REG - Palace Capital PLC - Half-year Report

Palace CapitalAnnouncement

26/11/2018 07:05

RNS Number : 4051I
Palace Capital PLC
26 November 2018
 


Palace Capital plc
("Palace Capital", the "Company" or the "Group")
 
Interim Results for the 6 months ended 30 September 2018
 
Continued delivery of income and capital growth through active asset management
Palace Capital (LSE: PCA), the Main Market listed property investment company that has a diversified portfolio of UK regional commercial real estate in carefully selected locations outside of London, is pleased to announce its unaudited half yearly results for the six months ended 30 September 2018.
Highlights
Financial Highlights
·      Joined FTSE SmallCap and FTSE All-Share Index in May 2018 following the premium listing on the Main Market in March 2018
·      EPRA NAV per share up 1.4% to 421p (Mar-18: 415p)
·      Total accounting return for the period of 4.0% (NAV growth plus dividends paid)
·      Portfolio valuation £283.3m, up 2.4% from 31 March 2018 (Mar-18: £276.7m)
·      Gross rental income £9.2m, up 29.0% (Sep-17: £7.1m)
·      IFRS Profit after Tax of £7.3m, up 67.1% (Sep-17: £4.4m)
·      Quarterly Dividends maintained at 4.75p per quarter
·      Adjusted EPS of 8.0p, 0.84x covering dividends of 9.5p for the 6 months (uncovered due to increased equity base following £70m raise in October 2017 and patient strategy on acquisitions)
·      Net debt £84.0m, maintaining conservative net LTV of 30.3% (Mar-18: 29.9%)
·      Average cost of debt 3.5% with 70% fixed (Mar-18: 3.4% and 70% fixed)
 
Operational Highlights
·      Total property return of 5.3%, outperforming the MSCI IPD Quarterly Benchmark of 3.3%
·      Like-for-like valuation increase of 1.7%, driven by industrial and office sectors
·      Annualised contracted rental income £17.4m per annum with significant reversionary potential (ERV: £21.1m per annum)
·      Demolition due to be completed next month of 2-acre Hudson Quarter site in York, ready for construction to start in first quarter of 2019
·      One disposal for £0.95m, 30.1% above 31 March 2018 book valuation
·      22 lease events in the period across 140,000 sq ft 9% ahead of ERV
·      Overall EPRA occupancy remains high at 88% (Mar-18: 90%) to a sustainable tenant base
·      WAULT of 5.5 years to break and 7.3 years to expiry
 
Neil Sinclair, CEO of Palace Capital, said: 
"Today's results are further evidence of the continued success of our focus on total returns, driving both income and capital growth.
"Following a busy 12 months to 31 March 2018, where we added significantly to our portfolio with the £68 million RT Warren portfolio acquisition, this period has very much been one of consolidation. We have been actively assessing the investment market, but remain resolute in our adherence to our investment strategy and have found it difficult to find value, where an appropriate return can be delivered to our shareholders, in the current market. However, in these somewhat uncertain times we believe there will be opportunities over the coming six months and, with a strong balance sheet, we are well positioned to act when the right opportunity arises."             
 
Stanley Davis, Chairman of Palace Capital, said:
"I am very pleased to report that the Company is delivering increasing growth both in income and capital value. While our EPRA NAV per share was diluted somewhat last year with the successful £70 million equity raise, notwithstanding this we have virtually doubled our NAV since listing five years ago and we have outperformed the sector over that period on a total accounting return basis of 128%.
The acquisition of the RT Warren portfolio will in due course be earnings and value enhancing for the company and, with momentum building in our asset management progress, the signs of this are beginning to show. Our strategy of selectively investing in the best towns and cities in the UK outside of London is delivering and with a positive outlook for regional fundamentals, we believe we are well positioned for the year ahead."




For more information:


 




Palace Capital:


 




Neil Sinclair
Stephen Silvester


020 3301 8330




FTI Consulting:


 




Claire Turvey
Meth Tanyanyiwa


020 3727 1000
Palacecapital@fticonsulting.com




 
About Palace Capital PLC:
Palace Capital plc (LSE: PCA) is a Main Market listed property investment company that has a £283.3 million diversified portfolio of UK regional commercial property. The Company maintains a disciplined investment strategy focused on towns and cities outside of London that are characterised by thriving local economies and strengthening fundamentals. Within those locations, the highly experienced management team selects assets that provide opportunity to drive both capital value and long term rental income through tailored active asset management programmes, ultimately delivering attractive shareholder returns.
 
 Chairman's Statement
I am pleased to report our interim results for the six months ended 30 September 2018, which shows that the Group has made a profit before tax of £8.4 million, up 71.9% from £4.9 million in the comparative period. We continue to exercise our brand of active management with successful lettings, rent reviews, lease renewals and one asset sale at 30.1% above 31 March 2018 book value. Reference has already been made to the fact that it is difficult to buy in the current market but we were successful in purchasing a small vacant office building in Fareham, Hampshire, for £0.75 million. This property immediately adjoins one of our existing holdings in our portfolio. We are evaluating our long-term options for this property which is part let until March 2020.
As at 30 September 2018, our portfolio was valued by Cushman and Wakefield and the directors at £283.3 million, with an annual contracted rent roll of £17.4 million and a net income after property costs of £15.8 million per annum. We are very conservatively geared at only 30.3% LTV net of cash. Our EPRA NAV per share has increased by 1.4% to 421p per share (March 2018: 415p). At 30 September 2018, the Group had a net asset value of £186.6 million (March 2018:  £183.3 million).
We continue to look to grow our recurring income but maintain a parallel focus on increasing capital values. This will enable us to maintain our dividend policy and grow NAV. For the six months to 30 September 2018, rental income, net of non-recoverable costs, totalled £8.1 million (up 25.5% from £6.5 million in the comparative period).
Our second quarterly dividend of 4.75p will be payable on 28 December 2018 to shareholders on the register as at 7 December 2018. As we have not made a significant acquisition for over a year this has caused a drag on our dividend cover which was 84% covered in the first six months of the year. However, we consider that this will resolve through a combination of earnings enhancing lettings through our active asset management within the existing portfolio and off the back of deploying resources in suitable acquisitions. In the meantime, we have every intention of maintaining the dividend.
We consider that we are different from most of our peer group. Firstly, we believe that we have created considerable shareholder value by making mainly corporate acquisitions rather than direct purchases. This has provided us with considerable savings in SDLT and often tangible benefits with inherent tax losses and capital allowances. Secondly, we are a property company and while we keep REIT status under review as a matter of course, the Board takes the view that this is the right vehicle through which to deliver on our objectives.
While it has been a challenge to find the right assets that meet our strict investment criteria in the current market, our highly regarded management team has been working hard in actively assessing investment opportunities throughout the period. Notwithstanding the positive activity in HY19 growing both income and capital, our prudent approach to acquisitions will likely have a marginal impact on our adjusted profit before tax for this financial year. However, we remain confident in our disciplined approach to making acquisitions that will deliver value for the portfolio. We are in a strong position to act swiftly when the right investment opportunities are identified as we have the cash and bank facilities available to deploy and we hope to make an announcement in this regard in the coming weeks.
 
ACQUISITIONS AND DISPOSALS
We continue to grow the Company by our entrepreneurial brand of active management, which requires a level of cash on the balance sheet, to ensure that we are able to carry out our development and refurbishment plans, and can opportunistically act on investment opportunities that meet our criteria.
We stated last year that we would sell the residential element of the RT Warren portfolio which, on acquisition, comprised 65 units. We sold three earlier this year and we will retain two for strategic reasons. We have now exchanged contracts to sell 50 units all of which are uncharged. The sale of the units will provide further flexibility for new acquisitions as well as our active management programme, which includes development and refurbishment.
In April we acquired a small vacant office building in Fareham in Hampshire for £0.75 million which immediately adjoins one of our holdings in our portfolio. We have medium term development plans for these two properties.
Our investment strategy has always been to focus on economically vibrant towns and cities which are being positively affected by strengthening fundamentals such as urbanisation and infrastructure improvements. In many of these locations there has been a significant reduction in space, be it offices or industrial assets, as a result of either permitted development, allowing change of use to residential, or the lack of speculative development. This is holding us in good stead, particularly in locations such as Southampton, Winchester, Newcastle and York.
PORTFOLIO ACTIVITY
Hudson Quarter, Toft Green, York
As shareholders are aware, we secured planning consent in August last year to redevelop this two-acre site only one minute's walk from York Railway Station with 127 flats, 5,000 sq ft of retail/restaurant space, 34,500 sq ft of offices and car parking. We also took the decision to undertake the development of this scheme ourselves, which we believe will deliver the best returns.
I am pleased to report that the demolition of the site is nearly complete and our Project Managers are in discussion with a major contractor who has submitted the most favourable tender with a view to work starting in February of next year.
We have agreed Heads of Terms with a leading bank to finance the construction element. We will be making a relatively small contribution to this element and we have the necessary cash resources to do so.
We do not intend to offer any of the residential units until the marketing suite has been completed in early June 2019. However, we formally launched the scheme as "Hudson Quarter" in October and we are already receiving strong interest through the website www.hudsonquarteryork.com 
We are very excited about this scheme which is due to be completed in January 2021.
 
2&3 St James Gate, Newcastle-upon-Tyne
We are delighted with this acquisition which comprises 82,500 sq ft of multi-let offices plus 16,500 sq ft of retail.
We will shortly commence a limited refurbishment of this property involving an outlay of £2 million which includes giving it a more prominent identity and improving a 11,000 sq ft office floor which has become vacant. Comparable properties in the area are letting at 15-20% more than what we are currently securing and with very limited development and shrinking office supply in Newcastle, we are optimistic about the prospects for this asset.
Sol, Northampton
While the challenges faced in the leisure sector have somewhat hindered our progress here, we continue to deliver a very satisfactory return from key tenants including Vue, Accor and Fitness for Less. In addition, with letting and managing agents having been appointed, we are seeing increased interest in the vacant space. I hope to be able to report some positive news in due course.
Boulton House, Chorlton Street, Manchester
We bought this 75,000 sq ft property for £10.45 million just before the result of the Referendum on the EU was announced and it is a good example of our ability to realise value potential. We have spent about £800,000 on the property to date and it was recently valued at £14.5 million. In 2016 the building was commanding rents at £12.50-£13.00 per sq ft, but we recently let about 2,000 sq ft of offices at £18.95 per sq ft. Manchester is a thriving city and we are very pleased with this investment.
249 Midsummer Boulevard, Milton Keynes
Milton Keynes is part of the growth corridor between Oxford and Cambridge. We have a vacant unit of 14,500 sq ft at this office building situated only a few minutes' walk from the railway station and we are hopeful of securing rents well in excess of what was being achieved when we bought it in 2016.
Bridge House, 41-45 High Street Weybridge
We have made a planning application for 4,000 sq ft of retail and 28 apartments in this affluent Surrey town. A decision on this is anticipated in Q1 of the next financial year.
Museum Street/Lendal, York
This retail and office building was acquired as part of the RT Warren Portfolio. There is a major shortage of offices in York and the vacancy rate has fallen to 3%. We have 5,500 sq ft, most of which had been vacant for some time but in urgent need of refurbishment. We have now placed a contract to refurbish the offices and this is due for completion in February 2019.
Regency House, High Street, Winchester
This building is partly let to a firm of solicitors but 4,600 sq ft is vacant and we have just placed a contract to refurbish it. Again, there is a severe shortage of office space in Winchester and we are very hopeful of growing the value considerably.
Aldi Supermarket, Mumby Road, Gosport, Hants
Post the end of the half year we announced that we had concluded a letting to Aldi on our Gosport property to include a small adjoining site for a term of 20 years at an increased rental of £291,000 per annum with annual increases.
Summary
In the upcoming period, there are a raft of new opportunities for us to address, ranging from lease expiries and redevelopments. A case in point is our property in Royal Leamington Spa, which currently comprises two office buildings of 40,000 sq ft producing £600,000 per annum. It sits on a 1.5 acre site in the town centre, just over an hour by train to Marylebone, and has very considerable potential that we will look to unlock in the future.
BALANCE SHEET
At the half year we had borrowings of £99.2 million at an average cost of 3.5% per annum, of which 70% is hedged. We continue to maintain positive working relationships with our banks and we see their contribution as key to enhancing the performance of our business.
Our second quarterly dividend of 4.75p will be payable on 28 December 2018 to shareholders on the register as at 7 December 2018. Our adherence to our investment criteria in the current market - which is absolutely the right approach for shareholders - means we have not made a significant acquisition for over a year. While this has resulted in a drag on our dividend cover, which was 84% covered in the first six months of the year, I firmly believe that, in time, this will resolve itself through a combination of earnings enhancing lettings, active asset management within the existing portfolio and off the back of deploying resources in suitable acquisitions.
CONCLUSION AND OUTLOOK
Our active management strategy is bearing fruit, and having sold or in the process of selling those properties with limited or no growth potential, we are focusing on our core sectors where we see the greatest opportunity in the coming years to grow both our income and capital returns: City centre offices close to railway stations in growth locations, and the industrial and distribution sector. We have had another successful period of growing both the income and capital and with a strong balance sheet we remain primed and ready to make further acquisitions which will be accretive to earnings.
The market has been somewhat uncertain, which was to be expected as we entered uncharted waters in negotiating our exit from the European Union, but the momentum behind the fundamentals that underpin our investment case continues to take a positive trajectory. We are a strong country full of talent and I am in no doubt that we have the resilience to weather every storm. Palace Capital is an exciting company with a growth strategy and we have built a quality portfolio full of potential with a management team second to none. I am very optimistic about our future.
 
STANLEY DAVIS, CHAIRMAN
23 November 2018
 
  
 
Palace Capital plc
Condensed consolidated statement of comprehensive income
For the six months ended 30 September 2018

 

 




 
 


 
 
 
 
Notes


 


Unaudited
6 months to
30 September
2018
£000


Unaudited
6 months to
30 September
2017
£000


Audited
Year to
31 March
2018
£000




 


 


 


 


 


 




Rental and other income


 


      3


 


9,210


7,138


16,733




Property operating expenses


 


 


 


(1,101)


(675)


(1,824)




Net property income


 


 


8,109


6,463


14,909




 


 


 


 


 


 




Administrative costs


 


 


(1,985)


(1,487)


(4,185)




Operating profit before gains on investment properties


 


 


6,124


4,976


10,724




 


 


 


 


 


 




Gains on revaluation of investment properties


8


 


3,880


1,396


5,738




Profit/(loss) on disposal of investment properties


 


 


211


(159)


274




Operating profit


 


 


10,215


6,213


16,736




 


 


 


 


 


 




Finance income


 


 


88


-


10




Finance costs


 


 


(1,953)


(1,354)


(3,442)




Profit before taxation


 


 


8,350


4,859


13,304




 


 


 


 


 


 




Taxation


   4


 


(1,078)


(507)


(773)




Profit for the period and total comprehensive income


 


 


7,272


4,352


12,531




 


 


 


                  


                 


                  




 


 


 


 


 


 




 


 


 


 


 


 




Earnings per ordinary share


 


 




Basic


6


 


15.9p


17.3p


35.9p




Diluted


6


 


15.8p


17.3p


35.8p



 
 
 
 
 
 
 
 
 



 
The accompanying notes form an integral part of these condensed consolidated interim financial statements.
 
 
Palace Capital plc


Condensed consolidated statement of financial position
30 September 2018

 





 


 


Notes


Unaudited
30 September
2018
£000


Unaudited
30 September
2017
£000


Audited
31 March
2018
£000




Non-current assets


 


 


 


 


 




Investment properties


 


8


260,178


202,832


253,863




Tangible fixed assets


 


 


103


129


121




 


 


 


260,281


202,961


253,984




 


 


 


 


 


 




Current assets


 


 


 


 


 




Assets held for sale


 


 


21,708


-


21,708




Trade and other receivables


 


9


5,702


5,018


5,551




Cash and cash equivalents


 


10


13,818


8,733


19,033




Total current assets


 


 


41,228


13,751


46,292




Total assets


 


 


301,509


216,712


300,276




 


 


 


 


 


                  




Current liabilities


 


 


 


 


 




Trade and other payables


 


11


(8,460)


(8,353)


(8,834)




Borrowings


 


12


(6,124)


(2,186)


(2,686)




Total current liabilities


 


 


(14,584)


(10,539)


(11,520)




 


 


 


 




Net current assets


26,644


3,212


34,772




 


 


 


 


 


 




Non-current liabilities


 


 


 


 


 




Borrowings


 


12


(91,692)


(90,464)


(97,157)




Deferred tax


 


 


(6,972)


(2,499)


(6,531)




Obligations under finance leases


 


 


(1,587)


(1,588)


(1,588)




Derivative Financial Instruments


 


 


(104)


-


(181)




Total non-current liabilities


 


 


(100,355)


(94,551)


(105,457)




 


 


 


 


 


 




Net Assets


 


 


186,570


111,622


183,299




 


 


 


 


 


                 




Equity


 


 


 


 


 




Share capital


 


13


4,639


2,580


4,639




Share premium account


 


 


125,019


59,444


125,036




Merger reserve


 


 


3,503


3,503


3,503




Capital redemption reserve


 


 


340


340


340




Treasury share reserve


 


 


(1,893)


(2,250)


(2,011)




Retained earnings


 


 


54,962


48,005


51,792




Equity shareholders' funds


186,570


111,622


183,299




 


 


 


 


 


                 




Basic NAV per ordinary share


 


7


407p


442p


400p




Diluted NAV per ordinary share


 


7


406p


441p


400p




EPRA NAV per ordinary share


 


7


421p


451p


415p



 
 
 
 
 
 
 



 
The accompanying notes form an integral part of these condensed consolidated interim financial statements.
The condensed consolidated interim financial statements were approved by the Board of Directors on 23 November 2018.
  
 
Palace Capital plc
Condensed consolidated statement of cash flows
For the six months ended 30 September 2018

 





 


 
 
 
 
Notes


Unaudited
6 months to
30 September
2018
£000


Unaudited
6 months to
30 September
2017
£000


Audited
Year to
31 March
2018
£000




Operating activities


 


 


 


 




Profit before tax


 


8,350


4,859


13,304




Adjustments for non-cash items: 


 


 


 


 




Loss/(Profit) on sale of investment properties


 


(211)


159


(274)




Gain on revaluation of investment properties


 


(3,880)


(1,396)


(5,738)




Depreciation


 


16


30


45




Share-based payment


 


113


100


174




Net finance costs


 


1,865


1,354


3,432




Cash generated by operations


 


6,253


5,106


10,943




Changes in working capital


 


(1,070)


(847)


(1,044)




 


 


 


 


 




Cash flows from operations


 


5,183


4,259


9,899




Corporation tax received/(paid)   


 


9


(111)


(395)




Interest and other finance costs paid


 


(1,620)


(913)


(2,714)




Interest received


 


11


-


10




Cash flows from operating activities


 


3,583


3,235


6,800




 


 


 


 


 




Investing activities


 


 


 


 




Purchase of property, plant and equipment


 


-


(117)


(123)




Capital expenditure on refurbishments and new developments


 


(2,368)


(925)


(2,754)




Purchase of investment property


 


(797)


(20,000)


(72,808)




Proceeds from disposal of investment properties


 


948


3,246


8,765




Amounts transferred out of/(into) restricted cash deposits


 


336


-


(805)




 


 


 


 


 




Cash flows from investing activities


 


(1,881)


(17,796)


(67,725)




 


 


 


 


 




Financing activities


 


 


 


 




Proceeds from issue of Ordinary Share capital


 


-


-


70,000




Costs from issue of Ordinary Share capital


 


(17)


-


(2,349)




Dividends paid


5


(4,355)


(2,389)


(6,744)




Bank loan received


 


4,146


17,545


53,393




Bank loan repaid


 


(6,343)


(2,682)


(46,327)




Capital element of finance lease rental payments


 


-


(361)


-




Loan issue costs


 


(13)


-


-




Cash flows from financing activities


 


(6,582)


12,113


67,973




 


 


 


 


 




Net (decrease)/increase in cash


 


(4,880)


(2,448)


7,048




Opening cash and cash equivalents


10


17,985


11,181


10,937




Closing cash and cash equivalents


10


13,105


8,733


17,985




 


 


                   


                   


                 




 


 


 


 


 




The accompanying notes form an integral part of these condensed consolidated interim financial statements.

 
Palace Capital plc
Condensed consolidated statement of changes in equity
For the six months ended 30 September 2018

 





 


 
Share
 Capital
£000


 
Share
 Premium
£000


Treasury Shares
Reserve
£000


 
Other
Reserves
£000


 
Retained Earnings
£000


 
Total 
equity
 £000




As at 31 March 2017


2,580


59,444


(2,250)


3,843


45,942


109,559




 


 


 


 


 


 


 




Total comprehensive income for the period


-


-


-


-


4,352


4,352




Share based payments


-


-


-


-


100


100




Dividends


-


-


-


-


(2,389)


(2,389)




 


     


     


 


 


  


  




As at 30 September 2017


2,580


59,444


(2,250)


3,843


48,005


111,622




 


 


 


 


 


 


 




Total comprehensive income for the period


-


-


-


-


8,179


8,179




Share based payments


-


-


-


-


74


74




Gross proceeds from issue of new shares


2,059


67,941


-


-


-


70,000




Costs from issue of new shares


 


(2,349)


 


 


 


(2,349)




Exercise of share options


-


-


239


-


(239)


-




Issue of deferred bonus share options


 


 


 


 


128


128




Dividends


-


-


-


-


(4,355)


(4,355)




 


 


 


 


 


 


 




As at 31 March 2018


4,639


125,036


(2,011)


3,843


51,792


183,299




 


 


 


 


 


 


 




Total comprehensive income for the period


-


-


-


-


7,272


7,272




Share based payments


-


-


-


-


113


113




Costs from issue of new shares


-


(17)


-


-


-


(17)




Exercise of share options


-


-


118


-


(118)


-




Issue of deferred bonus share options


-


-


-


-


257


257




Dividends


-


-


-


-


(4,354)


(4,354)




 


 


 


 


 


 


 




As at 30 September 2018


4,639


125,019


(1,893)


3,843


54,962


186,570




 
The accompanying notes form an integral part of these condensed consolidated interim financial statements.
 
  
 
Palace Capital plc
Notes to the condensed consolidated financial statements                                            

For the six months ended 30 September 2018

 
 
1              General information
 
These financial statements are for Palace Capital plc ("the Company") and its subsidiary undertakings (together "the Group").
 
The Company's shares are admitted to trading on the Main Market of the London Stock Exchange. The Company is domiciled and registered in England and Wales and incorporated under the Companies Act 2006.  The address of its registered office is Lower Ground Floor, One George Yard, London, EC3V 9DF.
 
The nature of the Company's operations and its principal activities are that of property investment in the UK mainly through corporate acquisitions.
 
Basis of preparation
 
The condensed consolidated financial information included in this half yearly report has been prepared in accordance with the IAS 34 "Interim Financial Reporting", as adopted by the European Union. The current period information presented in this document is unaudited and does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006.
 
The interim results have been prepared in accordance with applicable International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB).  These standards are collectively referred to as "IFRS".
The accounting policies and methods of computations used are consistent with those as reported in the Group's Annual Report for the year ended 31 March 2018 and are expected to be used in the Group's Annual Report for the year ended 31 March 2019.
The financial information for the year ended 31 March 2018 presented in these unaudited condensed Group interim financial statements does not constitute the Company's statutory accounts for that period but has been derived from them. The Report and Accounts for the year ended 31 March 2018 were audited and have been filed with the Registrar of Companies. The Independent Auditor's Report on the Report and Accounts for the year ended 31 March 2018 was unqualified and did not draw attention to any matters by way of emphasis and did not contain statements under s498(2) or (3) of the Companies Act 2006. The financial information for the periods ended 30 September 2017 and 30 September 2018 are unaudited and have not been subject to a review in accordance with International Standard on Review Engagements 2410, Review of Interim Financial Information performed by the Independent Auditor of the Entity, issued by the Auditing Practices Board.
 
The interim report was approved by the Board of Directors on 23 November 2018.
 
Copies of this statement are available to the public for collection at the Company's Registered Office at Lower Ground Floor, One George Yard, London, EC3V 9DF and on the Company's website, www.palacecapitalplc.com.
 
Going Concern
The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Chairman's Statement. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in these financial statements.
The Directors have reviewed the current and projected financial position of the Group, making reasonable assumptions about future trading performance. As part of the review the Directors have considered the Group's cash balances, debt maturity profile of its undrawn facilities, and the long-term nature of tenant leases. On the basis of this review, and after making due enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue operational existence for the foreseeable future. As a consequence, the Directors believe that the Group is well placed to manage its business risk successfully.
Accordingly, they continue to adopt the going concern basis in preparing the Half Year Report.
 
Changes in accounting policies and disclosures
 
IRFS 9 Financial Instruments (became effective for accounting periods commencing on or after 1 January 2018)
This standard deals with the classification, measurement and recognition of financial assets and liabilities. The Group does not apply hedge accounting on the financial derivatives held, and as such there is no material impact on the financial statements relating to such items. Derivative financial instruments continue to qualify for designation as at fair value through profit and loss.
IFRS 9 requires the Group to make an assessment of Expected Credit Losses ('ECLs') on its debtors based on tenant payment history and the Directors' assessment of the future credit risk relating to its trade receivables at reporting dates. The Directors assessment resulted in no material differences and there has been no adjustment to opening balances as a result of IFRS 9.
 
IFRS 15 Revenue from Contracts with Customers (became effective for accounting periods commencing on or after 1 January 2018)
This standard is applicable to management fees and other income but excludes rent receivable. The majority of the Group's income is from tenant leases and is outside the scope of the new standard. The financial impact of the new standard is considered immaterial and does not materially impact the financial statements.
 
IFRS 16 Leases (became effective for accounting periods commencing on or after 1 January 2019)
This standard requires lessees to recognise a right-of-use asset and related lease liability representing the obligation to make lease payments. Interest expense on the lease liability and depreciation on the right-of-use asset will be recognised in the statement of comprehensive income. Lessor accounting is substantially unchanged from current accounting. As the Group is primarily a lessor, the Directors do not anticipate that the adoption of this will have a material impact on the Group's financial statements as the Group only holds one operating lease, being the head office. The Directors will continue to assess the impact of the new standard going forward.
 
2              Segmental reporting
During the period the Group operated in one business segment, being property investment in the UK and as such no further information is provided.
 
3              Net property income




 


 


Unaudited
6 months to
30 September
2018
£000


Unaudited
6 months to
30 September
2017
£000


Audited
Year to
31 March
2018
£000




 


 


 


 


 




Rent receivable


 


8,750


7,138


16,360




Management fees & other income


 


460


-


               373     




Total revenue


 


9,210


7,138


16,733




Service charge & vacant rates


 


(600)


(675)


(1,445)




Other property costs


 


(501)


-


(379)




Property operating expenses


 


(1,101)


(675)


(1,824)




 


 


 


 


 




Net property income


 


8,109


6,463


14,909




 
 
  
 
4              Taxation




 


 


Unaudited
6 months to
30 September
2018
£000


Unaudited
6 months to
30 September
2017
£000


Audited
Year to
31 March
2018
£000




 


 


 


 


 




Current income tax charge


 


637


490


1,062




Tax underprovided in prior year


 


-


-


10




Capital gains charged in period


 


-


-


31




Deferred tax


 


441


17


(330)




Tax charge


 


1,078


507


773




 
 
5              Dividends




 


 


 
 
 
 
Payment Date


Unaudited
6 months to
30 September
2018
£000


Unaudited
6 months to
30 September
2017
£000


Audited
Year to
31 March
2018
£000




Ordinary dividends paid


 


 


 


 


 




2017 Final dividend: 9.50p per share


 


28 July 2017


-


2,389


2,389




2018 Interim dividend: 9.50p per share


 


29 December 2017


-


-


4,355




2018 Interim dividend: 4.75p per share


 


13 April 2018


2,177


-


-




2018 Final dividend: 4.75p per share


 


31 July 2018


2,177


-


-




 


4,354


                 2,389


        6,744




 




 
Proposed dividend




2019 Q1 interim dividend: 4.75p per share paid on 19 October 2018.




2019 Q2 interim dividend: 4.75p per share payable on 28 December 2018.




 
6              Earnings per share
 
The Group financial statements are prepared under IFRS which incorporates non-realised fair value measures and nonrecurring items. Alternative Performance Measures ('APMs'), being financial measures which are not specified under IFRS, are also used by Management to assess the Group's performance. These include a number of European Public Real Estate Association ('EPRA') measures, prepared in accordance with the EPRA Best Practice Recommendations (BPR) reporting framework the latest update of which was issued in November 2016. We report a number of these measures (detailed in the glossary of terms) because the Directors considers them to improve the transparency and relevance of our published results as well as the comparability with other listed European real estate companies.
 
EPRA Earnings is a measure of operational performance and represents the net income generated from the operational activities. It is intended to provide an indicator of the underlying income performance generated from the leasing and management of the property portfolio. 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 closeout costs, one-off finance termination costs, share-based payments and other 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. The EPRA diluted earnings per share also takes into account the dilution of share options and warrants if exercised.
 
Palace Capital also reports an adjusted earnings measure which is based on recurring earnings before tax and the basic number of shares. This is the basis on which the directors consider dividend cover. This takes EPRA earnings as the starting point and then adds back tax and any other fair value movements or one-off items that were included in EPRA earnings. For Palace Capital this includes share-based payments being a non-cash expense and also one-off surrender premiums received. The corporation tax charge (excluding deferred tax movements, being a non-cash expense) is deducted in order to calculate the adjusted earnings per share. The earnings per ordinary share for the period is calculated based upon the following information:
 




 


 


Unaudited
6 months to
30 September
2018
£000


Unaudited
6 months to
30 September
2017
£000


Audited
Year to
31 March
2018
£000




 


 


 


 


 




 


Profit after tax attributable to ordinary shareholders for the period


7,272


4,352


12,531




 


 


 


 


 




 


Adjustments:


 


 


 




 


Gains on revaluation of investment property portfolio


(3,880)


(1,396)


(5,738)




 


(Profit)/loss on disposal of investment properties


(211)


159


(274)




 


Debt termination costs


-


-


127




 


Fair value (loss)/gain on derivatives


(77)


-


181




 


Deferred tax relating to EPRA adjustments and capital gains charged


441


-


(299)




 


EPRA earnings for the period


3,545


3,115


6,528




 


 


 


 


 




 


Share-based payments


113


100


174




 


Costs in respect of move to Main Market


-


-


698




 


 


 


 


 




 


Adjusted profit after tax for the period


3,658


3,215


7,400




 


Tax excluding deferred tax on EPRA adjustments and capital gain charged


637


490


1,071




 


Adjusted profit before tax for the period


4,295


3,705


8,471




           




 


 


Unaudited
6 months to
30 September
2018


Unaudited
6 months to
30 September
2017


Audited
Year to
31 March
2018




 


Weighted average number of shares for basic earnings per share


45,806,334


25,156,703


34,943,855




 


Dilutive effect of share options


106,695


36,322


36,322




 


Weighted average number of shares for diluted earnings per share


45,913,029


25,193,025


34,980,177




 


 


 


 


                  




 


Earnings per ordinary share


 


 


 




 


Basic


15.9p


17.3p


35.9p




 


Diluted


15.8p


17.3p


35.8p




 


EPRA and adjusted earnings per ordinary share




 


EPRA basic


7.7p


12.4p


18.7p




 


EPRA diluted


7.7p


12.4p


18.7p




 


Adjusted EPS


8.0p


12.8p


21.2p




 
7              Net asset 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 of 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 that are exercisable at the period end are exercised at the option price.
 
Net asset value is calculated using the following information:
 




 


 


             Unaudited
 30 September
2018
£000


Unaudited
30 September
2017
£000


Audited
31 March
2018
£000


 




 


Net assets at the end of the period


186,570


111,622


183,299


 




 


Diluted net assets


186,570


111,622


183,299


 




 


Exclude deferred tax on latent capital gains & capital allowances


6,972


2,499


6,531


 




 


Exclude fair value of financial instruments


104


-


181


 




 


EPRA NAV


193,646


114,121


190,011


 




 


Include deferred tax on latent capital gains & capital allowances


(6,972)


(2,499)


(6,531)


 




 


Include fair value of financial instruments


(104)


-


(181)


 




 


EPRA NNNAV


186,570


111,622


183,299


 




 


 


 


 


 


 




 


 


Unaudited
 30 September
2018


Unaudited
30 September
2017


Audited
31 March
2018


 




 


Number of ordinary shares issued at the end of the period


45,843,866


25,250,692


45,805,280


 




 


Dilutive effect of share options


106,695


36,322


36,322


 




 


Number of diluted ordinary shares for diluted and EPRA net assets per share


45,950,561


25,287,014


45,841,602


 




 


 


 


 


 


 




 


Net assets per ordinary share


 


 


 


 




 


Basic NAV


407p


442p


           400p


 




 


Diluted NAV


406p


441p


           400p


 




 


EPRA NAV


421p


451p


           415p


 




 


EPRA NNNAV


406p


441p


           400p


 




 


 


 


 


 


 




8              Investment Properties




 


 


Freehold Investment properties


Leasehold Investment properties


 
 
Total




 


 


£000


£000


£000




At 1 April 2017


160,228


23,688


183,916




Additions - new properties


92,014


-


92,014




Additions - refurbishments and developments


2,681


73


2,754




Transfer to assets held for sale


(21,708)


-


(21,708)




Gains on revaluation of investment properties


4,888


850


5,738




Disposals


(5,361)


(3,490)


(8,851)




At 31 March 2018


232,742


21,121


253,863




Additions - new properties


797


-


797


 




Additions - refurbishments and new developments


2,348


20


2,368


 




Gains on revaluation of investment properties


3,972


(92)


3,880


 




Disposals


(730)


-


(730)


 




At 30 September 2018


239,129


21,049


260,178


 




                                                        
Investment properties are stated at fair value 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.
 
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 giving property may differ from the valuations shown in the statement of financial position.
 
At 30 September 2018, the Group's freehold and leasehold investment properties were externally valued by Royal Institution of Chartered Surveyors ("RICS") registered independent valuers. A reconciliation of the valuations carried out by the external valuers to the carrying values shown in the balance sheet was as follows:
 




 


 


Unaudited
 30 September
2018
£000


Unaudited
30 September
2017
£000


Audited
31 March
2018
£000




 


 


 


 


 




Fair value per independent valuer


 


261,625


202,840


255,024




 


 


 


 


 




Adjustment in respect of minimum payment


 


 


 


 




under head leases included as a liability


 


1,600


1,600


1,600




Less lease incentive balance in prepayments


 


(2,346)


(1,608)


(1,731)




Less rent top-up adjustment


 


(701)


-


(1,030)




 


 


 


 


 




Carrying value per financial statements


 


260,178


202,832


253,863




 


 


                    


                  


                  



 
 
 
 
 
 
 
 



 
Investment properties with a carrying value of £234,948,600 (31 March 2018: £234,429,000) are subject to a first charge to secure the Group's bank loans amounting to £99,204,600 (31 March 2018: £101,395,000).
 
Valuation process
 
The valuation reports produced by the independent 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 period 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.
 
 
 
Assets held for sale




 


 


Unaudited
 30 September
2018
£000


Unaudited
30 September
2017
£000


Audited
31 March
2018
£000




 


 


 


 


 




Assets held for sale


 


21,708


-


21,708




 


 


 


 


 




Assets held for sale consist of the residential portfolio acquired in October 2017 as part of the Warren acquisition. The Group announced it was its intention to dispose of the portfolio as soon as terms with a potential buyer could be agreed. In accordance with the Group's accounting policy, these properties are classified as held for sale at 30 September 2018.
 
The residential portfolio has been valued by the board of directors based on open market information available and discussions with valuation professionals. The valuation has been held in the financial statements at a lower of their carrying value immediately prior to being classified as held for sale and fair value less costs to sell.
 
9              Trade and other receivables




 


 


Unaudited
 30 September
2018
£000


Unaudited
30 September
2017
£000


Audited
31 March
2018
£000




Current


 


 


 


 




Trade receivables


 


2,531


2,285


2,435




Prepayments and accrued income


 


2,797


2,230


2,393




Other taxes


 


250


359


609




Other debtors


 


124


144


114




 


 


5,702


5,018


5,551




 


 


 


 


 



 
 
 
 
 
 



                      
10           Cash and cash equivalents




 


 


Unaudited
 30 September
2018
£000


Unaudited
30 September
2017
£000


Audited
31 March
2018
£000




Cash and cash equivalents - unrestricted


 


13,105


8,733


17,985




Restricted cash


 


713


-


1,048




 


 


13,818


8,733


19,033




 
Restricted cash is cash where there is a legal restriction to specify its type of use. This is typically where the Group has agreed to deposit cash with a lender with regards to top-ups received from vendors on completion funds, to be realized over time consistent with the loss of income on vacant units.
 
11           Current trade and other payables




 


 


Unaudited
 30 September
2018
£000


Unaudited
30 September
2017
£000


Audited
31 March
2018
£000




 


 


 


 


 




Trade payables


 


632


875


986




Accruals


 


1,757


1,346


1,916




Deferred rental income


 


3,155


4,273


3,466




Taxes


 


2,697


1,852


2,358




Other payables


 


219


7


108




 


 


8,460


8,353


8,834




 
 
 
 
12           Borrowings




 


 


Unaudited
 30 September
2018
£000


Unaudited
30 September
2017
£000


Audited
31 March
2018
£000




Current borrowings


 


6,124


2,186


2,686




Non-current borrowings


 


91,692


90,464


97,157




Total borrowings


 


97,816


92,650


99,843




 


 


 


 


 




Non-current borrowings


 


 


 


 




Secured bank loans drawn


 


93,081


91,571


98,709




Unamortised facility fees


 


(1,389)


(1,107)


(1,552)




 


 


91,692


90,464


97,157




 


 


                   


                   


                  



 
 
 
 
 
 



 
The maturity profile of the Group's debt was as follows




 


 


Unaudited
 30 September
2018
£000


Unaudited
30 September
2017
£000


Audited
31 March
2018
£000




 


 


 


 


 




Within one year


 


6,124


2,186


2,686




From one to two years


 


2,436


2,186


2,686




From two to five years


 


78,447


76,751


83,607




From five to ten years


 


12,198


12,634


12,416




Total borrowings


 


99,205


93,757


101,395




 
Facility and arrangement fees
As at 30 September 2018




Secured borrowings


 


 
All in cost
%


 
Maturity
date


Facility drawn
£000


Unamortised facility fees
£000


Loan balance
£000




 


 


 


 


 


 


 




Scottish Widows


 


2.91


Jul 2026


14,191


(187)


14,378




National Westminster Bank plc


 


3.63


Mar 2021


14,658


(231)


14,889




Barclays


3.14


Jan 2023


39,123


(627)


39,750




Santander Bank plc


3.69


Aug 2022


26,169


(331)


26,500




Lloyds Bank plc


2.91


Apr 2019


3,675


(13)


3,688




 


 


 


 


97,816


(1,389)


99,205




 
The Group has unused loan facilities amounting to £15,000,000 (31 March 2018: £14,152,000). 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.
 
13           Share capital
Authorised, issued and fully paid share capital is as follows:




 


 


Unaudited
 30 September
2018


Unaudited
30 September
2017


Audited
31 March
2018




 


 


 


 


 




Ordinary 10p shares 


 


46,388,515


25,800,279


46,388,515




 


 


                   


                   


                   




Share capital - number of shares in issue


 


46,388,515


25,800,279


46,388,515




 


 


                   


                   


                   




Share capital - £


 


4,638,852


2,580,028


4,638,852



 
 
 
 
 
 



 
 
The Company has set up an employee benefit trust, 'The Palace Capital Employee Benefit Trust', for the granting of shares applicable to directors and employees under the Long-Term Incentive Plan. On 15 August 2018 the Company transferred 100,000 ordinary shares held in Treasury into The Palace Capital Employee Benefit Trust.
 
On 27 September 2018 the Company granted 38,586 shares, being the awards granted on 25 September 2017 under the Palace Capital Deferred Bonus Plan from The Palace Capital Employee Benefit Trust. As at 31 March 2018 there were 549,587 shares held in treasury but as a result of the 100,000 shares transferred into the Employee Benefit Trust, there are 449,587 shares remaining in Treasury.
 
 




Movement in ordinary authorised share capital


 


 


Price per share pence


Number of ordinary shares issued


Total number of shares




 


 


 


 


 


 




As at 1 Apr 2017


 


 


 


 


25,800,279




Equity issue


 


9 October 2017


340


20,588,236


 




 
As 31 March 2018 and 30 Sep 2018


 


 
46,388,515




 


 


 


 


 


 




 
The Company's issued share capital as at 30 September 2018 comprises 45,843,866 ordinary shares which is the denominator for the calculations of earnings per share and net asset value per share. This excludes the 544,649 ordinary shares held in treasury and the Employee Benefits Trust.
 
 
 
  
14           Palace Capital plc - Company Statement of Financial Position




 


 


 


 
Interim Balance sheet
as at 16 November
2018
£000


Audited
31 March
2018
£000


Prior Year Adjustment
£000


Restated
31 March
2018
£000


 




Non-current assets


 


 


 


 


 


 


 




Property, plant and equipment


 


 


101


121


-


121


 




Investments


 


 


120,872


126,331


-


126,331


 




Loans to subsidiary undertaking


 


 


25,099


26,569


-


26,569


 




 


 


 


146,072


153,021


-


153,021


 




 


 


 


 


 


 


 


 




Current assets


 


 


 


 


 


 


 




Trade and other receivables


 


 


20,270


22,185


(790)


21,395


 




Cash at bank and in hand


 


 


912


5,363


-


5,363


 




Total current assets


 


 


21,182


27,548


(790)


26,758


 




Total assets


 


 


167,254


180,569


(790)


179,779


 




 


 


 


 


 


 


 


 




Current liabilities


 


 


 


 


 


 


 




Creditors: amounts falling due within one year


 


 


(3,667)


(1,772)


(23,409)


(25,181)


 




 


 


 


 


 


 


 


 




Net current assets


 


 


17,515


25,776


(24,199)


1,577


 




 


 


 


 


 


 




Net assets


163,587


178,797


(24,199)


154,598


 




 


 


 


 


 


 


 


 




Equity


 


 


 


 


 


 


 




Called up share capital


 


 


4,639


4,639


-


4,639


 




Share premium account


 


 


125,019


125,036


-


125,036


 




Treasury shares


 


 


(1,893)


(2,011)


-


(2,011)


 




Merger reserve


 


 


3,503


3,503


-


3,503


 




Capital redemption reserve


 


 


340


340


-


340


 




Retained earnings


 


 


31,979


47,290


(24,199)


23,091


 




Equity - attributable to the owners of the parent


 
163,587


178,797


(24,199)


154,598


 




 


 


 


 


 


 


                 


 



 
 
 
 
 
 
 
 
 



The Palace Capital plc parent company balance sheet has been restated to reflect the post balance sheet event in note 15.
 
15           Post balance sheet events
During the year ended 31 March 2018 the parent company, Palace Capital plc, received a dividend from a subsidiary company which, due to a technical error, was subsequently found to have been declared unlawfully (as the subsidiary did not have relevant accounts that had been properly prepared as prescribed by Companies Act 2006 at the time that it declared the dividend). Consequently the parent company's financial statements for the year ending 31 March 2019 will reflect a prior year adjustment which reduces its profit after tax for the year ended 31 March 2018 by £24.2 million and increases amounts due by the parent company to subsidiaries at that date by the same amount. There is no impact on the consolidated financial statements.
In November 2018, Palace Capital was released from the liability to repay the dividend which has restored the £24.2 million of profit after tax and decreased the sum due to the subsidiary by an equivalent amount.
Palace Capital plc paid out dividends of 4.75p per share in July 2018 and a further dividend in October 2018 of 4.75p per share on the basis of its last annual accounts for the year ended 31 March 2018. Although the parent company had distributable reserves in excess of those needed to pay such dividends, even after adjusting for the unlawful dividend received, in view of the above, the 31 March 2018 accounts produced by the parent company did not constitute relevant accounts as prescribed by Companies Act 2006 to justify these dividends.
Note 14 in these interim accounts reflects the most current unaudited parent company balance sheet properly prepared as prescribed by Companies Act 2006, relevant for future dividends payable. The Company will be convening a General Meeting in due course in order to enter into a Shareholders' Deed of Release and Directors' Deed of Release with regard to the July 2018 and October 2018 dividends.  A circular will be sent out to shareholders notifying them of the resolutions and date of the meeting.
On 22 November 2018 contracts were exchanged to sell 50 residential units, acquired as part of the RT Warren (Investments) Ltd portfolio in October 2017, for a total consideration of £18.2 million, reflecting 97% of their book value, to the London Borough of Barnet. Completion for each respective unit sold will take place when they become vacant with all the properties expected to be sold on or before 31 March 2019. 
 
 
 
 
 
 
 
 
 




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END
 
 
IR LLFLALSLVFIT