RNS announcement

17 November 2020

PALACE CAPITAL PLC

("Palace Capital" or the "Company")

Interim Results for the six months ended 30 September 2020

RESILIENT RENT COLLECTION AND ACTIVE ASSET MANAGEMENT ENSURE STABLE PORTFOLIO PERFORMANCE

Palace Capital (LSE: PCA), the Main Market listed property investment company that has a diversified portfolio of UK commercial real estate in carefully selected locations outside of London, announces its unaudited results for the six months ended 30 September 2020.

Financial Highlights

Active asset management underpins resilient rent collection and dividend payment

·      82% of all rents due on and since the September quarter day collected, a higher percentage than at the equivalent stage in the previous two quarters with December monthly payments still to come when collection is expected to exceed 90%. 

·      94% of rent due on the June quarter day was collected compared to 96% on the March quarter day (excludes deferred rent).  

·      EPRA earnings of £3.2 million (September 2019: £6.7 million), with reduction reflecting a one-off surrender premium included in the comparative period last year.  

·      IFRS loss before tax for the period of £7.2 million (September 2019: £1.2 million) reflecting £10.5 million loss on revaluation of investment properties.  

·      Adjusted EPS of 7.3p, 146% cover of 5p dividend for the six-month period. 

·      Q2 dividend of 2.5p declared and payable on 31 December 2020. Q1 dividend of 2.5p was paid in October 2020.  

·      EPRA NTA per share of 347p reduced by 4.7% (March 2020: 364p) and IFRS net assets of £158.4 million (March 2020: £166.3 million), reflecting reductions due to asset revaluations following the pandemic and strategic capital expenditure on developments and refurbishments. 

·      LTV at 42% reflecting drawdowns on development loan at Hudson Quarter, due to complete in March 2021, weighted average cost of debt reduced from 3.1% to 2.9%.  

·      Solid balance sheet with cash reserves and immediately available facilities of £26.3 million as at 30 September 2020, to handle any unforeseen circumstances and to take advantage of potential opportunities in the short to medium term.

Operational highlights

Ongoing strategic disposals and redevelopment programme further enhancing portfolio quality

·      36 apartments now sold at an aggregate value of £9.6 million at flagship Hudson Quarter, York development. Practical completion of the scheme is now due in March 2021 and it remains on budget. 

·      Disposals of Meadowcourt, Sheffield for £1.25 million, 30% above book value, and Hyde Abbey House, Winchester sold post half year end for £1.46 million, 17% above book value.  

·      Rental concessions granted at Sol Northampton with Accor Hotels in return for a five-year lease extension until 2032 and with Gravity Fitness in return for removal of the break clause, securing the lease until 2034. Rental concession granted post the half year end at Broad Street Plaza, Halifax with TGI Friday's in return for three-year lease extension until 2030. 

·      Agents instructed on four further sales of non-core assets, with a combined book value of £8.3 million as at 30 September 2020.

Neil Sinclair, Chief Executive of Palace Capital said:

"Our strength in the regional office and industrial sectors, reflected in the quality of our occupier base, has enabled us to maintain high levels of rent collection across the period, despite the ongoing Covid-19 headwinds. The resilience in the income collection and the successful active portfolio management are testament to our team's experience and hard work during an extremely challenging half year period.

"While the market continues to be relatively uncertain due to the Covid-19 pandemic and with the Brexit deadline also close, we remain confident that the outlook for the UK regions is a positive one; the supply of good quality, well located office assets remains constrained and our portfolio is therefore very well placed, with additional value identified and unlocked as we progress our redevelopment and refurbishment programmes."

Stanley Davis, Chairman of Palace Capital said:

"Our financial year commenced one week after lockdown, therefore the pandemic and its impact will have a clear bearing on our results for this year. However, our well-located portfolio has shown its strength during this uncertain time and is well positioned to benefit from the trends we are seeing emerge from the pandemic, including relocation to the regions.

"In the short term we will continue to deploy our strategy of maintaining maximum liquidity, ensuring strong rent collection and pursuing the disposal of non-core assets. At the same time, the recent news of a potential vaccination programme getting underway by the end of this year or early next year provides some welcome hope that we may be moving toward the end of this Covid related uncertainty. We are preparing ourselves for the post Covid-19 era and the economic recovery, so that we can take advantage of the investment opportunities that we believe will emerge and progress our total return strategy."

 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 / George Fry

Tel: 44 (0)20 7260 1000

 Broker

Arden Partners plc

Corporate Finance: Paul Shackleton / Ciaran Walsh

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

Palace Capital plc (LSE: PCA) is a UK REIT that has a £281.6 million diversified portfolio of UK regional commercial property. The Company maintains a disciplined investment strategy focused on towns and cities outside of London that are characterised by thriving local economies and strengthening fundamentals. Within those locations the highly experienced management team select assets that provide opportunities to drive both capital value and long-term rental income through tailored active asset management programmes ultimately delivering attractive shareholder returns.

www.palacecapitalplc.com

CHAIRMAN'S STATEMENT

Our financial year commenced one week after lockdown; therefore, the pandemic and its impact has had a clear bearing on our results for this period and will continue to during the second half of the year.

PERFORMANCE

The Group made a loss after tax of £7.2 million in the period (September 2019: profit of £2.6 million). This was largely due to a 3.5% like-for-like reduction in property valuations in the period which compares to the MSCI UK quarterly property index which reported capital values down 3.7% in the same period. Rental income for the period reduced to £8.2 million (September 2019: £8.8 million) partially as a result of some increased vacancy across the portfolio and also due to the inclusion of a bad debt provision of £0.3 million in light of the Covid-related rent arrears.

The portfolio has an annual contracted rent roll of £16.9 million and a net income after property costs of £14.9 million per annum compared to an ERV of £20.2 million. Adjusted earnings totalled £3.4 million, translating to an adjusted EPS of 7.3p per share, 146% cover of the 5.0p per share for the period. Our second quarterly dividend of 2.5p will be payable on 31 December 2020 to shareholders on the register on 11 December 2020. The entire dividend will be paid as a Property Income Distribution.

BALANCE SHEET

Our balance sheet remains in good shape; an IFRS net asset value of £158.4 million with £26.3 million in cash and available facilities and, despite the like-for-like reduction in the portfolio valuations, our regional portfolio retains its resilient characteristics. As at 30 September 2020, our portfolio was independently valued by Cushman and Wakefield at £281.6 million and this valuation is not subject to 'material valuation uncertainty' which the valuer had applied to the year-end valuations.

The increase in LTV to 42% is largely due to drawdowns from the development facility for the continued construction progress at our Hudson Quarter development, which is due to complete in March 2021. This level of gearing is projected to fall to close to 30% once all residential units have been sold.

PANDEMIC RESPONSE

At the start of the first major lockdown in March, we immediately set our priorities as being to:

·      Ensure the safety of our staff and sites;

·      Maintain our robust rent collection;

·      Comply with our banking covenants;

·      Curtail all non-essential capital expenditure; and

·      Continue with disposal of non-core properties at or above book value.

Our high rent collection figures have ensured compliance with our banking covenants for the last two quarters, while the continuation of our strategic disposal of non-core assets has further supplemented our cash reserves.

We have a high-quality occupier base and our asset managers, who have worked incredibly hard over the past number of months, are continuing their meaningful dialogue with all of our tenants throughout this challenging time. As at the date of this announcement, our top 20 tenants, who contribute 44% of our income are all up to date with their rental payments for the current quarter.

LOOKING FORWARD

While we are now in the middle of a second lockdown, which might be extended despite being due to end early next month, the recent news of a potential vaccination programme getting underway by the end of this year or early next year provides some welcome hope that we may be moving toward the end of this Covid related uncertainty. However, we have no reason to amend our prudent response strategy at present and maintaining a healthy cash position will enable us to deal with any other unexpected circumstances that may be forthcoming. These reserves will also allow us to reduce some of our debt during the financial year and to take advantage of the attractive investment opportunities that we believe will arise during 2021.

The management team's deep and long held experience in the real estate sector means we benefit from extensive networks and relationships which will hold us in good stead as and when distressed opportunities emerge next year. We have a track record, since the early years of Palace Capital, of successful corporate acquisitions, having acquired a Quintain subsidiary and Property Investment Holdings Ltd for £39.25 million and £32 million respectively. These cost-effective transactions were available to us because the companies in both cases had high leverage and being corporates, it facilitated significant savings in Stamp Duty Land Tax. These portfolio investments have performed exceptionally well for the Company and therefore this is an investment strategy with which we intend to continue.

The working from home guidance has of course influenced office occupation and I am in no doubt that our way of working has been changed long term. However, these trends towards flexible and home working were already underway pre Covid-19, and the forced move to remote working has simply accelerated this momentum. Our strong view is, however, that this shift in working patterns will benefit the regions as companies reflect on the requirement for expensive Central London offices.  Debate around the demise of the office is premature and recent lettings activity shows that employers remain convinced of the role of the workplace: significant pre-lettings in excess of 80,000 sq ft have recently been announced in the city centres of Edinburgh, Manchester and Leeds.

Previous forecasts of the demise of the office - in the early 1980s with the advancement of computer technology and again in the early 2000s during the dotcom era - proved unfounded and our view is that they will again. We have always pursued a very disciplined acquisition strategy, which has focused on good quality assets in town centres and close to transport hubs, including major railway stations, so we firmly believe that we will see continued demand for our regional offices, particularly in Manchester, Leeds, York, Newcastle-upon-Tyne and Liverpool.

Savills, in August of this year, published a report which compared the current supply / demand dynamics in the regional office market with 2009. The report estimated that since 2015, excluding London, 31 million sq ft of office space has been converted to residential under Permitted Development Rights in England. Current availability of Grade B and C space across the regional markets in England has fallen by 45% since 2015. In parallel to this, there has been limited speculative office development in the regions in recent years. They further reported in August that there was a total available office supply of 11.3 million sq ft in the UK regional office markets, reflecting a 17% decrease since the end of 2019. However, of that just over 3 million sq ft is Grade A reflecting a 4% decrease since the end of 2019. When this is compared to average annual take up levels, this reflects only enough supply to meet the demand for 11 months of take up. Against this market backdrop we are well placed to benefit as HM Government continues to pursue its levelling up agenda and businesses contemplate the relocation of some of their operations from London and the South East, or implement a 'hub and spoke' model with a greater regional presence to meet the demands of their employees in an environment where the competition for talent is strong.

DEVELOPMENT PIPELINE

Our strategy focuses on delivering attractive total returns to our investors. We achieve this through active asset management to maximise the income potential of our assets, but also by identifying and creating development and refurbishment opportunities that can ultimately provide a higher quality, more secure income. We have a pipeline of prime, city centre opportunities, two of which are in Milton Keynes and another in Leamington Spa. Our property in Leamington Spa is fully let until 2022 and while we have no significant expenditure envisaged on these properties in the next 12 months, we have identified opportunities to unlock further capital appreciation by way of the planning process and, ultimately, redevelopment. Milton Keynes (as recently highlighted in the Financial Times, 27/10/20) is one of the fastest growing cities in the UK and only 30 minutes by train from London so we have taken the view to accept some vacancy here forfeiting potential income as part of the development contribution to total returns. Leamington Spa is a quality town with high residential values that is only 65 minutes by train from the capital.

PORTFOLIO OVERVIEW

At Hudson Quarter, our flagship development in York, we have sold 36 apartments at a total value of £9.6 million and we have a further unit currently under offer. We had sold 28 as at 31 March 2020. The pace of the sales process has been impacted by the government lockdown, which closed our show apartment for four months from March to July and has now effectively closed it again until at least early December except by appointment. During this time, however, we have been actively targeting overseas buyers through social media particularly in the Middle East and Far East, where interest has been strong, given the quality of the product.

Due to the impact of Covid-19, sales are somewhat slow at the moment. This will have an impact on our ability to reinvest the proceeds during the early part of our next financial year, which was our original plan. However, we are confident that post lockdown and approaching completion of this high quality scheme, potential sales will accelerate. The proceeds from these will then enable us to repay any remaining development debt, reduce the Group's LTV and to take advantage of value enhancing opportunities.

As previously announced, 4,500 sq ft of the office space has been pre-let to the listed legal and professional services firm Knights, on a 10-year lease at a record rent for York, which will commence when our building is completed in March 2021. We have also had considerable interest in HQ, the self-contained 35,000 sq ft office building, and we believe that, with York being only 105 minutes by a non-stop train service from London and HQ being within a two minute walk from the Station, the development is extremely well positioned to be a beneficiary of the post pandemic environment.

The reduction in NAV reported today is impacted by our two leisure assets, Sol Northampton and Broad Street Plaza in Halifax, which have been mostly affected by the lockdown closures and the prevailing sentiment towards the leisure industry. However, news of a potential vaccine has improved the outlook for the industry and these assets are well placed to bounce back post pandemic. We have strong covenants in both schemes and rent payments across both assets are up to date. Moreover, we are in discussion with a number of potential tenants regarding the vacant space in these properties as parties start focusing on the recovery in the economy.

CONCLUSION & OUTLOOK

Notwithstanding a very challenging economic environment, we are continuing with our strategy of maintaining maximum liquidity, ensuring strong rent collection and pursuing the disposal of non-core assets. At the same time we are preparing ourselves for the post Covid-19 era as the Government focuses on the economic recovery, so that we can take advantage of the distressed opportunities that we believe will arise from the Spring of 2021 and move forward with our value enhancing redevelopment/refurbishment plans. This is not an easy time, but we have a great team and a quality Board. We are very confident in our ability to prosper in this new normal.

STATEMENT OF PRINCIPAL RISKS AND UNCERTAINTIES

Whilst we consider there has been no material changes to the Group's principal risks, as set out on pages 43-45 of the Annual Report and Accounts for the year ended 31 March 2020, several risks continue to be elevated as a result of the ongoing Covid-19 pandemic.

The Board continues to monitor events and is taking appropriate action to prepare for any short to medium-term risks that could arise whilst this period of uncertainty continues. Our business is resilient, and we are able to respond quickly, positioning us well for the longer term.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The directors' confirm that the condensed set of consolidated financial statements have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and that the interim management report includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:

·      an indication of important events that have occurred during the first six months and their impact on the condensed interim financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

·      material related-party transactions in the first six months and any material changes in the related-party transactions described in the last annual report.

The directors of Palace Capital plc are listed on the Company website https://www.palacecapitalplc.com/

By order of the Board

Stanley Davis, Chairman

16 November 2020  

Palace Capital plc

Condensed consolidated statement of comprehensive income

For the six months ended 30 September 2020

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