REG - Palace Capital PLC - Final Results <Origin Href="QuoteRef">PCA.L</Origin> - Part 1
RNS Number : 2361APalace Capital PLC06 June 20166 June 2016
Palace Capital plc
("Palace Capital" or the "Company")
Audited results for the year ended 31 March 2016 -
Palace Capital delivers income and value creation
Palace Capital, the property investment company that focuses on commercial property outside London, is pleased to announce its audited results for the year ended 31 March 2016.
HIGHLIGHTS
Corporate highlights
Portfolio valuation at 31 March 2016: increased by 69% to 174.5 million (31 March 2015: 103.0 million)
EPRA NAV per share: increased by 5% to 414p at 31 March 2016 (31 March 2015: 396p) includes the absorption of equity raised at 360p
Profit before tax of 11.8 million (31 March 2015: 14.0 million)
EPRA earnings: increased by 64% to 7.7 million (31 March 2015: 4.7 million)
EPRA EPS: increased by 13% to 31.3p (31 March 2015: 27.7p)
Final dividend of 9p proposed, making a total for the year of 16p which is a 23% increase (31 March 2015: 13p)
Operational highlights
Five acquisitions totalling 66.0m:
Broad Street Plaza, Halifax for 24.18 million
Sol Central, Northampton for 20.7 million
249 Midsummer Boulevard, Milton Keynes for 7.225 million
Bank House King Street, Leeds for 10.0 million
46-54 High Street, Sutton for 3.95 million
Three sales, totalling 2.0million, all well above book value:
Unit 1, Clayton Manor, Burgess Hill for 1.25 million
54 Albert Road North, Reigate for 0.45 million
Unit F, 61 Albert Road North, Reigate for 0.31 million
Assetmanagement highlights
Approval by City of York Council for 139 apartments at Hudson House, York in February 2016
Secured the surrender of a lease held by Gala Casinos at Sol Central, Northampton for 3.8 million plus 0.2 million rates refund
Strip out of the Gala space in anticipation of agreeing new leases with prospective tenants completed
Work nearing completion on office-to-residential conversion of 14 apartments at The Copperfields, Dartford, Kent
Rent roll up 52% to 13.5 million per annum (31 March 2015: 8.9 million)
Weighted average unexpired lease term 6.3 years (31 March 2015: 4.5 years)
Financial highlights
20m equity raised at 360p in June 2015
80.0 million new debt facilities secured across the portfolio including a 30.0 million revolving credit facility on a 5 year term
Loan to value net of cash: 37% (31 March 2015: 23%)
Weighted average cost of debt: 3.1% (31 March 2015: 3.9%)
Weighted average debt maturity: 3.9 years (31 March 2015: 2.8 years)
* EPRAis the European Public Real EstateAssociation
Neil Sinclair, Chief Executive of Palace Capital, said:
"This has been a particularly exciting year for us and we are delighted with the progress that we are making. Our property portfolio has been strengthened by the acquisition of first class assets in growth locations as our active asset management strategy continues to grow both our rental income and capital values.
We are confident that our ability to source off market opportunities and our active asset management strategy will enable us to fulfil our progressive dividend policy for the benefit of shareholders in the medium term"
Notice of AGM
A copy of the annual report and accounts and notice of annual general meeting ("AGM") will shortly be posted to shareholders and is available from the Company's website, www.palacecapitalplc.com. The AGM will be held at the offices of Hamlins LLP, Roxburghe House, 273-287 Regent Street, London W1B 2AD at 10.00 a.m. on 6 July 2016.
For further information contact:
Palace Capital plc
Neil Sinclair, Chief Executive
Stephen Silvester, Finance Director
Tel. +44 (0)20 3301 8331
Allenby Capital Limited (Nominated Adviser and Joint Broker)
Nick Naylor / James Reeve
Tel. +44 (0)20 3328 5656
Arden Partners plc (Joint Broker)
Chris Hardie / Ciaran Walsh
Tel. +44 (0)207 614 5917
Capital Access Group (Financial PR)
Simon Courtenay
Tel. +44 (0)20 3763 3400
CHIEF EXECUTIVE'S REVIEW
We are delighted to report the Company's results for the year ended 31 March 2016, which show that we made a profit before tax of 11.8m. Net Asset Value per share increased by 5% from 396p to 414p and this includes the absorption of the dilutive impact of our 20m share placing last June at 360p per share.
The carrying value of the Company's portfolio is now at 174.5m compared to 103.0m 12 months prior largely reflecting acquisitions of 66m during the year.
Our contracted rent roll is now 13.5m per annum with a net income of 11.8m per annum allowing for head rents, service charge shortfall and empty rates. The latter would have been considerably lower but for the fact that one of our significant assets at Hudson House, York, the 103,000 sq ft office building adjoining the Railway Station, cannot be let on reasonable leases as it is pending refurbishment/redevelopment.
Our bank borrowings are at 71.9m representing a net LTV of 37% meaning we remain conservatively geared.
We have adopted a progressive dividend policy allowing our shareholders to benefit as the company prospers. We paid an interim dividend of 7.0 pence per share on 30 December 2015 and as we stated on 10 May 2016 we intend to pay a final dividend of 9.0 pence per share on 29 July 2016 to those shareholders on the register as at 8 July 2016.
We are making sure and steady progress. We have strict criteria on any potential acquisition so we are cautious but very opportunistic and only focus on those where we can achieve the desired
return. We are constantly travelling around the country meeting owners and agents and this has helped us to source and conclude off-market acquisitions.
Our focus has been to acquire properties outside London. We made the small 1.8m acquisition of Hockenhull Estates in 2011 comprising nine Cheshire based income producing properties but then made the significant 39.25m corporate acquisition of the Quintain subsidiary known as the Signal Portfolio in October 2013 comprising 24 properties and the 32m corporate acquisition of Property Investment Holdings Ltd in August 2014 comprising 17 properties.
We were investing in the regional market at a time when there were very few players with no talk of a Northern Powerhouse or Regional Devolution. We have seen very considerable growth from these two major acquisitions. The remaining properties in the Signal Portfolio have recently been valued at 71.0m and it is worth bearing in mind that 3.9m of sales have already taken place. In addition the remaining properties in the PIH portfolio have been valued at 36.5m with 2.0m of sales having been completed from this portfolio. The Board considers there are still considerable asset management opportunities on these two portfolios and we envisage continuing growth from them.
Our enlarged network has allowed us to make five opportunistic acquisitions totalling 66.0m in the last financial year three of which were off market. These were:
Bank House, King Street, Leeds - 10.0m
Sol Central, Northampton - 20.7m
46-54 High Street, Sutton - 3.95m
249 Midsummer Boulevard, Milton Keynes - 7.225m
Broad Street Plaza, Halifax - 24.18m
Further details of these acquisitions are contained in our Property Report. As with the rest of our portfolio, we will apply our own style of active management to all of these acquisitions, however, in our Portfolio Update announced on 10 May 2016 we made particular reference to Broad Street Plaza, Halifax. We have now received credit approval from a major insurance company to replace the existing short-term facility with a new loan of 15.2m for a term of ten years at a fixed interest rate of 3.5% including margin. Not only does this provide us with a current return on our equity of 14.5% but this rises to 16% in 2017 when the fixed rent increases take place. In addition, we have also been advised that we can claim full capital allowances as these have not been claimed to date so we have every opportunity of an exceptional return from this property. We are cash managers as well as property asset managers and Broad Street Plaza is a particular example.
Broad Street Plaza is within half a mile of one of the country's most successful but largely unknown urban regeneration schemes. Dean Clough in Halifax is a former mill which was once a carpet factory and which closed in 1983. It is now flourishing after tens of millions of pounds of investment with over 1,000,000 sq. ft of offices, restaurants, galleries and retail and is virtually fully occupied. This is very complementary to Broad Street Plaza.
We are really excited about Hudson House, York situated within a minute's walk from the Railway Station. City of York Council are one of only three councils in the country to recently announce a major initiative to see surplus railway land developed into thriving office, retail and residential schemes. This will be known as York Central and can only benefit our 103,000 sq ft office building where we are planning a major office and residential scheme. Our view is that public transport and in particular railway hubs such as York will play an increasing part for an office and residential development to be successful. We are exceptionally well placed at Hudson House as York is a growing business, educational and tourist destination.
We are delighted to have appointed Stephen Silvester as Group Finance Director and Matthew Simpson as Finance Manager during the year. We are also pleased to report that our Property Director, Richard Starr will be joining us as a full-time Executive Director on Monday 4 July 2016. They have made a significant contribution to the growth of Palace Capital. With Andrew Thomas joining us on 13 June 2016 as Investment Manager, we will have a formidable acquisition, asset management and finance team.
We are looking at a number of significant opportunities at the moment as we strive to grow the Company and joining the Official List of the London Stock Exchange remains our objective. Our acquisition strategy remains cautious but opportunistic. We are very grateful for the support shown by our shareholders and we believe we have the management team to achieve our goals. We look to the future with continued confidence.
Neil Sinclair FRICS
Chief Executive
3 June 2016
PROPERTY REVIEW
This year we have continued to build our property portfolio through five acquisitions totalling 66.0 million. At the same time we have sold some of our smaller holdings above book value. We now have a property portfolio valued at 174.5 million which is a meteoric rise since the significant purchase in October 2013 of the Signal portfolio.
KEY STATISTICS
54 properties comprising 1.85 million sq ft of space.
Over 140 tenants providing a contractual rent roll of 13.5 million per annum at 31 March 2016 (2015: 8.9 million).
34 new lettings and lease renewals completed during the year representing 10% of the total floor area.
Diversity of sectors within the portfolio including offices, industrial and retail, which is complemented by our new acquisitions in the leisure sector.
WAULT increased to 6.3 years (2015: 4.5 years) - a reflection of our active asset management initiatives.
ACQUISITIONS
These are referred to in the Chief Executive's Review and are set out in more detail below.
Bank House, Leeds
In April 2015 we completed the purchase of Bank House, Leeds for 10 million reflecting a net initial yield of 8.6%. A Grade II listed city centre office property, built in 1970, comprising 88,000 sq. ft. around a large central atrium. The property is home to The Bank of England, who have occupied it since it was built, as well as Walker Morris who are the largest independent firm of solicitors in Leeds.
Since the purchase we have extended the Bank of England lease until July 2023 with a minimum increase in the annual rent from 115,000 per annum to 232,000 per annum at the March 2020 rent review. The first floor, as anticipated, became vacant recently and we are in the process of starting a refurbishment programme following the settlement of dilapidations. When completed, this will provide a single floor plate of 17,000 sq. ft. which will be one of the largest second-hand office floors available.
We will be seeking to attract occupiers looking for a discount to the prime rents.
Sol Central, Northampton
In May 2015, we acquired the holding company of a prominent city centre leisure scheme, Sol Central in Northampton for 20.7m reflecting a net initial yield of 8.86%. Comprising a 10 screen cinema, casino, 151 room hotel, gym and 375 space car park, this 200,000 sq ft development has not been trading at its optimum level for a number of years. Significantly, the scheme lacks restaurants.
We intend to transform the scheme to create a dominant city centre offering to take advantage of the number of Council led initiatives within the city centre. A specialist architect and technical team have been instructed to ensure our vision can be achieved. To facilitate this we have taken a surrender of the lease to Gala Casino, who vacated in 2011 in return for 4 million to account for loss of rent, dilapidations and a rates rebate in August 2015.
46-54 High Street, Sutton
In August 2015, we completed the purchase of 46 - 54 High Street Sutton for 3.95 million reflecting a net initial yield of 8%. Comprising three retail units and 15,000 sq ft of offices, the building is held on a lease with 120 years unexpired from The London Borough of Sutton, with ground rent of 12.5% of rents receivable. Located moments from the railway station, the offices are let to Sutton Housing Partnership at 13.50 per sq. ft. which we consider modest and offers excellent rental growth potential in December 2017 when the next rent review is due. One of the retail units was recently let to Foxtons on a new 15 year lease.
Since the start of 2016 we have acquired two further investments, taken advantage of the new 30million Revolving Credit Facility with NatWest Bank and the capital created from our historic ownership.
249 Midsummer Boulevard, Milton Keynes
In February we completed the purchase of 249 Midsummer Boulevard, Milton Keynes for 7.225m reflecting a net initial yield of 7.25%. The property comprises 49,000 sq. ft. and is multi let to seven tenants including DHL & Crawford's. The majority of tenants are paying an average of 12 per sq. ft. which is a discount to a recently let suite at 13.50 per sq. ft. Milton Keynes is one of the fastest growing towns in the UK and so we consider there is excellent potential for these rents to continue to rise in line with those being currently achieved. The building is situated on a large site and has the potential for significant development in the medium term.
Broad Street Plaza, Halifax
Our final purchase of the financial year was completed in March. A significant leisure scheme known as Broad Street Plaza, Halifax was acquired for 24.18m providing a net initial yield of 7.25%. Significantly 40% of the leases benefit from minimum uplifts which will increase this yield to over 8% by August 2017. The scheme provides an excellent WAULT of 14 years to break. Whilst the scheme is trading well, we consider that this could be improved and we are undertaking various marketing initiatives to ensure the scheme reaches its full potential.
We set out below the highlights of our existing holdings:
HOCKENHULL PORTFOLIO
This was the initial portfolio acquired in 2011. Comprising nine individual properties, the portfolio remains fundamentally unchanged during the year although we have renewed two leases.
SIGNAL PORTFOLIO
The significant portfolio purchase in October 2013 has performed exceptionally well. We regularly visit the properties and meet our tenants which gives us immediate knowledge of occupational requirements so that we can ensure maximum occupation where possible In 2013 the Government introduced Legislation Permitted known as Development Rights PDR which grants permission in certain circumstances to allow the conversion of office space to residential use. We have taken advantage of this in Dartford and York. There is continual demand for residential properties in good locations which is being supported by institutional investors who now consider the private rented sector a sustainable investment. It is our opinion that there is long-term rental growth in this sector and will be looking to retain these units.
Hudson House, York
We have worked with our technical team to take this property into its next phase. The property comprises a 1960's 103,000 sq. ft. office building directly opposite York Railway Station. Transport links are excellent with a direct fast service to London and Edinburgh.
In September 2014 an application was made to convert the property into 82 residential units as well as create 37,000 sq. ft. of grade A office. A resolution to grant consent was approved in April 2016, subject to a section 106 agreement, as stated in our Portfolio Update in May 2016. An alternative consent had also been granted to convert the building into 139 residential units through PDR in February of this year. We are currently evaluating all our options to maximise value and will update our shareholders in due course.
Copperfields, Dartford
This is a mixed-use retail and office property in a commuter town, South East of London. Situated directly opposite the Priory Shopping Centre and within walking distance of the train station, the scheme provides nine retail units below vacant offices. PDR was granted for the conversion of the offices to 14 residential units in October 2015. The conversion is due to complete in August 2016 and our intention is to rent them. Once completed we will have transformed a tertiary shopping scheme into a vibrant mixed use investment.
Point Four Industrial Estate, Avonmouth
This 10 unit scheme is fully let to seven different tenants. Significantly we have completed the letting of a vacant unit to an existing tenant, who also extended their current leases so they are all co-terminus after 10 years. Refurbishment works were carried out to ensure the unit was let in an improved condition. In addition, minimum uplifts at the rent review in year 5 were agreed based on 2% per annum compound. We have negotiated to remove break clauses and settled rent reviews on other units at marginally higher than the passing rents.
Cater Road, Bristol
Following extensive negotiations, the lease with Computershare was surrendered and a new lease for 15 years to Wincanton Holdings Ltd was completed. The tenant has an option to determine after 10 years whilst the rent is subject to a minimum increase at rent review after five years, based on a minimum of 2.5% per annum compound.
Marsh Barton Trading Estate, Exeter
Following the year end the tenant company appointed Administrators. The Administrator is seeking to grant a licence to a newly formed company for 12 months, providing continuity of income. We are undertaking a strategic review to assess the long-term prospects for this well positioned site, as there is potential for a significant redevelopment.
Kiln Farm, Milton Keynes
The tenant at unit 2 has exercised their option to determine the lease from March 2016. We are progressing the dilapidation negotiations on this 14,500 sq ft office building and will evaluate all the options before deciding the best way forward.
Allen House, Stockport
Following the surrender of the lease in September 2015, we have been seeking to sell this 68,000 sq ft property. Demand has been limited but there are reasonably regular inspections so we are hopeful for an early sale.
Victoria Road, Stoke On Trent
The lease expired in September 2015 and a schedule of dilapidations with the outgoing tenant was settled at 250,000. We are seeking a buyer for this 45,000 sq ft building as the costs of refurbishment are not in the best interests of the Company.
Argent Court, Tolworth
This property has performed extremely well. Having purchased the property for 750,000 in October 2013, separate parts were sold in November and December 2013 for 1,070,000. We are now proposing to sell the remainder due to imminent lease expiries and strong demand from owner-occupiers.
PIH PORTFOLIO
Ovest House, Brighton
This is excellently located, equidistant between the Railway Station and the sea, within the city centre. We have undertaken a refurbishment of the 4th floor and reception area following a successful dilapidations settlement with the previous tenant. This attracted Quarto Publishing Plc to the property who have agreed to occupy all the offices being let at a 40% increase in rent. We have negotiated surrenders of the other leases to facilitate this and the new tenant will refurbish the remaining floors. The remaining floors will be refurbished to a similar specification.
Clayton Industrial Estate, Burgess Hill
We completed the letting to Polar Audio following a minor refurbishment using the dilapidation settlement from the former tenant. A new lease for 10 years incorporating an option to determine at year 5 was completed in August 2015. The tenant has an option to purchase at 1,450,000 no later than 28 July 2016.
Albert Road North, Reigate
We have sold No. 54 in April 2015 for 445,000 and Unit F at No. 61 in January 2016 for 310,000, both of which were in excess of book value.
There have been changes in legislation which affect the portfolio and we highlight these below:
MINIMUM ENERGY EFFICIENCY STANDARDS (MEES)
As of April 2018, it will be unlawful for commercial and residential landlords of properties with an Energy Performance Certificate (EPC) rating of less than "E" to grant new leases or renew tenant leases (except for some exemptions). Landlords will need to carry out works to improve the energy performance of their buildings to a rating of "E" or above or face civil penalties.
We have instructed a specialist to undertake a full review of our holdings to ensure that none of our holdings are affected.
STAMP DUTY LAND TAX
In March 2016, the Chancellor of the Exchequer introduced reforms to Stamp Duty Land Tax on commercial property which increased the top rate payable from 4% to 5% above 250,000. This has been factored into the latest independent valuations carried out as at 31 March 2016. Despite this impact, our portfolio valuations have continued to grow over the year.
THE FUTURE
We remain committed to our active brand of asset management and are confident there are still plenty of opportunities for us to continue to grow the income to support our progressive dividend policy, whilst we grow capital value through our expenditure and refurbishment programmes.
RICHARD STARR MRICS
FINANCIAL REVIEW
OVERVIEW AND HEADLINE RESULTS
This year we delivered a profit before tax of 11.8m, which reflects a basic earning per share of 43.9p. EPRA earnings is the industry measure of underlying profit stripping out revaluation gains and one-off acquisition costs. EPRA earnings for the year ended 31 March 2016 increased by 64% to 7.7m compared to 4.7m last year and as a result EPRA earnings per share improved to 31.3p from 27.7p.
The value of our portfolio increased by 69% at the year-end to 174.5m from 103.0m principally as a result of the opportunistic acquisitions made throughout the year and also due to 3.6m of revaluation gains. EPRA net assets per share increased by 10% to 414p taking into account the dilution from the 20 million equity raise and FY15 final dividend paid in July 2015. This 36p increase together with the total dividends of 16p paid in relation to FY16 represents a 14% total business return.
Our capital base grew during the year as a result of the 20.0m capital raising in June 2015 and also 80.0m of new debt facilities raised and this was utilised to fund 66.0m of new acquisitions in the year.
RECURRING EARNINGS
Rental income net of property costs totalled 13.0m in the year ended 31 March 2016 (2015: 7.4m), driven by the new acquisitions and also supported by the significant 3.0m surrender premium received from Gala Casinos at Sol Central, the Northampton leisure scheme acquired in June of last year. Administrative expenses increased to 2.0m from a low base in the prior year of 1.4m due to a strategic decision to increase resources and build a team capable of delivering results across a far larger portfolio. There was also a mid-year review into director remuneration to bring it closer in line with our peer group. Finance costs increased to 2.3m from 1.4m as a result of the increase in debt finance to help fund the acquisitions. Despite increasing the base costs of the business, underlying EPRA earnings grew 64% to 7.7m from 4.7m reflecting the increasing profitability of the business as a result of both scale and reliable stock selection.
Looking forward, the business is now capable of scalability, with the team and systems in place to support a significant growth in the portfolio. 249 Midsummer Boulevard, Milton Keynes and Broad Street Plaza, Halifax were acquired close to the year-end. Next year the impact of these on recurring earnings will be significant and at the time of writing the Group has a current gross rent roll of 13.5m per annum up from 8.9m per annum at 31 March 2015 and net of non-recoverable property costs of 11.8m per annum.
VALUATION GAINS & PROFITS ON DISPOSAL
The movement in the values of our investment properties can make a significant impact on our profit before tax, as demonstrated last year when we saw 9.8m uplift on the portfolio. This year 3.6m gains were achieved, however this should be combined with the 3.0m surrender premium received from Gala Casinos due to the direct impact the loss of income has on the Sol Central property valuation in the short-term, results in a 6.6m overall gain.
The portfolio has almost doubled in the past year and therefore the impact of like for like uplift in values is diminished as the initial absorption of purchase costs and stamp duty are taken into account this year. The 1% increase in stamp duty for commercial properties valued over 250,000 to 5% has had a one-off impact on the net valuations performed by the Independent Valuers this year. Despite this, we continue to see the impact of our asset management and capex initiatives particularly at our strategic properties such as Hudson House, York where we received approvals in the year and we have seen a significant uplift in value with this property now valued at 14.9m.
We continue to recycle capital through disposals of individual units and small properties where we can realise profit that reflects good value from our investment and 0.3m profit on disposal was achieved from three disposals during the current year.
EPS
Basic earnings per share (EPS) were 43.9p compared to 82.4p last year, down primarily due to the significant valuation surplus last year. Similarly to the adjustments we make to profit before tax which remove unrealised capital profits and one-off items such as profits on disposal and costs on acquisition we report EPRA earnings per share. This improved to 31.3p from 27.7p due to the significant one-off impact of the Gala surrender premium. Finally, we also report an adjusted earnings per share to provide a basis for dividend cover which excludes the impact of the surrender premium and this was 18.9p for the year.
DIVIDENDS
We are recommending a final dividend of 9p per share to be paid on 29 July 2016 to shareholders registered at the close of business on 8 July 2016. Taken with the interim dividend of 7p our full year dividend will be up 23% to 16p. The Company is very well placed to provide our shareholders with an increased dividend yield due to the growth in our portfolio and the core assets producing stable, long-term income. However, we continue to reinvest surplus funds into our strategic assets to provide investors with a two- pronged return through both income and capital growth.
NET ASSETS
At 31 March 2016 our net assets per share were 414p an increase of 18p since 31 March 2015.
2015. The increase in our net assets was driven by the increase in value of our investment properties, profits on disposal of investment properties and surplus profits remaining after dividends paid. We calculate an EPRA NAV consistent with standard practice in the property industry to adjust for any dilution of outstanding share options and fair value adjustments of financial instruments which we believe better reflects the underlying net assets attributable to shareholders. Our EPRA NAV was 414p at 31 March 2016 up from 396p at 31 March 2015. In fact, the growth was greater when the dilution of the 20.0m equity raise at 360p in June 2015 is taken into account along with the final dividend of 7p relating to FY15 resulting in an overall increase of 10% from 377p.
DEBT FINANCING
During the year our debt profile transformed. We entered into 80.0m of new debt facilities across the Group. The existing facility secured on the Signal portfolio was refinanced with a new five year 20.0m facility at a lower margin of 2.45% and due to the uplift in value since acquisition we were able to release six properties which became uncharged.
We also replaced the existing 16.0m NatWest facility on the PIH portfolio with a new combined 30.0m revolving credit facility secured across the existing portfolio and a number of new acquisitions. Lloyds and Santander also provided new facilities on the Bank House, Leeds and Sol Central, Northampton acquisitions made during the year and finally we took over the 15.2m Barclays facility secured on the Broad Street Plaza, Halifax property acquired in March 2016.
The Group debt profile is now spread across the majority of the UK clearing banks at an average margin of 2.5% over 3 month libor. We continue to take the decision not to put hedging in place as a result of the historically low interest rates and therefore enjoy an all in average cost of debt of 3.1% currently one of the lowest in the sector. The average debt maturity is 3.9 years which gives us security over income streams net of interest costs for a number of years before the need to refinance.
NET DEBT AND GEARING
Each debt facility is secured at a SPV level and we assess the gearing mainly through interest cover ratios (ICR) and loan to value ratios (LTV). In normal market conditions we gear our assets at a SPV level within a range of 40-60% LTV. At a group level we measure both the debt to net asset value ratio (NAV gearing) and loan to value net of cash. NAV gearing at 31 March 2016 was 61% up from 31% last year and the net LTV ratio was 37% at 31 March 2016 up from 23% last year. The Group remains conservatively geared and at year-end had 8.0m of unutilised facilities available along with 18.0m of properties uncharged.
TAXATION
The Group has a tax charge of 0.95m for the year ended 31 March 2016. This includes a corporation tax charge of 0.71m to reflect the tax payable on taxable profit in the year, an income tax charge of 0.02m on non- resident landlord income and an adjustment of 0.22m to reduce the deferred tax asset as a result of the utilisation of tax losses in the year. The effective tax rate for the year for tax payable remains low at 13% due to utilisation of brought forward losses and capital allowances.
STEPHEN SILVESTER ACA
Palace Capital plc
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 March 2016
Note
2016
2015
000
000
Rental and other income
1
14,593
8,637
Non recoverable property costs
5b
(1,624)
(1,200)
Net rental income
12,969
7,437
Administrative expenses
5c
(2,048)
(1,439)
Operating profit before gains and losses on property assets and cost of acquisitions
10,921
5,998
Gains on revaluation of investment property portfolios
3,620
9,769
Profit on disposal of investment properties
290
178
Cost of acquisitions
(815)
(639)
Operating profit
14,016
15,306
Finance income
3
34
18
Finance expense
4
(2,298)
(1,416)
Profit before taxation
11,752
13,908
Taxation
7
(953)
107
Profit after taxation for the yearattributable to owners of the parent
10,799
14,015
Other comprehensive income for the year
-
-
Total comprehensive income for the year
10,799
14,015
Attributable to: Equity holders of the parent
10,799
14,015
EARNINGS PER ORDINARY SHARE
Basic
8
43.9p
82.4p
Diluted
43.9p
82.0p
All activities derive from continuing operations of the Group. The Notes form an integral part of these financial statements.
Palace Capital plc
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
Company Registration Number: 05332938
As at 31 March 2016
Note
2016
2015
000
000
Non-current assets
Goodwill
11
-
6
Investment properties
13
174,542
102,988
Property, plant and equipment
14
37
52
Deferred tax
7
334
500
Trade and other receivables
15
825
924
175,738
104,470
Current assets
Trade and other receivables
15
3,327
3,375
Cash at bank and in hand
16
8,576
12,278
11,903
15,653
Total assets
187,641
120,123
Current liabilities
Trade and other payables
17
(6,815)
(3,087)
Borrowings
18
(2,233)
(400)
Creditors: amounts falling due within one year
(9,048)
(3,487)
Net current assets
2,855
12,166
Non-current liabilities
Borrowings
18
(69,711)
(35,406)
Obligations under finance leases
20
(2,067)
(1,214)
Net assets
106,815
80,016
Equity
Called up share capital
21
2,862
2,307
Share premium account
59,408
40,852
Merger reserve
3,503
3,503
Capital redemption reserve
65
65
Retained earnings
40,977
33,289
Equity - attributable to the owners of the parent
106,815
80,016
Basic NAV per ordinary share
9
414p
396p
Diluted NAV per ordinary share
414p
396p
These financial statements were approved by the Board of Directors and authorised for issue on 3 June 2016 and are signed on its behalf by:
Stanley Davis
Director
Palace Capital plc
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 31 March 2016
Share Capital
Share Premium
Merger Reserve
Capital redemption reserve
Convertible loan notes
equity
Retained earnings
Total equity
'000
'000
'000
'000
'000
'000
'000
At 31 March 2014
1,529
21,856
-
65
28
20,898
44,376
Total comprehensive income for the year
-
-
-
-
-
14,015
14,015
Issue of ordinary share capital net of expenses
778
18,996
3,503
-
-
-
23,277
Share based payments
-
-
-
-
-
114
114
Dividends
-
-
-
-
-
(1,766)
(1,766)
Transfer on repayment of loan
-
-
-
-
(28)
28
-
At 31 March 2015
2,307
40,852
3,503
65
-
33,289
80,016
Total comprehensive income for the year
-
-
-
-
-
10,799
10,799
Issue of ordinary share capital net of expenses
555
18,556
-
-
-
-
19,111
Share based payments
-
-
-
-
-
110
110
Dividends
-
-
-
-
-
(3,221)
(3,221)
At 31 March 2016
2,862
59,408
3,503
65
-
40,977
106,815
For the purpose of preparing the consolidated financial statement of the Group, the share capital represents the nominal value of the issued share capital of Palace Capital plc.
Share premium represents the excess over nominal value of the fair value consideration received for equity shares net of expenses of the share issue amounting to 888,383 (2015 795,684)
The merger reserve represents the excess over nominal value of the fair value consideration for the acquisition of subsidiaries satisfied by the issue of shares in accordance with S612 of the Companies Act 2006.
The convertible loan note equity reserve represents the difference between the proceeds from issuing the convertible loan notes and the fair value assigned to the liability component at the date of issue.
The capital redemption reserve represents the nominal value of preference shares capital redeemed.
Palace Capital plc
CONSOLIDATED STATEMENT OF CASH FLOWS
For the year ended 31 March 2016
Note
2016
2015
'000
'000
OPERATING ACTIVITIES
Net cash generated in operations
2
12,287
4,388
Interest received
34
18
Interest and other finance charges paid
(3,455)
(1,611)
Corporation tax paid in respect of operating activities
(158)
(14)
Net cash flows from operating activities
8,708
2,781
INVESTING ACTIVITIES
Purchase of investment property
(21,689)
(305)
Payments to acquire subsidiary undertakings
12
(29,095)
-
Capital expenditure on refurbishment of investment property
13
(1,182)
(2,508)
Deposit paid on purchase of investment property
-
(1,000)
Proceeds from disposal of investment property
1,957
952
Purchases of property, plant and equipment
14
(3)
(61)
Net cash flow (used in)/from investing activities
(50,012)
(2,922)
FINANCING ACTIVITIES
Other loans repaid
-
(300)
Bank loans repaid
(17,010)
(28,800)
Proceeds from new bank loans
38,282
18,500
Issue of new share capital
19,114
19,664
Dividends paid
10
(3,221)
(1,766)
Capital element of finance lease rental payments
(2)
(2)
Net cash flow from financing activities
37,163
7,296
NET INCREASE IN CASH AND CASH EQUIVALENTS
(4,141)
7,155
Cash and cash equivalents at beginning of the year
12,278
5,123
Cash acquired
439
-
Cash and cash equivalents at the end of the year
8,576
12,278
Palace Capital plc
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended 31 March 2016BASIS OF ACCOUNTING
The financial information does not constitute the Group's statutory accounts for the year ended 31 March 2016 and 31 March 2015 but is derived from those accounts. Statutory accounts for the year ended 31 March 2015 have been delivered to the Registrar of Companies and those for the year ended 31 March 2016 will be delivered following the Company's Annual General Meeting. The Auditor has reported on the 2016 and 2015 accounts; the reports were unqualified, did not include a reference to any matters to which the Auditor drew attention by way of emphasis without qualifying their report and did not contain a statement under section 498 of the Companies Act 2006.
BASIS OF PREPARATION
The Group financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and interpretations adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006. These financial statements are for the year ended 31 March 2016 and are presented in pounds sterling ("GBP").
1 SEGMENTAL REPORTING
For the purpose of IFRS 8, the chief operating decision maker ("CODM") takes the form of the three executive Directors (the Group's Executive Committee). The Group's Executive Committee are of the opinion that the business of the Group is as follows.
The principal activity of the Group was to invest in commercial real estate in the UK.
IFRS 8 Operating Segments requires operating segments to be identified on the basis of internal financial reports about components of the Group that are regularly reviewed by the chief operating decision maker (which in the Group's case is its Group's Executive Committee).
The internal financial reports received by the Group's Executive Committee contain financial information at a Group level as a whole and there are no reconciling items between the results contained in these reports and the amounts reported in the financial statements. Additionally, information is provided to the Group's Executive Committee showing gross property income and property valuation by individual property. Therefore, for the purposes of IFRS 8, each individual property is considered to be a separate operating segment in that its performance is monitored individually.
The Group's property portfolio includes investment properties located throughout England, predominantly regional investments outside London and comprises a diverse portfolio of commercial buildings. The Directors consider that these properties have similar economic characteristics. Therefore, these individual properties have been aggregated into a single operating segment. In the view of the Directors, there is one reportable segment under the provisions of IFRS 8.
All of the Group's properties are based in the UK. No geographical grouping is contained in any of the internal financial reports provided to the Group's Executive Committee and, therefore, no geographical segmental analysis is required by IFRS 8.
Revenue - type
2016
2015
'000
'000
Rents received from investment properties
11,375
8,181
Management fees & other income
46
456
Surrender premium
3,172
-
Total Revenue
14,593
8,637
No single tenant accounts for more than 10% of the Groups total rents received from investment properties.
The surrender premium resulted from the surrender of a lease by Gala (part of the Gala Coral Group) who held a lease until March 2028 on 28,000 sq ft at Sol Central, Northampton at a rental payable of 312,852 per annum. Gala paid to Palace Capital a cash sum of 3 million plus a proportion of a rates refund due to them to be relieved of any further liability for rent, service charge and rates.
2 Reconciliation of OPERATING PROFIT
Reconciliation of operating profit to cash utilised in operations
2016
2015
'000
'000
Profit before taxation
11,752
13,908
Finance income
(34)
(18)
Finance costs
2,298
1,416
Gains on revaluation of investment property portfolio
(3,620)
(9,769)
Profit on disposal of investment properties
(290)
(178)
Goodwill write off
6
-
Depreciation
18
10
Share based payments
110
114
Increase in receivables
(399)
(281)
Increase/(decrease) in payables
2,446
(814)
Net cash generated in operations
12,287
4,388
3 OTHER INTEREST RECEIVABLE AND SIMILAR INCOME
2016
2015
'000
'000
Bank interest received
34
18
34
18
4 Interest payable AND SIMILAR CHARGES
2016
2015
'000
'000
Interest on bank loans
1,652
1,117
Loan arrangement fees
502
167
Interest on other loans
-
12
Interest on finance leases
144
120
2,298
1,416
5 PROFIT FOR THE PERIOD
a) The Group's profit for the period is stated after charging the following:
2016
2015
'000
'000
Depreciation of tangible fixed assets:
18
10
Auditor's remuneration:
Fees payable to the auditor for the audit of the Group's annual accounts
42
28
Fees payable to the auditor for the audit of the subsidiary annual accounts
15
10
Fees payable to the auditor and its related entities for other services:
Corporate advisory services
98
50
Audit related assurance services
17
-
Tax services
13
-
185
88
Amounts payable to BDO LLP in respect of audit and non-audit services are disclosed in the table above.
b) The Group's property costs comprise the following:
2016
2015
'000
'000
Void property costs
1,511
614
Repairs and maintenance expenses
90
404
Legal and consultancy
23
45
Service charge expenses
-
137
1,624
1,200
c) The Group's administrative expenses comprise the following:
2016
2015
'000
'000
Staff costs
803
508
Legal & professional fees
269
177
PR and marketing costs
201
113
Other overheads
135
82
Accounting and audit fees
133
86
Property management fees
122
163
Share based payments
110
114
Stock exchange costs
88
91
Consultancy and recruitment fees
84
8
Rent, rates and other office costs
79
87
Depreciation
18
10
Amortisation of goodwill
6
-
2,048
1,439
6 EMPLOYEES AND DIRECTORS' REMUNERATION
Staff costs during the period were as follows:
2016
2015
'000
'000
Non-Executive Directors' fees
80
68
Wages and salaries
640
368
Pensions
14
24
Social security costs
69
48
Share based payments
110
114
913
622
The average number of employees of the company during the period was:
2016
2015
Number
Number
Directors and management
7
6
Administration
2
-
9
6
Key management are the Group's directors. Remuneration in respect of key management was as follows:
2016
2015
'000
'000
Short-term employee benefits:
Emoluments for qualifying services
610
342
Social security costs
76
41
Pension
13
-
Share based payments
99
102
798
485
The amounts set out above include remuneration in respect of the highest paid director as follows:
2016
2015
'000
'000
Short-term employee benefits:
Emoluments for qualifying services
299
194
Share based payments
64
68
363
262
7 TAXATION
2016
2015
'000
'000
Current income tax charge
726
20
Tax underprovided in prior year
6
-
Deferred tax
221
(127)
Tax charge/(credit)
953
(107)
2016
2015
'000
'000
Profit on ordinary activities before tax
11,752
13,908
Based on profit for the period:
Tax at 20.0% (2015: 21%)
2,350
2,921
Effect of:
Expenses not deductible for tax purposes
163
134
Capital losses and indexation used in the period
(1,416)
(2,090)
Capital allowances in excess of depreciation
(77)
(253)
Other adjustments
47
40
Deferred tax not previously recognised
(76)
(127)
Utilisation of losses brought forward
297
-
Tax under provided in prior years
6
-
Trading losses used in the period
(341)
(732)
Tax charge/(credit) for the period
953
(107)
Deferred taxes at 31 March relates to the following:
2016
2015
'000
'000
Deferred tax assets
Losses available to carry forward
334
500
Deferred tax asset
334
500
2016
2015
'000
'000
Deferred tax asset - brought forward
500
100
Deferred tax (charge)/credit for the period
(221)
127
Deferred tax recognised on acquisition
55
273
Deferred tax asset - carried forward
334
500
At 31 March 2016, the Group had tax losses of 1,681,228 (2015: 3,110,762) available to carry forward to future periods. A deferred tax asset of 334,000 (2015: 500,000) has been recognised as it is expected to be utilised in the foreseeable future.
Capital allowances have been claimed on improvements to investments properties amounting to 13,846,721 (2015: 8,676,012). A deferred tax liability amounting to 1,872,057 (2015: 1,735,202) has not been recognised in the financial statements as it is expected that they will not reverse when the properties are disposed of.
A deferred tax liability on the revaluation of investment properties to fair value has not been provided as once the availability of capital losses, indexation allowances and the 1982 valuations for certain properties have been taken into account it is anticipated that no capital gains tax would be payable if the properties were disposed of at their fair value as the potential capital gains after indexation of approximately 9,700,000 are offset by potential losses of 13,500,000. As at 31 March 2016 the Group also had approximately 7,400,000 (2015: 6,900,000) of realised capital losses to carry forward.
8 EARNINGS PER SHARE
Basic earnings per share
Basic earnings per share has been calculated on profit after tax attributable to ordinary shareholders for the period (as shown on the Consolidated Statement of Comprehensive Income) and the weighted average number of ordinary shares in issue during the period (see below table).
Diluted earnings per share
Diluted earnings per share has been calculated on profit after tax attributable to ordinary shareholders for the period (as shown on the Consolidated Income Statement) and the diluted weighted average number of ordinary shares in issue during the period (see below table):
2016
2015
'000
'000
Profit after tax attributable to ordinary shareholders for the period
10,799
14,015
2016
No of shares
2015
No of shares
Weighted average number of shares for basic earnings per share
24,597,258
17,010,762
Dilutive effect of share options
20,730
80,082
Weighted average number of shares for diluted earnings per share
24,617,988
17,090,844
EARNINGS PER ORDINARY SHARE;
Basic
43.9p
82.4p
Diluted
43.9p
82.0p
EPRA and adjusted diluted earnings per share
The European Public Real Estate Association (EPRA) has issued Best Practices Recommendations, the latest update of which was issued in December 2014, which gives guidelines for performance measures.
EPRA earnings are calculated taking the profit after tax excluding investment property revaluations and gains and losses on disposals, changes in fair value of financial instruments, associated close-out costs and share based-payments and one-off exceptional items. EPRA earnings is calculated on the basis of the basic number of shares in line with IFRS earnings as the dividends to which they give rise accrue to current shareholders and therefore it is more appropriate to use the basic number of shares. The EPRA diluted earnings per share also takes into account the dilution of share options and warrants if exercised.
Palace Capital also report on an adjusted earnings measure which is based on recurring earnings after tax and on the basis of the basic number of shares.
The EPRA and adjusted earnings per share for the period are calculated based upon the following information:
2016
2015
'000
'000
Profit after tax attributable to ordinary shareholders for the period
10,799
14,015
Costs of acquisition
815
639
Gains on revaluation of investment property portfolio
(3,620)
(9,769)
Profit on disposal of investment properties
(290)
(178)
EPRA earnings for the period
7,704
4,707
Surrender premium
(3,172)
-
Share based payment
110
114
Adjusted earnings after tax for the period
4,642
4,821
EPRA AND ADJUSTED EARNINGS PER ORDINARY SHARE;
EPRA Basic
31.3p
27.7p
EPRA Diluted
31.3p
27.5p
Adjusted EPS Basic
18.9p
28.3p
9 NET ASSETS VALUE PER SHARE
EPRA NAV calculation makes adjustments to IFRS NAV to provide stakeholders with the most relevant information on the fair value of the assets and liabilities within a true real estate investment company with a long-term investment strategy. EPRA NAV is adjusted to take effect of the exercise options, convertibles and other equity interests and excludes the fair value of financial instruments and deferred tax on latent gains. EPRA NNNAV measure is to report net asset value including fair values of financial instruments and deferred tax on latent gains.
The diluted net assets and the number of diluted ordinary issued shares at the end of the period assumes that all the outstanding options at the period end are exercised at the option price.
Net asset value is calculated using the following information:
2016
2015
'000
'000
Net assets at the end of the period
106,815
80,016
Effect of exercise of share options
109
109
Diluted net assets at end of the period
106,924
80,125
Exclude fair value of financial instruments & exclude deferred tax on latent capital gains
-
-
EPRA NAV
106,924
80,125
Include fair value of financial instruments & include deferred tax on latent capital gains
-
-
EPRA NNNAV
106,924
80,125
2016
No of shares
2015
No of shares
Number of ordinary issued shares issued at the end of the period
25,781,229
20,225,673
Dilutive effect of share options
20,730
16,308
Number of ordinary issued shares for diluted net assets per share
25,801,959
20,241,981
NET ASSETS PER ORDINARY SHARE
Basic
414p
396p
Diluted
414p
396p
EPRA NAV
414p
396p
EPRA NNNAV
414p
396p
10 DIVIDENDS
Payment date
Dividend per share
2016
'000
2015
'000
2016
Final dividend proposed
29 July 2016
9.00
-
-
Interim dividend
30 December 2015
7.00
1,805
-
Distribution of current year profit
16.00
1,805
-
2015
Final dividend
31 July 2015
7.00
1,416
-
Interim dividend
30 December 2014
6.00
-
1,204
Distribution of prior year profit
13.00
1,416
1,204
2014
Final dividend
31 July 2014
2.50
-
313
Interim dividend
7 May 2014
2.00
-
249
4.50
-
562
Dividends reported in the Group statement of changes in equity
3,221
1,766
Proposed Dividends
2016
'000
2015
'000
2016 final dividend: 9p (2015: 7p)
2,320
1,416
Proposed dividends on ordinary shares are subject to approval at the Annual General Meeting and are not recognised as a liability as at 31 March 2016.
11 INTANGIBLE FIXED ASSETS
Goodwill
'000Cost
At 1 March 2014 and 31 March 2015
6
Additions
-
At 31 March 2016
6
Goodwill
Provision for diminution in value
At 1 March 2014 and 31 March 2015
-
Provided in the year
6
At 31 March 2016
6
Carrying value at 31 March 2016
-
Carrying value at 31 March 2015
6
12 BUSINESS COMBINATIONS
Acquisition in year ended 31 March 2016
O&H Northampton Limited
On 17 June 2015 the Group acquired 100% of the share capital of O&H Northampton Limited (O&H) for a consideration of 1. O&H is a property investment company owning Sol Central, a leisure complex in Northampton, which was acquired to expand the Group's property portfolio. Following the acquisition O&H changed its name to Palace Capital (Northampton) Limited.
Carrying value at acquisition date
Adjustments
Fair value at acquisition date
'000
'000
'000
Investment properties
20,700
-
20,700
Receivables and prepayment
389
-
389
Deferred tax asset
55
-
55
Cash at bank and in hand
228
-
228
Payables and other creditors
(344)
-
(344)
Corporation tax
(128)
-
(128)
Accrued interest
(822)
-
(822)
Other loans
(3,441)
-
(3,441)
Bank loans
(16,637)
-
(16,637)
Net assets
-
-
-
Consideration
20,078
Payments of other loans and bank loans on acquisition
(20,078)
Net consideration
-
Goodwill on acquisition
-
The acquired subsidiary contributed 1,597,000 to the profit before tax of the Group.
The deferred tax asset represents tax losses incurred in the period prior to our acquisition. No deferred tax has been recognised on the adjustments to fair value as a result of the historical cost of the investment properties exceeding their fair value.
The fair value of the investment properties at acquisition was based on a valuation performed at the time of the acquisition amounting to 20,700,000 obtained from DTZ Debenham Tie Leung Limited.
Acquisition related costs
The Group incurred acquisition related costs in respect of this transaction amounting to 413,115 related to professional fees paid for due diligence, general professional fees and legal related costs. These costs have been included in administrative expenses in the Group's consolidated income statement.
Gregory Projects (Halifax) Limited
On 11 March 2016 the Group acquired 100% of the share capital of Gregory Projects (Halifax) Limited (GPH) for a consideration of 1. GPH is a property investment company owning Broad Street Plaza, a leisure complex in Halifax, which was acquired to expand the Group's property portfolio. Following the acquisition GPH changed its name to Palace Capital (Halifax) Limited.
Carrying value at acquisition date
Adjustments
Fair value at acquisition date
'000
'000
'000
Investment properties
-
24,180
24,180
Receivables and prepayment
144
-
144
Work in progress
24,180
(24,180)
-
Cash at bank and in hand
213
-
213
Payables and other creditors
(231)
-
(231)
Accrued interest
(84)
-
(84)
Other loans
(9,017)
-
(9,017)
Bank loans
(15,201)
-
(15,201)
Net assets
-
-
-
Consideration
9,017
Payments of other loans and bank loans on acquisition
(9,071)
Net consideration
-
Goodwill on acquisition
-
The acquired subsidiary contributed a loss of 121,000 to the profit before tax of the Group. The fair value of the investment properties at acquisition was based on the purchase price of the property as a result of the valuers having no clear comparable alternatives. The valuation performed at the year-end amounted to 24,000,000 and was obtained from Knight Frank. The fall in the value of the property in this period related to the increased stamp duty rates introduced by the government in its budget on 16 March 2016.
The fair value adjustment reclassifies the property as an investment property rather than a property held for resale following the change in management of the property.Acquisition related costs
The Group incurred acquisition related costs of 401,491 related to professional fees paid for due diligence, general professional fees and legal related costs. These costs have been included in administrative expenses in the Group's consolidated income statement.
Effect on Group results of the acquisitions
If both these acquisitions had occurred on 1 April 2015, Group revenue would have been an estimated 16.7m and Group profit before tax would have been an estimated 13.0m. In determining these amounts, management has assumed that the fair value adjustments that arose on the date of acquisition would have been the same if the acquisition occurred on 1 April 2015.
Dering Properties (Sutton) Limited
The acquisition of Dering Properties (Sutton) Limited was made on 17 August 2015. The directors have taken the view that this acquisition had similar attributes to that of an asset purchase rather than a business combination and therefore the value of the asset at the acquisition date amounting to 3,925,000 has been added to the additions within investment properties together with the costs of the acquisition amounting to 104,684.
Acquisition in year ended 31 March 2015
On 26 August 2014 the Group acquired 100% of the share capital of Property Investment Holdings Limited (PIH) for a consideration of 3,613,828. The consideration was satisfied by issuing 1,103,459 ordinary 10p shares at a fair value price of 3.275. PIH is a property investment company which was acquired to expand the Group's property portfolio.
Carrying value at acquisition date
Adjustments
Fair value at acquisition date
'000
'000
'000
Investment properties
29,385
2,356
31,741
Tangible fixed assets
-
-
-
Deferred tax asset
-
273
273
Receivables and prepayment
26
279
305
Cash at bank and in hand
-
-
-
Payables and other creditors
(732)
-
(732)
Bank loans and overdraft
(27,973)
-
(27,973)
Deferred tax
(401)
401
-
Net assets
305
3,309
3,614
Consideration
3,614
Goodwill on acquisition
-
The acquired subsidiary contributed 4,102,851 to the profit before tax of the Group. If this acquisition had occurred on 1 April 2014, Group revenue would have been an estimated 9.7m and Group profit before tax would have been an estimated 14.4m. In determining these amounts, management has assumed that the fair value adjustments that arose on the date of acquisition would have been the same if the acquisition occurred on 1 April 2014.
Deferred tax asset amounting to 273,029 was recognised as a fair value adjustment at the acquisition date being management's estimate, based on budgets and forecasts, of the future utilisation of tax losses of approximately 9m that were available to carry forward following the refinancing of the bank loans of the PIH which took place at acquisition. The deferred tax asset was increased to 500,000 at 31 March 2015 as a result of the restructuring of PIH and the repayment of 10m of intra group loans which has resulted in increasing the anticipated future annual profits of PIH.
No deferred tax has been recognised on the adjustments to fair value as a result of the historical cost of the investment properties exceeding their fair value.
The fair value of the investment properties at acquisition was based on a valuation performed at the time of the acquisition amounting to 32,020,000 obtained from DTZ Debenham Tie Leung Limited less a lease incentive balance which has been included in prepayments amounting to 278,901.
A fair value adjustment to prepayments amounting to 278,901 was made to bring the revenue recognition policy of PIH into line with that of the Group so that the rental income from investment properties leased out under operating leases is recognised in the Income Statement on a straight-line basis over the term of the lease.
Acquisition related costs
The Group incurred acquisition related costs of 638,668 related to professional fees paid for due diligence, general professional fees and legal related costs. These costs have been included in administrative expenses in the Group's consolidated income statement.
13 Investment Properties
Freehold Investment properties
Leasehold Investment properties
Total
'000
'000
'000
At 1 April 2014
41,620
17,820
59,440
Arising on acquisition of subsidiary undertaking
31,741
-
31,741
Additions - refurbishment
2,497
11
2,508
Additions - new properties
305
-
305
Gains on revaluation of investment property
9,180
589
9,769
Disposals
(775)
-
(775)
At 1 April 2015
84,568
18,420
102,988
Arising on acquisition of subsidiary undertakings
44,880
-
44,880
Additions - refurbishment
1,149
33
1,182
Additions - new properties
18,653
4,886
23,539
Gains on revaluation of investment properties
1,840
1,780
3,620
Disposals
(1,667)
-
(1,667)
At 31 March 2016
149,423
25,119
174,542
Investment properties are stated at fair value as determined by the Directors. The fair value of the Group's property portfolio is based upon external valuations and is inherently subjective. The fair value represents the amount at which the assets could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arms-length transaction at the date of valuation, in accordance with International Financial Reporting Standard 13. The fair value of each of the properties has been assessed by the directors. In determining the fair value of investment properties, the directors make use of historical and current market data as well as existing lease agreements
As a result of the level of judgement used in arriving at the market valuations, the amounts which may ultimately be realised in respect of any given property may differ from the valuations shown in the statement of financial position.
In addition to the gain on revaluation of investment properties included in the table above, realised gains of 290,525 (2015: 177,698) relating to investment properties disposed of during the year were recognised in profit or loss.
A reconciliation of the valuations carried out by the external valuers to the carrying values shown in the balance sheet was as follows:
2016
2015
'000
Scanlans Consultant Surveyors LLP
2,017
2,260
Cushman & Wakefield LLP
147,174
65,215
DTZ Debenham Tie Leung Limited
-
35,280
Knight Frank
24,000
-
Directors valuation
250
-
Fair value
173,441
102,755
Adjustment in respect of minimum payment under head leases separately included as a liability in the balance sheet
2,076
1,220
Less lease incentive balance included in prepayments
(975)
(987)
Carrying value
174,542
102,988
Investment properties with a carrying value of 151,065,990 (2015: 101,768,108) are subject to a first charge to secure the Group's bank loans amounting to 72,678,233 (2015: 36,205,461).
The valuations of all investment property held by the Group is classified as Level 3 in the IFRS 13 fair value hierarchy as they are based on unobservable inputs. There have been no transfers between levels of the fair value hierarchy during the year.
Valuation process
The valuation reports produced by the external valuers are based on information provided by the Group such as current rents, terms and conditions of lease agreements, service charges and capital expenditure. This information is derived from the Group's financial and property management systems and is subject to the Group's overall control environment. In addition, the valuation reports are based on assumptions and valuation models used by the valuers. The assumptions are typically market related, such as yields and discount rates, and are based on their professional judgment and market observations. Each property is considered a separate asset, based on its unique nature, characteristics and the risks of the property.
The executive director responsible for the valuation process verifies all major inputs to the external valuation reports, assesses the individual property valuation changes from the prior year valuation report and holds discussions with the external valuers. When this process is complete, the valuation report is recommended to the Audit Committee, which considers it as part of its overall responsibilities.
The key assumptions made in the valuation of the Group's investment properties are:
- the amount and timing of future income streams;
- anticipated maintenance costs and other landlord's liabilities; and
- an appropriate yield.
Valuation technique
The valuations reflect the tenancy data supplied by the Group along with associated revenue costs and capital expenditure. The fair value of the commercial investment portfolio has been derived from capitalising the future estimated net income receipts at capitalisation rates reflected by recent arm's length sales transactions.
31 March 2016
Significant unobservable inputs
Cushman & Wakefield
Knight Frank
Scanlans
Value of investment properties
147,174,000
24,000,000
2,017,000
Area (sq ft)
1,710,355
114,274
22,820
Gross Estimated Rental Value
12,559,734
1,775,104
196,910
Net Initial Yield
Minimum
Maximum
Weighted average
-6.9%
13.4%
6.1%
6.3%
31.0%
7.0%
8.3%
10.5%
9.8%
Reversionary Yield
Minimum
Maximum
Weighted average
5.5%
15.8%
6.7%
6.9%
6.9%
6.9%
8.3%
10.5%
9.8%
Equivalent Yield
Minimum
Maximum
Weighted average
3.2%
12.1%
8.0%
6.3%
17.5%
7.5%
8.3%
10.5%
9.8%
Negative Net Initial Yields arise where properties are vacant or partially vacant and void costs exceed rental income
31 March 2015
Significant unobservable inputs
Cushman & Wakefield
DTZ
Scanlans
Value of investment properties
65,215,000
35,280,000
2,260,000
Area (sq ft)
1,095,327
301,392
22,820
Gross Estimated Rental Value
6,703,332
2,740,900
195,653
Net Initial Yield
Minimum
Maximum
Weighted average
-6.4%
13.8%
7.6%
3.2%
10.8%
6.5%
7.5%
10.0%
8.5%
Reversionary Yield
Minimum
Maximum
Weighted average
6.0%
16.3%
6.4%
5.9%
9.6%
7.0%
7.5%
10.0%
8.5%
Equivalent Yield
Minimum
Maximum
Weighted average
0.9%
13.5%
9.0%
6.0%
9.0%
7.2%
7.5%
10.0%
8.5%
Sensitivity of measurement to variations in the significant unobservable inputs
Unobservable input
Impact on fair value measurement of significant increase in input
Impact on fair value measurement of significant decrease in input
Gross Estimated Rental Value
Increase
Decrease
Net Initial Yield
Decrease
Increase
Reversionary Yield
Decrease
Increase
Equivalent Yield
Decrease
Increase
The relationship between the unobservable inputs and their impact on the fair value measurement is not certain. Changes to the tenancies and/or income profile of an investment asset may also impact the fair value outside one or more of the above inter-relationships according to individual circumstances.
14 PROPERTY, PLANT AND EQUIPMENT
IT,fixtures and fittings
000At 1 April 2014
1
Assets acquired
-
Additions
62
At 1 April 2015
63
Assets acquired
-
Additions
3
At 31 March 2016
66
Depreciation
At 1 April 2014
-
Provided during the year
11
At 1 April 2015
11
Provided during the year
18
At 31 March 2016
29
Net book value at 31 March 2016
37
Net book value at 31 March 2015
52
15 TRADE AND OTHER RECEIVABLES
2016
2015
000
000
Current
Gross amounts receivable from tenants
2,727
1,938
Less: provision for impairment
(243)
(90)
Net amount receivable from tenants
2,484
1,848
Other taxes
68
5
Deposit on purchase of investment property
-
1,000
Other debtors
37
27
Accrued income
150
63
Prepayments
588
432
3,327
3,375
2016
2015
000
000
Non-Current
Accrued income
825
924
825
924
Accrued income amounting to 975,000 (2015: 986,892) relates to rents recognised in advance as a result of spreading the effect of rent free and reduced rent periods, capital contributions in lieu of rent free periods and contracted rent uplifts over the expected terms of their respective leases.
Movements in the provision for impairment of trade receivables were as follows:
2016
2015
'000
'000
Brought forward
90
89
Arising on acquisition
-
10
Utilised in the period
(11)
(33)
Provisions increased
164
24
243
90
As at 31 March, the analysis of trade receivables that were past due but not impaired is as follows:
2016
2015
'000
'000
0-30 days
2,106
1,599
31-60 days
95
(34)
61-90 days
66
52
91 - 120 days
46
204
More than 120 days
171
27
2,484
1,848
16 CASH AND CASH EQUIVALENTS
All of the Group's cash and cash equivalents at 31 March 2016 and 31 March 2015 are in sterling and held at floating interest rates.
2016
2015
'000
'000
Cash and cash equivalents
8,576
12,278
The Directors consider that the carrying amount of cash and cash equivalents approximates to their fair value.
17 TRADE AND OTHER PAYABLES
2016
2015
'000
'000
Trade payables
638
242
Corporation tax
662
-
Other taxes
1,036
587
Other payables
67
21
Deferred rental income
2,605
1,843
Accruals
1,807
394
6,815
3,087
18 BORROWINGS
2016
2015
'000
'000
Current
Bank loans
2,233
400
Non-current liabilities
Bank loans
69,711
35,406
Total borrowings
71,944
35,806
2016
2015
'000
'000
Non-current liabilities
Secured Bank loans drawn
70,445
35,806
Unamortised lending costs
(734)
(400)
69,711
35,406
The maturity profile of the Group's debt was as follows
2016
2015
'000
'000
Within one year
2,233
400
From one to two years
17,068
20,003
From two to five years
53,377
15,803
72,678
36,206
Facility and arrangement fees
As at 31 March 2016
Secured Borrowings
Margin over LIBOR %
Maturity date
Loan
Balance
'000
Unamortised facility fees '000
Facility drawn
'000
Santander Bank Plc
Lloyds Bank Plc
National Westminster Bank plc
2.25%
2.10%
2.50%
Jun 2020
May 2019
Mar 2021
9,815
4,246
21,734
(150)
(66)
(266)
9,965
4,312
22,000
Nationwide Building Society
Close Brothers Group plc
2.45%
4.00%
Nov 2020
Sep 2017
19,796
1,193
(204)
(7)
20,000
1,200
Barclays Bank plc
2.75%
Jul 2017
15,160
(41)
15,201
71,944
(734)
72,678
As detailed in note 13 the bank borrowings are secured on investment properties with a carrying value of 151,065,990.The Group has an unused loan facility amounting to 8,000,000 (2015: nil). Interest is charged on this facility at a rate of 1.25% and is payable quarterly. This facility is secured on the investment properties held by Property Investment Holdings Limited and Palace Capital (Properties) Limited
The Group has chosen not to enter into any hedging to date as a result of the historically low interest rates and constantly monitors this approach to manage interest rate risk.
The Group has been in compliance with all financial covenants of the above facilities applicable throughout the year.
19 GEARING and loan to value RATIO
The calculation of gearing is based on the following calculations of net assets and net debt:
2016
2015
'000
'000
Net asset value
106,815
80,016
Borrowings
71,944
35,806
Obligations under finance leases
2,067
1,214
Cash and cash equivalents
(8,576)
(12,278)
Net Debt
65,435
24,742
NAV Gearing
61.3%
30.9%
The calculation of bank loan to property value is calculated as follows:
2016
2015
'000
'000
Fair value of Property portfolio
173,441
102,755
Borrowings - Bank loans
72,678
36,205
Cash at bank
(8,576)
(12,278)
Net bank borrowings
64,102
23,927
Loan to value ratio
41.9%
35.2%
Net Loan to value ratio
37.0%
23.3%
20 LEASES
Operating lease receipts in respect of rents on investment properties are receivable as follows:
2016
2015
'000
'000
Within one year
12,165
8,269
From one to two years
10,734
6,984
From two to five years
24,987
12,999
From five to 25 years
44,204
12,139
After 25 years
685
693
92,775
41,084
Operating lease payments in respect of rents on leasehold properties occupied by the Group are payable as follows:
2016
2015
'000
'000
Within one year
45
45
From one to two years
12
45
From two to five years
-
12
57
102
Finance lease obligations in respect of rents payable on leasehold properties were payable as follows:
2016
2015
Minimum lease payments
Interest
Present value of minimum lease payments
Present value of minimum lease payments
'000
'000
'000
'000
Within one year
130
(128)
2
2
From one to two years
130
(128)
2
2
From two to five years
386
(380)
6
6
From five to 25 years
2,515
(2,447)
68
64
After 25 years
10,316
(8,327)
1,989
1,140
13,477
(11,410)
2,067
1,214
The net carrying amount of the leasehold properties is shown in note 13.The Group has over 200 leases granted to its tenants. These vary dependent on the individual tenant and the respective property and demise and vary considerably from short term leases of less than 1 year to longer term leases of over 10 years. A number of these leases contain rent free periods. Standard lease provisions include service charge payments and recovery of other direct costs. All investment properties in the Group's portfolio generated rental income during the both the current and prior periods except for one property, with an investment value of 1.5m, which was vacant throughout the current year but had some rental income in the prior year. The direct operating costs for this property during the year ended 31 March 2016 amounted to 163,000.
21 Share capital
2016
2015
Authorised, issued and fully paid share capital is as follows:
'000
'000
25,781,229 Ordinary Shares of 10p each (2015: 20,225,673)
2,578
2,023
315,937 Deferred Shares of 90p each (2015: 315,937)
284
284
2,862
2,307
2016
2015
Reconciliation of movement in ordinary share capital
'000
'000
At start of year
2,023
1,244
Issued in the year
555
779
At end of year
2,578
2,023
Year ending 31 March 2016
On 17 June 2015 the company issued 5,555,556 ordinary 10p shares at a price of 3.60. Issue costs amounting to 885,383 were incurred and have been deducted from the share premium account.
Year ending 31 March 2015
On 23 June 2014 79,665 warrants were exercised and as a result the company issued 79,665 ordinary 10p shares at a price of 2.00.
On 26 August 2014 the company issued 6,451,612 ordinary 10p shares at a price of 3.10. Issue costs amounting to 795,684 were incurred and have been deducted from the share premium account.
In addition, on the same day the company issued 1,103,459 ordinary 10p shares in exchange for 100% of the share capital of Property Investment Holdings Limited. The fair value of these shares was 3.275 per share.
On 18 February 2015 150,000 warrants were exercised and as a result the company issued 150,000 ordinary 10p shares at a price of 2.00.
The Deferred Shares have the following rights and restrictions. As regards income the Deferred Shares shall not entitle the holders thereof to receive any dividend or other distribution unless and until the holders of the Ordinary Shares shall have received in aggregate amongst them the sum of 100,000,000 in respect of such dividend or distribution. As regards voting the Deferred Shares shall not entitle the holders thereof to receive notice of or to attend or vote at any General Meeting of the Company. As regards capital on a return of capital on a winding up the holders of Deferred Shares shall only be entitled to receive the amount paid up on such shares after the holders of the Ordinary Shares have received the sum of 1,000,000 for each Ordinary Share held by them and shall have no other right to participate in the assets of the Company.
Share options:
2016
2015
Reconciliation of movement in outstanding share options
No of options
No of options
At start of year
448,754
811,752
Issued in the year
120,268
-
Exercised in the year
-
(229,665)
Lapsed in the year
-
(133,333)
At end of year
569,022
448,754
As at 31 March 2016, the Company had the following outstanding unexpired options.
Description of unexpired share options
2016
2015
No of options
Weighted average Option price
No of options
Weighted average Option price
Senior executive plan (note 22)
549,972
13p
429,704
17p
Warrants issued to Nominated Advisors and Broker
19,050
200p
19,050
200p
Total
569,022
20p
448,754
25p
Exercisable
50,643
216p
19,050
200p
Not exercisable
518,379
0p
429,704
17p
Warrants issued to the Groups Nominated advisors and Broker
No new share options were issued to the Group's Nominated advisor or Broker during the year. The Group's Nominated advisor and Broker received 248,715 options in 2014 in exchange for part of the fee charged by the brokers for the share issue that occurred during that year and the directors considered the fair value of the service to be 50,000. These options were exercisable at a price of 2.00 per share.
No new share options were issued to the Group's Broker and none were exercised during the year (2015: issued none and exercised 229,665). The average share price at the date of exercise was 3.48 per share.
The weighted average remaining contractual life of the options outstanding at 31 March 2016 was 2 years (2015: 2).
22 Share bASED PAYMENTS
Senior executive plan
The following table illustrates the number and weighted average exercise prices of, and movements in, share options during the year:
Number of options
Exercise price
Date from which exercisable
Expiry
date
Outstanding at 31 March 2014 and 2015
429,704
17p
Issued during the period (LTIP 2015)
120,268
0p
8 Dec 2018
8 Dec 2018
Outstanding at 31 March 2016
549,972
13p
LTIP 2014
The options are awarded to management on achievements against target on two separate measures over the three financial years ending 31 March 2017. Half the options will be awarded based on the first target and half based on the achievement of the second.
Earnings per share (EPS) growth: is based on a proforma profit after tax excluding property revaluations and disposal profits/losses for the financial year. This target will measure the compound growth in EPS over the three year period ending 31 March 2017.
Total shareholder return (TSR) measures the total shareholder return (price rise plus dividends) over the period from 21 October 2013 to 31 March 2017. The base price being 2.00 per share which was the placing price on that day.
Average annual TSR (compounded) over the TSR performance period
Vesting %
Average annual EPS growth (compounded) over the EPS performance period
Vesting %
<20%
0
<15%
0
Equal to 20%
33.33
Equal to 15%
50
Equal to 25%
66.66
Equal to 30%
100
Equal to 30%
100
For the TSR measure, the achievement of between 25 per cent and 30 per cent compound growth will result in the number of Ordinary shares vesting to be calculated on a straight line basis between 66.66 per cent and 100 per cent. A similar rule will apply between 20% and 25% and for the EPS condition between 15% and 30%.
LTIP 2015
The options are awarded to management on achievements against target on two separate measures over the three financial years ending 30 September 2018. Half the options will be awarded based on the first target and half based on the achievement of the second.
Net asset value per share (NAV) growth: is based on the Company's EPRA NAV value per share as at 30 September 2018 adding back dividends per share paid during the period. This target will measure the compound growth in NAV over the three-year period ending 30 September 2018. The base price being 4.04 per share which was the value at the 30 September 2015.
Total shareholder return (TSR) measures the total shareholder return (price rise plus dividends) over the period from 1 October 2015 to 30 September 2018. The base price being 3.70 per share which was the market price at the grant date.
Average annual TSR (compounded) over the TSR performance period
Vesting %
Average annual NAV growth (compounded) over the EPS performance period
Vesting %
<8%
0
<8%
0
Equal to 8%
33.33
Equal to 8%
33.33
Equal to 13%
100.00
Equal to 13%
100
For the TSR measure, the achievement of between 8 per cent and 13 per cent compound growth will result in the number of Ordinary shares vesting to be calculated on a straight line basis between 33.33 per cent and 100 per cent. A similar rule will apply for the NAV condition between 8% and 13%.
The fair value of grants was measured at the grant date using a Black-Scholes pricing model, taking into account the terms and conditions upon which the instruments were granted. The services received and a liability to pay for those services are recognised over the expected vesting period. The main assumptions of the Black-Scholes pricing model are as follows:
Grant date
8.12.15
Exercise price
0p
Term
3 years
Expected volatility
25%
Expected dividend yield
4%
Risk free rate
1%
Expected forfeiture p.a.
0%
For the portion of the options subject to market conditions (TSR measure), it has been assessed that there was a likelihood of 50% the options vesting.
The fair value of the options granted was 1.65 for the TSR tranche and 3.30 for the NAV tranche.
The expense recognised for employee services received during the period is shown in the following table:
2016
2015
'000
'000
Palace Capital No 1 share option scheme
-
5
LTIP 2014
77
109
LTIP 2015
33
-
Total expense arising from share-based payment transactions
110
114
23 RELATED PARTY TRANSACTIONS
Accounting services amounting to 75,633 (2015: 56,057) have been provided to the Group by Stanley Davis Group Limited, a company where Stanley Davis is a director.
24 CAPITAL COMMITMENTS
The obligation for capital expenditure relating to the construction, development or enhancement of investment properties entered into by the Group at 31 March 2016 amounted to 1,435,985 (2015 nil).
25 POST BALANCE SHEET EVENT
There have been no post balance sheet events that would require disclosure or adjustment to these financial statements.
26 Financial RISK MANAGEMENT
The Group's principal financial liabilities are loans and borrowings. The main purpose of the Group's loans and borrowings is to finance the acquisition and development of the Group's property portfolio. The Group has rent and other receivables, trade and other payables and cash and short-term deposits that arise directly from its operations.
All financial assets are classified as loans and receivables and all financial liabilities are measured at amortised cost.
The Group is exposed to market risk (including interest rate risk and real estate risk), credit risk and liquidity risk.
The Group's senior management oversee the management of these risks, and the Board of Directors has overall responsibility for the determination of the Group's risk management objectives and policies and it sets policies that seek to reduce risk as far as possible without unduly affecting the Group's competitiveness and flexibility. Further details regarding these policies are set out below:
Capital risk management
The Group considers its capital to comprise its share capital, share premium, other reserves and retained earnings which amounted to 106,815,113 at 31 March 2016 (2015: 80,015,514). The Group's capital management objectives are to safeguard the entity's ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders and to provide an adequate return to shareholders by pricing its services commensurately with the level of risk.
Within the subsidiaries of the Group, the business has covenanted to maintain a specified leverage ratio and a net interest expense coverage ratio, all the terms of which have been adhered to during the year.
The Group manages its capital structure, and makes adjustments to it, in the light of changes in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares.
Significant Accounting Policies
Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed at the beginning of the notes to these financial statements.
Foreign currency risk
The Group has minimal exposure to the differing types of foreign currency risk. It has no foreign currency denominated monetary assets or liabilities and does not make sales or purchases from overseas countries.
Interest rate risk
The interest rate exposure profile of the Group's financial assets and liabilities as at 31 March 2016 and 31 March 2015 were:
Nil rate
assets and liabilities
Floating
rate assets
Fixed rate liability
Floating rate liability
Total
'000
'000
'000
'000
'000
As at 31 March 2016
Trade and other receivables
2,521
-
-
-
2,521
Cash and cash equivalents
-
8,576
-
-
8,576
Trade and other payables
(2,512)
-
-
-
(2,512)
Bank borrowings
-
-
-
(71,944)
(71,944)
Obligation under finance leases
-
-
(2,067)
-
(2,067)
9
8,576
(2,067)
(71,944)
(65,426)
Nil rate
assets and liabilities
Floating
rate assets
Fixed rate liability
Floating rate liability
Total
'000
'000
'000
'000
'000
As at 31 March 2015
Trade and other receivables
2,875
-
-
-
2,875
Cash and cash equivalents
-
12,278
-
-
12,278
Trade and other payables
(658)
-
-
-
(658)
Bank borrowings
-
-
-
(35,806)
(35,806)
Obligation under finance leases
-
-
(1,214)
-
(1,214)
2,217
12,278
(1,214)
(35,806)
(22,525)
The Group is exposed to changes in interest rates as a result of the cash balances that it holds. The cash balances of the Group at the year end were around 8m (2015: 12m). The income statement would be affected by 80,000 (2015: 120,000) by a reasonably possible one percentage point change in floating interest rates on a full year basis.
The Group has loans amounting to 72,678,000 (2015: 36,205,461) which have interest payable at rates linked to the 3 month Libor interest rates or bank base rates. A 1% increase in the Libor or base rate will have the effect of increasing interest payable by 726,780 (2015: 362,055).
The Group is therefore relatively sensitive to changes in interest rates. The directors regularly review its position with regard to interest rates in order to minimise the Group's risk.
Credit risk management
Credit risk refers to the risk that a counter-party will default on its contractual obligations resulting in financial loss to the Group.
The Group has its cash held on deposit with four large banks in the United Kingdom. At 31 March 2016 the concentration of credit risk held with Barclays Bank plc, the largest of these banks, was 7,138,979 (2015: 12,075,426). Credit risk on liquid funds is limited because the counterparty is a UK bank with a high credit rating assigned by international credit rating agencies.
Credit risk also results from the possibility of a tenant in the Group's property portfolio defaulting on a lease. The largest lease amounts to 4.2% (2015: 7.0%) of the Group's anticipated income. The directors assess a tenants' credit worthiness prior to granting leases and employ professional firms of property management consultants to manage the portfolio to ensure that tenants debts are collected promptly and the directors in conjunction with the property managers take appropriate actions when payment is not made on time.
The carrying amount of financial assets (excluding cash balances) recorded in the financial statements, net of any allowances for losses, represents the Group's maximum exposure to credit risk without taking account of the value of any collateral obtained. The carrying amount of these assets at 31 March 2016 was 2,521,000 (2015: 2,874,983). The details of the provision for impairment are shown in note 15.
Liquidity risk management
The Group's policy is to hold cash and obtain loan facilities at a level sufficient to ensure that the Group has available funds to meet its medium term capital and funding obligations, including organic growth and acquisition activities, and to meet certain unforeseen obligations and opportunities. The Group holds cash to enable the Group to manage its liquidity risk.
The Group monitors its risk to a shortage of funds using a monthly cash management process. This process considers the maturity of both the Group's financial investments and financial assets (e.g. accounts receivable, other financial assets) and projected cash flows from operations.
The Group's objective is to maintain a balance between continuity of funding and flexibility through the use of multiple sources of funding including bank loans, term loans, loan notes, overdrafts and finance leases.
The table below summarises the maturity profile of the Group's financial liabilities based on contractual undiscounted payments:
On demand
0 - 1 years
1 to 2 years
2 to 5 years
> 5 years
Total
'000
'000
'000
'000
'000
'000
As at 31 March 2016
Interest bearing loans
-
4,529
19,967
57,234
-
80,730
Finance leases
-
130
130
386
12,831
13,477
Trade and other payables
2,521
-
-
-
-
2,521
2,521
4,659
20,097
57,620
12,831
96,728
On demand
0 - 1 years
1 to 2 years
2 to 5 years
> 5 years
Total
'000
'000
'000
'000
'000
'000
As at 31 March 2015
Interest bearing loans
-
1,696
20,961
16,974
-
39,631
Finance leases
-
87
87
261
8,023
8,458
Trade and other payables
658
-
-
-
-
658
658
1,783
21,048
17,235
8,023
48,747
Derivative financial instruments
The Group does not currently use derivative financial instruments as hedging is not considered necessary. Should the Group identify a requirement for the future use of such financial instruments, a comprehensive set of policies and systems, as approved by the Directors, will be implemented.
In accordance with IAS 39, "Financial instruments: recognition and measurement", the Group has reviewed all contracts for embedded derivatives that are required to be separately accounted for if they do not meet specific requirements set out in the standard. No material embedded derivatives have been identified.
Fair value measurements
Set out below is a comparison by class of the carrying amounts and fair value of the Group's financial instruments that are carried in the financial statements:
Carrying amount
Fair value
2016
2015
2016
2015
'000
'000
'000
'000
Financial assets
Trade and other receivables
2,521
2,875
2,521
2,875
Cash and cash equivalents
8,576
12,278
8,576
12,278
11,097
15,153
11,097
15,153
Current financial liabilities
Trade payables
638
242
638
242
Other payables
67
21
67
21
Accruals
1,807
394
1,807
394
Borrowings - bank loans
71,944
35,806
71,944
35,806
Obligations under finance leases
2,067
1,214
2,067
1,214
76,523
37,677
76,523
37,677
The directors consider that the fair value of the Group's financial instruments are not materially different to their carrying value. This view was formed on the basis that, as indicated in note 18 of the financial statements, the bank loans and the loan notes attracted a variable rate of interest and that the cash deposits, and trade payables and receivables, are short term in nature. Consequently, in accordance with paragraph 29(a) of IFRS 7, no fair value information has been disclosed and the information in paragraph 97 of IFRS 13 is not required.
This information is provided by RNSThe company news service from the London Stock ExchangeENDFR UOUNRNVANRAR
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