RNS announcement

6 April 2022

Palace Capital plc

("Palace Capital" or the "Company")

Trading update and dividend increase

Palace Capital (LSE: PCA), the Main Market property investment company that has a diversified portfolio of UK commercial real estate in carefully selected locations outside of London with a focus on the office & industrial sectors, announces a trading update for the period ended 31 March 2022 together with an increase in dividend.

Strategy Overview

The Directors anticipate that, subject to audit, EPRA earnings* and Adjusted PBT** for the year to 31 March 2022 will be ahead of market expectations. This is underpinned by the positive impact of asset management successes, lease activity and acquisitions.

The Company is well positioned for the future with:

1)    The disposal strategy ahead of target;

2)    The balance sheet considerably strengthened with £28.1 million of cash at year end;

3)    Improved portfolio income with solid rent collection; and

4)    Progressive dividend growth.

Following the success of Palace Capital's disposal strategy, which to date has realised gross proceeds of £31.5 million, and the significant pick-up in sales of residential units at Hudson Quarter, York, the Directors remain mindful of how and when these proceeds are deployed. As announced with our interim results on 16 November 2021, the Board is committed to maximising value for shareholders and closing the current share price discount to NAV. Accordingly, in consultation with shareholders, the Board is considering a range of strategic options, including a return of capital, to unlock further value in the business.

In addition to considering a range of strategic options, the Board will assess property investment opportunities. The Board is focused on acquiring high quality, income producing assets with attractive rental growth prospects and strong ESG credentials, that will enhance the Group's earnings and dividend payout.

Such investment opportunities will reposition the portfolio for growth in income and capital value, by pivoting the weighting towards higher quality assets. The intention is to use our core assets to provide a bedrock of sustainable income. This allows a balance for higher risk properties which can provide stronger returns through active management, by identifying opportunities provided in the regional office and industrial sectors which, in selected instances in the Company's view, are currently mispriced. The Company expects to balance the portfolio with c.50% core assets where we see rental and capital value growth, with the remainder split between value add/asset management of c.40% and development of c.10%. At 30 September 2021, the portfolio comprised 30% core, 58% value add and 12% development. This realignment provides the backbone to a progressive covered dividend policy.

Implementation of our strategy so far

·    Disposal strategy ahead of target with 14 out of the 15 properties sold generating, in aggregate, £31.5 million gross proceeds which is at 20% above book value, 12% ahead of purchase prices and capital expenditure, delivering an ungeared IRR of 11%.

·    Acquisition of 21,852 sq ft refurbished office building in Maidenhead with an EPC rating of B for £10.25 million, with a 6.83% net initial yield.

·   80 apartments at Hudson Quarter, York sold in the period for a total of £27.4 million, enabling full repayment of £26.5 million development loan facility nine months ahead of schedule. A further nine are under offer to the value of £3.7 million which leaves 38 units remaining.

·    55 lease events completed in the period totalling 319,000 sq ft at an average of 11% premium to ERV including:

o  44 new leases and lease renewals completed on 224,000 sq ft at a premium of 14% to ERV.

o  11 rent reviews completed on 95,000 sq ft at a premium of 15% to the previous passing rents.

o  18,042 sq ft at Hudson Quarter, York at £26 psf, surpassing record rent of £25 psf previously set by the Company in York.

o  13,550 sq ft at Bank House, King Street, Leeds bringing 89,000 sq ft asset to full occupancy.

·    Portfolio EPRA occupancy of 88.5% (31 March 2021: 86.4%).

Portfolio Overview

·    An additional £1.9 million of annualised net rental income gained in the year through asset management lease activity, acquisitions, and reduction in non-recoverable property costs. This takes into account income lost through disposals, lease expiries and lease breaks.

·    Portfolio repositioning in the year has led to a higher quality portfolio consisting of 36 properties, with improved EPC ratings (which support future rental uplifts), higher occupancy and weighting of core assets.

·    97% rent collection for the 12 months to 31 March 2022.

·   Two high quality income producing assets have been identified for potential investment in accordance with the strategy.

Financials

·   Balance sheet strengthened with net LTV expected to reduce to between 28% - 30% (depending on property valuations) as a result of strong sales at Hudson Quarter and disposal strategy being ahead of target.

·    Cash reserves of £28.1 million.

·    Net debt reduced by 38% to £73.6 million as at 31 March 2022.

·    EPRA earnings and Adjusted PBT, subject to audit, are expected to exceed market expectations for the full year ended 31 March 2022.

·    Quarterly dividend of 3.25 pence per ordinary share to be paid on Thursday 14 April 2022, in respect of the three months ended 31 December 2021. In light of the balance sheet strength and anticipated earnings performance, the final dividend, payable in July 2022, is expected to be a minimum of 3.75p, or 13.25p for the year.

Neil Sinclair, Chief Executive commented: "Following an extremely active period of portfolio management, the Company is well positioned with a higher quality portfolio delivering improved income and the opportunity for reinvestment underpinned by a significantly strengthened balance sheet. It means that as we recover from the pandemic, we are well placed to address the future with confidence."

The Company expects to release its annual results for the 12 months to 31 March 2022 on or around 14 June 2022, with confirmation of the date to be provided in due course.

*EPRA earnings: EPRA earnings is the IFRS profit after taxation excluding investment property revaluations, gains/losses on disposals, changes in the fair value of financial instruments and associated close-out costs and their related taxation.

**Adjusted PBT:  Is EPRA earnings excluding share-based payments and one-off exceptional items. This is the basis on which the Directors consider dividend cover.

ENDS

For further information please contact:

PALACE CAPITAL PLC

Neil Sinclair, Chief Executive

Tel. 44 (0)20 3301 8331

Matthew Simpson, Chief Financial Officer

Tel. 44 (0)20 3931 9175

Broker

Numis Securities

Heraclis Economides / Oliver Hardy

Tel: 44 (0)20 7260 1000

Broker

Arden Partners plc

Corporate Finance: Paul Shackleton / Elliot Mustoe

Corporate Broking: James Reed-Daunter

Tel: 44 (0)207 614 5900

Financial PR

FTI Consulting

Claire Turvey / Katie Hughes

Tel: 44 (0)20 3727 1000

palacecapital@fticonsulting.com

About Palace Capital plc (www.palacecapitalplc.com)

Palace Capital plc (LSE: PCA) is a UK Premium Listed REIT that has a 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

This announcement contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) 596/2014 as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018 ("MAR"), and is disclosed in accordance with the company's obligations under Article 17 of MAR.