REG - Palace Capital PLC - Results for the year ended 31 March 2022
14/06/2022 07:16
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RNS Number : 7210O Palace Capital PLC 14 June 2022
14 June 2022
PALACE CAPITAL PLC
("Palace Capital", the "Group" or the "Company")
Preliminary Results for the year ended 31 March 2022
A STRONG PERFORMANCE UNDERPINNED BY ACTIVE ASSET MANAGEMENT
Palace Capital (LSE: PCA), the Main Market property investment company that
has a diversified portfolio of UK commercial real estate in carefully selected
locations outside of London with a focus on the office & industrial
sectors, announces its preliminary results for the year ended 31 March 2022.
Steven Owen, Interim Executive Chairman, commented:
"The Group has delivered a robust set of results driven by a combination of
active operational and financial activity, property revaluation gains and
profits arising from the disposal strategy resulting in a total accounting
return of 14.8%.
"The Board announced in the Trading Update on 6 April 2022 that, in
consultation with shareholders, it was considering a range of strategic
options, including a return of capital, to unlock further value in the
business. We expect to update the market on the strategic options that we will
pursue before the Annual General Meeting in July 2022. The Board remains
committed to maximising value for shareholders and closing the current share
price discount to NAV."
Income statement metrics Year ended Year ended Change
31 March 2022 31 March 2021
Net property income £19.0m £14.9m +27.5%
Adjusted profit before tax £7.8m £7.5m +4.0%
Adjusted earnings per share 16.9p 16.4p +3.0%
IFRS profit/(loss) before tax £24.6m (£5.5m) +£30.1m
Basic earnings per share 53.1p (12.0p) +65.1p
Dividends
Dividend per share 13.25p 10.5p +26.2%
Dividend cover 128% 156%
Balance Sheet and operational metrics Year ended Year ended Change
31 March 2022 31 March 2021
EPRA NTA per share 390p 350p +11.4%
Net asset value £177.2m £157.8m +12.3%
Like-for-like portfolio valuation increase/(decrease) 3.9% (4.0%)
Total property return 12.5% 1.0%
Total accounting return 14.8% (1.2%)
EPRA vacancy rate 11.5% 13.6%
Debt
Loan to value 28% 42%
Total drawn debt £101.8m £128.3m -20.7%
Total fixed debt £61.4m £62.6m -1.9%
Average cost of debt 3.2% 3.0% +20 bps
Average debt maturity 1.9 years 2.6 years
Net interest cover 3.9x 3.7x
Financial highlights
· Adjusted profit before tax increased by 4.0% to £7.8 million
(2021: £7.5 million), largely due to asset management lease activity and
reversal of the ECL provision
· IFRS profit before tax of £24.6 million (2021: £5.5million
loss), driven by disposal strategy, revaluation gain and trading profit
· Like-for-like portfolio valuation increase of 3.9% (2021: 4.0%
decrease)
· Total Property Return of 12.5% for the year (2021: 1.0%), driven
by increased earnings and capital growth
· EPRA NTA per share increased by 11.4% to 390p (2021: 350p),
driven by portfolio valuation gains and profits from the disposal strategy
· Total Accounting Return of 14.8% (2021: minus 1.2%)
· LTV reduced to 28% (2021: 42%) as a result of £45.3 million
reduction in net debt
· Total dividends paid or declared for the year increased by 26.2%
to 13.25 pence per share (2021: 10.50 pence per share) and total dividends
paid increased by 56.7% to 11.75 pence per share (2021: 7.50 pence per share)
Operational highlights
· Disposal strategy ahead of target with £31.5 million of gross
proceeds achieved which is 19% above March 2021 book value, 12% ahead of
purchase prices and capital expenditure, delivering an ungeared IRR of 11%. 55
lease events completed in the period totalling 319,000 sq ft at an average of
11% premium to ERV
· An additional £1.9 million of annualised net rental income
gained in the year through asset management lease activity, acquisitions, and
reduction in non-recoverable property costs. This takes into account income
lost through disposals, lease expiries and lease breaks
· Portfolio repositioning in the year has delivered a higher
quality portfolio consisting of 37 properties, improved EPC ratings (which
support future rental uplifts), higher occupancy and weighting to core assets
· 98% rent collection for the 12 months to 31 March 2022
· Overall EPRA occupancy of 88.5% (2021: 86.4%), with majority of
remaining vacancy having been recently refurbished or identified for strategic
refurbishment or redevelopment
· WAULT of 4.7 years to break, 6.5 years to expiry, reflecting
flexible lease terms
· Increased prioritisation of ESG initiatives and incorporated
energy efficiency measures into our capital expenditure projects
Delivering strong total returns
Year ended Year ended
31 March 2022 31 March 2021
Total accounting return 14.8% (1.2%)
Income return 6.5% 7.0%
Capital return 6.0% (6.0%)
Total property return 12.5% 1.0%
Audio Webcast
The Company will hold an audio webcast for analysts and investors at 9.00 am
today which will be available via the link below. An on demand recording will
also be available from this link following the meeting and via the Company's
website www.palacecapitalplc.com (http://www.palacecapitalplc.com)
https://pcawebcast
(https://stream.brrmedia.co.uk/broadcast/62a31ab54699121b35bc6b99)
PALACE CAPITAL PLC
Steven Owen, Interim Executive Chairman / Matthew Simpson, Chief Financial
Officer
Tel. +44 (0)20 3301 8330
Broker
Numis Securities
Heraclis Economides / Oliver Hardy
Tel: +44 (0)20 7260 1000
Broker
Arden Partners plc
Corporate Finance: John Llewellyn-Lloyd/ Elliot Mustoe
Corporate Broking: James Reed-Daunter
Tel: +44 (0)207 614 5900
Financial PR
FTI Consulting
Dido Laurimore/ Giles Barrie
Tel: +44 (0)20 3727 1000
palacecapital@fticonsulting.com (mailto:palacecapital@fticonsulting.com)
About Palace Capital plc
Palace Capital plc (LSE: PCA) is a UK REIT that has a £259.0 million
portfolio of UK regional commercial property with a focus on the office and
industrial sectors. 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 select assets that provide
opportunities to drive both capital value and long-term rental income through
tailored active asset management programmes ultimately delivering attractive
shareholder returns.
www.palacecapitalplc.com (http://www.palacecapitalplc.com/)
The Annual Reports and Accounts together with the Notice convening the 2022
Annual General Meeting will be posted to Shareholders in June 2022.
Cautionary Statement
This announcement does not constitute an offer of securities by the Company.
Nothing in this announcement is intended to be, or intended to be construed
as, a profit forecast or a guide as to the performance, financial or
otherwise, of the Company or the Group whether in the current or any future
financial year. This announcement may include statements that are, or may be
deemed to be, ''forward-looking statements''. These forward-looking statements
can be identified by the use of forward-looking terminology, including the
terms ''believes'', ''estimates'', ''anticipates'', ''expects'', ''intends'',
''plans'', ''target'', ''aim'', ''may'', ''will'', ''would'', ''could'' or
''should'' or, in each case, their negative or other variations or comparable
terminology. They may appear in a number of places throughout this
announcement and include statements regarding the intentions, beliefs or
current expectations of the directors, the Company or the Group concerning,
amongst other things, the operating results, financial condition, prospects,
growth, strategies and dividend policy of the Group or the industry in which
it operates. By their nature, forward-looking statements involve risks and
uncertainties because they relate to events and depend on circumstances that
may or may not occur in the future and may be beyond the Company's ability to
control or predict. Forward-looking statements are not guarantees of future
performance. The Group's actual operating results, financial condition,
dividend policy or the development of the industry in which it operates may
differ materially from the impression created by the forward-looking
statements contained in this announcement. In addition, even if the operating
results, financial condition and dividend policy of the Group, or the
development of the industry in which it operates, are consistent with the
forward-looking statements contained in this announcement, those results or
developments may not be indicative of results or developments in subsequent
periods. Important factors that could cause these differences include, but are
not limited to, general economic and business conditions, industry trends,
competition, changes in government and other regulation, changes in political
and economic stability and changes in business strategy or development plans
and other risks.
Other than in accordance with its legal or regulatory obligations, the Company
does not accept any obligation to update or revise publicly any
forward-looking statement, whether as a result of new information, future
events or otherwise.
Chairman's Statement
I am pleased to present my first Chairman's Statement on the results for the
year ended 31 March 2022, following my appointment to the Board on 1 January
this year.
Despite the uncertainty and volatility in the economic environment over the
last two years, the Group has performed strongly with many of the key metrics
showing a marked improvement in these results. The UK's success in rolling
out its Covid-19 vaccination programme and thereby providing protection for
the public has translated into improved confidence, which in turn has had a
positive impact on the portfolio. This has been evidenced by strong letting
activity and rental collections returning to their pre-pandemic levels, as
people learn to live with the virus, get back to their offices and enjoy
leisure activities once again. Furthermore, with a portfolio comprising assets
in towns and cities across the regions, the Group is well placed to capitalise
on the government's Levelling Up agenda.
The Group has navigated the unprecedented challenges that faced the economy
and its business with the support of its tenants, banks and its employees. On
behalf of the Board, I would like to thank all of them and other stakeholders
for their support during the last year.
Overview of results
The Group has delivered a robust set of results over the last year driven by a
combination of active operational and financial activity, property revaluation
gains and profits arising from the disposal strategy resulting in a total
accounting return of 14.8% (2021: minus 1.2%).
The Group's adjusted profit before tax increased marginally to £7.8m
notwithstanding the dilution to earnings caused by property sales totalling
£31.5m which realised a profit of £5.0m. Trading profits from the sale of
residential units realised £3.8m.
The Group's portfolio has demonstrated resilience throughout the past year and
combined with asset management activity and yield compression, generated a
revaluation surplus of £8.2m, equivalent to 17.7 pence per share.
The aggregation of the profits described in the preceding paragraphs account
for the significant increase in profit before tax reported under IFRS of
£24.6m (2021: £5.5m loss).
Principally as a result of the revaluation surplus and profits arising from
the disposal strategy, EPRA NTA per share increased by 11.4% to 390 pence per
share (2021: 350 pence per share).
The Group's balance sheet has been significantly strengthened following the
disposal of properties and the revaluation surplus resulting in a loan to
value ratio of 28% (2021: 42%). As at 31 March 2022 the Group had cash and
cash equivalents of £28.1m and as at 10 June it was £22.7m, excluding the
£5.0m available to immediately draw from the NatWest revolving credit
facility, which was repaid post year end.
Dividend
The Group increased its paid or declared dividends by 26.2% to 13.25 pence per
share (2021: 10.50 pence per share) in relation to the year ended 31 March
2022, including a proposed final fourth quarter dividend of 3.75 pence per
share. The total dividend of 13.25 pence per share is covered 128% by Adjusted
earnings per share.
Total shareholder returns
The Company's share price increased from 236 pence per share on 31 March 2021
to 274p on 31 March 2022 which together with dividends distributed produced a
Total Shareholder Return of 21.1% (2021: 38.5%)
Environmental, Social and Governance ("ESG")
The Company is committed to responsible business and ESG matters which are at
the forefront of the Board's considerations. Further details on the approach
to responsible business can be found in the Annual Report and on the website.
Board changes
Prior to the publication of these results, the Board announced that Neil
Sinclair, Chief Executive and Co-founder would be stepping down from the Board
with immediate effect. Neil considered this to be the right time to step down
following the strong trading update announced on 6 April 2022 and the material
increase in NAV and dividend. Neil, with Stanley Davis and Andrew Perloff,
cofounded the Company and was instrumental in growing the business through a
combination of corporate and property transactions including moving from AIM
to the main market and conversion to a REIT. The Board would like to thank
him for his dedication, commitment and contribution to Palace Capital since
2010. The Board and staff of Palace Capital wish him well.
It was also announced then that I, previously non-executive Chairman, will
assume the role of Interim Executive Chairman with immediate effect.
In December 2021, it was announced that Stanley Davis, Chairman and Co-founder
of the Group in 2010, would retire from the Board on 31 December 2021. The
Board would also like to thank Stanley for his considerable service to the
Company.
Outlook
The year ahead is likely to be further affected by continuing macroeconomic
and geo-political uncertainty, particularly arising from the continuing war in
Ukraine. The inflationary headwinds and the consequential impact on consumer
and investor confidence are likely to constrain UK economic growth in the
short term. The consequential risks to real estate owners of such factors are
understood and the Board will continue to monitor the situation regarding any
impact on its business.
The Board announced in the Trading Update on 6 April that, in consultation
with shareholders, it was considering a range of strategic options to unlock
further value in the business. We expect to update the market on the strategic
options that we will pursue before the Annual General Meeting in July 2022.
The Board remains committed to maximising value for shareholders and closing
the current share price discount to NAV.
Steven Owen
Chairman
13 June 2022
OPERATIONAL REVIEW
SUMMARY OF THE YEAR
The Covid-19 pandemic dominated the period with the asset management team
working tirelessly to maintain personal contact with most tenants. Where
needed we provided financial support to deal with the drawn-out implications
of lockdown and then readjustment as occupiers dealt with unforeseen
circumstances.
The strategy for the year was threefold; to ensure we maintained our rent
collection achieving 98% for the 12 months to 31 March 2022 (2021: 95%),
secondly, to sell non-core assets which generated £31.5m at an average of 19%
above the March 2021 book value and finally to reinvest in higher quality
assets which aligned with our growing focus on ESG. Collectively, these
actions have rebalanced the portfolio towards a more equal weighting of Core
and Value-Add buildings.
ASSET MANAGEMENT
The pandemic placed a lot of focus on rent collection. We are proud of how we
interacted with our tenants working with them to maintain income whilst
supporting them where needed. More detail on this is provided in the financial
review.
Despite the various restrictions during the period, we completed 55 lease
events (2021: 31) totalling 319,000 sq ft (2021: 230,000 sq ft). This
generated an additional £1.9 million of annualised net rental income. Lease
activity and the associated reduction in non-recoverable property costs
generated £3.0m of net income, along with income generated from acquisitions
of £0.7m. These increases were offset by income lost through breaks and
expiries of £0.6m and income lost through disposals of £1.2m. We are
particularly pleased with three new lettings we achieved at our two leisure
schemes (Sol, Northampton and Broad Street Plaza, Halifax) taking occupancy
levels to 95% and 91% respectively. Overall, the portfolio EPRA occupancy has
increased to 88.5% (2021: 86.4%).
We report in detail on our Disposal Strategy later in this report. The
objective was to improve the portfolio's performance, recognise the importance
of ESG criteria and at the same time rebalance the assets. The portfolio
weightings are now 50% Core (2021: 28%) with the remainder focused on
value-add strategies which have the potential to generate greater returns.
PORTFOLIO OVERVIEW
Following the recent disposal programme of carefully selected non-core assets,
the portfolio now comprises 35 buildings, compared with 37 as at 31 March 2022
(2021: 48) with 164 occupiers (2021: 182), which is now higher quality, with
improved EPC ratings, occupancy and increased weighting to Core assets.
Our diversified portfolio has had a focus on the office and industrial
sectors, which make up 64% of the total holdings (increasing to 70% once the
remaining Hudson Quarter residential apartments have been sold). The remainder
comprises residential at 9% (HQ York), leisure at 14% and retail and retail
warehousing at 13%.
Cushman and Wakefield independently valued the portfolio as at 31 March 2022
at £259.0m, which is 3.9% higher than 31 March 2021 on a like-for-like basis.
The industrial sector performed the best, increasing by 20.8%, whilst our
offices showed a small decline of 0.9%. The retail, retail warehousing and
leisure properties increased in value by 2.8%.
FY22 FY21
Portfolio value £259.0m £282.8m
Net initial yield 5.6% 5.6%
Reversionary yield 7.5% 7.3%
Contractual rental income £15.9m £16.4m
Estimated rental value £19.4m £20.6m
WAULT to break 4.7 years 4.8 years
EPRA vacancy rate 11.5% 13.6%
INVESTMENT STRATEGY
We identified (as part of an ongoing strategic review of all assets) a number
of our buildings where business plans had been completed or income maximised.
We anticipated that a number of these buildings would not meet our increasing
ESG criteria without significant capital expenditure, which would not meet our
return hurdles. We therefore embarked on a disposal strategy which would
improve the portfolio's overall quality.
14 properties were sold for £31.5m at an average 19% premium to March 2021
book value, producing an 11% ungeared IRR from purchase, including any capital
expenditure during the hold period. We continue to strategically review our
portfolio and individual properties on an ongoing basis and anticipate further
sales in the coming year. Having prioritised our cash during Covid-19, our
disciplined acquisition strategy is focused on properties with good ESG
credentials (or viable potential), in regional university towns and city
centres, that are well positioned for future growth. In January 2022 we
completed on the acquisition of 22 Market Street, an office building in the
centre of Maidenhead at £10.25m reflecting a net initial yield of 6.83%.
Newly refurbished with an EPC B rating, the building added £0.75m per annum
with excellent potential for future rental growth. We continue to selectively
identify new investment opportunities as we look to recycle further capital
from the disposal programme and continuing residential sales at Hudson
Quarter.
HUDSON QUARTER, YORK
Our flagship development in York was completed on 20 April 2021. It comprises
127 residential units and 39,000 sq ft of Grade A, BREEAM Excellent office
space.
We sold 80 apartments (63%) during the year for a total of £27.4m, enabling
full repayment of £26.5m development loan facility, eight months ahead of
schedule. There remains strong interest from investors and occupiers with four
further completions, seven under offer to the value of £2.9m and 36 remaining
as at 13 June 2022. We expect this interest to continue as we target being
fully sold by 31 March 2023.
The HQ office is the only newly speculatively developed office building within
the historic city walls of York delivered this century. As anticipated, we
have capitalised on the lack of competing stock with the letting success
proving corporate tenants will pay the market rent for buildings which are
high quality. We have let a total of 18,000 sq ft to Great Rail Journeys and
Redcentric Solutions at an average rent of £26 per sq ft on ten year leases,
surpassing the previously set record rent of £25 per sq ft with the letting
to Knights Solicitors.
It is testament to the quality of the development, and those involved with its
delivery, that Hudson Quarter has been recognised an exemplar development
whilst it has also had a major positive impact in regenerating a key site
within a sensitive and historic setting. It has been shortlisted in ten
prestigious regional and national property awards, in both commercial and
residential categories, winning three so far. The scheme was recognised as a
"Gamechanger" at the Yorkshire Property Awards and by the RICS for Regional
Development of the Year. We are also shortlisted for the Property Week
residential awards.
The long term growth in York is positive with the redevelopment of York
Station, known as York Central with plans for over 1m sq ft of office, retail
and leisure properties and 2,500 homes. This is purported to be one of the
largest regeneration projects in Europe covering 111 acres. With our property
only two minutes' walk away from York Station, we expect this regeneration to
be directly beneficial.
TOP 20 OCCUPIERS
Maintaining a close working relationship with all our tenants has been
fundamental to our asset management strategy since inception. This groundwork
meant we were able to engage with all our occupiers easily during the pandemic
which ultimately protected our income.
Our top 20 tenants contribute 41% of our total passing rent and over the
period we collected 100% of their rent.
Tenant Location Industry Contracted Rent pa
(£'000)
Vue Entertainment Halifax & Northampton Leisure 913
Techtronic Industries Maidenhead Power Tools 718(*)
Rockwell Automation Milton Keynes Auto 544
Accor Hotels Northampton Hotel 510
National Lottery Newcastle Charity 487
Brose Coventry Auto 432
Exela Technologies Harlow Technology 424(**)
Somerset Bridge Newcastle Insurance 409
Wickes East Grinstead Retail 401
Apcoa Parking Halifax Car Parking 345
Bravissimo Leamington Spa Retail 294
Great Rail Journeys York Tour Operator 293(***)
Aldi Gosport Retail 291
Sutton Housing Partnership Sutton Local Authority 283
Quadrant Systems Burgess Hill Aviation 280
Calderdale and Huddersfield NHS Foundation Trust Halifax Health 262
Booker Burgess Hill Retail 246
BMI UK & Ireland Milton Keynes Construction 240
Bank of England Leeds Central Bank 232
Fedcap Employment Brighton Charity 219(***)
TOTAL: 7,823
(* ) Headline rent payable from March 2023
(** ) Headline rent payable from February 2025
(*** ) Headline rent payable from December 2022
ESG
The UK real estate market is increasingly conscious of the need for buildings
and occupiers to fulfil sustainable criteria to reflect the Paris Accord net
zero targets. We are embracing the issue and putting it at the centre of our
business strategy and we have engaged with an external advisor to ensure we
provide full transparency of the risks within our portfolio relating to
achieving a net zero target.
Central to our strategy of building a sustainable and future proofed portfolio
with asset and portfolio management strategies aligned, is improving our EPC
ratings. Following implementation of this policy the minimum rating within the
portfolio is E (with the exception of one listed property at F, 0.7% of
portfolio). 88.8% of our EPC's are rated A - D (2021: 75.7%).
All asset management initiatives and capital expenditure are heavily focused
on ESG benefits which as an example should reduce utility costs for occupiers.
New acquisitions undergo rigorous independent assessment of existing ratings
to verify that they meet our ESG criteria.
ACQUISITIONS
In January 2022 we completed the acquisition of 22 Market Street, an office
building in the centre of Maidenhead for £10.25m reflecting a net initial
yield of 6.83%. Newly refurbished with an EPC B rating, the building added
£0.75m per annum with excellent potential for future rental growth. The
tenant, Techtronic Industries EMEA Ltd, a subsidiary of Hong Kong listed
Techtronic Industries, completed the lease in April 2021 with this becoming
their European HQ. With Maidenhead being located on the newly opened Elizabeth
Line (Crossrail), new major town centre residential schemes have already been
delivered and regeneration is continuing apace with the £500 million mixed
use Nicholson Quarter scheme set to complete by 2025.
Richard Starr
Executive Property Director
13 June 2022
FINANCIAL REVIEW
FINANCIAL OVERVIEW
The Group increased adjusted profit before tax by 4.0% to £7.8m, and EPRA NTA
per share by 11.4% to 390p. The successful execution of the business strategy
over the past 12 months has seen the Group also grow the dividend, reduce LTV
and increase cash reserves, whilst delivering a total accounting return (TAR)
of 14.8%.
The increase in adjusted profit before tax to £7.8m is largely due to asset
management lease activity and the reversal of the expected credit loss
provision.
Adjusted earnings per share, which is used as the basis to distribute
dividends, increased to 16.9p (2021: 16.4p), an increase of 3.0%. The dividend
paid or declared increased by 26.2% to 13.25p (2021: 10.50p), which was 128%
cash covered by earnings (2021: 156%).
The £5.0m (2021: £0.9m) profit on disposal of 14 commercial properties sold,
the £3.8m realised profit on the sale of 80 residential units at Hudson
Quarter and the fair value commercial property valuation gain of £8.2m (2021:
£14.8m loss), contributed to the IFRS profit before tax of £24.6m (2021:
£5.5m loss).
The fair value revaluation gain has been a result of the success of asset
management initiatives driving rental growth and yield compression, as
confidence returned to the market.
FINANCIAL HIGHLIGHTS
2022 2021
Income growth
IFRS profit/(loss) before tax £24.6m (£5.5m)
Adjusted profit before tax £7.8m £7.5m
EPRA earnings £7.4m £7.2m
Basic EPS 53.1p (12.0p)
EPRA EPS 16.0p 15.7p
Adjusted EPS 16.9p 16.4p
Dividend per share paid or declared 13.25p 10.5p
Dividend cover 128% 156%
Capital growth
Portfolio like-for-like value 3.9% (4.0%)
Net Asset Value £177.2m £157.8m
Basic NAV per share 383p 343p
EPRA NTA per share 390p 350p
Total accounting return 14.8% (1.2%)
Total property return 12.5% 1.0%
Total shareholder return 21.1% 38.5%
The summary of the Group financial results are as follows:
INCOME STATEMENT SUMMARY
Current year Prior year
£m
£m
Net property income 19.0 14.9
Trading profit (3.8) -
Net rental income 15.2 14.9
Administrative expenses (excl. SBP) (4.4) (4.1)
Net finance costs (3.0) (3.3)
Adjusted profit before tax 7.8 7.5
Gain/(loss) on revaluation of investment property portfolio 8.2 (14.8)
Profit on disposal of investment properties 5.0 1.0
Trading profit 3.8 -
Fair value gain/(loss) on interest rate derivatives 0.3 (0.3)
Corporation tax (0.1) -
Development loan interest (0.2) -
Share based payments (0.1) (0.3)
Loss on disposal of equity investments (0.1) -
Debt termination costs (0.1) (0.1)
Impairment of trading properties - 0.8
Gain on listed equity investments - 0.7
IFRS earnings 24.5 (5.5)
Net property income in the year increased by 27.5% to £19.0m (2021: £14.9m).
This was driven by the £3.8m trading profit from the sale of residential
units at Hudson Quarter. Increased rental income generated from significant
lease activity and the acquisition of Maidenhead was offset by income lost due
to the timing of disposals in the year.
Non-recoverable property costs increased to £2.6m in the year (2021: £1.5m),
driven largely by the introduction of vacancy costs on the completion of
Hudson Quarter offices. The Group's EPRA cost ratio (excluding non-recoverable
property costs) reduced to 24.4% (2021: 30.6%) but including non-recoverable
property costs marginally increased to 39.4% (2021: 39.2%). The total expense
ratio was 1.6% (2021: 1.4%). Administrative costs (excluding share-based
payments) increased to £4.4m (2021: £4.1m). The increase was due to the
recruitment of a new chairman, appointment of an ESG consultant and an
increase in compliance, regulatory, advisory and payroll costs. Finance costs
reduced by 3.0% to £3.2m (2021: £3.3m), which was driven by the reduction in
Group debt repaid throughout the year.
In accordance with IFRS 9, in relation to the expected credit loss, we have
assessed the risk of recoverability of our rental arrears. We reversed £0.4m
of rental arrears from trade receivables to the income statement in the
financial period. This was due to an improved assessment of risks, as rent
collection returned to pre-pandemic levels and tenant financial covenant
health improved as the economy recovered.
Quarter Quarter Quarter Quarter Year ended
starting starting starting starting 31 Mar 22
Mar 21
Jun 21
Sep 21
Dec 21
£m
£m
£m
£m
£m
Total demanded 4.1 4.2 4.2 3.9 16.4
Total collected 3.9 4.2 4.1 3.8 16.0
Concessions/deferrals 0.1 - - - 0.1
Outstanding excluding payment plans 0.1 - 0.1 0.1 0.3
Current collection rates 98% 99% 98% 98% 98%
The March 2022 quarter rent collection rates remain robust at 98%, displaying
a continuation of the strong rent collection seen throughout the year.
SHAREHOLDER VALUE
EPRA NTA increased by 40 pence per share or 11.4% to 390p (2021: 350p) during
the year. This was driven largely due to the revaluation surplus of £8.2m, or
17.7 pence per share, the profit on disposal of non-core assets of £5.0m, or
10.7 pence per share and the £3.8m profit on completion of the 80 Hudson
Quarter residential units in the year, or 8.2 pence per share. Net adjusted
earnings, after dividends paid contributed an additional 5.2 pence per share.
The EPRA NTA return for the year, including dividends paid in the year, was
51.7 pence per share or 14.8% (2021: minus 1.2%). It remains a key focus of
the Company to reduce the share price discount to EPRA NAV.
EPRA NTA Movement
£m Pence
per share
EPRA NAV AT 31 MARCH 2021 161.3 350
Adjusted earnings before tax 7.8 16.9
Property revaluation movements 8.2 17.7
Disposal of non-core assets 5.0 10.7
Trading property profit 3.8 8.2
Fair value adj. of trading properties 1.0 2.0
Shares issued 0.1 (1.0)
Cash dividends paid (5.4) (11.7)
Derivative costs (0.7) (1.5)
Taxation (0.1) (0.3)
Development loan interest (0.2) (0.4)
Sale of listed equity investment (0.1) (0.3)
Debt termination costs (0.1) (0.3)
EPRA NAV AT 31 MARCH 2022 180.6 390
FINANCING
It has been a core discipline, since the start of the pandemic, that the Group
maintains an appropriate capital structure. The support from our banks has
ensured that we have remained covenant compliant on all facilities over the
past 12 months, with only a waiver obtained in April 2021 for the Scottish
Widows facility.
The Group's drawn debt reduced by £26.5m to £101.8m at year end (2021:
£128.3m). There were two facilities due to mature within one year. Post year
end, the Group refinanced the facility with Santander, reducing the margin
from 2.5% to 2.2% on a new five year facility, whilst also extending the
current debt facility with Lloyds for a further year until March 2024. The
average debt maturity decreased to 1.9 years (2021: 2.6 years), though this
has extended post year end to 2.9 years as at 13 June 2022 on the refinancing
of the two facilities stated above.
Since November, all disposal proceeds from the Hudson Quarter residential
scheme have enhanced cash reserves. At 31 March 2022 the Group's cash and cash
equivalents was £28.1m (2021: £9.4m). This included £5.0m drawn from the
NatWest revolving credit facility. As at 10 June 2022, the cash balance was
£22.7m, excluding the £5.0m available to immediately draw from the NatWest
revolving credit facility, which was repaid post year end.
Net debt at 31 March 2022 was £73.6m (2021: £118.9m) which resulted in a
significant reduction in the loan to value (LTV) ratio to 28% at the year-end
(2021: 42%). The main driver was the repayment of the outstanding development
loan facility of £20.6m with Barclays, which was paid eight months ahead of
schedule in November 2021, and the repayment of £15.7m of debt from the
proceeds of the disposal program announced at the beginning of the FY22
financial year. The total cost of debt increased slightly to 3.2% (2021:
3.0%).
Set out below is a table showing the movement in gross debt during the year:
2022
£m
Drawn debt at 31 March 2021 128.3
Repayment of development loan (20.6)(1)
Repayment of debt through disposals (15.7)
Amortisation of loans (1.7)
Debt drawdown 11.5
Drawn debt at 31 March 2022 101.8
1. At 31 March 2022 the development loan balance was £20.4m and during
the year a further £0.2m of loan interest was capitalised.
There have been no new debt facilities in the year. Given the economic climate
of increasing inflation, with interest rates expected to rise, we continue to
monitor swap rates. At the 31 March 2022 we held £61.4m of fixed or hedged
debt (2021: £62.6m), which was 60% of overall drawn debt (2021: 49%), as
shown in the table below:
DEBT
Fixed Floating Total drawn Years to
£m
£m
£m
maturity
Barclays 33.8 (4.6) 29.2 2.2
NatWest - 32.0 32.0 2.4
Santander 18.6 6.2 24.8 0.3
Lloyds - 6.8 6.8 0.9
Scottish Widows 9.0 - 9.0 4.3
61.4 40.4 101.8 1.9
The Group's key debt metrics are summarised in the table below:
DEBT METRICS
31 March 31 March
2022 2021
Net loan to value ratio 28% 42%
Debt drawn £101.8m £128.3m
Total fixed debt £61.4m £62.6m
Average cost of debt 3.2% 3.0%
Average debt maturity (yrs) 1.9yrs 2.6yrs
Post year end average debt maturity (yrs) 2.9yrs -
Net interest cover 3.9x 3.7x
NAV gearing 41% 74%
Matthew Simpson
Chief Financial Officer
13 June 2022
RISK MANAGEMENT
RISK FRAMEWORK
The Board has overall responsibility for ensuring that an effective system of
risk management and internal control exists within the business and confirms
that it has undertaken a robust assessment of the Group's emerging and
principal risks and uncertainties.
Risk management is an inherent part of the Board's decision making process.
This is then embedded into the business and its systems and processes. The
Board reviews its overall risk appetite and regularly considers, via the Audit
and Risk Committee, the principal risks facing the company, managements plans
for mitigating these and emerging risks. The Committee also considers, at
least annually, the effectiveness of the Company's system of risk management
and internal control. Further information on the work of the Committee in this
area is available in the Audit and Risk Committee report in the Report and
Accounts.
Our approach to risk identification and our open and supportive culture means
that asset managers and key individuals in the finance team are able to report
directly and at an early stage on issues, allowing management to take
appropriate mitigating action.
COVID-19
A number of risks were heightened as a result of the Covid-19 pandemic.
Although these have thankfully reduced over time, we kept matters under
regular consideration by the Board and management on, for example, rent
collection, compliance with banking covenants and the overall approach to
tenant engagement.
EMERGING RISKS INCLUDING CLIMATE CHANGE
A prolonged bout of Covid-19, new variants or further pandemics may lead to
further imposition of controls on the movement of people and interruption of
large parts of the economy for a significant period. This could result in
further economic disruption with continued uncertainty, reduced market
confidence, volatile market valuations and pressure on our rental income.
Cyber threats, technological advancements and the potential impact on
operations are increasing for all businesses and were further heightened as
working from home became vital in the fight against Covid-19. We took steps to
increase our security measures and continue to review ways in which we can
further mitigate the risk to our network and data.
Climate change is a local and global issue which presents both risks and
opportunities to the commercial real estate market, with the potential to
adversely impact the macroeconomic environment as well as our own operations
and those of our supply chain. Demand for sustainable buildings is increasing
across all stakeholder groups with evolving regulation in the built
environment. Like many other companies, we have determined that Climate Change
is now a Principal Risk. The Board's ESG Committee is tasked with overseeing
the Group's response to climate change and further information can be found in
the Report and Accounts.
GOING CONCERN STATEMENT
The Directors regularly assess the Group's ability to continue as a going
concern. The Strategic Report sets out in detail the Group's financial
position, cash flows, liquidity position, borrowing facilities and the factors
which will affect future performance. Given the ongoing economic disruption
and uncertainty caused by rising inflation and rising interest rates, the
assessment of the Group's ability to continue in operation has been
undertaken, with due consideration given to the Group's cash resources,
borrowing facilities, rental income, acquisitions and disposals of investment
properties, committed capital expenditure, Hudson Quarter sales and dividend
distributions.
DOWNSIDE SCENARIO
The Directors have considered various downside scenarios in assessing the
Groups' ability to continue as a going concern. Sensitivity analysis and
reverse stress testing were undertaken on all these scenarios, to assess the
impact on the business and in particular the loan covenants.
The downside scenario assumptions used in the assessment included:
• 15% reduction in rent collection from our two leisure assets
• 2% increase in SONIA interest rate from current levels
• Sales progression at Hudson Quarter, York is significantly reduced
• Cash reserves are used to repay debt/cure bank facility covenants
in the event of covenant breaches
LIQUIDITY
At 31 March 2022 the Group had £28.1m of cash and cash equivalents. The fair
value of our property portfolio is £259.0m, with £101.8m debt drawn at 31
March 2022 with net assets of £177.2m. The Group increased its total annual
dividend paid or declared for the year by 26.2% to 13.25p, fully covered from
rental income. The Group has conservative gearing and reduced its gearing from
42% to 28% during the year as a result of its disposal strategy and strong
Hudson Quarter residential apartment sales. The outstanding development
facility of £20.6m at the start of the year was repaid in full, eight months
ahead of schedule. There is a clear sales strategy at Hudson Quarter, York for
the remaining residential apartments, which is expected to deliver significant
cash into the Group over the next 12 months.
RENT COLLECTION
Rent collection has been resilient throughout the pandemic, and this has
continued to be resilient as we return to normality. We have collected 98% of
all rents demanded for the year ending 31 March 2022. On a quarterly basis, we
have increased the cash collected compared to each prior period comparative
quarter through the year. The high collection rate has continued into the new
financial year with 98% collected for the March 2022 rent demands, which we
expect to climb higher as the quarter progresses.
During the financial year we have given £0.1m of rent concessions to tenants
who have struggled to satisfy their rents. This is down from £1.1m in the
prior year, underpinning the strength of our tenant base. We also released
£0.4m of ECL provision as a result of collecting a high proportion of our
rents.
A fundamental area of our business is to collect our rents, and having gone
through a global pandemic where the economy effectively shut down, we are
buoyed by our strong rent collection statistics over the past two years and we
are positive that we will continue this high rent collection in the future.
BANK FACILITIES EXPIRING WITHIN THE GOING CONCERN PERIOD
The following facilities were due to expire within the going concern period
and thus are classified as current liabilities on the Balance Sheet:
Santander facility
The Santander facility is cross collateralized across three assets in
Newcastle, Manchester and Northampton. The current loan balance is £24.8m and
the carrying value of the asset is £48.3m. This loan was due to mature on 3
August 2022. On 27 May 2022, the Group refinanced this loan facility in full
for a further five years, therefore this falls outside the going concern
period and the three year viability period. The margin on this new facility
has decreased from 2.5% to 2.2%, providing increased headroom on the ICR
covenants.
Lloyd's facility
The Lloyds facility is secured by an office and retail asset at One Derby
Square in Liverpool. The current loan balance is £6.8m and the carrying value
of the asset is £13.2m. This loan was due to mature on 7 March 2023. On 13
April 2022, the Group took the option to extend the loan by one year,
therefore maturing on 7 March 2024. This falls outside the going concern
period but falls within the three year viability assessment.
DEBT COVENANTS / STRESS TESTING
Our lenders have remained supportive as the economic climate has improved as
the economy learns to live with the pandemic. We continually assess our rent
receipts and outstanding arrears. We engage with our lenders ahead of
potential breaches in covenants based on our continuous review of our covenant
headroom.
All covenants were compliant during the year or waivers obtained. A waiver was
obtained in April 2021 for the Scottish Widows facility which came under
pressure as rent concessions or deferrals were still in the process of being
agreed. Due to the high rent collection during the year, there was
considerable headroom on all other banking covenants. This is expected to
continue as we collect a high proportion of rents.
The going concern assessment of debt covenants considered the prospect of the
downside scenarios stated above. The Directors undertook reverse stress
testing to confirm the resilience of the covenants, including a 15% reduction
in rental collection from our two leisure assets, 75% of tenants vacating on
break clauses and 75% vacating on lease expiry on all assets, as well as an
increase in the SONIA interest rate. Given the current inflationary pressures,
this has created uncertainty in interest rate increases. A 2% increase in
SONIA interest rates from current levels was modelled as part of the downside
assessment. The current SONIA rate is just below 1% therefore a 3% SONIA
interest rate was applied throughout the whole period of the assessment. As
the current SONIA interest rate is just below 1%, the rate would need to
increase to roughly 5% in order to average 3% for the assessment period. The
downside was modelled to assess the impact on the covenants, especially
interest cover rations (ICR), debt service cover ratios (DSC) and loan to
value ratios (LTV). We considered the credit rating and financial position of
key tenants as part of the exercise and the potential impact they could have
on the loan covenants. The downside scenario only placed pressure on one loan
facility. If in the unlikely event this would happen, the Directors have the
option to sell assets and repay part of the proceeds to the debt facilities
and mitigate this risk by increasing the headroom on ICR covenants.
In addition, another downside scenario was considered using the same
assumptions as above, except for assuming the largest five tenants within our
portfolio only pay half of their rents over the next 12 months. This would
place even further pressure on the covenants, however, this can be mitigated
with a similar cure as indicated in the previous assessment.
We have significant headroom on our LTV covenants tests, meaning if values
fell 20% we would only need £3.6m to cure any breaches across the debt
portfolio. During the year the Group repaid £15.7m of bank debt, excluding
the development facility in which £20.6m was repaid. This has provided us
further headroom on our LTV covenants. The Scottish Widows facility of £9.0m,
which is the smallest loan facility within the Group, has the lowest headroom
of 8.1%, which means the value would need to fall by £1.4m before a potential
covenant breach.
Should we breach any of our loan covenants, our working capital model provides
evidence that the Group has sufficient capital to cure any loan breach without
lender support through covenant waivers. The Group can also access additional
capital through liquidating various assets which are not secured to lenders
though this remedy is not required in the stress test sensitivities
undertaken. In addition, the debt across the Group is secured on a bilateral
basis between SPV and bank, therefore the liability is contained within the
SPV and the Group has alternative options to generate liquidity to settle its
debt obligations as they fall due and therefore continue as a going concern.
GOING CONCERN STATEMENT
Based on the analysis undertaken of the reasonable downside scenarios and the
subsequent sensitivity analysis and stress testing, the Group has sufficient
liquidity to meet its ongoing liabilities that fall due over the assessment
period. Great consideration has been given to the impact on our liquidity,
loan covenants and the mitigating actions available to the Group to ensure
that the Company has adequate resources to continue in operational existence
for a period of at least 12 months. Given the market information available,
the Directors are not aware of any material uncertainty that exists that may
cast doubt upon the Group's ability to continue as a going concern. As a
result, the Directors consider it appropriate to continue to prepare the
financial statements on a going concern basis.
VIABILITY STATEMENT
In accordance with provision 31 of the UK Corporate Governance Code and taking
into consideration the current economic uncertainty, the Directors have
assessed the prospects of the Group and future viability over a three-year
period from the year end, being longer than the 12 months required by the
"Going Concern" provision.
The Board's assessment of the Group's viability for the next three years has
been made with reference to:
• The impact of the current economic uncertainties and resulting
impact on the Group and our tenants' ability to operate and meet their rental
obligations.
• The key principal risks of the business and its risk appetite.
• The Group's long-term strategy.
• The impact on business operations, mainly rent collection, rising
interest rates and progress on residential sales at Hudson Quarter, in the
event of a downturn in the economy.
• The Group's current position and its ability to meet future
financial obligations to remain covenant compliant.
ASSESSMENT OF REVIEW PERIOD
The Board considers a period of three years to be appropriate over which to
assess the long-term viability of the Company for the following reasons:
• The Group's working capital model, detailed budgets and cash flows
consist of a rolling three-year forecast.
• It reflects the short cycle nature of the Group's developments and
asset management initiatives.
• This is the period in which the investment team assesses
individual asset performance.
• Office refurbishments completed to date have taken less than 12
months.
• The Group's weighted average debt maturity at 31 March 2022 was
1.9 years - this has increased to 2.9 years post year end following the
refinancing of the Santander facility and the extension of the Lloyds
facility.
• The Group's WAULT at 31 March 2022 was 4.7 years.
STRESS TESTS & DOWNSIDE
The Directors have undertaken a robust scenario assessment of the principal
risks which could threaten the viability or the operational existence of the
Group. As part of the downside modelling, we reverse stress-tested our working
capital model and cash flows to understand the impact of our principal risks
including rising inflation and interest rates, the impact of the increased
cost of living on our tenants, the ability to meet our debt covenants, execute
our sales strategy at our completed development and refinance our debt
facilities.
The Group's downside forecasts and projections took into consideration a)
reasonable potential reduction in rent collection from tenants with increased
number of tenants vacating at lease break and expiry; b) a reduction in
forecasted residential sales at our completed development; c) increased SONIA
rates; d) reverse stress testing of the Group's debt facilities and liquidity
headroom; and e) our ability to refinance our Lloyds, NatWest, and Barclays
facilities during the viability period.
The debt covenants were reverse stress-tested beyond the 12-month going
concern period to allow for changes to banking covenants over the three-year
viability period based on the scenarios above. If there was an economic
downturn, ICR, DSC and LTV covenants could come under pressure. If covenant
waivers were not obtained for a covenant breach, we would utilise cure rights
and use additional liquidity if available. The Directors have considered
further actions that could be taken to mitigate any negative cash flow impact
and ensure additional liquidity. The Directors have assumed the Barclays,
NatWest and Lloyds facilities due to mature within the viability period will
be refinanced as positive discussions with the banks have already taken place.
In the event that one or more of the loan facilities could not be refinanced,
the Directors would dispose of the assets at a discount and repay the bank
debt which would release substantial capital into the Group to help mitigate
against other downside scenario impacts. As a result, the Company will
continue to operate in accordance with its existing bank covenants with a
smaller property portfolio.
CONFIRMATION OF VIABILITY
Having assessed the current position of the Group, its prospects and principal
risks and taking into consideration the assumptions stated above, the Board
has a reasonable expectation that the Group will be able to continue in
operation and meet its liabilities as they fall due over the next three years.
STRATEGIC RISKS FINANCIAL RISKS
01 02 03
MARKET CYCLE ECONOMIC AND POLITICAL CAPITAL STRUCTURE
Risk description Risk description Risk description
Failure to react appropriately to changing market conditions and adapt our Uncertainty from Covid-19 and other world events (including Brexit, rising An inappropriate level of gearing or failure to comply with debt covenants or
corporate strategy could negatively impact shareholder returns. Failure to inflation, rising interest rates, cost of living crisis) could impact economic manage re-financing events could put pressure on cash resources and lead to a
close the NAV gap could lead to increased shareholder activism and make the growth, weakening demand for our tenants and the profitability of their funding shortfall for operational activities.
Company a target for a hostile takeover. businesses.
Decisions made by Government and local councils can have a significant impact
on our ability to extract value from our properties.
Mitigation Mitigation Mitigation
The Board monitors market indicators and reviews the Group's strategy and Underlying Government support for the regions and levelling up bodes well for The Board regularly reviews its capital risk management policy, gearing
business objectives on a regular basis. It will tailor the delivery of the the markets in which we operate outside London. Further, through the use of strategy and debt maturity profile. Gearing is maintained at an appropriate
Company's strategy in light of current and forecast market conditions. consultants and experts we can anticipate key planning and development level and hedging is utilised to reduce exposure to interest rate volatility.
Management continues to take action to close the NAV gap including corporate policies and consider how these may impact our activities. Management Management maintain close relationships with key lenders. Assets are purchased
and property activities. continues to build on strong relationships with key stakeholders such as our that generate surplus cash and significant headroom on all loan covenants.
tenants and banks, so in the event of an economic downturn, we can ensure any
adverse impact is minimised.
Current position Current position Current position
The Board regularly reviews market indicators and the Group's strategy and Our budgets reflect current trading conditions. The markets in which we The Group's weighted average debt maturity is currently 1.9 years, rising to
business objectives. It will tailor the delivery of the Company's strategy in operate, including government actions and economic activity are regularly 2.9 years following the refinancing post year end. The Group's LTV has
light of current and forecast market conditions. Management continues to take reviewed. decreased from 42% to 28% with a downward trajectory. The Board's target LTV
action to close the NAV gap. is <40%.
Likelihood after mitigation Likelihood after mitigation Likelihood after mitigation
Score 1 (low) - 10 (high)
Score 1 (low) - 10 (high)
Score 1 (low) - 10 (high)
5 5 5
Impact after mitigation Impact after mitigation Impact after mitigation
Score 1 (low) - 10 (high)
Score 1 (low) - 10 (high)
Score 1 (low) - 10 (high)
7 7 5
Overall Risk Rating Overall Risk Rating Overall Risk Rating
Score 1 (low) - 20 (high)
Score 1 (low) - 20 (high)
Score 1 (low) - 20 (high)
12 12 10
04 05 06
LIQUIDITY PORTFOLIO STRATEGY ASSET MANAGEMENT
Risk description Risk description Risk description
Increasing costs of borrowing and increasing interest rates could affect the An inappropriate investment and development strategy that is not aligned to Failure to implement asset business plans and elevated risks associated with
Group's ability to borrow or reduce its ability to repay its debts overall corporate purpose objectives, economic conditions, or tenant demand major development or refurbishment could lead to longer void periods, higher
may result in lower investment returns arrears and overall investment performance, adversely impacting returns and
cashflows.
Mitigation Mitigation Mitigation
Undrawn bank facilities are in place to ensure sufficient funds are available The Board regularly reviews the Group's investment strategy and asset The process for reviewing asset business plans is embedded in the annual
to cover potential liabilities arising against projected cashflows. The Board allocation to ensure this is aligned to the overall corporate strategy. Every budget process. The Group's Capital Risk Management Policy limits development
reviews financial forecasts on a regular basis, including sensitivity against proposed corporate or property acquisition requires Investment Committee expenditure to <25% of Gross Asset Value and the core portfolio generates
financial covenants. The Audit and Risk Committee considers the going concern approval, before final approval from the Board. Our regional model ensures no sustainable cash flows. Our experienced management team with vast networks and
status of the Group bi-annually. exposure to London. Property returns are benchmarked against the MSCI IPD use of advisors and property managers supports the execution of asset
index and performance against the benchmark is reviewed formally at the half management strategies. Our active management approach and new investment
year end and year end. modelling system ensures we can monitor and analyse our cash flows, income
streams and monitor the impact of vacant space on returns.
Current position Current position Current position
The Barclays development facility has been repaid. The Santander facility has Rebalancing of the portfolio towards a core weighting with a focus on office Our development and refurbishment pipeline is continuously assessed to ensure
been refinanced after year end on a new five year term at a reduced margin. and industrial assets. No single asset comprises more than 10% of the the right projects are being brought forward at appropriate times ensuring
There is a threat of rising interest rates and inflation. portfolio's value. exposure at any one time is limited.
Likelihood after mitigation Likelihood after mitigation Likelihood after mitigation
Score 1 (low) - 10 (high)
Score 1 (low) - 10 (high)
Score 1 (low) - 10 (high)
4 4 3
Impact after mitigation Impact after mitigation Impact after mitigation
Score 1 (low) - 10 (high)
Score 1 (low) - 10 (high)
Score 1 (low) - 10 (high)
4 6 3
Overall Risk Rating Overall Risk Rating Overall Risk Rating
Score 1 (low) - 20 (high)
Score 1 (low) - 20 (high)
Score 1 (low) - 20 (high)
8 10 6
PORTFOLIO
RISKS
OPERATIONAL RISKS
07 08 09
VALUATION TENANT DEMAND BUSINESS CONTINUITY AND CYBER SECURITY
AND DEFAULT
Risk description Risk description Risk description
Decreasing capital and rental values could impact the Group's portfolio Failure to adapt to changing occupier demands and/or poor tenant covenants may Business disruption as a result of physical damage to buildings, Government
valuation leading to lower returns. result in us losing significant tenants, which could materially impact income, policy and social distancing measures implemented in response to pandemics,
capital values and profit. cyber attacks or other operational or IT failures or unforeseen events may
impact income and profits.
Mitigation Mitigation Mitigation
Independent valuations are undertaken for all assets at the half year end and The Board regularly reviews the portfolio's overall tenant profile and sector Our governance structure and internal control systems ensure sufficient Board
year end. These are reviewed by management and the Board. Members of the Audit diversification. Tenant diversification is high with no tenant making up more oversight, with delegated responsibilities, segregation of duties and clear
and Risk Committee meet with the valuers at least once a year to discuss than 10% of total rental income. Management maintain close relationships with authorisation processes. A comprehensive programme of insurance is in place
valuations and the valuation process. Management actively review leases, tenants, understanding their needs and supporting them throughout their which covers buildings, loss of rent, cyber risks, Directors' and Officers
tenant covenants and asset management initiatives to grow capital and rental business cycle. Managing agents support rent collection on a regular basis. liability and public liability. Antivirus software and firewalls protect IT
values. Tenant due diligence and credit checks are undertaken on an ongoing basis to systems and data is regularly backed up.
review covenant strength of existing and prospective tenants. Our ESG strategy
focuses on our stakeholder needs and ensuring sufficient Board oversight and
time is spent responding to tenant interests.
Current position Current position Current position
Valuations are up on a like-for-like basis and the market is showing signs of Loss of income from tenant administrations and CVAs is less than 1% of Our business interruption processes were well tested following the move to
correction following the pandemic impact. The ongoing disposal programme has portfolio contracted income. Rent concessions have been honoured and working from home in response to the Covid-19 pandemic. The Board continues to
improved the overall performance of the portfolio by removing those that are collection rates remain in excess of 98% per quarter. The biennial Tenant review the internal control environment and ensure good governance practices
low performers or where asset management initiatives have been completed. survey was reported to the board at the December 2021 meeting. Major are adopted throughout the business. Cyber security arrangements have been
refurbishments at Newcastle and Northampton during the year have incorporated kept under regular review to ensure we are deploying the most up to date
ESG considerations. technologies.
Likelihood after mitigation Score Likelihood after mitigation Score Likelihood after mitigation Score
1 (low) - 10 (high)
1 (low) - 10 (high)
1 (low) - 10 (high)
6 3 2
Impact after mitigation Impact after mitigation Impact after mitigation
Score 1 (low) - 10 (high)
Score 1 (low) - 10 (high)
Score 1 (low) - 10 (high)
5 4 2
Overall Risk Rating Overall Risk Rating Overall Risk Rating
Score 1 (low) - 20 (high)
Score 1 (low) - 20 (high)
Score 1 (low) - 20 (high)
11 7 4
ENVIRONMENTAL, SOCIAL AND GOVERNANCE RISKS
10 11 12
PEOPLE CLIMATE CHANGE REGULATORY AND TAX
Risk description Risk description Risk description
An inability to attract or retain staff and Directors with the right skills Failure to anticipate and prepare for transition and physical risks associated Non-compliance with the legal and regulatory requirements of a public real
and experience or failure to implement appropriate succession plans may result with climate change including increasing policy and compliance risks estate company, including the REIT regime could result in convictions or fines
in significant underperformance or impact the overall effectiveness of our associated with existing and emerging environmental legislation could lead to and negatively impact reputation.
operations. increased costs and the Group's assets becoming obsolete or unable to
attract occupiers.
Mitigation Mitigation Mitigation
We engage with staff regularly and encourage a positive working environment. The Group's ESG Committee oversees the execution of ESG related matters and The Company employs experienced staff and external advisers to provide
We maintain an attractive reward and benefits package and undertake regular ensures these are integrated into our business model and corporate strategy. guidance on key regulatory, accounting and tax issues. Compliance with the
performance reviews for each employee. The Workforce Advisory Panel provides a Climate related risks are considered as part of our overall corporate risk REIT regime is regularly monitored by the Board and the Executive team will
forum that allows direct feedback to the Board on employee related matters. assessment and ongoing environmental management of our buildings. Major consider the impact on the regime as part of their decision making.
Succession planning is a regular agenda item for the Nominations Committee. refurbishment projects include environmental considerations to ensure
buildings are maintained to current standards.
Current position Current position Current position
A competitive employment market and inflationary pressures are driving There has been an increased focus on environmental management and climate Emerging corporate governance and audit reforms may lead to considerable
increased pay and a review of benefits to ensure attraction and retention of change is now considered to be a principal risk. A TCFD working Group was changes to the financial reporting process, requiring additional processes and
individuals with the skills, knowledge and experience required. The Group's established during the year whose work will support the identification of procedures to be put in place and additional reporting on the Company's
headcount is stable with sufficient cover if any key personnel are climate-related risks and potential financial impacts. An initial warming resilience. The Audit and Risk Committee and Board are monitoring these
unavailable. The Workforce Advisory Panel continues to enhance employee scenario has already been analysed. Major refurbishments at Newcastle and changes.
engagement and ensure the Board understands the views of the whole workforce. Northampton during the year have incorporated ESG considerations.
A flexible working model continues following the pandemic.
Likelihood after mitigation Score Likelihood after mitigation Score Likelihood after mitigation Score
1 (low) - 10 (high)
1 (low) - 10 (high)
1 (low) - 10 (high)
5 5 4
Impact after mitigation Impact after mitigation Impact after mitigation
Score 1 (low) - 10 (high)
Score 1 (low) - 10 (high)
Score 1 (low) - 10 (high)
7 5 2
Overall Risk Rating Overall Risk Rating Overall Risk Rating
Score 1 (low) - 20 (high)
Score 1 (low) - 20 (high)
Score 1 (low) - 20 (high)
12 10 6
Statement of
Directors' Responsibilities
The Directors are responsible for preparing the Annual Report and the Group
and Company financial statements in accordance with applicable law and
regulations.
Company law requires the Directors to prepare Group and Company financial
statements for each financial year. Under that law, the Directors have
prepared the Group financial statements in accordance with International
Financial Reporting Standards (IFRSs) as adopted pursuant to Regulation (EC)
No 1606/2002 as it applies to the European Union, and have elected to prepare
the Company financial statements in accordance with United Kingdom Generally
Accepted Accounting Practice (United Kingdom Accounting Standards and
applicable law).
Under company law the Directors must not approve the financial statements
unless they are satisfied that they give a true and fair view of the state of
affairs of the Group and the Company and of the profit or loss of the Group
and the Company for the period. In preparing each of the Group and Company
financial statements the Directors are required to:
• select suitable accounting policies and then apply
them consistently;
• make judgements and estimates that are reasonable and prudent;
• for the Group financial statements, state whether they
have been prepared in accordance with international accounting standards in
conformity with the requirements
of the Companies Act 2006 and international financial reporting standards
adopted pursuant to Regulation (EC)
No 1606/2002 as it applies to the European Union, subject to any material
departures disclosed and explained in the financial statements;
• for the Company financial statements, state whether they have been
prepared in accordance with UK GAAP, subject to any material departure
disclosed and explained in the parent company financial statements;
• prepare the financial statements on the going concern basis unless
it is inappropriate to presume that the Group and the parent Company will
continue in business; and
• under applicable law and regulations, the Directors are also
responsible for preparing a Strategic Report, Directors' Report, Directors'
Remuneration Report and Corporate Governance Statement that complies with that
law and those regulations.
The Directors are responsible for keeping adequate accounting records that are
sufficient to show and explain the Company's transactions and disclose with
reasonable accuracy at any time the financial position of the Company and
enable them to ensure that the financial statements comply with the
requirements of the Companies Act 2006 and, as regards the Group Financial
Statements, Article 4 of the IAS Regulations.
They are also responsible for safeguarding the assets of the Group and hence
for taking reasonable steps for the prevention and detection of fraud and
other irregularities.
The Directors are responsible for ensuring the Annual Report and the financial
statements are made available on a website. Financial statements are published
on the Company's website in accordance with legislation in the United Kingdom
governing the preparation and dissemination of financial statements, which may
vary from legislation in other jurisdictions. The maintenance and integrity of
the Company's website is the responsibility of the Directors. The Directors'
responsibility also extends to the ongoing integrity of the financial
statements contained therein.
DIRECTORS' RESPONSIBILITIES STATEMENT
The Directors confirm to the best of their knowledge:
• the financial statements have been prepared in accordance with
international accounting standards in conformity with the requirements of the
Companies Act 2006, international financial reporting standards adopted
pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union
and Article 4 of the IAS Regulation, and give a true and fair view of the
assets, liabilities, financial position and profit or loss of the Company and
the undertakings included in the consolidation as a whole;
• the Strategic Report includes a fair review of the development and
performance of the business and the financial position of the Company and the
undertakings included in the consolidation as a whole, together with a
description of the principal risks and uncertainties that they face; and
• the Annual Report and Accounts, taken as a whole, is fair,
balanced and understandable and provides the information necessary for
Shareholders to assess the Group's and Company's performance, business model
and strategy.
On behalf of the Board
Phil Higgins
Company Secretary
FINANCIAL STATEMENTS
Consolidated Statement of Comprehensive Income
for the year ended 31 March 2022
2022 Restated*
Note £'000 2021
£'000
Revenue 1 49,064 22,242
Cost of sales 3b (30,408) (6,426)
Movement in expected credit loss 13 360 (949)
Net property income 19,016 14,867
Dividend income from listed equity investments 64 72
Administrative expenses 3c (4,623) (4,347)
Operating profit before gains and losses on property assets, listed equity 14,457 10,592
investments
and cost of acquisitions
Profit on disposal of investment properties 4,946 905
Gain/(loss) on revaluation of investment property portfolio 9 8,222 (14,750)
Reversal of impairment 10 - 763
Loss on disposal of listed equity investments (80) -
Gain on revaluation of listed equity investments 11 - 709
Operating profit/(loss) 27,545 (1,781)
Finance income - 1
Finance expense 2 (3,196) (3,347)
Debt termination costs (63) (140)
Changes in fair value of interest rate derivatives 329 (265)
Profit/(loss) before taxation 24,615 (5,532)
Taxation 5 (67) (1)
Profit/(loss) after taxation for the year and total comprehensive income 24,548 (5,533)
attributable
to owners of the Parent
Earnings per ordinary share
Basic 6 53.1p (12.0p)
Diluted 6 53.0p (12.0p)
All activities derive from continuing operations of the Group. The notes form
an integral part of these financial statements.
Consolidated Statement of Financial Position
as at 31 March 2022
2022 2021
Note £'000 £'000
Non-current assets
Investment properties 9 232,717 235,854
Listed equity investments at fair value 11 - 3,249
Right of use asset 12 17 165
Property, plant and equipment 12 45 71
232,779 239,339
Current assets
Trading property 10 20,287 42,719
Trade and other receivables 13 7,412 9,764
Cash and cash equivalents 14 28,143 9,417
55,842 61,900
Total assets 288,621 301,239
Current liabilities
Trade and other payables 15 (8,912) (12,908)
Borrowings 17 (32,749) (21,853)
Lease liabilities for right of use asset 20 - (154)
Derivative financial instruments 16 (47) -
Creditors: amounts falling due within one year (41,708) (34,915)
Net current assets 14,134 26,985
Non-current liabilities
Borrowings 17 (68,488) (105,432)
Deferred tax liability 5 (143) (228)
Lease liabilities for investment properties 20 (1,078) (1,804)
Derivative financial instruments 16 - (1,029)
Net assets 177,204 157,831
Equity
Called up share capital 21 4,639 4,639
Treasury shares (717) (1,288)
Merger reserve 3,503 3,503
Capital redemption reserve 340 340
Capital reduction reserve 125,019 125,019
Retained earnings 44,420 25,618
Equity - attributable to the owners of the Parent 177,204 157,831
Basic NAV per ordinary share 7 383p 343p
Diluted NAV per ordinary share 7 383p 342p
These financial statements were approved by the Board of Directors and
authorised for issue on 13 June 2022 and are signed on its
behalf by:
MATTHEW SIMPSON
Chief Financial Officer
Consolidated Statement of Changes in Equity
for the year ended 31 March 2022
Share Share Premium Treasury Share Other Capital Reduction Reserve Retained Earnings Total
Capital
Reserves
Equity
£'000 Reserve
£'000 £'000
£'000
£'000 £'000
Note £'000
At 31 March 2020 4,639 125,019 (1,349) 3,843 - 34,196 166,348
Total comprehensive income for the year - - - - - (5,533) (5,533)
Share-based payments 22 - - - - - 300 300
Exercise of share options - - 61 - - (61) -
Issue of deferred bonus share options - - - - - 171 171
Dividends paid 8 - - - - - (3,455) (3,455)
Transfer to capital reduction reserve account - (125,019) - - 125,019 - -
At 31 March 2021 4,639 - (1,288) 3,843 125,019 25,618 157,831
Total comprehensive income for the year - - - - - 24,548 24,548
Share-based payments 22 - - - - - 162 162
Exercise of share options - - 571 - - (571) -
Issue of deferred bonus share options - - - - - 90 90
Dividends paid 8 - - - - - (5,427) (5,427)
At 31 March 2022 4,639 - (717) 3,843 125,019 44,420 177,204
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.
Treasury shares represents the consideration paid for shares bought back from
the market.
Other reserves comprise the merger reserve and the capital redemption reserve.
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 capital redemption reserve represents the nominal value of cancelled
preference share capital redeemed.
The capital reduction reserve represents distributable profits generated as a
result of the share premium reduction.
Consolidated Statement of Cash Flows
for the year ended 31 March 2022
Note 2022 Restated*
£'000 2021
£'000
Operating activities
Profit/(loss) before taxation 24,615 (5,532)
Finance income - (1)
Finance expense 2 3,196 3,347
Changes in fair value of interest rate derivatives (329) 265
(Gain)/loss on revaluation of investment property portfolio 9 (8,222) 14,750
Profit on disposal of investment properties (4,946) (905)
Reversal of impairment of trading properties 10 - (763)
Loss on disposal of listed equity investments 80 -
Gain on revaluation of listed equity investments 11 - (709)
Debt termination costs 63 140
Depreciation of tangible fixed assets 12 48 46
Amortisation of right of use asset 12 148 148
Share-based payments 22 162 300
Decrease in receivables 2,289 491
Decrease in payables (2,929) (291)
Decrease/(increase) in trading property 21,972 (14,646)
Net cash generated from operations 36,147 (3,360)
Interest received - 1
Interest and other finance charges paid (3,417) (3,575)
Corporation tax paid in respect of operating activities (48) (1,174)
Net cash flows from operating activities 32,682 (8,108)
Investing activities
Purchase of investment properties (9,870) -
Capital expenditure on refurbishment of investment property (6,519) (2,425)
Capital expenditure on developments - (4,131)
Proceeds from disposal of investment property 31,221 5,290
Amounts transferred from restricted cash deposits 14 - 1,020
Disposal of non-current asset - equity investment 3,169 -
Dividends from listed equity investments 64 72
Purchase of property, plant and equipment 12 (22) (16)
Net cash flow used in investing activities 18,043 (190)
Financing activities
Bank loans repaid 19 (38,033) (11,363)
Proceeds from new bank loans 19 11,472 18,916
Loan issue costs paid 19 (11) (282)
Dividends paid 8 (5,427) (3,455)
Net cash flow from financing activities (31,999) 3,816
Net increase/(decrease) in cash and cash equivalents 18,726 (4,482)
Cash and cash equivalents at beginning of the year 9,417 13,899
Cash and cash equivalents at the end of the year 14 28,143 9,417
Notes to the Consolidated Financial Statements
BASIS OF ACCOUNTING
Basis of preparation
These preliminary results have been prepared in accordance with the Disclosure
Guidance and Transparency Rules of the UK Financial Conduct Authority and in
accordance with International Accounting Standards, in conformity with the
requirements of the Companies Act 2006, and International Financial Reporting
Standards, adopted pursuant to regulation (ED) 1606/2000 as it applies in the
European Union.
The financial information contained in this announcement does not constitute
the Company's statutory accounts as at and for the year ended 31 March 2022,
but is derived from those statutory accounts. The Company's statutory accounts
as at and for the year ended 31 March 2022 will be delivered to the Registrar
or Companies following the Company's Annual General Meeting on 29 July 2022.
The Directors continue to adopt the going concern basis in preparing the
Group's financial statements. The consolidated financial statements of the
Group comprise the results of Palace Capital plc ("the Company") and its
subsidiary undertakings.
The Company is quoted on the Main Market of the London Stock Exchange and is
domiciled and registered in England and Wales and incorporated under the
Companies Act. The address of its registered office is 4th Floor, 25 Bury
Street, St James's, London, United Kingdom, SW1Y 6AL.
BASIS OF PREPARATION
On 31 December 2020, IFRS as adopted by the European Union at that date was
brought into UK law and became UK-adopted International Accounting Standards,
with future changes being subject to endorsement by the UK Endorsement Board.
The Group transitioned to UK-adopted International Accounting Standards in its
consolidated financial statements on 1 January 2021. This change constitutes a
change in accounting framework, however, there is no impact on recognition,
measurement or disclosure.
The Group financial statements have been prepared in accordance with
UK-adopted International Accounting Standards, (the 'applicable framework'),
and have been prepared in accordance with the provisions of the Companies Act
2006 (the 'applicable legal requirements'). The Group financial statements
have been prepared under the historical cost convention as modified by the
revaluation of investment properties, the revaluation of property, plant and
equipment, pension scheme, and financial assets and liabilities held at fair
value.
RESTATEMENTS
The Consolidated Statement of Cash Flows for the comparative period has been
corrected to present cash outflows from an increase in trading properties as
operating activities for the year to 31 March 2021 of £14,646,000 that were
previously presented as investing activities. This has resulted in an increase
in the net movement in investing activities for the year to 31 March 2021 of
£14,646,000 and a corresponding net decrease in the cash inflows from
operating activities in the Consolidated Statement of Cash Flows. These cash
flows represent expenditure on trading properties that were expected to be
sold in the normal course of the Group's business and are therefore operating
in nature. There was no impact on profit or net assets for any periods
presented.
The Consolidated Statement of Comprehensive Income for the comparative period
has been corrected to present service charge income in revenue and recoverable
service charge costs in cost of sales. The Group has control over the
services being provided, and ultimately the risk of paying and recovering
these costs sit with the Group. Therefore, these receipts and recoverable
expenses are presented gross in the Statement of Comprehensive Income. This
has resulted in the Group recognising £4,926,000 as service charge income
within revenue and a corresponding £4,926,000 in recoverable service charge
costs in the cost of sales line. There was no impact on profit or net assets
for any periods presented. The revenue and cost of sales for the year ended 31
March 2021 were therefore restated to £22,242,000 and £6,426,000
respectively, from £17,316,000 and £1,500,000.
GOING CONCERN
The Directors have made an assessment of the Group's ability to continue as a
going concern which included the current uncertainties created by Covid-19,
coupled with the Group's cash resources, borrowing facilities, rental income,
acquisitions and disposals of investment properties, committed capital and
other expenditure and dividend distributions.
The Group's business activities, together with the factors likely to affect
its future development, performance and position, are set out in the Strategic
Report. The financial position of the Group, its cash flows, liquidity
position and borrowing facilities are described in these financial statements.
In addition, note 26 to the financial statements includes the Group's
objectives, policies and processes for managing its capital, its financial
risk management objectives, details of its financial instruments and its
exposures to credit risk and liquidity risk.
As at 31 March 2022 the Group had £28.1m of unrestricted cash and cash
equivalents, a low gearing level of 28% and a property portfolio with a fair
value of £259.0m. The Directors have reviewed the forecasts for the Group
taking into account the impact of Covid-19 on trading over the 12 months from
the date of signing this annual report. The forecasts have been assessed
against a range of possible downside outcomes incorporating significantly
lower levels of income in line with the possible ongoing effects of the
pandemic. See Going Concern and Viability Statement of the Annual Report for
further details.
The Directors have a reasonable expectation that the Group have adequate
resources to continue in operation for at least 12 months from the date of
approval of the financial statements. Accordingly, they continue to adopt the
going concern basis in preparing the financial statements.
NEW STANDARDS ADOPTED DURING THE YEAR
New standards effective for the year ended 31 March 2022 did not have a
material impact on the financial statements and were
not adopted.
New standards issued but not yet effective
There are no other standards that are not yet effective that would be expected
to have a material impact on the Group in the current or future reporting
periods and on the foreseeable future transactions.
Basis of consolidation
The consolidated financial statements incorporate the financial statements of
Palace Capital plc and its subsidiaries as at the year-end date.
Subsidiaries are all entities (including special purpose entities) over which
the Company has control. The Company controls an entity when the following
three elements are present: power to direct the activities of the entity;
exposure to variable returns from the entity; and the ability of the Company
to use its power to affect those variable returns. Where necessary,
adjustments have been made to the financial statements of subsidiaries and
associates to bring the accounting policies used and accounting periods into
line with those of the Group. Intra-group balances and any unrealised gains
and losses arising from intra-group transactions are eliminated in preparing
the Consolidated Financial Statements.
The results of subsidiaries acquired during the year are included from the
effective date of acquisition, being the date on which the Group obtains
control until the date that control ceases.
The consideration transferred for the acquisition of a subsidiary is the fair
value of the assets transferred, the liabilities incurred and the equity
interests issued by the Group. This fair value includes any contingent
consideration. Acquisition-related costs are expensed as incurred.
If the consideration is less than the fair value of the assets and liabilities
acquired, the difference is recognised directly in the Statement of
Comprehensive Income.
Where an acquired subsidiary does not meet the definition of a business, it is
accounted for as an asset acquisition rather than a business combination. A
business is an integrated set of activities and assets that is capable of
being conducted and managed for the purpose of providing goods or services to
customers, generating investment income (such as dividends or interest) or
generating other income from ordinary activities.
Revenue
Revenue is primarily derived from property income and represents the value of
accrued charges under operating leases for rental of
the Group's investment properties. Revenue is measured at the fair value of
the consideration received. All income is derived in the United Kingdom.
Rental income from investment properties leased out under operating leases is
recognised in the Statement of Comprehensive Income on a straight-line basis
over the term of the lease. Contingent rent reviews are recognised when such
reviews have been agreed with tenants. Lease incentives, rent concessions and
guaranteed rent review amounts are recognised as an integral part of the net
consideration for use of the property and amortised on a straight-line basis
over the term of lease. Judgement is exercised when determining the term over
which the lease incentives should be recognised.
Amounts received from tenants to terminate leases or to compensate for
dilapidations are recognised in the Group Statement of Comprehensive Income
when the right to receive them arises. Surrender premium income are payments
received from tenants to surrender their lease obligations and are recognised
immediately in the Group's Consolidated Statement of Comprehensive Income.
Insurance commissions are recognised as performance obligations are fulfilled
in terms of the individual performance obligations within the contract with
the insurance provider. Revenue is determined by the transaction price in the
contract and is measured at the fair value of the consideration received.
Revenue is recognised once the underlying contract between insured and insurer
has been signed.
Revenue from the sale of trading properties is recognised when control of the
trading property, along with the significant risks and rewards, have
transferred from the Group, which is usually on completion of contracts and
transfer of property title.
Service charge income relates to expenditure that is directly recoverable from
tenants. Service charge income is recognised as revenue in the period to which
it relates as required by IFRS 15 Revenue from Contracts with Customers.
Dividend income comprises dividends from the Group's listed equity investments
and is recognised when the Shareholder's right to receive payment is
established. Revenue is measured at the fair value of the consideration
received. All income is derived in the United Kingdom.
The disposal of investment properties is recognised when significant risks and
rewards attached to the property have transferred from the Group. This will
ordinarily occur on completion of contract, with such transactions being
recognised when this condition is satisfied. The profit or loss on disposal of
investment property is recognised separately in the Consolidated Statement of
Comprehensive Income and is the difference between the net sales proceeds and
the opening fair value asset plus any capital expenditure during the period to
disposal.
Deferred income
Where invoices to customers have been raised which relate to a period after
the Group year end, being 31 March 2022, the Group will recognise deferred
income for the difference between revenue recognised and amounts billed for
that contract.
Cost of sales
Cost of sales includes direct expenditure relating to the construction of the
trading properties, capitalised interest, and selling costs incurred as a
result of residential sales. Selling costs includes agent and legal fees. Cost
of sales is expensed to the income statement and is recognised on completion
of each residential unit. The cost for each unit is calculated using the ratio
of the unit selling price, over the total forecasted sales proceeds of all
residential units. This ratio is then applied to the total forecasted
development cost to get the cost of sale per unit.
Service charges and other such receipts arising from expenses recharged to
tenants are as stated in note 3b. Notwithstanding that the funds are held on
behalf of the occupiers, the ultimate risk for paying and recovering these
costs rests with the Group.
Borrowing costs
Bank borrowings are initially recognised at fair value net of any transaction
costs directly attributable to the issue of the instrument. After initial
recognition, loans and borrowings are subsequently measured at amortised cost
using the effective interest method. Amortised cost is calculated by taking
into account any issue costs, and any discount or premium on settlement. Gains
and losses are recognised in profit or loss in the Consolidated Statement of
Comprehensive Income when the liabilities are derecognised, as well as through
the amortisation process.
Borrowing costs directly attributable to development properties are
capitalised and not recognised in profit or loss in the Consolidated Statement
of Comprehensive Income. The capitalisation of borrowing costs is suspended if
there are prolonged periods when development activity is interrupted and cease
at the completion of the development. Interest is also capitalised on the
purchase cost of a site of property acquired specifically for redevelopment,
but only where activities necessary to prepare the asset for redevelopment are
in progress.
Interest associated with trading properties is capitalised. Interest is
capitalised from the start of the development work until the date of practical
completion. The rate used is the rate on specific associated borrowings.
Interest is then expensed through the income statement post completion of the
development.
When the Group refinances a loan facility, the Group considers whether the new
terms are substantially different from a quantitative and a qualitative
perspective. From a quantitative perspective, the terms are substantially
different if the discounted present value of the cash flows under the new
terms, including any fees paid net of any fees received and discounted using
the original effective interest rate, is at least 10 per cent different from
the discounted present value of the remaining cash flows of the original
financial liability. Modifications that would be considered substantial from a
qualitative perspective are those that result in a significant value transfer
and/or a new underwriting/pricing assessment of the financial instrument.
If it is deemed to be a substantial modification of terms, this is accounted
for as an extinguishment, and any costs or fees incurred are recognised as
part of the gain or loss on the extinguishment. If the modification is not
accounted for as an extinguishment, any costs or fees incurred adjust the
carrying amount of the liability and are amortised over the remaining term of
the modified liability.
Where the modification is not considered to be substantial, the loan continues
to be measured at amortised cost using the original effective interest rate.
Where the modification is substantial, the new effective interest rate is
used.
Financial assets
The Group classifies its financial assets into one of the categories discussed
below, depending on the purpose for which the asset was acquired. The Group's
accounting policy for each category is as follows:
Fair value through profit or loss
This category comprises in-the-money derivatives (see "Financial liabilities"
section for out-of-the-money derivatives classified as liabilities). They are
carried in the Consolidated Statement of Financial Position at fair value with
changes in fair value recognised in the Consolidated Statement of
Comprehensive Income in the finance income or expense line.
Amortised cost
Impairment provisions for current and non-current trade receivables are
recognised based on the simplified approach within IFRS 9 using a provision
matrix in the determination of the lifetime expected credit losses. During
this process the probability of the non-payment of the trade receivables is
assessed. This probability is then multiplied by the amount of the expected
loss arising from default to determine the lifetime expected credit loss for
the trade receivables. For trade receivables, which are reported net, such
provisions are recorded in a separate provision account with the loss being
recognised within cost of sales in the Consolidated Statement of Comprehensive
Income. On confirmation that the trade receivable will not be collectable, the
gross carrying value of the asset is written off against the associated
provision.
The Group's financial assets measured at amortised cost comprise trade and
other receivables and cash and cash equivalents in the Consolidated Statement
of Financial Position.
Listed equity investments
Listed equity investments are classified at fair value through profit and
loss. Listed equity investments are subsequently measured using Level 1
inputs, the quoted market price, and all fair value gains or losses in respect
of those assets are recognised in profit or loss in the Consolidated Statement
of Comprehensive Income.
Fair value hierarchy
• Level 1: Quoted (unadjusted) market prices in active markets for
identical assets or liabilities.
• Level 2: Valuation techniques for which the lowest level input
that is significant to the fair value measurement is directly or indirectly
observable.
• Level 3: Valuation techniques for which the lowest level input
that is significant to the fair value measurement is unobservable. For assets
and liabilities that are recognised in the financial statements on a recurring
basis, the Group determines whether transfers have occurred between levels in
the hierarchy by reassessing categorisation at the end of each reporting
period.
Cash and cash equivalents
Cash and cash equivalents includes cash in hand, deposits held at call with
banks, and other short-term highly liquid investments with original maturities
of three months or less.
Financial liabilities
The Group classifies its financial liabilities into one of two categories,
depending on the purpose for which the liability was acquired. The Group's
accounting policy for each category is as follows:
Fair value through profit or loss
This category comprises out-of-the-money derivatives (see "Financial assets"
for in-the-money derivatives where the time value offsets the negative
intrinsic value). They are carried in the Consolidated Statement of Financial
Position at fair value with changes in fair value recognised in the
Consolidated Statement of Comprehensive Income.
Amortised cost
Trade payables and accruals are initially measured at fair value and are
subsequently measured at amortised cost, using the effective interest rate
method.
Other financial liabilities
Bank borrowings are initially recognised at fair value net of any transaction
costs directly attributable to the issue of the instrument. Such
interest-bearing liabilities are subsequently measured at amortised cost using
the effective interest rate method, which ensures that any interest expense
over the period to repayment is at a constant rate on the balance of the
liability carried in the Consolidated Statement of Financial Position. For the
purposes of each financial liability, interest expense includes initial
transaction costs and any premium payable on redemption, as well as any
interest or coupon payment while the liability is outstanding.
Contributions to pension schemes
The Company operates a defined contribution pension scheme. The pension costs
charged against profits are the contributions payable to the scheme in respect
of the accounting period.
Investment properties
Investment properties are those properties that are held either to earn rental
income or for capital appreciation or both.
Investment properties are measured initially at cost including transaction
costs and thereafter are stated at fair value, which reflects market
conditions at the balance sheet date. Surpluses and deficits arising from
changes in the fair value of investment properties are recognised in the
Consolidated Statement of Comprehensive Income in the year in which they
arise.
Investment properties are stated at fair value as determined by the
independent external valuers. The fair value of the Group's property portfolio
is based upon independent 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 arm's
length transaction at the date of valuation, in accordance with Global
Valuation Standards. In determining the fair value of investment properties,
the independent valuers make use of historical and current market data as well
as existing lease agreements.
The Group recognises investment property as an asset when it is probable that
the economic benefits that are associated with the investment property will
flow to the Group and it can measure the cost of the investment reliably. This
is usually the date of completion of acquisition or completion of construction
if the development is a mixed-use scheme.
Investment properties cease to be recognised on completion of the disposal or
when the property is withdrawn permanently from use and no future economic
benefit is expected from disposal.
The Group evaluates all its investment property costs at the time they are
incurred. These costs include costs incurred initially to acquire an
investment property and costs incurred subsequently to add to, replace part
of, or service a property. Any costs deemed as repairs and maintenance or any
costs associated with the day-to-day running of the property are recognised in
the Consolidated Statement of Comprehensive Income as they are incurred.
Investment properties under construction are initially recognised at cost
(including any associated costs), which reflects the Group's investment in the
assets. The Group undertakes certain works including demolition, remediation
and other site preparatory works to bring a site to the condition ready for
construction of an asset. Subsequently, the assets are remeasured to fair
value at each reporting date. The fair value of investment properties under
construction is estimated as the fair value of the completed asset less any
costs still payable in order to complete, and an appropriate developer's
margin.
Trading properties
Trading property is developed for sale or held for sale after development is
complete, and is carried at the lower of cost and net realisable value.
Trading properties are derecognised on completion of sales contracts. Costs
includes direct expenditure and capitalised interest. Cost of sales, including
costs associated with off-plan residential sales, are expensed to the
Consolidated Statement of Comprehensive Income as incurred.
Right of use asset
Right of use assets are initially measured at the amount of the lease
liability, reduced for any lease incentives received, and increased for:
• lease payments made at or before commencement of the lease;
• initial direct costs incurred; and
• the amount of any provision recognised where the Group is
contractually required to dismantle, remove or restore the leased asset.
Subsequent to initial measurement, lease liabilities increase as a result of
interest charged at a constant rate on the balance outstanding and are reduced
for lease payments made. Right of use assets are amortised on a straight-line
basis over the remaining term of the lease or over the remaining economic life
of the asset if, rarely, this is judged to be shorter than the lease term.
Lease liabilities are remeasured when there is a change in future lease
payments arising from a change in an index or rate or when there is a change
in the assessment of the term of any lease.
The rate of amortisation for right of use assets is over the period of the
lease.
Lease liabilities
Lease obligations include lease obligations relating to investment properties
and lease obligations relating to right of use assets.
Lease obligations relating to investment properties are capitalised at the
lease's commencement and are measured at the present value of the remaining
lease payments. Each lease payment is allocated between the liability and
finance charges so as to achieve a constant rate on the finance balance
outstanding. The corresponding rental obligations, net of finance charges, are
included in liabilities. The finance charges are charged to the Consolidated
Statement of Comprehensive Income over the lease period so as to produce a
constant periodic rate of interest on the remaining balance of the liability
for each period. Investment properties classified as held under lease
liabilities are subsequently carried at their fair value.
Lease obligations relating to right of use assets are measured at the present
value of the contractual payments due to the lessor over the lease term,
discounted at the Group's incremental borrowing rate. Variable lease payments
are only included in the measurement of the lease liability if they depend on
an index or rate. In such cases, the initial measurement of the lease
liability assumes the variable element will remain unchanged throughout the
lease term. Other variable lease payments are expensed in the period to which
they relate.
On initial recognition, the carrying value of the lease liability also
includes:
• amounts expected to be payable under any residual value guarantee;
• the exercise price of any purchase option granted in favour of the
Group if it is reasonable certain to assess that option;
• any penalties payable for terminating the lease, if the term of
the lease has been estimated on the basis of termination option,
being exercised.
Property, plant and equipment and depreciation
Property, plant and equipment is stated at cost, net of depreciation and any
provision for impairment. Depreciation is calculated to write down the cost
less estimated residual value of all tangible fixed assets by equal annual
instalments over their expected useful economic lives. The rates generally
applicable are:
Fixtures, fittings and equipment 25% - 33% straight-line
Current taxation
Current tax assets and liabilities for the period not under UK REIT
regulations are measured at the amount expected to be recovered from or paid
to the tax authorities. The tax rates and the tax laws used to compute the
amount are those that are enacted or substantively enacted, by the balance
sheet date.
Deferred taxation
Deferred tax is the tax expected to be payable or recoverable on differences
between the carrying amounts of assets and liabilities in the financial
statements and the corresponding tax bases used in the computation of taxable
profit, and is accounted for using the balance sheet liability method.
Deferred tax liabilities are generally recognised for all taxable temporary
differences and deferred tax assets are recognised to the extent that it is
probable that taxable profits will be available against which deductible
temporary differences can be utilised. Such assets and liabilities are not
recognised if the temporary difference arises from goodwill or from the
initial recognition (other than in a business combination) of other assets and
liabilities in a transaction that affects neither the tax profit nor the
accounting profit.
Deferred tax is calculated at the tax rates that are expected to apply in the
period when the liability is settled or the asset is realised. Deferred tax is
charged or credited in profit or loss, except when it relates to items charged
or credited directly to other comprehensive income, in which case the deferred
tax is also dealt with in other comprehensive income.
The Government announced a proposal in March 2021 for an increase in the
corporation tax rate from 19% main rate in the tax year 2021 to 25% with
effect from 1 April 2023. This was enacted by the Finance Bill 2021 on 10 June
2021.
Dividends to equity holders of the parent
Interim ordinary dividends are recognised when paid and final ordinary
dividends are recognised as a liability in the period in which they are
approved by the Shareholders.
Share-based payments
The fair value of the share options are determined at the grant date and are
expensed on a straight-line basis over the vesting period. Non-market vesting
conditions are taken into account by adjusting the number of equity
instruments expected to vest at each reporting date so that ultimately the
cumulative amount recognised over the vesting period is based on the number of
options that eventually vest. Non-vesting conditions and market vesting
conditions are factored into the fair values of the options granted. As long
as all other vesting conditions are satisfied, a charge is made irrespective
of whether the market vesting conditions are satisfied. The cumulative expense
is not adjusted for failure to achieve a market vesting condition or where a
non-vesting condition is not satisfied.
Commitments and contingencies
Commitments and contingent liabilities are disclosed in the financial
statements. They are disclosed unless the possibility of an outflow of
resources embodying economic benefits is remote. A contingent asset is not
recognised in the financial statements but disclosed when an inflow of
economic benefits is probable. A contingent asset is recognised when the
realisation of the income is virtually certain.
Equity
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.
Treasury share reserve represents the consideration paid for shares bought
back from the market.
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 capital redemption reserve represents the nominal value of cancelled
preference share capital redeemed.
The capital reduction reserve represents distributable profits generated as a
result of the share premium reduction.
Critical accounting judgements and key sources of estimation and uncertainty
The preparation of the financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from these estimates. Information about such judgements and
estimation is contained in the accounting policies or the notes to the
accounts, and the key areas are summarised below.
Estimates
Properties
The key source of estimation uncertainty rests in the values of property
assets, which significantly affects the value of investment properties in the
Consolidated Statement of Financial Position. The investment property
portfolio and assets held for sale are carried at fair value, which requires a
number of estimates in assessing the Group's assets relative to market
transactions. The approach to this valuation and the amounts affected are set
out in the accounting policies and note 9.
Trading properties are held at the lower of cost and net realisable value. Net
realisable value is the value of an asset that can be realised upon the sale
of the asset, less a reasonable estimate of the costs associated with the
eventual sale or disposal of the asset.
The Group has valued the investment properties at fair value. To the extent
that any future valuation affects the fair value of the investment properties
and assets held for sale, this will impact on the Group's results in the
period in which this determination is made.
Expected credit loss model
The Group applies the IFRS 9 simplified approach to the expected credit loss
model, using 12 months of historic rental payment information for tenants, and
adjusting risk profile rates based on forward-looking information. Despite the
unlocking of the UK economy during 2021, we remain cautious as global supply
chain issues and rising inflation continue to create economic uncertainty.
With the relaxation of restrictions from the Covid-19 pandemic the risk of
certain tenants defaulting on their rents has reduced, although challenges
remain in the leisure and retail sectors. This has resulted in the ECL
provisions calculated at 31 March 2022 being lower than in previous periods
(refer to note 13).
In arriving at our estimates, we have considered the tenants at higher risk,
particularly in the leisure and retail sectors, those in administration or
CVA, and those tenants who have been impacted financially by the pandemic who
are not necessarily in high-risk sectors.
Estimates and Judgements
Share-based payments
Equity-settled share awards are recognised as an expense based on their fair
value at date of grant. The fair value of equity-settled share options is
estimated through the use of option valuation models, which require inputs
such as the risk-free interest rate, expected dividends, expected volatility
and the expected option life, and is expensed over the vesting period. Some of
the inputs used are not market observable and are based on estimates derived
from available data. The models utilised are intended to value options traded
in active markets. The share options issued by the Group, however, have a
number of features that make them incomparable to such traded options (see
note 22 on page •• for further details). The variables used to measure the
fair value of share-based payments could have a significant impact on that
valuation, and the determination of these variables requires a significant
amount of professional judgement. A minor change in a variable which requires
professional judgement, such as volatility or expected life of an instrument,
could have a quantitatively material impact on the fair value of the
share-based payments granted, and therefore will also result in the
recognition of a higher or lower expense in the Consolidated Statement of
Comprehensive Income.
Judgement is also exercised in assessing the number of options subject to
non-market vesting conditions that will vest.
1. RENTAL AND OTHER INCOME
The chief operating decision maker ("CODM") takes the form of the Executive
Directors (the Group's Executive Committee). The Group's Executive Committee
are of the opinion that the principal activity of the Group is to invest in
commercial real estate in the UK.
Operating segments are identified on the basis of internal financial reports
about components of the Group that are regularly reviewed by the CODM.
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, each individual property
is considered to be a separate operating segment in that its performance is
monitored individually.
The Directors have considered the requirements of IFRS 8 as to aggregation of
operating segments into reporting segments. All of the Group's revenue is
generated from investment and trading properties located outside of London.
The properties are managed as a single portfolio by an asset management team
whose responsibilities are not segregated by location or type but are managed
on an asset-by-asset basis.
The route to market is determined by reference to the current economic
circumstances that fluctuate through the life cycle of the portfolio. The
Group holds a diversified portfolio across different sectors including office,
industrial, retail, leisure, retail warehouse and residential. The Group does
from time to time engage in development projects. The Directors view the
Group's development activities as an integral part of the life cycle of each
of its assets rather than a separate business or division.
The Directors therefore consider that the individual properties have similar
economic characteristics and therefore have been aggregated into a single
reportable segment under the provision 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.
Revenue - type 2022 Restated
£'000 2021
£'000
Gross rental income 16,670 17,150
Dilapidations and other property related income 732 56
Insurance commission 92 110
Gross property income 17,494 17,316
Service charge income 4,155 4,926
Trading property income 27,415 -
Total revenue 49,064 22,242
No single tenant accounts for more than 10% of the Group's total rents
received from investment properties. Similarly, there was no individual or
corporate that accounts for more than 10% of the trading property income.
2. INTEREST PAYABLE AND SIMILAR CHARGES
2022 2021
£'000 £'000
Interest on bank loans 2,748 2,898
Amortisation of loan arrangement fees 305 300
Interest on lease liabilities - 105
Other finance charges 143 44
3,196 3,347
3. PROFIT FOR THE YEAR
a) The Group's profit for the year is stated after charging the following:
2022 2021
£'000 £'000
Depreciation of tangible fixed assets and amortisation of right of use assets: 196 194
Auditor's remuneration:
Fees payable to the Auditor for the audit of the Group's annual accounts 165 143
Fees payable to the Auditor for the audit of the subsidiaries' annual accounts 29 27
Additional fees payable to the Auditor in respect of the 2020 audit - 23
Fees payable to the Auditor and its related entities for other services:
Audit related assurance services in respect of the interim results 11 10
205 203
b) The Group's cost of sales comprise the following:
2022 2021
£'000 £'000
Void, investment and development property costs 2,310 1,275
Legal, lettings and consultancy costs 328 225
Property operating expenses 2,638 1,500
Service charge expenses 4,155 4,926
Trading property cost of sales 23,615 -
30,408 6,426
c) The Group's administrative expenses comprise the following:
2022 2021
£'000 £'000
Staff costs 2,895 2,642
Accounting and audit fees 269 297
Other overheads 260 244
Consultancy and recruitment fees 254 110
Stock Exchange costs 235 208
Share-based payments 162 300
PR and marketing costs 150 118
Amortisation of right of use asset 148 148
Rent, rates and other office costs 140 125
Legal and professional fees 62 109
Depreciation of tangible fixed assets 48 46
4,623 4,347
d) EPRA cost ratios are calculated as follows:
2022 2021
£'000 £'000
Gross property income 17,494 17,316
Administrative expenses 4,623 4,347
Property operating expenses 2,638 1,500
Movement in expected credit loss (360) 949
EPRA costs (including property operating expenses) 6,901 6,796
EPRA cost ratio (including property operating expenses) 39.4% 39.2%
Less property operating expenses (2,638) (1,500)
EPRA costs (excluding property operating expenses) 4,263 5,296
EPRA cost ratio (excluding property operating expenses) 24.4% 30.6%
Total expense ratio 1.6% 1.4%
4. EMPLOYEES AND DIRECTORS' REMUNERATION
Staff costs during the period were as follows:
2022 2021
£'000 £'000
Non-Executive Directors' fees 195 196
Wages and salaries 2,357 2,119
Pensions 116 102
Social security costs 227 225
2,895 2,642
Share-based payments 162 300
3,057 2,942
The average number of employees of the Group and the Company during the period
was:
2022 2021
Number Number
Directors 7 7
Senior management and other employees 9 9
16 16
Key management are the Group's Directors. Remuneration in respect of key
management was as follows:
2022 2021
£'000 £'000
Emoluments for qualifying services 1,423 1,218
Social security costs 185 167
Pension 25 36
1,633 1,421
Share-based payments 116 241
1,749 1,662
5. TAXATION
2022 2021
£'000 £'000
Tax underprovided in prior year - 1
Current income tax charge 152 -
Deferred tax (85) -
Tax charge 67 1
2022 2021
£'000 £'000
Profit/(loss) on ordinary activities before tax 24,615 (5,532)
Based on profit/(loss) for the period: Theoretical Tax at 19% (2021: 19%) 4,677 (1,051)
Effect of:
Net expenses not deductible for tax purposes 51 (32)
Tax underprovided in prior years - 1
Movement on sale and revaluation not recognised through deferred tax - (145)
Deferred tax released to profit and loss on REIT conversion (85) -
Residual losses not recognised for deferred tax (345) -
Gain on appropriation for Hudson Quarter 119 -
REIT exempt income (1,985) (1,622)
Non-taxable items (2,365) 2,850
Tax charge for the period 67 1
As a result of the Company's conversion to a REIT on 1 August 2019, the Group
is no longer required to pay UK corporation tax in respect of property rental
income and capital gains relating to its property rental business.
Deferred taxes relate to the following:
2022 2021
£'000 £'000
Deferred tax liability - brought forward (228) (228)
Tax rate increase from 19% to 25% (34) -
Deferred tax release on sale of trading property 119 -
Deferred tax liability - carried forward (143) (228)
2022 2021
£'000 £'000
Investment property unrealised valuation gains (143) (228)
Deferred tax liability - carried forward (143) (228)
A deferred tax liability on the revaluation of investment properties to fair
value has been provided totalling £143,000 (2021: £228,000) 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
capital gains tax would be payable if the properties were disposed of at their
fair value. The deferred tax liability relates to investment properties
transferred into trading stock, prior to the Group becoming a REIT. As at 31
March 2022 the Group had approximately £5,915,000 (2021: £9,694,000) of
realised capital losses to carry forward. There has been no deferred tax asset
recognised as the Directors do not consider it probable that future taxable
profits will be available to utilise these losses.
Finance Act 2021 sets the main rate of UK corporation tax at 19%, with an
increase in the main rate to 25% with effect from 1 April 2023. The deferred
tax liability relates to trading properties and has been calculated on the
basis of 19% due to the expectation that all properties are sold ahead of
April 2023.
6. EARNINGS PER SHARE
Basic earnings per share
Basic earnings per share and diluted earnings per share have been calculated
on profit after tax attributable to ordinary Shareholders for the year (as
shown on the Consolidated Statement of Comprehensive Income) and for the
earnings per share, the weighted average number of ordinary shares in issue
during the period (see table below) and for diluted weighted average number of
ordinary shares in issue during the year (see table below).
2022 2021
£'000 £'000
Profit/(loss) after tax attributable to ordinary Shareholders for the year 24,548 (5,533)
2022 2021
No. of shares No. of shares
Weighted average number of shares for basic earnings per share 46,257,514 46,061,417
Dilutive effect of share options 36,766 -
Weighted average number of shares for diluted earnings per share 46,294,280 46,061,417
Earnings per ordinary share
Basic 53.1p (12.0p)
Diluted 53.0p (12.0p)
Key Performance Measures
The Group financial statements are prepared under IFRS which incorporates
non-realised fair value measures and non-recurring 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 reporting framework the latest update of which was issued in
November 2019. The Group reports a number of these measures (detailed in the
glossary of terms) because the Directors consider them to improve the
transparency and relevance of our published results as well as the
comparability with other listed European real estate companies.
EPRA EPS and EPRA Diluted EPS
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 close-out costs, one-off finance termination costs 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.
Adjusted profit before tax and Adjusted EPS
The Group 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. This includes
share-based payments being a non-cash expense. The corporation tax charge
(excluding deferred tax movements, being a non-cash expense) is deducted in
order to calculate the adjusted earnings per share, if the charge is in
relation to recurring earnings.
The EPRA and adjusted earnings per share for the period are calculated based
upon the following information:
2022 2021
£'000 £'000
Profit/(loss) for the year 24,548 (5,533)
Adjustments:
(Gain)/loss on revaluation of investment property portfolio (8,222) 14,750
Reversal of impairment of trading properties - (763)
Profit on disposal of investment properties (4,946) (905)
Trading property revenue and cost of sales (3,800) -
Loss on disposal of listed equity investments 80 -
Gain on revaluation of listed equity investments - (709)
Debt termination costs 63 140
Fair value (gain)/loss on derivatives (329) 265
EPRA earnings for the year 7,394 7,245
Share-based payments 162 300
Hudson Quarter development loan interest 189 -
Adjusted profit after tax for the year 7,745 7,545
Tax excluding deferred tax on EPRA adjustments and capital gain charged 67 1
Adjusted profit before tax for the year 7,812 7,546
EPRA and adjusted earnings per ordinary share
EPRA Basic 16.0p 15.7p
EPRA Diluted 16.0p 15.7p
Adjusted EPS 16.9p 16.4p
7. NET ASSET VALUE PER SHARE
The Group has adopted the new EPRA NAV measures which came into effect for
accounting periods starting 1 January 2020. EPRA issued new best practice
recommendations (BPR) for financial guidelines on its definitions of NAV
measures. The new NAV measures as outlined in the BPR are EPRA net tangible
assets (NTA), EPRA net reinvestment value (NRV) and EPRA net disposal value
(NDV). The Group has adopted these new guidelines and applies them in the 31
March 2022 Annual Report.
The Group considered EPRA Net Tangible Assets (NTA) to be the most relevant
NAV measure for the Group and we are now reporting this as our primary NAV
measure, replacing our previously reported EPRA NAV and EPRA NNNAV per share
metrics. EPRA NTA excludes the intangible assets and the cumulative fair value
adjustments for debt-related derivatives which are unlikely to be realised.
As at 31 March 2022
EPRA NTA EPRA NRV ERPA NDV
£'000 £'000 £'000
Net assets attributable to Shareholders 177,204 177,204 177,204
Include:
Fair value adjustment of trading properties 3,188 3,188 3,188
Real estate transfer tax - 17,049 -
Fair value of fixed interest rate debt - - 413
Exclude:
Fair value of derivatives value 47 47 -
Deferred tax on latent capital gains and capital allowances 143 143 -
EPRA NAV 180,582 197,631 180,805
Number of ordinary shares issued for diluted and EPRA net assets per share 46,325,236 46,325,236 46,325,236
EPRA NAV per share 390p 427p 390p
The adjustments made to get to the EPRA NAV measures above are as follows:
• Fair value adjustment of trading properties: Difference between
development property held on the balance sheet at cost and fair value of that
development property.
• Real estate transfer tax: Gross value of property portfolio as
provided in the Valuation Certificate (i.e. the value prior to any deduction
of purchasers' costs).
• Fair value of fixed interest rate debt: Difference between any
financial liability and asset held on the balance sheet of the Group and the
fair value of that financial liability or asset.
• Fair value of derivatives: Exclude fair value financial
instruments that are used for hedging purposes where the company has the
intention of keeping the hedge position until the end of the contractual
duration.
• Deferred tax on latent capital gains and capital allowances:
Exclude the deferred tax as per IFRS balance sheet in respect of the
difference between the fair value and the tax book value of investment
property, development property held for investment, intangible assets, or
other non-current investments as this would only become payable if the assets
were sold.
As at 31 March 2021
EPRA NTA EPRA NRV EPRA NDV
£'000 £'000 £'000
Net assets attributable to Shareholders 157,831 157,831 157,831
Include:
Fair value adjustment of trading properties 2,247 2,247 2,247
Real estate transfer tax - 18,365 -
Fair value of fixed interest rate debt - - (59)
Exclude:
Fair value of derivatives value 1,029 1,029 -
Deferred tax on latent capital gains and capital allowances 228 228 -
EPRA NAV 161,335 179,700 160,019
Number of ordinary shares issued for diluted and EPRA net assets per share 46,154,624 46,154,624 46,154,624
EPRA NAV per share 350p 389p 347p
2022 2021
No of shares No of shares
Number of ordinary shares issued at the end of the year (excluding treasury 46,288,470 46,069,690
shares)
Dilutive effect of share options 36,766 84,934
Number of ordinary shares issued for diluted and EPRA net assets per share 46,325,236 46,154,624
Net assets per ordinary share
Basic 383p 343p
Diluted 383p 342p
EPRA NTA 390p 350p
8. DIVIDENDS
Payment date Dividend 2022 2021
per share £'000 £'000
2022
Interim dividend 31 December 2021 3.25 1,504 -
Interim dividend 15 October 2021 3.00 1,389 -
6.25 2,893 -
2021
Final dividend 05 August 2021 3.00 1,382 -
Interim dividend 09 April 2021 2.50 1,152 -
Interim dividend 31 December 2020 2.50 - 1,152
Interim dividend 16 October 2020 2.50 - 1,152
10.50 2,534 2,304
2020
Final dividend 14 August 2020 2.50 - 1,151
Interim dividend 27 December 2019 4.75 - -
Interim dividend 18 October 2019 4.75 - -
12.00 - 1,151
Dividends reported in the Group Statement of Changes in Equity 5,427 3,455
Proposed Dividends
2022 2021
£'000 £'000
July 2022 final dividend in respect of year end 31 March 2022: 3.75p (2021 1,736 1,382
final dividend: 3.00p)
April 2022 interim dividend in respect of year end 31 March 2022: 3.25p (2021 1,504 1,152
interim dividend: 2.50p)
3,240 2,534
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 2022.
9. PROPERTY PORTFOLIO
Freehold Leasehold Total
investment properties investment properties investment properties
£'000 £'000 £'000
At 1 April 2020 230,396 18,303 248,699
Additions - refurbishments 2,273 (44) 2,229
Capital expenditure on assets under construction 4,061 - 4,061
Loss on revaluation of investment properties (13,614) (1,136) (14,750)
Disposals (3,975) (410) (4,385)
At 31 March 2021 219,141 16,713 235,854
Additions - refurbishments 2,351 2,543 4,894
Additions - new properties 10,022 - 10,022
Gain on revaluation of investment properties 6,886 1,336 8,222
Disposals (22,290) (3,985) (26,275)
At 31 March 2022 216,110 16,607 232,717
Standing investment properties Investment properties under construction Total investment properties Trading properties Total property portfolio
£'000 £'000 £'000 £'000 £'000
At 1 April 2020 240,927 7,772 248,699 27,557 276,256
Additions - refurbishments 2,229 - 2,229 - 2,229
Capital expenditure on developments - 4,061 4,061 - 4,061
Additions - trading property - - - 14,399 14,399
(Loss)/gain on revaluation of properties (14,867) 117 (14,750) 763 (13,987)
Disposals (4,385) - (4,385) - (4,385)
At 31 March 2021 223,904 11,950 235,854 42,719 278,573
Additions - refurbishments 4,894 - 4,894 - 4,894
Additions - new properties 10,022 - 10,022 - 10,022
Additions - trading property - - - 1,182 1,182
Transfer from investment property under construction 11,950 (11,950) - - -
Gain on revaluation of properties 8,222 - 8,222 - 8,222
Disposals (26,275) - (26,275) (23,614) (49,889)
At 31 March 2022 232,717 - 232,717 20,287 253,004
The property portfolio has been independently valued at fair value. The
valuations have been prepared in accordance with the RICS Valuation - Global
Standards July 2017 ("the Red Book") and incorporate the recommendations of
the International Valuation Standards and the RICS valuation - Professional
Standards UK January 2014 (Revised April 2015) which are consistent with the
principles set out in IFRS 13.
The valuer in forming its opinion makes a series of assumptions, which are
typically market related, such as net initial yields and expected rental
values, and are based on the valuer's professional judgement. The valuer has
sufficient current local and national knowledge of the particular property
markets involved and has the skills and understanding to undertake the
valuations competently.
In addition to the loss on revaluation of investment properties included in
the table above, realised gains of £4,946,000 (2021: £905,000) relating to
investment properties disposed of during the year were recognised in profit or
loss.
The Group has developed a large mixed-use scheme at Hudson Quarter, York. Part
of the approved scheme consists of commercial
units which the Group holds for leasing. During the development the commercial
element of the scheme was classified as investment properties under
construction. As a result of achieving practical completion in April 2021, the
commercial element of the scheme is now classified as investment properties.
For investment properties under construction and trading properties, £51,674
(2021: £859,543) of borrowing costs have been capitalised in the year
including 100% of the interest due on the development loan.
A reconciliation of the valuations carried out by the independent valuers to
the carrying values shown in the Statement of Financial Position was as
follows:
2022 2021
£'000 £'000
Cushman & Wakefield LLP (property portfolio) 259,040 282,820
Adjustment in respect of minimum payment under head leases 1,078 1,804
Less trading properties at lower of cost and net realisable value (20,287) (42,719)
Less lease incentive balance included in accrued income (3,926) (3,804)
Less fair value uplift on trading properties (3,188) (2,247)
Carrying value of investment properties 232,717 235,854
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 - investment properties
The valuation reports produced by the independent 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 independent valuers. The assumptions are typically market
related, such as yields and discount rates, and are based on their
professional judgement 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 independent 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;
• An appropriate yield; and
• For investment properties under construction: gross development
value, estimated cost to complete and an appropriate developer's margin.
Valuation technique - standing investment properties
The valuations reflect the tenancy data supplied by the Group along with
associated revenue costs and capital expenditure. The fair value of the
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 2022 Office Industrial Significant unobservable inputs
Leisure Other Total
Fair value of property portfolio £122,125,000 £43,345,000 £36,990,000 £56,580,000 £259,040,000
Area (sq ft) 633,591 345,586 303,993 169,762 1,452,932
Gross Estimated Rental Value £10,952,762 £2,608,500 £3,270,645 £2,586,276 £19,418,183
Net Initial Yield
Minimum (5.1%) 3.5% 7.8% 3.5% (5.1%)
Maximum 9.6% 5.6% 9.2% 11.1% 11.1%
Weighted average 4.7% 4.5% 8.4% 7.2% 5.6%
Reversionary Yield
Minimum 4.5% 4.6% 7.3% 3.4% 3.4%
Maximum 11.3% 6.3% 9.1% 10.4% 11.3%
Weighted average 8.0% 5.5% 8.2% 7.2% 7.5%
Equivalent Yield
Minimum 4.5% 4.5% 8.4% 3.4% 3.4%
Maximum 8.8% 5.9% 9.8% 9.9% 9.9%
Weighted average 7.6% 5.4% 9.6% 7.2% 7.4%
The "other" sector includes Residential, Retail and Retail Warehousing
sectors.
Negative net initial yields arise where properties are vacant or partially
vacant and void costs exceed rental income.
31 March 2021 Significant unobservable inputs
Office Industrial Leisure Other Total
Fair value of property portfolio £116,280,000 £40,740,000 £35,455,000 £90,345,000 £282,820,000
Area (sq ft) 669,711 409,593 306,970 217,520 1,603,794
Gross Estimated Rental Value £10,813,496 £2,881,140 £3,226,035 £3,642,711 £20,563,382
Net Initial Yield
Minimum (5.1%) 1.4% 7.4% 4.4% (5.1%)
Maximum 10.0% 7.9% 8.3% 18.5% 18.5%
Weighted average 5.4% 5.4% 7.8% 7.0% 5.6%
Reversionary Yield
Minimum 6.5% 5.1% 7.4% 4.5% 4.5%
Maximum 10.8% 7.9% 8.6% 24.3% 24.3%
Weighted average 8.1% 4.7% 7.9% 6.5% 7.3%
Equivalent Yield
Minimum 6.1% 5.2% 8.3% 5.0% 5.0%
Maximum 8.1% 7.4% 9.5% 14.1% 14.1%
Weighted average 7.8% 6.3% 9.2% 6.5% 7.6%
The following descriptions and definitions relate to valuation techniques and
key unobservable inputs made in determining fair values:
Market comparable method
Under the market comparable method (or market comparable approach), a
property's fair value is estimated based on comparable transactions in the
market.
Unobservable input: estimated rental value
The rent at which space could be let in the market conditions prevailing at
the date of valuation (range: £23,640-£1,874,413 per annum).
Rental values are dependent on a number of variables in relation to the
Group's property. These include: size, location, tenant, covenant strength and
terms of the lease.
Unobservable input: net initial yield
The net initial yield is defined as the initial gross income as a percentage
of the market value (or purchase price as appropriate) plus standard costs of
purchase.
Sensitivities of measurement of significant unobservable inputs
As set out within significant accounting estimates and judgements above, the
Group's property Portfolio Valuation is open to judgements inherently
subjective by nature.
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
-5% in passing +5% in passing +0.25% in net -0.25% in net
rent (£m) rent (£m) initial yield (£m) initial yield (£m)
(Decrease)/increase in the fair value of investment properties as at 31 March (10.76) 10.76 (9.74) 12.36
2022
(Decrease)/increase in the fair value of investment properties as at 31 March (10.87) 10.87 (11.29) 12.35
2021
Valuation technique: properties under construction
Development assets are valued using the gross development value of the asset
less any costs still payable in order to complete, and an appropriate
developer's margin.
10. TRADING PROPERTY
Total
£'000
At 1 April 2020 27,557
Costs capitalised 14,399
Reversal of impairment of trading properties 763
At 1 April 2021 42,719
Costs capitalised 1,182
Disposal of trading properties (23,614)
At 31 March 2022 20,287
The Group developed a large mixed-use scheme at Hudson Quarter, York. Part of
the approved scheme consists of residential units which the Group is in the
process of selling. As a result, the residential element of the scheme is
classified as trading property.
11. LISTED EQUITY INVESTMENTS
Total
£'000
At 1 April 2020 2,540
Gain on revaluation of equity investment shown in Consolidated Statement of 709
Comprehensive Income
At 1 April 2021 3,249
Disposal of equity investment (3,249)
At 31 March 2022 -
12. PROPERTY, PLANT AND EQUIPMENT
IT, fixtures and fittings Right of use asset
£'000 £'000
At 1 April 2020 258 461
Additions 16 -
At 1 April 2021 274 461
Additions 22 -
At 31 March 2022 296 461
Depreciation
At 1 April 2020 157 148
Provided during the year 46 148
At 1 April 2021 203 296
Provided during the year 48 148
At 31 March 2022 251 444
Net book value at 31 March 2022 45 17
Net book value at 31 March 2021 71 165
13. TRADE AND OTHER RECEIVABLES
2022 2021
£'000 £'000
Current
Gross amounts receivable from tenants 2,624 4,115
Less: expected credit loss provision (980) (1,340)
Net amount receivable from tenants 1,644 2,775
Other taxes 156 143
Other debtors 1,022 2,461
Accrued income 3,926 3,804
Prepayments 664 581
7,412 9,764
Accrued income amounting to £3,926,000 (2021: £3,804,000) relates to rents
recognised in advance of receipt 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.
The carrying value of trade and other receivables classified at amortised cost
approximates fair value.
As at 31 March 2022 the lifetime expected credit loss provision for trade
receivables and contract assets is as follows:
More than More than More than Total
30 days
60 days
90 days
Current
£'000
past due past due past due
£'000
£'000 £'000 £'000
Expected loss rate 7% 82% 0% 90%
Gross carrying amount 1,668 12 - 944 2,624
Loss provision 124 10 - 846 980
Changes to credit risk management
The impact of Covid-19 has given rise to higher estimated probabilities of
default for some of the Group's tenants. As a result, impairment calculations
have been carried out on trade receivables using the IFRS 9 simplified
approach, using 12 months of historic rental payment information, and
adjusting risk profiles based on forward-looking information. In addition, the
Group has reviewed its register of tenants at higher risk, particularly in the
leisure and retail sectors, those in administration or CVA and the top 50
tenants by size with the remaining tenants considered on a sector by sector
basis.
Concentration of credit risk
The credit risk in respect of trade receivables is not concentrated as the
Group operates in many different sectors and locations around the UK, and has
a wide range of tenants from a broad spectrum of business sectors. The Group
predominantly operates in the office and industrial sectors, which has largely
remained unaffected by Covid-19. 48% of the ECL provision relates to tenants
in the leisure and retail sectors, and 3% of the ECL provision relates to
tenants in administration or CVA.
How forward looking information was incorporated
In calculating the ECL provision, the Group used forward looking information
when assessing the risk profiles of each tenant, most notably around the
assessment over the likelihood of tenants having the ability to pay rent as
demanded, as well as the likelihood of rent deferrals and rent frees being
offered to tenants. The Group considered factors such as the vaccine success
on the economy, whilst remaining cautious of potential new economic headwinds.
Key sources of estimation uncertainty
The Group's risk profile rates form a key part when calculating the ECL
provision. Default rates were applied to each tenant based on the ageing of
the outstanding receivable. Tenants were classified as either low (default
range of 0.5% - 8%), medium (default range of 20% - 50%), high (default range
of 65% - 80%), or extremely high risk (set default range of 100%), with
default rates applied to each risk profile. These rates have been calculated
by using historic and forward-looking information and is inherently
subjective.
A sensitivity analysis performed to determine the impact on the Group
Statement of Comprehensive Income from a 10% increase in each of the risk
profile rates would result in a decrease in profit by £305,084.
The Group does not hold any material collateral as security.
As at 31 March 2021 the lifetime expected credit loss provision for trade
receivables and contract assets is as follows:
More than 30 days More than 60 days More than 90 days
Current past due past due past due Total
£'000 £'000 £'000 £'000 £'000
Expected loss rate 12% 3% 7% 69%
Gross carrying amount 2,364 168 45 1,538 4,115
Loss provision 278 5 3 1,054 1,340
Movement in the expected credit loss provision was as follows:
2022 2021
£'000 £'000
Brought forward 1,340 391
Receivables written off during the year as uncollectable (158) -
Provisions released (276) -
Provisions increased 74 949
980 1,340
14. CASH AND CASH EQUIVALENTS
All of the Group's cash and cash equivalents at 31 March 2022 and 31 March
2021 are in sterling and held at floating interest rates.
2022 2021
£'000 £'000
Cash and cash equivalents - unrestricted 28,143 9,417
The Directors consider that the carrying amount of cash and cash equivalents
approximates to their fair value.
15. TRADE AND OTHER PAYABLES
2022 2021
£'000 £'000
Trade payables 604 1,143
Other taxes 1,167 2,100
Other payables 1,136 2,607
Deferred rental income 3,368 3,347
Accruals 2,637 3,711
8,912 12,908
The Directors consider that the carrying amount of trade and other payables
measured at amortised cost approximates to their
fair value.
Included within other payables are deposits on pre sales of apartments at
Hudson Quarter, York totalling £Nil (2021: £924k). These amounts will be
recognised as revenue when the title is transferred to the buyer.
16. DERIVATIVES
The Group adopts a policy of entering into derivative financial instruments
with banks to provide an economic hedge to its interest rate risks and ensure
its exposure to interest rate fluctuations is mitigated.
The contract rate is the fixed rate the Group is paying for its interest rate
swaps.
The valuation rate is the variable SONIA and bank base rate the banks are
paying for the interest rate swaps. Details of the interest rate swaps the
Group has entered can be found in the table below.
The valuations of all derivatives held by the Group are classified as Level 2
in the IFRS 13 fair value hierarchy as they are based on observable inputs.
There have been no transfers between levels of the fair value hierarchy during
the year.
Further details on interest rate risks are included in note 26.
Bank Notional principal Expiry Contract rate % Valuation rate % 2022 2021
date Fair value Fair value
£'000 £'000
Barclays Bank plc 33,847,900 25/01/2023 1.3420 0.1862 (50) (717)
Santander plc 18,591,549 03/08/2022 1.3730 0.1326 3 (312)
52,439,449 (47) (1,029)
17. BORROWINGS
2022 2021
£'000 £'000
Current liabilities
Bank loans 32,813 22,075
Unamortised lending costs (64) (222)
32,749 21,853
Non-current liabilities
Bank loans 68,940 106,238
Unamortised lending costs (452) (806)
68,488 105,432
Total borrowings
Bank loans 101,753 128,313
Unamortised lending costs (516) (1,028)
101,237 127,285
The maturity profile of the Group's debt was as follows:
2022 2021
£'000 £'000
Within one year 32,813 22,075
From one to two years 1,218 32,813
From two to five years 67,722 65,750
After five years - 7,675
101,753 128,313
Facility and arrangement fees
As at 31 March 2022
Secured Borrowings All in cost Maturity date Total Facility Unused loan facilities Facility drawn Unamortised facility fees Loan Balance
£'000 £'000 £'000 £'000 £'000
Santander Bank plc 3.71% August 2022 24,750 - 24,750 (29) 24,721
Lloyds Bank plc 2.64% March 2023 6,845 - 6,845 (35) 6,810
National Westminster Bank plc 2.79% August 2024 40,000 (7,957) 32,043 (230) 31,813
Barclays 3.41% June 2024 29,168 - 29,168 (128) 29,040
Scottish Widows 2.90% July 2026 8,947 - 8,947 (94) 8,853
109,710 (7,957) 101,753 (516) 101,237
As at 31 March 2021
Secured Borrowings All in cost Maturity date Total Facility Unused loan facilities Facility drawn Unamortised facility fees Loan Balance
£'000 £'000 £'000 £'000 £'000
Santander Bank plc 3.55% August 2022 25,250 - 25,250 (108) 25,142
Lloyds Bank plc 2.04% March 2023 6,845 - 6,845 (63) 6,782
National Westminster Bank plc 2.19% August 2024 40,000 (11,380) 28,620 (329) 28,291
Barclays 3.17% June 2024 37,976 - 37,976 (191) 37,785
Barclays 3.34% January 2022 22,298 (1,940) 20,358 (222) 20,136
Scottish Widows 2.90% July 2026 9,264 - 9,264 (115) 9,149
141,633 (13,320) 128,313 (1,028) 127,285
Investment properties with a carrying value of £218,780,000 (2021:
£234,613,000) are subject to a first charge to secure the Group's bank loans
amounting to £101,753,000 (2021: £128,313,000). Trading properties with a
carrying value of £20,286,000 (2021: £42,719,000) are no longer subject to a
first charge to secure the Group's bank loans following the repayment of the
Barclays loan in November 2021.
The Group has unused loan facilities amounting to £7,957,000 (2021:
£13,320,000). A facility fee is charged on this balance at a rate of 1.05%
p.a. and is payable quarterly. This facility is secured on the investment
properties held by Property Investment Holdings Limited, Palace Capital
(Properties) Limited and Palace Capital (Leeds) Limited as part of the NatWest
loan.
The Group constantly monitors its approach to managing interest rate risk. The
Group has fixed £61,386,000 (2021: £62,580,000) of its debt in order to
provide surety of its interest cost and to mitigate interest rate risk. The
remaining debt in place at year end is subject to floating rate in order to
take advantage of the historically low interest rate environment.
The Group has a loan with Scottish Widows for £8,947,000 (2021: £9,264,000)
which is fully fixed at a rate of 2.9%.
The Group has a loan with Barclays Bank plc for £29,168,000 (2021:
£37,976,000), of which £33,848,000 (2021: £34,348,000) is fixed using an
interest rate swap (see note 16). The floating rate portion of the loan is
charged at a margin of 1.95% plus SONIA.
The Group has a loan with Santander plc for £24,750,000 (2021: £25,250,000),
of which £18,592,000 (2021: £18,967,000) is fixed using an interest rate
swap (see note 16). The floating rate portion of the loan is charged at a
margin of 2.5% plus SONIA.
The Group has a loan with Lloyds Bank plc for £6,845,000 (2021: £6,845,000)
which is fully charged at a floating rate margin of 1.95% plus SONIA.
The Group has a loan with National Westminster Bank plc for £32,043,000
(2021: £28,620,000) which is fully charged at a floating rate margin of 2.1%
plus SONIA.
The fair value of borrowings held at amortised cost at 31 March 2022 was
£101,650,000 (2021: £127,342,000).
The Group's bank loans are subject to various covenants including Loan to
Value, Interest Cover and Debt Service Cover requirements. During the year,
the Group met all of its covenants, with a waiver obtained in April 2021 for
the Scottish Widows facility.
18. GEARING AND LOAN TO VALUE RATIO
The calculation of gearing is based on the following calculations of net
assets and net debt:
2022 2021
£'000 £'000
EPRA net asset value (note 7) 180,582 161,335
Borrowings (net of unamortised issue costs) 101,237 127,285
Lease liabilities for investment properties 1,078 1,804
Cash and cash equivalents (28,143) (9,417)
Net debt 74,172 119,672
NAV gearing 41% 74%
The calculation of bank loan to property value is calculated as follows:
2022 2021
£'000 £'000
Fair value of investment properties 235,565 240,101
Fair value of trading properties 23,475 42,719
Fair value of property portfolio 259,040 282,820
Borrowings 101,753 128,313
Cash at bank (28,143) (9,417)
Net bank borrowings 73,610 118,896
Loan to value ratio 28% 42%
19. RECONCILIATION OF LIABILITIES TO CASH FLOWS FROM
FINANCING ACTIVITIES
Bank borrowings Total
£'000 £'000
Balance at 1 April 2020 119,356 119,356
Cash flows from financing activities:
Bank borrowings drawn 18,916 18,916
Bank borrowings repaid (11,363) (11,363)
Loan arrangement fees paid (282) (282)
Non-cash movements:
Amortisation of loan arrangement fees 300 300
Capitalised loan arrangement fees 218 218
Debt termination costs 140 140
Balance at 1 April 2021 127,285 127,285
Cash flows from financing activities:
Bank borrowings drawn 11,472 11,472
Bank borrowings repaid (38,033) (38,033)
Loan arrangement fees paid (11) (11)
Non-cash movements:
Amortisation of loan arrangement fees 305 305
Capitalised loan arrangement fees 219 219
Balance at 31 March 2022 101,237 101,237
20. LEASES
Operating lease receipts in respect of rents on investment properties are
receivable as follows:
2022 2021
£'000 £'000
Within one year 15,765 16,170
From one to two years 15,109 14,730
From two to three years 13,000 12,637
From three to four years 12,357 10,502
From four to five years 10,787 9,535
From five to 25 years 49,821 47,005
116,839 110,579
Lease liabilities are classified as follows:
2022 2021
£'000 £'000
Lease liabilities for investment properties 1,078 1,804
Lease liabilities for right of use asset - 154
1,078 1,958
Lease obligations in respect of rents payable on leasehold properties were
payable as follows:
2022 2021
Present value
of lease
payments
£'000
Lease Present value of lease
payments payments
£'000 Interest £'000
£'000
Within one year 54 (54) - 2
From one to two years 54 (54) - 3
From two to five years 162 (162) - 10
From five to 25 years 1,081 (1,073) 8 47
After 25 years 4,813 (3,743) 1,070 1,742
6,164 (5,086) 1,078 1,804
Lease obligations in respect of rents payable on right of use assets were
payable as follows:
2022 2021
Present value
of lease
payments
£'000
Lease Present value of lease
payments payments
£'000 Interest £'000
£'000
Within one year - - - 154
The net carrying amount of the leasehold properties is shown in note 9.
The Group has over 180 leases granted to its tenants. These vary depending on
the individual tenant and the respective property and demise and vary
considerably from short-term leases of less than one 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
both the current and prior periods, with the exception of Hudson Quarter, York
held in Palace Capital (Developments) Limited which commenced development in
February 2018 and was completed in April 2021. Direct operating costs of £Nil
(2021: £Nil) were incurred on the property.
21. SHARE CAPITAL
2022 2021
Authorised, issued and fully paid share capital is as follows: £'000 £'000
46,388,515 ordinary shares of 10p each (2021: 46,388,515) 4,639 4,639
4,639 4,639
2022 2021
Reconciliation of movement in ordinary share capital £'000 £'000
At start of year 4,639 4,639
Issued in the year - -
At end of year 4,639 4,639
Movement in ordinary authorised share capital Price per share pence Number of ordinary shares issued Total number of shares
As at 31 March 2020, 31 March 2021 and 31 March 2022 - - 46,388,515
Movement in treasury shares Number of ordinary
shares issued Total number
of shares
As at 31 March 2020 and 31 March 2021 299,587
Shares transferred to EBT 14 July 2021 (200,000)
As at 31 March 2022 99,587
Total number of shares excluding the number held in treasury at 31 March 2022 46,288,928
Year ended 31 March 2022
On 14 July 2021, 200,000 shares were transferred into the employee benefit
trust.
Prior year figures included shares and transfers in the employee benefit
trust.
Shares held in Employee Benefit Trust
2022 2021
Authorised, issued and fully paid share capital is as follows: No. of No. of
options options
Brought forward 19,238 52,420
Transferred under scheme of arrangement 200,000 -
Shares exercised under deferred bonus share scheme (90,049) (33,182)
Shares exercised under employee LTIP scheme (134,814) -
Shares purchased by EBT 6,083 -
At end of year 458 19,238
Share options:
2022 2021
Reconciliation of movement in outstanding share options No. of options No. of options
At start of year 1,193,984 770,223
Issued in the year 402,717 573,456
Exercised in the year (134,814) -
Lapsed in the year (329,778) (201,447)
Deferred bonus share options issued 36,766 84,934
Deferred bonus share options exercised (90,049) (33,182)
At end of year 1,078,826 1,193,984
As at 31 March 2022, the Company had the following outstanding unexpired
options:
Description of unexpired share options 2022 2021
Weighted average Weighted average
No. of option price No. of option price
options options
Employee benefit plan 1,042,060 0p 1,114,232 0p
Deferred bonus share scheme issued 36,766 0p 84,934 0p
Total 1,078,826 0p 1,199,166 0p
Exercisable - 0p - 0p
Not exercisable 1,078,826 0p 1,199,166 0p
The weighted average remaining contractual life of share options at 31 March
2022 is 1.7 years (2021: 1.7 years).
22. SHARE-BASED PAYMENTS
Employee benefit plan
The following table illustrates the number and weighted average exercise
prices of, and movements in, share options during the period:
Number of Exercise Average Grant Vesting
options price share price at date date
date of
exercise
Outstanding at 31 March 2020 770,223 0p
Issued during the year (LTIP 2020) 573,456 0p 14 October 2020 14 October 2023
Deferred bonus share options issued 84,934 0p 14 July 2020 14 July 2021
Deferred bonus share options exercised (33,182) 0p 184p 25 June 2019 25 June 2020
Lapsed during year (LTIP 2017) (187,956) 0p
Lapsed during year (LTIP 2019) (13,491) 0p
Outstanding at 31 March 2021 1,193,984 0p
Exercised during the year (LTIP 2018) (134,814) 0p 254p 13 July 2018 13 July 2021
Issued during the year (LTIP 2021) 402,717 0p 247p 16 November 2021 16 November 2024
Deferred bonus share options issued 36,766 0p 253p 15 June 2021 15 June 2022
Deferred bonus share options exercised (90,049) 0p 254p 14 July 2020 14 July 2021
Lapsed during year (LTIP 2018) (114,405) 0p
Lapsed during year (LTIP 2019) (70,826) 0p
Lapsed during year (LTIP 2020) (144,547) 0p
Outstanding at 31 March 2022 1,078,826 0p
LTIP 2019
The options are awarded to employees on achievements against targets on two
separate measures over the three-year period. The options are subject to a
two-year holding period following vesting. Half the options will be awarded
based on the first target and half based on the achievement of the second.
Total property return growth is based on the increase in the total property
return of the Company compared with an increase in the MSCI IPD UK Quarterly
Index (PV growth) as at 31 March 2019. This target will measure the annualised
growth in total property return over the three-year period ending 31 March
2022 (PV performance period), and comparing this with the annualised total
property return growth of the MSCI IPD UK Quarterly Index.
Total Shareholder return (TSR) measures the total Shareholder return (price
rise plus dividends) over the period from 25 June 2019 to
24 June 2022. The base price is £2.85 per share which was the market price at
the grant date.
Annualised TSR over the Vesting % PV growth over the PV performance period Vesting %
TSR performance period
<5% 0 <0.5% 0
Equal to 5% 20 Equal to 0.5% 20
Between 5% and 9% 20-100 Between 0.5% and 2.5% 20-100
Equal to 9% 100 Equal to 2.5% 100
LTIP 2020
The options are awarded to employees on achievements against targets on two
separate measures over the three-year period. The options are subject to a
two-year holding period following vesting. Half the options will be awarded
based on the first target and half based on the achievement of the second.
Total property return growth is based on the increase in the total property
return of the Company compared with an increase in the MSCI IPD UK Quarterly
Index (PV growth) as at 31 March 2020. This target will measure the annualised
growth in total property return over the three-year period ending 31 March
2023 (PV performance period), and comparing this with the annualised total
property return growth of the MSCI IPD UK Quarterly Index.
Total Shareholder return (TSR) measures the total Shareholder return (price
rise plus dividends) over the period from 14 October 2020 to 13 October 2023.
The base price is £1.88 per share which was the market price at the grant
date.
Annualised TSR over the Vesting % PV growth over the PV performance period Vesting %
TSR performance period
<5% 0 <0.5% 0
Equal to 5% 20 Equal to 0.5% 20
Between 5% and 9% 20-100 Between 0.5% and 2.5% 20-100
Equal to 9% 100 Equal to 2.5% 100
LTIP 2021
The options are awarded to employees on achievements against targets on two
separate measures over the three-year period. For directors, the options are
subject to a two-year holding period following vesting. Half the options will
be awarded based on the first target and half based on the achievement of the
second.
Total property return growth is calculated as Total Property Return of the
Company over the Performance Period beginning on 31 March 2021 and ending on
31 March 2024, using the Total Property Return ("TPR") as calculated by MSCI
for the Group as compared with the TPR for the MSCI IPD Index (the
"Comparator") over the same period. The TPR for the Group and the Comparator
will be its percentage increase over the three-year Performance Period.
Total Shareholder return (TSR) measures the total Shareholder return (price
rise plus dividends) over the period from 16 November 2021 to 15 November
2024. The percentage of the TSR metric will be adjusted downwards according to
the Company's share price discount to net asset value at the time of vesting.
Share Price Discount will be calculated with reference to the closing share
price on 15 November 2024 and EPRA Net Tangible Assets as at 30 September
2024. The base price is £2.44 per share which was the market price at the
grant date.
Annualised TSR over the Vesting % TPR equivalent total over performance period Vesting %
TSR performance period
<5% 0 <0.5% 0
Equal to 5% 20 Equal to 0.5% 20
Between 5% and 9% 20-100 Between 0.5% and 2.5% 20-100
Equal to 9% 100 Equal to 2.5% 100
The fair value of grants was measured at the grant date using a
Black−Scholes pricing model for the TPR tranche and using a Monte Carlo
pricing model for the TSR tranche, 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 both the Black−Scholes and Monte Carlo
pricing models are as follows:
Monte Carlo TSR Black-Scholes PV
Tranche Tranche
Grant date 16 November 2021 16 November 2021
Share price £2.44 £2.44
Exercise price 0p 0p
Term 5 years 5 years
Expected volatility 38.03% 38.03%
Expected dividend yield 0.00% 0.00%
Risk free rate 0.59% 0.59%
Time to vest (years) 3.0 3.0
Expected forfeiture p.a. 0% 0%
Fair value per option £1.28 £2.44
The expense recognised for employee share-based payment received during the
period is shown in the following table:
2022 2021
£'000 £'000
LTIP 2017 - 13
LTIP 2018 42 86
LTIP 2019 9 135
LTIP 2020 72 66
LTIP 2021 39 -
Total expense arising from share-based payment transactions 162 300
23. RELATED PARTY TRANSACTIONS
Accounting services amounting to £Nil (2021: £3,062) have been provided to
the Group by Stanley Davis Group Limited, a company where Stanley Davis is a
Director and Shareholder.
Charitable donations amounting to £Nil (2021: £4,000) have been made by the
Group to Variety, the Children's Charity, a charity where Neil Sinclair is a
Trustee.
Dividend payments made to Directors amounted to £262,265 (2021: £163,511)
during the year. See note 4 for further details of key management
remuneration.
24. CAPITAL COMMITMENTS
The obligation for capital expenditure relating to the construction,
development or enhancement of investment properties entered into by the Group
amounted to £395,952 (2021: £5,575,818).
25. POST BALANCE SHEET EVENTS
On 1 April 2022, the Group completed the disposal of Warren House, Thame for a
total consideration of £1.63 million. The property was charged against the
loan facility with Barclays Bank plc and as a result, £506,758 of the total
consideration was used to repay the Barclays loan on 4 April 2022.
On 13 April 2022, the Group signed a 12 month extension with Lloyds in respect
of the Liverpool facility to extend the termination date to 7 March 2023.
On 14 April 2022, the Group completed the disposal of 2-4 High Road, Ickenham,
for a total consideration of £875,000. The property was charged against the
loan facility with Barclays Bank plc and as a result, £432,234 of the total
consideration was used to repay the Barclays loan facility on 21 April 2022.
On 19 May 2022, the Group exchanged on the disposal of Winchester Street,
Salisbury, for a total consideration of £2.01m. The property is charged
against the loan facility with NatWest plc, with £1.24m of the total
consideration being used to repay the facility. Completion of the sale is due
to take place by 28 June 2022.
On 27 May 2022, the Group signed an amend and restate for the Santander UK
facility. The amend and restate replaces the existing Santander UK facility
that was due to expire on 3 August 2022. The facility is charged at a margin
of 2.2% plus SONIA.
Post year end, the Group have completed on a further four residential unit
sales at Hudson Quarter for a total consideration of £1.7m.
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.
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:
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.
Capital risk management
The Group considers its capital to comprise its share capital, share premium,
other reserves and retained earnings which amounted to £177,204,000 at 31
March 2022 (2021: £157,831,000). 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.
Market risk
Market risk arises from the Group's use of interest bearing, and tradable
instruments. It is the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in interest rates
(interest rate risk) or other market factors.
Interest rate risk
The interest rate exposure profile of the Group's financial assets and
liabilities as at 31 March 2022 and 31 March 2021 were:
Nil rate Floating rate assets Fixed rate liability Floating rate
assets and liabilities £'000 £'000 liability Total
£'000 £'000 £'000
As at 31 March 2022
Trade and other receivables 2,666 - - - 2,666
Cash and cash equivalents - 28,143 - - 28,143
Trade and other payables (4,377) - - - (4,377)
Interest rate swaps - - (47) - (47)
Bank borrowings - - (61,386) (39,851) (101,237)
Lease liabilities - - (1,078) - (1,078)
(1,711) 28,143 (62,511) (39,851) (75,930)
Nil rate assets Floating rate assets Fixed rate Floating rate
and liabilities £'000 liability liability Total
£'000 £'000 £'000 £'000
As at 31 March 2021
Trade and other receivables 5,236 - - - 5,236
Cash and cash equivalents - 9,417 - - 9,417
Trade and other payables (7,461) - - - (7,461)
Equity investments 3,249 - - - 3,249
Interest rate swaps - - (1,029) - (1,029)
Bank borrowings - - (62,579) (64,706) (127,285)
Lease liabilities - - (1,958) - (1,958)
1,024 9,417 (65,566) (64,706) (119,831)
The Group's interest rate risk arises from borrowings issued at floating
interest rates. The Group's interest rate risk is reviewed throughout the year
by the Directors. The Group manages its exposure to interest rate risk on
borrowings through the use of interest rate derivatives (see note 16).
Interest rate swaps are used to mitigate the risk of an increase in interest
rates but also to allow the Group to benefit from a fall in interest rates.
60% of the Group's interest rate exposure is fixed and the remainder held on a
floating rate. The Group has employed an external adviser when contracting
hedging to advise on the structure of the hedging.
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
£28,143,000 (2021: £9,417,000). Interest receivable in the income statement
would be affected by £281,000 (2021: £94,000) by a one percentage point
change in floating interest rates on a full year basis.
The Group's borrowings with Lloyds, Barclays, NatWest, Scottish Widows and
Santander UK have all transitioned from the London Interbank Offer Rate
(LIBOR) benchmark to Sterling Overnight Index Average (SONIA) benchmark. There
has been and is expected to be negligible cost involved in the borrowing
facility transition and the respective hedge instrument amendments.
The Group has loans amounting to £39,851,000 (2021: £64,706,000) which have
interest payable at rates linked to the three-month SONIA interest rates or
bank base rates. A 1% increase in the SONIA or base rate will have the effect
of increasing interest payable by £399,000 (2021: £647,000).
The Group has interest rate swaps with a nominal value of £52,939,449 (2021:
£53,315,036). If the SONIA or base rate was to increase above the fixed
contract rate then the Group will benefit from a fair value increase of the
interest rate swap. If, however, the SONIA or base rate was to decrease, then
the Group would incur a decrease in the fair value of the interest rate swap.
-1% +1%
Change in interest rate
£'000 £'000
(Decrease)/increase in fair value of interest rates swaps as at 31 March 2022 (326) 321
(Decrease)/increase in fair value of interest rates swaps as at 31 March 2021 (859) 840
Upward movements in medium and long-term interest rates, associated with
higher interest rate expectations, increase the value of the Group's interest
rate swaps that provide protection against such moves. The converse is true
for downward movements in the yield curve.
The Group is therefore relatively sensitive to changes in interest rates. The
Directors regularly review the Group's position with regard to interest rates
in order to minimise its risk.
Credit risk management
Credit risk refers to the risk that a counterparty will default on its
contractual obligations resulting in financial loss to the Group.
The Group has its cash held on deposit with four large banks in the United
Kingdom. At 31 March 2022 the cash balances of the Group were £28,143,000
(2021: £9,417,000). The concentration of credit risk held with Barclays Bank
plc, the largest of these banks, was £20,281,000 (2021: £6,773,000). 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 tenant by contractual
income amounts to 5.7% (2021: 5.6%) of the Group's anticipated income. The
Directors assess a tenant's creditworthiness 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 2022
was £2,666,000 (2021: £5,236,000). The details of the provision for expected
credit loss are shown in note 13.
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 lease liabilities.
The tables below summarise the maturity profile of the Group's financial
liabilities based on contractual undiscounted payments:
On demand 0-1 years 1-2 years 2-5 years > 5 years Total
£'000 £'000 £'000 £'000 £'000 £'000
As at 31 March 2022
Interest bearing loans - 35,044 3,409 70,257 - 108,710
Lease liabilities - 54 54 162 5,894 6,164
Derivative financial instruments - - (3) 50 - 47
Trade and other payables 4,377 - - - - 4,377
4,377 35,098 3,460 70,469 5,894 119,298
On demand 0-1 years 1-2 years 2-5 years > 5 years Total
£'000 £'000 £'000 £,000 £'000 £'000
As at 31 March 2021
Interest bearing loans - 25,678 35,268 68,244 7,735 136,925
Lease liabilities - 107 108 323 10,799 11,337
Derivative financial instruments - - 312 717 - 1,029
Trade and other payables 7,461 - - - - 7,461
7,461 25,785 35,688 69,284 18,534 156,752
Company Statement of Financial Position
as at 31 March 2022
Note 2022 2021
£'000 £'000
Fixed assets
Investments in subsidiaries 2 122,864 125,567
Listed equity investments 3 - 3,249
Property, plant and equipment 4 43 68
122,907 128,884
Current assets
Trade and other receivables 5 42,576 33,899
Cash at bank and in hand 479 266
43,055 34,165
Total assets 165,962 163,049
Current liabilities
Creditors: amounts falling due within one year 6 (28,953) (19,159)
Net current assets 14,102 15,006
Total assets less current liabilities 137,009 143,890
Equity
Called up share capital 7 4,639 4,639
Treasury shares (717) (1,288)
Merger reserve 3,503 3,503
Capital redemption reserve 340 340
Capital reduction reserve 125,019 125,019
Retained earnings 4,225 11,677
Equity - attributable to the owners of the Parent 137,009 143,890
The Company's loss after tax for the year was £1,706,000 (2021: £2,826,000).
The financial statements were approved by the Board of Directors and
authorised for issue on 13 June 2022 and are signed on its behalf by:
MATTHEW SIMPSON
Chief Financial Officer
Company Statement of Changes in Equity
as at 31 March 2022
Share Share Treasury Other Capital Reduction Reserve Retained Total
Capital Premium Share Reserves £'000 Earnings Equity
£'000 £'000 Reserve £'000 £'000 £'000
£'000
At 31 March 2020 4,639 125,019 (1,349) 3,843 - 17,548 149,700
Total comprehensive income for the year - - - - - (2,826) (2,826)
Transactions with Equity Holders
Share-based payments - - - - - 300 300
Exercise of share options - - 61 - - (61) -
Issue of deferred bonus share options - - - - - 171 171
Dividends - - - - - (3,455) (3,455)
Transfer to capital reduction reserve account - (125,019) - - 125,019 - -
At 31 March 2021 4,639 - (1,288) 3,843 125,019 11,677 143,890
Total comprehensive income for the year - - - - - (1,706) (1,706)
Transactions with Equity Holders
Share-based payments - - - - - 162 162
Exercise of share options - - 571 - - (571) -
Issue of deferred bonus share options - - - - - 90 90
Dividends - - - - - (5,427) (5,427)
At 31 March 2022 4,639 - (717) 3,843 125,019 4,225 137,009
Share premium represents the excess over nominal value of the fair value
consideration received for equity shares net of expenses of the share issue.
Treasury shares represents the consideration paid for shares bought back from
the market.
Other reserves comprise the merger reserve and the capital redemption reserve.
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 capital redemption reserve represents the nominal value of cancelled
preference share capital redeemed.
The capital reduction reserve represents distributable profits generated as a
result of the share premium reduction.
Notes to the Company Financial Statements
Accounting policies
Palace Capital plc is a company incorporated in England and Wales under the
Companies Act. The address of the registered office is given on the contents
page and the nature of the Group's operations and its principal activities are
set out in the Strategic Report. The financial statements of the Company have
been prepared in accordance with FRS 102, the Financial Reporting Standard
applicable in the United Kingdom and the Republic of Ireland.
The preparation of financial statements in compliance with FRS 102 requires
the use of certain critical accounting estimates. It also requires Company's
management to exercise judgement in applying the Company's accounting policies
(as detailed below). The Statement of Financial Position heading relating to
the Company's investments and property, plant and equipment has been amended
to "Fixed assets" from "Non-current assets" to be consistent with the
Company's presentation of its Statement of Financial Position in accordance
with the balance sheet formats of the Companies Act 2006. Assets are
classified in accordance with the definitions of fixed and current assets in
the Companies Act instead of the presentation requirements of IAS 1
Presentation of Financial Statements
Dividends revenue
Revenue is recognised when the Company's right to receive payment is
established, which is generally when Shareholders of the paying company
approve the payment of the dividend.
Valuation of investments
Investments in subsidiaries are measured at cost less accumulated impairment.
Where merger relief is applicable, the cost of the investment in a subsidiary
undertaking is measured at the nominal value of the shares issued together
with the fair value of any additional consideration paid.
Listed equity investments
Listed equity investments have been classified as being at fair value through
profit and loss. Listed equity investments are subsequently measured using
Level 1 inputs, the quoted market price, and all fair value gains or losses in
respect of those assets are recognised in the profit and loss.
Current taxation
Current tax assets and liabilities for the current and prior periods are
measured at the amount expected to be recovered from or paid to the tax
authorities. The tax rates and the tax laws used to compute the amount are
those that are enacted or substantively enacted, by the balance sheet date.
Deferred taxation
The tax expense represents the sum of the tax currently payable and deferred
tax.
The tax currently payable is based on taxable profit for the year. Taxable
profit differs from net profit as reported in the income statement because it
excludes items of income or expense that are taxable or deductible in other
years and it further excludes items that are never taxable or deductible. The
Group's liability for current tax is calculated using tax rates that have been
enacted or substantively enacted by the balance sheet date.
Deferred tax balances are recognised in respect of timing differences that
have originated but not reversed on the balance sheet date. Deferred tax
liabilities are generally recognised for all taxable temporary differences and
deferred tax assets are recognised to the extent that it is probable that
taxable profits will be available against which deductible temporary
differences can be utilised.
Deferred tax balances are not recognised in respect of permanent differences
between the fair value of assets acquired and the future
tax deductions available for them and the differences between the fair values
of liabilities acquired and the amount that will be assessed for tax.
The carrying amount of deferred tax assets is reviewed at each balance sheet
date and reduced to the extent that it is no longer probable that sufficient
taxable profits will be available to allow all or part of the asset to be
recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the
period when the liability is settled or the asset is realised. Deferred tax is
charged or credited in profit or loss, except when it relates to items charged
or credited directly to other comprehensive income, in which case the deferred
tax is also dealt with in other comprehensive income.
The Government announced a proposal in March 2021 for an increase in the
corporation tax rate from 19% main rate in the tax year 2021 to 25% with
effect from 1 April 2023. This was enacted by the Finance Act 2021 on 10 June
2021.
Trade and other receivables
Trade and other receivables and intercompany receivables are recognised and
carried at the original transaction value. A provision for impairment is
established where there is objective evidence that the Company will not be
able to collect all amounts due according to the original terms of the
receivables concerned.
Cash and cash equivalents
Cash and cash equivalents comprise cash on hand and demand deposits, and other
short-term highly liquid investments that are readily convertible to a known
amount of cash and are subject to an insignificant risk of changes in value.
Financial liabilities and equity
Financial liabilities and equity instruments issued by the Company are
classified according to the substance of the contractual arrangements entered
into and the definitions of a financial liability and an equity instrument. An
equity instrument is any contract that evidences a residual interest in the
assets of the Company after deducting all of its liabilities. The accounting
policies adopted for specific financial liabilities and equity instruments are
set out below:
Trade payables
Trade payables are initially measured at fair value and are subsequently
measured at amortised cost, using the effective interest rate method.
Equity instruments
Equity instruments issued by the Company are recorded at the fair value of
proceeds received, net of direct issue costs.
Parent company disclosure exemptions
In preparing the separate financial statements of the Parent Company,
advantage has been taken of the following disclosure exemptions available in
FRS 102:
• no cash flow statement has been presented for the Parent Company;
• disclosures in respect of the Parent Company's financial
instruments have not been presented as equivalent disclosures have been
provided in respect of the Group as a whole;
• disclosures in respect of the Parent Company's share-based payment
arrangements have not been presented as equivalent disclosures have been
provided in respect of the Group as a whole; and
• disclosure has been given for the aggregate remuneration of the
key management personnel of the Parent Company as their remuneration is
included in the totals for the Group as a whole.
Judgements in applying accounting policies and key sources of estimation
uncertainty
Investments and loans to subsidiary undertakings (see note 3)
The most critical estimates, assumptions and judgements relate to the
determination of carrying value of unlisted investments in the Company's
subsidiary undertakings and the carrying value of the loans that the Company
has made to them. The nature, facts and circumstance of the investment or loan
are taken into account in assessing whether there are any indications of
impairment.
Provisions provided in the year reflect the reduction in net asset value of
subsidiaries for the year ended 31 March 2022. Write-down of investments
reflect the winding up of subsidiaries within the year.
1. PROFIT FOR THE FINANCIAL PERIOD
The Company has taken advantage of section 408 of the Companies Act 2006 and
consequently a profit and loss account for the Company alone has not been
presented.
2. INVESTMENTS IN SUBSIDIARIES
Cost: Investments Loans
in subsidiaries to subsidiaries Total
£'000 £'000 £'000
At 1 April 2020 183,614 40 183,654
Settlement of loans - (40) (40)
At 1 April 2021 183,614 - 183,614
Write-down of investments (2,658) - (2,658)
At 31 March 2021 180,956 - 180,956
Provision for impairment:
At 1 April 2020 56,197 - 56,197
Provided during the year 1,850 - 1,850
At 1 April 2021 58,047 - 58,047
Provided during the year 45 - 45
At 31 March 2022 58,092 - 58,092
Net book value at 31 March 2022 122,864 - 122,864
Net book value at 31 March 2021 125,567 - 125,567
The Group comprises a number of companies; all subsidiaries included within
these financial statements are noted below:
Subsidiary undertaking: Class of share held % shareholding Principal activity
Palace Capital (Leeds) Limited Ordinary 100 Property Investments
Palace Capital (Northampton) Limited Ordinary 100 Property Investments
Palace Capital (Properties) Limited Ordinary 100 Property Investments
Palace Capital (Developments) Limited Ordinary 100 Property Investments
Palace Capital (Halifax) Limited Ordinary 100 Property Investments
Palace Capital (Manchester) Limited Ordinary 100 Property Investments
Palace Capital (Liverpool) Limited Ordinary 100 Property Investments
Palace Capital (Signal) Limited Ordinary 100 Property Investments
Property Investment Holdings Limited Ordinary 100 Property Investments
Palace Capital (Dartford) Limited Ordinary 100 Property Management
Palace Capital (Newcastle) Limited Ordinary 100 Property Investments
Palace Capital (York) Limited Ordinary 100 Property Management
Associate Company:
HBP Services Limited* Ordinary 21.4 Property Management
Clubcourt Limited* Ordinary 40 Property Management
* Held indirectly
The results of the associates are immaterial to the Group.
The registered addresses for the subsidiaries across the Group are consistent
based on their country of incorporation and are as follows:
UK entities: 4th Floor, 25 Bury Street, St James's, London, SW1Y 6AL
On 22 March 2022 R.T. Warren (Investments) Limited was dissolved.
3. LISTED EQUITY INVESTMENTS
Total
£'000
At 31 March 2020 2,540
Gain on revaluation of listed equity investment shown in statement of 709
comprehensive income
At 31 March 2021 3,249
Disposal of listed equity investment (3,249)
At 31 March 2022 -
4. PROPERTY, PLANT AND EQUIPMENT
IT, fixtures and fittings £'000
At 31 March 2020 253
Additions 16
At 31 March 2021 269
Additions 222
At 31 March 2022 291
Depreciation
At 31 March 2020 157
Provided during the period 44
At 31 March 2021 201
Provided during the period 47
At 31 March 2022 248
Net book value at 31 March 2022 43
Net book value at 31 March 2021 68
5. TRADE AND OTHER RECEIVABLES
2022 2021
£'000 £'000
Amounts owed by subsidiary undertakings 36,374 30,063
Trade debtors 5,607 2,454
Other debtors 44 1,096
Accrued interest on amounts owed by subsidiary undertakings 309 65
Prepayments 242 221
42,576 33,899
Trade debtors represent amounts owed from subsidiary undertakings in relation
to management charges.
All amounts that fall due for repayment within one year and are presented
within current assets as required by the Companies Act. The amounts owed by
subsidiary undertakings are repayable on demand with no fixed repayment date,
although it is noted that a significant proportion of the amounts may not be
sought for repayment within one year depending on activity in the subsidiary
undertakings.
A loan amounting to £28,888,501 remains outstanding at 31 March 2022 (2021:
£26,375,362) from Palace Capital (Developments) Limited. No interest is
charged on this loan. This loan is repayable on demand.
A loan amounting to £519,534 remains outstanding at 31 March 2022 (2021:
£396,034) from Palace Capital (Leeds) Limited. Interest on this loan is
charged at a fixed rate of 5% per year. This loan is repayable on demand.
A loan amounting to £2,781,417 remains outstanding at 31 March 2022 (2021:
£3,291,417) from Palace Capital (Halifax) Limited. Interest on this loan is
charged at a fixed rate of 5% per year. This loan is repayable on demand.
A loan amounting to £4,034,646 remains outstanding at 31 March 2022 (2021:
£743,583 creditor) from Palace Capital (Properties) Limited. Interest on this
loan is charged at a fixed rate of 5% per year. This loan is repayable on
demand.
A loan amounting to £150,000 remains outstanding at 31 March 2022 (2021:
£Nil) from Palace Capital (Northampton) Limited. Interest on this loan is
charged at a fixed rate of 5% per year. This loan is repayable on demand.
6. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
2022 2021
£'000 £'000
Trade creditors 168 206
Amount owed to subsidiary undertaking 27,528 17,776
Other taxes 278 269
Other creditors 5 66
Accruals and deferred income 974 842
28,953 19,159
A loan amounting to £10,113,143 remains outstanding at 31 March 2022 (2021:
£9,373,143) to Palace Capital (Signal) Limited. No interest is charged on
this loan. This loan is repayable on demand.
A loan amounting to £Nil remains outstanding at 31 March 2022 (2021:
£2,662,519) to R.T. Warren Investments Limited. No interest is charged on
this loan. This loan is repayable on demand.
A loan amounting to £16,314,718 remains outstanding at 31 March 2022 (2021:
£4,996,489) to Property Investment Holdings Limited. No interest is charged
on this loan. This loan is repayable on demand.
A loan amounting to £1,100,000 remains outstanding at 31 March 2022 (2021:
£Nil) to Palace Capital (Liverpool) Limited. No interest is charged on this
loan. This loan is repayable on demand.
7. SHARE CAPITAL
The details of the Company's share capital are provided in note 21 of the
notes to the Consolidated Financial Statements.
8. LEASES
Operating lease payments in respect of rents on leasehold properties occupied
by the Company are payable as follows:
2022 2021
£'000 £'000
Within one year 19 178
From one to two years - 19
19 197
9. POST BALANCE SHEET EVENTs
There are no post balance sheet events.Officers and Professional Advisors
Directors
Steven Owen Interim Executive
Chairman
Matthew Simpson Chief
Financial Officer
Richard Starr Executive Property
Director
Kim Taylor-Smith
Non-Executive Director
Mickola Wilson Non-Executive Director
Paula Dillon Non-Executive
Director
Secretary
Phil Higgins
Registered office
25 Bury Street
London
SW1Y 6AL
Registered number
05332938 (England and Wales)
Auditor
BDO LLP
55 Baker Street
London
W1U 7EU
Registrar
Link Group
10th Floor
Central Square
29 Wellington Street
Leeds
LS1 4DL
Joint broker
Arden Partners plc
125 Old Broad Street
London
EC2N 1AR
Joint broker
Numis Securities Limited
45 Gresham Street
London
EC2V 7BF
Glossary
Adjusted EPS: Is adjusted profit before tax less corporation tax charge on
recurring earnings (excluding deferred tax movements) divided by the average
basic number of shares in the period.
Adjusted profit before tax: Is the IFRS profit before taxation excluding
investment property revaluations, gains/losses on disposals, acquisition
costs, fair value movement in derivatives, share-based payments and
exceptional items.
Assets Under Management (AUM): Is a measure of the total market value of all
properties owned and managed by the Group.
Balance sheet gearing: Is the balance sheet net debt divided by IFRS net
assets.
Building Research Establishment Environmental Assessment Methodology (BREEAM)
rating: A set of assessment methods and tools designed to help construction
professionals understand and mitigate the environmental impacts of the
developments they design and build. Performance is measured across a series of
ratings: Good, Very Good, Excellent and Outstanding.
Core: Is a property investment management style which adopts a certain risk
appetite growth strategy. Core is typically associated with a low to moderate
risk profile. Core property owners would have the ability to increase cash
flows through light refurbishment and asset management strategies. These
properties tend to be high quality and well occupied.
Dividend cover: Is the Adjusted EPS divided by dividend per share declared in
the period.
EPRA: Is the European Public Real Estate Association.
EPRA cost ratio (including direct vacancy costs): Is a proportionally
consolidated measure of the ratio of net overheads and operating expenses
against gross rental income (with both amounts excluding ground rents
payable). Net overheads and operating expenses relate to all administrative
and operating expenses, net of any service fees, recharges or other income
specifically intended to cover overhead and property expenses.
EPRA cost ratio (excluding direct vacancy costs): Is the ratio calculated
above, but with direct vacancy costs removed from the net overheads and
operating expenses balance.
EPRA diluted EPS: Is EPRA earnings divided by the average diluted number of
shares in the period.
EPRA earnings: Is the IFRS profit after taxation excluding investment property
revaluations, gains/losses on disposals and changes in fair value of financial
derivatives.
EPRA EPS: Is EPRA earnings divided by the average basic number of shares in
the period.
EPRA net assets (EPRA NAV): Are the balance sheet net assets according to the
definitions of the various NAV measures defined in the EPRA Best Practice
Recommendations that came into effect for accounting periods starting 1
January 2020.
EPRA NAV per share: Is EPRA NAV divided by the diluted number of shares at the
period end.
EPRA net tangible assets (EPRA NTA): Is the NAV adjusted to reflect the fair
value of trading properties and derivatives and to exclude deferred taxation
on revaluations.
EPRA occupancy rate: Is the ERV of occupied space divided by ERV of the whole
portfolio, excluding developments and residential property.
EPRA topped-up net initial yield: Is the current annualised rent, net of
costs, topped up for contracted uplifts, where these are not in lieu of rental
growth, expressed as a percentage of capital value.
EPRA vacancy rate: Is the ERV of vacant space divided by ERV of the whole
portfolio, excluding developments and residential property.
Equivalent yield: Is the net weighted average income return a property will
produce based upon the timing of the income received. In accordance with usual
practice, the equivalent yields (as determined by the external valuers) assume
rent received annually in arrears and on values before deducting prospective
purchaser's costs.
Estimated rental value (ERV): Is the external valuers' opinion as to the open
market rent which, on the date of valuation, could reasonably be expected to
be obtained on a new letting or rent review of a property.
IAS/IFRS: Is the International Financial Reporting Standards issued by the
International Accounting Standards Board and adopted by the UK.
Interest cover ratio (ICR): Is the number of times net interest payable is
covered by underlying profit before net interest payable and taxation.
Investment Property Databank (IPD): A wholly-owned subsidiary of MSCI
producing an independent benchmark of property returns and the Group's
portfolio returns.
Key Performance Indicators (KPIs): Are the most critical metrics that measure
the success of specific activities used to meet business goals - measured
against a specific target or benchmark, adding context to each activity being
measured.
LIBOR: Is the London Interbank Offered Rate, a formerly used interest rate
charged by one bank to another for lending money.
Like-for-like net rental income: Is the change in net rental income on
properties owned throughout the current and previous periods under review.
This growth rate includes revenue recognition and lease accounting adjustments
but excludes properties held for development in either period, properties with
guaranteed rent reviews, asset management determinations and surrender
premiums.
Like-for-like valuation: Is the change in the carrying value of properties
owned throughout the entire year.
This excludes properties acquired during the year, disposed of during the year
and capital expenditure
Loan to value (LTV): Is the ratio of principal value of gross debt less cash,
short-term deposits and liquid investments to the aggregate fair value of
properties and investments.
MSCI Inc. (MSCI IPD): Is a company that produces independent benchmarks of
property returns. The Group measures its performance against both the Central
London Offices Index and the UK All Property Index.
Net asset value (NAV) per share: Is the equity attributable to owners of the
Group divided by the number of ordinary shares in issue at the period end.
Net equivalent yield (NEY): Is the weighted average income return (after
adding notional purchaser's costs) a property will produce based upon the
timing of the income received. In accordance with usual practice, the
equivalent yields (as determined by the external valuers) assume rent is
received annually in arrears.
Net initial yield (NIY): Is the current annualised rent, net of costs,
expressed as a percentage of capital value, after adding notional purchaser's
costs.
Net rental income: Is the rental income receivable in the period after payment
of net property outgoings. Net rental income will differ from annualised net
rents and passing rent due to the effects of income from rent reviews, net
property outgoings and accounting adjustments for fixed and minimum contracted
rent reviews and lease incentives.
Net reversionary yield (NRY): Is the anticipated yield, which the initial
yield will rise to once the rent reaches the estimated rental value.
Passing rent: Is the gross rent, less any ground rent payable under head
leases.
Peer Group: A selection of small/medium sized property companies within the
listed real estate sector with a diversified portfolio.
Portfolio Valuation: The value of the Company's property portfolio, including
all investment and trading properties as valued by our independent valuers,
Cushman & Wakefield, and assets held for sale.
Portfolio Value (PV): The value of the investment properties within the Palace
Capital property portfolio as measured by Cushman & Wakefield. It is
referenced in relation the 2018 LTIP's awarded to employees in 2018.
Property Income Distribution (PID): A dividend received by a Shareholder of
the principal company in respect of profits and gains of the Property Rental
Business of the UK resident members of the REIT Group or in respect of the
profits or gains of a non-UK resident member of the REIT Group.
Real Estate Investment Trust (REIT): A UK Real Estate Investment Trust must be
a company listed on a recognised stock exchange with at least three-quarters
of its profits and assets derived from a qualifying property rental business.
Income and capital gains from the property rental business are exempt from tax
but the REIT is required to distribute at least 90% of those profits to
Shareholders. Tax is payable on profits from non-qualifying activities of the
residual business.
SONIA: Is the Sterling Overnight Index Average, the interest rate charged by
one bank to another for lending money.
Special Purpose Vehicle (SPV): Is a separate legal entity created by an
organisation. The SPV is a distinct company with its own assets and
liabilities, as well as its own legal status. Usually, they are created for a
specific objective, often which is to isolate financial risk. As it is a
separate legal entity, if the Parent Company goes bankrupt, the special
purpose vehicle can carry its obligations.
Tenant (or lease) incentives: Are any incentives offered to occupiers to enter
into a lease. Typically the incentive will be an initial rent free period, or
a cash contribution to fit-out or similar costs. Under accounting rules the
value of lease incentives given to tenants is amortised through the Income
Statement on a straight-line basis to the lease expiry.
Total Accounting Return (TAR): Is the increase or decrease in EPRA NAV per
share plus dividends paid, and this can be expressed as a percentage of EPRA
NAV per share at the beginning of the period.
Total Expense Ratio: Is calculated as total administrative costs for the year
divided by total asset value in the year.
Total Property Return (TPR): Total property return is a performance measure
calculated by the MSCI IPD and defined in the MSCI Global Methodology
Standards for Real Estate Investment as "the percentage value change plus net
income accrual, relative to the capital employed".
Total Shareholder Return (TSR): Is calculated as the movement in the share
price for the period plus dividends paid in the year, divided by opening share
price
Value-add: Is a risk appetite growth strategy. Typically associated with a
moderate to high-risk profile. Value-add properties tend to have low cash
flows at acquisition but have the potential to produce future cash flow
uplifts once value has been added. This could be by taking on larger capital
refurbishment projects to improve the layout and look of the property to
ensure rental increases and capital value enhancement.
Weighted average debt maturity: Is measured in years when each tranche of
Group debt is multiplied by the remaining period to its maturity and the
result is divided by total Group debt in issue at the period end.
Weighted average interest rate: Is the loan interest per annum at the period
end, divided by total debt in issue at the period end.
Weighted average unexpired lease term (WAULT): Is the average lease term
remaining to first break, or expiry, across the portfolio weighted by rental
income. This is also disclosed assuming all break clauses are exercised at the
earliest date,
as stated.
WiredScore: Wired Certification is a commercial real estate
rating system that empowers landlords to understand, improve, and promote
their buildings' digital infrastructure. Connectivity
is measured across a series of ratings: Platinum, Gold, Silver
and Certified.
Solicitors
Hamlins LLP
1 Kingsway
London
WC2B 6AN
CMS Cameron McKenna
Nabarro Olswang LLP
1 South Quay
Victoria Quays
Sheffield
S2 5SY
Walker Morris LLP
33 Wellington Street
Leeds
LS1 4DL
Edwin coe LLP
Lincoln's Inn
2, Stone Buildings
London
WC2A 3TH
Investor & public relations
FTI Consulting
200 Aldersgate
Aldersgate Street
London
EC1A 4HD
Bankers
Barclays Bank plc
69 Albion Street
Leeds
LS1 5AA
Lloyds Bank plc
25 Gresham Street
London
EC2V 7HN
National Westminster Bank plc
16 The Boulevard
Crawley
West Sussex
RH10 1XU
Santander UK plc
Bridle Road
Merseyside
L30 4GB
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