Picton Prop Regulatory News (PCTN)

Picton Property Income Ltd - Half Year Results

PR Newswire

London, November 13

14 November 2017

PICTON PROPERTY INCOME LIMITEDLEI: 213800RYE59K9CKR4497HALF YEAR RESULTS("PICTON", THE “COMPANY” OR THE "GROUP")

Picton (LSE: PCTN) announces its half year results for the six month period to 30 September 2017.

Continued NAV and earnings growth with dividend increase

- Profit after tax of £30.7 million

- Total return for the six months of 7.1%

- Increase in EPRA NAV per share of 5.0%, to 86 pence per share

- Gearing of 28.2% and weighted average interest rate reduced from 4.2% to 4.1%

- Dividends paid of £9.2 million or 1.7 pence per share

- Dividend cover of 118%

- 3% increase in annual dividend announced today, to 3.5 pence per share

Portfolio outperformance

- Total property return of 6.3%, outperforming the MSCI IPD Quarterly Benchmark of 5.0% 

- Improved occupancy to 95%, ahead of the MSCI IPD Quarterly Digest of 93%

- Acquisition of multi-let office in Bristol for £23.2 million

- Two disposals for £9.9 million, 37% ahead of March 2017 valuation

- Like-for-like portfolio rental income growth of 4.4%

- Like-for-like ERV growth of 1.7%

- 8% increase in average lot size to £12.7 million

* net of lease incentives, see Note 9.

** 120% prior to one-off income.

Picton Chairman, Nicholas Thompson, commented:

“As demonstrated by these results the team remains focused on our objective to achieve consistent long-term performance on behalf of our shareholders. Additionally it is pleasing to be able to announce a further increase in our level of dividend. With an eye on the future, we remain committed to our current portfolio strategy whilst ensuring the Company is prepared to be able to convert to UK REIT status. This decision will depend on the forthcoming result of the Government’s consultation into bringing non-resident landlord companies, like Picton, into the scope of UK corporation tax.”

Michael Morris, Chief Executive of Picton Capital, commented:

“We have continued to make considerable progress in the first half, improving occupancy and increasing the overall lot size of the portfolio. Strong performance from the industrial and logistics sector in particular, contributed to NAV growth, along with the disposal of two non-core assets. With our recent Bristol acquisition there is £6 million of reversionary potential in the portfolio and we believe that capturing this is key to driving income and valuation growth in the short to medium term. As we continue to seek to grow the business and enhance returns, we are confident that Picton is well placed to continue delivering value for shareholders.”

This announcement contains inside information.

For further information:

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

Picton Capital LimitedMichael Morris, 020 7011 9980, michael.morris@picton.co.uk

The Company SecretaryNorthern Trust International Fund Administration Services (Guernsey) Limited

Trafalgar CourtLes BanquesSt Peter PortGuernseyGY1 3QLAndy Le Page, 01481 745 001, team_picton@ntrs.com

Note to Editors

Picton is a property investment company established in 2005. It owns and actively manages a £661 million diversified UK commercial portfolio, invested across 52 assets and with around 350 occupiers (as at 30 September 2017). Through an occupier-focused, opportunity-led approach to asset management, Picton aims to be one of the consistently best performing diversified UK property companies listed on the main market of the London Stock Exchange.

www.picton.co.uk

CHAIRMAN’S STATEMENT

For the half year to 30 September 2017, I am pleased to report another set of good financial results, as evidenced by a profit after tax of £31 million, and a 5% increase in the net asset value over the six months.

The Company generated earnings per ordinary share of 5.7 pence. Net assets rose by £22 million to stand at £464 million at 30 September, or 86 pence per share. Based on these results the total return for the period was 7.1%.

Within the property portfolio, we have grown occupancy and achieved some significant lettings, which are set out in more detail in the Investment Manager’s Report.

Strategy

As we stated in our last Annual Report, our aim is to be one of the consistently best performing UK diversified property companies listed on the main market of the London Stock Exchange.

In order to achieve this aim, we have five key strategic priorities – working with occupiers, growing net income, operational efficiency, portfolio and asset management and the effective use of debt.

Performance

At the portfolio level, our assets have continued to outperform the MSCI IPD Quarterly Benchmark delivering a total property return of 6.3%, against 5.0%, in part driven by our income focus, our portfolio allocation and some attractively priced disposals.

Our ongoing charges over the period reduced to 1.1%, compared to 1.2% at 31 March 2017.

Whilst we have made good progress over the period, our objective is to generate consistent long term performance. Over the last five years we have increased our net asset value by 65% and our property portfolio has delivered an average annual total return of 12.7%.

Property Portfolio

In common with the wider market, the strongest performance within the portfolio has been in the industrial sector, followed by offices, with the retail and leisure sector making little progress, against a backdrop of higher inflation affecting retailers and consumers alike.

Through investment activity and growth in capital values, we have increased the average lot size within the portfolio, by some 8% to £12.7 million, which in turn reflects part of our strategy to improve operational efficiency.

Occupancy improved over the period and now stands at 95%, ahead of the market at 93%. We are confident of further lettings success which will improve the position.

Capital Structure

Recognising market risks and the ongoing uncertainty following last year’s referendum result, we believe that it remains appropriate in the current climate to try and keep our gearing level below 30%. During the last six months, we extended one of our two revolving credit facilities, moving the maturity date from 2018 to 2021. We intend to make use of these facilities on a tactical basis. A short-term increase in gearing, with the potential to pay down debt via equity issuance or future asset sales, gives us operational flexibility and allows us to act opportunistically. During the period, we made a drawdown of £12.5 million to partly fund the acquisition of our new Bristol asset.

The Company’s shares continue to trade broadly in line with the net asset value, against a backdrop of some UK REITs and property companies trading at significant premiums or discounts.

Future Growth

The Directors believe that Picton is in a strong position to benefit from the economies of scale that would result from prudent growth of the Company’s portfolio. As an internally managed company, we can do this without proportionately increasing our cost base.

We will continue to seek to grow the asset base of the Company selectively with attractive opportunities, provided that these are sourced under the right market conditions.

Corporate Structure

Earlier this year the Government ran a consultation exploring the case and option for bringing non-resident landlord companies, such as Picton, into the scope of UK corporation tax. We expect any legislation in this regard to be announced in the Budget later this month. In anticipation of this, we have continued to progress our planning for a potential conversion to a UK REIT in 2018. 

Contingent on the timing of the introduction of any new legislation, we expect to hold an extraordinary general meeting early in 2018 to seek shareholder approval for any corporate changes that may be required with UK REIT conversion. As part of this process, we are also reviewing how we can optimise our internal management structure by reducing costs and improving efficiency to maximise shareholder value. Although we do not intend to change our investment approach and portfolio strategy, we are undertaking an appraisal of the benefits of the Company’s current technical listing status as an investment company, rather than that of a commercial company, which would be more in-line with our internally managed peers.

Board Composition

In our 2017 Annual Report, I highlighted that we would be seeking to recruit a new Director this year and I am pleased to confirm that, after a comprehensive search and selection process, we announced the appointment of Mark Batten to the Board in October. Mark, a recently retired partner from PwC, has extensive experience in financial services, real estate, corporate finance, structuring and transactions and will further broaden the skill set of the Board. He will become Chairman of the Audit and Risk Committee during 2018 and Robert Sinclair has kindly agreed to remain on the Board to help facilitate this transition.

Dividends

During the period we paid £9.2 million in dividends, which were 118% covered by income profit.

We have said previously that our policy is to maintain a covered dividend in the long term, which is important in enabling the Company to invest back into the portfolio and safeguard future performance, whilst also allowing us to grow dividends progressively as our earnings increase.

Last year we announced a 3% dividend increase, having previously increased the dividend by 10% in 2015. I am pleased to confirm that after careful consideration by the Board, a further 3% increase in the Company’s dividend has been approved. The annual dividend will be increased to 3.5 pence per share and the first quarterly dividend of 0.875 pence per share is expected to be paid in February 2018. Once any transition to a UK REIT is complete we will revisit our dividend policy, particularly in the light of REIT regime distribution requirements.

Outlook

Consensus forecasts indicate that future returns look set to be driven in the short term by income. Picton remains well positioned at a macro level in terms of its sector allocation and I am confident that the team will, through active management, continue to unlock value and outperform the market. 

We believe the basics of asset management, occupier retention and growing income through leasing are our core strengths. With £6 million of reversionary potential within the portfolio, we believe that capturing this is key to driving income and valuation growth in the short to medium term. As we continue to seek to grow the business and enhance returns, the Board is confident that Picton is well placed to carry on delivering value for shareholders.

Nicholas ThompsonChairman13 November 2017

INVESTMENT MANAGER’S REPORT

Occupancy95%

Number of assets52

Average lot size£12.7m

Estimated rental value£47.6m

Economic Backdrop

During the last six months no significant progress appears to have been made in the negotiations surrounding the UK’s exit from the European Union, creating a general feeling of uncertainty. Despite this, UK GDP has been positive, albeit growing at a modest rate of 0.4% in the third quarter of 2017 and 0.3% in the second quarter of 2017.

Together with persistently higher than expected inflation, primarily driven by weak sterling as well as low productivity, the future economic growth outlook remains subdued. Despite this, the labour market has been resilient, recording its highest level of employment in over four decades.

The decision to leave the European Union is having a noticeable impact on the economic outlook. The increase in the inflation rate reflects the impact of the fall in sterling on the price of imports. In order to counter this inflationary pressure earlier this month the Bank of England increased the Base Rate by 0.25% to 0.5%, its first rise in ten years. In our view, this suggests that they are sufficiently confident that the economy can absorb this rise without significant impact and whilst further rises are possible, the Monetary Policy Committee stated that any future increases would be expected to be at a gradual pace and to a limited extent. They also indicated that there remains considerable risks to the economic outlook, including the response of households, businesses and financial markets to developments related to the process of EU withdrawal and with this move, the Committee has further headroom to respond as required.

UK Property Market

The commercial property market has held up well against this backdrop. The MSCI IPD Monthly Index shows a total return for All Property for the six months to September 2017 of 5.2%, with an income return of 2.7%. Capital growth for the six months to September 2017 was 2.4% compared to 2.0% for the six months to March 2017. Rental growth was positive at 1.0% for the six months to September, marginally higher than 0.8% for the six months to March 2017. Initial yields have moved from 5.3% in March 2017 to 5.2% in September 2017.

Industrial remained the best performing sector for the six months to September with total returns of 9.6%, almost double the All Property average. For the same period, office and retail returns were 4.0% and 3.7%, respectively.

The MSCI IPD Quarterly Digest recorded an occupancy rate of 93.0% in September 2017 (March 2017: 92.8%).

In the industrial sector, returns comprised 2.8% income and 6.7% capital growth. Rental growth was 2.6%. In terms of capital growth by segment, growth ranged from 2.8% in North and Scotland to 8.7% in London. Similarly, rental growth ranged from 4.9% in Inner South East to 1.0% for North and Scotland.

In the office sector, returns comprised 2.4% income and 1.6% capital growth. Rental growth was 0.7%. In terms of capital growth by segment, growth ranged from 2.9% in Outer South East to -2.0% in Scotland. Similarly, rental growth ranged from 3.0% for Outer South East to -0.3% for Scotland.

In the retail sector, returns comprised 3.0% income and 0.7% capital growth. Rental growth was 0.3%. In terms of capital growth by segment, growth ranged from 3.5% for Retail Warehouses in London to -2.5% for Rest of UK Shopping Centres. Similarly, rental growth ranged from 2.2% for South East Retail Warehouses to -1.5% for West Midland Standard Retail.

According to Property Data, total investment for the six months to September 2017 was £30 billion, an increase of 10.2% compared to £27.2 billion in the six months to March 2017. Over half of total investment in the period was from overseas investors.

Performance

For the six months to September, the portfolio returned 6.3%, outperforming the MSCI IPD Quarterly Benchmark which delivered 5.0%. The income return was 2.9%, 0.7% ahead of the Benchmark.

The portfolio valuation increased on a like-for-like basis by 3.4% over the period. The industrial portfolio increased by 6.0% and the office portfolio by 3.1%, while there was no change in the retail and leisure portfolio.

Our overweight position to the better performing sectors combined with active management and leasing activity contributed to the portfolio’s outperformance. Passing rent increased on a like-for-like basis by 4.4%, with the lettings at 50 Farringdon Road, London EC1 being the major driver. Overall, like-for-like ERV grew by 1.7%, led by the industrial portfolio at 3.0%, followed by the office portfolio at 1.5% and no change on the retail and leisure portfolio.

Portfolio Strategy

We believe that our diversified portfolio strategy, focus on income, overweight position to the better performing industrial and office sectors and our strong occupier focus is entirely appropriate for current market conditions. We remain committed to providing good quality space that businesses want to occupy and to working with our occupiers to assist them in achieving their goals.

We have demonstrated over the long term our ability to consistently deliver a higher than average income return despite a shorter than average lease expiry profile. By offering occupiers flexibility, we have been able to maintain a high occupancy rate. Where occupiers vacate, our aim is to create a product which is attractive to occupiers and re-lets easily. Over the six months, we have invested £2.3 million back into our assets, including refurbishing vacant space at 180 West George Street, Glasgow and at Angel Gate, London, developing the Starbucks pod unit at Gloucester Retail Park and modernising our industrial estate in Wokingham.

Investment Activity

Investment activity over the period reflected our strategy of investing into sectors where we have identified value and income growth potential and disposing of assets where upside is limited and business plans have been completed.

Two non-income producing office assets in Bracknell were sold for a combined consideration of £9.9 million, representing an overall gain of 37% above the March valuation. L’Avenir was a single-let office, which became vacant at the end of June. Phoenix House was also vacant and followed the disposal of Queensgate House, both in Waterside Park, earlier in the year. The rationale for the disposals was the attractive pricing relative to the future leasing and redevelopment risk.

During the period, we completed the acquisition of a grade A waterfront office building located in Bristol city centre for £23.2 million. Tower Wharf was constructed in 2005 to a BREEAM ‘Excellent’ rating, and provides over 70,000 sq ft of office accommodation arranged over ground and five upper floors. With 25,400 sq ft of vacant accommodation already fully refurbished to a high standard, we envisage leasing the space quickly in a strong occupational market. This is a good example of the type of investment opportunity where we can unlock attractive future performance.

The purchase price reflects a net initial yield of 3.6%, which is expected to grow to 7.5% on leasing the remaining vacant space and capturing the full reversionary potential. The purchase price represents a capital value of approximately £328 per sq ft, in line with the estimated replacement cost.

Occupancy

Occupancy has increased over the period to 95%, primarily due to the lettings at 50 Farringdon Road, London EC1 and Unit E, River Way, Harlow, which contribute a combined rent of over £1 million per annum.

The purchase of Tower Wharf, Bristol held back the occupancy as it is currently 64% occupied, which provides significant upside potential upon letting. Combined with the recently refurbished floors at 180 West George Street in Glasgow, these two properties account for 44% of the portfolio void. Both buildings provide grade A space in regional city centre markets with tight supply and we are confident about the letting prospects.

Looking Ahead

The portfolio has £6.0 million of reversion, primarily in the industrial and office sectors. £2.6 million of the reversion is from lettings, £1.6 million from lease renewals and rent reviews with the remainder from contracted uplifts. The supply and demand imbalance, combined with a lack of development, should drive rental growth in the industrial and office sectors in particular, providing further upside.

Picton Capital Limited13 November 2017

INVESTMENT MANAGER’S REPORT

INDUSTRIAL PORTFOLIO

The industrial portfolio has continued to perform well. Tight supply, limited development and continued demand has resulted in significant rental growth, especially in the South East, which we have captured through asset management activity. Capital values increased by 6.0% on a like-for-like basis. The rent roll increased by 3.3% to £15.8 million per annum and the ERV grew by 3.0% to £17.8 million on a like-for-like basis. The portfolio has a weighted average lease length of 4.8 years to the first lease event.

The UK wide distribution warehouse portfolio totals 1.3 million sq ft in six fully income producing units, let to occupiers including Belkin, DHL and The Random House Group. The multi-let estates, 69% located in the South East and 31% in the rest of the UK, total 1.4 million sq ft and are 97% let. Eight units are vacant, three of which were recently surrendered.

Notable lettings during the period include our largest industrial void, at Unit E, River Way in Harlow. This follows receipt of planning consent for a change of use, thereby satisfying conditions contained within an Agreement to Lease, completed earlier in the year. The 30,500 sq ft letting secures a minimum ten-year term certain and will produce an initial rent of £0.2 million per annum.

We have secured £0.14 million of additional income from five rent reviews settled over the period, 2% ahead of ERV. Two tenants have been retained at renewal securing £0.22 million per annum, 8% above ERV. Three leases were surrendered to facilitate active management and we expect to increase the passing rent, on re-letting, by 31% to £0.22 million per annum. Two of these units are under offer.

The industrial portfolio currently has £2.0 million of reversion and with high occupancy we can look to capture this through active management and lease events. Looking to the end of 2018, we have 23 lease events with an ERV of £2.0 million per annum, £0.3 million above the current passing rent.

OFFICE PORTFOLIO

Our office portfolio was rebalanced last year towards the regional markets, with 64% outside London, which has helped us to outperform. On a like-for-like basis capital values increased by 3.1% and the rent roll increased by 9.7% to £14 million per annum. The portfolio has a weighted average lease length of 3.8 years, assisted by recent lettings and active management such as at Sentinel House in Fleet, where we removed the break clauses from two leases extending the income from 2020 to 2025 with no incentive.

The portfolio is 90% let and letting activity was dominated by the largest office vacancy at 50 Farringdon Road. Three suites of a combined 15,600 sq ft have been let, generating a combined rent of £0.81 million per annum. The lettings are 2% ahead of ERV and 87% of the building is now let.

We have secured a 70% uplift at one rent review, increasing the rent to £0.19 million per annum, 7% over ERV, and retained three tenants at lease renewal securing £0.28 million per annum, 3% above ERV.

The short-term opportunities are the letting of the recently acquired Tower Wharf, Bristol, which is being marketed with good interest, and 180 West George Street, Glasgow where the refurbishment was completed in August. The combined ERV of voids at these two properties is £1.1 million. Along with the final suite at 50 Farringdon Road, these three properties account for 69% of the total office void.

We believe that our regional offices will perform well due to a tight supply in key locations, continued demand for space and the potential for rents to increase from relatively low levels. In London, the occupational market is active but more subdued. The portfolio has £3.8 million of reversionary potential and up to the end of 2018 the office portfolio has 37 lease events with an ERV of £3.0 million per annum, £0.14 million above the current passing rent.

RETAIL AND LEISURE PORTFOLIO

On a like-for-like basis both capital values and the rent roll remained flat over the period, with passing rent being £10.9 million per annum. The portfolio has a weighted average lease length of 7.9 years and is rack rented. The retail portfolio is delivering the highest yield of 6.3% and a lot of the rents have been rebased since 2007.

The largest asset in the retail and leisure portfolio by value is Stanford House in Covent Garden, a prime central London asset. 40% is in four retail warehouses with active management potential, and the remainder is in high street retail and leisure.

There has been limited asset management activity in the retail and leisure portfolio reflecting the already high occupancy at 97%. The most significant void relates to a retail warehouse unit in Bury, Greater Manchester, which recently became vacant. We are working on a comprehensive refurbishment to attract new retailers. The park continues to be anchored by TK Maxx.

During the period, the creation of the pod unit at Gloucester Retail Park was finished and a lease completed with a Starbuck’s franchisee for ten years at £60,000 per annum. At the same time, we improved the landscaping and signage, and resurfaced the car park.

Existing trends will continue in retail and leisure, with big regional cities and the best micro-locations succeeding at the expense of more secondary locations; however, we consider our exposure to the sector to be robust with added value opportunities on the retail warehouse parks and at Stanford House in Covent Garden in particular. Up to the end of 2018 the retail and leisure portfolio has only ten lease events with an ERV of £2.1 million per annum, £0.43 million above the current passing rent. 73% of this reversion relates to Stanford House, where the leases are lined up to secure vacant possession to facilitate a comprehensive refurbishment and repositioning scheme in 2018.

TOP TEN ASSETS

The largest assets in the portfolio as at 30 September 2017, ranked by capital value, represent 48% of the total portfolio valuation and are detailed below:

A full portfolio listing is available on the Company’s website: www.picton.co.uk

PORTFOLIO ALLOCATION BY VALUE

DIRECTORS’ RESPONSIBILITIES

STATEMENT OF PRINCIPAL RISKS AND UNCERTAINTIES

The Company’s assets comprise direct investments in UK commercial property. Its principal risks are therefore related to the commercial property market in general and its investment properties. Other risks faced by the Company include economic, investment and strategic, regulatory, management and control, operational and financial risks.

These risks, and the way in which they are managed, are described in more detail under the heading ‘Risk Management’ within the Strategic Report in the Company’s Annual Report for the year ended 31 March 2017. The Company’s principal risks and uncertainties have not changed materially since the date of that report.

STATEMENT OF GOING CONCERN

The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Therefore, they continue to adopt the going concern basis in preparing the financial statements.

STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE INTERIM REPORT

We confirm that to the best of our knowledge:

a. the condensed set of consolidated financial statements has been prepared in accordance with IAS 34 ‘Interim Financial Reporting’;

b. the Chairman’s Statement and Investment Manager’s Report (together constituting the Interim Management Report) together with the Statement of Principal Risks and Uncertainties above include a fair review of the information required by the Disclosure Guidance and Transparency Rules (‘DTR’) 4.2.7R, being an indication of important events that have occurred during the first six months of the financial year, a description of principal risks and uncertainties for the remaining six months of the year, and their impact on the condensed set of consolidated financial statements; and

c. the Chairman’s Statement together with the condensed set of consolidated financial statements include a fair review of the information required by DTR 4.2.8R, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the Company during that period, and any changes in the related party transactions described in the last Annual Report that could do so.

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

By Order of the Board

Robert Sinclair

Director13 November 2017

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOMEFOR THE HALF YEAR ENDED 30 SEPTEMBER 2017

The total column of this statement represents the Group’s Condensed Consolidated Statement of Comprehensive Income. The supplementary income return and capital return columns are both prepared under guidance published by the Association of Investment Companies. All items in the above statement derive from continuing operations.

All income is attributable to the equity holders of the Company. There are no minority interests. Notes 1 to 15 form part of these condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITYFOR THE HALF YEAR ENDED 30 SEPTEMBER 2017

Notes 1 to 15 form part of these condensed consolidated financial statements.

CONDENSED CONSOLIDATED BALANCE SHEETAS AT 30 SEPTEMBER 2017

These condensed consolidated financial statements were approved by the Board of Directors on 13 November 2017 and signed on its behalf by:

Robert SinclairDirector 

Notes 1 to 15 form part of these condensed consolidated financial statements.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWSFOR THE HALF YEAR ENDED 30 SEPTEMBER 2017

Notes 1 to 15 form part of these condensed consolidated financial statements.

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFOR THE HALF YEAR ENDED 30 SEPTEMBER 2017

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 financial statements are prepared for the period from 1 April to 30 September 2017, with unaudited comparatives for the period from 1 April to 30 September 2016. Comparatives are also provided from the audited financial statements for the year ended 31 March 2017.

2. SIGNIFICANT ACCOUNTING POLICIES

These financial statements have been prepared in accordance with IAS 34 ‘Interim Financial Reporting’. They do not include all of the information required for full annual financial statements, and should be read in conjunction with the financial statements of the Group as at and for the year ended 31 March 2017.

The accounting policies applied by the Group in these financial statements are the same as those applied by the Group in its financial statements as at and for the year ended 31 March 2017.

The annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards (‘IFRS’) as adopted by the IASB. The Group’s annual financial statements for the year ended 31 March 2017 refer to new Standards and Interpretations none of which had a material impact on these financial statements. There have been no significant changes to management judgement and estimates as disclosed in the last annual report and financial statements for the year ended 31 March 2017.

3. REVENUE FROM PROPERTIES

Rents receivable includes lease incentives recognised of £0.1 million (30 September 2016: £0.9 million, 31 March 2017: £0.9 million).

In the period ended 30 September 2016 and year ended 31 March 2017, £5.3 million was included within other income from the settlement received in respect of a dispute at the Strathmore Hotel in Luton.

4. PROPERTY EXPENSES

5. OPERATING SEGMENTS

The Board is charged with setting the Company’s investment policy and 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 reinvested, the key performance measure is that prepared under IFRS. Therefore no reconciliation is required between the measure of profit or loss used by the Board and that contained in the financial statements.

The Board has considered the requirements of IFRS 8 ‘Operating Segments’. The Board is of the opinion that the Group, through its subsidiary undertakings, operates in one reportable industry segment, namely real estate investment, and across one primary geographical area, namely the United Kingdom, and therefore no segmental reporting is required. The portfolio consists of 52 commercial properties, which are in the industrial, office, retail, retail warehouse and leisure sectors.

6. DIVIDENDS

The interim dividend of 0.85 pence per ordinary share in respect of the period ended 30 September 2017 has not been recognised as a liability as it was declared after the period end. A dividend of £4,591,000 will be paid on 30 November 2017.

7. EARNINGS PER SHARE

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

The diluted number of shares reflects the contingent shares to be issued under the Long Term Incentive Plan.

8. FAIR VALUE MEASUREMENTS

The fair value measurement for the financial assets and financial 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. The fair value of the Group’s secured loan facilities, as disclosed in note 10, are included in Level 2.

Level 3: unobservable inputs for the asset or liability. The fair value of the Group’s investment properties is included in Level 3.

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. There were no transfers between levels for the period ended 30 September 2017.

The fair value of all other financial assets and liabilities is not materially different from their carrying value in the financial statements.

The Group’s financial risk management objectives and policies are consistent with those disclosed in the consolidated financial statements for the year ended 31 March 2017.

9. INVESTMENT PROPERTIES

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

As at 30 September 2017, all of the Group’s properties are Level 3 in the fair value hierarchy as it involves the use of significant inputs and there were no transfers between levels during the period. 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).

The investment properties were valued by CBRE Limited, Chartered Surveyors, as at 30 September 2017 on the basis of fair value in accordance with the RICS Valuation – Global Standards 2017 which incorporates the International valuation standards and the RICS Valuation – Professional Standards UK January 2014 (revised April 2015). There were no significant changes to the inputs into the valuation process (ERV, net initial yield, reversionary yield and true equivalent yield), or assumptions and techniques used during the period, further details on which were included in note 14 of the consolidated financial statements of the Group for the year ended 31 March 2017.

The Group’s borrowings (note 10) are secured by a first ranking fixed charge over the majority of investment properties held.

10. LOANS AND BORROWINGS

In 2012, the Group entered into loan facilities with Canada Life Limited and Aviva Commercial Finance Limited for £113.7 million and £95.3 million respectively. The facility with Canada Life has a term of 15 years, with £33.7 million repayable on the tenth anniversary of drawdown. The Aviva facility has a term of 20 years with approximately one third repayable over the life of the loan in accordance with a scheduled amortisation profile.

The fair value of the secured loan facilities at 30 September 2017, estimated as the present value of future cash flows discounted at the market rate of interest at that date, was £223.2 million (30 September 2016: £235.3 million, 31 March 2017: £229.1 million). The fair value of the secured loan facilities is classified as Level 2 under the hierarchy of fair value measurements.

The Group has two revolving credit facilities (“RCF”) with Santander Corporate & Commercial Banking. The facility that had a maturity date of 2018 was extended during the period and now expires at the same time as the second RCF, in June 2021. The extended RCF is initially for £24 million, and once drawn, interest is charged at 190 basis points over 3 month LIBOR. In total the Group has £51.0 million available under both facilities, of which £12.5 million was drawn down in the period.

The weighted average interest rate on the Group’s borrowings as at 30 September 2017 was 4.10% (30 September 2016: 4.59%, 31 March 2017: 4.21%).

11. SHARE CAPITAL AND OTHER RESERVES

The Company has 540,053,660 ordinary shares in issue of no par value (30 September 2016: 540,053,660, 31 March 2017: 540,053,660).

The balance on the Company’s share premium account as at 30 September 2017 was £157,449,000 (30 September 2016: £157,449,000, 31 March 2017: £157,449,000).

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

12. ADJUSTMENT FOR NON-CASH MOVEMENTS IN THE CASH FLOW STATEMENT

13. NET ASSET VALUE

The net asset value per ordinary share is based on net assets at the period end and 540,053,660 (30 September 2016: 540,053,660, 31 March 2017: 540,053,660) ordinary shares, being the number of ordinary shares in issue at the period end.

At 30 September 2017, the Company had a net asset value per ordinary share of £0.86 (30 September 2016: £0.78, 31 March 2017: £0.82).

14. RELATED PARTY TRANSACTIONS

The total fees earned during the period by the five Directors of the Company were £103,000 (30 September 2016: £103,000, 31 March 2017: £205,500). As at 30 September 2017 the Group owed £nil to the Directors (30 September 2016 and 31 March 2017: £nil).

There have been no changes in the related parties transactions described in the last annual report that could have a material effect on the financial position or performance of the Group in the first six months of the current financial year.

The Company has no controlling parties.

15. EVENTS AFTER THE BALANCE SHEET DATE

A dividend of £4,591,000 (0.85 pence per share) was approved by the Board on 19 October 2017 and is payable on 30 November 2017.

The Group has exchanged on the disposal of one property since 30 September 2017 for proceeds of £0.6 million.

ENDS