RNS announcement

Palace Capital plc

Condensed consolidated statement of financial position

For the six months ended 30 September 2021

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 15 November 2021.

Palace Capital plc

Condensed consolidated statement of cash flows

For the six months ended 30 September 2021

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 2021

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

*During the year, the Group made an order to reduce the Group's share premium account and the crediting of the relevant sum to distributable profits. The Court order approving the Share Premium Reduction and a statement of capital were registered with the Registrar of Companies on 29 September 2020.  The Share Premium Reduction is now effective, and the amount that had been standing to the credit of the Company's share premium account (£125,018,886) has been credited to the Company's distributable profits.

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 25 Bury Street, London, SW1Y 6AL.

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

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 2021 and are expected to be used in the Group's Annual Report for the year ended 31 March 2022.

Further to these accounting policies, as a result of the disposal of trading properties in the first six months, the Group would like to provide further clarity on the accounting policies for trading property revenue and trading property cost of sales.

Revenue from the sale of trading properties is recognised when the performance obligation associated with the sale is completed. The transaction price comprises the fair value of the consideration received or receivable, net of value added tax, rebates and discounts. Revenue is recognised in the income statement when control is transferred to the customer. This is deemed to be when title of the property passes to the customer on legal completion.

Trading property cost of sales includes direct expenditure relating to the construction of the trading properties, capitalised interest, and selling costs incurred as a result of residential sales. Selling costs includes agent and legal fees. Cost of sales is expensed to the income statement and is recognised on completion of each residential unit. The cost for each unit is calculated using the ratio of the unit selling price, over the total forecasted sales proceeds of all residential units. This ratio is then applied to the total forecasted development cost to get the cost of sale per unit.

The financial information for the year ended 31 March 2021 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 2021 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 2021 was unqualified and did not contain statements under s498(2) or (3) of the Companies Act 2006. The financial information for the periods ended 30 September 2020 and 30 September 2021 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 15 November 2021.

Copies of this statement are available to the public for collection at the Company's Registered Office at 25 Bury Street, London, SW1Y 6AL and on the Company's website, www.palacecapitalplc.com.

Restatement

The cash flow statement for the comparative periods have been corrected to present cash outflows from an increase in trading properties as operating activities for the year to 31 March 2021 of £14,646,000 (six months to 30 September 2020: £10,125,000) that were previously presented as investing activities. This has resulted in an increase in the net movement in investing activities for the year to 31 March 2021 of £14,646,000 (six months to 30 September 2020: £10,125,000) and a corresponding net decrease in the cash inflows from operating activities in the Consolidated Cash Flow Statement. These cashflows represent expenditure on trading properties that were expected to be sold in the normal course of the Group's business and are therefore operating in nature.  There was no impact on profit or net assets for any periods presented.

Going Concern

The Directors have made an assessment of the Group's ability to continue as a going concern which included the current uncertainties created by Covid-19, coupled with the Group's cash resources, borrowing facilities, rental income, acquisitions and disposals of investment properties, committed capital and other expenditure and dividend distributions. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in these financial statements.

As at 30 September 2021 the Group had £13.7m of cash and cash equivalents, of which £10.6m was unrestricted cash, a low gearing level of 36% and a fair value property portfolio of £262.0m. The Directors have reviewed the forecasts for the Group taking into account the impact of Covid-19 on trading over the 12 months from the date of signing this annual report. The forecasts have been assessed against a range of possible downside outcomes incorporating significantly lower levels of income in line with the possible ongoing effects of the pandemic.

The Directors have a reasonable expectation that the Group have adequate resources to continue in operation for at least 12 months from the date of approval of the financial statements.

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

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              Revenue

4              Cost of sales

5              Taxation

                As a result of the Company's conversion to a REIT on 1 August 2019, the Group is no longer required to pay UK corporation tax in respect of property rental income and capital gains relating to its property rental business.

6              Dividends

7              Earnings per share

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

EPRA 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, 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, one-off surrender premiums received, and non-recovery development loan interest. 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:

8              Net asset value per share

The Group has adopted the new EPRA NAV measures which came into effect for accounting periods starting 1 January 2020. EPRA issued new best practice recommendations (BPR) for financial guidelines on its definitions of NAV measures. The new NAV measures as outlined in the BPR are EPRA net tangible assets (NTA), EPRA net reinvestment value (NRV) and EPRA net disposal value (NDV). The Group has adopted these new guidelines and applies them in the 30 September 2021 Interim Report.

The Group considered EPRA Net Tangible Assets (NTA) to be the most relevant NAV measure for the Group and we are now reporting this as our primary NAV measure, replacing our previously reported EPRA NAV and EPRA NNNAV per share metrics. EPRA NTA excludes the intangible assets and the cumulative fair value adjustments for debt-related derivatives which are unlikely to be realised.

9              Property Portfolio

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

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

At 30 September 2021, 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 £229,520,000 (31 March 2021: £234,613,000) and trading properties with a carrying value of £27,246,000 (31 March 2021: £42,719,000) are subject to a first charge to secure the Group's bank loans amounting to £106,906,000 (31 March 2021: £128,313,000).

Valuation process - investment properties

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

In addition, the valuation reports are based on assumptions and valuation models used by the independent valuers. The assumptions are typically market related, such as yields and discount rates, and are based on their professional judgment and market observations. Each property is considered a separate asset, based on its unique nature, characteristics and the risks of the property.

The Executive Director responsible for the valuation process verifies all major inputs to the external valuation reports, assesses the individual property valuation changes from the prior year valuation report and holds discussions with the independent valuers. When this process is complete, the valuation report is recommended to the Audit Committee, which considers it as part of its overall responsibilities.

The key assumptions made in the valuation of the Group's investment properties are:

• The amount and timing of future income streams;

• Anticipated maintenance costs and other landlord's liabilities;

• An appropriate yield; and

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

Valuation technique - standing investment properties

The valuations reflect the tenancy data supplied by the group along with associated revenue costs and capital expenditure. The fair value of the 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.

Reversal of impairment of trading properties

An impairment loss may only be reversed if there has been a change in the estimates used to determine the asset's recoverable amount since the last impairment loss had been recognised. If this is the case, then the carrying amount of the asset shall be increased to its recoverable amount. The increase will effectively be the reversal of an impairment loss.

10           Trading property

The Group has developed a large mixed-use scheme at Hudson Quarter, York. Part of the approved scheme consisted of residential units which the Group held for sale. As a result, the residential element of the scheme was classified as trading property. During the six month period, residential units to the value of £19,225,000 were sold.

11           Trade and other receivables

12           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 realised over time consistent with the loss of income on vacant units, and where the Group has agreed to deposit cash with a lender to provide additional security over loan facilities, and proceeds from sale of trading properties which is used to repay the development facility.

13           Trade and other payables

14           Borrowings

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

Facility and arrangement fees

As at 30 September 2021

Facility and arrangement fees

As at 31 March 2021

Facility and arrangement fees

As at 30 September 2020

The Group has unused loan facilities amounting to £16,189,000 (31 March 2021: £13,320,000). A facility fee is charged on £16,189,000 with NatWest, at a rate of 1.05% p.a. and is payable quarterly. This facility is secured on the investment properties held by Property Investment Holdings Limited, Palace Capital (Properties) Limited and Palace Capital (Leeds) Limited.

A facility fee is charged on £1,497,182 at a rate of 1.30% p.a. and is payable quarterly. The £1,497,182 balance of the unused facilities relates to a Barclays loan secured on the Hudson Quarter, York development held by Palace Capital (Developments) Limited.

15           Derivatives financial instruments

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

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

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

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

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

16           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 22 June 2021 the Company transferred 200,000 ordinary shares held in Treasury into The Palace Capital Employee Benefit Trust.

On 14 July 2021 the Company granted 90,049 shares, being the awards granted on 14 July 2020 under the Palace Capital Deferred Bonus Plan from The Palace Capital Employee Benefit Trust. On 13 and 19 August 2021, 134,814 share options were exercised under the 2018 employee LTIP scheme. As at 30 September 2021 there were 99,587 shares held in treasury.

The Company's issued share capital as at 30 September 2021 comprises 46,288,470 ordinary shares which is the denominator for the calculations of earnings per share and net asset value per share. This excludes the 100,045 ordinary shares held in treasury and the Employee Benefit Trust.