectors which have been less impacted by the lockdown. Throughout the year we have been operating in a UK property market characterised by fewer investment transactions and an occupational market where activity has slowed. Many companies were already in ‘wait and see’ mode awaiting an outcome on Brexit, and have now moved into temporary lockdown as a result of Covid-19, although Government support has helped mitigate a very difficultsituation. Covid-19 impact and response The defensive positioning of the Company over the last 12 months has meant that we are in a relatively strong position and able to withstand the unprecedented shock of the Covid-19 pandemic. We have the lowest loan to value ratio since the inception of the business, as well as fully undrawn loan facilitiestotalling£50million. Our short-term targets are focused around reducing the impact on our business and working with our occupierstogetthroughthisdifficult situation. We recognise both the short and longer-term effects on the business and the importance of adaptingourstrategytoreflectthe changing habits and needs of our occupiers. We have achieved good rentcollectionfigurescomparedto the market and have been working withoccupiersasrequiredtohelp them through this crisis. Recognising the two components of property returns are not only income but capital performance, we believe this is also the best approach to achieving long-term value for shareholders. As the lockdown starts to gradually ease, our attention is turning to the reoccupation of our buildings, the restartingofrefurbishmentprojects and leasing space, ensuring all of these activities are managed safely. Performance The property portfolio has again deliveredupperquartileperformance against the MSCI UK Quarterly Property Index over the year. Likewise, our shareholder total return for the periodwasintheupperquartilerange compared to our peers. Our total return was 4.5% over the year. Whilst this is relatively modest for Picton, it compares favourably to the negative market return, as measured by MSCI. EPRA earnings were lower for the year, whichisinpartareflectionofthe operating environment that has hindered progress with our pipeline of lettingsandrefurbishments.Equally, debt reduction through asset sales to protect the longer-term income profilehasalsohadashort-term impact on earnings. We are cognisant of the discount to net asset value that has emerged since the year end and believe that there is a clear disconnect between the performance of the Group and the share price. A focus of the Board will be to ensure that we reduce this discount over the coming year. 6 Picton Property Income Limited Annual Report 2020Purpose and strategy During the year, the Board has reviewed the purpose and strategy of the Group to ensure Picton, as a UK REIT, continues to deliver attractive income and capital returns to its shareholders over the long-term. As a result we haveredefinedourpurposeas: “Through our occupier focused, opportunity led approach, we aim to be one of the consistently best performingdiversifiedUKREITs.Tous this means being a responsible owner of commercial real estate, helping our occupiers succeed and being valued by all our stakeholders.” We have in place three distinct strategic pillars: Portfolio Performance, Operational Excellence and Acting Responsibly. These will ensure we are able to deliver on our purpose. I think it is also important to highlight the progress we have been making on sustainability and we have this year formally embedded this into our corporate strategy. Further details of this and our business model are included on pages 8 to 9. Property portfolio The outperformance of our property portfolio was driven by several factors. It is well positioned with over 80% in the better performing industrial and officesectors.Thebestperforming subsector according to MSCI was South East industrial, which is where over 35% of our portfolio is invested. Key themes during the year were reinvestment into the portfolio and upgrading of assets. This activity has delivered letting successes and retained occupiers across the portfolio. We have achieved considerable success working with existing occupiers to extend income. During theyearwesawasignificantnumber of transactions aimed at mitigating income risk due to materialise in 2020/21. This included income with four of our largest occupiers. We made two disposals at a healthy premium to the March 2019 valuation, which enabled us to capture upside that had been created through asset management. There were no acquisitionsduringtheyear. While we have grown like-for-like passing rent over the period, we would have liked to make further progress andhavetwokeyvoidstofill:one in Rugby, where the refurbishment completed in February, and another at Stanford Building in Covent Garden, where the refurbishment has been delayed due to Government lockdown restrictions. These, along with other vacancies, provide scope for us to increase occupancy and income going forwards. Capital structure Our strategic approach in recent years has meant that we have entered the Covid-19 crisis in a position of strength. We further reduced our loan to value ratio over the course of the year through a combination of asset sales, debt repayment and a small non- dilutiveequityraiselastJune. Since the year end, we have completed a new single revolving credit facility for an initial three- year term, replacing two existing facilities that were due to expire in 2021. This gives the Company accesstoupto£50millionof undrawn facilities, providing us with a lower cost of debt and even greaterheadroomandflexibility. Dividends We are acutely aware that the provision of income is important to investors, so our recent decision to reduce the dividend, even if temporary, was not taken lightly. While Picton is in a much better place than most of its peers, we are not immune to the impact that Covid-19 is having on our occupiers. Theadditionalflexibilitythatthis extra headroom provides will enable us to support our occupiers where appropriate, and will help us to protect as far as possible both income and capital over the longer-term. This was a prudent decision taken in the long- term interest of all of our stakeholders. Governance and Board composition I had expected to write this report as Chairman for the last time as I was duetoretirefromtheBoardinJuneof this year. Covid-19 has created all sorts of unforeseen circumstances and my proposed successor, Nicholas Wiles, has had to step down from the Board following his recent and unexpected appointment as Chief Executive at PayPoint Plc, having previously been Chairman. We have recommenced theprocesstofindasuitable successor, but it is vitally important in these times that continuity is provided,soattherequestofthe BoardIhaveagreedandconfirmed my commitment to remain in position until a new Chair is in place. We have also started the process to appoint a successor for Roger Lewis, currently Chair of the Property Valuation Committee, and we hope to be able to make a further announcement in that regard shortly. Outlook Whilst our focus remains very much around short-term issues and mitigating the impact of Covid-19, we recognise that we must also be thinking strategically about the changing long-term trends and demand for commercial property. We think these recent events have accelerated embedded trends in several areas, including online retail,flexibleworking,digitaland technological disruption to name but a few. In addition, a growing sense of environmental impact and the need for change has been self- evident in lockdown. We had already been considering disruptive trends and whilst we believe the portfolio is well positioned, this situation is evolving and continues to be kept under constant review. I believe our purpose, strategy and business model ensure we are well placed to respond to both the challenges and opportunities that lie ahead. Nicholas Thompson Chairman 22June2020 7 Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewPicton Property Income Limited Annual Report 2020Strategic Report Business Model Our Business Model Our business model creates value through owning a portfolio that generates a diversified and stable income stream. We have the flexibility to adapt to changing market conditions and so deliver value to our stakeholders through the property cycle. Through our occupier focused, opportunity led approach, we aim to be one of the consistently best performingdiversifiedUKREITs.Tousthismeansbeing a responsible owner of commercial real estate, helping our occupiers succeed and being valued by all our stakeholders. In order to deliver on our purpose, we have in place three distinct strategic pillars; Portfolio Performance, Operational Excellence and Acting Responsibly. These pillars include a range of strategic priorities which guide the direction of our business and are regularly reviewed. Read more on pages 14–15 Shareholders Occupiers Communities Our people Environment For more detailed information on our stakeholders, see our Section 172 statement Read more on pages 52–53 8 Picton Property Income Limited Annual Report 2020Our business model is driven by knowledge, expertise and research led decision making. 1 Stock selection and acquisition 3 Selling assets to recycle into better opportunities 2 Creating value - buying into growth assets, locations or sectors This is underpinned by: Risk management Our diverse portfolio and occupier base spreads risk and generates a stable income stream throughout the property cycle. We will adapt our capital structure and use debt effectively to achieve enhanced returns. We will maintain a covered dividend policy, to generate surplus cash and allow us to invest back into the portfolio. Responsibility We have a responsible and ethical approach to business and sustainability is embedded in our corporate strategy. We understand the impact of our business on the environment and are committed to creating and delivering value for the benefitofallourstakeholders. 1 Stock selection and acquisition Wehaveestablishedadiversified UK property portfolio and while income focused, we will consider opportunities where we can enhance value and/or income. 2 Creating value through proactive asset management - buying into growth assets, locations or sectors Our diverse occupier base generates a stable income stream, which we aim to grow through active management and capturing market rental uplifts. Our occupier focused, opportunity led approach ensures we create space that meets our occupiers’ needs in order to maintain high levels of occupancy across the portfolio. 3 Selling assets to recycle into better opportunities We identify opportunities at the right point in the property cycle to dispose of assets to allow reinvestment. Read more on pages 19–23 9 GovernanceFinancial StatementsAdditional InformationPicton Property Income Limited Annual Report 2020Strategic ReportBusiness Overview Strategic Report Our Marketplace Our Marketplace Economic backdrop For much of the year Brexit weighed heavily on the UK economy. The lack of clarity surrounding the nature and timing of the UK’s exit from the European Union was responsible for widespread political and economic uncertainty. Weaker productivity growth came as a result of reduced business investment and the redirection of resources to prepare for possible Brexit outcomes. Despite Brexit, economic indicators remained reasonably robust. In 2019 Gross Domestic Product (GDP) grew by 1.4%. To put this into an internationalcontext,theG7Major Advanced Economies had an average GDP growth of 1.6% per annum for the group, with the UK in third place behind the USA and Canada. For the three months leading up to March 2020, the UK’s unemployment rate was at a near record low of 3.9%, and annual growth in average weekly earnings was 2.4%. In real terms, annual pay growth has been positive since February 2018. The 12-month Consumer Price Index (CPI) was 1.3% in December 2019, rising to 1.5% in March 2020. Today, the Covid-19 global pandemic has changed priorities and the economic outlook dramatically. Despite the UK easing the lockdown, social distancing will change habits for some months to come, and uncertainty and volatility will continue to impact the economy with potentiallylong-lastingconsequences. Recent data shows the dramatic impact the lockdown is having on the UK economy, with GDP recording its weakest ever monthly decline at -20.4% in April. Although the UK will be in recession inthesecondquarterof2020asthe lockdown eases, the magnitude of the economic impact and speed of recovery are not easily gauged. TheOfficeforBudgetResponsibility has forecast an annual decline of 12.8% for 2020, with unemployment rising from 4.0% to 7.3% in the finalthreemonthsoftheyear. In response to the pandemic, the Bank of England dropped the bank rate twice in March, from 0.75% to 0.25% and then again to 0.1%. The extent to which these low interest rates can support consumer spendingandjobsinthecoming months is yet to be determined. UK property market According to the MSCI UK Quarterly Property Index, commercial property delivered a total return of -0.5% for the year ended March 2020. The negative total return is attributable to thedownturnexperiencedinthefinal quarterendingMarch2020.Untilthen, quarterlytotalreturnswerepositive. The reduction relative to last year was driven by capital value falls of -4.8% and an income return of 4.5%. Capital growthwasnegativequarter-on- quarterbutworsenedconsiderably in the three months to March 2020. By comparison, for the year to March 2019, capital growth was 0.1% and the income return was 4.4%. Industrial was the top performing sector for the year to March 2020, showing good signs of rental and capital growth. The industrial sector 12-month total return was 5.7%, comprising 1.3% capital growth and 4.3% income return. Industrial ERV growth for the period was 2.7%, with a range of 1.7% to 4.2% within subsectors. Capital growth ranged from -0.5% to 4.2% within subsectors.Equivalentyieldsfor industrial property now stand at 5.3%. Theofficesectorproducedatotal return of 3.3% for the year to March 2020, comprising -0.5% capital growth and 3.8% income return. Whilst capital values showed a decline in the finalquarter,fortheninemonthsto December 2019 MSCI capital growth forAllOfficeswas0.4%.Fortheyearto March 2020, central London and the SouthEastofficemarketswerethe only subsectors to produce positive capitalgrowth.AllOfficeannualrental growth was 1.4%, ranging from 0.5% to 2.3% within subsectors. The range of capital growth by subsector was from-3.2%to1.8%.Equivalentyields forofficepropertynowstandat5.6%. Itwasaverydifficultyearforthe retail sector, with challenging trading conditions leading to a high number of retail failures. The situation has been significantlyimpactedbytheCovid-19 lockdown starting in March 2020. The retail sector produced a total return of -9.8% for the year to March 2020. This comprised capital growth of -14.5% and income return of 5.4%. Rental values fell -5.7% over the period and were negative across all subsectors, ranging from -8.2% to -1.7%. Retail subsector capital growth ranged from -22.6%to-1.0%.Equivalentyieldsfor retail property now stand at 6.4%. The impact of the Covid-19 pandemicisnotfullyreflectedin the above numbers. The MSCI UK Monthly Property Index showed for the two-month April – May 2020 period, that overall capital values for All Property have declined -2.9% and ERVs are down -0.6%. For the same period, capital values in the industrial sector saw a decline of -1.6% and ERVs grew by 0.1%. Intheofficesectorcapitalvalues declined -2.1% and ERVs -0.1%. The retail sector is the worst affected with capital values showing a decline of -5.0% and ERVs down -2.0%. According to Property Data, the total investment volume for the year to March2020was£56.5billion,an8.3% decrease from the year to March 2019. The volume of investment by overseas investors in the year to March 2020was£30.5billion,accountingfor 53.9% of all transactions. Illustrating theliquidityissueswithintheretail sector, it had investment transactions ofjust£5.0billion,accountingfor only 8.9% of all transactions. During the Covid-19 lockdown it hasbeenextremelydifficulttobuy or sell property and the impact on investment volumes and pricing is yet to be fully realised. Despite lowering investment returns available elsewhere, the risk premium attached to property looks set toincrease,reflectinggreater income risk in the short-term. 10 Picton Property Income Limited Annual Report 2020Market drivers and impacts Market driver Impact Covid-19 The lockdown and social distancing measures imposed by the UK Government to curb the spread of Covid-19 have resulted in rapid deterioration of the UK economic and property market outlook. In the longer-term, the unwinding of the lockdown and so called ‘new normal’ way in which we live will have implications for property investors and occupiers. Economy The media spotlight is no longer on Brexit, but key issues remain unresolved. TheUKlefttheEuropeanUnionon31January2020andis now in a transition period under the withdrawal agreement until the end of the year. Negotiations for a free trade agreement are underway. Property cycles The property market is cyclical, with performance linked to economic growth. The balance of supply and demand in the investment and occupier markets impact pricing and rental growth respectively. Historically, all property sectors have moved through cycles broadly in unison, however more recently there is a greater divergence between sectors. Almost all subsectors in the MSCI UK Quarterly Property Index are currently experiencing declining capital values following Covid-19. The declines are most strongly felt in the retail sector. Technology The continued rise of online retail, now including food, challenges the conventional retail and leisure sectors. Video conferencing is available to all and is being fully utilised in lockdown. Robotics and automation, smart devices and the advancement of 5G technology are all key drivers of change within society and the workplace. Sustainability There is heightened public awareness of environmental and social issues. Highprofilemediacoverageontopicsincludingtheclimate emergency and plastic pollution has brought sustainability and societal impact central to the corporate agenda. ӱ A recession is imminent, resulting in sharp deteriorationinconsumerandbusinessconfidence. ӱ Deglobalisation of the travel industry, supply chains and the movement of goods and services. ӱ Occupierreassessmentofbuildingrequirementsand expansion plans. ӱ Increased reliance on e-commerce and logistics operators to the detriment of bricks and mortar retail. ӱ The retail sector is bolstered by the more positive outlook for supermarkets. ӱ Expect lasting impact on the leisure and restaurant industries; a reduction in travel and increase in time spent online. ӱ The Centre for European Reform estimate the impact on potential output to mid-2018 was a reduction of 2.5% as a result of the Brexit vote. ӱ Clarityonthespecificsofthetradingagreementwill begin to assuage this. ӱ As well as cross sector problems such as workforce shortages, business sectors each face their own specificBrexitchallenges. ӱ Eachpropertysectorissubjecttoitsowncycle,with demand and supply affecting investor demand and rental value growth. ӱ The retail sector is operating within a very challenging environment, with declining capital values and rental decline pulling away from the other main sectors. ӱ There is polarisation within sectors as the current public health risks and economic headwinds have different impacts on subsectors. For example, in retail, supermarkets experienced boosted sales and footfall, while all other non-essential stores were forced to close. ӱ The acceleration in the adoption of remote and flexibleworkingduringthepandemicisunlikelytobe fully reversed. ӱ Officeoccupierswillbepromptedtoreassess requirementsforsize,location,layoutanddensity. ӱ A robotic workforce is unaffected by a public health crisis. ӱ BigData,ArtificialIntelligenceandMachineLearning are shaping the future of the workforce and the requirementsforbuildingsinwhichtheyoperate. ӱ Declaration of ESG policies and progression to targets is now the norm for UK businesses. ӱ Occupiers are increasingly considering employee wellbeing when selecting space. Natural light, biophilia,fitnessfacilitiesandexcellentoccupier amenities all provide a competitive edge. 11 GovernanceFinancial StatementsAdditional InformationPicton Property Income Limited Annual Report 2020Strategic ReportBusiness OverviewStrategic Report Our Marketplace continued Industrial market trends Office market trends Retail and Leisure market trends 12 Standard industrial units, particularly in the supply constrained markets of London and the South East, are expected to deliver the strongest sector performance. Land constraints and change of use in these areas have limited supply. Robust demand pushed rents to record highs. Given rent affordability pressures and the current economic climate, rental growth is forecast to fall back from an elevated level. It is anticipated that some standard industrial occupiers, such as last mile logistics operators, will seek to increasefloorspaceinordertoserviceheightenedconsumerdemandfrom online retailing. As industrial property is arguably more able to accommodate social distancing guidelines than other sectors, it appears well placed to weather the storm. The long-term outlook for standard industrial property is the most encouraging, underpinned by tight supply and healthy demand. The outlook is less positive for big box logistics, where a recent increase in speculative development is expected to be met with downward pressure on rents. The fate of the logistics sector is more closely tied to retailers, who are faced with extraordinary challenges in the current climate. Officevacancyratesaregenerallylowbyhistoricstandardsanddevelopment activity is not at the level seen before the 2008 Global Financial Crisis. Under more ordinary economic conditions, healthy rental growth would be expected. However,withstrongtiestofinancialmarkets,officesectordemandis expected to be subdued in the current climate. In addition, the Government’s recommendation to work from home during the pandemic has forced previouslyreluctantemployerstoadoptremoteandmoreflexibleworking practices, a trend which is unlikely to revert entirely. This may prompt occupiers toreassessrequirementsforofficefloorplatesize,capacityandlocation. Expansion plans are likely to be put on hold. Thereisparticularconcernthatflexibleofficeproviders,forwhomcustomer demandcanbeturnedoffveryquickly,maystruggletosurvive.However,asthe economybeginstoimproveitisperhapstheseflexibleleasingmodelsthatwill be the most attractive in the future. The retail sector was already suffering from structural issues before the lockdown and social distancing measures were put in place. In March 2020, the monthly retail sales volume suffered the largest fall since records began. All non-essential retail outlets were ordered to close in an extraordinarily unprecedented blow to the already ailing sector. The likelihood is that the 2018/19 theme of retail failures and CVAs will continue at an accelerated rate, especially for those that do not have well established online offerings. Recent examples include Warehouse, Oasis and Laura Ashley. Online sales, as a proportion of all retailing, reached a record high of 22.3% in March 2020 as consumers switched to online purchasing during the pandemic. Theleisuresectorfacesitsownuniquelong-termchallengesiftemporary closures lead to behavioural changes in businesses and consumers. The extent to which the recent adoption of online meeting platforms will curtail business travel plans is yet to be realised. Virtual entertainment, media streaming platforms and other online offerings, previously a threat to cinemas and other leisure activities, will be strengthened by prolonged social distancing measures. Food stores, on the other hand, saw the strongest monthly sales growth on record in March 2020 as consumers sought to stockpile goods ahead of the lockdown. With rising vacancy leading to an oversupply of retail units, downward pressure on rents looks set to continue in most retail markets. Picton Property Income Limited Annual Report 2020What this means for Picton Our response to these trends ӱ The portfolio is well positioned by being ӱ Picton’s occupier focused approach has enabled us to capitalise overweight to the industrial sector. We will continuetoacquirecomplementaryassets in this sector where possible. ӱ We will seek to capture rental growth through new lettings and occupier transactions. ӱ We envisage only limited and selective disposals. on strong demand for industrial property and grow ERVs through new lettings, regears and rent reviews. ӱ With a structural shift towards online retail, growth in delivery apps and increased expectation for shorter delivery times, means industrial property continues to remain in demand. ӱ Picton will strategically maintain its overweight position in the sector, applying an opportunity led approach to expand this element of the portfolio when appropriate and would seek to capitaliseonliquiditywhentheinvestmentmarketopensandif there are suitable purchasing opportunities. What this means for Picton Our response to these trends ӱ We will retain our balance of regional officeswithreducedLondonexposure. ӱ We will seek to capture rental growth through new lettings and occupier transactions. ӱ We recognise that in the short-term we mayneedtoprovidemoreflexibleleasing arrangementsreflectingthecurrent market. ӱ We have been upgrading space, focusing on amenities and makingimprovementsinenergyefficiency,ensuringour buildings meet occupier expectations. ӱ Pictonwillcontinuetoactivelymanagetheofficeportfolio, aiming to capitalise on rental growth, particularly within the regions, and engage with existing and potential occupiers to grow occupancy and income in the portfolio. ӱ Whenstrategicallyconsideringthefutureoftheofficeportfolio, due diligence and research will include a focus on UK wide infrastructureimprovementprojects.Thiswillhelptoensurethat theofficeportfolioispositionedinlocationslikelytoexperience thehighestlevelsofgrowthandbenefitfromcontinuing improvementsinthemostdesirablecitiesandleadingoffice markets. What this means for Picton Our response to these trends ӱ There is likely to be lower demand for retail property in the short to medium-term. ӱ We expect rental income in this element of the portfolio to reduce in the medium- term. ӱ Picton remains very cautious on the outlook for the retail sector. ӱ Picton is pursuing opportunities to convert retail property to other higher value uses. ӱ Through engaging with occupiers, we seek to create open dialogue enabling opportunities to extend income and maintain occupancy,butreflectinglowerrentallevels. ӱ We have refurbished space to enhance the retail experience, helping occupiers attract and retain customers. ӱ We will seek to reduce our retail exposure over the next 12 months. 13 GovernanceFinancial StatementsAdditional InformationPicton Property Income Limited Annual Report 2020Strategic ReportBusiness OverviewStrategic Report Our Strategy We have a strategy focused on delivering our purpose Purpose Through our occupier focused, opportunity led approach, we aim to be one of the consistently best performing diversified UK REITs. To us this means being a responsible owner of commercial real estate, helping our occupiers succeed and being valued by all our stakeholders. Strategy In order to deliver on our purpose, we have in place three distinct strategic pillars: Portfolio Performance, Operational Excellence and Acting Responsibly. These pillars include a range of strategic priorities which guide the direction of our business and are regularly reviewed. 3 1 2 portfolio which provides income and capital growth Portfolio Performance 1 Creating and owning a 2 Growing occupancy 3 Enhancing asset quality, 4 Outperforming the MSCI UK Quarterly Property Index providing space that meets occupier demand and income profile Associated Risks & Connected KPIs 2 5 6 7 8 A C D G I J Read more on pages 19-23 14 Picton Property Income Limited Annual Report 20203 1 2 company values, positive working culture and alignment of the team Acting Responsibly 1 Ensuring we maintain our 2 Working closely with our 3 Ensuring sustainability is occupiers, shareholders and other stakeholders integrated within our business model and how we and our occupiers operate 1 2 3 business model, adaptable to market trends operating platform, utilising technology as appropriate Operational Excellence 1 Maintaining an efficient 2 Having an agile and flexible 3 Delivering earnings growth 4 Having an appropriate 5 Growing to deliver capital structure for the market cycle economies of scale Associated Risks & Connected KPIs Associated Risks & Connected KPIs 1 3 4 10 11 E F H 4 9 B K L Read more on pages 19-23 Read more on pages 19-23 15 GovernanceFinancial StatementsAdditional InformationPicton Property Income Limited Annual Report 2020Strategic ReportBusiness OverviewStrategic Report Chief Executive’s Review Continued upper quartile performance Alongside running the business in these extraordinary market conditions, this year we have also focused on reviewing our strategy to ensure it reflects emerging trends. The three key pillars of our strategy are Portfolio Performance, Operational Excellence and Acting Responsibly. These do not dramatically change the direction of the business, but better defineourareasoffocusthrough the more detailed priorities (listed on pages 14 to 15) and ensure we are best placed to deliver on our purpose. The impact of Covid-19 has in the short-term led to an almost complete shutdown in both the commercial leasing and investment markets. This makes it harder than usual for valuers to provide a valuation or estimates of market price when there is no market itself. This uncertainty has led to the suspension of open-ended property funds,andsignificantvolatilitywithin listed property company shares. There is currently a clear arbitrage between pricing listed and unlisted property vehicles. We think there will be renewed selling pressure from these open-ended structures when they reopen, which may in itself create opportunistic buying opportunities for those that are well capitalised. Looking back, the primary concern last year was about the impact of Brexit on trade and occupational demand. The uncertainty created by the political process led many companies to delay occupancy decisions and whilst these risks have not yet gone away,inJanuarywewerestartingto see positive signals and an increase in occupational and investment demand following the General Election result and the certainty that provided. Lastyearwemadenoacquisitions and where we made disposals we used the proceeds to repay debt and reduce our gearing. We are well 16 positioned, with a high exposure to industrial, warehouse and logistics, alongsidetheregionalofficemarket. It is likely, however, that any prolonged lockdown will change habits and occupationalrequirements.Asthe impact becomes clearer we will have to ensure our portfolio approach remains relevant to maintain our track record of outperformance. £22.5m Total profit £509m Net assets 93p NAV per share 3.7p EPRA earnings per share Covid-19 response We continue to operate effectively and all of our employees have been working remotely since mid-March. We have not needed to furlough any members of our team or access any form of Government support. The health and safety of our employees, our occupiers and service providers is paramount and our actions to date have been effective in ensuring this. This shutdown has affected our occupiers to varying degrees, but it is encouraging to see buildings being re-occupied, albeit in line with social distancing measures, and we are working to establish proper protocols as the lockdown is gradually eased. Central London, with its reliance on public transport, would appear less ready to return to work than other parts of the UK, but a safe and steady approach is sensible under the circumstances and this matches the feedback we are receiving from our occupiers. Whilst the March rent collection number stands at 82%, which is lower than last year, we recognise that there will be a short-term impact as a result of the lockdown. We think it is appropriate to look at individual circumstances and be creative to protect value and also provide supporttooccupiersasrequired. Picton Property Income Limited Annual Report 2020will always be outperforming and underperforming elements, our positioning against the retail and leisure sector in favour of industrial andregionalofficeshasbeen advantageous for some time. Wehavemadesignificantprogress in enhancing our assets this year. Our refurbishment programme totalled £9million,whichisasubstantial increase on preceding years. We have also had considerable success working with our occupiers, enabling them to have space that meets their needs. We have undertaken some key transactions, extending income, de-riskingourcashflow,andthese aredetailedinthesubsequentcase studies. Although we have grown the passing rent on a like-for-like basis, the strategy to keep gearing low does have an impact on overall income, and with debt costs generally lower than property yields, there is still a trade-off between capital and income returns. It has been frustrating that we have not grown occupancy over the year, which currently stands at 89%. Ultimately these vacancies provideasignificantelementofthe future income upside potential. Againstadifficultbackdrop,the leasing markets have not been easy and a number of refurbishment projectstooklongertocomplete andconsequentlydelayedletting prospects. We also sold income producing assets to de-risk the balance sheet which has had a negative impact on income and occupancy,butequallyhave protected our capital position and crystallised gains. Operational Excellence We have undertaken and implemented several measures aimedatincreasingtheefficiency within the business. During the year we introduced an asset management system, Coyote, to better manage our assets, as well as a new IT system. Both systems are working well as we continue to work remotely. We have recruited a Head of Occupier Services to strengthen our property management service delivery, a further commitment to our occupier focused approach. We continue to have an agile and flexiblebusinessandthespeedwith which we were able to adapt to remote working is testament to this. 17 We believe our assets, our team and our strategy will continue to drive our success. Michael Morris Chief Executive We do however have to strike the right balance between occupier and shareholder, recognising these are difficultcircumstancesforall.Weare fortunate to have already established good relationships with our occupiers well ahead of this crisis, so we have a good understanding of their business needs. We will look at circumstances on a case-by-case basis and prioritise needsacrosstheportfolio.Equally, weneedtofindcreativesolutionsto this problem and by offering short- termcashflowassistancewemay well be able to protect or enhance capital values, by virtue of longer lease commitments, stepped rents or agreeing future rent increases. The recently announced dividend reduction will enable us to deliver the best outcomes in this regard. Portfolio Performance We have again continued to outperform the MSCI UK Quarterly Property Index. Our track record now means we have outperformed that Index since inception and over thelastone,three,fiveandten years.Recognisingthediversified nature of the portfolio, where there GovernanceFinancial StatementsAdditional InformationPicton Property Income Limited Annual Report 2020Strategic ReportBusiness OverviewThere is significant embedded upside in the portfolio income profile from the current occupancy level. Michael Morris Chief Executive Picton has low leverage and significantoperationalheadroom againstcovenants.Themajorityof the portfolio is invested in sectors that have been less impacted through Covid-19, and likely to reboundmorequickly.Itisclear that the digital transformation will continue apace, be that increased home working or further spend online and our portfolio will need to continue to adapt to these changes. Our focus is to control what we can, manage risks and focus on future opportunities. Michael Morris Chief Executive 22June2020 Strategic Report Chief Executive’s Review continued From an income perspective our EPRAearningsarelower,reflecting activity referred to in the Portfolio Performance section above. We have reduced our gearing over the year, concerned about risks associated with Brexit, but this has proved timely recognising the adverse impact of Covid-19. We have maintained our company values, positive working culture and alignment of the team throughout theyear.Wespecificallyundertook an employee survey last year and the results of this were fed back to the Board via our Non- Executive Director responsible for employee engagement. Outlook Recognisingournewlydefined purpose and that property returns are driven by both income and capital, our focus is currently two- fold. In the short-term we need to work through lockdown and help our occupiers get their businesses back up and running. Workplace protocols, lease restructurings and financialassistanceareallaspectsthat will protect value for shareholders. We are also focused on the future and how this short-term disruption may well change future occupational requirementsandconsequently create opportunities. We need to own assets where there is continued occupational demand, enabling a growingincomeprofile,andinturn capital appreciation. Thereissignificantembedded upside in the portfolio income profilefromthecurrentoccupancy level. Once markets reopen, findingoccupiersforthisvacant space is an absolute priority. Our strategy, which offers a diverse approachandallowsustheflexibility toadjusttheportfoliotobetter performing sectors, ensures we are not constrained to a single sector strategy, with limited ways to exit, as has been the case for some of the REIT specialists in recent years. We continue to manage the business through these events so we come out the other side in a strong position. We will continue to provide updates as we make progress this year. Our net asset growth has been more muted than in previous years, but this is not unexpected recognising market conditions. We believe our assets, our team and our strategy will continue to drive our success. Growth, be that organicorthroughacquisition,willbe considered so long as it creates value for shareholders. Acting Responsibly Wehavemadesignificantprogress strengthening relationships with occupiers this year and this is borne out by the portfolio activity and projectswehaveundertaken. The work we have done this year to promote and deliver our Picton Promise – focused on Action, Community, Technology, Support and Sustainability - has many overlapping features and we believe our occupiers, and indeed future occupiers, will want to work and engage with a landlord that shares similar values on not only reducing emissions but a broader array of sustainability issues. We provide regular shareholder updates and through Edison provide regular updates and video interviews. ThroughourbrokersJPMorgan, Stifelandspecificallyintheregional wealth management community with Kepler, we have regular engagement with both existing and prospective shareholders. Whilst sustainability has been a focus of ours for many years, the introduction of a Responsibility Committee in 2018 further integrated this within our business model and sustainability now forms part of our corporate strategy. We have engaged with occupiers and investors this year to review and better understand material issues in order to progress our sustainability initiatives. We were awarded EPRA Gold for our separate Sustainability Report last year and we are part of GRESB. 18 Picton Property Income Limited Annual Report 2020Our strategy in action Acting Responsibly Working closely with our occupiers, shareholders and other stakeholders. Working with our occupiers is fundamental to what we do and assists us in identifying asset management opportunities, especially when occupiers need to expand and contract. Knowing what our occupiers’ business needs are allows us to work with them to restructure leases, increase lease lengths, and potentially enhance rents by, for example, surrendering leases where the passing rent is below the market level. 1/ 3 1 2 Shipton Way, Rushden At our distribution unit in Rushden, we worked with our largest occupier ahead of their lease expiry in early 2020. We knew the space was too largefortheircurrentrequirementsso we worked to identify how we could minimise any disruption to income. We agreed to move the expiry date to October 2020 to aid their relocation and at the same time, working closely with Whistl, the sub-tenant of part, entered into an agreement whereby Whistl agreed to take a new lease on the whole unit. This will make Whistl the single largest occupier within our portfolio. The new lease is for a minimum term offiveyearsatarentof£1.6millionper annum, in line with ERV. Read more on pages 32–33 2/ 3 1 2 Tower Wharf, Bristol At Tower Wharf in Bristol, we further upgraded the space through the refurbishment of the reception, common areas and installation of additional shower facilities. As a result of these improvements, we worked with an existing occupier, enabling them to expand within the building,upsizingthemby73%to19,000 sqft.Wesecuredaminimumoften yearsataninitialrentof£0.5million,5% above ERV. Elsewhere in the building, we moved an occupier break option out by three years to August 2023 and settled a rent review, securing£0.4millionperannum,4% ahead of ERV. Read more on pages 34–35 19 GovernanceFinancial StatementsAdditional InformationPicton Property Income Limited Annual Report 2020Strategic ReportBusiness OverviewStrategic Report Chief Executive’s Review continued Our strategy in action Acting Responsibly Ensuring sustainability is integrated within our business model and how we and our occupiers operate. As a responsible landlord, we are committed to assessing the environmental performance of our portfolio to reduce the impact of our buildings. We have a continuous programme of monitoring EPCs in place throughout the portfolio, and seek to improve a building’s environmental efficiencywhencarryingoutrefurbishments.Wehave introduced green lease clauses into our standard lease agreementswhichaddressenergyandwaterefficiency, wastemanagementandregulatoryrequirements. 1/ 3 1 2 Swiftbox, Rugby AtSwiftbox,our99,500sqft distribution unit in Rugby, we have carried out a comprehensive refurbishment including a new roof and modernisation of the exterior. The unit is rare, being cross docked with a large self- contained yard, and we expect good occupational interest. The refurbishment focused on improving the unit’s energy efficiencyaswellasenhancingits specificationforanincoming occupier. The EPC rating moved from an E to a B, which is the best possible rating for a unit such as this and means it is future-proofed. Read more on pages 32-33 20 99,500 sq ft Distribution unit Picton Property Income Limited Annual Report 202055,500 sq ft Multi-let industrial estate 2/ 3 1 2 Datapoint, London E16 AtDatapoint,LondonE16,whereweowna55,500sqft multi-letindustrialestate,wehaveseensignificant rental growth in the area over the last year due to scarcity of supply. Two leases with short-term income and low rents were surrendered,wherewereceivedapremiumof£0.2 million, in order that we could attract new occupiers on longer leases at higher rents. The units have been comprehensively refurbished, to include external enhancements which modernise the estate and environmental improvements, meaning the EPC rating has increased from an E to a C. One of the units has already been leased, two weeks after completion of the works, for a minimum term of ten yearsatarentof£0.2millionperannum,24%aheadof ERV and 83% ahead of the previous passing rent. Read more on pages 32–33 3/ 3 1 2 Metro, Manchester During the year, we refurbished the reception and common areas at Metro, alongside the refurbishment of a recently vacatedofficesuite.Theseworkswerefocusedonenhancing the entrance, common areas and occupier amenities, with break out space, showers and changing facilities. The building already had a BREEAM excellent rating and these works enhanced further its sustainability credentials, including encouraging people to cycle to work. Theseworkssuccessfullyallowedustoleasethevacantfloor to a Government department on a new lease, securing a minimumoftenyearsataninitialrentof£0.4millionper annum, 2% above ERV. The occupier feedback has been positive and the building is now fully leased. 21 GovernanceFinancial StatementsAdditional InformationPicton Property Income Limited Annual Report 2020Strategic ReportBusiness OverviewStrategic Report Chief Executive’s Review continued Our strategy in action Portfolio Performance Enhancing asset quality, providing space that meets occupier demand. We believe it is important to continue to invest in our assets, to mitigate the impact of depreciation, improve their attractiveness in the marketplace and enhance letting prospects. 1/ 3 1 2 Stanford Building, London WC2 At Stanford Building in the heart of Covent Garden, we are underway with a comprehensive refurbishment which, Covid-19 permitting, is due to complete in the summer. This makes the most of the features of this Grade II listed building and willprovidethreefloorsofretail space with original features and a landmark unit fronting Long Acre with an additional entrance onto therejuvenatedFloralStreet. Threefloorsofofficeswillprovide someofthebestqualityspace availableinthesizerange, complemented by a larger reception with concierge and occupier amenities including bicycle storage and shower facilities.Theupperfloorwillbe high end residential, with stunning views over the London skyline. The building will be future-proofed in respect of its environmental credentials, with the works includinghighlyefficientair- conditioning, solar panels and low energy lighting throughout. Read more on pages 36-37 22 2/ 3 1 2 Angouleme Retail Park, Bury At Angouleme Retail Park in Bury, our focus has been on repositioning the park through refurbishment, creating a modern shopping environment which appeals to occupiers and shoppers. TheschemeishelpingtorejuvenateBurytowncentre. As part of the works, we were able to secure a new lease with Argos,securingaten-yeartermataninitialrentof£0.2millionper annum, which was 10% below the previous passing rent but 16% ahead of ERV. Having secured an anchor occupier and completed the refurbishment, we are pursuing the second stage of our strategy and focusing on letting the remaining two units once the Covid-19 lockdown ends. Read more on pages 36–37 Picton Property Income Limited Annual Report 2020Operational Excellence Having an appropriate capital structure for the market cycle. In order to ensure an appropriate balance of risk and return, we consider the overall level of debt, its operationalflexibilityanditscost.Wewillmake adjustmentsinthelightofexpectedfuturereturns. 1/ 3 1 2 Citylink, Croydon and Magna Park, Lutterworth During the year we completed two disposals in CroydonandLutterworthforacombined£34.1million and used the proceeds to reduce both our total debt outstanding by 15% and our loan to value ratio, which nowstandsat22%.Thishelpedtoreducefinancecosts overtheyearandnowprovidesuswithsignificant operationalflexibilityinthecurrentenvironment. 23 GovernanceFinancial StatementsAdditional InformationPicton Property Income Limited Annual Report 2020Strategic ReportBusiness OverviewStrategic Report Key Performance Indicators Measuring the success of the business 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, 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. Thisyearwehaveaddedanewnon-financialkey performance indicator, employee satisfaction, based on the results of an employee survey carried out in the year. Key performance indicators are also used to determine variable remuneration rewards for the Executive Directors and the rest of the Picton team. The indicators used are total return, total shareholder return, total property return and EPRA earnings per share. This is set out more fully in the Remuneration Report. Remuneration link Linking our performance to EPRA Best Practices Recommendations pages 112–114 Total return (%) 2020 4.5 2019 6.5 2018 14.9 A Total shareholder return (%) 2020 3.6 2019 10.1 2018 4.8 B 24 Why we use this indicator The total return is the key measure of the overall performance of the Group. It is the change in the Group’s net asset value, calculated in accordance with IFRS, over the year, plus dividends paid. The Group’s total return is used to assess whether our aim to be one of the consistentlybestperformingdiversified UK REITs is being achieved, and is a measure used to determine the annual bonus. Why we use this indicator The total shareholder return measures the change in our share price over the year plus dividends paid. We use this indicator because it is the return seen by investors on their shareholdings. Our total shareholder return relative to a comparator group is a performance metric used in the Long-term Incentive Plan. Our performance in 2020 Compared to our peer group, our total return of 4.5% was one of the highest for the year, and against a background of negative market returns, as measured by MSCI. 3 1 2 Our performance in 2020 Our return of 3.6% was one of the few in our peer group to be positive for the year. 3 1 2 Picton Property Income Limited Annual Report 2020 Total property return (%) 2020 5.3 2019 7.5 2018 13.0 C Property income return (%) 2020 4.8 2019 5.6 2018 6.0 D Loan to value ratio (%) 2020 21.7 2019 24.7 2018 26.7 E Cost ratio (%) 2020 1.1 2019 2018 1.1 1.1 F Our performance in 2020 We have delivered an upper quartile return of 5.3% compared to the MSCI UK Quarterly Property Index return of -0.5% for the year, and we have also outperformed on a three, five and ten-year basis. 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. We use this indicator because it shows the success of the portfolio strategy without the impact of gearing and corporate costs. Our total property return relative to the MSCI UK Quarterly Property Index is a performance condition for both the annual bonus and the Long-term Incentive Plan. 3 1 2 Why we use this indicator The property income return, as calculated by MSCI, is the ungeared income return of the portfolio. With our portfolio biased towards income generation, this is an important indicator. Our performance in 2020 The income return for the year of 4.8% was ahead of the MSCI UK Quarterly Property Index of 4.5%, and we have also outperformed on a three, five and ten- year basis. 3 1 2 Our performance in 2020 The loan to value ratio has reduced further this year following the repayment of our revolving credit facilities. 3 1 2 Our performance in 2020 The cost ratio has remained at 1.1% this year with administrative expenses largely unchanged from 2019. 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 and is a measure of financingrisk.SeetheSupplementary Disclosures section for further details. Why we use this indicator The cost ratio, recurring administration expenses as a proportion of the average netassetvalue,showshowefficientlythe business is being run, and the extent to which economies of scale are being achieved. See the Supplementary Disclosures section for further details. 3 1 2 25 GovernanceFinancial StatementsAdditional InformationPicton Property Income Limited Annual Report 2020Strategic ReportBusiness Overview Strategic Report Key Performance Indicators continued Why we use this indicator The net asset value per share, calculated in accordance with EPRA, measures the valueofshareholders’equityinthe business. We use this to measure the growth of the business over time. Our performance in 2020 The EPRA net asset value per share has remained stable over the year. 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. We use this because it measures theoperationalprofitgeneratedby the business from the core property rental business. The growth in EPRA earnings per share is also a performance measure used for the annual bonus and the Long-term Incentive Plan. 3 1 2 Our performance in 2020 EPRA earnings per share is lower this year largely due to the refurbishment of a number of assets taking place, which has reduced occupancy in the short-term. 3 1 2 Why we use this indicator The vacancy rate measures the amount of vacant space in the portfolio at the end ofeachfinancialperiod,andoverthe long-term, is an indication of the success of asset management initiatives undertaken. Our performance in 2020 The EPRA vacancy rate has increased over the year as a result of lease events together with a large proportion of the vacant space under refurbishment, most notably at our Covent Garden asset. The vacancy rate is above the MSCI IRIS Benchmark vacancy rate of 7.0%. 3 1 2 EPRA net asset value per share (pence) 2020 93 2019 93 2018 90 G EPRA earnings per share (pence) 2020 3.7 2019 4.3 2018 4.2 H EPRA vacancy rate (%) 2020 11.5 2019 10.3 2018 4.2 I 26 Picton Property Income Limited Annual Report 2020 Retention rate (%) Why we use this indicator This provides us with a measure of asset suitability and satisfaction of our occupiers. 2020 53 2019 49 2018 63 J EPC ratings (%) 2020 89 2019 82 2018 81 K Employee satisfaction (%) 2020 83 2019 N/A 2018 N/A L Our performance in 2020 Retention was similar to 2019, reflecting that we continue to regear leases early and ahead of lease expiry, meaning a lot of income risk was mitigated in prior years. A further £5.5 million of rental income was extended and retained for lease expiries beyond March 2020. Including this income would increase our retention rate to 78%. 3 1 2 Why we use this indicator EnergyPerformanceCertificates(EPC) indicatehowenergyefficientabuildingis byassigningaratingfrom‘A’(veryefficient) to‘G’(inefficient).AhigherEPCratingis likely to lead to lower occupational costs for occupiers. Our performance in 2020 The proportion of EPC ratings between A to D has increased on the prior year and now makes up 89% of the total portfolio. Where we have upgraded space we have sought to enhance EPC ratings as appropriate. 3 1 2 Our performance in 2020 We will build on the results of this initial survey and have considered all of the issues raised. Why we use this indicator We have introduced this indicator to assess our performance against one of our strategic priorities, to nurture a positive culturereflectingthevaluesand alignment of the Picton team. The indicator is based on the employee survey carried out during the year. 3 1 2 27 GovernanceFinancial StatementsAdditional InformationPicton Property Income Limited Annual Report 2020Strategic ReportBusiness OverviewStrategic Report Portfolio Review Proactively managing the portfolio We have had a number of considerable successes across the portfolio despite it being such a difficult year in which to operate. We ended the year with a like-for-like increase in the portfolio valuation, rental income and Estimated Rental Value (ERV). We have had one of the busiest years in terms of portfolio transactions, up 30% on the previous year. We have invested heavily back into the portfolioenhancingthequalityand lettability of space, and we have been able to de-risk and extend our income profile.Wehavefurtherstrengthened our relationships with occupiers and our focus on our key commitments of Action, Community, Technology, Support and Sustainability, appears increasingly helpful in light of the Covid-19 impact. Performance Our portfolio now comprises 47 assets, with around 350 occupiers, and is valuedat£664.6millionwithanet initial yield of 4.9% and reversionary yield of 6.4%. Our asset allocation, with 48%inindustrial,34%inofficeand 18% in retail and leisure, combined with investment disposals and transactional activity, has enabled us again to outperform the MSCI UK Quarterly Property Index on a total returnbasisoverone,three,fiveand ten years. Overall the like-for-like valuation was up 1.4%, with the industrial sector up 6%,officesdeliveringgrowthof3% and retail and leisure declining -12%. This compares with the MSCI index recording capital declines of -4.8% over the period. The industrial assets continue to perform better than the other sectors, primarily due to our allocation to South East multi-let estates which account for over 73% of our industrial exposure. In addition we have extended income with three of our largest occupiers at three of our distribution warehouses. Conversely, and despite active management to mitigate downside risk, our retail assets have delivered negative returns. Pleasingly, rental transactions have been generally very close to or higher than independent ERVs ratherthansignificantlybelow, which we understand is happening elsewhere in the market. Key facts 47 Portfolio assets 89% Occupancy £36.2m Passing rent 28 Picton Property Income Limited Annual Report 2020Theoverallpassingrentis£36.2million, an increase from the prior year of 1.2% on a like-for-like basis. This was a result of the industrial portfolio rents growingby6%,offsetbytheoffice and retail rents decreasing by 2% and 3%respectively.Theregionaloffices saw growth of 1%, which was offset by declines in London and in particular at Angel Gate, Islington which is being adversely affected by the serviced officesector.Wearecounteringthe effectbyofferingfullyfittedsuitesand flexibleleasingterms. The March 2020 ERV of the portfolio is £45.2million,withthepositivegrowth in the industrial sector of 4.4% and officesectorof3.5%offsetbythe negative growth in the retail sector of -8.0%. We have set out the principal activity in each of the sectors in which we are invested and believe our strategy and proactive occupier engagement will continue to assist us in managing the portfolio during the current business climate. Theindustrialandregionaloffice occupational markets have remained resilient. Conversely, retail demand has not improved, and we expect it to worsen over the next year, particularly recognising the additional impact Covid-19 will have on occupational demand. Activity We have had an exceptionally good year in respect of active management transactions. We completed 20 rent reviews, 10% ahead of ERV, 31 lease renewals or regears, 12% ahead of ERV and 35 lettings or agreements to lease, 2% ahead of ERV. Two assets were sold for gross proceedsof£34.1million,15%aheadof the March 2019 valuation. Citylink, Croydon was sold following the early surrender of two leases, generating £0.6millionofadditionalincome.The propertywassoldfor£18.2million reflectinganetinitialyieldof4.8%. We also sold 3220 Magna Park, Lutterworth following active management where we extended the lease by a further three years to December 2022 and settled a 2019 rentreviewsecuringan11%upliftto£1 million per annum, achieving one of the highest rents at the Park. The propertywassoldfor£15.9million reflectinganetinitialyieldof5.8%. Both sales crystallise the upside from the active management activity and, noting the age of the buildings and oversupply in these locations, avoid potential future capital expenditure and extended void periods. Overtheyearwehaveinvested£9 million into the portfolio across 20 separateprojects.Thesehaveall been aimed at enhancing space to attract occupiers and grow income. Whilstanumberofkeyprojectsare still to be completed, we are now well placed to attract occupiers and our refurbishment pipeline is substantially reduced, having completed themajorityoftheprojects. Our largest void is Stanford Building on Long Acre in Covent Garden, accounting for over a third of the total vacancy rate. Work on site paused due to the lockdown and will now complete in the summer. The building willprovidebest-in-classretail,office and residential accommodation. 29 Picton Property Income Limited Annual Report 2020GovernanceFinancial StatementsAdditional InformationStrategic ReportBusiness OverviewStrategic Report Portfolio Review continued The retail and leisure sector will need to evolve, especially following the current lockdown, but with this sector only making up 18% of our portfolio, we will work with occupiers to ensure we can assist them where appropriate to maintain income. The work done over the year to lease space and extend income, together with our portfolio weightings, has put us in a strong position to weather this storm. In line with our occupier focused, opportunity led approach, we continue to proactively engage with our occupiers, which we believe assists occupier retention and adds value. This investment across the portfolio has enabled us to create high qualityspaceandhelptofuture- proof assets from a sustainability perspective. We have also worked with occupiers to achieve their occupational aims and thereby create value through additional leasing or extending income. Althoughnoacquisitionsweremade, the net effect of the above is that the averagelotsizeoftheportfoliowas £14.1million,inlinewithlastyear. Outlook If activity for most of the year was tempered by Brexit, towards the end of the year it has been impacted by the Covid-19 pandemic and consequentiallockdownon23March 2020. This has led to a far more uncertain business environment and our focus has been on delivering our Picton Promise, focusing particularly on our commitments of Action, Community and Support to help our occupiers who need assistance. Newrequirementsfrompotential occupiers have slowed and social distancing measures make viewingsdifficulttoconduct.We are, however, embracing new technologies, creating virtual tours and thinking more laterally as to how we can market our buildings. Our focus remains on working with our occupiers during this period of business uncertainty, whilst continuing to proactively manage the existing portfolio. At 31 March the portfolio has £9millionofreversionaryupside,£5 millionfromlettingthevoid,£3million fromexpiringrentfreeand£1million from reversionary leases. We are seeing better demand for our industrial properties, which account for 48% of the total portfolio by value, and we believe this sector will continue to outperform. Businesses continue to seek best- in-classspaceintheofficesector, hence our investment over the year intonineofficebuildings,andthis, combinedwithourflexibleoffering, makes our properties attractive to current and new occupiers. Top ten assets The largest assets as at 31 March 2020, ranked by capital value, represent 54% of the total portfolio valuation and are detailed below. Assets Parkbury Industrial Estate, Radlett, Herts. River Way Industrial Estate, Harlow, Essex Angel Gate, City Road, London EC1 Stanford Building, Long Acre, London WC2 Tower Wharf, Cheese Lane, Bristol 50 Farringdon Road, London EC1 Shipton Way, Rushden, Northants. Datapoint, Cody Road, London E16 Lyon Business Park, Barking, Essex Colchester Business Park, Colchester Acquisition date Property type Tenure Approximate area (sq ft) No. of occupiers Occupancy rate (%) 03/2014 Industrial Freehold 12/2006 Industrial Freehold Office Freehold 10/2005 Retail Freehold 05/2010 Office Freehold 08/2017 10/2005 Office Leasehold 07/2014 Industrial Leasehold 05/2010 Industrial Leasehold 09/2013 Industrial Freehold Office Leasehold 10/2005 336,700 454,800 64,500 19,700 70,800 31,000 312,900 55,500 99,400 150,700 21 10 22 0 5 5 1 5 9 22 100 98 74 0 83 100 100 88 100 99 30 Picton Property Income Limited Annual Report 2020Top ten occupiers The largest occupiers, based as a percentage of contracted rent, as at 31 March 2020, are as follows: Occupier Public sector Belkin Limited B&Q Plc The Random House Group Limited Snorkel Europe Limited XMA Limited Portal Chatham LLP TK Maxx Canterbury Christ Church University DHL Supply Chain Limited Contracted rent (£m) 1.7 1.7 1.2 1.2 1.1 1.0 0.8 0.7 0.7 0.6 % 4.3 4.2 3.1 3.0 2.8 2.4 2.0 1.8 1.7 1.5 Total 10.7 26.8 Longevity of income As at 31 March 2020, expressed as a percentage of contracted rent, the average length of the leases to the firstterminationwasincreasedto5.5years(2019:5.1 years). This is summarised as follows: 0 to 1 year 1 to 2 years 2 to 3 years 3 to 4 years 4 to 5 years 5 to 10 years 10 to 15 years 15 to 25 years 25 years and over Total % 8.8 14.1 11.0 12.6 12.3 31.6 8.2 0.1 1.3 100.0 Retention rates and occupancy Over the year, total ERV at risk due to lease expiries or break options totalled £6.6million,comparedto£6.9million for the year to March 2019. Excluding asset disposals, we retained 53% of total ERV at risk in the year to March 2020. This comprised 32% on lease expiries and 21% on break options. In addition to units at risk due to lease expiries or break options during the year,afurther£5.5millionofERVwas retained by either removing future breaks or extending future lease expiries ahead of the lease event. Occupancy has reduced slightly duringtheyear,primarilyreflectingthe timing of lease events, ongoing challenges in the retail sector and somespecificassetmanagement surrenders we have initiated. At the year end 62% of our vacant buildings were being refurbished, so only 38% were available to lease immediately. Occupancy has decreased from 90% to 89%, which is behind the MSCI IRIS Benchmark of 93% at March 2020. On a look-through basis we have 57% of ourtotalvoidinoffices,28%inretail, primarilyataflagshipstoreinCovent Garden, and only 15% of our void is in industrial,reflectingthestronger occupational market. 31 Picton Property Income Limited Annual Report 2020GovernanceFinancial StatementsAdditional InformationStrategic ReportBusiness OverviewStrategic Report Portfolio Review continued Industrial The industrial portfolio, which accounts for 48% of the portfolio, again delivered the strongest sector performance of the year. This was the result of active management extending income on our distribution assets, combined with continued occupational demand for the smaller units, resulting in further rental growth, especially in London and the South East. Through asset management activity we have been able to capture rental growth and extend income. This, combined with continued strength in the investment market, has resulted in another strong year for this element of the portfolio. On a like-for-like basis, our industrial portfoliovalueincreasedby£18.1 millionor6.0%to£318.3million,and the annual rental income increased by£0.9millionor6.0%to£16.0 million. The portfolio has an average weighted lease length of 5.1 years and £2.6millionofreversionarypotential. We have seen rental growth of 4.4% across the portfolio and are experiencing demand across all of our estates. Occupancy is 96%, with the key void being our unit in Rugby which has recently been refurbished. In respect of the multi-let estates we only have three vacant units out of 127, one of which is under offer. 32 We extended income on three of our distribution units, one of which we subsequentlysold,andwecompleted the refurbishment of our unit in Rugby, which is now being marketed. Portfolio activity At Shipton Way, Rushden, in what would have been our largest single income risk in 2020, we extended a lease with the existing occupier, Belkin, to facilitate a pre-letting of the entire building to Whistl UK Limited. Whistl will take a new ten-year lease, subjecttobreakin2025,atanannual rentof£1.6million,inlinewithERV, and become our largest single occupier from October 2020, when Belkin vacates. At Parkbury, Radlett, we extended a lease with the largest occupier on the estate which was due to expire in November 2020. This secures a new ten-yearreversionarylease,subject to break in 2025, with stepped rental increasesto£1.0millionperannum, 42% ahead of ERV. In addition, we letfourunitsforacombined£0.4 million per annum, 8% ahead of ERV, renewedoneleasefor£0.2million per annum, 5% ahead of ERV, and settled four rent reviews achieving a £0.3millionupliftinrentto£1million per annum, 19% ahead of ERV. At Trent Road, Grantham, we extended the lease that was due to expirein2023until2029,subjectto breakin2026,at£1.2millionper annum, in line with ERV. At 3220 Magna Park in Lutterworth, we restructured the lease and secured a further three years term certain until an occupier break option in December 2022. As part of the same transaction, the December 2019 rent review was settled, securing an 11% upliftto£1millionperannum,6% ahead of ERV, achieving one of the highest rents at the Park. The unit was subsequentlysoldfor£15.9million. At Datapoint in London E16, following the completion of a rent review, we achieveda98%upliftinrentto£0.1 million per annum, 15% ahead of ERV. Two leases were surrendered on the estate,securingapremiumof£0.2 million,andweresubsequently refurbished by March. One has been let, two weeks after completion, for a minimum term of tenyearsatarentof£0.2millionper annum, 24% ahead of ERV and 82% ahead of the previous passing rent. We have good interest in the other unit. At Nonsuch Industrial Estate in Epsom, the active management strategy to combine units resulted in a letting to Topps Tiles and we also completed three further lettings during the period,foracombined£0.2million per annum, 2% ahead of ERV. Two leases were renewed, the passing rent increasingby22%toacombined£0.1 million per annum, 5% ahead of ERV. Our largest void in the industrial portfolioisSwiftbox,the99,500sqft unit in Rugby, where we completed a comprehensive refurbishment in February. This is one of the few cross- docked units available in the ‘Golden Triangle’ and we expect good interest. Outlook The full impact of the Covid-19 pandemic remains to be seen, but Brexit concerns have had a limited impact to date. Demand remains strong for sub- 100,000sqftunits,withoccupiers being more discerning about the age andspecificationofthelarger distribution units. We see continued rental growth, albeit at a slower rate, in respect of the smaller units especially in Greater London and the South East, where there remains a lack of supply and a limited development pipeline. We do not expect rental growth to come through on the larger units, due to a strong development pipeline, although there is a short-term demand spike due to Covid-19 from supermarkets and other retailers with increasedstoragerequirements. The focus going forward is the leasing of Rugby and both capturing the rental growth on the smaller units and working proactively with our occupiers to facilitate their business needs. We have 16 lease events in the coming year, the overall ERV for these units is 16.5% higher than thecurrentpassingrentof£0.7 million. This provides us with the opportunity to grow income further. Picton Property Income Limited Annual Report 2020Key metrics £318.3m 2020 value (2019:£312.8m) 2.6m sq ft Internal area (2019:2.7msqft) £16.0m Annual rental income (2019:£16.0m) £18.6m Estimated rental value (2019:£18.7m) 96% Occupancy (2019: 98%) 16 Number of assets (2019: 17) Locations 15 10 11 12 6 7 3 14 16 8 13 2 4 5 1 9 1 7 13 Parkbury Industrial Estate Radlett 336,700sqft–Freehold Sundon Business Park Luton 127,800sqft–Leasehold Western Industrial Estate Bracknell 41,200sqft–Freehold 2 8 14 River Way Industrial Estate Harlow 454,800sqft–Freehold The Business Centre Wokingham 100,800sqft–Freehold Swiftbox Rugby 99,500sqft–Freehold 3 9 15 Shipton Way Rushden 312,900sqft–Leasehold Nonsuch Industrial Estate Epsom 41,700sqft–Leasehold Abbey Business Park Belfast 61,700sqft–Freehold 4 10 16 Datapoint London E16 55,500sqft–Leasehold Vigo 250 Washington 246,800sqft–Freehold Magnet Trade Centre Reading 13,700sqft–Freehold 5 11 Lyon Business Park Barking 99,400sqft–Freehold Units 1 & 2 Kettlestring Lane, York 157,800sqft–Freehold 6 12 Grantham Book Services Grantham 336,100sqft–Leasehold Easter Court Warrington 81,500sqft–Freehold Parkbury Industrial Estate Radlett 33 Picton Property Income Limited Annual Report 2020GovernanceFinancial StatementsAdditional InformationStrategic ReportBusiness OverviewStrategic Report Strategic Report Portfolio Review continued Portfolio Review continued Office The office portfolio, which accounts for 34% of the portfolio, delivered the second strongest performance of the year. This was a result of our investment into the buildings to make them more attractive to existing and new occupiers, combined with continued occupational demand, especially in the regions. Through working with our occupiers and actively managing our properties, we have been able to retain and attract occupiers, which in turn enables us to capture rental growth, particularly in markets with a shortage of Grade A space, such as Bristol and Milton Keynes. Onalike-for-likebasis,ouroffice portfoliovalueincreasedby£6.6 millionor3.0%to£224.6million, and the annual rental income decreasedmarginallyby£0.3 millionor2.2%to£12.9million.The portfolio has an average weighted leaselengthof4.0yearsand£4.5 million of reversionary potential. Occupational demand has been stronger in the regions than in London. We have seen rental growth of 3.5% across the portfolio and occupancy is 88%, primarily due to key voids at Angel Gate, London and Pembroke Court, Chatham. Weinvested£2.7millionintoour officeassetsduringtheperiodand disposed of one asset, detailed below. Portfolio activity At Tower Wharf, Bristol, following completion of works to upgrade the reception and the installation of additional shower facilities, we agreed toupsizeanexistingoccupierand extended their lease which was due to expire in May 2020. This increased theirfloorspaceby73%andsecured anew15-yearlease,subjecttobreak in2030,atarentof£0.5millionper annum, which was 5% ahead of the ERVand£0.3millionaheadofthe previous passing rent. In addition, we moved out an occupier’s break option by three years and settled a rent review,achievinga29%upliftto£0.4 million per annum, 4% ahead of ERV. At Grafton Gate, Milton Keynes, we comprehensively refurbished the common areas and, working with anoccupier,upgradedtheiroffice, installingenergyefficientLEDlighting and creating an up-to-date working environment. These works meant the building’s EPC rating improved fromanEtoaC,future-proofingit in respect of the Minimum Energy EfficiencyStandards.Aspartofthe officeupgradeworks,wesettledarent review,securinga52%upliftto£0.6 million per annum, 30% ahead of ERV. At Metro, Salford Quays, where a leaseeventcreatedavacantfloor, we comprehensively refurbished the commonareasforthebenefitofour occupiers and to make the building moreattractive.Thefloorwasletto HM Government within six months of the refurbishment completing ona20-yearleasesubjecttobreak in2030,at£0.4millionperannum, which was 2% ahead of ERV. At Waterside House, Leeds, following upgradeworks,weupsizedour existing occupier, HM Government, into the whole building on a ten-year leaseatarentof£0.3millionper annum, which was 16% ahead of ERV. At Citylink, Croydon, we restructured two leases after occupiers actioned break clauses. This resulted in an early surrender for a premium and a simultaneous new short- term letting. The property was subsequentlysoldfor£18.2million. Ourlargestofficevoidistheoffice element at Stanford Building WC2 which is classed as a retail property and is detailed in the retail section. 34 Theofficeswillprovidefibre- enabled Grade A accommodation with original warehouse features, commissionaire, occupier amenities and environmental improvements. We expect good interest due to thequalityoftheaccommodation onofferandsizeofthesuites. Occupancy remained stable over the period at 88%, with the letting activity offset by space coming back in Chatham and London. Outlook Generally, the regions continue to outperform London with occupiers lookingforhighspecification buildings, which is why we have carriedoutsignificantrefurbishments at eight of our regional buildings, investing£2.5milliontoimprove common areas, adding occupier amenityspaceandfuture-proofing them in respect of sustainability. The longer-term impact of the Covid-19 pandemic may well lead to more remote working which is likely to change the way physicalofficespaceisused. We have countered the impact ofservicedofficesbyoffering flexibilitythroughour‘rightsizing’ approachaswellasourhighquality contemporary space and occupier amenities, meaning our buildings remain attractive to businesses who want control of their own space. Looking forward, we will build on the upgrade work completed acrosstheofficeportfoliotoactively manage it to attract occupiers. We have 33 lease events in the coming year, the current ERV for these units is 13.2% higher than the current passingrentof£2.0millionanda 12% void. This provides us with the opportunity to grow income further. Picton Property Income Limited Annual Report 2020Key metrics £224.6m 2020 value (2019:£235.0m) 0.8m sq ft Internal area (2019:0.9msqft) £12.9m Annual rental income (2019:£14.2m) £17.4m Estimated rental value (2019:£18.1m) 88% Occupancy (2019: 88%) 14 Number of assets (2019: 15) Locations 7 9 14 6 13 2 8 10 4 11 1 3 12 5 1 7 13 Angel Gate London EC1 64,500sqft–Freehold 180 West George Street Glasgow 52,100sqft–Freehold Longcross Court Cardiff 72,100sqft–Freehold 2 8 14 Tower Wharf Bristol 70,800sqft–Freehold 401 Grafton Gate East Milton Keynes 57,100sqft–Freehold Waterside House Leeds 25,200sqft–Freehold 3 9 50 Farringdon Road London EC1 31,000sqft–Leasehold Queens House Glasgow 49,400sqft–Freehold 4 10 Colchester Business Park Colchester 150,700sqft–Leasehold Trident House St Albans 19,000sqft–Freehold 5 11 30 & 50 Pembroke Court Chatham 86,300sqft–Leasehold Atlas House Marlow 25,400sqft–Freehold 6 12 Metro Manchester 71,000sqft–Freehold Sentinel House Fleet 33,500sqft–Freehold Tower Wharf, Bristol Refurbished reception area 35 Picton Property Income Limited Annual Report 2020GovernanceFinancial StatementsAdditional InformationStrategic ReportBusiness OverviewStrategic Report Portfolio Review continued Retail and Leisure The retail and leisure portfolio, which accounts for 18% of the portfolio, delivered the weakest performance of the year. This was a result of ongoing changes in shopping patterns and weak occupational demand resulting in negative rental growth in a lot of markets. Stanford Building in Covent Garden, whichhasbothretailandofficeuse,is our largest element of the retail portfolio at 28%, of the balance, 40% is in the retail warehouse sector, 22% in high street retail and 10% in hotel and leisure assets. Our investment into the retail parks in Bury and Swansea has enabled us to retain and attract new occupiers. By working with our occupiers and through active management, we have been able to temper the declines in value over the period by extending income, letting space and achieving rents overall very close to the ERV. On a like-for-like basis, our retail and leisure portfolio value decreased by £15.8millionor11.5%to£121.7million, and the annual rental income decreasedmarginallyby£0.2million or2.6%to£7.3million.Theportfolio has an average weighted lease length of8.9yearsand£1.9millionof reversionarypotentialto£9.2million per annum. Occupational demand has been weaker in the retail warehouse and restaurant sector, with high street 36 At Scots Corner, Birmingham we renewed HM Government’s lease for a furthertenyears,subjecttobreakin 2024,atarentof£0.1millionper annum, in line with ERV. Towards the endoftheyear,wegottwoadjoining shop units back due to insolvencies, securing a payment on one of them. Thesearecurrentlybeingreconfigured and one of the units is under offer. Our largest retail void is the unit at Stanford Building WC2 where the refurbishment of the whole building is currently underway and is due to complete in the summer. The unit is in aprimelocationandprovidesunique spacearrangedoverthreefloors.Itis thefirsttimetheunithasbeen available to lease in over 100 years and we expect good interest in due course. Outlook The retail and leisure sector continues to undergo structural change due to evolving shopping habits, which have resulted in an oversupply in most markets with occupiers being able to negotiate lower rents and higher incentives. The Covid-19 pandemic has considerably worsened the outlook, and it is likely that a number of less resilient businesses will not survive, further increasingthesupplyoffloorspace. We are working on a number of schemes where we envisage changing the use from retail or leisure to other uses and we will resume with progressing these plans once restrictions are lifted. We are working with our occupiers to assist them where we can, by for example, postponing rental payments or providing upfront incentives to remove future break options and/ or extend leases. The lockdown has causedsignificantcashflowissues to a lot of businesses in this sector and until shops, gyms, hotels and restaurants are allowed to open, we cannot see an improvement outside of the supermarket sector. The full impact of the Covid-19 pandemic remains to be seen and this reinforces our portfolio positioning. shops and London seeing slightly better demand. We have seen negative rental growth of 8.0% across the portfolio and occupancy is 75%, primarily due to key voids at Stanford Building, London and Angouleme RetailPark,Bury.Weinvested£3.3 million into the retail portfolio during the period. Portfolio activity At Parc Tawe Retail Park, Swansea we carried out a comprehensive refurbishment of the park to include new signage, modernisation of the units and environmental improvements, for example changing to LED lighting. This has created an improved shopping environment for customers and enabled us to attract new occupiers. Once we completed enabling works, Lidl relocated to the former Homebase unit and, following practical completion of refurbishment works, we completed a new 15-year lease at their former unit to Farmfoods atasteppedrentto£0.1millionper annum, 14% below ERV. We also agreed to extend Pets at Home’s lease,expiringin2022,byafurtherfive yearsandrebasedtheirrentto£0.1 million per annum from completion, a reduction of 18%, but 10% ahead of the preceding ERV. We have one unit available to lease, accounting for13%oftheparkbyfloorarea. At Angouleme Way Retail Park, Bury we carried out a comprehensive refurbishment to update the park for customers and to enable us to attract new occupiers and retain existing ones. Argos renewed on a ten-year leaseatarentof£0.2millionper annum, which was 16% ahead of ERV. Another unit was let to a regional occupieronafive-yearlease,subject to a break in three years, at a stepped rentto£0.1millionperannum,inline with ERV. We have two units available to lease, accounting for 40% of the parkbyfloorarea. At the Crown & Mitre complex in Carlisle, we settled the hotel rent review,securinga42%upliftto£0.2 million per annum, 8% ahead of ERV.Thereisahistoriclaneadjacent to the property, with small shops and local occupiers. Working with our occupiers, we refurbished the lanetocreateasignificantlybetter environment in keeping with the Grade II property and attracting higher footfall for our occupiers. Picton Property Income Limited Annual Report 2020Key metrics £121.7m 2020 value (2019:£137.5m) 0.8m sq ft Internal area (2019:0.8msqft) £7.3m Annual rental income (2019:£7.5m) £9.2m Estimated rental value (2019:£10.0m) 75% Occupancy (2019: 77%) 17 Number of assets (2019: 17) Locations 14 8 13 17 12 2 5 15 16 7 9 3 4 10 11 1 6 1 7 13 Stanford Building London WC2 19,600sqft–Freehold Regency Wharf Birmingham 44,300sqft–Leasehold 17-19 Fishergate Preston 59,900sqft–Freehold 2 8 14 Queens Road Sheffield 105,600sqft–Freehold Crown & Mitre Complex Carlisle 23,800sqft–Freehold 72-78 Murraygate Dundee 9,700sqft–Freehold 3 9 15 Parc Tawe North Retail Park Swansea 116,700sqft–Leasehold Scots Corner Birmingham 30,000sqft–Freehold 7-9 Warren Street Stockport 8,700sqft–Freehold 4 10 16 Gloucester Retail Park Gloucester 113,900sqft–Freehold 53-57 Broadmead Bristol 10,400sqft–Leasehold 6-12 Parliament Row Hanley 17,300sqft–Freehold 5 11 17 Angouleme Retail Park Bury 76,200sqft–Free/Leasehold 62-68 Bridge Street Peterborough 88,700sqft–Freehold 18-28 Victoria Lane Huddersfield 14,600sqft–Leasehold 6 12 Thistle Express Luton 81,600sqft–Leasehold 78–80 Briggate Leeds 7,700sqft–Freehold Long Acre, Covent Garden London, WC2 37 Picton Property Income Limited Annual Report 2020GovernanceFinancial StatementsAdditional InformationStrategic ReportBusiness OverviewStrategic Report Financial Review The total profit for the year was £22.5 million. Inthecontextofuncertainanddifficultmarketconditions, ourresultsfortheyearwerepositive.Thetotalprofit recordedwas£22.5million,comparedto£31.0million for 2019, reduced due to lower valuation movements, particularlyinthefinalquarteroftheyear.OurEPRA earningsdeclinedto£19.9million,andwemaintained a covered dividend. Earnings per share were 4.1 pence overall (3.7 pence on an EPRA basis), and the total return based on these results was 4.5% for the year. TheCovid-19pandemicishavingasignificantimpacton businesses throughout the UK. For Picton, like many commerciallandlords,thefirsttangibleconsequencewas on the March rent collection date. We received 82% of the rent due, and this is discussed more fully below, along with the actions being taken. We also experienced a decline in the portfolio valuation at the end of March, principally on the retail assets. We expect these themes to continue through the course of the pandemic. Net asset value ThenetassetsoftheGroupincreasedto£509.3million, largelyfollowingtheequityraiseintheyear.Thechart below shows the components of this increase over the year. The EPRA net asset value remained at 93 pence. March 2019 net asset value Incomeprofit Valuation movement Profitonassetdisposals Issue of ordinary shares Share-based awards Purchase of shares Dividends paid March 2020 net asset value £m 499.4 19.9 (0.9) 3.5 7.0 0.3 (0.9) (19.0) 509.3 38 Picton Property Income Limited Annual Report 2020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) 2020 £m 2019 £m 2018 £m 509.3 (29.6) 479.7 499.4 487.4 (24.8) (21.1) 474.6 466.3 93 93 88 93 93 88 90 90 87 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 112. Income statement Total revenue from the property portfolio for the year was £45.7million.Onalike-for-likebasis,rentalincomeonan EPRA basis has reduced compared to the previous year. Throughout the year we have been carrying out a number ofrefurbishmentprojectsaimedatimprovingthequalityof space at those assets and so improving letting prospects. This is discussed further in the Portfolio Review, but the impact on this year’s results is lower net property income. The table below sets out the rent collection statistics for the Marchquarter,analysedbysector.Thegreatestimpact,not unexpectedly, is in the retail sector. Rent due 25 March to 1 April Industrial (%) Collected Moved to monthly Deferred Concessions agreed Active management Outstanding 84 1 6 – – 9 Office (%) 89 Retail and Leisure (%) 67 1 5 1 – 4 8 8 – 4 13 Total (%) 82 2 6 – 1 9 TherentdemandedontheMarchquarterdayisin advance,uptotheJune2020quarterday.Wehave, however, made increased provisions against our tenant debtorsinthisfinancialyear,andthishasimpactedour rentalincomeby£0.5million. Administrativeexpensesfortheyearwere£5.6million,so slightlylowerthanthe£5.8millionin2019.Theseinclude the one-off costs of REIT conversion. Realised and unrealised valuation gains on the portfolio were£2.6millionfortheyear,lowerthanthegainsof£11.3 millionreportedlastyear.Thisisverymuchareflectionof the commercial property market, and particularly the sentiment in the retail sector, where there have been well publicised issues of retail failures. Interest payable is lower this year compared to 2019, at £8.3million.Thisreflectsafullyear’ssavingfollowingthe Canada Life repayment in 2018, and also the repayment of the current revolving credit facilities. ThisisthefirstfullyearthatwehavereportedasaUKREIT. Alloftheprofitsfromthepropertyrentalbusinessare exempt from UK tax. We must, as a REIT, distribute at least 90%oftheseprofitstoshareholdersasPropertyIncome Distributions. Based on our initial submitted tax returns to date,wehavefullycompliedwiththisrequirement.This year we have received a small tax repayment, an adjustmentarisingfrompreviousyears. EPRAearningsfortheyearwere£19.9million,lowerthan the£22.9millionstatedin2019,principallyforthereasons stated above. Dividends The annual dividend rate has remained at 3.5 pence, with totaldividendspaidoutof£19.0million.Dividendcoverfor the full year was lower than last year at 105%. Following the year end we have announced a 29% reduction in the dividend rate, which was applied to the dividend paid in May, due to the uncertainty caused by the Covid-19 pandemic. Investment properties The appraised value of our investment property portfolio was£664.6millionat31March2020,downfrom£685.3 million a year previously. This year we have disposed oftwobuildings,fornetproceedsof£33.1million, realisingacombinedgainof£3.5millioncomparedto lastyear’svaluation.£8.9millionofcapitalexpenditure was invested back into the existing portfolio. The overall revaluationmovementwasasmalllossof£0.9million, principallyarisinginthefinalquarteroftheyear,as the impact of the Covid-19 pandemic was felt. With the reduction in investment market activity and less evidence available, the independent valuers included a ‘material uncertainty’ clause in the March valuation. At 31 March 2020 the portfolio comprised 47 assets, with an averagelotsizeof£14.1million. A further analysis of capital expenditure, in accordance with EPRA Best Practices Recommendations, is set out in the EPRA Disclosures section. 39 Picton Property Income Limited Annual Report 2020GovernanceFinancial StatementsAdditional InformationStrategic ReportBusiness OverviewShare capital During the year the Company issued 7,551,936 new ordinarysharesofnoparvalue,forgrossproceedsof£7.1 million, bringing the total shares in issue to 547,605,596. TheCompany’sEmployeeBenefitTrustacquiredafurther 954,000shares,atacostof£0.8million,duringtheyearto satisfy the future vesting of awards made under the Long- term Incentive Plan, and now holds a total of 2,103,683 shares. As the Trust is consolidated into the Group’s results, these shares are effectively held in treasury and therefore have been excluded from the net asset value and earnings per share calculations, from the date of purchase. Andrew Dewhirst Finance Director 22June2020 Strategic Report Financial Review continued Borrowings Totalborrowingswere£167.5millionat31March2020, with the loan to value ratio having reduced to 21.7%. The weighted average interest rate on our borrowings has increased slightly to 4.2%, while the average loan duration is now 9.9 years. Our senior loan facility with Aviva reduced by the regular amortisationof£1.2millionintheyear. The Group remained fully compliant with the loan covenants throughout the year. During the year we repaid all the outstanding amounts drawnunderourrevolvingcreditfacilities,leaving£49 million undrawn at the year end. The year-end interest rate payable on these loans was around 2.7%. Subsequenttotheyearend,wehavecompletedanew single revolving credit facility, replacing the two existing ones.Thenew£50millionfacilityisforaninitialtermof three years, until May 2023, with two one-year extensions available. Interest is payable at 150 basis points over LIBOR, which is at a lower rate than the facilities it replaces. Loan arrangement costs are capitalised and are amortised over the terms of the respective loans. At 31 March 2020, the unamortised balance of these costs across all facilities was£2.3million. The fair value of our borrowings at 31 March 2020 was £197.0million,higherthanthebookamount.Lending margins have remained broadly in line with the previous year, but gilt rates have fallen in comparison. A summary of our borrowings is set out below: Fixedrateloans(£m) Drawn revolving facilities (£m) Totalborrowings(£m) Borrowings net of cash (£m) Undrawnfacilities(£m) Loan to value ratio (%) Weighted average interest rate (%) Average duration (years) 2020 167.5 – 167.5 143.9 49.0 21.7 4.2 9.9 2019 2018 168.7 203.5 26.0 194.7 10.5 214.0 169.5 182.5 25.0 24.7 4.0 9.8 40.5 26.7 4.1 10.3 Cash flow and liquidity Thecashflowfromouroperatingactivitieswas£13.5 millionthisyear,downfromthe2019figure.Proceeds fromassetsaleswereusedtofinancethenetreduction inborrowings.Dividendpaymentsof£19.0millionwere made in the year. Our cash balance at the year end stood at£23.6million. 40 Picton Property Income Limited Annual Report 2020Strategic Report Principal Risks Managing Risk Principal risk Trend The Board recognises that there are risks and uncertainties that could have a material impact on the Group’s results. Risk management provides a structured approach to the decision making process such that the identifiedriskscanbeidentified, measured, managed, mitigated and reported and the uncertainty surrounding expected outcomes can be reduced. The Board has developed a risk management policy which it reviews on a regular basis. The Audit and Risk Committee carries out a detailed assessment of all risks, whether investment or operational, and considers the effectiveness of the risk management and internal control processes. The Executive Committee is responsible for implementing strategy within the agreed risk management policy, as well as identifying and assessing risk in day-to-day operational matters. The management committees support the Executive Committee in these matters. The small number of employees andrelativelyflatmanagement structureallowriskstobequickly identifiedandassessed. 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 UK Corporate Governance CoderequirestheBoardtomakea Viability Statement. This considers the Company’s current position and principal risks and uncertainties combined with an assessment of the future prospects for the Company, in order that the Board can state that the Company will be able to continue its operations over the period of their assessment. The statement is set out in the Directors’ Report. 1 Political and economic 2 Market cycle 3 Regulatory and tax 4 Climate change 5 Portfolio strategy 6 Investment 7 Asset management 8 Valuation 9 People 10 Finance strategy 11 Capital structure Covid-19 The current global Covid-19 pandemic is causing an unprecedented level of disruption to the global economy. Many governments, including the UK, have imposed lockdowns, giving rise to the closure of some businesses. It is not clear how long the restrictions will last nor what the impact on the UK economy will be. Some of our occupiersarefacingfinancial difficultiesandweareworkingwith themtofindsolutionsthatbothhelp them and mitigates any impact on our capitalvaluesandcashflow. The risks associated with this pandemic fall across many of the principal risks set out here, and in many cases increase the potential impactsignificantly.Therehasalready been an impact on the Group’s cash flow,anditisconsideredlikelythatthis will continue in at least the short-term. Picton has a diverse portfolio spread across the UK, with around 350 occupiers in a wide range of businesses.Thecashflowarising from our occupiers underpins our business model. We are continuing to let space, although a number of transactions have been put on hold since the pandemic began to affect the UK economy. There are few investment transactions taking place to provide comparable evidence for valuations, and as a result our external valuers have added a material valuation uncertainty clause to their report as at 31 March 2020, in line with market practice. We have considered in our Viability Statement the potential impact of various scenarios resulting from Covid-19 on the business. 41 Picton Property Income Limited Annual Report 2020GovernanceFinancial StatementsAdditional InformationStrategic ReportBusiness Overview Strategic Report Principal Risks continued Brexit Although the UK has now left the EU and is in the transition period, there is still uncertainty regarding a future trading relationship. The transition period ends on 31 December 2020 and in the absence of any agreement being reached there could be further disruption to the UK economy. We have considered the potential impact from a disruptive Brexit in a number of scenarios included in our Viability Statement. Emerging risks During the year the Board has considered themes where emerging risks or disrupting events may impact the business. These may arise from behavioural changes, political or regulatory changes, advances in technology, environmental factors, economic conditions or demographic changes. As noted above Covid-19 may also have an impact on a number of these themes. Some are already considered to be principal risks in their own right such as the impact of climate change, others are reviewed as part of the ongoing risk management process. Risk management framework Board • Has overall responsibility for risk management including approval of the risk management framework, risk policies and risk appetite • Determines business model Executive Committee • • • Carries out risk management, mitigation Implements strategy and risk policy Identifiesandassessesrisks and reporting Audit and Risk Committee • Reviews and recommends risk management framework including risk policies • Reviews detailed risk matrix and principal risks • Reviews internal controls and the testing of those controls Management Committees • Reviewspecifictransactionrisks • Consider impact of forthcoming legislation on the Group’s risks • Review operational risk The matrix below illustrates the assessment of the impact and likelihood of each of the principal risks. Likelihood after mitigation 2 11 5 8 7 10 1 4 h g H i i m u d e M w o L t c a p m i l a i t n e t o P 6 3 9 Read more on pages 43–45 Low Medium High Likelihood after mitigation 42 Picton Property Income Limited Annual Report 2020 Corporate Strategy 1 Political and economic Risk Uncertainty in the UK economy, whether arising from political events or otherwise, brings risks to the property market and to occupiers’ businesses. This can result in lower shareholder returns, lower asset liquidity and increased occupier failure. 2 Market cycle Risk The property market is cyclical and returns can be volatile. There is an ongoing risk that the Company fails to react appropriately to changing market conditions, resulting in an adverse impact on shareholder returns. 3 Regulatory and tax Risk The Group could fail to comply with legal, fiscal, health and safety or regulatory matters which could lead to financial loss, reputational damage or loss of REIT status. 4 Climate change Risk Failure to react to climate change could lead to the Group’s assets becoming obsolete and unable to attract occupiers. Mitigation The Board considers economic conditions and market uncertainty when setting strategy, considering thefinancialstrategyofthebusiness and in making investment decisions. Commentary The risks around the UK economy have increased with the Covid-19 pandemic. Although there is more certainty regarding Brexit, no future deal with the EU has yet been agreed and this may lead to further uncertainty later in 2020. Mitigation The Board reviews the Group’s strategyandbusinessobjectives on a regular basis and considers whether any change is needed, in light of current and forecast market conditions. Commentary There may be increased volatility in the property market as a result of the currenteconomicrestrictions.Official forecasts indicate a substantial fall in UK GDP this year. The impact of Covid-19 may also cause businesses to review their existing operating models (e.g.futureneedforofficespace). Mitigation The Board and senior management receive regular updates on relevant laws and regulations. The Group is a member of the BPF and EPRA, and management attend industrybriefings. Commentary Therearenosignificantchanges expected to the regulatory environment in which the Group operates. Mitigation Sustainability is embedded within the Group’s business model and strategy. Allrefurbishmentprojectsinclude environmental considerations to ensure buildings are maintained to current standards. Commentary Climate change is now considered to be a principal risk given its increasing importance and the impact of real estate on the environment. Risk trend Connected KPIs Strategic Pillar A C G H 3 1 2 Risk trend Connected KPIs Strategic Pillar C D 3 1 2 Risk trend Connected KPIs Strategic Pillar A F 3 1 2 Risk trend Connected KPIs Strategic Pillar A C J K 3 1 2 43 Picton Property Income Limited Annual Report 2020GovernanceFinancial StatementsAdditional InformationStrategic ReportBusiness OverviewStrategic Report Principal Risks continued Property 5 Portfolio strategy Risk The Group has an inappropriate portfolio strategy, as a result of poor sector or geographical allocations, or holding obsolete assets, leading to lower shareholder returns. 6 Investment Risk Investment decisions may be flawed as a result of incorrect assumptions, poor research or incomplete due diligence, leading to financial loss. 7 Asset management Risk Failure to properly execute asset business plans or poor asset management could lead to longer void periods, higher occupier defaults, higher arrears and low occupier retention, all having an adverse impact on earnings and cash flow. 8 Valuation Risk A fall in the valuation of the Group’s property assets could lead to lower investment returns and a breach of loan covenants. 44 Mitigation TheGroupmaintainsadiversified portfolio in order to minimise exposure to any one geographical area or market sector. Commentary Continued divergence of returns across sectors, coupled with the impact of Covid-19 particularly on retail and leisure assets, have increased this risk. Risk trend Connected KPIs Strategic Pillar A C 3 1 2 Risk trend Connected KPIs Strategic Pillar A C 3 1 2 Risk trend Connected KPIs Strategic Pillar C J K 3 1 2 Commentary There is no change to this risk. Commentary The importance of effective asset management has been heightened by the Covid-19 pandemic and its impact on occupiers’ businesses. Mitigation The Executive Committee must approve all investment transactions overathresholdlevel,andsignificant transactionsrequireBoardapproval. A formal appraisal and due diligence process is carried out for all potential purchases. Areviewofeachacquisitionis performed within two years of completion. Mitigation Management prepare business plans for each asset which are reviewed regularly. The Executive Committee must approve all investment transactions overathresholdlevel,andsignificant transactionsrequireBoardapproval. Management maintain close contact with occupiers and have oversight of the Group’s Property Manager. Mitigation The Group’s property assets are valuedquarterlybyanindependent valuer with oversight by the Property Valuation Committee. Market commentary is provided regularly by the independent valuer. TheBoardreviewsfinancialforecasts for the Group on a regular basis, including sensitivity against financialcovenants. Commentary The current economic situation could lead to negative sentiment and see further falls in asset values. Risk trend Connected KPIs Strategic Pillar A C 3 1 2 Picton Property Income Limited Annual Report 2020Operational 9 People Risk The Group relies on a small team to implement the strategy and run the day-to-day operations. Failure to retain or recruit key individuals with the right blend of skills and experience may result in poor decision making and underperformance. Financial 10 Finance strategy Risk The Group has a number of loan facilities to finance its activities. Failure to comply with covenants or to manage re-financing events could lead to a funding shortfall for operational activities. 11 Capital structure Risk The Group operates a geared capital structure, which magnifies returns from the portfolio, both positive and negative. An inappropriate level of gearing relative to the property cycle could lead to lower investment returns. Mitigation The Board has a remuneration policy in place which incentivises performance and is aligned with shareholders’ interests. There is a Non-Executive Director responsible for employee engagement who provides regular feedback to the Board. Commentary The Group has a stable and aligned team in place. Significanteffortshavebeen,andwill continue to be made to ensure the safety and well-being of the Group’s employees through the course of the Covid-19 pandemic. Risk trend Connected KPIs Strategic Pillar H L 3 1 2 Commentary Although the Group has headroom againstitsloancovenants,significant falls in valuations or income during the current Covid-19 crisis could lead to pressure on covenants. However, a number of stress tests have been conducted to assess the potential risk, which the Board continue to monitor. Risk trend Connected KPIs Strategic Pillar C D E Mitigation The Group’s property assets are valuedquarterlybyanindependent valuer with oversight by the Property Valuation Committee. Market commentary is provided regularly by the independent valuer. TheBoardreviewsfinancialforecasts for the Group on a regular basis, including sensitivity against financialcovenants. The Audit and Risk Committee considers the going concern status of the Group biannually. Mitigation The Board regularly reviews its gearing strategy and debt maturity profile,atleastannually,inlightof changing market conditions. Commentary Although the Group has a modest level of gearing, falls in capital values willbemagnifiedbytheimpact of gearing. 3 1 2 Risk trend Connected KPIs Strategic Pillar A C E G H 3 1 2 45 Picton Property Income Limited Annual Report 2020GovernanceFinancial StatementsAdditional InformationStrategic ReportBusiness OverviewStrategic Report Being Responsible Our responsible and ethical approach At Picton we believe that sustainability has to be fully embedded into all of our activities. A responsible and ethical approach to business is essential for the benefit of all our stakeholders, and understanding the long-term impact of our decisions will help us to manage risk and continue to generate value. This report looks at the components of sustainability – environmental, social and governance – how we approach each of these, and our progress in each area. Corporate strategy In determining our new corporate strategy, we have established three new strategic pillars: Portfolio Performance, Operational Excellence and Acting Responsibly. Within each of these pillars, we have determined anumberofspecificstrategic priorities, which are measured by our key performance indicators. Theidentifiedmaterialissuesare all incorporated within these new strategic priorities, and this year we will be setting clear targets against each of these so that we can effectively measure our sustainability performance. For more information please see our Sustainability Report. Highlights of the year ӱ Carried out materiality assessment of relevant sustainability issues ӱ Incorporated sustainability into our corporate strategy ӱ Improved portfolio EPC ratings ӱ Incorporated energy efficiencymeasuresinto building refurbishments ӱ Further developed our occupier and employee engagement programmes ӱ Achieved EPRA Gold for 2019 Sustainability Report Visit our website www.picton.co.uk Materiality assessment During the year we re-visited our approach to sustainability with a view to integrating it within our strategy. Previously we had considered sustainability in terms of the environmental impact of the portfolio, and how we could minimise this. We set a number of targets in 2016 and with many of these having been met, considered that it was the right time to re-evaluate sustainability issues important to us and all our stakeholders. We carried out a materiality assessment in order to identify those sustainability issues that were most relevanttoPicton.Thefindingswill help us to determine our sustainability priorities in the light of our overall business strategy. The assessment wascarriedoutinconjunction with Emperor, an independent consultant. The process included a robust analysis of potential material issues, both internal and external, and stakeholder interviews. At the end of the assessment there were 12 material sustainability issues identified.Thesewerealignedwithin a sustainability framework and our overall corporate strategy. 46 Picton Property Income Limited Annual Report 2020Environmental 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 across the portfolio. What we have done this year ӱ Progressed our EPC management programme ӱ Achieved a 7% increase in our A to D EPC ratings ӱ Incorporatedenergyefficiency measuresintoallmajor refurbishmentprojects ӱ Developed refurbishment checklisttoassessprojects against industry standards and best practice ӱ Continued to implement green clauses in all our new leases, and developed a tracker to monitor this ӱ Carried out ESG audits on four energy intensive properties within the portfolio ӱ Installed a green wall as part of officerefurbishment What we will do next year ӱ Carry out further ESG audits ӱ Further increase our proportion of A to D EPC ratings ӱ Investigate carbon offsetting and biodiversity opportunities EPC management We have a continuous programme of monitoring EPCs in place throughout the portfolio. During the year we completed 19 EPCs at higher ratings than previously and achieved a 7% increase in A to D ratings compared to last year. All EPCs expiring within the next 12 months will be reviewed to assess where environmental measures can be put in place to improve the rating. Environmental initiatives This year there have been a number ofbuildingrefurbishmentprojects commenced, and we have ensured environmental issues have been fully incorporated into these. We have considered where energy efficiencymeasurescouldbeincluded within the refurbishments, such as new lighting, improved plant andequipment,solarpanels,new building management systems, insulation and new water systems. We have also introduced more occupier amenities where possible, such as cycle storage facilities, changing rooms and showers. Moredetailontheseprojectsis included within this year’s Sustainability Report, including case studies. We have installed two beehives at our Queens House property in Glasgow. The bee population at these hives has more than doubled since they were installed in 2018, helping the pollination of surrounding plant life. These hives have also been successful in engaging with our occupiers at the building, with workshops and presentations taking place. This year we completed scoping exercises at several buildings to locate viable sites for further beehives and an installation at our Metro building in Salford is underway. Transportationisamajorsourceof greenhouse gas emissions worldwide. We recognise our role in supporting our occupiers’ transition to a more sustainable solution and have been working to identify buildings where electric charging points can be installed. We are pleased to have installed charging points at two of our properties – 180 West George Street and Easter Court, Warrington. In addition, we will be installing 20 charging points at Metro in Salford this year. We are investigating where else we can install charging points across the portfolio. AtTowerWharf,ourmulti-letoffice building in Bristol, we carried out a refurbishment of the reception area. As part of this we installed a green wall, which comprises moss from sustainable sources. The moss improvestheairqualityandreduces the carbon within the building. We expect energy bills to be reduced as the moss cools the area in summer and helps insulate it in winter. 47 Picton Property Income Limited Annual Report 2020GovernanceFinancial StatementsAdditional InformationStrategic ReportBusiness OverviewStrategic Report Being Responsible continued Green leases We have now introduced new sustainability clauses into our standard lease agreements – so- called ‘green lease clauses’. These clauses set out the responsibilities of both Picton and the occupier with regard to sustainability issues. We have developed three levels of clauses, from basic through to leader, where there are greater expectations on sustainability issues andrequireamorecollaborative approach between Picton and the occupier. The increasing importance of sustainability to many businesses has led them to re-evaluate how they use space and these clauses help to provide the right framework. We have also implemented a ‘green lease tracker’ this year. The tracker allows us to keep a record of all green leases we have in place, with a scoring system so that we can measure and improve on the number of green clauses we have. ESG audits We have carried out ESG audits at four ofourmulti-letofficepropertiesinthe portfolio. These were at Tower Wharf in Bristol, Metro in Salford, 50 Farringdon Road in London and Queens House in Glasgow. The audits were carried outbyqualifiedengineersfromour sustainability advisers CBRE. The audits focused on the key areas ofenergyusageandefficiency, water and waste management, and provided a summary of recommendations of energy saving measures, and the associated costs. We have developed an action plan for each property to implement the recommendationsasrequired. We will carry out more ESG audits at ourothermulti-letofficesinthis coming year. Social Our people We aim to attract and retain employees who can thrive at Picton and realise their full potential. We valuethecontributionsmadeby the whole Picton team, with a strong and open company culture that was co-created by our employees. We aim to have a positive business environment consistent with our values,withequalopportunitiesforall. What we have done this year ӱ Carried out an employee engagement survey across the whole team ӱ Held a forum for employees to raise matters with the designated Non-Executive Director responsible for employee engagement ӱ Maintained alignment with further LTIP awards to the whole team ӱ Held an offsite meeting for the whole team, including a tour of local Picton properties What we will do next year ӱ Build on the employee survey and engagement carried out this year ӱ Increase training and personal development opportunities for employees Employee engagement Last year we appointed one of our Non-Executive Directors, Maria Bentley, to be responsible for employee engagement. This year we carried out a survey across the whole team, and the results of this were then discussed at a team meeting attended by Maria. There were a rangeofquestionsputtotheteam, and the results were positive. Of the questionsasked,93%wereanswered either Strongly Agree or Agree. We have used the results to prepare an Employee Satisfaction score, and have introduced this as a new key performance indicator this year. We intend to repeat the survey this year. One of the issues raised through the surveywasthelevelofemployee training. As a result we have increased this, as set out below, and haveencouragedemployeesto identify training needs and courses thattheywouldbenefitfrom. Wellbeing We believe that having a happy and healthyteamisimportanttothe success of the business. In this year’s employee survey the whole team were positive about their work/life balance. Our commitment to providing a safe and healthy working environment for our employees is achieved by: ӱ Adhering to the appropriate health and safety standards ӱ Providing a working environment that enables employees to work effectively and free from unnecessary anxiety, stress and fear ӱ Offeringprivatehealthbenefitsto all employees ӱ Ensuring employees can report inappropriate behaviour or concerns through the whistleblowing policy Having appropriate family friendly policies Diversity and inclusion 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. Werecognisethebenefitsofdiversity and the value this brings to the Group. We aim to maintain the right blend of skills, experience and knowledge within the Board and the Picton team. At the date of this Report, the number of men and women employed by the Group were: Board Rest of team Total Men Women 5 4 9 1 3 4 48 Picton Property Income Limited Annual Report 2020Charity and local communities We are committed to improving the impact of our buildings on local communities, whether providing space to local businesses, improvement of local areas or minimising the environmental impact of buildings themselves. We also support local communities through our occupier led charitable matched giving initiative. What we have done this year ӱ Made charitable donations of £6,600 ӱ Developed a partnership with Coram, a children’s charity ӱ Increased the opportunities for employees to volunteer their time with Coram What we will do next year ӱ Increase our donations to charitable causes, especially as the Covid-19 situation continues ӱ Build on our partnership with Coram 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 tojointogethertosupportsocial changeprojectsandhaveraisedover £13millionforover2,000diverselocal, nationalandinternationalprojects. Our Responsibility Committee encourages our employees to play a positive role in community activities and works with Coram, a charity that supports vulnerable children, to provide team volunteering opportunities. This year employees have volunteered at an adoption day and helped at the annual Coram Christmas carol concert. One of the Picton team has agreed to run the London marathon to raise funds for Coram, which is now due to take place in October. As well as our occupier matched giving policy, we also offer matched giving for employees who are raising money for charity. 49 PictonteamhelpingatjunglethemedCoramadoptionday Training and development We want to encourage our employees to realise their full potential by giving them access to development and training opportunities. This year the amount of training carried out by employees has increased from 1.2% to 1.5%, on a time spent basis. Employee development is based on the following key principles: ӱ Development should be continuous; employees should always be actively seeking to improve performance ӱ Regular investment of time in learning is seen as an essential part of working life ӱ Development needs are met by a mixofactivities,whichinclude internal and external training courses,structured‘onthejob’ 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 objectivessetatthestartoftheyear. Picton Property Income Limited Annual Report 2020GovernanceFinancial StatementsAdditional InformationStrategic ReportBusiness OverviewStrategic Report Being Responsible continued Our occupiers 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.Weuseourexpertise in asset management to provide modernflexiblespacethatissafe, cleanandenergyefficient.Webelieve that it is important to engage with our occupiers on sustainability. In this way we can constantly strive to reduce our environmental impact. What we have done this year ӱ Implemented sustainability workshops at a number of properties ӱ Carried out an occupier survey ӱ Included new occupier amenities when carrying out refurbishments, such as showers and cycle racks ӱ Continued with our policy of occupier matched giving for charitable donations. Eight occupiers took advantage of this policy over the year What we will do next year ӱ Work with our occupiers to prepare our buildings for re-occupation ӱ Carry out more sustainability workshops ӱ Continue with providing occupier amenities when carrying out building improvements Responsibility Committee We have a Responsibility Committee in place which is chaired by Andrew Dewhirst, and also comprises Tim Hamlin, our Senior Asset Manager, and Louisa McAleenan, our Research Analyst. The Committee normally meets monthly and its remit covers all aspects of sustainability and environmental initiatives, ESG reporting, health and safety, employee engagement and wellbeing, and relevant regulatory issues. The Committee also meets regularly with CBRE, who are consultants to the Group and carry out all necessary ESG data collection. Our suppliers We have in place a framework for conducting business across the Group, in a way that makes a positive contribution to society, while minimising any negative impact on people and the environment. We expect high standards within our business and similarly from our suppliers. Governance The Board is responsible for the long- term success of the business, and for establishing its culture and values, including leading on sustainability. We have in place a framework of corporate governance and report against the 2018 UK Corporate Governance Code. The Governance section of this Report sets this out in more detail. We will act in a fair and responsible manner. This section sets out how sustainability is included within our business principles. What we have done this year ӱ Included responsible business principles in our corporate strategy ӱ Carried out a materiality assessment of relevant issues ӱ Published our 2019 Modern Slavery Statement What we will do next year ӱ Develop and further communicate our supplier code of conduct ӱ Joinrelevantindustryleadership schemes 50 Picton Property Income Limited Annual Report 2020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. In our 2020 Sustainability Report we detail our GHG emissions for the last six years, showing how our reporting has evolved since 2014. For this Report, we have revised our reporting periodtofiscalyearreportingto matchourfinancialreports. Scope 1 Scope 1 emissions account for 1,137 tCO2e of our total emissions, which is a decrease of 7% from previous year. This is due to the implementation ofenergyefficiencymeasures,an increaseindataqualityandthe disposal of sites in 2018 and 2019. Excludingtheimpactofacquisitions and disposals and void units, like- for-like Scope 1 emissions have decreasedby11%duetoproject works at various sites which includes building management system upgrades, control optimisation projectsandboilerreplacements. Scope 2 Scope 2 emissions account for 2,295 tCO2e, which is a decrease of approximately 13% from previous year. Scope 2 emissions have seen the greatest impact from the decarbonisation of the national grid. With Scope 2 emissions being the largest contributor to our emissions which we can directly control, it is positive to also see a 4% decrease in like-for-like emissions. This is largely thankstoenergyefficiencyprojects at Atlas House, Marlow, 180 West George Street, Glasgow and Metro, Manchester, where various lighting, and air conditioning related works have been completed. We hope to see further improvements in 2020/21 whentheprojectswillhavehadafull reportingyeartorealisetheirbenefits. Scope 3 Scope 3 emissions account for 3,628 tCO2e, which is a 32% decrease from previous year due to Covid-19 impacting occupier data accessibility. Due to the variance in occupier data thatwereceiveitisdifficulttoread too much into the large decrease in Scope 3 emissions, with Scope 1 and 2 emissions remaining our priority for improvement measures. We hope to continue to gather occupier data throughout this year to ensure we have a more complete data set for better comparison. Methodology We have reported on all the emission sourcesrequiredunderthecore requirementsofEPRA’s‘BestPractices 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),regardlessofthespecific 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 largefloorareastypicallyassociated 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. Reporting against EPRA sustainability best practice Our overall energy, greenhouse gas, water and waste usage by sector is reported within our 2020 Sustainability Report. The EPRA sustainability measures are reported in the 2020 Sustainability Report. Emission source Combustion of fuel and operation of facilities Electricity, heat, steam and cooling purchased for own use Business travel Occupier data Officepremises Landlord water and treatment Landlord waste Total 2020 2019 2018 Absolute GHG emissions (tCO2e) GHG intensity (tCO2e/m2) Absolute GHG emissions (tCO2e) GHG intensity (tCO2e/m2) Absolute GHG emissions (tCO2e) GHG intensity (tCO2e/m2) GHG Scope 1 2 3 3 3 3 3 1,137 0.005 1,220 0.006 1,260 0.006 2,295 4 3,534 17 53 20 7,060 0.014 N/A 0.004 N/A 0.001 0.000 0.024 2,648 8 5,274 10 55 21 9,236 0.015 N/A 0.003 N/A 0.001 0.000 3,316 7 9,566 13 53 21 0.025 14,236 0.015 N/A 0.005 N/A 0.001 0.000 0.027 51 Picton Property Income Limited Annual Report 2020GovernanceFinancial StatementsAdditional InformationStrategic ReportBusiness OverviewStrategic Report Section 172 Companies Act 2006 Statement Section 172 As the Company is registered in Guernsey, the UK Companies Act 2006 has no legal effect. However, in accordance with the UK Corporate Governance Code 2018 and as a matter of good governance, the Directors, individually and collectively as the Board, act as they consider most likely to promote the success of the Company for the benefit of our shareholders as a whole. In doing so, the Directors have regard for the likely long-term consequences of decisions, maintaining a reputation for high standards of business conduct, and the need to act fairly between stakeholders. This year, to illustrate this, we have explained the Board’s decision-making process in relation to Covid-19. The Directors also have regard for our employees’ interests, business relationships with our wider stakeholders, the impact of our operations on communities and the environment in which we operate. Consideration of these factors and other relevant matters is embedded into all Board decision- making, strategy development and risk assessment throughout the year. Our key stakeholders and the primary ways in which the Board engages directly or delegates responsibility for engagement to management is set out below. Engagement with stakeholders Our shareholders As owners of Picton we rely on the support of our shareholders and their views are important to us. The long- term success of the business will deliver value for shareholders. Senior management hold regular meetings with shareholders and feedback from these meetings is reported back to the Board. This feedback may be on operationalmatters,financingstrategy or dividend policy, as examples. The Directors normally attend the Annual General Meeting to meet with shareholders and to answer any questionstheymayhave. Our occupiers 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 futurerequirements.TheBoard has delegated responsibility for engaging with occupiers to the asset management team, who have ongoing communication with occupiers, and use this information when making proposals to the Board on investment transactions, such as refurbishment projectsorleasingevents. Our people Our people are key to our business and we want them to succeed both as individuals and as a team. One of our Non-Executive Directors, Maria Bentley, has responsibility for employee engagement. During the year we undertook an employee survey. The results of this survey were discussed at a forum attended by Maria and the employees, without the Executive Directors present. The views of the employees on a number of issues, including theofficeaccommodationand training, were reported directly back to the rest of the Board. Local communities and the environment We are committed to improving the impact of our buildings on local communities, whether providing space to local businesses, improvement of local areas or minimising the environmental impact of buildings themselves. The Board has established a Responsibility Committee, which is chaired by one of the Executive Directors, to deal with sustainability policy and initiatives on its behalf. The Board receives regular reports of progress on sustainability matters. Suppliers We have in place a framework for conducting business across the Group in a way that makes a positive contribution to society, while minimising any negative impact on people and the environment. The Board has agreed the overall business framework and delegated its implementation to the management team. 52 Picton Property Income Limited Annual Report 2020Considering stakeholders in key Board decision-making The impact of Covid-19 Themostsignificantissuethatthe Board has given due consideration to in the past 12 months has been around the impact of Covid-19 on the business and our response to it. The Board considered what would be in the long-term interests of all of our stakeholders in the business before coming to a decision. Restrictions due to Covid-19 were introduced by the UK Government in March 2020, with the lockdown coming into effect from 23 March 2020. Many businesses were shut from that time, particularly in the retail and leisure sectors. The Government introduced a number of measures designed to help businesses and individualswhowouldsufferfinancial hardship as a result of the restrictions. While the Government restrictions are still in place it is uncertain the extent to which there will be a loss of income to the business for the foreseeable future. The Board had to consider therefore what mitigating actions wouldberequiredtoprotectthe long-term viability of the business. The options and potential consequencesforstakeholderswere considered to be: Suspension or reduction of dividend Increase in borrowings to fund cash shortfall Rent concessions Other cost reduction measures including employee costs Reduction or delay of capital expenditure programme Actions The Board recognised the value to shareholders of regular dividend payments. A suspension of dividends, even on a temporary basis, would have an adverse impact on investors. The Board reviewed forecast cash scenarios and considered that the use of borrowingswouldbeappropriateinlimitedcircumstancesbutthatanysignificant increase in borrowings would potentially put pressure on lending covenants which would not be in the long-term interests of the Company. TheBoardrecognisedthatsomeoccupierswereexperiencingfinancialdifficulties asaresultoftherestrictions,andconsequentlytheirabilitytomakerentpayments. WestartedtoopendialogueswithoccupiersastheMarch2020rentquarterday approached.Requestsfromoccupiersexperiencingfinancialdifficultieswere considered on a case-by-case basis, with the aim of assisting occupiers while minimisingtheimpacttobothPicton’scapitalvaluesandcashflow.Ourrent collectionfortheMarchquarteriscurrently82%,althoughtheextenttowhich uncollected rent is a deferral or a permanent loss of revenue was, and still is, unclear. We have looked to reduce the service charge as much as possible in the short-term, especiallyinrelationtotheofficeportfoliowhereweareseeingloweroccupancy levelscurrently.Thisistoassistouroccupierswithcashflow,acknowledgingthe current business climate. We continue to monitor the position to ensure the services provided match reoccupation plans in place at each property. The Board decided that it would not be in the interests of the business to furlough employees or seek other Government assistance. Picton has a small and highly motivated team who are aligned to the success of the business. The capital expenditure programme was reviewed on a case-by-case basis. Ongoingprojectswouldbecompleted,whilenon-essentialworkswouldbe delayed.However,wherecapitalexpenditurewasrequiredtoeitherfacilitatefuture lettings or protect the capital values of properties, the Board determined that these projectsshouldgoaheadonanappropriatetimescale. The Board has concluded it is appropriate to reduce the level of dividend during this period and until market conditions become clearer. This change provides the Company withflexibilityinmanagingthe property portfolio and the ability to support our occupiers, with a view to creating longer-term value for shareholders, while maintaining balance sheet strength. Borrowings will be utilised to a limited extent to fund essential capital expenditure. 53 Picton Property Income Limited Annual Report 2020GovernanceFinancial StatementsAdditional InformationStrategic ReportBusiness OverviewGovernance Chairman’s Introduction Introduction to the Corporate Governance Report Nicholas Thompson, Chairman This has been the Company’s first full year as a UK REIT. Dear Shareholder I am pleased to introduce our 2020 Corporate Governance Report. Board composition In last year’s report I stated that I intended to step down as Chairman once a suitable successor had been appointed, and that the search process for that successor had begun. To that end we appointed NickWilestotheBoardon1January this year, and it was my intention to retire after the publication of these annual results. Unfortunately, after only a short time on the Board, Nick has been appointed unexpectedly as the Chief Executive of another listed company and is unable to take on the Picton Chairman role as well. Hence he has resigned from the Board with effect from 20 May 2020. I would like to thank him for his contribution during his tenure on the Board and wish him well in his new role. The Board has asked me to remain as Chairman until a new appointment has been made, and I was very pleased to accept that. We have therefore started the search process again for a replacement, and I hope we will be making an announcement on this in due course. Maria Bentley has again agreed to become Chair of the Nomination Committee to lead the search for suitable candidates. Succession We have also commenced the search process for a new Director to replace Roger Lewis, who has now served on the Board for ten years, and will step down once his successor has been appointed. We expect that the new appointee will take over as Chair of the Property Valuation Committee. The selection process for a new appointment is described in more detail in the Nomination Committee Report. Governance This year we are reporting against the 2018 Corporate Governance Code forthefirsttime.TheCodecontains updated Principles of good corporate governance. The application of these new Principles is described within the following Corporate Governance Report, and also within the various Committee reports. We have set out how we have engaged with all of our stakeholders within the new Section 172 Statement and also within Acting Responsibly. Our Compliance Statement is set out within the Directors’ Report. ThishasbeenthefirstfullyearasaUK REIT, with management established in the UK. We have maintained the same structure of Board and management committees, and I believe these are working well, and provide an appropriate framework for the governance and decision-making within the Company. 54 Picton Property Income Limited Annual Report 2020Annual Report and Accounts 2018 Board evaluation This year we carried out an internal evaluation of the Board, based on adetailedquestionnaireprepared by the Company’s Administrator. All of the Directors completed the questionnaire,andtheanonymised results were then discussed by the Board at their next meeting. As part of the evaluation this year we considered the committee structure, particularly the need for a separate Property Valuation Committee, and concluded that we would retain the existing structure. It was concluded that the Board was working effectively, as were the Board Committees.Anumberofspecific actionswereidentified,andthese have been addressed. Nicholas Thompson Chairman 22June2020 Our people and culture We have further developed our programme of employee engagement this year. Previously we had appointed Maria Bentley as our Non-Executive Director with responsibility for employee engagement. This year we have carried out an employee survey, and this was followed up with a discussion forum attended by Maria and the team, but without the Executive Directors. The issues raised through the survey were covered and as a result a number of actions were agreed and implemented. Our team is key to the success of the business and underpins our occupier focused approach. This year there have been some changes made to the team, including the appointment of a new Head of Occupier Services. This new role is focused on ensuring that our occupiers receive excellent property management, in line with our Picton Promise. The Responsibility Committee has extended the Company’s relationship with Coram, a charity helping and supporting vulnerable children and young people. Some team members have volunteered at Coram events, and we hope this will be maintained despite these currentdifficultcircumstances.This relationship is in keeping with the Company’s culture and values, where we encourage employees to take part in community and charitable activities. The wellbeing of our team is uppermost in these extraordinary circumstances and the Board fully supports the efforts being made to maintain team activities and morale while working remotely. 55 Picton Property Income Limited Annual Report 2020Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewGovernance Board of Directors We have the relevant skills and We have the relevant skills and experience for future gro experience for future growth The Board is responsible for the long-term success of the business, providing leadership and direction with due regard and consideration to all stakeholders in the business. Diversity of experience 83% Real Estate 67% Strategy and Governance 67% Corporate finance and public companies 33% Finance and Accounting Nicholas Thompson Chairman Key strengths and skills – Chartered Surveyor with 44 years’ experience, 36 of which are in property investment management – Clearvisionandstronginfluencing skills Appointed to the Board September 2005 Responsibilities Ensuring the Board is effective in setting and implementing the Company’s direction and strategy, including reviewing and evaluating the performance of the Chief Executive. Principal external commitments – Director of the Lend Lease Retail Partnership – Independent Director of the Association of Real Estate Funds Previous experience and appointments – Director and Head of Fund and Investment Management, Prudential Property Investment Management – Fellow of the Royal Institution of Chartered Surveyors. Appointed to the Board October 2015 Responsibilities Overall strategic direction and execution of the Group’s business model. Michael Morris Chief Executive Key strengths and skills – Successful track record of driving investment strategy and delivering results for shareholders – Proven leadership skills – In-depth understanding of real estate equitycapitalmarkets Principal external commitments None Previous experience and appointments – 25 years’ wide ranging commercial real estate market experience – Senior Director and Fund Manager at ING Real Estate Investment Management – Member of the Investment Property Forum 56 Picton Property Income Limited Annual Report 2020Annual Report and Accounts 2018 Andrew Dewhirst Finance Director Key strengths and skills – Chartered Accountant with extensive experienceinfinancialplanningand reporting – In-depthknowledgeoffinancial services, capital markets and real estate funds – Expertiseindebtandequityfinancing Appointed to the Board October 2018 Responsibilities Strategicfinancialplanning and reporting for the Group. Principal external commitments None Previous experience and appointments – Director of Client Accounting at ING Real Estate Investment Management – Director at Hermes Administration Services – Associate member of the Institute of Chartered Accountants in England and Wales Appointed to the Board October 2018 Responsibilities Leading on the recommendation of remuneration policies and levels, for effective succession planning and employee engagement. Maria Bentley Chair of Remuneration Committee, Chair of Nomination Committee Key strengths and skills – Business head leading change across global teams – Expertise in human resources – Extensiveexperienceinfinancial services Principal external commitments – Non-Executive Director of BlueBay Asset Management LLP and Chair of Remuneration Committee Previous experience and appointments – Senior Managing Director & Global Head of HR, Wholesale & Head of HR EMEA at Nomura International plc – Group Managing Director & Global Head of HR, UBS Investment Bank – Managing Director, Global Head of HR forEquitiesandFixedIncome, Goldman Sachs International Mark Batten Chair of Audit and Risk Committee, Senior Independent Director Key strengths and skills – Chartered Accountant and restructuring specialist – Extensive experience in banking, insurance, real estate, debt structuring and restructuring – Broad real estate knowledge, covering most subsectors Principal external commitments – Board member and Chairman of the Audit Committee, Assured Guaranty Europe – Board member, Armour re (UK) – Board member and Chairman of the Finance Committee, The Royal BromptonandHarefieldFoundation Trust – Senior adviser to UK Government Investments Previous experience and appointments – Partner, PricewaterhouseCoopers LLP (restructuring and corporate valuation practices) – Non-Executive Director, L&F Indemnity Roger Lewis Chair of the Property Valuation Committee Key strengths and skills – Over 40 years’ experience in residential and commercial property – Public Company experience – Corporatefinanceexperience Principal external commitments None Previous experience and appointments – Chairman and Director, Berkeley Group Holdings PLC – GroupChiefExecutiveOfficer,Crest Nicholson Group PLC Appointed to the Board October 2017 Responsibilities Financial reporting and accounting policies, audit strategy and the evaluation of internal controls and risk management systems. Appointed to the Board March 2010 Responsibilities Overseeing the review of thequarterlyvaluation process and making recommendations to the Board as appropriate. 57 Picton Property Income Limited Annual Report 2020Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness Overview Governance Our Team With extensive experience across real estate management and financial services, our team have an in- depth knowledge and understanding of the UK commercial property market. 01 Andrew Dewhirst Finance Director 03 Michael Morris Chief Executive Responsibleforthefinancialstrategyand reporting for the Group, Andrew has over 30 years’experiencewithinfinancialservicesand real estate sectors. Michael has over 25 years’ experience within the UK commercial property sector and is responsible for the strategic direction and effective execution of the Group’s business model. 02 James Forman Financial Controller 04 Mark Alder Head of Occupier Services JameshasworkedwiththeGroupsinceits launch in 2005 and has 20 years’ experience in the real estate sector. He is responsible for all theaccountingandfinancialreportingforthe Group and is a member of the Transaction and Finance Committee. Mark is a Chartered Surveyor with over 35 years of property management experience. He is responsible for delivering effective property management and strengthening our relationship with our occupiers. 01 02 03 04 58 Picton Property Income Limited Annual Report 2020Annual Report and Accounts 2018 05 Lucy Stearman Assistant Accountant 07 Melissa Ricardo OfficeManager 09 Louisa McAleenan Research Analyst Lucy has over eight years’ experience within financialservicesandjoinedtheGroupin April 2019 to assist with the accounting and financialreporting. Melissajoinedin2017andisresponsibleforthe day-to-daymanagementoftheofficeand oversees administrative aspects of the Company. 06 Jay Cable Head of Asset Management A Chartered Surveyor with over 19 years of real estateexperience,Jayhasworkedwiththe Group since its launch in 2005. He is responsible for the proactive asset management of the portfolio and overseeing its strategic direction, and is a member of the Executive Committee and the Transaction and Finance Committee. 08 Tim Hamlin Senior Asset Manager Tim is a Chartered Surveyor with 12 years of real estate experience and is responsible for creating and implementing asset level business plans in line with the portfolio’s strategic direction. He is a member of the Responsibility Committee. Louisa has over ten years’ experience of real estate research and is responsible for all aspects of research and analysis, contributing to the direction of the Group’s investment strategy and is a member of the Responsibility Committee. 05 06 07 08 09 59 Picton Property Income Limited Annual Report 2020Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewGovernance Corporate Governance Report Leadership structure The Board Chairman: Nicholas Thompson Comprises: 2 Executive Directors and 4 Non-Executive Directors Responsibilities: – Direction and control of the business – Overall long-term success – Sets and implements strategy – Establishes the culture and values of the business – Promotes wider stakeholder relationships Board Committees Audit and Risk Chair: Mark Batten Remuneration Chair: Maria Bentley Property Valuation Chair: Roger Lewis Nomination Chair: Maria Bentley Comprises: 3 Non-Executive Directors Comprises: 4 Non-Executive Directors Comprises: 4 Non-Executive Directors Comprises: 4 Non-Executive Directors Responsibilities: – Overseesfinancial reporting Responsibilities: – Determines remuneration policy – Monitors risk management – Reviews system of internal controls – Sets remuneration of Executive Directors – Reviews remuneration of – Evaluates external auditor whole workforce – Approves bonus and LTIP awards Responsibilities: – Oversees the independent valuation process – Recommends the appointment and remuneration of the valuer – Ensures compliance with applicable standards Responsibilities: – Recommends Board appointments – Considers succession planning – Board evaluation – Board composition and diversity Management Committees Executive Committee Chair: Michael Morris Comprises: 2 Executive Directors and 1 senior executive Implementation of strategy Responsibilities: – – Manages operations – Day-to-day management of the business – Employee remuneration and development Transaction and Finance Chair: Michael Morris Comprises: 2 Executive Directors and 2 team members Responsibility Chair: Andrew Dewhirst Comprises: 1 Executive Director and 2 team members Responsibilities: – Reviews and recommends portfolio transactions – Monitors portfolio costs – Reviews compliance with lending covenants Responsibilities: – Determines sustainability policy and strategy – Monitors compliance with relevant standards and legislation – Approves ESG reporting – Employee wellbeing 60 Picton Property Income Limited Annual Report 2020Annual Report and Accounts 2018 Division of responsibilities Role Responsibilities Chairman Nicholas Thompson Chief Executive Michael Morris – Leads the Board – Responsible for overall Board effectiveness – Promotes Company culture and values – Sets the agenda and tone of Board discussions – Ensures that all Directors receive full and timely information to enable effective decision making – Promotes open debate at meetings – Ensures effective communication with stakeholders – Build relationships between Executive and Non-Executive Directors – Develops and recommends strategy to the Board – Responsible for the implementation of strategy set by the Board – Manages the business on a day-to-day basis – Manages communication with shareholders and ensures that their views are represented to the Board Senior Independent Director Mark Batten – Leads the evaluation of the Chairman – Available for communication with shareholders when other channels are not appropriate – BringindependentjudgementandscrutinytothedecisionsoftheBoard – Bring a range of skills and experience to the deliberations of the Board – Monitor business progress against agreed strategy – Reviewtheriskmanagementframeworkandtheintegrityoffinancialinformation – Determine the remuneration policy for the Group and approve performance targets in line with strategy – Supports the Chief Executive in the formulation of strategy – ManagesthefinancialoperationsoftheGroup – DevelopsandmaintainsthesystemoffinancialcontrolswithintheGroup – Recommends the risk management framework to the Board Non-Executive Directors Roger Lewis Mark Batten Maria Bentley Executive Director Andrew Dewhirst Composition of Board Role Diversity Tenure Number % Number % Number % Non-Executive Chairman Executive Directors Independent Non-Executive Directors 1 2 17% 33% 3 50% Male Female 5 1 83% 17% 0 to 3 years 3 to 6 years Over 9 years 3 1 2 50% 17% 33% 61 Picton Property Income Limited Annual Report 2020Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewGovernance Corporate Governance Report continued The role of the Board The Board is responsible for the long-term success of the business. It provides leadership and direction, with due regard to the views of all of the stakeholders in the business. The Board operates in an open and transparent way, and seeks to engage with its shareholders, employees, occupiers and local communities. The Board has full responsibility for the direction and control of the business, and sets and implements strategy, within a framework of strong internal controls and risk management. It establishes the culture and values of the Group. The Board has a schedule of matters reserved for its attention.Thisincludesallacquisitionsandsignificant disposals,significantleasingtransactions,dividendpolicy, gearingandmajorexpenditure. The Board has collectively a range of skills and experience that are complementary and relevant to the business. These are set out in the biographies of the individual Directors on pages 56 to 57. Board meetings The Board has a regular schedule of meetings. The Board hastwomeetingseachquarter;thefirstofwhichfocuses on operational matters, and the second covers strategic issues and longer-term planning. External advisers are invitedtoattendBoardmeetingson a regularbasis. Board changes On1January2020NicholasWileswasappointedtothe Board as a Non-Executive Director and resigned on 20 May 2020. Nicholas Thompson will remain on the Board as Chairman until a successor has been appointed. Roger Lewis, having served on the Board since 2010, intends to step down from the Board this year, once a suitable successor has been appointed. Composition The Board currently comprises the Chairman, two Executive Directors and three independent Non-Executive Directors. All of the Directors will stand for re-election at the forthcoming Annual General Meeting. As at 31 March 2020 the Board comprised 50% independent Non-Executive Directors. Board Committees The Board has established four Committees: Audit and Risk, Remuneration, Property Valuation and Nomination. These arecomprisedentirelyofNon-ExecutiveDirectorsandoperatewithindefinedtermsofreference.Thetermsofreference are available on the Company’s website. Attendance at Board and Committee meetings Nicholas Thompson Michael Morris Andrew Dewhirst Mark Batten Maria Bentley Roger Lewis Nicholas Wiles Total number of meetings Date appointed Board and Risk Remuneration Audit Property Valuation Nomination 15.09.2005 01.10.2015 01.10.2018 01.10.2017 01.10.2018 31.03.2010 01.01.2020 8/9 8/9 9/9 9/9 8/9 9/9 2/2 9 – – – 4/4 4/4 4/4 1/1 4 7/7 – – 6/7 7/7 7/7 1/1 7 4/4 – – 4/4 4/4 4/4 1/1 4 5/5 – – 5/5 5/5 4/5 2/2 5 The above meetings were the scheduled Board and Committee meetings. Additional meetings were held to deal with othermattersasrequiredandarenotincludedabove. 62 Picton Property Income Limited Annual Report 2020Annual Report and Accounts 2018 Non-Executive Directors Excluding the Chairman, the Board includes three independent Non-Executive Directors. The Non-Executive Directors bring a variety of skills and business experience to theBoard.Theirroleistobringindependentjudgement and scrutiny to the recommendations of the Executive. Each of the Non-Executive Directors are considered to be independentincharacterandjudgement. 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 failuretoachievebusinessobjectivesandcanonlyprovide 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 throughoutthefullfinancialyear,anduptothedateofthe approvalofthefinancialstatements,andtheBoardis satisfiedwiththeireffectiveness. This process involves a review by the Board of the control environment within the Group’s service providers to ensure thattheGroup’srequirementsaremet. The Group does not have an internal audit function. 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 theexternalauditorinconjunctionwiththeauditofthe Group’saccountswillprovidetheBoardwithsufficient assurance regarding the internal control systems in place. These systems are designed to ensure effective and efficientoperations,internalcontrolandcompliancewith 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 concerninrelationtotheauditopiniononthefinancial statements and, if necessary, representatives of senior management would be excluded from that discussion. Shareholder engagement InconjunctionwiththeBoard,theAdministratorkeeps 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 questionsanddiscussmatterswiththeDirectorsand senior management. Investors are able to direct any questionsfortheBoardviatheSecretary. The Chairman regularly attends analyst meetings and is availabletomeetinvestorsifrequested.Theoutcomeof these meetings is communicated to the rest of the Board. Board evaluation The Board has a policy of undertaking an external evaluation every three years, with internal evaluations in the other years. This year an internal review was carried outbytheDirectors,basedonaquestionnaireprepared by the Company’s Administrator. The anonymised results of the evaluation were debated by the Board at the next scheduled meeting. The main conclusions of the evaluation were as follows: ӱ The Property Valuation Committee should continue in its present form ӱ The search for a new Non-Executive Director is a focus for the Nomination Committee ӱ Board meetings should continue to take place twice a quarter ӱ Asset visits would be arranged for the Board over the next year ӱ The Board should periodically review key assets in depth ӱ Sustainabilityobjectiveswouldbeincludedinstrategic priorities ӱ There would be a mid-year review by the Board of progress against strategic priorities Conflicts of interest DirectorsarerequiredtonotifytheCompanyofany potentialconflictsofinterestthattheymayhave.Any conflictsarerecordedandreviewedbytheBoardateach meeting.Noconflictshavebeenrecordedduringtheyear. Employee engagement We recognise that our employees are integral to the business, and we aim to provide a working environment where they are able to reach their potential. Last year we appointed Maria Bentley as the designated Non-Executive Director with responsibility for employee engagement. During the year we have carried out an employee survey, covering all of the Picton team with the exception of the Directors. The results of the survey were then discussed at an informal meeting attended by Maria and the employees. The feedback from the team was positive. 63 Picton Property Income Limited Annual Report 2020Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewGovernance Nomination Committee Report Nomination Committee Terms of reference The Committee’s terms of reference include consideration of the following issues: ӱ Review and make recommendations regarding the sizeandcompositionofthe Board; ӱ Consider and make recommendations regarding succession planning for the Board and senior management; ӱ Identify and nominate candidates tofillBoardvacanciesasthey arise; The members of the Nomination Committee are Nicholas Thompson, Roger Lewis, Mark Batten and Maria Bentley. Maria Bentley was Chair of the Committee during the year until 31January2020,whilethesearch for a new Chairman took place. Subsequently,NicholasThompson was reappointed as Chair of the Committee. As the search for a new Chairman has re-commenced, Maria Bentley has again taken over as Chair of the Committee, with effect from 20 May 2020. The role of the Committee is to considerthesize,structureand 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 thatwillberelevanttothespecificrole and that will complement the existing Board members. ӱ Review the results of the Board evaluation relating to composition; ӱ Reviewthetimerequirementsfor Directors; and ӱ Recommend the membership of Board Committees. Visit our website www.picton.co.uk The Committee ensures that the appointment process is formal, rigorous and transparent. Activity TheCommitteemetfivetimesduring the year ended 31 March 2020 and considered the following matters: ӱ The selection process for the appointment of a new Director to replace Nicholas Thompson; ӱ The appointment of external consultants to compile a list of candidates; ӱ The formation of a working group of the Committee to manage the recruitment process and work with the consultants; ӱ Considerationofthefinalshortlist ofcandidatesandafinal recommendation; ӱ Future composition of the Board; and ӱ Succession planning. The Nomination Committee is chaired by Maria Bentley The Committee ensures that the appointment process is formal, rigorous and transparent. 64 Picton Property Income Limited Annual Report 2020Annual Report and Accounts 2018 Appointment of new Chairman During the year the Committee focused on the selection and appointment of a successor to Nicholas Thompson, who stated his intention to retire from the Board in the previous Report. Independent executive search consultants Heidrick JCAGroupwereprovidedwitha detailed description of the role and thecapabilitiesrequiredforit.The consultants prepared a list of potential candidates, which was assessed by the Committee for suitability to the role. The shortlist of candidates were interviewed initially by the Chair of theCommitteeandsubsequently by two other Directors. The whole Committee then considered the feedback from this process before recommending to the Board that Nicholas Wiles be appointed. Board composition and succession At the date of this Report, the Board comprises the Chairman, two Executive Directors and three further independent Non-Executive Directors. The Committee has commenced the search for a replacement for Roger Lewis, who has now served on the Board since 2010. Roger has brought extensive property experience to the Board, and has served as Chair of the Property Valuation Committee. The search is focused on identifying someone with suitable experience to take over this role. As noted above, the Committee has also re-commenced the search for a new Chair of the Company, following Nick Wiles’ recent departure. Tenure and re-election 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 setafinitetenurepolicy. The provisions of the 2018 Corporate Governance Code recommend thatallDirectorsbesubjectto annual re-election at the Annual General Meeting. The Board will follow this recommendation at this year’s Annual General Meeting. Diversity policy The Company is committed to treatingallemployeesequally and considers all aspects of diversity, including gender, when considering recruitment at any level of the business. All candidates are considered on merit but having regard to the right blend of skills, experience and knowledge at Board and Executive level, and amongst our employees generally. Induction The induction process for Nicholas Wiles was led by the Chairman and supported by the other Directors. The process commenced shortly after theappointmentwasconfirmed, and comprised a number of one- to-one meetings with the other Non-Executive Directors, the Chief Executive and the Finance Director. Additionally, reading and reference material was provided that was specifictotheGroupanditsbusiness. Maria Bentley Chair of the Nomination Committee 22June2020 65 Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewPicton Property Income Limited Annual Report 2020Governance Audit and Risk Committee Report Audit and Risk Committee Terms of reference The Committee’s terms of reference include consideration of the following issues: ӱ Financial reporting, including significantaccounting judgementsandaccounting policies; ӱ Adoption of the Group’s Risk Management Policy; ӱ Monitoring and evaluating the risks relating to the Group; ӱ Evaluation of the Group’s risk profileandriskappetite,and whether these are aligned with its business model and strategy; ӱ Internal controls and risk management systems; ӱ Ensuring that key risks are identifiedandeffectively measured, managed, mitigated and reported; ӱ The Group’s relationship with the external auditor, including effectiveness and independence; ӱ Internal audit arrangement; ӱ The programme of controls testing; and ӱ Reporting responsibilities. Visit our website www.picton.co.uk The Audit and Risk Committee is chaired by Mark Batten. The other members of the Committee are Roger Lewis and Maria Bentley. Meetings of the Audit and Risk Committee are attended by the Group’s Finance Director, other members of the financeteamandtheexternalauditor, KPMG Channel Islands Limited. The external auditor is given the opportunity to discuss matters without management present. Activity The Audit and Risk Committee met four times during the year ended 31 March 2020 and considered the following matters: ӱ External audit strategy and plan; ӱ Audit tender process; ӱ Audit and accounting issues of significance; ӱ The Annual and Interim Reports of the Group; ӱ Reports from the external auditor; ӱ The effectiveness of the audit process and the independence of KPMG Channel Islands Limited; ӱ Review of the Risk Matrix and mitigating controls; ӱ Review of controls testing undertaken; and ӱ Stock Exchange announcements. The Audit and Risk Committee is chaired by Mark Batten 66 Picton Property Income Limited Annual Report 2020Annual Report and Accounts 2018 Financial reporting and significant reporting matters TheCommitteeconsidersallfinancial information published in the annual andhalf-yearfinancialstatementsand considers accounting policies adopted by the Group, presentation and disclosureofthefinancialinformation andthekeyjudgementsmadeby management in preparing the financialstatements. The Directors are responsible for preparing the Annual Report. AttherequestoftheBoard,the Committee considered whether the 2020 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. Thekeyareaofjudgementthat the Committee considered in reviewingthefinancialstatements was the valuation of the Group’s investment properties. The valuation is conducted on a quarterlybasisbyindependent valuers,andissubjecttooversightby the Property Valuation Committee. It is a key component of the annual andhalf-yearfinancialstatements andisinherentlysubjective,requiring significantjudgement.Membersof the Property Valuation Committee, together with Picton employees, meet with the independent valuer onaquarterlybasistoreview 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 inJune2020andconfirmed that the following matters had been considered in discussions with the independent valuers: ӱ Property market conditions; ӱ Yields on properties within the portfolio; ӱ Letting activity and vacant properties; ӱ Covenant strength and lease lengths; ӱ Estimated rental values; and ӱ Comparable market evidence. The Audit and Risk Committee reviewed the report from the Chairman of the Property Valuation Committee, including the assumptions applied to the valuation, and considered their appropriateness, as well as considering current market trends and conditions, and valuation movements compared topreviousquarters.TheCommittee noted that the independent valuer had included a ‘material valuation uncertainty’ statement in their report as at the valuation date due to the current unprecedented circumstances and that less certainty can be attached to the valuation as a result. The Committee considered the valuation and agreed that this wasappropriateforthefinancial statements. The Committee was satisfiedthatthe2020AnnualReport is fair, balanced and understandable and included the necessary information as set out above, and ithasconfirmedthistotheBoard. 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 ensure risks are accepted in accordance with the Group’s risk appetite and further to ensure the effective management of all risks throughproactiveidentification, measurement, management and reporting of risk pertaining to all activities undertaken by the Group. The Risk Management Policy is intended to: ӱ Ensurethatmajorrisksare reported to the Board for review and acceptance; ӱ Result in the management of thoserisksthatmaysignificantly affect the pursuit of the stated strategicgoalsandobjectives; ӱ Embed a culture of evaluation and identify risks at multiple levels within the Group; and ӱ Meet legal and regulatory requirements. Internal controls The Board is responsible for the Group’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 hasbeenpreparedthatidentifies the Company’s key functions and the individual activities undertaken within those functions. From this, the BoardhasidentifiedtheCompany’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 for the reasons set out below, in order to provide the Board with independent assurance that the controls are operating as intended and that they have been in place throughout the year. The Board also monitors the performance of the Company against its strategy and receives regular reports from management covering all business 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 2019, prepared in accordance with International Standard on Assurance Engagements 3402, in respect of property management accounting services provided to Picton Property Income Limited. Given the scale of the Group’s operations, the Board has determined that a separate internal audit function is unnecessary and that additional procedures carried out by the external auditorinconjunctionwiththeaudit of the Group’s accounts will provide theBoardwithsufficientindependent assurance regarding the internal control systems in place. 67 Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewPicton Property Income Limited Annual Report 2020Governance Audit and Risk Committee Report continued Audit tender As stated in last year’s Annual Report, during the year the Committee carried out a tender process for the external audit as KPMG Channel Islands Limited had been in place as the Group’s auditor for ten years. A tender was not mandatory, but was considered best practice at this time. The Committee determined that any new appointment would be in respect of the audit for the year ended 31 March 2021, with a suitable handover period following completion of the audit for 31 March 2020. The tender process was as follows: ӱ Aninitiallistoffivefirmswas invited to take place in the tender, includingtheincumbentfirmand twonon-BigFourfirms.Ofthese, onefirmdeclinedtotakepart; ӱ ARequestforProposalwassentto thefourparticipatingfirms.This contained key information about the Group, the timetable for the process and contact details; ӱ Eachparticipatingfirmhad meetings and/or calls with the Chair of the Committee and the Finance Director to answer any specificquestionsabouttheGroup and the audit; ӱ The Committee considered the four proposals received and decided to invite all four participatingfirmstomakea presentation to the Committee; ӱ The most recent FRC Audit Quality Review reports for each of the participatingfirmswerereviewed by the Committee; ӱ Following the presentations the Committee Chair spoke to independent referees for two of theparticipatingfirmsandfed back to the rest of the Committee; ӱ The Committee had a further meeting, at which it agreed to put forwardtotheBoardtwofirms, with a recommendation that KPMG Channel Islands Limited be reappointed as external auditor. 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 that their independence may be conflicted.TheCommitteemonitors the level of fees incurred for non-audit services to ensure that this is not material,andobtainsconfirmation, where appropriate, that personnel involved in any non-audit services provided to the Group are not involved in the Group’s audit. 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 auditoranditsmemberfirmsare as follows: Audit fees Interim review fees Non-audit fees 2020 £000 159 16 16 191 2019 £000 115 15 27 157 Thenon-auditfeesinclude£16,000for additional controls testing carried out by KPMG Channel Islands Limited. Annual auditor assessment On an annual basis, the Committee assessesthequalifications,expertise and independence of the Group’s external auditor, as well as the effectiveness of the audit process. It does this through discussion and enquirywithseniormanagement, review of a detailed assessment questionnaireandconfirmation from the external auditor. The Committee also considers the external audit plan, which sets out the auditor’s assessment of the key audit risk areas, and reporting received from the external auditor in respect of both the half-year and year-end reports and accounts. As part of the review of auditor independence and effectiveness, KPMG Channel Islands Limited has confirmedthat: ӱ They have internal procedures in place to identify any aspects of non-audit work which could compromise their role as auditor andtoensuretheobjectivityofthe audit report; ӱ The total fees paid by the Group during the year do not represent a material part of their total fee income; and ӱ They consider that they have maintained their independence throughout the year. In evaluating KPMG Channel Islands Limited, the Committee completed its assessment of the externalauditorforthefinancial periodunderreview.Ithassatisfied itselfastotheirqualificationsand expertiseandremainsconfidentthat theirobjectivityandindependence 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 followingatenderprocessinJuly 2009. The current audit engagement partner, Deborah Smith, has served three years as audit partner. The Committee recommends that KPMG Channel Islands Limited are recommended for reappointment at the next Annual General Meeting. Mark Batten Chair of the Audit and Risk Committee 22June2020 68 Picton Property Income Limited Annual Report 2020Annual Report and Accounts 2018 Governance Remuneration Report Remuneration Committee The Remuneration Committee is chaired by Maria Bentley Terms of reference The Committee’s terms of reference are available on the Company’s website. The principal functions of the Committee as set out in the terms of reference include the following matters: ӱ Review the ongoing appropriateness and relevance of the Directors’ Remuneration Policy; ӱ Determine the remuneration of the Chairman, Executive Directors and such members of the executive management as it is designated to consider; The Remuneration Committee is chaired by Maria Bentley. The other members of the Committee are Nicholas Thompson, Mark Batten and Roger Lewis. Advisers During the year, Deloitte LLP has provided independent advice in relation to market data, share valuations, share plan administration and content of the Remuneration Report. Total fees for the year were £34,800(calculatedonatimespent basis). 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 adviceandissatisfiedthatitdoesnot compromise the independence of the advice that it has received. Other attendees at Committee meetings during the year were Michael Morris and Andrew Dewhirst. Neither participated in discussions relating to their own remuneration. ӱ Review the design of all share incentive plans for approval by the Board; and ӱ Appoint and set the terms of reference for any remuneration consultants. Visit our website www.picton.co.uk Annual statement Dear Shareholders Introduction On behalf of the Board, I am pleased to introduce the Remuneration Committee report for the year ended 31 March 2020. This report comprises three sections: ӱ This annual statement; ӱ Summary of the Directors’ Remuneration Policy; and ӱ The Annual Report on Remuneration for the year ended 31 March 2020. The Committee met seven times during the year and set out below is a summary of its activity. Our current Remuneration Policy was approved by shareholders in 2018, so this is the second year of application. TheCommitteeissatisfiedthatthe Policy has operated as intended so there are no changes to the Policy being proposed this year. 69 Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewPicton Property Income Limited Annual Report 2020Governance Remuneration Report continued Covid-19 impact This year’s remuneration review takes place against the backdrop of the Covid-19 pandemic, which is causing unprecedented levels of uncertainty and volatility in the UK economy. Many businesses are facing financialhardshipfromasevere drop in earnings, giving rise to cost cutting measures and even closure in some cases. We are working with ouroccupiersthroughthisdifficult periodtofindworkablesolutionsthat help them but also maintain value for all our stakeholders. We have also takenthedifficultdecisiontoreduce our dividend and our share price is now at a substantial discount to the net asset value, although this is in common with many other property companies. It is in this context that the Committee has considered this year’s salary review, bonus and LTIP awards. Picton has a small team and is unusual in having a high degree of alignment for all employees, notjusttheExecutiveDirectors. We have recognised previously, when our current Remuneration Policy was set, that the base salaries of our Executive Directors are low relative to the market, and that a greater emphasis would be placed on the performance related variable elements of remuneration. Although we have concluded that there will be no increase in base salary for the Executive Directors, we have decided that the formulaic outcome for both the annual bonus and LTIPawardsareafairreflectionof the Group’s performance for the respective performance periods andthatnofurtheradjustmentis required.Inparticularwetookinto accounttheupperquartilerelative performance achieved for the total return, total property return and total shareholder return metrics. For the forthcoming LTIP awards we recognise that the current share price discount to net asset value potentially could lead to an unusually high share award and windfall gains on vesting. As a result, we have scaled back the LTIP awards by 30% this year. Taken together, we believe this is an appropriately balanced set of decisions by the Committee. As in prior years, a proportion of 2020/21 annual bonus and LTIP awards will be based on EPS targets. In these highly unusual circumstances we have decided to delay setting these targets until later in the year when the economic outlook will hopefully be more certain to enable us to set appropriate target ranges. Group performance and alignment We have set out on pages 24 to 27 the key performance indicators (KPIs) that we currently use to monitor the success of the business. In order to appropriately align executive remuneration with business performance, we incorporate KPIs within our incentive schemes. In both 2019/20 and 2020/21 the KPIs that we are using to determine variable remuneration are: ӱ Total return ӱ Total property return ӱ Total shareholder return ӱ Growth in EPRA earnings per share The precise application of these measures to both the annual bonus and the Long-term Incentive Plan is set out later in the Report. Annual bonus awards for 2019/20 The Executive Directors were set a number of challenging targets for this year, comprising a combination of financialmeasuresandcorporateand personalobjectives. Thethreefinancialmeasureswere total return, total property return and growth in EPRA earnings per share. The actual outcomes are set out in the Annual Remuneration Report, but the overall result was that the Directors earned an estimated 67% of the maximum award available under thesefinancialmeasures. Thecorporateandpersonalobjectives weresettoensurethatspecifickey strategic targets were reached. The mainobjectiverelatedtoleading the business and making progress against its strategic priorities. Other corporateobjectivessetwere targets for dividend cover and loan to value ratio. This year there were personalobjectivessetindividually for the Executive Directors, relating to occupancy, IT, sustainability and borrowings. The Committee considered that the Executive Directorshadmadesignificant progress in many areas. More detail is provided later in this Remuneration Report, but overall the Committee 70 considered that outcomes of 74% and 83% of the maximum award for the two Executive Directors was merited against the corporate andpersonalobjectives. In aggregate, annual bonus awards for the two Executive Directors are 70% and 73% of the maximum award (2018/19 – 79% of maximum). The Committee considered the formulaic bonus outcome in the context of the Group’s overall performance for the year. Performance has been discussed earlier in the Report but particular points considered by the Committee included: ӱ The return from the property portfoliowasupperquartile compared to the MSCI UK Quarterly Property Index for the year, and our long-term record of outperformance has been maintainedoverthree,fiveandten years; ӱ TheGroup’sprofitfortheyearwas £23million,givingatotalreturnof 4.5%. Although this is lower than the previous year, it was achieved underdifficultmarketconditions and when many other companies havereportedsignificantlosses. Compared to the peer group, our returnwasagainupperquartile; ӱ EPRA earnings for the year were lower, but largely due to the active managementprojectstakingplace at a number of properties; ӱ The loan to value ratio has fallen following the repayment of borrowings. The Committee concluded that it was satisfiedtheformulaicbonusoutcome wasafairreflectionofoverallGroup performance during the past financialyear. Picton Property Income Limited Annual Report 2020Annual Report and Accounts 2018 Long-term Incentive Plan awards (performance period to 31 March 2020) The awards made under the Long-term IncentivePlan(LTIP)inJune2017were based on three performance conditions measured over the three-year period ending on 31 March 2020. The LTIP provides the link between the long- term success of the Company and the remuneration of the whole team. The Committee has assessed the extent to which these three performance conditions have been met. Thethreeequallyweighted performance conditions were total shareholder return, total property return and growth in EPRA earnings per share. The actual outcomes for these conditions are set out in the Annual Report on Remuneration, and give rise to an overall award of 67% of the maximum granted. The Committee agreed that the formulaic outcomewasafairreflection of overall Group performance over the performance period. Salary review for 2020/21 In considering the salary review for 2020/21, the Committee took into account a number of factors. They received an independent benchmarking report covering each of the roles within the Picton team and considered publicly available data and other market intelligence. As a result and in order to maintain a competitive package the Committee determined that there would be an overall average rise for the workforce as a whole of 2.6% in base salaries with effect from 1 April 2020. However, the Committee agreed that there would be no salary increases this year for the Executive Directors. Corporate Governance Code 2018 This year we are reporting against the provisions of the 2018 Code for the firsttime. We have reviewed the provisions of the 2018 Code in respect of remuneration and believe that our approach is compliant. In particular, we operate a consistent level of pension provision across our workforce; LTIP awards are onlyreleasedfiveyearsafteraward;and malus and clawback provisions apply to all incentive awards. We have provisions in the rules of our remuneration share plans that prevent, other than in exceptional circumstances, accelerated vesting of awards when an employee leaves Picton. However, in light of evolving market practice, we will consider the introduction of a more formal post-employment shareholding guideline when the Remuneration Policy is reviewed next year. The remuneration arrangements provide alignment with shareholders throughtheuseoffinancialmetrics andcorporateobjectives.Allmembers of the team participate in the annual bonusandLTIP,notjusttheExecutive Directors. The Remuneration Policy and its components are clearly set out in this Report and the rules of the variable remuneration schemes are available to the whole team. We use standard performance metrics, which are also Key Performance Indicators for the business, to determine awards. There are clear target and maximum levels for each condition. The Committee believes that the variable remuneration schemes in place are fair and proportionate, and align the remuneration of the team with the Group’s performance. We are alsosatisfiedthattheremuneration structure does not encourage inappropriate risk-taking. The Committee does retain discretion over formulaic outcomes if it considers that thesearenotafairreflectionofthe Group’s performance. Implementation of policy Our remuneration structure will remain unchanged for the year to 31 March 2021 although this year we have reduced the LTIP awards for the ExecutiveDirectorsby30%toreflect the lower share price and discount to net asset value, and to avoid any windfall gains arising on vesting. The bonus deferral policy for Executive Directors will continue, with 50% of any annual bonus award being deferred into Picton shares for a period of two years before vesting. The Executive Directors are expected to build up a shareholding of 200% of base salary under our shareholding guidelines. Wehavesetshort-termobjectivesfor the business while we navigate through the current Covid-19 pandemic. We will review and update these as appropriate at the mid-year stage to form the corporate targets for the Executive Directors. At this stage we will also confirmthepersonaltargetsforthe Executive Directors and the LTIP performance targets. We intend to maintain our current pension arrangements for the Executive Directors, as these are consistent with those of the rest of the workforce. As a Committee, we are committed to ongoing dialogue with our shareholders. We look forward to receiving your continued support at the forthcoming Annual General Meeting. Maria Bentley Chair of the Remuneration Committee 22June2020 71 Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewPicton Property Income Limited Annual Report 2020Governance Remuneration Report continued Remuneration at a glance Total remuneration for 2019/20 Fixed Pay Base salary Pension contributions Benefits Read more on pages 77–83 Variable pay The annual bonus for 2019/20 is determined by: orate o bje c ti v s e 5% 7.5% 20% 7.5% p r o c d n a 20% F i n a n c i a l c o n ditions Annual bonus Up to 50% of the annual bonus is deferre d into shares which will vest in two years’ time. 20% l a n o s r e P 20% Personal and corporate objectives Progress against strategic priorities Corporate objectives Personal objectives Enhance stakeholder reputation Financial conditions Total return Total property return Growth in EPRA earnings per share The LTIP is based on three financial metrics, each measured over three years: Total shareholder return Total property return Growth in EPRA earnings per share 33% 33% 33% Long-term incentive plan (LTIP) 72 Picton Property Income Limited Annual Report 2020 Annual Report and Accounts 2018 The single figure of remuneration for the Directors for the year 2019/20 (in £ thousands) is: 2 9 0 Chief Executive Finance Director Non-Executive Directors 229 250 290 135 824 x x x x 2 38 305 534 Key: 551 353 218 170 198 x x x x 2 26 198 250 x x x x Salary Benefits Pension Annual bonus Long-term incentive plan Total fixed Total variable The potential remuneration of the Executive Directors for the year to 31 March 2021 is: The following charts show the composition of the Executive Directors’ remuneration at three performance levels: Chief Executive Finance Director – Fixed pay – this comprises base salary from 1 April 2020,benefitsandpensionsalarysupplementof 15% of base salary Chief Executive (£) 100% 100% £290K £290K Finance Director (£) 100% 100% £198K £198K £198K £380K £380K £394K – On target –thisisfixedpayplustargetvestingfor the annual bonus (at 50% of maximum opportunity for illustrative purposes) and threshold vesting for the LTIP (at 25% of maximum award) – Maximum –fixedpayplusmaximumvestingfor both the annual bonus (175% of base salary) and the LTIP (87.5% (Chief Executive) and 77% (Finance Director) of base salary – Maximum with share price growth – maximum scenario incorporating assumption of 50% share price growth during LTIP vesting period 100% 51% 51% 39% 39% 10% 10% £290K £564K £564K 100% 52% 52% 39% 39% 9% 9% 50% 37% 13% 31% 31% 46% 46% 23% 23% £587K £947K £947K 50% 37% 13% 32% 32% 47% 47% 21% 21% £627K £627K 28% 42% 30% £1,040K 29% 43% 28% £683K 27% 27% 24% 42% 42% 37% 21% 21% 26% 10% £1,056K 10% £1,056K 13% £1,196K 29% 29% 25% 43% 43% 37% 19% 9% £692K 19% 9% £692K 13% £777K 25% Other than where stated, the charts do not incorporate sharepricegrowthordividendequivalentawards. Key: Key: Key: Total fixed Total fixed Total fixed Annual Bonus Annual Bonus Annual bonus LTIP LTIP LTIP Share growth Share growth Share growth Remuneration in context Percentage change in remuneration of the Chief Executive The table below shows the percentage change in the Chief Executive’s total remuneration between the years ended 31 March 2019 and 31 March 2020 compared to the average remuneration of all other employees of the Group. Relative importance of spend on pay The table below shows the expenditure and percentage change on employee costs compared to other key financialindicators. Chief Executive Average of all employees Change from previous year Base salary 4.2% 7.2% Benefits 4.4% 6.9% Annual bonus -8.7% 6.9% Employee costs Dividends EPRA earnings 31 March 2020 £000 3,273 19,039 19,912 31 March 2019 £000 3,672 18,860 22,912 % change -11% 1% -13% 73 Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewPicton Property Income Limited Annual Report 2020 Governance Remuneration Report continued Summary of Directors’ Remuneration Policy TheobjectiveoftheGroup’sRemunerationPolicyistohaveasimpleandtransparentremunerationstructurealignedwith the Group’s strategy. The Group aims to provide a remuneration package which will attract and 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. A summary of the Remuneration Policy approved by shareholders at the 2018 Annual General Meeting is set out below. The full Policy is contained in our 2018 Annual Report which is available on our website at www.picton.co.uk. Executive Directors’ Remuneration Policy Base salary Purpose Operation AbasesalarytoattractandretainexecutivesofappropriatequalitytodelivertheGroup’s strategy. Base 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: ӱ Salaries would typically be increased at a rate consistent with the average employee salary increase; ӱ Larger increases may be considered appropriate in certain circumstances (including, but not limitedto,achangeinanindividual’sresponsibilitiesorinthescaleoftheirroleorinthesize and complexity of the Group); ӱ Larger increases may also be considered appropriate if a Director has been initially appointed to the Board at a lower than typical salary. None None To provide a competitive remuneration package. TheCompanyhasestablisheddefinedcontributionpensionarrangementsforallemployees. For Executive Directors, the Company pays a monthly salary supplement in lieu of Company pension contributions. Performance measures Clawback Pension Purpose Operation Maximum The salary supplement is set at 15% of base salary. Performance measures Clawback Benefits Purpose Operation None None To provide a competitive remuneration package. This principally comprises: ӱ Private medical insurance ӱ Life assurance ӱ Permanent health insurance TheCommitteemayagreetoprovideotherbenefitsasitconsidersappropriate. Maximum Benefitsareprovidedatmarketrates. Performance measures Clawback None None 74 Picton Property Income Limited Annual Report 2020 Annual Report and Accounts 2018 Annual bonus Purpose Operation A short-term incentive to reward Executive Directors on meeting the Company’s annual financialandstrategictargetsandontheirpersonalperformance. The Committee may determine that up to 50% of the annual bonus will be paid in the Company’ssharesanddeferredfortwoyears.Dividendequivalentsmaybeawardedandpaid at the end of the deferral period in cash. Maximum The maximum bonus will be 175% of base salary. Performance measures Theannualbonusisbasedonarangeofone-yearfinancial,strategicandindividualtargetsset 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 theawardwillbeassessedoncorporatefinancialmeasures. Forcorporatefinancialmeasures,50%ofthemaximumbonusopportunitywillbepayablefor on target performance and, if applicable, up to 25% for threshold performance. Clawback Malus and clawback provisions apply. Long-term incentive plan Purpose Operation Maximum Performance measures A long-term incentive plan to align executives’ interests with those of shareholders and to promote the long-term success of the Company. Awards are granted annually in the form of a conditional share award or nil cost option. Awardswillnormallyvestattheendofathree-yearperiodsubjecttomeetingtheperformance conditions and continuing employment. TheRemunerationCommitteemayawarddividendequivalentsonawardsthatvest. The Committee may apply a holding period of a further two years to awards that vest. Annual awards with a maximum value of up to 150% of base salary may be made. There will initially be three performance conditions, each measured over a three-year performanceperiod.Eachconditionwillbeequallyweighted,buttheCommitteehasthe flexibilitytovarythis. 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 Operation Maximum Performance measures Clawback To align Executive Directors with the interests of shareholders. Executive Directors are expected to build up and thereafter maintain a minimum shareholding equivalentto200%ofbasesalary. Not applicable Not applicable Not applicable 75 Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewPicton Property Income Limited Annual Report 2020Governance Remuneration Report continued Non-Executive Directors’ Remuneration Policy Fees Purpose Operation To provide competitive Director fees. Annual fee for the Chairman, and annual base fees for other independent Non-Executive Directors. Additional fees for those Directors with additional responsibilities chairing a Board Committee. Allfeeswillbepayablequarterlyinarrearsincash. Fees will usually be reviewed independently every three years. The independent Non-Executive Directors are not eligible to receive share options or other performance-relatedelements,orreceiveanyotherbenefitsotherthanwheretraveltothe Company’sregisteredofficeisrecognisedastaxablebenefit,inwhichcaseaNon-Executive Directormayreceivethegrossed-upcostsoftravelasabenefit.Non-ExecutiveDirectorsare entitled to reimbursement of reasonable expenses. Maximum The Company’s Articles set an annual limit for the total of Non-Executive Directors’ remunerationof£300,000. Performance measures Clawback None None Notes to table: 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 conditionwouldbemoreappropriate,providedthatanysuchamendedorsubstitutedperformanceconditionwouldnotbemateriallylessdifficulttosatisfythantheoriginal  condition(initsopinion).TheCommitteemayadjustthecalculationofperformancetargetsandvestingoutcomes(forinstanceformaterialacquisitions,disposalsor investmentsandeventsnotforeseenatthetimethetargetswereset)toensuretheyremainafairreflectionofperformanceovertherelevantperiod.TheCommitteealso retainsdiscretiontomakedownwardorupwardadjustmentsresultingfromtheapplicationoftheperformancemeasuresifitconsidersthattheoutcomesarenotafairand accuratereflectionofbusinessperformance.IntheeventthattheCommitteeweretomakeanadjustmentofthissort,afullexplanationwouldbeprovidedinthenext Remuneration Report. 2. Performancemeasures–annualbonus.Theannualbonusmeasuresarereviewedannuallyandchosentofocusexecutiverewardsondeliveryofkeyfinancialtargetsforthe forthcomingyearaswellaskeystrategicoroperationalgoalsrelevanttoanindividual.SpecifictargetsforbonusmeasuresaresetatthestartofeachyearbytheRemuneration Committeebasedonarangeofrelevantreferencepointsincluding,forGroupfinancialtargets,theCompany’sbusinessplanandaredesignedtobeappropriatelystretching. 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. TheCommitteereservestherighttomakeanyremunerationpaymentsand/orpaymentsforlossofoffice(includingexercisinganydiscretionsavailabletoitinconnectionwith 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. Policy for other employees RemunerationforotheremployeesbroadlyfollowsthesameprinciplesasforExecutiveDirectors.Asignificantelementof 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. 76 Picton Property Income Limited Annual Report 2020Annual Report and Accounts 2018 Annual Report on Remuneration Total remuneration for the year ThetablebelowsetsoutthetotalremunerationreceivablebyeachoftheDirectorswhoheldofficeduringtheyearto 31March2020,withacomparisontothepreviousfinancialyear: Executive Michael Morris Andrew Dewhirst Non-Executive Nicholas Thompson Roger Lewis Mark Batten Maria Bentley Nicholas Wiles Robert Sinclair Vic Holmes Salary/fees £000 Benefits £000 Pension salary supplement £000 Annual bonus £000 Deferred bonus £000 Long-term incentive plan £000 250 240 170 80 98 98 45 45 48 46 49 23 10 – – 24 – 23 2 2 2 1 – – – – – – – – – – – – – – 38 36 26 12 153 167 109 56 152 167 109 56 229 308 135 181 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Total £000 824 920 551 386 98 98 45 45 48 46 49 23 10 – – 24 – 23 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 Benefitscompriseprivatemedicalinsuranceandlifeassurance. Executive Directors receive a salary supplement of 15% of base salary in lieu of company pension contributions. Theabovefiguresfor2019fortheExecutiveDirectorsforannualbonusandLTIPawardshavebeenre-stated.The estimatedfiguresforannualbonusincludedinlastyear’sreportwere£313,500(MichaelMorris)and£104,500(Andrew Dewhirst).Theestimatesincludedanoutcomeof50%fortherelativetotalreturnmetric.Thefinaloutcomewas determinedtobe77%,andtheawardswereadjustedto£333,500(MichaelMorris)and£111,200(AndrewDewhirst).The aboveLTIPawardsfor2019fortheExecutiveDirectorshavebeenre-statedtoreflectthesharepriceatvesting(95.0p) ratherthantheaverageforthequarter(87.56p)andtoincludedividendequivalentsof£25,700(MichaelMorris)and £15,100(AndrewDewhirst). AndrewDewhirstandMariaBentleyjoinedtheBoardon1October2018. Robert Sinclair and Vic Holmes retired from the Board on 30 September 2018. NicholasWilesjoinedtheBoardon1January2020andresignedon20May2020. The value of LTIP awards are based on the number of shares to be awarded to the Executive Directors and the average sharepriceoverthequarterended31March2020of92.64pence,andtheestimatedvalueofdividendequivalents. MariaBentleyreceivedadditionalfeesattherateof£5,000perannumwhileservingasChairoftheNominationCommittee. Annual bonus for 2019/20 Theannualbonusfortheyearended31March2020fortheExecutiveDirectorswasbasedonacombinationoffinancial metrics(60%)andcorporateandpersonalobjectives(40%). Thefinancialmetricscomprisedthreeequallyweightedcomponents:totalreturnrelativetoacomparatorgroupofsimilar companies, set out later in this report; total property return compared to the MSCI UK Quarterly Property Index; and growthinEPRAearningspershareoverthefinancialyear. 77 Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewPicton Property Income Limited Annual Report 2020Governance Remuneration Report continued The targets set for the year ended 31 March 2020 and the assessment of actual performance achieved are set out in the table below. Performance condition Basis of calculation Total return versus comparator group Bonus weighting: 20% Total property return versus MSCI Index Bonus weighting: 20% Growth in EPRA EPS Bonus weighting: 20% Less than median – 0% Equaltomedian–50% Equaltoupperquartile–100% Less than median – 0% Equaltomedian–50% Equaltoupperquartile–100% Less than 1% – 0% Equalto1%–25% Equalorgreaterthan9%–100% Range Median -2.3% Upperquartile2.4% Median 0.6% Upperquartile2.9% Actual 4.5% Awarded (% of maximum) 100% Awarded (% of salary) 35% 5.3% 100% 35% 1% – 4.29p 9% – 4.63p 3.66p 0% 0% ThecorporateandpersonalobjectivesfortheExecutiveDirectorsfortheyearto31March2020weredeterminedbythe Remuneration Committee and accounted for 40% of the maximum award. Thecorporateobjectivesapplyingtobothexecutives,andtheassessmentofperformanceagainstthese,areasfollows: Performance condition Assessment Dividend cover for the year to be in excess of 110% Dividend cover is 105% for the year, so this target has not been met. Awarded (% of maximum) Awarded (% of salary) 0% 0% Bonus weighting: 3.75% The Group’s overall loan to value ratio to be below 25% at the end of the financialyear Bonus weighting: 3.75% Lead the business and make progress against the strategic pillars: ӱ Property Performance ӱ Operational Excellence ӱ Acting Responsibly Bonus weighting: 20% The LTV at 31 March 2020 is 21.7%, so this target has been met. 100% 6.6% 90% 31.5% The Committee assessed the progress made against each of the strategic pillars. They noted particularly the following factors: ӱ Significantcapitalexpenditureprogrammeacross multiple assets; ӱ Two disposals in Croydon and Lutterworth made capturingsignificantupsideagainstMarch2019 valuation; ӱ During the year both revolving credit facilities have beenfullyrepaidaheadofre-financing.Thenew facilitywillprovidefinancialflexibilityforfiveyears mitigating cash drag and with no repayment fees; ӱ Team repositioned and appointment of Head of Occupier Services, with lower cost base; ӱ Efficiencyhasbeenimprovedthroughthe introduction of new asset management and operational software; ӱ Working with occupiers to undertake letting and regear transactions in Bristol, Rushden, Grantham and Radlett; ӱ Continued use of LTIP and deferred bonus; share awards hedged through purchases at discount to net asset value during the year; Enhance reputation with stakeholders Bonus weighting: 5% ӱ Consistently positive investor feedback from Kepler, 90% 7.9% JPMorganandStifel ӱ Enhanced activity with Edison ӱ Increased digital led engagement with investors and occupiers 45.9% 78 Picton Property Income Limited Annual Report 2020 Annual Report and Accounts 2018 ThepersonalobjectivesfortheindividualDirectorsandtheassessmentofperformanceareasfollows: Performance condition Assessment Awarded (% of maximum) Awarded (% of salary) Michael Morris The EPRA vacancy rate to be at or less than 7% at the end of the financialyear Bonus weighting: 3.75% Further develop Picton Promise Initiative – Focus on Action, Community, Technology, Sustainability and Support Bonus weighting: 3.75% Andrew Dewhirst Manage IT transition effectively Bonus weighting: 3.75% Combine and extend the existing revolving credit facilities to a maturity date in 2024 Bonus weighting: 3.75% Vacancy rate at 31 March 2020 was 11%, so this target was not met. 0% 0% Contentandbrandingfinalised,occupierpacksissued and with messaging displayed in vacant accommodation and reception areas. 90% 5.9% The IT transition comprised initially an upgrade to the main accounting system, followed by migration to a new hosting platform. This was completed successfully within the agreed timescale. Anew£50millionrevolvingcreditfacilityhasbeen completedsubsequenttotheyearend.Thenewfacility is for an initial three-year term with two one-year extensions available. 5.9% 100% 6.6% 90% 5.9% 12.5% As discussed in the Committee Chair’s statement on pages 69 to 71, the Committee considered the formulaic bonus outcomeinthecontextoftheGroup’soverallperformancefortheyearandconcludedthatitwassatisfiedtheformulaic bonusoutcomewasafairreflectionofoverallGroupperformanceduringtheyear.TheCommitteewasalsosatisfiedthat theaboveperformancewasachievedwithinanacceptableriskprofile. The overall annual bonus outcome for the Executive Directors is, therefore, as follows. Michael Morris Andrew Dewhirst Financial metrics (out of maximum 60%) Corporate objectives (out of maximum 32.5%) Personal objectives (out of maximum 7.5%) Overall bonus % of maximum Bonus % of salary Total bonus £ 40.0 40.0 26.3 26.3 3.4 7.1 69.6 73.4 121.8 304,600 128.4 218,300 In accordance with the Directors’ Remuneration Policy, the Committee has determined that 50% of the annual bonuses awardedtotheExecutiveDirectorsshouldbedeferredandpayableinsharesintwoyears’time.Dividendequivalentswill accrue on the shares and these will be paid when the awards vest. 79 Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewPicton Property Income Limited Annual Report 2020Governance Remuneration Report continued Long-term Incentive Plan TheLTIPawardsgrantedon16June2017weresubjecttoperformanceconditionsforthethreeyearsended31March 2020. The performance conditions and the actual performance for these were as follows: Performance condition Basis of calculation Range Total shareholder return versus comparator group Less than median – 0% Equaltomedian–25% Equaltoupperquartile–100% Median -5.4% Upperquartile5.8% Total property return versus MSCI Index Less than median – 0% Equaltomedian–25% Equaltoupperquartile–100% Median 5.5% Upperquartile7.1% Actual 7.3% 8.5% Weighting (% of award) Awarded (% of maximum) 33.3% 100% 33.3% 100% Growth in EPRA EPS Less than 3% per annum – 0% Equalto3%perannum–25% Equalorgreaterthan9%per annum – 100% 3% – 4.16p 9% – 4.93p 3.66p 33.3% 0% TheCommitteewassatisfiedthattheaboveperformancewasachievedwithinanacceptableriskprofile.TheCommittee wassatisfiedtheformulaicoutcomewasafairreflectionofoverallGroupperformanceduringtheperiod.Basedonthe vesting percentage above, the shares awarded and their estimated values, using an average share price of 92.64 pence for thequarterended31March2020,are: Director Michael Morris Andrew Dewhirst Maximum number of shares at grant Number of shares vesting Number of lapsed shares Estimated value1,2 £ 334,150 222,767 111,383 229,092 196,898 131,265 65,633 134,993 1. TheestimatedvalueincludesdividendequivalentawardswhichwillbemadeinrelationtovestedLTIPawardsatthepointofvesting.Thevalueofthedividendequivalent awardsis£22,722(MichaelMorris)and£13.389(AndrewDewhirst). 2. £17,204(MichaelMorris)and£10,138(AndrewDewhirst)ofthisvaluerelatestosharepricegrowthsincethedateofgrant. ThefollowingawardsintheLong-termIncentivePlanweregrantedtotheExecutiveDirectorson19June2019: Number of shares Basis (% of salary) Face value per share (£) Award face value (£) Performance period Michael Morris Andrew Dewhirst 328,153 125% 0.9523 312,500 1 April 2019 to 31 March 2022 214,218 120% 0.9523 204,000 1 April 2019 to 31 March 2022 Threshold vesting 25% 25% The face value is based on a weighted average price per share, being the average of the closing share prices over the three businessdaysimmediatelyprecedingtheawarddate.Awardswillvestafterthreeyearssubjecttocontinuedserviceand theachievementofthesameperformanceconditionsasappliedtotheJune2017LTIPawardsetoutabove.Vested awardswillbesubjecttoatwo-yearholdingperiod.AnyLTIPvestingwillalsobesubjecttotheRemunerationCommittee confirmingthat,initsassessment,thevestingoutturnwasachievedwithinanacceptableriskprofile. The Executive Directors have the following outstanding share awards under the Long-term Incentive Plan and Deferred Bonus Plan: Date of grant Performance period Market value on date of grant At 1 April 2019 Granted in year Exercised in year Lapsed in year As at 31 March 2020 Michael Morris 2016 LTIP 27January2017 2017 LTIP 16June2017 2018 LTIP 8June2018 2019 LTIP 19June2019 2019 DBP 19June2019 1 April 2016 to 31 March 2019 1 April 2017 to 31 March 2020 1 April 2018 to 31 March 2021 1 April 2019 to 31 March 2022 1 April 2018 to 31 March 2019 79.085p 358,791 84.917p 334,150 90.80p 330,396 – – – 95.23p – 328,153 95.23p – 175,137 1,023,337 503,290 – – – – – – (61,976) 296,815 – 334,150 – 330,396 – 328,153 – 175,137 (61,976) 1,464,651 80 Picton Property Income Limited Annual Report 2020Annual Report and Accounts 2018 Date of grant Performance period Market value on date of grant At 1 April 2019 Granted in year Exercised in year Lapsed in year As at 31 March 2020 Andrew Dewhirst 2016 LTIP 27January2017 2017 LTIP 16June2017 2018 LTIP 8June2018 2019 LTIP 19June2019 2019 DBP 1 19June2019 1 April 2016 to 31 March 2019 1 April 2017 to 31 March 2020 1 April 2018 to 31 March 2021 1 April 2019 to 31 March 2022 1 April 2018 to 31 March 2019 79.085p 211,418 84.917p 196,898 90.80p 193,833 – – – 95.23p – 214,218 95.23p – 116,758 602,149 330,976 – – – – – – (36,519) 174,899 – 196,898 – 193,833 – 214,218 – 116,758 (36,519) 896,606 1. The number of shares awarded to Andrew Dewhirst in 2019 under the Deferred Bonus Plan is the total awarded. This differs from the Single Figure Remuneration table where 50% of this award is included, as he was a Director from 1 October 2018 only. Awards under the Long-term Incentive Plan normally vest three years after the grant date. Awards from 2019 onwards are subjecttoafurthertwo-yearholdingperiod.AwardsundertheDeferredBonusPlannormallyvesttwoyearsafterthe grant date. Comparator group The Committee has agreed that the following companies are used as a comparator group for the total shareholder return and total return metrics in determining variable remuneration. A smaller group is used for the total return metric due to the different reporting periods of some companies. The criteria for inclusion in the groups are: ӱ Listed companies paying an above average dividend yield, principally directly investing in the UK in one or more of the maincommercialpropertysectorsandwithamarketcapitalisationoflessthan£2billion. Total shareholder return Total return Company AEW UK REIT plc BMO Commercial Property Trust Limited BMO UK Real Estate Investments Limited Capital & Regional plc Custodian REIT plc Ediston Property Investment Company PLC LondonMetric Property PLC McKay Securities PLC NewRiver REIT PLC RDI REIT PLC Regional REIT Limited Schroder Real Estate Investment Trust Limited Standard Life Investments Property Income Trust Limited Supermarket Income REIT PLC UK Commercial Property REIT Limited Warehouse REIT plc BothHansteenHoldingsplcandMucklow(A.&J.)PLChavebeenremovedfromthecomparatorgroupfollowing corporate events in the year and will not be included in the performance metrics of any current or future awards. Supermarket Income REIT and Warehouse REIT were added to the group for awards made from 2019 onwards. Tritax Big Box REIT was included in the group for awards made in 2017 only. 81 Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewPicton Property Income Limited Annual Report 2020Governance Remuneration Report continued Statement of Directors’ shareholdings Directors and employees are encouraged to maintain a shareholding in the Company’s shares to provide alignment with investors. ThenumbersofsharesbeneficiallyheldbyeachDirector(includingconnectedpersons)asat31March2020,wereasfollows: Michael Morris Andrew Dewhirst Nicholas Thompson Roger Lewis Mark Batten Maria Bentley Nicholas Wiles Beneficial holding 2020 Beneficial holding 2019 Holding as a % of salary Outstanding LTIP awards1 Outstanding DBP awards 53,596 53,596 19% 1,289,514 175,137 28,500 28,500 15% 779,848 116,758 215,000 215,000 600,000 600,000 – 74,436 – – – – 1. The outstanding number of LTIP shares includes 296,815 shares (Michael Morris) and 174,899 shares (Andrew Dewhirst) that have vested but not yet been exercised. The percentage holding for the Executive Directors is based on base salaries as at 31 March 2020 and a share price of £0.89.Thebeneficialholdingsofsharesincludeanyheldbyconnectedpersons. ExecutiveDirectorsarenowrequiredtomaintainashareholdingof200%ofbasesalaryandbothDirectorsarecurrently in the process of building up to that level. The Executive Directors intend to retain at least 50% of any share awards (post-tax) until the guidelines are met. 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 TherewerenopaymentstopastDirectorsorpaymentsforlossofofficetoDirectorsduringtheyearended31March2020. Historical total shareholder return performance The graph below shows the Company’s total shareholder return (TSR) since 31 March 2010 as represented by share price growth with dividends reinvested, against the FTSE All-Share Index and the FTSE EPRA NAREIT UK Index. These indices have been chosen as they provide comparison against relevant sectoral and pan-sectoral benchmarks. 400 350 300 250 200 150 100 50 M ar 2 010 S e p 2 010 Key: M ar 2 011 S e p 2 011 M ar 2 012 S e p 2 012 M ar 2 013 S e p 2 013 M ar 2 014 S e p 2 014 M ar 2 015 S e p 2 015 M ar 2 016 S e p 2 016 M ar 2 017 S e p 2 010 7 M ar 2 018 S e p 2 018 M ar 2 019 S e p 2 019 M ar 2 0 2 0 Picton FTSE EPRA NAREIT UK FTSE All-share The table below shows the remuneration of the Chief Executive for the past two years, together with the annual bonus percentage and LTIP vesting level. The Company has only had a Chief Executive since 1 October 2018 and therefore the table below shows his remuneration for the past two years. 2020 2019 82 Total remuneration (£000) Annual bonus (% of maximum) LTIP vesting (% of maximum award) 824 920 70% 79% 67% 83% Picton Property Income Limited Annual Report 2020Annual Report and Accounts 2018 Implementation of Remuneration Policy in 2020/21 Executive Directors Base salaries MichaelMorris(ChiefExecutive)–£250,000 AndrewDewhirst(FinanceDirector)–£170,000 Pension and benefits 15%salarysupplementinlieuofpensionplusstandardotherbenefits. Change from prior year There are no salary increases for the Chief Executive and Finance Director this year. The average increase for the rest of the workforce is 4.6%. No change. All employees may receive 15% salary pension provision. Annual bonus1 Maximum bonus of 175% of salary with 50% of any bonus deferred in shares for No change two years. 60%ofbonustobedeterminedbycorporatefinancialmetricsofrelativetotal return, relative total property return and growth in EPRA earnings per share, with the remaining 40% determined by strategic and personal measures. LTIP1 Award of shares worth: ӱ Michael Morris (Chief Executive) 87.5% of salary ӱ Andrew Dewhirst (Finance Director) 77% of salary Shares released after three-year performance and two-year holding period. Vestingofsharesbasedequallyonrelativetotalshareholderreturn,relative total property return and growth in EPRA earnings per share measures. Target ranges for the relative measures are set out on page 78. Targets for the EPS measure will be set and disclosed later in the year. Non-Executive Directors Fees Chairman–£98,000 Director–£40,000 Supplementary fee for Chair of the Property Valuation or Remuneration Committee–£5,000 SupplementaryfeeforChairoftheAuditandRiskCommittee–£7,500 Awards to the Executive Directors have been reduced by 30% this year to avoid the potential for windfall gains on vesting. No change 1. The Remuneration Committee has discretion to override the formulaic outcomes in both the annual bonus and LTIP. TheCommitteealsoconfirmsthatperformancehasbeenachievedwithinanacceptableriskprofilebeforepayoutsare made.Incentivepayoutsaresubjecttomalusandclawbackprovisions. Statement of voting at the last Annual General Meeting The following table sets out the voting for the Remuneration Report, which was approved by shareholders at the Annual General Meeting held on 14 November 2019, representing 51% of the issued share capital of the Company, and also for the Remuneration Policy, which was approved by shareholders at the Annual General Meeting held on 13 September 2018, representing 31% of the issued share capital of the Company. For Against Votes cast Withheld Maria Bentley Chair of the Remuneration Committee 22June2020 Remuneration Report Remuneration Policy Votes cast % Votes cast % 270,048,780 96.88 148,636,904 94.98 8,700,568 3.12 7,853,028 5.02 278,749,348 100.0 156,489,932 100.0 337,816 10,100,551 83 Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewPicton Property Income Limited Annual Report 2020Governance Property Valuation Committee Report Property Valuation Committee Terms of reference The Committee shall review the quarterlyvaluationreportsproduced by the independent valuers before their submission to the Board, looking in particular at: ӱ Significantadjustmentsfrom previousquarters; ӱ Individual property valuations; ӱ Commentary from management; ӱ Compliance with applicable standards and guidelines; ӱ Reviewingfindingsor recommendations of the valuers; and ӱ The appointment, remuneration and removal of the Company’s valuers, making such recommendations to the Board as appropriate. The Property Valuation Committee is chaired by Roger Lewis ӱ Significantissuesthatshouldbe raised with management; ӱ Material and unexplained movements in the Company’s net asset value; The Property Valuation Committee is chaired by Roger Lewis. The other members of the Committee are Nicholas Thompson, Mark Batten and Maria Bentley. Activity The Property Valuation Committee met four times during the year ended 31 March 2020 and considered the following matters: ӱ Property market conditions and trends; ӱ Movements compared to previous quarters; ӱ Yields on properties within the portfolio; ӱ Letting activity and vacant properties; ӱ Covenant strength and lease lengths; ӱ Estimated rental values; and ӱ Comparable market evidence. TheCommitteewassatisfiedwiththe valuation process throughout the year. Visit our website www.picton.co.uk Material uncertainty The Committee noted that the external valuer had included a ‘material valuation uncertainty’ statement in their report as at 31 March 2020. This was the result of the impact of the Covid-19 pandemic on market activity as the valuers had an unprecedented set of circumstances on which to base theirjudgement.Inlinewithmarket practice therefore, the valuers have stated that less certainty can be attached to the valuations than would otherwise have been the case. 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 propertyassetseachquarter,the results of which are incorporated into the Group’s half-year and annualfinancialstatements,and thequarterlynetassetstatements. The Committee reviewed the performance of the valuer and recommended that the appointment be continued for a further 12 months. Roger Lewis Chair of the Property Valuation Committee 22June2020 84 Picton Property Income Limited Annual Report 2020Annual Report and Accounts 2018 Governance Directors’ Report Directors’ Report At the 2019 Annual General Meeting shareholders gave the Directors authority to issue up to 54,760,558 shares (being 10% of the Company’s issued share capital as at 10 October 2019)withouthavingtofirstoffer those shares to existing shareholders. On21June2019theCompany issued 7,551,936 new ordinary shares at 94.5 pence per share under the authority granted to the Directors at the 2018 Annual General Meeting. No ordinary shares have been issued subsequentlyunderthisauthority, which expires at this year’s Annual General Meeting and resolutions 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 2,103,683 ordinary shares in the Company to satisfy awards made under the Long-term Incentive Plan. During the year the Trustee acquired954,000ordinarysharesat 88.26 pence per share. The Trustee has waived its right to receive dividends on the shares it holds. The Directors of Picton Property Income Limited present the Annual Reportandauditedfinancial statements for the year ended 31 March 2020. The Company is registered under the provisions of the Companies (Guernsey) Law, 2008. Code Compliance Statement TheBoardconfirmsthatfortheyear ended 31 March 2020 the Principles of good corporate governance contained in the 2018 UK Corporate Governance Code have been consistently applied, with the exception of the matter described below. Principal activity The principal activity of the Group is commercial property investment in the United Kingdom. Results and dividends The results for the year are set out in the Consolidated Statement of Comprehensive Income. The Company is a UK Real Estate Investment Trust (REIT) and must distribute to its shareholders at least 90%oftheprofitsonitsproperty rental business for each accounting period as a Property Income Distribution (PID). As set out in Note 10 to the consolidatedfinancialstatements, the Company has paid four interim dividends of 0.875 pence per share, making a total dividend for the year ended 31 March 2020 of 3.5 pence per share (2019: 3.5 pence). All four interim dividends were paid as PIDs. Directors The Directors of the Company who served throughout the year are set out on pages 56 to 57, together with Nicholas Wiles, who was appointed on1January2020andresignedon 20 May 2020. The Directors’ interests in the shares of the Company as at 31 March 2020 are set out in the Remuneration Report. All of the Directors will offer themselves for re-election at the forthcoming Annual General Meeting. As both Nicholas Thompson and Roger Lewis have served for more than nine years on the Board, the Company has not complied with those provisions within the Code relating to tenure. Both Directors intend to step down from the Board once suitable replacements have been appointed. More information is provided in the Nomination Committee 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 2020 was 547,605,596 (2019: 540,053,660) ordinary shares of no par value, including 2,103,683 ordinary shares which are held by the Trustee of the Company’sEmployeeBenefitTrust (2019: 1,542,000 ordinary shares). The Directors have authority to buy back up to 14.99% of the Company’s ordinarysharesinissue,subjecttothe renewal of this authority from shareholders at each Annual General Meeting. Any buy-back of ordinary sharesis,andwillbe,madesubjectto 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. 85 Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewPicton Property Income Limited Annual Report 2020Governance Directors’ Report continued Statement of going concern Given the impact of the current Covid-19 pandemic on the UK economy, the Directors have focused on assessing whether the going concern basis remains appropriate for the preparation of thefinancialstatementsfortheyear ended 31 March 2020. In making their assessment, the Directors have considered the principal risks relating the Group, its loan covenants, accesstofundingandliquidity position. They have also considered a number of scenarios, in particular as regards the impact of different levels of rent collection across the portfolio and over varying timescales, andthepotentialconsequences onfinancialperformance,asset values,capitalprojectsandloan covenants. Leasing and investment transactions have been assumed to be severely curtailed throughout the assessment period. Future lease events over the assessment period have been considered on a case-by- case basis to determine the range of most likely outcomes. More details regarding the Group’s business activities, together with the factors affecting performance, investment activities and future development, are set out in the Strategic Report. Furtherinformationonthefinancial position of the Group, including its liquidityposition,borrowingfacilities anddebtmaturityprofile,issetout in the Financial Review and in the consolidatedfinancialstatements. Under all of these scenarios the Grouphassufficientcashresourcesto continue its operations, and remain within its loan covenants, for a period of at least 12 months from the date ofthesefinancialstatements. Based on their assessment and knowledge of the portfolio and market, the Directors have therefore continued to adopt the going concern basis in preparing thefinancialstatements. Viability assessment and statement The UK Corporate Governance CoderequirestheBoardtomakea ‘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 afive-yeartimescale,consideredtobe 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, loancovenantsandliquidity. Themajorrisksidentifiedwerethose relating to the current Covid-19 pandemic and a disruptive Brexit and their potential impact on the UK economy and commercial property market over the period of the assessment. In the ordinary course of business the Board reviews adetailedfinancialmodelona quarterlybasis,includingforecast market returns. This model allows for different assumptions regarding lease expiries, breaks and incentives. For the purposes of the viability assessment of the Group, the model coversafive-yearperiodandisstress tested under various scenarios. In the context of both the current Covid-19 pandemic and a disruptive Brexit, the Board considered a number of scenarios around their impact on the Group’s property portfolioandfinancialposition. These scenarios included different levels of rent collection, occupier defaults, void periods and incentives within the portfolio, and the consequentialimpactonproperty costs and loan covenants. All lease events and assumptions were reviewed over the period under the different scenarios and their impactonrevenueandcashflow. Future letting activity was assumed to be severely curtailed during the initial period of the assessment. Significantfallsincapitalvalues were included in these scenarios, including the potential impact on the Group’s loan covenants. The Group’s long-term loan facilities are in place throughout the assessment period, while the Board assumed that the Group would continue to have access to its short-term facilities. The Board considered the impact of these scenarios on its ability to continue to pay dividends at different rates over the assessment period. These matters were assessed over the period to 31 March 2025 and will continuetobeassessedoverfive-year rolling periods. The Directors consider that the stress testing performed was sufficientlyrobustthateven under extreme conditions the Company remains viable. Based on their assessment, and in the context of the Group’s business model and strategy, the Directors expect that the Group will be able to continue in operation and meet its liabilities as theyfalldueoverthefive-yearperiod to 31 March 2025. 86 Picton Property Income Limited Annual Report 2020Annual Report and Accounts 2018 Substantial shareholdings Basedonnotificationsreceived and on information provided by the Company’s brokers, the Company understands the following shareholdersheldabeneficialinterest of 3% or more of the Company’s issued share capital as at 27 May 2020. % of issued share capital Investec Wealth & Investment Limited Brewin Dolphin Limited Mattioli Woods Plc BlackRock Inc. Thames River Capital LLP Interactive Investor Services Limited Smith & Williamson Investment Management Canaccord Genuity Wealth Management The Vanguard Group Inc. 14.0 6.6 5.9 5.0 4.6 4.3 4.2 3.7 3.4 Disclosure of information to auditor TheDirectorswhoheldofficeatthe date of approval of this Directors’ Reportconfirmthat,sofarastheyare 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 or she ought to have taken as a Director to make themselves 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 tocontinueinofficeastheCompany’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 financialstatementsinaccordance with applicable law and regulations. CompanylawrequirestheDirectorsto preparefinancialstatementsforeach financialyear.Underthatlawthey haveelectedtopreparethefinancial statements in accordance with International Financial Reporting Standards, as issued by the IASB, and applicable law. Under company law the Directors mustnotapprovethefinancial statementsunlesstheyaresatisfied that they give a true and fair view of the state of affairs of the Company andofitsprofitorlossforthatperiod. Inpreparingthesefinancialstatements, theDirectorsarerequiredto: ӱ select suitable accounting policies and then apply them consistently; ӱ makejudgementsandestimates that are reasonable, relevant and reliable; ӱ state whether applicable accounting standards have been followed,subjecttoanymaterial departures disclosed and explainedinthefinancial statements; ӱ assess the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and ӱ use the going concern basis of accounting unless they either intendtoliquidatetheGroupor to cease operations, or have no realistic alternative but to do so. The Directors are responsible for keeping proper accounting records thataresufficienttoshowandexplain the Company’s transactions and disclose with reasonable accuracy at anytimethefinancialpositionofthe Company and enable them to ensure thatitsfinancialstatementscomply with the Companies (Guernsey) Law, 2008. They are responsible for such internal controls as they determine are necessary to enable the preparation ofthefinancialstatementsthatare 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 corporateandfinancialinformation included on the Company’s website, and for the preparation and disseminationoffinancialstatements. Legislation in Guernsey governing the preparation and dissemination of financialstatementsmaydifferfrom legislationinotherjurisdictions. Directors’ responsibility statement in respect of the Annual Report and financial statements Weconfirmthattothebestofour knowledge: ӱ thefinancialstatements,prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities,financialpositionand profitorlossoftheGroup;and ӱ the Strategic Report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces. We consider the Annual Report and accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Group’s position and performance, business model and strategy. By Order of the Board Andrew Dewhirst Director 22June2020 87 Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewPicton Property Income Limited Annual Report 2020Financial Statements Independent Auditor’s Report to the Members of Picton Property Income Limited Our opinion is unmodified Wehaveauditedtheconsolidatedfinancialstatementsof Picton Property Income Limited (the “Company”) and its subsidiaries (together, the “Group”), which comprise the consolidated balance sheet as at 31 March 2020, the consolidated statements of comprehensive income, changesinequityandcashflowsfortheyearthenended, andnotes,comprisingsignificantaccountingpoliciesand other explanatory information. Inouropinion,theaccompanyingconsolidatedfinancial statements: ӱ giveatrueandfairviewofthefinancialpositionofthe Groupasat31March2020,andoftheGroup’sfinancial performanceandcashflowsfortheyearthenended; ӱ are prepared in accordance with International Financial Reporting Standards; and Key audit matters: our assessment of the risks of material misstatement Key audit matters are those matters that, in our professionaljudgement,wereofmostsignificanceinthe auditoftheconsolidatedfinancialstatementsandinclude themostsignificantassessedrisksofmaterial misstatement(whetherornotduetofraud)identifiedby 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 oftheconsolidatedfinancialstatementsasawhole,andin 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 2019): Valuation of investment properties ӱ comply with the Companies (Guernsey) Law, 2008. £654.5million;(2019£676.1million) Refer to page 67 of the Audit and Risk Committee Report, Note2significantaccountingpolicyandNote13investment properties disclosures Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Ourresponsibilitiesaredescribedbelow.Wehavefulfilled our ethical responsibilities under, and are independent of the Company and Group in accordance with, UK ethical requirementsincludingFRCEthicalStandards,asapplied to listed entities. We believe that the audit evidence we haveobtainedisasufficientandappropriatebasisfor our opinion. The risk Our response Basis: The Group’s investment properties accounted for 94% (2019: 94%) of the Group’s total assets as at 31 March 2020. The fair value of investment properties at 31 March 2020 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’sinvestmentpropertiesisasignificant area of our audit given that it represents the majorityofthetotalassetsoftheGroupand requirestheuseofsignificantjudgements andsubjectiveassumptions. The outbreak of Covid-19 has impacted market activity in many sectors. As at the valuation date, the Valuer’s consider that they can attach less weight to previous market evidence for comparison purposes, to inform opinions of value. Accordingly, the valuations across the investment property portfolio have been reported on the basis of “material valuation uncertainty”. The Valuers haveclarifiedthatthe“materialvaluation uncertainty” does not mean that the valuation cannot be relied upon rather, less certainty can be attached to the valuation than would otherwise be the case. Our audit procedures included: Control evaluation: We assessed the design, implementation and operating effectiveness of certain controls over the valuation of investment properties including the review and approval by the Board of Directors of the valuations and the capture and recording of information contained in the lease database for investment properties Evaluating experts engaged by management: Weassessedthecompetence,capabilitiesandobjectivityoftheValuer.Wealso 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: ӱ evaluating the appropriateness of the valuation methodologies and assumptions used ӱ undertakingdiscussionsonkeyfindingswiththeValuerandchallengingthe valuations based on market information and knowledge ӱ assessing the assumptions applied by the Valuer in relation to rental collections and void periods resulting from Covid-19 We also compared a sample of the key inputs used to calculate the valuations such as annual rent and tenancy contracts for consistency with other audit findings. Assessing disclosures: We also considered the Group’s investment property valuation policies and their applicationasdescribedinthenotestotheconsolidatedfinancialstatements forcompliancewithIFRSinadditiontotheadequacyofdisclosuresinNote13in relation to fair value of the investment properties including the impact of Covid- 19. 88 Picton Property Income Limited Annual Report 2020Annual Report and Accounts 2018 Other information The Directors are responsible for the other information. The other information comprises the information included in the Annual Report but does not include the consolidated financialstatementsandourauditor’sreportthereon.Our opinionontheconsolidatedfinancialstatementsdoesnot cover the other information and we do not express an audit opinion or any form of assurance conclusion thereon. Inconnectionwithourauditoftheconsolidatedfinancial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financialstatementsorourknowledgeobtainedinthe audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, wearerequiredtoreportthatfact.Wehavenothingto report in this regard. Disclosures of emerging and principal risks and longer term viability Basedontheknowledgeweacquiredduringourfinancial statements audit, we have nothing material to add or draw attention to in relation to: ӱ theDirectors’confirmationwithintheviability assessment and statement (page 86) that they have carried out a robust assessment of the emerging and principal risks facing the Group, including those that would threaten its business model, future performance, solvencyorliquidity; ӱ the Principal Risks disclosures describing these risks and explaining how they are being managed or mitigated; ӱ the Directors’ explanation in the viability assessment and statement (page 86) 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 anynecessaryqualificationsorassumptions. Our application of materiality and an overview of the scope of our audit Materialityfortheconsolidatedfinancialstatementsasa wholewassetat£6.96million,determinedwithreference toabenchmarkofGrouptotalassetsof£695.6million,of which it represents approximately 1.0% (2019: 1%). We reported to the Audit and Risk Committee any corrected oruncorrectedidentifiedmisstatementsexceeding £348,000,inadditiontootheridentifiedmisstatements thatwarrantedreportingonqualitativegrounds. Our audit of the Group was undertaken to the materiality levelspecifiedabove,whichhasinformedouridentification ofsignificantrisksofmaterialmisstatementandthe associated audit procedures performed in those areas as detailed above. The group team performed the audit of the Group as if it wasasingleaggregatedsetoffinancialinformation.The audit was performed using the materiality level set out above and covered 100% of total group revenue, total groupprofitbeforetax,andtotalgroupassetsandliabilities. We have nothing to report on going concern TheDirectorshavepreparedtheconsolidatedfinancial statements on the going concern basis as they do not intendtoliquidatetheGrouportoceasetheiroperations, andastheyhaveconcludedthatGroup’sfinancialposition means that this is realistic. They have also concluded that there are no material uncertainties that could have cast significantdoubtoveritsabilitytocontinueasagoing concern for at least a year from the date of approval of the financialstatements(‘thegoingconcernperiod’). In our evaluation of the Directors’ conclusions, we considered the inherent risks to the Group’s activities including where relevant the impact of the Covid-19 pandemic and the requirementsoftheapplicablefinancialreporting framework. We analysed how those risks might affect the Group’sfinancialresourcesorabilitytocontinueoperations over the going concern period, including challenging the underlying data and key assumptions used to make the assessment, and evaluated the Director’s plans for future actions in relation to their going concern assessment. Basedonthiswork,wearerequiredtoreporttoyouifwe have anything material to add or draw attention to in relation to the Directors’ statement in Note 2 to the consolidatedfinancialstatementsontheuseofthegoing concern basis of accounting with no material uncertainties thatmaycastsignificantdoubtoverGroup’suseofthat basis for a period of at least twelve months from the date ofapprovaloftheconsolidatedfinancialstatements.We have nothing to report in these respects. 89 Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewPicton Property Income Limited Annual Report 2020Financial Statements Independent Auditor’s Report to the Members of Picton Property Income Limited continued Auditor’s responsibilities Ourobjectivesaretoobtainreasonableassuranceabout whethertheconsolidatedfinancialstatementsasawhole 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 couldreasonablybeexpectedtoinfluencetheeconomic decisions of users taken on the basis of the consolidated financialstatements. 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 matterswearerequiredtostatetotheminanauditor’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 22June2020 Corporate governance disclosures Wearerequiredtoreporttoyouif: ӱ wehaveidentifiedmaterialinconsistenciesbetween theknowledgeweacquiredduringourfinancial statements audit and the Directors’ statement that they consider that the Annual Report and consolidated financialstatementstakenasawholeisfair,balanced and understandable and provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy; or ӱ 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. WearerequiredtoreporttoyouiftheCorporate Governance Statement does not properly disclose a departure from the provisions of the UK Corporate GovernanceCodespecifiedbytheListingRulesfor 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 requiresustoreporttoyouif,inouropinion: ӱ the Company has not kept proper accounting records; or ӱ theconsolidatedfinancialstatementsarenotin agreement with the accounting records; or ӱ 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 87, the Directors are responsible for: the preparation of the consolidatedfinancialstatementsincludingbeingsatisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of consolidatedfinancialstatementsthatarefreefrom 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 theyeitherintendtoliquidatetheGrouportocease operations, or have no realistic alternative but to do so. 90 Picton Property Income Limited Annual Report 2020Annual Report and Accounts 2018 Financial Statements Consolidated statement of comprehensive income for the year ended 31 March 2020 Income Revenue from properties Property expenses Net property income Expenses Administrative expenses Total operating expenses Operating profit before movement on investments Investments Profitondisposalofinvestmentproperties Investment property valuation movements Total profit on investments Operating profit Financing Interest received Interest paid Debt prepayment fees Total finance costs Profit before tax Tax Profit and total comprehensive income for the period Earnings per share Basic Diluted 2020 Total £000 2019 Total £000 Notes 3 4 45,664 (12,027) 47,733 (9,433) 33,637 38,300 6 (5,563) (5,842) (5,563) (5,842) 28,074 32,458 13 13 3,478 (882) 379 10,909 2,596 11,288 30,670 43,746 8 9 9 (8,295) – 38 (9,126) (3,245) (8,286) (12,333) 22,384 124 31,413 (458) 22,508 30,955 11 11 4.1p 4.1p 5.7p 5.7p All items in the above statement derive from continuing operations. AlloftheprofitandtotalcomprehensiveincomefortheyearisattributabletotheequityholdersoftheCompany. Notes1to26formpartoftheseconsolidatedfinancialstatements. 91 Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewPicton Property Income Limited Annual Report 2020Financial Statements Consolidated statement of changes in equity for the year ended 31 March 2020 Balance as at 31 March 2018 Profitfortheyear Dividends paid Share-based awards Purchase of shares held in trust Balance as at 31 March 2019 Profitfortheyear Dividends paid Issue of ordinary shares Issue costs of shares Vesting of shares held in trust Share-based awards Purchase of shares held in trust Balance as at 31 March 2020 Notes1to26formpartoftheseconsolidatedfinancialstatements. Share capital £000 Retained earnings £000 Other reserves £000 Total £000 Notes 157,449 330,157 30,955 (18,860) – – – – – – 157,449 342,252 22,508 (19,039) – – (54) – – – – 7,137 (186) – – – 10 7 7 10 19 7 7 (251) 487,355 30,955 (18,860) 363 (398) – – 363 (398) (286) 499,415 22,508 (19,039) 7,137 (186) – 292 (844) – – – – 54 292 (844) 164,400 345,667 (784) 509,283 92 Picton Property Income Limited Annual Report 2020Annual Report and Accounts 2018 Financial Statements Consolidated balance sheet as at 31 March 2020 Non-current assets Investment properties Tangible assets Total non-current assets Current assets Accounts receivable Cashandcashequivalents Total current assets Total assets Current liabilities Accounts payable and accruals Loans and borrowings Obligations under leases Total current liabilities Non-current liabilities Loans and borrowings Obligations under leases Total non-current liabilities Total liabilities Net assets Equity Share capital Retained earnings Other reserves Total equity Net asset value per share Notes 2020 £000 2019 £000 13 654,486 676,102 25 20 654,506 676,127 14 15 17,601 23,567 14,309 25,168 41,168 39,477 695,674 715,604 16 17 21 (19,438) (888) (108) (22,400) (833) (109) (20,434) (23,342) 17 (164,248) 21 (1,709) (191,136) (1,711) (165,957) (192,847) (186,391) (216,189) 509,283 499,415 19 164,400 157,449 345,667 342,252 (286) (784) 509,283 499,415 22 93p 93p TheseconsolidatedfinancialstatementswereapprovedbytheBoardofDirectorson22June2020andsignedonits behalf by: Andrew Dewhirst Director 22June2020 Notes1to26formpartoftheseconsolidatedfinancialstatements. 93 Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewPicton Property Income Limited Annual Report 2020Financial Statements Consolidated statement of cash flows for the year ended 31 March 2020 Operating activities Operatingprofit Adjustmentsfornon-cashitems Interest received Interest paid Tax received/(paid) (Increase)/decrease in accounts receivable (Decrease)/increase in accounts payable and accruals Cash inflows from operating activities Investing activities Capital expenditure on investment properties Disposal of investment properties Purchase of tangible assets Cash inflows from investing activities Financing activities Borrowings repaid Borrowings drawn Debt prepayment fees Issue of ordinary shares Issue costs of ordinary shares Purchase of shares held in trust Dividends paid Cash outflows from financing activities Net decrease in cash and cash equivalents Cashandcashequivalentsatbeginningofyear Notes 2020 £000 2019 £000 20 30,670 (2,295) 9 (7,952) 123 (4,078) (2,936) 43,746 (10,918) 38 (8,668) (845) 396 1,532 13,541 25,281 13 (8,861) 33,859 (4) (1,559) 11,837 (27) 24,994 10,251 17 17 19 7 10 (33,204) 6,000 – 7,137 (186) (844) (19,039) (34,871) 15,500 (3,245) – – (398) (18,860) (40,136) (41,874) (1,601) 25,168 (6,342) 31,510 Cash and cash equivalents at end of year 15 23,567 25,168 Notes1to26formpartoftheseconsolidatedfinancialstatements. 94 Picton Property Income Limited Annual Report 2020Annual Report and Accounts 2018 Financial Statements Notes to the consolidated financial statements for the year ended 31 March 2020 1. General information Picton Property Income Limited (the ‘Company’ and together with its subsidiaries the ‘Group’) was established on 15 September 2005 as a closed ended Guernsey investment company and entered the UK REIT regime on 1 October 2018.Theconsolidatedfinancialstatementsarepreparedfortheyearended31March2020withcomparativesforthe year ended 31 March 2019. 2. Significant accounting policies Basis of accounting Thefinancialstatementshavebeenpreparedonagoingconcernbasisandadoptthehistoricalcostbasis,exceptforthe revaluation of investment properties. Historical cost is generally based on the fair value of the consideration given in exchangefortheassets.Thefinancialstatements,whichgiveatrueandfairview,arepreparedinaccordancewith International Financial Reporting Standards (IFRS) as issued by the IASB and are in compliance with the Companies (Guernsey) Law, 2008. Given the impact of the current Covid-19 pandemic on the UK economy, the Directors have focused on assessing whether thegoingconcernbasisremainsappropriateforthepreparationofthefinancialstatements.Theyhavereviewedthe Group’sprincipalrisks,itsloanfacilities,accesstofundingandliquiditypositionandthenconsideredanumberof scenariosincludingdifferentlevelsofrentcollectionovervaryingtimescales,andthepotentialconsequencesonfinancial performance,assetvalues,capitalprojectsandloancovenants.UnderallofthesescenariostheGrouphassufficient resources to continue its operations, and remain within its loan covenants, for a period of at least 12 months from the date ofthesefinancialstatements. Based on their assessment and knowledge of the portfolio and market, the Directors have therefore continued to adopt thegoingconcernbasisinpreparingthefinancialstatements. Thefinancialstatementsarepresentedinpoundssterling,whichistheCompany’sfunctionalcurrency.Allfinancial information presented in pounds sterling has been rounded to the nearest thousand, except when otherwise indicated. New or amended standards issued Theaccountingpoliciesadoptedareconsistentwiththoseofthepreviousfinancialperiod,asamendedtoreflectthe adoption of new standards, amendments and interpretations which became effective in the year as shown below. ӱ IFRS 16 Leases TheadoptionofthisstandardhashadnomaterialeffectontheconsolidatedfinancialstatementsoftheGroup. Atthedateofapprovalofthesefinancialstatementsthereareanumberofnewandamendedstandardsinissuebutnot yeteffectiveforthefinancialyearended31March2020andthushavenotbeenappliedbytheGroup. ӱ AmendmentstoIFRS3(BusinessCombinations)iseffectiveforfinancialyearscommencingonorafter1January2020. Theamendmentrelatestochangesinthecriteriafordeterminingwhetheranacquisitionisabusinesscombinationor anassetacquisition.Theseamendmentswillbeappliedtoanyfuturebusinesscombinations. ӱ AmendmentstoIFRS9(FinancialInstruments)iseffectiveforfinancialyearscommencingonorafter1January2020. The amendments offer relief in meeting the criteria for hedge accounting on the transition from LIBOR to IBOR. The adoptionoftheseamendmentsisnotconsideredtohaveamaterialimpactonthefinancialstatementsoftheGroup. ӱ AmendmentstoReferencestotheConceptualFrameworkareeffectforfinancialyearscommencingonorafter 1January2020.Theadoptionoftheseamendmentsisnotconsideredtohaveamaterialimpactonthefinancial statements of the Group. ӱ Amendments to IAS 8 (Accounting Policies, Changes in Accounting Estimates and Errors) are also effective for financialyearscommencingonorafter1January2020.Theamendmentwillbeappliedtoanyfuturechangesin Accounting Policy, Accounting Estimates or Errors. Use of estimates and judgements ThepreparationoffinancialstatementsinconformitywithIFRSrequiresmanagementtomakejudgements,estimates and assumptions that affect the application of policies and the reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making estimates about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Significant estimates The critical estimates and assumptions relate to the investment property valuations applied by the Group’s independent valuer and this is described in more detail in Note 13. Revisions to accounting estimates are recognised in the year in which the estimate is revised if the revision affects only that year, or in the year of the revision and future years if the revision affects both current and future years. 95 Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewPicton Property Income Limited Annual Report 2020Financial Statements Notes to the consolidated financial statements continued for the year ended 31 March 2020 2. Significant accounting policies continued Significant judgements Criticaljudgements,wheremade,aredisclosedwithintherelevantsectionofthefinancialstatementsinwhichsuch judgementshavebeenapplied.Keyjudgementsrelatetothetreatmentofbusinesscombinations,leaseclassifications,or employeebenefitswheredifferentaccountingpoliciescouldbeapplied.Thesearedescribedinmoredetailinthe accountingpolicynotesbelow,orintherelevantnotestothefinancialstatements. Basis of consolidation TheconsolidatedfinancialstatementsincorporatethefinancialstatementsoftheCompanyandentitiescontrolledbythe 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 thedateonwhichcontrolistransferredoutoftheGroup.Thesefinancialstatementsincludetheresultsofthesubsidiaries disclosed in Note 12. All intra-group transactions, balances, income and expenses are eliminated on consolidation. Fair value hierarchy The fair value measurement for the assets and liabilities are categorised into different levels in the fair value hierarchy basedontheinputstovaluationtechniquesused.Thedifferentlevelshavebeendefinedasfollows: Level1:quotedprices(unadjusted)inactivemarketsforidenticalassetsorliabilitiesthattheGroupcanaccessatthe measurement date. Level2:inputsotherthanquotedpricesincludedwithinLevel1thatareobservablefortheassetorliability,eitherdirectly 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 FreeholdpropertyheldbytheGrouptoearnincomeorforcapitalappreciation,orboth,isclassifiedasinvestment property in accordance with IAS 40 ‘Investment Property’. Property held under head leases for similar purposes is also classifiedasinvestmentproperty.Investmentpropertyisinitiallyrecognisedatpurchasecostplusdirectlyattributable acquisitionexpensesandsubsequentlymeasuredatfairvalue.Thefairvalueofinvestmentpropertyisbasedona valuationbyanindependentvaluerwhoholdsarecognisedandrelevantprofessionalqualificationandwhohasrecent 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 andfinanciallyfeasible. The fair value of investment property generally involves consideration of: ӱ Market evidence on comparable transactions for similar properties; ӱ The actual current market for that type of property in that type of location at the reporting date and current market expectations; ӱ Rental income from leases and market expectations regarding possible future lease terms; ӱ 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 ӱ Investor expectations on matters such as future enhancement of rental income or market conditions. Gains and losses arising from changes in fair value are included in the Consolidated Statement of Comprehensive Income in the year in which they arise. Purchases and sales of investment property are recognised when contracts have been unconditionallyexchangedandthesignificantrisksandrewardsofownershiphavebeentransferred. Aninvestmentpropertyisderecognisedforaccountingpurposesupondisposalorwhennofutureeconomicbenefitsare expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the Consolidated Statement of Comprehensive Income in the year the asset is derecognised. Investment properties are not depreciated. Themajorityoftheinvestmentpropertiesarechargedbywayofafirstrankingmortgageassecurityfortheloansmadeto the Group; see Note 17. Leases Headleases,whichtransfertotheGroupsubstantiallyalltherisksandbenefitsincidentaltoownershipoftheleasedasset, are capitalised at the inception of the lease at the fair value of the leased asset or, if lower, the present value of the minimumleasepayments.Leasepaymentsareapportionedbetweenfinancechargesandareductionofthelease 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. 96 Picton Property Income Limited Annual Report 2020Annual Report and Accounts 2018 Lease income is recognised in income on a straight-line basis over the lease term. Direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised as an expense over the lease term on the same basis as the lease income. Premiums received on the surrender of leases are recorded as income immediately if there are no relevant conditions attached to the surrender. Cash and cash equivalents Cashincludescashinhandandcashwithbanks.Cashequivalentsareshort-term,highlyliquidinvestmentsthatare readilyconvertibletoknownamountsofcashwithoriginalmaturitiesinthreemonthsorlessandthataresubjecttoan insignificantriskofchangeinvalue. 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. RevenueisrecognisedtotheextentthatitisprobablethattheeconomicbenefitwillflowtotheGroupandtherevenue 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 leaseend.Uponreceiptofasurrenderpremiumfortheearlyterminationofalease,theprofit,netofdilapidationsand non-recoverableoutgoingsrelatingtotheleaseconcerned,isimmediatelyreflectedinrevenuefromproperties. 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 shownseparatelyinNotes3and4toreflectthat,notwithstandingthismoneyisheldonbehalfofoccupiers,theultimate risk for paying and recovering these costs rests with the property owner. Employee benefits Defined contribution plans Adefinedcontributionplanisapost-employmentbenefitplanunderwhichtheCompanypaysfixedcontributionsintoa separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to definedcontributionpensionplansarerecognisedasanexpenseintheConsolidatedStatementofComprehensive Income in the periods during which services are rendered by employees. Short-term benefits Short-termemployeebenefitobligationsaremeasuredonanundiscountedbasisandareexpensedastherelatedservice isprovided.Aliabilityisrecognisedfortheamountexpectedtobepaidundershort-termcashbonusorprofit-sharing plans if the Company has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. Share-based payments The fair value of the amounts payable to employees in respect of the Deferred Bonus Plan, when settled in cash, is recognised as an expense with a corresponding increase in liabilities, over the period that the employees become unconditionallyentitledtopayment.Wheretheawardsareequitysettled,thefairvalueisrecognisedasanexpense,with acorrespondingincreaseinequity.Theliabilityisremeasuredateachreportingdateandatsettlementdate.Anychanges in the fair value of the liability are recognised under the category staff costs in the Consolidated Statement of Comprehensive Income. The grant date fair value of awards to employees made under the Long-term Incentive Plan is recognised as an expense, withacorrespondingincreaseinequity,overthevestingperiodoftheawards.Theamountrecognisedasanexpenseis adjustedtoreflectthenumberofawardsforwhichtherelatednon-marketperformanceconditionsareexpectedtobe 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 valueoftheshare-basedawardsismeasuredtoreflectsuchconditionsandthereisnoadjustmentbetweenexpected and actual outcomes. ThecostoftheCompany’ssharesheldbytheEmployeeBenefitTrustisdeductedfromequityintheGroupBalance 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.TheGroupappliestheIFRS9simplifiedapproachtomeasuringexpectedcreditlosses,whichusesalifetime expectedimpairmentprovisionforallapplicableaccountsreceivable.Baddebtsarewrittenoffwhenidentified. 97 Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewPicton Property Income Limited Annual Report 2020Financial Statements Notes to the consolidated financial statements continued for the year ended 31 March 2020 2. Significant accounting policies continued Loans and borrowings All loans and borrowings are initially recognised at cost, being the fair value of the consideration received net of issue costs associatedwiththeborrowing.Afterinitialrecognition,loansandborrowingsaresubsequentlymeasuredatamortisedcost using the effective interest method. Amortised cost is calculated by taking into account any issue costs, and any discount or premiumonsettlement.GainsandlossesarerecognisedinprofitorlossintheConsolidatedStatementofComprehensive Income when the liabilities are derecognised for accounting purposes, as well as through the amortisation process. Assets classified as held for sale Any investment properties on which contracts for sale have been exchanged but which had not completed at the period end are disclosed as properties held for sale. Investment properties included in the held for sale category continue to be measured in accordance with the accounting policy for investment properties. Other assets and liabilities Other assets and liabilities, including trade creditors and accruals, trade and other debtors and creditors, and deferred rental income, which are not interest bearing are stated at their nominal value. Share capital Ordinarysharesareclassifiedasequity.Incrementalcostsdirectlyattributabletotheissueofordinarysharesare recognisedasadeductionfromequity. Taxation TheGroupelectedtobetreatedasaUKREITwitheffectfrom1October2018.TheUKREITrulesexempttheprofitsofthe Group’s UK property rental business from UK corporation and income tax. Gains on UK properties are also exempt from tax,providedtheyarenotheldfortrading.TheGroupisotherwisesubjecttoUKcorporationtax. AsaREIT,theCompanyisrequiredtopayPropertyIncomeDistributionsequaltoatleast90%oftheGroup’sexempted net income. To remain a UK REIT there are a number of conditions to be met in respect of the principal company of the Group,theGroup’squalifyingactivityanditsbalanceofbusiness.TheGroupcontinuestomeettheseconditions. 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 flowsfromoperatingactivities,investingactivitiesandfinancingactivities.Thenetresulthasbeenadjustedforamountsin the Consolidated Statement of Comprehensive Income and movements in the Consolidated Balance Sheet which have not resulted in cash income or expenditure in the relating period. The cash amounts in the Consolidated Statement of Cash Flows include those assets that can be converted into cash without any restrictions and without any material risk of decreases in value as a result of the transaction. 3. Revenue from properties Rentsreceivable(adjustedforleaseincentives) Surrender premiums Dilapidation receipts Other income Service charge income Rentsreceivableincludesleaseincentivesrecognisedof£1.3million(2019:£0.8million). 4. Property expenses Property operating costs Property void costs Recoverable service charge costs 2020 £000 2019 £000 37,780 603 471 81 6,729 45,664 40,942 682 269 122 5,718 47,733 2020 £000 2,293 3,005 6,729 12,027 2019 £000 2,342 1,373 5,718 9,433 5. Operating segments The Board is responsible for setting the Group’s business model and strategy. The key measure of performance used by the Board to assess the Group’s performance is the total return on the Group’s net asset value. As the total return on the Group’s net asset value is calculated based on the net asset value per share calculated under IFRS as shown at the foot of the Balance Sheet, assuming dividends are reinvested, the key performance measure is that prepared under IFRS. Therefore, no reconciliation is requiredbetweenthemeasureofprofitorlossusedbytheBoardandthatcontainedinthefinancialstatements. TheBoardhasconsideredtherequirementsofIFRS8‘OperatingSegments’.TheBoardisoftheopinionthattheGroup, through its subsidiary undertakings, operates in one reportable industry segment, namely real estate investment, and acrossoneprimarygeographicalarea,namelytheUnitedKingdom,andthereforenosegmentalreportingisrequired. Theportfolioconsistsof47commercialproperties,whichareintheindustrial,office,retailandleisuresectors. 98 Picton Property Income Limited Annual Report 2020Annual Report and Accounts 2018 6. Administrative expenses Director and staff costs Auditor’s remuneration Other administrative expenses 2020 £000 3,273 191 2,099 5,563 2019 £000 3,672 157 2,013 5,842 One-offREITconversioncostsof£215,000wereincurredduringtheyearended31March2019,whichareincludedwithin other administrative expenses. Auditor’s remuneration comprises: Audit fees: AuditofGroupfinancialstatements Auditofsubsidiaries’financialstatements Audit-related fees: Reviewofhalf-yearfinancialstatements Non-audit fees: Additional controls testing Liquidators’fees Tax compliance 7. Director and staff costs Wages and salaries Non-Executive Directors’ fees Social security costs Other pension costs Share-based payments – cash settled Share-basedpayments–equitysettled 2020 £000 2019 £000 92 67 16 175 16 – – 16 72 43 15 130 15 7 5 27 191 157 2020 £000 1,688 250 394 45 473 423 3,273 2019 £000 1,654 257 623 48 727 363 3,672 The emoluments of the Directors are set out in detail within the Remuneration Committee report. Employees participate in two share-based remuneration arrangements: the Deferred Bonus Plan and the Long-term Incentive Plan (the ‘LTIP’). For all employees, a proportion of any discretionary annual bonus will be an award under the Deferred Bonus Plan. With theexceptionofExecutiveDirectors,awardsarecashsettledandvestaftertwoyears.Thefinalvalueofawardsare determined by the movement in the Company’s share price and dividends paid over the vesting period. For Executive Directors,awardsareequitysettledandalsovestaftertwoyears.On19June2019awardsof441,322unitsweremade whichvestinJune2021(2019:572,389units).ThenextawardsareduetobemadeinJune2020forvestinginJune2022. The table below summarises the awards made under the Deferred Bonus Plan. Employees have the option to defer the vesting date of their awards for a maximum of seven years. The units which vested at 31 March 2020, and were not deferred,werepaidoutsubsequenttotheyearendatacostof£210,000(2019:£925,000). Vesting date 31 March 2016 31 March 2017 31 March 2018 31 March 2019 31 March 2020 31 March 2021 Units at31 March 2018 Units granted in the year Units cancelled in the year Units redeemed in the year Units at31 March 2019 Units granted in the year Units cancelled in the year Units redeemed in the year Units at 31 March 2020 65,198 127,916 127,234 950,890 – – – – – 572,389 – – – – – (14,331) (7,785) – (65,198) (127,916) (127,234) (936,559) – – – – – 564,604 – – – – – – – 441,322 – – – – (2,616) (2,415) – – – – – – – – (319,479) 242,509 – 438,907 1,271,238 572,389 (22,116) (1,256,907) 564,604 441,322 (5,031) (319,479) 681,416 99 Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewPicton Property Income Limited Annual Report 2020Financial Statements Notes to the consolidated financial statements continued for the year ended 31 March 2020 7. Director and staff costs continued TheGroupalsohasaLong-termIncentivePlanforallemployeeswhichisequitysettled.Awardsaremadeannuallyand vest three years from the grant date. Vesting is conditional on three performance metrics measured over each three-year period.AwardstoExecutiveDirectorsarealsosubjecttoafurthertwo-yearholdingperiod.On19June2019awardsfora maximum of 878,164 shares were granted to employees in respect of the three-year period ending on 31 March 2022. In thepreviousyear,awardsof1,006,938sharesweremadeon8June2018fortheperiodending31March2021. The three performance metrics are: ӱ Total shareholder return (TSR) of Picton Property Income Limited, compared to a comparator group of similar listed companies; ӱ Total property return (TPR) of the property assets held within the Group, compared to the MSCI UK Quarterly Property Index; and ӱ Growth in EPRA earnings per share (EPS) of the Group. The fair value of option grants is measured using a combination of a Monte Carlo model for the market conditions (TSR) and a Black-Scholes model for the non-market conditions (TPR and EPS). The fair value is recognised over the expected vesting period. For the awards made during this year and the previous year the main inputs and assumptions of the models, and the resulting fair values, are: Assumptions Grant date 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) 19June2019 95.0p Nil 3 years 0.84% 18.7% 18.1% 27.1% 7.5% 3.0% 51.5p 95.0p 95.0p 8June2018 90.9p Nil 3 years 0.83% 18.4% 18.1% 33.2% 7.6% 3.1% 42.9p 90.9p 90.9p TheTrusteeoftheCompany’sEmployeeBenefitTrustacquired954,000ordinarysharesduringtheyearfor£844,000 (2019:472,000sharesfor£398,000). The Group employed nine members of staff at 31 March 2020 (2019: ten). The average number of people employed by the Group for the year ended 31 March 2020 was ten (2019: 11). 8. Interest paid Interest payable on loans at amortised cost Interestonobligationsunderfinanceleases Non-utilisation fees Amortisationoffinancecosts 2020 £000 7,562 114 248 371 8,295 2019 £000 8,117 114 220 675 9,126 Theloanarrangementcostsincurredto31March2020are£4,534,000(2019:£4,534,000).Theseareamortisedoverthe durationoftheloanswith£371,000amortisedintheyearended31March2020(2019:£675,000). 9. Tax The charge for the year is: Current UK income tax Incometaxadjustmenttoprovisionforprioryear Current UK corporation tax UKcorporationtaxadjustmenttoprovisionforprioryear Total tax (credit)/charge 100 2020 £000 – (68) (68) – (56) (56) (124) 2019 £000 324 25 349 121 (12) 109 458 Picton Property Income Limited Annual Report 2020Annual Report and Accounts 2018 A reconciliation of the tax charge applicable to the results at the statutory tax rate to the charge for the year is as follows: Profitbeforetaxation Expected tax charge on ordinary activities at the standard rate of taxation of 19% (2019: 20%) Less: UK REIT exemption on net income Revaluation movement not taxable Gains on disposal not taxable Income not taxable, including interest receivable Expenditure not allowed for tax purposes Losses utilised Capital allowances and other allowable deductions Losses carried forward to future years Total tax charge 2020 £000 22,384 4,253 2019 £000 31,413 6,283 (3,760) 168 (661) – – – – – – (2,315) (2,182) (76) (163) 985 (2) (2,291) 85 324 Fortheyearended31March2020therewasanincometaxcreditof£68,000inrespectoftheGroup(2019:£349,000 charge)andacorporationtaxcreditof£56,000(2019:£109,000charge). AsaUKREIT,theincomeprofitsoftheGroup’sUKpropertyrentalbusinessareexemptfromcorporationtax,asareany gainsitmakesfromthedisposalofitsproperties,providedtheyarenotheldfortrading.TheGroupisotherwisesubjectto UK corporation tax at the prevailing rate. AstheprincipalcompanyoftheREIT,theCompanyisrequiredtodistributeatleast90%oftheincomeprofitsofthe Group’sUKpropertyrentalbusiness.Thereareanumberofotherconditionsthatarealsorequiredtobemetbythe Company and the Group to maintain REIT tax status. These conditions were met in the year and the Board intends to conduct the Group’s affairs such that these conditions continue to be met for the foreseeable future. Accordingly, deferred tax is no longer recognised on temporary timing differences relating to the property rental business. The Group is exempt from Guernsey taxation under the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989. 10. Dividends Declared and paid: Interim dividend for the period ended 31 March 2018: 0.875 pence Interimdividendfortheperiodended30June2018:0.875pence Interim dividend for the period ended 30 September 2018: 0.875 pence Interim dividend for the period ended 31 December 2018: 0.875 pence Interim dividend for the period ended 31 March 2019: 0.875 pence Interimdividendfortheperiodended30June2019:0.875pence Interim dividend for the period ended 30 September 2019: 0.875 pence Interim dividend for the period ended 31 December 2019: 0.875 pence 2020 £000 2019 £000 – – – – 4,712 4,781 4,773 4,773 4,716 4,716 4,716 4,712 – – – – 19,039 18,860 The interim dividend of 0.625 pence per ordinary share in respect of the period ended 31 March 2020 has not been recognisedasaliabilityasitwasdeclaredaftertheyearend.Thisdividendof£3,409,000waspaidon29May2020. 11. Earnings per share Basicanddilutedearningspershareiscalculatedbydividingthenetprofitfortheyearattributabletoordinary shareholders of the Company by the weighted average number of ordinary shares in issue during the year, excluding the averagenumberofsharesheldbytheEmployeeBenefitTrustfortheyear.Thedilutednumberofsharesalsoreflectsthe contingent shares to be issued under the Long-term Incentive Plan. Thefollowingreflectstheprofitandsharedatausedinthebasicanddilutedprofitpersharecalculation: NetprofitattributabletoordinaryshareholdersoftheCompany fromcontinuingoperations(£000) Weightedaveragenumberofordinarysharesforbasicprofitpershare Weightedaveragenumberofordinarysharesfordilutedprofitpershare 2020 2019 22,508 544,192,866 546,227,914 30,955 538,815,550 541,035,348 101 Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewPicton Property Income Limited Annual Report 2020Financial Statements Notes to the consolidated financial statements continued for the year ended 31 March 2020 12. Investments in subsidiaries The Company had the following principal subsidiaries as at 31 March 2020 and 31 March 2019: Name Picton UK Real Estate Trust (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 Financing UK Limited (established on 14 February 2020) Picton Property No 3 Limited Place of incorporation Ownership proportion Guernsey Guernsey Guernsey Guernsey Guernsey England & Wales Guernsey Guernsey England & Wales England & Wales England & Wales Guernsey 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% TheresultsoftheaboveentitiesareconsolidatedwithintheGroupfinancialstatements. Picton UK Real Estate Trust (Property) Limited and Picton (UK) REIT (SPV) Limited own 100% of the units in Picton (UK) Listed Real Estate, a Guernsey Unit Trust (the ‘GPUT’). The GPUT holds a 99.9% interest in both Picton No 2 Limited Partnership and Picton No 3 Limited Partnership, the remaining balances are held by Picton (General Partner) No 2 Limited and Picton (General Partner) No 3 Limited respectively. 13. Investment properties Thefollowingtableprovidesareconciliationoftheopeningandclosingamountsofinvestmentpropertiesclassifiedas Level 3 recorded at fair value. Fair value at start of year Capital expenditure on investment properties Disposals Realised gains on disposal Unrealised movement on investment properties Fair value at the end of the year Historic cost at the end of the year The fair value of investment properties reconciles to the appraised value as follows: Appraised value Valuation of assets held under head leases Lease incentives held as debtors Fair value at the end of the year 2020 £000 2019 £000 676,102 674,524 1,559 (11,269) 379 10,909 8,861 (33,073) 3,478 (882) 654,486 676,102 629,932 648,044 2020 £000 2019 £000 664,615 685,335 1,565 (10,798) 1,489 (11,618) 654,486 676,102 The investment properties were valued by independent valuers, CBRE Limited, Chartered Surveyors, as at 31 March 2020 and 31 March 2019 on the basis of fair value in accordance with the version of the RICS Valuation – Global Standards (incorporating the International Valuation Standards) and the UK national supplement (the Red Book) current as at the valuation date. The total fees earned by CBRE Limited from the Group are less than 5% of their total UK revenue. ThefairvalueoftheGroup’sinvestmentpropertieshasbeendeterminedusinganincomecapitalisationtechnique, whereby contracted and market rental values are capitalised with a market capitalisation rate. The resulting valuations are cross-checkedagainsttheequivalentyieldsandthefairmarketvaluespersquarefootderivedfromcomparablemarket transactions on an arm’s length basis. Inaddition,theGroup’sinvestmentpropertiesarevaluedquarterlybyCBRELimited.Thevaluationsarebasedon: ӱ Information provided by the Group including rents, lease terms, revenue and capital expenditure. Such information is derivedfromtheGroup’sfinancialandpropertysystemsandissubjecttotheGroup’soverallcontrolenvironment. ӱ Valuationmodelsusedbythevaluers,includingmarket-relatedassumptionsbasedontheirprofessionaljudgement and market observation. 102 Picton Property Income Limited Annual Report 2020Annual Report and Accounts 2018 The assumptions and valuation models used by the valuers, and supporting information, are reviewed by senior management and the Board through the Property Valuation Committee. Members of the Property Valuation Committee, togetherwithseniormanagement,meetwiththeindependentvalueronaquarterlybasistoreviewthevaluationsand underlying assumptions, including considering current market trends and conditions, and changes from previous quarters.TheBoardwillalsoconsiderwherecircumstancesatspecificinvestmentproperties,suchasalternativeusesand issueswithoccupationaltenants,areappropriatelyreflectedinthevaluations.Thefairvalueofinvestmentpropertiesis measured based on each property’s highest and best use from a market participant’s perspective and considers the potentialusesofthepropertythatarephysicallypossible,legallypermissibleandfinanciallyfeasible. TheoutbreakofCovid-19,declaredbytheWorldHealthOrganizationasa‘GlobalPandemic’on11March2020,has impactedglobalfinancialmarkets.Travelrestrictionshavebeenimplementedbymanycountries.Marketactivityisbeing impacted in many sectors. As at the valuation date, the external valuers consider that they can attach less weight to previous market evidence for comparison purposes, to inform opinions of value. The current response to Covid-19 means thatexternalvaluersarefacedwithanunprecedentedsetofcircumstancesonwhichtobaseajudgement.The valuations across all asset classes are therefore reported on the basis of ‘material valuation uncertainty’ as per VPS 3 and VPGA 10 of the RICS Red Book Global. Consequently,lesscertainty–andahigherdegreeofcaution–shouldbeattachedtothevaluationsprovidedthanwould normallybethecase.Theexternalvaluershaveconfirmedthattheinclusionofthe‘materialvaluationuncertainty’ declaration does not mean that valuations cannot be relied upon. Rather, the phrase is used in order to be clear and transparent with all parties, in a professional manner, that – in the current extraordinary circumstances – less certainty can be attached to valuations than would otherwise be the case. As at 31 March 2020 and 31 March 2019 all of the Group’s properties are Level 3 in the fair value hierarchy as it involves use ofsignificantinputs.Therewerenotransfersbetweenlevelsduringtheyearandtheprioryear.Level3inputsusedin valuingthepropertiesarethosewhichareunobservable,asopposedtoLevel1(inputsfromquotedprices)andLevel2 (observable inputs either directly, i.e. as prices, or indirectly, i.e. derived from prices). Informationonthesesignificantunobservableinputspersectorofinvestmentpropertiesisdisclosedasfollows: Appraisedvalue(£000) Area(sqft,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 2020 2019 Office Industrial 224,620 808 318,330 2,570 Retail and Leisure 121,665 829 Office Industrial 235,035 856 312,790 2,731 Retail and Leisure 137,510 829 £11.00 to £53.59 £27.92 £3.54 to £19.58 £9.79 £3.46 to £81.77 £32.13 £9.52to £51.78 £27.33 £3.54to £17.70 £8.91 £3.88to £84.11 £31.50 0.00% to 7.59% 4.89% –2.54% to 8.16% 4.63% –0.18% to 25.27% 5.25% 2.48% to 8.59% 5.15% 0.00% to 8.25% 4.78% –0.17% to 15.36% 5.11% 5.47% to 10.80% 7.04% 4.46% to 10.17% 5.40% 4.36% to 11.97% 6.63% 5.32% to 10.70% 7.01% 4.60% to 9.99% 5.55% 4.63% to 12.11% 6.37% 5.33% to 9.80% 6.97% 4.39% to 9.65% 5.40% 3.97% to 11.95% 7.17% 5.24% to 9.49% 6.88% 4.63% to 9.48% 5.59% 4.09% to 10.86% 6.75% Thepropertyvaluationsreflecttheexternalvaluers’assessmentoftheimpactofCovid-19atthevaluationdate.An increase/decrease in ERV will increase/decrease valuations, while an increase/decrease to yield decreases/increases valuations. In light of this material valuation uncertainty we have reviewed the ranges used in assessing the impact of changes in unobservable inputs on the fair value of the Group’s property portfolio and concluded these were still reasonable. The table below sets out the sensitivity of the valuation to changes of 50 basis points in yield. Sector 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 2020 Impact on valuation Decrease of £29.3m Increase of £36.1m Decrease of £17.5m Increase of £20.5m Decrease of £10.9m Increase of £13.9m 2019 Impact on valuation Decreaseof£28.7m Increaseof£34.7m Decreaseof£18.7m Increaseof£21.3m Decreaseof£12.6m Increaseof£15.8m 103 Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewPicton Property Income Limited Annual Report 2020Financial Statements Notes to the consolidated financial statements continued for the year ended 31 March 2020 14. Accounts receivable Tenant debtors (net of provisions for bad debts) Lease incentives Other debtors 2020 £000 2019 £000 5,197 11,618 786 17,601 2,594 10,798 917 14,309 Theestimatedfairvaluesofreceivablesarethediscountedamountoftheestimatedfuturecashflowsexpectedtobe received and the approximate of their carrying amounts. Amounts are considered impaired using the lifetime expected credit loss method. Movement in the balance considered to be impaired has been included in the Consolidated Statement of Comprehensive Income. As at 31 March 2020, tenant debtorsof£1,676,000(2019:£918,000)wereconsideredimpairedandprovidedfor. 15. Cash and cash equivalents Cash at bank and in hand Short-term deposits 2020 £000 23,564 3 23,567 2019 £000 24,454 714 25,168 Cashatbankandinhandearnsinterestatfloatingratesbasedondailybankdepositrates.Short-termdepositsaremadefor varyingperiodsofbetweenonedayandonemonthdependingontheimmediatecashrequirementsoftheGroup,and earn interest at the respective short-term deposit rates. The carrying amounts of these assets approximate their fair value. 16. Accounts payable and accruals Accruals Deferred rental income VAT liability Income tax liability Trade creditors Other creditors 17. Loans and borrowings Current Aviva facility Capitalisedfinancecosts Non-current Santander revolving credit facility Santander revolving credit facility Canada Life facility Aviva facility Capitalisedfinancecosts 104 2020 £000 5,263 7,817 1,685 – 1,058 3,615 2019 £000 6,596 8,381 1,994 57 230 5,142 19,438 22,400 Maturity 2020 £000 2019 £000 – – 1,258 (370) 888 1,204 (371) 833 18June2021 20June2021 24July2027 24July2032 – – – 80,000 86,207 (1,959) 11,500 14,500 80,000 87,465 (2,329) 164,248 191,136 165,136 191,969 Picton Property Income Limited Annual Report 2020Annual Report and Accounts 2018 Thefollowingtableprovidesareconciliationofthemovementinloansandborrowingstocashflowsarisingfrom financingactivities. Balance as at 1 April Changes from financing cash flows Proceeds from loans and borrowings Repayment of loans and borrowings Other changes Amortisationoffinancingcosts Balance as at 31 March 2020 £000 2019 £000 191,969 210,664 6,000 (33,204) 15,500 (34,871) (27,204) (19,371) 371 371 676 676 165,136 191,969 TheGrouphasan£80milliontermloanfacilitywithCanadaLifeLimitedwhichmaturesinJuly2027.Interestisfixedat 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)No2Limited,valuedat£307.5million(2019:£292.4million). Additionally,theGrouphasa£95.3milliontermloanfacilitywithAvivaCommercialFinanceLimitedwhichmaturesinJuly 2032.Theloanisforatermof20yearsandwasfullydrawnon24July2012withapproximatelyone-thirdrepayableover thelifeoftheloaninaccordancewithascheduledamortisationprofile.TheGrouphasrepaid£1.2millionintheyear(2019: £1.2million).Interestontheloanisfixedat4.38%overthelifeoftheloan.Thefacilityhasaloantovaluecovenantof65% and a debt service cover ratio of 1.4. The facility is secured over the Group’s properties held by Picton No 3 Limited PartnershipandPictonPropertyNo3Limited,valuedat£189.0million(2019:£230.3million). As at 31 March 2020 the Group had two revolving credit facilities (‘RCFs’) with Santander Corporate & Commercial Banking whichexpiredinJune2021.IntotaltheGrouphad£49.0million(2019:£51.0million)availableunderbothfacilities;thereis nothing drawn down under these facilities at the year end. Interest was payable on drawn balances at LIBOR plus margins of 175 or 190 basis points. The facilities were secured on properties held by Picton (UK) REIT (SPV No 2) Limited and Picton (UK)ListedRealEstate,valuedat£131.8million(2019:£133.7million).Postyearend,bothRCFswerecancelledandreplaced withanew£50.0millionRCF. Thefairvalueofthedrawnloanfacilitiesat31March2020,estimatedasthepresentvalueoffuturecashflowsdiscounted atthemarketrateofinterestatthatdate,was£197.0million(2019:£219.5million).Thefairvalueofthesecuredloan facilitiesisclassifiedasLevel2underthehierarchyoffairvaluemeasurements. There were no transfers between levels of the fair value hierarchy during the current or prior years. The weighted average interest rate on the Group’s borrowings as at 31 March 2020 was 4.2% (2018: 4.0%). 18. Contingencies and capital commitments The Group has entered into contracts for the refurbishment of 11 properties with commitments outstanding at 31 March 2020ofapproximately£4.5million(2019:£1.4million).Nofurtherobligationstoconstructordevelopinvestmentproperty orforrepairs,maintenanceorenhancementswereinplaceasat31March2020(2019:£nil). 19. Share capital and other reserves Authorised: Unlimited number of ordinary shares of no par value Issued and fully paid: 547,605,596 ordinary shares of no par value (31 March 2019: 540,053,660) Share premium 2020 £000 2019 £000 – – – – 164,400 157,449 On21June2019theCompanyraised£7.1millionthroughtheissueof7,551,936newordinarysharesofnoparvalueat94.5 pence per share. The Company now has 547,605,596 ordinary shares in issue of no par value (31 March 2019: 540,053,660). 105 Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewPicton Property Income Limited Annual Report 2020Financial Statements Notes to the consolidated financial statements continued for the year ended 31 March 2020 19. Share capital and other reserves continued ThebalanceoftheCompany’ssharepremiumaccountasat31March2020was£164,400,000(31March2019:£157,449,000). Ordinary share capital NumberofsharesheldinEmployeeBenefitTrust Number of ordinary shares 2020 Number of shares 2019 Number of shares 547,605,596 (2,103,683) 540,053,660 (1,542,000) 545,501,913 538,511,660 The fair value of awards made under the Long-term Incentive Plan is recognised in other reserves. SubjecttothesolvencytestcontainedintheCompanies(Guernsey)Law,2008beingsatisfied,ordinaryshareholdersare entitled to all dividends declared by the Company and to all of the Company’s assets after repayment of its borrowings andordinarycreditors.TheTrusteeoftheCompany’sEmployeeBenefitTrusthaswaiveditsrighttoreceivedividendson the 2,103,683 shares it holds but continues to hold the right to vote. Ordinary shareholders have the right to vote at meetingsoftheCompany.Allordinarysharescarryequalvotingrights. TheDirectorshaveauthoritytobuybackupto14.99%oftheCompany’sordinarysharesinissue,subjecttotheannual renewaloftheauthorityfromshareholders.AnybuybackofordinaryshareswillbemadesubjecttoGuernseylaw,and the making and timing of any buy-backs will be at the absolute discretion of the Board. 20. Adjustment for non-cash movements in the cash flow statement Profitondisposalofinvestmentproperties Movement in investment property valuation Share-based provisions Depreciation of tangible assets 2020 £000 (3,478) 882 292 9 2019 £000 (379) (10,909) 363 7 (2,295) (10,918) 21. Obligations under leases TheGrouphasenteredintoanumberofheadleasesinrelationtoitsinvestmentproperties.Theseleasesareforfixed termsandsubjecttoregularrentreviews.Theycontainnomaterialprovisionsforcontingentrents,renewalorpurchase options nor any restrictions outside of the normal lease terms. Lease liabilities in respect of rents payable on leasehold properties were payable as follows: Future minimum payments due: Within one year Inthesecondtofifthyearsinclusive Afterfiveyears Less:financechargesallocatedtofutureperiods Present value of minimum lease payments The present value of minimum lease payments is analysed as follows: Current Within one year Non-current Inthesecondtofifthyearsinclusive Afterfiveyears 106 2020 £000 2019 £000 117 466 7,266 7,849 (6,032) 1,817 117 466 7,383 7,966 (6,146) 1,820 2020 £000 2019 £000 108 108 109 109 388 1,321 1,709 1,817 392 1,319 1,711 1,820 Picton Property Income Limited Annual Report 2020Annual Report and Accounts 2018 Operating leases where the Group is lessor The Group leases its investment properties under commercial property leases which are held as operating leases. At the reporting date, the Group’s future income based on the unexpired lessor lease length was as follows (based on annual rentals): Within one year Inthesecondtofifthyearsinclusive Afterfiveyears 2020 £000 2019 £000 38,296 37,497 124,942 113,403 88,902 111,711 274,949 239,802 Thesepropertiesaremeasuredunderthefairvaluemodelasthepropertiesareheldtoearnrentals.Themajorityofthese non-cancellableleaseshaveremainingleasetermsofmorethanfiveyears. 22. Net asset value The net asset value per share calculation uses the number of shares in issue at the year end and excludes the actual numberofsharesheldbytheEmployeeBenefitTrustattheyearend;seeNote19. 23. Financial instruments TheGroup’sfinancialinstrumentscomprisecashandcashequivalents,accountsreceivable,securedloans,obligations under head leases and accounts payable that arise from its operations. The Group does not have exposure to any derivativefinancialinstruments.Apartfromthesecuredloans,asdisclosedinNote17,thefairvalueofthefinancialassets andliabilitiesisnotmateriallydifferentfromtheircarryingvalueinthefinancialstatements. Categories of financial instruments 31 March 2020 Financial assets Debtors Cashandcashequivalents Financial liabilities Loans and borrowings Obligations under head leases Creditors and accruals 31 March 2019 Financial assets Debtors Cashandcashequivalents Financial liabilities Loans and borrowings Obligations under head leases Creditors and accruals Held at fair value through profit or loss £000 Financial assets and liabilities at amortised cost £000 Total £000 – – – 5,983 23,567 5,983 23,567 29,550 29,550 – 165,136 165,136 1,817 – 9,936 – 1,817 9,936 – 176,889 176,889 Held at fair value through profitorloss £000 Financial assets and liabilities at amortised cost £000 Total £000 – – – 3,511 25,168 3,511 25,168 28,679 28,679 – 191,969 191,969 1,820 – 11,968 – 1,820 11,968 – 205,757 205,757 Note 14 15 17 21 16 Note 14 15 17 21 16 107 Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewPicton Property Income Limited Annual Report 2020Financial Statements Notes to the consolidated financial statements continued for the year ended 31 March 2020 24. Risk management The Group invests in commercial properties in the United Kingdom. The following describes the risks involved and the applied risk management. Senior management reports regularly both verbally and formally to the Board, and its relevant committees, to allow them to monitor and review all the risks noted below. Capital risk management The Group aims to manage its capital to ensure that the entities in the Group will be able to continue as a going concern whilemaximisingthereturntostakeholdersthroughtheoptimisationofthedebtandequitybalance.TheBoard’spolicy istomaintainastrongcapitalbasesoastomaintaininvestor,creditorandmarketconfidenceandtosustainfuture development of the business. ThecapitalstructureoftheGroupconsistsofdebt,asdisclosedinNote17,cashandcashequivalentsandequity attributabletoequityholdersoftheCompany,comprisingissuedcapital,reservesandretainedearnings.TheGroupisnot subjecttoanyexternalcapitalrequirements. The Group monitors capital on the basis of the gearing ratio. This ratio is calculated as the principal borrowings outstanding, as detailed under Note 17, divided by the gross assets. There is a limit of 65% as set out in the Articles of Association of the Company. Gross assets are calculated as non-current and current assets, as shown in the Consolidated Balance Sheet. At the reporting date the gearing ratios were as follows: Total borrowings Gross assets Gearing ratio (must not exceed 65%) 2020 £000 2019 £000 167,465 194,669 695,674 715,604 24.1% 27.2% The Board of Directors monitors the return on capital as well as the level of dividends to ordinary shareholders. The Group has managed its capital risk by entering into long-term loan arrangements which will enable the Group to manage its borrowings in an orderly manner over the long-term. The Group has two revolving credit facilities which provide greater flexibilityinmanagingthelevelofborrowings. TheGroup’snetdebttoequityratioatthereportingdatewasasfollows: Total liabilities Less:cashandcashequivalents 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: 2020 £000 2019 £000 186,391 216,189 (25,168) (23,567) 162,824 191,021 509,283 499,415 0.32 0.38 31 March 2020 Financial assets Tenant debtors Cashandcashequivalents 31 March 2019 Financial assets Tenant debtors Cashandcashequivalents 108 Held at fair value through profit or loss £000 Financial assets and liabilities at amortised cost £000 Total £000 – – – 5,197 23,567 5,197 23,567 28,764 28,764 Held at fair value through profitor loss £000 Financial assets and liabilities at amortised cost £000 Total £000 – – – 2,594 25,168 2,594 25,168 27,762 27,762 Note 14 15 Note 14 15 Picton Property Income Limited Annual Report 2020Annual Report and Accounts 2018 Creditriskreferstotheriskthatacounterpartywilldefaultonitscontractualobligationsresultinginfinanciallosstothe Group.TheGrouphasadoptedapolicyofonlydealingwithcreditworthycounterpartiesandobtainingsufficientcollateral whereappropriate,asameansofmitigatingtheriskoffinanciallossfromdefaults.TheGroup’sexposureandcredit ratings of its counterparties are continuously monitored and the aggregate value of transactions concluded is spread amongst approved counterparties. Credit exposure is controlled by counterparty limits that are reviewed regularly. Tenant debtors consist of a large number of occupiers, spread across diverse industries and geographical areas. Ongoing creditevaluationsareperformedonthefinancialconditionoftenantdebtorsand,whereappropriate,creditguarantees areacquired.Rentcollectionisoutsourcedtomanagingagentswhoreportregularlyonpaymentperformanceand providetheGroupwithintelligenceonthecontinuingfinancialviabilityofoccupiers.TheGroupdoesnothaveany significantcreditriskexposuretoanysinglecounterpartyoranygroupofcounterpartieshavingsimilarcharacteristics.The creditriskonliquidfundsislimitedbecausethecounterpartiesarebankswithhighcreditratingsassignedby international credit rating agencies. Thecarryingamountoffinancialassetsrecordedinthefinancialstatements,netofanyallowancesforlosses,represents the Group’s maximum exposure to credit risk. The Board continues to monitor the Group’s exposure to credit risk. The Group has a panel of banks with which it makes deposits, based on credit ratings with set counterparty limits. The Group’s main cash balances are held with National Westminster Bank plc (‘NatWest’), Santander plc (‘Santander’), Nationwide International Limited (‘Nationwide’) and The Royal Bank of Scotland plc (‘RBS’). Insolvency or resolution of the bank holding cash balances may cause the Group’s recovery of cash held by them to be delayed or limited. The Group managesitsriskbymonitoringthecreditqualityofitsbankersonanongoingbasis.NatWest,Santander,Nationwideand RBSareratedbyallthemajorratingagencies.Ifthecreditqualityofthesebanksdeteriorates,theGroupwouldlookto move the short-term deposits or cash to another bank. Procedures exist to ensure that cash balances are split between banks to minimise exposure. At 31 March 2020 and at 31 March 2019 Standard & Poor’s credit rating for the Group’s bankers was A-1. There has been no change in the fair values of cash or receivables as a result of changes in credit risk in the current or prior periods, due to the actions taken to mitigate this risk, as stated above. Liquidity risk UltimateresponsibilityforliquidityriskmanagementrestswiththeBoard,whichhasbuiltanappropriateliquidityrisk managementframeworkforthemanagementoftheGroup’sshort,mediumandlong-termfundingandliquidity managementrequirements.TheGroup’sliquidityriskismanagedonanongoingbasisbyseniormanagementand monitoredonaquarterlybasisbytheBoardbymaintainingadequatereservesandloanfacilities,continuously monitoringforecastsandactualcashflowsandmatchingthematurityprofilesoffinancialassetsandliabilitiesfora period of at least 12 months. Thetablebelowhasbeendrawnupbasedontheundiscountedcontractualmaturitiesofthefinancialassets/(liabilities), including interest that will accrue to maturity. 31 March 2020 Cashandcashequivalents Debtors Capitalisedfinancecosts Obligations under head leases Fixed interest rate loans Creditors and accruals 31 March 2019 Cashandcashequivalents Debtors Capitalisedfinancecosts Obligations under head leases Fixed interest rate loans Floating interest rate loans Creditors and accruals Less than 1 year £000 23,567 5,983 370 (117) (8,332) (9,936) 1 to 5 years £000 More than 5 years £000 Total £000 – – 912 (466) 23,567 – 5,983 – 2,329 1,047 (7,849) (7,266) (33,329) (193,259) (234,920) (9,936) – – 11,535 (32,883) (199,478) (220,826) Less than 1 year £000 25,177 3,511 371 (117) (8,332) (360) (11,968) 1 to 5 years £000 More than 5 years £000 Total £000 – – 1,062 (466) (33,329) (26,869) – – – 1,267 (7,383) (201,591) – – 25,177 3,511 2,700 (7,966) (243,252) (27,229) (11,968) 8,282 (59,602) (207,707) (259,027) 109 Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewPicton Property Income Limited Annual Report 2020Financial Statements Notes to the consolidated financial statements continued for the year ended 31 March 2020 24. Risk management continued Market risk TheGroup’sactivitiesareprimarilywithintherealestatemarket,exposingittoveryspecificindustryrisks. The yields available from investments in real estate depend primarily on the amount of revenue earned and capital appreciationgeneratedbytherelevantpropertiesaswellasexpensesincurred.Ifpropertiesdonotgeneratesufficient 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 propertiestooccupiers,thequalityofthemanagement,competitionfromotheravailablepropertiesandincreased operating costs (including real estate taxes). Inaddition,theGroup’srevenuewouldbeadverselyaffectedifasignificantnumberofoccupierswereunabletopayrent or its properties could not be rented on favourable terms. This has increased given the Covid-19 pandemic and the resultanteffectontenants’abilitytopayrent.Certainsignificantexpenditureassociatedwitheachequityinvestmentin realestate(suchasexternalfinancingcosts,realestatetaxesandmaintenancecosts)isgenerallynotreducedwhen circumstances cause a reduction in revenue from properties. By diversifying in regions, sectors, risk categories and occupiers,seniormanagementexpectstolowertheriskprofileoftheportfolio.TheBoardcontinuestooverseetheprofile of the portfolio to ensure risks are managed. ThevaluationoftheGroup’spropertyassetsissubjecttochangesinmarketconditions.Suchchangesaretakentothe Consolidated Statement of Comprehensive Income and thus impact on the Group’s net result. A 5% increase or decrease inpropertyvalueswouldincreaseordecreasetheGroup’snetresultby£33.2million(2019:£34.3million). Interest rate risk management Interestrateriskarisesoninterestpayableontherevolvingcreditfacilitiesonly.TheGroup’sseniordebtfacilitieshavefixed interestratesoverthetermsoftheloansandthustheGrouphaslimitedexposuretointerestrateriskonthemajorityofits borrowings and no sensitivity is presented. Interest rate risk Thefollowingtablesetsoutthecarryingamount,bymaturity,oftheGroup’sfinancialassets/(liabilities). 31 March 2020 Floating Cashandcashequivalents Fixed Secured loan facilities Obligations under leases 31 March 2019 Floating Cashandcashequivalents Secured loan facilities Fixed Secured loan facilities Obligations under leases Less than 1 year £000 1 to 5 years £000 More than 5 years £000 Total £000 23,567 – – 23,567 (1,258) (108) (5,616) (160,591) (1,321) (388) (167,465) (1,817) 22,201 (6,004) (161,912) (145,715) Less than 1 year £000 1 to 5 years £000 More than 5 years £000 Total £000 25,168 – – (26,000) – – 25,168 (26,000) (1,204) (109) (5,377) (392) (160,884) (1,319) (167,465) (1,820) 23,855 (31,769) (162,203) (170,117) Concentration risk As discussed above, all of the Group’s investments are in the UK and therefore it is exposed to macroeconomic changes in the UK economy. Furthermore, the Group has around 350 occupiers so does not place reliance on a limited number of occupiers for its rental income, with the single largest occupier accounting for 4.2% of the Group’s annual contracted rental income. Currency risk The Group has no exposure to foreign currency risk. 110 Picton Property Income Limited Annual Report 2020Annual Report and Accounts 2018 25. Related party transactions ThetotalfeesearnedduringtheyearbytheNon-ExecutiveDirectorsoftheCompanyamountedto£250,000(2019: £257,000).Asat31March2020theGroupowed£niltotheNon-ExecutiveDirectors(2019:£nil).Theemolumentsofthe Executive Directors are set out in the Remuneration Report. Picton Property Income Limited has no controlling parties. 26. Events after the balance sheet date Adividendof£3,409,000(0.625pencepershare)wasapprovedbytheBoardon27April2020andwaspaidon29May2020. On27May2020theGroupenteredintoanew£50millionrevolvingcreditfacility;thisreplacestheexistingfacilitiesheld with Santander Corporate & Commercial Banking which have been cancelled. Post Balance Sheet event disclosure TheglobaloutbreakofCovid-19in2020hasresultedinsignificantlossoflife,adverselyimpactedcommercialactivityand contributedtosignificantvolatilityincertainequityanddebtmarkets.Theglobalimpactoftheoutbreakevolvedrapidly and,on11March2020,theWorldHealthOrganizationdeclaredapandemic.Manycountrieshavereactedbyinstituting quarantines,prohibitionsontravelandtheclosureofoffices,businesses,schools,retailstoresandotherpublicvenues. Businesses are also implementing similar precautionary measures. Such measures, as well as the general uncertainty surrounding the dangers and impact of Covid-19, are creating significantdisruptioninsupplychainsandeconomicactivityandarehavingaparticularlyadverseimpacton transportation,hospitality,tourism,entertainmentandotherindustries.TheimpactofCovid-19hasledtosignificant volatilityanddeclinesintheglobalpublicequitymarketsanditisuncertainhowlongthisvolatilitywillcontinue.As Covid-19 continues to spread, the potential impacts, including a global, regional or other economic recession, are increasinglyuncertainanddifficulttoassess. TheoutbreakofCovid-19andtheresultingfinancialandeconomicmarketuncertaintycouldhaveasignificantadverse impact on the Group. Any future impact on the Group is likely to be in connection with the assessment of the fair value of investmentsandstabilityofrentalincomeatfuturedates.Atthedateofreportingitisnotpossibletoquantifythefuture financialimpactofCovid-19ontheCompany’sinvestmentpropertiesorrentalincomewithadegreeofcertainty.The Board will continue to closely analyse and review the impact of Covid-19 on the Company and will take appropriate action asrequired. 111 Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewPicton Property Income Limited Annual Report 2020Additional Information Supplementary disclosures (unaudited) for the year ended 31 March 2020 The European Public Real Estate Association (EPRA) is the industry body representing listed companies in the real estate sector. EPRA publishes Best Practices 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. Profitfortheyearaftertaxation Exclude: Investment property valuation movement Gains on disposal of investment properties Debt prepayment fees EPRA earnings Weighted average number of shares in issue (000s) EPRA earnings per share 2020 £000 2019 £000 2018 £000 22,508 30,955 64,168 882 (3,478) – (10,909) (379) 3,245 (38,920) (2,623) – 19,912 22,912 22,625 544,193 538,816 539,734 3.7p 4.3p 4.2p 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 liabilitiesthatarenotexpectedtocrystalliseinnormalcircumstances,suchasthefairvalueoffinancialderivativesand deferred taxes on property valuation surpluses. Balance Sheet net assets Fairvalueoffinancialinstruments Deferred tax EPRA NAV Shares in issue (000s) EPRA NAV per share 2020 £000 2019 £000 2018 £000 509,283 – – 499,415 487,355 – – – – 509,283 499,415 487,355 545,502 538,512 538,984 93p 93p 90p EPRA NNNAV per share TheEPRAtriplenetassetvalueincludesthefairvalueadjustmentsinrespectofallmaterialbalancesheetitems. EPRA NAV Fair value of debt Deferred tax EPRA NNNAV Shares in issue (000s) EPRA NNNAV per share 2020 £000 2019 £000 2018 £000 509,283 (29,569) – 499,415 487,355 (21,106) (24,811) – – 479,714 474,604 466,249 545,502 538,512 538,984 88p 88p 87p 112 Picton Property Income Limited Annual Report 2020Annual Report and Accounts 2018 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 Grossed up property portfolio valuation Annualised cash passing rental income Property outgoings Annualised net rents EPRA net initial yield 2020 £000 2019 £000 2018 £000 664,615 685,335 683,800 46,197 46,771 44,847 709,462 732,106 729,997 36,236 (2,017) 34,219 4.8% 37,699 (1,896) 41,360 (1,327) 35,803 40,033 4.9% 5.5% EPRA ‘topped-up’ net initial yield TheEPRA‘topped-up’NIYiscalculatedbymakinganadjustmenttotheEPRANIYinrespectoftheexpirationofrent-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 2020 £000 34,219 3,910 38,129 5.4% 2019 £000 2018 £000 35,803 2,739 40,033 3,160 38,542 43,193 5.3% 5.9% 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 2020 £000 5,179 45,224 11.5% 2019 £000 2018 £000 4,828 46,839 10.3% 1,995 47,854 4.2% 113 Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewPicton Property Income Limited Annual Report 2020Additional Information Supplementary disclosures (unaudited) continued EPRA cost ratio EPRAcostratioreflectstheoverheadsandoperatingcostsasapercentageofthegrossrentalincome. Property operating costs Property void costs Administrative 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) 2020 £000 2,293 3,005 5,563 (259) 10,602 (3,005) 7,597 37,780 (259) 37,521 28.3% 20.2% 2019 £000 2,342 1,373 5,842 2018 £000 2,578 1,830 5,566 (256) (217) 9,301 (1,373) 9,757 (1,830) 7,928 7,927 40,942 (256) 41,412 (217) 40,686 41,195 22.9% 19.5% 23.7% 19.2% Capital expenditure Thetablebelowsetsoutthecapitalexpenditureincurredoverthefinancialyear,inaccordancewithEPRABestPractices Recommendations. Acquisitions Development Like-for-like portfolio Other Total capital expenditure 2020 £000 – – 8,861 – 8,861 2019 £000 – – 1,559 – 1,559 2018 £000 – – 3,553 – 3,553 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 Propertiesacquired Properties sold Offices Industrial Retail and Leisure Total 2020 £000 2019 £000 2020 £000 2019 £000 12,925 – 534 13,459 13,657 – 1,160 14,817 15,738 – 625 16,363 15,953 – 774 16,727 2020 £000 7,958 – – 7,958 2019 £000 9,398 – – 9,398 2020 £000 2019 £000 36,621 – 1,159 37,780 39,008 – 1,934 40,942 114 Picton Property Income Limited Annual Report 2020Annual Report and Accounts 2018 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: Cashandcashequivalents Total net borrowings Investment property valuation Loan to value 2020 £000 2019 £000 2018 £000 167,465 194,669 214,040 (23,567) (25,168) (31,510) 143,898 169,501 182,530 664,615 685,335 683,800 21.7% 24.7% 26.7% Cost ratio The cost ratio is based on historical information and provides shareholders with an indication of the likely level of cost of managing the Group. The cost ratio uses the annual recurring administrative expenses as a percentage of the average net asset value over the period. Administrative expenses Less: REIT conversion and restructuring costs Recurring administrative expenses Average net asset value over the year Cost ratio 2020 £000 2019 £000 2018 £000 5,563 5,842 5,566 – (215) (307) 5,563 5,627 5,259 511,868 497,304 470,252 1.1% 1.1% 1.1% 115 Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewPicton Property Income Limited Annual Report 2020Additional Information Property portfolio Properties valued in excess of £40 million ӱ Parkbury Industrial Estate, Radlett, Herts. Properties valued between £5 million and £10 million ӱ Units 1 & 2, Kettlestring Lane, York ӱ River Way Industrial Estate, River Way, Harlow, Essex ӱ Queens House, St Vincent Place, Glasgow Properties valued between £30 million and £40 million ӱ Angel Gate, City Road, London EC1 ӱ Easter Court, Europa Boulevard, Warrington ӱ Trident House, Victoria Street, St Albans, Herts. ӱ Stanford Building, Long Acre, London WC2 Properties valued between £20 million and £30 million ӱ Tower Wharf, Cheese Lane, Bristol ӱ 50 Farringdon Road, London EC1 ӱ Units 1 & 2, Western Industrial Estate, Downmill Road, Bracknell, Berks. ӱ Swiftbox, Haynes Way, Rugby, Warwickshire ӱ Angouleme Retail Park, George Street, Bury, Greater ӱ Express Business Park, Shipton Way, Rushden, Manchester Northants. ӱ Datapoint, Cody Road, London E16 ӱ Lyon Business Park, Barking, Essex ӱ Colchester Business Park, The Crescent, Colchester, Essex ӱ 30 & 50 Pembroke Court, Chatham, Kent Properties valued between £10 million and £20 million ӱ Metro, Salford Quays, Manchester ӱ Grantham Book Services, Trent Road, Grantham, Lincs. ӱ Sundon Business Park, Dencora Way, Luton, Beds. ӱ The Business Centre, Molly Millars Lane, Wokingham, Berks. ӱ Thistle Express, The Mall, Luton, Beds. ӱ Atlas House, Third Avenue, Marlow, Bucks. ӱ Sentinel House, Harvest Crescent, Fleet, Hants. ӱ Longcross Court, Newport Road, Cardiff ӱ Regency Wharf, Broad Street, Birmingham ӱ Crown & Mitre Complex, English Street, Carlisle, Cumbria Properties valued under £5 million ӱ Scots Corner, High Street, Kings Heath, Birmingham ӱ 53-57 Broadmead, Bristol ӱ Waterside House, Kirkstall Road, Leeds ӱ 62-68 Bridge Street, Peterborough ӱ 180 West George Street, Glasgow ӱ 78-80 Briggate, Leeds ӱ B&Q,QueensRoad,Sheffield ӱ Abbey Business Park, Mill Road, Newtownabbey, Belfast ӱ Nonsuch Industrial Estate, Kiln Lane, Epsom, Surrey ӱ 17-19 Fishergate, Preston, Lancs. ӱ 401 Grafton Gate East, Milton Keynes, Bucks. ӱ 72-78 Murraygate, Dundee ӱ Gloucester Retail Park, Eastern Avenue, Gloucester ӱ Magnet Trade Centre, 6 Kingstreet Lane, Winnersh, ӱ Parc Tawe North Retail Park, Link Road, Swansea ӱ Vigo 250, Birtley Road, Washington, Tyne and Wear Reading ӱ 7-9 Warren Street, Stockport ӱ 6-12 Parliament Row, Hanley, Staffs. ӱ 18-28VictoriaLane,Huddersfield,WestYorks. 116 Picton Property Income Limited Annual Report 2020Annual Report and Accounts 2018 Five year financial summary Income statements Net property income Administrative expenses Exceptional costs Netfinancecosts Income profit before tax Tax Income profit Property gains and losses Debt prepayment fee Profit 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) Allfiguresarein£millionunlessotherwisestated. 2020 2019 2018 2017 2016 33.6 (5.6) – 28.0 (8.2) 19.8 0.1 19.9 2.6 – 22.5 19.0 2020 38.3 (5.6) (0.2) 32.5 (9.1) 23.4 (0.5) 22.9 11.3 (3.2) 31.0 18.9 38.5 (5.3) (0.3) 32.9 (9.7) 23.2 (0.5) 22.7 41.5 – 64.2 18.5 42.3 (5.0) (0.2) 37.1 (10.8) 26.3 (0.5) 25.8 17.0 – 42.8 18.0 35.9 (4.4) – 31.5 (11.4) 20.1 (0.2) 19.9 44.9 – 64.8 17.8 2019 2018 2017 2016 654.5 (167.5) 22.3 676.1 (194.7) 18.0 670.7 (214.0) 30.7 615.2 (204.6) 31.3 646.0 (249.5) 20.6 509.3 499.4 487.4 441.9 417.1 93 93 4.1 3.5 105 89.0 93 93 5.7 3.5 122 89.2 90 90 11.9 3.4 122 84.3 82 82 7.9 3.3 144 83.8 77 77 12.0 3.3 112 69.8 117 Picton Property Income Limited Annual Report 2020Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewAdditional Information Glossary Annual rental income Contracted rent Cost ratio DTR Dividend cover Cash rents passing at the Balance Sheet date. The contracted gross rent receivable which becomes payable after all the occupier incentives in the letting have expired. Total operating expenses, excluding one-off costs, as a percentage of the average net asset value over the period. Disclosure and Transparency Rules, issued by the United Kingdom Listing Authority. EPRA earnings divided by dividends paid. Earnings per share (EPS) Profitfortheperiodattributabletoequityshareholdersdividedbytheaverage number of shares in issue during the period. EPC EPRA Estimated rental value (ERV) Fair value Fair value movement FRI lease Group IASB IFRS LIBOR Initial yield Lease incentives MSCI NAV EnergyPerformanceCertificate. European Public Real Estate Association, the industry body representing listed companies in the real estate sector. 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. 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. Anaccountingadjustmenttochangethebookvalueofanassetorliabilitytoitsfair value. A lease which imposes full repairing and insuring obligations on the tenant, relieving the landlord from all liability for the cost of insurance and repairs. Picton Property Income Limited and its subsidiaries. International Accounting Standards Board. International Financial Reporting Standards. London Interbank Offered Rate is a benchmark interest rate that indicates borrowing costs between banks. Annual cash rents receivable (net of head rents and the cost of vacancy), as a percentage of gross property value, as provided by the Group’s external valuers. Rents receivable following the expiry of rent-free periods are not included. Incentives offered to occupiers to enter into a lease. Typically this will be an initial rent-freeperiod,oracashcontributiontofit-out.Underaccountingrulesthevalueof the lease incentives is amortised through the Income Statement on a straight-line basis until the lease expiry. An organisation supplying independent market indices and portfolio benchmarks to the property industry. NetassetvalueistheequityattributabletoshareholderscalculatedunderIFRS. Over-rented Space where the passing rent is above the ERV. Property income return The ungeared income return of the portfolio as calculated by MSCI. Rack-rented Reversionary yield Total property return Total return Space where the passing rent is the same as the ERV. The estimated rental value as a percentage of the gross property value. Combined ungeared income and capital return from the property portfolio. 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 Weighted average interest rate 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. 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 Theaverageleasetermremainingtofirstbreak,orexpiry,acrosstheportfolio weighted by contracted rental income. 118 Picton Property Income Limited Annual Report 2020Annual Report and Accounts 2018 Financial calendar Annual results announced Annual results posted to shareholders June 2020 NAV announcement Annual General Meeting 2020 half-year results to be announced December 2020 NAV announcement Dividend payment dates 23June2020 July2020 July2020(provisional) November 2020 (provisional) November 2020 (provisional) January2021(provisional) August/November/February/May 119 Picton Property Income Limited Annual Report 2020Strategic ReportGovernanceFinancial StatementsAdditional InformationBusiness OverviewAdditional Information Shareholder information Directors Nicholas Thompson (Chairman) Mark Batten Maria Bentley Andrew Dewhirst Roger Lewis Michael Morris NicholasWiles(appointed1January2020, resigned 20 May 2020) Registered office PO Box 255 Trafalgar Court LesBanques St Peter Port Guernsey GY1 3QL Registered Number: 43673 UK office 28 Austin Friars London EC2N 2QQ T: 020 7011 9978 E:enquiries@picton.co.uk Administrator and Secretary Northern Trust International Fund Administration Services (Guernsey) Limited PO Box 255, Trafalgar Court LesBanques St Peter Port Guernsey GY1 3QL T: 01481 745001 E:team_picton@ntrs.com Registrar Computershare Investor Services (Guernsey) Limited NatWest House Le Truchot St Peter Port Guernsey GY1 1WD T: 0370 707 4040 E:info@computershare.co.je 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 LesBanques St Peter Port Guernsey GY1 4BZ Property valuers CBRE Limited Henrietta House Henrietta Place London W1G 0NB Tax adviser Deloitte LLP Hill House 1 Little New Street London EC4A 3TR Shareholder enquiries AllenquiriesrelatingtoholdingsinPictonPropertyIncome Limited,includingnotificationofchangeofaddress,queries regarding dividend/interest payments or the loss of a certificate,shouldbeaddressedtotheCompany’sregistrars. Website The Company has a corporate website which contains more detailed information about the Group www.picton.co.uk Corporate brokers JPMorganSecuritiesLimited 25 Bank Street LondonE145JP 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 Media Tavistock Communications 1 Cornhill London EC3V 3ND T: 020 7920 3150 120 Picton Property Income Limited Annual Report 2020Picton Property Income Limited 28 Austin Friars London EC2N 2QQ +44 (0) 207 011 9978 www.picton.co.uk P i c t o n P r o p e r t y I n c o m e L i m i t e d A n n u a l R e p o r t 2 0 2 0 P i c t o n P r o p e r t y I n c o m e L i m i t e d A n n u a l R e p o r t 2 0 2 0 

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