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Palace Capital PLC   -  PCA   

Annual Results For The Year Ended 31 March 2019

Released 07:00 04-Jun-2019

RNS Number : 0073B
Palace Capital PLC
04 June 2019
 

Palace Capital plc

("Palace Capital" or the "Company")

ANNUAL RESULTS FOR THE YEAR ENDED 31 MARCH 2019

REGIONAL FOCUS CONTINUES TO GENERATE INCOME AND CAPITAL GROWTH

 

Palace Capital (LSE: PCA), the Main Market listed real estate investment company that has a diversified portfolio of UK commercial real estate in carefully selected locations outside of London, is pleased to announce its annual results for the year ended 31 March 2019 following its first full year on the Main Market of the London Stock Exchange.

Positive financial results despite economic uncertainty

·      Profit before tax of £6.4 million

·      Adjusted profit before tax of £8.9 million

·      Adjusted earnings per share of 17.3p

·      Dividend maintained at 19.0p or £8.7 million paid

·      Decrease in net assets of 1.6%, to £180.3 million

·      EPRA NAV of 407p

Outperforming property portfolio

·      Total property return of 7.1%, well ahead of MSCI UK Quarterly Index figure of 4.6%

·      Like-for-like valuation increase of 0.5%, compared to MSCI growth in UK capital values of 0.1%

·      Like-for-like rental value up 1.1% to £16.4 million

·      37 new leases completed at an average of 14% above ERV

·      Occupancy of 87%, with some tactical vacancies held for accretive asset management

·      Sale of 50 non-core residential assets for £18.2 million

·      Acquisition of One Derby Square, Liverpool for £14.0 million with considerable asset management opportunities

·      £5.6 million invested in accretive refurbishment and development projects

Significant progress on Hudson Quarter York development

·      Demolition and site preparation completed in the year, scheme launching June 2019

·      Funding secured with Barclays Bank for development facility totalling £26.5 million

·      £33.6 million construction contract signed and two year project commenced

·      Fundamentals of City of York showing positive momentum, early occupier interest encouraging

Capital structure remains robust

·      Debt facilities total £145.9 million, with £22.9 million of cash available for acquisitions

·      Loan to value ratio 34% within target range

·      Average cost of debt reduced to 3.3%

Proposed REIT conversion to support Total Return Strategy

·      UK REIT conversion recommended by the Board following extensive professional, independent advice

·      Conversion expected 1 August 2019

 Palace Capital Chairman, Stanley Davis, commented:

"We've delivered another set of positive results against an uncertain economic backdrop, generating a total property return of 7.1% well above the UK Quarterly Property Index - testimony to our strategy of focussing on selected regions outside of London. Having taken extensive independent advice, it is clear that Palace Capital has now reached a certain scale where the benefits of converting to a REIT are tangible and we are convinced that this is the best course to support our Total Return Strategy as the Company continues to grow. The Board is therefore recommending that the Company converts to a REIT, which will also unlock new pools of capital and improve liquidity."

Neil Sinclair, Chief Executive of Palace Capital, commented:

"Our portfolio structure and proactive approach to asset management has enabled us to continue to grow both income and capital values, building further on our strong track record. We are well positioned to take advantage of investment opportunities, but remain disciplined in this regard as we believe that pricing in the market at the moment does not provide sustainable value and, therefore, doesn't meet our strict criteria. Our priority is therefore to exploit our own portfolio, where there is significant reversionary potential and accretive redevelopment opportunities. Looking ahead to FY20, we will remain focussed on growing income through lease restructuring, improving occupancy and other asset management projects including refurbishments and developments." 

This announcement contains inside information.

For further information please contact:

 

PALACE CAPITAL PLC

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

 

Broker

Numis Securities

Heraclis Economides / Oliver Hardy

Tel: +44 (0)20 7260 1000

 

Broker

Arden Partners plc

Corporate Finance: Paul Shackleton / Ciaran Walsh / Daniel Gee-Summons

Corporate Broking: James Reed-Daunter

Tel: +44 (0)207 614 5900

 

Financial PR 

FTI Consulting

Claire Turvey / Methuselah Tanyanyiwa

Tel: +44 (0)20 3727 1000

palacecapital@fticonsulting.com

 

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 regional portfolio across the UK and has 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.

 

The Annual Reports and Accounts together with the Notice convening the Annual General Meeting for 10.00am on 12 July 2019 will be posted to Shareholders shortly.

Chief Executive's Review

I am pleased to report the Company's results for the year ended 31 March 2019 which shows an IFRS profit before tax for the year of £6.4 million (2018: £13.3 million) and a net asset value as at 31 March 2019 of £180.3 million (2018: £183.3 million). Although profit for the year is down on last year due to the fair value reductions compared to uplifts last year, adjusted profit before tax has increased to £8.9 million (2018: £8.4 million), reflecting underlying rental growth from the portfolio.

We are an ambitious and exciting real estate company which only had a market capitalisation of £108,000 in July 2010 and now has a portfolio valued at £286.3 million so we have made considerable progress. You would have noted in our Portfolio and Trading Update announced early last month that we have had a busy year achieving a number of our strategic objectives notwithstanding the uncertain political environment.

reiT conversion

One of these objectives was to convert to a Real Estate Investment Trust (REIT) and this is due to take effect on 1 August 2019 pending shareholder approval to amend the Articles of Association at the AGM in July. The Board has taken extensive professional independent advice and is convinced that REIT conversion supports our Total Return Strategy, harnessing the core income-producing portfolio for income growth, whilst exploiting value-add and development opportunities for capital growth.

We expect REIT conversion to increase liquidity in our shares through unlocking new pools of capital, improve earnings through elimination of the tax charge on rental profits and increase our net assets through elimination of deferred tax liabilities.

strategy

Our focus is on value creation through our targeted acquisition of regional commercial property in select growth locations and sectors, exploiting the low interest rate environment to leverage the yield differential of core-plus regional assets versus the low return London sectors. Specifically, city centre offices make up 47.3% of our portfolio and our skillset and ability to enhance the income profile through refurbishments and redevelopments is at the heart of our continuing success.

highlights

There have been a number of highlights in the last financial year including a full year on the Main Market of the London Stock Exchange, as well as being part of the FTSE Small Cap Index and the FTSE All Share Index.

When we bought R.T. Warren (Investments) Ltd in October 2017 for £68 million we acquired 21 commercial buildings and alongside these, 65 residential properties which for us were non-core. We sold three very quickly and just before the year end, we exchanged contracts to sell 50 to Barnet Council, with 26 completing by 31 March 2019 and 24 in May 2019. We have achieved 98% of book value so far which is well ahead of the business plan on acquisition. Post the year end, a further five have been sold with the remainder to be sold imminently.

Our flagship project is the development under construction on our two-acre site known as Hudson Quarter, York. We are erecting 127 apartments, 35,000 sq ft of offices and 5,000 sq ft of other commercial space plus car parking which is all due to complete in the early part of 2021. We already announced that we have secured a £26.5 million funding facility from Barclays Bank on very competitive terms and that we have placed a building contract with Caddick Construction.

The marketing suite for the apartments is virtually complete and June will see the first batch of apartments launched for sale. York was voted the best place to live in the UK in 2018 and was a regional winner this year. In the Nationwide House Price Index for the first quarter of this year house prices rose 2% in Yorkshire and Humberside whilst in London they fell 4%, further emphasising the benefits of our targeted regional strategy.

acquisitions

We have very selective investment criteria and with vendors endeavouring to secure prices that we believe are no longer realistic, we only made one acquisition in the year for £14.0 million which was One Derby Square, Liverpool, a virtually fully let retail and office property in a superb location. One Derby Square produces rent in excess of £1.0 million per annum. I am proud of the high-quality income producing portfolio we have assembled primarily since 2013 and this bodes well for the years ahead.

As a result of the limited opportunities to acquire properties that meet our strict criteria, we held surplus cash in the year. Management took the decision to acquire a 5% holding in a listed equity investment with a strategy focussed on the regional office sector, consistent with our own.

valuations

Our independent valuations show an underlying increase from the previous year of 0.5% and this is no mean feat in a year dominated by political uncertainty and negative retail sentiment. Our strategy of focussing on offices in university towns and cities across the UK continues to bear fruit.

A number of our office properties are in core city centre locations such as Leeds, Milton Keynes, Leamington Spa and Manchester, and some of these have significant development and refurbishment potential. The Board has made the strategic decision to harness this potential, as we are doing in York, and we will of course update shareholders as and when appropriate.

total return

We operate on a total return basis so it is important to grow our capital values as well as our income. There is no doubt that major tenants want quality buildings which are preferably new or almost new, therefore achieving satisfactory planning consents on our potential development pipeline will be crucial going forward. We secured planning consent at Hudson Quarter, York through a pro-active, engaged approach with a pragmatic City of York Council harnessing a superb professional team. This will benefit not only the residents and visitors to York but our shareholders as well as value is created.

dividend policy

I have always referred to our progressive dividend policy. This should not necessarily mean that it increases every year but does over time. This year we intend to maintain it and we are proposing a final dividend of 4.75p per share payable on 13 July 2019 to those shareholders on the Register as at 14 June 2019, which if approved takes the total dividends for the year to 19p. 

epra nav

Our EPRA Net Asset Value per share at 31 March 2019 is 407p which is 1.9% below that of last year. We have had to take account of the Stamp Duty Land Tax on the Liverpool acquisition as well as the reduction in the share price of our listed investment. These factors, in my view, are short term in nature and will not affect our medium to long-term strategic goals or ambition to outperform our peer group on a total return basis.

PORtfolio

Following the acquisition of One Derby Square, Liverpool, the fair value of the Company's portfolio is now at £286.3 million (including trading properties and assets held for sale) compared to £276.7 million as at 31 March 2018. This takes into account the relevant acquisitions and disposals we have made during the financial year.

Our contracted rent roll as at 31 March 2019 was £17.7 million per annum with a net income of £16.4 million after allowing for head rents, service charge shortfall and empty rates. Looking forward, this rent roll may increase during the year if we find the right acquisition opportunities but this year's patient approach will be more rewarding in time.

conservative gearing

Having personally experienced a number of economic downturns it is crucial to keep our gearing at a conservative level. Our bank borrowings are £96.5 million net of cash representing a loan to value (LTV) of 34% (2018: 30%)

ASSET MANagement

We are making good progress with our asset management initiatives on our strategically well-located holdings in Leeds, Manchester, Liverpool, Newcastle, Southampton, Brighton, Winchester, Leamington Spa, Milton Keynes and Northampton and these are referred to in our Property Review.

POSITIVE regional OUTLOOK

Government policy is being directed to encourage investment in the regions, supporting our outlook. Many leading companies have, or are about to, relocate to the regions including Hiscox, Burberry, Channel 4 and Talk Talk. Graduate retention in the regions, particularly in the core cities, is rising providing a pool of talent as London becomes unaffordable to many.

Chancellor Philip Hammond recently told the House of Commons Treasury Select Committee that the next Spending Review expected in the autumn of this year would have a focus on improving regional productivity, with the modern industrial strategy at the heart of the plan. He advised that the review's priority will be to focus on geographical areas which have high potential for productivity growth and projects such as the Northern Powerhouse Rail which can enable this. This project will connect Hull, Leeds, Manchester, Liverpool, Newcastle and Sheffield. The purpose is to create a single economic geography out of a belt of northern cities and to further create an overall area of economic activity which can rival London. Except for Hull, we have holdings in all of these cities.

disciplined investment strategy

We are focussing on exploiting our own portfolio through active management, but we are also very much in the market for acquisition opportunities that conform with our criteria. However, in my view, prices that might have been attainable nine to twelve months ago no longer provide sustainable value. Therefore, we are adopting a patient approach as we increase our cash balances, although this does affect short-term profitability. This will enable us to act very quickly when the right opportunity presents itself. In this business a crucial discipline is to know when to walk away as well as striking when the iron is hot. However, we have built up a large network of contacts, particularly in the regions, and I am confident that we will secure the mainly off-market opportunities that have helped us to grow this Company to date.

We travel extensively in the regions to meet investors both large and small as well as regularly reviewing our portfolio and this policy will continue.

Notwithstanding the risks associated with current economic conditions and the Brexit transition in particular, we believe these are exciting times for the Company. We want to build on our track record and regional strategy and continue to deliver efficiencies for shareholders as we grow. We have a clear business strategy, and we are confident that this will enable Palace to flourish within the UK REIT regime.

I am extremely grateful for the support of our shareholders. We have a management and support team together with our Non-Executive Directors which is second to none and I continue to be very confident about our future.

 

Neil Sinclair

Chief Executive

 

Property Review

We continued to focus on finding value from our existing portfolio this year. Many of the assets in the R.T. Warren portfolio acquired in October 2017 complemented our existing holdings and we have begun to extract value. Buying in the last 12 months has been competitive with private equity institutions and local authorities covering 71% of the market (ACRE Real Estate Q1 2019 snapshot). Our stringent acquisition strategy and being prepared to 'walk away' if the price required doesn't provide us with the opportunity to generate market leading Total Property Returns meant we selected only to purchase One Derby Square, Liverpool.

Most major cities have experienced rental growth for new or refurbished offices in the last couple of years, so buying a property where the passing rents are 20% below current market levels is an achievement.

We have our portfolio independently valued every six months and as at 31 March 2019, Cushman & Wakefield reported the value at £274.6 million of commercial property, a like-for-like increase of 0.5% over the year.

We have maintained our WAULT (4.5 years to break) enabling us to prepare a strategy for each asset in advance and adapt as situations evolve.

We have focussed on the office sector for the last couple of years which has outperformed the retail sector as the high street goes through a revolutionary change. With 47.3% of our portfolio predominantly in university city centres, we have seen rental growth and completed lettings or lease renewals in Brighton, Manchester, Milton Keynes, Harlow, Exeter, Farnborough and Newcastle.

The industrial market continues to be the sector of choice for investors as demand from national multiples drives investment and limited supply generates rental growth. Our highest rental increase was in Coventry where a new five year lease saw an uplift of 32.8%. Our tenant, a German car parts manufacturer, is evidence that leaving the EU is potentially not all doom and gloom. At our industrial estate in Verwood, following a refurbishment, we completed a new letting at a rent 22.3% higher than at the time of purchase. 

Following the recent letting to Soo Yoga at Sol, Northampton, we have started a new branding and marketing campaign to promote the scheme. In September, the opening of the £330 million university campus which is within walking distance, could be the catalyst to attracting further tenants.

We have commenced the development of our signature scheme, Hudson Quarter, formerly known as Hudson House, in York. The first new mixed residential and office development within the historic city walls in ten years is the culmination of four years determination to obtain the best consent possible. We have appointed locally based advisors to ensure the design of the apartments and office buildings are of the highest quality and match the local architecture. We have already had interest in the speculative 35,000 sq ft office building, with practical completion not until early 2021, so we will look to update shareholders as this progresses. 

The Company completed the sale of four commercial properties during the year. Additionally, the majority of the residential properties in the R.T. Warren portfolio acquired in the prior year were sold pre and post year end.

We have resolution to grant planning consent for the development of Bridge House, High Street, Weybridge, and are looking at how we can maximise values in a number of our other significant assets.

We made a conscious decision to avoid buying retail investments a few years ago due to the concern rental levels wouldn't be sustainable. As the high street adapts to the changing habits of shoppers, we have limited exposure to the Company Voluntary Arrangements (CVA) process, which has resulted in only two tenancies ending prior to their expiry date.

There are a number of value-accretive opportunities in our portfolio, including in Leamington Spa, Milton Keynes, Leeds and Manchester. We have noticed the amount of residential development through Permitted Development Rights fall as the returns from commercial-led refurbishment increases.

Statistics

·      We own 59 commercial properties (2018: 60 commercial properties)

·      Properties comprising 1.7 million sq ft (2018: 1.8 million sq ft)

·      Tenants providing a contractual rent roll of £17.7million per annum (2018: £18.0million per annum)

Acquisitions

Despite the Brexit headwinds, the investment market remained more resilient than had been predicted. UK real estate is still very much on the radar for domestic and foreign investors. Colliers reported that investment volumes in 2018 'broke through the £60 billion mark for the fourth time in the past five years' even though transaction activity was slightly below 2017. The beginning of 2019 continued this trend and vendors' expectations are mainly higher than the levels buyers are prepared to pay, which we expect to continue until there is a more certain political climate.

Our acquisition strategy of only buying when investments can generate the returns we seek has resulted in us often 'walking away' from competitive bidding scenarios. However, we did acquire One Derby Square, Liverpool, a mixed-use property in December 2018 for £14.0 million. This reflects a net initial yield of 6.75%. The property is 96% occupied with a WAULT of four years to break or expiry. The tenants include Tesco, Pret a Manger, Medicash and Exchange Chambers who contribute 49.7% of the income. We anticipate being able to improve returns by increasing the rental tone of the offices from their current low base of £12 psf. 

SECTOR FOCUS

Offices

Even though political uncertainty has dominated the headlines, activity levels in the UK city office market proved resilient. Knight Frank reported the number of occupier deals completed was 'up 8% year-on-year, meaning overall take-up was almost a fifth above the long-term trend'. The biggest shift to this sector is institutional acceptance that flexible leases should not be discounted from a valuation perspective. It all comes back to the 'property fundamentals' of location and quality of product. The former is essential to our acquisition strategy and the latter provided by the refurbishment work we undertake. We focus on city centre locations and Knight Frank reported that in 2018, occupier migration into cities from business parks served to underpin demand for office space and this inward shift accounted for 20% of take-up in 2018.

With almost half our portfolio invested in this sector we have strived to ensure that we can deliver the quality of office space required. We have completed 13 lettings and lease renewals covering 87,000 sq ft per annum totalling £1.4 million. The significant lettings have been in Milton Keynes, Newcastle and Harlow.

Our EPRA occupancy as at 31 March 2019 is 87% which is something we are looking to increase in the coming year as we complete our refurbishment projects.

We are looking at further refurbishment works at Boulton House, Manchester and 249 Midsummer Boulevard, Milton Keynes. The vacant office space in both locations has been refurbished and we are now concentrating on the upgrade of the common areas.

Two key aspects that office occupiers are focussed on and require are connectivity and flexibility. We have instructed WiredScore to assess the former in our major office buildings. In Leeds, Manchester and Newcastle they are all rated Gold or better. We have committed to a Platinum rating at our Hudson Quarter development and in 249 Midsummer Boulevard, Milton Keynes the rating is Certified. There is a continuing trend away from long leases towards flexible leases, as they become more acceptable as an institutional investment. We are comfortable with this approach as it provides the opportunity to increase rents in line with the market on a more regular basis.

Our office holdings represent 47.3% of the total value of the portfolio.

The largest letting was to Exela Technologies Limited, for 28,500 sq ft, who expanded within Sandringham House, Harlow to take 87% of the building on a new five year lease. The annual rent of £355,363 (£12.50 per sq ft) was more than double their prior commitment as they expanded to take an additional 30% more space. An incentive equating to nine months' rent free was provided as half rent for 18 months.

The letting of Solaris House, Kiln Farm, Milton Keynes in April 2018 was also very positive as we had completed a significant refurbishment of the building during which time rental values increased. Crucially, the terms of the letting and the refurbishment matched the adjoining properties we own, let to Rockwell Automation, where we are negotiating the rent review from December 2018.  The building comprises 14,500 sq ft and was let for 10 years without break at a headline rent equating to £16.50 per sq ft. The tenant was granted the equivalent of 20 months' rent free as half rent for 40 months, which was less than the average lease incentive for comparable lettings.

At St James Gate in Newcastle Upon Tyne, we renewed the lease to Serco for 12 months which was the length of their contract. Since the end of the financial year we have completed a new lease for five years with a tenant option to determine after two years at a rental of £245,916 per annum, reflecting an increase of 10.8%. We are currently refurbishing the vacant third floor of 11,187 sq ft and the ground floor reception area. This work is to ensure that the building remains attractive to current occupiers and will attract new ones in the future.

The remaining lettings were in Manchester, Exeter, Beaconsfield, Gerrards Cross, Farnborough and Brighton.

Retail

Our retail holdings represent 10.0% of the total value of the portfolio which we consider conservative enough to limit our exposure to the challenges facing this sector. Our largest exposure is Aldi in Gosport at £291,000 per annum representing 13.9% of our retail rents.

The challenges being faced by the high street is a common and continuing theme within the media. However, the difficulty surrounding the sector is akin more to the change in how consumers shop, which is only part of the issue. Since 2015, the number of retail businesses entering into administration has increased by 30% according to figures from the Centre for Retail Research. There is an overwhelming acceptance within the property industry that business rates are at punitive levels. This is compounded by business owners of multiple stores historically expanding quickly by increasing debt to achieve short-term high returns, as well as not adapting to changing consumer habits. Department stores are now paying the price for carrying out sale and leasebacks in the last cycle, committing themselves to increasing rents over long periods of time.

Landlords have been handed the short straw with many retailers returning stores that are not performing to owners by entering a CVA. New ventures are more likely to start new businesses online, which is not helping to address the large number of vacancies in the high street. However, there is an equilibrium as we have observed that in many regional cities, high street shopping also has a social advantage, so we expect this sector to continue to evolve over the coming years.

During the year we completed six new lettings totalling 21,376 sq ft totalling £431,500 per annum. The significant part of this was the new lease to Aldi in Gosport where we held a small area of land with planning consent for a 'drive thru' unit to be developed. Aldi required additional car parking so a new lease incorporating this land was agreed. The rent subsequently increased from £247,000 per annum to £291,000 per annum, an increase of 17.8%, which was the equivalent rent achievable from the additional land. The lease term was extended from 12 years to 20 years retaining the existing rent review provisions of minimum increases in line with inflation, capped at 2.75% and collared at 1.0% per annum compounded.

The other lettings were in Brighton, Dartford, York and Banbury.

Industrial

This was again the sector of choice for institutional investment across the UK last year. This has been driven principally by the requirements from retailers to have large regional distribution centres with excellent transport links and the 'last mile' requirement so customers can have products delivered as quickly as possible. It is inevitable that this expansion must slow down as the operators reach saturation point at a future point in time.

Our industrial holdings represent 13.1% of the total value of the portfolio. Whilst this is a sector we would invest further in, the opportunity to buy assets which provide an attractive initial return is difficult as it is common for inherent rental growth to be priced in.

During the year we agreed five new lettings across 25,000 sq ft totalling £189,000 per annum. These lettings were predominately at Black Moor Road, Verwood which was purchased as part of the R.T. Warren portfolio in October 2017. The average rent at that time was £5.25 per sq ft and, following a refurbishment of some vacant space, the new rent equates to £7.00 per sq ft which is more than 10% higher than anticipated at the time of purchase.

We have also completed the refurbishment of Unit 8B at Point 4 Industrial Estate, Avonmouth. This followed a tenant going into administration in June 2018. Agents have been appointed and we are looking to agree terms with a new tenant before the end of the current financial year.

Post the year end, at Courtauld House, Foleshill Enterprise Park, Coventry, Brose completed a five year lease renewal at a rent of £431,500 per annum. This equates to £5.55 per sq ft, an uplift of 32.8% to the passing rent. Getting commitment from a German supplier to the automotive industry from Germany is a positive sign that companies from the EU will continue to work in the UK post Brexit.

We also settled a rent review at Plot 24, Blackwater Way Aldershot where the rent increased from £181,475 per annum to £210,000 per annum, equating to 15.7% and slightly ahead of ERV.

Leisure

The leisure market has been in a state of flux for the last couple of years. Several tenants have struggled to survive whilst many do not exist anymore as many brands have suffered from similar issues highlighted in the Retail commentary. The letting of vacant space has been challenging but we consider that the market has now turned. There are new concepts from operators seeking to provide an 'experience' for customers. We know that the branding and marketing campaigns at both Northampton and Halifax are having a positive impact on bringing customers to the schemes.

Our holdings represent 14.5% of the total value of the portfolio.

At Sol, Northampton, we let 12,800 sq ft to Soo Yoga who signed a 15 year lease at an initial rental of £85,000 per annum, with a minimum increase after five years to £100,000 per annum. The scheme is now undergoing a branding and marketing change and we are in discussions to let a significant remainder of the vacant space. The remaining tenants are trading well which is evidenced by Ibis Hotels who has made a turnover payment of £107,000 in addition to their £510,000 rent.

We have been working to attract tenants to the vacant space at Broad Street Plaza, Halifax. Post the year end we completed the letting to Whitecross Dental Care on a 15 year lease for 7,000 sq ft which was a former Chinese Buffet. The rent of £111,625 per annum represents an uplift of 20.7% on rents previously received. We are confident that interest in the remaining vacant units will increase with this letting and when the College opens opposite our asset in September 2019.

Development

We placed the contract for the development of Hudson Quarter, York. Since 2013, we have worked on obtaining planning consent for 127 apartments, 35,000 sq ft of grade A offices and 5,000 sq ft of other commercial space and car parking. This will be the first significant office development within the historic city wall for over a decade. We are excited about the development which will formally launch in June 2019. We expect to sell many of the apartments prior to practical completion in early 2021. The initial interest from prospective tenants for the new offices is encouraging and we are targeting an unprecedented rental tone for York. Further information can be found at www.hudsonquarteryork.com. A loan of £26.5 million has been agreed on competitive terms to part fund the development. 

In March 2019, after 15 months of consultation and planning meetings, a resolution to grant planning consent was secured for Bridge House, High Street, Weybridge. The new development is for 28 apartments and 4,000 sq ft of retail. The residential scheme is targeting the affordable level of the local market as most of the units are one bedroom apartments. We are looking to complete the Section 106 agreement and will finalise costs during the year.

Disposals

We completed four commercial sales over the period raising a total of £2.1million. The key factor being that all the properties were either vacant or due to become vacant. Post the year end, we completed the sale of Rathbone and Old House for £1.5 million.

When we acquired the R.T. Warren portfolio, we announced that we would sell the residential element. Of the 65 properties, all of which were income producing, three were sold last year and two are being retained for strategic purposes. The significant sale was for 50 houses to Barnet Council for £18.2 million. Contracts were exchanged in December 2018 with 26 completed before the year end and 24 completed post the year end on 1 May 2019. Post the year end a further five properties were sold, with the remaining five due to be sold imminently.

Minimum Energy Efficiency Standards (MEES)

From 1 April 2018 in England and Wales it was illegal to renew or grant new tenancies at properties that have F or G Energy Performance Certificate (EPC) ratings.  The scope of these regulations is due to increase from 2023 to include existing leases. We identified this risk a number of years ago and have action plans in place to ensure our buildings are compliant.

Outlook

Our view on the market has not fundamentally changed since last year, with strong occupational demand in the regional office markets continuing and rental growth following suit. Continuing uncertainty around Brexit will only lead to further procrastination to decision making among the business community.

Industrial investment, development and occupation will probably continue to be the leading performer, whilst the retail and leisure sector may have further tenant failures as the sector finds its own solutions to increased competition from online and rising occupational costs and changing shopping habits. 

During the forthcoming year we are focussed on letting the vacant space as a priority. This will increase our cashflow and reduce our holding costs. However, we are also mindful of the opportunities to carry out significant refurbishment or development where appropriate. This may mean that strategically, we do not actively seek to let all the vacant space which could enable us to maximise shareholder returns in the medium to long term.

We believe that we remain well placed to grow income and add further value to the portfolio.

Richard Starr, MRICS

Executive Director

 

Financial Review

OVERVIEW AND HEADLINE RESULTS

The Company continues to deliver on its objective to drive income and capital growth and outperform the MSCI industry benchmark on a Total Return basis.

The performance of the Group in the year ended 31 March 2019 was financially robust, maintaining our conservative capital structure with a LTV of 34% (2018: 30%), whilst generating strong income and capital performance against a politically uncertain backdrop. We delivered an adjusted profit before tax of £8.9million for the year and maintained a dividend yield over 6.5% based on 31 March 2019 share price, as a result of total dividends for the year of 19p, 0.9 times covered.

Balance sheet value remains significantly above share price, illustrated by an EPRA NAV per share of 407p (2018: 415p). This performance was driven by our outstanding regional portfolio that achieved a Total Property Return of 7.1% for the year against the MSCI IPD index comparable of 4.6%. We added to the core-plus element of the portfolio with One Derby Square, Liverpool in December 2018 for £14.0million, acquired at 6.75% NIY and generating £1.0million net rental income p.a. Our approach to recycling capital out of lower-performing assets and sectors continued as we agreed to sell 50 of the houses acquired as part of the R.T. Warren portfolio to Barnet Council for £18.2million, with 26 completing before the year end and 24 completing on 1 May 2019, releasing surplus funds back into working capital.

This year we delivered an IFRS profit before tax of £6.4million (2018: £13.3million), which reflects a basic earnings per share of 11.3p (2018: 35.9p), down on last year due to £0.6million loss on disposal and £0.3million downward revaluation of the residential assets held for sale in the year, compared to almost £6.0million upward revaluation of the investment portfolio in the prior year.

EPRA earnings is the industry measure of underlying profit excluding revaluation gains, profits on disposals and one-off costs. EPRA earnings for the year ended 31 March 2019 increased by 16.2% to £7.6million compared to £6.5million last year reflecting the increased earnings from the growing portfolio.

We also report an adjusted profit before tax in order to track recurring earnings and to form a basis for calculating dividend cover. This totalled £8.9million for the year ended 31 March 2019 (2018: £8.5million), up 5.6%, and adjusted earnings per share reduced to 17.3p from 21.2p as a result of the increased shareholder base whilst not fully deploying available capital in the year. The proposed final dividend of 4.75p will be payable in July 2019 which ensures a total dividend for the year of 19.0p covered by adjusted earnings 0.9 times.

On the capital side, net asset value has fallen to £180.3million, down 1.6% from the previous year-end of £183.3million and this translates into EPRA net asset value per share of 407p, down from 415p. This 8p decrease, together with the total dividends of 19p paid during the year, overall represents a 2.6% total accounting return.

financial highlights


2019

2018

2017

INCOME GROWTH




IFRS profit before tax

£6.4m

£13.3m

£12.6m

Adjusted profit before tax

£8.9m

£8.5m

£6.7m

EPRA earnings

£7.6m

£6.5m

£5.4m

Basic EPS

11.3p

35.9p

36.6p

EPRA EPS

16.6p

18.7p

21.2p

Adjusted EPS

17.3p

21.2p

22.2p

Dividend per share

19.0p

19.0p

18.5p

Dividend cover

0.9x

1.1x

1.2x





CAPITAL GROWTH




Portfolio like for like value

+0.5%

+3.5%

+4.5%

Net Asset Value

£180.3m

£183.3m

£109.6m

Basic NAV per share

393p

400p

436p

EPRA NAV per share

407p

415p

443p

Total accounting return

2.6%

-2.0%

11.4%

Total shareholder return

-6.0%

-1.4%

 7.4%





DEBT FINANCE




Debt balance

£119.4m

£101.4m

£78.7m

Average cost of debt

3.3%

3.4%

2.9%

Average debt maturity

3.6yrs

4.7yrs

4.6 yrs

Loan to Value Ratio

34%

30%

37%

NAV gearing

52%

43%

61%

 

RECURRING EARNINGS

Rental income totalled £18.8million in the year ended 31 March 2019 (2018: £16.7million) driven by the improving portfolio. Net rental income similarly increased to £16.4million (2018: £14.9million).

Administrative expenses decreased to £4.1million (2018: £4.2million). The employee numbers were relatively stable during the year and, including the Board, totalled 16 people at the balance sheet date, compared to 14 in the prior year as a result of one new role within the team created and a new Non-Executive Director who joined in early 2019.

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 the Directors 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) framework, and company adjusted measures. Further details are given in notes 6 and 7 of the financial statements. We report a number of these measures (detailed in the glossary of terms) because the Directors consider them to improve the transparency and relevance of our published results as well as the comparability with other listed European real estate companies.

Finance costs increased to £3.8million from £3.3million as a result of increasing the debt book to support the larger asset base and average cost of debt reduced slightly to 3.3% (2018: 3.4%) as we leveraged our larger, diversified portfolio to improve our lender terms.

Looking forward, the business is capable of scalability, with the team and systems in place to support significant growth of the portfolio. The Group has a gross rent roll of £17.7million per annum as at 31 March 2019 with a reversion to £21.5million per annum as well as holding cash funding for further acquisitions and reinvestment in the portfolio to generate further growth.

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 property values on an underlying basis were up 0.5% in a flat market where MSCI recorded 0.1% capital growth across the UK.

In addition, we have continued to recycle capital out of low-yielding residential assets and vacant properties with limited growth prospects into income-generating properties as part of the core-plus element of the business strategy. 26 residential properties were sold in the year for a total consideration of £9.3million, generating loss on disposal of £0.5million, along with four commercial properties for £2.1million, resulting in profits on disposal of £0.2million. The combination of revaluation movements and losses on disposal can have a significant impact on the underlying value of the business, and this reflected a 2p drop in net asset value per share.

EPS

We report EPRA earnings per share, which removes property revaluation, losses and one-off items such as losses on disposal and costs on acquisition. This reduced to 16.6p from 18.7p last year. Finally, we also report an adjusted earnings per share to provide a basis for dividend cover and this was 17.3p for the year down from 21.2p.

DIVIDENDS

The Board is recommending a final quarterly dividend of 4.75p per share to be paid 13 July 2019 to shareholders registered at the close of business on 14 June 2019. Taken with the total interim dividends of 14.25p, our full year dividend will total 19.0p which remains over 6.5% yield on the latest share price. It should be noted that the Q1 and Q2 dividends were paid on the basis of the Parent Company balance sheet which was subsequently restated during the year as the result of a technical error. This is detailed in note 10 of the Company Accounts.

The Company has sufficient distributable reserves to provide our shareholders with a consistent quarterly dividend on the back of the core-plus assets that make up the majority of our portfolio which generates strong cash-on-cash returns. In addition there are value-added assets and also a growing pipeline of opportunistic development assets within our portfolio that we look to apply pro-active asset management strategies to generate both income and capital growth.

NET ASSETS

At 31 March 2019, our net assets were £180.3million, equating to basic net asset per share of 393p, a decrease of 7p since 31 March 2018. The decrease in our net assets was driven largely by the absorption of acquisition costs and fair value of derivatives despite the increase in underlying portfolio values. 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 totalled 407p at 31 March 2019, down from 415p at 31 March 2018 due to the realisation of tax on disposal of the residential held for sale.

DEBT FINANCING

During the year our debt profile improved as we entered into two new facilities. In February 2019 we agreed a £26.5million development facility with Barclays Bank plc in order to provide the majority of the funding for our significant development of Hudson Quarter, York. Terms include a margin of 3.25% over LIBOR and a non-utilisation rate of 1.30% for the undrawn element of the facility throughout the term. The facility is available once the remaining equity has been invested in the project and it is expected that the monthly drawdown will commence in the second half of this year.

We also entered into a new facility with Lloyds Bank plc for £6.845million secured against the recent acquisition in Liverpool on competitive terms at a margin of 1.95% over three month LIBOR. The Group debt facilities total £119.4million, fully drawn at the year-end. We continue to monitor swap rates and as at year-end held £69.2million of fixed or hedged debt which was approximately 59% of overall debt drawn. Our lenders include the majority of the UK clearing banks and the Group's all-in average cost of debt is 3.3%. The average debt maturity on the investment facilities is 3.6 years which gives us security over income streams net of interest costs for a number of years before the need to refinance.

debt


Fixed
£m

Floating
£m

Total Drawn
£m

Years to maturity

Barclays

35.3

3.8

39.1

3.8

NatWest

-

29.4

29.4

1.9

Santander

19.7

6.6

26.3

3.3

Lloyds

-

10.4

10.4

2.6

Scottish Widows

14.2

-

14.2

7.3

Total

69.2

50.2

119.4

3.6

 

 

 

 

 

 

 

 

 

 

 

 

NET DEBT AND GEARING

Each debt facility is secured at a Special Purpose Vehicle (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% to 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 2019 was 52% and the LTV ratio was 34% at 31 March 2019. The Group remains conservatively geared and at year-end had £22.9million of cash along with over £22.1million of properties uncharged to lenders.

TAXATION

The Group has a tax charge of £1.3million for the year ended 31 March 2019. This includes a corporation tax charge of £2.2million to reflect the tax payable in the year, less a deferred tax credit of £0.9million.

REIT Conversion

The Company's plans to convert to a UK REIT, and the potential benefits, are set out on page 27 of the Report. The Group currently pays UK income tax on its net rental income, after deductions. Its estimated UK tax liability for recurring earnings for this year is £1.0 million. Following REIT conversion we expect this tax liability to be reduced to zero, as the bulk of the Group's activities will fall within the REIT exemption. Conversely, if the Company did not join the REIT regime, we would expect the Group's tax liability to increase as the Group continues to grow.

OUTLOOK

From a financial point of view, the Company has had a solid year and performed well against the politically uncertain backdrop. It remains financially robust with conservative gearing at 34% and £22.9million of cash in the bank provides capacity for the Group to make further acquisitions and invest in its assets, to grow both the income and capital values. We continue to pay out an attractive dividend yield of over 6.5% on the share price at 31 March 2019, whilst retaining surplus capital to reinvest in our portfolio to drive performance and maximise total returns for our investors. In addition, we have commenced the Hudson Quarter, York development which is forecast to deliver an award-winning, sustainable mixed-use scheme in the heart of York which will have significant benefits for all involved in the heart of the local community.

 

Stephen Silvester FCA

Finance Director

 

Risk management

 

THE BOARD CONTINUALLY ASSESSES THE KEY RISKS TO THE BUSINESS TO ENSURE EXPOSURE IS MITIGATED

 

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 2018/19

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 less than 25% of Gross Asset Value.

·      Limited capital expenditure during the current year across a range of properties.

·      The only development the Group has entered into is the £33.6million construction contract signed for the development of Hudson Quarter, York, which is part funded by a £26.5million facility with Barclays Bank plc.

 

Medium Risk Rating

High Risk Impact

 

Financing and 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 weighted average debt maturity is currently 3.6 years and looking to extend this further providing longevity and financial support to maintain the current portfolio.

·      The Group's LTV is conservative at 34%.

·      59% 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

 

Accounting, tax, legal and regulatory

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

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

·      Engagement with British Property Federation (BPF) on regulatory changes that impact the real estate industry.

·      Engagement with Deloitte on REIT conversion.

 

·      Greater level of scrutiny required by the Board covering corporate governance and requirements for reporting to the FRC following the move to the Main Market.

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

·      Clarity has now been provided following the passing of legislation to take effect from 1 April 2017 for corporate interest restriction.

·      Board has given sign off for REIT conversion on 1 August 2019.  

High Risk Rating

Low Risk Impact

 

Property

Exposure to tenant administration and poor tenant covenants could
result in lower income, and therefore property values could decrease.

·      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, and as a result falling property values.

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

·      Total number of commercial leases across portfolio: 234 making up contractual rent roll of £17.7m.

·      Loss of income from tenant administrations and CVAs in the year totalled £39,222, which is  very small percentage of portfolio contractual income.

·      Portfolio weighted average lease length is 4.5 years providing reasonable longevity of income.

·      Our occupancy for the year ending 31 March 2019 was 87%, with the target occupancy across the portfolio 90% for the year ending 31 March 2020. Property values have increased 0.5% from 2018.

Low Risk Rating

Low Risk Impact

 

Economical and Political

Uncertainty from Brexit and world events could impact our tenants and the profitability of their businesses. Decisions made by councils and local government 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 industry bodies including BPF in order to monitor the impact of all relevant current issues.

·      Concerns remain as to the effect of Brexit on the UK economy.

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

 

High Risk Rating

High 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 difficult transitions and potential loss of income.

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

·      Continuing to keep under review the Financial Position and Prospects Procedures Board Memorandum put in place as part of the move to the Main Market in 2018, ensuring plans in place to deal with disruption risk.

·      Increase in staff numbers to 16 which provides cover reducing exposure should any of the key personnel become unavailable.

·      Key man insurance cover in place for Executive Directors.

 

High 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, 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 at Hudson Quarter in York is due to take 23 months from commencement to practical completion.

·      The Group's weighted average debt maturity at 31 March 2019 was 3.6 years.

·      The Group's WAULT at 31 March 2019 was 4.5 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 and loan to value metrics. Additionally, we look at our 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 in March 2019 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. If the property values fell by approximately 20%, a £4.6m repayment of debt would be required to cure any loan breaches under the existing debt facilities. The interest cover across the Group was also sufficient that net income would need to fall by 37% or interest costs increase by 62% to breach the interest cover ratios.

The Group has signed a design and build construction contract in February 2019 for £33.6m with a contractor in order to complete the redevelopment of Hudson Quarter, York. In order to part finance the development, a new facility with Barclays Bank plc for £26.5m was agreed. The NatWest facility, due to expire in March 2021, is currently being refinanced.

The Directors have also taken into account the strong financial position at 31 March 2019, 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 and Group will be able to continue in operation and meet its liabilities as they fall due over the three-year period of their assessment.

 

Statement of Directors' Responsibilities

The Directors are responsible for preparing the Annual Report and the Group and Parent Company financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare Group and Parent Company financial statements for each financial year. Under that law the Directors have prepared the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and the have elected to prepare the Company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law).

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Parent Company and of the profit or loss of the Group for the period. In preparing each of the Group and parent Company financial statements the Directors are required to:

·      select suitable accounting policies and then apply them consistently;

·      make judgements and estimates that are reasonable and prudent;

·      for the Group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the European Union, subject to any material departures disclosed and explained in the financial statements;

·      for the Parent Company financial statements, state whether they have been prepared in accordance with UK GAAP, subject to any material departure disclosed and explained in the parent company financial statements;

·      prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Parent Company will continue in business; and

·      under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors' Report, Directors' Remuneration Report and Corporate Governance Statement that complies with that law and those regulations.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Parent Company's transactions and disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that the financial statements comply with the requirements of the Companies Act 2006 and, as regards the Group Financial Statements, Article 4 of the IAS Regulations.

They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for ensuring the Annual Report and the financial statements are made available on a website. Financial statements are published on the Company's website in accordance with legislation in the United Kingdom governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the Company's website is the responsibility of the Directors. The Directors' responsibility also extends to the ongoing integrity of the financial statements contained therein.

Director' Responsibilities Statement

We confirm to the best of our knowledge:

·      the financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by The European Union and Article 4 of the IAS regulation, and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation as a whole;

·      the Strategic Report includes a fair review of the development and performance of the business and the financial position of the Company and the undertakings included in the consolidation as a whole, together with a description of the principal risks and uncertainties that they face; and

·      the Annual Report and Accounts taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's performance, business model and strategy.

Provision of information to auditors

Each of the persons who are Directors at the time when the Directors' Report is approved has confirmed that:

·      so far as that Director is aware, there is no relevant audit information of which the Company's auditors are unaware; and

·      that Director has taken all the steps that ought to have been taken as a Director in order to be aware of any information needed by the Company's auditors in connection with preparing their report and to establish that the Company's auditors are aware of the information.

On behalf of the Board

 

David Kaye

Company Secretary

3 June 2019

 

Consolidated Statement of Comprehensive Income

For the year ended 31 March 2019

 

 


Note

2019

£'000

2018

£'000

Rental and other income

1

18,750

16,733

Property operating expenses

3b

(2,318)

(1,824)

Net rental income


16,432

14,909





Dividend income from listed equity investments


43

-

Administrative expenses

3c

(4,122)

(4,185)

Operating profit before gains and losses on property assets,                                                     listed equity investments and cost of acquisitions


12,353

10,724





Profit on disposal of investment properties


218

274

(Loss)/gain on revaluation of investment property portfolio

9

(382)

5,738

Loss on disposal of assets held for sale


(579)

-

Impairment on assets held for sale

9

(291)

-

Loss on revaluation of listed equity investments

11

(214)

-





Operating profit


11,105

16,736

Finance income


20

10

Finance expense

2

(3,763)

(3,261)

Changes in fair value of interest rate derivatives


(929)

(181)

Profit before taxation


6,433

13,304





Taxation

5

(1,263)

(773)

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


5,170

12,531





EARNINGS PER ORDINARY SHARE




Basic

6

11.3p

35.9p

Diluted


11.3p

35.8p

 

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 2019

 

 


Note

2019

£'000

2018

£'000

Non-current assets




Investment properties

9

258,331

253,863

Listed equity investments at fair value

11

2,636

-

Property, plant and equipment

12

97

121



261,064

253,984





Current assets




Assets held for sale

9

11,756

21,708

Trading property

10

14,367

-

Trade and other receivables

13

6,243

5,551

Cash and cash equivalents

14

22,890

19,033



55,256

46,292

Total assets


316,320

300,276





Current liabilities




Trade and other payables

15

(10,001)

(8,834)

Borrowings

17

(5,999)

(2,686)

Creditors: amounts falling due within one year


(16,000)

(11,520)

Net current assets


39,256

34,772





Non-current liabilities




Borrowings

17

(112,017)

(97,157)

Deferred tax liability

5

(5,580)

(6,531)

Obligations under finance leases

20

(1,585)

(1,588)

Derivative financial instruments

16

(815)

(181)

Net assets


180,323

183,299





Equity




Called up share capital

21

4,639

4,639

Share premium account


125,019

125,036

Treasury shares


(1,771)

(2,011)

Merger reserve


3,503

3,503

Capital redemption reserve


340

340

Retained earnings


48,593

51,792

Equity - attributable to the owners of the parent


180,323

183,299





Basic NAV per ordinary share

7

393p

400p

Diluted NAV per ordinary share


392p

400p

 

These financial statements were approved by the Board of Directors and authorised for issue on 3 June 2019 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 2019

 

 


Notes

Share Capital

£'000

Share

Premium

£'000

Treasury
Share

Reserve

£'000

Other

 Reserves

£'000

Retained Earnings

£'000

Total
Equity

£'000

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

Cost of issue of new shares

21

-

(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

8

-

-

-

-

(6,744)

(6,744)

At 31 March 2018


4,639

125,036

(2,011)

3,843

51,792

183,299









Total comprehensive income for the year


-

-

-

-

5,170

5,170

Transactions with Equity Holders








Costs of issue of new shares


-

(17)

-

-

-

(17)

Share based payments

22

-

-

-

-

332

332

Exercise of share options

21

-

-

240

-

(240)

-

Issue of deferred bonus share options

21

-

-

-

-

257

257

Dividends paid

8

-

-

-

-

(8,718)

(8,718)

At 31 March 2019


4,639

125,019

(1,771)

3,843

48,593

180,323

 

For the purpose of preparing the consolidated financial statements 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 comprise the merger reserve and the capital redemption reserve.

The merger reserve represents the excess over nominal value of the fair value consideration for the acquisition of subsidiaries satisfied by the issue of shares in accordance with S612 of the Companies Act 2006.

The capital redemption reserve represents the nominal value of cancelled preference share capital redeemed.

 

Consolidated Statement
of Cash Flows

For the year ended 31 March 2019

 

 


Note

2019

£'000

2018

£'000

Operating activities




Profit before taxation


6,433

13,304

Finance income


(20)

(10)

Finance expense

2

3,763

3,261

Changes in fair value of interest rate derivatives


929

181

Loss/(gain) on revaluation of investment property

9

382

(5,738)

Loss on revaluation of assets held for sale

9

291

-

Profit on disposal of investment properties

9

(218)

(274)

Loss on disposal of investment properties held for sale


579

-

Loss on revaluation of investments

11

214

-

Depreciation

12

31

45

Share-based payments

22

332

174

Increase in receivables


(691)

(3,081)

(Decrease)/increase in payables


(105)

2,037

Net cash generated from operations


11,920

9,899

Interest received


20

10

Interest and other finance charges paid


(3,405)

(2,714)

Corporation tax paid in respect of operating activities


(1,639)

(395)

Net cash flows from operating activities


6,896

6,800




Investing activities




Purchase of investment property and acquisition costs capitalised

9

(15,505)

(72,808)

Capital expenditure on refurbishment of investment property

9

(2,453)

(2,754)

Capital expenditure on developments

9

(1,923)

-

Capital expenditure on trading property

9

(535)

-

Proceeds from disposal of investment property


2,078

8,765

Proceeds from assets held for sale


9,082

-

Amounts transferred from restricted cash deposits

14

553

(805)

Purchase of non-current asset - equity investment

11

(2,850)

-

Purchase of property, plant and equipment

12

(7)

(123)

Net cash flow used in investing activities


(11,560)

(67,725)




Financing activities




Bank loans repaid

19

(8,037)

(45,242)

Proceeds from new bank loans

19

25,991

53,393

Loan issue costs paid

19

(145)

(1,085)

Proceeds from issue of Ordinary Share capital


-

70,000

Costs from issue of Ordinary Share capital


(17)

(2,349)

Dividends paid

8

(8,718)

(6,744)

Net cash flow from financing activities


9,074

67,973




Net increase in cash and cash equivalents


4,410

7,048

Cash and cash equivalents at beginning of the year


17,985

10,937

Cash and cash equivalents at the end of the year

14

22,395

17,985

 

 

Notes to the Consolidated
Financial Statements

 

BASIS OF ACCOUNTING

The consolidated financial statements of the Group comprise the results of Palace Capital plc ('the Company') and its subsidiary undertakings.

The Company is quoted on the Main Market of the London Stock Exchange and is domiciled and registered in England and Wales and incorporated under the Companies Act. The address of its registered office is Lower Ground Floor, One George Yard, London, United Kingdom, EC3V 9DF.

BASIS OF PREPARATION

The financial information contained in this results announcement has been prepared on the basis of the accounting policies set out in the financial statements for the year ended 31 March 2018 except for the adoption of IFRS 9 and IFRS 15 during the year ended 31 March 2019 which have not had a material impact on the results.  Whilst the financial information included in this announcement has been computed in accordance with the recognition and measurement requirements of IFRS, as adopted by the European Union, this announcement does not itself contain sufficient disclosures to comply with IFRS.  The financial information does not constitute the Group's financial statements for the years ended 31 March 2019 or 31 March 2018, but is derived from those financial statements.  Financial statements for the year ended 31 March 2018 have been delivered to the Registrar of Companies and those for the year ended 31 March 2019 will be delivered following the Company's Annual General Meeting.  The auditors' reports on both the 31 March 2019 and 31 March 2018 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.

GOING CONCERN

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in these financial statements. In addition, note 26 to the financial statements includes the Group's objectives, policies and processes for managing its capital, its financial risk management objectives, details of its financial instruments and its exposures to credit risk and liquidity risk.

As at 31 March 2019 the Group had £22.9m of cash and cash equivalents, a low gearing level of 34% and a fair value property portfolio of £286.3m. Accordingly the Group has the financial resources together with long term leases with a wide range of tenants, to continue to adopt the going concern basis in preparing the Annual Report and financial statements.

After making enquiries, and in accordance with the FRC's Guidance on Risk Management, Internal Control and Related Financial and Business Reporting 2014, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operation for at least 12 months from the date of approval of the financial statements. Accordingly, they continue to adopt the going concern basis in preparing the financial statements.

NEW STANDARDS ADOPTED DURING THE YEAR

The following new standards are effective and have been adopted for the year ended 31 March 2019.

Standards in issue and effective from 1 January 2018

IFRS 9 Financial Instruments

·  This standard deals with the classification, measurement and recognition of financial assets and liabilities, impairment provisioning and hedge accounting.

·  The Group does not apply hedge accounting on the financial derivatives held. The Group's assessment of IFRS 9 determined that the main area of potential impact was impairment provisioning on trade receivables, given the requirement to use a forward-looking expected credit loss model. However, the Group concludes that this has no material impact on its financial statements. This is due to the Company having a majority of tenants with strong covenants and generally tenant receipts are received in advance or on the due date, therefore the Group considers the probability of default to be low.

·  In 2018 the Group extended a loan facility. Under IAS 39, the difference arising on reestimation of the cash flows was amortised over the remaining term of the loan. Under IFRS 9, this difference is recognised through profit and loss immediately. The impact of this change was not material.

IFRS 15 Revenue from Contracts with Customers

·  IFRS 15 combines a number of previous standards, setting out a five-step model for the recognition of revenue and establishing principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue.

·  The standard is applicable to insurance commission income, investment property disposals and trading property disposals, but excludes rent receivable, which is within the scope of IAS 17. This adoption had no material impact on the financial statements.

 

Standards in issue but not yet effective

IFRS 16 Leases (Effective 1 January 2019)

·      This standard requires lessees to recognise a right-of-use asset and related lease liability representing the obligation to make lease payments. Interest expense on the lease liability and depreciation on the right-of-use asset will be recognised in the Statement of Comprehensive Income. The Directors do not anticipate that the adoption of this standard will have a material impact on the Group's financial statements as the Group only holds one operating lease, being the head office. The Directors will continue to assess the impact of the new standard going forward. The accounting for lessors will not significantly change as we will continue to account for leases either as finance or operating leases.

SIGNIFICANT ACCOUNTING POLICIES

Basis of consolidation

The consolidated financial statements incorporate the financial statements of Palace Capital plc and its subsidiaries as at the year end date.

Subsidiaries are all entities (including special purpose entities) over which the Company has control. The Company controls an entity when the following three elements are present: power to direct the activities of the entity, exposure to variable returns from the entity and the ability of the Company to use its power to affect those variable returns. Where necessary, adjustments have been made to the financial statements of subsidiaries and associates to bring the accounting policies used and accounting periods into line with those of the Group. Intra-group balances and any unrealised gains and losses arising from intra-group transactions are eliminated in preparing the Consolidated Financial Statements.

The results of subsidiaries acquired during the year are included from the effective date of acquisition, being the date on which the Group obtains control until the date that control ceases.

The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred and the equity interests issued by the Group. This fair value includes any contingent consideration. Acquisition-related costs are expensed as incurred.

If the consideration is less than the fair value of the assets and liabilities acquired, the difference is recognised directly in the Statement of Comprehensive Income.

Where an acquired subsidiary does not meet the definition of a business, it is accounted for as an asset acquisition rather than a business combination. A business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing goods or services to customers, generating investment income (such as dividends or interest) or generating other income from ordinary activities.

Revenue

Revenue is primarily derived from property income and represents the value of accrued charges under operating leases for rental of the Group's investment properties. Revenue is measured at the fair value of the consideration received. All income is derived in the United Kingdom.

Rental income from investment properties leased out under operating leases is recognised in the Statement of Comprehensive Income on a straight-line basis over the term of the lease. Contingent rent reviews are recognised when such reviews have been agreed with tenants. Lease incentives and guaranteed rent review amounts are recognised as an integral part of the net consideration for use of the property and amortised on a straight-line basis over the term of lease.

Amounts received from tenants to terminate leases or to compensate for dilapidations are recognised in the Group Statement of Comprehensive Income when the right to receive them arises.

Insurance commissions are recognised as performance obligations are fulfilled in terms of the individual performance obligations within the contract with the insurance provider. Revenue is determined by the transaction price in the contract and is measured at the fair value of the consideration received. Revenue is recognised once the underlying contract between insured and insurer has been signed.

Revenue from the disposal of investment properties is recognised when significant risks and rewards attached to the property have transferred from the Group. This will ordinarily occur on completion of contracts. Such transactions are recognised when any conditions are satisfied. The profit or loss on disposal of investment property is recognised separately in the Consolidated Statement of Comprehensive Income and is the difference between the net sales proceeds and the opening fair value asset plus any capital expenditure during the period to disposal.

Revenue from the sale of trading properties are recognised when significant risks and rewards attached to the trading property have transferred from the Group, which is usually on completion of contracts.

Dividend income comprises dividends from the Group's listed equity investments and is recognised when the shareholder's right to receive payment is established. Revenue is measured at the fair value of the consideration received. All income is derived in the United Kingdom.

Borrowing costs

Bank borrowings are initially recognised at fair value net of any transaction costs directly attributable to the issue of the instrument. After initial recognition, loans and borrowings are subsequently measured at amortised cost using the effective interest method. Amortised cost is calculated by taking into account any issue costs, and any discount or premium on settlement. Gains and losses are recognised in profit or loss in the Consolidated Statement of Comprehensive Income when the liabilities are derecognised, as well as through the amortisation process.

Borrowing costs directly attributable to development properties are capitalised and not recognised in profit or loss in the Consolidated Statement of Comprehensive Income.

Financial Assets

The Group classifies its financial assets into one of the categories discussed below, depending on the purpose for which the asset was acquired. The Group's accounting policy for each category is as follows:

Fair value through profit or loss

This category comprises in-the-money derivatives (see 'financial liabilities' section for out-of-money derivatives classified as liabilities). They are carried in the Consolidated Statement of Financial Position at fair value with changes in fair value recognised in the Consolidated Statement of Comprehensive Income in the finance income or expense line.

LISTED EQUITY INVESTMENTS

Listed equity investments are classified at fair value through profit and loss. Listed equity investments are subsequently measured using level 1 inputs, the quoted market price, and all fair value gains or losses in respect of those assets are recognised in profit or loss in the Consolidated Statement of Comprehensive Income.

Fair value hierarchy

·      Level 1: Quoted (unadjusted) market prices in active markets for identical assets or liabilities.

·      Level 2: Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable.

·      Level 3: Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. For assets and liabilities that are recognised in the financial statements on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by reassessing categorisation at the end of each reporting period.

amortised cost

These assets arise principally from the provision of goods and services to customers (eg trade receivables), but also incorporate other types of financial assets where the objective is to hold these assets in order to collect contractual cash flows and contractual cash flows are solely payments of principal and interest. They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue and are subsequently carried at amortised cost being the effective interest rate method, less provision for expected credit loss.

Impairment provisions for current and non-current trade receivables are recognised based on the simplified approach within IFRS 9 using a provision matrix in the determination of the lifetime expected credit losses. During this process the probability of the non-payment of the trade receivables is assessed. This probability is then multiplied by the amount of the expected loss arising from default to determine the lifetime expected credit loss for the trade receivables. For trade receivables, which are reported net, such provisions are recorded in a separate provision account with the loss being recognised within cost of sales in the Consolidated Statement of Comprehensive Income. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision.

The Group's financial assets measured at amortised cost comprise trade and other receivables and cash and cash equivalents in the Consolidated Statement of Financial Position.

Cash and cash equivalents

Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short term highly liquid investments with original maturities of three months or less.

Financial liabilities

The Group classifies its financial liabilities into one of two categories, depending on the purpose for which the liability was acquired. The Group's accounting policy for each category is as follows:

Fair value through profit or loss

This category comprises out-of-the-money derivatives (see "Financial assets" for in-the-money derivatives where the time value offsets the negative intrinsic value). They are carried in the Consolidated Statement of Financial Position at fair value with changes in fair value recognised in the Consolidated Statement of Comprehensive Income.

amortised cost

Trade payables and accruals are initially measured at fair value and are subsequently measured at amortised cost, using the effective interest rate method.

other financial liabilites

Bank borrowings are initially recognised at fair value net of any transaction costs directly attributable to the issue of the instrument. Such interest bearing liabilities are subsequently measured at amortised cost using the effective interest rate method, which ensure that any interest expense over the period to repayment is at a constant rate on the balance of the liability carried in the Consolidated Statement of Financial Position. For the purposes of each financial liability, interest expense includes initial transaction costs and any premium payable on redemption, as well as any interest or coupon payment while the liability is outstanding.

CONTRIBUTIONS TO PENSION SCHEMES

The Company operates a defined contribution pension scheme. The pension costs charged against profits are the contributions payable to the scheme in respect of the accounting period.

INVESTMENT PROPERTIES

Investment properties are those properties that are held either to earn rental income or for capital appreciation or both.

Investment properties are measured initially at cost including transaction costs and thereafter are stated at fair value, which reflects market conditions at the balance sheet date. Surpluses and deficits arising from changes in the fair value of investment properties are recognised in the Consolidated Statement of Comprehensive Income in the year in which they arise.

Investment properties are stated at fair value as determined by the independent external valuers. The fair value of the Group's property portfolio is based upon independent valuations and is inherently subjective. The fair value represents the amount at which the assets could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arms-length transaction at the date of valuation, in accordance with International Valuation Standards. In determining the fair value of investment properties, the independent valuers make use of historical and current market data as well as existing lease agreements.

The Group recognises investment property as an asset when it is probable that the economic benefits that are associated with the investment property will flow to the Group and it can measure the cost of the investment reliably. This is usually the date of completion.

Investment properties cease to be recognised on completion of the disposal or when the property is withdrawn permanently from use and no future economic benefit is expected from disposal.

The Group evaluates all its investment property costs at the time they are incurred. These costs include costs incurred initially to acquire an investment property and costs incurred subsequently to add to, replace part of, or service a property. Any costs deemed as repairs and maintenance or any costs associated with the day-to-day running of the property will be recognised in the Consolidated Statement of Comprehensive Income as they are incurred.

Investment properties under construction are initially recognised at cost (including any associated costs), which reflect the Group's investment in the assets. The Group undertakes certain works including demolition, remediation and other site preparatory works to bring a site to the condition ready for construction of an asset. Subsequently, the assets are remeasured to fair value at each reporting date. The fair value of investment properties under construction is estimated as the fair value of the completed asset less any costs still payable in order to complete, and an appropriate developer's margin.

assets held for sale

Assets are classified as held for sale when:

·  They are available for immediate sale;

·  Management is committed to a plan to sell;

·  It is unlikely that significant changes to the plan will be made or that the plan will be withdrawn;

·  An active programme to locate a buyer has been initiated;

·  The asset is being marketed at a reasonable price in relation to its fair value; and

·  A sale is expected to complete within 12 months from the date of classification.

Investment properties classified as held for sale are measured at fair value in accordance with the measurement criteria of IAS 40.

Assets held for sale are derecognised when significant risks and rewards attached to the asset have transferred from the Group which is on completion of contracts.

Transfers between investment properties and TRADING PROPERTIES

When the Group begins to redevelop an existing investment property for continued future use as an investment property, the property continues to be held as an investment property. When the Group begins to redevelop an existing investment property with a view to sell, the property is transferred to trading properties and held as a current asset. The property is re-measured to fair value as at the date of the transfer with any gain or loss being taken to the Consolidated Statement of Comprehensive Income. The re-measured amount becomes the deemed initial cost of the trading property.

TRADING PROPERTIES

Trading property is being developed for sale or being held for sale after development is complete, and is carried at the lower of cost and net realisable value. Trading properties are derecognised on completion of sales contracts. Cost includes direct expenditure and capitalised interest. Cost of sales, including costs associated with off-plan residential sales, are expensed to the Consolidated Statement of Comprehensive Income as incurred.

OBLIGATIONS UNDER FINANCE LEASES

Leases of assets where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the lease's commencement at the lower of the fair value of the property and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in liabilities. The finance charges are charged to the Consolidated Statement of Comprehensive Income over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Investment properties classified as held under finance leases are subsequently carried at their fair value.

OPERATING LEASES

Amounts payable under operating leases are charged directly to the Consolidated Statement of Comprehensive Income on a straight-line basis over the period of the lease. The aggregate costs of operating lease incentives provided by the Group are recognised as a reduction in rental income on a straight-line basis over the lease term.

PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION

Property, plant and equipment is stated at cost, net of depreciation and any provision for impairment. Depreciation is calculated to write down the cost less estimated residual value of all tangible fixed assets by equal annual instalments over their expected useful economic lives. The rates generally applicable are:

Fixtures, fittings and equipment          25% - 33% straight line

CURRENT TAXATION

Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the tax authorities. The tax rates and the tax laws used to compute the amount are those that are enacted or substantively enacted, by the balance sheet date.

DEFERRED TAXATION

The tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the Statement of Comprehensive Income because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in profit or loss, except when it relates to items charged or credited directly to other comprehensive income, in which case the deferred tax is also dealt with in other comprehensive income.

The government announced in the summer 2015 budget the reduction in the corporation tax rate from 20% main rate in the tax year 2016 to 19% with effect from 1 April 2017 and to 17% from 1 April 2020.

DIVIDENDS TO EQUITY HOLDERS OF THE PARENT

Interim ordinary dividends are recognised when paid and final ordinary dividends are recognised as a liability in the period in which they are approved by the shareholders.

Share-based PAYMENTS

The fair value of the share options are determined at the grant date and are expensed on a straight line basis over the vesting period. Non-market vesting conditions are taken into account by adjusting the number of equity instruments expected to vest at each reporting date so that ultimately the cumulative amount recognised over the vesting period is based on the number of options that eventually vest. Non-vesting conditions and market vesting conditions are factored into the fair values of the options granted. As long as all other vesting conditions are satisfied, a charge is made irrespective of whether the market vesting conditions are satisfied. The cumulative expense is not adjusted for failure to achieve a market vesting condition or where a non-vesting condition is not satisfied.

COMMITMENTS AND CONTINGENCIES

Commitments and contingent liabilities are disclosed in the financial statements. They are disclosed unless the possibility of an outflow of resources embodying economic benefits is remote. A contingent asset is not recognised in the financial statements but disclosed when an inflow of economic benefits is probable.

EQUITY

For the purpose of preparing the consolidated financial information 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.

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.

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

The capital redemption reserve represents the nominal value of cancelled preference share capital redeemed.

CRITICAL ACCOUNTING JUDGEMENTS and KEY SOURCES OF ESTIMATION AND UNCERTAINTY

The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Information about such judgements and estimation is contained in the accounting policies or the notes to the accounts, and the key areas are summarised below.

Estimates

Properties

The key source of estimation uncertainty rests in the values of property assets, which significantly affects the value of investment properties and assets held for sale in the Consolidated Statement of Financial Position. The investment property portfolio and assets held for sale are carried at fair value, which requires a number of judgements and estimates in assessing the Group's assets relative to market transactions. The approach to this valuation and the amounts affected are set out in the accounting policies and note 11.

The Group has valued the investment properties and assets held for sale at fair value. To the extent that any future valuation affects the fair value of the investment properties and assets held for sale, this will impact on the Group's results in the period in which this determination is made.

Judgements

Share-based payments

Equity-settled share awards are recognised as an expense based on their fair value at date of grant. The fair value of equity-settled share options is estimated through the use of option valuation models, which require inputs such as the risk-free interest rate, expected dividends, expected volatility and the expected option life, and is expensed over the vesting period. Some of the inputs used are not market observable and are based on estimates derived from available data. The models utilised are intended to value options traded in active markets. The share options issued by the Group, however, have a number of features that make them incomparable to such traded options. The variables used to measure the fair value of share-based payments could have a significant impact on that valuation, and the determination of these variables require a significant amount of professional judgement. A minor change in a variable which requires professional judgement, such as volatility or expected life of an instrument, could have a quantitively material impact on the fair value of the share-based payments granted, and therefore will also result in the recognition of a higher or lower expense in the Consolidated Statement of Comprehensive Income.

Judgement is also exercised in assessing the number of options subject to non-market vesting conditions that will vest.

Deferred tax

In determining the quantum of deferred tax balances to be recognised, judgement is required in assessing the extent to which it is probable that future taxable profit will arise in the companies concerned and the timing and tax rate applied to these transactions. Management use forecasts of future taxable profits and make assumptions on growth rates for each entity in assessing the recoverability of assets recognised.

1. RENTAL And other income

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

Operating segments are identified on the basis of internal financial reports about components of the Group that are regularly reviewed by the CODM.

The internal financial reports received by the Group's Executive Committee contain financial information at a Group level as a whole and there are no reconciling items between the results contained in these reports and the amounts reported in the financial statements. Additionally, information is provided to the Group's Executive Committee showing gross property income and property valuation by individual property. Therefore, each individual property is considered to be a separate operating segment in that its performance is monitored individually.

The 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.

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

Revenue - type

2019

£'000

2018

£'000

Rents received from investment properties

17,960

16,360

Dilapidations and other property related income

589

257

Insurance commission

201

116

Total Revenue

18,750

16,733

 

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

2. INTEREST PAYABLE AND SIMILAR CHARGES


2019

£'000

2018

£'000

Interest on bank loans

3,291

2,677

Loan arrangement fees

364

342

Debt termination cost

-

127

Interest on finance leases

108

115


3,763

3,261

 

3. PROFIT FOR THE year

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


2019

£'000

2018

£'000

Depreciation of tangible fixed assets:

31

45




Auditor's remuneration:



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

109

83

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

25

21

Additional fees payable to the auditor in respect of the 2018 audit

20

-

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



Audit related assurance services

8

8

Tax services

3

64


165

176

 

In addition to the above, the auditor's remuneration for 2018 included an amount of £240,000 which related to share issues, which was debited to the share premium account.

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


2019

£'000

2018

£'000

Void, investment and development property costs

1,844

1,445

Legal, lettings and consultancy costs

474

379


2,318

1,824

 

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


2019

£'000

2018

£'000

Staff costs

2,202

2,200

Rent, rates and other office costs

363

207

Share based payments

332

174

Other overheads

264

162

Accounting and audit fees

225

188

Consultancy and recruitment fees

213

145

Stock Exchange costs

176

93

PR and marketing costs

169

160

Legal and professional fees

143

108

Depreciation

31

45

Property management fees

4

5

Costs in respect of move to Main Market

-

698


4,122

4,185

 

d) EPRA cost ratios are calculated as follows:

 


2019

£'000

2018

£'000

Gross property income

18,750

16,733

Administrative expenses

4,122

4,185

Property operating expenses

2,318

1,824

EPRA costs (including property operating expenses)

6,440

6,009

EPRA Cost Ratio (including property operating expenses)

34.3%

35.9%




Less property operating expenses

(2,318)

(1,824)

EPRA costs (excluding property operating expenses)

4,122

4,185

EPRA Cost Ratio (excluding property operating expenses)

22.0%

25.0%

Adjust for:



Exceptional costs in respect of move to Main Market

-

(698)

Net administrative expenses

4,122

3,487

Company administrative cost ratio

22.0%

20.8%

 

4. EMPLOYEES AND DIRECTORS' REMUNERATION

Staff costs during the period were as follows:


2019

£'000

2018

£'000

Non-Executive Directors' fees

152

108

Wages and salaries

1,696

1,795

Pensions

98

67

Social security costs

256

230


2,202

2,200

Share based payments

332

174


2,534

2,374

 

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

 


2019

 Number

2018

Number

Directors

7

6

Senior management and other employees

9

8


16

14

 

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

 


2019

£'000

2018

£'000

Emoluments for qualifying services

1,127

1,369

Social security costs

156

200

Pension

33

38


1,316

1,607

Share-based payments

291

153


1,607

1,760

 

Full details of the Directors' individual remuneration can be found in the Corporate Governance section on pages 66 to 67.

5. taxation


2019

£'000

2018

£'000

Current income tax charge

1,008

1,062

Capital gains charge in period

1,194

31

Tax underprovided in prior year

12

10

Deferred tax

(951)

(330)

Tax charge

1,263

773

 

 

 

2019

£'000

2018

£'000

Profit on ordinary activities before tax

6,433

13,304

Based on profit for the period: Tax at 19.0% (2018: 19%)

1,222

2,528




Effect of:



Utilisation of tax losses not previously recognised in deferred tax

(5)

(1,142)

Net expenses not deductible for tax purposes

75

48

Chargeable gain (lower than)/in excess of profit or loss on investment property

(126)

31

Tax underprovided in prior years

12

10

Movement on sale and revaluation not recognised through deferred tax

85

(702)

Tax charge for the period

1,263

773

 

Deferred taxes relate to the following:

 

 

 

2019

£'000

2018

£'000

Deferred tax liability - brought forward

(6,531)

(2,187)

Losses used in the year

-

(13)

Deferred tax liability on accredited capital allowances

(647)

400

Deferred tax on fair value of investment property

1,598

(40)

Deferred tax recognised on acquisition

-

(4,691)

Deferred tax liability - carried forward

(5,580)

(6,531)

 


2019

£'000

2018

£'000

Accelerated capital allowances

(3,241)

(2,594)

Investment property unrealised valuation gains

(2,339)

(3,937)

Deferred tax liability - carried forward

(5,580)

(6,531)

 

Capital allowances have been claimed on improvements to investment properties amounting to £19,065,000 (2018: £15,259,000). A deferred tax liability amounting to £3,241,000 (2018: £2,594,000) has been recognised in the financial statements, although the Directors do not expect that the capital allowances will reverse when the properties are disposed of as a result of section 198 elections being agreed with purchasers.

A deferred tax liability on the revaluation of investment properties to fair value has been provided totalling £2,339,000 (2018: £3,937,000) 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 2019 the Group had approximately £6,328,000 (2018: £6,413,000) of realised capital losses to carry forward. There has been no deferred tax asset recognised as the Directors do not consider it probable that future taxable profits will be available to utilise these losses.

Finance Act 2015 sets the main rate of UK corporation tax at 20% 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% from April 2017 and 17% from April 2020. The deferred tax liability has been calculated on the basis of 17 % 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%.

6. EARNINGS PER SHARE

Basic earnings per share

Basic earnings per share and diluted earnings per share have been calculated on profit after tax attributable to ordinary shareholders for the year (as shown on the Consolidated Statement of Comprehensive Income) and for the earnings per share, the weighted average number of ordinary shares in issue during the period (see below table) and for diluted weighted average number of ordinary shares in issue during the year (see below table).

 


2019

£'000

2018

£'000

Profit after tax attributable to ordinary shareholders for the year

5,170

12,531

 


2019

No of shares

2018

No of shares

Weighted average number of shares for basic earnings per share

45,834,436

34,943,855

Dilutive effect of share options

63,690

36,322

Weighted average number of shares for diluted earnings per share

45,898,126

34,980,177

Earnings per ordinary share



Basic

11.3p

35.9p

Diluted

11.3p

35.8p

 

Key Performance Measures

The Group financial statements are prepared under IFRS which incorporates non-realised fair value measures and non-recurring items. Alternative Performance Measures ('APMs'), being financial measures which are not specified under IFRS, are also used by management to assess the Group's performance. These include a number of European Public Real Estate Association ('EPRA') measures, prepared in accordance with the EPRA Best Practice Recommendations reporting framework the latest update of which was issued in November 2016. The Group reports a number of these measures (detailed in the glossary of terms) because the Directors consider them to improve the transparency and relevance of our published results as well as the comparability with other listed European real estate companies.

EPRA EPS and EPRA Diluted EPS

EPRA Earnings is a measure of operational performance and represents the net income generated from the operational activities. It is intended to provide an indicator of the underlying income performance generated from the leasing and management of the property portfolio. EPRA earnings are calculated taking the profit after tax excluding investment property revaluations and gains and losses on disposals, changes in fair value of financial instruments, associated close-out costs, one-off finance termination costs, 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

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

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


2019

£'000

2018

£'000

Profit for the year

5,170

12,531

Adjustments:



Loss/(gain) on revaluation of investment property portfolio

382

(5,738)

Impairment on assets held for sale

291

-

Profit on disposal of investment properties

(218)

(274)

Loss on disposal of assets held for sale

579

-

Loss on revaluation of listed equity investments

214

-

Debt termination interest rate costs

-

127

Fair value loss on derivatives

929

181

Deferred tax relating to EPRA adjustments and capital gain charged

243

(299)




EPRA earnings for the year

7,590

6,528

Share based payments

332

174

Costs in respect of move to Main Market

-

698




Adjusted profit after tax for the year

7,922

7,400

Tax excluding deferred tax on EPRA adjustments and capital gain charged

1,020

1,071

Adjusted profit before tax for the year

8,942

8,471




EPRA AND ADJUSTED EARNINGS PER ORDINARY SHARE



EPRA Basic

16.6p

18.7p

EPRA Diluted

16.5p

18.7p

Adjusted EPS

17.3p

21.2p

 

7. NET ASSET VALUE PER SHARE

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

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

Net asset value is calculated using the following information:

 


2019

£'000

2018

£'000

Net assets at the end of the year

180,323

183,299

Diluted net assets at end of the year

180,323

183,299




Include fair value adjustment of trading properties

250

-

Exclude fair value of derivatives

815

181

Exclude deferred tax on latent capital gains and capital allowances

5,580

6,531

EPRA NAV

186,968

190,011

Include fair value of derivatives

(815)

(181)

Include deferred tax on latent capital gains and capital allowances

(5,580)

(6,531)

EPRA NNNAV

180,573

183,299

 

 


2019

No of shares

2018

No of shares

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

45,883,249

45,805,280

Dilutive effect of share options

63,690

36,322

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

45,946,939

45,841,602




Net assets per ordinary share



Basic

393p

400p

Diluted

392p

400p

EPRA NAV

407p

415p

EPRA NNNAV

393p

400p

 

8. DIVIDENDS


Payment date

Dividend
per share

 2019

£'000

2018

 £'000

2019





Interim dividend

28 December 2018

4.75

2,182

-

Interim dividend

19 October 2018

4.75

2,182

-



9.50

4,364

-

2018





Final dividend

31 July 2018

4.75

2,177

-

Interim dividend

13 April 2018

4.75

2,177

-

Interim dividend

29 December 2017

9.50

-

4,355



19.00

4,354

4,355






2017





Final dividend

28 July 2017

9.50

-

2,389



9.50

-

2,389

Dividends reported in the Group Statement of Changes in Equity


8,718

6,744

 

Proposed Dividends

 


 2019

£'000

2018

 £'000

July 2019 final dividend in respect of year end 31 March 2019: 4.75p (2018 final dividend: 4.75p)

2,182

2,177

April 2019 interim dividend in respect of year end 31 March 2019: 4.75p (2018 final dividend: 4.75p)

2,182

2,177


4,364

4,354

 

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 2019.

 

9. property portfolio

 


Freehold investment properties

£'000

Leasehold investment properties

£'000

Total

 investment properties

£'000

At 1 April 2017

160,228

23,688

183,916

Additions - refurbishment

2,681

73

2,754

Additions - new properties

70,306

-

70,306

Gains on revaluation of investment properties

4,888

850

5,738

Disposals

(5,361)

(3,490)

(8,851)

At 1 April 2018

232,742

21,121

253,863

Additions - refurbishments

2,521

179

2,700

Additions - new properties

15,505

-

15,505

Capital expenditure on developments

2,014

-

2,014

Transfer to trading property

(13,509)

-

(13,509)

Loss on revaluation of investment properties

(122)

(260)

(382)

Disposals

(1,860)

-

(1,860)

At 31 March 2019

237,291

21,040

258,331

 

 


Standing investment properties

£'000

Investment properties under construction

£'000

Total investment properties

£'000

Trading properties

£'000

Assets held for sale

£'000

Total

property portfolio

£'000

At 1 April 2017

183,916

-

183,916

-

-

183,916

Additions - refurbishment

2,754

-

2,754

-

-

2,754

Additions - new properties

70,306

-

70,306

-

21,708

92,014

Gains on revaluation of investment properties

5,738

-

5,738

-

-

5,738

Disposals

(8,851)

-

(8,851)

-

-

(8,851)

At 1 April 2018

253,863

-

253,863

-

21,708

275,571

Additions - refurbishments

2,700

-

2,700

-

-

2,700

Additions - new properties

15,505

-

15,505

-

-

15,505

Transfer to investment property under construction

(3,810)

3,810

-

-

-

-

Capital expenditure on developments

1,772

242

2,014

-

-

2,014

Transfer to trading property

(13,509)

-

(13,509)

13,509

-

-

Additions - trading property

-

-

-

858

-

858

Loss/(gain) on revaluation of investment properties

(452)

70

(382)

-

-

(382)

Loss on revaluation of assets held for sale

-

-

-

-

(291)

(291)

Disposals

(1,860)

-

(1,860)

-

(9,661)

(11,521)

At 31 March 2019

254,209

4,122

258,331

14,367

11,756

284,454

 

The property portfolio (other than assets held for sale) has been independently valued at fair value. The valuations have been prepared in accordance with the RICS Valuation - Global Standards July 2017 ("the Red Book") and incorporate the recommendations of the International Valuation Standards and the RICS valuation - Professional Standards UK January 2014 (Revised April 2015) which are consistent with the principles set out in IFRS 13.

The valuer in forming its opinion make a series of assumptions, which are typically market related, such as net initial yields and expected rental values and are based on the valuer's professional judgement. The valuer has sufficient current local and national knowledge of the particular property markets involved and has the skills and understanding to undertake the valuations competently.

In addition to the gain on revaluation of investment properties included in the table above, realised gains of £218,000 (2018: £274,000) 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:


2019

£'000

2018

£'000

Cushman & Wakefield LLP (property portfolio)

274,560

255,024

Assets held for sale

11,756

21,708

Fair value of property portfolio

286,316

276,732




Adjustment in respect of minimum payment under head leases

1,600

1,600

Less assets held for sale

(11,756)

(21,708)

Less trading properties at cost

(14,367)

-

Less lease incentive balance included in accrued income

(2,752)

(1,731)

Less rent top-up adjustment

(460)

(1,030)

Less fair value uplift on trading properties

(250)

-

Carrying value of investment properties

258,331

253,863

 

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

Valuation process - investment properties

The valuation reports produced by the independent valuers are based on information provided by the Group such as current rents, terms and conditions of lease agreements, service charges and capital expenditure. This information is derived from the Group's financial and property management systems and is subject to the Group's overall control environment.

In addition, the valuation reports are based on assumptions and valuation models used by the independent valuers. The assumptions are typically market related, such as yields and discount rates, and are based on their professional 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;

·  An appropriate yield; and

·  For investment properties under construction: gross development value, estimated cost to complete and an appropriate developer's margin.

 

Valuation technique - standing investment properties

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

31 March 2019





Significant
unobservable inputs

Office

Leisure

Industrial

Other

Total

Fair value of property portfolio

£135,455,000

£41,380,000

£37,395,000

£60,330,000

£274,560,000

Area (sq ft)

794,726

247,470

405,593

205,649

1,657,438

Gross Estimated Rental Value

£12,094,259

£3,341,944

£2,891,320

£3,145,621

£21,473,144







Net Initial Yield






Minimum

(4.6%)

6.2%

4.2%

(7.3%)

(7.3%)

Maximum

14.6%

6.9%

8.5%

25.0%

25.0%

Weighted average

5.4%

6.5%

5.7%

6.0%

5.7%

Reversionary Yield






Minimum

4.7%

7.1%

5.5%

4.5%

4.5%

Maximum

14.6%

7.6%

8.7%

28.1%

28.1%

Weighted average

8.0%

7.3%

6.6%

5.3%

7.0%

Equivalent Yield






Minimum

4.1%

7.5%

5.4%

5.0%

4.1%

Maximum

10.2%

8.3%

8.1%

13.2%

13.2%

Weighted average

7.5%

7.8%

6.3%

7.1%

6.8%

 

Negative net initial yields arise where properties are vacant or partially vacant and void costs exceed rental income.

 

31 March 2018





Significant unobservable inputs

Office

Leisure

Industrial

Other

Total

Fair value of property portfolio

£117,724,000

£42,070,000

£36,075,000

£59,155,000

£255,024,000

Area (sq ft)

722,977

247,472

427,789

208,418

1,606,656

Gross Estimated Rental Value

£10,453,820

£3,341,875

£2,691,524

£3,400,050

£19,887,269

Net Initial Yield






Minimum

(4.0%)

6.2%

3.8%

1.6%

(4.0%)

Maximum

8.7%

8.8%

8.0%

21.5%

21.5%

Weighted average

5.9%

6.7%

5.8%

7.0%

6.2%

Reversionary Yield






Minimum

4.7%

7.1%

5.6%

5.2%

4.7%

Maximum

13.2%

7.5%

9.6%

15.0%

15.0%

Weighted average

8.0%

7.4%

5.2%

5.1%

6.9%

Equivalent Yield






Minimum

4.2%

7.8%

5.7%

3.5%

3.5%

Maximum

15.5%

8.3%

9.3%

13.4%

15.5%

Weighted average

7.4%

7.8%

6.5%

6.9%

7.2%

 

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

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: £38,400 - £1,761,669 per annum).

Rental values are dependent on a number of variables in relation to the Group's property. These include: size, location, tenant, covenant strength and terms of the lease.

Unobservable input: net initial yield

The net initial yield is defined as the initial gross income as a percentage of the market value (or purchase price as appropriate) plus standard costs of purchase.

Sensitivities of measurement of significant unobservable inputs

As set out within significant accounting estimates and judgements above, the Group's property Portfolio Valuation is open to judgements inherently subjective by nature.

 

Unobservable input

Impact on fair value measurement of significant increase in input

Impact on fair value measurement of significant decrease in input

Gross Estimated Rental Value

Increase

Decrease

Net Initial Yield

Decrease

Increase

Reversionary Yield

Decrease

Increase

Equivalent Yield

Decrease

Increase

 


-5% in passing rent (£m)

+5% in passing rent (£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 2019

(12.95)

12.95

(10.16)

12.63

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

(8.77)

10.33

(9.73)

10.74

 

Valuation technique: properties under construction

Development assets are valued using the gross development value of the asset less any costs still payable in order to complete, and an appropriate developer's margin.

 

Assets held for sale

Assets held for sale consist of the residential portfolio acquired in October 2017 as part of the Warren acquisition. On acquisition, the Group announced it was its intention to dispose of the portfolio as soon as terms with a potential buyer could be agreed.

Assets totalling £9,661,000 were disposed of during the year. The remaining £11,756,000 are expected to be sold within the next 12 months. Details of disposals post year end can be found in note 25.

In accordance with the Group's accounting policy, these properties are classified as held for sale at 31 March 2019 and measured at fair value.

The residential portfolio has been valued by the Directors based on open market information available and discussions with valuation professionals.

10. Trading property

 


Total

£'000

At 1 April 2018

-

Transfer from standing investment properties

13,509

Costs capitalised

858

At 31 March 2019

14,367

 

The Group is developing a large mixed-use scheme at Hudson Quarter, York. Part of the approved scheme consists of residential units which the Group holds for sale. As a result, the residential element of the scheme is classified as trading property.

11. LISTED EQUITY INVESTMENTS


Total

£'000

At 1 April 2018

-

Additions

2,850

Loss on revaluation of equity investment shown in Consolidated Statement of Comprehensive Income

(214)

At 31 March 2019

2,636

 

During the year the Group purchased listed equity investments to the value of £2,850,000. The investment has subsequently been revalued using level 1 inputs, the quoted market price.

12. PROPERTY, PLANT AND EQUIPMENT

 


IT, fixtures and fittings
£'000

At 1 April 2017

92

Additions

123

At 1 April 2018

215

Additions

7

At 31 March 2019

222



Depreciation


At 1 April 2017

49

Provided during the year

45

At 1 April 2018

94

Provided during the year

31

At 31 March 2019

125



Net book value at 31 March 2019

97

Net book value at 31 March 2018

121

 

13. TRADE AND OTHER RECEIVABLES

 


2019

£'000

2018

£'000

Current



Gross amounts receivable from tenants

2,006

2,598

Less: expected credit loss provision

(71)

(163)

Net amount receivable from tenants

1,935

2,435

Other taxes

177

609

Other debtors

604

114

Accrued income

2,752

1,731

Prepayments

775

662


6,243

5,551

 

Accrued income amounting to £2,752,000 (2018: £1,731,000) relates to rents recognised in advance of receipt as a result of spreading the effect of rent free and reduced rent periods, capital contributions in lieu of rent free periods and contracted rent uplifts over the expected terms of their respective leases.

The carrying value of trade and other receivables classified at amortised cost approximates fair value.

The Group applies the IFRS 9 simplified approach to measuring expected credit losses using a lifetime expected credit loss provision for trade receivables and contract assets. To measure expected credit losses on a collective basis, trade receivables and contract assets are grouped based on similar credit risk and aging. The contract assets have similar risk characteristics to the trade receivables for similar types of contracts. The expected credit loss provision and the incurred loss provision in the prior year is immaterial. No reasonably possible changes in the assumptions underpinning the expected credit loss provision would give rise to a material difference.

The expected loss rates are based on the Group's historical credit losses experienced over the three year period prior to the period end. The historical loss rates are then adjusted for current and forward-looking information on macroeconomic factors affecting the Group's tenants.

As at 31 March 2019 the lifetime expected credit loss provision for trade receivables and contract assets is as follows:


Current

£'000

More than 30 days past due

£'000

More than 60 days past due

£'000

More than 90 days past due

£'000

Total

£'000

Expected loss rate

0%

1%

1%

16%


Gross carrying amount

1,400

144

26

436

2,006

Loss provision

-

2

-

69

71

 

Movement in the expected credit loss provision was as follows:


2019

£'000

2018

£'000

Brought forward

163

139

Receivable written off during the year as uncollectible

(154)

(71)

Provisions increased

62

95


71

163

 

14. CASH AND CASH EQUIVALENTS

All of the Group's cash and cash equivalents at 31 March 2019 and 31 March 2018 are in sterling and held at floating interest rates.


2019

£'000

2018

£'000

Cash and cash equivalents - unrestricted

22,395

17,985

Restricted cash

495

1,048


22,890

19,033

 

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 realised over time consistent with the loss of income on vacant units.

15. TRADE AND OTHER PAYABLES


2019

£'000

2018

£'000

Trade payables

1,229

986

Corporation tax

1,626

1,051

Other taxes

914

1,307

Other payables

503

108

Deferred rental income

3,457

3,466

Accruals

2,272

1,916


10,001

8,834

 

The Directors consider that the carrying amount of trade and other payables measured at amortised cost approximates to their fair value.

16. DERIVATIVES

The Group adopts a policy of entering into derivative financial instruments with banks to provide an economic hedge to its interest rate risks and ensure its exposure to interest rate fluctuations is mitigated.

The contract rate is the fixed rate the Group are paying for its interest rate swaps.

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

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

The valuations of all derivatives held by the Group are classified as Level 2 in the IFRS 13 fair value hierarchy as they are based on observable inputs. There have been no transfers between levels of the fair value hierarchy during the year.

Further details on interest rate risks are included in note 26.

Bank

Notional principal

Expiry date

Contract rate

%

Valuation rate

%

2019

Fair value

£'000

2018

Fair value

£,000

Barclays Bank plc

35,347,900

25/01/2023

1.3420

1.2850

(526)

(92)

Santander plc

19,718,310

03/08/2022

1.3730

1.2630

(289)

(89)


55,066,210




(815)

(181)

 

17. BORROWINGS

 


2019

£'000

2018

£'000

Current liabilities



Bank loans

5,999

2,686

Non-current liabilities



Bank loans

112,017

97,157

Total borrowings

118,016

99,843

 

Non-current liabilities



Secured bank loans drawn

113,351

98,709

Unamortised lending costs

(1,334)

(1,552)


112,017

97,157

 

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


2019

£'000

2018

£'000

Within one year

5,999

2,686

From one to two years

29,825

2,686

From two to five years

71,546

83,607

After five years

11,980

12,416


119,350

101,395

 

Facility and arrangement fees

As at 31 March 2019

Secured Borrowings

All in cost

Maturity date

Loan Balance

£'000

Unamortised facility fees

£'000

 Facility drawn

£'000

Santander Bank plc

3.74%

August 2022

25,961

(289)

26,250

Lloyds Bank plc

2.95%

May 2019

3,562

(1)

3,563

Lloyds Bank plc

2.80%

March 2023

6,715

(130)

6,845

National Westminster Bank plc

3.35%

March 2021

29,204

(185)

29,389

Barclays

3.24%

January 2023

38,589

(554)

39,143

Scottish Widows

2.90%

July 2026

13,985

(175)

14,160




118,016

(1,334)

119,350

 

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%

May 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 £250,960,000 (2018: £234,429,000) are subject to a first charge to secure the Group's bank loans amounting to £119,350,000 (2018: £101,395,000).

The Group has unused loan facilities amounting to £26,500,000 (2018: £14,152,000). This facility is with Barclays Bank plc is secured on the Hudson Quarter, York development held by Palace Capital (Developments) Limited.

The Group constantly monitors its approach to managing interest rate risk. The Group has fixed £69,226,000 (2018: £70,119,000) 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 £14,160,000 (2018: £14,596,000) which is fully fixed at a rate of 2.9%.

The Group has a loan with Barclays Bank plc for £39,143,000 (2018: £35,848,000), of which £35,348,000 (2018: £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 £26,250,000 (2018: £26,750,000), of which £19,718,000 (2018: £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 fair value of borrowings held at amortised cost at 31 March 2019 was £117,720,000 (2018: £99,843,000).

The Group has two loans with Lloyds Bank plc; one for £3,563,000 (2018: £3,812,000) which is fully charged at floating rate of 3m LIBOR plus 2.1%, and one for £6,845,000 which is fully charged at floating rate of 3m LIBOR plus 1.95%.

The Group has a loan with National Westminster Bank plc for £29,389,000 (2018: £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:


2019

£'000

2018

£'000

EPRA net asset value (note 7)

186,968

190,011

Borrowings (net of unamortised issue costs)

118,016

99,843

Obligations under finance leases

1,585

1,588

Cash and cash equivalents

(22,890)

(19,033)

Net debt

96,711

82,398

NAV gearing

52%

43%

 

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


2019

£'000

2018

£'000

Fair value of investment properties

259,943

255,024

Fair value of trading properties

14,617

-

Fair value per Cushmans valuation

274,560

255,024

Fair value of assets held for sale

11,756

21,708

Fair value of property portfolio

286,316

276,732

Borrowings

119,350

101,395

Cash at bank

(22,890)

(19,033)

Net bank borrowings

96,460

82,362

Loan to value ratio

34%

30%

 

19. RECONCILIATION OF LIABILITIES TO CASH FLOWS FROM FINANCING ACTIVITIES


Bank borrowings

£'000

Total

£'000

Balance at 1 April 2017

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 R.T. 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 1 April 2018

99,843

99,843

Cash flows from financing activities:



Bank borrowings drawn

25,991

25,991

Bank borrowings repaid

(8,037)

(8,037)

Loan arrangement fees paid

(145)

(145)

Non cash movements:



Amortisation of loan arrangement fees

364

364

Balance at 31 March 2019

118,016

118,016

 

20. LEASES

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


2019

£'000

2018

£'000

Within one year

16,118

16,911

From one to two years

14,803

14,699

From two to five years

35,039

29,612

From five to 25 years

59,685

41,635


125,645

102,857

 

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


2019

£'000

2018

£'000

Within one year

178

178

From one to two years

178

178

From two to five years

197

375


553

731

 

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


2019

2018

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

289

(281)

8

8

From five to 25 years

1,870

(1,814)

56

58

After 25 years

7,852

(6,335)

1,517

1,518


10,203

(8,618)

1,585

1,588

 

The net carrying amount of the leasehold properties is shown in note 9.

The Group has over 230 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, with the exception of Hudson Quarter, York held in Palace Capital (Developments) Limited which commenced development in February 2018. Direct operating costs of £Nil were incurred on the property.

 

21. Share capital

 

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

2019

£'000

2018

£'000

46,388,515 ordinary shares of 10p each (2018: 46,388,515)

4,639

4,639


4,639

4,639

 

Reconciliation of movement in ordinary share capital

2019

£'000

2018

£'000

At start of year

4,639

2,580

Issued in the year

-

2,059

At end of year

4,639

4,639

 

Movement in ordinary authorised share capital


Price per
share pence

Number
of ordinary
shares issued

Total number
of shares

As at 31 March 2017




25,800,279

Equity issue

9 October 2017

340

20,588,236


As at 31 March 2018 and 31 March 2019




46,388,515

 

 

Movement in treasury shares


Number
of ordinary
shares issued

Total number
of shares

As at 31 March 2017



649,587

Shares exercised under employee LTIP scheme

20 September 2017

(66,352)


As at 31 March 2018


583,235

Shares issued under deferred bonus share scheme

27 September 2018

(38,586)


Share options exercised under employee LTIP scheme

14 January 2019

(39,383)


As at 31 March 2019



505,266

Total number of shares excluding the number held in treasury at 31 March 2019


45,883,249

 

Year ended 31 March 2019

On 27 September 2018, 38,586 share options were exercised under the deferred bonus share scheme.

On 14 January 2019, 39,383 share options were exercised under the 2015 employee LTIP scheme.

Issue costs amounting to £17,000 were incurred and were deducted from the share premium account relating to shares issued in the prior year.

Year ended 31 March 2018

On 20 September 2017, 66,352 share options were exercised under the 2014 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 were deducted from the share premium account.

Shares held in Employee Benefit Trust

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

2018

No of options

Brought forward

33,648

-

Transferred under scheme of arrangement

100,000

100,000

Shares exercised under deferred bonus share scheme

(38,586)

-

Shares exercised under employee LTIP scheme

(39,383)

(66,352)

At end of year

55,679

33,648

 

Share options:

Reconciliation of movement in outstanding share options

2019

No of options

2018

No of options

At start of year

536,827

689,660

Issued in the year

265,774

215,456

Exercised in the year

(39,383)

(66,352)

Lapsed in the year

(138,856)

(338,259)

Deferred bonus share options issued

63,690

36,322

Deferred bonus share options exercised

(36,322)

-

At end of year

651,730

536,827

 

As at 31 March 2019, the Company had the following outstanding unexpired options.

 

Description of unexpired share options

2019

2018

No of options

Weighted average option price

No of options

Weighted average option price

Employee benefit plan (note 22)

588,040

0p

500,505

0p

Deferred bonus share scheme issued

63,690

0p

36,322

0p

Total

651,730

0p

536,827

0p






Exercisable

-

0p

-

0p

Not exercisable

651,730

0p

536,827

0p

 

The weighted average remaining contractual life of share options at 31 March 2019 is 1.4 years (2018: 1.3 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 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

-

25 September 2017

25 September 2018

Lapsed during year (LTIP 2014)

(331,759)

0p

-



Lapsed during year (LTIP 2017)

(6,500)

0p

-



Outstanding at 31 March 2018

536,827

0p

-



Exercised during the year (LTIP 2015)

(39,383)

0p

309p



Issued during the year (LTIP 2018)

265,774

0p

-

13 July 2018

13 July 2021

Deferred bonus share options issued

63,690

0p

-

13 July 2018

13 July 2019

Deferred bonus share options exercised

(36,322)

0p

306p

25 September 2017

25 September 2018

Lapsed during year (LTIP 2015)

(80,885)

0p

-



Lapsed during year (LTIP 2017)

(21,000)

0p

-



Lapsed during year (LTIP 2018)

(36,971)

0p

-



Outstanding at 31 March 2019

651,730

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 2016

The options are awarded to employees on achievements against targets on two separate measures over the three-year period . 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 ended 31 March 2019, and comparing this with the Net Asset Value Growth of a group of comparable companies. The base NAV per share was £4.14 and this was adjusted to £3.89 for the final 18 months of calculations as reported previously.

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 was £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% 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 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. 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 is £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 is £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

 

LTIP 2018

The options are awarded to employees on achievements against targets on two separate measures over the three-year period. The options are subject to a two year holding period following vesting. Half the options will be awarded based on the first target and half based on the achievement of the second.

Total property return growth is based on the increase in the total property return of the Company compared with an increase in the MSCI IPD UK Quarterly Index as at 31 March 2018. This target will measure the compound growth in total property return over the three-year period ending 31 March 2021, and comparing this with the total property return growth of a group of comparable companies.

Total shareholder return (TSR) measures the total shareholder return (price rise plus dividends) over the period from 13 July 2018 to 12 July 2021. The base price is £3.54 per share which was the market price at the grant date.

Average annual TSR (compounded)
over the TSR performance period

Vesting %


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

Vesting %

<8%

0


<1%

0

Equal to 8%

33.33


Equal to 1%

33.33

Equal to 13%

100


Equal to 3%

100

 

The fair value of grants was measured at the grant date using a Black-Scholes pricing model for the Portfolio Value (PV) 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 PV Tranche

Grant date

13.07.18

13.07.18

Share price

£3.54

£3.54

Exercise price

0p

0p

Term

5 years

5 years

Expected volatility

15.84%

15.84%

Expected dividend yield

5.44%

5.44%

Risk free rate

0.77%

0.77%

Time to vest (years)

3.0

3.0

Expected forfeiture p.a.

0%

0%

Fair value per option

£0.65

£3.00

 

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


2019

£'000

2018

£'000

LTIP 2015

46

82

LTIP 2016

171

61

LTIP 2017

67

31

LTIP 2018

48

-

Total expense arising from share-based payment transactions

332

174

 

23. RELATED PARTY TRANSACTIONS

Accounting services amounting to £1,960 (2018: £84,951) have been provided to the Group by Stanley Davis Group Limited, a company where Stanley Davis is a Director and shareholder. Prior year includes one off fees paid for property searches in connection with the acquisition of R.T. Warren (Investments) Limited of £61,069.

Charitable donations amounting to £13,757 (2018: £19,953) 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 £404,734 (2018: £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 amounted to £35,412,295 (2018: £1,595,028).

 

25. POST BALANCE SHEET EVENTs

On 16 April 2019 the Group completed the disposal of one residential unit for a total consideration of £525,000.

On 17 April 2019, the Group completed the disposal of one residential unit, with a further 23 residential units completing on 1 May 2019. These units were part of the 50 residential units where contracts were exchanged with London Borough of Barnet on 28 November 2018. The disposal of 26 of these units completed before 31 March 2019.

On 30 April 2019, the Group completed the disposal of Rathbone House and Old House in Weybridge, for a total consideration of £1.5million.

On 2 May 2019, the Group repaid its loan facility with Lloyds Bank plc, which was fully charged at 3m LIBOR plus 2.1%. At 31 March 2019, the outstanding amount of this loan facility was £3,563,000.

On 7 May 2019, the Group completed the disposal of one residential unit for a total consideration of £285,000.

On 7 May 2019, the Group contractually agreed the surrender of the occupational lease at Priory House, Gooch Street North, in Birmingham. The tenant has agreed to surrender its lease, which runs to December 2027 at a rent of £322,000 per annum, and to pay effectively all rent due to expiry, totalling £2.85 million. The contract for surrender completed on 31 May 2019, with the tenant continuing to pay all outgoings until then. The Group will continue to be liable for empty rates and insurance. The lease surrender will allow Palace Capital to move forward with a business plan for the property, with all options to maximise shareholder value currently being assessed.

On 30 May 2019, the Group exchanged sales contracts on three residential units for a total consideration of £720,000.

26. Financial RISK MANAGEMENT

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

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

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

Capital risk management

The Group considers its capital to comprise its share capital, share premium, other reserves and retained earnings which amounted to £180,323,000 at 31 March 2019 (2018: £183,299,000). 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.

Market risk

Market risk arises from the Group's use of interest bearing, and tradable instruments. It is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in interest rates (interest rate risk) or other market factors.

Interest rate risk

The interest rate exposure profile of the Group's financial assets and liabilities as at 31 March 2019 and 31 March 2018 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 2019






Trade and other receivables

2,539

-

-

-

2,539

Cash and cash equivalents

-

22,890

-

-

22,890

Trade and other payables

(4,004)

-

-

-

(4,004)

Equity investments

2,636

-

-

-

2,636

Interest rate swaps

-

-

(815)

-

(815)

Bank borrowings

-

-

(69,226)

(48,790)

(118,016)

Obligation under finance leases

-

-

(1,585)

-

(1,585)


1,171

22,890

(71,626)

(48,790)

(96,355)

 


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)

 

The Group's interest rate risk arises from borrowings issued at floating interest rates (see note 16). The Group's interest rate risk is reviewed throughout the year by the Directors. The Group manages its exposure to interest rate risk on borrowings through the use of interest rate derivatives. 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. The Group does not hedge 100% of its debt, with 59% of the Group's interest rate exposure being fixed and the remainder held on a floating rate. The Group has employed an external adviser when contracting hedging to advise on the structure of the hedging.

The Group is exposed to changes in interest rates as a result of the cash balances that it holds. The cash balances of the Group at the year end were £22,890,000 (2018: £19,033,000). The income statement would be affected by £229,000 (2018: £190,000) by a one percentage point change in floating interest rates on a full year basis.

The Group has loans amounting to £48,790,000 (2018: £29,724,000) 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 £488,000 (2018: £297,000).

The Group has interest rate swaps with a nominal value of £55,066,210 (2018: £55,722,900). 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 rates swaps as at 31 March 2019

(1,947)

1,869

(Decrease)/increase in fair value of interest rates swaps as at 31 March 2018

(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 2019 the cash balances of the Group were £22,890,000 (2018: £19,033,000). The concentration of credit risk held with Barclays Bank plc, the largest of these banks, was £16,964,000 (2018: £11,884,000). 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 5.2% (2018: 5.4%) 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 2019 was £1,935,000 (2018: £2,435,000). The details of the provision for expected credit loss are shown in note 13.

Liquidity risk management

The Group's policy is to hold cash and obtain loan facilities at a level sufficient to ensure that the Group has available funds to meet its medium-term capital and funding obligations, including organic growth and acquisition activities, and to meet certain unforeseen obligations and opportunities. The Group holds cash to enable the Group to manage its liquidity risk.

The Group monitors its risk to a shortage of funds using a monthly cash management process. This process considers the maturity of both the Group's financial investments and financial assets (e.g. accounts receivable, other financial assets) and projected cash flows from operations.

The Group's objective is to maintain a balance between continuity of funding and flexibility through the use of multiple sources of funding including bank loans, term loans, loan notes, overdrafts and 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

1-2 years

£'000

2-5 years

£'000

> 5 years

£'000

Total

£'000

As at 31 March 2019







Interest bearing loans

-

9,484

32,323

76,132

12,767

130,706

Finance leases

-

96

96

289

9,722

10,203

Derivative financial instruments

-

-

-

815

-

815

Trade and other payables

4,004

-

-

-

-

4,004


4,004

9,580

32,419

77,236

22,489

145,728








 

 

On
demand

£'000

0-1 years

£'000

1-2 years

£'000

2-5 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

Derivative financial instruments

-

-

-

181

-

181

Trade and other payables

3,010

-

-

-

-

3,010


3,010

5,264

4,876

90,765

23,524

127,439

 

 

Company Statement
of Financial Position

As at 31 March 2019

 

 


Note

2019

£'000

As previously stated

2018

£'000

Prior Year Adjustment

£'000

Restated

2018

£'000

Non-current assets






Investments in subsidiaries

2

77,671

126,331

-

126,331

Loans to subsidiary undertakings

2

53,823

26,569

-

26,569

Listed equity investments

3

2,636

-

-

-

Property, plant and equipment

4

92

121

-

121



134,222

153,021

-

153,021







Current assets






Trade and other receivables

5

22,042

22,185

(790)

21,395

Cash at bank and in hand


12,176

5,363

-

5,363



34,218

27,548

(790)

26,758

Total assets


168,440

180,569

(790)

179,779







Current liabilities






Creditors: amounts falling due within one year

6

(5,862)

(1,772)

(23,409)

(25,181)

Net current assets


28,356

25,776

(24,199)

1,577







Net assets


162,578

178,797

(24,199)

154,598







Equity






Called up share capital

7

4,639

4,639

-

4,639

Share premium account


125,019

125,036

-

125,036

Treasury shares


(1,771)

(2,011)

-

(2,011)

Merger reserve


3,503

3,503

-

3,503

Capital redemption reserve


340

340

-

340

Retained earnings


30,848

47,290

(24,199)

23,091

Equity - attributable to the owners of the parent


162,578

178,797

(24,199)

154,598

 

The Company's profit after tax for the year was £16,126,000 (restated 2018: £8,565,000).

The financial statements were approved by the Board of Directors and authorised for issue on 3 June 2019 and are signed on its behalf by:

 

Stephen Silvester                              Neil Sinclair

Finance Director                                  Chief Executive

 

Company Statement of
Changes in Equity

 

 



Share Capital

£'000

Share Premium

£'000

Treasury shares

£'000

Other

 Reserves

£'000

Retained earnings

£'000

Total
equity

£'000

At 31 March 2017


2,580

59,444

(2,250)

3,843

21,207

84,824









Total comprehensive income for the year

-

-

-

-

32,764

32,764

Transactions with Equity Holders








Gross proceeds of issue from new shares

2,059

67,941

-

-

-

70,000

Costs of issue of new shares


-

(2,349)

-

-

-

(2,349)

Share based payments


-

-

-

-

174

174

Exercise of share options


-

-

239

-

(239)

-

Issue of deferred bonus share options

-

-

-

-

128

128

Dividends


-

-

-

-

(6,744)

(6,744)

At 31 March 2018 as previously stated


4,639

125,036

(2,011)

3,843

47,290

178,797

Prior year adjustment (note 10)


-

-

-

-

(24,199)

(24,199)

At 31 March 2018 restated


4,639

125,036

(2,011)

3,843

23,091

154,598









Total comprehensive income for the year

-

-

-

-

16,126

16,126

Transactions with Equity Holders








Costs of issue of new shares


-

(17)

-

-

-

(17)

Share based payments


-

-

-

-

332

332

Exercise of share options


-

-

240

-

(240)

-

Issue of deferred bonus share options

-

-

-

-

257

257

Dividends


-

-

-

-

(8,718)

(8,718)

At 31 March 2019


4,639

125,019

(1,771)

3,843

30,848

162,578

 

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

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

Other reserves comprise the merger reserve and the capital redemption reserve.

The merger reserve represents the excess over nominal value of the fair value consideration for the acquisition of subsidiaries satisfied by the issue of shares in accordance with S612 of the Companies Act 2006.

The capital redemption reserve represents the value of preference shares capital redeemed.

 

Notes to the Company Financial Statements

 

ACCOUNTING POLICIES

Palace Capital plc is a company incorporated in England and Wales under the Companies Act. The address of the registered office is given on the contents page and the nature of the Group's operations and its principal activities are set out in the Strategic Report. The financial statements of the Company have been prepared in accordance with FRS 102 the Financial Reporting Standard applicable in the United Kingdom and the Republic of Ireland.

The preparation of financial statements in compliance with FRS 102 requires the use of certain critical accounting estimates. It also requires Company's management to exercise judgement in applying the Company's accounting policies (as detailed below).

DIVIDENDS REVENUE

Revenue is recognised when the Company's right to receive payment is established, which is generally when shareholders of the paying company approve the payment of the dividend.

VALUATION OF INVESTMENTS

Investments in subsidiaries are measured at cost less accumulated impairment. Where merger relief is applicable, the cost of the investment in a subsidiary undertaking is measured at the nominal value of the shares issued together with the fair value of any additional consideration paid.

LISTED EQUITY INVESTMENTS

Listed equity investments been classified as being at fair value through profit and loss. Listed equity investments are subsequently measured using level 1 inputs, the quoted market price, and all fair value gains or losses in respect of those assets are recognised in the profit and loss.

CURRENT TAXATION

Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the tax authorities. The tax rates and the tax laws used to compute the amount are those that are enacted or substantively enacted, by the balance sheet date.

DEFERRED TAXATION

The tax expense represents the sum of the tax currently payable and deferred tax.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

Deferred tax balances are recognised in respect of timing differences that have originated but not reversed on the balance sheet date. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised.

Deferred tax balances are not recognised in respect of permanent differences between the fair value of assets acquired and the future tax deductions available for them and the differences between the fair values of liabilities acquired and the amount that will be assessed for tax.

The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in profit or loss, except when it relates to items charged or credited directly to other comprehensive income, in which case the deferred tax is also dealt with in other comprehensive income.

The government announced in the Summer 2015 budget the reduction in the corporation tax rate from 20% main rate in the tax year 2016 to 19% with effect from 1 April 2017 and to 17% from 1 April 2020.

 

Trade and other receivables

Trade and other receivables are recognised and carried at the original transaction value. A provision for impairment is established where there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of the receivables concerned.

Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and demand deposits, and other short-term highly liquid investments that are readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.

financial liabilities and equity

Financial liabilities and equity instruments issued by the Company are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument. An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities. The accounting policies adopted for specific financial liabilities and equity instruments are set out below

Trade payables

Trade payables are initially measured at fair value and are subsequently measured at amortised cost, using the effective interest rate method.

EQUITY INSTRUMENTS

Equity instruments issued by the Company are recorded at the fair value of proceeds received, net of direct issue costs.

Parent company disclosure exemptions

In preparing the separate financial statements of the Parent Company, advantage has been taken of the following disclosure exemptions available in FRS 102:

·      no cash flow statement has been presented for the Parent Company;

·      disclosures in respect of the Parent Company's financial instruments have not been presented as equivalent disclosures have been provided in respect of the Group as a whole;

·      disclosures in respect of the Parent Company's share-based payment arrangements have not been presented as equivalent disclosures have been provided in respect of the Group as a whole; and

·      do disclosure has been given for the aggregate remuneration of the key management personnel of the Parent Company as their remuneration is included in the totals for the Group as a whole.

JUDGEMENTS IN APPLYING ACCOUNTING POLICIES AND KEY SOURCES OF ESTIMATION UNCERTAINTY

Investments and loans to subsidiary undertakings (see note 3)

The most critical estimates, assumptions and judgements relate to the determination of carrying value of unlisted investments in the Company's subsidiary undertakings and the carrying value of the loans that the Company has made to them. The nature, facts and circumstance of the investment or loan are taken into account in assessing whether there are any indications of impairment.

1. PROFIT FOR THE FINANCIAL PERIOD

The Company has taken advantage of section 408 of the Companies Act 2006 and consequently a profit and loss account for the Company alone has not been presented.

2. INVESTMENTS in subsidiaries

Cost:

Investments in subsidiaries

£'000

Loans to subsidiaries

£'000

Total
£'000

At 1 April 2017

44,213

38,682

82,895

Acquisitions

62,648

-

62,648

Additions

-

8,887

8,887

Transfer

21,000

(21,000)

-

At 31 March 2018

127,861

26,569

154,430

Additions

3,743

27,254

30,997

Write down of investments

(9,360)

-

(9,360)

At 31 March 2019

122,244

53,823

176,067





Provision for impairment:




At 1 April 2017

1,530

-

1,530

Provided during the year

-

-

-

At 31 March 2018

1,530

-

1,530

Provided during the year

43,043

-

43,043

At 31 March 2019

44,573

-

44,573





Net book value at 31 March 2019

77,671

53,823

131,494

Net book value at 31 March 2018

126,331

26,569

152,900

 

Loans to Subsidiaries

A loan amounting to £2,566,660 remains outstanding at 31 March 2019 (2018: £3,430,660) from Palace Capital (Northampton) Limited. Interest on this loan is charged at a fixed rate of 5% per year. This loan is repayable on 14 June 2020.

A loan amounting to £13,711,448 remains outstanding at 31 March 2019 (2018: £14,614,856) from Palace Capital (Properties) Limited. Interest on this loan is charged at a fixed rate of 5% per year. This loan is repayable on 11 March 2021.

A loan amounting to £944,025 remains outstanding at 31 March 2019 (2018: £1,875,025) from Palace Capital (Halifax) Limited. Interest on this loan is charged at a fixed rate of 5% per year. This loan is repayable on 11 March 2021.

A loan amounting to £3,067,963 remains outstanding at 31 March 2019 (2018: £2,992,963) from Palace Capital (Manchester) Limited. Interest on this loan is charged at a fixed rate of 5% per year. This loan is repayable on 31 December 2020.

A loan amounting to £4,328,294 remains outstanding at 31 March 2019 from Palace Capital (Liverpool) Limited. Interest on this loan is charged at a fixed rate of 5% per year. This loan is repayable on 7 March 2023.

A loan amounting to £29,204,796 remains outstanding at 31 March 2019 (2018: £33,703,000) from Palace Capital (Signal) Limited. Interest on this loan is charged at a fixed rate of 5% per year. This loan is repayable on 31 October 2023.

Investment in Subsidiaries

Year ended 31 March 2019

On 21 December 2018 the Company acquired One Derby Square, Liverpool. The Company issues 3,500,000 ordinary £1 share in Palace Capital (Liverpool) Limited.

 

Year ended 31 March 2018

On 4 August 2017 the Company acquired 100% of the share capital of SM Newcastle OB Limited for £20,000,000. Following the acquisition, the subsidiary changed its name to Palace Capital (Newcastle) Limited. The Company purchased 5,000,000 ordinary £1 shares in Palace Capital (Newcastle) Limited.

On 9 October 2017 the Company acquired the entire share capital of R.T. Warren (Investments) Limited for a total consideration of £53,400,000.

On 31 March 2018 the Company purchased an additional 21,000,000 ordinary £1 shares at par in Palace Capital (Signal) Limited in order to refinance the subsidiary.

The Group comprises a number of companies, all subsidiaries included within these financial statements are noted below:


Class of share held

%
shareholding

Principal activity

Subsidiary undertaking:




Palace Capital (Leeds) Limited

Ordinary

100

Property Investments

Palace Capital (Northampton) Limited

Ordinary

100

Property Investments

Palace Capital (Properties) Limited

Ordinary

100

Property Investments

Palace Capital (Developments) Limited

Ordinary

100

Property Investments

Palace Capital (Halifax) Limited

Ordinary

100

Property Investments

Palace Capital (Manchester) Limited

Ordinary

100

Property Investments

Palace Capital (Liverpool) Limited

Ordinary

100

Property Investments

Hockenhull Estates Limited **

Ordinary

100

Property Investments

Palace Capital (Signal) Limited

Ordinary

100

Property Investments

Quintain (Signal) Member B Limited*

Ordinary

100

Holding

Signal Property Investments LLP*

Member

100

Property Investments

Signal Investments LLP*

Member

100

Holding

Property Investment Holdings Limited

Ordinary

100

Property Investments

Palace Capital (Dartford) Limited

Ordinary

100

Property Management

Palace Capital (Newcastle) Limited

Ordinary

100

Property Investments

R.T. Warren (Investments) Limited

Ordinary

100

Property Investments

Associate Company:




HBP Services Limited*

Ordinary

21.4

Property Management

Meadowcourt Management (Meadowhall) Limited*

Ordinary

30

Property Management

Clubcourt Limited*

Ordinary

40

Property Management

 

*    Held indirectly
**  Incorporated in Isle of Man

The results of the associates are immaterial to the group.

The registered addresses for the subsidiaries across the Group are consistent based on their country of incorporation and are as follows:

·  UK entities: Lower Ground Floor, 1 George Yard, London, EC3V 9DF.

·  Isle of Man entity: 2nd Floor, Quay House, South Quay, Douglas, Isle of Man, IM1 5AR.

 

3. listed EQUITY INVESTMENTS

 


Total

£'000

At 1 April 2018

-

Additions

2,850

Loss on revaluation of listed equity investment shown in statement of comprehensive income

(214)

At 31 March 2019

2,636

 

During the year the Company purchased listed equity investments to the value of £2,850,000. The investment has subsequently been revalued using level 1 inputs, the quoted market price.

4. Property, plant and equipment


IT, fixtures and fittings
£'000

At 1 April 2017

76

Additions

139

At 1 April 2018

215

Additions

2

At 31 March 2019

217



Depreciation


At 1 April 2017

49

Provided during the period

45

At 1 April 2018

94

Provided during the period

31

At 31 March 2019

125



Net book value at 31 March 2019

92

Net book value at 31 March 2018

121

 

5. TRADE AND other RECEIVABLES


2019

£'000

Restated

2018

£'000

Current



Amounts owed by subsidiary undertakings

14,250

15,944

Trade debtors

720

540

Corporation tax recoverable

-

144

Other debtors

48

37

Other taxes and social security

34

150

Accrued interest on amounts owed by subsidiary undertakings

6,882

4,499

Prepayments

108

81


22,042

21,395

 

A loan amounting to £10,160,251 remains outstanding at 31 March 2019 (2018: £7,976,000) from Palace Capital (Developments) Limited. No interest is charged on this loan. This loan is repayable on demand.

A loan amounting to £4,090,165 remains outstanding at 31 March 2019 (2018: £3,655,165) from Palace Capital (Leeds) Limited. Interest on this loan is charged at a fixed rate of 5% per year. This loan is repayable on 8 May 2019.

6. CREDITORS: Amounts falling due within one yeaR

 


2019

£'000

Restated

2018

£'000

Trade creditors

57

476

Amount owed to subsidiary undertaking

5,104

23,839

Other taxes

55

52

Accruals and deferred income

646

814


5,862

25,181

 

A loan amounting to £Nil remains outstanding at 31 March 2019 (2018: £165,000) to Hockenhull Investments Limited. No interest is charged on this loan. This loan is repayable on demand.

A loan amounting to £1,538,132 remains outstanding at 31 March 2019 (2018: £265,000) to Palace Capital (Newcastle) Limited. No interest is charged on this loan. This loan is repayable on demand.

A loan amounting to £Nil remains outstanding at 31 March 2019 (2018: £32,913,000) to R.T. Investments Limited. No interest is charged on this loan. This loan is repayable on demand.

A loan amounting to £3,566,350 remains outstanding at 31 March 2019 (2018: £7,969,000 debtor) to Property Investment Holdings limited. No interest is charged on this loan. This loan is repayable on demand.

7. SHARE CAPITAL

The details of the Company's share capital are provided in note 21 of the notes to the Consolidated Financial Statements.

8. LEASES

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


2019

£'000

2018

£'000

Within one year

178

178

From one to two years

178

178

From two to five years

197

375


553

731

 

9. POST BALANCE SHEET EVENT

There are no post balance sheet events.

10. Prior year adjustment

During the year ended 31 March 2018 the Parent Company, Palace Capital plc, received a dividend from a subsidiary company which, due to a technical error, was subsequently found to have been declared unlawfully (as the subsidiary did not have relevant accounts that had been properly prepared as prescribed by Companies Act 2006 at the time that it declared the dividend). Consequently, the Parent Company's financial statements for the year ending 31 March 2019 reflect a prior year adjustment which reduces its profit after tax for the year ended 31 March 2018 by £24.2 million and increases amounts due by the Parent Company to subsidiaries at that date by the same amount. There was no impact on the Consolidated Financial Statements. In November 2018, Palace Capital was released from the liability to repay the dividend which has restored the £24.2 million of profit after tax and decreased the sum due to the subsidiary by an equivalent amount.

 

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 movements in derivatives and share-based payments and exceptional items.

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

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

Building Research Establishment Environmental Assessment Methodology (BREEAM) rating: A set of assessment methods and tools designed to help construction professionals understand and mitigate the environmental impacts of the developments they design and build. Performance is measured across a series of ratings: Good, Very Good, Excellent and Outstanding.

Core plus: Is a property investment management style which adopts a certain risk appetite growth strategy. Core plus is typically associated with a low to moderate risk profile. Core plus property owners would have the ability to increase cash flows through light refurbishment and asset management strategies. Core plus properties tend to be high-quality and well-occupied.

Dividend cover: Is the Adjusted EPS divided by dividend per share declared in the period.

EPRA: Is the European Public Real Estate Association.

EPRA cost ratio (including direct vacancy costs): Is a proportionally consolidated measure of the ratio of net overheads and operating expenses against gross rental income (with both amounts excluding ground rents payable). Net overheads and operating expenses relate to all administrative and operating expenses, net of any service fees, recharges or other income specifically intended to cover overhead and property expenses.

EPRA cost ratio (excluding direct vacancy costs): Is the ratio calculated above, but with direct vacancy costs removed from the net overheads and operating expenses balance.

EPRA diluted EPS: Is EPRA earnings divided by the average diluted number of shares in the period.

EPRA earnings: Is the IFRS profit after taxation excluding investment property revaluations 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 ratio (ICR): Is the number of times net interest payable is covered by underlying profit before net interest payable and taxation.

Investment Property Databank (IPD): A wholly owned subsidiary of MSCI producing an independent benchmark of property returns and the Group's portfolio returns.

Key Performance Indicators (KPIs): Are the most critical metrics that measure the success of specific activities used to meet business goals - measured against a specific target or benchmark, adding context to each activity being measured.

LIBOR: Is the London Interbank Offered Rate, 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.

MSCI Inc. (MSCI IPD): Is a company that produces independent benchmarks of property returns. The Group measures its performance against the UK All Property Index.

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.

Northern Powerhouse: Is a proposal to boost economic growth in the North of England by the 2010-15 coalition government and 2015-2017 Conservative government in the United Kingdom, particularly in the 'Core Cities' of Manchester, Liverpool, Leeds, Sheffield, Hull and Newcastle.

Passing rent: Is the gross rent, less any ground rent payable under head leases.

Peer Group: Is 16 companies in the listed real estate sector.

Property Income Distribution (PID): A dividend received by a shareholder of the principal company in respect of profits and gains of the Property Rental Business of the UK resident members of the REIT Group or in respect of the profits or gains of a non-UK resident member of the REIT Group.

Portfolio Valuation: Is the value of the Company's property portfolio, including all investment and trading properties as valued by our independent valuers, Cushman & Wakefield, and assets held for sale.

Portfolio Value (PV): Is the value of the investment properties within the Palace Capital property portfolio as measured by Cushman & Wakefield. It is referenced in relation the 2018 LTIP's awarded to employees in 2018.

Real Estate Investment Trust (REIT): A UK Real Estate Investment Trust must be a publicly quoted company with at least three-quarters of its profits and assets derived from a qualifying property rental business. Income and capital gains from the property rental business are exempt from tax but the REIT is required to distribute at least 90% of those profits to shareholders. Tax is payable on non-qualifying activities of the residual business.

 

Special Purpose Vehicle (SPV): Is a separate legal entity created by an organisation. The SPV is a distinct company with its own assets and liabilities, as well as its own legal status. Usually, they are created for a specific objective, often which is to isolate financial risk. As it is a separate legal entity, if the Parent Company goes bankrupt, the special purpose vehicle can carry its obligations.

Tenant (or lease) incentives: Are any incentives offered to occupiers to enter into a lease. Typically the incentive will be an initial rent-free period, or a cash contribution to fit-out or similar costs. Under accounting rules the value of lease incentives given to tenants is amortised through the Income Statement on a straight-line basis to the lease expiry.

Total Accounting Return (TAR): Is the increase or decrease in EPRA NAV per share plus dividends paid, and this can be expressed as a percentage of EPRA NAV per share at the beginning of the period.

Total 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.

Total Property Return (TPR): Total property return is a performance measure calculated by the MSCI IPD and defined in the MSCI Global Methodology Standards for Real Estate Investment as 'the percentage value change plus net income accrual, relative to the capital employed.'

Value added: Is a risk appetite growth strategy. Typically associated with a moderate to high risk profile. Value add properties tend to have low cash flows at acquisition but have the potential to produce future cash flow uplifts once value has been added. This could be by taking on larger capital refurbishment projects to improve the layout and look of the property to ensure rental increases and capital value enhancement.

Weighted average debt maturity: Is measured in years when each tranche of Group debt is multiplied by the remaining period to its maturity and the result is divided by total Group debt in issue at the period end.

Weighted average interest rate: Is the loan interest per annum at the period end, divided by total debt in issue at the period end.

Weighted average unexpired lease term (WAULT): Is the average lease term remaining to first break, or expiry, across the portfolio weighted by rental income. This is also disclosed assuming all break clauses are exercised at the earliest date, as stated.

WiredScore: Wired Certification is a commercial real estate rating system that empowers landlords to understand, improve, and promote their buildings' digital infrastructure. Connectivity is measured across a series of ratings: Platinum, Gold, Silver and Certified.

 


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Annual Results For The Year Ended 31 March 2019 - RNS