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RNS
Palace Capital PLC  -  PCA   

Final Results

Released 07:00 11-Jun-2018

RNS Number : 8641Q
Palace Capital PLC
11 June 2018
 

Palace Capital plc

("Palace Capital" or the "Company")

The Regional Property Investment Company

 

ANNUAL RESULTS FOR THE YEAR ENDED 31 MARCH 2018

 

Palace Capital, the property investment company that focuses on commercial property outside London, is pleased to announce its annual results for the year ended 31 March 2018.

 

TRANSFORMATIONAL YEAR ON ALL FRONTS:

 

LARGEST ACQUISITION TO DATE

 

MOVE TO THE MAIN MARKET OF THE LONDON STOCK EXCHANGE

 

LARGEST CAPITAL RAISE TO DATE

 

REGIONAL FOCUS CONTINUES TO GENERATE INCOME AND CAPITAL GROWTH

 

 

Stanley Davis, Chairman of Palace Capital, COMMENTED:

"This financial year was a momentous period for Palace Capital. We acquired the RT Warren portfolio, our largest purchase to date. The company secured £70m of additional equity capital from a range of existing and new shareholders. Significantly, Palace Capital moved to the Main Market of the London Stock Exchange, reflecting the growing scale of our business.

The management team has worked diligently to produce an excellent performance; both from a financial and operational perspective. I am very pleased to report that we have made considerable progress against all of our goals and I am confident that Palace Capital will continue to generate value for shareholders in the future."

 

Financial highlights

·      IFRS profit before tax: increased by 6% to £13.3m (31 March 2017: £12.6m) reflecting a combination of recurring earnings, revaluation gains and profit on disposals

·      Adjusted profit before tax: increased by 27% to £8.5m (31 March 2017: £6.7m)

·      Net rental income: increased by 22% to £14.9m (31 March 2017: £12.2m)

·      Portfolio valuation at 31 March 2018*: increased by 51% to £276.7m (31 March 2017: £183.2m) reflecting +3.5% like-for-like growth in the existing portfolio and net acquisitions including the £68m transformational acquisition of the RT Warren Portfolio

·      IFRS Net Asset Value: increased by 67% to £183.3m (31 March 2017: £109.6m) reflecting £70m equity raised in the year

·      EPRA NAV per share: decreased by 6% to 415p at 31 March 2018 (31 March 2017: 443p) due to the one-off dilution from the £70m equity raise at 340p. From a proforma base of 389p post fundraise, EPRA NAV per share subsequently increased by 7% at 31 March 2018

·      Basic EPS: decreased marginally to 35.9p (31 March 2017: 36.6p)

·      Adjusted EPS: decreased marginally to 21.2p (31 March 2017: 22.2p)

·      Final dividend: 4.75p proposed, making a total for the year of 19.0p, a 3% increase (31 March 2017: 18.5p) and 1.1x covered by adjusted earnings

 

* Includes investment properties and assets held for sale.

The Group financial statements are prepared in accordance with IFRS. Alternative performance measures are not specified under IFRS but are widely used by the property sector as they highlight the underlying recurring performance of the Group's property rental business and are based on EPRA Best Practice Recommendations (BPR) reporting framework. Further details and reconciliations between EPRA measures, company adjusted measures and IFRS equivalents can be found in Notes 8 and 9 in the financial statements.

 

Operational highlights

·      £70m new equity to fund RT Warren portfolio purchase

·      £67m new debt facilities to support acquisitions

·      £88m of acquisitions

·      £9m of disposals to recycle capital

 

Main Market move completed in March 2018

·      There was strong support from investors to commence the move to the Main Market following the Placing in October 2017

·      The management team successfully completed the transition within six months of the Placing

·      Will join the FTSE Small Cap Index and FTSE All Share Index on 18 June 2018.

 

Neil Sinclair, chief executive of Palace Capital, COMMENTED:

"Since our re-admission to the London Stock Exchange in October 2013, Palace Capital has grown strongly and consistently. We have developed a portfolio now worth over £275m and generated almost 120% total return. Our results today demonstrate considerable progress. Importantly, I believe that they highlight the scope for additional value creation. Our regionally-focused, active asset management strategy is well proven. The acquisition of the Warren portfolio highlighted how Palace Capital can identify value where others might not. Our successful fund raising demonstrated that investors agree and prompted our move to the Main Market of the London Stock Exchange. We are now of a size where further value-creating opportunities present themselves regularly.

"While Palace Capital has accomplished a lot in a short period of time, there remains much more to do. I am confident that our management team will continue to drive the business forward successfully, albeit with a cautious approach, committed to the creation of value for all our shareholders."

 

For further information please contact:

 

PALACE CAPITAL PLC

Neil Sinclair, Chief Executive             
Stephen Silvester, Finance Director
Tel. +44 (0)20 3301 8331

Broker

Arden Partners plc
Chris Hardie / Ciaran Walsh

Tel. +44 (0)207 614 5917

Joint Broker

Allenby Capital Limited
Nick Naylor / James Reeve

Tel. +44 (0)20 3328 5656

 Investor & Public Relations

Capital Access Group
Scott Fulton

Tel: +44 (0) 203 763 3405

About Palace Capital plc (www.palacecapitalplc.com)

Palace Capital is a property investment company with a premium listing on the Main Market of the London Stock Exchange (Stock Code: PCA). The Company owns a diversified portfolio across the UK and has built a reputation for being entrepreneurial and opportunistic. Palace Capital acquires properties where it can enhance the long-term income and capital value through asset management and strategic capital development in locations outside London.

 



 

Chief Executive's Review

The results show an IFRS profit before tax of £13.3m and a net asset value of £183.3m

I am delighted to report the Company's results for the year ended 31 March 2018 which shows an IFRS profit before tax of £13.3m and a net asset value of £183.3m.

In our Portfolio & Trading update announced on 24 April 2018, I stated that these were exciting times for our Company. Our very selective stock selection, together with taking advantage of opportunistic, mainly corporate purchases, means that we have assembled a high-quality property portfolio. The growth in income from these is already being experienced in our independent valuations. Additionally, several of our properties in city centres have significant development and refurbishment potential.

We continue to focus our strategy on growing both income and capital value. We have had a terrific year and as a result of this we are proposing a final dividend of 4.75p per share payable on 31st July 2018 to those shareholders on the register as at 6th July 2018 which, if approved, takes total dividends for the year to 19p.

It is important to us that we maintain our progressive dividend policy which we first set out in our Re-Admission Document in October 2013 which stated that we would pay a dividend of 12p for the year ended 31 March 2015.

Our EPRA Net Asset Value (NAV) per share for the year ended 31 March 2017 was 443p but this was diluted to 389p by the £70m fundraise last October which enabled us to acquire RT Warren (Investments) Ltd (Warren) which had a portfolio of 21 commercial buildings and 65 residential properties. We deliberated on this very carefully and concluded this was the best portfolio we had seen in over two years. It is already proving to be an excellent acquisition as we are identifying plenty of opportunities to apply our brand of active asset management and grow income.

Our EPRA Net Asset Value per share at 31 March 2018 is 415p so we are already making significant progress. We believe that the acquisition of the Warren portfolio will be both earnings and NAV enhancing. We have no regrets regarding the short-term dilution as we consider it will be hugely beneficial in the medium term. Our first significant acquisition was the Sequel portfolio acquired in October 2013 when on Re-Admission our reported NAV was 218p. We have made tremendous progress notwithstanding the short-term dilution.

Following the acquisition of the Warren portfolio and the St James Complex in Newcastle, the carrying value of the Company's portfolio is now at £276.7m (including assets held for sale) compared to £183.2m the twelve months previous. This takes into account the relevant acquisitions and the disposals we have made during the financial year.

Our contracted rent roll as at 31 March 2018 was £17.9m per annum with a net income of £16.8m per annum after allowing for head rents, service charge shortfall and empty rates. We expect this to increase during the year as we use our available cash and the cash resulting from further property sales.

It is our policy that we keep gearing at a conservative level. Our bank borrowings are £82.4m net of cash, representing a net loan to value (LTV) of 30% (31 March 2017: £67.5m and 37% respectively).

The highlight of the year is that we joined the Main Market of the London Stock Exchange at the end of March 2018 and will enter the FTSE Small Cap Index and FTSE All Share Index on 18 June 2018. We believe this will increase the liquidity and make our stock more attractive to investors.

We are making excellent progress on our existing portfolio. This is due not only to investing in the right towns and cities such as Manchester, Newcastle, Leeds, York, Southampton, Brighton, Winchester, Salisbury, Northampton and Milton Keynes but also in the right places in those cities and towns. An update on our portfolio is contained in the Property Review.

However, I do need to refer to our proposed development currently known as Hudson House, Toft Green, York. I did originally mention that we were considering a joint venture partner for the development but it became increasingly clear that it would be much more in our interest to carry out the scheme ourselves. We have planning permission to erect 127 apartments, 34,000 sq ft of of offices, 5,000 sq ft of other commercial plus car parking on this 2-acre site close to York railway station. We have a first-class professional team including a highly experienced project manager and with York being voted by The Sunday Times as the Best Place to Live 2018 and as we expect a strong demand for the properties, we are excited at the prospects here. We are in the early stages of discussions with lenders to finance the construction costs having regard to the fact that the property is not charged and currently valued at £16.0m. Demolition is ongoing, and this will lead to a saving of £0.75m per annum in empty rates and running costs.

We also believe that it is in our interests to develop or refurbish our properties ourselves once we secure satisfactory planning permission. We are working closely with our advisers to achieve this objective and we will announce our progress on these as and when the situation arises. A case in point is Solaris House, Milton Keynes, a 14,500 sq ft office building which became vacant in 2016. We took the decision to carry out the refurbishment as we believed we could let it at a rent well in excess of the rent being paid on the two adjoining office buildings comprising 38,000 sq ft, let to Rockwell Automation which we own, and where a rent review is due in December of this year.  We announced the letting to Monier Redland last April at a headline rental of £240,000 per annum which is £16.55 per sq ft and £6.00 per sq ft more than is being paid by Rockwell. This is a further example of our active asset management which is being applied right across the board, such as at Sandringham House, Harlow, where we announced a significant letting last month.

Both transactions took place after the year end, so they are not reflected in the year end property valuations.

Recycling our capital is a priority, particularly those properties that have no prospect for growth, are empty or are not core to our business. The latter is the case in respect of the houses that were acquired as part of the Warren Portfolio. Agents have been instructed to sell 60 houses and once achieved we will reinvest the funds in suitable commercial opportunities. We had planned to sell the portfolio by June 2018 and discussions are ongoing with a particular party but as we had already sold three properties at above book value we are also examining selling packages of properties over a longer period. The properties are not charged so we are under no pressure.

Government policy continues to encourage investment in the regions. At the moment buying opportunities are somewhat limited as the prices that we are being asked to pay are generally too high to provide a satisfactory return for shareholders. In my experience, part of the discipline is to know when to walk away but I am confident that with our network of contacts, particularly in the regions, we will achieve our objective of securing off-market opportunities on terms acceptable to us.

Although we are based in London, my colleagues and I regularly travel up and down the country not only to review our existing portfolio or potential new acquisitions but also to meet regional wealth managers and brokers as well as to make presentations to potential retail investors. We have done the latter for nearly three years as we make every effort to create interest in our story. We value all our shareholders both large and small.

I am very grateful for the support of our shareholders. With a management team that is second to none, I am very confident about our prospects. We have opportunistically assembled a very high-quality portfolio and it is my job to make sure that the investment community are aware of the quality of the portfolio and the potential for growth in both income and NAV.

Neil Sinclair

Chief Executive

 



 

Property Review

We have continued to grow our portfolio with £88m of acquisitions which included the significant corporate acquisitions of the Warren portfolio and St James Gate in Newcastle. These purchases reflect our strategy of acquiring assets in locations which we consider have sustainable rental growth prospects.

Generally, we buy properties with potential for improvement either through refurbishment or development.  During the financial year, we completed three office refurbishment projects in Milton Keynes, Leeds and Manchester and we are embarking on a very exciting mixed use development in York.

We have our portfolio independently valued every six months and as at 31st March 2018 we owned property valued at £276.7 million, a like for like increase of 3.5% over the year and a revaluation gain of £5.7m for the year.

The portfolio still has many investments which we consider have yet to achieve their potential, mainly as they are let and income producing.  We regularly highlight our recurring income which is reflected by a Weighted Average Unexpired Lease Term (WAULT) of 5.3 years to break. This enables us to prepare a strategy for each asset well in advance and adapt as situations evolve.

Statistics

60 commercial properties (2017: 44) comprising 1.8m sq ft (2017: 1.6m) - this excludes the residential properties from the Warren portfolio.

303 commercial tenants (2017: 165) providing a contractual rent roll of £17.9m p.a. (2017: £12.7m p.a.)

Market Commentary

Media reporting on UK economics point unreservedly towards uncertainty.  However, how one views the year ahead will be dependent upon whether you are a 'glass half full' or a 'glass half empty' person.  The latter view is supported by negative views on Brexit and sluggish GDP growth which puts a squeeze on consumer incomes.  The former positive approach, and one which the Board hold, is that the UK has a robust labour market, is seeing rapid growth in technology and rising export demand for manufacturers which outweighs the glass half empty protagonists.  Regeneration and reinvention through public and private investment is delivering results, with new spaces being created. New investment is forthcoming for UK wide infrastructure projects.

Acquisitions

The Warren portfolio, valued at £71.8m, completed in October 2017 and has all the hallmarks of being a portfolio of properties with long term rental and capital growth opportunities. As highlighted in our Portfolio & Trading Update announced in April 2018, this was the best portfolio we had seen for over two years.

We see significant rental growth in locations where Permitted Development has reduced available commercial space.  As rental values grow, this is likely to encourage speculative development but we are well placed to benefit in the meantime.  This is evident at Regency House in Winchester and Lendal/Museum Street in York. The upper parts of both properties are vacant and in need of significant refurbishment to be let. The immediate solution would be to convert to residential (Winchester already has planning permission).  However, we would have to sell the flats losing potential income, and we can achieve better returns with less capital expenditure if we maintain the commercial use.  This is because rental values have grown through a lack of supply.

Since purchase, we have let London Court, a vacant office building in Southampton city centre, for ten years at a headline rent of £150,000 per annum and renewed leases in Beaconsfield, Verwood and Banbury.

We consider ourselves strategically opportunistic.  Post the year end, in Fareham, we have bought an office building and large car park adjacent to Admiral House (which we own) as we concluded that the combined ownerships are worth more than the sum of the parts. 

The Warren portfolio included 65 residential properties, predominantly houses, in Hayes.  All apart from two are let and income producing.  However, this is not our speciality sector or our core business so we consider the returns for shareholders will be significantly increased if invested in the commercial sector.  We have instructed agents to sell these holdings, apart from two which sit alongside a commercial holding. Three others were sold at 14% above book value in February 2018.

St James Gate, Newcastle - In August 2017, we acquired for £20m, 100% of the share capital of a company owning a significant freehold site minutes from Newcastle railway station and in an improving location.

Comprising 82,500 sq. ft. of offices and 16,500 sq. ft. of retail space, this fully let property produces £1.76 million per annum.  We have extended the lease to Serco until June 2019 and are finalising plans to improve the ground floor reception and external landscaping.  This will increase its attraction as a destination compared to new developments in the city so we either retain our existing tenants or attract others if necessary.

Sector Focus

Offices

The property market in 2017 exudes a positive tone. "Occupier demand for office space defied wavering confidence, with take-up reaching a 15 year high supported by headcount growth, business restructuring and new market entrants." (Knight Frank 2018 Regional Office Review). With almost half our portfolio in the office sector, the changing demands of occupiers is a key driver to our performance. The economic uncertainty has forced many tenants to actively consider and commit to locations that present a property and operational cost advantage. Therefore, we actively seek to refurbish vacant space to compete with the best quality space available but at rents which are slightly discounted. 

The vibrancy, cohesion and relative affordability of regional cities is increasingly appealing to young professionals. Different lifestyle choices are creating a supply of regional talent that occupiers are recognising. The delivery of brand new office space has remained relatively subdued, exacerbating the shortages of modern office stock in many of the largest cities and leading to stronger prospects for rental growth.  As supply tightens, we are seeing regional companies broadening their areas of search which is likely to increase the level of competition between regional centres. Economic conditions mean cost sensitivity may be a priority but occupiers increasingly accept that low cost, low quality real estate options are actually a false economy as they create expensive staff churn.

48.5% of our portfolio is in this sector and accounts for £8.0m p.a. in rent from 110 tenants in 32 buildings.  The key assets are:

Bank House, Leeds - This multi-let office property, acquired in April 2015 for £10m is extremely well located, moments from the railway station.  Comprising 88,000 sq ft, it is let to The Bank of England until July 2023 and Walker Morris until December 2019.  We have completed the refurbishment of the vacant 1st floor and are marketing at a 30% discount to current Grade A rental levels with interest coming from companies seeking flexible terms.  As at 31 March 2018 the independent valuation was £10.9m, a 2.1% increase over the year.

Boulton House, Manchester - A multi let office building within close proximity to Manchester Piccadilly Station and the proposed HS2 interchange was purchased for £10.45m in August 2016.  It comprises 75,300 sq ft and at the time of purchase the average rent in the building was £12.50 per sq ft.  We have refurbished the vacant space as well as the ground floor reception area at a cost of £800,000.  During the year 6,400 sq ft has been let at a rental value of £17.50 per sq ft.  Following the year end, a further 2,120 sq ft has also been let at £18.95 per sq ft and negotiations continue with existing tenants who have forthcoming lease renewals.  As at 31st March 2018 this property was independently valued at £14.3m, an increase of 18% over the year.

249 Midsummer Boulevard, Milton Keynes - A multi let office building within walking distance of the railway station.  Purchased in February 2016 for £7.2m, the property comprises 46,000 sq ft let to DHL, Crawfords and others.  The average rental at the time of purchase was £12 per sq ft. The leases on the 2nd floor have expired and since the tenants' vacated we have taken the opportunity to refurbish this space and upgrade the ground floor reception area and common parts at a cost of £450,000. Milton Keynes remains one of the fastest growing cities in the UK which is reflected by steady rental growth and our quoting rental is now at £18.50 per sq ft. The valuation as at 31 March 2018 was £8.0m, an increase of 7.74% over the year.

Solaris House, Kiln Farm, Milton Keynes - Having obtained vacant possession of this property in March 2016, dilapidations were settled and re-invested in a refurbishment to the same specification of the adjacent office buildings that we own & let to Rockwell Automation.  Following the end of the financial year, we have announced a letting of the entire 14,500 sq ft to Monier Redland at a headline rent of £16.50 per sq ft.  We expect a significant increase at the forthcoming rent review of the Rockwell properties in December 2018. 

Leisure / Retail

Consumer spending has slowed and reflects the tough times for retailers and leisure operators. New developments are being proposed and are attracting new leisure concepts and integrating retail to provide an 'experience'. Uncertainty around EU citizens' rights to remain post March 2019 poses challenges to the hospitality sector.

15% of our portfolio is in this sector which accounts for £3.4m per annum in rent from 22 tenants in 2 buildings.  The key assets are:

Sol Central, Northampton - In May 2015, we acquired the company owning a prominent city centre leisure scheme for £20.7m.  Comprising a 10 screen cinema, casino, 151 room hotel, gym and 375 space car park, this 200,000 sq ft development has not been trading at its optimum level for a number of years.  The scheme requires investment to adapt to the changing demands of customers to attract new tenants and we have recently appointed new letting and managing agents. The occupational market has been widely reported as being slow so before we commit significant funds, new tenants need to be signed up.  However, in the meantime repairs to the external lighting and roof costing in the region of £1.0m have completed utilising the surrender premium of £4.0m from Gala.  We have instructed a specialist to run the car park which has improved the availability of spaces and increased income.  As at 31 March 2018 the independent valuation was £18.88m, an increase of 1.34% over the year.

Broad Street Plaza, Halifax - This significant leisure scheme was acquired through a corporate purchase in March 2016 for £24.18m.  We increased returns during the financial year as 40% of the leases benefited from rent reviews.  Unfortunately, two tenants entered administration during the year which has reduced the end of year valuation by 4.6%.  We have appointed new letting agents to market the vacant space and are pleased that our remaining tenants trade well which together with the opening of the Piece Hall helped to attract over one million visitors to Halifax since its opening in August 2017.

Industrial

The star industry performer in terms of overall returns during 2017 and currently the investment of choice over other sectors.  The loss of land to alternate uses compounded with the need for space to support the functions of a city remains high, which is likely to lead to multi storey logistic development.

13.2% of our portfolio is in this sector which accounts for £2.3m per annum in rent from 44 tenants in 13 buildings. The key assets are:

Point 4 Industrial Estate, Bristol - this multi-let estate comprises 81,000 sq ft in 10 units all of which are now let.  Two lettings were completed as well as a lease renewal which have set a new rental tone in excess of £6 per sq ft.  This is an increase of 20% during the financial year.  The recent valuation of £7.05 million was an increase of 8.46% on the year.

Black Moor Road, Verwood - Purchased as part of the Warren portfolio in October 2017, the multi let estate totals 65,000 sq ft.  Two units have become vacant since purchase and require significant refurbishment.  Post the year end, a lease has been renewed at a 20% increase to the passing rent and there are three further units due for rent reviews, or lease renewals, this year.  The valuation of £6.86 million reflects an increase of 12.46% since its purchase in October 2017.

TECHNOLOGY

Online sales will continue to grow and increase its share in the UK to c 19% at the end of 2018. (CBRE Real Estate Market Outlook 2018). The shift from physical to online will have profound implications for how retailers use physical space to showcase their brand.  As this evolves, it is harder to assess rental levels of high street retail units. In August 2017, the Government announced 'truck platooning' to provide relief to drivers from necessary rules regarding driver hours, so expect to see the "last mile" delivery become less strategic as vehicle technology moves towards automation.

Sales

We continue to recycle our capital where we consider that our holdings have reached their potential or they are not core assets.  During the year, ten properties were sold for £9.0m, releasing funds from low growth assets. The key sale was the former Polestar building adjoining the Marsh Barton Industrial Estate in Exeter.  Our tenant entered administration and the building required considerable capital expenditure.  We had already considered that the letting in May 2016 was unlikely to be a long term solution so we had commissioned various reports on the site's long term viability.  Following this process and by the time it became vacant, we had decided that the capital expenditure required was not in shareholders' interest and a sale process commenced.  Travis Perkins plc acquired the site for their own occupation for £3.28 million in December 2017, a 10% premium to September 2017 valuation. 

Managing Agents

We are delighted to have appointed Savills in January 2018 to manage a significant number of our assets as part of our rationalisation. They have replaced four different companies which will increase the level of service we can give to our tenants.

Environmental

As a landlord of second hand commercial property, our active asset management approach means that we are constantly assessing our portfolio and earmarking assets for refurbishment and renewal, utilising the latest technology and environmentally efficient products to equip our properties for 21st Century occupation.

Minimum Energy Efficiency Standards (MEES)

As of April 2018, it is unlawful for commercial and residential landlords of properties with an Energy Performance Certificate (EPC) rating of less than "E" to grant new leases or renew tenant leases (except for some exemptions). Landlords will need to carry out works to improve the energy performance of their buildings to achieve the minimum standards or face civil penalties.

We have undertaken a full review of our portfolio and are delighted to say that a few minor works are required at this stage to comply with the proposed new guidelines.  We have a specialist consultant advising us to ensure that none of our holdings are affected.

Richard Starr MRICS

Executive Director - Head of Property



 

Financial Review

Our full year dividend is up 2.7% to 19 pence per share

Financial highlights


2018

2017

2016

INCOME GROWTH




IFRS profit before tax

£13.3m

£12.6m

£11.8m

Adjusted profit before tax

£8.5m

£6.7m

£5.6m

EPRA earnings (excluding one-off surrender premiums)

£6.5m

£5.4m

£4.5m

Basic EPS

35.9p

36.6p

43.9p

EPRA EPS

18.7p

21.2p

31.3p

Adjusted EPS

21.2p

22.2p

18.9p

Dividend per share

19.0p

18.5p

16.0p

Dividend cover

1.1x

1.2x

1.2x





CAPITAL GROWTH




Portfolio like for like value

+3.5%

+4.5%

+8.0%

Net Asset Value

£183.3m

£109.6m

£106.8m

Basic NAV per share

400p

436p

414p

EPRA NAV per share

415p

443p

414p

Accounting return

-2%

11.4%

8.1%

Total shareholder return

-1.4%

 7.4%

-2.3%





DEBT FINANCE




Debt balance

£101.4m

£78.7m

£72.7m

Average cost of debt

3.4%

2.9%

3.1%

Average debt maturity

4.7yrs

4.6 yrs

3.9 yrs

Net Loan to Value Ratio

30%

37%

37%

NAV gearing

43%

61%

61%

 

Key performance measures

The Group's 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 included in the Highlights for the year and throughout this document. These include a number of European Public Real Estate Association ('EPRA') measures, prepared in accordance with the EPRA Best Practice Recommendations (BPR) reporting framework, and company adjusted measures. Further details are given in notes 8 and 9 of the financial statements. We report a number of these measures (detailed in the glossary of terms) because Management considers them to improve the transparency and relevance of our published results as well as the comparability with other listed European real estate companies.

Overview And Headline Results

This review summarises the financial performance for the year and provides a number of key metrics illustrating that the Company continues to deliver on its objective to drive income and capital growth and generate attractive, sector-leading returns for our investors.

The year ended 31 March 2018 was a transformational year for the Group which included our largest equity raise to date of £70.0m in October 2017 and this supported the largest acquisition to date - the Warren portfolio valued at £71.8m. As a result, the shareholder base has increased to 45.8m shares. However, as the shares were issued at 340 pence per share, this had a one-off dilutionary impact on EPS and NAV per share which are covered below.

The year ended with a much anticipated move from the AIM to a Premium Listing on the Main Market of the London Stock Exchange which will attract a larger range of investors to support the continuing growth of the business. The associated one-off costs have been included in the income statement for the current year.

This year we delivered an IFRS profit before tax of £13.3m, which reflects a basic earnings per share of 35.9p. EPRA earnings is the industry measure of underlying profit stripping out revaluation gains, profits on disposals and one-off costs. EPRA earnings for the year ended 31 March 2018 increased by 20.3% to £6.5m compared to £5.4m last year.

Management also report an adjusted profit before tax in order to track recurring earnings and to form a basis for the progressive dividend. This totalled £8.5m for the year ended 31 March 2018 (2017: £6.7m), up 27%, however, as a result of the increased shareholder base adjusted earnings per share reduced to 21.2p from 22.2p. The Board announced in October 2017 that it would be moving to a quarterly dividend policy in 2018 and the Q3 quarterly payment was made to investors in April 2018. The proposed final dividend of 4.75p will be payable in July 2018 which ensures a total dividend for the year of 19.0p (up 2.7%), covered by adjusted earnings 1.1x.

On the capital side, net asset value has grown to £183.3m up 67% from the previous year-end of £109.6m and this translates into EPRA net asset value per share of 415p, down 6% from 443p having regard to the dilution. This 28p decrease, together with the total dividends of 19p paid during the year, overall represents a -2% total accounting return.

Recurring Earnings

Rental income totalled £16.7m in the year ended 31 March 2018 (2017: £14.3m) driven by the improving portfolio, with fully annualised income from the acquisitions in the prior year and also benefiting from the acquisition of the Warren portfolio and the office and retail buildings in Newcastle during the year. Net rental income similarly was up to £14.9m (2017: £12.2m) and this included £0.6m of non-recoverable costs in the current year from properties held for development which should reduce as projects progress.

Administrative expenses increased to £4.2m (2017: £2.9m). This included £0.7m one-off exceptional costs incurred as a result of moving from the AIM to the Main Market. The team, including the Board, totalled fourteen at the balance sheet date, up from eleven the prior year.

Finance costs increased to £3.4m from £3.0m as a result of increasing the debt book to support the larger asset base and £0.1m termination costs as a result of refinancing during the year. Despite increasing the base costs of the business, adjusted profit before tax grew 27% to £8.5m from £6.7m reflecting the increasing profitability of the business as a result of both scale and income-enhancing acquisitions.

Looking forward, the business is now capable of scalability, with the team and systems in place to support significant growth in the portfolio. The Group has a gross rent roll of £17.9m per annum as at 31 March 2018 and this is set to increase further once surplus funds are deployed.

Valuation Gains & Profits On Disposal

The movement in the values of our investment properties can make a significant impact on profit before tax and is determined by independent valuers' assessment of what a willing purchaser would pay for the property on the basis of an arms' length transaction. We have been extremely pleased with how our properties have performed as a result of our regional strategy. This year £5.7m of gains were achieved, with property values on a like for like basis up 3.5%.

In addition, we have continued to recycle capital out of vacant properties with limited growth prospects into income generating properties core to the business strategy. Ten properties were sold in the year for a total consideration of £9.0m, resulting in profits on disposal of £0.3m. The combination of revaluation gains and profits on disposal have a significant impact on the underlying value of the business, reflecting 13p uplift in net asset value per share. One of the key advantages of the Company's relatively small size compared to its peer group is its ability to 'shift the dial' and grow the underlying value of the business on a per share basis.

The combination of careful stock selection, buying at the right price and the impact of our asset management and capex initiatives, particularly at our strategic properties such as Hudson House, York, where we have commenced demolition as a result of obtaining planning consent to redevelop the property, are having a significant income and capital impact on the business.

Debt


Fixed

£m

Floating

£m

Undrawn

£m

Total Drawn

£m

Years to maturity

£m

Barclays

35.8

4.2

(4.2)

 35.8

4.8

NatWest

0

30.4

(10)

20.4

2.9

Santander

20

6.8

0

 26.8

4.3

Lloyds

0

3.8

0

 3.8

1.1

Scottish Widows

14.6

0

0

 14.6

8.3


70.4

45.2

(14.2)

 101.4

4.7

 

EPS

Basic earnings per share (EPS) was 35.9p compared to 36.6p last year. We also report on EPRA earnings per share, which removes unrealised capital profits and one-off items such as profits on disposal and costs on acquisition. This reduced to 18.7p from 21.2p last year. Finally, we also report an adjusted earnings per share to provide a basis for dividend cover and this was 21.2p for the year down marginally from 22.2p.

Dividends

The Board is recommending a final quarterly dividend of 4.75p per share to be paid on 31 July 2018 to shareholders registered at the close of business on 6 July 2018. Taken with the total interim dividends of 14.25p, our full year dividend will be up 2.7% to 19.0p. The Company is very well placed to provide our shareholders with an increased dividend payment due to the growth in the portfolio and the core assets producing sustainable, long-term income. However, we continue to reinvest surplus funds into our strategic assets to provide investors with a two-pronged return through both income and capital growth.

Net Assets

At 31 March 2018, our net assets were £183.3m, equating to basic net asset per share of 400p a decrease of 36p since 31 March 2017. The increase in our net assets was driven largely by the £70.0m equity raise and the increased value of our investment properties, profits on disposal of investment properties and surplus profits after dividends paid. We calculate an EPRA NAV consistent with standard practice in the property industry to adjust for any dilution of outstanding share options and fair value adjustments of financial instruments and deferred tax which we believe better reflects the underlying net assets attributable to shareholders. Our EPRA NAV was 415p at 31 March 2018, down from 443p at 31 March 2017, however up 7% from 389p pro-forma post the fundraise.

Debt Financing

During the year our debt profile improved as we refinanced two facilities and repaid one other. In August 2017, we refinanced the £15.6m Santander facility to incorporate a charge over the St James' Gate, Newcastle acquisition and extended the facility to £27.0m for a further five years at a margin of 2.5% over three month LIBOR.

The Barclays facility of £14.5m inherited as part of the Warren acquisition in October 2017 was subsequently refinanced in January 2018 along with the remaining £12.7m Nationwide facility and replaced with a new £40.0m 5 year facility with Barclays at a margin of 1.95% over three month LIBOR.

As is the normal course of business for a property company, the Group evaluates its debt position and exposure to interest rate rises on an ongoing basis. Earlier this year there was a growing belief in the market that the Bank of England could raise interest rates later this year. The Board took the decision to enter into hedging facilities with both Barclays and Santander in order to lock-in fixed rates across the majority of its debt. As a result, the average cost of debt has increased in the short-term to 3.4% and the fixed position of the Group's total debt facilities totals 70% of drawn facilities as at 31 March 2018.

The Group debt facilities total £115.5m, with £101.4m drawn at the year-end. Our lenders include the majority of the UK clearing banks and the Group's all in average cost of debt is 3.4%. The average debt maturity is 4.7 years which gives us security over income streams net of interest costs for a number of years before the need to refinance.

Net Debt And Gearing

Each debt facility is secured at an SPV level and we assess the gearing mainly through interest cover ratios (ICR) and loan to value ratios (LTV). In normal market conditions we gear our assets within a range of 40-60% LTV. At a group level we measure both the debt to net asset value ratio (NAV gearing) and loan to value net of cash. NAV gearing at 31 March 2018 was 43% and the net LTV ratio was 30% at 31 March 2018 down from 37% at the last financial year-end. The Group remains conservatively geared and at year-end had £19.0m of cash and £14.2m of unutilised facilities available, along with over £40.0m of properties uncharged.

Taxation

The Group has a tax charge of £0.8m for the year ended 31 March 2018. This includes a corporation tax charge of £1.1m to reflect the tax payable on profit in the year and a deferred tax reduction of £0.3m to reflect capital allowances claimed in excess of depreciation and losses utilised in the year. The effective tax rate for the year for tax payable on IFRS profit remains low at 5.8% due largely to utilisation of brought forward losses, capital allowances and non-realisation of property revaluation gains.

Outlook

From a financial point of view, the Company has had a transformational year, growing the capital base through the £70.0m equity raise in October 2017 and entering into new debt facilities totalling £67.0m. This helped fund the two acquisitions in the year totalling £88m and increases the future capacity of the Group to make further acquisitions. These will help generate additional income and capital profits as we continue to pay out an attractive dividend yield in line with our progressive dividend policy and manage our assets in order to maximise total returns for our investors.  In addition, we have commenced demolition of Hudson House, York in order to prepare the site for the planned development which will eliminate £0.75m of non-recoverable holding costs per annum.

"We are well positioned to continue to grow the business on the basis of both income and capital growth, rewarding our shareholders with sector-leading returns."

 

Stephen Silvester ACA

Finance Director

 



 

 

Financial risk management

The Group is exposed to market risk (including interest rate risk and real estate market 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 in note 26.

The Board continually assesses the key risks to the business to ensure exposure is mitigated and provide greater security to investors on the future income and capital return.

 

Responsibilities of the Risk committee

The Executive Team is responsible for risk management on a day-to-day basis. The current principal risks facing the Company are described in the table below.

Risk

Mitigation

Progress 2017/18

Rating

Development
Over exposure to development could put pressure on cash flow and debt finance.

·  Core portfolio generates sustainable cash flows.

·  Conservative gearing used to take advantage of the gap between property yields and cost of borrowing.

·  Clear strategy on each property to create and deliver value.

·  All developments require Board approval based on merits of strategy for assets.

·  Developments are modelled and financed appropriately to minimise risk and maximise return.

·  The Group's Capital Risk Management Policy limits development expenditure to <25% of Gross Asset Value

·  Limited capital expenditure during the current year across a range of properties totalling £2.7m.

·  Planning approval granted at Hudson House, York in August 2017 to build 127 apartments, 5,000 sq ft of commercial space and 34,000 sq ft Grade A offices. Demolition commenced in February 2018.

·  Hudson House Development planned to commence in 2019 which will include commitment to a full design and build contract.

Medium Risk Rating

High Risk Impact

 

Financing & Cash flow
Breach of debt covenants could trigger loan defaults and repayment of facilities putting pressure on surplus cash resources. Bank of England monetary policy may result in interest rate rises and increased cost of borrowing. Financial regulatory changes under Basel III may increase the cost to borrowers.

·  The Group actively engages in close relationships with its key lenders, ensuring transparency when it comes to monitoring the properties secured by debt.

·  Assets are purchased that generate surplus cash and significant headroom on ICR & LTV Loan Covenants.

·  Gearing is maintained at a conservative level and hedging utilised to reduce exposure to interest rate volatility.

·  The Group's average debt maturity of debt has improved to 4.7years providing longevity and financial support to maintain the current portfolio

·  The Group's net LTV is conservative at 30% and ICR over 4.5 times.

·  70% of drawn debt at year-end is fixed, limiting the Group's exposure to increases in Bank of England base rate & LIBOR.

Low Risk Rating

High Risk Impact

 

Tenant
Exposure to tenant administration and poor tenant covenants could
result in lower income.

·  Our strategy to invest across different sectors reduces our exposure to an individual sector or tenant.

·  We maintain close relationships with our tenants and support them throughout their business cycle.

·  Management meet with managing agents to review rent collection and arrears on a regular basis.

·  We actively manage our properties to improve security of income and limit exposure to voids.

·  Tenant diversification is high with no tenant making up more than 7% of total rental income.

·  Total number of leases across portfolio: 303 making up contractual rent roll of £17.9m

·  Loss of income from tenant administrations and CVAs in the year totalled £0.1m, which is c1% of portfolio contractual income

·  Portfolio weighted average lease length is 5.3 years providing reasonable longevity of income

·  Occupancy across the portfolio has decreased slightly to 90% - reassuringly at the Group's target of 90%

Low Risk Rating

Low Risk Impact

 

Economic and Political
Uncertainty from Brexit and world events could impact our tenants and the profitability of their businesses. Decisions made by Government and Local Councils can have a significant impact on our ability to extract value from our properties.

·  Monitoring of economic and property industry research by executive team and review at Board Meetings.

·  Use of consultants and experts when considering planning and development work.

·  Review tenant profile and sector diversification.

·  Member of various Bodies including British Property Federation (BPF) in order to monitor the impact of all relevant current issues.

·  Russian politics continue to destabilise the region, along with the risk of a U.S. trade war with its trade partners. Despite this, they appear to have little impact on the day to day activities of our tenants and their businesses.

·  Progress towards an orderly Brexit is reducing the risk of a cliff-edge for the UK economy and improving forecast conditions for the UK economy.

·  Government support for regional development initiatives bodes well for the markets in which we operate.

High Risk Rating

High Risk Impact

 

Accounting, tax, legal
and regulatory

Non-compliance as a result of changes to accounting standards, regulatory requirements for a public real estate company and incorrect application of new tax rules.

·  Key advisors including Auditors, Solicitors and Brokers are engaged on key regulatory, accounting and tax issues.

·  Engagement with BPF on regulatory changes that impact the real estate industry.

·  This being the first year for the Group on the Main Market means a greater level of scrutiny required by the Board covering corporate governance and requirements for reporting to the Financial Reporting Council (FRC).

·  Business forecasts and strategy allows for changes to corporation tax rates and interest deductibility rules.

·  Legislation has now been passed and the rules took effect from 1 April 2017 for corporate interest restriction.

·  Due to the Group interest payable in the year totalling above the de minimis it has elected for public infrastructure exemption.

Low Risk Rating

Low Risk Impact

 

Operational
Business disruption. Without adequate systems and controls, our exposure to operational risk and business disruption is increased.

·  Insurance cover for loss of rent up to three years.

·  Tight-knit team with systems in place to ensure Executive Team have shared responsibility across all major decisions.

·  General policy of retaining incumbent managing agents on new property acquisitions to avoid awkward transitions and potential loss of income.

·  Segregation of duties applied to payments processing and bank authorisations.

·  Board review of Financial Position and Prospects Procedures carried out in February 2018 as part of move to the Main Market ensuring plans in place to deal with disruption risk.

·  Recruitment in the year brings the number of team members up to fourteen at year end and provides cover across the team reducing exposure should any of the key personnel be unavailable.

·  Key man insurance cover in place for Executive Directors

·  Energy Performance Certificate (EPC) assessments carried out on all assets at acquisition to ensure all assets are in required condition for letting within the new EPC rules.

Low Risk Rating

Low Risk Impact

 

 



 

Viability Statement

In accordance with provision C.2.2 of the UK Corporate Governance Code, the Directors have assessed the prospects of the Group and future viability over a three-year period, being longer than the 12 months required by the 'Going Concern' provision. The Board conducted this review taking account of the Group's long-term strategy, principal risks and risk appetite, current position, asset performance and future plans.

Assessment Of Review Period

The viability review was conducted over a three-year period of assessment, which the Board considered appropriate for the following reasons:

·      The Group's working capital model and detailed budgets and cashflows consist of a rolling three-year forecast

·      It reflects the short cycle nature of the Group's developments and asset management initiatives

·      Office refurbishments completed to date have taken less than 12 months and the major redevelopment planned at Hudson House in York is due to take 22 months from commencement to practical completion

·      The Group's weighted average debt maturity at 31 March 2018 was 4.7 years

Three years is considered to be the optimum balance between long term property investment and the inability to accurately forecast ahead given the cyclical nature of property investment.

Assessment of Prospects

The Group's working capital model consists of a base case scenario which only includes deals under offer and also a reasonable case which factors in acquisition and disposal assumptions.

The working capital model includes budgeted profit and cash flows and also considers capital commitments, dividend cover, loan to value, earnings per share and net asset value per share metrics. These are updated at least quarterly against actual performance.

The Executive Committee provides regular strategic input to the financial forecasts covering investment, divestment and development plans, capital allocation and hedging. Executive Directors and senior managers receive regular presentations from external advisors on the macroeconomic outlook which assist with the development of strategy and forecasts. Forecasts are updated at least quarterly, reviewed against actual performance and reported to the Board.

Assessment of viability

 A sensitivity analysis was carried out as part of the Prospectus in February 2018 in preparation for moving to the Main Market, which involved flexing a number of key assumptions to consider the impact of changes to the Group's principal risks affecting the viability of the business, being:

·      Changes to macro-economic conditions impacting rental income levels and property values

·      Availability of funds for capex and investment

·      Changes to interest rates

The debt covenants were stress tested to validate resilience to property valuation and rental income decline, as well as increases in future libor and swap rates. It assessed the limits at which key financial covenants and ratios would be breached. The Property values would need to fall by approximately 30% on average to breach the loan to value covenant thresholds under the existing debt facilities. The interest cover across the Group was also sufficient that net income would need to fall by half or interest costs double to breach a 250% interest cover ratio.

The Directors have also taken into account the strong financial position at 31 March 2018, significant cash and available facilities, low LTV, uncharged properties and the Group's ability to raise new finance.

Conclusion

Based on the results of their review, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the three year period of their assessment.



 

Consolidated Statement of Comprehensive Income

For the year ended 31 March 2018

 


Note

2018

£'000

2017

£'000

Rental and other income

1

16,733

14,266

Property operating expenses

5b

(1,824)

(2,055)

Net property income


14,909

12,211





Administrative expenses

5c

(4,185)

(2,915)

Operating profit before gains and losses on property assets and cost of acquisitions


10,724

9,296





Profit on disposal of investment properties


274

3,191

Gains on revaluation of investment property portfolios

11

5,738

3,101





Operating profit


16,736

15,588

Finance income

3

10

3

Finance expense

4

(3,442)

(3,014)

Profit before taxation


13,304

12,577





Taxation

7

(773)

(3,191)

Profit after taxation for the year and total comprehensive income attributable to owners of the parent


12,531

9,386





EARNINGS PER ORDINARY SHARE




Basic

8

35.9p

36.6p

Diluted


35.8p

36.5p

 

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 2018


Note

2018

£'000

2017

£'000

Non-current assets




Investment properties

11

253,863

183,916

Property, plant and equipment

12

121

43



253,984

183,959

Current assets




Assets held for sale

11

21,708

-

Trade and other receivables

13

5,551

2,511

Cash at bank and in hand

14

19,033

11,181



46,292

13,692

Total assets


300,276

197,651

Current liabilities




Trade and other payables

15

(8,834)

(6,161)

Borrowings

17

(2,686)

(2,036)

Creditors: amounts falling due within one year


(11,520)

(8,197)

Net current assets


34,772

5,495

Non-current liabilities




Borrowings

17

(97,157)

(75,758)

Deferred tax liability

7

(6,531)

(2,187)

Obligations under finance leases

20

(1,588)

(1,950)

Derivative Financial Instruments

16

(181)

-

Net assets


183,299

109,559

Equity




Called up share capital

21

4,639

2,580

Share premium account


125,036

59,444

Treasury shares


(2,011)

(2,250)

Merger reserve


3,503

3,503

Capital redemption reserve


340

340

Retained earnings


51,792

45,942

Equity - attributable to the owners of the parent


183,299

109,559

Basic NAV per ordinary share

9

400p

436p

Diluted NAV per ordinary share


400p

434p

 

These financial statements were approved by the Board of Directors and authorised for issue on 8 June 2018 and are signed on its behalf by:

 

Stephen Silvester                               Neil Sinclair

Finance Director                                  Chief Executive



 

Consolidated Statement of Changes in Equity

For the year ended 31 March 2018

 


Notes

Share Capital

£'000

Share

Premium

£'000

Treasury Share

Reserve

£'000

Other

 Reserves

£'000

Retained Earnings

£'000

Total
Equity

£'000

At 31 March 2016


2,862

59,408

-

3,568

40,977

106,815









Total comprehensive income for the year


-

-

-

-

9,386

9,386

Transactions with Equity Holders








Redemption of shares


-

-

(2,357)

-

-

(2,357)

Gross proceeds of issue from new shares

21

2

36

107

-

-

145

Redemption of deferred shares


(284)

-

-

275

-

(9)

Share-based payments

22

-

-

-

-

237

237

Exercise of share options

21

-

-

-

-

(41)

(41)

Dividends paid

10

-

-

-

-

(4,617)

(4,617)

At 31 March 2017


2,580

59,444

(2,250)

3,843

45,942

109,559









Total comprehensive income for the year


-

-

-

-

12,531

12,531

Transactions with Equity Holders








Gross proceeds of issue from new shares

21

2,059

67,941

-

-

-

70,000

Costs of issue of new shares

-

(2,349)

-

-

-

(2,349)

Share based payments

22

-

-

-

-

174

174

Exercise of share options

21

-

-

239

-

(239)

-

Issue of deferred bonus share options

21

-

-

-

-

128

128

Dividends paid

10

-

-

-

-

(6,744)

(6,744)

At 31 March 2018


4,639

125,036

(2,011)

3,843

51,792

183,299

 

For the purpose of preparing the consolidated financial statement of the Group, the share capital represents the nominal value of the issued share capital of Palace Capital plc.

Share premium represents the excess over nominal value of the fair value consideration received for equity shares net of expenses of the share issue.

Treasury shares represents the consideration paid for shares bought back from the market.

Other reserves comprises 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.

 



 

Consolidated Statement of Cash Flows

For the year ended 31 March 2018

 


Note

2018

£'000

2017

£'000

Operating activities




Net cash generated in operations

2

9,899

10,294

Interest received


10

-

Interest and other finance charges paid


(2,714)

(2,516)

Corporation tax paid in respect of operating activities


(395)

(1,047)

Net cash flows from operating activities


6,800

6,731





Investing activities




Purchase of investment property and acquisition costs capitalised

11

(72,808)

(10,950)

Capital expenditure on refurbishment of investment property

11

(2,754)

(4,579)

Proceeds from disposal of investment property


8,765

12,447

Amounts transferred into restricted cash deposits


(805)

(244)

Purchase of property, plant and equipment

12

(123)

(26)

Net cash flow (used in)/from investing activities


(67,725)

(3,352)





Financing activities




Bank loans repaid


(45,242)

(19,346)

Proceeds from new bank loans


53,393

25,813

Loan issue costs paid


(1,085)

(606)

Proceeds from issue of Ordinary Share capital


70,000

29

Costs from issue of Ordinary Share capital


(2,349)

-

Dividends paid

10

(6,744)

(4,617)

Purchase of treasury shares


-

(2,250)

Payment of share options exercised


-

(41)

Net cash flow from financing activities


67,973

(1,018)





Net increase in cash and cash equivalents


7,048

2,361

Cash and cash equivalents at beginning of the year


10,937

8,576

Cash and cash equivalents at the end of the year

14

17,985

10,937

 



 

Notes to the Consolidated Financial Statements

BASIS OF ACCOUNTING

The consolidated financial information comprises 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 1985. The address of its registered office is Lower Ground Floor, One George Yard, London, United Kingdom, EC3V 9DF.

The nature of the Company's operations and its principal activities are set out in the Strategic Report.

BASIS OF PREPARATION

The financial information contained in this announcement has been prepared on the basis of the accounting policies set out in the financial statements for the year ended 31 March 2018.  Whilst the financial information included in this announcement has been computed in accordance with IFRS, as adopted by the European Union, this announcement does not itself contain sufficient information to comply with IFRS.  The financial information does not constitute the Group's financial statements for the years ended 31 March 2018 or 31 March 2017, but is derived from those financial statements.  Those accounts give a true and fair view of the assets, liabilities, financial position and results of the Group.  Financial statements for the year ended 31 March 2017 have been delivered to the Registrar of Companies and those for the year ended 31 March 2018 will be delivered following the Company's Annual General Meeting.  The auditors' reports on both the 31 March 2018 and 31 March 2017 financial statements were unqualified; did not draw attention to any matters by way of emphasis; and did not contain statements under section 498 (2) or (3) of the Companies Act 2006.

The consolidated financial information for the year ended 31 March 2018 has been prepared on a historical cost basis, except for investment properties and derivatives which have been measured at fair value. The consolidated financial information is presented in pounds sterling ("GBP") which is also the Company and the Group's functional currency.

The accounting policies applied are consistent with those used in the Group's financial statements for the year ended 31 March 2017.



 

1. SEGMENTAL REPORTING

For the purpose of IFRS 8, the chief operating decision maker ("CODM") takes the form of the three executive Directors
(the Group's Executive Committee). The Group's Executive Committee are of the opinion that the business of the Group
is as follows.

The principal activity of the Group is to invest in commercial real estate in the UK.

IFRS 8 Operating Segments requires operating segments to be identified on the basis of internal financial reports about components of the Group that are regularly reviewed by the 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, for the purposes of IFRS 8, each individual property is considered to be a separate operating segment in that its performance is monitored individually.

The Group's property portfolio includes investment properties located throughout England, predominantly regional investments outside London and comprises a diverse portfolio of commercial buildings. The Directors consider that these properties have similar economic characteristics. Therefore, these individual properties have been aggregated into a single operating segment. In the view of the Directors, there is one reportable segment under the provisions of IFRS 8.

All of the Group's properties are based in the UK. No geographical grouping is contained in any of the internal financial reports provided to the Group's Executive Committee and, therefore, no geographical segmental analysis is required by IFRS 8.

Revenue - type

2018

£'000

2017

£'000

Rents received from investment properties

16,360

13,809

Management fees & other income

373

457

Total Revenue

16,733

14,266

 

No single tenant accounts for more than 10% of the Group's total rents received from investment properties.

2. RECONCILIATION OF OPERATING PROFIT

Reconciliation of operating profit to cash generated in operations


2018

£'000

2017

£'000

Profit before taxation

13,304

12,577

Finance income

(10)

(3)

Finance costs

3,442

3,014

Gains on revaluation of investment property portfolio

(5,738)

(3,101)

Profit on disposal of investment properties

(274)

(3,191)

Depreciation

45

20

Share based payments

174

237

(Increase)/Decrease in receivables

(3,081)

1,681

Increase/(Decrease) in payables

2,037

(940)

Net cash generated in operations

9,899

10,294

 



 

3. OTHER INTEREST RECEIVABLE AND SIMILAR INCOME


2018

£'000

2017

£'000

Bank interest received

10

3


10

3

 

4. INTEREST PAYABLE AND SIMILAR CHARGES


2018

£'000

2017

£'000

Interest on bank loans

2,677

2,452

Loan arrangement fees

342

249

Debt termination cost

127

155

Interest on finance leases

115

158

Fair value loss on derivatives

181

-


3,442

3,014

 

5. PROFIT FOR THE PERIOD

a) The Group's profit for the period is stated after charging the following:


2018

£'000

2017

£'000

Depreciation of tangible fixed assets:

45

20




Auditor's remuneration:



Fees payable to the auditor for the audit of the Group's annual accounts

83

50

Fees payable to the auditor for the audit of the subsidiaries annual accounts

21

21

Fees payable to the auditor and its related entities for other services:



Corporate advisory services

240

-

Audit related assurance services

8

8

Tax services

64

18


416

97

 

Amounts payable to BDO LLP in respect of audit and non-audit services are disclosed in the table above.



 

 

b) The Group's property operating expenses comprise the following:


2018

£'000

2017

£'000

Void investment and development property costs

1,445

2,055

Legal, lettings and consultancy costs

379

-


1,824

2,055

 

The Group had no properties that were vacant throughout the period.

c) The Group's administrative expenses comprise the following:


2018

£'000

2017

£'000

Staff costs

2,200

1,413

Costs in respect of move to Main Market

698

-

Rent, rates and other office costs

207

80

Accounting and audit fees

188

141

Share based payments

174

237

Other overheads

162

77

PR and marketing costs

160

197

Consultancy and recruitment fees

145

93

Legal & professional fees

108

393

Stock Exchange costs

93

86

Depreciation

45

20

Property management fees

5

178


4,185

2,915

 



 

d) EPRA cost ratios are calculated as follows:


2018

£'000

2017

£'000

Gross revenue

16,733

14,266




Administrative expenses

4,185

2,915

Property operating expenses

1,824

2,055

EPRA costs (including property operating expenses)

6,009

4,970

EPRA Cost Ratio (including property operating expenses)

35.9%

34.8%




Less property operating expenses

(1,824)

(2,055)

EPRA costs (excluding property operating expenses)

4,185

2,915

EPRA Cost Ratio (excluding property operating expenses)

25.0%

20.4%




Adjust for:



Exceptional costs in respect of move to Main Market

(698)

-

Net administrative expenses

3,487

2,915

Company admin cost ratio

20.8%

20.4%

 



 

6. EMPLOYEES AND DIRECTORS' REMUNERATION

Staff costs during the period were as follows:


2018

£'000

2017

£'000

Non-Executive Directors' fees

108

84

Wages and salaries

1,795

1,150

Pensions

67

55

Social security costs

230

124


2,200

1,413




Share based payments

174

237


2,374

1,650

 

The average number of employees of the Group and the Company during the period was:


2018

 Number

2017

Number

Directors

6

6

Senior management and other employees

8

5


14

11

 

Key management are the Group's Directors. Remuneration in respect of key management was as follows:


2018

£'000

2017

£'000

Short-term employee benefits:



Emoluments for qualifying services

1,369

992

Social security costs

200

132

Pension

38

37


1,607

1,161




Share-based payments

153

198


1,760

1,359

 



 

 

7. TAXATION


2018

£'000

2017

£'000

Current income tax charge

1,062

683

Capital gains charge in period

31

-

Tax under/(over)provided in prior year

10

(13)

Deferred tax

(330)

2,521

Tax charge

773

3,191

 

 

 

2018

£'000

2017

£'000

Profit on ordinary activities before tax

13,304

12,577




Based on profit for the period:
Tax at 19.0% (2017: 20%)

2,528

2,515




Effect of:



Capital losses and indexation used in the period

(1,142)

(1,260)

Other adjustments

48

52

Capital gains charge in period

31

-

Tax under/(over)provided in prior years

10

(13)

Deferred tax not previously recognised

(702)

1,897

Tax charge for the period

773

3,191

 

Deferred taxes at 31 March 2018 relates to the following:


2018

£'000

2017

£'000

Deferred tax (liability)/asset - brought forward

(2,187)

334

Losses used in the year

(13)

(321)

Deferred tax liability on accredited capital allowances

400

(2,142)

Deferred tax on fair value of investment property

(40)

(58)

Deferred tax recognised on acquisition

(4,691)

-

Deferred tax (liability) - carried forward

(6,531)

(2,187)

 



 

 


2018

£'000

2017

£'000

Accelerated capital allowances

(2,594)

(2,142)

Investment property unrealised valuation gains

(3,937)

(58)

Losses carried forward

-

13

Deferred tax (liability) - carried forward

(6,531)

(2,187)

 

At 31 March 2018, the Group had tax losses of £Nil (2017: £67,211) available to carry forward to future periods.

Capital allowances have been claimed on improvements to investment properties amounting to £18,697,000 (2017: £12,908,000). A deferred tax liability amounting to £2,594,000 (2017: £2,142,000) has been recognised in the financial statements, although it is expected that the capital allowances will not reverse when the properties are disposed of.

A deferred tax liability on the revaluation of investment properties to fair value has been provided totalling £3,937,000 (2017: £58,000) 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. As at 31 March 2018 the Group had approximately £6,413,000 (2017: £6,500,000) of realised capital losses to carry forward. There has been no deferred tax asset recognised as it is not probable future taxable profits will be available to utilise these losses.

Finance Act 2015 sets the main rate of UK corporation tax at 20 per cent with effect on 1 April 2015. The enactment of Finance (No. 2) Act 2015 and Finance Act 2016 reduces the main rate of corporation tax to 19 per cent from April 2017 and 17 per cent from April 2020. The deferred tax liability has been calculated on the basis of 17 percent due to the expectation that all properties are retained through April 2020, with the exception of the assets held for sale which have been calculated on the current corporation tax basis of 19%.

8. 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 below table) and for Diluted weighted average number of ordinary shares in issue during the year (see below table).


2018

£'000

2017

£'000

Profit after tax attributable to ordinary shareholders for the year

12,531

9,386

 


2018

No of shares

2017

No of shares

Weighted average number of shares for basic earnings per share

34,943,855

25,650,141

Dilutive effect of share options

36,322

87,584

Weighted average number of shares for diluted earnings per share

34,980,177

25,737,725




Earnings per ordinary share;



Basic

35.9p

36.6p

Diluted

35.8p

36.5p

 

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 (BPR) reporting framework the latest update
of which was issued in November 2016. We report a number of these measures (detailed in the glossary of terms) because Management considers them to improve the transparency and relevance of our published results as well as the comparability
with other listed European real estate companies.

EPRA 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, share-based payments and other one-off exceptional items. EPRA earnings is calculated on the basis of the basic number of shares in line with IFRS earnings as the dividends to which they give rise accrue to current shareholders. The EPRA diluted earnings per share also takes into account the dilution of share options and warrants if exercised.

Adjusted profit before tax and Adjusted EPS

Palace Capital also reports an adjusted earnings measure which is based on recurring earnings before tax and the basic number of shares. This is the basis on which the directors consider dividend cover. This takes EPRA earnings as the starting point and then adds back tax and any other fair value movements or one-off items that were included in EPRA earnings. For Palace Capital this includes share-based payments being a non-cash expense and also one-off surrender premiums received. The corporation tax charge (excluding deferred tax movements, being a non-cash expense) is deducted in order to calculate the adjusted earnings per share.

The EPRA and adjusted earnings per share for the period are calculated based upon the following information:


2018

£'000

2017

£'000

Profit for the year

12,531

9,386

Adjustments:



Gains on revaluation of investment property portfolio

(5,738)

(3,101)

Profit on disposal of investment properties

(274)

(3,191)

Debt termination costs

127

155

Fair value loss on derivatives

181

-

Deferred tax relating to EPRA adjustments and capital gain charged

(299)

2,200




EPRA earnings for the year

6,528

5,449

Share based payments

174

237

Costs in respect of move to Main Market

698

-




Adjusted profit after tax for the year

7,400

5,686

Tax excluding deferred tax on EPRA adjustments and capital gain charged

1,071

991

Adjusted profit before tax for the year

8,471

6,677




EPRA AND ADJUSTED EARNINGS PER ORDINARY SHARE;



EPRA Basic

18.7p

21.2p

EPRA Diluted

18.7p

21.2p

Adjusted EPS

21.2p

22.2p

 



 

9. NET ASSETS VALUE PER SHARE

EPRA NAV calculation makes adjustments to IFRS NAV to provide stakeholders with the most relevant information on the fair value of the assets and liabilities within a true real estate investment company with a long-term investment strategy. EPRA NAV is adjusted to take effect of the exercise options, convertibles and other equity interests and excludes the fair value of financial instruments and deferred tax on latent gains. EPRA NNNAV measure is to report net asset value including fair values of financial instruments and deferred tax on latent gains.

The diluted net assets and the number of diluted ordinary issued shares at the end of the period assumes that all the outstanding options that are exercisable at the period end are exercised at the option price.

Net asset value is calculated using the following information:


2018

£'000

2017

£'000

Net assets at the end of the year

183,299

109,559

Diluted net assets at end of the year

183,299

109,559




Exclude fair value of financial instruments

181

-

Exclude deferred tax on latent capital gains & capital allowances

6,531

2,200

EPRA NAV

190,011

111,759

Include fair value of financial instruments

(181)

-

Include deferred tax on latent capital gains & capital allowances

(6,531)

(2,200)

EPRA NNNAV

183,299

109,559

 


2018

No of shares

2017

No of shares

Number of ordinary shares issued at the end of the year (excluding treasury shares)

45,805,280

25,150,692

Dilutive effect of share options

36,322

87,584

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

45,841,602

25,238,276




Net assets per ordinary share



Basic

400p

436p

Diluted

400p

434p

EPRA NAV

415p

443p

EPRA NNNAV

400p

434p

 



 

10. DIVIDENDS


Payment date

Dividend
per share

 2018

£'000

2017

 £'000

2018





Final dividend

31 July 2018

4.75

-

-

Interim dividend

13 April 2018

4.75

-

-

Interim dividend

29 December 2017

9.50

4,355

-

Distribution of current year profit


19.00

4,355

-






2017





Final dividend

28 July 2017

9.50

2,389

-

Interim dividend

30 December 2016

9.00

-

2,309

Distribution of current year profit


18.50

2,389

2,309






2016





Final dividend

29 July 2016

9.00

-

2,308

Interim dividend

30 December 2015

7.00

-

-

Distribution of prior year profit


16.00

-

2,308






Dividends reported in the Group Statement of Changes in Equity


6,744

4,617

 

Proposed Dividends


 2018

£'000

2017

 £'000

July 2018 final dividend: 4.75p (2017 final dividend: 9.50p)

2,177

2,389

April 2018 interim dividend: 4.75p (2017 final dividend: n/a)

2,177

-


4,354

2,389

 

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 2018.



 

11. Investment Properties


Freehold Investment properties

£'000

Leasehold Investment properties

£'000

Total

£'000

At 1 April 2016

149,423

25,119

174,542

Additions - refurbishment

4,505

74

4,579

Additions - new properties

10,950

-

10,950

Gains on revaluation of investment properties

3,090

11

3,101

Disposals

(7,740)

       (1,516)

(9,256)

At 1 April 2017

160,228

23,688

183,916

Additions - refurbishments

2,681

73

2,754

Additions - new properties

92,014

-

92,014

Transfer to assets held for sale

(21,708)

-

(21,708)

Gains on revaluation of investment properties

4,888

850

5,738

Disposals

(5,361)

(3,490)

(8,851)

At 31 March 2018

232,742

21,121

253,863

 

The Group made two corporate acquisitions in the year:

SM Newcastle OB Limited

The acquisition of SM Newcastle OB Limited was made on 7 August 2017. The Directors have taken the view that this acquisition had the attributes of an asset purchase rather than a business combination and therefore the value of the asset at the acquisition date amounting to £20.0m has been added to the additions within investment properties, net of rent top-ups of £1.2m, together with the acquisition costs amounting to £371,000.

R.T Warren (Investments) Limited

The acquisition of R.T Warren (Investments) Limited was made on 9 October 2017. The Directors have taken the view that this acquisition had the attributes of an asset purchase rather than a business combination and therefore the value of the asset at the acquisition date amounting to £71.8m has been added to the additions within investment properties together with the acquisition costs amounting to £1.5m.

Investment properties are stated at fair value as determined by independent valuers who make use of historical and current market data as well as existing lease agreements. 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 arms-length transaction at the date of valuation, in accordance with International Financial Reporting Standard 13. The fair value of each of the properties has been assessed by the independent valuers.

As a result of the level of judgement used in arriving at the market valuations, the amounts which may ultimately be realised in respect of any given property may differ from the valuations shown in the Statement of Financial Position.

In addition to the gain on revaluation of investment properties included in the table above, realised gains of £274,000 (2017: £3,191,000) relating to investment properties disposed of during the year were recognised in profit or loss.



 

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:


2018

£'000

2017

£'000

Cushman & Wakefield LLP

255,024

183,175




Adjustment in respect of minimum payment under head leases

1,600

1,959

Less lease incentive balance included in accrued income

(1,731)

(1,218)

Less rent top-up adjustment

(1,030)

-

Carrying value

253,863

183,916

 

The valuations of all investment property held by the Group is classified as Level 3 in the IFRS 13 fair value hierarchy as they are based on unobservable inputs. There have been no transfers between levels of the fair value hierarchy during the year.

Valuation process

The valuation reports produced by the 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 judgment and market observations. Each property is considered a separate asset, based on its unique nature, characteristics and the risks of the property.

The Executive Director responsible for the valuation process verifies all major inputs to the external valuation reports, assesses the individual property valuation changes from the prior year valuation report and holds discussions with the 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; and

- An appropriate yield.

Valuation technique

The valuations reflect the tenancy data supplied by the Group along with associated revenue costs and capital expenditure. The fair value of the commercial investment portfolio has been derived from capitalising the future estimated net income receipts at capitalisation rates reflected by recent arm's length sales transactions.



 

11. Investment Properties

31 March 2018

Significant unobservable inputs

Cushman & Wakefield

Value of investment properties

£255,024,000

Area (sq ft)

1,606,656

Gross Estimated Rental Value

£19,887,269



Net Initial Yield


Minimum

(4.0%)

Maximum

21.5%

Weighted average

6.2%

Reversionary Yield


Minimum

4.7%

Maximum

15.0%

Weighted average

6.9%

Equivalent Yield


Minimum

3.5%

Maximum

15.5%

Weighted average

7.2%

 

Negative Net Initial Yields arise where properties are vacant or partially vacant and void costs exceed rental income.

31 March 2017

Significant unobservable inputs

Cushman & Wakefield

Value of investment properties

£183,175,000

Area (sq ft)

1,576,206

Gross Estimated Rental Value

£15,892,432

Net Initial Yield


Minimum

0.9%

Maximum

9.2%

Weighted average

5.9%

Reversionary Yield


Minimum

5.5%

Maximum

18.7%

Weighted average

6.9%

Equivalent Yield


Minimum

3.2%

Maximum

11.7%

Weighted average

7.6%

The following descriptions and definitions relating to valuation techniques and key unobservable inputs made in determining fair values are as follows:

Valuation techniques: 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: £34,000 - £1,761,600 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 (range: 1.76%-6.76%)

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 ERV (£m)

+5% in ERV (£m)

+0.25% in net initial yield (£m)

-0.25% in net initial yield (£m) 

(Decrease)/increase in the fair value of investment properties as at 31 March 2018

(8.77)

10.33

(9.73)

10.74

(Decrease)/increase in the fair value of investment properties as at 31 March 2017

(7.64)

7.18

(7.88)

9.32

 

Assets held for sale


2018
£'000

2017

£'000

Assets held for sale

21,708

-


21,708

-

 

Assets held for sale consist of the residential portfolio acquired in October 2017 as part of the Warren acquisition. The Group announced it was its intention to dispose of the portfolio as soon as terms with a potential buyer could be agreed. In accordance with the Group's accounting policy, these properties are classified as held for sale at 31 March 2018.

The residential portfolio has been valued by the board of directors based on open market information available and discussions with valuation professionals. The valuation has been held in the financial statements at a lower of their carrying value immediately prior to being classified as held for sale and fair value less costs to sell.



 

12. PROPERTY, PLANT AND EQUIPMENT


IT, fixtures
and fittings
£000

At 1 April 2016

66

Assets acquired

-

Additions

26

At 1 April 2017

92

Additions

123

At 31 March 2018

215



Depreciation


At 1 April 2016

29

Provided during the year

20

At 1 April 2017

49

Provided during the year

45

At 31 March 2018

94



Net book value at 31 March 2018

121

Net book value at 31 March 2017

43

 



 

13. TRADE AND OTHER RECEIVABLES


2018

£000

2017

£000

Current



Gross amounts receivable from tenants

2,598

1,090

Less: provision for impairment

(163)

(139)

Net amount receivable from tenants

2,435

951

Other taxes

609

-

Other debtors

114

61

Accrued income

1,731

1,218

Prepayments

662

281


5,551

2,511

 

Accrued income amounting to £1,731,000 (2017: £1,218,000) 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. 

Movements in the provision for impairment of trade receivables were as follows:


2018

£'000

2017

£'000

Brought forward

139

243

Utilised in the period

(71)

(182)

Provisions increased

95

78


163

139

 

As at 31 March, the analysis of trade receivables, net of provisions, which were past due but not impaired is as follows:


2018

£'000

2017

£'000

0 - 30 days

1,848

630

31 - 60 days

16

92

61 - 90 days

26

21

91 - 120 days

236

78

More than 120 days

309

130


2,435

951

 



 

14. CASH AND CASH EQUIVALENTS

All of the Group's cash and cash equivalents at 31 March 2018 and 31 March 2017 are in Sterling and held at floating interest rates.


2018

£'000

2017

£'000

Cash and cash equivalents - unrestricted

17,985

10,937

Restricted cash

1,048

244


19,033

11,181

 

The Directors consider that the carrying amount of cash and cash equivalents approximates to their fair value.

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

15. TRADE AND OTHER PAYABLES


2018

£'000

2017

£'000

Trade payables

986

570

Corporation tax

1,051

564

Other taxes

1,307

844

Other payables

108

6

Deferred rental income

3,466

2,860

Accruals

1,916

1,317


8,834

6,161

 

16. DERIVATIVES

The Group adopts a policy of entering into derivative financial instruments 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 are paying for its interest rate swaps.

The valuation rate is the variable LIBOR & bank base rate the banks are paying for the interest rate swaps.

Details of the interest rate swaps the Group entered can be found in the table below.

The valuations of all derivatives held by the Group is 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
date

Contract rate
%

Valuation rate
%

2018 Fair value

£'000

2017 Fair value

£'000

Barclays Bank plc

35,722,900

25/01/2023

1.3420

1.2850

(92)

-

Santander plc

20,000,000

03/08/2022

1.3730

1.2630

(89)

-


55,722,900




(181)

-

 



 

17. BORROWINGS


2018

£'000

2017

£'000

Current



Bank loans

2,686

2,036

Non-current liabilities



Bank loans

97,157

75,758

Total borrowings

99,843

77,794

 


2018

£'000

2017

£'000

Non-current liabilities



Secured Bank loans drawn

98,709

76,694

Unamortised lending costs

(1,552)

(936)


97,157

75,758

 

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


2018

£'000

2017

£'000

Within one year

2,686

2,036

From one to two years

2,686

2,036

From two to five years

83,607

61,806

After 5 years

12,416

12,852


101,395

78,730

 

Facility and arrangement fees

As at 31 March 2018

Secured Borrowings

All in cost

Maturity date

Loan Balance

£'000

Unamortised facility fees

£'000

 Facility drawn

£'000

Santander Bank Plc

3.71%

August 2022

26,376

(374)

26,750

Lloyds Bank Plc

2.81%

April 2019

3,789

(23)

3,812

National Westminster Bank plc

3.21%

March 2021

20,113

(276)

20,389

Barclays

2.66%

January 2023

35,169

(679)

        35,848    

Scottish Widows

2.91%

July 2026

14,396

(200)

        14,596




99,843

(1,552)

101,395

 

Investment properties with a carrying value of £234,429,000 (2017: £162,320,000) are subject to a first charge to secure the Group's bank loans amounting to £101,395,000 (2017: £78,730,000).

The Group has unused loan facilities amounting to £14,152,000 (2017: £3,582,000). A facility fee is charged on £10,000,000 of these facilities at a rate of 1.25% p.a. and is payable quarterly. This facility is secured on the investment properties held by Property Investment Holdings Limited and Palace Capital (Properties) Limited as part of the Natwest loan. The £4,152,000 balance of the unused facilities relates to the Barclays loan and has been drawn down since the year end (see post balance sheet event note 25).

The Group constantly monitors its approach to managing interest rate risk. The Group has fixed £70,119,000 (2017: £25,032,000) 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 £14,596,000 which is fully fixed at a rate of 2.9%.

The Group has a loan with Barclays Bank plc for £35,848,000, of which £35,723,000 is fixed using an interest rate swap (see note 16). The floating rate portion of the loan is charged at 3m LIBOR plus 1.95%.

The Group has a loan with Santander plc for £26,750,000, of which £20,000,000 is fixed using an interest rate swap (see note 16). The floating rate portion of the loan is charged at 3m LIBOR plus 2.5%.

The Group has a loan with Lloyds Bank plc for £3,812,000 which is fully charged at floating rate of 3m LIBOR plus 2.1%.

The Group has a loan with National Westminster Bank plc for £20,389,000 which is fully charged at floating rate of 3m LIBOR plus 2.5%.

The Group has been in compliance with all financial covenants of the above facilities applicable throughout the year.

18. GEARING and loan to value RATIO

The calculation of gearing is based on the following calculations of net assets and net debt:


2018

£'000

2017

£'000

EPRA net asset value (note 9)

190,011

111,759

Borrowings

99,843

77,794

Obligations under finance leases

1,588

1,950

Cash and cash equivalents

(19,033)

(11,181)

Net Debt

82,398

68,563




NAV Gearing

43%

61%

 

The calculation of bank loan to property value is calculated as follows:


2018

£'000

2017

£'000

Fair value of investment properties

253,863

183,175

Assets held for sale

21,708

-

Fair value of property portfolio

275,571

183,175

Borrowings - Bank loans

101,395

78,730

Cash at bank

(19,033)

(11,181)

Net bank borrowings

82,362

67,549

Loan to value ratio

37%

43%

Net Loan to value ratio

30%

37%

 

 



 

19. RECONCILIATION OF LIABILITIES TO CASH FLOWS FROM FINANCING ACTIVITIES


Bank borrowings

£'000

Total

£'000

Balance at the start of the year

77,794

77,794

Cash flows from financing activities:



Bank borrowings drawn

53,392

53,392

Bank borrowings repaid

(45,242)

(45,242)

Loan arrangement fees paid

(1,085)

(1,085)

Non cash movements:



Bank loan acquired on purchase of RT Warren

14,515

14,515

Amortisation of loan arrangement fees

342

342

Amortisation of loan arrangement fees on the repayment of loans

127

127

Balance at the end of the year

99,843

99,843

 

20. LEASES

Operating lease receipts in respect of rents on investment properties are receivable as follows:


2018

£'000

2017

£'000

Within one year

16,911

13,204

From one to two years

14,699

10,882

From two to five years

29,612

22,810

From five to 25 years

41,635

41,001


102,857

87,897

 

Operating lease payments in respect of rents on leasehold properties occupied by the Group are payable as follows:


2018

£'000

2017

£'000

Within one year

178

13

From one to two years

178

-

From two to five years

375

-


731

13

 



 

Finance lease obligations in respect of rents payable on leasehold properties were payable as follows:


2018

2017

Minimum lease payments

£'000

Interest

£'000

Present value of minimum lease payments

£'000

Present value of minimum lease payments

£'000

Within one year

96

(94)

2

2

From one to two years

96

(94)

2

2

From two to five years

290

(282)

8

8

From five to 25 years

1,876

(1,818)

58

63

After 25 years

7,943

(6,425)

1,518

1,875


10,301

(8,713)

1,588

1,950

 

The net carrying amount of the leasehold properties is shown in note 11.

The Group has over 240 leases granted to its tenants. These vary dependent on the individual tenant and the respective property and demise and vary considerably from short-term leases of less than 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 the both the current and prior periods.

21. Share capital

Authorised, issued and fully paid share capital is as follows:

2018

£'000

2017

£'000

46,388,515 Ordinary Shares of 10p each (2017: 25,800,279)

4,639

2,580


4,639

2,580

 

Reconciliation of movement in ordinary share capital

2018

£'000

2017

£'000

At start of year

2,580

2,578

Issued in the year

2,059

2

At end of year

4,639

2,580

 

 



 

Movement in ordinary authorised share capital


Price per
share pence

Number
of ordinary
shares issued

000s

Total number
of shares

000s

As at 31 Mar 2016




25,781,229






Exercise of warrants

15 June 2016

200

19,050







As at 31 Mar 2017




25,800,229

Equity issue

9 October 2017

340

20,588,236


As at 31 March 2018




46,388,515

 

Movement in treasury shares


Price per
share pence

Number
of ordinary
shares issued

000s

Total number
of shares

000s

Share buy-back by company

17 June 2016

360

91,587


Share buy-back by company

20 June 2016

360

58,000


Share buy-back by company

10 March 2017

340

531,593


Share options issued from Treasury

10 March 2017

340

(31,593)


Shares exercised under employee LTIP scheme

20 September 2017


(66,352)


As at 31 March 2018




583,235




Total number of shares excluding the number held in treasury at 31 March 2018


45,805,280

 

Year ended 31 March 2018

On 20 September 2017, 66,352 share options were exercised under the employee LTIP scheme.

On 9 October 2017 the company issued 20,588,236 ordinary 10p shares at a price of £3.40. Issue costs amounting to £2,349,000 were incurred and have been deducted from the share premium account.

Year ended 31 March 2017

On 15 June 2016 the company issued 19,050 ordinary shares of 10p. The issue costs amounting to £36,195 have been deducted from the share premium account.

On 17 June 2016 the company purchased 91,587 ordinary share of 10p each at a price of £3.60. All these purchased share are to be held as treasury shares.

On 20 June 2016 the company purchased 58,000 ordinary shares of 10p each at a price of £3.60. All these purchased shares are to be held as treasury shares.

On 10 March 2017 the company issued 31,593 ordinary 10p shares from Treasury at a price of £3.40.

On 10 March 2017 the company purchased 531,593 ordinary shares of 10p each at a price of £3.40. All these purchased share are to be held as treasury shares.

Shares held in Employee Benefit Trust

Authorised, issued and fully paid share capital is as follows:

Number of options

000s

Transferred under scheme of arrangement

100,000

Shares exercised under employee share scheme

(66,352)


33,648

 

 

Share options:

Reconciliation of movement in outstanding share options

2018

No of options

2017

No of options

At start of year

689,660

569,022

Issued in the year

215,456

171,281

Exercised in the year

(66,352)

(50,643)

Lapsed in the year

(338,259)

-

Deferred bonus shares

36,322

-

At end of year

536,827

689,660

 

As at 31 March 2018, the Company had the following outstanding unexpired options.

Description of unexpired share options

2018

2017

No of options

Weighted average option price

No of options

Weighted average option price

Employee benefit plan (note 22)

500,505

0p

689,660

0p

Deferred bonus share scheme

36,322

0p

-

0p

Total

536,827

0p

689,660

0p






Exercisable

-

0p

-

0p

Not exercisable

536,827

0p

689,660

0p

 

The weighted average remaining contractual life of share options at 31 March 2018 is 1.25 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 options

 Exercise
price

Average share price at date of exercise

Grant
date

Vesting

date

Outstanding at 31 March 2016

549,972

13p

-



Issued during the year (LTIP 2016)

171,281

0p

-

4 July 2016

4 July 2019

Exercised during year to 31st March 2017

(31,593)

225p

-



Outstanding at 31 March 2017

689,660

0p

-



Exercised during the year (LTIP 2014)

(66,352)

0p

337p



Issued during the year (LTIP 2017)

215,456

0p

-

1 November 2017

1 November 2020

Deferred bonus share options

36,322

0p

-



Lapsed during year (LTIP 2014)

(331,759)

0p

-



Lapsed during year (LTIP 2017)

(6,500)

0p

-



Outstanding at 31 March 2018

536,827

0p

-



 

The performance conditions applicable to the LTIPs 2015 and 2016 were adjusted following the acquisition of the R.T Warren portfolio and related placing.

LTIP 2015

The options are awarded to management on achievements against target on two separate measures over the three-year period ending 7 December 2018. Half the options will be awarded based on the first target and half based on the achievement of the second.

Net asset value per share (NAV) growth: is based on the Company's EPRA NAV per share as at 30 September 2018 adding back dividends per share paid during the period. This target will measure the compound growth in NAV over the three-year period ending 30 September 2018. The base level being £4.04 per share which was the EPRA NAV per share as at 30 September 2015. The base level was adjusted to £3.89 for the 3rd year calculation.

Total shareholder return (TSR) measures the total shareholder return (price rise plus dividends) over the period from 8 December 2015 to 7 December 2018. The base price being £3.70 per share which was the market price at the grant date.

Average annual TSR (compounded)
over the TSR performance period

Vesting %


Average annual NAV growth (compounded) over the TSR performance period

Vesting %

<8%

0


<8%

0

Equal to 8%

33.33


Equal to 8%

33.33

Equal to 13%

100


Equal to 13%

100

 

For the TSR measure, the achievement of between 8% and 13% compound growth will result in the number of Ordinary shares vesting to be calculated on a straight line basis between 33.33% and 100%. A similar rule will apply for the NAV condition between 8% and 13%.

LTIP 2016

The options are awarded to employees on achievements against targets on two separate measures over the three-year period ending 3 July 2019. Half the options will be awarded based on the first target and half based on the achievement of the second.

Net asset value per share (NAV) growth is based on the Company's EPRA NAV value per share as at 31 March 2016. This target will measure the compound growth in NAV over the three-year period ending 31 March 2019, and comparing this with the Net Asset Value Growth of a group of comparable companies. The base NAV per share being £4.14. The base NAV per share was adjusted to £3.89 for the final 2 years of calculations as stated previously.



 

22. Share-based PAYMENTS continued

Total shareholder return (TSR) measures the total shareholder return (price rise plus dividends) over the period from 4 July 2016 to 3 July 2019. The base price being £3.16 per share which was the market price at the grant date.

Average annual TSR (compounded)
over the TSR performance period

Vesting %


Average annual NAV growth (compounded) over the TSR performance period

Vesting %

<8%

0


At median

20

Equal to 8%

33.33


Between median and upper quartile

20-100

Equal to 13%

100


Upper quartile and above

100

 

For the TSR measure, the achievement of between 8 per cent and 13 per cent compound growth will result in the number of Ordinary shares vesting to be calculated on a straight line basis between 33.33 per cent and 100 per cent.  A similar rule will apply for the NAV condition median and upper quartile.

LTIP 2017

The options are awarded to employees on achievements against targets on two separate measures over the three-year period ending 31 October 2020.  Half the options will be awarded based on the first target and half based on the achievement of the second.

Net asset value per share (NAV) growth is based on the Company's EPRA NAV value per share as at 31 March 2017. This target will measure the compound growth in NAV over the three-year period ending 31 March 2020, and comparing this with the Net Asset Value Growth of a group of comparable companies. The base NAV per share being £3.89.

Total shareholder return (TSR) measures the total shareholder return (price rise plus dividends) over the period from 1 November 2017 to 31 October 2020.  The base price being £3.40 per share which was the market price at the grant date.

Average annual TSR (compounded)
over the TSR performance period

Vesting %


Average annual NAV growth (compounded) over the TSR performance period

Vesting %

<8%

0


At median

20

Equal to 8%

33.33


Between median and upper quartile

20-100

Equal to 13%

100


Upper quartile and above

100

 

The fair value of grants was measured at the grant date using a Black-Scholes pricing model for the NAV 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 Tranche

Black-Scholes NAV Tranche

Grant date

01.11.17

01.11.17

Share price

£3.40

£3.40

Exercise price

0p

0p

Term

3 years

3 years

Expected volatility

16.00%

16.00%

Expected dividend yield

5.59%

5.59%

Risk free rate

0.56%

0.56%

Time to vest (years)

3.0

3.0

Expected forfeiture p.a.

0%

0%

Fair value per option

£0.62

£2.87

 

 

 

The expense recognised for employee share-based payment received during the period is shown in the following table:


2018

£'000

2017

£'000

LTIP 2014

-

108

LTIP 2015

82

82

LTIP 2016

61

47

LTIP 2017

31

-

Total expense arising from share-based payment transactions

174

237

 

23. RELATED PARTY TRANSACTIONS

Accounting services amounting to £84,951 (2017: £85,863) have been provided to the Group by Stanley Davis Group Limited, a company where Stanley Davis is a Director.

Charitable donations amounting to £19,953 (2017: £9,811) 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 £372,000 during the year.

24. CAPITAL COMMITMENTS

The obligation for capital expenditure relating to the construction, development or enhancement of investment properties entered into by the Group at 31 March 2018 amounted to £1,595,028 (2017: £78,363).

25. POST BALANCE SHEET EVENT

On 3 April 2018 the undrawn loan balance of £4,152,000 was drawn down, less fees. The balance is treated as a floating rate loan and is charged at 3 month LIBOR plus 1.95%.

26. Financial RISK MANAGEMENT

The Group's principal financial liabilities are loans and borrowings. The main purpose of the Group's loans and borrowings is to finance the acquisition and development of the Group's property portfolio. The Group has rent and other receivables, trade and other payables and cash and short-term deposits that arise directly from its operations.

All financial assets are classified as loans and receivables and all financial liabilities are measured at amortised cost.

The Group is exposed to market risk (including interest rate risk and real estate risk), credit risk and liquidity risk.

The Group's senior management oversee the management of these risks, and the Board of Directors has overall responsibility for the determination of the Group's risk management objectives and policies and it sets policies that seek to reduce risk as far as possible without unduly affecting the Group's competitiveness and flexibility. Further details regarding these policies are set out below:

Capital risk management

The Group considers its capital to comprise its share capital, share premium, other reserves and retained earnings which amounted to £183,299,000 at 31 March 2018 (2017: £109,599,000). 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.

The Group manages its capital structure, and makes adjustments to it, in the light of changes in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares.

Significant accounting policies

Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in the financial statements for the year ended 31 March 2018.

Market risk

Market risk arises from the Group's use of interest bearing, tradable and foreign currency financial 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), foreign exchange rates (foreign currency 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 2018 and 31 March 2017 were:


Nil rate assets and liabilities

£'000

Floating rate assets

£'000

Fixed rate liability

£'000

Floating rate liability

£'000

Total

£'000

As at 31 March 2018






Trade and other receivables

2,549

-

-

-

2,549

Cash and cash equivalents

-

19,033

-

-

19,033

Trade and other payables

(3,010)

-

-

-

(3,010)

Interest rate swaps

-

-

(181)

-

(181)

Bank borrowings

-

-

(70,119)

(29,724)

(99,843)

Obligation under finance leases

-

-

(1,588)

-

(1,588)


(461)

19,033

(71,888)

(29,724)

(83,040)

 


Nil rate assets and liabilities

£'000

Floating rate assets

£'000

Fixed rate
liability

£'000

Floating rate liability

£'000

Total

£'000

As at 31 March 2017






Trade and other receivables

1,012

-

-

-

1,012

Cash and cash equivalents

-

11,181

-

-

11,181

Trade and other payables

(1,894)

-

-

-

(1,894)

Interest rate swaps

-

-

-

-

-

Bank borrowings

-

-

(25,032)

(52,762)

(77,794)

Obligation under finance leases

-

-

(1,950)

-

(1,950)


(882)

11,181

(26,982)

(52,762)

(69,445)

 

The Group's interest rate risk arises from borrowings issued at floating interest rates (see note 17). The Group's interest rate risk is reviewed throughout the year at board meetings by the Board. 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. 70% of the Group's interest rate exposure is fixed and the remainder is 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 £19,033,000 (2017: £11,181,000). The income statement would be affected by £190,000 (2017: £112,000) by a one percentage point change in floating interest rates on a full year basis.

The Group has loans amounting to £29,724,000 (2017: £53,684,000) which have interest payable at rates linked to the three month Libor interest rates or bank base rates. A 1% increase in the LIBOR or base rate will have the effect of increasing interest payable by £297,240 (2017: £536,840).

The Group has interest rate swaps with a nominal value of £55,722,900 (see note 16). If the LIBOR 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 LIBOR or base rate was to decrease, then the Group would incur a decrease in the fair value of the Interest rate swap.

Change in interest rate

-1%

£'000

+1%

£'000 

(Decrease)/increase in fair value of interest rate swaps

(2,619)

2,149

 

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 its position with regard to interest rates in order to minimise the Group's risk.

Credit risk management

Credit risk refers to the risk that a counter-party will default on its contractual obligations resulting in financial loss to the Group.

The Group has its cash held on deposit with four large banks in the United Kingdom. At 31 March 2018 the cash balances of the Group at the year end were £19,033,000 (2017: £11,181,000). The concentration of credit risk held with Barclays Bank plc, the largest of these banks, was £11,884,000 (2017: £7,770,000).  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 5.4% (2017: 6.7%) of the Group's anticipated income. The Directors assess a tenants' credit worthiness prior to granting leases and employ professional firms of property management consultants to manage the portfolio to ensure that tenants debts are collected promptly and the directors in conjunction with the property managers take appropriate actions when payment is not made on time.

The carrying amount of financial assets (excluding cash balances) recorded in the financial statements, net of any allowances for losses, represents the Group's maximum exposure to credit risk without taking account of the value of any collateral obtained. The carrying amount of these assets at 31 March 2018 was £2,435,000 (2017: £951,000). The details of the provision for impairment 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 finance leases.



 

The table below summarises the maturity profile of the Group's financial liabilities based on contractual undiscounted payments:


On demand

£'000

0-1 years

£'000

1 to 2 years

£'000

2 to 5 years

£'000

> 5 years

£'000

Total

£'000

As at 31 March 2018







Interest bearing loans

-

5,168

4,780

90,294

13,705

113,947

Finance leases

-

96

96

290

9,819

10,301

Interest rate swaps

-

-

-

181

-

181

Trade and other payables

3,010

-

-

-

-

3,010


3,010

5,264

4,876

90,765

23,524

127,439








 

 

On demand

£'000

0-1 years

£'000

1 to 2 years

£'000

2 to 5 years

£'000

> 5 years

£'000

Total

£'000

As at 31 March 2017







Interest bearing loans

-

4,190

4,293

65,678

14,325

88,486

Finance leases

-

122

122

366

12,131

12,741

Trade and other payables

1,894

-

-

-

-

1,894


1,894

4,312

4,415

66,044

26,456

103,121

 



 

Glossary

Adjusted EPS: Is Adjusted profit before tax less corporation tax charge (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 share-based payments and exceptional items.

Assets under Management (AUM): Is a measure of the total market value of all properties owned by the Group.

Balance sheet gearing: Is the balance sheet net debt divided by IFRS net assets.

Dividend cover: 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 and 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 excluding the mark to market on effective cash flow hedges and related debt adjustments, deferred taxation on revaluations and diluting for the effect of those shares potentially issuable under employee share schemes.

EPRA NAV per share: Is EPRA NAV divided by the diluted number of shares at the period end.

EPRA NNNAV: is the EPRA NAV adjusted to reflect the fair value of debt and derivatives and to include 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 EU.

Interest cover: Is the number of times net interest payable is covered by underlying profit before net interest payable and taxation.

LIBOR: Is the London Interbank Offered Rate, the 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 and disposed of during the year.

Loan to value (LTV): is the ratio of principal value of gross debt less cash, short term deposits and liquid investments to the aggregate value of properties and investments.

Net Loan to Value (LTV): Is the ratio of gross debt less cash, short-term deposits and liquid investments to the aggregate value of properties and investments.

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.

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 property return: is calculated as the change in capital value, less any capex incurred, plus net income, expressed as a percentage of capital employed over the period.

Total Shareholder Return (TSR): Is calculated by the growth in capital from purchasing a share in the Company assuming that the dividends are reinvested each time they are paid.

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.


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