Picton Property Income Ltd – Preliminary Annual Results

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25 May 2023

PICTON PROPERTY INCOME LIMITED

(“Picton”, the “Company” or the “Group”)

LEI: 213800RYE59K9CKR4497

Preliminary Annual Results

Picton announces its annual results for the year ending 31 March 2023.

Chair, Lena Wilson CBE, commented:

“Despite the challenges of inflation and higher interest rates, we have maintained both our EPRA earnings and our long-term track record of outperformance. We are continuing to upgrade and adapt our assets, ensuring they remain relevant and attractive to our occupiers, providing income sustainability.

As a business, we are in a resilient position. We have a strong capital structure with attractive long-term fixed rate debt. Our portfolio offers significant income upside, and we are already starting to see stability in asset values.”

Michael Morris, Chief Executive of Picton, commented:

“For the tenth consecutive year we have outperformed the MSCI UK Quarterly Property Index and our long-term track record shows upper quartile performance since launch in 2005. We remain focused on our portfolio performance, operational excellence and acting responsibly, and have strengthened our team accordingly.

One of the key advantages of having a diversified approach and a team with a proven track record of managing assets across sectors through several iterations of the investment cycle, is that we can draw on this experience during more challenging markets. This year, we have made significant progress, delivering rental growth and exploring and securing more valuable alternative uses at selected office assets. We have remained focused on sustainability, with further progress on our net zero pathway.

After a sharp and significant pricing correction in the property market in 2022, valuations appear to be stabilising, supported by resilience in the occupational markets. We will continue to explore opportunities to maximise earnings, whether at an asset level by capturing reversionary potential with our occupier focused approach or through growth and the economies of scale that our internally managed structure can deliver.”

Financial performance

– Stable EPRA earnings of £21 million

– Net assets of £548 million, or 100p per share

– Dividends paid of £19 million, 4% higher than preceding year

– Dividend cover of 112%

Defensive capital structure

– Loan to value of 27%

– Weighted average interest rate of 3.8%

– 95% of drawn borrowings fixed with 2031/32 maturities

– EPRA NDV £23 million higher than net assets, reflecting fair value of debt

– £38 million undrawn debt facilities

Resilient operational performance

– Outperforming property portfolio relative to MSCI UK Quarterly Property Index

– Like-for-like increase in passing rent of 10% and 3% in contracted rent

– Like-for-like estimated rental value increase of 9%

– Capturing rental growth through:

– 39 lettings, 25% ahead of March 2022 ERV

– 37 lease renewals or regears, 6% ahead of March 2022 ERV

– 20 rent reviews, 7% ahead of March 2022 ERV

– Rent collection over 99% for the year

– Occupancy of 91%

– Three separate acquisitions totalling £21 million

Increased investment with sustainability focus

– £6 million invested into upgrading over 15 assets

– Net zero carbon pathway progress, including installation of solar arrays

– 100% compliance with 2023 EPC minimum standards

– Improved EPC profile with 76% of portfolio rated A-C

– Scope 1 and 2 emissions reduced by 24% compared to 2019 baseline

	31 March 2023	31 March 2022	31 March 2021
Property valuation	£766m	£849m	£682m
Net assets	£548m	£657m	£528m
EPRA NTA per share	100p	120p	97p

	Year ended 31 March 2023	Year ended 31 March 2022	Year ended 31 March 2021
(Loss)/profit for the year	£(90.0)m	£147.4m	£33.8m
EPRA earnings	£21.3m	£21.2m	£20.1m
Earnings per share	(16.5)p	27.0p	6.2p
EPRA earnings per share	3.9p	3.9p	3.7p
Total return	(13.9)%	28.3%	6.6%
Total shareholder return	(26.4)%	18.7%	0.0%
Total dividend per share	3.5p	3.4p	2.8p
Dividend cover	112%	115%	134%

This announcement contains inside information.

For further information:

Tavistock

James Verstringhe, 020 7920 3150, james.verstringhe@tavistock.co.uk

Picton

Michael Morris, 020 7011 9980, michael.morris@picton.co.uk

Note to Editors

Picton, established in 2005, is a UK REIT. It owns and actively manages a £766 million diversified UK commercial property portfolio, invested across 49 assets and with around 400 occupiers (as at 31 March 2023). Through an occupier focused, opportunity led approach to asset management, Picton aims to be one of the consistently best performing diversified UK focused property companies listed on the main market of the London Stock Exchange.

For more information please visit: www.picton.co.uk

Chief Executive’s Review

Resilient business performance

Against a challenging economic backdrop, we have been able to grow income through our proactive approach to asset management and have successfully continued our long-term track record of outperformance.

Following our record profit delivered a year ago, this period has been defined by a significant change in macroeconomic conditions evidenced by rising interest rates, inflationary pressures and lower economic growth.

Driven in part by rising food and energy costs, a consequence of the disruption caused by the war in Ukraine, UK inflation has been over 10% and in response base rates have quadrupled since this time last year. Asset pricing has been adversely impacted and commercial real estate has been no exception.

In October 2022, the MSCI Monthly Index recorded the worst month of capital decline on record and a 21% decline in values between July 2022 and February 2023. After eight months and a much sharper pricing correction than during the global financial crisis in 2008, markets finally appear to have stabilised, and positive overall monthly movements were recorded in the Index in March and April 2023.

In these conditions we have continued to focus on what we can control, undertaking nearly 40% more asset management activity than last year. This has enabled us to grow rental income and the overall rental value of the portfolio.

With the majority of our debt being fixed, we are insulated from rising financing costs and have been able to report EPRA earnings of £21.3 million, marginally ahead of last year. During the year, we paid dividends of £19.1 million, 4% higher than the preceding year with strong dividend cover of 112%.

Performance

Our net assets are £548 million or 100 pence per share, a 16.6% reduction from a year ago, principally driven by the revaluation of our property portfolio. Our accounting total return was -13.9% in the year to 31 March 2023.

Our total shareholder return, reflecting share price movement and dividends paid, was -26.4%. As markets have adjusted to a higher interest rate environment so too have share prices of UK REITs and discounts have widened in the sector. However, it is encouraging to see that these discounts have narrowed more recently as reported asset values have stabilised.

Outperforming property portfolio

For the tenth consecutive year we have outperformed the MSCI UK Quarterly Property Index. We have now delivered upper quartile returns over three, five, ten years and since inception in 2005 and we are ranked fifth out of 141 portfolios over the last ten years.

At a portfolio level, we delivered a total property return of -8.7% which reflects this marked change in the macroeconomic outlook. Asset management activity drove rental growth and helped offset some of the impact of rising yields.

Growing occupancy and income

We have seen a resilient occupational market, particularly in the industrial sector, and we have been able to increase income and rental growth through asset management and acquisition activity, leading to a 3% increase in contracted rent, a 10% increase in passing rent and a 9% increase in estimated rental value, all on a like-for-like basis. Although we have been able to grow net income there has also been a rise in property costs, primarily driven by void costs, including service charges, business rates and security.

Growing occupancy is a priority as the portfolio has significant upside income potential with more than £5.3 million of additional rent available from current vacancies. With the majority of our vacancy in the office sector, we are pursuing change of use strategies at a number of office assets to include residential, student and other uses to help to reduce this void.

Concerns over the health of the UK economy and political uncertainty have led to a more cautious approach from businesses taking new space during the year. Occupancy at 31 March 2023 was 91%, lower than the previous year but up from a low of 90% at September 2022.

Enhancing asset quality

We have invested £6 million into the portfolio this year, across over 15 separate projects. This is partly a reflection of the current occupancy position but also reflects further upgrading of our assets from a sustainability perspective.

We are now reviewing on a project-by-project basis whether it is appropriate to install renewable energy, primarily in the form of solar panels on refurbishments. Three projects on industrial assets have already recently completed and whilst these incur additional costs, in due course they will generate a modest supplementary revenue stream, alongside rental income.

Operational excellence

There is significant work required to upgrade our assets as we seek to reduce emissions from the portfolio and progress on our net zero pathway. This year we have expanded the team and brought in a dedicated Head of Building Surveying to oversee the increasing number of refurbishment projects that we are undertaking. They are now training to become an in-house EPC assessor, which will enable us to better understand and improve our assets.

We have decided during the year to bring our company secretarial arrangements in house and have recently appointed a dedicated resource here in London. We will be transitioning these arrangements in the coming months, following this year’s Annual General Meeting.

We have received positive feedback from recent occupier engagement surveys across our office and industrial assets and have started to roll out occupier apps at a number of our multi-let office assets to improve engagement.

Rent collection for the year stood at over 99%.

Capital structure

We are well placed in terms of our debt structure, with over 95% of borrowing fixed until 2031/32.

Our weighted average interest rate is 3.8% per annum, well below current market rates and as our longer-term facilities are fixed directly with our lenders, there is no mark-to-market pricing of our debt in our reported net asset value. This is reflected in our EPRA NDV being £23 million higher than our net asset value.

Our loan to value ratio at the year-end was 27% and we have significant headroom against lending covenants on all our facilities.

In the current environment, in common with the wider real estate market, and with the share price trading at a discount to net asset value, it has not been possible to raise new equity.

Growth

Our internalised management model means that our costs are not linked to net asset value, so there is significant potential for earnings accretion that can be delivered through growth.

As discounts across the sector persist, the case for consolidation and the creation of larger diversified REITs remains compelling. We continue to believe that the combination of cost savings and earnings growth through economies of scale alongside greater relevance to an investor audience would be well received and there is already evidence of this being the case.

We have proactively considered opportunities during the year and we will continue to be an advocate for consolidation where it is beneficial to our shareholders.

At a portfolio level we made three acquisitions totalling £21 million during the year. The two principal acquisitions were both mixed-use assets with retail/leisure at the ground floor and offices above. One is fully leased and at the other we have applied for planning consent for residential conversion in respect of some of the vacant space.

Acting responsibly

As part of our further commitment to integrate sustainability into the business this year, we have included our sustainability reporting within our annual report rather than producing a separate report.

The team is increasing its efforts to ensure our assets are relevant and in demand in a net zero future. This year we have set up a Climate Action Working Group covering all areas of the business, ensuring that there is a cohesive approach to our net zero commitments, mitigating the risks of climate change and adapting our portfolio to reduce emissions.

Specifically, we have been able to reduce our Scope 1 and 2 emissions by 24% compared to our 2019 baseline year.

We have improved the overall EPC ratings of our assets, with 100% of the units within the portfolio being compliant with 2023 EPC minimum standards and 76% by rental value have an EPC rating A-C.

We have started to incorporate on-site renewable energy across larger refurbishments and provide greater engagement with occupiers on this issue, further embedding sustainability into our day-to-day activities.

Although progress is encouraging, we recognise that we must continue to maintain our focus to meet our 2040 net zero commitment.

Outlook

Despite macroeconomic conditions, the economy and indeed occupier markets have remained resilient. Equally, the interest rate environment, both in terms of short-term rates and longer-term gilt yields, needs to stabilise and be more supportive, which may be possible when inflationary pressures start to subside.

As we have seen this year, whilst occupational demand and tight supply have increased rents in some markets, rising costs have also impacted construction. This, combined with rising yields in the last few months, has started to impact development viability and is likely to be a constraint on supply and support rental levels.

Our predominately fixed rate debt with a long maturity profile will provide earnings stability during this more challenging period. Our key focus remains on growing net income further and gaining efficiencies through growth.

Michael Morris

Chief Executive

24 May 2023

Our Marketplace

Signs of economic stability

Economic backdrop

After a tumultuous year, there are signs that the economic backdrop is beginning to stabilise.

Geopolitical tension, the war in Ukraine, rising inflation, the cost of living crisis and the fall-out from the political events and Autumn mini-budget caused unprecedented volatility, high levels of market stress and economic headwinds.

Following the end of the pandemic and the war in Ukraine’s impact on energy and commodity prices and supply chains, CPI inflation rose to a peak of 11.1% in October 2022.

As a shock reaction to the Autumn mini-budget, ten-year Government bond yields increased by approximately 200 basis points in a month to reach 4.5% in late September and the value of sterling fell to historic lows. The Bank of England’s response was a series of interest rate hikes, with the base rate rising from 1.75% in August 2022 to 4.5% in May 2023.

The ramifications of the increased cost of debt and rise in the risk-free rate have been multifaceted, from the impact on pensions, investment markets and property yields, to house prices, retail sales and consumer and business confidence.

Households have been impacted by the cost of living crisis, soaring fuel and energy bills, lower real incomes and rising debt and mortgage costs. Retail sales volumes did rise by 0.6% in the three months to March 2023, however this is the first rolling three-month increase since August 2021. It is hoped that increased post-pandemic tourism will go some way to compensate for weak domestic consumer demand in 2023.

The Consumer Price Index (CPI) rose by 8.7% in the 12 months to April 2023. This is the first month that consumer price inflation has been below 10% since August 2022. As inflationary pressures start to reduce, households are expected to increase spending power, helping to drive the economic recovery.

In terms of business confidence, the S&P Global/CIPS UK Composite PMI saw the longest period of decline since the Global Financial Crisis of 2007/08, experiencing six consecutive months of contraction to January 2023. This is due largely to the elevated cost of materials and labour putting pressure on profit margins, and higher financing costs hampering expansion plans. A sharp rebound began in February, and the latest data for April shows the Composite PMI was 54.9.

Although job vacancies have declined from their recent peak, at 1.08 million, they remain elevated. The strong labour market has driven up average pay; however, in real terms, wages are not keeping up with inflation. At 3.9%, unemployment is very low by historic standards, having risen only slightly from a 50-year low of 3.5% in August 2022.

The economic backdrop is now showing positive signs of stabilisation and even recovery. GDP growth has surprised on the upside, with the UK narrowly avoiding a recession in 2022. UK GDP is estimated to have increased 0.1% in the three months to March 2023.

Inflation has been more stubborn than expected, owing largely to persistent growth in food prices. There have been improvements in supply driven inflation, as some of the production difficulties and supply chain issues faced by businesses have started to ease, leading to a fall in the price of imported goods. In addition, higher interest rates and the fall in households’ disposable incomes have dampened demand driven inflation and fuel prices have fallen significantly.

Interest rate expectations have moderated compared to what was predicted in late 2022. Reduced uncertainty and falling inflation have allowed bond yields to stabilise, with ten-year Government bonds now at around 4%.

UK property market

Due to the sharp rise in the risk-free rate and cost of debt, the MSCI UK Quarterly Property Index All Property equivalent yield moved out by 85 basis points in the three months to December 2022. MSCI reported capital growth of -12.6% for this period, the fastest quarterly correction since December 2008 at the height of the Global Financial Crisis. The situation appears to now be stabilising and the three months to March 2023 saw capital growth of -1.0%.

Looking at the year to March 2023, the MSCI UK Quarterly Property Index reported an All Property total return of -12.6%, comprising -16.1% capital growth and 4.1% income return. This is in sharp contrast to the previous year; the total return for the 12 months to March 2022 was 19.5%.

Despite the tribulations of the investment market, the occupier market saw a more encouraging performance, and All Property ERV growth for the year to March 2023 was 3.5%. This compares to 3.1% ERV growth for the year to March 2022.

Following an extraordinarily strong year of capital growth to March 2022, the low yielding industrial sector was disproportionately affected by the recent market correction. The MSCI All Industrial total return for the year to March 2023 was -20.4%, comprising capital growth of -23.2% and income return of 3.6%. Capital growth ranged from -18.7% to -27.1% between sub-sectors.

On a more positive note, due to ongoing supply constraints and healthy occupier demand, the industrial sector achieved strong rental growth for the year to March 2023 of 8.6%, ranging from 10.0% to 7.2% between sub-sectors.

In addition to the recent rise in yields experienced by all sectors, the office sector is still undergoing a structural change reflecting post-pandemic working patterns and sustainability-related costs. There is a growing trend of polarisation between prime, energy efficient space and secondary office stock and locations. MSCI reported an All Office total return of -12.3% for the year to March 2023, comprising -15.3% capital growth and 3.6% income return. Capital growth ranged from -10.3% to -22.7% between sub-sectors. ERV growth was 1.6%, ranging from 2.8% to 0.6% between sub-sectors.

Following a prolonged phase of repricing, the retail sector suffered less of an impact from the recent correction than others. The MSCI All Retail total return for the year to March 2023 was -7.9%, comprising capital growth of -12.7% and income return of 5.4%. Capital growth ranged from -5.6% to -17.8% between sub-sectors. The wave of retailer liquidations and CVAs seems to have abated, and arguably retailers that survived the pandemic years should be better placed to weather the storm of weaker consumer demand owing to the cost of living crisis. Following four years of decline, All Retail ERV growth turned positive at 0.4%, ranging from 4.4% to -2.1% between sub-sectors.

According to analysis from Property Data, the total investment volume for the year to March 2023 was £50.6 billion, a 31% decrease on the year to March 2022. The slowdown in investment activity is only evident during the six months to March 2023, which is 58% down on the same period for the previous year.

Investors have been waiting for greater stability in the macroenvironment, which has more recently been affected by concerns within the banking sector. The five-year swap rate currently stands at around 4%, placing the cost of debt just below the MSCI All Property equivalent yield.

More recent data from the MSCI UK Monthly Property Index shows that property values have begun to stabilise with continued positive capital growth in the industrial and retail sectors in April.

Portfolio Review

Industrial weighting	57%
South East	41%
Rest of UK	16%

Office weighting	32%
Central London	13%
Rest of UK	10%
South East	9%

Retail and Leisure weighting	11%
Retail Warehouse	7%
High Street Rest of UK	2%
Leisure	2%

Continued proactive management of our portfolio

The year has been characterised by significant active management activity, set against headwinds of repricing and occupier caution driven by a rising interest rate environment.

We have continued to actively manage the portfolio, increasing passing rent and estimated rental value (ERV) by working with our occupiers, investing into our assets, and advancing our sustainability priorities.

The overall portfolio passing rent is £43.3 million, an increase from the prior year of £4.7 million. On a like-for-like basis this increased by 10% and the contracted rent, which is the gross rent receivable after lease incentives, increased by £1.1 million or 3%.

The March 2023 ERV of the portfolio is £55.8 million, a 9% increase on the prior year on a like-for-like basis. We had ERV growth of 18% in the industrial sector proven by new lettings and active management, whilst the office sector was up 2% and the retail and leisure sector reduced by 1%.

We have been able to offset some of the valuation re-rating through the completion of over 100 asset management transactions.

Inflationary pressures and rising energy costs have impacted all sectors but particularly the office sector, where service charges are highest.

Occupational demand remains resilient in the industrial sector and in the retail sector it has stabilised for good quality real estate, with the business rates’ revaluation acting to reduce occupational costs. The office sector is still going through a period of transition following the pandemic, with a flight to quality and many occupiers still uncertain about working patterns and operating on a more flexible basis. We are adapting our portfolio and exploring alternative uses as we position our portfolio for the medium-term.

Our investment into assets has helped us to retain and secure new occupiers while improving our EPC ratings, with our refurbishment guidelines specifying a minimum B rating for most projects.

We continue to be occupier focused and this approach remains key to our active management of the portfolio. This philosophy of working in collaboration with our occupiers is a significant contributor to our long-term track record of outperformance.

Portfolio overview

Performance

Our portfolio comprises 49 assets, with around 400 occupiers, and is valued at £766 million with a net initial yield of 5.0% and a reversionary yield of 6.7%. The average lot size of the portfolio is £15.6 million as at 31 March 2023.

Our asset allocation, with 57% in industrial, 32% in office and 11% in retail and leisure, combined with transactional activity, has enabled us to materially outperform the MSCI UK Quarterly Property Index over the year.

Overall, the like-for-like valuation decreased by 12%, after a 21% increase in the prior year. This compares with the MSCI UK Quarterly Property Index recording a capital value decrease of 16% over the period.

We believe that the portfolio remains well placed in respect of our overall sector allocations. Where demand is weaker, we are exploring higher value alternative use strategies.

Industrial

The recent economic turmoil has had a direct impact on property yields. Industrial property is the lowest yielding sector, and these yields have risen to maintain the margin above the risk-free rate.

Conversely, occupational demand in the sector remains resilient and we are capturing rental growth. A lack of supply, especially of multi-let estates, coupled with increasing build costs, means that occupiers have restricted choice when looking for a unit, which has driven strong rental growth across the country.

On a like-for-like basis, capital values decreased by 14%, or £70.7 million, and some of the significant gains over the past two years have been eroded. The passing rent increased by 13% and the ERV grew by 18%, or £4.1 million, on a like-for-like basis.

We remain committed to the sector over the medium-term, primarily due to the strength of occupational demand, lack of supply and low capital expenditure requirements.

Our UK-wide distribution warehouse assets total 1.2 million sq ft in five units, which are fully leased with a weighted average unexpired lease term of 4.4 years. Two of the units have rent reviews outstanding and we expect to secure significant uplifts.

The multi-let estates, of which 89% by value are in the South East, total 2.1 million sq ft and we only have eight vacant units out of 161, with one under offer and four currently undergoing refurbishment.

The industrial portfolio currently has £7.6 million of reversionary income potential, with £1.3 million relating to the void units.

Office

In respect of the office sector, it remains a story of Grade A versus everything else with the latter proving harder to lease. There is now a noticeably widening yield gap aligned to quality and increasing capital expenditure required for ongoing upgrades, including sustainability improvements.

The investment into our portfolio over the past few years means most of our buildings are good quality, future-proofed and increasingly sustainable with a focus on health and wellbeing – all of which are attractive attributes to occupiers.

Several of our properties have alternative use potential, and we have progressed this on three buildings with existing vacancies, further detailed within the portfolio activity section.

On a like-for-like basis, capital values decreased by 10%, or £24.4 million. The passing rent increased by 6% and the ERV grew by 2%, or £0.3 million.

The office portfolio currently has £5.6 million of reversionary income potential, with £3.6 million relating to the void units.

Retail and Leisure

The retail and leisure sector was already high yielding and has therefore been less affected by outward yield movement. The cost of living crisis is predicted to further affect the sector; however, our fully leased retail warehouse parks are underpinned by value led retailers.

The retail warehouse assets, which make up 7% of the total portfolio, total 0.4 million sq ft in 19 units across four parks and are fully leased, with a weighted average unexpired lease term of 5.2 years.

Our high yielding high street portfolio, which makes up 2% of the total portfolio, is fully leased with the exception of one unit in Carlisle which is under offer. We see opportunities in the sector for prime high street locations off rebased rents.

On a like-for-like basis, capital values decreased by 8%, or £7.1 million. The passing rent increased by 9% and the ERV declined by 1%, or £0.1 million.

The retail and leisure portfolio has negative reversion of £0.7 million per annum, primarily relating to the over renting of the high street retail assets.

Portfolio activity

Proactive management

It has been a very active year in respect of asset management transactions.

We completed:

– 39 lettings or agreements to lease, 25% ahead of ERV and securing a new contracted rent of £2.3 million

– 37 lease renewals or regears, 6% ahead of ERV, securing an uplift in contracted rent of £0.7 million

– 20 rent reviews, 7% ahead of ERV, securing an uplift in passing rent of £0.7 million

– Three lease variations to remove occupier break options, securing £0.4 million of income

– 11 lease surrenders to facilitate active management

Leasing and occupancy

Occupancy has decreased during the year from 93% to 91% with a total void ERV of £5.3 million, which compares to the MSCI UK Quarterly Property Index of 92% as at 31 March 2023.

Our industrial portfolio is 95% leased with demand remaining high across the country. We have only eight vacant industrial units, four of which are being refurbished.

The office portfolio occupancy is 83%. Our occupancy has reduced primarily due to three office properties where we are working through potential changes of use to residential and student accommodation. Excluding these three properties, the office occupancy rate would increase to 91%.

During the year our SwiftSpace offering has helped to grow occupancy in smaller units, with nearly a quarter of lettings by number being SwiftSpace lettings across four properties.

In terms of retail and leisure, occupancy is 94%. The retail warehouse portfolio is fully leased, and we have one vacant high street shop, which is under offer. At Regency Wharf, Birmingham, we have a small office element to lease.

Our largest voids are at:

– Angel Gate, London – accounting for 18% of the total portfolio void. We are in the process of securing change of use at the property to residential in respect of vacant units.

– Charlotte Terrace, London – accounting for 12% of the total void. We recently acquired this property and have submitted a planning application for change of use of part of the space to residential.

– Longcross, Cardiff – accounting for 9% of the total void. We are working through options for alternative uses.

Retention

Over the year, total ERV at risk due to lease expiries or break options totalled £5.5 million, in line with the year to March 2022.

We retained 67% of total ERV at risk in the year to March 2023. Of the ERV that was not retained, a further 8% or £0.5 million was re-let to new occupiers during the year.

In addition, a further £3.4 million of ERV was retained by either removing future breaks or extending future lease expiries ahead of the lease event.

Portfolio investment

Refurbishment upgrades

Over the year we have invested £6.1 million into the portfolio across over 15 projects, with the top five projects accounting for 65% of the spend.

These have all been aimed at enhancing space to attract occupiers, improve sustainability credentials and grow income. All works undertaken are in line with our refurbishment guidelines, outlining best industry practice, which includes where appropriate, the removal of natural gas from buildings, installation of solar panels and insulation upgrades in line with our net zero carbon pathway.

We are continually focused on future-proofing assets from a sustainability perspective, which has resulted in an improvement in our EPC ratings with 76% of our properties (by rental value) now rated C and above.

Investment activity

We acquired two new properties during the year, as well as the acquisition of a further unit at an existing holding.

109-117 High Street, Cheltenham – £5.3 million

This mixed-use property comprises 7,700 sq ft of ground floor retail space with 11,450 sq ft of office space over two upper floors, and is located in Cheltenham’s pedestrianised town centre, adjacent to John Lewis.

Comprehensively refurbished in 2020, the property has good environmental credentials including EPC ratings of B on both the office and retail elements and no natural gas.

On purchase it was leased to four occupiers, with an average lease length of 12 years to expiry and eight years to break. We have since surrendered one of the retail leases and re-let the unit to a national retailer, securing a ten-year lease, subject to break.

The current contracted rent is £0.4 million, equating to £21 per sq ft, with most leases containing fixed rental uplifts that will increase income to £0.5 million per annum by 2026.

The purchase price reflected a net initial yield of 7.2%, rising to 9.0% by 2026. The low capital value of £277 per sq ft is below its estimated replacement cost.

Charlotte Terrace, Hammersmith Road, W14 – £13.7 million

This mixed-use asset comprises four adjoining buildings, which total 28,500 sq ft of office space and 4,400 sq ft of retail space, arranged over five floors. The property was redeveloped behind the façade in 1990 and is Grade II listed, meaning there are no business rates payable on void units.

The property is located close to Olympia, which is currently undergoing a £1 billion redevelopment to deliver a new creative district, with a new theatre, entertainment venue, hotel, office, retail and leisure space, which will enhance the surrounding area.

Since purchase we have leased a retail unit and an office suite. We are in the process of relocating an office occupier, to secure vacant possession of one of the office buildings so we can seek a change of use to residential and the planning application for this has been submitted.

The purchase price reflects a net initial yield of 3.3%, rising to over 8% once fully let and reflecting a low capital value of £417 per sq ft, which is below its estimated replacement cost. Residential values in the area are approximately £1,000 per sq ft.

Unit 7V Madleaze Trading Estate, Gloucester – £0.4 million

We acquired another unit on this industrial estate with vacant possession, and leased the space to an existing occupier. The acquisition helps to consolidate our ownership.

In addition, we acquired the freehold of our Rushden distribution asset for nil consideration, having previously owned a long leasehold interest.

Looking ahead

Outlook

The sharp yield correction in 2022 has caused a repricing of commercial property, but we are now seeing values stabilise, creating potential opportunities in some sectors.

The quality of our portfolio, which has benefited from significant investment in respect of refurbishments and sustainability upgrades in recent years, means that we have started to future-proof properties to ensure that they are attractive to occupiers. Our net zero carbon pathway is in place, and we will continue to invest in the improvement of our buildings.

Our occupiers remain our key focus and we have long-standing relationships with many of them, which enable us to work with and assist businesses as they grow and contract.

As at 31 March 2023 the portfolio had £12.5 million of reversionary income potential; £5.3 million from letting the vacant space, £4.2 million from expiring rent-free periods or stepped rents and £3.0 million where the rent is below market level. This is significant and is our focus for the coming year.

Demand for our industrial properties continues to be resilient as proven by our high occupancy and growing ERVs. With this sector accounting for 57% of the total portfolio by value, we believe it will contribute to our performance off rebased values that are now stable, with supply constraints and high building costs likely to lead to further rental growth.

Many of our office buildings have had investment into them in recent years, to upgrade space, create occupier amenities and improve their sustainability credentials. Our best-in-class offices are attracting and retaining occupiers; however, where we do have higher vacancy rates, we are exploring higher value alternative uses, including residential conversion at two central London properties. The sector is going through an adjustment, and we will look to reduce exposure through change of use and selective sales.

The retail and leisure sector has recovered following the pandemic, but there are still headwinds in respect of an oversupply of floor space and a cost of living crisis impacting disposable income. By virtue of the marked repricing in this sector in prior years we believe there are opportunities in the sector for selective acquisitions.

The portfolio is well placed and of a high quality, enabling us to maintain and enhance income through our proven occupier focused approach. Looking forward, our focus is on growing occupancy and improving the overall portfolio quality through selective disposals, reinvestment and refurbishments to improve the sustainability credentials of our assets.

Jay Cable

Head of Asset Management

Top ten assets

Site	Property type	Approximate area (sq ft)	Capital value (£m)	No. of occupiers	Occupancy rate (%)	EPC rating
Parkbury Industrial Estate, Radlett	Industrial	343,700	>100	21	98	A-D
River Way Industrial Estate, Harlow	Industrial	454,800	50-75	10	100	A-D
Angel Gate, City Road, London EC1	Office	64,600	30-50	16	56	B-E
Stanford Building, London WC2	Office	20,100	30-50	5	100	B-D
Shipton Way, Rushden	Industrial	312,900	30-50	1	100	C
Datapoint, Cody Road, London E16	Industrial	55,100	20-30	6	100	B-C
Lyon Business Park, Barking	Industrial	99,400	20-30	7	76	B-E
Tower Wharf, Cheese Lane, Bristol	Office	70,600	20-30	6	90	B-D
50 Farringdon Road, London EC1	Office	31,300	20-30	4	100	B
Sundon Business Park, Dencora Way, Luton	Industrial	127,800	20-30	11	93	B-D

Top ten occupiers

The largest occupiers, based as a percentage of contracted rent, as at 31 March 2023, are as follows:

Occupier	Contracted rent (£m)	%
Public sector	2.3	4.8
Whistl UK Limited	1.6	3.5
B&Q Plc	1.2	2.6
The Random House Group Limited	1.2	2.5
Snorkel Europe Limited	1.2	2.5
XMA Limited	1.0	2.1
Portal Chatham LLP	1.0	2.0
DHL Supply Chain Limited	0.8	1.7
4 Aces Limited	0.7	1.5
Hi-Speed Services Limited	0.7	1.5
Total	11.7	24.7

Longevity of income

As at 31 March 2023, expressed as a percentage of contracted rent, the average length of leases to first termination was 4.6 years (2022: 4.8 years). This is summarised as follows:

	%
0 to 1 year	12.9
1 to 2 years	14.2
2 to 3 years	21.7
3 to 4 years	12.5
4 to 5 years	11.5
5 to 10 years	18.4
10 to 15 years	7.6
15 years or more	1.2
Total	100

Financial Review

A year marked by resilient income, despite valuation movements

The early part of this financial year saw the UK economy continue to grow, and at 30 June 2022 our net asset value reached £670 million. However, the September mini-budget caused a significant shock to UK markets, with rising interest rates and bond yields impacting commercial property pricing. The negative capital growth between September and December was the largest ever quarterly movement recorded by MSCI.

Our overall loss for the year was £90.0 million, comprising a negative valuation movement of £111.3 million and EPRA earnings of £21.3 million. This year, we have seen the reversal of some of the record valuation gains recorded in 2021/22.

Our EPRA earnings, comprising the operating results and net interest expense were £21.3 million for the year, a small increase over the equivalent figure last year. As discussed below, rental income rose by 7.1% compared to 2022; however, this increase was largely offset by higher property operating and void costs.

Commercial property values fell in the latter half of 2022 as interest rates and bond yields rose rapidly. Although we have seen valuation movements moderating in the first quarter of 2023, further interest rate rises may still have an adverse impact this year.

Based on these results our total return for the year was -13.9%, compared to 28.3% for the year to 31 March 2022.

Net asset value

The net assets of the Group at 31 March 2023 were £547.6 million, or 100 pence per share, which was a fall of 16.7% over the year. The chart below shows the components of this decrease.

	£m
March 2022 net asset value	657.1
EPRA earnings	21.3
Valuation movement	(111.3)
Share-based awards	0.7
Purchase of shares	(1.1)
Dividends paid	(19.1)
March 2023 net asset value	547.6

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

	2023 £m	2022 £m	2021 £m
Net assets – IFRS and EPRA net tangible asset value	547.6	657.1	528.2
Fair value of debt	22.8	(6.7)	(21.0)
EPRA net disposal value	570.4	650.4	507.2
Net asset value per share (pence)	100	120	97
EPRA net tangible asset value per share (pence)	100	120	97
EPRA net disposal value per share (pence)	105	119	93

Income statement

The result for the year is dominated by the adverse valuation movement at the end of 2022 as property yields moved out. However, EPRA earnings were stable, with increased rental income largely offset by increased property costs.

Total revenue from the property portfolio for the year was £51.8 million, up from £46.5 million last year. Rental income has increased by 7.1% compared to 2022, as a result of the impact of new acquisitions over the full year, as well as rental growth.

Property operating and void costs have shown a marked increase this year, from £4.9 million to £7.1 million. This is partly the result of the higher vacancy rate, but also demonstrates the impact of inflation and higher costs over the past year. Administrative expenses, however, only increased by a small amount, £0.2 million, or 3.5%, to a little under £6.0 million. Staff costs were broadly in line with the previous year, while some one-off costs incurred this year increased other corporate expenses.

Interest and other finance costs have increased from £8.5 million to £9.0 million. This is partly due to the additional interest on the increased Canada Life facility, which completed in March 2022. This transaction also extended the facility to 2031, reduced the interest rate to 3.25% and enabled us to repay most of the revolving credit facility.

95% of our borrowings are at fixed rates and do not mature until 2031/32. This year we have drawn down further under our revolving credit facility to finance acquisitions. Although only a relatively small element of our total borrowings, the interest rate on our revolving credit facility has increased from 2.3% in March 2022 to its current rate of 5.8%.

The negative capital movement on the portfolio was £111.3 million for the year, including the movement on owner-occupied property. The industrial sector saw the largest movement, especially where yields were lowest.

Dividends

This year we have maintained our quarterly dividend rate of 0.875 pence per share, equating to an annual rate of 3.5 pence per share. Total dividends paid out were £19.1 million, an increase of 3.6% compared to 2022. Dividend cover for the year remained healthy at 112%.

Investment properties

The appraised value of our investment property portfolio was £766.2 million at 31 March 2023, lower than the £849.3 million reported a year ago. We have made acquisitions this year, for a total consideration of £20.6 million, including costs. These acquisitions are discussed in more detail in the Portfolio Review section. Also this year, we have invested £6.1 million of capital expenditure in the portfolio upgrading a number of assets, including Madleaze Trading Estate, Gloucester, Colchester Business Park, Lyon Business Park, Essex and Metro, Manchester.

In line with last year, the value of the floor that we occupy at Stanford Building, London, has been excluded from the value of Investment Properties and included separately with Property, Plant and Equipment. Any capital movements arising from the revaluation of this element of the property are shown within Other Comprehensive Income.

At 31 March 2023 the portfolio comprised 49 assets, with an average lot size of £15.6 million.

Borrowings

Total borrowings are now £224.5 million at 31 March 2023, with the loan to value ratio at 26.7%. The weighted average interest rate on our borrowings is 3.8%, while the average loan duration is now 8.4 years.

Our loan facility with Aviva reduced by the regular amortisation, £1.4 million in the year.

The Group remained fully compliant with its loan covenants throughout the year. At 31 March 2023, we had £11.9 million drawn under the revolving credit facility, which matures in 2025. This year we drew down £7.0 million under this facility, largely to fund the acquisition of the new Cheltenham asset, as well as for ongoing capital expenditure projects.

The fair value of our drawn borrowings at 31 March 2023 was £201.7 million, lower than the book value by some £22.8 million. As a result, our EPRA NDV asset value was £570.4 million at 31 March 2023, higher than the reported net assets under IFRS. Both lending margins and gilt yields are currently higher relative to the rates set on our facilities.

A summary of our borrowings is set out in the table below.

	2023	2022	2021
Fixed rate loans (£m)	212.6	213.9	166.2
Drawn revolving facility (£m)	11.9	4.9	–
Total borrowings (£m)	224.5	218.8	166.2
Borrowings net of cash (£m)	204.4	180.3	142.8
Undrawn facilities (£m)	38.1	45.1	50.0
Loan to value ratio (%)	26.7	21.2	20.9
Weighted average interest rate (%)	3.8	3.7	4.2
Average duration (years)	8.4	9.6	8.9

Cash flow and liquidity

Our cash outflow for the year was £18.5 million. The cash flow from operating activities this year is £23.0 million, some 15% higher than the previous year. We invested £26.8 million during the year; £20.6 million being the consideration paid for two principal acquisitions, as well as £6.1 million of capital expenditure. Overall borrowings increased by £5.6 million. Dividends paid increased to £19.1 million. Our cash balance at the year-end stood at £20.1 million.

Share capital

No new ordinary shares were issued during the year.

The Company’s Employee Benefit Trust acquired a further 1,250,000 shares, at a cost of £1.1 million, or 90 pence per share, during the year. This was to satisfy the future vesting of awards made under the Long-term Incentive Plan and Deferred Bonus Plan, and now holds a total of 2,388,694 shares. As the Trust is consolidated into the Group’s results, these shares are effectively held in treasury and therefore have been excluded from the net asset value and earnings per share calculations, from the date of purchase.

Andrew Dewhirst

Finance Director

24 May 2023

Principal Risks

Managing risks

The Board recognises that there are risks and uncertainties that could have a material impact on the Group’s results.

Risk management provides a structured approach to the decision-making process such that the identified risks can be mitigated and the uncertainty surrounding expected outcomes can be reduced. The Board has developed a Risk Management Policy which it reviews on a regular basis. The Audit and Risk Committee carries out a detailed assessment of all risks, whether investment or operational, and considers the effectiveness of the risk management and internal control processes. The Executive Committee is responsible for implementing strategy within the agreed Risk Management Policy, as well as identifying and assessing risk in day-to-day operational matters. The Management Committees support the Executive Committee in these matters. The small number of employees and relatively flat management structure allow risks to be quickly identified and assessed. The Group’s risk appetite will vary over time and during the course of the property cycle. The principal risks – those with potential to have a material impact on performance and results – are set out here, together with mitigating controls.

The UK Corporate Governance Code requires the Board to make a Viability Statement. This considers the Company’s current position and principal and emerging risks and uncertainties combined with an assessment of the future prospects for the Company, in order that the Board can state that the Company will be able to continue its operations over the period of their assessment. The statement is set out in the Directors’ Report.

Climate-related risks

Last year the Board carried out an assessment of the physical and transition risks most relevant to the business, and undertook a review of its procedures for identifying and managing those risks. The recommendations arising from the review have been implemented this year. The mitigating actions that have been carried out in respect of climate-related risks are described in the Task Force on Climate-related Financial Disclosures section of the report, together with more detail on the risk assessment and modelling undertaken.

Emerging risks

During the year the Board has considered themes where emerging risks or disrupting events may impact the business. These may arise from behavioural changes, political or regulatory changes, advances in technology, environmental factors, economic conditions or demographic changes. All emerging risks are reviewed as part of the ongoing risk management process.

The principal emerging risks have been identified to be:

– high inflation remaining in the UK economy, causing further interest rate rises and an adverse impact on asset values;

– further political uncertainty in the lead-up to a general election in the UK;

– the increasing importance of sustainability issues to all stakeholders;

– changing demand for commercial space, as businesses reassess their requirements in the light of more flexible working, advances in AI technology and employee wellbeing;

– changes in regulations are increasing environmental standards and property owners must keep pace to avoid the risk of stranded assets; and

– cyber security, with an increased prevalence of ransomware attacks and greater vulnerability of systems with home working.

Corporate Strategy

1
Political and economic

Risk Uncertainty in the UK economy, whether arising from political events or otherwise, brings risks to the property market and to occupiers’ businesses. This can result in lower shareholder returns, lower asset liquidity and increased occupier failure.	Mitigation The Board considers economic conditions and market uncertainty when setting strategy, considering the financial strategy of the business and in making investment decisions.	Commentary Economic uncertainty has risen over the year, although is less than in the immediate aftermath of the September mini-budget. Interest rates have risen significantly and inflation remains at a high level. The cost of living crisis is still evident and industrial disputes, particularly in the public sector, are causing further disruption. The UK economy is not forecast to grow by any meaningful amount over the next year. The war in Ukraine continues to impact global politics and economics.	Risk trend Increasing
2
Market cycle

Risk The property market is cyclical and returns can be volatile. There is an ongoing risk that the Company fails to react appropriately to changing market conditions, resulting in an adverse impact on shareholder returns.	Mitigation The Board reviews the Group’s strategy and business objectives on a regular basis and considers whether any change is needed, in light of current and forecast market conditions.	Commentary Economic factors have caused more volatility in the property market this year. Interest rates and bond yields have risen, with a consequent adverse impact on property yields and valuations, particularly towards the end of 2022.	Risk trend Increasing
3
Regulatory and tax

Risk The Group could fail to comply with legal, fiscal, health and safety or regulatory matters which could lead to financial loss, reputational damage or loss of REIT status.	Mitigation The Board and senior management receive regular updates on relevant laws and regulations from the Group’s professional advisers. The Group has a Health and Safety Committee which monitors all health and safety issues including oversight of the Property Manager. The Group is a member of the BPF and EPRA, and management attend industry briefings.	Commentary There are no significant changes expected to the regulatory environment in which the Group operates.	Risk trend No change/ stable

4
Climate change resilience

Risk Failure to react to climate change could lead to reputational damage, loss of income and value and being unable to attract occupiers. Rising materials and energy costs as a result of climate change could give rise to asset obsolescence.	Mitigation Sustainability is embedded within the Group’s business model and strategy. We have published our pathway to net zero carbon and have reported on our progress this year. We have addressed the identification and assessment of climate-related risks as identified through the TCFD process.	Commentary Climate change resilience remains a key issue for property owners. The increasing cost of energy has raised the importance of building efficiency for occupiers. On-site renewables, such as solar panels, are increasingly being included in refurbishment projects.	Risk trend Increasing

Property

5
Portfolio strategy

Risk The Group has an inappropriate portfolio strategy, as a result of poor sector or geographical allocations, or holding obsolete assets, leading to lower shareholder returns.	Mitigation The Group maintains a diversified portfolio in order to minimise exposure to any one geographical area or market sector.	Commentary The industrial sector, having benefitted from strong investment demand leading to lower yields, saw a greater valuation movement in 2022. Demand for the office sector remains muted as businesses continue to reassess their requirements. The retail sector is showing some improvement, but from a low base.	Risk trend Increasing
6
Investment

Risk Investment decisions may be flawed as a result of incorrect assumptions, poor research or incomplete due diligence, leading to financial loss.	Mitigation The Executive Committee must approve all investment transactions over a threshold level, and significant transactions require Board approval. A formal appraisal and due diligence process is carried out for all potential purchases including environmental assessments. A review of each acquisition is performed within two years of completion.	Commentary Volatility in the investment market has increased over the year. There is more uncertainty in making investment decisions due to increasing costs, climate-related risks and recessionary pressures.	Risk trend Increasing

7
Asset management

Risk Failure to properly execute asset business plans or poor asset management could lead to longer void periods, higher occupier defaults, higher arrears and low occupier retention, all having an adverse impact on earnings and cash flow.	Mitigation Management prepare business plans for each asset which are reviewed regularly. The Executive Committee must approve all investment transactions over a threshold level, and significant transactions require Board approval. Management maintain close contact with occupiers to have early indication of intentions. Management regularly assess the performance of the Group’s Property Manager.	Commentary Rent collection has remained high throughout the year, with limited occupier defaults.	Risk trend No change/ stable
8
Valuation

Risk A fall in the valuation of the Group’s property assets could lead to lower investment returns and a breach of loan covenants.	Mitigation The Group’s property assets are valued quarterly by an independent valuer with oversight by the Property Valuation Committee. Market commentary is provided regularly by the independent valuer. The Board reviews financial forecasts for the Group on a regular basis, including sensitivity and adequate headroom against financial covenants.	Commentary Following the mini-budget in September 2022, there were significant increases in interest rates and bond yields, causing commercial property valuations to decline. After a marked fall in December, valuations have subsequently stabilised to some extent. However, further interest rate rises may cause some further pressure on valuations. There remains good headroom against the Group’s lending covenants.	Risk trend Increasing

Operational

9
People

Risk The Group relies on a small team to implement the strategy and run the day-to-day operations. Failure to retain or recruit key individuals with the right blend of skills and experience may result in poor decision making and underperformance.	Mitigation The Board has a remuneration policy in place which incentivises performance and is aligned with shareholders’ interests. All employees receive an annual performance appraisal including training and development needs. There is a Non-Executive Director responsible for employee engagement who provides regular feedback to the Board.	Commentary The team has remained stable throughout the year with no leavers. Positive feedback was received from the employee engagement survey. Flexible working arrangements for the team have been maintained.	Risk trend No change/ stable

Financial

10
Finance strategy

Risk The Group has a number of loan facilities to finance its activities. Failure to comply with covenants or to manage refinancing events could lead to a funding shortfall for operational activities.	Mitigation The Board reviews financial forecasts for the Group on a regular basis, including sensitivity against financial covenants. The Group’s property assets are valued quarterly by an independent valuer with oversight by the Property Valuation Committee. Market commentary is provided regularly by the independent valuer. The Audit and Risk Committee considers the going concern status of the Group biannually.	Commentary The Group has mainly fixed rate long-term borrowings in place. Covenants are monitored regularly and there is good headroom against these. The revolving credit facility has been extended for a further year until 2025.	Risk trend No change/ stable
11
Capital structure

Risk The Group operates a geared capital structure, which magnifies returns from the portfolio, both positive and negative. An inappropriate level of gearing relative to the property cycle could lead to lower investment returns.	Mitigation The Board regularly reviews its gearing strategy and debt maturity profile, at least annually, in light of changing market conditions. The Group has a revolving credit facility in place which can be repaid if required to reduce the level of gearing.	Commentary The use of gearing has amplified the valuation movements this year, resulting in lower returns. However, the Group’s loan to value ratio remains low.	Risk trend Increasing

Viability assessment and statement

The UK Corporate Governance Code requires the Board to make a ‘viability statement’ which considers the Company’s current position and principal and emerging risks and uncertainties combined with an assessment of the future prospects for the Company, in order that the Board can state that the Company will be able to continue its operations over the period of their assessment.

The Board conducted this review over a five-year timescale, considered to be the most appropriate for long-term investment in commercial property. The assessment has been undertaken taking into account the principal and emerging risks and uncertainties faced by the Group which could impact its investment strategy, future performance, loan covenants and liquidity.

The major risks identified were those relating to high inflation, rising interest rates, other recessionary pressures and the lead up to a general election over the period of the assessment. In the ordinary course of business, the Board reviews a detailed financial model on a quarterly basis, including forecast market returns. This model allows for different assumptions regarding lease expiries, breaks and incentives. For the purposes of the viability assessment of the Group, the model covers a five-year period and is stress tested under various scenarios.

The Board considered a number of scenarios and their impact on the Group’s property portfolio and financial position. These scenarios included different levels of rent collection, occupier defaults, void periods and incentives within the portfolio, and the consequential impact on property costs and loan covenants. All lease events and assumptions were reviewed over the period under the different scenarios, including their impact on revenue and cash flow. Forecast movements in capital values were included in these scenarios, including their potential impact on the Group’s loan covenants. The Group’s long-term loan facilities are contracted to be in place throughout the assessment period, while the Board has assumed that the Group will continue to have access to its short-term facilities which expire in 2025. The Board considered the impact of these scenarios on its ability to continue to pay dividends at different rates over the assessment period.

These matters were assessed over the period to 31 March 2028 and will continue to be assessed over rolling five-year periods.

The Directors consider that the stress testing performed was sufficiently robust and that even under extreme conditions the Company remains viable.

Based on their assessment, and in the context of the Group’s business model and strategy, the Directors expect that the Group will be able to continue in operation and meet its liabilities as they fall due over the five-year period to 31 March 2028.

Statement of Directors’ responsibilities

The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law they are required to prepare the financial statements in accordance with International Financial Reporting Standards, as issued by the IASB, and applicable law.

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of its profit or loss for that period.

In preparing these financial statements, the Directors are required to:

– select suitable accounting policies and then apply them consistently;

– make judgements and estimates that are reasonable, relevant and reliable;

– state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the financial statements;

– assess the Group and Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and

– use the going concern basis of accounting unless they either intend to liquidate the Group or the Company or to cease operations, or have no realistic alternative but to do so.

The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that its financial statements comply with the Companies (Guernsey) Law, 2008. They are responsible for such internal controls as they determine are necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error, and have a general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website, and for the preparation and dissemination of financial statements. Legislation in Guernsey governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

Directors’ responsibility statement in respect of the Annual Report and financial statements

We confirm that to the best of our knowledge:

– the financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company; and

– the Strategic Report includes a fair review of the development and performance of the business and the position of the Issuer, together with a description of the principal risks and uncertainties that they face.

We consider the Annual Report and accounts, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company’s position and performance, business model and strategy.

By Order of the Board

Andrew Dewhirst

24 May 2023

Financial Statements

Consolidated statement of comprehensive income

for the year ended 31 March 2023

	Notes	2023 £000	2022 £000
Income
Revenue from properties	3	51,816	46,543
Property expenses	4	(15,566)	(11,098)

Net property income		36,250	35,445

Expenses
Administrative expenses	6	(5,955)	(5,755)

Total operating expenses		(5,955)	(5,755)

Operating profit before movement on investments		30,295	29,690

Investments
Profit on disposal of investment properties	13	–	42
Revaluation of owner-occupied property	14	(382)	–
Investment property valuation movements	13	(110,433)	129,801

Total (loss)/profit on investments		(110,815)	129,843

Operating (loss)/profit		(80,520)	159,533

Financing
Interest received		24	–
Interest paid	8	(9,034)	(8,502)
Debt prepayment fees	18	–	(4,045)

Total finance costs		(9,010)	(12,547)

(Loss)/profit before tax		(89,530)	146,986
Tax	9	–	–
(Loss)/profit after tax		(89,530)	146,986

Other comprehensive income
Revaluation of owner-occupied property	14	(434)	434

Total other comprehensive (loss)/income for the year		(434)	434

Total comprehensive (loss)/income for the year		(89,964)	147,420

Earnings per share
Basic	11	(16.5)p	27.0p
Diluted	11	(16.5)p	26.9p

All items in the above statement derive from continuing operations.

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

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

Consolidated statement of changes in equity

for the year ended 31 March 2023

	Notes	Share capital £000	Retained earnings £000	Other reserves £000	Revaluation reserve £000	Total £000
Balance as at 31 March 2021		164,400	364,466	(669)	–	528,197
Profit for the year		–	146,986	–	–	146,986
Dividends paid	10	–	(18,425)	–	–	(18,425)
Share-based awards		–	–	668	–	668
Purchase of shares held in trust	7	–	–	(730)	–	(730)
Other comprehensive income for the year	14	–	–	–	434	434

Balance as at 31 March 2022		164,400	493,027	(731)	434	657,130
Loss for the year		–	(89,530)	–	–	(89,530)
Dividends paid	10	–	(19,091)	–	–	(19,091)
Share-based awards		–	–	675	–	675
Purchase of shares held in trust	7	–	–	(1,126)	–	(1,126)
Other comprehensive loss for the year	14	–	–	–	(434)	(434)

Balance as at 31 March 2023		164,400	384,406	(1,182)	–	547,624

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

Consolidated balance sheet

as at 31 March 2023

	Notes	2023 £000	2022 £000
Non-current assets
Investment properties	13	746,342	830,027
Property, plant and equipment	14	3,415	4,383

Total non-current assets		749,757	834,410

Current assets
Accounts receivable	15	22,749	22,850
Cash and cash equivalents	16	20,050	38,547

Total current assets		42,799	61,397

Total assets		792,556	895,807

Current liabilities
Accounts payable and accruals	17	(19,471)	(19,138)
Loans and borrowings	18	(1,129)	(1,068)
Obligations under leases	22	(114)	(114)

Total current liabilities		(20,714)	(20,320)

Non-current liabilities
Loans and borrowings	18	(221,635)	(215,764)
Obligations under leases	22	(2,583)	(2,593)

Total non-current liabilities		(224,218)	(218,357)

Total liabilities		(244,932)	(238,677)

Net assets		547,624	657,130

Equity
Share capital	20	164,400	164,400
Retained earnings		384,406	493,027
Other reserves		(1,182)	(731)
Revaluation reserve		–	434

Total equity		547,624	657,130

Net asset value per share	23	100p	120p

These consolidated financial statements were approved by the Board of Directors on 24 May 2023 and signed on its behalf by:

Andrew Dewhirst

Director

24 May 2023

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

Consolidated statement of cash flows

for the year ended 31 March 2023

	Notes	2023 £000	2022 £000
Operating activities
Operating (loss)/profit		(80,520)	159,533
Adjustments for non-cash items	21	111,655	(129,010)
Interest received		24	–
Interest paid		(7,937)	(8,102)
Decrease/(increase) in accounts receivable		101	(3,305)
(Decrease)/increase in accounts payable and accruals		(291)	897

Cash inflows from operating activities		23,032	20,013

Investing activities
Purchase of investment properties	13	(20,613)	(25,005)
Capital expenditure on investment properties	13	(6,135)	(9,551)
Disposal of investment properties	13	–	726
Purchase of tangible assets	14	(13)	(3)

Cash outflows from investing activities		(26,761)	(33,833)

Financing activities
Borrowings repaid	18	(6,368)	(26,917)
Borrowings drawn	18	12,000	79,545
Debt prepayment fees	18	–	(4,045)
Financing costs	18	(183)	(419)
Purchase of shares held in trust	7	(1,126)	(730)
Dividends paid	10	(19,091)	(18,425)

Cash (outflows)/inflows from financing activities		(14,768)	29,009

Net (decrease)/increase in cash and cash equivalents		(18,497)	15,189
Cash and cash equivalents at beginning of year		38,547	23,358

Cash and cash equivalents at end of year	16	20,050	38,547

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

Notes to the consolidated financial statements

For the year ended 31 March 2023

1. General information

Picton Property Income Limited (the ‘Company’ and together with its subsidiaries the ‘Group’) was established on 15 September 2005 as a closed ended Guernsey domiciled investment company and entered the UK REIT regime on 1 October 2018. The consolidated financial statements are prepared for the year ended 31 March 2023 with comparatives for the year ended 31 March 2022.

2. Significant accounting policies

Basis of accounting

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

The Directors have assessed whether the going concern basis remains appropriate for the preparation of the financial statements. They have reviewed the Group’s principal and emerging risks, existing loan facilities, access to funding and liquidity position and then considered different adverse scenarios impacting the portfolio and the potential consequences on financial performance, asset values, dividend policy, capital projects and loan covenants. Under all these scenarios the Group has sufficient resources to continue its operations, and remain within its loan covenants, for the foreseeable future and in any case for a period of at least 12 months from the date of these financial statements.

Based on their assessment and knowledge of the portfolio and market, the Directors have therefore continued to adopt the going concern basis in preparing the financial statements.

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

New or amended standards issued

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

– Onerous Contracts – Cost of Fulfilling a Contract (Amendments to IAS 37)

– Annual Improvements to IFRS Standards 2018-2020

– Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16)

– Reference to the Conceptual Framework (Amendments to IFRS 3)

The adoption of these standards has had no material effect on the consolidated financial statements of the Group.

At the date of approval of these financial statements, there are a number of new and amended standards in issue but not yet effective for the financial year ended 31 March 2023 and thus have not been applied by the Group.

– IFRS 17 Insurance Contracts

– Amendments to IFRS 17

– Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2)

– Definition of Accounting Estimates (Amendments to IAS 8)

– Deferred Tax Related to Assets and Liabilities Arising from a Single Transaction – Amendments to IAS 12 Income Taxes

– Initial Application of IFRS 17 and IFRS 9 – Comparative Information (Amendments to IFRS 17)

– Classification of Liabilities as Current or Non-current (Amendments to IAS 1)

– Lease Liability in a Sale and Leaseback (Amendments to IFRS 16)

– Non-current Liabilities with Covenants (Amendments to IAS 1)

– Sale or Contributions of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28)

The adoption of these new and amended standards, together with any other IFRSs or IFRIC interpretations that are not yet effective, are not expected to have a material impact on the financial statements of the Group.

Use of estimates and judgements

The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of policies and the reported amounts of assets, liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of estimates about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis.

Significant judgements and estimates

Judgements made by management in the application of IFRSs that have a significant effect on the financial statements and major sources of estimation uncertainty are disclosed in Note 13.

The critical estimates and assumptions relate to the investment property and owner-occupied property valuations applied by the Group’s independent valuer. Revisions to accounting estimates are recognised in the year in which the estimate is revised if the revision affects only that year, or in the year of the revision and future years if the revision affects both current and future years.

Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company at the reporting date. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect these returns through its power over the entity.

Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. These financial statements include the results of the subsidiaries disclosed in Note 12. All intra-group transactions, balances, income and expenses are eliminated on consolidation.

Fair value hierarchy

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

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

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

Level 3: unobservable inputs for the asset or liability.

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

Investment properties

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

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

The fair value of investment property generally involves consideration of:

– Market evidence on comparable transactions for similar properties;

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

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

– Hypothetical sellers and buyers, who are reasonably informed about the current market and who are motivated, but not compelled, to transact in that market on an arm’s length basis; and

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

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

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

The majority of the investment properties are charged by way of a first ranking mortgage as security for the loans made to the Group; see Note 18.

Property, plant and equipment

Owner-occupied property

Owner-occupied property is stated at its revalued amount, which is determined in the same manner as investment property. It is depreciated over its remaining useful life (in this case 40 years) with the depreciation included in administrative expenses. On revaluation, any accumulated depreciation is eliminated against the gross carrying amount of the property concerned, and the net amount restated to the revalued amount. Subsequent depreciation charges are adjusted based on the revalued amount. Any difference between the depreciation charge on the revalued amount and that which would have been charged under historic cost is transferred between the revaluation reserve and retained earnings as the property is used. Any gain arising on this remeasurement is recognised in profit or loss to the extent that it reverses a previous impairment loss on the specific property, with any remaining gain recognised in other comprehensive income and presented in the revaluation reserve. Any loss is recognised in profit or loss. However, to the extent that an amount is included in the revaluation surplus for that property, the loss is recognised in other comprehensive income and reduces the revaluation surplus within equity.

Plant and equipment

Plant and equipment is depreciated on a straight-line basis over the estimated useful lives of each item of plant and equipment. The estimated useful lives are between three and five years.

Leases

Where the Group holds interests in investment properties other than as freehold interests (e.g. as a head lease), these are accounted for as right of use assets, which is recognised at its fair value on the Balance Sheet, within the investment property carrying value. Upon initial recognition, a corresponding liability is included as a lease liability. Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability so as to produce a constant periodic rate of interest on the remaining lease liability. Contingent rent payable, being the difference between the rent currently payable and the minimum lease payments when the lease liability was originally calculated, are charged as expenses within property expenditure in the years in which they are payable.

The Group leases its investment properties under commercial property leases which are held as operating leases. An operating lease is a lease other than a finance lease. A finance lease is one where substantially all the risks and rewards of ownership are passed to the lessee. Lease income is recognised as income on a straight-line basis over the lease term. Direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised as an expense over the lease term on the same basis as the lease income. Upon receipt of a surrender premium for the early termination of a lease, the profit, net of dilapidations and non-recoverable outgoings relating to the lease concerned, is immediately reflected in revenue from properties if there are no relevant conditions attached to the surrender.

Cash and cash equivalents

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

Income and expenses

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

Lease incentive payments are amortised on a straight-line basis over the period from the date of lease inception to the end of the lease term and presented within accounts receivable. Lease incentives granted are recognised as a reduction of the total rental income, over the term of the lease.

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

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

Employee benefits

Defined contribution plans

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

Short-term benefits

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

Share-based payments

The fair value of the amounts payable to employees in respect of the Deferred Bonus Plan, when these are to be settled in cash, is recognised as an expense with a corresponding increase in liabilities, over the period that the employees become unconditionally entitled to payment. Where the awards are equity settled, the fair value is recognised as an expense, with a corresponding increase in equity. The liability is remeasured at each reporting date and at settlement date. Any changes in the fair value of the liability are recognised under the category staff costs in the Consolidated Statement of Comprehensive Income.

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

The cost of the Company’s shares held by the Employee Benefit Trust is deducted from equity in the Consolidated Balance Sheet. Any shares held by the Trust are not included in the calculation of earnings or net assets per share.

Dividends

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

Accounts receivable

Accounts receivable are stated at their nominal amount as reduced by appropriate allowances for estimated irrecoverable amounts. The Group applies the IFRS 9 simplified approach to measuring expected credit losses, which uses a lifetime expected impairment provision for all applicable accounts receivable. Bad debts are written off when identified.

Loans and borrowings

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

Assets classified as held for sale

Any investment properties on which contracts for sale have been exchanged but which had not completed at the period end are disclosed as properties held for sale. Investment properties included in the held for sale category continue to be measured in accordance with the accounting policy for investment properties.

Other assets and liabilities

Other assets and liabilities, including trade creditors, accruals, other creditors, and deferred rental income, which are not interest bearing are stated at their nominal value.

Share capital

Ordinary shares are classified as equity.

Revaluation reserve

Any surplus or deficit arising from the revaluation of owner-occupied property is taken to the revaluation reserve. A revaluation deficit is only taken to retained earnings when there is no previous revaluation surplus to reverse.

Taxation

The Group elected to be treated as a UK REIT with effect from 1 October 2018. The UK REIT rules exempt the profits of the Group’s UK property rental business from UK corporation and income tax. Gains on UK properties are also exempt from tax, provided they are not held for trading. The Group is otherwise subject to UK corporation tax.

Principles for the Consolidated Statement of Cash Flows

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

The cash amounts in the Consolidated Statement of Cash Flows include those assets that can be converted into cash without any restrictions and without any material risk of decreases in value as a result of the transaction.

3. Revenue from properties

	2023 £000	2022 £000
Rents receivable (adjusted for lease incentives)	42,964	40,133
Surrender premiums	147	59
Dilapidation receipts	170	21
Other income	107	118
Service charge income	8,428	6,212
	51,816	46,543

Rents receivable have been adjusted for lease incentives recognised of £1.2 million (2022: £2.8 million).

4. Property expenses

	2023 £000	2022 £000
Property operating costs	3,491	2,477
Property void costs	3,647	2,409
Recoverable service charge costs	8,428	6,212
	15,566	11,098

5. Operating segments

The Board is responsible for setting the Group’s strategy and business model. The key measure of performance used by the Board to assess the Group’s performance is the total return on the Group’s net asset value. As the total return on the Group’s net asset value is calculated based on the net asset value per share calculated under IFRS as shown at the foot of the Consolidated Balance Sheet, assuming dividends are reinvested, the key performance measure is that prepared under IFRS. Therefore, no reconciliation is required between the measure of profit or loss used by the Board and that contained in the financial statements.

The Board has considered the requirements of IFRS 8 ‘Operating Segments’. The Board is of the opinion that the Group, through its subsidiary undertakings, operates in one reportable industry segment, namely real estate investment, and across one primary geographical area, namely the United Kingdom, and therefore no segmental reporting is required. The portfolio consists of 49 commercial properties, which are in the industrial, office, retail and leisure sectors.

6. Administrative expenses

	2023 £000	2022 £000
Director and staff costs	3,487	3,415
Auditor’s remuneration	195	206
Other administrative expenses	2,273	2,134
	5,955	5,755

Auditor’s remuneration comprises:	2023 £000	2022 £000
Audit fees:
Audit of Group financial statements	92	92
Audit of subsidiaries’ financial statements	87	82

Audit-related fees:
Review of half-year financial statements	16	16
	195	190
Non-audit fees:
Additional controls testing	–	16
	–	16
	195	206

7. Director and staff costs

	2023 £000	2022 £000
Wages and salaries	1,879	1,765
Non-Executive Directors’ fees	275	275
Social security costs	425	402
Other pension costs	34	27
Share-based payments – cash settled	142	201
Share-based payments – equity settled	732	745
	3,487	3,415

Employees participate in two share-based remuneration arrangements: the Deferred Bonus Plan and the Long-term Incentive Plan (the ‘LTIP’).

For all employees, a proportion of any discretionary annual bonus will be an award under the Deferred Bonus Plan. With the exception of Executive Directors, awards are cash settled and vest after two years. The final value of awards is determined by the movement in the Company’s share price and dividends paid over the vesting period. For Executive Directors, awards are equity settled and also vest after two years. On 17 June 2022, awards of 500,905 notional shares were made which vest in June 2024 (2022: 531,108 notional shares). The next awards are due to be made in June 2023 for vesting in June 2025.

The table below summarises the awards made under the Deferred Bonus Plan. Employees have the option to defer the vesting date of their awards for a maximum of seven years.

Vesting date	Units at 31 March 2021	Units granted in the year	Units cancelled in the year	Units redeemed in the year	Units at 31 March 2022	Units granted in the year	Units cancelled in the year	Units redeemed in the year	Units at 31 March 2023
19 June 2021	438,907	–	–	(438,907)	–	–	–	–	–
29 June 2022	599,534	–	–	–	599,534	–	–	(589,779)	9,755
22 June 2023	–	531,108	–	–	531,108	–	–	–	531,108
17 June 2024	–	–	–	–	–	500,905	–	–	500,905
	1,038,441	531,108	–	(438,907)	1,130,642	500,905	–	(589,779)	1,041,768

The Group also has a Long-term Incentive Plan for all employees which is equity settled. Awards are made annually and vest three years from the grant date. Vesting is conditional on three performance metrics measured over each three-year period. Awards to Executive Directors are also subject to a further two-year holding period. On 17 June 2022, awards for a maximum of 1,174,589 shares were granted to employees in respect of the three-year period ending on 31 March 2025. In the previous year, awards of 1,107,155 shares were made on 22 June 2021 for the period ending 31 March 2024.

The three performance metrics are:

– Total shareholder return (TSR) of Picton Property Income Limited, compared to a comparator group of similar listed companies;

– Total property return (TPR) of the property assets held within the Group, compared to the MSCI UK Quarterly Property Index; and

– Growth in EPRA earnings per share (EPS) of the Group.

The fair value of share grants is measured using the Monte Carlo model for the TSR metric and a Black-Scholes model for the TPR and EPS metrics. The fair value is recognised over the expected vesting period. For the awards made during this year and the previous year the main inputs and assumptions of the models, and the resulting fair values, are:

Assumptions
Grant date	17 June 2022	22 June 2021
Share price at date of grant	92.6p	87.3p
Exercise price	Nil	Nil
Expected term	3 years	3 years
Risk-free rate – TSR condition	2.28%	0.23%
Share price volatility – TSR condition	28.3%	28.3%
Median volatility of comparator group – TSR condition	32.4%	31.8%
Correlation – TSR condition	25.0%	29.4%
TSR performance at grant date – TSR condition	(2.5)%	0.3%
Median TSR performance of comparator group at grant date – TSR condition	2.2%	10.7%
Fair value – TSR condition (Monte Carlo method)	46.0p	37.7p
Fair value – TPR condition (Black-Scholes model)	92.6p	87.3p
Fair value – EPS condition (Black-Scholes model)	92.6p	87.3p

The Trustee of the Company’s Employee Benefit Trust acquired 1,250,000 ordinary shares during the year for £1,126,000 (2022: 750,000 shares for £730,000).

The Group employed ten members of staff at 31 March 2023 (2022: nine). The average number of people employed by the Group for the year ended 31 March 2023 was nine (2022: ten).

8. Interest paid

	2023 £000	2022 £000
Interest payable on loans	8,576	8,134
Interest on obligations under finance leases	175	129
Non-utilisation fees	283	239
	9,034	8,502

The loan arrangement costs incurred to 31 March 2023 are £3,328,000 (2022: £3,325,000). These are amortised over the duration of the loans with £304,000 amortised in the year ended 31 March 2023 and included in interest payable on loans (2022: £967,000).

9. Tax

The charge for the year is:

2023

£000

2022

£000

Tax expense in year

–

Total tax charge

–

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

	2023 £000	2022 £000
(Loss)/profit before taxation	(89,530)	146,986
Expected tax (credit)/charge on ordinary activities at the standard rate of taxation of 19% (2022: 19%)	(17,011)	27,927
Less:
UK REIT exemption on net income	(4,044)	(3,257)
Revaluation movement not taxable	21,055	(24,662)
Gains on disposal not taxable	–	(8)
Total tax charge	–	–

As a UK REIT, the income profits of the Group’s UK property rental business are exempt from corporation tax, as are any gains it makes from the disposal of its properties, provided they are not held for trading. The Group is otherwise subject to UK corporation tax at the prevailing rate.

As the principal company of the REIT, the Company is required to distribute at least 90% of the income profits of the Group’s UK property rental business. There are a number of other conditions that are also required to be met by the Company and the Group to maintain REIT tax status. These conditions were met in the year and the Board intends to conduct the Group’s affairs such that these conditions continue to be met for the foreseeable future. Accordingly, deferred tax is no longer recognised on temporary differences relating to the property rental business.

10. Dividends

	2023 £000	2022 £000
Declared and paid:
Interim dividend for the period ended 31 March 2021: 0.8 pence	–	4,365
Interim dividend for the period ended 30 June 2021: 0.85 pence	–	4,644
Interim dividend for the period ended 30 September 2021: 0.85 pence	–	4,640
Interim dividend for the period ended 31 December 2021: 0.875 pence	–	4,776
Interim dividend for the period ended 31 March 2022: 0.875 pence	4,774	–
Interim dividend for the period ended 30 June 2022: 0.875 pence	4,775	–
Interim dividend for the period ended 30 September 2022: 0.875 pence	4,771	–
Interim dividend for the period ended 31 December 2022: 0.875 pence	4,771	–
	19,091	18,425

The interim dividend of 0.875 pence per ordinary share in respect of the period ended 31 March 2023 has not been recognised as a liability as it was declared after the year-end. This dividend of £4,771,000 will be paid on 31 May 2023.

11. Earnings per share

Basic and diluted earnings per share is calculated by dividing the net (loss)/profit for the year attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares in issue during the year, excluding the average number of shares held by the Employee Benefit Trust for the year. The diluted number of shares also reflects the contingent shares to be issued under the Long-term Incentive Plan.

The following reflects the (loss)/profit and share data used in the basic and diluted profit per share calculation:

	2023	2022
Net (loss)/profit attributable to ordinary shareholders of the Company from continuing operations (£000)	(89,964)	147,420
Weighted average number of ordinary shares for basic earnings per share	545,378,286	545,904,197
Weighted average number of ordinary shares for diluted earnings per share	546,856,450	547,295,589

12. Investments in subsidiaries

The Company had the following principal subsidiaries as at 31 March 2023 and 31 March 2022:

Name	Place of incorporation	Ownership proportion
Picton UK Real Estate Trust (Property) Limited	Guernsey	100%
Picton (UK) REIT (SPV) Limited	Guernsey	100%
Picton (UK) Listed Real Estate	Guernsey	100%
Picton UK Real Estate (Property) No 2 Limited	Guernsey	100%
Picton (UK) REIT (SPV No 2) Limited	Guernsey	100%
Picton Capital Limited	England & Wales	100%
Picton (General Partner) No 2 Limited	Guernsey	100%
Picton (General Partner) No 3 Limited	Guernsey	100%
Picton No 2 Limited Partnership	England & Wales	100%
Picton No 3 Limited Partnership	England & Wales	100%
Picton Financing UK Limited	England & Wales	100%
Picton Financing UK (No 2) Limited	England & Wales	100%
Picton Property No 3 Limited	Guernsey	100%

The results of the above entities are consolidated within the Group financial statements.

Picton UK Real Estate Trust (Property) Limited and Picton (UK) REIT (SPV) Limited own 100% of the units in Picton (UK) Listed Real Estate, a Guernsey Unit Trust (the ‘GPUT’). The GPUT holds a 99.9% interest in both Picton No 2 Limited Partnership and Picton No 3 Limited Partnership and the remaining balances are held by Picton (General Partner) No 2 Limited and Picton (General Partner) No 3 Limited respectively.

13. Investment properties

The following table provides a reconciliation of the opening and closing amounts of investment properties classified as Level 3 recorded at fair value.

	2023 £000	2022 £000
Fair value at start of year	830,027	665,418
Capital expenditure on investment properties	6,135	9,551
Acquisitions	20,613	25,005
Disposals	–	(687)
Acquisition of right of use asset	–	897
Realised gains on disposal	–	42
Unrealised movement on investment properties	(110,433)	129,801
Fair value at the end of the year	746,342	830,027
Historic cost at the end of the year	681,118	654,370

The fair value of investment properties reconciles to the appraised value as follows:

	2023 £000	2022 £000
Appraised value	766,235	849,325
Valuation of assets held under head leases	2,081	2,237
Owner-occupied property	(3,248)	(4,168)
Lease incentives held as debtors	(18,726)	(17,367)
Fair value at the end of the year	746,342	830,027

The investment properties were valued by independent valuers, CBRE Limited, Chartered Surveyors, as at 31 March 2023 and 31 March 2022 on the basis of fair value in accordance with the version of the RICS Valuation – Global Standards (incorporating the International Valuation Standards) and the UK national supplement (the Red Book) current as at the valuation date. The total fees earned by CBRE Limited from the Group are less than 5% of their total UK revenue.

The fair value of the Group’s investment properties has been determined using an income capitalisation technique, whereby contracted and market rental values are capitalised with a market capitalisation rate. The resulting valuations are cross-checked against the equivalent yields and the fair market values per square foot derived from comparable market transactions on an arm’s length basis.

In addition, the Group’s investment properties are valued quarterly by CBRE Limited. The valuations are based on:

– Information provided by the Group including rents, lease terms, revenue and capital expenditure. Such information is derived from the Group’s financial and property systems and is subject to the Group’s overall control environment.

– Valuation models used by the valuers, including market-related assumptions based on their professional judgement and market observation.

The assumptions and valuation models used by the valuers, and supporting information, are reviewed by senior management and the Board through the Property Valuation Committee. Members of the Property Valuation Committee, together with senior management, meet with the independent valuer on a quarterly basis to review the valuations and underlying assumptions, including considering current market trends and conditions, and changes from previous quarters. The Board will also consider whether circumstances at specific investment properties, such as alternative uses and issues with occupational tenants, are appropriately reflected in the valuations. The fair value of investment properties is measured based on each property’s highest and best use from a market participant’s perspective and considers the potential uses of the property that are physically possible, legally permissible and financially feasible.

As at 31 March 2023 and 31 March 2022 all of the Group’s properties, including owner-occupied property, are Level 3 in the fair value hierarchy as it involves use of significant judgement. There were no transfers between levels during the year and the prior year. Level 3 inputs used in valuing the properties are those which are unobservable, as opposed to Level 1 (inputs from quoted prices) and Level 2 (observable inputs either directly, i.e. as prices, or indirectly, as derived from prices).

Information on these significant unobservable inputs per sector of investment properties is disclosed as follows:

	2023			2022
	Office	Industrial	Retail and Leisure	Office	Industrial	Retail and Leisure
Appraised value (£000)	245,260	439,570	81,405	251,125	509,730	88,470
Area (sq ft, 000s)	877	3,240	692	828	3,240	692
Range of unobservable inputs:
Gross ERV (sq ft per annum)
– range	£11.00 to £84.12	£3.30 to £27.83	£3.23 to £26.05	£10.96 to £82.32	£2.82 to £26.77	£3.23 to £28.49
– weighted average	£35.33	£13.16	£11.66	£35.10	£11.47	£11.83
Net initial yield
– range	–0.68% to 11.65%	2.28% to 7.75%	3.51% to 30.85%	0.92% to 9.00%	0.00% to 6.75%	3.07% to 25.00%
– weighted average	5.32%	4.30%	8.56%	4.64%	3.25%	7.33%
Reversionary yield
– range	4.76% to 13.55%	4.83% to 8.17%	6.87% to 12.18%	4.29% to 9.63%	3.04% to 7.37%	6.19% to 12.89%
– weighted average	7.87%	5.78%	7.98%	7.00%	4.24%	7.42%
True equivalent yield
– range	4.57% to 10.38%	4.75% to 7.98%	7.00% to 12.17%	4.09% to 9.95%	3.00% to 7.00%	6.25% to 13.02%
– weighted average	7.23%	5.51%	8.11%	6.49%	4.11%	7.55%

An increase/decrease in ERV will increase/decrease valuations, while an increase/decrease to yield decreases/increases valuations. We have reviewed the ranges used in assessing the impact of changes in unobservable inputs on the fair value of the Group’s property portfolio and concluded these were still reasonable. The table below sets out the sensitivity of the valuation to changes of 50 basis points in yield.

Sector	Movement	2023 Impact on valuation	2022 Impact on valuation
Industrial	Increase of 50 basis points	Decrease of £36.7m	Decrease of £55.2m
	Decrease of 50 basis points	Increase of £44.5m	Increase of £69.0m
Office	Increase of 50 basis points	Decrease of £16.1m	Decrease of £11.9m
	Decrease of 50 basis points	Increase of £18.0m	Increase of £12.5m
Retail and Leisure	Increase of 50 basis points	Decrease of £4.5m	Decrease of £5.1m
	Decrease of 50 basis points	Increase of £5.1m	Increase of £5.9m

14. Property, plant and equipment

Property, plant and equipment principally comprises the fair value of owner-occupied property. The fair value of these premises is based on the appraised value at 31 March 2023.

	Owner Occupied Property £000	Plant and equipment £000	Total £000
At 1 April 2021	3,830	281	4,111
Additions	–	3	3
Depreciation	(96)	(69)	(165)
Revaluation	434	–	434
At 31 March 2022	4,168	215	4,383
Additions	–	13	13
Depreciation	(104)	(61)	(165)
Revaluation	(816)	–	(816)
At 31 March 2023	3,248	167	3,415

15. Accounts receivable

	2023 £000	2022 £000
Tenant debtors (net of provisions for bad debts)	2,855	4,618
Lease incentives	18,726	17,367
Other debtors	1,168	865
	22,749	22,850

The estimated fair values of receivables are the discounted amount of the estimated future cash flows expected to be received and the approximate value of their carrying amounts.

Amounts are considered impaired using the lifetime expected credit loss method. Movement in the balance considered to be impaired has been included in the Consolidated Statement of Comprehensive Income. As at 31 March 2023, tenant debtors of £92,000 (2022: £302,000) were considered impaired and provided for.

16. Cash and cash equivalents

	2023 £000	2022 £000
Cash at bank and in hand	20,045	38,542
Short-term deposits	5	5
	20,050	38,547

Cash at bank and in hand earns interest at floating rates based on daily bank deposit rates. Short-term deposits are made for varying periods of between one day and one month depending on the immediate cash requirements of the Group and earn interest at the respective short-term deposit rates. The carrying amounts of these assets approximate to their fair value.

17. Accounts payable and accruals

	2023 £000	2022 £000
Accruals	4,712	4,994
Deferred rental income	8,654	8,399
VAT liability	1,782	1,638
Trade creditors	515	357
Other creditors	3,808	3,750
	19,471	19,138

18. Loans and borrowings

	Maturity	2023 £000	2022 £000
Current
Aviva facility	–	1,433	1,372
Capitalised finance costs	–	(304)	(304)
		1,129	1,068

Non-current
Canada Life facility	24 July 2031	129,045	129,045
Aviva facility	24 July 2032	82,089	83,518
NatWest revolving credit facility	26 May 2025	11,900	4,900
Capitalised finance costs	–	(1,399)	(1,699)
		221,635	215,764
		222,764	216,832

The following table provides a reconciliation of the movement in loans and borrowings to cash flows arising from financing activities.

	2023 £000	2022 £000
Balance at start of year	216,832	163,655

Changes from financing cash flows
Proceeds from loans and borrowings	12,000	79,545
Repayment of loans and borrowings	(6,368)	(26,917)
Financing costs paid	(183)	(419)
	5,449	52,209
Other changes
Amortisation of financing costs	304	967
Change in accrued financing costs	179	1
	483	968
Balance as at 31 March	222,764	216,832

The Group has a £129.0 million loan facility with Canada Life which matures in July 2031. Interest is fixed at 3.25% per annum over the remaining life of the loan. The loan agreement has a loan to value covenant of 65% and an interest cover test of 1.75. The loan is secured over the Group’s properties held by Picton No 2 Limited Partnership and Picton UK Real Estate Trust (Property) No 2 Limited, valued at £353.2 million (2022: £415.2 million). In the prior year a debt prepayment fee of £4.0 million was incurred to reset the interest rate on the Canada Life facility.

Additionally, the Group has a £95.3 million term loan facility with Aviva Commercial Finance Limited which matures in July 2032. The loan is for a term of 20 years and was fully drawn on 24 July 2012 with approximately one-third repayable over the life of the loan in accordance with a scheduled amortisation profile. The Group has repaid £1.4 million in the year (2022: £1.3 million). Interest on the loan is fixed at 4.38% per annum over the life of the loan. The facility has a loan to value covenant of 65% and a debt service cover ratio of 1.4. The facility is secured over the Group’s properties held by Picton No 3 Limited Partnership and Picton Property No 3 Limited, valued at £193.6 million (2022: £208.1 million).

The Group also has a £50 million revolving credit facility (‘RCF’) with National Westminster Bank Plc which matures in May 2025. As at 31 March there was £11.9 million drawn under the facility, interest is charged at 150 basis points over SONIA on drawn balances and there is an undrawn commitment fee of 60 basis points. The facility is secured on properties held by Picton UK Real Estate Trust (Property) Limited, valued at £143.4 million (2022: £163.2 million).

The fair value of the drawn loan facilities at 31 March 2023, estimated as the present value of future cash flows discounted at the market rate of interest at that date, was £201.7 million (2022: £225.6 million). The fair value of the drawn loan facilities is classified as Level 2 under the hierarchy of fair value measurements.

There were no transfers between levels of the fair value hierarchy during the current or prior years.

The weighted average interest rate on the Group’s borrowings as at 31 March 2023 was 3.8% (2022: 3.7%).

19. Contingencies and capital commitments

The Group has entered into contracts for the refurbishment of five properties with commitments outstanding at 31 March 2023 of approximately £2.9 million (2022: £2.4 million). No further obligations to construct or develop investment property or for repairs, maintenance or enhancements were in place as at 31 March 2023 (2022: £nil).

20. Share capital and other reserves

	2023 £000	2022 £000
Authorised:
Unlimited number of ordinary shares of no par value	–	–

Issued and fully paid:
547,605,596 ordinary shares of no par value (31 March 2022: 547,605,596)	–	–
Share premium	164,400	164,400

The Company has 547,605,596 ordinary shares in issue of no par value (2022: 547,605,596).

No new ordinary shares were issued during the year ended 31 March 2023.

	2023 Number of shares	2022 Number of shares
Ordinary share capital	547,605,596	547,605,596
Number of shares held in Employee Benefit Trust	(2,388,694)	(1,974,253)
Number of ordinary shares	545,216,902	545,631,343

The fair value of awards made under the Long-term Incentive Plan is recognised in other reserves.

Subject to the solvency test contained in the Companies (Guernsey) Law, 2008 being satisfied, ordinary shareholders are entitled to all dividends declared by the Company and to all of the Company’s assets after repayment of its borrowings and ordinary creditors. The Trustee of the Company’s Employee Benefit Trust has waived its right to receive dividends on the 2,388,694 shares it holds but continues to hold the right to vote. Ordinary shareholders have the right to vote at meetings of the Company. All ordinary shares carry equal voting rights.

The Directors have authority to buy back up to 14.99% of the Company’s ordinary shares in issue, subject to the annual renewal of the authority from shareholders. Any buy-back of ordinary shares will be made subject to Guernsey law, and the making and timing of any buy-backs will be at the absolute discretion of the Board.

21. Adjustment for non-cash movements in the cash flow statement

	2023 £000	2022 £000
Profit on disposal of investment properties	–	(42)
Movement in investment property valuation	110,433	(129,801)
Revaluation of owner-occupied property	382	–
Share-based provisions	675	668
Depreciation of tangible assets	165	165
	111,655	(129,010)

22. Obligations under leases

The Group has entered into a number of head leases in relation to its investment properties. These leases are for fixed terms and subject to regular rent reviews. They contain no material provisions for contingent rents, renewal or purchase options nor any restrictions outside of the normal lease terms.

Lease liabilities in respect of rents on leasehold properties were payable as follows:

	2023 £000	2022 £000
Future minimum payments due:
Within one year	185	185
In the second to fifth years inclusive	740	740
After five years	8,898	9,083
	9,823	10,008
Less: finance charges allocated to future periods	(7,126)	(7,301)
Present value of minimum lease payments	2,697	2,707

The present value of minimum lease payments is analysed as follows:

	2023 £000	2022 £000
Current
Within one year	114	114
	114	114

Non-current
In the second to fifth years inclusive	405	410
After five years	2,178	2,183
	2,583	2,593
	2,697	2,707

Operating leases where the Group is lessor

The Group leases its investment properties under commercial property leases which are held as operating leases.

At the reporting date, the Group’s future income based on the unexpired lease length was as follows (based on annual rentals):

	2023 £000	2022 £000
Within one year	43,824	41,928
One to two years	39,548	39,244
Two to three years	34,806	35,416
Three to four years	29,506	29,972
Four to five years	25,454	24,748
After five years	105,675	99,788
	278,813	271,096

These properties are measured under the fair value model as the properties are held to earn rentals. Commercial property leases typically have lease terms between five and ten years and include clauses to enable periodic upward revision of the rental charge according to prevailing market conditions. Some leases contain options to break before the end of the lease term.

23. Net asset value

The net asset value per share calculation uses the number of shares in issue at the year-end and excludes the actual number of shares held by the Employee Benefit Trust at the year-end; see Note 20.

24. Financial instruments

The Group’s financial instruments comprise cash and cash equivalents, accounts receivable, secured loans, obligations under head leases and accounts payable that arise from its operations. The Group does not have exposure to any derivative financial instruments. Apart from the secured loans, as disclosed in Note 18, the fair value of the financial assets and liabilities is not materially different from their carrying value in the financial statements.

Categories of financial instruments

31 March 2023	Notes	Held at fair value through profit or loss £000	Financial assets and liabilities at amortised cost £000	Total £000
Financial assets
Debtors	15	–	4,023	4,023
Cash and cash equivalents	16	–	20,050	20,050
		–	24,073	24,073

Financial liabilities
Loans and borrowings	18	–	222,764	222,764
Obligations under head leases	22	–	2,697	2,697
Creditors and accruals	17	–	9,035	9,035
		–	234,496	234,496

31 March 2022	Notes	Held at fair value through profit or loss £000	Financial assets and liabilities at amortised cost £000	Total £000
Financial assets
Debtors	15	–	5,483	5,483
Cash and cash equivalents	16	–	38,547	38,547
		–	44,030	44,030

Financial liabilities
Loans and borrowings	18	–	216,832	216,832
Obligations under head leases	22	–	2,707	2,707
Creditors and accruals	17	–	9,101	9,101
		–	228,640	228,640

25. Risk management

The Group invests in commercial properties in the United Kingdom. The following describes the risks involved and the risk management framework applied by the Group. Senior management reports regularly both verbally and formally to the Board, and its relevant Committees, to allow them to monitor and review all the risks noted below.

Capital risk management

The Group aims to manage its capital to ensure that the entities in the Group will be able to continue as a going concern while maximising the return to stakeholders through optimising its capital structure. The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business.

The capital structure of the Group consists of debt, as disclosed in Note 18, cash and cash equivalents and equity attributable to equity holders of the Company, comprising issued share capital, reserves, retained earnings and revaluation reserve. The Group is not subject to any external capital requirements.

The Group monitors capital on the basis of its gearing ratio. This ratio is calculated as the principal borrowings outstanding, as detailed under Note 18, divided by the gross assets. There is a limit of 65% as set out in the Articles of Association of the Company. Gross assets are calculated as non-current and current assets, as shown in the Consolidated Balance Sheet.

At the reporting date the gearing ratios were as follows:

	2023 £000	2022 £000
Total borrowings	224,467	218,835
Gross assets	792,556	895,807
Gearing ratio (must not exceed 65%)	28.3%	24.4%

The Board of Directors monitors the return on capital as well as the level of dividends to ordinary shareholders. The Group has managed its capital risk by entering into long-term loan arrangements with different maturities, which will enable the Group to manage its borrowings in an orderly manner over the long-term. The Group also has a revolving credit facility which provides greater flexibility in managing the level of borrowings.

The Group’s net debt to equity ratio at the reporting date was as follows:

	2023 £000	2022 £000
Total liabilities	244,932	238,677
Less: cash and cash equivalents	(20,050)	(38,547)
Net debt	224,882	200,130
Total equity	547,624	657,130
Net debt to equity ratio at end of year	0.41	0.30

Credit risk

The following tables detail the balances held at the reporting date that may be affected by credit risk:

31 March 2023	Notes	Held at fair value through profit or loss £000	Financial assets and liabilities at amortised cost £000	Total £000
Financial assets
Tenant debtors	15	–	2,855	2,855
Cash and cash equivalents	16	–	20,050	20,050
		–	22,905	22,905

31 March 2022	Notes	Held at fair value through profit or loss £000	Financial assets and liabilities at amortised cost £000	Total £000
Financial assets
Tenant debtors	15	–	4,618	4,618
Cash and cash equivalents	16	–	38,547	38,547
		–	43,165	43,165

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group has adopted a policy of only dealing with creditworthy counterparties and obtaining collateral where appropriate, as a means of mitigating the risk of financial loss from defaults. The Group’s exposure to and credit ratings of, its counterparties are continuously monitored and the aggregate value of transactions concluded is spread amongst approved counterparties.

Tenant debtors consist of a large number of occupiers, spread across diverse industries and geographical areas. Ongoing credit evaluations are performed on the financial condition of tenant debtors and, where appropriate, credit guarantees or rent deposits are acquired. As at 31 March 2023 tenant rent deposits held by the Group’s managing agents in segregated bank accounts totalled £2.6 million (2022: £2.4 million). The Group does not have access to these rent deposits unless the occupier defaults under its lease obligations. Rent collection is outsourced to managing agents who report regularly on payment performance and provide the Group with intelligence on the continuing financial viability of occupiers. The Group does not have any significant concentration risk whether in terms of credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. The credit risk on liquid funds is limited because the counterparties are banks with strong credit ratings assigned by international credit rating agencies.

The carrying amount of financial assets recorded in the financial statements, net of any allowances for losses, represents the Group’s maximum exposure to credit risk. The Board continues to monitor the Group’s overall exposure to credit risk.

The Group has a panel of banks with which it makes deposits, based on credit ratings assigned by international credit rating agencies and with set counterparty limits that are reviewed regularly. The Group’s main cash balances are held with National Westminster Bank Plc (‘NatWest’), Nationwide International Limited (‘Nationwide’) and Lloyds Bank Plc (‘Lloyds’). Insolvency or resolution of the bank holding cash balances may cause the Group’s recovery of cash held by them to be delayed or limited. The Group manages its risk by monitoring the credit quality of its bankers on an ongoing basis. NatWest, Nationwide and Lloyds are rated by all the major rating agencies. If the credit quality of any of these banks were to deteriorate, the Group would look to move the relevant short-term deposits or cash to another bank. Procedures exist to ensure that cash balances are split between banks to minimise exposure. At 31 March 2023 and at 31 March 2022, Standard & Poor’s short-term credit rating for each of the Group’s bankers was A-1.

There has been no change in the fair values of cash or receivables as a result of changes in credit risk in the current or prior periods, due to the actions taken to mitigate this risk, as stated above.

Liquidity risk

Ultimate responsibility for liquidity risk management rests with the Board, which has put in place an appropriate liquidity risk management framework for the management of the Group’s short, medium and long-term funding and liquidity management requirements. The Group’s liquidity risk is managed on an ongoing basis by senior management and monitored on a quarterly basis by the Board by maintaining adequate reserves and loan facilities, continuously monitoring forecasts, loan maturity profiles and actual cash flows and matching the maturity profiles of financial assets and liabilities for a period of at least 12 months.

The table below has been drawn up based on the undiscounted contractual maturities of the financial assets/(liabilities), including interest that will accrue to maturity.

31 March 2023	Less than 1 year £000	1 to 5 years £000	More than 5 years £000	Total £000
Cash and cash equivalents	20,652	–	–	20,652
Debtors	4,023	–	–	4,023
Capitalised finance costs	304	785	614	1,703
Obligations under head leases	(185)	(740)	(8,898)	(9,823)
Fixed interest rate loans	(9,262)	(37,049)	(233,629)	(279,940)
Floating interest rate loans	(690)	(12,696)	–	(13,386)
Creditors and accruals	(9,035)	–	–	(9,035)
	5,807	(49,700)	(241,913)	(285,806)

31 March 2022	Less than 1 year £000	1 to 5 years £000	More than 5 years £000	Total £000
Cash and cash equivalents	38,547	–	–	38,547
Debtors	5,483	–	–	5,483
Capitalised finance costs	304	934	765	2,003
Obligations under head leases	(185)	(740)	(9,083)	(10,008)
Fixed interest rate loans	(8,524)	(37,049)	(242,891)	(288,464)
Floating interest rate loans	(113)	(5,031)	–	(5,144)
Creditors and accruals	(9,101)	–	–	(9,101)
	26,411	(41,886)	(251,209)	(266,684)

The Group expects to meet its financial liabilities through the various available liquidity sources, including a secure rental income profile, asset sales, undrawn committed borrowing facilities and, in the longer-term, debt refinancing.

Market risk

The Group’s activities are primarily within the real estate market, exposing it to very specific industry risks.

The yields available from investments in real estate depend primarily on the amount of revenue earned and capital appreciation generated by the relevant properties, as well as expenses incurred. If properties do not generate sufficient revenues to meet operating expenses, including debt service costs and capital expenditure, the Group’s operating performance will be adversely affected.

Revenue from properties may be adversely affected by the general economic climate, local conditions such as oversupply of properties or a reduction in demand for properties in the market in which the Group operates, the attractiveness of the properties to occupiers, the quality of the management, competition from other available properties and increased operating costs.

In addition, the Group’s revenue would be adversely affected if a significant number of occupiers were unable to pay rent or its properties could not be rented on favourable terms. Certain significant expenditure associated with investment in real estate (such as external financing costs and maintenance costs) is generally not reduced when circumstances cause a reduction in revenue from properties. By diversifying in regions, sectors, risk categories and occupiers, senior management expects to mitigate the risk profile of the portfolio effectively. The Board continues to oversee the profile of the portfolio to ensure risks are managed.

The valuation of the Group’s property assets is subject to changes in market conditions. Such changes are taken to the Consolidated Statement of Comprehensive Income and thus impact on the Group’s net result. A 5% increase or decrease in property values would increase or decrease the Group’s net result by £38.3 million (2022: £42.5 million).

Interest rate risk management

Interest rate risk arises on interest payable on the revolving credit facility only. The Group’s senior debt facilities have fixed interest rates over the terms of the loans. The amount drawn under the revolving credit facility makes up a small proportion of the overall debt, the Group therefore has limited exposure to interest rate risk on its borrowings and no sensitivity is presented.

Interest rate risk

The following table sets out the carrying amount, by maturity, of the Group’s financial assets/(liabilities).

31 March 2023	Less than 1 year £000	1 to 5 years £000	More than 5 years £000	Total £000
Floating
Cash and cash equivalents	20,050	–	–	20,050
Secured loan facilities	–	(11,900)	–	(11,900)

Fixed
Secured loan facilities	(1,433)	(6,401)	(204,733)	(212,567)
Obligations under leases	(114)	(405)	(2,178)	(2,697)
	18,503	(18,706)	(206,911)	(207,114)

31 March 2022	Less than 1 year £000	1 to 5 years £000	More than 5 years £000	Total £000
Floating
Cash and cash equivalents	38,547	–	–	38,547
Secured loan facilities	–	(4,900)	–	(4,900)

Fixed
Secured loan facilities	(1,372)	(6,127)	(206,436)	(213,935)
Obligations under leases	(114)	(410)	(2,183)	(2,707)
	37,061	(11,437)	(208,619)	(182,995)

Concentration risk

As discussed above, all of the Group’s investments are in the UK and therefore the Group is exposed to macroeconomic changes in the UK economy. Furthermore, the Group derives its rental income from around 400 occupiers, although the largest occupier accounts for only 4.8% of the Group’s annual contracted rental income.

Currency risk

The Group has no exposure to foreign currency risk.

26. Related party transactions

The total fees earned during the year by the Non-Executive Directors of the Company amounted to £275,000 (2022: £275,000). As at 31 March 2023, the Group owed £nil to the Non-Executive Directors (2022: £nil).

The remuneration of the Executive Directors is set out in note 7 and in the Annual Remuneration Report.

Picton Property Income Limited has no controlling parties.

27. Events after the Balance Sheet date

A dividend of £4,771,000 (0.875 pence per share) was approved by the Board on 25 April 2023 and will be paid on 31 May 2023.

A further £3,000,000 was drawn down under the revolving credit facility with National Westminster Bank Plc on 3 May 2023.

END

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Picton Property Income Ltd – Preliminary Annual Results

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