RNS announcement

Condensed consolidated statement of financial position

30 September 2018

The accompanying notes form an integral part of these condensed consolidated interim financial statements.

The condensed consolidated interim financial statements were approved by the Board of Directors on 23 November 2018.

Palace Capital plc

Condensed consolidated statement of cash flows

For the six months ended 30 September 2018

The accompanying notes form an integral part of these condensed consolidated interim financial statements.
 

Palace Capital plc

Condensed consolidated statement of changes in equity

For the six months ended 30 September 2018

The accompanying notes form an integral part of these condensed consolidated interim financial statements.

Palace Capital plc

Notes to the condensed consolidated financial statements                                            

1              General information

These financial statements are for Palace Capital plc ("the Company") and its subsidiary undertakings (together "the Group").

The Company's shares are admitted to trading on the Main Market of the London Stock Exchange. The Company is domiciled and registered in England and Wales and incorporated under the Companies Act 2006.  The address of its registered office is Lower Ground Floor, One George Yard, London, EC3V 9DF.

The nature of the Company's operations and its principal activities are that of property investment in the UK mainly through corporate acquisitions.

Basis of preparation

The condensed consolidated financial information included in this half yearly report has been prepared in accordance with the IAS 34 "Interim Financial Reporting", as adopted by the European Union. The current period information presented in this document is unaudited and does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006.

The interim results have been prepared in accordance with applicable International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB).  These standards are collectively referred to as "IFRS".

The accounting policies and methods of computations used are consistent with those as reported in the Group's Annual Report for the year ended 31 March 2018 and are expected to be used in the Group's Annual Report for the year ended 31 March 2019.

The financial information for the year ended 31 March 2018 presented in these unaudited condensed Group interim financial statements does not constitute the Company's statutory accounts for that period but has been derived from them. The Report and Accounts for the year ended 31 March 2018 were audited and have been filed with the Registrar of Companies. The Independent Auditor's Report on the Report and Accounts for the year ended 31 March 2018 was unqualified and did not draw attention to any matters by way of emphasis and did not contain statements under s498(2) or (3) of the Companies Act 2006. The financial information for the periods ended 30 September 2017 and 30 September 2018 are unaudited and have not been subject to a review in accordance with International Standard on Review Engagements 2410, Review of Interim Financial Information performed by the Independent Auditor of the Entity, issued by the Auditing Practices Board.

The interim report was approved by the Board of Directors on 23 November 2018.

Copies of this statement are available to the public for collection at the Company's Registered Office at Lower Ground Floor, One George Yard, London, EC3V 9DF and on the Company's website, www.palacecapitalplc.com.

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 Chairman's Statement. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in these financial statements.

The Directors have reviewed the current and projected financial position of the Group, making reasonable assumptions about future trading performance. As part of the review the Directors have considered the Group's cash balances, debt maturity profile of its undrawn facilities, and the long-term nature of tenant leases. On the basis of this review, and after making due enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue operational existence for the foreseeable future. As a consequence, the Directors believe that the Group is well placed to manage its business risk successfully.

Accordingly, they continue to adopt the going concern basis in preparing the Half Year Report.

Changes in accounting policies and disclosures

IRFS 9 Financial Instruments (became effective for accounting periods commencing on or after 1 January 2018)

This standard deals with the classification, measurement and recognition of financial assets and liabilities. The Group does not apply hedge accounting on the financial derivatives held, and as such there is no material impact on the financial statements relating to such items. Derivative financial instruments continue to qualify for designation as at fair value through profit and loss.

IFRS 9 requires the Group to make an assessment of Expected Credit Losses ('ECLs') on its debtors based on tenant payment history and the Directors' assessment of the future credit risk relating to its trade receivables at reporting dates. The Directors assessment resulted in no material differences and there has been no adjustment to opening balances as a result of IFRS 9.

IFRS 15 Revenue from Contracts with Customers (became effective for accounting periods commencing on or after 1 January 2018)

This standard is applicable to management fees and other income but excludes rent receivable. The majority of the Group's income is from tenant leases and is outside the scope of the new standard. The financial impact of the new standard is considered immaterial and does not materially impact the financial statements.

IFRS 16 Leases (became effective for accounting periods commencing on or after 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. Lessor accounting is substantially unchanged from current accounting. As the Group is primarily a lessor, the Directors do not anticipate that the adoption of this 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.

2              Segmental reporting

During the period the Group operated in one business segment, being property investment in the UK and as such no further information is provided.

3              Net property income

4              Taxation

5              Dividends

6              Earnings per share

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

EPRA 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 closeout 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.

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

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:

8              Investment Properties

Investment properties are stated at fair value 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.

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 giving property may differ from the valuations shown in the statement of financial position.

At 30 September 2018, the Group's freehold and leasehold investment properties were externally valued by Royal Institution of Chartered Surveyors ("RICS") registered independent valuers. 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 £234,948,600 (31 March 2018: £234,429,000) are subject to a first charge to secure the Group's bank loans amounting to £99,204,600 (31 March 2018: £101,395,000).

Valuation process

The valuation reports produced by the independent 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 period 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.

Valuation technique

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

Assets held for sale

Assets held for sale consist of the residential portfolio acquired in October 2017 as part of the Warren acquisition. The Group announced it was its intention to dispose of the portfolio as soon as terms with a potential buyer could be agreed. In accordance with the Group's accounting policy, these properties are classified as held for sale at 30 September 2018.

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

9              Trade and other receivables

10           Cash and cash equivalents

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

11           Current trade and other payables

12           Borrowings

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

Facility and arrangement fees

As at 30 September 2018

The Group has unused loan facilities amounting to £15,000,000 (31 March 2018: £14,152,000). 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.

13           Share capital

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

The Company has set up an employee benefit trust, 'The Palace Capital Employee Benefit Trust', for the granting of shares applicable to directors and employees under the Long-Term Incentive Plan. On 15 August 2018 the Company transferred 100,000 ordinary shares held in Treasury into The Palace Capital Employee Benefit Trust.

On 27 September 2018 the Company granted 38,586 shares, being the awards granted on 25 September 2017 under the Palace Capital Deferred Bonus Plan from The Palace Capital Employee Benefit Trust. As at 31 March 2018 there were 549,587 shares held in treasury but as a result of the 100,000 shares transferred into the Employee Benefit Trust, there are 449,587 shares remaining in Treasury.

The Company's issued share capital as at 30 September 2018 comprises 45,843,866 ordinary shares which is the denominator for the calculations of earnings per share and net asset value per share. This excludes the 544,649 ordinary shares held in treasury and the Employee Benefits Trust.

14           Palace Capital plc - Company Statement of Financial Position

The Palace Capital plc parent company balance sheet has been restated to reflect the post balance sheet event in note 15.

15           Post balance sheet events

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 will 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 is 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.

Palace Capital plc paid out dividends of 4.75p per share in July 2018 and a further dividend in October 2018 of 4.75p per share on the basis of its last annual accounts for the year ended 31 March 2018. Although the parent company had distributable reserves in excess of those needed to pay such dividends, even after adjusting for the unlawful dividend received, in view of the above, the 31 March 2018 accounts produced by the parent company did not constitute relevant accounts as prescribed by Companies Act 2006 to justify these dividends.

Note 14 in these interim accounts reflects the most current unaudited parent company balance sheet properly prepared as prescribed by Companies Act 2006, relevant for future dividends payable. The Company will be convening a General Meeting in due course in order to enter into a Shareholders' Deed of Release and Directors' Deed of Release with regard to the July 2018 and October 2018 dividends.  A circular will be sent out to shareholders notifying them of the resolutions and date of the meeting.

On 22 November 2018 contracts were exchanged to sell 50 residential units, acquired as part of the RT Warren (Investments) Ltd portfolio in October 2017, for a total consideration of £18.2 million, reflecting 97% of their book value, to the London Borough of Barnet. Completion for each respective unit sold will take place when they become vacant with all the properties expected to be sold on or before 31 March 2019.