23 May 2024
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 2024.
Chair, Lena Wilson CBE, commented:
"These results demonstrate that we have been able to grow EPRA earnings despite the impacts of inflation, higher interest rates and a weaker economic backdrop.
This year, helped by our industrial exposure and strategy to reposition non-core office assets for alternative uses, our portfolio has outperformed the MSCI UK Quarterly Property Index. This marks our eleventh consecutive year of outperformance and maintains our track record of upper quartile performance since launch in 2005.
We have a resilient business model with long-term fixed rate financing, and we are confident in our ability to capture the significant income upside potential from our portfolio. I am pleased that we were able to announce in April a near 6% dividend increase."
Michael Morris, Chief Executive of Picton, commented:
"Our approach capitalises on real estate being an ever-evolving asset class, with buildings continually adapted, upgraded or repurposed to meet changing occupier demand.
There remains significant income upside within the portfolio, whether that is captured directly at rent review or lease expiry or through the recycling of assets and reinvestment.
Our priority in the short-term is continuing to grow EPRA earnings while focusing on improving our share price rating to be more reflective of the performance and potential of the business."
Robust financial performance delivering EPRA earnings growth
‒ EPRA earnings of £21.7 million, up 2% (2023: £21.3 million)
‒ Net assets of £524.5 million, or 96p per share (2023: £547.6 million, or 100p per share)
‒ Dividends paid during the financial year of £19.1 million (2023: £19.1 million)
‒ Strong dividend cover of 114%
Outperforming property portfolio with improving income and reversionary potential
‒ Continued MSCI outperformance for 11 consecutive years with a total property return of 1.6% for the year (MSCI UK Quarterly Property Index: -1.0%)
‒ Delivered upper quartile outperformance against the MSCI UK Quarterly Property Index over three, five and ten years, and since launch in 2005
‒ Repositioned portfolio to reduce office exposure with two office assets held for sale at year end (totalling £35.7 million)
‒ Capturing rental growth through:
‒ 26 lettings, 3% ahead of March 2023 ERV
‒ 31 lease renewals or regears, 2% ahead of March 2023 ERV
‒ 13 rent reviews, 2% ahead of March 2023 ERV
‒ 3% increase in passing rent, contracted rent and ERV
‒ 4.5% increase in net property income
‒ Diversified income stream with stable occupancy of 91%, over 99% rent collection and WAULT of 4.2 years to break or 5.8 years to expiry
‒ Portfolio with significant reversionary potential of £12.8 million, 29% above the March 2024 passing rent
Valuable long-term debt structure
‒ Loan to value of 28%
‒ Weighted average interest rate of 3.9%
‒ 93% of drawn borrowings fixed with 2031/32 maturities
‒ EPRA NDV of 101p per share, reflecting fair value of debt
Continued sustainability progress towards net zero targets
‒ Improvement in portfolio EPC ratings, with 80% now rated A-C (2023: 76%)
‒ Reduction in Scope 1 and 2 emissions by 16% compared to 2019 baseline
‒ £4.5 million invested into upgrading over 20 assets
‒ 99% of leases completed during the year contained green clauses
‒ Increase in solar capacity of 184% compared to 2023
Positive activity post year-end supporting dividend increase
‒ Reduced office exposure with the sale of Angel Gate, London EC1 for £29.6 million
‒ Sale proceeds used in part to repay £16.4 million drawn under RCF, the £50.0 million facility is now undrawn
‒ Weighted average interest rate on debt facilities reduced with 100% now fixed at 3.7%
‒ Occupancy increases to 93% when excluding assets held for sale
‒ Completed lease extensions at Grantham (industrial), Radlett (industrial) and Marlow (office) for a combined rent of £2.5 million per annum, a 14% increase on the previous passing rent
‒ Encouraging pipeline of leasing activity, agreed subject to contract, for a combined rent of £0.9 million per annum, at Bristol (office), Bracknell (industrial), Warrington (industrial) and Gloucester (industrial)
‒ Dividend increased by 5.7% to 3.7p per share, effective from May 2024
| | 31 March 2024 | 31 March 2023 | 31 March 2022 |
| Property valuation | £745m | £766m | £849m |
| Net assets | £524m | £548m | £657m |
| EPRA NTA per share | 96p | 100p | 120p |
| | Year ended | Year ended | Year ended |
| (Loss)/profit for the year | £(4.8)m | £(90.0)m | £147.4m |
| EPRA earnings | £21.7m | £21.3m | £21.2m |
| Earnings per share | (0.9)p | (16.5)p | 27.0p |
| EPRA earnings per share | 4.0p | 3.9p | 3.9p |
| Total return | (0.9)% | (13.9)% | 28.3% |
| Total shareholder return | (1.0)% | (26.4)% | 18.7% |
| Total dividend per share | 3.5p | 3.5p | 3.4p |
| Dividend cover | 114% | 112% | 115% |
THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION FOR THE PURPOSES OF THE UK MARKET ABUSE REGULATION
For further information:
Tavistock
James Verstringhe
020 7920 3150, james.verstringhe@tavistock.co.uk
Picton
Kathy Thompson, Company Secretary
020 7011 9988, kathy.thompson@picton.co.uk
About Picton
Established in 2005, Picton is listed on the main market of the London Stock Exchange and is a constituent of a number of EPRA indices including the FTSE EPRA Nareit Global Index.
Picton owns and actively manages a £745 million UK commercial property portfolio, invested across 49 assets and with around 400 occupiers (as at 31 March 2024).
Through an occupier focused, opportunity led approach, Picton aims to be one of the consistently best performing diversified UK REITs and has delivered upper quartile outperformance and a consistently higher income return than the MSCI Quarterly Property Index since launch.
With a portfolio strategically positioned to capture income and capital growth, currently weighted towards the industrial sector, Picton's agile business model provides flexibility to adapt to evolving market trends over the long-term.
Picton has a responsible approach to business and is committed to being net zero carbon by 2040.
For more information please visit: www.picton.co.uk
Chief Executive's Review
Well-positioned and resilient portfolio
We have successfully continued our long-term track record of outperformance through our proactive approach to asset management.
This year, we have increased both rental income and the reversionary potential of our portfolio, despite the impact of higher costs, and we have also been able to grow our EPRA earnings. The business is well-positioned with valuable long-term fixed rate debt and we continue to outperform the MSCI UK Quarterly Property Index.
Despite a challenging economic backdrop we have achieved letting success across all areas of the portfolio and extended or increased income, capturing reversionary potential and demonstrating rental growth within the portfolio. The team has worked incredibly hard and I would like to thank them for their individual and collective contributions over the last 12 months as we have continued to make good progress with our strategic priorities.
Performance
We have seen considerably more stability in the property market, however, it has not been an easy operating environment with the ongoing impact of rising interest rates affecting sentiment and activity. Our portfolio valuation reduced from £766 million to £745 million or 2.8% over the year, contributing to a decline in net assets of 4.2% to £524 million or 96 pence per share. Encouragingly our net assets showed stability between December 2023 and March 2024, the first time since the 2022 disruption in bond markets.
Despite this, we have improved many key metrics over the year. Most notably, we have increased the passing rent, contracted rent and also the reversionary potential of the portfolio by 3%.
We have operated with a well-covered dividend of 114% (covered for the twelfth consecutive year) and earlier this month we were able to announce a near 6% uplift, increasing the dividend above its pre-pandemic level.
Our share price performance over the year has been weaker, with a total shareholder return of -1%. At the year-end our discount to net asset value was 32%, but encouragingly this has narrowed in recent weeks, in part reflecting some of the positive activity that we have been able to announce.
Portfolio Performance
Outperforming property portfolio
We have again outperformed the MSCI UK Quarterly Property Index, now for the eleventh consecutive year and we continue to deliver upper quartile performance since launch in 2005.
Our diversified approach and long-term track record highlight the benefits of being able to adapt the portfolio to changing market conditions.
Growing occupancy and income
We have taken steps to reposition the portfolio, through our alternative use strategy, looking to reduce our office exposure. During the year, we exchanged contracts to sell two part-vacant office buildings, both at premiums to the preceding valuation. One disposal completed following the year-end and the other is conditional upon planning permission which is expected to be obtained during the next financial year.
Headline occupancy remained stable at 91%. Occupancy in our industrial and retail assets was more than 97%, but offices remained lower, in part due to market conditions, and also the need to obtain vacant possession on some assets in order to maximise disposal proceeds. Excluding the two assets held for sale at the year- end, occupancy rose to 93%.
We have been able to grow rental income and capture some of the reversionary potential in the portfolio through leasing activity and rent reviews during the year, particularly in the industrial assets, and further details are within the Portfolio Review section.
Operational excellence
The long-term success we have had at a property level has also been mirrored with prudent management of our balance sheet.
We have been able to repay our revolving credit facility using proceeds from an asset sale, post year-end. At the time of writing, our revolving credit facility of £50.0 million remains fully undrawn and we will be exploring options to extend this ahead of its maturity next year.
We have a valuable debt structure with 100% of our long-term debt fixed for over seven years and at an average interest rate of 3.7%, well below the prevailing market rate. The fair value of our debt book is not reflected in our reported net assets, but in our EPRA NDV which is 5% higher or 101 pence per share.
During the year, we incurred a number of non-recurring costs to further develop and improve the operation of the business. Effective from October, we internalised our company secretarial function, which has improved our corporate governance and our overall operational effectiveness.
We have also recruited a new Chief Financial Officer, Saira Johnston, as successor to Andrew Dewhirst who retired at the end of the financial year. Andrew has been with the Company since 2011 and will be greatly missed by the team. We are looking forward to working with Saira who has a proven track record in real estate finance.
Despite the inflationary pressures on costs generally and an increase in these one-off costs, we have been able to grow EPRA earnings by 2.2% over the year.
Acting responsibly
We have continued to invest in our portfolio to ensure not only that it meets the needs of today's occupiers but is also future-proofed and helps us achieve our net zero carbon commitments.
We have invested in our assets and improved our portfolio EPCs with 80% of the portfolio now rated A-C. This is yet another year-on-year improvement and compares with 55% A-C rated in 2020.
We have made good progress in removing gas installations and converting heating to electrical systems across five assets. This is reflected in the 10% reduction in like-for-like Scope 1 emissions in the year. We have installed more on-site renewables in the form of solar this year than in any preceding period; an increase in capacity of 184%.
Consolidation and growth
The Board and the team are committed to act in the interests of all stakeholders and recognise the need to remain relevant to shareholders. Much has been written about the challenges with the UK listed markets generally. Real estate businesses have been impacted by the rising interest rate environment and wide share price discounts have led to consolidation, acquisitions and managed wind-downs.
We considered multiple opportunities during the year and specifically had extensive discussions in 2023 about a possible combination with UK Commercial Property REIT, which we were disappointed to be unable to progress. We still believe there is merit in consolidation, and equally that there is a place for a well-managed diversified REIT that can adapt to changing market conditions.
While the rationale for merging was to capitalise on our internalised management model and track record, allowing shareholders to benefit from the economies of scale, we believe this corporate activity also had some adverse short-term impact on our share price.
Outlook
2024 appears to have started with considerably more momentum than the preceding year and this has been apparent in the continued rental growth and stabilisation in capital growth as captured in the MSCI indices. The occupier markets remain more resilient than some had expected and we have a good pipeline of activity across all areas of the portfolio.
Our approach capitalises on real estate being an ever-evolving asset class, with buildings continually adapted, upgraded or repurposed to meet changing occupier demand.
There remains significant income upside within the portfolio, whether that is captured directly at rent review or lease expiry or through the recycling of assets and reinvestment.
Our priority in the short-term is continuing to grow EPRA earnings while focusing on improving our share price rating to be more reflective of the performance and potential of the business.
Michael Morris
Chief Executive
22 May 2024
Our Marketplace
Lower interest rates will fuel economic recovery
Economic backdrop
After a challenging 2023, the UK economy appears to be improving, with inflation falling and the Bank of England widely anticipated to commence base rate cuts in the second half of 2024. This expected reduction in interest rates should continue the positive momentum in terms of improving business, investor and consumer confidence, as the cost of debt and cost of living pressures continue to ease.
Despite increases in long-term UK Government bond yields over the year, paralleled by similar rises in property yields, there are signs of stabilisation emerging.
The economy has already recovered from the mild technical recession of 2023, with the Office for National Statistics estimating encouragingly strong GDP growth of 0.6% for the first three months of 2024.
In terms of output, both services and production contributed positively to the recovery, recording growth of 0.7% and 0.8% respectively. Output from construction fell -0.9%, which somewhat reflects the bad weather conditions that affected the building sector during this period. In terms of expenditure, increases in the volume of net trade, household and Government spending contributed to economic growth.
Inflation has fallen a long way from its forty-year peak of 11.1% in October 2022, with the annual increase in the consumer prices index in March 2024 at 3.2%. Core inflation (excluding energy, food and tobacco prices), which has been more stubborn, reduced to 4.2% in March 2024.
There has recently been some softening within the labour market, with the unemployment level increasing to 4.3%, and job vacancy numbers on a downward trend, however real wage growth is now positive and has remained so since June 2023. As at March 2024, wage growth in real terms was 2.0% per annum for regular pay and 1.7% per annum for total pay.
The housing market has remained resilient in the face of rising interest rates, and house price growth has started to re-emerge, with new mortgage rates down from the peak of summer 2023. According to the Halifax House Price Index, house prices grew 1.1% in the year to April 2024. Widespread loan defaults and forced sales have not been a feature of this downturn, partly due to stricter lending criteria and high levels of employment in comparison to previous market cycles.
According to the ONS, retail sales volumes have been on a downward trajectory since April 2021, whereas retail sales values have been rising, which reflects the impact of inflation. Looking at the quarter to March 2024, retail sales volumes did increase by 1.9% compared to the previous three months, following the low sales volumes over the Christmas period. Going forwards, households benefitting from falling inflation and interest rates should support consumer spending.
The short to medium-term economic outlook offers signs of cautious optimism. Downside risks remain, particularly in relation to geopolitical instability in the Middle East and eastern Europe, which could potentially fuel inflationary pressures.
The timing of and scale of the Bank of England's interest rate cuts are highly dependent on the trajectory of inflation and strength of the labour market in the coming months.
UK property market
For the year to March 2024, the property market remained subdued as the impact of higher interest rates continued to be felt.
The MSCI UK Quarterly Property Index reported an All Property total return of -1.0%, comprising -5.5% capital growth and 4.7% income return. This was a significant improvement on the -12.6% total return for the year to March 2023. In March 2024, the MSCI All Property equivalent yield was 6.6% (March 2023: 6.2%).
The occupier market has recently shown more resilience than the investment market, with All Property ERV growth for the year to March 2024 recorded at 3.7% (March 2023: 3.5%).
The All Property averages mask nuances at sector and sub-sector levels, with polarisation remaining a key theme.
Of the three main sectors, industrial was the best performer, both in terms of investment returns and rental growth. Standard industrial market fundamentals are particularly favourable, with continued healthy demand for well-placed units and low levels of supply.
The MSCI Industrial total return for the year to March 2024 was 4.4%, comprising capital growth of 0.0% and an income return of 4.3%. Looking at sub-sectors, capital growth ranged from -0.9% for Distribution Warehouses to 1.7% for Standard Industrial - London.
In March 2024 the MSCI Industrial equivalent yield was 6.0% (March 2023: 5.7%). Industrial rental growth for the year to March 2024 was 6.5% and strong in all sub-sectors, ranging from 5.7% for Standard Industrial - Rest of UK to 7.0% for Standard Industrial - London.
The office sector is still undergoing a period of recalibration, with increasing refurbishment and upgrading costs, combined with weaker and more selective occupational demand, impacting both pricing and investor sentiment.
The MSCI Office total return for the year to March 2024 was -9.5%, comprising -13.1% capital growth and 4.1% income return. Office capital growth was negative across all sub-sectors, ranging from -18.7% in the Rest of London to -9.9% in Central London. In March 2024 the MSCI Office equivalent yield was 7.6% (March 2023: 6.7%). Office rental growth for the year to March 2024 was 2.8% and positive for all sub-sectors, ranging from 0.5% for the Rest of London to 4.6% in Central London, however, these rental growth numbers do not reflect capital invested into upgrading space.
The retail sector has shown signs of stabilisation, aided by easing inflation and a recovery in real earnings positively impacting consumer confidence. However, store closures and CVAs still remain a feature of the market and not all sub-sectors are recovering at the same pace.
The MSCI Retail total return for the year to March 2024 was -0.2%, comprising capital growth of -5.9% and income return of 6.0%.
Retail capital growth ranged from -8.3% to -1.0% between sub-sectors; Supermarkets experienced the strongest fall in capital values, whereas Out of Town Shopping Centres was the best performer. In March 2024, the MSCI Retail equivalent yield was 6.8% (March 2023: 6.6%). Retail ERV growth was 1.0%, with sub-sectors ranging from -1.6% for Shopping Centres - In Town to 3.7% for Department Stores.
During the year there has been lacklustre transactional activity, due to the increased cost of debt and falling capital values. MSCI recorded £40.1 billion of investment transactions for the year to March 2024, which is 27% down on the £55.4 billion recorded for the year to March 2023 and 51% lower than the £82.1 billion transacted in the year to March 2022. Transactions in the industrial sector had the highest weighting, comprising 24% of the total.
With interest rates anticipated to reduce from the second half of 2024 and increased liquidity in the lending market, it is expected that trading activity will begin to pick up as we head towards the end of the year.
Portfolio Review
| Industrial weighting | 59% |
| South East | 42% |
| Rest of UK | 17% |
| Office weighting | 30% |
| Rest of UK | 9% |
| South East | 8% |
| Central London | 7% |
| Alternative use | 6% |
| Retail and Leisure weighting | 11% |
| Retail Warehouse | 7% |
| High Street Rest of UK | 2% |
| Leisure | 2% |
Continued portfolio outperformance
This year we have been able to repurpose assets to unlock value with alternative use potential and continue our property level outperformance.
We continue to actively manage the portfolio completing over 80 asset management transactions, increasing both passing rent and estimated rental value (ERV).
At the year-end, the portfolio passing rent was £44.7 million, an increase from the prior year of £1.4 million, or 3%. The contracted rent, which is the gross rent receivable after the expiry of lease incentives, also increased by 3% or £1.2 million.
The March 2024 ERV of the portfolio was £57.6 million, a 3% increase on the prior year. We had ERV growth of 3% in the industrial sector proven by new lettings and active management. The office sector was up 4% with our central London holdings in Farringdon and Covent Garden particularly benefitting from rental growth, and the retail and leisure sector increased by 1%.
Recognising the weak economic backdrop during the year, occupational markets have been remarkably resilient, and there is a noticeable improvement so far in 2024 compared with 2023.
Occupational demand remains robust in the industrial sector and in the retail sector it has stabilised for good quality real estate. The office sector is still going through a period of transition, with the very best quality and greener buildings seeing rental growth, while offices requiring greater capital investment or which are in the wrong location, are struggling to attract occupiers.
We have successfully repurposed office assets in Cardiff for student accommodation and in London for residential use, resulting in exchange of contracts to sell both assets at premiums to the preceding quarterly independent valuation. We are also pursuing an alternative use strategy at Charlotte Terrace, London W14.
Our investment into over 20 assets has helped us to retain and secure new occupiers while improving our EPC ratings for the fourth consecutive year.
Portfolio overview
Performance
Our portfolio comprises 49 assets, with around 400 occupiers, and is valued at £744.6 million with a net initial yield of 5.2% and a reversionary yield of 7.0%. The average lot size of the portfolio is £15.2 million as at 31 March 2024.
Our asset allocation, with 59% in industrial, 30% 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 valuation only decreased by 3%, after a 12% decrease in the prior year. This compares with the MSCI UK Quarterly Property Index recording capital growth of -5.5% over the period.
We believe that the portfolio remains well placed in respect of our overall sector allocations, which are critical to outperformance when there is such a divergence in returns.
Industrial
We believe that industrial yields, and valuations are now stabilising for some of the best multi-let estates. Due to the level of development of distribution units over the past few years, we are of the opinion that secondary units may struggle to attract occupiers.
Occupational demand in the sector remains good and we are capturing rental growth. A lack of supply of multi-let estates, coupled with high build costs, means that occupiers have restricted choice when looking for a unit, which has driven rental growth across the country.
Capital values were marginally positive over the year. The passing rent increased by 12% and the ERV grew by 3%, or £0.9 million.
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 3.8 years.
The multi-let estates, of which 88% by value are in the South East, total 2.1 million sq ft and we only have seven vacant units out of 158, with two under offer and one currently undergoing refurbishment.
The industrial portfolio currently has £6.1 million of reversionary income potential, with £0.7 million relating to the void units.
Office
There is limited appetite for investment in the office sector, due to concerns about occupational demand and capital expenditure requirements. While this is certainly the case in respect of some secondary buildings, prime offices are still attracting occupiers and showing rental growth as reflected in our portfolio.
Asset selection is key. Each building must be viewed independently, in respect of its location and dynamics, sustainability, flexibility of floorplates and occupier amenities. Certain secondary locations lack occupier demand post-pandemic, and are more suited to alternative use strategies.
We have a rolling capital investment programme, which is currently focused on removing natural gas from buildings as we upgrade air-conditioning systems that have reached or are approaching the end of their life.
Capital values decreased by 8%, or £20.4 million. The passing rent decreased by 7%, some of which was related to obtaining vacant possession for alternative uses, and the ERV grew by 4%, or £0.8 million.
Excluding the properties held for sale, the office portfolio currently has £5.9 million of reversionary income potential, with £2.9 million relating to the void units.
Retail and Leisure
The cost of living crisis has further affected the sector, with well-publicised retail failures this year. However, it is again very asset specific and if the location is not significantly oversupplied there is occupational demand for well-configured units. We see opportunities in the sector for certain retail warehouse and prime high street locations off rebased rents.
Our fully leased retail warehouse parks are underpinned by value-led retailers and make up 7% of the total portfolio. They consist of 0.4 million sq ft in 19 units across four parks and are fully leased, with a weighted average unexpired lease term of 4.6 years.
Our high yielding high street portfolio, which makes up 2% of the total portfolio, is fully leased except for two small shops in Carlisle that became available during the second half of the year.
Capital values decreased by 2%, or £1.6 million. The passing rent increased by 2% and the ERV increased by 1%, or £0.1 million.
The retail and leisure portfolio has negative reversion of £0.8 million per annum, primarily relating to the overrenting of some of the high street retail assets.
Portfolio activity
Proactive management
It has been an active year in respect of asset management transactions.
We completed:
‒ 26 lettings or agreements to lease, 3% ahead of ERV and securing additional contracted rent of £2.4 million
‒ 31 lease renewals or regears, 2% ahead of ERV, securing an uplift in contracted rent of £0.4 million
‒ 13 rent reviews, 2% ahead of ERV, securing an uplift in passing rent of £0.8 million
‒ Five lease variations to remove occupier break options, securing £1.0 million of income
‒ Seven lease surrenders to facilitate active management
Leasing and occupancy
Occupancy has been stable during the year at 91%, rising to 93%, excluding the two office assets which are held for sale at the year-end. This compares to the MSCI UK Quarterly Property Index of 92% as at 31 March 2024. The total void ERV is £3.7 million, excluding the held for sale properties.
Our industrial portfolio is 98% leased with demand remaining high across the country. We have only seven vacant industrial units, with two under offer and one being refurbished.
The office portfolio occupancy is 80%, or 85%, excluding the properties held for sale. Seven of our office buildings are fully leased, two are being sold and we have suites available in the remaining eight buildings with four of these being over 25% vacant by ERV.
In terms of retail and leisure, occupancy is 98%. The retail warehouse portfolio is fully leased, and we have two small vacant high street shops. At Regency Wharf, Birmingham, we have one remaining office suite to lease.
Our largest voids, excluding the two properties held for sale, which account for 31% of the void, are at:
‒ Tower Wharf, Bristol - accounting for 13% of the total void. We have agreed terms to upsize an existing occupier, increasing their floorspace by 146%. We will be offering fully fitted suites in respect of the remaining space, which is to be refurbished later this year.
‒ Charlotte Terrace, London - accounting for 13% of the total void. We are working through options for alternative uses and are awaiting planning permission.
‒ Colchester Business Park, Colchester - accounting for 11% of the total void. The majority relates to an office building that recently became available. We are working up a refurbishment of the property, to include SwiftSpace suites, and already have occupational interest.
Retention
Over the year, total ERV at risk, due to lease expiries or break options, totalled £6.4 million. This excludes office buildings where we have intentionally kept space vacant for change of use.
We retained 76% of total ERV at risk in the year to March 2024. Of the ERV that was not retained, a further 1% or £0.1 million was re-let to new occupiers during the year.
In addition, a further £2.7 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 £4.5 million into the portfolio across more than 20 projects, with the top five projects accounting for 57% of the spend.
These have all been aimed at enhancing space to retain and attract occupiers, improve sustainability credentials and grow income. All works undertaken are in line with our sustainable refurbishment guidelines, outlining best industry practice. Where appropriate, we remove natural gas from buildings, install solar panels and upgrade insulation, in line with our net zero carbon pathway.
We are continually focused on future-proofing our assets from a sustainability perspective, which has resulted in an improvement in our EPC ratings with 80% of our properties (by rental value) now rated C and above, an increase of 4% on the prior year.
Investment activity
The investment market was subdued throughout 2023, with a low volume of transactions. However, since the start of 2024, we have seen more activity in the market, reflecting greater optimism.
No acquisitions were made during the year, and we exchanged contracts to sell two properties as detailed below.
Angel Gate, London EC1
Contracts were exchanged at the end of March 2024 to sell Angel Gate, EC1, with completion occurring mid-April. The sale is in line with our strategy to repurpose appropriate office assets and follows the securing of residential planning consents during 2023.
The sale consideration was 5% ahead of the 31 December 2023 valuation of £28.1 million. The property is approximately 50% occupied and represented 19% of the total portfolio void at the year-end.
Longcross, Cardiff
During the year, we exchanged contracts to sell this almost vacant office building to an experienced student accommodation developer.
The transaction is conditional on planning permission, which will be submitted during Summer 2024. The sale price is dependent on the exact planning consent obtained and, in particular, upon the number of rooms secured. The base price was 16% ahead of the March 2023 valuation and we expect to benefit from an overage payment once planning is secured. We will retain an adjacent small income-producing industrial unit and vacant car parking site.
To facilitate the disposal, we have completed a number of surrenders that ensure we can secure vacant possession in 2024, albeit this has a short-term negative effect on portfolio occupancy and net income.
Currently, the property is approximately 90% vacant and represents 12% of the total portfolio void.
Looking ahead
Outlook
The sharp yield correction in 2022/23 caused a widespread repricing of commercial property, but we are now seeing values stabilise and indeed some are increasing. Occupational markets on the whole have continued to remain positive even when values were falling. With interest rates predicted to reduce in the second half of 2024, we can see values rising for prime properties in all three sectors we are invested in.
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 future-proofed properties that are attractive to occupiers.
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 2024, the portfolio had £12.8 million of reversionary income potential; £5.3 million from letting the vacant space, £3.9 million from expiring rent-free periods or stepped rents and £3.6 million where the rent is below market level.
There is a wide disparity in performance across the sectors and it comes back to a building's fundamentals and micro-location. Good quality, well-located real estate will attract occupiers, but secondary assets will remain in less demand. The quality of the portfolio combined with sector weightings are critical to outperformance.
Demand for our multi-let industrial properties continues to be good as proven by our high occupancy, significant rental growth over the year and growing ERVs. Our distribution portfolio remains fully let. With industrial accounting for 59% of the total portfolio by value, we believe it will contribute to our performance, with supply constraints and high building costs likely to lead to further rental growth.
Each office building has to be viewed on its own merits, with the majority of our buildings offering strong fundamentals in terms of amenities, natural light, adaptable floor plates and above average car parking facilities. Our strategy to reduce office exposure, where we believe there is a lack of occupational demand and a higher value alternative use can be created, is successfully moving forward with two sales exchanged and further potential opportunities identified.
The retail sector is now seeing some stability, despite recent retailer closures, for example The Body Shop and Wilko, however, value retailers are taking a lot of the space becoming available. The sector provides an attractive yield and buying opportunities for best-in-class stock.
The portfolio remains well-placed and of a high quality, enabling us to maintain and enhance income through our proven occupier focused approach.
Our focus is on reducing office exposure, which will enable higher occupancy, and improving the overall portfolio income through reinvestment and refurbishment.
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 | 340,900 | >100 | 20 | 98 | A-D |
| River Way Industrial Estate, Harlow | Industrial | 454,800 | 50-75 | 9 | 100 | A-D |
| Stanford Building, London WC2 | Office | 20,100 | 30-50 | 5 | 100 | B-D |
| Datapoint, Cody Road, London E16 | Industrial | 55,100 | 20-30 | 6 | 100 | B-C |
| Shipton Way, Rushden | Industrial | 312,900 | 20-30 | 1 | 100 | C |
| Angel Gate, City Road, London EC1* | Office | 64,600 | 20-30 | 14 | 52 | B-D |
| Lyon Business Park, Barking | Industrial | 99,400 | 20-30 | 8 | 100 | B-E |
| Sundon Business Park, Dencora Way, Luton | Industrial | 127,800 | 20-30 | 12 | 100 | B-D |
| Tower Wharf, Cheese Lane, Bristol | Office | 70,600 | 20-30 | 5 | 67 | B-C |
| 50 Farringdon Road, London EC1 | Office | 31,300 | 20-30 | 4 | 100 | B |
*Asset held for sale.
Top ten occupiers
The largest occupiers, based as a percentage of contracted rent, as at 31 March 2024, are as follows:
| Occupier | Contracted rent (£m) | % |
| Public sector | 1.7 | 3.6 |
| Whistl UK Limited | 1.6 | 3.4 |
| The Random House Group Limited | 1.6 | 3.4 |
| B&Q Plc | 1.2 | 2.6 |
| Snorkel Europe Limited | 1.2 | 2.4 |
| XMA Limited | 1.0 | 2.0 |
| Portal Chatham LLP | 0.9 | 1.8 |
| DHL Supply Chain Limited | 0.8 | 1.6 |
| 4 Aces Limited | 0.7 | 1.4 |
| Hi-Speed Services Limited | 0.7 | 1.4 |
| Total | 11.4 | 23.6 |
Longevity of income
As at 31 March 2024, expressed as a percentage of contracted rent, the average length of leases to first termination was 4.2 years (2023: 4.6 years). This is summarised as follows:
| | % |
| 0 to 1 year | 14.3 |
| 1 to 2 years | 24.1 |
| 2 to 3 years | 15.2 |
| 3 to 4 years | 10.7 |
| 4 to 5 years | 9.0 |
| 5 to 10 years | 20.3 |
| 10 to 15 years | 5.3 |
| 15 years or more | 1.1 |
| Total | 100 |
Financial Review
Earnings growth to support dividend increase
We have delivered net property income growth and increased EPRA earnings during the year, despite a challenging economic backdrop and high interest rate environment.
EPRA earnings, comprising the operating profit before movement on investments, less the net interest expense, was £21.7 million, an increase of 2.2% during the financial year. This was driven by growth in net property income of 4.5% which was primarily delivered from the industrial assets.
The overall loss for the year was £4.8 million which arose as a result of the negative valuation movements of £26.5 million despite commercial property values stabilising during the last quarter of the financial year.
We have prioritised the divestment of low-income producing office assets in order to support earnings growth over the medium-term which has enabled us to repay our floating rate debt after the year-end. We are focused on delivering a covered and sustainable dividend through our sector and asset allocation alongside asset management that supports dividend progression for our shareholders.
Net asset value
The Group's net assets as at 31 March 2024 was £524.5 million, or 96 pence per share. This reflected a decrease of 4% or 4 pence per share over the financial year. The analysis of the net asset value movement is set out below.
| | £m |
| March 2023 net asset value | 547.6 |
| EPRA earnings | 21.7 |
| Valuation movement | (26.5) |
| Share-based awards | 0.8 |
| Dividends paid | (19.1) |
| March 2024 net asset value | 524.5 |
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).
| | 2024 £m | 2023 £m | 2022 £m |
| Net assets - IFRS and EPRA net tangible asset value | 524.5 | 547.6 | 657.1 |
| Fair value of debt | 24.7 | 22.8 | (6.7) |
| EPRA net disposal value | 549.2 | 570.4 | 650.4 |
| Net asset value per share (pence) | 96 | 100 | 120 |
| EPRA net tangible asset value per share (pence) | 96 | 100 | 120 |
| EPRA net disposal value per share (pence) | 101 | 105 | 119 |
Income statement
Net property income increased by £1.6 million during the financial year to £37.9 million, delivering a 4.5% increase year-on-year.
Total revenue from the property portfolio increased by 4% to £45.1 million, excluding service charge income. The increase was primarily driven by rental growth in the property portfolio (£0.9 million) and other income (£0.8 million). The industrial assets contributed to additional rental income of around £1.0 million with notable rent reviews concluding at Grantham and Gloucester, in addition to the incremental income from the acquisition of Cheltenham that completed in the previous financial year. Rent collection has continued to be strong, reflecting the quality of our occupiers and asset management oversight.
Total property and void expenses, excluding service charge costs, have been stable during the financial year. We are focused on reducing these further with the office disposal programme; the two office assets held for sale as at the 31 March 2024 contributed to around 15% of the property costs.
We recognise the importance of cost management and the inflationary pressures on our costs, particularly in relation to administrative costs. These expenses increased by £1.3 million to £7.2 million during the financial year, which includes the following non-recurring items:
‒ Costs in relation to abortive corporate activity of £0.2 million;
‒ Costs for internalising the company secretarial function and lender consents of £0.3 million; and
‒ Chief Financial Officer transition costs of £0.1 million
Staff costs increased year-on-year due to additional headcount and salary reviews agreed at the start of the year.
Our EPRA cost ratio (excluding direct vacancy costs) has increased from 21% to 23% during the financial year in part due to the non-recurring items noted above.
The Group cost ratio has increased from 1.0% to 1.2% which is due to the lower average net asset value over the period and the increased administrative costs.
Net finance costs
Our cost of debt increased from £9.0 million to £9.5 million. This was mainly due to amounts drawn under our revolving credit facility with interest charged at 150bps above SONIA. The revolving credit facility balance outstanding as at 31 March 2024 was £16.4 million which was repaid following the year-end.
Interest income received during the year was £0.6 million, which reflects the higher interest rate environment in addition to amounts received from managing agents in respect of interest on client monies from previous periods.
Dividends
This year, we 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, in line with 2023. Dividend cover for the year was 114%.
Following the year-end we increased our annual dividend rate to 3.7 pence per share, following the sale of Angel Gate, London and subsequent debt repayment.
Investment properties
As at 31 March 2024, the portfolio comprised 49 assets and the appraised value was £744.6 million.
The negative capital movement on the portfolio was £26.5 million for the year, which was primarily driven by yield movement.
There were no acquisitions or disposals completed during the year, however, we exchanged contracts to sell the following office assets, which are classified as assets held for sale as at 31 March 2024:
‒ Longcross, Cardiff
‒ Angel Gate, London
We have continued to invest in the property portfolio and incurred £4.5 million in capital expenditure during the financial year to support the rental income increases and capital values over the medium to longer-term.
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 the Consolidated Statement of Comprehensive Income.
Summary of borrowings
| | 2024 | 2023 | 2022 |
| Fixed rate loans (£m) | 211.1 | 212.6 | 213.9 |
| Drawn revolving facility (£m) | 16.4 | 11.9 | 4.9 |
| Total borrowings (£m) | 227.5 | 224.5 | 218.8 |
| Borrowings net of cash (£m) | 207.7 | 204.4 | 180.3 |
| Undrawn facilities (£m) | 33.6 | 38.1 | 45.1 |
| Loan to value ratio (%) | 27.9 | 26.7 | 21.2 |
| Weighted average interest rate (%) | 3.9 | 3.8 | 3.7 |
| Average duration (years) | 7.2 | 8.4 | 9.6 |
Borrowings
Total borrowings were £227.5 million at 31 March 2024, with the loan to value ratio at 27.9%. The weighted average interest rate on our borrowings was 3.9% while the average loan duration was 7.2 years.
The fair value of our drawn borrowings at 31 March 2024 was £202.8 million, lower than the book value by some £24.7 million. As a result, our EPRA NDV asset value was £549 million at 31 March 2024, higher than the reported net assets under IFRS. Both lending margins and gilt yields continue to be higher relative to the rates set on our facilities.
At 31 March 2024, we had £16.4 million drawn under revolving credit facility, which was fully repaid in April 2024 with the sale proceeds from Angel Gate, London. The £50.0 million facility matures in May 2025 and we will seek to extend it during the year in order to provide flexibility to execute transactions and manage cash flow. We have strong banking relationships with our lenders; the Group has remained fully compliant with its loan covenants and has made scheduled amortisation payments during the year of £1.4 million.
Cash flow and liquidity
During the year, our cash balances reduced by £0.3 million. The cash flow from operating activities this year was £20.2 million and we invested £4.5 million in capital expenditure into the property portfolio. Overall borrowings increased by £3.1 million and dividends paid were £19.1 million. Our cash balance at the year-end stood at £19.8 million.
Share capital
No new ordinary shares were issued during the year.
The Company's Employee Benefit Trust now holds 1,642,440 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.
Saira Johnston
Chief Financial Officer
22 May 2024
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.
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 and persisting discounts to asset values within the listed property sector adversely impacting investor sentiment;
‒ Political uncertainty in the lead-up to a general election in the UK;
‒ Cyber security and rapid changes in technology such as AI are causing businesses to reshape their operational activities;
‒ Structural changes within the office sector, as businesses continue to reassess their requirements in light of homeworking, technology advances and ESG factors;
‒ Changes in regulations are increasing environmental standards and property owners must keep pace to avoid the risk of stranded assets; and
‒ Increasing demand on the electrical infrastructure being driven by decarbonisation and the phasing out of fossil fuels.
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 The UK economy has been more stable this year, after the volatility seen in 2022/23. However, growth has been muted and only limited growth is forecast in the medium-term. Interest rates remain high. The prospect of a general election in the UK this year is also causing uncertainty. Global events, such as the crisis in the Middle East and the continuing war in Ukraine, are also hampering economies. | Risk trend No change/ stable
|
|
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 Although interest rates rose during 2023, it appears that these have peaked and are forecast to fall later in the year. Bond yields, however, have remained relatively high and have increased since the start of 2024. | Risk trend Decreasing
|
|
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. Physical and transitional risks associated with climate change could give rise to asset obsolescence.
| Mitigation Sustainability is embedded within the Group's business model and strategy. We have published our net zero carbon pathway 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 Adaptation to climate change and asset resilience is an important issue for property owners. This year, the Group has developed its on-site renewable strategy, with the installation of solar panels at a number of properties.
| Risk trend No change/ stable
|
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 Group has implemented a strategy to reduce its office sector weighting through exploring higher value alternative uses. The outlook for the industrial and retail sectors is positive over the medium-term. | 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 Uncertainty and high interest rates have impacted investment market volumes in the UK this year. Recessionary pressures have started to ease and interest rates are expected to fall later in 2024.
| Risk trend No change/ stable
|
| 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 The occupational market has shown positive signs since the beginning of 2024. 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 Commercial property values have declined to a modest extent over the year. Interest rates have risen in the early part of the year but are considered to have peaked and may fall later in 2024. There remains good headroom against the Group's lending covenants. | Risk trend Decreasing |
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 Group's Finance Director retired at the end of March, and there has been a transition period with his successor. The Group's company secretarial function has been brought in-house. Feedback from the employee engagement survey remained positive.
| 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 with maturities in 2031 and 2032. Covenants are monitored regularly and there is good headroom against these. The revolving credit facility does not mature 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 Following asset sales the Group's revolving credit facility has been fully repaid subsequent to the year-end. As a result the Group's loan to value ratio has reduced.
| Risk trend No change/ stable |
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, financing and liquidity.
The major risks identified were those relating to market risk in relation to persistent inflation, high interest rates, other recessionary pressures and the lead up to a general election over the period of the assessment as well as financing, liquidity and other operational risks.
In the ordinary course of business, the Board reviews quarterly forecasts, including forecast market returns. The forecasts include assumptions regarding lease expiries, breaks and incentives and capital expenditure. 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, based on input from external economic consultants, 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, but is not reliant on, its revolving credit facility which expires 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 2029 and will continue to be assessed over rolling five-year periods.
The Directors consider that the scenario testing performed was sufficiently robust and that even under stressed 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 2029.
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
Saira Johnston
22 May 2024
Financial Statements
Consolidated statement of comprehensive income
for the year ended 31 March 2024
| | Notes | 2024 £000 | 2023 £000 |
| Income | | | |
| Revenue from properties | 3 | 54,690 | 51,816 |
| Property expenses | 4 | (16,799) | (15,566) |
| | | | |
| Net property income | | 37,891 | 36,250 |
| | | | |
| Expenses | | | |
| Administrative expenses | 6 | (7,219) | (5,955) |
| | | | |
| Total operating expenses | | (7,219) | (5,955) |
| | | | |
| Operating profit before movement on investments | | 30,672 | 30,295 |
| | | | |
| Investments | | | |
| Revaluation of owner-occupied property | 14 | 223 | (382) |
| Investment property valuation movements | 13 | (26,757) | (110,433) |
| | | | |
| Total loss on investments | | (26,534) | (110,815) |
| | | | |
| Operating profit/(loss) | | 4,138 | (80,520) |
| | | | |
| Financing | | | |
| Interest income | 8 | 604 | 24 |
| Interest expense | 8 | (9,531) | (9,034) |
| | | | |
| Total finance costs | | (8,927) | (9,010) |
| | | | |
| Loss before tax | | (4,789) | (89,530) |
| Tax | 9 | - | - |
| Loss after tax | | (4,789) | (89,530) |
| | | | |
| Other comprehensive income | | | |
| Revaluation of owner-occupied property | 14 | - | (434) |
| | | | |
| Total other comprehensive loss for the year | | - | (434) |
| | | | |
| Total comprehensive loss for the year | | (4,789) | (89,964) |
| | | | |
| Earnings per share | | | |
| Basic | 11 | (0.9)p | (16.5)p |
| Diluted | 11 | (0.9)p | (16.5)p |
All items in the above statement derive from continuing operations.
All of the loss and total comprehensive loss 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 2024
| | Notes | Share £000 | Retained earnings £000 | Other reserves £000 | Revaluation reserve £000 | Total £000 |
| 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 |
| Loss for the year | | - | (4,789) | - | - | (4,789) |
| Dividends paid | 10 | - | (19,089) | - | - | (19,089) |
| Share-based awards | | - | - | 729 | - | 729 |
| | | | | | | |
| Balance as at 31 March 2024 | | 164,400 | 360,528 | (453) | - | 524,475 |
Notes 1 to 27 form part of these consolidated financial statements.
Consolidated balance sheet
as at 31 March 2024
| | Notes | 2024 £000 | 2023 £000 |
| Non-current assets | | | |
| Investment properties | 13 | 688,310 | 746,342 |
| Property, plant and equipment | 14 | 3,499 | 3,415 |
| | | | |
| Total non-current assets | | 691,809 | 749,757 |
| | | | |
| Current assets | | | |
| Investment properties held for sale | 13 | 35,733 | - |
| Accounts receivable | 15 | 26,601 | 22,749 |
| Cash and cash equivalents | 16 | 19,773 | 20,050 |
| | | | |
| Total current assets | | 82,107 | 42,799 |
| | | | |
| Total assets | | 773,916 | 792,556 |
| | | | |
| Current liabilities | | | |
| Accounts payable and accruals | 17 | (20,622) | (19,471) |
| Loans and borrowings | 18 | (1,194) | (1,129) |
| Obligations under leases | 22 | (114) | (114) |
| | | | |
| Total current liabilities | | (21,930) | (20,714) |
| | | | |
| Non-current liabilities | | | |
| Loans and borrowings | 18 | (224,940) | (221,635) |
| Obligations under leases | 22 | (2,571) | (2,583) |
| | | | |
| Total non-current liabilities | | (227,511) | (224,218) |
| | | | |
| Total liabilities | | (249,441) | (244,932) |
| | | | |
| Net assets | | 524,475 | 547,624 |
| | | | |
| Equity | | | |
| Share capital | 20 | 164,400 | 164,400 |
| Retained earnings | | 360,528 | 384,406 |
| Other reserves | | (453) | (1,182) |
| Revaluation reserve | | - | - |
| | | | |
| Total equity | | 524,475 | 547,624 |
| | | | |
| Net asset value per share | 23 | 96p | 100p |
These consolidated financial statements were approved by the Board of Directors on 22 May 2024 and signed on its behalf by:
Saira Johnston
Chief Financial Officer
22 May 2024
Notes 1 to 27 form part of these consolidated financial statements.
Consolidated statement of cash flows
for the year ended 31 March 2024
| | Notes | 2024 £000 | 2023 £000 |
| Operating activities | | | |
| Operating profit/(loss) | | 4,138 | (80,520) |
| Adjustments for non-cash items | 21 | 27,406 | 111,655 |
| Interest received | | 102 | 24 |
| Interest paid | | (9,085) | (7,937) |
| (Increase)/decrease in accounts receivable | | (3,350) | 101 |
| Increase/(decrease) in accounts payable and accruals | | 996 | (291) |
| | | | |
| Cash inflows from operating activities | | 20,207 | 23,032 |
| | | | |
| Investing activities | | | |
| Purchase of investment properties | 13 | - | (20,613) |
| Capital expenditure on investment properties | 13 | (4,458) | (6,135) |
| Purchase of property, plant and equipment | 14 | (4) | (13) |
| | | | |
| Cash outflows from investing activities | | (4,462) | (26,761) |
| | | | |
| Financing activities | | | |
| Borrowings repaid | 18 | (1,433) | (6,368) |
| Borrowings drawn | 18 | 4,500 | 12,000 |
| Financing costs | 18 | - | (183) |
| Purchase of shares held in trust | 7 | - | (1,126) |
| Dividends paid | 10 | (19,089) | (19,091) |
| | | | |
| Cash outflows from financing activities | | (16,022) | (14,768) |
| | | | |
| Net decrease in cash and cash equivalents | | (277) | (18,497) |
| Cash and cash equivalents at beginning of year | | 20,050 | 38,547 |
| | | | |
| Cash and cash equivalents at end of year | 16 | 19,773 | 20,050 |
Notes 1 to 27 form part of these consolidated financial statements.
Notes to the consolidated financial statements
For the year ended 31 March 2024
1. General information
Picton Property Income Limited (the 'Company' and together with its subsidiaries the 'Group') was established in Guernsey on 15 September 2005. It has a premium listing on the London Stock Exchange as a commercial company and entered the UK REIT regime on 1 October 2018. The consolidated financial statements are prepared for the year ended 31 March 2024 with comparatives for the year ended 31 March 2023.
2. Material 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, share-based awards and property, plant and equipment. 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 Accounting Standards) 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.
‒ IFRS 17 Insurance Contracts
‒ 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
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 2024 and thus have not been applied by the Group.
‒ 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)
‒ Amendments to IAS 7 and IFRS 7 - Supplier Finance Arrangements
‒ Amendments to IAS 21 - Lack of Exchangeability
‒ IFRS 18 Presentation and Disclosure in Financial Statements
‒ IFRS 19 Subsidiaries without Public Accountability
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 other than IFRS 18 (Presentation and Disclosure in Financial Statements) that the Group is in the process of assessing.
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 subject to 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 as control over the properties is still retained over the period end. 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
| | 2024 £000 | 2023 £000 |
| Rents receivable (adjusted for lease incentives) | 43,910 | 42,964 |
| Surrender premiums | 102 | 147 |
| Dilapidation receipts | 952 | 170 |
| Other income | 124 | 107 |
| Service charge income | 9,602 | 8,428 |
| | 54,690 | 51,816 |
Rents receivable have been adjusted for lease incentives recognised of £nil (2023: £1.2 million).
4. Property expenses
| | 2024 £000 | 2023 £000 |
| Property operating costs | 3,075 | 3,491 |
| Property void costs | 4,122 | 3,647 |
| Recoverable service charge costs | 9,602 | 8,428 |
| | 16,799 | 15,566 |
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
| | 2024 £000 | 2023 £000 |
| Director and staff costs | 4,191 | 3,487 |
| Auditor's remuneration | 248 | 195 |
| Other administrative expenses | 2,780 | 2,273 |
| | 7,219 | 5,955 |
| Auditor's remuneration comprises: | 2024 £000 | 2023 £000 |
| Audit fees: | | |
| Audit of Group financial statements | 120 | 92 |
| Audit of subsidiaries' financial statements | 103 | 87 |
| | | |
| Audit-related fees: | | |
| Review of interim financial statements | 25 | 16 |
| | 248 | 195 |
7. Director and staff costs
| | 2024 £000 | 2023 £000 |
| Wages and salaries | 2,422 | 1,879 |
| Non-Executive Directors' fees | 287 | 275 |
| Social security costs | 435 | 425 |
| Other pension costs | 47 | 34 |
| Share-based payments - cash settled | 189 | 142 |
| Share-based payments - equity settled | 811 | 732 |
| | 4,191 | 3,487 |
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 14 June 2023, awards of 834,885 notional shares were made which vest in June 2025 (2023: 500,905 notional shares). The next awards are due to be made in June 2024 for vesting in June 2026.
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 2022 | Units granted in the year | Units cancelled in the year | Units redeemed in the year | Units at 31 March 2023 | Units granted in the year | Units cancelled in the year | Units redeemed in the year | Units at 31 March 2024 |
| 29 June 2022 | 599,534 | - | - | (589,779) | 9,755 | - | - | (9,755) | - |
| 22 June 2023 | 531,108 | - | - | - | 531,108 | - | - | (391,152) | 139,956 |
| 17 June 2024 | - | 500,905 | - | - | 500,905 | - | (2,117) | - | 498,788 |
| 14 June 2025 | - | - | - | - | - | 834,885 | (2,305) | - | 832,580 |
| | 1,130,642 | 500,905 | - | (589,779) | 1,041,768 | 834,885 | (4,422) | (400,907) | 1,471,324 |
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 14 June 2023, awards for a maximum of 1,219,010 shares were granted to employees in respect of the three-year period ending on 31 March 2026. In the previous year, awards of 1,174,589 shares were made on 17 June 2022 for the period ending 31 March 2025.
The 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 | 14 June 2023 | 17 June 2022 |
| Share price at date of grant | 76.2p | 92.6p |
| Exercise price | Nil | Nil |
| Expected term | 3 years | 3 years |
| Risk-free rate - TSR condition | 4.8% | 2.28% |
| Share price volatility - TSR condition | 27.4% | 28.3% |
| Median volatility of comparator group - TSR condition | 27.2% | 32.4% |
| Correlation - TSR condition | 38.6% | 25.0% |
| TSR performance at grant date - TSR condition | 7.0% | (2.5)% |
| Median TSR performance of comparator group at grant date - TSR condition | 2.3% | 2.2% |
| Fair value - TSR condition (Monte Carlo method) | 35.0p | 46.0p |
| Fair value - TPR condition (Black-Scholes model) | 76.2p | 92.6p |
| Fair value - EPS condition (Black-Scholes model) | 76.2p | 92.6p |
The Trustee of the Company's Employee Benefit Trust did not acquire any ordinary shares during the year (2023: 1,250,000 shares for £1,126,000).
The Group employed 12 members of staff at 31 March 2024 (2023: ten). The average number of people employed by the Group for the year ended 31 March 2024 was 11 (2023: nine).
8. Interest expense and interest income
| Interest paid | 2024 £000 | 2023 £000 |
| Interest payable on loans | 9,146 | 8,576 |
| Interest on obligations under finance leases | 174 | 175 |
| Non-utilisation fees | 211 | 283 |
| | 9,531 | 9,034 |
The loan arrangement costs incurred to 31 March 2024 are £3,328,000 (2023: £3,328,000). These are amortised over the duration of the loans with £304,000 amortised in the year ended 31 March 2024 and included in interest payable on loans (2023: £304,000).
Interest income of £604,000 (2023: £24,000) includes £502,000 received from managing agents in respect of interest earned on client monies in respect of the current and previous financial periods.
9. Tax
The charge for the year is:
| | 2024 £000 | 2023 £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:
| | 2024 £000 | 2023 £000 |
| Loss before taxation | (4,789) | (89,530) |
| Expected tax (credit)/charge on ordinary activities at the standard rate of taxation of 25% (2023: 19%) | (1,197) | (17,011) |
| Less: | | |
| UK REIT exemption on net income | (5,437) | (4,044) |
| Revaluation movement not taxable | 6,634 | 21,055 |
| 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
| | 2024 £000 | 2023 £000 |
| Declared and paid: | | |
| 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 |
| Interim dividend for the period ended 31 March 2023: 0.875 pence | 4,771 | - |
| Interim dividend for the period ended 30 June 2023: 0.875 pence | 4,770 | - |
| Interim dividend for the period ended 30 September 2023: 0.875 pence | 4,771 | - |
| Interim dividend for the period ended 31 December 2023: 0.875 pence | 4,777 | - |
| | 19,089 | 19,091 |
The interim dividend of 0.925 pence per ordinary share in respect of the period ended 31 March 2024 has not been recognised as a liability as it was declared after the year-end. This dividend of £5,050,000 will be paid on 31 May 2024.
11. Earnings per share
Basic and diluted earnings per share is calculated by dividing the net loss 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 and share data used in the basic and diluted profit per share calculation:
| | 2024 | 2023 |
| Net loss attributable to ordinary shareholders of the Company from continuing operations (£000) | (4,789) | (89,964) |
| Weighted average number of ordinary shares for basic earnings per share | 545,437,264 | 545,378,286 |
| Weighted average number of ordinary shares for diluted earnings per share | 547,092,154 | 546,856,450 |
12. Investments in subsidiaries
The Company had the following principal subsidiaries as at 31 March 2024 and 31 March 2023:
| 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.
| | 2024 £000 | 2023 £000 |
| Fair value at start of year | 746,342 | 830,027 |
| Capital expenditure on investment properties | 4,458 | 6,135 |
| Acquisitions | - | 20,613 |
| Unrealised movement on investment properties | (26,757) | (110,433) |
| Fair value at the end of the year | 724,043 | 746,342 |
| Historic cost at the end of the year | 685,576 | 681,118 |
The fair value of investment properties reconciles to the appraised value as follows:
| | 2024 £000 | 2023 £000 |
| Current | | |
| Appraised value of properties held for sale | 35,900 | - |
| Lease incentives held as debtors of properties held for sale | (167) | - |
| | 35,733 | - |
| | | |
| Non-current | | |
| Appraised value | 708,740 | 766,235 |
| Valuation of assets held under head leases | 2,046 | 2,081 |
| Owner-occupied property | (3,391) | (3,248) |
| Lease incentives held as debtors | (19,085) | (18,726) |
| | 688,310 | 746,342 |
| Fair value at the end of the year | 724,043 | 746,342 |
As at 31 March 2024, contracts have been exchanged to sell Angel Gate, London EC1 and Longcross, Cardiff so these assets have been classified as assets held for sale, net of lease incentives. The sale of Angel Gate completed in April 2024 and the sale of Longcross is due to complete towards the end of the year. As at 31 March 2023, there were no assets classified as held for sale.
The investment properties were valued by independent valuers, CBRE Limited, Chartered Surveyors, as at 31 March 2024 and 31 March 2023 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 2024 and 31 March 2023, 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:
| | 2024 | 2023 | ||||
| | Office | Industrial | Retail and Leisure | Office | Industrial | Retail and Leisure |
| Appraised value (£000) | 224,885 | 439,945 | 79,810 | 245,260 | 439,570 | 81,405 |
| Area (sq ft, 000s) | 874 | 3,240 | 692 | 877 | 3,240 | 692 |
| Range of unobservable inputs: | | | | | | |
| Gross ERV (sq ft per annum) | | | | | | |
| - range | £6.00 to £87.81 | £3.79 to £27.95 | £3.35 to £21.53 | £11.00 to £84.12 | £3.30 to £27.83 | £3.23 to £26.05 |
| - weighted average | £38.26 | £13.37 | £11.63 | £35.33 | £13.16 | £11.66 |
| Net initial yield | | | | | | |
| - range | -4.85% to 10.73% | 2.30% to 7.75% | 6.80% to 42.40% | -0.68% to 11.65% | 2.28% to 7.75% | 3.51% to 30.85% |
| - weighted average | 5.22% | 4.63% | 9.17% | 5.32% | 4.30% | 8.56% |
| Reversionary yield | | | | | | |
| - range | 5.09% to 15.01% | 4.82% to 8.05% | 7.00% to 12.72% | 4.76% to 13.55% | 4.83% to 8.17% | 6.87% to 12.18% |
| - weighted average | 8.81% | 5.86% | 8.20% | 7.87% | 5.78% | 7.98% |
| True equivalent yield | | | | | | |
| - range | 4.85% to 10.83% | 4.75% to 8.00% | 7.25% to 12.25% | 4.57% to 10.38% | 4.75% to 7.98% | 7.00% to 12.17% |
| - weighted average | 7.75% | 5.66% | 8.29% | 7.23% | 5.51% | 8.11% |
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 | 2024 Impact on valuation | 2023 Impact on valuation |
| Industrial | Increase of 50 basis points | Decrease of £35.7m | Decrease of £36.7m |
| | Decrease of 50 basis points | Increase of £43.1m | Increase of £44.5m |
| Office | Increase of 50 basis points | Decrease of £14.6m | Decrease of £16.1m |
| | Decrease of 50 basis points | Increase of £16.5m | Increase of £18.0m |
| Retail and Leisure | Increase of 50 basis points | Decrease of £4.3m | Decrease of £4.5m |
| | Decrease of 50 basis points | Increase of £4.9m | Increase of £5.1m |
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 2024.
| | Owner Occupied Property £000 | Plant and equipment £000 | Total £000 |
| At 1 April 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 |
| Additions | - | 4 | 4 |
| Depreciation | (80) | (63) | (143) |
| Revaluation | 223 | - | 223 |
| At 31 March 2024 | 3,391 | 108 | 3,499 |
15. Accounts receivable
| | 2024 £000 | 2023 £000 |
| Tenant debtors (net of provisions for bad debts) | 5,279 | 2,855 |
| Lease incentives | 19,252 | 18,726 |
| Other debtors | 2,070 | 1,168 |
| | 26,601 | 22,749 |
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 2024, tenant debtors of £193,000 (2023: £92,000) were considered impaired and provided for.
16. Cash and cash equivalents
| | 2024 £000 | 2023 £000 |
| Cash at bank and in hand | 19,747 | 20,045 |
| Short-term deposits | 26 | 5 |
| | 19,773 | 20,050 |
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
| | 2024 £000 | 2023 £000 |
| Accruals | 4,839 | 4,712 |
| Deferred rental income | 7,963 | 8,654 |
| VAT liability | 1,899 | 1,782 |
| Trade creditors | 631 | 515 |
| Other creditors | 5,290 | 3,808 |
| | 20,622 | 19,471 |
18. Loans and borrowings
| | Maturity | 2024 £000 | 2023 £000 |
| Current | | | |
| Aviva facility | - | 1,497 | 1,433 |
| Capitalised finance costs | - | (303) | (304) |
| | | 1,194 | 1,129 |
| | | | |
| Non-current | | | |
| Canada Life facility | 24 July 2031 | 129,045 | 129,045 |
| Aviva facility | 24 July 2032 | 80,591 | 82,089 |
| NatWest revolving credit facility | 26 May 2025 | 16,400 | 11,900 |
| Capitalised finance costs | - | (1,096) | (1,399) |
| | | 224,940 | 221,635 |
| | | 226,134 | 222,764 |
The following table provides a reconciliation of the movement in loans and borrowings to cash flows arising from financing activities.
| | 2024 £000 | 2023 £000 |
| Balance at start of year | 222,764 | 216,832 |
| | | |
| Changes from financing cash flows | | |
| Proceeds from loans and borrowings | 4,500 | 12,000 |
| Repayment of loans and borrowings | (1,433) | (6,368) |
| Financing costs paid | - | (183) |
| | 3,067 | 5,449 |
| Other changes | | |
| Amortisation of financing costs | 303 | 304 |
| Change in accrued financing costs | - | 179 |
| | 303 | 483 |
| Balance as at 31 March | 226,134 | 222,764 |
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 £348.1 million (2023: £353.2 million).
Additionally, the Group has a £95.3 million term loan facility with Aviva Commercial Finance Limited which matures in July 2032. The loan is for a term of 20 years and was fully drawn on 24 July 2012 with approximately one-third repayable over the life of the loan in accordance with a scheduled amortisation profile. The Group has repaid £1.4 million in the year (2023: £1.4 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 £184.3 million (2023: £193.6 million).
The Group also has a £50.0 million revolving credit facility (RCF) with National Westminster Bank Plc which matures in May 2025. As at 31 March there was £16.4 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 £138.7 million (2023: £143.4 million).
The fair value of the drawn loan facilities at 31 March 2024, estimated as the present value of future cash flows discounted at the market rate of interest at that date, was £202.8 million (2023: £201.7 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 2024 was 3.9% (2023: 3.8%).
19. Contingencies and capital commitments
The Group has entered into contracts for the refurbishment of eight properties with commitments outstanding at 31 March 2024 of approximately £4.2 million (2023: £2.9 million). No further obligations to construct or develop investment property or for repairs, maintenance or enhancements were in place as at 31 March 2024 (2023: £nil).
20. Share capital and other reserves
| | 2024 £000 | 2023 £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 2023: 547,605,596) | - | - |
| Share premium | 164,400 | 164,400 |
The Company has 547,605,596 ordinary shares in issue of no par value (2023: 547,605,596).
No new ordinary shares were issued during the year ended 31 March 2024.
| | 2024 Number of shares | 2023 Number of shares |
| Ordinary share capital | 547,605,596 | 547,605,596 |
| Number of shares held in Employee Benefit Trust | (1,642,440) | (2,388,694) |
| Number of ordinary shares | 545,963,156 | 545,216,902 |
The fair value of awards made under the Long-term Incentive Plan is recognised in other reserves.
Subject to the solvency test contained in the Companies (Guernsey) Law, 2008 being satisfied, ordinary shareholders are entitled to all dividends declared by the Company and to all of the Company's assets after repayment of its borrowings and ordinary creditors. The Trustee of the Company's Employee Benefit Trust has waived its right to receive dividends on the 1,642,440 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
| | 2024 £000 | 2023 £000 |
| Movement in investment property valuation | 26,757 | 110,433 |
| Revaluation of owner-occupied property | (223) | 382 |
| Share-based provisions | 729 | 675 |
| Depreciation of tangible assets | 143 | 165 |
| | 27,406 | 111,655 |
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:
| | 2024 £000 | 2023 £000 |
| Future minimum payments due: | | |
| Within one year | 185 | 185 |
| In the second to fifth years inclusive | 740 | 740 |
| After five years | 8,712 | 8,898 |
| | 9,637 | 9,823 |
| Less: finance charges allocated to future periods | (6,952) | (7,126) |
| Present value of minimum lease payments | 2,685 | 2,697 |
The present value of minimum lease payments is analysed as follows:
| | 2024 £000 | 2023 £000 |
| Current | | |
| Within one year | 114 | 114 |
| | 114 | 114 |
| | | |
| Non-current | | |
| In the second to fifth years inclusive | 409 | 405 |
| After five years | 2,162 | 2,178 |
| | 2,571 | 2,583 |
| | 2,685 | 2,697 |
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):
| | 2024 £000 | 2023 £000 |
| Within one year | 43,818 | 43,824 |
| One to two years | 38,530 | 39,548 |
| Two to three years | 33,085 | 34,806 |
| Three to four years | 28,687 | 29,506 |
| Four to five years | 24,411 | 25,454 |
| After five years | 98,539 | 105,675 |
| | 267,070 | 278,813 |
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 2024 | Notes | Held at fair value through profit or loss £000 | Financial assets and liabilities at amortised cost £000 | Total £000 |
| Financial assets | | | | |
| Debtors | 15 | - | 7,349 | 7,349 |
| Cash and cash equivalents | 16 | - | 19,773 | 19,773 |
| | | - | 27,122 | 27,122 |
| | | | | |
| Financial liabilities | | | | |
| Loans and borrowings | 18 | - | 226,134 | 226,134 |
| Obligations under head leases | 22 | - | 2,685 | 2,685 |
| Creditors and accruals | 17 | - | 10,760 | 10,760 |
| | | - | 239,579 | 239,579 |
| 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 |
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 the 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 primarily 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:
| | 2024 £000 | 2023 £000 |
| Total borrowings | 227,533 | 224,467 |
| Gross assets | 773,916 | 792,556 |
| Gearing ratio (must not exceed 65%) | 29.4% | 28.3% |
The Board of Directors monitors the return on capital as well as the level of dividends to ordinary shareholders. The Group has managed its financing 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:
| | 2024 £000 | 2023 £000 |
| Total liabilities | 249,441 | 244,932 |
| Less: cash and cash equivalents | (19,773) | (20,050) |
| Net debt | 229,668 | 224,882 |
| Total equity | 524,475 | 547,624 |
| Net debt to equity ratio at end of year | 0.44 | 0.41 |
Credit risk
The following tables detail the balances held at the reporting date that may be affected by credit risk:
| 31 March 2024 | Notes | Held at £000 | Financial assets and liabilities at amortised cost £000 | Total £000 |
| Financial assets | | | | |
| Tenant debtors | 15 | - | 5,279 | 5,279 |
| Cash and cash equivalents | 16 | - | 19,773 | 19,773 |
| | | - | 25,052 | 25,052 |
| 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 |
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.
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 2024, tenant rent deposits held by the Group's managing agents in segregated bank accounts totalled £2.5 million (2023: £2.6 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), Santander plc (Santander) 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, Santander 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 reduce overall exposure to credit risk. At 31 March 2024 and at 31 March 2023, 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 2024 | Less than 1 year £000 | 1 to 5 years £000 | More than 5 years £000 | Total £000 |
| Cash and cash equivalents | 20,366 | - | - | 20,366 |
| Debtors | 7,349 | - | - | 7,349 |
| Obligations under head leases | (185) | (740) | (8,712) | (9,637) |
| Fixed interest rate loans | (9,262) | (37,049) | (224,367) | (270,678) |
| Floating interest rate loans | (1,117) | (16,571) | - | (17,688) |
| Creditors and accruals | (10,760) | - | - | (10,760) |
| | 6,391 | (54,360) | (233,079) | (281,048) |
| 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 |
| 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) |
| | 5,503 | (50,485) | (242,527) | (287,509) |
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 these 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 £37.2 million (2023: £38.3 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. The Group manages its interest rate risk by entering into long-term fixed rate debt facilities.
Interest rate risk
The following table sets out the carrying amount, by maturity, of the Group's financial assets/(liabilities).
| 31 March 2024 | Less than 1 year £000 | 1 to 5 years £000 | More than 5 years £000 | Total £000 |
| Floating | | | | |
| Cash and cash equivalents | 19,773 | - | - | 19,773 |
| Secured loan facilities | - | (16,400) | - | (16,400) |
| | | | | |
| Fixed | | | | |
| Secured loan facilities | (1,497) | (6,686) | (202,950) | (211,133) |
| Obligations under leases | (114) | (409) | (2,162) | (2,685) |
| | 18,162 | (23,495) | (205,112) | (210,445) |
| 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) |
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 3.6% 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 £287,000 (2023: £275,000). As at 31 March 2024, the Group owed £nil to the Non-Executive Directors (2023: £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
The sale of Angel Gate, London EC1 completed on 16 April 2024 for £29,600,000.
The £16,400,000 drawn under the revolving credit facility with National Westminster Bank Plc was repaid in full on 18 April 2024.
A dividend of £5,050,000 (0.925 pence per share) was approved by the Board on 30 April 2024 and will be paid on 31 May 2024.
END
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