RNS announcement

PALACE CAPITAL PLC

("Palace Capital" or the "Company")

PALACE CAPITAL MAKING EXCELLENT PROGRESS

AFTER TRANSFORMATIONAL ACQUISTION

Palace Capital, the AIM listed real estate company, today announces its second interim results for the twelve month period ended 31 January 2014.

Highlights

·    Completion of £39.25m Sequel property portfolio acquisition

·    Acquisition supported by £24.25m of new equity

·    Active management programme has increased the running yield of the portfolio to 14.5%

·    Significant progress made on reducing irrecoverable outgoings

·    Property disposals completed above book value

·    Net bank debt reduced from £21.2m to £18.5m

·    Net income from Sequel portfolio increased to £5.7m

·    Accelerated dividend of 2p per share declared

Commenting on, Neil Sinclair, Managing Director said;

"Palace Capital is in excellent shape. After the transformational £39 million Sequel portfolio acquisition, we have been working hard to improve the returns from these properties.  We are delighted with the progress. Through our style of active management we have increased both the gross and net rental income, reduced the irrecoverable costs and reduced our debt significantly.

" There is still much to do, but the Board is confident that we will continue to create value for our shareholders. In light of this, we have accelerated our plan to pay dividends to our shareholders. The future for the Company is extremely promising."

-ends-

Date: 27th March 2014

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CHAIRMAN'S STATEMENT FOR THE TWELVE MONTHS ENDED 31 JANUARY 2014

I am pleased to report our second interim results for the twelve months ended 31 January 2014.  This has been a transformational year for Palace Capital. The main event was the £39.25 million acquisition of the Sequel property portfolio that completed on 22 October 2013. 

As announced previously, our year end has changed to 31 March. So this year we will be reporting our final results for a fourteen month period and we expect to make this announcement in June. This brings the Company into alignment with the majority of the other quoted real estate companies in the sector.

Results

Our profit before taxation for the 12 months ended 31 January 2014 was approximately £5.7 million. This takes into account the results of the Sequel property portfolio for approximately three months from completion of the acquisition on 22 October 2013. The properties we acquired were purchased for £39.25 million, which was funded by the issue of £24.25 million of new equity and a debt facility from Nationwide of £20 million. We were delighted with the support we received from both existing and new institutional shareholders during this transaction.

At the time of acquisition, the Sequel portfolio consisted of 24 properties situated around the UK.  We estimated that the portfolio would produce a gross income of £6.45 million per annum, but this reduced to a net income of circa £5.2m per annum. The £1.25 million difference between gross and net income consisted of irrecoverable expenditure, which included empty rates, service charges and insurance shortfall. We identified that if we could reduce these outgoings, this represented a significant opportunity to improve the returns from the portfolio.  Our style of active management has been to focus on increasing the gross income and reducing the irrecoverable expenditure.

Recent disposals and lettings

At the date of acquisition there were two office buildings which had been vacant for some time.  These were Gelderd Point, Leeds comprising 20,495 sq. ft. and Argent Court, Tolworth, Surrey comprising 12,577 sq. ft. We identified that these were non-core and we marketed these for sale. Our early focus was to sell these two buildings and we are pleased that this was achieved last December and in February of this year.  Both disposals were completed at a significant premium to book value. These were important transactions in that not only did we eliminate the irrecoverable expenditure, but we also reduced the interest payable to our senior lender and brought down the outstanding level of debt by £1.85 million.

Our Business Plan envisaged the sale of the freehold interest of The Bonded Warehouse, Atlantic Wharf, Cardiff a 17,375 sq. ft. office building which had not been substantially refurbished since 1987 and 9,050 sq. ft. was vacant at the time of acquisition.  I am pleased to advise that, as announced on 26 March 2014, we sold the property for £1.1 million, which is 20% above book value.

We have also sold a small office building adjoining Argent Court, Tolworth as well as a small vacant office unit at Meadowcourt, Sheffield.  Encouragingly, all these disposals have been achieved at prices above book value.

One of our principal assets is Hudson House, Toft Green, York a 102,700 sq. ft. office building adjacent to York Station. At the date of acquisition, about 71% of the building was vacant but, since that time, various short term lettings totalling circa 15,000 sq. ft. have been concluded. This has increased gross income by circa £150,000 per annum and reduced the irrecoverable expenditure by approximately the same amount.

With a letting concluded at our industrial estate at Avonmouth, Bristol our gross income from the Sequel portfolio is now circa £6.7 million per annum and our irrecoverable expenditure has been reduced by circa £482,000 per annum to circa £995,000 per annum. As a result, our pro forma net income has now increased to circa £5.705 million which equates to a running yield of circa 14.5% on the original purchase price.

In addition and as described below, various management initiatives have been implemented in order not only to maximise income but also to increase value where we can.

Current developments

We believe that Hudson House, York, has the potential for significant upside. It is very well located in the heart of York, in an area that is benefiting from significant change. It adjoins both George Stephenson House, an 80,000 sq. ft. office building occupied by Network Rail, and the new 140,000 sq. ft.  City of York Council Offices. We are planning a major refurbishment of Hudson House and have instructed a highly rated team to advise us as to what will be the most productive scheme.  It is early in the process, but we will keep shareholders updated as we are excited about the prospects for this asset.

We have a number of lease expiries and break clauses operative this year but we are in discussions with all our tenants. With one exception we are in negotiation for all of the tenancies to continue. At Leamington Spa, we own Imperial Court and Imperial House comprising 38,004 sq. ft. of offices. One of our tenants, Freestyle Games Ltd (part of the Vivendi Group) had an option to break their lease on 1 March 2013 but elected not to do so. This tenancy continues until September 2019 at a rental of £150,065 per annum.

Portfolio valuation

We completed the acquisition of the Sequel Portfolio in October 2013 for £39.25 million.  The properties were valued individually by Cushman & Wakefield, as at 30 August 2013, at a total of £44.2 million.  Demand for regional secondary investments has become much more competitive since our purchase of the Sequel portfolio with more buyers and lenders entering the market. This has had the effect of compressing yields, which should be reflected in an uplift in the value of our properties after the next valuation. It will therefore be our intention to instruct our valuers to provide updated figures for the 14 months ending 31 March 2014, not only of the Sequel Portfolio but also of the properties in Cheshire owned by our subsidiary, Hockenhull Estates Limited, acquired in October 2011.

The Hockenhull Portfolio comprises nine properties in Crewe and Nantwich, Cheshire, which are fully let, save for one small retail unit. This portfolio has performed much better than expected, producing a yield on cost of in excess of 11%. The Hockenhull portfolio was last valued at £2.015 million as at 6 July 2011, shortly before its acquisition by the Company.

Future plans

We are keen to grow Palace Capital by selective acquisition as well as organically and we have been looking at a number of portfolios. Shareholders will be updated as appropriate.

Borrowings

Since acquiring the Sequel portfolio we have been successful in disposing of a number of, mostly vacant, properties while enhancing the income and cash flows from the portfolio. This has resulted in a reduction in the level of bank borrowings from £21.2 million to £18.5 million as at the current date.

Board

Further to the announcement made on 16 January 2014, I wish to take this opportunity to welcome Roger Nagioff to our Board. He has a wealth of experience and contributes fully at our Board Meetings. I believe that he will make a valuable contribution to Palace Capital.

Dividend

In the Company's admission document dated 2 October 2013, the Board stated its intention to recommend the payment of a dividend of 4p per share in respect of the period from completion of the acquisition of the Sequel portfolio to 31 March 2014. However, to reflect the significant progress made to date in terms of property disposals, reduction in debt and increases in both gross and net income from the portfolio, the Board has decided to accelerate the payment of dividends and is declaring a dividend of 2p per share in respect of the period since completion of the Sequel acquisition to 31 January 2014. This will be paid on 7 May 2014 to those shareholders on the register on 4 April 2014. The intention is therefore to recommend the payment of a further 2p per share when reporting the full year results for the fourteen month period ending 31 March 2014.

Outlook

We continue to identify and review further acquisition opportunities and I look forward to reporting on progress in this area and on our full year results in June. The management team is delivering on our strategy to create shareholder value and I am excited about our future prospects.

STANLEY DAVIS

CHAIRMAN, PALACE CAPITAL PLC

26 MARCH 2014

Palace Capital Plc

CONSOLIDATED INCOME STATEMENT

for the twelve months ended 31 January 2014