Picton Property Income Limited Annual Report 2021

Occupier focused, Opportunity led.

Picton Property Income Limited

Annual Report 2021

Business Overview Welcome

Welcome to our 2021


Business Overview Welcome 2021 Highlights Picton at a Glance Chair’s Statement Strategic Report Business Model

2 4 8

Annual Report

12 14

Our Marketplace

Our Strategy 

20 22 30 34 44 47 52 54 62 64 66 68 70 74 76 79 98 99

Chief Executive’s Review  Key Performance Indicators

Portfolio Review Financial Review Principal Risks TCFD Statement

Being Responsible Section 172 Statement Governance Chair’s Introduction Board of Directors

Through our occupier focused, opportunity led approach, we aim to be one of the consistently best performing diversified UK REITs. To us this means being a responsible owner of commercial real estate, helping our occupiers succeed and being valued by all our stakeholders.

Our Team

Corporate Governance Report Nomination Committee Report Audit and Risk Committee Report

Remuneration Report

Property Valuation Committee Report

Directors’ Report

Financial Statements Independent Auditor’s Report Consolidated Statement of Comprehensive Income Consolidated Statement of Changes in Equity Consolidated Balance Sheet



107 108 109

Consolidated Statement of Cash Flows

Notes to the Consolidated Financial Statements Additional Information Supplementary Disclosures


127 131 132 133 134 135

Property Portfolio

Five Year Financial Summary


Financial Calendar

Shareholder Information

Visit our website www.picton.co.uk

Whatmakes us different?

Visit our website for more information onwhy to invest www.picton.co.uk

1 Our long-term track record of upper quartile outperformance

We have outperformed the MSCI UK Quarterly Property Index over one, three, five and ten years, and since inception.

Parkbury Industrial Estate Radlett

Read more on pages 6–7

2 Diversified exposure to the UK commercial propertymarket with flexibility to adapt to changingmarket conditions Our diversified property portfolio generates income from around 350 occupiers across a wide range of businesses, providing the opportunity for income and capital growth.

Stanford Building London 

Read more on pages 34–43

3 Our occupier focused and responsible approach to business Our occupier focused approach ensures we actively manage our assets, maintain high occupancy and create space for our occupiers to succeed. Sustainability is integrated within our business model and corporate strategy and in the way we and our occupiers operate.

50 Farringdon Road London

Read more on pages 54–61


Business Overview 2021 Highlights Highlights

Positive results underlining the resilience of the business and our continued long-term track record of outperformance.

Resilient financial performance ӱ Profit after tax of £33.8 million, an increase of over 50% on the prior year results ӱ Net assets of £528 million, or 97p per share, an increase of 3.7% ӱ Earnings per share of 6.2p ӱ Total return of 6.6% ӱ Received 92% of rental income over the financial year, with a further 1% deferred ӱ Combined reduction of 6% in property, operating and finance costs over the year ӱ Total dividends paid of £15.0 million, with dividend cover of 134% ӱ Loan to value ratio reduced to 21% with significant headroom against loan covenants ӱ New £50 million revolving credit facility completed Outperforming property portfolio ӱ Total property return of 7.3%, outperforming MSCI UK Quarterly Property Index of 1.2% ӱ Upper quartile outperformance against MSCI over one, three, five and ten years, and since inception ӱ Well-positioned portfolio comprising: Industrial 53%, Office 36%, Retail and Leisure 11% ӱ Like-for-like valuation increase of 3.2% ӱ Like-for-like increase in passing rent of 1.9% ӱ Like-for-like estimated rental value increase of 1.1% ӱ One retail asset disposal for £4.0 million, 30% ahead of March 2020 valuation

Improving occupancy through asset management ӱ Increased occupancy to 91% ӱ Occupier retention of 88% ӱ 90 asset management transactions completed including: – 17 rent reviews, 7% ahead of ERV – 30 lease renewals or regears, 10% ahead of ERV – 25 lettings or agreements to lease, 3% ahead of ERV ӱ £5 million invested into asset refurbishment and repositioning projects Supporting our stakeholders ӱ Provided assistance to over 90 occupiers during the Covid-19 pandemic ӱ Increased dividends twice during the year, with payments almost back to pre-pandemic levels ӱ Reduction in property running costs to assist our occupiers ӱ Improvement in annual GRESB score achieving two Green star status ӱ Pathway to net zero carbon to be in place by March 2022

See Financial Review for more highlights on pages 44–46


Financial highlights

£34m Profit after tax (2020: £23m) (2019: £31m)

£528m Net assets

£682m Property valuation

6.6% Total return (2020: 4.5%) (2019: 6.5%) 134% Dividend cover (2020: 105%) (2019: 122%)

0.0% Total shareholder return

(2020: £509m) (2019: £499m)

(2020: £665m) (2019: £685m)

(2020: 3.6%) (2019: 10.1%)

97p NAV per share (2020: 93p) (2019: 93p)

6.2p Earnings per share

2.8p Dividends per share

(2020: 4.1p) (2019: 5.7p)

(2020: 3.5p) (2019: 3.5p)


97p EPRANTA per share (2020: 93p) (2019: 93p)

93p EPRANDV per share (2020: 88p) (2019: 88p)

105p EPRANRV per share (2020: 102p) (2019: 101p) 8.8% EPRA vacancy rate (2020: 11.5%) (2019: 10.3%)

£20.1m EPRA earnings (2020: £19.9m) (2019: £22.9m) 26.9% EPRA cost ratio1

3.7p EPRA earnings per share (2020: 3.7p) (2019: 4.3p)

4.8% EPRA net initial yield

5.5% EPRA ‘topped-up’ net initial yield

20.8% EPRA cost ratio2

(2020: 4.8%) (2019: 4.9%)

(2020: 28.3%) (2019: 22.9%)

(2020: 20.2%) (2019: 19.5%)

(2020: 5.4%) (2019: 5.3%)

The European Public Real Estate Association’s (EPRA) mission is to promote, develop and represent the European public real estate sector. As an EPRA member, we fully support the EPRA Best Practices Recommendations which recognise the key performance measures, as detailed above. Specific EPRA metrics can be found within the KPIs and Financial Review sections of this Report with further disclosures and supporting calculations on pages 127 to 129. We use a number of Alternative Performance Measures and these are discussed in more detail in the Financial Review on page 45.

Covid-19 The effects of the Covid-19 pandemic have been widespread, impacting the UK economy, businesses and people’s everyday lives. Our response to the pandemic is set out throughout this Report. In the Marketplace section we look at its impact on the commercial property market and how we are responding. In Managing Risks we have described the impact on our principal and emerging risks. We have also described how we have engaged and supported our occupiers and other stakeholders, in the Portfolio Review and Being Responsible sections. Our Covid-19 response

Read more on pages 30-33 and 44-51

1 Including direct vacancy costs 2 Excluding direct vacancy costs


Business Overview Picton at a Glance

Occupier focused, Opportunity led.

Corporate summary £528m Net assets £468m Market capitalisation £166m Borrowings

We are an award-winning Real Estate Investment Trust (REIT) investing in UK commercial property. Our diversified property portfolio consists of 46 assets with over 50% invested in the industrial sector.

3.7% Dividend yield 1.0% Cost ratio 21% Loan to value

Our business We acquire, create and manage buildings for around 350 commercial occupiers across a wide range of businesses. By applying insight, agility and a personalised service, we provide attractive, well-located spaces to help our occupiers’ businesses succeed and in turn enhance value for our shareholders. We have a long-term track record and have outperformed the MSCI UK Quarterly Property Index, producing upper quartile returns over one, three, five and ten years, and since inception. Our purpose Through our occupier focused, opportunity led approach, we aim to be one of the consistently best performing diversified UK REITs. To us this means being a responsible owner of commercial real estate, helping our occupiers succeed and being valued by all our stakeholders.

Our values Principled We are professional, diligent and strategic. Demonstrated through our transparent reporting, occupier focused approach, alignment with shareholders, delivery of our Picton Promise, commitment to sustainability and positive environmental initiatives. Perceptive We are insightful, thoughtful and intuitive. Demonstrated through our long-term track record, our gearing strategy, diverse sector allocation and engagement with our occupiers. Progressive We are forward-thinking, enterprising, and continually advancing. Demonstrated through our culture, work ethic and proactive asset management.

Portfolio summary 46 Number of assets £682m Value

4.8% Net initial yield 6.3% Reversionary yield

Read more on pages 12–13

91% Occupancy 4.1m sq ft Area


Top five occupiers Occupier

Contracted rent (£m)

%of total contracted rent

Public sector

2.1 1.6 1.2 1.2 1.2 7.3

5.0 3.9 3.0 2.8 2.8 17.5

Whistl UK Limited

Industrial weighting 53% South East

B&Q Plc

The RandomHouse Group Limited

Snorkel Europe Limited


Top five assets Assets

40% 13%

Property type

Capital value (£m)

Rest of UK

Parkbury Industrial Estate, Radlett, Herts. River Way Industrial Estate, Harlow, Essex Angel Gate, City Road, London EC1 Stanford Building, Long Acre, London WC2

Industrial Industrial


50-60 30-40 30-40 20-30

Read more on pages 38–39

Office Office

Datapoint, Cody Road, London E16


Outperformance track record Total property return (%) (Picton vs MSCI)

Office weighting 36% South East


Picton All Property MSCI UK Quarterly Property Index

0.0 5.0 10.0

(15.0) (10.0) (5.0)

16% 11%

Rest of UK


City and West End

Read more on pages 40–41

Indexed total property returns (Picton vs MSCI)


Picton All Property MSCI UK Quarterly Property Index

100.0 150.0 200.0 250.0

Retail and Leisureweighting 11% Retail Warehouse 7% High Street Rest of UK 3% Leisure 1%

0.0 50.0

Annualised total property return (%) 10.0

 Picton


8.0 6.0 4.0 2.0 0

Read more on pages 42–43

1 Year

3 Year annualised

5 Year annualised

10 Year annualised

Since inception


Business Overview Picton at a Glance continued 15years of outperformance

Our occupier focused, opportunity led approach continues to deliver long-term shareholder value.

2012 • Internalisation is effective from 1 January, with significant saving in costs • Company’s debt facilities refinanced • Introduction of covered dividend policy 2013 • New equity raised to fund property acquisitions 2014 • Placing Programme initiated to raise £100 million of new equity • £81 million of new property assets acquired • Acquired Parkbury Industrial Estate, Radlett, our largest industrial asset, through property swap

2008 • Used the IPD (nowMSCI) Environmental Code analysis of environmental information on our office properties to implement improvements 2009 • During the global financial crisis, successful renegotiation of loan covenants for nil cost for the collection, measurement and

2010 • Acquisition of Rugby Estates Investment Trust plc • Decision taken to internalise the Company’s management 2011 Name changed to Picton Property Income Limited

2005 • The Company was

successfully launched as ING UK Real Estate Income Trust Limited on the London Stock Exchange 2006 • Acquisition of £125 million portfolio, increasing the Company’s property assets


2018 • Entered UK REIT regime • Changed from investment company to a commercial company 2019 • Relaunched the Picton Community, Technology, Support and Sustainability • Raised new equity and repaid debt, reducing LTV • Major refurbishment and upgrade of office assets instructed Promise with five key commitments to our occupiers: Action,

2020 • Supported occupiers in face of Covid-19 global pandemic • Dividend reduced but subsequently increased as a result of rent collection performance • LTV reduced to 22%, down from 54% in 2013 • Fully integrated sustainability into corporate strategy, completing materiality assessment 2021 • Retail exposure reduced to 11%, down from 30% in 2012 • Sixth consecutive year of upper quartile performance against MSCI UK Quarterly Property Index

2015 • Highest reported profit and total return since 2006 • New revolving credit facility established 2016 • Established further revolving credit facility • Reduced central London office exposure and repaid debt • Reduced borrowings through repayment of zero dividend preference shares

2017 • Fifth anniversary since internalisation • Outperformed MSCI UK Quarterly Property Index over 1, 3, 5 and 10 years • Increase in market capitalisation from £129 million to £408 million over the five years since internalisation • Alignment of teamwith shareholders through Long-term Incentive Plan


Moneywise Investment Trust Awards – Winner 2018

MSCI UK Property Investment Awards – Winner 2018

Citywire Investment Trust Awards – Winner 2019, 2018, 2017

Money Observer Trust Awards – Best Property Trust Winner 2018, 2017, 2016

Investment Company of the Year Awards – Property Winner 2018, 2017, 2016

EPRA Gold Awards Financial Reporting – 2020, 2019, 2018, 2017, 2016, 2015 Sustainability Reporting – 2020, 2019


Business Overview Chair’s Statement

These results show an improvement on the preceding year and underline the resilience of the business. LenaWilson CBE Chair

Inmy first year as Chair of Picton, I ampleased to be able to share with you the results for the 12-month period to 31 March 2021.

This has been an unprecedented year, with significant disruption to businesses, livelihoods, family and day-to-day life. During the year, we have remained focused on our three strategic pillars of Portfolio Performance, Operational Excellence and Acting Responsibly. As such, it gives me pleasure to be able to report that the business is in good shape, delivering a profit for the year of £34 million, an increase of over 50% compared with the preceding year. This has been achieved during a period where we have also provided significant assistance and support to help our occupiers cope with the disruption caused by the Covid-19 pandemic. This demonstrates the strength of our business model, our position entering the pandemic and our hands-on approach which has even led to growing occupancy over the year. Performance We delivered a total return of 6.6% over the year driven by portfolio growth in the latter half of the year. We have maintained our EPRA earnings despite being impacted by lower rent collection during the year, and have offset this with additional income generated through asset management transactions and a reduction in finance, property and operating costs.

At a property level, the portfolio has again outperformed the MSCI UK Quarterly Property Index continuing our track record of upper quartile outperformance which spans the period since inception. Our share price has been more volatile over the period but has responded well to the increases in dividend that we have announced through the year. The share price still does not fully reflect the net asset value of the business, but is currently in a better position than for many of our real estate peers. Property portfolio The outperformance at a property level has been driven by our exposure to the industrial sector, which now accounts for 53% of the portfolio. Also, our retail and leisure exposure has reduced, now accounting for only 11%. The combination of these two factors has been helpful alongside some key lettings and retaining many occupiers at or prior to lease-end. Broadly, rent collection for the year stands at 92% of income demanded, and we expect this to continue to rise, but have made appropriate provisions to reflect the likelihood of not making a full recovery.


Sustainability We continue to make good progress on multiple fronts in respect of sustainability issues and during the year we joined the Better Buildings Partnership, a collaboration of the UK’s leading commercial property owners. Our focus for the coming year will be on establishing our pathway to achieving net zero carbon. We are mindful of the need to do this in a way that benefits all our stakeholders. During the year we celebrated our fifteenth anniversary by supporting grassroots charities, helping support the work they do in this particularly difficult period. Outlook It is clear that we are well positioned and have built up an impressive track record over the years. What is more important is that this is maintained, and that we can innovate and position the business to ensure that we capture the positive opportunities that are likely to arise following this long period of disruption. Thankfully there is now light at the end of the tunnel, but we are mindful of the changing landscape and longer-term impacts that the pandemic might have on both the economy and how real estate is used. Along with my fellow Board members, I am excited about the potential ahead.

Capital structure We are conservatively positioned with a Group loan to value ratio of 21%. We have £50 million available through our revolving credit facility and assuming the economic recovery strengthens we will be seeking to deploy this, at least in part during the forthcoming year. We recognise that the current market cost of debt is lower than our own and where opportunities arise to reduce this on attractive terms, they will be pursued. Governance We continue to maintain strong corporate governance and during the year several changes to the Board have been made including my own appointment as Chair and that of Richard Jones as Chair of the Property Valuation Committee. I would like to thank my predecessor, Nicholas Thompson, for his years of service and similarly Roger Lewis who also stood down in the year. Despite not being able to meet physically due to the constraints of lockdown, I am pleased to have been able to spend time virtually with the Picton team and a number of larger shareholders. I look forward to continuing open and constructive engagement as we return to some degree of normality. Dividends Our initial response to the pandemic was to introduce a more conservative distribution policy, recognising the uncertainty around the severity and impact of the pandemic on our cash flow. Since then, and based on robust performance, we have been able to increase the dividend in both November and February such that the current distribution is 91% of pre-pandemic levels. We will continue to work hard to further improve occupancy and income in order to get back to pre-pandemic levels, hopefully during the forthcoming year.

LenaWilson CBE Chair 26 May 2021


Business Overview Chair’s Statement continued

Q&Awith LenaWilsonCBE

The Picton teamhad the opportunity to conduct a virtual Q&Awith LenaWilson, our new Chair.


What attracted you to Picton? A As I carried out my research for the role it was clear to me that Picton was an understated jewel in the crown as far as the sector is concerned. I was impressed with Picton’s track record and how the Company has dealt with the challenges of the past year. I believe in the business and it is a sector that is important to the economy. In particular, I also think I can add value given my experience.


What are your first impressions of the Company? A I’m pleased to say that I am very glad I joined! I think Picton is at an inflection point in terms of opportunity, building

on its long-term performance. I am looking forward to being part of the team and the journey. Q&A





What in your view is the biggest challenge facing the business and the real estate sector? A The biggest challenge facing all businesses at the moment is economic uncertainty and the real estate sector is no exception. The economy has been described as a tightly wound spring that is ready to bounce back post vaccine, but there are significant challenges too. The slower vaccine rollout across Europe will have an effect across a range of sectors, as will how we return to workplaces and what the future of work, leisure, hospitality and retail look like. Having good networks, insights and market knowledge will be key for the real estate sector and those who can access capital, be adaptive and have the confidence to seize opportunities will prosper.

What do you think are Picton’s core strengths? A As part of my due diligence before joining the team I reached out to a range of stakeholders, and they all told me what Picton’s core strengths are - and it’s the team and the culture. With a terrific track record to be proud of, Picton has made a series of very sound decisions, controlled its costs and pursued the right opportunities. For the business to be in the position it is in after the last 12 months is remarkable, a view shared by stakeholders.

What do you dowhen you are not at work? A I try to really enjoy life and that includes work. I am very fortunate to have worked in so many countries and I still love to travel. Friendships and family are also very important to me. I am a big consumer of broad culture, live music, theatre and art and I read widely. I like to keep fit and used to be quite a competitive runner, but now walk a lot, do some high intensity workouts and try to make time for daily yoga practice and meditation. I realised a while back that overall wellness means more than just physical fitness and I believe that approach has served me well across a range of high-pressure roles.


What are the key priorities for the business next year? A In the short-term, planning and preparing for an end of lockdown recovery and working closely with all stakeholders, as companies start to reoccupy their buildings, but also to assess longer-term opportunities for growth. While good progress has been made against a number of sustainability priorities over the course of this year, a key focus will also be developing our net zero carbon pathway.


Strategic Report Business Model OurBusinessModel

Our businessmodel creates value throughowning a portfolio that generates a diversified and stable income stream.We have the flexibility to adapt to changing market conditions and sodeliver value toour stakeholders through the property cycle. Through our occupier focused, opportunity led approach, we aim to be one of the consistently best performing diversified UK REITs. To us this means being a responsible owner of commercial real estate, helping our occupiers succeed and being valued by all our stakeholders. In order to deliver on our purpose, we have in place three distinct strategic pillars: Portfolio Performance, Operational Excellence, and Acting Responsibly. These pillars include a range of strategic priorities which guide the direction of our business and are regularly reviewed.

Howwe create value

1 Our businessmodel is driven by knowledge, expertise and research led decisionmaking Our in-depth understanding of the UK commercial property market enables us to identify and source value across different sectors and reposition the portfolio through the property cycle. 2 Stock selection and acquisition – buying into growth assets, locations or sectors We have established a diversified UK property portfolio and while income focused, we will consider opportunities where we can enhance value and/or income. 3 Creating value through proactive asset management Our diverse occupier base generates a stable income stream, which we aim to grow through active management and capturing market rental uplifts. Our occupier focused, opportunity led approach ensures we create space that meets our occupiers’ needs in order to maintain high levels of occupancy across the portfolio. 4 Selling assets to recycle into better opportunities We identify assets for disposal to maximise value creation. Proceeds are invested into new opportunities, or used elsewhere within the Group.

Read more on pages 20-21


Creating and delivering value for our stakeholders: Shareholders £34m Profit after tax Occupiers 88% Retention rate Communities £29,000 Charitable donations Our people 85% Employee satisfaction score The environment 92% EPC ratings A-D


Our business model is driven by knowledge, expertise and research led decisionmaking 1

Creating value through proactive asset management 3

This is underpinned by:

Riskmanagement Our diverse portfolio and occupier base spreads risk and generates a stable income stream throughout the property cycle. We will adapt our capital structure and use debt effectively to achieve enhanced returns. We will maintain a covered dividend policy, to generate surplus cash and allow us to invest back into the portfolio.

Responsible stewardship We have a responsible and ethical approach to business and sustainability is embedded within our corporate strategy. We understand the impact of our business on the environment and are committed to creating and delivering value for the benefit of all our stakeholders.

For more detailed information on our stakeholders, see our Section 172 statement on pages 62-63


Strategic Report Our Marketplace Our Marketplace

Since the Covid-19 pandemic took hold its effects have been far reaching and dramatic; however, the UK Government’s comprehensive stimulus package has helped to protect livelihoods and providedmuch-needed support for households and businesses.

Economic backdrop The UK’s vaccination programme has been one of the most well- executed globally. We are close to restrictions being fully lifted and there is a much-anticipated economic recovery starting to emerge. During the year the UK left the European Union, however there remain several matters to be resolved, such as financial passporting rights. Pending any major Brexit-related disruption or problematic new coronavirus variants, the outlook for the UK economy looks considerably brighter than it did this time last year. During 2020, GDP contracted by -9.8%, marking the largest annual fall in UK GDP on record. The largest quarterly fall was during the second quarter of 2020 following the first and strictest period of lockdown. Thankfully, a double dip recession was avoided. To mitigate the impact of the pandemic and stimulate the economy, there has been a large response both in terms of UK Government policy and measures introduced by the Bank of England, including the furlough scheme, business rates relief, a ban on commercial evictions, record ultra- low interest rates (0.1% since March 2020) and Quantitative Easing. In stark contrast to previous periods of recession, average house prices in the UK rose 7.7% during 2020, largely thanks to the stamp duty holiday, which has been extended in part until September 2021. The UK unemployment rate hit a five-year peak of 5.1% in November 2020, 1.3% higher than a year earlier. The furlough and self-employed support schemes were extended to September 2021 and this plus the easing of restrictions is hoped will keep a lid on rising unemployment.

Stanford Building London

Swiftbox Rugby


year was a result of a smaller decline in capital values; capital growth was -3.2% in the year to March 2021, better than the -4.7% recorded for the previous year. The income return was 4.5%, the same as the preceding year. The industrial sector had a strong year and was the top performing sector for the fifth consecutive year. The industrial total return for the year ending March 2021 was 14.3%, with capital growth at a three-year high at 9.6% and an income return of 4.3%. Industrial ERV growth for the period was 2.8%, with a sub- sector range of 2.2% to 3.8%. Capital growth ranged from 6.1% to 13.0% within sub-sectors. Equivalent yields for industrial property now stand at 5.0% (March 2020: 5.3%). The office sector faced a degree of uncertainty this year, as the success of working from home has provoked thought over future office space requirements for many occupiers. The office sector produced a total return of -0.8% for the year to March 2021, comprising -4.5% capital growth and 3.8% income return. All Office annual rental growth was -1.0% ranging from -2.1% to 1.2% within sub-sectors. Office capital growth was negative across all sub- sectors, ranging from -6.7% to -1.7%. Equivalent yields for office property now stand at 5.8% (March 2020: 5.6%). It was an extraordinarily challenging time for the retail sector, with three national lockdowns resulting in the closure of all non-essential shops for much of the year. Months of lost trading and dramatically reduced footfall due to Covid-19 exacerbated an already tough environment for retailers, which has led to a high number of CVAs and administrations during the year. The retail sector produced a total return of -8.1% for the year to March 2021. This

comprised capital growth of -12.9% and income return of 5.5%. Rental values fell -9.0% over the period and were negative across all sub-sectors, ranging from -20.1% to -1.4%. Retail sub-sector capital growth ranged from -27.4% to 3.6%. Supermarkets were the only retail sub-sector to record positive capital growth. Equivalent yields for retail property now stand at 6.7% (March 2020: 6.4%). According to Property Data, the total investment volume for the year to March 2021 was £41.5 billion, a -28% decrease on the year to March 2020. The volume of investment by overseas investors in the year to March 2021 was £19.5 billion, accounting for 47% of all transactions. When looking at average returns at the All Property level, the year to March 2021 was disappointing but not surprising given the plight some sectors faced during the pandemic. However as always, the devil is in the detail as there was a marked range of returns across sectors. At the March 2021 year end the difference between the highest and lowest performing sectors has never been more polarised. There are risks and heightened uncertainty to navigate but also opportunity and optimism regarding the speed and strength of recovery in the latter half of 2021. Low interest rates and low returns from Government bond yields make investment into well-let commercial property with a secure income stream an attractive proposition.

The annual percentage change in the consumer price index has been at or below 1% since April 2020 and in March 2021 stood at 0.7%. In March 2021 retail sales rose higher than pre-pandemic levels, even before non-essential shops reopened. Online retail reached a record proportion of total retail sales in January 2021 of 36.4%, as consumers were restricted from using physical stores. Of course, whilst some retail sectors have struggled, others have thrived. As people were confined to their local area, businesses still able to trade benefitted from this additional footfall at the expense of retailers situated at transport hubs or in central business districts. Many companies with an established online offering had a strong year. Many households were fortunate to see income levels maintained and outgoings reduced, contributing to a record increase in the household savings ratio, which reached a peak of 25.9% in the second quarter of 2020. As restrictions are eased and retail and leisure businesses reopen, it is expected that this elevated savings ratio will contribute to an economic recovery. The recovery has begun to gather pace. It is anticipated that healthy consumer spending and interest rates staying lower for longer will contribute to a rapid rebound in the second half of 2021. The Office for Budget Responsibility has forecast GDP growth of 4.0% for 2021 and a recovery to pre-pandemic levels by mid-2022. UK propertymarket According to the MSCI UK Quarterly Property Index, commercial property delivered a total return of 1.2% for the year ended March 2021, which compares to -0.4% for the year ending March 2020. The increase on last


Strategic Report Our Marketplace continued

Market drivers and impacts Market driver



ӱ Economic, social, environmental and health ramifications will be felt throughout the world for many years to come. ӱ For the property sector, the accelerated changes in the way we live, work, socialise and shop are likely to have a lasting impact on the built environment.

The Covid-19 pandemic has been a significant disruptor to many aspects of life since the first lockdown began in March 2020. The legacy of the pandemic will be far reaching and is yet to be fully realised. The impact of the pandemic affects the economic, property, technology and environmental market drivers described below and is referenced throughout this Report. The vaccine rollout is now well underway and we are following the UK Government’s roadmap to post-Covid normality.

Our Covid-19 response


ӱ The Government reportedly plans to invest in infrastructure, the green economy and support ailing towns in order to stimulate economic growth. ӱ Interest rates are expected to stay lower for longer. ӱ The household savings ratio has remained at an elevated level, with the potential to boost consumer spending when restrictions are lifted. ӱ Due to the stimulus package, UK Government borrowing has reached the highest levels since World War II. Necessary tax increases will impact UK businesses and households in the medium-term. There is an increased risk of inflationary pressure.

Since March 2020 and the first national lockdown, the UK has been on a pathway of increased understanding, adaptation and coping with the Covid-19 pandemic. Subsequent lockdowns were less severe on the economy, allowing the UK to avoid a double dip recession. There has been extensive Government stimulus to protect businesses and livelihoods. Not all parts of the economy have been equally affected. The success of the UK’s vaccination programme is expected to allow a strong and rapid recovery during the second half of 2021. There are some elements of the Brexit transition process still underway. Amongst issues still to be determined are passporting rights for financial services.

Property cycles

ӱ The retail sector has been operating within a very challenging environment, with declining rents and capital values. There has been a recent improvement in retail capital value growth, particularly for retail warehouses and supermarkets, however it is yet to be known if all sub-sectors have reached a nadir. ӱ The impact of working from home during the pandemic on offices has caused uncertainty within the sector and led to a decline in capital values. There is increased polarisation between Grade A and other offices, with many occupiers pursuing a flight to quality. ӱ There is high demand from both occupiers and investors within the industrial sector leading to further price rises.

The property market is cyclical, with performance linked to economic growth. The balance of supply and demand in the investment and occupier markets impact pricing and rental growth respectively. Historically, all property sectors have moved through cycles broadly in unison; however, more recently there is a greater divergence between sectors. The declines in property values as result of Covid-19 were more strongly felt in retail and leisure; periods of forced closure, increased online spending, retail failures and CVAs all blighted the sector. Industrial property rallied during 2020 as demand for warehousing grew, helped by an acceleration in online spending.


Market drivers and impacts Market driver



ӱ Remote working, flexible working and reduced business travel are facilitated by the advancement of online communications platforms. Although accelerated by the pandemic, these working patterns will continue in some form of hybrid model. ӱ The Government’s agenda to ban sales of new combustion engines by 2030 will shape requirements for electric vehicle charging where we live, work and shop, with implications for buildings, power supply and parking arrangements. A longer- term consideration is the rollout of the 5G network, enabling driverless vehicles. ӱ There is a heightened need for data storage and datacentres. Big Data, Artificial Intelligence, Machine Learning and Cloud Computing are shaping the future of the workforce and the requirements for buildings in which they operate. Bolstering cyber security and secure data storage is high on corporate agendas. ӱ For retailers, investment in online platforms and fulfilment is paramount. The proportion of online spending is unlikely to revert to pre-pandemic levels. Longer-term, the increased use of robotics, electric industrial vehicles and drones has the potential to impact the way online orders are fulfilled and industrial property is occupied. ӱ Sustainability is becoming widely and fully embedded into Government and corporate agendas. ӱ TCFD is promoting the improvement and increased reporting of climate-related financial information and enabling progress to be measured against science- based targets. ӱ The social and human cost of achieving success is increasingly considered. Society is holding Government and corporations accountable for the wider impact of investment decisions. ӱ It is fully recognised that there are heightened costs associated with owning and occupying non-energy efficient buildings and there is a price premium on those which meet modern requirements. ӱ Occupiers are increasingly considering employee wellbeing when selecting work space. Natural light, biophilia, fitness facilities and other occupier amenities all provide a competitive edge.

The technology trends set to directly impact the property sector in the short to medium-term are wide ranging, from smart building technology, the 5G network, increased adoption of electric vehicles, Artificial Intelligence, robotics, Big Data and Cloud Computing. Competitiveness in a post-pandemic world will depend on a company’s ability to thrive in the digital environment. The use of analytics to make data-backed decisions provides confidence to investors. Property sectors are all uniquely impacted by technological advances in multiple areas, with each facing its own benefits and challenges.

Environmental and social responsibility

During lockdown there has been increased reflection and environmental awareness, with particular focus on climate change. The year could be seen as the tipping point for organisations embedding climate risk into corporate strategy and considering the impacts of climate change on investments. The Government has declared a target of bringing all UK greenhouse gas emissions to net zero by 2050. With the pandemic amplifying social injustices and inequalities, societal value has also moved up the corporate agenda. There is recognition that we need to transition to a fairer and greener economy.


Strategic Report Our Marketplace continued

Throughout the year the acceleration in structural changeswithin themain property sectors has contributed to increased polarisationof performance .

Industrial market trends

What thismeans for Picton ӱ The accelerated structural shift towards online retail, growth in delivery apps and increased expectation for shorter delivery times mean industrial property continues to remain in demand. The portfolio is well positioned by being overweight to the industrial sector. ӱ Our occupier focused approach has enabled us to capitalise on strong demand for industrial property and grow ERVs through new lettings, renewals and rent reviews. Our response to these trends ӱ We will continue to capture rental growth through new lettings and proactive portfolio management. ӱ We will strategically maintain our overweight position to the sector. ӱ We will continue to acquire complementary assets where possible, whilst remaining selective given the recent increase in pricing. ӱ We envisage only limited and selective disposals. 2020 was a strong year for the industrial sector, which saw high levels of occupational demand, particularly for logistics units, as retailers and third- party logistics companies invested in fulfilment of online orders in response to the pandemic. The proportion of retail spend online reached a record high and is not expected to revert to pre-pandemic levels. Last mile logistics requirements have sustained upward pressure on rents, particularly in urban locations. The sector is also experiencing strong investor demand, with capital values increasing 9.6% in the year to March 2021. The industrial sector accounted for 29% of total investment volumes at a value of £12 billion. There is strong competition to invest in industrial assets which has driven yields down. The outlook for the industrial sector is a continuation of these trends. Standard industrial units in London and the South East are forecast to be amongst the top performing sub-sectors in the short to medium-term.

The industrial sector has benefitted from the increase in online consumer spending to the detriment of bricks and mortar retail, whilst enforced working from home is likely to lead to a longer-term shift towards a more hybrid model of home and office-based working. Our Covid-19 response


Retail andLeisure market trends

Office market trends

What thismeans for Picton ӱ The office sector now brings a heightened level of risk, as long-termworking from home continues to impact the sector. ӱ With weaker occupier demand, the focus is on quality of office space. Our offices must continue to go above and beyond occupiers’ expectations. ӱ We will need to provide more flexible leasing arrangements reflecting the current market. ӱ There is a greater emphasis on wellbeing within the office environment. Our response to these trends ӱ We will continue to actively manage the office portfolio and engage with existing and potential occupiers to grow occupancy and income. ӱ We have been upgrading space, focusing on amenities, and making improvements in energy efficiency. ӱ Due diligence and research will ensure that the office portfolio is positioned in the most accessible and desirable locations. ӱ We will be increasingly selective when considering office acquisitions. With office workers proving during the pandemic that working from home is a viable option, many companies are likely to incorporate an element of flexible and home working post-pandemic in a hybrid model, but the office is by no means redundant. Reflecting uncertainty surrounding the sector, during the year to March 2021, capital values decreased -4.5% and yields moved out 20 basis points. Rental values declined -1.0%. The role of the office is evolving into a hub for face-to- face interaction, collaboration and team building, and plays an important part in attracting talent, showcasing company culture, training and mentoring. The layout is likely to change, with the ratio of desk to collaborative meeting space switching, leading to less densely populated offices rather than a dramatic reduction in floorspace. Occupiers are seeking higher quality, digitally capable, sustainable spaces with a greater emphasis on employee wellbeing. Vacancy rates have risen but remain low by historic standards, and with limited new supply in the pipeline it is not expected that rental values will suffer more than a short-term dip. London and large city centre office markets are forecast to perform better than the All Property average.

Both the retail and leisure sectors have been severely affected by the pandemic and occupier failures. The retail sector has experienced a price correction, with capital values falling -12.9% and rents down -9.0% in the year to March 2021. Even as restrictions ease and trade improves, it looks unlikely that there will be sufficient demand to fill the high numbers of vacant units. The sector faced oversupply and legacy issues prior to the pandemic which have only been exacerbated. The UK Government’s change in use class restrictions will gradually allow repurposing of retail space and tackle the demand/supply balance in the longer-term. Until the oversupply is addressed in town centres, we do not expect to see any significant recovery in capital or rental values. However, it is increasingly apparent that there is not a ‘one size fits all’ outlook for retail and leisure property. Retail warehouses are starting to plateau and are forecast to strongly outperform shopping centres and high street retail.

What thismeans for Picton ӱ We will continue to maintain an underweight position to the retail and leisure sectors. ӱ We have had to provide rent holidays and assistance on a bespoke basis to help our occupiers through the crisis. ӱ We expect rental income in this element of the portfolio to remain reduced in the short to medium-term.

Our response to these trends ӱ We will seek to maintain occupancy, even if this means having to accept lower rental levels. ӱ We will continue to reposition retail assets and reduce our weighting through disposals, seeking opportunities to sell to special purchasers and owner-occupiers where appropriate. ӱ With revised pricing, we will look cautiously at potential acquisitions within selective retail sub-sectors.


Strategic Report Our Strategy We have a strategy focused ondelivering our purpose Purpose Through our occupier focused, opportunity led approach, we aim to be one of the consistently best performing diversified UK REITs. To us this means being a responsible owner of commercial real estate, helping our occupiers succeed and being valued by all our stakeholders. Strategy In order to deliver on our purpose, we have in place three distinct strategic pillars: Portfolio Performance, Operational Excellence and Acting Responsibly. These pillars include a range of strategic priorities which guide the direction of our business and are regularly reviewed.

Portfolio Performance 1 Creating and owning a portfolio which provides income and capital growth 2 Growing occupancy and income profile 3 Enhancing asset quality, providing space that




Integrating sustainability into our corporate strategy

We believe that sustainability has to be fully embedded into all of our activities. A responsible and ethical approach to business is essential for the benefit of all our stakeholders and understanding the long-term impact of our decisions will help us to manage risk and continue to generate value.

exceeds occupier expectations Sustainable buildings See pages 54-61

Read more on pages 54–61

4 Outperforming the MSCI UK Quarterly Property Index

Associated Risks 2 4 5 6 7 8

Sustainability governance

Connected KPIs A C D G I



Operational Excellence 1 Maintaining an efficient

Acting Responsibly 1 Ensuring wemaintain our company values, positive working culture and alignment of the team Our employees See pages 54-61 2 Working closely with our occupiers, shareholders and other stakeholders Stakeholder engagement See pages 54-61 3 Ensuring sustainability is







operating platform, utilising technology as appropriate 2 Having an agile and flexible business model, adaptable to market trends 3 Delivering earnings growth 4 Having an appropriate capital structure for the market cycle 5 Growing to deliver economies of scale

integrated within our business model and howwe and our occupiers operate Environmental focus See pages 54-61

Associated Risks 1 3 4 10 11 Connected KPIs E F H

Associated Risks 4 9 Connected KPIs B K L

Read more on pages 30-33 and pages 49-51


Strategic Report Chief Executive’s Review

We have increased occupancy and continued to deliver upper quartile returns, whilst supporting our occupiers through an incredibly difficult period.

Michael Morris Chief Executive

Despite the challenges of this year, we have been able to successfully navigate the disruption caused by the Covid-19 pandemic and deliver positive results which highlight the strength and resilience of the business.

Portfolio Performance We have continued to outperform the MSCI UK Quarterly Property Index and have delivered upper quartile performance for the sixth consecutive year. Over the year we ranked 24 out of the 232 portfolios in the MSCI benchmark and over the longer-term have ranked 15 out of 99 portfolios over the 15 years since inception. Despite the impact of lower rent collection, we have been able to grow income across the portfolio on a like-for-like basis through letting and asset management activity, which has generated additional income. We have had to think creatively around some of the occupier assistance that we have given this year. Despite having a short-term impact on income, this has delivered longer- term value for our investors. Examples of this are where leases have been extended, rent reviews have been agreed in advance or longer-term payment plans have been put in place. Pleasingly, the contractual passing rent and ERV of the portfolio have both grown during the year.

It has probably been one of the hardest 12-month periods in which to operate, and few could have foreseen the scale and extent of the disruption caused by lockdown rules. As a team, we have worked remotely for the whole year and have only all been able to meet in person on one socially distanced occasion. The team has pulled together incredibly well and we have been able to run the business effectively, helped to some extent by our small size and nimble approach. We have not made redundancies, furloughed any employees or needed any form of Government support. We have supported our occupiers this year and provided help where needed. This has required a delicate balance, but to have achieved the financial results we have, whilst simultaneously supporting so many of our occupiers throughout the year, is an accomplishment we are particularly proud of. Set out below is a summary of our performance against our strategic priorities. Almost all our KPIs show progress against the previous year and further details are provided in that section of the Report.

£34m Profit after tax £528m

Net assets 97p

NAV per share 6.6% Total return


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