Preliminary Annual Results

RNS Number : 5749P

Picton Property Income Limited

09 June 2015

 



9 June 2015

PICTON PROPERTY INCOME LIMITED

PRELIMINARY ANNUAL RESULTS

("PICTON" OR THE "COMPANY")

Picton (LSE: PCTN) announces its annual results for the year ended 31 March 2015.

2015 HIGHLIGHTS

	2015	2014	2013
Property assets*	£532.9m	£417.6m	£382.7m
Net assets	£370.0m	£214.1m	£169.4m
Profit/(loss) after tax	£68.9m	£37.3m	£(14.6)m
Net asset value per share	69p	56p	49p
Earnings per share	15.4p	10.4p	(4.2)p
Dividends paid per share	3.0p	3.0p	3.5p
Dividend cover	117%	124%	122%
Total return	27.4%	21.6%	(7.6)%
Total shareholder return	32.3%	50.2%	6.2%

* net of lease incentives

FINANCIAL HIGHLIGHTS

·    Profit for the year of £68.9 million

·    Total return of 27.4%

·    Growth in net assets by 73% to £370 million

·    Increase in EPRA NAV per share of 23%, to 69 pence per share

·    Reduction in net gearing to 30.1%

·    Established new three year revolving credit facility of £26 million

·    £102 million of new equity raised through a Placing Programme

·    Reduction in Ongoing Charges ratio by 29% to 1.2%

OPERATIONAL HIGHLIGHTS

·    Total Property return of 19.0%, outperforming IPD

·    Improved portfolio occupancy from 91% to 95%

·    Invested £62.1 million in five new property assets during the year

·    Sold four assets for £4.4 million, on average 14% ahead of the March 2014 valuation

·    Over £4 million invested into refurbishment projects

·    26 lease renewals and re-gears retaining £2.2 million per annum

·    68 lettings completed securing £4.4 million in additional annual income

Picton Chairman, Nicholas Thompson, commented:

"At the end of another productive year, Picton has delivered a strong set of results, reflecting both the improving UK commercial property market and our own achievements. Specifically we successfully concluded our placing programme and have increased net assets by 73%. In addition, efficiencies resulting from this growth have enabled a 10% increase in the annual dividend, which was effective from last month. With our new revolving credit facility, we now have further operational and financial flexibility to support continued shareholder growth."

Michael Morris, Chief Executive of Picton Capital, commented:

"We have made considerable progress during the last 12 months, improving occupancy and delivering strong property returns, which have been further enhanced by our use of debt. As well as many portfolio transactions, we have also made a number of selective but accretive acquisitions. There has been a marked improvement in sentiment among occupiers, especially in the regions outside of London, and we look forward to capitalising on this momentum in the coming year."

For further information:

Tavistock

Jeremy Carey/James Verstringhe, 020 7920 3150, [e-mail]

Picton Capital Limited

Michael Morris, 020 7011 9980, [e-mail]

The Company Secretary

Northern Trust International Fund Administration Services (Guernsey) Limited

Trafalgar Court

Les Banques

St Peter Port

Guernsey

GY1 3QL

David Sauvarin, 01481 745 529, [e-mail]

Note to Editors

Picton is an income focused, internally managed Investment Company listed on the London Stock Exchange. Picton can invest both directly and indirectly in commercial property across the United Kingdom.

With Net Assets of £370.0 million at 31 March 2015, the Company's objective is to provide shareholders with an attractive level of income, together with the potential for capital growth by investing in the principal commercial property sectors.  www.picton.co.uk

CHAIRMAN'S STATEMENT

ANOTHER YEAR OF CONSIDERABLE PROGRESS

During the last financial year, we have made considerable progress and delivered strong returns for shareholders. Our profit for the year was £69 million, the largest we have reported since 2006. For the 12 months to 31 March 2015, we have delivered a total return of 27%, while the return to shareholders was 32%.

At a portfolio level we have grown occupancy from 91% to 95%, which reflects the improving occupier market and a continuation of our occupier focused strategy, and has helped contribute to another year of outperformance against the IPD Quarterly Benchmark.

Our growth this year has allowed us to benefit from efficiencies created by the Company's internalised management structure, which have resulted in our Ongoing Charges ratio falling significantly, by 29%, from 1.7% to 1.2%.

I believe the success of our overall strategy has been demonstrated by the results this year and the shareholder support for our Placing Programme, which together have contributed to a £170 million increase in our market capitalisation.

OUR STRATEGY

As a business we have continued with our occupier focused, opportunity led approach.  We are invested across the UK commercial property market, both geographically and by sector.

Our strategy enables us to acquire and dispose of assets on a selective basis, looking to exploit mis-pricing in the market and providing flexibility to acquire assets in better value sectors. We have taken advantage of a tightening market and a limited supply of suitable investments to make a number of selective disposals, having completed previously identified asset management initiatives, which have further enhanced performance.

Our use of debt has again enhanced our returns and the property portfolio continues to provide a yield higher than our cost of debt.  During the year we established a revolving credit facility, which provides us with greater flexibility as we look ahead to the maturity of our zero dividend preference shares next year, and further details are provided in the Financial Review. 

SUCCESSFUL PLACING PROGRAMME

In May last year, we established a Placing Programme to raise new equity with the aim of investing this in the portfolio and a re-priced property market. This has enabled us to take advantage of opportunities arising in the market, and the improving economic conditions. 

During the year we successfully raised £102 million, utilising the majority of the Placing Programme.  We have acquired five assets, investing £62 million, with a further £20 million committed following the financial year end. 

GROWING AND DIVERSIFYING OUR PORTFOLIO

The property portfolio has increased in value by 28% to £541 million over the past 12 months, taking into account both valuation gains and the impact of new acquisitions. Sector weightings remain broadly similar and the Company continued to be overweight to the industrial sector, whilst remaining underweight to retail, relative to the IPD Quarterly Benchmark. Whilst we have continued to make acquisitions, we have taken advantage of improved market liquidity to dispose of a number of non-core assets. This has led to an increase in the average lot size within the portfolio, from £7.4 million to £9.5 million.

GOVERNANCE

During the year, Trust Associates was commissioned to carry out an independent evaluation of Picton's Board. In addition to concluding that the Board was operating effectively, Trust Associates recognised the length of service of a number of the Directors and made a recommendation that the Board should expedite further its provisions for succession planning. As a result, a Nominations Committee has been created to formalise our plan for Board succession.  At the same time it has been agreed that Trevor Ash will stand down from the Board in September 2015, ahead of the forthcoming Annual General Meeting. On behalf of the Board I would like to thank Trevor for his longstanding and valuable service to the Company. I am pleased to announce that it is our intention that Michael Morris, the Chief Executive of Picton Capital Limited, will join the Board as a non-executive director from 1 October 2015.

I would also like to thank shareholders for their overwhelming support for the resolutions at last year's Annual General Meeting. The next Annual General Meeting will take place in November and details will be provided in due course.

We have noted that a number of our immediate peers have adopted UK REIT status. This is an issue that we continue to keep under review, but have no immediate plans to change the Company's position.

DIVIDENDS AND INCOME

Income is a significant factor for the Company and its shareholders, and we are pleased to remain one of the higher yielding, fully covered property investment companies. Our EPRA earnings increased by £2 million to £15.3 million, and our dividend cover remained at a healthy 117%.

I am very pleased to be able to report that we have been able to increase the dividend following the year end.  This reflects the success we have had over recent years and also the more favourable conditions in which we are now operating.

The increase of 10% means that the current annualised dividend is 3.3 pence per annum and, based on the share price of 70.75 pence on 5 June, reflects a dividend yield of 4.7%. 

OUR DEDICATED TEAM

We are fortunate to have a talented team of committed individuals that have helped drive success over the last 12 months.  Whilst we have grown net assets by over 70%, we have only needed to recruit one further asset manager, again demonstrating the benefits of our internalised management structure. The investment management team is entirely focused on Picton, and has complete alignment with the interests of our shareholders.

The team is partly remunerated though our Long Term Incentive Plan, linked to the Company's share price, and we believe this alignment of interests is fundamental to our success. 

OUTLOOK

During the last 12 months we have seen a marked positive rebound within the commercial property market.  We view the improvement in occupier markets and general economic sentiment positively, especially given the backdrop of increasingly tight supply. Whilst we expect another year of double digit returns for UK commercial property in 2015, we expect the rate of growth to be lower than in 2014. 

We believe our ability to invest across the whole UK market will enable us to continue to take advantage of attractive investment opportunities and accretive asset management transactions. I believe we are well placed, recognising our diverse portfolio and bias towards the office and industrial sectors, and we remain confident about our prospects.

Nicholas Thompson

Chairman

8 June 2015

CHIEF EXECUTIVE'S REVIEW

PROGRESS AGAINST OUR STRATEGY

Benchmarked against our five key strategic priorities, Picton has had a very successful 12 months.

The team continues to work well and their efforts are evident from the Key Performance Indicators that have been reported. The total property return of 19%, ahead of the IPD Benchmark for the year, and a total return of 27.4%, are particular highlights. 

As we have grown the business we have continued to reshape the portfolio through a combination of disposing of non-core assets and making new acquisitions. This has resulted in a 28% increase in the average lot size to £9.5 million.

GROWTH IN NET INCOME

The starting point for growing net income in a sustainable way is to increase occupancy. 

Net income has risen by over £2 million this year primarily reflecting the larger portfolio and improved occupancy.  During the year we have held a higher level of cash compared to previous years, which will reduce with the investments announced following the year end. There is a lag effect in terms of reducing void holding costs, following letting activity, and we expect these benefits to become further apparent in the next financial year.

In addition, the Company has taken advantage of more buoyant occupier markets to make a number of transactions that have not, in the short term, grown net income, but have secured income longevity or enhanced value (our activity at Chancery Lane for example, which is further detailed in the Investment Manager's Report). Therefore we do not see the lower EPRA earnings per share this year as significant in the context of overall returns.

Equally, we are starting to see emerging signs of rental growth, which are no longer confined to the core areas within central London.  Whilst this will not immediately lead to an increase in income until it is captured at lease expiry or at the next rent review, conditions in the occupier market are certainly the best they have been, in our view, since 2008. 

We are utilising gearing to enhance returns, recognising that we believe there is still further momentum within the property cycle and there remains a positive arbitrage between the portfolio yield and our cost of debt, which further improves our net income. 

WORKING WITH OUR OCCUPIERS 

Within our portfolio, occupancy continues to be above that recorded by the IPD Index. We have had considerable success increasing occupancy to 95%, up from 91% 12 months ago.

Key to this success has been our ability to attract new occupiers while retaining existing ones through our occupier focused approach.  We have, over the course of the year, worked with numerous occupiers to help them 'right size' their business and I genuinely believe this personal hands-on approach and attention to detail is key as we manage our assets and improve their attractiveness for occupiers. This approach has really started to show results since we internalised the investment management function in 2012.

OPERATIONAL EFFICIENCY

Whilst the net assets of the Group have risen considerably this year, by over 70% to £370 million, our management team has only seen the addition of one new asset manager. Our cost base does not rise in proportion to assets, unlike most externally managed investment companies and, as such, the Ongoing Charges ratio, a measure of how efficiently the business is run, has fallen from 1.7% to 1.2%.

PORTFOLIO AND ASSET MANAGEMENT

As demonstrated not only by our total property performance relative to IPD, but also in the detail of the following pages, we have achieved many asset management successes across the portfolio.  In addition, our acquisitions and disposals have contributed to performance, while our overweight position relative to the industrial sector has also helped.

EFFECTIVE USE OF DEBT

As we have seen positive valuation gains across the portfolio over the year, we have also seen a positive effect from the gearing, with a property return of 19% giving rise to a total return of 27% for the year.  We continue to be mindful of the need to manage gearing effectively and to reduce it in a structured and disciplined way as we progress through the cycle.

Currently gearing stands at 30%, but this is expected to rise modestly as monies are invested into higher income producing property assets during the coming months, with a corresponding positive impact on dividend cover.

We believe the right mid-cycle gearing for a company such as Picton is around 35%. Our current level, a reduction from 48% a year ago, remains appropriate under the circumstances.

As we look forward, the revolving credit facility that has been established is expected to reduce financing costs by in excess of £1 million per annum when the zero dividend preference shares mature in 2016.

AS WE HEAD INTO OUR TENTH YEAR

We have a strong, committed and aligned team at Picton and we remain confident about our prospects as we continue to build on the accomplishments of the last 12 months.  We have a good pipeline of occupational activity and continue to see good access to investment opportunities.

As we report our largest profit since 2006, we must not be complacent as there is still much to build on.  We have to continue to treat our occupiers well, manage our lease expiry profile and cashflow and continually look at ways in which we can maximise overall total returns from within the portfolio.

As markets continue to improve and asset values rise, we believe further opportunities will be unlocked.  As such, I believe we continue to employ the right strategy for the prevailing market conditions.

Michael Morris

Chief Executive, Picton Capital Limited

8 June 2015

INVESTMENT MANAGER'S REPORT

INTRODUCTION

This year there has been considerable activity, in terms of acquisitions, disposals and the asset management of the existing portfolio.

With the new equity raised we have been able to acquire five new assets, investing £62 million in two distribution warehouses, a city centre retail property and two retail warehouse assets (one of these was adjacent to an existing holding). All were acquired on favourable terms and offer potential for future income and capital growth.

Additionally we have disposed of four non-core assets for total proceeds of £4 million, having completed asset management initiatives.

Our portfolio now comprises 57 assets, with around 400 occupiers, it is valued at £541 million, and the average lot size has increased to £9.5 million.

The asset management team have worked hard to complete a significant number of transactions in the year, including 68 lettings and 59 other lease transactions. This has resulted in an increase in occupancy across the portfolio to 95%, up from 91%. This is the highest level of occupancy since 2007, and is well ahead of the market. The passing rent has risen to £34.6 million, up from £30.9 million a year ago, and we have outperformed the IPD Quarterly Benchmark on both a capital and income basis.

A number of key asset transactions were completed during the year and these are set out in the following individual portfolio updates. Looking ahead we will be focused on deploying the remainder of new capital raised, maintaining a high occupancy level and completing asset management initiatives across the portfolio.

Our sector and geographic weightings, as at 31 March 2015, were:

	Industrial (%)	Offices (%)	Retail & Leisure (%)	Total (%)
Central & Greater London	3.6	19.0	6.1	28.7
South East	22.1	8.2	1.4	31.7
Rest of UK	14.6	4.9	20.1	39.6
Total	40.3	32.1	27.6	100.0

PORTFOLIO OVERVIEW

As at 31 March 2015, the portfolio generated a net initial yield of 5.9% after void costs, which in rental terms reflects a current passing rent of £34.6 million per annum.

The portfolio's total return for the year to 31 March 2015 was 19%, which equates to a 11% outperformance relative to the IPD Quarterly Benchmark. This outperformance was principally driven by the growth in occupancy and our performance in the office and industrial sectors.

The portfolio's capital value for the year grew by 14%. Regional office values rose by 22%, with London assets growing by 28%. Industrial values grew by 12% and retail and leisure by 4%.

Overall, like-for-like growth in the portfolio's estimated rental values was 5% during the year to March 2015. Estimated rental values in the office sector grew by 7.8% over the year, predominantly driven by growth in London of 16.5%. Industrial estimated rental values grew by 5% with retail and leisure stabilising.

We have continued our strategy of re-shaping the portfolio. As a result of four disposals and five acquisitions the number of properties in the portfolio is 57, with the average lot size growing by 28%.

We are seeing continued rental growth across central London offices and in the industrial portfolio.  Compared to a year ago we are now seeing emergent growth in the regional offices on the back of occupational demand in locations such as Chester, Glasgow and St. Albans. The retail portfolio rental values have been re-based and where we have space to let we are generally in line with the estimated rental values.

Within the portfolio the over-rented properties are isolated to a small number of properties principally in the regional offices and retail and leisure sectors. Overall the majority of the portfolio is now rack-rented or reversionary and we therefore expect to grow income on lease events.

We have had a very good year for lettings, generating an additional £4.3 million of income after incentives, the overall rent being 6% ahead of the preceding estimated rental values. Whilst the occupancy rate is high at 95%, compared to the IPD benchmark of 92%, we believe we can maintain this level and are confident it will increase over the next year. The estimated rental value of the void portfolio is £1.9 million per annum, with further financial benefits from reduced void holding costs as properties are let.

Demand in the industrial sector, which includes warehousing and logistics, is good and the largest void in the portfolio is unit O at Lyon Business Park, Barking, which was surrendered in an active management transaction in January 2015. The unit has been comprehensively refurbished and, as our largest void with a rental value of £214,000 per annum, we expect to attract an occupier quickly, given the limited competing supply in the immediate area.

OUTLOOK FOR THE COMING YEAR

We expect to build on the leasing success during the year and already have a number of vacant units under offer. Over the next 12 months we have six lease events where the rent is over £100,000 per annum, and four of the occupiers have already indicated they wish to renew, which is extremely encouraging.

We see capital value growth coming from the regional assets as the occupier market continues to improve, translating into rental growth, which is already apparent in some locations, and investment demand continuing to strengthen.

The focus is on continuing the strategy of re-shaping the portfolio, de-risking income through active management and growing the portfolio's income. With high occupancy levels and improving occupational demand, we believe we are in a strong position to capitalise on this throughout the portfolio.

TOP TEN ASSETS

The largest assets in the portfolio as at 31 March 2015, ranked by capital value, represent just over 49% of the total portfolio valuation and are detailed below.

Asset	Acquisition Date	Property Type	Tenure	Approx. Area (sq ft)	Occupancy Rate
Parkbury Industrial Estate, Radlett	March 2014	Industrial	Freehold	336,700	100%
River Way Industrial Estate, Harlow	December 2006	Industrial	Freehold	451,700	100%
Stanford House, Long Acre, London WC2	May 2010	Retail	Freehold	19,700	91%
Angel Gate, City Road, London EC1	October 2005	Office	Freehold	61,300	94%
50 Farringdon Road, London EC1	October 2005	Office	Leasehold	32,000	100%
Boundary House, Jewry Street, London EC3	May 2006	Office	Freehold	45,000	100%
Belkin Unit, Shipton Way, Rushden, Northamptonshire	July 2014	Industrial	Leasehold	312,800	100%
Phase II, Parc Tawe Retail Park, Swansea	October 2005	Retail Warehouse	Leasehold	116,700	100%
Angouleme Way Retail Park, Bury	October 2005 / January 2015	Retail Warehouse	Leasehold	76,200	100%
Colchester Business Park, The Crescent, Colchester	October 2005	Office	Leasehold	150,700	98%

TOP TEN OCCUPIERS

The top ten occupiers, based as a percentage of annual rental income, as at 31 March 2015, are summarised as follows:

OCCUPIER	Annual Rental Income (£000)	%
Belkin Limited	1,630	4.5
DHL Supply Chain Limited *	1,560	4.3
Snorkel Europe Limited	1,008	2.8
The Random House Group Limited	1,000	2.8
Cadence Design Systems Limited	972	2.7
Trainline.com Limited	838	2.3
Edward Stanford Limited	785	2.2
Ricoh UK Limited	640	1.8
Viglen Limited*	611	1.7
Asda Stores Limited	600	1.7
Total	9,644	26.8

^* Includes fixed rental uplift

RETENTION RATES

For the year ended 31 March 2015, based on rental value, the percentage of income that was retained on lease expiry or break options was 73%, an improvement from 2014. This comprises 90% retained on lease expiry and 10% after break options.This analysis does not take into account early renewals and where we have successfully removed occupier break options. We are finding occupiers are keen to stay unless they have different space requirements or the business strategy has changed. With supply reducing and rents growing, we expect our retention rates to remain high.

INCOME CONCENTRATION

There is a wide diversity of occupiers within the portfolio, as set out below, which are compared to the IPD Benchmark by contracted rent, as at 31 March 2015.

Industry Sector	Picton (%)	Benchmark (%)
Retail Trade	26.8	38.0
Services	24.2	19.6
Manufacturing	13.5	8.2
Financial Services	10.9	16.6
Transportation, Communications	10.8	6.0
Public Administration	3.6	3.6
Undetermined	2.5	1.0
Wholesale Trade	6.5	3.8
Other	1.2	3.2
	100	100

Source: IPD IRIS Report March 2015

LONGEVITY OF INCOME

As at 31 March 2015, based as a percentage of current annual rent, the average length of the leases to the first termination was 6.2 years. This is summarised as follows:

Years	%
Up to 5	59.7
5 to 10	29.5
10 to 15	2.8
15 to 25	5.6
25 and over	2.4
Total	100

THE INDUSTRIAL PORTFOLIO

	2015	2014
Value	£217.7 million	£164.4 million
Internal Area	2,736,500 sq ft	2,116,000 sq ft
Annual Rental Income	£14.8 million	£12.3 million
Estimated Rental Value	£16.5 million	£12.8 million
Occupancy	96.5%	96.9%
Number of Assets	18	17

Property	Area (sq ft)	Freehold/ Leasehold
Units A-G2, River Way Industrial Estate, Harlow, Essex	451,700	F
Parkbury Industrial Estate, Radlett, Herts.	336,700	F
Grantham Book Services, Trent Road, Grantham, Lincolnshire	336,100	L
Belkin Unit, 3 Shipton Way, Rushden, Northants.	312,800	F
Vigo 250, Birtley Road, Washington, Tyne and Wear	246,800	F
Unit 3220, Magna Park, Lutterworth, Leics.	160,900	L
Lawson Mardon Buildings, Kettlestring Lane, York	157,800	F
Units 1-13 Dencora Way, Sundon Park, Luton, Beds.	127,500	L
Haynes Way, Swift Valley Industrial Estate, Rugby, Warwickshire	101,800	L
The Business Centre, Molly Millars Lane, Wokingham, Berks.	99,900	F
Lyon Business Park, Barking, Essex	96,900	F
Easter Court, Gemini Park, Warrington	81,500	F
Abbey Business Park, Mill Road, Newtownabbey, Belfast	61,700	F
Datapoint Business Centre, Cody Road, London E16	51,100	L
Nonsuch Industrial Estate, 1-25 Kiln Lane, Epsom, Surrey	41,700	L
Western Industrial Estate, Downmill Road, Bracknell	41,500	F
Manchester Road/Drury Lane, Oldham, Lancashire	16,400	F
Magnet Trade Centre, Winnersh, Reading	13,700	F

	Largest occupiers	% of total portfolio
1	Belkin Limited	4.5
2	DHL Supply Chain Limited*	4.3
3	Snorkel Europe Limited	2.8
4	Viglen Limited*	1.7
5	Amcor Packaging UK Limited	1.5

*Including fixed rental uplift

Overall, within the industrial portfolio, we let 18 units at a combined rent of £1.3 million per annum, renewed nine leases with a combined rent of £800,000 per annum and surrendered seven leases to facilitate active management. The surrenders included unit O at Lyon Business Park in Barking, our largest void, where the outgoing occupier paid a surrender premium equating to £300,000 plus dilapidations. We have seen rental growth of 5% across the portfolio.

Highlights of the year

The most significant activity was the acquisition of two distribution warehouses for a combined price of £31.5 million, which are currently valued at over £35 million. This growth in capital value is attributable to the early settlement of a rent review ahead of estimated rental value and a strengthening investment market for this type of property.

The Belkin distribution unit in Rushden was acquired in July 2014 for £20 million, a net initial yield of 7.7% and a capital value of £64 per sq ft. This modern 312,800 sq ft distribution unit is located on the A45, which provides access to the M1, A14 and A1(M). The passing rent on acquisition was £1,630,000 per annum. The April 2015 rent review was subsequently settled directly with the occupier at £1,691,000 per annum, a 4% increase and 1% above the estimated rental value.

The Group also acquired a 336,100 sq ft East Midlands distribution warehouse, in Grantham, Lincolnshire for £11.5 million. The property has good access to the UK road network, located immediately adjacent to the A1. The income is secured against The Random House Group Limited (part of Penguin Random House) for eight years and currently produces an annual rent of £1 million, equivalent to just under £3 per sq ft. The purchase price represents a net initial yield of 8.2% and a low capital value of £34 per sq ft.

Demand has outstripped supply in respect of the majority of the Group's Greater London estates, with full occupation in Bromley-by-Bow, Epsom and Radlett, and with active management surrenders facilitating new lettings and higher rents. Four units in Barking are currently being refurbished and we expect strong demand for these. In the regions we are also seeing demand, albeit at a more subdued level, and we have seven light industrial units to lease out of 64, with a rental value of £312,000 per annum. We expect them all to let relatively quickly.

At the Group's largest holding, Parkbury Industrial Estate in Radlett, we let four vacant units for a combined rent of £383,000 per annum. The combined rental levels were 6% ahead of the estimated rental value. In addition, we removed a June 2015 break clause and simultaneously settled an outstanding rent review at £127,600 per annum, a 5.5% uplift on the previous rent, securing the occupier until 2020. We agreed a back-to-back surrender of an occupier's lease, who were not in occupation, and let the unit on a new ten year lease at a rent of £129,200 per annum (£8.75 per sq ft) which sets a new rental level for this terrace. The transaction increased the lease term on the unit by eight years and the outgoing occupier paid a premium equivalent to the incentive under the new lease. The estate is now fully let.

Middleton Trade Park in Lancashire was sold for £2.2 million. The sale of this 24,000 sq ft multi-let estate followed considerable letting success, which included the letting of six units to a range of occupiers including Screwfix. The sale price was 23% ahead of the apportioned valuation when the asset was purchased as part of Picton's acquisition of Rugby REIT in 2010, and 27% ahead of the March 2014 valuation.

At River Way Industrial Estate in Harlow, we renewed the lease on Fleet House to DHL securing £675,000 per annum, a 31% uplift on the previous passing rent. TNT vacated Unit D in October and this unit was re-let in December, securing £370,000 per annum, which represents an 8% uplift on the previous passing rent. The estate remains fully let.

In respect of the regional assets, there is only one vacant unit at Abbey Business Park in Belfast and we are seeing rental growth, albeit off a low base. We have one vacant unit in Warrington, Oldham and Wokingham, and three in Luton.

Sector outlook

Looking forward, we expect to maintain the high occupancy rate and grow the income profile, led by our Greater London and South East estates. The de-risking of income streams will continue and strong occupational demand means we can negotiate longer leases on renewal with little or no incentive.

THE OFFICE PORTFOLIO

	2015	2014
Value	£173.4 million	£139.4 million
Internal Area	799,800 sq ft	877,000 sq ft
Annual Rental Income	£10.6 million	£10.3 million
Estimated Rental Value	£14.3 million	£13.0 million
Occupancy	93.1%	83.0%
Number of Assets	20	21

Property	Area (sq ft)	Freehold/ Leasehold
Colchester Business Park, The Crescent, Colchester, Essex	150,700	L
Longcross Court, Newport Road, Cardiff	72,900	F
Angel Gate Office Village, City Road, London EC1	61,300	F
401 Grafton Gate East, Milton Keynes, Bucks.	57,600	F
Queens House, 19/29 St Vincent Place, Glasgow	50,200	F
800 Pavilion Drive, Northampton Business Park, Northampton	49,500	F
Citylink, Addiscombe Road, Croydon	48,300	F
Boundary House, Jewry Street, London EC3	45,000	F
L'Avenir, Opladen Way, Westwick, Bracknell, Berks.	41,300	F
Sentinel House, Ancells Business Park, Fleet, Hants.	33,600	F
50 Farringdon Road, London EC1	32,000	L
Waterside Park, Longshot Lane, Bracknell, Berks.	30,200	F
Waterside House, Kirkstall Road, Leeds	25,200	F
Atlas House, Third Avenue, Globe Park, Marlow, Bucks.	24,800	F
Merchants House, Crook Street, Chester	22,200	F
Trident House, 42/48 Victoria Street, St Albans, Herts.	19,300	F
1-3 Chancery Lane, London WC2	15,100	F
8-9 College Place, Southampton	11,900	F
Marshall Building,122-124 Donegall Street, Belfast	8,700	F
Land at Westlea Campus, Swindon, Wilts.	-	F

	Largest occupiers	% of total portfolio
1	Cadence Design Systems Limited	2.7
2	Trainline.com Limited	2.3
3	Ricoh UK Limited	1.8
4	BPP Holdings Limited	1.5
5	Essex County Council	1.2

The central London market has continued to drive performance with the portfolio delivering 11% rental growth over the year, but notably we have seen a marked increase in occupational demand in the regions, although location specific, generating rental growth of 3% in respect of this part of the Group's portfolio.

Highlights of the year

We let 43 units at a combined rent of £2.8 million per annum, 9% ahead of the estimated rental value, renewed 11 leases with a combined rent of £1.1 million per annum and surrendered five leases to facilitate active management.

In our largest office letting of the year, education provider BPP took 24,000 sq ft of office space at the newly refurbished Grade A Citylink in East Croydon. BPP occupies the whole of the west wing of the building at an annual rent of £522,000 per annum, which is in line with the estimated rental value. This asset is now 90% occupied, with one small ground floor suite of 4,800 sq ft available.

At Angel Gate in central London, we have implemented an architect-led refurbishment scheme resulting in rental growth of 30% over the year with the refurbished units achieving £40 per sq ft.

Boundary House, EC3 is fully let following four lettings, confirming a new rental level for the property of £36.50 per sq ft. Overall the cumulative annual rent was 11% ahead of the estimated rental value.

Significant refurbishment projects have been completed at Merchants House in Chester and Queens House in Glasgow, where we have had considerable lettings success. We completed ten lettings in Glasgow for a combined rent of £167,000 per annum, leaving only two vacant suites out of 31, and four lettings in Chester for a combined rent of £94,000 per annum. We have good interest in the remaining space at both properties.

At 401 Grafton Gate in Milton Keynes, we renewed a major occupier's lease for a further five years at a rent of £398,750 per annum, in line with the estimated rental value. In addition, we let two vacant office suites to existing occupiers for a combined rent of £240,000 per annum, 2% ahead of the estimated rental value. There is now only one suite available which is currently being refurbished.

At Sentinel House in Fleet we have secured United Business Centres, who are taking two leases for ten years, subject to a break, at a stepped rent to £400,000 per annum, plus a top up rent based on the occupancy of the business centre.  The leases will complete after the refurbishment of the property. This will be one of the largest lettings in Fleet in 2015.

We obtained a resolution to grant planning permission for a food store and outline planning for a 70 unit residential scheme at Westlea Campus in Swindon. Subsequent to the year end we have sold the land for the food store to Aldi for £1.65 million. We expect to sell the remaining 4.4 acre site to a residential developer and will report further in the coming months.

In April 2014 we sold the freehold of a non-core asset, The Cloisters, Dartford, for £425,000, which was in line with the March 2014 valuation. The property was purchased in 2010 as part of a larger portfolio for £335,000, following which we surrendered the occupational leases for a premium payment and secured planning consent for residential use, subsequently selling to a developer.

Sector outlook

Our central London portfolio is very well let and the small amount of vacant space is currently being refurbished. The story over the next year is the regional portfolio, and a number of buildings have recently been refurbished including Longcross Court, Cardiff and Merchants House, Chester. We are seeing good demand for the finished product and expect to replicate the success we had at Queens House in Glasgow which is 93% let. The leases at Sentinel House, Fleet will complete by the end of the summer and the only notable void on the horizon is a small office building in Bracknell, where supply continues to reduce.

THE RETAIL AND LEISURE PORTFOLIO

	2015	2014
Value	£149.7 million	£119.2 million
Internal Area	732,300 sq ft	516,000 sq ft
Annual Rental Income	£9.2 million	£8.6 million
Estimated Rental Value	£9.3 million	£8.0 million
Occupancy	96.1%	95.7%
Number of Assets	19	19

Property	Area (sq ft)	Freehold/ Leasehold
Parc Tawe, Phase II, Link Road, Swansea	116,700	L
Gloucester Retail Park, Eastern Avenue, Gloucester	112,400	F
62/68 Bridge Street, Peterborough	88,700	F
Strathmore Hotel, Arndale Centre, Luton, Beds.	81,600	L
Angouleme Way Retail Park, Bury, Greater Manchester	76,200	F/L
17/19 Fishergate, Preston, Lancs.	59,900	F
Regency Wharf, Broad Street, Birmingham	44,300	L
Scots Corner, High Street/Institute Road, Birmingham	30,000	F
56 Castle Street, 2/12 English Street and 12-21 St Cuthberts Lane, Carlisle, Cumbria	25,300	F
Stanford House, 12-14 Long Acre, London WC2	19,700	F
6/12 Parliament Row, Hanley, Staffs.	17,300	F
Units 1-3, 18/28 Victoria Lane, Huddersfield, West Yorks.	14,600	L
53/55/57 Broadmead, Bristol	10,500	L
72/78 Murraygate, Dundee	9,700	F
7 & 9 Warren Street, Stockport	8,700	F
78-80 Briggate, Leeds	7,700	F
2 Bath Street, Bath	4,700	F
6 Argyle Street, Bath	2,500	F
123 High Street, Guildford, Surrey	1,800	F

	Largest occupiers	% of total portfolio
1	Edward Stanford Limited	2.2
2	Asda Stores Limited	1.7
3	Homebase Limited	1.2
4	Central England Co-operative Limited	1.2
5	Barclays Bank Plc	1.2

Highlights of the year

During the year we let seven units at a combined rent of £250,000 per annum and renewed six leases with a combined rent of £280,000 per annum.

At the year end we had one vacant retail unit in Bristol and two vacant leisure units in Birmingham, which have subsequently been let. In line with the wider market, rental growth has been static during the year.

In September 2014, the Group acquired a freehold city centre retail property in Peterborough for £9.1 million, reflecting a net initial yield of 6.5%. The property, which totals 89,000 sq ft, comprises two prime high street retail units, with significant frontage to the pedestrianised Bridge Street, let to TK Maxx and New Look until 2020 and 2021 respectively. It produces an annual rent of £625,000 reflecting a low average overall rent of £7.00 per sq ft, which is subject to review in 2015 and 2016.

In March 2015 we acquired Gloucester Retail Park for £14.65 million, reflecting a net initial yield of 6.9%.  This retail park is prominently located on Eastern Avenue and comprises four units totalling 113,000 sq ft. It is in a recognised retail warehouse location and is leased to leading discount retailers: B&M Bargains, Carpetright, The Range and AHF. It produces a diversified annual income of £1.1 million with an average weighted lease length of 13.2 years, at a low average rent of under £9.60 per sq ft, which reflects recent letting activity.

At 1 Chancery Lane, we proactively surrendered Hammick's lease, paying the occupier £250,000 to vacate. In a back-to-back transaction, we let the unit to Itsu on a 15 year lease at a rent of £165,000 per annum with a nominal incentive. The transaction increased the lease term by eight years, the passing rent by £40,000 per annum and added over £1 million to the value of the property.

We settled the September 2013 rent review on the retail unit at Stanford House, Covent Garden at £785,000 per annum, a 17% uplift from £668,500 per annum.

The lease at 78 Briggate in Leeds was extended by a further five years until 2023. The transaction secures the rent of £177,000 per annum, which is significantly ahead of the estimated rental value, and we gained an improved covenant on the lease.

In Carlisle we secured planning permission to combine four vacant retail units into one. Following this we completed a letting to toy shop chain The Entertainer for 11 years at £65,000 per annum. We also agreed the June 2013 rent review on the Crown and Mitre Hotel, increasing the rent by 23% to £137,500 per annum.

We have surrendered a temporary occupational lease and re-let a unit in Huddersfield at a rent of £42,500 per annum, 6% ahead of the estimated rental value. This improved the occupier line up, with Savers Health & Beauty joining Peacocks and Argos at the property.

We are actively pursuing legal action against the guarantor of the occupational lease of the Strathmore Hotel in Luton and expect this to be resolved by the end of the year.

113/113a High Street, Sutton was sold for £850,000. The sale of this retail unit follows the re-gear of Stan James' lease in 2012 for ten years, with the other unit being let to the Fragrance Shop until 2017. The sale price was 14% ahead of the March 2014 valuation. In addition, having recently restructured the long leasehold with Brighton City Council, we disposed of a small retail and restaurant unit in Bartholomew Square, Brighton, for a combined consideration of £1.1 million. This was in line with the March 2014 valuation.

Sector outlook

Rental growth, outside London, has been muted and we expect a small improvement from the re-based rental levels. The portfolio is very well let and we expect to maintain these high occupancy levels.

FINANCIAL REVIEW

INTRODUCTION

This year the Group has produced a very strong set of results.  With the completion of the Placing Programme we have raised £102 million of new equity and, together with an increase in the share price of 26%, the market capitalisation of the Company reached £387 million by the year end, an increase of 80% over the year.

We have invested £62 million into new assets, growing and diversifying the portfolio, as well as over £4 million in the existing assets, making these more attractive to occupiers in an improving market. The portfolio made valuation gains of nearly £54 million over the year.

Our new acquisitions, plus the rise in occupancy, have increased net income by over £2 million compared with last year, with the overall income profit up by 15% from 2014. This has given us the confidence to increase the level of the dividend subsequent to the year end.

It is pleasing to see the benefits of our internalised structure evident in the fall in the Ongoing Charges ratio, down some 29% compared to last year.

We have established a new three-year revolving credit facility with Santander for £26 million, which will provide us with greater financial flexibility in the medium term.

NET ASSET VALUE

The Group's net asset value increased over the year from £214.1 million to £370.0 million, an overall increase of £155.9 million, or over 70%.  The main factor behind the increase was the new equity raised during the year, of £102 million before costs. However there have also been strong valuation gains of £53.6 million, contributing to earnings per share of 15.4 pence for the year. On a per share basis, the net asset value rose from 56 pence to 69 pence, or 23%.

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).

	2015	2014	2013
	£m	£m	£m
Net asset value - EPRA and IFRS	370.0	214.1	169.4
Fair value of debt	(19.8)	17.8	5.7
EPRA Triple Net Asset Value	350.2	231.9	175.1
Net Asset Value per share (pence)	69	56	49
EPRA Net Asset Value per share (pence)	69	56	49
EPRA Triple Net Asset Value per share (pence)	65	61	51

INCOME STATEMENT

Total revenue from the property portfolio was £39.7 million, an increase of 7.9% over 2014. This reflects the additional income generated from the new assets acquired in the year and from the improved occupancy rate. Property expenses are also higher, at £9.3 million, but at 3.6%, a lower rate than the growth in revenue.

The like-for-like change in rental income compared to the previous year, on an EPRA basis, is set out in the EPRA Disclosures section.

Operating expenses increased from 2014, and this is largely a result of higher staff costs arising from the increased value of LTIP awards. Although this increase is not significant in the context of the increased shareholder value generated, it has impacted management costs this year, and is evidence of the alignment between management and shareholders.

Financing costs are largely unchanged from 2014, as would be expected with the Group's fixed long-term borrowings in place.

As stated above, there were positive valuation movements of £53.6 million for the year, representing 13.9% like-for-like unrealised gain across the portfolio.

The Group is subject to UK tax on its net property income and management fees, in total £0.3 million for the year. The Group has agreed Advance Thin Capitalisation Agreements with HMRC in respect of the majority of its UK income, and these are in place until 31 March 2017, when the position will be reviewed.

The income profit for the year was £15.3 million, an increase of 15% from 2014. This, together with the capital gains, resulted in a total profit for the year of £68.9 million.

DIVIDENDS

We paid four quarterly dividends of 0.75 pence per share, giving a total of 3 pence for the year, in line with 2014. Dividend cover remained healthy at 117%, if lower than the 124% of the previous year. Cover has been impacted by new rents being set at re-based market levels and to a lesser extent by the lag in investing the new equity. However, given the increase in revenue and improved occupancy, the Board has decided to increase the dividend to an annual rate of 3.3 pence per share, a 10% uplift. This was effective from the dividend paid in May.

INVESTMENT PROPERTIES

The fair value of our investment property portfolio increased to £532.9 million at 31 March 2015, up from £417.6 million. Included within this uplift are acquisitions of £62.0 million, which are detailed in the Investment Manager's Report, and capital expenditure across the existing portfolio of £4.1 million, enhancing the quality of the assets and space available. Four small non-core assets were disposed of, for proceeds of £4.4 million, realising a small gain compared to the 2014 valuation. The overall revaluation gain was £53.2 million, representing a 13.9% like-for-like increase in the valuation of the portfolio. At 31 March 2015 the portfolio comprised 57 assets, so an average lot-size of £9.5 million.

A further analysis of capital expenditure, in accordance with EPRA Best Practice Recommendations, is set out in the EPRA Disclosures section.

BORROWINGS

Total borrowings remained stable at £232.8 million this year. Our senior loan facilities with Canada Life and Aviva remained in place, reduced only by the amortisation of the Aviva facility (£1.0 million in the year). The Group remained fully compliant with the loan covenants throughout the year.

Our unsecured loan notes, arising from the Rugby acquisition in 2010, were fully repaid before the year end from surplus cash, thus reducing the total borrowings by £2.0 million.

Our 22 million of zero dividend preference shares continued to roll up additional capital at an annual rate of 7.25%, £1.8 million over the year. These shares mature in October 2016, the earliest maturity of any of our borrowings.

In March 2015 we agreed a new three year revolving credit facility with Santander Corporate Banking, for £26 million. The facility pays interest at 175 basis points over three month LIBOR, and will give flexibility in the financing of potential new asset acquisitions, as well as a potential solution to the ZDP maturity next year.

The Group's loan-to-value ratio fell to 30.1% at 31 March 2015, due to the increase in size of the portfolio but also influenced by the cash balance at the year end, arising from the recent equity issue. The ratio will increase once these funds are fully invested.

The fair value of our borrowings at 31 March 2015 was £252.6 million, higher than the book amount, due to the current very low gilt rates and lower margins in the lending market.

A summary of our borrowings is set out below:

	2015	2014	2013
Total borrowings (£m)	232.8	234.0	233.4
Borrowings net of cash (£m)	162.8	201.7	210.5
Undrawn facilities (£m)	26.0	-	-
Loan to value ratio (%)	30.1	47.7	54.5
Weighted average interest rate (%)	4.6	4.5	4.5
Average duration (years)	12.4	13.4	14.5

CAPITAL STRUCTURE

Following the issues of equity during the year, our share capital has increased by over £100 million, to £157.3 million. Retained earnings increased by £55.7 million, comprising the total profit for the year of £68.8 million less the dividends paid of £13.1 million.

Our net gearing ratio, using the method prescribed by the AIC, has fallen from 101.7% as at 31 March 2014 to 48.9% at 31 March 2015. Further details are provided in the Supplementary Disclosures section.

CASH FLOW AND LIQUIDITY

Our cash balances increased to over £70 million at the year end, boosted by the final tranche of the Placing Programme undertaken in March 2015. Of the £102 million raised through the Programme, £62 million had been invested in new assets during the year, and a further £4 million was utilised as capital expenditure on the existing portfolio. Subsequent to the year end a further £20 million has been invested in new assets.

Andrew Dewhirst

Finance Director, Picton Capital Limited

8 June 2015

Directors' responsibility statement in respect of the Annual Report and Financial Statements

The Directors confirm that to the best of their knowledge and belief the report and accounts taken as a whole, is fair, balanced and understandable and provides the information necessary to assess the Company's performance, business model and strategy.

Directors' responsibility statement under the Disclosure and Transparency Rules 4.1.12

The Directors confirm to the best of their knowledge and belief:

(a) the financial statements, prepared in accordance with International Financial Reporting Standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and

(b) the Strategic Report includes a fair review of development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

By Order of the Board

Robert Sinclair

8 June 2015

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 March 2015

				2015	2014
	Note	Income	Capital	Total	Total
		£000	£000	£000	£000
Income
Revenue from properties	3	39,662	-	39,662	36,749
Property expenses	4	(9,320)	-	(9,320)	(8,992)
Net property income		30,342	-	30,342	27,757
Expenses
Management expenses	6	(2,591)	-	(2,591)	(2,127)
Other operating expenses	8	(1,194)	-	(1,194)	(1,139)
Total operating expenses		(3,785)	-	(3,785)	(3,266)
Operating profit before movement on investments		26,557	-	26,557	24,491
Investments
Profit on disposal of investment properties	14	-	412	412	5,660
Investment property valuation movements	14	-	53,163	53,163	18,422
Total profit on investments		-	53,575	53,575	24,082
Operating profit		26,557	53,575	80,132	48,573
Financing
Interest received		184	-	184	164
Interest paid	9	(11,114)	-	(11,114)	(11,032)
Total finance costs		(10,930)	-	(10,930)	(10,868)
Profit before tax		15,627	53,575	69,202	37,705
Tax	10	(347)	-	(347)	(357)
Total comprehensive income		15,280	53,575	68,855	37,348
Earnings per share
Basic and diluted	12	3.4p	12.0p	15.4p	10.4p

The total column of this statement represents the Group's Consolidated Statement of Comprehensive Income. The supplementary income return and capital return columns are prepared under guidance published by the Association of Investment Companies. 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 2015
	Note	Share Capital	Retained Earnings	Total
		£000	£000	£000
Balance as at 31 March 2013		39,149	130,267	169,416
Issue of ordinary shares	20	18,229	-	18,229
Issue costs of shares		(186)	-	(186)
Profit for the year		-	37,348	37,348
Dividends paid	11	-	(10,711)	(10,711)
Balance as at 31 March 2014		57,192	156,904	214,096
Issue of ordinary shares	20	102,176	-	102,176
Issue costs of shares		(2,055)	-	(2,055)
Profit for the year		-	68,855	68,855
Dividends paid	11	-	(13,102)	(13,102)
Balance as at 31 March 2015		157,313	212,657	369,970

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

CONSOLIDATED BALANCE SHEET

As at 31 March 2015
		2015	2014
	Note	£000	£000
Non-current assets
Investment properties	14	532,926	417,207
Tangible assets		101	140
Accounts receivable	15	3,871	4,046
Total non-current assets		536,898	421,393
Current assets
Investment properties held for sale	14	-	425
Accounts receivable	15	14,019	10,102
Cash and cash equivalents	16	70,092	32,352
Total current assets		84,111	42,879
Total assets		621,009	464,272
Current liabilities
Accounts payable and accruals	17	(16,365)	(14,330)
Loans and borrowings	18	(1,012)	(2,935)
Obligations under finance leases	22	(103)	(104)
Total current liabilities		(17,480)	(17,369)
Non-current liabilities
Loans and borrowings	18	(231,834)	(231,081)
Obligations under finance leases	22	(1,725)	(1,726)
Total non-current liabilities		(233,559)	(232,807)
Total liabilities		(251,039)	(250,176)
Net assets		369,970	214,096
Equity
Share capital	20	157,313	57,192
Retained earnings		212,657	156,904
Total equity		369,970	214,096
Net asset value per share	23	69p	56p

These consolidated financial statements were approved by the Board of Directors on 8 June 2015 and signed on its behalf by:

Robert Sinclair

Director

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

CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended 31 March 2015
		2015	2014
	Note	£000	£000
Operating activities
Operating profit		80,132	48,573
Adjustments for non-cash items	21	(55,427)	(25,428)
Interest received		184	164
Interest paid		(8,879)	(8,932)
Tax paid		(369)	(394)
Cash inflows from operating activities		15,641	13,983
Investing activities
Capital expenditure on investment properties	14	(4,070)	(2,060)
Acquisition of investment properties	14	(62,059)	(19,611)
Disposal of investment properties	14	4,410	10,850
Purchase of tangible assets		(10)	(17)
Cash outflows from investing activities		(61,729)	(10,838)
Financing activities
Issue of ordinary shares		102,176	18,229
Issue costs of ordinary shares		(2,055)	(186)
Borrowings repaid		(2,936)	(1,031)
Financing costs		(255)	-
Dividends paid	11	(13,102)	(10,711)
Cash inflows from financing activities		83,828	6,301
Net increase in cash and cash equivalents		37,740	9,446
Cash and cash equivalents at beginning of year		32,352	22,906
Cash and cash equivalents at end of year	16	70,092	32,352

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

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED 31 MARCH 2015

1.  General information

     Picton Property Income Limited (the "Company" and together with its subsidiaries the "Group") was registered on 15 September 2005 as a closed ended Guernsey investment company. The consolidated financial statements are prepared for the year ended 31 March 2015 with comparatives for the year ended 31 March 2014.

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 are prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by IASB and are in compliance with the Companies (Guernsey) Law, 2008.

     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.

     Changes in accounting policies

     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.

·    IAS 32 Offsetting Financial Assets and Financial Liabilities, effective for periods beginning on or after 1 January 2014. The amendments to IAS 32 clarify the offsetting criteria by explaining when an entity currently has a legally enforceable right to set-off and when gross settlement is considered to be equivalent to net settlement. The amendments to IAS 32 had no impact on the Group.

     At the date of approval of these financial statements, the following standards and interpretations were in issue but not yet effective for the financial year and have not been adopted early:

·    In July 2014, the IASB published the final version of IFRS 9 Financial Instruments, which introduces new requirements for the classification and measurement of financial assets. Under IFRS 9 (2009), financial assets are classified and measured based on the business model in which they are held and the characteristics of their contractual cash flows. IFRS 9 (2010) introduces additional changes relating to financial liabilities. The IASB currently has an active project to make limited amendments to the classification and measurement requirements of IFRS 9 and add new requirements to address the impairment of financial assets and hedge accounting. IFRS 9 (2010) and (2009) are effective for annual periods beginning on or after 1 January 2018, with early adoption permitted.

     The Directors do not expect that the adoption of the standard listed above will have a material impact on the Group's financial statements in the year of initial application, other than on presentation and disclosure.

     Use of estimates and judgements

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

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

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

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

Level 3: unobservable inputs for the asset or liability.

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

The critical estimate and assumption relate to the investment property valuations applied by the Group's independent valuer and this is described in more detail in the accounting policy on page 70 and in note 14. Revisions to accounting estimates are recognised in the year in which the estimate is revised, if the revision affects only that year, or in the year of the revision and future years, if the revision affects both current and future years.

Critical judgements, where made, are disclosed within the relevant section of the financial statements in which such judgements have been applied. Key judgements relate to the treatment of business combinations, lease classifications, or employee benefits where different accounting policies could be applied. These are described in more detail in the accounting policy notes below, or in the relevant notes to the financial statements.

Basis of consolidation

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

Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. These financial statements include the results of the subsidiaries disclosed in note 13. All intra-group transactions, balances, income and expenses are eliminated on consolidation.

Business combinations

The Group acquires subsidiaries that own real estate. At the time of acquisition, the Group considers whether the acquisition represents the acquisition of a business. The Group accounts for an acquisition as a business combination where an integrated set of activities is acquired in addition to the property. More specifically, the following criteria are considered:

·    The number of items of land and buildings owned by the subsidiary;

·    The extent to which significant processes are acquired and in particular the extent of ancillary services provided by the subsidiary; and

·    Whether the subsidiary has allocated its own staff to manage the property and/or to deploy any processes, including provision of all relevant administration and information to the entity's owners.

When the acquisition of subsidiaries does not represent a business, it is accounted for as an acquisition of a group of assets and liabilities.

Goodwill on business combinations is measured as the fair value of the consideration transferred less the net recognised amount (fair value) of the identifiable assets acquired and liabilities assumed, all measured as of the acquisition date. When the excess is negative, this is recognised immediately in the Consolidated Statement of Comprehensive Income.

Transaction costs, other than those associated with the issue of debt or equity securities, that the Group incurs in connection with a business combination are expensed as incurred.

Presentation of the Consolidated Statement of Comprehensive Income

In order to better reflect the activities of an investment company and in accordance with guidance issued by the AIC, supplementary information which analyses the Consolidated Statement of Comprehensive Income between items of a revenue and capital nature has been presented alongside the Consolidated Statement of Comprehensive Income.

Investment properties

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

The fair value of investment properties is measured based on each property's highest and best use from a market participant's perspective and considers the potential uses of the property that are physically possible, legally permissible and financially feasible. The Group ensures the use of suitable qualified external valuers valuing the investment properties held by the Group.

The fair value of investment property generally involves consideration of:

·    Market evidence on comparable transactions for similar properties;

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

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

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

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

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

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

Realised and unrealised gains on investment properties have been presented as capital items within the Consolidated Statement of Comprehensive Income.

The loans have a first ranking mortgage over the majority of properties, see note 14.

Leases

Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalised at the inception of the lease at the fair value of the leased property or, if lower, the present value of the minimum lease payments. Lease payments are apportioned between finance charges and a reduction of the lease liability to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to the Consolidated Statement of Comprehensive Income.

An operating lease is a lease other than a finance lease. Lease income is recognised in income on a straight-line basis over the lease term. Direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised as an expense over the lease term on the same basis as the lease income.  The financial statements reflect the requirements of SIC 15, 'Operating Leases - Incentives' to the extent that they are material. Premiums received on the surrender of leases are recorded as income immediately if there are no relevant conditions attached to the surrender.

Cash and cash equivalents

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

Income and expenses

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

Revenue is recognised to the extent that it is probable that the economic benefit will flow to the Group and the revenue can be reliably measured.

Lease incentive payments are amortised on a straight-line basis over the period from the date of lease commencement to the lease end. Upon receipt of a surrender premium for the early termination of a lease, the profit, net of dilapidations and non-recoverable outgoings relating to the lease concerned, is immediately reflected in revenue from properties.

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

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

Employee benefits

Defined contribution plans

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

Short-term benefits

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

Share-based payments

The fair value of the amounts payable to employees in respect of the Long Term Incentive Plan, which are settled in cash, is recognised as an expense with a corresponding increase in liabilities, over the period that the employees become unconditionally entitled to payment. The liability is re-measured at each reporting date and at settlement date. Any changes in the fair value of the liability are recognised as staff costs in the Consolidated Statement of Comprehensive Income.

Dividends

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

Trade receivables

Trade receivables are stated at their nominal amount as reduced by appropriate allowances for estimated irrecoverable amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when identified.

Loans and borrowings

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

Assets classified as held for sale

A property is classified as held for sale when its carrying amount is to be recovered principally through a sales transaction and a sale is highly probable. 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 are not interest bearing and are stated at their nominal value.

Share capital

Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity.

Taxation

The Directors conduct the affairs of the Group such that the management and control of the Group is not exercised in the United Kingdom and that the Group does not carry on a trade in the United Kingdom. Accordingly the Group will not be liable to United Kingdom taxation on its income or capital gains arising in the United Kingdom, other than certain income deriving from a United Kingdom source.

The Group is subject to United Kingdom taxation on income arising on the investment properties after deduction of allowable debt financing costs and allowable expenses. The Group is tax exempt in Guernsey for the year ended 31 March 2015.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit before taxation reported in the Consolidated Statement of Comprehensive Income because it excludes items of income or expenses that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred income tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are measured at the tax rates that are expected to apply to the period when the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Deferred income tax assets are only recognised if it is considered more likely than not that there will be suitable profits from which the future reversal of the underlying timing differences can be deducted. As the Directors consider that the value of the property portfolio is likely to be realised by sale rather than use over time, and that no charge to Guernsey or United Kingdom taxation will arise on capital gains, no provision has been made for deferred tax on valuation uplifts.

Principles for the Consolidated Statement of Cash Flows

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

The cash amounts in the Consolidated Statement of Cash Flows include those assets that can be converted into cash without any restrictions and without any material risk of decreases in value as a result of the transaction. Dividends that have been paid are included in the cash flow from financing activities.

3.  Revenue from properties

	2015	2014
	£000	£000
Rents receivable (adjusted for lease incentives)	34,088	31,036
Surrender premiums	464	157
Dilapidation receipts	528	677
Other income	71	97
Service charge income	4,511	4,782
	39,662	36,749

Rents receivable includes lease incentives recognised of £1.2 million (31 March 2014: £1.0 million).

4.  Property expenses

	2015	2014
	£000	£000
Property operating expenses	2,861	2,527
Property void costs	1,948	1,683
Recoverable service charge costs	4,511	4,782
	9,320	8,992

5.  Operating segments

The Board is charged with setting the Company's investment strategy in accordance with the Company's investment restrictions and overall objectives. The key measure of performance used by the Board to assess the Group's performance is the total return on the Group's net asset value. As the total return on the Group's net asset value is calculated based on the net asset value per share calculated under IFRS as shown at the foot of the Balance Sheet, assuming dividends are re-invested, 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 have delegated the day to day implementation of this strategy to the Investment Manager but retain responsibility to ensure that adequate resources of the Company are directed in accordance with their decisions. The operating activities of the Investment Manager are reviewed on a regular basis to ensure compliance with the policies and legal responsibilities of the Board.

The Investment Manager has been given authority to act on behalf of the Company in certain situations. Under the terms of the Investment Management Agreement, subject to the overall supervision of the Board, the Investment Manager advises on the investment strategy of the Company, advises the Company on its borrowing policy and geared investment position, manages the investment of the Company's short term liquid resources, and advises on the use and management of derivatives and hedging by the Company. Whilst the Investment Manager may make operational decisions on a day to day basis regarding the property investments, any changes to the investment strategy or allocation decisions have to be approved by the Board, even though they may be proposed by the Investment Manager.

The Board therefore retains full responsibility for investment policy and strategy. The Investment Manager will always act under the terms of the Investment Management Agreement which cannot be changed without the approval of the Board. The Board has considered the requirements of IFRS 8 'Operating Segments'. The Board is of the opinion that the Group, through its subsidiary undertakings, operates in one reportable industry segment, namely real estate investment, and across one primary geographical area, namely the United Kingdom and therefore no segmental reporting is required. The portfolio consists of 57 commercial properties, which are in the industrial, office, retail, retail warehouse, and leisure sectors.

6.  Management expenses

	2015	2014
	£000	£000
Staff costs	2,019	1,610
Other management costs	572	517
	2,591	2,127

The Investment Manager for the Group is Picton Capital Limited, a wholly owned subsidiary company. The above staff and other management costs are those incurred by Picton Capital Limited during the year.

7.  Staff costs

	2015	2014
	£000	£000
Wages and salaries	1,258	1,072
Social security costs	175	130
Other pension costs	125	125
Share-based payments	461	283
	2,019	1,610

Staff costs are those of the employees of Picton Capital Limited. Employees in the Group participate in a share-based Long Term Incentive Plan ('LTIP'). Awards made under the LTIP are linked to the Company's share price and dividends paid, and normally vest after periods of two or three years. Employees must still be in the Group's employment to receive payment on the vesting date. During the year the Group made awards of 719,512 units (year ended 31 March 2014: 621,586 units), of which 359,756 units vest on 31 March 2017 and 359,756 units vest on 31 March 2018.

The table below summarises the awards made under the Long Term Incentive Plan to Picton Capital staff. Employees have the option to defer the vesting date of their awards for a maximum of seven years. The units which vested at 31 March 2015 and were not deferred were paid out subsequent to the year end at a cost of £147,000.

Vesting Date	Units at start of year	Units granted in the year	Units cancelled in the year	Units redeemed in the year	Units at end of year
31 March 2014	114,070	-	-	(104,100)	9,970
31 March 2015	356,695	-	(2,480)	(186,165)	168,050
31 March 2016	583,293	-	(3,232)	-	580,061
31 March 2017	310,793	359,756	(1,982)	-	668,567
31 March 2018	-	359,756	-	-	359,756
	1,364,851	719,512	(7,694)	(290,265)	1,786,404

The emoluments of the Directors are set out in the Remuneration Report section of the Directors' Report.

The Group employed 12 members of staff at 31 March 2015 (31 March 2014: 11). The average number of people employed by the Group for the year ended 31 March 2015 was 12 (31 March 2014: 12).

8.  Other operating expenses

	2015	2014
Recurring costs	£000	£000
Valuation expenses	87	71
Administrator fees	192	193
Auditor's remuneration	138	156
Directors' fees	212	202
Other expenses	565	517
	1,194	1,139

     Auditor's remuneration comprises:

	2015	2014
	£000	£000
Audit fees:
Audit of Group financial statements	56	56
Audit of subsidiaries' financial statements	63	63
Audit related fees:
Review of half year financial statements	19	20
	138	139
Non-audit fees:
Additional controls testing	14	12
FCA CASS audit	4	5
Tax compliance	7	-
	25	17
	163	156

9.  Interest paid

	2015	2014
	£000	£000
Interest payable on loans at amortised cost	8,758	8,797
Capital additions on zero dividend preference shares	1,766	1,647
Interest on obligations under finance leases	115	115
Amortisation of finance costs	475	473
	11,114	11,032

The loan arrangement costs incurred to 31 March 2015 are £5,728,000 (31 March 2014: £5,275,000). These are amortised over the duration of the loans with £475,000 written off in the year ended 31 March 2015 (31 March 2014: £473,000).

10.        Tax

     The charge for the year is:

	2015	2014
	£000	£000
Current UK income tax	250	357
Income tax adjustment to provision for prior year	(54)	-
	196	357
UK corporation tax	151	-
	151	-
	347	357

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

	2015	2014
	£000	£000
Profit before taxation	69,202	37,705
Expected tax charge on ordinary activities at the standard rate of taxation of 20%	13,840	7,541
Less:
Revaluation gains not taxable	(10,715)	(4,816)
Income not taxable, including interest receivable	(138)	(64)
Expenditure not allowed for income tax purposes	584	542
Losses utilised	(102)	(10)
Capital allowances and other allowable deductions	(3,334)	(2,836)
Losses carried forward to future years	115	-
Adjustment to provision for prior years	(54)	-
Total tax charge	196	357

For the year ended 31 March 2015 there was an income tax liability of £196,000 in respect of the Group (31 March 2014: £357,000) and corporation tax of £151,000 (31 March 2014: £nil).

The Group is exempt from Guernsey taxation under the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989. A fixed fee of £600 (£1,200 from 1 January 2015) per company per year is payable to the State of Guernsey in respect of this exemption. No charge to Guernsey taxation will arise on capital gains.

The Directors conduct the affairs of the Group such that the management and control of the Group is not exercised in the United Kingdom and that the Group does not carry on a trade in the United Kingdom. 

The Group is subject to United Kingdom taxation on rental income arising on the investment properties after deduction of allowable debt financing costs and allowable expenses. The treatment of such costs and expenses in estimating the overall tax liability for the Group requires judgement and assumptions regarding their deductibility. The Directors have considered comparable market evidence and practice in determining the extent to which these are allowable. This is shown above as Current UK income tax. UK corporation tax relates to the corporation tax arising in respect of Picton Capital Limited.

No deferred tax asset has been recognised from unused tax losses which total £4.8 million as the Group  is only able to utilise the losses to offset taxable profits in certain discrete business streams, and the Group considers the probability of realising the benefit in future periods in these business streams as remote (31 March 2014: £3.0 million).

11.        Dividends

	2015	2014
Declared and paid:	£000	£000
Interim dividend for the period ended 31 March 2013: 0.75 pence	-	2,590
Interim dividend for the period ended 30 June 2013: 0.75 pence	-	2,590
Interim dividend for the period ended 30 September 2013: 0.75 pence	-	2,682
Interim dividend for the period ended 31 December 2013: 0.75 pence	-	2,849
Interim dividend for the period ended 31 March 2014: 0.75 pence	2,849	-
Interim dividend for the period ended 30 June 2014: 0.75 pence	3,294	-
Interim dividend for the period ended 30 September 2014: 0.75 pence	3,294	-
Interim dividend for the period ended 31 December 2014: 0.75 pence	3,665	-
	13,102	10,711

The interim dividend of 0.825 pence per ordinary share in respect of the period ended 31 March 2015 has not been recognised as a liability as it was declared after the year end.  A dividend of £4,455,000 was paid on 29 May 2015.

12.        Earnings per share

Basic earnings per share is calculated by dividing the net profit for the year attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares in issue during the year. The following reflects the profit and share data used in the basic and diluted profit per share calculation: 

	2015	2014
Net profit attributable to ordinary shareholders of the Company from continuing operations (£000)	68,855	37,348
Weighted average number of ordinary shares for basic and diluted profit per share	445,259,094	359,866,250

13.        Investments in subsidiaries

The Company had the following principal subsidiaries as at 31 March 2015:

Name	Place of incorporation	Ownership proportion
Picton UK Real Estate (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 (UK) Listed Real Estate Limited	Guernsey	100%
Merbrook Business Property Unit Trust*	Jersey	100%
Merbrook Prime Retail Property Unit Trust*	Jersey	100%
Merbrook Bristol Property Unit Trust*	Jersey	100%
Merbrook Swindon Property Unit Trust*	Jersey	100%
Picton Capital Limited	England & Wales	100%
Picton ZDP Limited	Guernsey	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 Property No 3 Limited	Guernsey	100%
Picton Finance Limited	Guernsey	100%

* - (the "JPUTS")

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

Picton UK Real Estate (Property) Limited and Picton (UK) REIT (SPV) Limited own 100% of the units in Picton (UK) Listed Real Estate, a Guernsey Unit Trust (the "GPUT"). The GPUT holds a 99.9% interest in both Picton No 2 Limited Partnership and Picton No 3 Limited Partnership.

Picton No 3 Limited Partnership owns all of the units in the JPUTs, which are each registered as Jersey Unit Trusts. 

14.        Investment properties

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

	2015	2014
	£000	£000
Fair value at start of year	417,632	382,729
Acquisitions	62,059	53,611
Capital expenditure on investment properties	4,070	2,060
Disposals	(4,410)	(44,850)
Realised gains on disposal	438	5,664
Realised losses on disposal	(26)	(4)
Unrealised gains on investment properties	60,094	30,606
Unrealised losses on investment properties	(6,931)	(12,184)
Fair value at the end of the year	532,926	417,632
Historic cost at the end of the year	628,645	566,494

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

	2015	2014
	£000	£000
Appraised value	540,905	423,020
Valuation of assets held under finance leases	1,155	1,166
Lease incentives held as debtors	(9,134)	(6,554)
Fair value at the end of the year	532,926	417,632

The investment properties were valued by CBRE Limited, Chartered Surveyors, as at 31 March 2015 and 31 March 2014 on the basis of fair value in accordance with the RICS Valuation - Professional Standards (2012). The total fees earned by CBRE Limited from the Group is less than 5% of their total UK revenue.

As at 31 March 2014 The Cloisters, Dartford had an unconditional sales offer so had been reclassified as an asset held for sale. The sale completed on 16 April 2015. As at 31 March 2015 there were no assets held for sale.

Included within acquisitions and disposals for the year ended 31 March 2014 in the above table is a swap transaction whereby the Group acquired an asset for a consideration of £40.5 million, before costs, satisfied by the transfer of one of its investment properties sold for £34.0 million, plus a cash balance of £6.5 million.

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 arms length basis.

The Group's investment properties are valued quarterly by independent valuers. The valuations are based on:

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

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

The assumptions and valuation models used by the valuers, and supporting information, are reviewed by the Investment Manager and the Board through the Property Valuation Committee. Members of the Property Valuation Committee, together with the Investment Manager, meet with the independent valuer on a quarterly basis to review the valuations and underlying assumptions, including considering current market trends and conditions, and changes from previous quarters. The Directors will also consider where circumstances at specific investment properties, such as alternate 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 2015 and 31 March 2014 all of the Group's properties are level 3 in the fair value hierarchy as it involves use of significant inputs. There were no transfers between levels during the year. Level 3 inputs used in valuing the properties are those which are unobservable, as opposed to level 1 (inputs from quoted prices) and level 2 (observable inputs either directly, i.e. as prices, or indirectly, i.e. derived from prices).

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

	2015	2015	2015	2014	2014	2014
	Offices	Industrial	Retail and Leisure	Offices	Industrial	Retail and Leisure
Appraised value (£000)	173,420	217,745	149,740	139,395	164,395	119,230
Area (sq ft, 000s)	800	2,736	732	877	2,116	516
Range of unobservable inputs:
Gross ERV (sq ft per annum)
-range	£7.57-£50.99	£2.98-£15.31	£5.74-£81.04	£7.57-£46.01	£3.55-£14.86	£7.32-£81.04
-weighted average	£26.83	£6.94	£30.53	£24.03	£7.12	£31.49
Net initial yield
-range	-1.09%-25.47%	0%-10.55%	2.65%-14.47%	0%- 19.5%	5.21%-11.71%	3.49%-14.60%
-weighted average	5.36%	6.18%	6.00%	6.42%	6.86%	6.65%
Reversionary yield
-range	5.07%-18.02%	5.68%-13.15%	4.08%-18.46%	5.44%-20.86%	6.08%-12.57%	4.08%-18.63%
-weighted average	7.64%	6.87%	6.39%	8.83%	7.32%	6.59%
True equivalent yield
-range	0%-13.13%	5.80%-12.59%	4.50%-20.05%	5.56%-13.6%	6.22%-12.62%	4.46%-19.47%
-weighted average	7.15%	7.03%	6.93%	8.43%	7.49%	7.06%

An increase/decrease in ERV will increase/decrease valuations, while an increase/decrease to yield decreases/increases valuations. The table below sets out the sensitivity of the valuation to changes of 50 basis points in yield.

		2015	2014
Sector	Movement	Impact on Valuation	Impact on Valuation
Industrial	Increase of 50 basis points	Decrease of £15.7m	Decrease of £11.3m
	Decrease of 50 basis points	Increase of £18.2m	Increase of £13.0m
Office	Increase of 50 basis points	Decrease of £12.5m	Decrease of £9.0m
	Decrease of 50 basis points	Increase of £14.4m	Increase of £10.2m
Retail and Leisure	Increase of 50 basis points	Decrease of £10.5m	Decrease of £8.1m
	Decrease of 50 basis points	Increase of £12.3m	Increase of £9.5m

15.        Accounts receivable   

	2015	2014
	£000	£000
Current
Tenant debtors (net of provisions for bad debts)	3,871	2,327
Lease incentives	9,134	6,554
Other debtors	388	749
Capitalised finance costs	626	472
	14,019	10,102
Non-current
Capitalised finance costs	3,871	4,046
	3,871	4,046
	17,890	14,148

Tenant debtors, which are generally due for settlement at the relevant quarter end, are recognised and carried at the original invoice amount less an allowance for any uncollectable amounts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off when identified.

16.        Cash and cash equivalents     

	2015	2014
	£000	£000
Cash at bank and in hand	16,416	16,006
Short term deposits	53,676	16,346
	70,092	32,352

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

17.        Accounts payable and accruals

	2015	2014
	£000	£000
Accruals	3,803	3,180
Deferred rental income	7,482	6,702
VAT liability	1,935	1,530
Income tax liability	206	228
Trade creditors	750	499
Other creditors	2,189	2,191
	16,365	14,330

18.        Loans and borrowings

	Maturity	2015	2014
		£000	£000
Current
Secured loan facility	-	1,012	968
Unsecured loan stock	-	-	1,967
		1,012	2,935
Non-current
Secured loan facility	20 July 2022	33,718	33,718
Secured loan facility	24 July 2027	80,000	80,000
Secured loan facility	24 July 2032	91,982	92,995
Zero dividend preference shares	15 October 2016	26,134	24,368
		231,834	231,081
		232,846	234,016

The Group has a loan with Canada Life Limited for £113.7 million, which is fully drawn. The loan is for a term of 15 years, with £33.7 million repayable on the tenth anniversary of drawdown. Interest is fixed at 4.08% over the life of the loan. The loan agreement has a loan to value covenant of 65% and an interest cover test of 1.75. The loan is secured over the Group's properties held by Picton No 2 Limited Partnership and Picton UK Real Estate Trust (Property) No 2 Limited.

Additionally the Group has a term loan facility agreement with Aviva Commercial Finance Limited for £95.3 million, which was fully drawn on 24 July 2012. The loan is for a term of 20 years, with approximately one third repayable over the life of the loan in accordance with a scheduled amortisation profile. The Group has repaid £1.0 million in the year (31 March 2014: £0.9 million). Interest on the loan is fixed at 4.38% over the life of the loan. The facility has a loan to value covenant of 65% and a debt service cover ratio of 1.4. The facility is secured over the Group's properties held by Picton No 3 Limited Partnership, Picton Property No 3 Limited and the JPUTs.

The fair value of the secured loan facilities at 31 March 2015, estimated as the present value of future cash flows discounted at the market rate of interest at that date, was £224.9 million (31 March 2014: £188.3 million). The fair value of the secured loan facilities is classified as Level 2 under the hierarchy of fair value measurements.

The Group has 22,000,000 zero dividend preference shares ('ZDPs') in issue with a maturity date of 15 October 2016. The ZDPs accrue additional capital at a rate of 7.25% per annum, resulting in a final capital entitlement at maturity of 132.3 pence per share. The ZDPs do not receive any dividends or income distributions, and are listed on the London Stock Exchange. The ZDPs were issued by Picton ZDP Limited, a wholly owned subsidiary company.

The fair value of the zero dividend preference shares at 31 March 2015, based on the quoted market price at that date, was £27.7 million (31 March 2014: £25.9 million). The fair value of the zero dividend preference shares is classified as Level 1 under the hierarchy of fair value measurements (31 March 2014: level 1).

The Group's unsecured loan stock was repaid in full on 27 March 2015.

A new three-year £26 million revolving credit facility has been entered into with Santander Corporate & Commercial Banking on 26 March 2015. Once drawn, interest will be charged at 175 basis points over 3 month LIBOR, there is also a non-utilisation fee of 70 basis points. The facility is secured over the Group's properties held by Picton (UK) REIT (SPV No 2) Limited.

The weighted average interest rate on the Group's borrowings as at 31 March 2015 was 4.56% (31 March 2014: 4.51%).

In accordance with the AIFM Directive, information in relation to the Group's leverage is required to be made available to investors. The Group's maximum and average actual leverage levels at 31 March 2015 are shown below:

	Gross method	Commitment method
Maximum limit	285%	285%
Actual	144%	163%

For the purpose of the AIFM Directive, leverage is any method which increases the Group's exposure, including the borrowing of cash and use of derivatives. It is expressed as a percentage of the Group's exposure to its net asset value and is calculated on both a gross and commitment method.

Under the gross method, exposure represents the sum of the Group's positions after deduction of cash balances, without taking account of any hedging or netting arrangements. Under the commitment method, exposure is calculated without the deduction of cash balances and after certain hedging and netting positions are offset against each other.

The leverage limits are set by the Board and are in line with the maximum leverage levels permitted in the Company's Articles of Incorporation.

19.Contingencies and capital commitments

The Group has entered into contracts for the refurbishment of 17 properties with commitments outstanding at 31 March 2015 of approximately £3.2 million, (31 March 2014: £1.9 million). No further obligations to construct or develop investment property or for repairs, maintenance or enhancements were in place as at 31 March 2015.

20.        Share capital

	2015	2014
Authorised:	£000	£000
Unlimited number of ordinary shares of no par value	-	-
Issued and fully paid:
540,053,660 ordinary shares of no par value (31 March 2014: 379,869,729)	-	-
Share premium	157,313	57,192

The Company issued the following new ordinary shares of no par value in the period:

·      59,322,034 shares at 59.0 pence per share for cash of £35,000,000 on 23 May 2014

·      39,215,686 shares at 63.75 pence per share for cash of £25,000,000 on 22 December 2014

·      10,294,118 shares at 68.0 pence per share for cash of £7,000,000 on 27 January 2015

·      51,352,093 shares at 68.5 pence per share for cash of £35,176,000 on 18 March 2015

The consideration received net of expenses has been credited to the share premium account.

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. 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 and provided that the ZDP Share Cover for the  ZDPs is not less than 3.5 times, after the proposed repurchase. 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

	2015	2014
	£000	£000
Profit on disposal of investment properties	(412)	(5,660)
Increase in investment property valuation	(53,163)	(18,422)
Depreciation of tangible assets	49	47
Increase in receivables	(3,764)	(2,158)
Increase in payables	1,863	765
	(55,427)	(25,428)

22.     Obligations under leases

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

Finance lease obligations in respect of rents payable on leasehold properties were payable as follows:

	2015	2014
	£000	£000
Future minimum payments due:
Within one year	116	116
In the second to fifth years inclusive	466	466
After five years	7,849	7,965
	8,431	8,547
Less: finance charges allocated to future periods	(6,603)	(6,717)
Present value of minimum lease payments	1,828	1,830

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

	2015	2014
	£000	£000
Current
Within one year	103	104
	103	104
Non-current
In the second to fifth years inclusive	351	352
After five years	1,374	1,374
	1,725	1,726
	1,828	1,830

Operating leases where the Group is lessor

The Group leases its investment properties under operating leases.

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

	2015	2014
	£000	£000
Within one year	35,617	29,495
In the second to fifth years inclusive	121,873	94,845
After five years	134,409	122,343
	291,899	246,683

The Group has entered into commercial property leases on its investment property portfolio. These properties, held under operating leases, are measured under the fair value model as the properties are held to earn rentals. The majority of these non-cancellable leases have remaining lease terms of more than 5 years.

23.Net asset value

The net asset value per ordinary share is based on net assets at the year end and 540,053,660 (31 March 2014: 379,869,729) ordinary shares, being the number of ordinary shares in issue at the year end.

At 31 March 2015, the Company had a net asset value per ordinary share of £0.69 (31 March 2014: £0.56). 

24.Financial instruments

The Group's financial instruments comprise cash and cash equivalents, accounts receivable, secured loans, zero dividend preference shares, obligations under finance leases and accounts payable that arise from its operations. The Group does not have exposure to any derivative financial instruments. Apart from the secured loans and the zero dividend preference shares, 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 2015	Note	Held at fair value through profit or loss £000	Financial assets and liabilities at amortised cost £000	Total £000
Financial assets
Accounts receivable	15	-	17,890	17,890
Cash and cash equivalents	16	-	70,092	70,092
		-	87,982	87,982
Financial liabilities
Loans	18	-	232,846	232,846
Obligations under finance leases	22	-	1,828	1,828
Accounts payable and accruals	17	-	16,365	16,365
		-	251,039	251,039

31 March 2014	Note	Held at fair value through profit or loss £000	Financial assets and liabilities at amortised cost £000	Total £000
Financial assets
Accounts receivable	15	-	14,148	14,148
Cash and cash equivalents	16	-	32,352	32,352
		-	46,500	46,500
Financial liabilities
Loans	18	-	234,016	234,016
Obligations under finance leases	22	-	1,830	1,830
Accounts payable and accruals	17	-	14,330	14,330
		-	250,176	250,176

25.Risk management

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

Capital risk management

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

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

The Board of Directors monitors the return on capital as well as the level of dividends to ordinary shareholders. The Group has managed its capital risk by entering into long term loan arrangements which will enable the Group to reduce its borrowings in an orderly manner over the long term.

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

	2015	2014
	£000	£000
Total liabilities	251,039	250,176
Less: cash and cash equivalents	(70,092)	(32,352)
Net debt	180,947	217,824
Total equity	369,970	214,096
Net debt to equity ratio at end of year	0.49	1.02

Interest rate risk management

Interest rate risk arises on interest payable on the revolving credit facility and unsecured loan stock only. The Group's senior debt facilities have fixed interest rates over the lives of the loans and thus the Group has limited exposure to interest rate risk on the majority of its borrowings and no sensitivity is presented.

Interest rate risk

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

31 March 2015	Less than one year £000	1 to 5 Years £000	More than 5 years £000	Total £000
Floating
Cash and cash equivalents	70,092	-	-	70,092
Fixed
Secured loan facilities	(1,012)	(4,517)	(201,183)	(206,712)
Zero dividend preference shares	-	(26,134)	-	(26,134)
	69,080	(30,651)	(201,183)	(162,754)

31 March 2014	Less than one year £000	1 to 5 Years £000	More than 5 years £000	Total £000
Floating
Cash and cash equivalents	32,352	-	-	32,352
Unsecured loan stock	(1,967)	-	-	(1,967)
Fixed
Secured loan facilities	(968)	(4,325)	(202,388)	(207,681)
Zero dividend preference shares	-	(24,368)	-	(24,368)
	29,417	(28,693)	(202,388)	(201,664)

     Credit risk

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

	Note	Held at fair value through profit or loss £000	Financial assets and liabilities at amortised cost £000	Total £000
31 March 2015 Financial assets
Tenant debtors	15	-	3,871	3,871
Cash and cash equivalents	16	-	70,092	70,092
		-	73,963	73,963
31 March 2014 Financial assets
Tenant debtors	15	-	2,327	2,327
Cash and cash equivalents	16	-	32,352	32,352
		-	34,679	34,679

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

Trade debtors consist of a large number of occupiers, spread across diverse industries and geographical areas. On-going credit evaluations are performed on the financial condition of trade debtors, and where appropriate, credit guarantees are acquired. The Group does not have any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. The credit risk on liquid funds is limited because the counterparties are banks with high credit ratings assigned by international credit rating agencies. Rent collection is outsourced to managing agents who report regularly on payment performance and provide the Group with intelligence on the continuing financial viability of occupiers.

A provision of £2,049,000 (31 March 2014: £1,400,000) exists at the year end, in relation to outstanding debtors that are considered to be impaired based on a review of individual debtor balances. The Group believes that unimpaired amounts that are overdue by more than 30 days are still collectable, based on the historic payment behaviours and extensive analyses of the underlying customers' credit ratings. At 31 March 2015 debtors overdue by more than 30 days totalled £2,595,000 (31 March 2014: £1,670,000).

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

The Group has a panel of banks with which it makes deposits, based on credit ratings with set counterparty limits. The Group's main cash balances are held with National Westminster Bank plc ("NatWest"), Santander plc ("Santander"), Nationwide International Limited ("Nationwide") and The Royal Bank of Scotland plc ("RBS"). Bankruptcy or insolvency of the bank holding cash balances may cause the Group's rights with respect to the cash held by them to be delayed or limited. The Group manages its risk by monitoring the credit quality of its bankers on an on-going basis. NatWest, Santander, Nationwide and RBS are rated by all the major rating agencies. If the credit quality of these banks deteriorates, the Group would look to move the short term deposits or cash to another bank. Procedures exist to ensure that cash balances are split between banks to minimise exposure. At 31 March 2015 and at 31 March 2014 Standard & Poor's credit rating for Nationwide and Santander was A-1 (31 March 2014: A-2) and the Group's remaining bankers had an A-2 rating.

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

Liquidity risk

Ultimate responsibility for liquidity risk management rests with the Board, which has built an appropriate liquidity risk management framework for the management of the Group's short, medium and long-term funding and liquidity management requirements. The Group manages liquidity risk by maintaining adequate reserves and loan facilities by continuously monitoring forecasts and actual cash flows and matching the maturity profiles of financial assets and liabilities.

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. 

		Less than 1 year £000	1 to 5 years £000	More than 5 years £000	Total £000
31 March 2015
Cash		70,180	-	-	70,180
Accounts receivable		14,019	3,871	-	17,890
Finance lease liability		(116)	(466)	(1,246)	(1,828)
Fixed interest rate loans		(9,708)	(67,945)	(272,078)	(349,731)
Accounts payable and accruals		(16,365)	-	-	(16,365)
		58,010	(64,540)	(273,324)	(279,854)
31 March 2014
Cash		32,392	-	-	32,392
Accounts receivable		10,102	4,046	-	14,148
Finance lease liability		(116)	(466)	(1,248)	(1,830)
Fixed interest rate loans		(9,708)	(67,945)	(281,786)	(359,439)
Floating interest rate facility		(1,978)	-	-	(1,978)
Accounts payable and accruals		(14,330)	-	-	(14,330)
		16,362	(64,365)	(283,034)	(331,037)

Market risk

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

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

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

In addition, the Group's revenue would be adversely affected if a significant number of occupiers were unable to pay rent or its properties could not be rented on favourable terms. Certain significant expenditure associated with each equity investment in real estate (such as external financing costs, real estate taxes and maintenance costs) generally are not reduced when circumstances cause a reduction in revenue from properties. By diversifying in regions, sectors, risk categories and occupiers, the Investment Manager expects to lower the risk profile of the portfolio. The Board continues to oversee the profile of the portfolio to ensure risks are managed. See the Investment Manager's report for the geographical spread and the analysis of the top ten occupiers of the portfolio.

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 £27.0 million (31 March 2014: £21.2 million).

Concentration risk

As discussed above, all of the Group's investments are in the UK and therefore it is exposed to macroeconomic changes in the UK economy. Furthermore, the Group places reliance on a limited number of occupiers for its rental income, with one occupier accounting for 4.5% 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 five Directors of the Company was £211,875 (31 March 2014: £202,000). As at 31 March 2015 the Group owed £nil to the Directors (31 March 2014: £nil). The emoluments of each Director are set out in the Remuneration Report section of the Directors' Report.

Picton Property Income Limited has no controlling parties.

27.        Events after the balance sheet date

A dividend of £4,455,000 (0.825 pence per share) was approved by the Board on 20 April 2015 and paid on 29 May 2015. 

The Group has disposed of two properties since 31 March 2015 for proceeds of £3,145,000 and made two acquisitions for £20,165,000, before costs of disposal and acquisition respectively.

 

END

 

 

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