25
May 2023
PICTON PROPERTY INCOME LIMITED
(“Picton”, the “Company” or the
“Group”)
LEI: 213800RYE59K9CKR4497
Preliminary Annual Results
Picton announces its annual results for the year ending
31 March 2023.
Chair, Lena Wilson CBE,
commented:
“Despite the challenges of inflation and higher interest rates, we
have maintained both our EPRA earnings and our long-term track
record of outperformance. We are continuing to upgrade and adapt
our assets, ensuring they remain relevant and attractive to our
occupiers, providing income sustainability.
As a business, we are in a resilient position. We have a strong
capital structure with attractive long-term fixed rate debt. Our
portfolio offers significant income upside, and we are already
starting to see stability in asset values.”
Michael Morris, Chief
Executive of Picton, commented:
“For the tenth consecutive year we have outperformed the MSCI UK
Quarterly Property Index and our long-term track record shows upper
quartile performance since launch in 2005. We remain focused on our
portfolio performance, operational excellence and acting
responsibly, and have strengthened our team accordingly.
One of the key advantages of having a diversified approach and a
team with a proven track record of managing assets across sectors
through several iterations of the investment cycle, is that we can
draw on this experience during more challenging markets. This year,
we have made significant progress, delivering rental growth and
exploring and securing more valuable alternative uses at selected
office assets. We have remained focused on sustainability, with
further progress on our net zero pathway.
After a sharp and significant pricing correction in the property
market in 2022, valuations appear to be stabilising, supported by
resilience in the occupational markets. We will continue to explore
opportunities to maximise earnings, whether at an asset level by
capturing reversionary potential with our occupier focused approach
or through growth and the economies of scale that our internally
managed structure can deliver.”
Financial performance
–
Stable EPRA earnings of £21 million
–
Net assets of £548 million, or 100p per share
–
Dividends paid of £19 million, 4% higher than preceding
year
–
Dividend cover of 112%
Defensive capital structure
–
Loan to value of 27%
–
Weighted average interest rate of 3.8%
–
95% of drawn borrowings fixed with 2031/32 maturities
–
EPRA NDV £23 million higher than net assets, reflecting fair value
of debt
–
£38 million undrawn debt facilities
Resilient operational performance
–
Outperforming property portfolio relative to MSCI UK Quarterly
Property Index
–
Like-for-like increase in passing rent of 10% and 3% in contracted
rent
–
Like-for-like estimated rental value increase of 9%
–
Capturing rental growth through:
-
39 lettings, 25% ahead of March 2022
ERV
-
37 lease renewals or regears, 6% ahead of March 2022 ERV
-
20 rent reviews, 7% ahead of March
2022 ERV
–
Rent collection over 99% for the year
–
Occupancy of 91%
–
Three separate acquisitions totalling £21 million
Increased investment with sustainability
focus
–
£6 million invested into upgrading over 15 assets
–
Net zero carbon pathway progress, including installation of solar
arrays
–
100% compliance with 2023 EPC minimum standards
–
Improved EPC profile with 76% of portfolio rated A-C
–
Scope 1 and 2 emissions reduced by 24% compared to 2019
baseline
|
31 March 2023
|
31 March 2022
|
31 March 2021
|
Property valuation
|
£766m
|
£849m
|
£682m
|
Net assets
|
£548m
|
£657m
|
£528m
|
EPRA NTA per share
|
100p
|
120p
|
97p
|
|
Year ended
31 March 2023
|
Year ended
31 March 2022
|
Year ended
31 March 2021
|
(Loss)/profit for the year
|
£(90.0)m
|
£147.4m
|
£33.8m
|
EPRA earnings
|
£21.3m
|
£21.2m
|
£20.1m
|
Earnings per share
|
(16.5)p
|
27.0p
|
6.2p
|
EPRA earnings per share
|
3.9p
|
3.9p
|
3.7p
|
Total return
|
(13.9)%
|
28.3%
|
6.6%
|
Total shareholder return
|
(26.4)%
|
18.7%
|
0.0%
|
Total dividend per share
|
3.5p
|
3.4p
|
2.8p
|
Dividend cover
|
112%
|
115%
|
134%
|
This announcement contains inside information.
For further information:
Tavistock
James Verstringhe, 020 7920 3150,
james.verstringhe@tavistock.co.uk
Picton
Michael Morris, 020 7011 9980,
michael.morris@picton.co.uk
Note to Editors
Picton, established in 2005, is a UK REIT. It owns and actively
manages a £766 million diversified UK commercial property
portfolio, invested across 49 assets and with around 400 occupiers
(as at 31 March 2023). Through an
occupier focused, opportunity led approach to asset management,
Picton aims to be one of the consistently best performing
diversified UK focused property companies listed on the main market
of the London Stock Exchange.
For more information please visit: www.picton.co.uk
Chief Executive’s Review
Resilient business performance
Against a challenging economic backdrop, we have been able
to grow income through our proactive approach to asset management
and have successfully continued our long-term track record of
outperformance.
Following our record profit delivered a year ago, this period has
been defined by a significant change in macroeconomic conditions
evidenced by rising interest rates, inflationary pressures and
lower economic growth.
Driven in part by rising food and energy costs, a consequence of
the disruption caused by the war in Ukraine, UK inflation has been over 10% and in
response base rates have quadrupled since this time last year.
Asset pricing has been adversely impacted and commercial real
estate has been no exception.
In October 2022, the MSCI Monthly
Index recorded the worst month of capital decline on record and a
21% decline in values between July
2022 and February 2023. After
eight months and a much sharper pricing correction than during the
global financial crisis in 2008, markets finally appear to have
stabilised, and positive overall monthly movements were recorded in
the Index in March and April
2023.
In these conditions we have continued to focus on what we can
control, undertaking nearly 40% more asset management activity than
last year. This has enabled us to grow rental income and the
overall rental value of the portfolio.
With the majority of our debt being fixed, we are insulated from
rising financing costs and have been able to report EPRA earnings
of £21.3 million, marginally ahead of last year. During the year,
we paid dividends of £19.1 million, 4% higher than the preceding
year with strong dividend cover of 112%.
Performance
Our net assets are £548 million or 100
pence per share, a 16.6% reduction from a year ago,
principally driven by the revaluation of our property portfolio.
Our accounting total return
was -13.9% in the year to 31 March
2023.
Our total shareholder return, reflecting share price movement and
dividends paid, was -26.4%. As markets have adjusted to a higher
interest rate environment so too have share prices of UK REITs and
discounts have widened in the sector. However, it is encouraging to
see that these discounts have narrowed more recently as reported
asset values have stabilised.
Outperforming property portfolio
For the tenth consecutive year we have outperformed the MSCI UK
Quarterly Property Index. We have now delivered upper quartile
returns over three, five, ten years and since inception in 2005 and
we are ranked fifth out of 141 portfolios over the last ten
years.
At a portfolio level, we delivered a total property return of -8.7%
which reflects this marked change in the macroeconomic outlook.
Asset management activity drove rental growth and helped offset
some of the impact of rising yields.
Growing occupancy and income
We have seen a resilient occupational market, particularly in the
industrial sector, and we have been able to increase income and
rental growth through asset management and acquisition activity,
leading to a 3% increase in contracted rent, a 10% increase in
passing rent and a 9% increase in estimated rental value, all on a
like-for-like basis. Although we have been able to grow net income
there has also been a rise in property costs, primarily driven by
void costs, including service charges, business rates and
security.
Growing occupancy is a priority as the portfolio has significant
upside income potential with more than £5.3 million of additional
rent available from current vacancies. With the majority of our
vacancy in the office sector, we are pursuing change of use
strategies at a number of office assets to include residential,
student and other uses to help to reduce this void.
Concerns over the health of the UK economy and political
uncertainty have led to a more cautious approach from businesses
taking new space during the year. Occupancy at 31 March 2023 was 91%, lower than the previous
year but up from a low of 90% at September
2022.
Enhancing asset quality
We have invested £6 million into the portfolio this year, across
over 15 separate
projects. This is partly a reflection of the current occupancy
position but also reflects further upgrading of our assets
from a sustainability perspective.
We are now reviewing on a project-by-project basis whether it is
appropriate to install renewable energy, primarily in the form of
solar panels on refurbishments. Three projects on industrial assets
have already recently completed and whilst these incur additional
costs, in due course they will generate a modest supplementary
revenue stream, alongside rental income.
Operational excellence
There is significant work required to upgrade our assets as we seek
to reduce emissions from the portfolio and progress on our net zero
pathway. This year we have expanded the team and brought in a
dedicated Head of Building Surveying to oversee the increasing
number of refurbishment projects that we are undertaking. They are
now training to become an in-house EPC assessor, which will enable
us to better understand and improve our assets.
We have decided during the year to bring our company secretarial
arrangements in house and have recently appointed a dedicated
resource here in London. We will
be transitioning these arrangements in the coming months, following
this year’s Annual General Meeting.
We have received positive feedback from recent occupier engagement
surveys across our office and industrial assets and have started to
roll out occupier apps at a number of our multi-let office assets
to improve engagement.
Rent collection for the year stood at over 99%.
Capital structure
We are well placed in terms of our debt structure, with over 95% of
borrowing fixed until 2031/32.
Our weighted average interest rate is 3.8% per annum, well below
current market rates and as our longer-term facilities are fixed
directly with our lenders, there is no mark-to-market pricing of
our debt in our reported net asset value. This is reflected in our
EPRA NDV being £23 million higher than our net asset
value.
Our loan to value ratio at the year-end was 27% and we have
significant headroom against lending covenants on all our
facilities.
In the current environment, in common with the wider real estate
market, and with the share price trading at a discount to net asset
value, it has not been possible to raise new equity.
Growth
Our internalised management model means that our costs are not
linked to net asset value, so there is significant potential for
earnings accretion that can be delivered through growth.
As discounts across the sector persist, the case for consolidation
and the creation of larger diversified REITs remains compelling. We
continue to believe that the combination of cost savings and
earnings growth through economies of scale alongside greater
relevance to an investor audience would be well received and there
is already evidence of this being the case.
We have proactively considered opportunities during the year and we
will continue to be an advocate for consolidation where it is
beneficial to our shareholders.
At a portfolio level we made three acquisitions totalling £21
million during the year. The two principal acquisitions were both
mixed-use assets with retail/leisure at the ground floor and
offices above. One is fully leased and at the other we have applied
for planning consent for residential conversion in respect of some
of the vacant space.
Acting responsibly
As part of our further commitment to integrate sustainability into
the business this year, we have included our sustainability
reporting within our annual report rather than producing a separate
report.
The team is increasing its efforts to ensure our assets are
relevant and in demand in a net zero future. This year we have set
up a Climate Action Working Group covering all areas of the
business, ensuring that there is a cohesive approach to our net
zero commitments, mitigating the risks of climate change and
adapting our portfolio to reduce emissions.
Specifically, we have been able to reduce our Scope 1 and 2
emissions by 24% compared to our 2019 baseline year.
We have improved the overall EPC ratings of our assets, with 100%
of the units within the portfolio being compliant with 2023 EPC
minimum standards and 76% by rental value have an EPC rating
A-C.
We have started to incorporate on-site renewable energy across
larger refurbishments and provide greater engagement with occupiers
on this issue, further embedding sustainability into our day-to-day
activities.
Although progress is encouraging, we recognise that we must
continue to maintain our focus to meet our 2040 net zero
commitment.
Outlook
Despite macroeconomic conditions, the economy and indeed occupier
markets have remained resilient. Equally, the interest rate
environment, both in terms of short-term rates and longer-term gilt
yields, needs to stabilise and be more supportive, which may be
possible when inflationary pressures start to subside.
As we have seen this year, whilst occupational demand and tight
supply have increased rents in some markets, rising costs have also
impacted construction. This, combined with rising yields in the
last few months, has started to impact development viability and is
likely to be a constraint on supply and support rental
levels.
Our predominately fixed rate debt with a long maturity profile will
provide earnings stability during this more challenging period. Our
key focus remains on growing net income further and gaining
efficiencies through growth.
Michael
Morris
Chief Executive
24 May 2023
Our Marketplace
Signs of economic stability
Economic backdrop
After a tumultuous year, there are signs that the economic backdrop
is beginning to stabilise.
Geopolitical tension, the war in Ukraine, rising inflation, the cost of living
crisis and the fall-out from the political events and Autumn
mini-budget caused unprecedented volatility, high levels of market
stress and economic headwinds.
Following the end of the pandemic and the war in Ukraine’s impact
on energy and commodity prices and supply chains, CPI inflation
rose to a peak of 11.1% in October
2022.
As a shock reaction to the Autumn mini-budget, ten-year Government
bond yields increased by approximately 200 basis points in a month
to reach 4.5% in late September and the value of sterling fell to
historic lows. The Bank of England’s response was a series of
interest rate hikes, with the base rate rising from 1.75% in
August 2022 to 4.5% in May 2023.
The ramifications of the increased cost of debt and rise in the
risk-free rate have been multifaceted, from the impact on pensions,
investment markets and property yields, to house prices, retail
sales and consumer and business confidence.
Households have been impacted by the cost of living crisis, soaring
fuel and energy bills, lower real incomes and rising debt and
mortgage costs. Retail sales volumes did rise by 0.6% in the three
months to March 2023, however this is
the first rolling three-month increase since August 2021. It is hoped that increased
post-pandemic tourism will go some way to compensate for weak
domestic consumer demand in 2023.
The Consumer Price Index (CPI) rose by 8.7% in the 12 months to
April 2023. This is the first month
that consumer price inflation has been below 10% since August 2022. As inflationary pressures start to
reduce, households are expected to increase spending power, helping
to drive the economic recovery.
In terms of business confidence, the S&P Global/CIPS UK
Composite PMI saw the longest period of decline since the Global
Financial Crisis of 2007/08, experiencing six consecutive months of
contraction to January 2023. This is
due largely to the elevated cost of materials and labour putting
pressure on profit margins, and higher financing costs hampering
expansion plans.
A sharp rebound began in February, and the latest data for April
shows the Composite PMI was 54.9.
Although
job vacancies have declined from their recent peak, at 1.08
million, they remain elevated.
The strong labour market has driven up average pay; however, in
real terms, wages are not keeping up with inflation. At 3.9%,
unemployment is very low by historic standards, having risen only
slightly from a 50-year low of 3.5% in August 2022.
The economic backdrop is now showing positive signs of
stabilisation and even recovery. GDP growth has surprised on the
upside, with the UK narrowly avoiding a recession in 2022. UK GDP
is estimated to have increased 0.1% in the three months to
March 2023.
Inflation has been more stubborn than expected, owing largely to
persistent growth in food prices. There have been improvements in
supply driven inflation, as some of the production difficulties and
supply chain issues faced by businesses have started to ease,
leading to a fall in the price of imported goods. In addition,
higher interest rates and the fall in households’ disposable
incomes have dampened demand driven inflation and fuel prices have
fallen significantly.
Interest rate expectations have moderated compared to what was
predicted in late 2022. Reduced uncertainty and falling inflation
have allowed bond yields to stabilise, with ten-year Government
bonds now at around 4%.
UK property market
Due to the sharp rise in the risk-free rate and cost of debt, the
MSCI UK Quarterly Property Index All Property equivalent yield
moved out by 85 basis points in the three months to December 2022. MSCI reported capital growth of
-12.6% for this period, the fastest quarterly correction since
December 2008 at the height of the
Global Financial Crisis. The situation appears to now be
stabilising and the three months to March
2023 saw capital growth of -1.0%.
Looking at the year to March 2023,
the MSCI UK Quarterly Property Index reported an All Property total
return of -12.6%, comprising -16.1% capital growth and 4.1% income
return. This is in sharp contrast to the previous year; the total
return for the 12 months to March
2022 was 19.5%.
Despite the tribulations of the investment market, the occupier
market saw a more encouraging performance, and All Property ERV
growth for the year to March 2023 was
3.5%. This compares to 3.1% ERV growth for the year to March 2022.
Following an extraordinarily strong year of capital growth to
March 2022, the low yielding
industrial sector was disproportionately affected by the recent
market correction. The MSCI All Industrial total return for the
year to March 2023 was -20.4%,
comprising capital growth of -23.2% and income return of 3.6%.
Capital growth ranged from -18.7% to -27.1% between
sub-sectors.
On a more positive note, due to ongoing supply constraints and
healthy occupier demand, the industrial sector achieved strong
rental growth for the year to March
2023 of 8.6%, ranging from 10.0% to 7.2% between
sub-sectors.
In addition to the recent rise in yields experienced by all
sectors, the office sector is still undergoing a structural change
reflecting post-pandemic working patterns and
sustainability-related costs. There is a growing trend of
polarisation between prime, energy efficient space and secondary
office stock and locations. MSCI reported an All Office total
return of -12.3% for the year to March
2023, comprising -15.3% capital growth and 3.6% income
return. Capital growth ranged from -10.3% to -22.7% between
sub-sectors. ERV growth was 1.6%, ranging from 2.8% to 0.6% between
sub-sectors.
Following a prolonged phase of repricing, the retail sector
suffered less of an impact from the recent correction than others.
The MSCI All Retail total return for the year to March 2023 was -7.9%, comprising capital growth
of -12.7% and income return of 5.4%. Capital growth ranged from
-5.6% to -17.8% between sub-sectors. The wave of retailer
liquidations and CVAs seems to have abated, and arguably retailers
that survived the pandemic years should be better placed to weather
the storm of weaker consumer demand owing to the cost of living
crisis. Following four years of decline, All Retail ERV growth
turned positive at 0.4%, ranging from 4.4% to -2.1% between
sub-sectors.
According to analysis from Property Data, the total investment
volume for the year to March 2023 was
£50.6 billion, a 31% decrease on the year to March 2022. The slowdown in investment activity
is only evident during the six months to March 2023, which is 58% down on the same period
for the previous year.
Investors have been waiting for greater stability in the
macroenvironment, which has more recently been affected by concerns
within the banking sector. The five-year swap rate currently stands
at around 4%, placing the cost of debt just below the MSCI All
Property equivalent yield.
More recent data from the MSCI UK Monthly Property Index shows that
property values have begun to stabilise with continued positive
capital growth in the industrial and retail sectors in
April.
Portfolio Review
Industrial weighting
|
57%
|
South East
|
41%
|
Rest of UK
|
16%
|
Office weighting
|
32%
|
Central London
|
13%
|
Rest of UK
|
10%
|
South East
|
9%
|
Retail and Leisure weighting
|
11%
|
Retail Warehouse
|
7%
|
High Street Rest of UK
|
2%
|
Leisure
|
2%
|
Continued proactive management of our
portfolio
The year has been characterised by significant active
management activity, set against headwinds of repricing and
occupier caution driven by a rising
interest rate environment.
We have continued to actively manage the portfolio, increasing
passing rent and estimated rental value (ERV) by working with our
occupiers, investing into our assets, and advancing our
sustainability priorities.
The overall portfolio passing rent is £43.3 million, an increase
from the prior year of £4.7 million. On a like-for-like basis this
increased by 10% and the contracted rent, which is the gross rent
receivable after lease incentives, increased by £1.1 million or
3%.
The March 2023 ERV of the portfolio
is £55.8 million, a 9% increase on the prior year on a
like-for-like basis. We had ERV growth of 18% in the industrial
sector proven by new lettings and active management, whilst the
office sector was up 2% and the retail and leisure sector reduced
by 1%.
We have been able to offset some of the valuation re-rating through
the completion of over 100 asset management
transactions.
Inflationary pressures and rising energy costs have impacted all
sectors but particularly the office sector, where service charges
are highest.
Occupational demand remains resilient in the industrial sector and
in the retail sector it has stabilised for good quality real
estate, with the business rates’ revaluation acting to reduce
occupational costs. The office sector is still going through a
period of transition following the pandemic, with a flight to
quality and many occupiers still uncertain about working patterns
and operating on a more flexible basis. We are adapting our
portfolio and exploring alternative uses as we position our
portfolio for the medium-term.
Our investment into assets has helped us to retain and secure new
occupiers while improving our EPC ratings, with our refurbishment
guidelines
specifying a minimum B rating for most projects.
We continue to be occupier focused and this approach remains key to
our active management of the portfolio. This philosophy of working
in collaboration with our occupiers is a significant contributor to
our long-term track record of outperformance.
Portfolio overview
Performance
Our portfolio comprises 49 assets, with around 400 occupiers, and
is valued at £766 million with a net initial yield of 5.0% and a
reversionary yield of 6.7%. The average lot size of the portfolio
is £15.6 million as at 31 March
2023.
Our asset allocation, with 57% in industrial, 32% in office and 11%
in retail and leisure, combined with transactional activity, has
enabled us to materially outperform the MSCI UK Quarterly Property
Index over the year.
Overall, the like-for-like valuation decreased by 12%, after a 21%
increase in the prior year. This compares with the MSCI UK
Quarterly Property Index recording a capital value decrease of 16%
over the period.
We believe that the portfolio remains well placed in respect of our
overall sector allocations.
Where demand is weaker, we are exploring higher value alternative
use strategies.
Industrial
The recent economic turmoil has had a direct impact on property
yields. Industrial property is the lowest yielding sector, and
these yields have risen to maintain the margin above the risk-free
rate.
Conversely, occupational demand in the sector remains resilient and
we are capturing rental growth. A lack of supply, especially of
multi-let estates, coupled with increasing build costs, means that
occupiers have restricted choice when looking for a unit, which has
driven strong rental growth across the country.
On a like-for-like basis, capital values decreased by 14%, or £70.7
million, and some of the significant gains over the past two years
have been eroded. The passing rent increased by 13% and the ERV
grew by 18%, or £4.1 million, on a like-for-like basis.
We remain committed to the sector over the medium-term, primarily
due to the strength of occupational demand, lack of supply and low
capital expenditure requirements.
Our UK-wide distribution warehouse assets total 1.2 million sq ft
in five units, which are fully leased with a weighted average
unexpired lease term of 4.4 years. Two of the units have rent
reviews outstanding and we expect to secure significant
uplifts.
The multi-let estates, of which 89% by value are in the South East,
total 2.1 million sq ft and we only have eight vacant units out of
161, with one under offer and four currently undergoing
refurbishment.
The industrial portfolio currently has £7.6 million of reversionary
income potential, with £1.3 million relating to the void
units.
Office
In respect of the office sector, it remains a story of Grade A
versus everything else with the latter proving harder to lease.
There is now a noticeably widening yield gap aligned to quality and
increasing capital expenditure required for ongoing upgrades,
including sustainability improvements.
The investment into our portfolio over the past few years means
most of our buildings are good quality, future-proofed and
increasingly sustainable with a focus on health and wellbeing – all
of which are attractive attributes to occupiers.
Several of our properties have alternative use potential, and we
have progressed this on three buildings with existing vacancies,
further detailed within the portfolio activity section.
On a like-for-like basis, capital values decreased by 10%, or £24.4
million. The passing rent increased by 6% and the ERV grew by 2%,
or £0.3 million.
The office portfolio currently has £5.6 million of reversionary
income potential, with £3.6 million relating to the void
units.
Retail and Leisure
The retail and leisure sector was already high yielding and has
therefore been less affected by outward yield movement. The cost of
living crisis is predicted to further affect the sector; however,
our fully leased retail warehouse parks are underpinned by value
led retailers.
The retail warehouse assets, which make up 7% of the total
portfolio, total 0.4 million sq ft in 19 units across four parks
and are fully leased, with a weighted average unexpired lease term
of 5.2 years.
Our high yielding high street portfolio, which makes up 2% of the
total portfolio, is fully leased with the exception of one unit in
Carlisle which is under offer. We
see opportunities in the sector for prime high street locations off
rebased rents.
On a like-for-like basis, capital values decreased by 8%, or £7.1
million. The passing rent increased by 9% and the ERV declined by
1%, or £0.1 million.
The retail and leisure portfolio has negative reversion of £0.7
million per annum, primarily relating to the over renting of the
high street retail assets.
Portfolio activity
Proactive management
It has been a very active year in respect of asset management
transactions.
We completed:
-
39 lettings or agreements to lease, 25% ahead of ERV and securing a
new contracted rent of £2.3 million
-
37 lease renewals or regears, 6% ahead of ERV, securing an uplift
in contracted rent of £0.7 million
-
20 rent reviews, 7% ahead of ERV, securing an uplift in passing
rent of £0.7 million
-
Three lease variations to remove occupier break options, securing
£0.4 million of income
-
11 lease surrenders to facilitate active management
Leasing and occupancy
Occupancy has decreased during the year from 93% to 91% with a
total void ERV of £5.3 million, which compares to the MSCI UK
Quarterly Property Index of 92% as at 31
March 2023.
Our industrial portfolio is 95% leased with demand remaining high
across the country. We have only eight vacant industrial units,
four of which are being refurbished.
The office portfolio occupancy is 83%. Our occupancy has reduced
primarily due to three office properties where we are working
through potential changes of use to residential and student
accommodation. Excluding these three properties, the office
occupancy rate would increase to 91%.
During the year our SwiftSpace offering has helped to grow
occupancy in smaller units, with nearly a quarter of lettings by
number being SwiftSpace lettings across four properties.
In terms of retail and leisure, occupancy is 94%. The retail
warehouse portfolio is
fully leased, and we have one vacant high street shop, which is
under offer. At Regency Wharf, Birmingham, we have a small office element to
lease.
Our largest voids are at:
-
Angel Gate, London – accounting for 18% of the total
portfolio void. We are in the process of securing change of use at
the property to residential in respect of vacant units.
-
Charlotte Terrace, London – accounting for 12% of the total void.
We recently acquired this property and have submitted a planning
application for change of use of part of the space to
residential.
-
Longcross, Cardiff – accounting for 9% of the total void. We are
working through options for alternative uses.
Retention
Over the year, total ERV at risk due to lease expiries or break
options totalled £5.5 million, in line with the year to
March 2022.
We retained 67% of total ERV at risk in the year to March 2023. Of the ERV that was not retained, a
further 8% or £0.5 million was re-let to new occupiers during the
year.
In addition, a further £3.4 million of ERV was retained by either
removing future breaks or extending future lease expiries ahead of
the lease event.
Portfolio investment
Refurbishment upgrades
Over the year we have invested £6.1 million into the portfolio
across over 15 projects, with the top five projects accounting for
65% of the spend.
These have all been aimed at enhancing space to attract occupiers,
improve sustainability credentials and grow income. All works
undertaken are in line with our refurbishment guidelines, outlining
best industry
practice, which includes where appropriate, the removal of natural
gas from buildings, installation of solar panels and insulation
upgrades in line with our net zero carbon pathway.
We are continually focused on future-proofing assets from a
sustainability perspective, which has resulted in an improvement in
our
EPC ratings with 76% of our properties (by rental value) now rated
C and above.
Investment activity
We acquired two new properties during the year, as well as the
acquisition of a further unit at an existing holding.
109-117 High Street, Cheltenham – £5.3 million
This mixed-use property comprises 7,700 sq ft of ground floor
retail space with 11,450 sq ft of office space over two upper
floors, and is located in Cheltenham’s pedestrianised town centre,
adjacent to John Lewis.
Comprehensively refurbished in 2020, the property has good
environmental credentials including EPC ratings of B on both the
office and retail elements and no natural gas.
On purchase it was leased to four occupiers, with an average lease
length of 12 years to expiry and eight years to break. We have
since surrendered one of the retail leases and re-let the unit to a
national retailer, securing a ten-year lease, subject to
break.
The current contracted rent is £0.4 million, equating to £21 per sq
ft, with most leases containing fixed rental uplifts that will
increase income to £0.5 million per annum by 2026.
The purchase price reflected a net initial yield of 7.2%, rising to
9.0% by 2026. The low capital value of £277 per sq ft is below its
estimated replacement cost.
Charlotte Terrace,
Hammersmith Road, W14 – £13.7 million
This mixed-use asset comprises four adjoining buildings, which
total 28,500 sq ft of office space and 4,400 sq ft of retail space,
arranged over five floors. The property was redeveloped behind the
façade in 1990 and is Grade II listed, meaning there are no
business rates payable on void units.
The property is located close to Olympia, which is currently undergoing a £1
billion redevelopment to deliver a new creative district, with a
new theatre, entertainment venue, hotel, office, retail and leisure
space, which will enhance the surrounding area.
Since purchase we have leased a retail unit and an office suite. We
are in the process of relocating an office occupier, to secure
vacant possession of one of the office buildings so we can seek a
change of use to residential and the planning application for this
has been submitted.
The purchase price reflects a net initial yield of 3.3%, rising to
over 8% once fully let and reflecting a low capital value of £417
per sq ft, which is below its estimated replacement cost.
Residential values in the area are approximately £1,000 per sq
ft.
Unit 7V Madleaze Trading Estate, Gloucester – £0.4 million
We acquired another unit on this industrial estate with vacant
possession, and leased the space to an existing occupier. The
acquisition helps to consolidate our ownership.
In addition, we acquired the freehold of our Rushden distribution
asset for nil consideration, having previously owned a long
leasehold interest.
Looking ahead
Outlook
The sharp yield correction in 2022 has caused a repricing of
commercial property, but we are now seeing values stabilise,
creating potential opportunities in some sectors.
The quality of our portfolio, which has benefited from significant
investment in respect of refurbishments and sustainability upgrades
in recent years, means that we have started to future-proof
properties to ensure that they are attractive to occupiers. Our net
zero carbon pathway is in place, and we will continue to invest in
the improvement of our buildings.
Our occupiers remain our key focus and we have long-standing
relationships with many of them, which enable us to work with and
assist businesses as they grow and contract.
As at 31 March 2023 the portfolio had
£12.5 million of reversionary income potential; £5.3 million from
letting the vacant space, £4.2 million from expiring rent-free
periods or stepped rents and £3.0 million where the rent is below
market level. This is significant and is our focus for the coming
year.
Demand for our industrial properties continues to be resilient as
proven by our high occupancy and growing ERVs. With this sector
accounting for 57% of the total portfolio by value, we believe it
will contribute to our performance off rebased values that are now
stable, with supply constraints and high building costs likely to
lead to further rental growth.
Many of our office buildings have had investment into them in
recent years, to upgrade space, create occupier amenities and
improve their sustainability credentials. Our best-in-class offices
are attracting and retaining occupiers; however, where we do have
higher vacancy rates, we are exploring higher value alternative
uses, including residential conversion at two central London properties. The sector is going through
an adjustment, and we will look to reduce exposure through change
of use and selective sales.
The retail and leisure sector has recovered following the pandemic,
but there are still headwinds in respect of an oversupply of floor
space and a cost of living crisis impacting disposable income. By
virtue of the marked repricing in this sector in prior years we
believe there are opportunities in the sector for selective
acquisitions.
The portfolio is well placed and of a high quality, enabling us to
maintain and enhance income through our proven occupier focused
approach. Looking forward, our focus is on growing occupancy and
improving the overall portfolio quality through selective
disposals, reinvestment and refurbishments to improve the
sustainability credentials of our assets.
Jay
Cable
Head of Asset Management
Top ten assets
Site
|
Property type
|
Approximate area (sq ft)
|
Capital value (£m)
|
No. of occupiers
|
Occupancy rate (%)
|
EPC rating
|
Parkbury Industrial Estate, Radlett
|
Industrial
|
343,700
|
>100
|
21
|
98
|
A-D
|
River Way Industrial Estate, Harlow
|
Industrial
|
454,800
|
50-75
|
10
|
100
|
A-D
|
Angel Gate, City Road, London EC1
|
Office
|
64,600
|
30-50
|
16
|
56
|
B-E
|
Stanford Building, London WC2
|
Office
|
20,100
|
30-50
|
5
|
100
|
B-D
|
Shipton Way, Rushden
|
Industrial
|
312,900
|
30-50
|
1
|
100
|
C
|
Datapoint, Cody Road, London E16
|
Industrial
|
55,100
|
20-30
|
6
|
100
|
B-C
|
Lyon Business Park, Barking
|
Industrial
|
99,400
|
20-30
|
7
|
76
|
B-E
|
Tower Wharf, Cheese Lane, Bristol
|
Office
|
70,600
|
20-30
|
6
|
90
|
B-D
|
50 Farringdon Road,
London EC1
|
Office
|
31,300
|
20-30
|
4
|
100
|
B
|
Sundon Business Park, Dencora Way, Luton
|
Industrial
|
127,800
|
20-30
|
11
|
93
|
B-D
|
Top ten occupiers
The largest occupiers, based as a percentage of contracted rent, as
at 31 March 2023, are as
follows:
Occupier
|
Contracted rent (£m)
|
%
|
Public sector
|
2.3
|
4.8
|
Whistl UK Limited
|
1.6
|
3.5
|
B&Q Plc
|
1.2
|
2.6
|
The Random House Group Limited
|
1.2
|
2.5
|
Snorkel Europe Limited
|
1.2
|
2.5
|
XMA Limited
|
1.0
|
2.1
|
Portal Chatham LLP
|
1.0
|
2.0
|
DHL Supply Chain Limited
|
0.8
|
1.7
|
4 Aces Limited
|
0.7
|
1.5
|
Hi-Speed Services Limited
|
0.7
|
1.5
|
Total
|
11.7
|
24.7
|
Longevity of income
As at 31 March 2023, expressed as a
percentage of contracted rent, the average length of leases to
first termination was 4.6 years (2022: 4.8 years). This is
summarised as follows:
|
%
|
0 to 1 year
|
12.9
|
1 to 2 years
|
14.2
|
2 to 3 years
|
21.7
|
3 to 4 years
|
12.5
|
4 to 5 years
|
11.5
|
5 to 10 years
|
18.4
|
10 to 15 years
|
7.6
|
15 years or more
|
1.2
|
Total
|
100
|
Financial Review
A year marked by resilient income, despite valuation
movements
The early part of this financial year saw the UK economy continue
to grow, and at 30 June 2022 our net
asset value reached £670 million. However, the September
mini-budget caused a significant shock to UK markets, with rising
interest rates and bond yields impacting commercial property
pricing. The negative capital growth between September and December
was the largest ever quarterly movement recorded by
MSCI.
Our overall loss for the year was £90.0 million, comprising a
negative valuation movement of £111.3 million and EPRA earnings of
£21.3 million. This year, we have seen the reversal of some of the
record valuation gains recorded in 2021/22.
Our EPRA earnings, comprising the operating results and net
interest expense were £21.3 million for the year, a small increase
over the equivalent figure last year. As discussed below, rental
income rose by 7.1% compared to 2022; however, this increase was
largely offset by higher property operating and void
costs.
Commercial property values fell in the latter half of 2022 as
interest rates and bond yields rose rapidly. Although we have seen
valuation movements moderating in the first quarter of 2023,
further interest rate rises may still have an adverse impact this
year.
Based on these results our total return for the year was -13.9%,
compared to 28.3% for the year to 31 March
2022.
Net asset value
The net assets of the Group at 31 March
2023 were £547.6 million, or 100
pence per share, which was a fall of 16.7% over the year.
The chart below shows the components of this decrease.
|
£m
|
March 2022 net asset value
|
657.1
|
EPRA earnings
|
21.3
|
Valuation movement
|
(111.3)
|
Share-based awards
|
0.7
|
Purchase of shares
|
(1.1)
|
Dividends paid
|
(19.1)
|
March 2023 net asset value
|
547.6
|
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).
|
2023
£m
|
2022
£m
|
2021
£m
|
Net assets – IFRS and EPRA net tangible asset value
|
547.6
|
657.1
|
528.2
|
Fair value of debt
|
22.8
|
(6.7)
|
(21.0)
|
EPRA net disposal value
|
570.4
|
650.4
|
507.2
|
Net asset value per share (pence)
|
100
|
120
|
97
|
EPRA net tangible asset value per share (pence)
|
100
|
120
|
97
|
EPRA net disposal value per share (pence)
|
105
|
119
|
93
|
Income statement
The result for the year is dominated by the adverse valuation
movement at the end of 2022 as property yields moved out. However,
EPRA earnings were stable, with increased rental income largely
offset by increased property costs.
Total revenue from the property portfolio for the year was £51.8
million, up from £46.5 million last year. Rental income has
increased by 7.1% compared to 2022, as a result of the impact of
new acquisitions over the full year, as well as rental
growth.
Property operating and void costs have shown a marked increase this
year, from £4.9 million to £7.1 million. This is partly the result
of the higher vacancy rate, but also demonstrates the impact of
inflation and higher costs over the past year. Administrative
expenses, however, only increased by a small amount, £0.2 million,
or 3.5%, to a little under £6.0 million. Staff costs were broadly
in line with the previous year, while some one-off costs incurred
this year increased other corporate expenses.
Interest and other finance costs have increased from £8.5 million
to £9.0 million. This is partly due to the additional interest on
the increased Canada Life facility, which completed in March 2022. This transaction also extended the
facility to 2031, reduced the interest rate to 3.25% and enabled us
to repay most of the revolving credit facility.
95% of our borrowings are at fixed rates and do not mature until
2031/32. This year we have drawn down further under our revolving
credit facility to finance acquisitions. Although only a relatively
small element of our total borrowings, the interest rate on our
revolving credit facility has increased from 2.3% in March 2022 to its current rate of
5.8%.
The negative capital movement on the portfolio was £111.3 million
for the year, including the movement on owner-occupied property.
The industrial sector saw the largest movement, especially where
yields were lowest.
Dividends
This year we have maintained our quarterly dividend rate of
0.875 pence per share, equating to an
annual rate of 3.5 pence per share.
Total dividends paid out were £19.1 million, an increase of 3.6%
compared to 2022. Dividend cover for the year remained healthy at
112%.
Investment properties
The appraised value of our investment property portfolio was £766.2
million at 31 March 2023, lower than
the £849.3 million reported a year ago. We have made acquisitions
this year, for a total consideration of £20.6 million, including
costs. These acquisitions are discussed in more detail in the
Portfolio Review section. Also this year, we have invested £6.1
million of capital expenditure in the portfolio upgrading a number
of assets, including Madleaze Trading Estate, Gloucester, Colchester Business Park, Lyon
Business Park, Essex and Metro,
Manchester.
In line with last year, the value of the floor that we occupy at
Stanford Building, London, has
been excluded from the value of Investment Properties and included
separately with Property, Plant and Equipment. Any capital
movements arising from the revaluation of this element of the
property are shown within Other Comprehensive Income.
At 31 March 2023 the portfolio
comprised 49 assets, with an average lot size of £15.6
million.
Borrowings
Total borrowings are now £224.5 million at 31 March 2023, with the loan to value ratio at
26.7%. The weighted average interest rate on our borrowings is
3.8%, while the average loan duration is now 8.4 years.
Our loan facility with Aviva reduced by the regular amortisation,
£1.4 million in the year.
The Group remained fully compliant with its loan covenants
throughout the year. At 31 March
2023, we had £11.9 million drawn under the revolving credit
facility, which matures in 2025. This year we drew down £7.0
million under this facility, largely to fund the acquisition of the
new Cheltenham asset, as well as
for ongoing capital expenditure projects.
The fair value of our drawn borrowings at 31
March 2023 was £201.7 million, lower than the book value by
some £22.8 million. As a result, our EPRA NDV asset value was
£570.4 million at 31 March 2023,
higher than the reported net assets under IFRS. Both lending
margins and gilt yields are currently higher relative to the rates
set on our facilities.
A summary of our borrowings is set out in the table
below.
|
2023
|
2022
|
2021
|
Fixed rate loans (£m)
|
212.6
|
213.9
|
166.2
|
Drawn revolving facility (£m)
|
11.9
|
4.9
|
–
|
Total borrowings (£m)
|
224.5
|
218.8
|
166.2
|
Borrowings net of cash (£m)
|
204.4
|
180.3
|
142.8
|
Undrawn facilities (£m)
|
38.1
|
45.1
|
50.0
|
Loan to value ratio (%)
|
26.7
|
21.2
|
20.9
|
Weighted average interest rate (%)
|
3.8
|
3.7
|
4.2
|
Average duration (years)
|
8.4
|
9.6
|
8.9
|
Cash flow and liquidity
Our cash outflow for the year was £18.5 million. The cash flow from
operating activities this year is £23.0 million, some 15% higher
than the previous year. We invested £26.8 million during the year;
£20.6 million being the consideration paid for two principal
acquisitions, as well as £6.1 million of capital expenditure.
Overall borrowings increased by £5.6 million. Dividends paid
increased to £19.1 million. Our cash balance at the year-end stood
at £20.1 million.
Share capital
No new ordinary shares were issued during the year.
The Company’s Employee Benefit Trust acquired a further 1,250,000
shares, at a cost of £1.1 million, or 90
pence per share, during the year. This was to satisfy the
future vesting of awards made under the Long-term Incentive Plan
and Deferred Bonus Plan, and now holds a total of 2,388,694 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
24 May 2023
Principal Risks
Managing risks
The Board recognises that there are risks and uncertainties
that could have a material impact on the Group’s
results.
Risk management provides a structured approach to the
decision-making process such that the identified risks can be
mitigated and the uncertainty surrounding expected outcomes can be
reduced. The Board has developed a Risk Management Policy which it
reviews on a regular basis. The Audit and Risk Committee carries
out a detailed assessment of all risks, whether investment or
operational, and considers the effectiveness of the risk management
and internal control processes. The Executive Committee is
responsible for implementing strategy within the agreed Risk
Management Policy, as well as identifying and assessing risk in
day-to-day operational matters. The Management Committees support
the Executive Committee in these matters. The small number of
employees and relatively flat management structure allow risks to
be quickly identified and assessed. The Group’s risk appetite will
vary over time and during the course of the property cycle. The
principal risks – those with potential to have a material impact on
performance and results – are set out here, together with
mitigating controls.
The UK Corporate Governance Code requires the Board to make a
Viability Statement. This considers the Company’s current position
and principal and emerging 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.
Climate-related risks
Last year the Board carried out an assessment of the physical and
transition risks most relevant to the business, and undertook a
review of its procedures for identifying and managing those risks.
The recommendations arising from the review have been implemented
this year. The mitigating actions that have been carried out in
respect of climate-related risks are described in the Task Force on
Climate-related Financial Disclosures section of the report,
together with more detail on the risk assessment and modelling
undertaken.
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. All emerging risks are reviewed as part of the
ongoing risk management process.
The principal emerging risks have been identified to be:
-
high inflation remaining in the UK economy, causing further
interest rate rises and an adverse impact on asset
values;
-
further political uncertainty in the lead-up to a general election
in the UK;
-
the increasing importance of sustainability issues to all
stakeholders;
-
changing demand for commercial space, as businesses reassess their
requirements in the light of more flexible working, advances in AI
technology and employee wellbeing;
-
changes in regulations are increasing environmental standards and
property owners must keep pace to avoid the risk of stranded
assets; and
-
cyber security, with an increased prevalence of ransomware attacks
and greater vulnerability of systems with home working.
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.
|
Mitigation
The Board considers economic conditions and market uncertainty when
setting strategy, considering the financial strategy of the
business and in making investment decisions.
|
Commentary
Economic uncertainty has risen over the year, although is less than
in the immediate aftermath of the September mini-budget. Interest
rates have risen significantly and inflation remains at a high
level. The cost of living crisis is still evident and industrial
disputes, particularly in the public sector, are causing further
disruption. The UK economy is not forecast to grow by any
meaningful amount over the next year. The war in Ukraine continues
to impact global politics and economics.
|
Risk trend
Increasing
|
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.
|
Mitigation
The Board reviews the Group’s strategy and business objectives on a
regular basis and considers whether any change is needed, in light
of current and forecast market conditions.
|
Commentary
Economic factors have caused more volatility in the property market
this year. Interest rates and bond yields have risen, with a
consequent adverse impact on property yields and valuations,
particularly towards the end of 2022.
|
Risk trend
Increasing
|
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.
|
Mitigation
The Board and senior management receive regular updates on relevant
laws and regulations from the Group’s professional
advisers.
The Group has a Health and Safety Committee which monitors all
health and safety issues including oversight of the Property
Manager.
The Group is a member of the BPF and EPRA, and management attend
industry briefings.
|
Commentary
There are no significant changes expected to the regulatory
environment in which the Group operates.
|
Risk trend
No change/ stable
|
4
|
Climate change resilience
|
|
|
|
|
|
|
Risk
Failure to react to climate change could lead to
reputational damage, loss of income and value and being unable to
attract occupiers. Rising materials and energy costs as a result of
climate change could give rise to asset
obsolescence.
|
Mitigation
Sustainability is embedded within the Group’s business model and
strategy.
We have published our pathway to net zero carbon and have reported
on our progress this year.
We have addressed the identification and assessment of
climate-related risks as identified through the TCFD
process.
|
Commentary
Climate change resilience remains a key issue for property owners.
The increasing cost of energy has raised the importance of building
efficiency for occupiers. On-site renewables, such as solar panels,
are increasingly being included in refurbishment
projects.
|
Risk trend
Increasing
|
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.
|
Mitigation
The Group maintains a diversified portfolio in order to minimise
exposure to any one geographical area or market sector.
|
Commentary
The industrial sector, having benefitted from strong investment
demand leading to lower yields, saw a greater valuation movement in
2022. Demand for the office sector remains muted as businesses
continue to reassess their requirements. The retail sector is
showing some improvement, but from a low base.
|
Risk trend
Increasing
|
6
|
Investment
|
|
|
|
|
|
|
|
Risk
Investment decisions may be flawed as a result of incorrect
assumptions, poor research or incomplete due diligence, leading to
financial loss.
|
Mitigation
The Executive Committee must approve all investment transactions
over a threshold level, and significant transactions require Board
approval.
A formal appraisal and due diligence process is carried out for all
potential purchases including environmental assessments.
A review of each acquisition is performed within two years of
completion.
|
Commentary
Volatility in the investment market has increased over the year.
There is more uncertainty in making investment decisions due to
increasing costs, climate-related risks and recessionary
pressures.
|
Risk trend
Increasing
|
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.
|
Mitigation
Management prepare business plans for each asset which are reviewed
regularly.
The Executive Committee must approve all investment transactions
over a threshold level, and significant transactions require Board
approval.
Management maintain close contact with occupiers to have early
indication of intentions.
Management regularly assess the performance of the Group’s Property
Manager.
|
Commentary
Rent collection has remained high throughout the year, with limited
occupier defaults.
|
Risk trend
No change/ stable
|
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.
|
Mitigation
The Group’s property assets are valued quarterly by an independent
valuer with oversight by the Property Valuation Committee. Market
commentary is provided regularly by the independent
valuer.
The Board reviews financial forecasts for the Group on a regular
basis, including sensitivity and adequate headroom against
financial covenants.
|
Commentary
Following the mini-budget in September 2022, there were significant
increases in interest rates and bond yields, causing commercial
property valuations to decline. After a marked fall in December,
valuations have subsequently stabilised to some extent. However,
further interest rate rises may cause some further pressure on
valuations.
There remains good headroom against the Group’s lending
covenants.
|
Risk trend
Increasing
|
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.
|
Mitigation
The Board has a remuneration policy in place which incentivises
performance and is aligned with shareholders’ interests.
All employees receive an annual performance appraisal including
training and development needs.
There is a Non-Executive Director responsible for employee
engagement who provides regular feedback to the Board.
|
Commentary
The team has remained stable throughout the year with no leavers.
Positive feedback was received from the employee engagement survey.
Flexible working arrangements for the team have been
maintained.
|
Risk trend
No change/ stable
|
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
refinancing events could lead to a funding shortfall for
operational activities.
|
Mitigation
The Board reviews financial forecasts for the Group on a regular
basis, including sensitivity against financial
covenants.
The Group’s property assets are valued quarterly by an independent
valuer with oversight by the Property Valuation Committee. Market
commentary is provided regularly by the independent
valuer.
The Audit and Risk Committee considers the going concern status of
the Group biannually.
|
Commentary
The Group has mainly fixed rate long-term borrowings in place.
Covenants are monitored regularly and there is good headroom
against these. The revolving credit facility has been extended for
a further year until 2025.
|
Risk trend
No change/ stable
|
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 regularly reviews its gearing strategy and debt maturity
profile, at least annually, in light of changing market
conditions.
The Group has a revolving credit facility in place which can be
repaid if required to reduce the level of gearing.
|
Commentary
The use of gearing has amplified the valuation movements this year,
resulting in lower returns. However, the Group’s loan to value
ratio remains low.
|
Risk trend
Increasing
|
Viability assessment and statement
The UK Corporate Governance Code requires the Board to make a
‘viability statement’ which considers the Company’s current
position and principal and emerging risks and uncertainties
combined with an assessment of the future prospects for the
Company, in order that the Board can state that the Company will be
able to continue its operations over the period of their
assessment.
The Board conducted this review over a five-year timescale,
considered to be the most appropriate for long-term investment in
commercial property. The assessment has been undertaken taking into
account the principal and emerging risks and uncertainties faced by
the Group which could impact its investment strategy, future
performance, loan covenants and liquidity.
The major risks identified were those relating to high inflation,
rising interest rates, other recessionary pressures and the lead up
to a general election over the period of the assessment. In the
ordinary course of business, the Board reviews a detailed financial
model on a quarterly basis, including forecast market returns. This
model allows for different assumptions regarding lease expiries,
breaks and incentives. For the purposes of the viability assessment
of the Group, the model covers a five-year period and is stress
tested under various scenarios.
The Board considered a number of scenarios and their impact on the
Group’s property portfolio and financial position. These scenarios
included different levels of rent collection, occupier defaults,
void periods and incentives within the portfolio, and the
consequential impact on property costs and loan covenants. All
lease events and assumptions were reviewed over the period under
the different scenarios, including their impact on revenue and cash
flow. Forecast movements in capital values were included in these
scenarios, including their potential impact on the Group’s loan
covenants. The Group’s long-term loan facilities are contracted to
be in place throughout the assessment period, while the Board has
assumed that the Group will continue to have access to its
short-term facilities which expire in 2025. 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 2028 and will continue to be assessed
over rolling five-year periods.
The Directors consider that the stress testing performed was
sufficiently robust and that even under extreme conditions the
Company remains viable.
Based on their assessment, and in the context of the Group’s
business model and strategy, the Directors expect that the Group
will be able to continue in operation and meet its liabilities as
they fall due over the five-year period to 31 March 2028.
Statement of Directors’
responsibilities
The Directors are responsible for preparing the Annual Report and
the financial statements in accordance with applicable law and
regulations.
Company law requires the Directors to prepare financial statements
for each financial year. Under that law they are required to
prepare the financial statements in accordance with International
Financial Reporting Standards, as issued by the IASB, and
applicable law.
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Company and of its profit or
loss for that period.
In preparing these financial statements, the Directors are required
to:
-
select suitable accounting policies and then apply them
consistently;
-
make judgements and estimates that are reasonable, relevant and
reliable;
-
state whether applicable accounting standards have been followed,
subject to any material departures disclosed and explained in the
financial statements;
-
assess the Group and Company’s ability to continue as a going
concern, disclosing, as applicable, matters related to going
concern; and
-
use the going concern basis of accounting unless they either intend
to liquidate the Group or the Company or to cease operations, or
have no realistic alternative but to do so.
The Directors are responsible for keeping proper accounting records
that are sufficient to show and explain the Company’s transactions
and disclose with reasonable accuracy at any time the financial
position of the Company and enable them to ensure that its
financial statements comply with the Companies (Guernsey) Law,
2008. They are responsible for such internal controls as they
determine are necessary to enable the preparation of the financial
statements that are free from material misstatement, whether due to
fraud or error, and have a general responsibility for taking such
steps as are reasonably open to them to safeguard the assets of the
Group and to prevent and detect fraud and other
irregularities.
The Directors are responsible for the maintenance and integrity of
the corporate and financial information included on the Company’s
website, and for the preparation and dissemination of financial
statements. Legislation in Guernsey governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions.
Directors’ responsibility statement in respect of the
Annual Report and financial statements
We confirm that to the best of our knowledge:
-
the financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair view
of the assets, liabilities, financial position and profit or loss
of the Company; and
-
the Strategic Report includes a fair review of the development and
performance of the business and the position of the Issuer,
together with a description of the principal risks and
uncertainties that they face.
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 Company’s position and
performance, business model and strategy.
By Order of the Board
Andrew
Dewhirst
24 May 2023
Financial Statements
Consolidated statement of comprehensive
income
for the year ended 31 March
2023
|
Notes
|
2023
£000
|
2022
£000
|
Income
|
|
|
|
Revenue from properties
|
3
|
51,816
|
46,543
|
Property expenses
|
4
|
(15,566)
|
(11,098)
|
|
|
|
|
Net property income
|
|
36,250
|
35,445
|
|
|
|
|
Expenses
|
|
|
|
Administrative expenses
|
6
|
(5,955)
|
(5,755)
|
|
|
|
|
Total operating expenses
|
|
(5,955)
|
(5,755)
|
|
|
|
|
Operating profit before movement on
investments
|
|
30,295
|
29,690
|
|
|
|
|
Investments
|
|
|
|
Profit on disposal of investment properties
|
13
|
–
|
42
|
Revaluation of owner-occupied property
|
14
|
(382)
|
–
|
Investment property valuation movements
|
13
|
(110,433)
|
129,801
|
|
|
|
|
Total (loss)/profit on investments
|
|
(110,815)
|
129,843
|
|
|
|
|
Operating (loss)/profit
|
|
(80,520)
|
159,533
|
|
|
|
|
Financing
|
|
|
|
Interest received
|
|
24
|
–
|
Interest paid
|
8
|
(9,034)
|
(8,502)
|
Debt prepayment fees
|
18
|
–
|
(4,045)
|
|
|
|
|
Total finance costs
|
|
(9,010)
|
(12,547)
|
|
|
|
|
(Loss)/profit before tax
|
|
(89,530)
|
146,986
|
Tax
|
9
|
–
|
–
|
(Loss)/profit after tax
|
|
(89,530)
|
146,986
|
|
|
|
|
Other comprehensive income
|
|
|
|
Revaluation of owner-occupied property
|
14
|
(434)
|
434
|
|
|
|
|
Total other comprehensive (loss)/income for the
year
|
|
(434)
|
434
|
|
|
|
|
Total comprehensive (loss)/income for the
year
|
|
(89,964)
|
147,420
|
|
|
|
|
Earnings per share
|
|
|
|
Basic
|
11
|
(16.5)p
|
27.0p
|
Diluted
|
11
|
(16.5)p
|
26.9p
|
All items in the above statement derive from continuing
operations.
All of the profit and total comprehensive income for the year is
attributable to the equity holders of the Company.
Notes 1 to 27 form part of these consolidated financial
statements.
Consolidated statement of changes in
equity
for the year ended 31 March
2023
|
Notes
|
Share
capital
£000
|
Retained earnings
£000
|
Other reserves
£000
|
Revaluation reserve
£000
|
Total
£000
|
Balance as at 31 March 2021
|
|
164,400
|
364,466
|
(669)
|
–
|
528,197
|
Profit for the year
|
|
–
|
146,986
|
–
|
–
|
146,986
|
Dividends paid
|
10
|
–
|
(18,425)
|
–
|
–
|
(18,425)
|
Share-based awards
|
|
–
|
–
|
668
|
–
|
668
|
Purchase of shares held in trust
|
7
|
–
|
–
|
(730)
|
–
|
(730)
|
Other comprehensive income for the year
|
14
|
–
|
–
|
–
|
434
|
434
|
|
|
|
|
|
|
|
Balance as at 31 March 2022
|
|
164,400
|
493,027
|
(731)
|
434
|
657,130
|
Loss for the year
|
|
–
|
(89,530)
|
–
|
–
|
(89,530)
|
Dividends paid
|
10
|
–
|
(19,091)
|
–
|
–
|
(19,091)
|
Share-based awards
|
|
–
|
–
|
675
|
–
|
675
|
Purchase of shares held in trust
|
7
|
–
|
–
|
(1,126)
|
–
|
(1,126)
|
Other comprehensive loss for the year
|
14
|
–
|
–
|
–
|
(434)
|
(434)
|
|
|
|
|
|
|
|
Balance as at 31 March 2023
|
|
164,400
|
384,406
|
(1,182)
|
–
|
547,624
|
Notes 1 to 27 form part of these consolidated financial
statements.
Consolidated balance sheet
as at 31 March 2023
|
Notes
|
2023
£000
|
2022
£000
|
Non-current assets
|
|
|
|
Investment properties
|
13
|
746,342
|
830,027
|
Property, plant and equipment
|
14
|
3,415
|
4,383
|
|
|
|
|
Total non-current assets
|
|
749,757
|
834,410
|
|
|
|
|
Current assets
|
|
|
|
Accounts receivable
|
15
|
22,749
|
22,850
|
Cash and cash equivalents
|
16
|
20,050
|
38,547
|
|
|
|
|
Total current assets
|
|
42,799
|
61,397
|
|
|
|
|
Total assets
|
|
792,556
|
895,807
|
|
|
|
|
Current liabilities
|
|
|
|
Accounts payable and accruals
|
17
|
(19,471)
|
(19,138)
|
Loans and borrowings
|
18
|
(1,129)
|
(1,068)
|
Obligations under leases
|
22
|
(114)
|
(114)
|
|
|
|
|
Total current liabilities
|
|
(20,714)
|
(20,320)
|
|
|
|
|
Non-current liabilities
|
|
|
|
Loans and borrowings
|
18
|
(221,635)
|
(215,764)
|
Obligations under leases
|
22
|
(2,583)
|
(2,593)
|
|
|
|
|
Total non-current liabilities
|
|
(224,218)
|
(218,357)
|
|
|
|
|
Total liabilities
|
|
(244,932)
|
(238,677)
|
|
|
|
|
Net assets
|
|
547,624
|
657,130
|
|
|
|
|
Equity
|
|
|
|
Share capital
|
20
|
164,400
|
164,400
|
Retained earnings
|
|
384,406
|
493,027
|
Other reserves
|
|
(1,182)
|
(731)
|
Revaluation reserve
|
|
–
|
434
|
|
|
|
|
Total equity
|
|
547,624
|
657,130
|
|
|
|
|
Net asset value per share
|
23
|
100p
|
120p
|
These consolidated financial statements were approved by the Board
of Directors on 24 May 2023 and
signed on its behalf by:
Andrew
Dewhirst
Director
24 May 2023
Notes 1 to 27 form part of these consolidated financial
statements.
Consolidated statement of cash flows
for the year ended 31 March
2023
|
Notes
|
2023
£000
|
2022
£000
|
Operating activities
|
|
|
|
Operating (loss)/profit
|
|
(80,520)
|
159,533
|
Adjustments for non-cash items
|
21
|
111,655
|
(129,010)
|
Interest received
|
|
24
|
–
|
Interest paid
|
|
(7,937)
|
(8,102)
|
Decrease/(increase) in accounts receivable
|
|
101
|
(3,305)
|
(Decrease)/increase in accounts payable and accruals
|
|
(291)
|
897
|
|
|
|
|
Cash inflows from operating activities
|
|
23,032
|
20,013
|
|
|
|
|
Investing activities
|
|
|
|
Purchase of investment properties
|
13
|
(20,613)
|
(25,005)
|
Capital expenditure on investment properties
|
13
|
(6,135)
|
(9,551)
|
Disposal of investment properties
|
13
|
–
|
726
|
Purchase of tangible assets
|
14
|
(13)
|
(3)
|
|
|
|
|
Cash outflows from investing activities
|
|
(26,761)
|
(33,833)
|
|
|
|
|
Financing activities
|
|
|
|
Borrowings repaid
|
18
|
(6,368)
|
(26,917)
|
Borrowings drawn
|
18
|
12,000
|
79,545
|
Debt prepayment fees
|
18
|
–
|
(4,045)
|
Financing costs
|
18
|
(183)
|
(419)
|
Purchase of shares held in trust
|
7
|
(1,126)
|
(730)
|
Dividends paid
|
10
|
(19,091)
|
(18,425)
|
|
|
|
|
Cash (outflows)/inflows from financing
activities
|
|
(14,768)
|
29,009
|
|
|
|
|
Net (decrease)/increase in cash and cash
equivalents
|
|
(18,497)
|
15,189
|
Cash and cash equivalents at beginning of year
|
|
38,547
|
23,358
|
|
|
|
|
Cash and cash equivalents at end of
year
|
16
|
20,050
|
38,547
|
Notes 1 to 27 form part of these consolidated financial
statements.
Notes to the consolidated financial
statements
For the year ended 31 March
2023
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
domiciled investment company and entered the UK REIT regime on
1 October 2018. The consolidated
financial statements are prepared for the year ended 31 March 2023 with comparatives for the year
ended 31 March 2022.
2. Significant accounting policies
Basis of accounting
The financial statements have been prepared on a going concern
basis and adopt the historical cost basis, except for the
revaluation of investment properties. Historical cost is generally
based on the fair value of the consideration given in exchange for
the assets. The financial statements, which give a true and fair
view, are prepared in accordance with International Financial
Reporting Standards (IFRS) as issued by the IASB and the Companies
(Guernsey) Law, 2008.
The Directors have assessed whether the going concern basis remains
appropriate for the preparation of the financial statements. They
have reviewed the Group’s principal and emerging risks, existing
loan facilities, access to funding and liquidity position and then
considered different adverse scenarios impacting the portfolio and
the potential consequences on financial performance, asset values,
dividend policy, capital projects and loan covenants. Under all
these scenarios the Group has sufficient resources to continue its
operations, and remain within its loan covenants, for the
foreseeable future and in any case for a period of at least 12
months from the date of these financial statements.
Based on their assessment and knowledge of the portfolio and
market, the Directors have therefore continued to adopt the going
concern basis in preparing the financial statements.
The financial statements are presented in pounds sterling, which is
the Company’s functional currency. All financial information
presented in pounds sterling has been rounded to the nearest
thousand, except when otherwise indicated.
New or amended standards issued
The accounting policies adopted are consistent with those of the
previous financial period, as amended to reflect the adoption of
new standards, amendments and interpretations which became
effective in the year as shown below.
-
Onerous Contracts – Cost of Fulfilling a Contract (Amendments to
IAS 37)
-
Annual Improvements to IFRS Standards 2018-2020
-
Property, Plant and Equipment: Proceeds before Intended Use
(Amendments to IAS 16)
-
Reference to the Conceptual Framework (Amendments to IFRS
3)
The adoption of these standards has had no material effect on the
consolidated financial statements of the Group.
At the date of approval of these financial statements, there are a
number of new and amended standards in issue but not yet effective
for the financial year ended 31 March
2023 and thus have not been applied by the Group.
-
IFRS 17 Insurance Contracts
-
Amendments to IFRS 17
-
Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS
Practice Statement 2)
-
Definition of Accounting Estimates (Amendments to IAS 8)
-
Deferred Tax Related to Assets and Liabilities Arising from a
Single Transaction – Amendments to IAS 12 Income Taxes
-
Initial Application of IFRS 17 and IFRS 9 – Comparative Information
(Amendments to IFRS 17)
-
Classification of Liabilities as Current or Non-current (Amendments
to IAS 1)
-
Lease Liability in a Sale and Leaseback (Amendments to IFRS
16)
-
Non-current Liabilities with Covenants (Amendments to IAS
1)
-
Sale or Contributions of Assets between an Investor and its
Associate or Joint Venture (Amendments to IFRS 10 and IAS
28)
The adoption of these new and amended standards, together with any
other IFRSs or IFRIC interpretations that are not yet effective,
are not expected to have a material impact on the financial
statements of the Group.
Use of estimates and judgements
The preparation of financial statements in conformity with IFRS
requires management to make judgements, estimates and assumptions
that affect the application of policies and the reported amounts of
assets, liabilities, income and expenses. The estimates and
associated assumptions are based on historical experience and
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis of 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 judgements and estimates
Judgements made by management in the application of IFRSs that have
a significant effect on the financial statements and major sources
of estimation uncertainty are disclosed in Note 13.
The critical estimates and assumptions relate to the investment
property and owner-occupied property valuations applied by the
Group’s independent valuer. 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.
Basis of consolidation
The consolidated financial statements incorporate the financial
statements of the Company and entities controlled by the Company at
the reporting date. The Group controls an entity when it is exposed
to, or has rights to, variable returns from its involvement with
the entity and has the ability to affect these returns through its
power over the entity.
Subsidiaries are consolidated from the date on which control is
transferred to the Group and cease to be consolidated
from the date on which control is transferred out of the Group.
These financial statements include the results of the
subsidiaries
disclosed in Note 12. All intra-group transactions, balances,
income and expenses are eliminated on consolidation.
Fair value hierarchy
The fair value measurement for the Group’s assets and liabilities
is categorised into different levels in the fair value hierarchy
based on the inputs to valuation techniques used. The different
levels have been defined as follows:
Level 1: quoted prices (unadjusted) in active markets for identical
assets or liabilities that the Group can access at the measurement
date.
Level 2: inputs other than quoted prices included within Level 1
that are observable for the asset or liability, either directly or
indirectly.
Level 3: unobservable inputs for the asset or liability.
The Group recognises transfers between levels of the fair value
hierarchy as of the end of the reporting period during which the
transfer has occurred.
Investment properties
Freehold property held by the Group to earn income or for capital
appreciation, or both, is classified as investment property in
accordance with IAS 40 ‘Investment Property’. Property held under
head leases for similar purposes is also classified as investment
property. Investment property is initially recognised at purchase
cost plus directly attributable acquisition expenses and
subsequently measured at fair value. The fair value of investment
property is based on a valuation by an independent valuer who holds
a recognised and relevant professional qualification and who has
recent experience in the location and category of the investment
property being valued.
The fair value of investment properties is measured based on each
property’s highest and best use from a market participant’s
perspective and considers the potential uses of the property that
are physically possible, legally permissible and financially
feasible.
The fair value of investment property generally involves
consideration of:
-
Market evidence on comparable transactions for similar
properties;
-
The actual current market for that type of property in that type of
location at the reporting date and current market
expectations;
-
Rental income from leases and market expectations regarding
possible future lease terms;
-
Hypothetical sellers and buyers, who are reasonably informed about
the current market and who are motivated, but not compelled, to
transact in that market on an arm’s length basis; and
-
Investor expectations on matters such as future enhancement of
rental income or market conditions.
Gains and losses arising from changes in fair value are included in
the Consolidated Statement of Comprehensive Income in the year in
which they arise. Purchases and sales of investment property are
recognised when contracts have been unconditionally exchanged and
the significant risks and rewards of ownership have been
transferred.
An investment property is derecognised for accounting purposes upon
disposal or when no future economic benefits are expected to arise
from the continued use of the asset. Any gain or loss arising on
derecognition of the asset (calculated as the difference between
the net disposal proceeds and the carrying amount of the item) is
included in the Consolidated Statement of Comprehensive Income in
the year the asset is derecognised. Investment properties are not
depreciated.
The majority of the investment properties are charged by way of a
first ranking mortgage as security for the loans made to the Group;
see Note 18.
Property, plant and equipment
Owner-occupied property
Owner-occupied property is stated at its revalued amount, which is
determined in the same manner as investment property. It is
depreciated over its remaining useful life (in this case 40 years)
with the depreciation included in administrative expenses. On
revaluation, any accumulated depreciation is eliminated against the
gross carrying amount of the property concerned, and the net amount
restated to the revalued amount. Subsequent depreciation charges
are adjusted based on the revalued amount. Any difference between
the depreciation charge on the revalued amount and that which would
have been charged under historic cost is transferred between the
revaluation reserve and retained earnings as the property is used.
Any gain arising on this remeasurement is recognised in profit or
loss to the extent that it reverses a previous impairment loss on
the specific property, with any remaining gain recognised in other
comprehensive income and presented in the revaluation reserve. Any
loss is recognised in profit or loss. However, to the extent that
an amount is included in the revaluation surplus for that property,
the loss is recognised in other comprehensive income and reduces
the revaluation surplus within equity.
Plant and equipment
Plant and equipment is depreciated on a straight-line basis over
the estimated useful lives of each item of plant and equipment. The
estimated useful lives are between three and five years.
Leases
Where the Group holds interests in investment properties other than
as freehold interests (e.g. as a head lease), these are accounted
for as right of use assets, which is recognised at its fair value
on the Balance Sheet, within the investment property carrying
value. Upon initial recognition, a corresponding liability is
included as a lease liability. Minimum lease payments are
apportioned between the finance charge and the reduction of the
outstanding liability so as to produce a constant periodic rate of
interest on the remaining lease liability. Contingent rent payable,
being the difference between the rent currently payable and the
minimum lease payments when the lease liability was originally
calculated, are charged as expenses within property expenditure in
the years in which they are payable.
The Group leases its investment properties under commercial
property leases which are held as operating leases. An operating
lease is a lease other than a finance lease. A finance lease is one
where substantially all the risks and rewards of ownership are
passed to the lessee. Lease income is recognised as 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. Upon
receipt of a surrender premium for the early termination of a
lease, the profit, net of dilapidations and non-recoverable
outgoings relating to the lease concerned, is immediately reflected
in revenue from properties if there are no relevant conditions
attached to the surrender.
Cash and cash equivalents
Cash includes cash in hand and cash with banks. Cash equivalents
are short-term, highly liquid investments that are readily
convertible to known amounts of cash with original maturities in
three months or less and that are subject to an insignificant risk
of change in value.
Income and expenses
Income and expenses are included in the Consolidated Statement of
Comprehensive Income on an accruals basis. All of the Group’s
income and expenses are derived from continuing
operations.
Lease incentive payments are amortised on a straight-line basis
over the period from the date of lease inception to the end of the
lease term and presented within accounts receivable. Lease
incentives granted are recognised as a reduction of the total
rental income, over the term of the lease.
Property operating costs include the costs of professional fees on
letting and other non-recoverable costs.
The income charged to occupiers for property service charges and
the costs associated with such service charges are shown separately
in Notes 3 and 4 to reflect that, notwithstanding this money is
held on behalf of occupiers, the ultimate risk for paying and
recovering these costs rests with the property owner.
Employee benefits
Defined contribution plans
A defined contribution plan is a retirement benefit plan under
which the Company pays fixed contributions into a separate entity
and will have no legal or constructive obligation to pay further
amounts. Obligations for contributions to defined contribution
pension plans are recognised as an expense in the Consolidated
Statement of Comprehensive Income in the periods during which
services are rendered by employees.
Short-term benefits
Short-term employee benefit obligations are measured on an
undiscounted basis and are expensed as the related service is
provided. A liability is recognised for the amount expected to be
paid under short-term cash bonus or profit-sharing plans if the
Company has a present legal or constructive obligation to pay this
amount as a result of past service provided by the employee and the
obligation can be estimated reliably.
Share-based payments
The fair value of the amounts payable to employees in respect of
the Deferred Bonus Plan, when these are to be settled in cash, is
recognised as an expense with a corresponding increase in
liabilities, over the period that the employees become
unconditionally entitled to payment. Where the awards are equity
settled, the fair value is recognised as an expense, with a
corresponding increase in equity. The liability is remeasured at
each reporting date and at settlement date. Any changes in the fair
value of the liability are recognised under the category staff
costs in the Consolidated Statement of Comprehensive
Income.
The grant date fair value of awards to employees made under the
Long-term Incentive Plan is recognised as an expense, with a
corresponding increase in equity, over the vesting period of the
awards. The amount recognised as an expense is adjusted to reflect
the number of awards for which the related non-market performance
conditions are expected to be met, such that the amount ultimately
recognised is based on the number of awards that meet the related
non-market performance conditions at the vesting date. For
share-based payment awards with market conditions, the grant date
fair value of the share-based awards is measured to reflect such
conditions and there is no adjustment between expected and actual
outcomes.
The cost of the Company’s shares held by the Employee Benefit Trust
is deducted from equity in the Consolidated Balance Sheet. Any
shares held by the Trust are not included in the calculation of
earnings or net assets per share.
Dividends
Dividends are recognised in the period in which they are
declared.
Accounts receivable
Accounts receivable are stated at their nominal amount as reduced
by appropriate allowances for estimated irrecoverable amounts. The
Group applies the IFRS 9 simplified approach to measuring expected
credit losses, which uses a lifetime expected impairment provision
for all applicable accounts receivable. Bad debts are written off
when identified.
Loans and borrowings
All loans and borrowings are initially recognised at cost, being
the fair value of the consideration received net of issue costs
associated with the borrowing. After initial recognition, loans and
borrowings are subsequently measured at amortised cost using the
effective interest method. Amortised cost is calculated by taking
into account any issue costs, and any discount or premium on
settlement. Gains and losses are recognised in profit or loss in
the Consolidated Statement of Comprehensive Income when the
liabilities are derecognised for accounting purposes, as well as
through the amortisation process.
Assets classified as held for sale
Any investment properties on which contracts for sale have been
exchanged but which had not completed at the period end are
disclosed as properties held for sale. Investment properties
included in the held for sale category continue to be measured in
accordance with the accounting policy for investment
properties.
Other assets and liabilities
Other assets and liabilities, including trade creditors, accruals,
other creditors, and deferred rental income, which are not interest
bearing are stated at their nominal value.
Share capital
Ordinary shares are classified as equity.
Revaluation reserve
Any surplus or deficit arising from the revaluation of
owner-occupied property is taken to the revaluation reserve. A
revaluation deficit is only taken to retained earnings when there
is no previous revaluation surplus to reverse.
Taxation
The Group elected to be treated as a UK REIT with effect from
1 October 2018. The UK REIT rules
exempt the profits of the Group’s UK property rental business from
UK corporation and income tax. Gains on UK properties are also
exempt from tax, provided they are not held for trading. The Group
is otherwise subject to UK corporation tax.
Principles for the Consolidated Statement of Cash
Flows
The Consolidated Statement of Cash Flows has been drawn up
according to the indirect method, separating the cash flows from
operating activities, investing activities and financing
activities. The net result has been adjusted for amounts in the
Consolidated Statement of Comprehensive Income and movements in the
Consolidated Balance Sheet which have not resulted in cash income
or expenditure in the related 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
|
2023
£000
|
2022
£000
|
Rents receivable (adjusted for lease incentives)
|
42,964
|
40,133
|
Surrender premiums
|
147
|
59
|
Dilapidation receipts
|
170
|
21
|
Other income
|
107
|
118
|
Service charge income
|
8,428
|
6,212
|
|
51,816
|
46,543
|
Rents receivable have been adjusted for lease incentives recognised
of £1.2 million (2022: £2.8 million).
4. Property expenses
|
2023
£000
|
2022
£000
|
Property operating costs
|
3,491
|
2,477
|
Property void costs
|
3,647
|
2,409
|
Recoverable service charge costs
|
8,428
|
6,212
|
|
15,566
|
11,098
|
5. Operating segments
The Board is responsible for setting the Group’s strategy and
business model. 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 Consolidated Balance Sheet,
assuming dividends are reinvested, the key performance measure is
that prepared under IFRS. Therefore, no reconciliation is required
between the measure of profit or loss used by the Board and that
contained in the financial statements.
The Board has considered the requirements of IFRS 8 ‘Operating
Segments’. The Board is of the opinion that the Group, through its
subsidiary undertakings, operates in one reportable industry
segment, namely real estate investment, and across one primary
geographical area, namely the United
Kingdom, and therefore no segmental reporting is required.
The portfolio consists of 49 commercial properties, which are in
the industrial, office, retail and leisure sectors.
6. Administrative expenses
|
2023
£000
|
2022
£000
|
Director and staff costs
|
3,487
|
3,415
|
Auditor’s remuneration
|
195
|
206
|
Other administrative expenses
|
2,273
|
2,134
|
|
5,955
|
5,755
|
Auditor’s remuneration comprises:
|
2023
£000
|
2022
£000
|
Audit fees:
|
|
|
Audit of Group financial statements
|
92
|
92
|
Audit of subsidiaries’ financial statements
|
87
|
82
|
|
|
|
Audit-related fees:
|
|
|
Review of half-year financial statements
|
16
|
16
|
|
195
|
190
|
Non-audit fees:
|
|
|
Additional controls testing
|
–
|
16
|
|
–
|
16
|
|
195
|
206
|
7. Director and staff costs
|
2023
£000
|
2022
£000
|
Wages and salaries
|
1,879
|
1,765
|
Non-Executive Directors’ fees
|
275
|
275
|
Social security costs
|
425
|
402
|
Other pension costs
|
34
|
27
|
Share-based payments – cash settled
|
142
|
201
|
Share-based payments – equity settled
|
732
|
745
|
|
3,487
|
3,415
|
Employees participate in two share-based remuneration arrangements:
the Deferred Bonus Plan and the Long-term Incentive Plan (the
‘LTIP’).
For all employees, a proportion of any discretionary annual bonus
will be an award under the Deferred Bonus Plan. With the exception
of Executive Directors, awards are cash settled and vest after two
years. The final value of awards is determined by the movement in
the Company’s share price and dividends paid over the vesting
period. For Executive Directors, awards are equity settled and also
vest after two years. On 17 June
2022, awards of 500,905 notional shares were made which vest
in June 2024 (2022: 531,108 notional
shares). The next awards are due to be made in June 2023 for vesting in June 2025.
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.
Vesting date
|
Units
at
31 March 2021
|
Units granted in the year
|
Units cancelled in the year
|
Units redeemed in the year
|
Units
at
31 March
2022
|
Units granted
in the year
|
Units cancelled
in the year
|
Units redeemed in the year
|
Units
at
31 March
2023
|
19 June 2021
|
438,907
|
–
|
–
|
(438,907)
|
–
|
–
|
–
|
–
|
–
|
29 June 2022
|
599,534
|
–
|
–
|
–
|
599,534
|
–
|
–
|
(589,779)
|
9,755
|
22 June 2023
|
–
|
531,108
|
–
|
–
|
531,108
|
–
|
–
|
–
|
531,108
|
17 June 2024
|
–
|
–
|
–
|
–
|
–
|
500,905
|
–
|
–
|
500,905
|
|
1,038,441
|
531,108
|
–
|
(438,907)
|
1,130,642
|
500,905
|
–
|
(589,779)
|
1,041,768
|
The Group also has a Long-term Incentive Plan for all employees
which is equity settled. Awards are made annually and vest three
years from the grant date. Vesting is conditional on three
performance metrics measured over each three-year period. Awards to
Executive Directors are also subject to a further two-year holding
period. On 17 June 2022, awards for a
maximum of 1,174,589 shares were granted to employees in respect of
the three-year period ending on 31 March
2025. In the previous year, awards of 1,107,155 shares were
made on 22 June 2021 for the period
ending 31 March 2024.
The three performance metrics are:
-
Total shareholder return (TSR) of Picton Property Income Limited,
compared to a comparator group of similar listed
companies;
-
Total property return (TPR) of the property assets held within the
Group, compared to the MSCI UK Quarterly Property Index;
and
-
Growth in EPRA earnings per share (EPS) of the Group.
The fair value of share grants is measured using the Monte Carlo model for the TSR metric and a
Black-Scholes model for the TPR and EPS metrics. 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
|
17 June 2022
|
22 June 2021
|
Share price at date of grant
|
92.6p
|
87.3p
|
Exercise price
|
Nil
|
Nil
|
Expected term
|
3 years
|
3 years
|
Risk-free rate – TSR condition
|
2.28%
|
0.23%
|
Share price volatility – TSR condition
|
28.3%
|
28.3%
|
Median volatility of comparator group – TSR condition
|
32.4%
|
31.8%
|
Correlation – TSR condition
|
25.0%
|
29.4%
|
TSR performance at grant date – TSR condition
|
(2.5)%
|
0.3%
|
Median TSR performance of comparator group at grant date – TSR
condition
|
2.2%
|
10.7%
|
Fair value – TSR condition (Monte Carlo method)
|
46.0p
|
37.7p
|
Fair value – TPR condition (Black-Scholes model)
|
92.6p
|
87.3p
|
Fair value – EPS condition (Black-Scholes model)
|
92.6p
|
87.3p
|
The Trustee of the Company’s Employee Benefit Trust acquired
1,250,000 ordinary shares during the year for £1,126,000 (2022:
750,000 shares for £730,000).
The Group employed ten members of staff at 31 March 2023 (2022: nine). The average number of
people employed by the Group for the year ended 31 March 2023 was nine (2022: ten).
8. Interest paid
|
2023
£000
|
2022
£000
|
Interest payable on loans
|
8,576
|
8,134
|
Interest on obligations under finance leases
|
175
|
129
|
Non-utilisation fees
|
283
|
239
|
|
9,034
|
8,502
|
The loan arrangement costs incurred to 31
March 2023 are £3,328,000 (2022: £3,325,000). These are
amortised over the duration of the loans with £304,000 amortised in
the year ended 31 March 2023 and
included in interest payable on loans (2022: £967,000).
9. Tax
The charge for the year is:
|
2023
£000
|
2022
£000
|
Tax expense in year
|
–
|
–
|
Total tax charge
|
–
|
–
|
A reconciliation of the tax charge applicable to the results at the
statutory tax rate to the charge for the year is as
follows:
|
2023
£000
|
2022
£000
|
(Loss)/profit before taxation
|
(89,530)
|
146,986
|
Expected tax (credit)/charge on ordinary activities at the standard
rate of taxation of 19% (2022: 19%)
|
(17,011)
|
27,927
|
Less:
|
|
|
UK REIT exemption on net income
|
(4,044)
|
(3,257)
|
Revaluation movement not taxable
|
21,055
|
(24,662)
|
Gains on disposal not taxable
|
–
|
(8)
|
Total tax charge
|
–
|
–
|
As a UK REIT, the income profits of the Group’s UK property rental
business are exempt from corporation tax, as are any gains it makes
from the disposal of its properties, provided they are not held for
trading. The Group is otherwise subject to UK corporation tax at
the prevailing rate.
As the principal company of the REIT, the Company is required to
distribute at least 90% of the income profits of the Group’s UK
property rental business. There are a number of other conditions
that are also required to be met by the Company and the Group to
maintain REIT tax status. These conditions were met in the year and
the Board intends to conduct the Group’s affairs such that these
conditions continue to be met for the foreseeable future.
Accordingly, deferred tax is no longer recognised on temporary
differences relating to the property rental business.
10. Dividends
|
2023
£000
|
2022
£000
|
Declared and paid:
|
|
|
Interim dividend for the period ended 31 March 2021: 0.8
pence
|
–
|
4,365
|
Interim dividend for the period ended 30 June 2021: 0.85
pence
|
–
|
4,644
|
Interim dividend for the period ended 30 September 2021: 0.85
pence
|
–
|
4,640
|
Interim dividend for the period ended 31 December 2021: 0.875
pence
|
–
|
4,776
|
Interim dividend for the period ended 31 March 2022: 0.875
pence
|
4,774
|
–
|
Interim dividend for the period ended 30 June 2022: 0.875
pence
|
4,775
|
–
|
Interim dividend for the period ended 30 September 2022: 0.875
pence
|
4,771
|
–
|
Interim dividend for the period ended 31 December 2022: 0.875
pence
|
4,771
|
–
|
|
19,091
|
18,425
|
The interim dividend of 0.875 pence
per ordinary share in respect of the period ended 31 March 2023 has not been recognised as a
liability as it was declared after the year-end. This dividend of
£4,771,000 will be paid on 31 May
2023.
11. Earnings per share
Basic and diluted earnings per share is calculated by dividing the
net (loss)/profit for the year attributable to ordinary
shareholders of the Company by the weighted average number of
ordinary shares in issue during the year, excluding the average
number of shares held by the Employee Benefit Trust for the year.
The diluted number of shares also reflects the contingent shares to
be issued under the Long-term Incentive Plan.
The following reflects the (loss)/profit and share data used in the
basic and diluted profit per share calculation:
|
2023
|
2022
|
Net (loss)/profit attributable to ordinary shareholders of the
Company from continuing operations (£000)
|
(89,964)
|
147,420
|
Weighted average number of ordinary shares for basic earnings per
share
|
545,378,286
|
545,904,197
|
Weighted average number of ordinary shares for diluted earnings per
share
|
546,856,450
|
547,295,589
|
12. Investments in subsidiaries
The Company had the following principal subsidiaries as at
31 March 2023 and 31 March 2022:
Name
|
Place of incorporation
|
Ownership
proportion
|
Picton UK Real Estate Trust (Property) Limited
|
Guernsey
|
100%
|
Picton (UK) REIT (SPV) Limited
|
Guernsey
|
100%
|
Picton (UK) Listed Real Estate
|
Guernsey
|
100%
|
Picton UK Real Estate (Property) No 2 Limited
|
Guernsey
|
100%
|
Picton (UK) REIT (SPV No 2) Limited
|
Guernsey
|
100%
|
Picton Capital Limited
|
England & Wales
|
100%
|
Picton (General Partner) No 2 Limited
|
Guernsey
|
100%
|
Picton (General Partner) No 3 Limited
|
Guernsey
|
100%
|
Picton No 2 Limited Partnership
|
England & Wales
|
100%
|
Picton No 3 Limited Partnership
|
England & Wales
|
100%
|
Picton Financing UK Limited
|
England & Wales
|
100%
|
Picton Financing UK (No 2) Limited
|
England & Wales
|
100%
|
Picton Property No 3 Limited
|
Guernsey
|
100%
|
The results of the above entities are consolidated within the Group
financial statements.
Picton UK Real Estate Trust (Property) Limited and Picton (UK) REIT
(SPV) Limited own 100% of the units in Picton (UK) Listed Real
Estate, a Guernsey Unit Trust (the ‘GPUT’). The GPUT holds a 99.9%
interest in both Picton No 2 Limited Partnership and Picton No 3
Limited Partnership and the remaining balances are held by Picton
(General Partner) No 2 Limited and Picton (General Partner) No 3
Limited respectively.
13. Investment properties
The following table provides a reconciliation of the opening and
closing amounts of investment properties classified as Level 3
recorded at fair value.
|
2023
£000
|
2022
£000
|
Fair value at start of year
|
830,027
|
665,418
|
Capital expenditure on investment properties
|
6,135
|
9,551
|
Acquisitions
|
20,613
|
25,005
|
Disposals
|
–
|
(687)
|
Acquisition of right of use asset
|
–
|
897
|
Realised gains on disposal
|
–
|
42
|
Unrealised movement on investment properties
|
(110,433)
|
129,801
|
Fair value at the end of the year
|
746,342
|
830,027
|
Historic cost at the end of the year
|
681,118
|
654,370
|
The fair value of investment properties reconciles to the appraised
value as follows:
|
2023
£000
|
2022
£000
|
Appraised value
|
766,235
|
849,325
|
Valuation of assets held under head leases
|
2,081
|
2,237
|
Owner-occupied property
|
(3,248)
|
(4,168)
|
Lease incentives held as debtors
|
(18,726)
|
(17,367)
|
Fair value at the end of the year
|
746,342
|
830,027
|
The investment properties were valued by independent valuers, CBRE
Limited, Chartered Surveyors, as at 31 March
2023 and 31 March 2022 on the
basis of fair value in accordance with the version of the RICS
Valuation – Global Standards (incorporating the International
Valuation Standards) and the UK national supplement (the Red Book)
current as at the valuation date. The total fees earned by CBRE
Limited from the Group are less than 5% of their total UK
revenue.
The fair value of the Group’s investment properties has been
determined using an income capitalisation technique, whereby
contracted and market rental values are capitalised with a market
capitalisation rate. The resulting valuations are cross-checked
against the equivalent yields and the fair market values per square
foot derived from comparable market transactions on an arm’s length
basis.
In addition, the Group’s investment properties are valued quarterly
by CBRE Limited. The valuations are based on:
-
Information provided by the Group including rents, lease terms,
revenue and capital expenditure. Such information is derived from
the Group’s financial and property systems and is subject to the
Group’s overall control environment.
-
Valuation models used by the valuers, including market-related
assumptions based on their professional judgement and market
observation.
The assumptions and valuation models used by the valuers, and
supporting information, are reviewed by senior management and the
Board through the Property Valuation Committee. Members of the
Property Valuation Committee, together with senior management, meet
with the independent valuer on a quarterly basis to review the
valuations and underlying assumptions, including considering
current market trends and conditions, and changes from previous
quarters. The Board will also consider whether circumstances at
specific investment properties, such as alternative uses and issues
with occupational tenants, are appropriately reflected in the
valuations. The fair value of investment properties is measured
based on each property’s highest and best use from a market
participant’s perspective and considers the potential uses of the
property that are physically possible, legally permissible and
financially feasible.
As at 31 March 2023 and 31 March 2022 all of the Group’s properties,
including owner-occupied property, are Level 3 in the fair value
hierarchy as it involves use of significant judgement. There were
no transfers between levels during the year and the prior year.
Level 3 inputs used in valuing the properties are those which are
unobservable, as opposed to Level 1 (inputs from quoted prices) and
Level 2 (observable inputs either directly, i.e. as prices, or
indirectly, as derived from prices).
Information on these significant unobservable inputs per sector of
investment properties is disclosed as follows:
|
2023
|
2022
|
|
Office
|
Industrial
|
Retail and Leisure
|
Office
|
Industrial
|
Retail and Leisure
|
Appraised value (£000)
|
245,260
|
439,570
|
81,405
|
251,125
|
509,730
|
88,470
|
Area (sq ft, 000s)
|
877
|
3,240
|
692
|
828
|
3,240
|
692
|
Range of unobservable inputs:
|
|
|
|
|
|
|
Gross ERV (sq ft per annum)
|
|
|
|
|
|
|
– range
|
£11.00 to
£84.12
|
£3.30 to
£27.83
|
£3.23 to
£26.05
|
£10.96 to £82.32
|
£2.82 to
£26.77
|
£3.23 to
£28.49
|
– weighted average
|
£35.33
|
£13.16
|
£11.66
|
£35.10
|
£11.47
|
£11.83
|
Net initial yield
|
|
|
|
|
|
|
– range
|
–0.68% to 11.65%
|
2.28% to
7.75%
|
3.51% to 30.85%
|
0.92% to 9.00%
|
0.00% to 6.75%
|
3.07% to 25.00%
|
– weighted average
|
5.32%
|
4.30%
|
8.56%
|
4.64%
|
3.25%
|
7.33%
|
Reversionary yield
|
|
|
|
|
|
|
– range
|
4.76% to 13.55%
|
4.83% to
8.17%
|
6.87% to 12.18%
|
4.29% to
9.63%
|
3.04% to
7.37%
|
6.19% to
12.89%
|
– weighted average
|
7.87%
|
5.78%
|
7.98%
|
7.00%
|
4.24%
|
7.42%
|
True equivalent yield
|
|
|
|
|
|
|
– range
|
4.57% to 10.38%
|
4.75% to
7.98%
|
7.00% to 12.17%
|
4.09% to
9.95%
|
3.00% to 7.00%
|
6.25% to 13.02%
|
– weighted average
|
7.23%
|
5.51%
|
8.11%
|
6.49%
|
4.11%
|
7.55%
|
An increase/decrease in ERV will increase/decrease valuations,
while an increase/decrease to yield decreases/increases valuations.
We have reviewed the ranges used in assessing the impact of changes
in unobservable inputs on the fair value of the Group’s property
portfolio and concluded these were still reasonable. The table
below sets out the sensitivity of the valuation to changes of 50
basis points in yield.
Sector
|
Movement
|
2023 Impact on valuation
|
2022 Impact on valuation
|
Industrial
|
Increase of 50 basis points
|
Decrease of £36.7m
|
Decrease of £55.2m
|
|
Decrease of 50 basis points
|
Increase of £44.5m
|
Increase of £69.0m
|
Office
|
Increase of 50 basis points
|
Decrease of £16.1m
|
Decrease of £11.9m
|
|
Decrease of 50 basis points
|
Increase of £18.0m
|
Increase of £12.5m
|
Retail and Leisure
|
Increase of 50 basis points
|
Decrease of £4.5m
|
Decrease of £5.1m
|
|
Decrease of 50 basis points
|
Increase of £5.1m
|
Increase of £5.9m
|
14. Property, plant and equipment
Property, plant and equipment principally comprises the fair value
of owner-occupied property. The fair value of these premises is
based on the appraised value at 31 March
2023.
|
Owner Occupied Property £000
|
Plant and equipment £000
|
Total
£000
|
At 1 April 2021
|
3,830
|
281
|
4,111
|
Additions
|
–
|
3
|
3
|
Depreciation
|
(96)
|
(69)
|
(165)
|
Revaluation
|
434
|
–
|
434
|
At 31 March 2022
|
4,168
|
215
|
4,383
|
Additions
|
–
|
13
|
13
|
Depreciation
|
(104)
|
(61)
|
(165)
|
Revaluation
|
(816)
|
–
|
(816)
|
At 31 March 2023
|
3,248
|
167
|
3,415
|
15. Accounts receivable
|
2023
£000
|
2022
£000
|
Tenant debtors (net of provisions for bad debts)
|
2,855
|
4,618
|
Lease incentives
|
18,726
|
17,367
|
Other debtors
|
1,168
|
865
|
|
22,749
|
22,850
|
The estimated fair values of receivables are the discounted amount
of the estimated future cash flows expected to be received and the
approximate value 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 2023, tenant
debtors of £92,000 (2022: £302,000) were considered impaired and
provided for.
16. Cash and cash equivalents
|
2023
£000
|
2022
£000
|
Cash at bank and in hand
|
20,045
|
38,542
|
Short-term deposits
|
5
|
5
|
|
20,050
|
38,547
|
Cash at bank and in hand earns interest at floating rates based on
daily bank deposit rates. Short-term deposits are made for varying
periods of between one day and one month depending on the immediate
cash requirements of the Group and earn interest at the respective
short-term deposit rates. The carrying amounts of these assets
approximate to their fair value.
17. Accounts payable and accruals
|
2023
£000
|
2022
£000
|
Accruals
|
4,712
|
4,994
|
Deferred rental income
|
8,654
|
8,399
|
VAT liability
|
1,782
|
1,638
|
Trade creditors
|
515
|
357
|
Other creditors
|
3,808
|
3,750
|
|
19,471
|
19,138
|
18. Loans and borrowings
|
Maturity
|
2023
£000
|
2022
£000
|
Current
|
|
|
|
Aviva facility
|
–
|
1,433
|
1,372
|
Capitalised finance costs
|
–
|
(304)
|
(304)
|
|
|
1,129
|
1,068
|
|
|
|
|
Non-current
|
|
|
|
Canada Life facility
|
24 July 2031
|
129,045
|
129,045
|
Aviva facility
|
24 July 2032
|
82,089
|
83,518
|
NatWest revolving credit facility
|
26 May 2025
|
11,900
|
4,900
|
Capitalised finance costs
|
–
|
(1,399)
|
(1,699)
|
|
|
221,635
|
215,764
|
|
|
222,764
|
216,832
|
The following table provides a reconciliation of the movement in
loans and borrowings to cash flows arising from financing
activities.
|
2023
£000
|
2022
£000
|
Balance at start of year
|
216,832
|
163,655
|
|
|
|
Changes from financing cash flows
|
|
|
Proceeds from loans and borrowings
|
12,000
|
79,545
|
Repayment of loans and borrowings
|
(6,368)
|
(26,917)
|
Financing costs paid
|
(183)
|
(419)
|
|
5,449
|
52,209
|
Other changes
|
|
|
Amortisation of financing costs
|
304
|
967
|
Change in accrued financing costs
|
179
|
1
|
|
483
|
968
|
Balance as at 31 March
|
222,764
|
216,832
|
The Group has a £129.0 million loan facility with Canada Life which
matures in July 2031. Interest is
fixed at 3.25% per annum over the remaining life of the loan. The
loan agreement has a loan to value covenant of 65% and an interest
cover test of 1.75. The loan is secured over the Group’s properties
held by Picton No 2 Limited Partnership and Picton UK Real Estate
Trust (Property) No 2 Limited, valued at £353.2 million (2022:
£415.2 million). In the prior year a debt prepayment fee of £4.0
million was incurred to reset the interest rate on the Canada Life
facility.
Additionally, the Group has a £95.3 million term loan facility with
Aviva Commercial Finance Limited which matures in July 2032. The loan is for a term of 20 years and
was fully drawn on 24 July 2012 with
approximately one-third repayable over the life of the loan in
accordance with a scheduled amortisation profile. The Group has
repaid £1.4 million in the year (2022: £1.3 million). Interest on
the loan is fixed at 4.38% per annum over the life of the loan. The
facility has a loan to value covenant of 65% and a debt service
cover ratio of 1.4. The facility is secured over the Group’s
properties held by Picton No 3 Limited Partnership and Picton
Property No 3 Limited, valued at £193.6 million (2022: £208.1
million).
The Group also has a £50 million revolving credit facility (‘RCF’)
with National Westminster Bank Plc which matures in May 2025. As at 31 March there was £11.9 million
drawn under the facility, interest is charged at 150 basis points
over SONIA on drawn balances and there is an undrawn commitment fee
of 60 basis points. The facility is secured on properties held by
Picton UK Real Estate Trust (Property) Limited, valued at £143.4
million (2022: £163.2 million).
The fair value of the drawn loan facilities at 31 March 2023, estimated as the present value of
future cash flows discounted at the market rate of interest at that
date, was £201.7 million (2022: £225.6 million). The fair value of
the drawn loan facilities is classified as Level 2 under the
hierarchy of fair value measurements.
There were no transfers between levels of the fair value hierarchy
during the current or prior years.
The weighted average interest rate on the Group’s borrowings as at
31 March 2023 was 3.8% (2022:
3.7%).
19. Contingencies and capital
commitments
The Group has entered into contracts for the refurbishment of five
properties with commitments outstanding at 31 March
2023 of approximately £2.9 million (2022: £2.4 million). No further
obligations to construct or develop investment property
or for repairs, maintenance or enhancements were in place as at
31 March 2023 (2022:
£nil).
20. Share capital and other reserves
|
2023
£000
|
2022
£000
|
Authorised:
|
|
|
Unlimited number of ordinary shares of no par value
|
–
|
–
|
|
|
|
Issued and fully paid:
|
|
|
547,605,596 ordinary shares of no par value (31 March 2022:
547,605,596)
|
–
|
–
|
Share premium
|
164,400
|
164,400
|
The Company has 547,605,596 ordinary shares in issue of no par
value (2022: 547,605,596).
No new ordinary shares were issued during the year ended
31 March 2023.
|
2023
Number of shares
|
2022
Number of shares
|
Ordinary share capital
|
547,605,596
|
547,605,596
|
Number of shares held in Employee Benefit Trust
|
(2,388,694)
|
(1,974,253)
|
Number of ordinary shares
|
545,216,902
|
545,631,343
|
The fair value of awards made under the Long-term Incentive Plan is
recognised in other reserves.
Subject to the solvency test contained in the Companies (Guernsey)
Law, 2008 being satisfied, ordinary shareholders are entitled to
all dividends declared by the Company and to all of the Company’s
assets after repayment of its borrowings and ordinary creditors.
The Trustee of the Company’s Employee Benefit Trust has waived its
right to receive dividends on the 2,388,694 shares it holds but
continues to hold the right to vote. Ordinary shareholders have the
right to vote at meetings of the Company. All ordinary shares carry
equal voting rights.
The Directors have authority to buy back up to 14.99% of the
Company’s ordinary shares in issue, subject to the annual renewal
of the authority from shareholders. Any buy-back of ordinary shares
will be made subject to Guernsey law, and the making and timing of
any buy-backs will be at the absolute discretion of the
Board.
21. Adjustment for non-cash movements in the cash flow
statement
|
2023
£000
|
2022
£000
|
Profit on disposal of investment properties
|
–
|
(42)
|
Movement in investment property valuation
|
110,433
|
(129,801)
|
Revaluation of owner-occupied property
|
382
|
–
|
Share-based provisions
|
675
|
668
|
Depreciation of tangible assets
|
165
|
165
|
|
111,655
|
(129,010)
|
22. Obligations under leases
The Group has entered into a number of head leases in relation to
its investment properties. These leases are for fixed terms and
subject to regular rent reviews. They contain no material
provisions for contingent rents, renewal or purchase options nor
any restrictions outside of the normal lease terms.
Lease liabilities in respect of rents on leasehold properties were
payable as follows:
|
2023
£000
|
2022
£000
|
Future minimum payments due:
|
|
|
Within one year
|
185
|
185
|
In the second to fifth years inclusive
|
740
|
740
|
After five years
|
8,898
|
9,083
|
|
9,823
|
10,008
|
Less: finance charges allocated to future periods
|
(7,126)
|
(7,301)
|
Present value of minimum lease payments
|
2,697
|
2,707
|
The present value of minimum lease payments is analysed as
follows:
|
2023
£000
|
2022
£000
|
Current
|
|
|
Within one year
|
114
|
114
|
|
114
|
114
|
|
|
|
Non-current
|
|
|
In the second to fifth years inclusive
|
405
|
410
|
After five years
|
2,178
|
2,183
|
|
2,583
|
2,593
|
|
2,697
|
2,707
|
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 lease length was as follows (based on annual
rentals):
|
2023
£000
|
2022
£000
|
Within one year
|
43,824
|
41,928
|
One to two years
|
39,548
|
39,244
|
Two to three years
|
34,806
|
35,416
|
Three to four years
|
29,506
|
29,972
|
Four to five years
|
25,454
|
24,748
|
After five years
|
105,675
|
99,788
|
|
278,813
|
271,096
|
These properties are measured under the fair value model as the
properties are held to earn rentals. Commercial property leases
typically have lease terms between five and ten years and include
clauses to enable periodic upward revision of the rental charge
according to prevailing market conditions. Some leases contain
options to break before the end of the lease term.
23. Net asset value
The net asset value per share calculation uses the number of shares
in issue at the year-end and excludes the actual number of shares
held by the Employee Benefit Trust at the year-end; see Note
20.
24. Financial instruments
The Group’s financial instruments comprise cash and cash
equivalents, accounts receivable, secured loans, obligations under
head leases and accounts payable that arise from its operations.
The Group does not have exposure to any derivative financial
instruments. Apart from the secured loans, as disclosed in Note 18,
the fair value of the financial assets and liabilities is not
materially different from their carrying value in the financial
statements.
Categories of financial instruments
31 March 2023
|
Notes
|
Held at
fair value through profit or loss
£000
|
Financial assets and liabilities at amortised
cost
£000
|
Total
£000
|
Financial assets
|
|
|
|
|
Debtors
|
15
|
–
|
4,023
|
4,023
|
Cash and cash equivalents
|
16
|
–
|
20,050
|
20,050
|
|
|
–
|
24,073
|
24,073
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
Loans and borrowings
|
18
|
–
|
222,764
|
222,764
|
Obligations under head leases
|
22
|
–
|
2,697
|
2,697
|
Creditors and accruals
|
17
|
–
|
9,035
|
9,035
|
|
|
–
|
234,496
|
234,496
|
31 March 2022
|
Notes
|
Held at
fair
value through profit or loss
£000
|
Financial assets and liabilities at amortised cost
£000
|
Total
£000
|
Financial assets
|
|
|
|
|
Debtors
|
15
|
–
|
5,483
|
5,483
|
Cash and cash equivalents
|
16
|
–
|
38,547
|
38,547
|
|
|
–
|
44,030
|
44,030
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
Loans and borrowings
|
18
|
–
|
216,832
|
216,832
|
Obligations under head leases
|
22
|
–
|
2,707
|
2,707
|
Creditors and accruals
|
17
|
–
|
9,101
|
9,101
|
|
|
–
|
228,640
|
228,640
|
25. Risk management
The Group invests in commercial properties in the United Kingdom. The following describes the
risks involved and the risk management framework applied by the
Group. Senior management reports regularly both verbally and
formally to the Board, and its relevant Committees, to allow them
to monitor and review all the risks noted below.
Capital risk management
The Group aims to manage its capital to ensure that the entities in
the Group will be able to continue as a going concern while
maximising the return to stakeholders through optimising its
capital structure. The Board’s policy is to maintain a strong
capital base so as to maintain investor, creditor and market
confidence and to sustain future development of the
business.
The capital structure of the Group consists of debt, as disclosed
in Note 18, cash and cash equivalents and equity attributable to
equity holders of the Company, comprising issued share capital,
reserves, retained earnings and revaluation reserve. The Group is
not subject to any external capital requirements.
The Group monitors capital on the basis of its gearing ratio. This
ratio is calculated as the principal borrowings outstanding, as
detailed under Note 18, divided by the gross assets. There is a
limit of 65% as set out in the Articles of Association of the
Company. Gross assets are calculated as non-current and current
assets, as shown in the Consolidated Balance Sheet.
At the reporting date the gearing ratios were as
follows:
|
2023
£000
|
2022
£000
|
Total borrowings
|
224,467
|
218,835
|
Gross assets
|
792,556
|
895,807
|
Gearing ratio (must not exceed 65%)
|
28.3%
|
24.4%
|
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 with different maturities, which will enable the Group
to manage its borrowings in an orderly manner over the long-term.
The Group also has a revolving credit facility which provides
greater flexibility in managing the level of borrowings.
The Group’s net debt to equity ratio at the reporting date was as
follows:
|
2023
£000
|
2022
£000
|
Total liabilities
|
244,932
|
238,677
|
Less: cash and cash equivalents
|
(20,050)
|
(38,547)
|
Net debt
|
224,882
|
200,130
|
Total equity
|
547,624
|
657,130
|
Net debt to equity ratio at end of year
|
0.41
|
0.30
|
Credit risk
The following tables detail the balances held at the reporting date
that may be affected by credit risk:
31 March 2023
|
Notes
|
Held at
fair value through profit
or loss
£000
|
Financial assets and liabilities at amortised
cost
£000
|
Total
£000
|
Financial assets
|
|
|
|
|
Tenant debtors
|
15
|
–
|
2,855
|
2,855
|
Cash and cash equivalents
|
16
|
–
|
20,050
|
20,050
|
|
|
–
|
22,905
|
22,905
|
31 March 2022
|
Notes
|
Held at
fair value through profit
or loss
£000
|
Financial assets and liabilities at amortised cost
£000
|
Total
£000
|
Financial assets
|
|
|
|
|
Tenant debtors
|
15
|
–
|
4,618
|
4,618
|
Cash and cash equivalents
|
16
|
–
|
38,547
|
38,547
|
|
|
–
|
43,165
|
43,165
|
Credit risk refers to the risk that a counterparty will default on
its contractual obligations resulting in financial loss to the
Group. The Group has adopted a policy of only dealing with
creditworthy counterparties and obtaining collateral where
appropriate, as a means of mitigating the risk of financial loss
from defaults. The Group’s exposure to and credit ratings of, its
counterparties are continuously monitored and the aggregate value
of transactions concluded is spread amongst approved
counterparties.
Tenant debtors consist of a large number of occupiers, spread
across diverse industries and geographical areas. Ongoing credit
evaluations are performed on the financial condition of tenant
debtors and, where appropriate, credit guarantees or rent deposits
are acquired. As at 31 March 2023
tenant rent deposits held by the Group’s managing agents in
segregated bank accounts totalled £2.6 million (2022: £2.4
million). The Group does not have access to these rent deposits
unless the occupier defaults under its lease obligations. Rent
collection is outsourced to managing agents who report regularly on
payment performance and provide the Group with intelligence on the
continuing financial viability of occupiers. The Group does not
have any significant concentration risk whether in terms of credit
risk exposure to any single counterparty or any group of
counterparties having similar characteristics. The credit risk on
liquid funds is limited because the counterparties are banks with
strong credit ratings assigned by international credit rating
agencies.
The carrying amount of financial assets recorded in the financial
statements, net of any allowances for losses, represents the
Group’s maximum exposure to credit risk. The Board continues to
monitor the Group’s overall exposure to credit risk.
The Group has a panel of banks with which it makes deposits, based
on credit ratings assigned by international credit rating agencies
and with set counterparty limits that are reviewed regularly. The
Group’s main cash balances are held with National Westminster Bank
Plc (‘NatWest’), Nationwide International Limited (‘Nationwide’)
and Lloyds Bank Plc (‘Lloyds’). Insolvency or resolution of the
bank holding cash balances may cause the Group’s recovery of cash
held by them to be delayed or limited. The Group manages its risk
by monitoring the credit quality of its bankers on an ongoing
basis. NatWest, Nationwide and Lloyds are rated by all the major
rating agencies. If the credit quality of any of these banks were
to deteriorate, the Group would look to move the relevant
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 2023 and at
31 March 2022, Standard & Poor’s
short-term credit rating for each of the Group’s bankers was
A-1.
There has been no change in the fair values of cash or receivables
as a result of changes in credit risk in the current or prior
periods, due to the actions taken to mitigate this risk, as stated
above.
Liquidity risk
Ultimate responsibility for liquidity risk management rests with
the Board, which has put in place an appropriate liquidity risk
management framework for the management of the Group’s short,
medium and long-term funding and liquidity management requirements.
The Group’s liquidity risk is managed on an ongoing basis by senior
management and monitored on a quarterly basis by the Board by
maintaining adequate reserves and loan facilities, continuously
monitoring forecasts, loan maturity profiles and actual cash flows
and matching the maturity profiles of financial assets and
liabilities for a period of at least 12 months.
The table below has been drawn up based on the undiscounted
contractual maturities of the financial assets/(liabilities),
including interest that will accrue to maturity.
31 March 2023
|
Less than
1 year
£000
|
1 to 5
years
£000
|
More than
5 years
£000
|
Total
£000
|
Cash and cash equivalents
|
20,652
|
–
|
–
|
20,652
|
Debtors
|
4,023
|
–
|
–
|
4,023
|
Capitalised finance costs
|
304
|
785
|
614
|
1,703
|
Obligations under head leases
|
(185)
|
(740)
|
(8,898)
|
(9,823)
|
Fixed interest rate loans
|
(9,262)
|
(37,049)
|
(233,629)
|
(279,940)
|
Floating interest rate loans
|
(690)
|
(12,696)
|
–
|
(13,386)
|
Creditors and accruals
|
(9,035)
|
–
|
–
|
(9,035)
|
|
5,807
|
(49,700)
|
(241,913)
|
(285,806)
|
31 March 2022
|
Less than
1 year
£000
|
1 to 5
years
£000
|
More than
5 years
£000
|
Total
£000
|
Cash and cash equivalents
|
38,547
|
–
|
–
|
38,547
|
Debtors
|
5,483
|
–
|
–
|
5,483
|
Capitalised finance costs
|
304
|
934
|
765
|
2,003
|
Obligations under head leases
|
(185)
|
(740)
|
(9,083)
|
(10,008)
|
Fixed interest rate loans
|
(8,524)
|
(37,049)
|
(242,891)
|
(288,464)
|
Floating interest rate loans
|
(113)
|
(5,031)
|
–
|
(5,144)
|
Creditors and accruals
|
(9,101)
|
–
|
–
|
(9,101)
|
|
26,411
|
(41,886)
|
(251,209)
|
(266,684)
|
The Group expects to meet its financial liabilities through the
various available liquidity sources, including a secure rental
income profile, asset sales, undrawn committed borrowing facilities
and, in the longer-term, debt refinancing.
Market risk
The Group’s activities are primarily within the real estate market,
exposing it to very specific industry risks.
The yields available from investments in real estate depend
primarily on the amount of revenue earned and capital appreciation
generated by the relevant properties, as well as expenses incurred.
If properties do not generate sufficient revenues to meet operating
expenses, including debt service costs and capital expenditure, the
Group’s operating performance will be adversely
affected.
Revenue from properties may be adversely affected by the general
economic climate, local conditions such as oversupply of properties
or a reduction in demand for properties in the market in which the
Group operates, the attractiveness of the properties to occupiers,
the quality of the management, competition from other available
properties and increased operating costs.
In addition, the Group’s revenue would be adversely affected if a
significant number of occupiers were unable to pay rent or its
properties could not be rented on favourable terms. Certain
significant expenditure associated with investment in real estate
(such as external financing costs and maintenance costs) is
generally not reduced when circumstances cause a reduction in
revenue from properties. By diversifying in regions, sectors, risk
categories and occupiers, senior management expects to mitigate the
risk profile of the portfolio effectively. The Board continues to
oversee the profile of the portfolio to ensure risks are
managed.
The valuation of the Group’s property assets is subject to changes
in market conditions. Such changes are taken to the Consolidated
Statement of Comprehensive Income and thus impact on the Group’s
net result. A 5% increase or decrease in property values would
increase or decrease the Group’s net result by £38.3 million (2022:
£42.5 million).
Interest rate risk management
Interest rate risk arises on interest payable on the revolving
credit facility only. The Group’s senior debt facilities have fixed
interest rates over the terms of the loans. The amount drawn under
the revolving credit facility makes up a small proportion of the
overall debt, the Group therefore has limited exposure to interest
rate risk on its borrowings and no sensitivity is
presented.
Interest rate risk
The following table sets out the carrying amount, by maturity, of
the Group’s financial assets/(liabilities).
31 March 2023
|
Less than
1 year
£000
|
1 to 5
years
£000
|
More than
5 years
£000
|
Total
£000
|
Floating
|
|
|
|
|
Cash and cash equivalents
|
20,050
|
–
|
–
|
20,050
|
Secured loan facilities
|
–
|
(11,900)
|
–
|
(11,900)
|
|
|
|
|
|
Fixed
|
|
|
|
|
Secured loan facilities
|
(1,433)
|
(6,401)
|
(204,733)
|
(212,567)
|
Obligations under leases
|
(114)
|
(405)
|
(2,178)
|
(2,697)
|
|
18,503
|
(18,706)
|
(206,911)
|
(207,114)
|
31 March 2022
|
Less than
1 year
£000
|
1 to 5
years
£000
|
More than
5 years
£000
|
Total
£000
|
Floating
|
|
|
|
|
Cash and cash equivalents
|
38,547
|
–
|
–
|
38,547
|
Secured loan facilities
|
–
|
(4,900)
|
–
|
(4,900)
|
|
|
|
|
|
Fixed
|
|
|
|
|
Secured loan facilities
|
(1,372)
|
(6,127)
|
(206,436)
|
(213,935)
|
Obligations under leases
|
(114)
|
(410)
|
(2,183)
|
(2,707)
|
|
37,061
|
(11,437)
|
(208,619)
|
(182,995)
|
Concentration risk
As discussed above, all of the Group’s investments are in the UK
and therefore the Group is exposed to macroeconomic changes in the
UK economy. Furthermore, the Group derives its rental income from
around 400 occupiers, although the largest occupier accounts for
only 4.8% of the Group’s annual contracted rental
income.
Currency risk
The Group has no exposure to foreign currency risk.
26. Related party transactions
The total fees earned during the year by the Non-Executive
Directors of the Company amounted to £275,000 (2022: £275,000). As
at 31 March 2023, the Group owed £nil
to the Non-Executive Directors (2022: £nil).
The remuneration of the Executive Directors is set out in note 7
and in the Annual Remuneration Report.
Picton Property Income Limited has no controlling
parties.
27. Events after the Balance Sheet date
A dividend of £4,771,000 (0.875 pence
per share) was approved by the Board on 25
April 2023 and will be paid on 31 May
2023.
A further £3,000,000 was drawn down under the revolving credit
facility with National Westminster Bank Plc on 3 May 2023.
END