15 November 2023

Palace Capital plc

("Palace Capital" or the "Company")

Interim Results for the six months ended 30 September 2023

FOCUSED ON MAXIMISING CASH RETURNS TO SHAREHOLDERS

Palace Capital (LSE: PCA) announces its unaudited results for the six months ended 30 September 2023.

Steven Owen, Executive Chairman, commented:

"We continue to make good progress in achieving disposals at values ahead of book enabling us to further reduce debt and leverage as we deliver on our strategy of maximising cash returns to shareholders. Proactive balance sheet management ensures Palace Capital is in a strong financial position, with net debt currently at £7.7 million and leverage at 6.5%, both having been reduced since the period end. This provides the Company with the flexibility and optionality regarding the timing of future disposals and other strategic initiatives, including various options for returning capital to shareholders. The results below reflect the disposals strategy.

"At an operational level, the Company continues to make good progress with its asset management activities notwithstanding the difficult and uncertain conditions in financial and property markets.

"Since July 2022, we have returned £21.9 million of capital to shareholders through share buybacks. It is expected that further progress regarding disposals and options for returning capital, including a potential tender offer, will be announced in a Trading Update during the first quarter of 2024."

Financial highlights

·    Adjusted profit before tax of £2.3 million (September 2022: £3.5 million) reflecting the reduction in income following disposals

·      IFRS loss before tax for the period of £0.2 million (September 2022: £12.4 million loss) primarily due to the valuation deficit of £5.6 million offset by the profit on property disposals of £3.5 million

·      Adjusted EPS of 5.5 pence (September 2022: 7.9 pence)

·      7.5 pence per share of dividends paid, an increase of 7.1% (September 2022: 7.0p)

·      Completed £15.2 million of share buybacks in the period, an 8.0 pence per share accretion to EPRA NTA

·     EPRA NTA per share of 294 pence reduced by 0.7% (March 2023: 296 pence) and IFRS net assets of £110.0 million (March 2023: £128.5 million)

·      Investment property portfolio valuation reduced by 4.4% on a like-for-like basis

·      Portfolio ERV growth over the half year was 2.6% on a like-for-like basis

·      LTV of 9% at 30 September 2023 (March 2023: 31%), which has reduced further post period-end to 6.5%

·      Gross debt reduced by £44.1m or 68.6% in the period to £20.2 million (March 2023: £64.3 million). Gross debt reduced by a further £6.2 million post period-end to £14.0 million

Operational highlights

·      In the period to 30 September 2023, sale of 12 investment properties for £66.9 million, 7% ahead of the 31 March 2023 book value

·      Post period end, a further three investment properties have been sold for £6.4 million, bringing the total sales year to date to £73.3 million, 6% ahead of the March 2023 book value

·      Apartment sales at Hudson Quarter, York, have been slower, reflecting the wider housing market but continue to progress. A further six apartments have been sold since 31 March 2023 for a total of £2.6 million, with aggregate proceeds of the 109 units sold totalling £40.1 million. Since 30 September two units are under offer for £1.2 million, leaving 16 units remaining

·      Portfolio WAULT resilient at 4.9 years (March 2023 4.8 years) 

·     An additional £1.1 million of annualised net rental income was created during the half year through leasing and review activity and the associated reduction in non-recoverable property costs which was, on average 3% ahead of the 31 March 2023 ERVs.  Annualised net rental income lost from lease expiries and breaks totalled £0.5 million resulting in a net additional annualised increase of £0.6 million from active asset management activity. Net rental income lost following disposals totalled £4.2 million per annum resulting in a net loss in annualised net rental income of £3.6 million

·      Rent collection for the first half of the financial year was 99% (31 March 2023: 99%)

·      EPRA occupancy remains stable at 87.6% (31 March 2023: 87.7%)

·      Total Property Return of 2.4%, outperforming the MSCI UK Quarterly Property Index benchmark performance of -0.5%.

Palace Capital plc
Steven Owen, Executive Chairman
info@palacecapitalplc.com

Financial PR
FTI Consulting
Dido Laurimore / Giles Barrie
Tel: +44 (0)20 3727 1000
palacecapital@fticonsulting.com

Cautionary Statement

This announcement does not constitute an offer of securities by the Company. Nothing in this announcement is intended to be, or intended to be construed as, a profit forecast or a guide as to the performance, financial or otherwise, of the Company or the Group whether in the current or any future financial year. This announcement may include statements that are, or may be deemed to be, ''forward-looking statements''. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms ''believes'', ''estimates'', ''anticipates'', ''expects'', ''intends'', ''plans'', ''target'', ''aim'', ''may'', ''will'', ''would'', ''could'' or ''should'' or, in each case, their negative or other variations or comparable terminology. They may appear in a number of places throughout this announcement and include statements regarding the intentions, beliefs or current expectations of the directors, the Company or the Group concerning, amongst other things, the operating results, financial condition, prospects, growth, strategies and dividend policy of the Group or the industry in which it operates. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future and may be beyond the Company's ability to control or predict. Forward-looking statements are not guarantees of future performance. The Group's actual operating results, financial condition, dividend policy or the development of the industry in which it operates may differ materially from the impression created by the forward-looking statements contained in this announcement. In addition, even if the operating results, financial condition and dividend policy of the Group, or the development of the industry in which it operates, are consistent with the forward-looking statements contained in this announcement, those results or developments may not be indicative of results or developments in subsequent periods. Important factors that could cause these differences include, but are not limited to, general economic and business conditions, industry trends, competition, changes in government and other regulation, changes in political and economic stability and changes in business strategy or development plans and other risks.

Other than in accordance with its legal or regulatory obligations, the Company does not accept any obligation to update or revise publicly any forward-looking statement, whether as a result of new information, future events or otherwise.

EXECUTIVE CHAIRMAN'S STATEMENT

Update on delivery of strategic objectives

At our Full Year results announced in June, it was noted that the year ahead was likely to be further affected by continuing macroeconomic and geo-political uncertainty although the inflation outlook in the UK was expected to improve. Increased interest rates continue to adversely impact the commercial property market in relation to general investment activity, although the Company has had an active first half, disposing of £66.9 million of investment properties at 7% above the 31 March 2023 valuation. This includes the office building in Maidenhead sold after the Trading Update of 26 July 2023 for £9.0 million, 9.7% ahead of the March 2023 valuation.

Since 30 September 2023, three investment properties have been sold for £6.4 million, 2% above the March 2023 valuation: the long leasehold interest of a residential block at HQ York for £1.5 million; Bank House, Leeds, for £2.65 million: and Princeton House, Farnborough, for £2.28 million. These take total investment property sales in the year to date to £73.3 million, which is 6% above the March 2023 valuation.

Unsurprisingly, activity in relation to residential sales at Hudson Quarter, York, has been more muted with a further six apartment sales completed during the half year period for £2.6 million and since 30 September two units are under offer for £1.2 million, leaving 16 units remaining.

Total investment properties sold since the change of strategy in July 2022 amount to £84.4 million or £94.5 million including residential apartments.

Operationally, the business remains robust. The team has been proactive in implementing asset management plans to increase income and reduce void costs with lettings, renewals and rent reviews on average 3% ahead of the 31 March 2023 estimated rental values. During the first half, 14 lease events comprising five new lettings, three lease renewals and six rent reviews were completed across 129,000 sq ft of space providing £0.8 million of additional annualised income. Including the associated reduction in non-recoverable property costs of £0.3 million, an additional £1.1 million of annualised net rental income was created during the first half.

There were two key lettings during the period:

Firstly, at 2 St James' Gate, Newcastle, where Orega, a premium, flexible, serviced office workspace provider, entered into a 15 year management agreement to take the second and third floors totalling 22,500 sq ft of the seven storey, 82,500 sq ft building. Following a comprehensive refurbishment, which is currently underway, the operation is expected to open shortly, providing c.400 workstations. This letting significantly increased the occupancy at the property, taking it from 65% as at 31 March 2023 to 88% as at 30 September 2023 and, together with the letting to Softcat plc in December 2022, are the first two major lettings at St James' Gate since the property was acquired in 2017.

Secondly, at Broad Street Plaza, Halifax, where Calderdale and Huddersfield NHS Foundation Trust entered into a new 15 year lease and took an additional 6,000 sq ft unit increasing their occupation to over 27,000 sq ft. The new rent on the combined space is over £14 psf and is 41% higher than the March 2023 ERV. The NHS now accounts for over 16% of the net income from the property and we believe that the letting was the key reason why the property increased in value as at September 2023 compared with March 2023.

In terms of managing our own costs, Palace Capital continues to reduce its level of administrative expenses in line with its strategy, with measures implemented in the period saving £0.5 million and £0.9 million in the year to date. This includes reducing headcount and relocating its head office to a smaller office in Victoria, London on expiry of its current lease term on 1 December 2023. Annual occupancy costs of the Company's new premises will be £0.25 million lower than those of its former offices in Bury Street, SW1.

During the half year period, the Company purchased 6.2 million shares for £15.2 million, contributing an additional 8.0 pence to EPRA NTA. Since July 2022, cash returned to shareholders through the share buyback programmes to date totals £21.9 million.

Overview of results

The Group's adjusted profit before tax reduced to £2.3 million (September 2022: £3.5 million) as a result of income lost through disposals. Investment property sales during the half year period totalled £66.9 million, which realised a profit of £3.4 million (September 2022: £0.9 million). Trading profits from the sale of residential units realised a profit of £0.1 million (September 2022: £0.1 million).

The whole portfolio was independently valued by CBRE as at 30 September 2023 at £124.5 million, a reduction of 4.4% on a like-for-like basis. The valuation deficit of £5.6 million equates to 13.5 pence per share.

The investment portfolio (excluding residential properties held as trading properties) was valued at £115.2 million and a net initial yield (NIY) of 8.1%. Within the investment portfolio the office and leisure assets, which comprise 84% of the portfolio, were valued at NIYs of 7.4% and 11.0% respectively.

The ERVs used by the valuers were, on the whole portfolio, 2.6% higher on a like-for-like basis than as at 31 March 2023. Within the portfolio the ERV growth for the office and leisure assets was 2.1% and 5.1% respectively.

EPRA NTA decreased by 2.0 pence per share or 0.7% to 294 pence (March 2023: 296 pence) during the period, principally as a result of the revaluation deficit of £5.6 million or 13.5 pence per share offset by the 8.0 pence per share share buyback accretion and the profit from the disposal of investment properties, which contributed 8.2 pence per share. The excess of dividends paid per share over adjusted earnings per share was -2.0 pence per share and other items, principally the denominator effect of the reduced number of shares at period end compared with the average for the period, was -2.7 pence per share.

The Group's balance sheet remains strong with cash reserves of £8.9 million as at 30 September 2023. Gross debt reduced by 68.6% in the period to £20.2 million (March 2023: £64.3 million), which has resulted in the loan to value ratio reducing to 9% (March 2023: 31%). Since the half year end, gross debt has reduced by a further £6.2 million and proforma LTV has reduced to 6.5%.

Directorate Change

Today, the Company has announced further progress in the delivery of its strategy to focus on maximising cash returns to shareholders. In light of this, Matthew Simpson, CFO and the Board have agreed that now is the right time for Matthew to step down as a Director and from the Board. The Company's financial circumstances (including cancellation of bank facilities and reduced portfolio size) mean that the CFO role is significantly reduced and therefore no longer requires the level of expertise and skillset that Matthew contributes.

Matthew's CFO report is contained within this Half Year Report below.

Going forward, the financial operations of the Company will be managed by the Financial Controller and Financial Planning Analyst with operational oversight by myself as Executive Chairman and by the Audit and Risk Committee on behalf of the Board. After a short handover, Matthew will leave the Company at the end of this month.

Matthew leaves with the Board's best wishes and gratitude for his eight years with the Company, latterly as CFO and prior to that as Financial Controller. He has supported the Board in reshaping the Company over the last sixteen months including returning cash to shareholders and reducing bank debt.

Dividend

The Group increased its paid dividends by 7.1% to 7.5 pence per share (September 2022: 7.0 pence per share) in relation to the period ended 30 September 2023. The Company has declared an interim dividend of 3.75 pence per share which will be paid on 29 December 2023 as a Property Income Distribution (PID). The record date will be 24 November 2023.

As previously reported, the dividend policy is that the current level of dividend is expected to be maintained and paid from adjusted profits including trading profits. As the portfolio has been significantly repositioned and cash returned to shareholders in the last 12 months, if this level of dividend cannot be achieved then, as a minimum, the dividend payment is expected to be set at the Property Income Distribution (PID) level.

AGM update

In line with best practice recommendations, the Company provides an update on communication with shareholders on issues where there were significant votes against a resolution at the AGM. In relation to the votes for the resolution seeking approval of my own re-election, 77% of votes cast at the AGM were in favour of the resolution. Mark Davies, Senior Independent Director contacted a major shareholder who had voted against the resolution. That shareholder subsequently confirmed that this had been an administrative error and that they had intended to vote in favour of the resolution, as they had done with all of the other resolutions proposed. Had this been correctly cast, the votes in favour of the resolution would have been 91% instead of the 77% recorded.

We continue to communicate with our major shareholders on significant issues affecting the Company and welcome constructive dialogue.

General Meeting

The Company has successfully used share buybacks as one method of returning capital to shareholders. Accordingly, further authority is sought for the Company to acquire its own shares, having fully utilised the authority for the market purchase of its own shares previously provided by shareholders at the AGM held on 26 July 2023. The Company will hold a General Meeting to consider this resolution with the General Meeting being held in person at the offices of CMS Cameron McKenna Nabarro Olswang LLP, Cannon Place, 78 Cannon Street, London EC4N 6AF at 1.00 p.m. on Monday 4 December 2023. The number of shares subject to the proposal is 5,634,044 shares representing approximately 15% of the issued ordinary share capital of the Company as at 14 November 2023. Full details are contained in the Notice of General Meeting which will shortly be available on the Company's website www.palacecapitalplc.com. The Company is utilising the authority provided by shareholders at the 2023 AGM to hold a general meeting on a shorter timescale of 14 clear days' notice to provide the Company with the appropriate flexibility, which is considered by the Directors to be in the best interests of the Company.

Outlook

The commercial property market remains challenging but the disposals in the current financial year to date represent a further significant step forward in reducing debt and leverage and demonstrate continued progress in our strategy of maximising cash returns to shareholders. The Company is in a strong financial position and its current low leverage of 6.5% provides it with the flexibility and optionality regarding the timing of further disposals and other strategic initiatives, including various options for returning capital to shareholders.

At an operational level, the Company continues to make good progress with its asset management activities notwithstanding the difficult and uncertain conditions in financial and property markets.

It is expected that further progress regarding disposals and options for returning capital, including a potential tender offer, will be announced in a Trading Update during the first quarter of 2024.

Steven Owen

Executive Chairman

CHIEF FINANCIAL OFFICER'S REPORT

Financial Overview

The Company's adjusted profit before tax reduced by 34.3% to £2.3 million (September 2022: £3.5 million) and EPRA NTA per share by 0.7% to 294 pence (March 2023: 296 pence). Against a backdrop of economic uncertainty, Palace Capital continued to deliver at an operational level, by reducing gross debt in a rising interest rate environment and making continued progress in reducing administration costs. In line with the strategy of returning capital to shareholders, the Company has increased the dividend paid by 7.1% in the period compared with the previous half year and completed £15.2 million of share buybacks in the period, which was accretive to EPRA NTA by 8.0 pence per share. The summary of the Company's financial results are as follows:

Income Statement Summary

Net property income in the period reduced to £5.4 million (September 2022: £7.3 million) as result of the twelve investment property disposals in the period, which were 7% ahead of the 31 March 2023 book value. Property operating expenses have risen by £0.2 million as a result of inflationary pressures on service charge and insurance costs on our void units. Rent collection has remained consistently high at 99% throughout the period.

The Company has continued to reduce its cost base, with annualised cost savings of £0.5 million in the period and £0.9 million in the year to date. As a result of cost savings implemented in the prior year of £1.4 million, total savings for FY23 and FY24 to date are £2.3 million.  Recurring administrative costs reduced by 15% to £1.7 million (September 2022: £2.0 million) for the period

Finance costs have reduced by 11.1% or £0.2 million to £1.6 million (September 2022: £1.8 million) following the significant reduction in our debt in the period, despite the increases in Bank of England base rates.  

EPRA NTA Movement

EPRA NTA decreased by 2 pence per share or 0.7% to 294 pence (March 2023: 296 pence) during the period. The revaluation deficit of £5.6 million or 13.5 pence per share reduced EPRA NTA as a result of a 4.4% like-for-like reduction in the property portfolio. This was offset by the £15.2 million of shares purchased through the share buyback programme in the period, which was accretive by 8.0 pence per share, and the profit from the disposal of investment properties which contributed 8.2 pence per share. These disposals were 7% ahead of the 31 March 2023 book value.

Adjusted earnings before tax of £2.3 million increased EPRA NTA by 5.5 pence per share, this was offset by the dividends paid in the period of 7.5 pence per share. Hudson Quarter trading profit (net of fair value adjustment to trading properties) increased EPRA NTA by 0.1 pence per share, whilst other movements contributed to a reduction of 2.8 pence per share.

*Other movements include debt termination costs, shares purchased by EBT, the denominator effect of the reduced number of shares at period end compared with the average for the period and the effect of rounding.

FINANCING

The Company has made further significant progress in reducing its drawn debt which has been reduced by £44.1 million, or 68.6% to £20.2 million (March 2023: £64.2 million). This includes the repayment of the Santander and Lloyds debt facilities, which had drawn debt at 31 March 2023 of £11.8 million and £6.8 million respectively. The repayment of these two facilities enabled the release from charge of £34.0 million of property, giving the Group further flexibility and optionality regarding the timing of the sales of such properties.

The Company prioritises the efficient use of its capital, and the £44.1 million reduction in debt has resulted in an LTV of 9% at 30 September 2023 (March 2023: 31%) and reduced our average cost of debt to 5.4% (March 2023: 5.8%). The Company has remained compliant with all covenants on its bank facilities in the period.

At 30 September 2023 cash and net debt was £8.9 million (March 2023: £5.5 million) and £11.3 million (March 2023: £58.8 million) respectively, with the disposal proceeds from Hudson Quarter residential sales continuing to enhance cash reserves, as this cash is unfettered and free from bank debt.

Since 30 September 2023, the Company has repaid a further £6.2 million of drawn debt, resulting in a net debt of £7.7 million and an LTV of 6.5%. This includes the full repayment of the NatWest term loan and the cancellation of the undrawn Revolving Credit Facility of £20.0 million.

Set out below is a table showing the movement in drawn debt during the year:

At 30 September 2023 we held £8.4 million of fixed rate debt (March 2023: £8.6 million) which was 42% of overall drawn debt (March 2023: 13%), as shown in the table below:

DEBT AT 30 SEPTEMBER 2023

Following the repayment of the NatWest facility the percentage of fixed rate debt has increased to 60% from 42%.

The Company's key debt metrics are summarised in the table below:

DEBT METRICS

Matthew Simpson

CHIEF FINANCIAL OFFICER

14 November 2023

Statement of Principal Risks

We consider there has been no material changes to the Company's principal risks, as set out in the Annual Report and Accounts for the year ended 31 March 2023 and summarised below. However, several risks continue to be elevated as a result of the ongoing economic outlook for the UK.

This includes increased risks relating to Market Cycle, Economic and Political, Liquidity and Valuation through increased economic uncertainty, higher interest rates, inflation and energy costs which may negatively impact revenues and costs for our tenants, for the commercial property market and the Company. We are working with our tenants, banks and other stakeholders to mitigate these risks.

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 www.palacecapitalplc.com

By order of the Board

Phil Higgins

Company Secretary

14 November 2023 

Palace Capital plc

Condensed consolidated statement of comprehensive income

For the six months ended 30 September 2023

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