Notes to the Consolidated Financial Statement
For the year ended 31 March 2016
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 AIM market of the London Stock Exchange and is domiciled and registered in England and Wales and incorporated under the Companies Act 1985. The address of its registered office is 41 Chalton Street, London, NW1 1JD.
The nature of the Company’s operations and its principal activities are set out in the Strategic Report.
BASIS OF PREPARATION
The Group financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and interpretations adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006. These financial statements are for the year ended 31 March 2016 and are presented in pounds sterling (“GBP”).
The principal accounting policies are set out below.
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.
The Group has reasonable financial resources together with long term contracts with a wide range of tenants. As a consequence, the Directors believe that the Group is well placed to manage its business risk successfully.
After making enquiries, and in accordance with the FRC’s Going Concern and Liquidity Risk: Guidance for Directors of UK Companies 2009, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts.
NEW STANDARDS ADOPTED DURING THE YEAR
The following standards, amendments and interpretations endorsed by the EU were effective for the first time for the Group’s 31 March 2016 year end and had no material impact on the financial statements:
IAS 19 Amendments: Defined Benefit Plans: Employee Contributions
Annual Improvements to IFRSs 2010–2012 Cycle
Annual Improvements to IFRSs 2011–2013 Cycle
IFRIC 21 Levies Interpretation: (Effective 17 June 2014)
Standards Issued But Not Yet Effective
At the date of authorisation of these financial statements the following Standards and Interpretations, some of which have not been endorsed by the EU, which have not been applied in these financial statements but were in issue but not yet effective:
International accounting standards (IAS/IFRSs)
Endorsed by the EU:
IAS27 Amendments: Equity Method in Separate Financial Statements (Effective 1 January 2016)
IAS1 Amendments: Presentation of Financial Statements - Disclosure initiative (Effective 1 January 2016)
Annual Improvements to IFRSs 2012–2014 Cycle (Effective 1 January 2016)
IAS 16 and IAS 38 Amendments: Clarification of Acceptable Methods of Depreciation and Amortisation (Effective 1 January 2016)
IFRS 11 Amendments: Accounting for Acquisitions of Interests in Joint Operations (Effective 1 January 2016)
Not yet endorsed by the EU:
IFRS 14 Regulatory Deferral Accounts (Effective 1 January 2016)
IFRS10 and IAS28 Amendments: Sale or contribution of assets between an investor and its associate or joint venture (deferred indefinitely)
IFRS10, IFRS 12 and IAS 28 Amendments: Investments Entities: Applying the Consolidation Exemption (Effective 1 January 2016)
IAS12 Amendments: Recognition of Deferred Tax Assets for Unrealised Losses (effective 1 January 2017)
IAS7 Amendments: Disclosure Initiative (Effective 1 January 2017)
FRS15 Revenue from Contracts with Customers (Effective 1 January 2018)
IAS9 Financial Instruments (Effective 1 January 2018)
IFRS16 Leases (Effective 1 January 2019)
The Directors have not yet carried out an assessment of the impact on the financial statements of the Group.
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 Group is exposed to, or has variable returns from, its involvement with the entity and has the ability to affect those returns through its power over the entity. Where necessary, adjustments have been made to the financial statements of subsidiaries, associates and joint ventures to bring the accounting policies used and accounting periods into line with those of the Group. Intragroup balances and any unrealised gains and losses arising from intragroup 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. They are deconsolidated on the date that control ceases.
Business combinations are accounted for under the acquisition method. Any excess of the consideration paid for the business combination over the fair value of the identifiable assets and liabilities acquired is recognised as goodwill.
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 the directors take the view that an acquisition of a subsidiary has similar attributes to that of an asset purchase rather than the purchase of a business, the value of the asset is treated as an addition to investment properties rather than as a business combination.
Revenue is 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 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 Income Statement 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.
Other income comprises surrender premium, insurance commission, property management fees and miscellaneous income and is accounted for on an accruals basis.
Operating profit is stated before interest and tax.
Financial assets and financial liabilities are recognised on the Group’s balance sheet when the Group has become a party to the contractual provision of the instrument.
CONTRIBUTIONS TO PENSION SCHEMES
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 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 Statement of Comprehensive Income in the year in which they arise.
Investment properties are stated at fair value as determined by the Directors. The fair value of the Group’s property portfolio is based upon external valuations and is inherently subjective. The fair value represents the amount at which the assets could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arms-length transaction at the date of valuation, in accordance with International Valuation Standards. The fair value of each of the properties has been assessed by the directors. In determining the fair value of investment properties, the directors make use of historical and current market data as well as existing lease agreements.
Additions and disposals of investment properties are recognised in the accounts when contracts are completed.
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 Income Statement 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.
Amounts payable under operating leases are charged directly to the 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
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 Group 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 Group 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 Group after deducting all of its liabilities. The accounting policies adopted for specific financial liabilities and equity instruments are set out below.
Trade payables are initially measured at fair value and are subsequently measured at amortised cost, using the effective interest rate method.
Equity instruments issued by the company are recorded at the fair value of proceeds received, net of direct issue costs.
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.
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 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.
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 the current 20% main rate in the tax year 2016 to 19% with effect from 1st April 2017 and to 17% from 1st 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 PAYMENT
The Group has applied the requirements of IFRS 2 Share based payment to share options. 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.
EVENTS AFTER THE BALANCE SHEET DATE
Post year-end events that provide additional information about a company’s position at the balance sheet date and are adjusting events are reflected in the financial statements. Post year-end events that are not adjusting events are disclosed in the notes when material.
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.
The key source of estimation uncertainty rests in the values of property assets, which significantly affects the value of investment properties in the Statement of Financial Position. The investment property portfolio is carried at fair value, which requires a number of judgements and estimates in assessing the qualities of 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 13.
The Group has valued the investment properties at fair value. To the extent that any future valuation affects the fair value of the investment properties, this will impact on the Group’s results in the period in which this determination is made.
In determining the quantum of deferred tax assets 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. Management use forecasts of future taxable profits and make assumptions on growth rates for each entity in assessing the recoverability of assets recognised.
In determining whether to account for a property acquisition in a special purpose vehicle as a business combination or as an acquisition of an investment property, management make an assessment based on the application of the IFRS 3 Business Combinations standard. Management make a professional judgement on the inputs, processes and outputs of the property prior to acquisition and whether these elements represent an acquisition of a fully functioning business or whether these are limited and represent solely an asset purchase.
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. Using different input estimates or models could produce different option values, which would result in the recognition of a higher or lower expense. Judgement is also exercised in assessing the number of options subject to non market vesting conditions that will vest.
1. SEGMENTAL REPORTING
For the purpose of IFRS 8, the chief operating decision maker (“CODM”) takes the form of the three executive Directors (the Group’s Executive Committee). The Group’s Executive Committee are of the opinion that the business of the Group is as follows.
The principal activity of the Group was to invest in commercial real estate in the UK.
IFRS 8 Operating Segments requires operating segments to be identified on the basis of internal financial reports about components of the Group that are regularly reviewed by the chief operating decision maker (which in the Group’s case is its Group’s Executive Committee).
The internal financial reports received by the Group’s Executive Committee contain financial information at a Group level as a whole and there are no reconciling items between the results contained in these reports and the amounts reported in the financial statements. Additionally, information is provided to the Group’s Executive Committee showing gross property income and property valuation by individual property. Therefore, for the purposes of IFRS 8, each individual property is considered to be a separate operating segment in that its performance is monitored individually.
The Group’s property portfolio includes investment properties located throughout England, predominantly regional investments outside London and comprises a diverse portfolio of commercial buildings. The Directors consider that these properties have similar economic characteristics. Therefore, these individual properties have been aggregated into a single operating segment. In the view of the Directors, there is one reportable segment under the provisions of IFRS 8.
All of the Group’s properties are based in the UK. No geographical grouping is contained in any of the internal financial reports provided to the Group’s Executive Committee and, therefore, no geographical segmental analysis is required by IFRS 8.
No single tenant accounts for more than 10% of the Groups total rents received from investment properties.
The surrender premium resulted from the surrender of a lease by Gala (part of the Gala Coral Group) who held a lease until March 2028 on 28,000 sq ft at Sol Central, Northampton at a rental payable of £312,852 per annum. Gala paid to Palace Capital a cash sum of £3 million plus a proportion of a rates refund due to them to be relieved of any further liability for rent, service charge and rates.
2. RECONCILIATION OF OPERATING PROFIT
Reconciliation of operating profit to cash utilised in operations
3. OTHER INTEREST RECEIVABLE AND SIMILAR INCOME
4. INTEREST PAYABLE AND SIMILAR CHARGES
5. PROFIT FOR THE PERIOD
a) The Group’s profit for the period is stated after charging the following:
Amounts payable to BDO LLP in respect of audit and non-audit services are disclosed in the table above.
b) The Group’s property costs comprise the following:
c) The Group’s administrative expenses comprise the following:
6. EMPLOYEES AND DIRECTORS’ REMUNERATION
Staff costs during the period were as follows:
The average number of employees of the company during the period was:
Key management are the Group’s directors. Remuneration in respect of key management was as follows:
The amounts set out above include remuneration in respect of the highest paid director as follows:
Deferred taxes at 31 March relates to the following:
At 31 March 2016, the Group had tax losses of £1,681,228 (2015: £3,110,762) available to carry forward to future periods. A deferred tax asset of £334,000 (2015: £500,000) has been recognised as it is expected to be utilised in the foreseeable future.
Capital allowances have been claimed on improvements to investments properties amounting to £13,846,721 (2015: £8,676,012). A deferred tax liability amounting to £1,872,057 (2015: £1,735,202) has not been recognised in the financial statements as it is expected that they will not reverse when the properties are disposed of.
A deferred tax liability on the revaluation of investment properties to fair value has not been provided as once the availability of capital losses, indexation allowances and the 1982 valuations for certain properties have been taken into account it is anticipated that no capital gains tax would be payable if the properties were disposed of at their fair value as the potential capital gains after indexation of approximately £9,700,000 are offset by potential losses of £13,500,000. As at 31 March 2016 the Group also had approximately £7,400,000 (2015: £6,900,000) of realised capital losses to carry forward.
8. EARNINGS PER SHARE
Basic earnings per share
Basic earnings per share has been calculated on profit after tax attributable to ordinary shareholders for the period (as shown on the Consolidated Statement of Comprehensive Income) and the weighted average number of ordinary shares in issue during the period (see below table).
Diluted earnings per share
Diluted earnings per share has been calculated on profit after tax attributable to ordinary shareholders for the period (as shown on the Consolidated Income Statement) and the diluted weighted average number of ordinary shares in issue during the period (see below table):
EPRA and adjusted diluted earnings per share
The European Public Real Estate Association (EPRA) has issued Best Practices Recommendations, the latest update of which was issued in December 2014, which gives guidelines for performance measures.
EPRA earnings are calculated taking the profit after tax excluding investment property revaluations and gains and losses on disposals, changes in fair value of financial instruments, associated close-out costs and share based-payments and one-off exceptional items. EPRA earnings is calculated on the basis of the basic number of shares in line with IFRS earnings as the dividends to which they give rise accrue to current shareholders and therefore it is more appropriate to use the basic number of shares. The EPRA diluted earnings per share also takes into account the dilution of share options and warrants if exercised.
Palace Capital also report on an adjusted earnings measure which is based on recurring earnings after tax and on the basis of the basic number of shares.
The EPRA and adjusted earnings per share for the period are calculated based upon the following information:
9. NET ASSETS VALUE PER SHARE
EPRA NAV calculation makes adjustments to IFRS NAV to provide stakeholders with the most relevant information on the fair value of the assets and liabilities within a true real estate investment company with a long-term investment strategy. EPRA NAV is adjusted to take effect of the exercise options, convertibles and other equity interests and excludes the fair value of financial instruments and deferred tax on latent gains. EPRA NNNAV measure is to report net asset value including fair values of financial instruments and deferred tax on latent gains.
The diluted net assets and the number of diluted ordinary issued shares at the end of the period assumes that all the outstanding options at the period end are exercised at the option price.
Net asset value is calculated using the following information:
Proposed dividends on ordinary shares are subject to approval at the Annual General Meeting and are not recognised as a liability as at 31 March 2016.
11. INTANGIBLE FIXED ASSETS
12. BUSINESS COMBINATIONS
Acquisition in year ended 31 March 2016
O&H Northampton Limited
On 17 June 2015 the Group acquired 100% of the share capital of O&H Northampton Limited (O&H) for a consideration of £1. O&H is a property investment company owning Sol Central, a leisure complex in Northampton, which was acquired to expand the Group’s property portfolio. Following the acquisition O&H changed its name to Palace Capital (Northampton) Limited.
The acquired subsidiary contributed £1,597,000 to the profit before tax of the Group.
The deferred tax asset represents tax losses incurred in the period prior to our acquisition. No deferred tax has been recognised on the adjustments to fair value as a result of the historical cost of the investment properties exceeding their fair value.
The fair value of the investment properties at acquisition was based on a valuation performed at the time of the acquisition amounting to £20,700,000 obtained from DTZ Debenham Tie Leung Limited.
Acquisition related costs
The Group incurred acquisition related costs in respect of this transaction amounting to £413,115 related to professional fees paid for due diligence, general professional fees and legal related costs. These costs have been included in administrative expenses in the Group’s consolidated income statement.
Gregory Projects (Halifax) Limited
On 11 March 2016 the Group acquired 100% of the share capital of Gregory Projects (Halifax) Limited (GPH) for a consideration of £1. GPH is a property investment company owning Broad Street Plaza, a leisure complex in Halifax, which was acquired to expand the Group’s property portfolio. Following the acquisition GPH changed its name to Palace Capital (Halifax) Limited.
The acquired subsidiary contributed a loss of £121,000 to the profit before tax of the Group. The fair value of the investment properties at acquisition was based on the purchase price of the property as a result of the valuers having no clear comparable alternatives. The valuation performed at the year-end amounted to £24,000,000 and was obtained from Knight Frank. The fall in the value of the property in this period related to the increased stamp duty rates introduced by the government in its budget on 16 March 2016.
The fair value adjustment reclassifies the property as an investment property rather than a property held for resale following the change in management of the property.
Acquisition related costs
The Group incurred acquisition related costs of £401,491 related to professional fees paid for due diligence, general professional fees and legal related costs. These costs have been included in administrative expenses in the Group’s consolidated income statement.
Effect on Group results of the acquisitions
If both these acquisitions had occurred on 1 April 2015, Group revenue would have been an estimated £16.7m and Group profit before tax would have been an estimated £13.0m. In determining these amounts, management has assumed that the fair value adjustments that arose on the date of acquisition would have been the same if the acquisition occurred on 1 April 2015.
Dering Properties (Sutton) Limited
The acquisition of Dering Properties (Sutton) Limited was made on 17 August 2015. The directors have taken the view that this acquisition had similar attributes to that of an asset purchase rather than a business combination and therefore the value of the asset at the acquisition date amounting to £3,925,000 has been added to the additions within investment properties together with the costs of the acquisition amounting to £104,684.
Acquisition in year ended 31 March 2015
On 26 August 2014 the Group acquired 100% of the share capital of Property Investment Holdings Limited (PIH) for a consideration of £3,613,828. The consideration was satisfied by issuing 1,103,459 ordinary 10p shares at a fair value price of £3.275. PIH is a property investment company which was acquired to expand the Group’s property portfolio.
The acquired subsidiary contributed £4,102,851 to the profit before tax of the Group. If this acquisition had occurred on 1 April 2014, Group revenue would have been an estimated £9.7m and Group profit before tax would have been an estimated £14.4m. In determining these amounts, management has assumed that the fair value adjustments that arose on the date of acquisition would have been the same if the acquisition occurred on 1 April 2014.
Deferred tax asset amounting to £273,029 was recognised as a fair value adjustment at the acquisition date being management’s estimate, based on budgets and forecasts, of the future utilisation of tax losses of approximately £9m that were available to carry forward following the refinancing of the bank loans of the PIH which took place at acquisition. The deferred tax asset was increased to £500,000 at 31 March 2015 as a result of the restructuring of PIH and the repayment of £10m of intra group loans which has resulted in increasing the anticipated future annual profits of PIH.
No deferred tax has been recognised on the adjustments to fair value as a result of the historical cost of the investment properties exceeding their fair value.
The fair value of the investment properties at acquisition was based on a valuation performed at the time of the acquisition amounting to £32,020,000 obtained from DTZ Debenham Tie Leung Limited less a lease incentive balance which has been included in prepayments amounting to £278,901.
A fair value adjustment to prepayments amounting to £278,901 was made to bring the revenue recognition policy of PIH into line with that of the Group so that the rental income from investment properties leased out under operating leases is recognised in the Income Statement on a straight-line basis over the term of the lease.
Acquisition related costs
The Group incurred acquisition related costs of £638,668 related to professional fees paid for due diligence, general professional fees and legal related costs. These costs have been included in administrative expenses in the Group’s consolidated income statement.
13. INVESTMENT PROPERTIES
Investment properties are stated at fair value as determined by the Directors. The fair value of the Group’s property portfolio is based upon external valuations and is inherently subjective. The fair value represents the amount at which the assets could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arms-length transaction at the date of valuation, in accordance with International Financial Reporting Standard 13. The fair value of each of the properties has been assessed by the directors. In determining the fair value of investment properties, the directors make use of historical and current market data as well as existing lease agreements
As a result of the level of judgement used in arriving at the market valuations, the amounts which may ultimately be realised in respect of any given property may differ from the valuations shown in the statement of financial position.
In addition to the gain on revaluation of investment properties included in the table above, realised gains of £290,525 (2015: £177,698) relating to investment properties disposed of during the year were recognised in profit or loss.
A reconciliation of the valuations carried out by the external valuers to the carrying values shown in the balance sheet was as follows:
Investment properties with a carrying value of £151,065,990 (2015: £101,768,108) are subject to a first charge to secure the Group’s bank loans amounting to £72,678,233 (2015: £36,205,461).
The valuations of all investment property held by the Group is classified as Level 3 in the IFRS 13 fair value hierarchy as they are based on unobservable inputs. There have been no transfers between levels of the fair value hierarchy during the year.
The valuation reports produced by the external valuers are based on information provided by the Group such as current rents, terms and conditions of lease agreements, service charges and capital expenditure. This information is derived from the Group’s financial and property management systems and is subject to the Group’s overall control environment. In addition, the valuation reports are based on assumptions and valuation models used by the valuers. The assumptions are typically market related, such as yields and discount rates, and are based on their professional judgment and market observations. Each property is considered a separate asset, based on its unique nature, characteristics and the risks of the property.
The executive director responsible for the valuation process verifies all major inputs to the external valuation reports, assesses the individual property valuation changes from the prior year valuation report and holds discussions with the external valuers. When this process is complete, the valuation report is recommended to the Audit Committee, which considers it as part of its overall responsibilities.
The key assumptions made in the valuation of the Group’s investment properties are:
– the amount and timing of future income streams;
– anticipated maintenance costs and other landlord’s liabilities; and
– an appropriate yield.
The valuations reflect the tenancy data supplied by the Group along with associated revenue costs and capital expenditure. The fair value of the commercial investment portfolio has been derived from capitalising the future estimated net income receipts at capitalisation rates reflected by recent arm’s length sales transactions.
Sensitivity of measurement to variations in the significant unobservable inputs
The relationship between the unobservable inputs and their impact on the fair value measurement is not certain. Changes to the tenancies and/or income profile of an investment asset may also impact the fair value outside one or more of the above inter-relationships according to individual circumstances.
14. PROPERTY, PLANT AND EQUIPMENT
15. TRADE AND OTHER RECEIVABLES
As at 31 March, the analysis of trade receivables that were past due but not impaired is as follows:
16. CASH AND CASH EQUIVALENTS
All of the Group’s cash and cash equivalents at 31 March 2016 and 31 March 2015 are in sterling and held at floating interest rates.
The Directors consider that the carrying amount of cash and cash equivalents approximates to their fair value.
17. TRADE AND OTHER PAYABLES
The maturity profile of the Group’s debt was as follows
Facility and arrangement fees
As at 31 March 2016
As detailed in note 13 the bank borrowings are secured on investment properties with a carrying value of £151,065,990.
The Group has an unused loan facility amounting to £8,000,000 (2015: £nil). Interest is charged on this facility at a rate of 1.25% and is payable quarterly. This facility is secured on the investment properties held by Property Investment Holdings Limited and Palace Capital (Properties) Limited.
The Group has chosen not to enter into any hedging to date as a result of the historically low interest rates and constantly monitors this approach to manage interest rate risk.
The Group has been in compliance with all financial covenants of the above facilities applicable throughout the year.
19. GEARING AND LOAN TO VALUE RATIO
The calculation of gearing is based on the following calculations of net assets and net debt:
Operating lease receipts in respect of rents on investment properties are receivable as follows:
Finance lease obligations in respect of rents payable on leasehold properties were payable as follows:
The net carrying amount of the leasehold properties is shown in note 13.
The Group has over 200 leases granted to its tenants. These vary dependent on the individual tenant and the respective property and demise and vary considerably from short term leases of less than 1 year to longer term leases of over 10 years. A number of these leases contain rent free periods. Standard lease provisions include service charge payments and recovery of other direct costs. All investment properties in the Group’s portfolio generated rental income during the both the current and prior periods except for one property, with an investment value of £1.5m, which was vacant throughout the current year but had some rental income in the prior year. The direct operating costs for this property during the year ended 31 March 2016 amounted to £163,000.
21. SHARE CAPITAL
Year ending 31 March 2016
On 17 June 2015 the company issued 5,555,556 ordinary 10p shares at a price of £3.60. Issue costs amounting to £885,383 were incurred and have been deducted from the share premium account.
Year ending 31 March 2015
On 23 June 2014 79,665 warrants were exercised and as a result the company issued 79,665 ordinary 10p shares at a price of £2.00.
On 26 August 2014 the company issued 6,451,612 ordinary 10p shares at a price of £3.10. Issue costs amounting to £795,684 were incurred and have been deducted from the share premium account.
In addition, on the same day the company issued 1,103,459 ordinary 10p shares in exchange for 100% of the share capital of Property Investment Holdings Limited. The fair value of these shares was £3.275 per share.
On 18 February 2015 150,000 warrants were exercised and as a result the company issued 150,000 ordinary 10p shares at a price of £2.00.
The Deferred Shares have the following rights and restrictions. As regards income the Deferred Shares shall not entitle the holders thereof to receive any dividend or other distribution unless and until the holders of the Ordinary Shares shall have received in aggregate amongst them the sum of £100,000,000 in respect of such dividend or distribution. As regards voting the Deferred Shares shall not entitle the holders thereof to receive notice of or to attend or vote at any General Meeting of the Company. As regards capital on a return of capital on a winding up the holders of Deferred Shares shall only be entitled to receive the amount paid up on such shares after the holders of the Ordinary Shares have received the sum of £1,000,000 for each Ordinary Share held by them and shall have no other right to participate in the assets of the Company.
Warrants issued to the Groups Nominated advisors and Broker
No new share options were issued to the Group’s Nominated advisor or Broker during the year. The Group’s Nominated advisor and Broker received 248,715 options in 2014 in exchange for part of the fee charged by the brokers for the share issue that occurred during that year and the directors considered the fair value of the service to be £50,000. These options were exercisable at a price of £2.00 per share.
No new share options were issued to the Group’s Broker and none were exercised during the year (2015: issued none and exercised 229,665). The average share price at the date of exercise was £3.48 per share.
The weighted average remaining contractual life of the options outstanding at 31 March 2016 was 2 years (2015: 2).
22. SHARE BASED PAYMENTS
Senior executive plan
The following table illustrates the number and weighted average exercise prices of, and movements in, share options during the year:
The options are awarded to management on achievements against target on two separate measures over the three financial years ending 31 March 2017. Half the options will be awarded based on the first target and half based on the achievement of the second.
Earnings per share (EPS) growth: is based on a proforma profit after tax excluding property revaluations and disposal profits/ losses for the financial year. This target will measure the compound growth in EPS over the three year period ending 31 March 2017.
Total shareholder return (TSR) measures the total shareholder return (price rise plus dividends) over the period from 21 October 2013 to 31 March 2017. The base price being £2.00 per share which was the placing price on that day.
For the TSR measure, the achievement of between 25 per cent and 30 per cent compound growth will result in the number of Ordinary shares vesting to be calculated on a straight line basis between 66.66 per cent and 100 per cent. A similar rule will apply between 20% and 25% and for the EPS condition between 15% and 30%.
The options are awarded to management on achievements against target on two separate measures over the three financial years ending 30 September 2018. Half the options will be awarded based on the first target and half based on the achievement of the second.
Net asset value per share (NAV) growth: is based on the Company’s EPRA NAV value per share as at 30 September 2018 adding back dividends per share paid during the period. This target will measure the compound growth in NAV over the three-year period ending 30 September 2018. The base price being £4.04 per share which was the value at the 30 September 2015.
Total shareholder return (TSR) measures the total shareholder return (price rise plus dividends) over the period from 1 October 2015 to 30 September 2018. The base price being £3.70 per share which was the market price at the grant date.
For the TSR measure, the achievement of between 8 per cent and 13 per cent compound growth will result in the number of Ordinary shares vesting to be calculated on a straight line basis between 33.33 per cent and 100 per cent. A similar rule will apply for the NAV condition between 8% and 13%.
The fair value of grants was measured at the grant date using a Black-Scholes pricing model, taking into account the terms and conditions upon which the instruments were granted. The services received and a liability to pay for those services are recognised over the expected vesting period. The main assumptions of the Black-Scholes pricing model are as follows:
For the portion of the options subject to market conditions (TSR measure), it has been assessed that there was a likelihood of 50% the options vesting.
The fair value of the options granted was £1.65 for the TSR tranche and £3.30 for the NAV tranche.
The expense recognised for employee services received during the period is shown in the following table:
23. RELATED PARTY TRANSACTIONS
Accounting services amounting to £75,633 (2015: £56,057) have been provided to the Group by Stanley Davis Group Limited, a company where Stanley Davis is a director.
24. CAPITAL COMMITMENTS
The obligation for capital expenditure relating to the construction, development or enhancement of investment properties entered into by the Group at 31 March 2016 amounted to £1,435,985 (2015 £nil).
25. POST BALANCE SHEET EVENT
There have been no post balance sheet events that would require disclosure or adjustment to these financial statements.
26. FINANCIAL RISK MANAGEMENT
The Group’s principal financial liabilities are loans and borrowings. The main purpose of the Group’s loans and borrowings is to finance the acquisition and development of the Group’s property portfolio. The Group has rent and other receivables, trade and other payables and cash and short-term deposits that arise directly from its operations.
All financial assets are classified as loans and receivables and all financial liabilities are measured at amortised cost.
The Group is exposed to market risk (including interest rate risk and real estate risk), credit risk and liquidity risk.
The Group’s senior management oversee the management of these risks, and the Board of Directors has overall responsibility for the determination of the Group’s risk management objectives and policies and it sets policies that seek to reduce risk as far as possible without unduly affecting the Group’s competitiveness and flexibility. Further details regarding these policies are set out below:
Capital risk management
The Group considers its capital to comprise its share capital, share premium, other reserves and retained earnings which amounted to £106,815,113 at 31 March 2016 (2015: £80,015,514). The Group’s capital management objectives are to safeguard the entity’s ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders and to provide an adequate return to shareholders by pricing its services commensurately with the level of risk.
Within the subsidiaries of the Group, the business has covenanted to maintain a specified leverage ratio and a net interest expense coverage ratio, all the terms of which have been adhered to during the year.
The Group manages its capital structure, and makes adjustments to it, in the light of changes in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares.
Significant Accounting Policies
Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed on pages 42 to 46 to these financial statements.
Foreign currency risk
The Group has minimal exposure to the differing types of foreign currency risk. It has no foreign currency denominated monetary assets or liabilities and does not make sales or purchases from overseas countries.
Interest rate risk
The interest rate exposure profile of the Group’s financial assets and liabilities as at 31 March 2016 and 31 March 2015 were:
The Group is exposed to changes in interest rates as a result of the cash balances that it holds. The cash balances of the Group at the year end were around £8m (2015: £12m). The income statement would be affected by £80,000 (2015: £120,000) by a reasonably possible one percentage point change in floating interest rates on a full year basis.
The Group has loans amounting to £72,678,000 (2015: £36,205,461) which have interest payable at rates linked to the 3 month Libor interest rates or bank base rates. A 1% increase in the Libor or base rate will have the effect of increasing interest payable by £726,780 (2015: £362,055).
The Group is therefore relatively sensitive to changes in interest rates. The directors regularly review its position with regard to interest rates in order to minimise the Group’s risk.
Credit risk management
Credit risk refers to the risk that a counter-party will default on its contractual obligations resulting in financial loss to the Group.
The Group has its cash held on deposit with four large banks in the United Kingdom. At 31 March 2016 the concentration of credit risk held with Barclays Bank plc, the largest of these banks, was £7,138,979 (2015: £12,075,426). Credit risk on liquid funds is limited because the counterparty is a UK bank with a high credit rating assigned by international credit rating agencies.
Credit risk also results from the possibility of a tenant in the Group’s property portfolio defaulting on a lease. The largest lease amounts to 4.2% (2015: 7.0%) of the Group’s anticipated income. The directors assess a tenants’ credit worthiness prior to granting leases and employ professional firms of property management consultants to manage the portfolio to ensure that tenants debts are collected promptly and the directors in conjunction with the property managers take appropriate actions when payment is not made on time.
The carrying amount of financial assets (excluding cash balances) recorded in the financial statements, net of any allowances for losses, represents the Group's maximum exposure to credit risk without taking account of the value of any collateral obtained. The carrying amount of these assets at 31 March 2016 was £2,521,000 (2015: £2,874,983). The details of the provision for impairment are shown in note 15.
Liquidity risk management
The Group’s policy is to hold cash and obtain loan facilities at a level sufficient to ensure that the Group has available funds to meet its medium termcapital and funding obligations, including organic growth and acquisition activities, and to meet certain unforeseen obligations and opportunities. The Group holdscash 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:
Derivative financial instruments
The Group does not currently use derivative financial instruments as hedging is not considered necessary. Should the Group identify a requirement for the future use of such financial instruments, a comprehensive set of policies and systems, as approved by the Directors, will be implemented.
In accordance with IAS 39, “Financial instruments: recognition and measurement”, the Group has reviewed all contracts for embedded derivatives that are required to be separately accounted for if they do not meet specific requirements set out in the standard. No material embedded derivatives have been identified.
Fair value measurements
Set out below is a comparison by class of the carrying amounts and fair value of the Group’s financial instruments that are carried in the financial statements:
The directors consider that the fair value of the Group’s financial instruments are not materially different to their carrying value. This view was formed on the basis that, as indicated in note 18 of the financial statements, the bank loans and the loan notes attracted a variable rate of interest and that the cash deposits, and trade payables and receivables, are short term in nature. Consequently, in accordance with paragraph 29(a) of IFRS 7, no fair value information has been disclosed and the information in paragraph 97 of IFRS 13 is not required.