P
A
L
A
C
E
C
A
P
I
T
A
L
P
L
C
A
N
N
U
A
L
R
E
P
O
R
T
A
N
D
A
C
C
O
U
N
T
S
2
0
2
0
EXPERTS IN
REGIONAL
PROPERTY
A N N UA L R E P O RT A N D A CC O U N T S 2 0 2 0
27192 Palace Capital AR2020.indd 3
00000
13 July 2020 12:21 pm
Proof 14
14-Jul-20 6:26:44 PM
WHO WE ARE
Palace Capital are experts
in regional property
investment, unlocking
value to deliver attractive
total returns.
O U R P U R P O S E
O U R VA LU ES
O U R C U LT U R E
We want to be the leading investor in
We are AMBITIOUS in our goals
Within Palace Capital we promote a
regional commercial property, generating
and together as a team we are
culture of inclusivity which allows all our
sector-leading total returns, while growing
courageous in our approach to
people to contribute to the formulation
a sustainable portfolio of assets that
adapts to changing occupier demands.
delivering our strategy.
and achievement of our strategic
priorities. We are a highly professional
and skilled team, with a profound family
ethos ensuring employees feel valued
and supported in both their working and
personal lives.
We are ASTUTE in our approach to
business, identifying opportunities
and applying our expertise to
maximise total returns.
We are ACTIVE asset managers,
focused on excelling and applying
the highest standards of integrity in
everything we do.
VISIT OUR NEW LOOK WEBSITE AT
WWW.PALACECAPITALPLC.COM
FOR REPORTS AND PRESENTATIONS,
GO TO HTTPS://WWW.
PALACECAPITALPLC.COM/INVESTORS/
REPORTS-AND-PRESENTATIONS/
IFC
HIGHLIGHTS
TOTAL PROPERTY
RETURN
1.1%
2020
7.1%
2019
IFRS (LOSS)/PROFIT
BEFORE TAX
£(9.1)m
2020
£6.4m
2019
ADJUSTED PROFIT
BEFORE TAX1
£8.0m
2020
£8.9m
2019
1 For more information see note 6 on page 107.
2 For more information see note 7 on page 108.
NET RENTAL INCOME
£18.8m
2020
£16.4m
2019
IFRS NAV
£166.3m
2020
£180.3m
2019
EPRA NAV PER SHARE2
364p
2020
407p
2019
COVID-19 RESPONSE
Covid-19 has had a significant impact on the UK economy since the Government enforced
lockdown in March 2020. We have responded quickly to ensure our stakeholders are
supported and the underlying resilience of the business is maintained.
OUR PEOPLE:
• The health and well-being of our people has always been our priority. All of our office-
based staff were encouraged to work from home from 16 March.
• Our Asset Managers contacted every tenant in order to understand their needs and
work through the economic challenges that they are facing.
OUR PORTFOLIO
• Covid-19 has made day-to-day operations difficult and complex for many of our
tenants. For tenants most in need, we have agreed a range of rent concessions.
OUR FUNDING
• Palace Capital has a strong balance sheet and remains well placed to deal with the
unprecedented challenges Covid-19 presents.
• Our major development at Hudson Quarter York is now fully debt funded and there
are minimal capital expenditure commitments across the rest of the portfolio.
• We are financially robust with a Loan To Value of 38% and £47.8m of cash and available
facilities as at 31 March 2020.
CONTENTS
Highlights
Investment Case
At a Glance
Strategic Report
Regional Focus
– The North
– The Midlands
– The South
Business Model
Strategy
Case Studies
– Core-plus
– Value-add
– Opportunistic Development
KPIs
Chief Executive’s Review
Property Review
Financial Review
Risk Management
Corporate Social Responsibility
Governance
Board of Directors
Chairman’s Governance Overview
Nominations Committee Report
CSR Committee Report
Audit and Risk Committee Report
Directors’ Remuneration Report
Remuneration At A Glance
Our Remuneration Policy
Annual Remuneration Report
Directors’ Report and Additional
Disclosures
Statement of Directors’
Responsibilities
Independent Auditor’s Report
Financial Statements
Consolidated Statement of
Comprehensive Income
Consolidated Statement of
Financial Position
Consolidated Statement of
Changes in Equity
Consolidated Statement of
Cash Flows
Notes to the Consolidated
Financial Statements
Company Statement of
Financial Position
Company Statement of
Changes in Equity
Notes to the Company
Financial Statements
01
02
04
08
10
12
14
16
18
20
22
24
26
30
36
40
46
52
54
62
64
66
69
71
72
75
81
83
84
92
93
94
95
96
128
129
130
Officers and Professional Advisers 136
Glossary
137
27192 Palace Capital AR2020.indd 3-1
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
01
14-Jul-20 6:13:52 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSOVERVIEW
INVESTMENT CASE
REGIONAL INSIGHT...
1
0
2
0
3
0
ENTREPRENEURIAL
AND OPPORTUNISTIC
APPROACH
We are entrepreneurial and opportunistic
PROACTIVE ASSET
MANAGEMENT
STRATEGIES
We apply proactive asset management
in our approach to stock selection. We are
strategies to unlock sustainable cash
not restricted to one sector and evaluate
returns by growing rents and improving
each opportunity on its own merits with a
occupancy. Within our investment portfolio
view to limiting exposure to sector specific
we have identified potential development
fluctuations.
opportunities which, providing they are
viable, we will look to unlock over the
medium term to deliver real estate which
meets occupational demands.
STRONG AND
EXTENSIVE EXPERTISE
AND RELATIONSHIP
NETWORK
The management team are regional
experts with exceptional market
penetration through their relationship
networks and extensive property and
financial backgrounds.
...DELIVERING TOTAL SHAREHOLDER RETURNS
4
0
5
0
6
0
TOTAL RETURN MODEL
We operate on a total return basis so it
is important for us to grow our capital
values as well as our income. We have
established a core portfolio of sustainable
income-producing assets which has
INVESTED IN SECTORS
AND LOCATIONS
WITH GOOD GROWTH
PROSPECTS
Demand for office and industrial space
enabled us to reward investors with an
outside London remains strong. The
attractive dividend. Furthermore, we have
limited supply of office space (partly due
the flexibility to reinvest surplus capital to
to the loss of offices to residential from
refurbish, reposition and recycle property.
Permitted Development Rights) is creating
advantageous supply-demand dynamics
and prospects for rental growth in certain
DIVERSIFIED
PORTFOLIO
We have a carefully selected portfolio
across the UK, diversified by location,
sector and tenant in order to limit risk and
capitalise on rental growth dynamics.
We see particular value in university towns
and cities with good infrastructure such
as major road arteries and fast rail links
because urbanisation and population
growth drive demand for commercial
locations. We consider there is implicit
space.
rental growth in the regions.
DEVELOPMENT PIPELINE
PROGRESSING OUR DRIVERS OF GROWTH
TOTAL PROPERTY RETURN VS MSCI INDEX –
THREE YEAR TRACK RECORD
Total Return 2018 – 2020 % pa
PORTFOLIO VALUATION
Total Value/£m
TOTAL POTENTIAL AREA
>209,000sq ft
HIGH STREET, WEYBRIDGE.
Planning consent obtained for 28
residential units.
23,000sq ft
HIGH STREET, UXBRIDGE.
Planning application submitted for 10 residential units.
6,000sq ft
MILBARN MEDICAL, BEACONSFIELD.
Potential for up to 10,000 sq ft of mixed use
development, treble the existing floorspace.
10,000sq ft
100,000sq ft
MIDSUMMER BLVD, MILTON KEYNES.
Potential for at least 100,000 sq ft of mixed use development.
Design and pre-application for planning being considered.
70,000sq ft
HOLLY WALK, LEAMINGTON SPA.
Potential 70,000 sq ft mixed
use development.
2020
2021
2022
2023
2024 and beyond
02
2018
2019
2020
10.5%
10.1%
7.1%
4.5%
1.1%
-0.5%
2016
2017
2018
2019
2020
£173.4m
£183.2m
£276.7m
£286.3m
£277.8m
Total Property Return
MSCI index
FOR MORE INFORMATION SEE
NOTE 9 ON PAGES 110–113
FOR MORE INFORMATION SEE
GLOSSARY ON PAGES 137–138
27192 Palace Capital AR2020.indd 2-3
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
03
14-Jul-20 6:13:53 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSOVERVIEW AT A GLANCE
NUMBER OF
PROPERTIES (53)
OFFICES
INDUSTRIAL
LEISURE
DEVELOPMENT
RETAIL
RETAIL WAREHOUSES
Newcastle
Halifax
Manchester
Liverpool
York
Leeds
Sheffield
Coventry
Kettering
Leamington Spa
Banbury
Northampton
Milton Keynes
Thame
Beaconsfield
Harlow
Avonmouth
Newbury
Gerrards Cross
Staines
Weybridge
Winchester
Farnborough
Ickenham
Uxbridge
Dartford
Walton-on-Thames
Sutton
East Grinstead
Salisbury
Verwood
Southampton
Aldershot
Fareham
Portsmouth
Burgess Hill
Brighton
Rustington
Exeter
Plymouth
04
Gosport
TOP 10 PROPERTIES BY VALUE
Y
O
R
K
N
E
W
C
A
S
T
L
E
U
P
O
N
T
Y
N
E
M
A
N
C
H
E
S
T
E
R
L
E
E
D
S
E
A
S
T
G
R
I
N
S
T
E
A
D
H
A
L
I
F
A
X
N
O
R
T
H
A
M
P
T
O
N
L
I
V
E
R
P
O
O
L
I
M
L
T
O
N
K
E
Y
N
E
S
V
E
R
W
O
O
D
A R E A – 1 3 0 ,0 0 0 s q f t
Rental income: N/A
Hudson Quarter is a residential
and office development within
York’s city walls comprising
127 apartments and 39,500
sq ft of grade A office space.
Construction is due to
complete in Q1 2021.
Distance from train station:
0.1m
2 min
A R E A – 9 9,1 2 5 s q f t
Rental income: £1.3m p.a.
Multi-let office block in the
city centre with existing
tenants including Serco and
the National Lottery. Two
refurbished floors are available
to let.
Distance from train station:
0.3m
6 min
A R E A – 7 4 , 6 5 3 s q f t
Rental income: £0.8m p.a.
Boulton House is an eight
storey office block in
Manchester cIty centre within
walking distance of Piccadilly
mainline station. A variety of
refurbished suites are available
to let.
Distance from train station:
0.3m
7 min
A R E A – 8 8 ,0 3 6 s q f t
Rental income: £0.5m p.a.
Multi-let city centre office
building let to the Bank of
England and JM Bentley.
33,000 sq ft is available for let
on a short-term basis.
Distance from train station:
0.1m
2 min
A R E A - 3 0 , 6 7 2 s q f t
Rental income: £0.5m p.a.
Multi-let Retail Warehouse
in prominent location let to
Wickes and Pets at Home on
long-term leases.
Distance from train station:
1.4m
4 min
27192 Palace Capital AR2020.indd 4-5
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
A R E A – 1 1 7,7 6 7 s q f t
Rental income: £1.8m p.a.
Broad Street Plaza is a
dominant city centre leisure
scheme anchored by a ten
screen Vue cinema and a car
park. Other operators include
Wetherspoons, PizzaExpress,
TGI Friday’s and PureGym.
Distance from train station:
0.5m
12 min
A R E A – 1 8 9, 2 0 3 s q f t
Rental income: £1.8m p.a.
Dominant city centre leisure
scheme incorporating a Vue
Cinema, Ibis hotel and Gravity
Fitness. 22,000 sq ft of vacant
space is available to let.
Distance from train station:
0.2m
4 min
A R E A – 7 0 ,1 6 1 s q f t
Rental income: £1.1m p.a.
City centre office and retail
property with tenants including
Tesco, Medicash and Exchange
Chambers. 100% occupied
and let.
Distance from train station:
0.5m
11 min
A R E A – 5 2 , 8 1 8 s q f t
Rental income: £0.7m p.a.
Our three buildings in Kiln
Farm are let to Rockwell and
Monier Redland. They offer
low passing rents and potential
for growth.
Distance from train station:
2.9m
8 min
A R E A - 6 5 ,7 6 5 s q f t
Rental income: £0.4m p.a.
Multi-let industrial estate with
two refurbished units available
for letting. Rental levels have
grown by 30% since purchase.
Distance from train station:
11.2m
18 min
05
14-Jul-20 6:14:07 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSOVERVIEW
Strategic
Report
Regional Focus
– The North
– The Midlands
– The South
Business Model
Strategy
Case Studies
– Core-plus
– Value-add
– Opportunistic Development
KPIs
Chief Executive’s Review
Property Review
Financial Review
Risk Management
Corporate Social Responsibility
08
10
12
14
16
18
20
22
24
26
30
36
40
46
We acquire regional
properties and unlock
value to create
sustainable assets
through our proactive
management
approach to property
investment.
WHAT WE DO
1
0
ACQ U I R E
We identify and buy strategically
located real estate outside London
that fits our investment criteria.
2
0
R E F U R B I S H
We seek to revitalise assets,
creating refurbished space meeting
occupational demand.
3
0
R E D E V E LO P
We secure planning permission and
financing to unlock value, creating
excellent modern commercial space.
4
0
R E I N V EST
Once we have achieved our
objectives, we recycle capital into
new opportunities through disposal.
06
27192 Palace Capital AR2020.indd 6-7
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
07
14-Jul-20 6:14:13 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSSTRATEGIC REPORT
REGIONAL FOCUS: THE NORTH
WE HAVE BEEN FOCUSED ON REGIONAL
PROPERTY INVESTMENT OUTSIDE OF LONDON
FOR A DECADE. WE SEE PARTICULAR VALUE IN
UNIVERSITY TOWNS AND CITIES AND SELECT
ASSETS WHICH ARE CLOSE TO LOCAL AND
NATIONAL INFRASTRUCTURE.
Regional cities have continued to grow steadily in recent years.
Following the General Election in December 2019, it is expected that the
Government will introduce initiatives to support growth and development
to reduce the North / South divide.
WHY THE NORTH?
There are many towns and cities which have the potential to provide rental and
capital growth. Some of these larger cities are now included in the Northern
Powerhouse and we have invested in these locations.
We expect the economies in the North, in particular the Yorkshire and the Humber
region, to out-perform other areas of the UK in the next few years. There has been
more clarity over the future of HS2 which when complete will increase connectivity
throughout the UK and encourage more companies to locate away from London.
Although it is forecast that the route will take until 2032 to complete, it is already
encouraging more investment in the North.
KEY
0 Number of properties
Office
Industrial
Leisure
Development
Retail
Retail warehouses
Size of city/population
Miles to nearest train station
Walking time to nearest train station
Driving time to nearest train station
Newcastle:
Speculative development of office space and strong take-up
in the industrial and logistics market prove promising with
prime office headline rents now at £26 psf and vacancy rates
at an all-time low of 4%. Coupled with over 85,000 university
students, Newcastle is an attractive and vibrant university city.
Liverpool:
Office take-up in the city region continues to increase year on
year with several key projects currently under construction and
in planning, such as Paddington Village and the mixed-use Pall
Mall scheme.
Home to three major universities, there are over 55,000
university students and in 2019 the city welcomed over 64
million visitors.
Leeds:
Leeds is the biggest contributor to the Northern Powerhouse
– the city is England’s largest regional finance centre with a
total workforce of 1.4 million people in the Leeds City Region.
Over the last decade there has been significant investment
in large-scale mixed-use development projects, with a
further £7.3bn worth of development under construction
and in the pipeline. Channel 4’s decision to open its national
headquarters in Leeds has further marked the city as a hub for
innovation and creativity.
L I V E R P OO L
Sector: 1
Rental income: £1.1m p.a.
0.5m
11 mins
Opportunity: Increase the passing
rental tone on the office space.
M A N C H EST E R
Sector: 1
Rental income: £0.8m p.a.
0.3m
7 mins
Opportunity: Let the remaining
vacant refurbished space.
Yorkshire
Northumberland
Lancashire
N E W C A ST L E
Sector: 1
Rental income: £1.3m p.a.
0.3m
6 mins
Opportunity: To let the vacant
refurbished space.
H A L I FA X
Sector: 1
Rental income: £1.8m p.a.
0.5m
12 mins
Opportunity: To attract new
tenants to the vacant space and
generate increasing footfall.
YO R K
Sector: 1 1
Rental income: £0.3m p.a.
0.1m
2 mins
Opportunity: Sell the remaining
residential units and let the
speculative office space.
L E E D S
Sector: 1
Rental income: £0.5m p.a.
0.1m
2 mins
Opportunity: Let the remaining
office space on a short-term
basis.
S H E FF I E L D
Sector: 1
Rental income: £0.1m p.a.
3.5m
8 mins
Opportunity: Let the vacant
space.
09
14-Jul-20 6:14:16 PM
08
27192 Palace Capital AR2020.indd 8-9
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSSTRATEGIC REPORT REGIONAL FOCUS: THE MIDLANDS
THE LARGEST INFRASTRUCTURE PROJECT
IN EUROPE, HS2, IS SET TO LINK LONDON TO
BIRMINGHAM AND BEYOND BY A FAST RAIL
CONNECTION WITH TRAIN SPEEDS OF UP TO
225MPH ENABLING AS MANY AS 14 JOURNEYS
PER HOUR.
KEY
0 Number of properties
Office
Industrial
Leisure
Development
Retail
Retail warehouses
WHY THE MIDLANDS?
We see great potential in the Midlands. Cities such as Birmingham are already
moving in the right direction with developments such as the first phase of Paradise
and Three Snowhill nearing completion and an even more exciting future pipeline.
The East Midlands economy has grown steadily in recent years and a strong
transport network should enable further economic growth.
Size of city/population
Miles to nearest train station
Walking time to nearest train station
Driving time to nearest train station
Milton Keynes:
Milton Keynes is an active market with increasing rents, strong
demand and a welcome return of development. With the town
set to benefit from key transport infrastructure improvements,
the fundamentals for continuing rental growth and inward
investment are in place over the short and medium term, both
in town and out of town.
Milton Keynes has attracted a large volume of headquarter
occupiers, including Network Rail, Santander, Mercedes Benz,
Nissan and Volkswagen and is home to over 10,000 businesses,
75% of which consider Milton Keynes as their headquarters.
At a headline rent of £27.50 psf on new stock, Milton Keynes
offers an attractive discount to the competing South East
region. With the Milton Keynes University due to open in 2023,
we see this as a growth area in the medium to long term.
Northampton:
Northampton is one of the largest urban centres in the United
Kingdom without city status and is the most populous non-
metropolitan district of England. The main private-sector
employers are in distribution and finance and it is also home
to Barclaycard and Nationwide Building Society as well as
Carlsberg.
The University of Northampton is also a major employer, with
700 staff members and 14,000 students. The University opened
a new campus in 2018 which was a £330m development and is
within a 15 minute walk of our Sol Northhampton scheme. The
council are keen to promote the many developments planned
for the centre which include the Waterside scheme which is
opposite our scheme and would provide up to 60,000 sq ft of
grade A space when a private sector partner is found.
Warwickshire
Buckinghamshire
Northamptonshire
Oxfordshire
C OV E N T RY
Sector: 1
Rental income: £0.5m p.a.
2.6m
9 mins
Opportunity: long-term rental
growth.
N O RT H A M P TO N
Sector: 1
Rental income: £1.8m p.a.
0.2m
4 mins
Opportunity: Continue to
improve footfall through the
scheme to attract new operators.
L E A M I N GTO N S PA
Sector: 1
Rental income: £0.6m p.a.
0.9m
4 mins
Opportunity: Medium-term
development opportunity in an
area with improving rental values.
B A N B U RY
Sector: 1
Rental income: £0.1m p.a.
1.2m
5 min
Opportunity: Extend leases with
current occupiers and explore
development possibilities.
K E T T E R I N G
Sector: 1
Rental income: £0.1m p.a.
2.1m
6 min
Opportunity: Let the newly
refurbished vacant unit.
M I LTO N K E Y N E S
Sector: 2
Rental income: £1.1m p.a.
8 min
2.9m
Opportunity: Explore
development opportunity at 249
Midsummer Boulevard and take
advantage of improving rental
values at Kiln Farm.
11
14-Jul-20 6:14:20 PM
10
27192 Palace Capital AR2020.indd 10-11
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSSTRATEGIC REPORT REGIONAL FOCUS: THE SOUTH
PALACE CAPITAL HOLDS OVER 25% OF
ITS PORTFOLIO IN THE SOUTH EAST –
MAINLY OFFICES IN TOWNS AND CITIES
INCLUDING STAINES, UXBRIDGE, SUTTON AND
FARNBOROUGH.
Beyond Greater London and the South East, Palace Capital owns assets
across the major cities in the South, including Brighton, Southampton,
Winchester and Exeter.
WHY THE SOUTH?
The South East has long been recognised as the second-most prosperous region
in the UK after London. Ahead of the Covid-19 pandemic, the South East region
was expected to grow significantly by the end of 2023, with strong employment
growth. Meanwhile, the South West region continues to be a hub for aerospace and
advanced engineering in the UK.
KEY
0 Number of properties
Office
Industrial
Leisure
Development
Retail
Retail warehouses
Size of city/population
Miles to nearest train station
Walking time to nearest train station
Driving time to nearest train station
Weybridge:
Weybridge is a Surrey commuter town with regular trains to the
capital. Its real estate prices are well above the national average.
During the year we engaged a professional team and obtained
planning consent to develop 28 residential apartments and
4,000 sq ft of ground floor retail space. See page 34 for further
information.
Brighton:
Only 54 miles from London, with a direct train in under an hour,
Brighton is a commuter town as well as being a significant hub
for businesses including some well-known multinationals such as
American Express.
The success of The Brinell Building (65,000 sq ft), being fully
pre-let eight months prior to completion in June 2019, is
a testament to the attractive demand and supply side
factors in this city.
Prime office headline rents are now at £32 psf and
the office vacancy rate is currently at 7%.
SOUTH WEST
B R I STO L
Winchester
Winchester has a critical shortage of office
supply and experienced limited activity in
2019. However, it remains in strong demand
P LY M O U T H
should new space be delivered and office rents
across the region were up in 2019, boosted by
constrained supply and rising demand for better
quality spaces.
Prime office headline rents are now at £25 psf and there is
further growth expected.
E X E T E R
Sector: 1
Revenue: £0.4m
0.5m
Opportunity: Let the
remaining vacant space.
10mins
Oxfordshire, Essex, Kent,
Buckinghamshire, Berkshire,
Wiltshire, Dorset, Hampshire,
Sussex, Middlesex and Surrey
B E AC O N S F I E L D
Sector: 2
Rental income: £0.2m p.a.
1.1m
4 mins
Opportunity: Explore change
of use for the recently vacated
property.
H A R LOW
Sector: 1
Rental income: £0.4m p.a.
2.5m
6mins
G E R R A R D S
C R O S S
DA R T F O R D
Sector: 1
Rental income: £0.3m p.a.
6 mins
0.3m
Opportunity:
Let the recently vacated
restaurant unit.
I C K E N H A M
U X B R I D G E
Sector: 2
Rental income: £0.2m p.a.
STA I N ES
0.2m 4m
Opportunity: Seek
planning consent for the
development of the rear
car park and change of
use to the upper parts.
W E Y B R I D G E
V E R W OO D
S A L I S B U RY
FA R N B O R O U G H
FA R E H A M
A L D E R S H OT
G O S P O RT
S O U T H A M P TO N
Sector: 2 2
Rental income: £0.4m p.a.
0.5m
9mins
Opportunity: Complete
outstanding rent review, let
vacant space and extend
leasehold with local authority.
P O RT S M O U T H
Sector: 1
Rental income: £0.4m p.a.
5.6m
10 m
Opportunity: Refurbish the
vacant office space and
seek a new tenant.
B R I G H TO N
Sector: 2
Rental income: £0.3m p.a.
0.5m
11m
Opportunity: Refurbish the
vacant space and achieve
increased rental level.
S U T TO N
Sector: 1
Rental income: £0.4m p.a.
0.3m
6mins
Opportunity: Extend the
lease to the council and
improve rental income.
E A ST G R I N ST E A D
Sector: 1
Rental income: £0.5m p.a.
1.4m
4 mins
B U R G E S S H I L L
Sector: 1
Rental income: £0.4m p.a.
0.9m
3 mins
Opportunity: Increase rental
level at forthcoming rent
review.
13
14-Jul-20 6:14:26 PM
12
Other properties at: Newbury, Rustington, Thame and Walton-on-Thames
27192 Palace Capital AR2020.indd 12-13
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSSTRATEGIC REPORT BUSINESS MODEL
KEY
RESOURCES
PORTFOLIO MIX AND
FINANCIAL BENEFIT
OUR PEOPLE
•
Extensive property and
financial expertise
C O R E - P LUS
The core of the portfolio has medium/long
leases, high occupancy and a strong
• Over 100 years of combined
income profile.
real estate expertise
• Regional expertise
• Entrepreneurial and
proactive approach to
property investment
OUR PORTFOLIO
•
Majority of portfolio is core-
plus, generating strong
cash-on-cash returns
• Value-added and
opportunistic assets with
future growth potential
• Potential development
pipeline within existing
portfolio
• Lower risk focus in markets
showing supply-demand
imbalance and rental
growth
OUR FUNDING
• Balanced capital structure
with conservative debt level
• Core portfolio creates
surplus cash generation
which in turn supports
dividends
• Sustainable cash returns
•
Debt maturity matched to
portfolio lease lengths
• Strong relationships with
main UK clearing banks
Core-plu
s
ACQUISITION
OF ASSETS
We identify and buy
strategically located real
estate outside London that
fits our investment criteria.
V
a
l
u
e
-
a
d
d
n i s ti c d e v elop m ent
O p p o r
u
t
B E N E F I T
Sustainable income
generated, used to
fund dividends
READ MORE ABOUT CORE-PLUS
ASSETS ON PAGES 18 AND 19
VA LU E -A D D
We reinvest surplus capital
to adapt to changing
occupier demands
B E N E F I T
Short-term upside in rents
and portfolio value
READ MORE ABOUT
VALUE-ADD ASSETS
ON PAGES 20 AND 21
O PP O R T U N I ST I C D E V E LO P M E N T
B E N E F I T
Within the investment portfolio, we have
identified potential development opportunities,
which will unlock significant growth over the
medium/long term.
Medium/long-term upside in
rents and portfolio value
READ MORE ABOUT
OPPORTUNISTIC DEVELOPMENT
ON PAGES 22 AND 23
DISPOSAL AND
REINVESTMENT
VALUE
CREATED
Once we have achieved our
objectives, we recycle capital into
new opportunities through disposal.
CHARACTERISTICS OF
DISPOSALS:
Assets with limited
growth prospects
1
0
Non-core assets that don’t fit
with our regional office and
industrial strategy
2
0
3
0
Assets where we can realise
profit that reflects good value
from our investments, which
we can reinvest into growth
opportunities
Assets that are vacant
4
0
INVESTORS
• We have a total return strategy,
involving increasing capital return
as well as income returns.
• Ambition to outperform our
sector as measured against MSCI
benchmark.
TOTAL PROPERTY RETURN
1.1%
versus MSCI Index: -0.5%
TENANTS
• We create space for modern
occupational requirements.
• We aim to ensure our
refurbishments and
redevelopments are
environmentally efficient.
SPACE LET IN THE YEAR
292,000sq ft
COMMUNITIES
• Sustainably built developments.
• Meeting regional demand.
• Working with local authorities.
•
Helping regenerate city centres
through developing desirable
real estate.
NO. OF COMMERCIAL
LEASES ACROSS
PORTFOLIO
220
15
14-Jul-20 6:14:30 PM
14
27192 Palace Capital AR2020.indd 14-15
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSSTRATEGIC REPORT PA L AC E C A P I TA L P L C A N N UA L R E P O R T A N D ACC O U N T S
ST R AT E G I C R E P O RT
STRATEGY
Our focus is on value creation through our
targeted acquisition of regional commercial
property.
We invest across sectors outside London, based on fundamental demand/
supply macroeconomics supported by structural trends. We focus on
properties where we can enhance the long-term income and capital value
through proactive management and strategic capital developments to
create desirable real estate that meets demand. We employ a conservative
financing strategy with debt aligned to our property strategy.
READ MORE ABOUT OUR
KPIS ON PAGES 24 AND 25
READ MORE ABOUT OUR
RISKS ON PAGES 40–45
KPIs KEY
1 Total Property Return (TPR)
2 Total Shareholder Return (TSR)
3 Total Accounting Return (TAR)
4 Rental Growth versus ERV
5 Adjusted PBT
6 EPRA Vacancy Rate %
7 LTV of Group Debt
8 Average Cost of Debt
PRINCIPAL RISKS KEY
1 Development
2 Tenant
3 Financing and Cash Flow
4 Economic and Political
5 Accounting, tax, legal and regulatory
6 Operational
7 People
8 Portfolio
We acquire
strategically
located
properties
and revitalise
them to create
sustainable
assets.
16
1
0
GROW OUR REGIONAL
PORTFOLIO
We are continuously reviewing
opportunities to grow the business
and extend our income through
both direct property and corporate
acquisitions.
Through our conservative capital structure
we are able to access capital and debt
on attractive terms in order to support
acquisitions. We have a robust programme
of investor relations practices and through
our careful approach to capital allocation
we ensure every opportunity supports our
total return model.
Progress during the year
• Monitored the market closely for
potential acquisitions
• Refinanced two debt facilities,
increasing average debt maturity to
3.9 years
• Made 26 presentations over
four roadshows in Dublin, Edinburgh,
Jersey and London
Future Focus
• Seek income-enhancing acquisitions
focused on our core office and
industrial sectors
support potential investment
• Maintain strong banking relationships
• Reduce the discount to NAV to the
share price through our investor
relations programme and engagement
with retail investors and wealth
managers as well as institutions
Link to KPIs
1
4
2
5 7 8
2
0
GENERATE
ATTRACTIVE TOTAL
RETURNS
3
0
MANAGE OUR ASSETS
EFFECTIVELY
4
0
BE A RESPONSIBLE
COMPANY
Our long-term strategic objective
We apply proactive asset
We are committed to conducting
is to outperform our peer group on
management strategies
our business responsibly and
a total return basis.
balancing income generation and
focusing on the issues that matter
development activity.
most to each of our stakeholder
groups.
We measure ourselves against the MSCI
By recycling equity out of under-
We continue to embed corporate
industry benchmark.
performing assets, we can deploy this
responsibility initiatives into our daily
To ensure we deliver on this strategy we
acquire assets across a range of risk/return
strategies from core-plus to value-add,
through to opportunistic developments.
into refurbishment and other value-add
business practices and seek to operate in
opportunities in order to reposition assets
a way that provides a positive contribution
and meet occupational demand. We have
to society and creates sustainable value for
an opportunistic pipeline of assets which
our shareholders.
are well positioned for medium-term
development.
Progress during the year
Progress during the year
Progress during the year
• Outperformed the MSCI benchmark
• Disposed of the final 34 residential
• Established a CSR Committee and
by 1.5%
units from the RT Warren portfolio
Workforce Advisory Panel
• Secured new lettings 9% above the
• Obtained planning consent for
• Focused on tenant engagement
estimated rental value
a development at High Street,
initiatives
•
Increased annual rent by 21% on
Weybridge
• Expanded environmental data
lease renewals
• Surrendered short leashold at Priory
collection
House, Birmingham for £2.85m at a
25% premium to book value
Future Focus
Future Focus
Future Focus
•
Improve sustainability of dividend
•
Increase sold units and achieve
•
Improve our environmental
practical completion at Hudson
performance
• Grow recurring income through lease
renewals and re-gears and reduce
Quarter, York in 2021
• Continue to identify assets within
portfolio for optimum timing of
• Secure pre-lets on office space and
complete sales programme for the
disposal
127 residential apartments at Hudson
•
Improve occupier engagement
Quarter development, York
• Continue to identify assets that
•
Identify the optimum time to dispose
require improvement in order to
of assets earmarked for sale
grow rental values
• Continue to outperform the MSCI
benchmark
Link to KPIs
1
3
2
4 5 6
Link to KPIs
4
6
• Continue to work alongside our
tenants supporting their business
occupational needs
• Retain and develop our talented
workforce
Link to KPIs
2
7
6
8
Link to risks
2
7
5
17
14-Jul-20 6:14:35 PM
• Maintain conservative levels of cash to
void costs
Link to risks
6 8
1
4
3
Link to risks
3
8
4
Link to risks
1
6
2
8
27192 Palace Capital AR2020.indd 16-17
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
CASE STUDY: CORE-PLUS
O
N
E
D
E
R
B
Y
S
Q
U
A
R
E
–
L
I
V
E
R
P
O
O
L
18
RENTAL INCOME:
£1.1m p.a.
ACQUISITION DATE:
12/2018
OCCUPANCY LEVEL:
100%
AREA:
70,161 sq ft
SECTOR:
Office / Retail
ONE DERBY SQUARE
This imposing building with
extensive frontages onto Lord
Street, Castle Street and Derby
Square comprises 70,000 sq ft of
office and retail units over five floors.
The property was acquired for £14.0m in
December 2018 and included tenants such
as Pret A Manger, Tesco, Medicash and
Exchange Chambers.
During the year we completed three lease
events which increased the rental income
to £1.1m p.a. and full occupation.
LIVERPOOL
Liverpool is the 6th largest City in
the UK and 2nd largest in the North
West region, after Manchester.
The City has undergone a major
resurgence since being awarded
European Capital of Culture in
2008, with investment of over £3bn
in construction and infrastructure
projects. The City is also home to
four universities with an annual
student population of approximately
50,000. Liverpool has experienced
above average improvements in the
skills of both 16-24 and 25-64 year
olds, in housing affordability and in
terms of falling carbon emissions.
(Good Growth for Cities, PwC
Report 2019)
27192 Palace Capital AR2020.indd 18-19
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
19
14-Jul-20 6:14:41 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSSTRATEGIC REPORT
Manchester
Manchester
Arena
Arena
VICTORIA
VICTORIA
STATION
STATION
VICTORIA
National Football
Museum
Be here.
Be stylish.
Be there.
Be there.
C H A P E L S T
Be individual.
Be flexible.
The Corn
The Corn
Exchange
Exchange
Be stunning.
Be in touch.
Manchester
Manchester
Cathedral
Cathedral
SHUDEHILL
CASE STUDY: VALUE-ADD
Manchester
Manchester
Arena
Arena
VICTORIA
VICTORIA
STATION
STATION
VICTORIA
National Football
Museum
Be here.
Be stylish.
Be there.
Be there.
C H A P E L S T
Manchester
Manchester
Cathedral
Cathedral
Be individual.
Be flexible.
The Corn
The Corn
Exchange
Exchange
Manchester
Manchester
Arena
Arena
SHUDEHILL
VICTORIA
Be stunning.
VICTORIA
VICTORIA
STATION
STATION
Be in touch.
17 Chorlton Street, Manchester, M1 3HY.
B
L
A
C
K
F
R
I
A
R
S
R
Selfridges
Selfridges
D
E
T
A
G
S
N
Be stylish.
A
E
D
ST. ANN’S
SQUARE
M&S
M&S
r
t
e
M
Be there.
Be there.
C H A P E L S T
C
B
A
L
T
E
E
R
T
S S
S
O
R
C
K
F
R
I
A
R
S
R
D
The Lowry Hotel
Be here.
17 Chorlton Street, Manchester, M1 3HY.
SALFORD
CENTRAL
Boulton House occupies a prominent
position on Chorlton Street, just off
Portland Street, close to the city’s financial
and professional core.
healthcare, environment, culture
MANCHESTER
Capital of the Northern
Powerhouse and once again,
named by The Economist as
and infrastructure. Business too
The location benefits from an abundance of
thinks Manchester is a great place
cosmopolitan café bars and leisure facilities
to locate and grow, with a record
take-up of office space in 2019.
and Manchester’s principal shopping areas
Growing numbers of people are
are within a few minutes’ walk.
BRIDGE ST.
SALFORD
CENTRAL
Boulton House occupies a prominent
position on Chorlton Street, just off
Portland Street, close to the city’s financial
and professional core.
JOHN DALTON ST.
the most liveable city in the UK
in 2019. Manchester has held
top spot for Britain every year
since the “Global Liveability
Index” was launched in 2011
which is based on factors such
Key / distance
as political and social stability,
crime rates, education, access to
Transport
to study and live, helping to fuel a
choosing Manchester as a place
SPINNINGFIELDS
SPINNINGFIELDS
The location benefits from an abundance of
cosmopolitan café bars and leisure facilities
and Manchester’s principal shopping areas
are within a few minutes’ walk.
record number of 4,380 new jobs
for the city region and a boom
ALBERT
SQUARE
in both the start-up tech and
E
T
A
G
S
N
A
E
D
creative sectors.
QUAY STREET
Retail
St. Ann’s
Church
The Lowry Hotel
INCREASE IN ERV SINCE
ACQUISITION:
M&S
M&S
r
t
e
M
E
T
A
G
S
N
A
E
D
T
E
E
R
T
T
E
E
R
T
S S
S
O
R
C
26.5%
St. Ann’s
Church
ST. ANN’S
SQUARE
RENTAL INCOME:
FO U NTAIN S
£814,924 p.a.
BRIDGE ST.
OPER STREET
ACQUISITION DATE:
JOHN DALTON ST.
08/2016
C O
C
H
A
R
L
O
T
T
E S
T
R
19
n
sio
n
e
t
x
k E
olin
National Football
Museum
Manchester
Arndale
Manchester
Manchester
Cathedral
Cathedral
Be individual.
21
Be flexible.
The Corn
The Corn
Exchange
Exchange
17 Chorlton Street, Manchester, M1 3HY.
Amenities map
Aerial
The Lowry Hotel
SHUDEHILL
22
Be stunning.
Be in touch.
20
Selfridges
Selfridges
n
sio
n
e
t
x
k E
olin
NORTHERN QUARTER
MARKET
Manchester
STREET
Arndale
15
21
14
P
OLD HA M STREET
LEVER STREET
22
I
17 Chorlton Street, Manchester, M1 3HY.
20
NORTHERN QUARTER
ADILLY
C
C
13
PICCADILLY
GARDENS
12
2
16 17
6
7
18
MARKET
STREET
15
OLD HA M STREET
LEVER STREET
SALFORD
CENTRAL
Boulton House occupies a prominent
position on Chorlton Street, just off
Portland Street, close to the city’s financial
and professional core.
T
E
A
R
G
A
N
C
O
A
T
S S
The location benefits from an abundance of
cosmopolitan café bars and leisure facilities
Aerial
and Manchester’s principal shopping areas
are within a few minutes’ walk.
Be stylish.
Central
Retail Park
Be individual.
Be there.
Be there.
SPINNINGFIELDS
SPINNINGFIELDS
E
E
T
T
R
C H A P E L S T
Manchester
Manchester
Cathedral
Cathedral
BRIDGE ST.
Amenities map
Be here.
G
R
E
A
B
L
T
A
A
C
K
F
N
C
R
I
A
O
A
T
R
S
Key / distance
Transport
S S
1 Manchester Central Coach Station
2 Piccadilly Metrolink Station
3 Piccadilly Train Station
4 Oxford Road Train Station
The Lowry Hotel
T
R
D
R
QUAY STREET
Retail
E
E
E
T
Central
A
G
20 Market Street
Retail Park
S
21 Manchester Arndale
N
A
22 Northern Quarter
E
D
T
ST. JOHNS
GARDENS
N
E
W
Y
O
9
11
8
T
E
E
R
23
T
R
R
T
T
T
E
E
E
E
24
K S
10
FO U NTAIN S
P O R TL A N D ST R EET
SILV E R ST
5
Manchester Central
Manchester
Art Gallery
Coach Station
OPER STREET
1
C O
L
T
R
C
P
N
H
O
O
A
C
H
R
I
N
S
A
C
E
C
S
K
V
I
L
S S
L
T.
E S
T
R
E
E
T
M
I
N
S
11
N
H
E
U
W
9
L
Y
L S
O
R
T
8
T
R
E
K S
10
R
E
E
T
E
T
M A J O R S T
L
R
O
A
Y
13
T
PICCADILLY
GARDENS
O
U
N
12
S
T
R
E
E
T
23
P
C
I
C
7
6
14
18
ADILLY
16 17
Restaurants and bars
SALFORD
CENTRAL
Boulton House occupies a prominent
position on Chorlton Street, just off
Portland Street, close to the city’s financial
5 Upper Crust
6 Pizza Express
and professional core.
7 Ask Italian
2
8 Grill on New York Street
9 The Alchemist
The location benefits from an abundance of
10 Giovannis Deli
cosmopolitan café bars and leisure facilities
11 Philpotts
12 Starbucks
and Manchester’s principal shopping areas
13 Cafe Nero
T
are within a few minutes’ walk.
14 Zizzis
R
15 Bella Italia
O
T
S
16 Byron
17 Pret
18 Wrap it Up
19 China Town
SPINNINGFIELDS
SPINNINGFIELDS
26
25
27
E S
25
27
D
C
C
A
P
C
C
A
P
L
L
S
S
T
Y
T
A
N
H
T
E
R
M
T
O
I
E
E
U
I
I
T
BRIDGE ST.
E
T
A
G
S
T
N
E
E
A
R
E
D
T
D
26
I
L
3
L
Y
QUAY STREET
S
Retail
T
E S
R
O
M S T
T
T
E S
R
T
B L O
S
19
T
R
O
T
E
E
P O R TL A N D ST R EET
E
E
T
C
H
N
R
E
U
L
I
Y
L S
24
Be
SILV E R ST
M A J O R S T
there.
Key / distance
M S T
Transport
B L O
S
T
O
E
E
T
R
O
O
R
L
1
5
Manchester Central
Coach Station
N
1 Manchester Central Coach Station
2 Piccadilly Metrolink Station
3 Piccadilly Train Station
4 Oxford Road Train Station
E
E
T
T
R
20 Market Street
21 Manchester Arndale
22 Northern Quarter
ST. JOHNS
GARDENS
3
PICCADILLY
STATION
Restaurants and bars
FAIRFIELD STREET
Hotels
S
A
C
K
V
I
L
L
E S
E
R
T
T
R
E
T
E
E
T
SACKVILLE
GARDENS
H S
T
W H I T W O R
University Of
Manchester
PICCADILLY
STATION
FAIRFIELD STREET
23 Mecure, Piccadilly
24 Brittania
25 Malmaison
26 DoubleTree by Hilton
27 Holiday Inn
University Of
Manchester
W H I T W O R
E
E
T
5 Upper Crust
SACKVILLE
6 Pizza Express
GARDENS
R
7 Ask Italian
T
H S
8 Grill on New York Street
T
9 The Alchemist
10 Giovannis Deli
11 Philpotts
12 Starbucks
13 Cafe Nero
14 Zizzis
15 Bella Italia
16 Byron
17 Pret
18 Wrap it Up
19 China Town
PETER STREET
Retail
QUAY STREET
Radisson
Hotel
20 Market Street
21 Manchester Arndale
22 Northern Quarter
ST. JOHNS
GARDENS
OCCUPANCY LEVEL:
SPINNINGFIELDS
SPINNINGFIELDS
T
E
E
R
T
S
T
N
U
O
M
E
T
A
G
S
N
Manchester
A
E
Central
D
Library
AREA:
80.0%
ST. PETER’S
SQUARE
Manchester
Art Gallery
ALBERT
SQUARE
P
R
I
N
C
E
S
Midland
Hotel
SECTOR:
One
St. Peter’s
74,653 sq ft
PETER STREET
Square
Radisson
Hotel
W ER M O SLEY ST
Office
W ER M O SLEY ST
BARBIROLLI
SQUARE
Midland
Hotel
O
O
D
R
X
F
L O
S
T
R
BARBIROLLI
SQUARE
Hotels
23 Mecure, Piccadilly
24 Brittania
25 Malmaison
26 DoubleTree by Hilton
27 Holiday Inn
L O
S S
T.
T
E
E
R
T
S
T
N
U
O
M
Manchester
Central
Library
REET
T
N S
IO
B
L
A
Bridgewater
Hall
Hilton Hotel
DEANSGATE
STATION
REET
T
N S
IO
B
L
A
E
E
T
Bridgewater
Hall
ST. PETER’S
SQUARE
One
St. Peter’s
Square
O
X
F
O
R
D
S
T
R
E
E
T
Be
there.
4
OXFORD ROAD
STATION
4
OXFORD ROAD
STATION
1 Manchester Central Coach Station
2 Piccadilly Metrolink Station
3 Piccadilly Train Station
4 Oxford Road Train Station
20 Market Street
21 Manchester Arndale
22 Northern Quarter
Transport
Key / distance
ST. JOHNS
GARDENS
1 Manchester Central Coach Station
2 Piccadilly Metrolink Station
3 Piccadilly Train Station
4 Oxford Road Train Station
Hotels
Restaurants and bars
23 Mecure, Piccadilly
24 Brittania
25 Malmaison
5 Upper Crust
26 DoubleTree by Hilton
6 Pizza Express
27 Holiday Inn
7 Ask Italian
8 Grill on New York Street
9 The Alchemist
10 Giovannis Deli
11 Philpotts
12 Starbucks
13 Cafe Nero
14 Zizzis
15 Bella Italia
16 Byron
17 Pret
18 Wrap it Up
19 China Town
DEANSGATE
STATION
Hilton Hotel
Restaurants and bars
5 Upper Crust
6 Pizza Express
7 Ask Italian
8 Grill on New York Street
9 The Alchemist
10 Giovannis Deli
11 Philpotts
12 Starbucks
13 Cafe Nero
14 Zizzis
15 Bella Italia
16 Byron
17 Pret
18 Wrap it Up
19 China Town
Be
there.
B
L
A
C
K
F
R
I
A
R
S
R
D
n
sio
n
e
t
x
k E
olin
r
t
e
M
Selfridges
Selfridges
M&S
M&S
T
E
E
R
T
S S
S
O
R
C
E
T
A
G
S
N
A
E
D
St. Ann’s
Church
Manchester
Manchester
Arena
Arena
VICTORIA
VICTORIA
STATION
STATION
VICTORIA
ST. ANN’S
SQUARE
Amenities map
Aerial
G
R
E
A
T
A
N
C
O
A
T
S S
T
R
E
E
T
Central
Retail Park
Manchester
Arndale
21
20
T
E
E
R
T
FO U NTAIN S
22
NORTHERN QUARTER
OLD HA M STREET
LEVER STREET
MARKET
STREET
15
14
P
I
C
C
ADILLY
13
PICCADILLY
GARDENS
12
2
16 17
6
7
18
National Football
Museum
JOHN DALTON ST.
E
T
A
G
S
N
A
E
D
Selfridges
Selfridges
M&S
M&S
n
sio
n
e
t
x
k E
olin
r
t
e
M
Be flexible.
The Corn
The Corn
Exchange
Exchange
Be stunning.
Be in touch.
ALBERT
SQUARE
SHUDEHILL
OPER STREET
C O
11
N
E
9
W
Y
O
R
8
K S
T
R
10
E
E
T
23
C
H
A
R
L
O
T
T
A
Y
T
O
U
N
S
T
Manchester
Arndale
PETER STREET
Radisson
21
Hotel
20
T
E
E
R
T
S
T
N
U
O
M
Manchester
Central
Library
Manchester
Art Gallery
P
R
I
N
C
E
S
ST. PETER’S
S S
SQUARE
22
T.
Midland
Hotel
W ER M O SLEY ST
T
BARBIROLLI
SQUARE
L O
E
E
R
T
FO U NTAIN S
Hall
Bridgewater
NORTHERN QUARTER
One
St. Peter’s
Square
MARKET
STREET
15
O
X
F
14
O
R
D
P
I
C
C
ADILLY
13
PICCADILLY
S
T
GARDENS
R
12
E
E
T
2
16 17
6
7
18
M
I
N
S
H
24
SILV E R ST
M A J O R S T
U
L
L S
T
R
E
E
T
R
I
E
E
Aerial
T
27
P
25
C
C
A
26
D
I
L
L
Y
E
19
Amenities map
T
E S
T
R
E
P O R TL A N D ST R EET
5
C
H
O
R
L
T
O
N
1
Manchester Central
Coach Station
S
M S T
O
B L O
T
R
E
E
T
S
A
C
K
V
I
L
L
E S
T
R
E
E
T
OLD HA M STREET
LEVER STREET
G
R
E
A
T
A
N
C
O
A
T
SACKVILLE
GARDENS
T
E
E
R
T
H S
T
W H I T W O R
University Of
Manchester
T
E
E
R
T
E S
R
O
T
S
3
S S
T
R
E
E
T
Central
Retail Park
PICCADILLY
STATION
FAIRFIELD STREET
REET
T
N S
OPER STREET
IO
B
L
A
C O
One
St. Peter’s
Square
O
X
F
O
R
D
S
T
R
E
E
T
A
Y
T
O
U
N
S
T
N
S
H
OXFORD ROAD
E
R
U
L
L S
STATION
E
T
27
T
R
E
E
T
P
I
C
25
C
A
D
I
L
L
Y
26
C
H
A
R
L
O
T
T
E S
T
R
19
11
N
E
9
W
Y
O
R
8
K S
T
R
10
E
E
T
23
T
E
E
P O R TL A N D ST R EET
5
C
H
4
I
M
24
SILV E R ST
M A J O R S T
O
R
L
T
O
N
1
Manchester Central
Coach Station
S
S
A
C
K
V
I
L
L
E S
T
R
E
E
T
M S T
O
B L O
T
R
E
E
T
T
E
E
R
T
E S
R
O
T
S
3
PICCADILLY
STATION
SACKVILLE
GARDENS
T
E
E
R
T
H S
T
W H I T W O R
University Of
Manchester
FAIRFIELD STREET
T
E
E
R
T
S S
S
O
R
C
Hotels
ST. ANN’S
SQUARE
23 Mecure, Piccadilly
24 Brittania
25 Malmaison
26 DoubleTree by Hilton
27 Holiday Inn
St. Ann’s
Church
JOHN DALTON ST.
Hilton Hotel
DEANSGATE
ALBERT
STATION
SQUARE
T
E
E
R
T
S
T
N
U
O
M
Manchester
Central
Library
Manchester
Art Gallery
P
R
I
N
C
E
S
ST. PETER’S
S S
SQUARE
T.
PETER STREET
Radisson
Hotel
Midland
Hotel
W ER M O SLEY ST
L O
BARBIROLLI
SQUARE
Hilton Hotel
Bridgewater
Hall
REET
T
N S
IO
B
L
A
DEANSGATE
STATION
4
OXFORD ROAD
STATION
21
14-Jul-20 6:14:47 PM
BOULTON HOUSE
We had sought to purchase an office
building in Manchester city centre for
a few years prior to this acquisition in
August 2016. Demand was high prior
to the announcement of a referendum
to remain within the EU, whereupon
many buyers became nervous about the
property market. We took the view that
the property fundamentals and pricing
were attractive to complete a purchase.
Totalling just under 75,000 sq ft, at
the time of purchase office rents in
the building were £12 psf exclusive. A
number of vacant office suites required
refurbishment which in 2017 was
completed and included an upgrade to
the ground floor reception area. Following
this capital expenditure of £0.8m we have
increased the rental tone to £18.50 psf.
During the year six lease events were
completed increasing the annual rent by
£0.26m per annum. We expect to see
continued growth in this asset as leases
expire and tenants have rent reviews in the
coming years.
Many leases are due to expire during 2024
and the building offers a medium-term
development opportunity. Located in a
prime growth hub within a few minutes
walk of Manchester Piccadilly mainline
station and only 1 mile from the university,
we expect this location to be part of
significant regeneration planned for
Be
there.
Manchester in the long term.
B
O
U
L
T
O
N
H
O
U
S
E
–
M
A
N
C
H
E
S
T
E
R
20
27192 Palace Capital AR2020.indd 20-21
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSSTRATEGIC REPORT
CASE STUDY: OPPORTUNISTIC DEVELOPMENT
Image is CGI
Image is CGI
H
U
D
S
O
N
Q
U
A
R
T
E
R
-
Y
O
R
K
22
HUDSON QUARTER
This two acre property was very much
the ”jewel in the crown” from the Signal
portfolio, acquired in September 2013.
The office building was 45 years old
and comprised 100,000 sq ft which was
predominantly vacant and required
significant capital expenditure. We
looked at numerous options to maximise
shareholder returns.
The property fundamentals are key
to why we see this property as being
transformational to our Company with
significant capital enhancement options.
Transport connections are excellent,
having a direct non-stop train service to
King’s Cross in 1 hour 50 minutes. Plans
to regenerate the vast area of vacant
railway land known as York Central include
the upgrade of the adjacent station.
Residential sales values have remained
strong and even in the financial crisis
of 2009 plateaued rather than fell. The
demand for office space is strong and
rental values were predicted to grow at
the time of purchase.
Between December 2014 and August
2017, we engaged with City of York
Council and local interest groups to obtain
planning permission for a new build
development. The final scheme comprises
three blocks totalling 127 high end
residential apartments and a Headquarters
grade A office building of 35,000 sq ft as
well as a further ground floor unit of 4,500
sq ft and associated car parking.
The blocks are all set within landscape
gardens close to the historic city wall.
Demolition was completed in December
2018 following which Caddick
Construction was appointed contractor for
a £33.6m development of the site. This is
part funded by a £26.5m debt facility from
Barclays with the balance from our cash
reserves. Practical completion remains on
course for spring 2021.
RESIDENTIAL SALES
During the financial year, contracts were
exchanged on the sale of 28 apartments
with 17 under offer. We continue to see
demand for the units and anticipate
continued sales during the construction
process.
OFFICE LETTINGS
We have sought a single occupier for the
Hudson Quarter office property. Interest
is strong from a number of tenants, some
of whom seek the whole or part of the
building. We continue to negotiate with
a number of parties and will announce
progress in due course. In the meantime,
we have pre-let the ground floor of
Victoria comprising c.4,500 sq ft to a
subsidiary of Knights plc for ten years at
£25 psf, which is the highest rent achieved
in York.
NO. OF APARTMENTS:
127
APARTMENTS SOLD AT 31
MARCH 2020:
28
EXPECTED COMPLETION:
Spring 2021
AREA OF OFFICE SPACE:
39,500 sq ft
SECTOR:
Office/
Residential
A
1
9
B
O
O
T
H
A
M
8
M USEUM
G AR DEN S
STATION ROAD
R
O
U
3
G
I
E
R
S
T
W
O
2
TA N N E R R
7
S TATI ON
LEEMAN ROAD
D
A
O
N R
TIO
A
T
S
1
TOFT GREEN
A T E
6
MIC K L E G
M IC KL EG ATE
BAR
NUNNERY LAN
E
BLOSSOM STREET
< L E E D S
18
O
W
E
H
T
R
H G
S C A R B O R O U G H
LORD M
AY
O
R’S W
A
L
K
17
YORK
MINSTER
GILLYGATE
B OOTHAM
BAR
H
I
G
H P
E
T
E
R
G
AT
E
S
T
L
E
O
N
A
R
D
S
P
L
STONEGATE
S T HEL EN’S
S Q
E
T
A
G
A
M
A
R
D
O
O
G
L
L
O
O
W P
W P
E
E
T
T
E
E
S
W
I
N
E
G
R
R
G
G
A
A
T
T
E
E
A
T
E
KING’S SQ
KING’S SQ
12
PA
R
L
I
A
S
H
A
M
B
L
E
S
M
E
N
T
S
T
P PERGATE
O
C
13
10
C
L
I
F
O
R
D
S
T
R
E
E
T
LEN DAL
B RIDG E
B RIDG E
B RIDG E
B RIDG E
11
ST SAMPSON’S
SQ
DAVYGATE
C
O
N
E
Y
9
10
S
T
R
E
E
T
M ARKET ST
N
O
R
T
H
S
T
OUS E
B RIDG E
B R I DGE ST
5
4
5
R
I
V
E
R
O
U
S
E
S
K
E
L
D
E
R
G
A
T
E
N K G A T E
O
M
FOSS BANK
LAYERTH O R PE
A
L
D
W
A
L
K
N E B O W
O
T
S
MONK
MONK
MONK
BARBAR
BAR
ST ANDREWGATE
ST SAVIOURGATE
F
O
S
S
G
A
T
E
PIC
C
A
DIL
L
Y
CLIFFO RD’S
TOWER
14
15
TOWER STREET
PEASHOLME GREEN
16
R I V E R F O S S
R I V E R F O S S
15
WALMGATE
WALMGATE
FISHERGATE
FISHERGATE
BAR
P A R A G O N S T R E E T
SKELDERGATE
BRIDGE
BISHOPGATE
F
I
S
H
E
R
R
G
G
A
A
T
E
E
E
R
N
>
C I T Y C E N T R E
1 Network Rail
under 5 minutes
2 City of York Council
3 Aviva
4 Langleys Solicitors
5 Sainsburys
9 Prime Retail
10 All High Street Banks
11 Bettys Café Tea Rooms
12 M&S and Market
13 Jorvik Viking Centre
15 Castle Museum
16 Hiscox
17 York Minster
18 York St. John University
S T U N N I N G LO C AT I O N
E N R I C H E D CI T Y L I VI N G
Award-winning Michelin starred dining and mainstream city centre
retail thrive with delicious delis, cafés and bars amongst artisan
emporiums, boutiques, street food and bustling craft and produce
markets, every day of the week. A globally renowned ‘City of
Festivals’ - Vikings, Chocolate, Mystery Plays… to cutting edge
media arts and film - no two weeks are the same in York and this
enviably rich choice is just a few minutes stroll from Hudson Quarter.
13
6 Micklegate Cafés, Bars and Restaurants
7 National Railway Museum
8 Yorkshire Museum
under 10 minutes
F
O
S
S
I
S
L
A
N
D
S
R
O
A
D
WALMGATE
WALMGATE
BAR
BAR
14 Clifford’s Tower
under 15 minutes
L >
UL
H
1 Network rail
under 5 minutes
7 National Railway Museum
13 Jorvik Viking Centre
2 City of York Council
8 Yorkshire Museum
under 10 minutes
14 Clifford’s Tower
under 15 minutes
3 Aviva
4 Langleys Solicitors
5 Sainsburys
6 Micklegate
9 Prime Retail
10 All High Street Banks
11 Bettys Cafe Tea Rooms
12 M&S and Market
15 Castle Museum
16 Hiscox
17 York Minster
27192 Palace Capital AR2020.indd 22-23
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
23
14-Jul-20 6:14:53 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSSTRATEGIC REPORT
PA L AC E C A P I TA L P L C A N N UA L R E P O R T A N D ACC O U N T S
ST R AT E G I C R E P O RT
KPIs
We measure our performance using KPIs
linked to our strategic priorities.
To align the focus of management with the interests of shareholders,
some KPIs are reflected in our remunerations schemes as set out in
the Directors’ Remuneration Report.
Where possible, we link our performance to EPRA best practice
recommendations, recognised as industry standard measures.
We also consider that industry standard measures, such as those
calculated by MSCI, are appropriate to use alongside certain EPRA
measures and others that are relevant to our business.
1
0
TOTAL PROPERTY
RETURN (TPR)
Total Property Return (TPR) is the total
2
0
TOTAL SHAREHOLDER
RETURN (TSR)
Measures the performance of the
3
0
TOTAL ACCOUNTING
RETURN (TAR)
Total Accounting Return (TAR) is the total
4
0
RENTAL GROWTH
VERSUS ERV
Increase in net rental income above
income and capital return as measured
Company share price over the year
net asset value (NAV) growth plus dividend
estimated rental value (ERV)
by MSCI
Why we use this measure
Our long-term strategic objective is
to outperform our peer group on a
total return basis. This is the industry
benchmark across the UK
Performance Vs benchmark
1.1%
2020 (MSCI: (0.5)%)
7.1%
2019 (MSCI: 4.5%)
including any dividends paid in the period
per share
Why we use this measure
Why we use this measure
Why we use this measure
Actual market-based returns achieved by
This measure takes into account the actual
To identify the underlying income growth
an investor
income return to shareholders measured by
of the portfolio generated through asset
dividends added to the underlying net asset
management
Performance
value growth
Performance
(30.9)%
2020
(6.0)%
2019
(7.5)%
2020
2.6%
2019
Performance
6%
2020
14%
2019
2020/21 ambition
2020/21 ambition
2020/21 ambition
2020/21 ambition
Outperform the MSCI IPD UK Quarterly
Reduce the discount between the share
Deliver superior underlying shareholder
Deliver like-for-like income growth ahead
Index
Link to strategy
1
2
Link to remuneration
• Annual Bonus and LTIP
5
0
ADJUSTED PBT
The Company uses recurring earnings,
stripping out fair value movements and
one-off items, as the basis for establishing
the dividend cover
Why we use this measure
To demonstrate the sustainability of
dividends paid
Performance
£8.0m
2020
2020/21 ambition
£8.9m
2019
To ensure we drive recurring income and
maintain our dividend cover
Link to strategy
3
Link to remuneration
• Annual Bonus
S
O
L
–
N
O
R
T
H
A
M
P
T
O
N
READ MORE ABOUT OUR
STRATEGY ON PAGES 16 AND 17
24
24
price and NAV
value as measured by TAR
of inflation and ERV
Link to strategy
1
4
2
Link to remuneration
• LTIP
6
0
EPRA VACANCY
RATE %
Vacancy rate of investment portfolio
Link to strategy
2
Link to remuneration
• LTIP
Link to strategy
1
2
3
7
0
LTV OF
GROUP DEBT
Debt drawn less cash held as a fraction of
8
0
AVERAGE COST
OF DEBT
Average cost of debt drawn to finance
measured against portfolio ERV
portfolio valuation
investment portfolio
Why we use this measure
Why we use this measure
Why we use this measure
Maintain strong occupier contentment
To demonstrate our commitment to a
To demonstrate financial efficiency by
and retention
conservative level of gearing
maintaining lower cost of finance to
Performance
13%
2020
13%
2019
Performance
38%
2020
34%
2019
drive returns
Performance
3.1%
2020
3.3%
2019
2020/21 ambition
2020/21 ambition
2020/21 ambition
Maintain high occupancy across the
Maintain LTV at less than 40%
Maintain low average cost of debt less
investment portfolio in order to maximise
income and minimise costs
Link to strategy
2
4
3
Link to remuneration
• Annual Bonus
Link to strategy
1
4
than 3.5% p.a.
Link to strategy
1
4
27192 Palace Capital AR2020.indd 24-25
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
25
25
14-Jul-20 6:14:54 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSSTRATEGIC REPORT
CHIEF EXECUTIVE’S REVIEW
Neil Sinclair
CHIEF EXECUTIVE
I did not expect to be reporting to you during an
unprecedented lockdown, a pandemic and a severe
jolt to our economy.
Remote working has enabled us to conduct our business
successfully during this period, with our first task being to
conduct an extensive stress test on our Company, taking into
account the sudden deterioration of the UK economy. Our
Board was very satisfied with the outcome, the details of which
to recover.
STRATEGY
Our focus since we were founded ten
years ago has been on value creation
through targeting regional assets
and creating increased value through
refurbishment and redevelopment,
underpinned by the positive fundamentals
in those locations in which we have
chosen to invest. This strategic capital
expenditure is not necessarily reflected
The authorisation for the construction of
HS2 is just the beginning and we expect
to see further backing for Northern
Powerhouse rail infrastructure in the
near future, with the first stage being a
high speed connection between Leeds
and Manchester. In due course the
government’s intention is to connect Hull,
Leeds, Manchester, Sheffield, Liverpool
and Newcastle.
in increased values until the properties
Graduate retention is rising in the core
are completed and let or sold. The
regional cities with Manchester at over
effect of Covid-19 in the final month of
50%, Birmingham at just under 50%
our financial year has not been helpful.
and Newcastle at over 35%. This is
However, notwithstanding current market
encouraging for companies seeking to
conditions, we firmly believe that this
relocate to the regions as it gives them
strategy of selected, value enhancing
the confidence that they can secure the
capital deployment is the right policy
appropriate talent, which was not the case
which will benefit shareholders over the
even ten years ago.
medium to long term, particularly when we
turn the corner and the economy begins
2020 HIGHLIGHTS
As stated earlier, we have had a very active
year. We sold the 34 remaining residential
properties in the Warren portfolio for
£11.7m, bringing the total to 63 non-core
properties disposed in all since the Warren
portfolio was acquired. We have retained
two for strategic reasons because they
adjoin one of our commercial properties.
The construction of our flagship project
at Hudson Quarter, York where we are
building 127 apartments and 39,500 sq ft
of offices has only been slightly impacted
by Covid-19. We are working with a strong
and highly reputable Yorkshire contractor
who has long-standing relationships
with its subcontractors, and this has
proved particularly helpful in ensuring
that work has continued throughout
One of the nasty effects of Covid-19 is
the lockdown period (in adherence with
unemployment and we are confident
government guidelines) and delays have
that the Government will provide every
been minimised. The project is due for
Offices make up nearly 50% of our
possible incentive to regenerate hard-hit
completion in March 2021.
portfolio. The regions have been
areas, particularly in the Midlands and the
starved of supply of good quality office
North. We are well placed to play our part
space with limited construction and the
in supporting the growth of the regional
amount of office space lost to Permitted
economy.
READ MORE ABOUT OUR
STRATEGIC PRIORITIES ON PAGES
16 AND 17
Development without being replaced,
particularly in cities such as Liverpool,
Southampton, Winchester and Brighton.
This supply pipeline is unlikely to be
replenished any time soon and we believe
that we will continue to see underlying
growth in our portfolio.
REGIONAL FOCUS
Through careful stock selection we have
acquired city centre office buildings
in Liverpool, Manchester, Leeds and
Newcastle, adding to that a 35,000 sq
ft office building as part of the Hudson
Quarter development only one minute’s
walk from York Station. All of these
properties fall within the domain of the
Northern Powerhouse, which we firmly
believe in, and following the election
of a Conservative Government with a
significant majority we expect to be
a beneficiary of the Prime Minister’s
“levelling up agenda”. This is intended
to boost the regions, particularly the
Midlands and the North where we are very
well represented.
H
U
D
S
O
N
Q
U
A
R
T
E
R
–
Y
O
R
K
can be found in our viability statement. Over the past year,
we continued to execute our strategy aimed at growing our
income, and as part of that we have been pushing ahead with
our refurbishment and redevelopment programme, including
our flagship development, Hudson Quarter in York.
As expected, our capital expenditure on these value enhancing
projects, together with the impact of Covid-19 in the last
month of our financial year, has had an effect on the value
of our portfolio. In recognition of the uncertainty created by
the pandemic, real estate companies have been subject to a
material uncertainty clause from independent valuers.
Our EPRA earnings for the year were £10.8m resulting in EPRA
earnings per share of 23.4p (2019: 16.6p). However, as a result
of the reduction in the value of our properties for the reasons
outlined, we are reporting a statutory loss before tax of £9.1m.
We continue to be an exciting and ambitious property
investment company with a quality portfolio that has been
carefully selected. Our active asset management strategy aims
to maximise the potential of those assets and across 47 new
lettings, rent reviews and lease renewals over the course of the
year we have increased our contractual rental income by £1.8m
per annum.
PORTFOLIO
VALUATION
£277.8m
-3.0%
NET RENTAL
INCOME
£18.8m
+14.1%
H
U
D
S
O
N
Q
U
A
R
T
E
R
–
Y
O
R
K
26
27192 Palace Capital AR2020.indd 26-27
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
27
14-Jul-20 6:14:55 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSSTRATEGIC REPORT
CHIEF EXECUTIVE’S REVIEW
Although the marketing suite was
closed during the lockdown interest in
the apartments continued to be robust
through our website and social media, and
the suite has now reopened. As at 30 June
2020 we had exchanged contracts on 32
apartments to the value of £8.5m, while
five apartments are currently under offer
to the value of £1.6m.
Victoria, one of the four buildings at
Hudson Quarter, has a commercial use
at ground floor level and in February we
pre-let 4,500 sq ft to Knights, the quoted
law firm, at a record rent for York of £25
psf per annum.
VALUATIONS
Our independent valuations show a
decrease of 5.7%, compared to the like-
for-like values as at 31 March 2019. This
takes into account the reduction due to
Covid-19; our capital expenditure strategy,
where value impacts are yet to materialise;
and a small like-for-like decline. We have
also taken the decision to develop some of
our properties and this includes tactically
securing vacant possession, which could
be followed by demolition or short-term
letting. This can naturally have a short
term negative effect on values, but these
are ultimately enhanced in the medium to
long term when the new or refurbished
buildings are completed and let or sold.
We believe we will see the positive effect
of this at Hudson Quarter and at other
properties as our capital deployment
begins to bear fruit.
Our EPRA Net Asset Value per share on
31 March 2020 was 364p which is 10.5%
below that as of 31 March 2019. This is
largely due to the impact of Covid-19 on
the year end valuations.
PORTFOLIO
Our portfolio is now valued at £277.8m
with a contracted rental income of £17.6m
per annum. Our net rental income after
surrender premiums and the deduction of
property operating expenses is £18.8m for
the year ended 31 March 2020. This value
includes Hudson Quarter, York which is
currently under construction and due for
completion in March 2021.
28
One of the advantages of the regions is
that rents are relatively modest compared
to London, while the cost of living is lower
and the quality of life considered high. We
believe that companies will now examine
whether they need to lease expensive
offices, or as much office space, in and
around London. Prior to Covid-19, several
companies had already relocated out
of London including Talk Talk (Salford),
Burberry (Leeds), Channel 4 (Leeds) and
Hiscox (York).
We currently have office space available
in Milton Keynes and Leeds. In the current
climate our view is that companies and the
public sector will be very cost conscious,
therefore we are reasonably confident that
a sizeable proportion of our office vacancy
will be let during this financial year.
We have two leisure assets at
Northampton and Halifax which make up
13.7% of our portfolio and, in line with
experiences across the sector, these have
been particularly challenging. However,
most of our properties are let to solid
covenants, some of whom have recently
carried out successful equity raises on
the London Stock Exchange. We expect
to collect any outstanding rental arrears
from these tenants when the legislation
protecting them expires.
At Sol Northampton during the lockdown
period, we agreed with Accor, the largest
hotel company in France, a five year lease
extension from 2027 to 2032 in return for
a six month rent-free period from March
2020. In view of the fact that the lease
yields £0.5m per annum plus a share of
turnover we consider this to be a very
satisfactory outcome.
Our exposure to retail is limited but our
two retail warehouses are let to Booker (a
subsidiary of Tesco), Wickes (part of Travis
Perkins) and Pets at Home, while our only
supermarket is let to Aldi on a long lease.
Our retail shops, of which there are few,
are generally let at very modest levels.
We are not looking in the next month or
two to increase the size of our portfolio
until we see where the economy may be
heading. Our focus will be on actively
asset managing our portfolio and
particularly on rent collection, making sure
that we maintain maximum liquidity.
In addition to our cash balances, we have
six uncharged properties with a total value
of £18.2m and a 5.6% shareholding in a
listed company valued at £2.5m at the year
end. Most of these uncharged properties
are earmarked for sale but only at a time
of our choosing.
ASSET MANAGEMENT
We continue to make good progress
with our properties in Milton Keynes,
Weybridge, Leeds, Newcastle,
Northampton and Leamington Spa which
have been identified for refurbishment
or redevelopment, although against the
current backdrop we have taken the
prudent decision to defer all non-essential
capital expenditure for this year.
Notwithstanding this, we own a prime
site in Weybridge, Surrey with planning
consent for 28 apartments and a small
amount of retail. Weybridge has always
been a very buoyant area, even in difficult
times, and we are now carrying out a
review of the scheme in light of current
market conditions. This is one of our
uncharged assets so this could either
be sold or alternatively developed,
which we would only proceed with when
we consider it the appropriate time.
These economic conditions will mean
that a number of potentially competing
schemes will not go ahead. However,
with a recovery in the residential market
expected in 2022, it may be in our interest
to commence the development in our next
financial year, if the viability can provide an
acceptable return.
We have plans to develop or refurbish our
city centre properties in Leeds and Milton
Keynes but even if satisfactory planning
consents are secured, these projects will
not commence until 2024 at the earliest.
Based on my many years of experience
throughout cycles, development can
provide very lucrative returns if the timing
coincides with a growing economic upturn.
We will keep shareholders updated on
these initiatives.
DIVIDEND POLICY
We maintain a progressive dividend policy,
however following the outbreak of the
pandemic we proactively reviewed this in
order to preserve maximum liquidity in
the Group. Taking a prudent approach in
view of the uncertainty, on 2 April 2020 we
announced our decision to cancel the third
quarter dividend.
Parliament has since passed the Corporate
Insolvency and Governance Act 2020
and this prevents commercial landlords
serving statutory demands or winding
up orders on tenants who do not meet
their contractual obligations. We are very
proud of our good relationships with our
occupiers, but unfortunately a few have
taken the opportunity this legislation
provides to avoid paying any rent and
service charge, or to discount any need
to engage with us to find a mutually
satisfactory conclusion. This legislation has
now been extended until 30 September
2020. As with other commercial property
owners, it is restricting our ability to
recover rents from occupiers who are
adopting a “will not pay” policy, rather
than a “can pay” policy. Fortunately, the
effect of this is relatively limited and we
hope that the recently published Covid-19
Code of Practice for commercial real
estate relationships will have a positive
influence in these minority cases.
Having carefully considered our liquidity
position and our positive rent collection
record over the past quarter, we are
proposing a final dividend of 2.5p,
bringing the total annual dividend to 12p.
This will be fully covered by earnings. We
have conducted a very comprehensive
review as to the likely outcome for the
year ending 31 March 2021. Taking an
ultra-conservative approach, we would
expect the final dividend to be the
minimum level of dividend to be paid
each quarter for the year ending 31 March
2021.
We have a superb team at Palace Capital
and an experienced Board with a wide
range of expertise. I have worked through
several downturns and pandemics and I
am in no doubt that we will weather the
storm and emerge fitter and stronger
than ever. I am particularly grateful to our
hard-working team and our long-standing
shareholders who have been incredibly
supportive.
NEIL SINCLAIR
Chief Executive
6 July 2020
A
L
D
I
–
G
O
S
P
O
R
T
LISTED INVESTMENT
We currently hold 1,592,500 ordinary
shares representing a 5.6% stake in Circle
Property Plc, an AIM listed property
investment company. This company is
not dissimilar to ours but is considerably
smaller and we continue to keep our
shareholding under review.
INVESTMENT
STRATEGY
As indicated, we have grown our portfolio
based on very careful stock selection
criteria. Besides our core office holdings in
the Midlands and the North, we also have
office buildings in Southampton, Winchester,
Staines, Exeter and Farnborough with
industrial holdings in Bristol, Burgess Hill,
Verwood, Coventry, Kettering and Newbury.
Office and industrial assets make up 60.3%
of our portfolio.
In the period leading up to the General
Election, with the uncertain backdrop
caused by Brexit, there were very
few investment opportunities for us
to seriously consider, which met our
strict value criteria and which we could
recommend to shareholders. We have a
strong commitment to our policy of not
investing where we believe properties are
overpriced, based on our many years of
experience and in depth knowledge of the
UK’s regional markets, and this approach
holds us in very good stead.
We will continue to focus on the office
and industrial sectors. Our 39,500 sq ft
office development in York will be retained
within our portfolio as York has a very low
vacancy rate and is the fastest connection
to the North from London, being only
1 hour and 50 minutes by train. This
building will have a WiredScore certificate
“Platinum” making it one of the best in the
country for connectivity.
The team at Palace Capital is highly
experienced and has a deep network of
contacts across the property and financial
worlds, exposing us to both real estate
and corporate opportunities. Most of
our acquisitions since inception in 2010
have been corporate and we view this
as a cost effective way of accessing
property portfolios, so remain alive to any
opportunities that may arise in the second
half of the year.
27192 Palace Capital AR2020.indd 28-29
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
29
14-Jul-20 6:14:56 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSSTRATEGIC REPORT
PROPERTY REVIEW
Richard Starr MRICS
EXECUTIVE PROPERTY DIRECTOR
This year has been challenging on many levels. The
political deadlock since the referendum to leave the
EU ensured there was a continuous cloud hanging
over the real estate sector for much of the financial
year. The final quarter saw the “Boris bounce”
following a significant Conservative majority in
the general election, with a positive message for
balancing the regions with London. However, by
the end of March the Covid-19 pandemic had
struck and this led to a decline in values across
the sector, including our own portfolio, as material
uncertainty clauses came into effect due to the lack
of comparable and reliable market evidence.
Our holdings are predominantly in the office sector, in which
we own 28 buildings, and we have ten industrial assets. Both
of these subsectors have performed well over the last couple
of years and we expect continued growth in the coming year.
We own two leisure assets and 8.6% of the portfolio is held in
the retail sector, with two development assets making up the
remainder of the value.
Cushman & Wakefield independently valued the portfolio as
SECTOR SPLIT
D
13.6%
E
8.6%
F
3.8%
A
46.3%
A OFFICES
B INDUSTRIAL
C LEISURE
D DEVELOPMENT
E RETAIL
F RETAIL WAREHOUSES
at 31 March 2020 at £277.8m, which is a decrease of 5.7% on
a like-for-like basis compared to the previous year for reasons
already outlined.
C
13.7%
B
14.0%
LETTING ACTIVITY
New
leases (22)
9%*
Lease
renewals (18)
6%*
Rent
reviews (7)
2%*
£741,000
£1,815,000
£1,973,000
£1,199,000
£1,364,000
£1,447,000
£944,000
£1,201,000
£1,226,000
Rent pre-event
ERV pre-event
Rent reviews
* Ahead of ERV
30
Despite the challenges, our active asset management strategy
has delivered positive results. New lettings secured at a 9%
premium to ERV increased income by £1.2m per annum; an
additional £248,193 per annum was generated from lease
renewals, which is a 21% increase in annual rent (6% above
ERV); and we secured a 30% increase in annual rent from open
market rent reviews, or an additional £283,113 per annum (2%
above ERV).
During the year, we completed 47 lease events which added
£1.8m to our annual contracted rent roll and achieved £267,732
per annum above the independent ERV.
Alongside this, we continued to improve our buildings through
refurbishment and development. We spent a total of £24.0m, of
which £17.9m was on our Hudson Quarter development in York,
Prior to refurbishment
Post refurbishment
CASE STUDY
This multi-let estate was
acquired in the Signal
portfolio in October 2013.
During the financial year we
completed a refurbishment
programme for two units
which resulted in both units
being let.
Both units were refurbished at a cost
of £0.2m each and subsequently let
at rental levels above ERV.
The rental tone has increased by
32% since purchase and the current
income reflects the original ERV
which has also continued to rise on a
similar basis.
–
A
V
O
N
M
O
U
T
H
P
O
N
T
I
4
I
N
D
U
S
T
R
A
L
I
E
S
T
A
T
E
where we also secured a pre-let of 4,500
sq ft of office space for a 10 year term
at a record rent of £25 psf, a significant
milestone for this development and the
York office market. Other buildings to
benefit from capital expenditure during
the year included those in Newcastle and
Winchester. We also have plans to further
invest in our properties in Kettering,
Manchester and Avonmouth.
ACQUISITIONS
The financial year was challenging on
many fronts. The delay to leaving the EU,
exacerbated by the political impasse,
meant that while opportunities did
present themselves, pricing meant our
returns requirement would not be met,
so our existing portfolio was strategically
prioritised for equity deployment.
DISPOSALS
We are continuously looking to recycle
assets that no longer meet our returns
requirement.
We completed the sale of 34 residential
assets acquired from the RT Warren
purchase in October 2017 for a
consideration of £11.7m. We achieved 97%
of book value from these assets, which
was higher than originally anticipated from
a portfolio sale.
Disposals of commercial properties
totalled £5.6m, reflecting a 19.0%
premium to book value, in Weybridge,
Southampton and Birmingham. The latter
was sold at 25% above book value.
TOP 10 OCCUPIERS
We value our customer relationships and
the property team inspect our buildings
as regularly as possible, engaging with
occupiers to understand their business
needs. This ensures that our strategies
for each property are current and flexible
enough to be adapted to changing
occupier demands.
Top 10 tenants
KEY
£913,104
£543,617
£510,000
£444,413
£431,500
£408,978
£401,405
£360,000
£355,363
£345,000
27192 Palace Capital AR2020.indd 30-31
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
31
14-Jul-20 6:14:58 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSSTRATEGIC REPORT
PROPERTY REVIEW
We specialise in owning property which can generate increasing returns from both income and capital.
We look to invest in university towns and city centres across different sectors in buildings either let to multiple tenants or single
occupiers. We expect to grow rental and capital values over the long term through refurbishment or development.
CORE SECTOR FOCUS
1
0
O
F
F
C
E
I
OVERVIEW
46.3% of our portfolio is in this sector and
accounts for £8.8m p.a. in rent from 103
tenants in 28 buildings.
INVESTMENT SUMMARY
We focus on city centre locations, close
to public transport connections. These
TOP HOLDINGS
BY VALUATION AT
31 MARCH 2020
• 2/3 St James’ Gate,
Newcastle
• Boulton House,
Manchester
locations are generally in areas we consider
• One Derby Square,
to have long-term rental growth.
Liverpool
PROPERTIES
28
AREA
778,218sq ft
VALUE £128.5m
2
0
PROPERTIES
10
3
0
I
N
D
U
S
T
R
A
L
I
L
E
I
S
U
R
E
OVERVIEW
14.0% of our portfolio is in this sector and
accounts for £2.4m p.a. in rent from 28
tenants in 10 buildings.
INVESTMENT SUMMARY
We have a mix of multi-let and single-let
properties which saw good rental growth
TOP HOLDINGS
BY VALUATION AT
31 MARCH 2020
• 25/27 Blackmoor Road,
Verwood
• Point Four Industrial
Estate, Avonmouth
last year. We are expecting this to continue
• Clayton Industrial Estate,
as many properties have further rent
reviews and lease expiries to come.
Burgess Hill
AREA
409,593sq ft
VALUE £38.8m
TOP HOLDINGS
BY VALUATION AT
31 MARCH 2020
• Broad Street Plaza,
Halifax
• Sol, Northampton
OVERVIEW
13.7% of our portfolio is in this sector and
accounts for £3.6m p.a. in rent from 19
tenants in 2 buildings.
INVESTMENT SUMMARY
A number of operators have struggled in the
last few years. The majority of our tenants in
both schemes continued to trade well until
Covid 19. Post Covid-19, we are focused on
letting the vacant space and our marketing
initiatives will help to increase footfall.
PROPERTIES
2
AREA
306,970sq ft
VALUE £37.9m
32
4
0
R
E
T
A
I
L
OVERVIEW
8.6% of our portfolio is in this sector and
accounts for £2.0m p.a. in rent from 36
tenants in eight buildings.
INVESTMENT SUMMARY
Our units are in good locations with a
mix of local and national brands. We are
working closely with our tenants to ensure
that they can trade effectively in light of
the ongoing pandemic.
PROPERTIES
8
AREA
128,171sq ft
VALUE
£23.9m
R
E
T
A
I
L
5
W
A
0
R
E
H
O
U
S
E
OVERVIEW
3.8% of our portfolio is in this sector and
accounts for £0.8m p.a. in rent from three
tenants in two buildings.
INVESTMENT SUMMARY
This sector continues to perform well. Our
holdings are located in the South East and
we expect to see continued rental growth
in the medium term.
PROPERTIES
2
AREA
59,478sq ft
VALUE
£10.5m
27192 Palace Capital AR2020.indd 32-33
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
33
14-Jul-20 6:15:01 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSSTRATEGIC REPORT
PROPERTY REVIEW
SECTOR FOCUS
OFFICES
The Government has announced a
levelling of investment away from a
historical bias towards southern England.
However, the emergence of Covid-19 has
raised questions on how quickly this will
be implemented. We remain confident that
our holdings are well placed to benefit
from this investment as and when it
occurs. A topic of debate in recent months
has been whether working habits have
been changed sufficiently by lockdown
refurbishing our properties in Newcastle,
Manchester and Leeds, and adapt our
space to meet shifting demands and
changing structural trends. We are
working with Backbone Connect, an IT
services specialist, to ensure our significant
holdings meet the expectations of existing
tenants and attract new ones to the vacant
space.
INDUSTRIAL
Demand has continued to be driven by
LEISURE
The leisure sector as a whole has
struggled, although we have not been
as adversely affected as some. There
has been a continued shift towards
operators meeting customer demand
for “experiences”, which we have built
into our asset management strategies,
however the emergence of Covid-19 has
forced widespread temporary closures. We
continue to communicate regularly with
our tenants which is especially critical in
to affect demand for office space long
retailers needing “last mile” distribution
this difficult time. The planned reopening
term. While we believe there will inevitably
space to meet increased customer
of leisure and hospitality venues from
be more desire to work from home
demand from e-commerce. Warehousing
4 July should provide a positive stimulus at
where appropriate, we expect the office
and distribution in locations with good
our two leisure schemes.
market to remain resilient, as it has in
transport links should see continued rental
comparable moments over cycles. The key
growth.
Assets in the leisure sector make up 13.7%
of our portfolio and we have continued
component will remain location, followed
by connectivity and a continued emphasis
on sustainability.
Having accelerated existing structural
to devise marketing campaigns to attract
trends, including the shift towards online,
new tenants. As a result, we secured a
the Covid-19 pandemic has highlighted
key anchor tenant at Sol, Northampton
The flexible model will evolve further
the importance of warehouse space.
in Gravity Fitness, for a minimum term of
as businesses adapt and are not tied
into specific buildings. This can benefit
landlords’ ability to capture increasing
rental values on a regular basis.
The industrial sector is an attractive
proposition, but growing demand has
left it challenging to find opportunities
to invest at acceptable levels. This is
We currently hold 46.3% of our portfolio
unlikely to change in the forthcoming
in the office sector. We are looking at
year, however we will continue to seek
how we can maximise returns from
opportunities to increase our 14.0%
our holdings, having invested £2.6m in
holding.
10 years at a 20% premium to ERV. Post
the financial year we have successfully
extended the lease to Accor so that it now
expires in 2032.
W
E
Y
B
R
I
D
G
E
H
I
G
H
S
T
R
E
E
T
–
CASE STUDY
We acquired this prime office and
retail property in August 2014
within the PIH acquisition. We
considered that a development
would maximise shareholder
return and during the financial year
we engaged with a professional
team to obtain consent for a new
building comprising 28 residential
apartments and 4,000 sq ft of
ground floor retail space and
associated car parking.
CASE STUDY
A city centre leisure scheme
comprising 189,000 sq ft of
space which was acquired in
May 2015 for £20.7m. We saw
an opportunity to improve
the quality of the tenant mix
to match the changing leisure
demand as well as increase
overall rental income. In order
to achieve this we accepted a
surrender of the lease to Gala
Casino in 2016 for £4m.
Following the letting to Soo Yoga in
the last financial year we commenced a
new marketing and branding campaign
to attract an anchor tenant which will
drive footfall. We were delighted to
complete a letting to Gravity Fitness
on 23,500 sq ft representing 40%
of the vacant space, for a minimum
ten-year term at a rent 20% above the
ERV with an additional turnover rent.
A £1.5m contribution was made to
the internal fit-out and even though
trading commenced just weeks before
the Covid-19 lockdown the initial
feedback is that this will drive footfall
through the scheme to attract new
restaurants and leisure offerings.
Pre Covid-19, Vue cinema saw an
increase in the number of admissions
over the year. Accor hotels also sought
to improve their offering with a partial
refurbishment of their hotel rooms.
S
O
L
–
N
O
R
T
H
A
M
P
T
O
N
RETAIL AND RETAIL
WAREHOUSE
As is well reported, the retail market
continues to be challenging. Traditional
retailers are struggling to compete
with online operators, who have less
fixed costs, and changing consumer
habits towards online shopping have
been accelerated by the government
lockdown. The Covid-19 pandemic has
decimated trading due to the enforced
social distancing measures. Businesses
that innovate and reposition will remain
competitive.
The Company has a limited exposure to
the retail market with only 10% of our
portfolio represented in this sector. Our
tenants include Tesco and Aldi, as well as
Wickes and Pets at Home which benefit
from strong financial balance sheets. We
will continue to have an open dialogue
with our tenants and support their ability
to trade where we can.
SUSTAINABILITY
We have increased our focus on the
sustainability of our portfolio with a
view to improving the environmental
performance of individual assets on an
annual basis. The specific areas we are
looking at are EPC rating, energy supply
and use, waste collection and water
consumption.
OUTLOOK
As this report is being prepared, our team
tenants to help them operate and grow
their businesses as best they can. We
work closely with our managing agents
CBRE, JLL, Knight Frank and Savills to
ensure efficient rent collection. We have
looked at the impact on our rental income
and capital expenditure programme and
continue to focus on the aspects of our
business that we can control. Due to our
responsive asset management team,
we are well positioned operationally
and financially to respond quickly once
the ongoing pandemic passes, which
are working from home, leisure schemes
inevitably it will.
have closed their doors and high street
shops have only just reopened having
been closed for three months. This has
meant the occupational and investment
market has effectively closed down,
preventing us from letting our vacant
RICHARD STARR
Executive Property Director
space or investing our capital into new
6 July 2020
opportunities. The critical factor for the
forthcoming year is to continue efforts to
maximise our income and work with our
34
27192 Palace Capital AR2020.indd 34-35
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
35
14-Jul-20 6:15:01 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSSTRATEGIC REPORT
FINANCIAL REVIEW
Stephen Silvester FCA
FINANCE DIRECTOR
Rent collection in the March 2020 and June 2020 quarters are
somewhat impacted due to the moratorium on lease forfeiture
and Government legislation in force until 30 September 2020.
This has given tenants (even those well capitalised with a
strong credit-rating) a “carte blanche” not to pay rent in order
to manage their working capital. Hence landlords, ourselves
included, have been left without a portion of the usual quarterly
income with which to pay out dividends. Consequently, the
Bank of England has firmly requested UK lenders waive
covenant breaches at this unprecedented time in order to
support borrowers while this moratorium is in force.
All that being said, we are well positioned with a conservative
capital base and sufficient cash available to continue to grow
the business and deliver on its objective to drive income and
capital growth and outperform the MSCI benchmark on a Total
Property Return basis. We have received covenant waivers
on two of our facilities for the April quarterly test and all our
lenders have either provided or offered to provide covenant
waivers during these unprecedented times, if required.
As a result of our robust rent collection at both the March
quarter (93% collected to date, including 91% cash collected
and 2% on payment plans) and June quarter (84% to date,
including 64% cash collected and 20% on payment plans) we
have proposed a final dividend of 2.5p to be approved at
the Annual General Meeting and have set out an expected
minimum quarterly dividend level for the next financial year. As
the economy recovers, we expect normal trading to resume and
our rent collection to return to normal levels which will give us
far better visibility as the year progresses.
TOTAL PROPERTY
RETURN
TAX SAVING SINCE
REIT CONVERSION
1.1%
MSCI BENCHMARK:
-0.5%
£0.7m
Along with the rest of the UK business community,
Palace Capital has faced a challenging year with
a backdrop of ongoing political and economic
instability. However, the financial performance for
the financial year was solid, generating recurring
earnings of £8.0m.
We have maintained a conservative capital structure and
utilised our working capital to support a highly active year of
refurbishment and redevelopment. The Group did make a loss
before tax of £9.1m though this was largely due to the £17.9m
decline in the value of our assets that resulted from the latest
independent valuations from Cushman & Wakefield which
offset the recurring earnings.
Other than the reduction in property values, the emergence
of the Covid-19 pandemic and the resulting lockdown had
a limited impact on the financial performance for the year
ended 31 March 2020. However, it has had a significant impact
on business operations post year end, with rent collection
challenges and debt covenants, particularly interest cover
ratios (ICR) under pressure as a result.
Rent collection and working capital have become our priorities
post year end in order to manage the Group through this
economic crisis. Consequently, the April 2020 quarterly
dividend was cancelled in order to preserve cash, along with
freezing all significant discretionary capital expenditure until
we have greater clarity on the future.
36
FINANCIAL HIGHLIGHTS
gains, profits on disposals and exceptional
items. EPRA earnings for the year ended
Change
2020
2019
2018
31 March 2020 increased by 41.9% to
Income growth
IFRS (loss)/profit after tax
Adjusted profit before tax
EPRA earnings
Basic EPS
EPRA EPS
Adjusted EPS
Dividend per share
Dividend cover
Capital growth
(£5.4m)
£8.0m
£10.8m
(11.8p)
23.4p
17.5p
12.0p
1.5×
£5.2m
£8.9m
£7.6m
11.3p
16.6p
17.3p
19.0p
0.9×
£12.5m
£8.5m
£6.5m
35.9p
18.7p
21.2p
19.0p
1.1×
Portfolio like-for-like value
-5.7%
+0.5%
+3.5%
£10.8m compared to £7.6m last year,
reflecting the increased earnings from the
portfolio and specifically including £2.9m
for a surrender premium received from the
tenant at the Priory House, Birmingham
property which we subsequently sold.
The Group also report an adjusted profit
before tax in order to track recurring
earnings and to form a basis for calculating
dividend cover. This totalled £8.0m for the
year (2019: £8.9m), down 10.2%, albeit
adjusted earnings per share increased to
17.5p from 17.3p as a result of a lower tax
£166.3m
£180.3m
£183.3m
bill from REIT conversion.
Net Asset Value
Basic NAV per share
EPRA NAV per share
Total accounting return
Total shareholder return
Debt finance
Debt balance
Average cost of debt
Average debt maturity
Loan to Value Ratio
NAV gearing
361p
364p
-7.5%
-30.9%
393p
407p
2.6%
-6.0%
400p
415p
-2.0%
-1.4%
£120.8m
£119.4m
£101.4m
3.1%
3.9yrs
38%
63%
3.3%
3.6yrs
34%
52%
3.4%
4.7yrs
30%
43%
KEY PERFORMANCE MEASURES
The Group’s 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 the Directors to assess the Group’s performance included in the
highlights for the year and throughout this document. These include a number of
European Public Real Estate Association (EPRA) measures, prepared in accordance
with the EPRA Best Practice Recommendations (BPR) framework, and Group
adjusted measures. Further details are given in notes 6 and 7 to the financial
statements. We report a number of these measures (detailed in the glossary of
terms) because the Directors consider them to improve the transparency and
On the capital side, we have experienced
a 7.7% reduction in our IFRS net asset
value to £166.3m (2019: £180.3m), a
reduction in net asset value per share
from 393p in 2019 to 361p and this
translates into EPRA net asset value per
share of 364p, down from 407p in 2019.
The 43p decrease, together with the total
dividends of 12.0p paid during the year,
represents a -7.5% total accounting return
overall. The reduction in net asset value in
the year is reflective of the write-down in
property valuations based on Cushman’s
assessment of the market as a result
of Covid-19 impacting the economy in
an unprecedented way. There is also a
timing issue, given that £24.0m of capital
expenditure across the portfolio, including
the major investment into our flagship
development scheme at Hudson Quarter
in York, has been incurred and until the
newly developed space has been let, the
valuation cannot fully account for any
uplift.
relevance of our published results as well as the comparability with other listed
We have undertaken significant capital
European real estate companies.
HEADLINE FY20
RESULTS
Despite the impact of Covid-19 at the
7.5% for the year and capital return of
-6.0%. Despite this strong performance on
a relative basis, it has nonetheless resulted
in an overall IFRS loss after tax of £5.4m
back end of the financial year, the Group
(2019: £5.2m profit) and a reduction in the
continues to outperform the MSCI
Group net asset value to £166.3m (2019:
benchmark on a Total Property Return
£180.3m) as at 31 March 2020.
basis, generating 1.1% for the year, versus
the benchmark performance of -0.5%.
This was made up of income return of
EPRA earnings is the industry measure of
underlying profit excluding revaluation
expenditure in the year and we expect
to benefit from future rental and capital
growth subsequent to re-letting vacant,
refurbished space. Our approach to
recycling capital out of lower-performing
assets and sectors continued as we sold
the final 34 residential assets which
were acquired as part of the R.T. Warren
portfolio in 2017. This completed the
sale of the residential portfolio, releasing
surplus funds into working capital to
support our capital expenditure strategy.
27192 Palace Capital AR2020.indd 36-37
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
37
14-Jul-20 6:15:01 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSSTRATEGIC REPORT FINANCIAL REVIEW
RECURRING EARNINGS
Gross income totalled £21.1m in the year
ended 31 March 2020 (2019: £18.8m)
maintained by a steady portfolio and
supported by the significant £2.9m
surrender premium received from
a departing tenant at Priory House,
DEBT
Barclays
NatWest
Santander
Lloyds
Birmingham as part of their lease
Scottish Widows
surrender. Net rental income similarly
increased to £18.8m (2019: £16.4m).
Administrative expenses increased to
£4.3m (2019: £4.1m) largely due to
amortisation of a right of use asset
and including one-off costs associated
with converting to a REIT on 1 August
2019 and recruitment fees in relation to
the appointment of an additional Non
Executive Director in early 2020.
Barclays development
length transaction. At this reporting
date, Cushman & Wakefield carried out
the portfolio-wide valuation exercise
and included a “material uncertainty”
clause in their report to acknowledge the
difficulty of valuing in a market impacted
by Covid-19 and with limited transactional
evidence. Like-for-like valuations at year-
The employee numbers were fairly stable
end were consequently down 5.7%. This
throughout the year and, including the
resulted in a £17.9m downward revaluation
Board, totalled 17 people at the balance
through the income statement.
sheet date, compared to 16 in the prior
year. Finance costs remained stable at
£3.8m (2019: £3.8m). There was £0.5m
of debt termination costs as a result of
a refinancing which has had a positive
impact by contributing to a reduction in the
average cost of debt to 3.1% (2019: 3.3%)
leveraging our larger diversified portfolio
and established banking relationships for an
improvement to lender terms.
Looking forward, the business is capable
of scalability with the team and systems in
place to support significant growth of the
portfolio.
We have progressed extremely well with
our flagship development at Hudson
Quarter, York, where we have seen 28
flats exchanged as at the year end and
secured a ten-year lease on 4,500 sq ft at
a record rent for York of £25 psf on one
of the commercial units. With completion
expected in March 2021, this will have a
significant impact on income and capital
for the business.
DIVIDENDS
In light of the Covid-19 outbreak, the
Board has given careful consideration to
The Group has a gross rent roll of £17.6m
our obligations to all our stakeholders.
per annum as at 31 March 2020 with a
Therefore, the Board is recommending a
reversion to £20.6m per annum as well as
final quarterly dividend of 2.5p per share
holding cash to support working capital,
fund further acquisitions and continue
to be paid 14 August 2020 to shareholders
registered at the close of business on
to reinvest in the portfolio to generate
24 July 2020. The Group announced on
further growth.
VALUATION LOSSES &
PROFITS ON DISPOSAL
The movement in the values of our
investment properties can make a
significant impact on profit before tax,
even though they are not cash-based
or realised. They are determined by
independent valuers’ assessment of
what a willing purchaser would pay for
the property on the basis of an arm’s
38
2 April that it would cancel the payment
of the April 2020 quarterly dividend, as
the Covid-19 pandemic began to impact
on the global economy. The Group made
this prudent decision to ensure maximum
liquidity at such an unprecedented time.
The full year dividend, when taking
account of the quarterly dividends paid
in October and December 2019, will total
12.0p, representing a 6.7% yield on the
share price at 31 March 2020.
Fixed
34.9
–
19.3
–
13.7
–
67.9
Floating
Total drawn
Years to
maturity
6.0
28.6
6.5
6.8
–
5.0
40.9
28.6
25.8
6.8
13.7
5.0
52.9
120.8
4.2
4.4
2.3
2.9
6.3
1.5
3.9
NET ASSETS
At 31 March 2020, our net assets totalled
£166.3m, equating to a basic net asset
per share of 361p, a decrease of 32p since
31 March 2019. The decrease in our net
assets was driven largely by the decrease
in value of our investment properties and
also the £0.4m mark-to-market reduction
in the value of the equity investment we
hold, priced at 31 March 2020 subsequent
to the stock market fall as a result of the
Covid-19 economic lockdown and the
£0.3m loss on disposal of the remaining
residential assets held for sale, in addition
to the one-off debt termination costs of
£0.5m.
We calculate an EPRA NAV consistent with
standard practice in the property industry
to adjust for any dilution of outstanding
share options and fair value adjustments
of financial instruments and deferred tax
which totalled 364p at 31 March 2020,
down from 407p at 31 March 2019.
DEBT FINANCING
The Group maintained its conservative
capital structure ending the year with a loan
to value (LTV) of 38% net of cash (2019:
34%). This increased over the year in line
with expectations as the Group commenced
monthly drawdowns of the development
facility for Hudson Quarter, York.
AVERAGE COST OF DEBT
3.1%
ADJUSTED PBT
£8.0m
PORTFOLIO VALUE
£277.8m
56% of overall debt drawn. The average
reopen and the tenants recommence
debt maturity on the investment facilities
rental payments.
We refinanced two debt facilities during
the year resulting in an improved debt
profile, lowering our overall total cost
of debt to 3.1% (2019: 3.3%). We have
increased the revolving credit facility with
NatWest from £30.0m to £40.0m and
extended it to August 2024, reducing
the margin to 2.1% from 2.5%. We
charged additional security to access a
further £3.5m on the Barclays investment
facility due to expire in August 2023 and
extended this to June 2024 at the same
margin of 1.95% over three-month LIBOR.
This has provided additional capacity to
support our capital expenditure strategy.
We began our monthly drawdown on
the Barclays development facility for the
Hudson Quarter, York, development in
January 2020. We have completed our
equity investment into the project and we
will now fund this project solely from the
debt facility through to completion in early
2021. Finally, we repaid the remaining
£3.5m on one of our two Lloyds facilities
in May 2019 from our cash reserves as the
maturity date approached.
The Group debt facilities at year end total
£120.8m with a further £32.9m undrawn.
We continue to monitor swap rates and
as at year end held £67.9m of fixed or
hedged debt which was approximately
has increased to 3.9 years and there
is no investment facility that is due for
repayment within the next two years.
NET DEBT & GEARING
Each debt facility is secured at a Special
Purpose Vehicle (SPV) level and we assess
the gearing mainly through interest cover
ratios (ICR) and loan to value ratios (LTV).
In normal market conditions we gear
our assets within a range of 40% to 60%
LTV. At a Group level we measure both
the debt to net asset value ratio (NAV
gearing) and loan to value net of cash.
NAV gearing at 31 March 2020 was 63%
and the LTV ratio was 38% at 31 March
2020. The Group remains conservatively
geared and at year end had £14.9m of
cash and £32.9m of unutilised facilities
available, along with £18.2m of properties
uncharged to lenders.
Post year end, two of our facilities have
breached ICR covenants as part of
the quarterly April test due to the non
payment of rent specifically at our two
leisure assets. Both banks have provided
covenant waivers and we expect to return
to compliance once the leisure schemes
INCOME STATEMENT AS FOLLOWS
FY20
£m
FY19
£m
INCOME STATEMENT
Adjusted profit after tax
Surrender premium & fair value of options
EPRA earnings
Revaluation losses
Equity investment revaluation losses
Losses on disposals
Hedging and derivative losses
Debt termination costs
Deferred tax REIT adjustment
IFRS (loss)/profit for the year
8.0
2.8
10.8
(17.9)
(0.4)
(0.2)
(0.9)
(0.5)
3.7
(5.4)
DIVIDENDS RECORD AS FOLLOWS
FY16
FY17
FY18
FY19
DIVIDENDS
Adjusted EPS
DPS
Dividend cover
18.9p
16.0p
1.2×
22.2p
18.5p
1.2×
21.2p
19.0p
1.1×
17.3p
19.0p
0.9×
7.9
(0.3)
7.6
(0.7)
(0.2)
(0.4)
(1.0)
-
(0.2)
5.1
FY20
17.5p
12.0p
1.5×
REIT CONVERSION AND
TAXATION
The Group converted to a UK REIT on
1 August 2019. As a consequence, our UK
tax liability has reduced as the majority
of the Group’s activities falls within the
REIT exemption. The Group has a tax
credit for the year ended 31 March 2020
of £3.6m. The bulk of this was in relation
to the deferred tax credit of £5.6m as part
of the REIT conversion, which was offset
by a corporation tax charge for the year
of £2.0m. If the Group had not converted
to a REIT, an additional £0.7m corporation
tax liability would have been recognised in
the financial statements for the year.
OUTLOOK
The Group has performed well from a
financial perspective against a challenging
political and economic environment,
made more difficult with the emergence
of Covid-19. We have continued to
outperform the UK MSCI IPD index
benchmark while remaining financially
robust with conservative gearing at 38%,
cash reserves of £14.9m and the ability
to draw down further on our revolving
credit facility with NatWest. This provides
the Group with capacity to support our
working capital requirements and invest in
our excellent regional assets, to continue
to grow income and capital values. We
have proposed a final dividend of 2.5p
and we expect to maintain this as the
minimum level of quarterly dividend going
forwards. We look forward to continued
progress on our flagship development
at Hudson Quarter in York, where we
expect to deliver an excellent sustainable
mixed-use scheme which will benefit the
local economy of York, come completion
in 2021.
STEPHEN SILVESTER
Finance Director
6 July 2020
39
14-Jul-20 6:15:02 PM
27192 Palace Capital AR2020.indd 38-39
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSSTRATEGIC REPORT RISK MANAGEMENT
RISK FRAMEWORK
The Board has overall responsibility for
ensuring that an effective system of risk
management and internal control exists
within the business and confirms that it
has undertaken a robust assessment of the
Group’s emerging and principal risks.
continues to meet fortnightly to review
the businesses response and take any
decisions that are required. For further
detail regarding the impact on the
business and the mitigating action that
has been taken please refer to the eight
Principal Risks set out on pages 42–44.
Risk management is an inherent part of
the Executive team’s day-to-day decision
making, as they work hard to deliver
the Company’s strategy. The amount
of risk taken is assessed in light of our
strengths, the external environment, our
financial position and where we are in the
property cycle. Our risk appetite will vary
over time but as a business with a small
number of employees and a relatively flat
management structure, we are able to
assess and respond quickly to new and
emerging risks.
Our top down, bottom up approach to risk
identification means that asset managers
and key individuals in the finance team
are able to report directly and at an
early stage, allowing management to take
appropriate mitigating action.
The Executive team maintain a formal
register of current and emerging risks
and this is reviewed by the Audit and Risk
Committee twice a year.
The Audit and Risk Committee will support
the Board in determining the principal
risks facing the business and reviewing,
at least annually, the effectiveness of the
Company’s system of risk management
and internal control.
COVID-19
A number of risks are heightened during
the current period of disruption caused
by Covid-19 and we have seen an impact
across all aspects of the business. As
uncertainty increased, we paid particularly
close attention to our tenant exposure and
the macroeconomic environment.
While the full effects are yet to be seen,
there is no doubt that the ramifications
will be far-reaching. We expect all sectors
of the commercial property market to be
impacted, not only affecting our business,
but those of our tenants and suppliers.
Our team mobilised quickly to respond
to the various risks and challenges that
presented themselves following the
outbreak. The Board has met and
40
EMERGING RISKS
While the UK’s exit from the European
Union is somewhat overshadowed by the
ongoing pandemic the Board continues
to consider how supply and demand and
consumer confidence may be affected
once the UK leaves the EU.
Cyber risks and the potential impact on
operations are increasing for all businesses
and are further heightened as working
from home becomes vital in the fight
against Covid-19. We have taken steps to
increase our security measures during the
year and continue to review ways in which
we can further mitigate the risk to our
network and data.
In addition, climate change is a global
issue which presents both risks and
opportunities to the commercial real
estate market, with the potential to
adversely impact the macroeconomic
environment as well as our own operations
and those of our supply chain.
GOING CONCERN
STATEMENT
The Directors have made an assessment
of the Group’s ability to continue as a
going concern which includes the current
uncertainties created by Covid-19,
coupled with the Group’s cash resources,
borrowing facilities, rental income,
acquisition and disposals of investment
properties, committed capital expenditure
and dividend distributions.
The Group’s business activities, together
with the factors likely to affect its future
development, performance and position
are set out in the Strategic Report. The
financial position of the Group, its cash
flows, liquidity position and borrowing
facilities are described in the financial
statements. In addition, note 26 to the
financial statements includes the Group’s
objectives, policies and processes for
managing its capital, its financial risk
management objectives, details of its
financial instruments and its exposures to
credit risk and liquidity risk.
As at 31 March 2020 the Group had
£14.9m of cash and cash equivalents,
of which £13.9m was unrestricted cash,
a low gearing level of 38% and a fair
value property portfolio of £277.8m. The
Directors have reviewed the forecasts
for the Group taking into account the
impact of Covid-19 on trading over the
twelve 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 effects of the pandemic.
The key assumptions used in the review
are summarised below:
• The Group rental income receipts
were modelled for each tenant on an
individual basis
• Existing loan facilities remain available,
but no new financing is arranged; and
• Free cash is utilised to repay debt/cure
bank facilities covenants.
DEBT COVENANTS
Although there has been significant
headroom on the majority of covenants
within the year ended 31 March 2020,
the impact of Covid-19 and the resultant
lock-down post year-end has resulted
in a number of tenants withholding
rental payments and, in particular ,at
the two leisure schemes in Halifax and
Northampton. As a result, two of the
facilities, Scottish Widows and Santander,
did not meet their ICR covenant tests at
the April 2020 test dates. On request the
banks provided covenant waivers for both
the April and July covenant test dates. In
addition, during the year £0.8m cash was
placed in a lock-up account on behalf of
Scottish Widows in order to satisfy the LTV
covenant resulting from a reduction in the
property valuation prepared on behalf of
the bank in August 2019. All other facilities
remain within covenants.
As part of the going concern assessment,
and taking the above into consideration,
the Directors reviewed a number of
scenarios which included extreme
downside sensitivities and reverse stress
tests in relation to rental cash collection
assuming no property acquisitions, no
further capital expenditure beyond that
committed and no dividends.
STRESS TESTS
The debt covenants were reverse stress-
tested to validate resilience to property
valuation declines and rental income
declines as well as increases in future
interest costs. It assessed the limits at
which key financial covenants and ratios
would be breached. To supplement the
scenario planning, constructive discussions
were held with all the Group’s lenders
around the ability to waive or change
the respective covenants, if required. All
lenders have indicated they will be willing
to provide covenant waivers for the June
and September quarters in the event of a
breach. This was further underpinned by
the Bank of England’s financial services
regulatory and supervisory body, the
Prudential Regulation Authority (“PRA”)
providing guidance to its regulated
members on 26 March 2020. The Group
has organised its debt at a loan security
sub pool / single purpose vehicle (“SPV”)
level so in the unlikely event of a covenant
breach that led to a lender requesting
early repayment of the loan, the facility
is non-recourse and does not affect the
financing and cash flow for the rest of the
Group.
DOWNSIDE SCENARIO
The downside scenario considered
the impact on the working capital
model, including the loss of 50% of all
rental income over a 12-month period,
taking into consideration no property
acquisitions, only committed capital
expenditure and no dividend payments. In
this scenario the business would be loss-
making and therefore it would be unlikely
to be required to pay out any dividends
under the REIT regime. A 50% reduction
in rental income would result in a breach
of the financing cost ratio requirement of
1.25x under the REIT regime. However,
there would be no adverse implication
in terms of going concern from exiting
the REIT regime, albeit the payment of
corporation tax would commence when
the business returned to profitability.
More critical would be the covenant
breaches with the debt lenders. The main
covenants on the Group’s loans are the
interest cover ratio (“ICR”), debt service
cover (“DSC”) and loan to value (“LTV”)
ratios. Our reverse stress tests indicate
that, depending on the particular loan
security sub pool, income would need
to fall by between 7% and 62% and
values by between 6% and 26% before
key ICR, DSC and LTV covenants were
breached. Mitigating the various covenant
requirements would, in the first instance,
involve requests for covenant waivers.
If the property values fell by approximately
20%, a £9.2m repayment of debt would
be required to cure loan breaches under
the existing debt facilities and future
covenants, which could be satisfied with
existing working capital. However, in the
downside scenario allowing for loss of 50%
of all rental income over the going concern
period, assuming the lenders require debt
covenant cures, the business would need
to reduce loan balances by up to £38m in
order to bring down interest costs in line
with ICR and DSC requirements. This is
above and beyond current cash balances
available. The Group would therefore
look to access additional cash through
liquidating various assets within the
balance sheet not secured to lenders.
As noted above, the ICR covenants for
the two loan facilities relating to the two
leisure schemes had to be waived by the
lenders at the April testing date. Whilst
we forecast that these covenants will be
met at the July testing date and future
periods, in the worst case scenario that
the covenants are not met, and the Group
is unable to agree a suitable cure right
position with the lenders, this could result
in early repayment of the debt forcing the
sale of some or all of the assets charged
to these loans which include two office
assets in addition to the two leisure assets.
On aggregate they are currently valued at
£73.8 million compared to the drawn debt
balances of £39.2 million so the disposal
of all the assets would most likely lead
to surplus cash available to the Group
once debt has been repaid. However, in a
downside scenario and assuming it would
not be possible to sell the assets and
the banks took control of the assets, the
Group’s net assets would be reduced by
£34.6 million, loss of annual net income
would total £4.9 million and reduction
in annual finance costs would total £1.3
million.
CONCLUSION
Subject to these downside scenarios,
the results of the sensitivity analysis and
stress testing demonstrates that the
Group has sufficient liquidity to meet its
on-going liabilities and committed capital
expenditure as they fall due over the
period of assessment. Given the amount
of unrestricted cash currently held by the
Group, the limited level of committed
capital expenditure in the forthcoming
12 months, and reasonable downside
sensitivities, the Directors are satisfied
that the Group has adequate resources
to continue in operational existence, for
a period of at least 12 months from the
date that these Financial Statements were
approved.
Should the impacts of the pandemic on
trading conditions be more prolonged
or severe than currently forecast by the
Directors, the Going Concern statement
would be dependent on the Group’s
ability to take further actions. Detailed
consideration was given to the availability
and likely effectiveness of mitigating
actions that could be taken, including
future cash conservation strategies and
discussions with lenders regarding the
terms of the loan agreements, being
mindful of recent PRA guidance to lenders.
Furthermore, the Directors are not aware
of any material uncertainties that may
cast significant doubt upon the Group’s
ability to continue as a going concern.
Based on these considerations, together
with available market information and the
Directors’ knowledge and experience of
the Company’s property portfolio and
markets, the Directors have adopted
the going concern basis in preparing the
accounts.
The Audit Committee reviewed whether
it was appropriate to adopt the going
concern basis in the preparation of the
financial statements. In considering this
the Committee reviewed the 12-month
forecasts, availability of bank facilities
and the headroom under the financial
covenants in our debt arrangements. With
this knowledge and following the review
the Committee recommended to the
Board that it was appropriate to adopt a
going concern basis.
27192 Palace Capital AR2020.indd 40-41
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
41
14-Jul-20 6:15:02 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSSTRATEGIC REPORT RISK MANAGEMENT
VIABILITY STATEMENT
In accordance with provision 31 of the UK
Corporate Governance Code, and taking
into consideration Covid-19, the Directors
have assessed the prospects of the Group
and future viability over a three-year period
from the year end, being longer than the
12 months required by the ‘Going Concern’
provision. The Board conducted the review
with regard to the Group’s long-term
strategy, principal risks and risk appetite,
current position, asset performance and
future plans, and determined that three
years to 31 March 2023 is the maximum
timescale over which the performance
of the Group can be forecast with any
material degree of accuracy, and so is an
appropriate period over which to consider
the Group’s viability.
A range of downside sensitivity analyses
were stress tested to form part of the
review, with material inputs filtered to
consider differing economic backdrops,
and how such challenges would be met.
Achievement of the one-year forecast has
a greater level of certainty and is used to
set near-term targets across the Group.
Achievement of the subsequent forecasted
years is less certain than the one year.
The Board’s forecast, though provides a
longer-term outlook against which strategic
decisions can be made.
ASSESSMENT OF REVIEW
PERIOD
The viability review was conducted over
a three-year period of assessment, which
the Board considered appropriate for the
following reasons:
• The Group’s working capital model,
detailed budgets and cash flows
consist of a rolling three-year forecast.
•
It reflects the short cycle nature of
the Group’s developments and asset
management initiatives.
• Office refurbishments completed to
date have taken less than 12 months
and the major redevelopment at
Hudson Quarter in York is expected
to take no longer than 24 months
from commencement to practical
completion.
• The Group’s weighted average debt
maturity at 31 March 2020 was 3.9
years.
• The Group’s WAULT at 31 March 2020
was 4.8 years.
42
Three years is considered to be the
optimum balance between long term
property investment and the inability
to accurately forecast ahead given the
cyclical nature of property investment.
ASSESSMENT OF PROSPECTS
The financial planning process considers
the Group’s profitability, capital values, cash
flows, dividend cover, banking covenants
including but not exclusively LTV and ICR
tests, and other key financial metrics over
the three-year period. The metrics were
subject to a sensitivity analysis, in which a
number of the main underlying assumptions
are flexed and reverse stress-tested to
consider a range of alternative macro-
environments and portfolio compositions.
In addition, the review was updated to
consider the impact of Covid-19 using a
severe but plausible downside scenario.
STRESS TESTS & DOWNSIDE
The debt covenants were reverse stress-
tested beyond the 12 month going concern
period to allow for changes to banking
covenants over the three-year viability
period to validate resilience to property
valuation declines and rental income
declines as well as increases in future
interest costs. As noted above, the ICR
covenants have come under pressure at the
April 2020 test dates due to the impact of
lockdown on tenants who have withheld
rent. However, we expect to be compliant
with all ICR covenants at the July 2020 test
dates across all the debt facilities. Longer
term, in the event of an economic downturn
there is a greater risk that LTV covenants
would come under pressure during the
viability period. We have considered the fall
in property values which could be sustained
without an impact on banking covenants. In
the event of covenant breaches, the Group
would in the first instance apply cure rights
and the Group would therefore look to
access additional cash through liquidating
various assets not secured by lenders. In
the worst case scenario that covenants are
not met, the Group is unable to agree a
suitable cure right position with a lender,
and the assets cannot be sold to repay
the debt, then the properties effectively
become the property of the bank.
However, all debt is secured at an SPV level
and is non-recourse to Palace Capital plc
which would enable the Group to continue
operating, albeit in a reduced form.
In the period of the viability assessment
and on the assumption the current
economic turbulence resulting from the
impact of Covid-19 will be ameliorated by
the UK Government actions and normalise
within one year and taking into account
lender support and mitigating management
actions, the Company would have adequate
resources to continue its operations
and in the downside scenario, any debt
covenant curing could be resolved with a
combination of disposals in order to release
sufficient cash to pay down debt.
Furthermore, the Board, in conjunction
with the Audit and Risk Committee,
carried out a robust assessment of the
principal risks and uncertainties facing
the Group, including those that would
threaten its business model, strategy, future
performance, solvency or liquidity over the
three-year period. The risk review process
provided the Board with assurance that the
mitigations and management systems are
operating as intended. The Board believes
that the Group is well positioned to
manage its principal risks and uncertainties
successfully, taking into account the current
Covid-19 risk, and the economic and
political environment.
The Board’s expectation is further
underpinned by the regular briefings
provided by the Executive team. These
briefings consider updated rent collections,
tenant negotiations, debt covenant status,
market conditions, opportunities, the ability
to raise third-party funds and deploy these
promptly, and changes in the regulatory
landscape, and the current political and
economic risks and uncertainties. These
risks, and other potential risks which may
arise, continue to be closely monitored by
the Board.
CONFIRMATION OF VIABILITY
The Board confirms that it has a
reasonable expectation that the Group
will be able to continue in operation and
meet its liabilities as they fall due over
the next three years, taking account of
the Group’s current position, the principal
risks as set out on the following pages and
on the assumption the current economic
turbulence resulting from the impact of
Covid-19 will be ameliorated by the UK
Government actions and normalise within
one year.
KEY
L Low M Medium H High D Decrease S Stable I Increase
1
0
DEVELOPMENT
2
0
TENANT
Risk description
Risk description
Overexposure to development could put
pressure on cash flow and debt finance
and must be managed in the context of
the REIT regime.
Delays with construction, increased costs,
adverse planning judgements and failure
of a major contractor may all impact our
underlying income.
As a result of Covid-19 there may be
implications if access to labour is limited
and the availability of raw materials
continue to be affected. Over the longer
term, profitability of schemes may be
impaired as macroeconomic circumstances
worsen.
Mitigation
• The Group’s Capital Risk Management
Policy limits development expenditure
to <25% of Gross Asset Value.
• Core portfolio generates sustainable
cash flows.
• Developments are modelled and
financed appropriately to minimise
risk and maximise return.
• A competitive tender process is
undertaken, and Contractors are
assessed for financial stability.
• Project managers are utilised to
closely monitor the design,
construction and delivery projects.
• Professional teams engaged to
develop sales strategies.
Progress 2019/2020
• £34m construction contract in respect
of Hudson Quarter is underway and
part funded by £26.5m Barclays
Development facility.
• Principal Contractor appointed with
proven track record and strong safety
credentials.
Exposure to tenant administration and
poor tenant covenants could result in
lower income, liability for voids and
management time spent chasing arrears.
The ongoing Covid-19 pandemic is likely
to result in an increase in business failures.
Changing tenant demand in relation to
new technologies, energy efficiency and
new trends and practices.
Mitigation
• Our strategy to invest across different
sectors reduces our exposure to an
individual sector or tenant.
• We maintain close relationships with
our tenants, understanding their needs
and supporting them throughout their
business cycle.
• Management meet with managing
agents to review rent collection and
arrears on a regular basis.
• We actively manage our properties to
improve security of income and limit
exposure to voids.
Progress 2019/2020
• Total number of leases across
portfolio: 220, making up contractual
rent roll of £17.6m.
• Loss of income from tenant
administrations and CVAs in the year
totalled £67.4k, which is 0.4% of
portfolio contractual income.
• Portfolio weighted average lease
length is 4.8 years, providing
reasonable longevity of income.
• Occupancy across the portfolio is 87%.
• A tenant survey has been conducted
in the year.
• Corporate Social Responsibility
committee established to ensure
sufficient Board oversight of
stakeholder interests.
• Development pipeline continuously
•
assessed ensuring exposure is limited
at any one time
Likelihood
Impact Change
M
H
S
In light of the Covid-19 pandemic
we have undertaken a risk review
of each one of our tenants. We are
regularly communicating with each of
our tenants and continue to work with
them through this difficult time.
Likelihood
Impact Change
M
M
I
43
14-Jul-20 6:15:05 PM
27192 Palace Capital AR2020.indd 42-43
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSSTRATEGIC REPORT RISK MANAGEMENT
3
0
FINANCING AND CASH
FLOW
4
0
ECONOMIC AND
POLITICAL
5
0
ACCOUNTING, LEGAL
AND REGULATORY
KEY
L Low M Medium H High D Decrease S Stable I Increase
6
0
OPERATIONAL
7
0
PEOPLE
8
0
PORTFOLIO
Risk description
Risk description
Risk description
Risk description
Risk description
Risk description
Uncertainty from Covid-19 and other world
events (including Brexit) could impact
economic growth, weakening demand
of our tenants and the profitability of
their businesses. Decisions made by
Government and local councils can have a
significant impact on our ability to extract
value from our properties.
Mitigation
• Monitoring of economic and property
industry research by Executive team
and review at Board meetings,
adjusting strategy accordingly.
• Our activities are focused solely on the
UK regions with no foreign exchange
exposure.
• We undertake sensitivity modelling
against a downturn in economic
outlook to test the robustness of our
financial position.
Non-compliance as a result of changes to
accounting standards, and the legal and
regulatory requirements for a public real
estate company.
Non-compliance with REIT regime leading
to loss of REIT status or other changes to
the Company’s tax status and/or incorrect
application of new tax rules.
Mitigation
• Advisers including Solicitors and
Brokers are engaged on key
regulatory, accounting and tax issues.
• Engagement with The British Property
Federation on regulatory changes that
impact the real estate industry.
• REIT regime compliance is regularly
monitored by the Board and the
Executive team will consider the
• Use of consultants and experts when
impact on the regime as part of their
considering planning and development
work.
decision making.
• Review tenant profile and sector
Progress 2019/2020
• Greater level of scrutiny from the
Board covering corporate governance
and the FRCs reporting requirements.
• Business forecasts and strategy allow
for changes to corporation tax rates
and interest deductibility rules.
• Following conversion to a REIT on
1 August 2019 the Company has
complied with the REIT regime.
Likelihood
Impact Change
H
L
I
diversification.
Progress 2019/2020
• The full impact of the ongoing
Covid-19 pandemic is yet to be seen.
Where we can, we have updated our
budget in respect of the next financial
year and continue to closely monitor
the situation.
• Concerns remain as to whether there
will be an orderly Brexit and the
climate of uncertainty continues to
impact decision making. However, the
UK’s economy has remained relatively
stable.
• Government support for regional
development initiatives bodes well for
the markets in which we operate.
Likelihood
Impact Change
H
H
I
Breach of debt covenants could trigger
loan defaults and repayment of facilities
putting pressure on surplus cash
resources. Bank of England monetary
policy may result in interest rate rises and
increased cost of borrowing. Financial
regulatory changes under Basel III may
increase the cost to borrowers.
As the full impact of Covid-19 materialises
we could see cash flows impacted where
tenants request payment holidays or are
unable to pay rent.
Mitigation
• The Group actively engages in close
relationships with its key lenders,
ensuring transparency when it comes
to monitoring the properties secured
by debt.
• Assets are purchased that generate
surplus cash and significant headroom
on ICR and LTV Loan Covenants.
• Gearing is maintained at a
conservative level and hedging utilised
to reduce exposure to interest rate
volatility.
• We maintain significant cash balances
and where necessary we will defer
capital expenditure projects.
Progress 2019/2020
• Amendment and extension to NatWest
RCF providing additional financial
support and longevity at lower margin.
• The Group’s weighted average debt
maturity is currently 3.9 years.
• The Group’s net LTV is conservative
at 38%.
• Fifty-seven per cent of drawn debt
at year end is hedged, limiting the
Group’s exposure to increases in Bank
of England base rate and LIBOR.
• We continue to stress test our budgets
and cash flows and have updated
our scenario modelling in light of the
current Covid-19 pandemic.
Likelihood
Impact Change
M
H
I
44
Business disruption as a result of physical
damage to buildings, IT systems failure,
cybercrime, extreme weather occurrences,
or other environmental events, including
those arising from climate change.
Without adequate systems and controls
our exposure to operational risk and
business disruption is increased.
The Group’s strategy and core business
operations are led by a small number of
individuals.
An inability to attract or retain staff and
Directors, suppliers and/or managing
agents with the right skills and experience
may result in significant underperformance
or impact the overall effectiveness of our
operations.
Mitigation
• Key man insurance cover in place for
Executive Directors.
• Succession planning is a regular
agenda item for the Nomination
Committee.
• We engage with staff regularly
and encourage a positive working
environment.
• We maintain an attractive reward
and benefits package and undertake
regular performance reviews.
• General policy of retaining incumbent
managing agents on new property
acquisitions to avoid awkward
transitions and potential loss of
income.
Progress 2019/2020
• The number of staff remains at 12
and provides cover across the team
reducing exposure should any of the
key personnel be unavailable.
• Formed the Workforce Advisory
Panel to further enhance employee
engagement and ensure the Board
understands the views of the whole
workforce.
Likelihood
Impact Change
L
M
D
Mitigation
• Our buildings are covered by
comprehensive buildings and loss of
rent insurance.
• Antivirus software and firewalls protect
IT systems and data is regularly
backed up. Cyber insurance is in place.
• Tight-knit team with systems in
place to ensure Executive team have
shared responsibility across all major
decisions.
• Segregation of duties applied to
payments processing and bank
authorisations.
• Climate related risks are considered
as part of our ongoing environmental
management. For example, flood
risk assessments are considered as
part of our acquisition strategy and
compliance with Minimum Energy
Efficiency Standards is regularly
monitored.
Progress 2019/2020
• Continued to keep under review the
internal control environment and
ensure good governance practices are
adopted throughout the business.
• Reviewed our cyber security
arrangements to ensure we are
deploying the most up-to-date
technologies.
Increased our focus on environmental
management, which forms a key part
of the work of the Corporate Social
•
Responsibility Committee.
Likelihood
Impact Change
M
M
I
Decrease in portfolio valuation, volatile
rental values and general underperformance
of assets through inappropriate investment
strategies and failure to implement asset
business plans will adversely impact
profitability and net assets.
Mitigation
• Diversification of portfolio minimising
exposure to any one geographic
location or sector with no exposure to
London.
• All investment decisions require Board
approval.
• Experienced management team with
vast experience, networks and use of
advisers to support the assessment of
investment opportunities.
• Asset managers report regularly to the
Executive management team on their
progress implementing their business
plans.
Independent valuations are
undertaken for all assets at the year
end and half year end.
•
• Property returns are benchmarked
against MSCI IPD UK Quarterly
Index and performance against the
benchmark is reviewed formally at the
half year and year end.
Progress 2019/2020
• We have a balanced portfolio across a
range of geographical areas outside of
London.
• No single asset comprises more than
10% of the portfolio’s value.
• The portfolio’s valuation remains
consistent taking into consideration
strategic disposals during the year.
Likelihood
Impact Change
L
M
I
27192 Palace Capital AR2020.indd 44-45
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
45
14-Jul-20 6:15:05 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSSTRATEGIC REPORT CORPORATE SOCIAL RESPONSIBILITY
SECTION 172
OUR SECTION 172 STATEMENT CAN
BE FOUND IN THE GOVERNANCE
SECTION ON PAGE 60
STAKEHOLDER RELATIONS
HOW WE ENGAGE
We engage with our investors through a regular
INTERESTS OF THE STAKEHOLDER
Our investors are looking for robust financial
programme of events, where we set out how we
performance that generates a return on their
intend to generate attractive total returns:
investment incorporating both income and
• Bi-annual presentations
• Capital Markets days
• Shareholder analysis
• Regular updates on lettings, acquisitions and
capital growth within a control environment that
mitigates risk and ensures sound governance and
compliance.
disposals via RNS
• Property/site visits
Through our proactive approach to asset
management we engage with our tenants in a
Our tenants want fit-for-purpose spaces that are
able to evolve with their business.
variety of ways:
• On-site review meetings
• Dedicated building managers and asset
managers
• Visiting assets and listening to concerns
• Tenant surveys which cover general
satisfaction, and opinions on how we can
improve our assets – in the broadest sense
Our employees are vital to our continued success
and as a small team we encourage a positive
contribution through:
• Bi-weekly team meetings
• Regular internal communications
• Team strategy days
• Formal Workforce Advisory Panel
• Team building events
• Participation in employee share schemes
•
Annual performance appraisals
We rely on a number of key partnerships to
support our property and facilities management.
We actively engage with these suppliers and work
closely with them:
• Weekly calls with our managing agents and
regular contact by telephone and email
• Formal review meetings
• Monthly meetings with our external project
managers
• Sharing insights and initiatives
• Ensuring payments are made within agreed
terms
This includes the necessary utilities and
amenities as well as good local infrastructure and
connectivity.
Our employees value an open and positive
working environment.
They want work that is both challenging and
interesting and provides continuing professional
development, as well as a package that provides
valuable benefits and reward and a work
environment that is modern and fit-for-purpose.
Our relationships with our suppliers are mutually
beneficial supporting both parties’ interests.
Our managing agents, property managers
and external project managers want clear
communication and operational efficiency.
We actively support community events and seek
to have a positive impact on local areas:
The communities within which we invest want to
see attractive, safe and environmentally friendly
• Creating employment opportunities
• Enhancing the built environment
• Supporting charitable organisations and local
community activities
• Where large construction or refurbishment
projects are underway, our contractors will
participate in schemes such as the Considerate
Constructors Scheme and we will consider
certifications such as BREEAM to minimise the
impact on our neighbours and the environment
spaces, which enhance the local area.
They want to be kept up to date with planned
activities and have a say on what happens.
1
0
INVESTORS
2
0
TENANTS
3
0
EMPLOYEES
4
0
SUPPLIERS,
AGENTS AND
CONSULTANTS
5
0
COMMUNITIES
AND THE
ENVIRONMENT
46
CASE STUDY
In York, where our flagship
development Hudson Quarter
is taking shape, we raised over
£850 for Variety, the Children’s
Charity where our kart “The
Hudson Rocket” whizzed over
the cobbles at the Micklegate
Run.
A joint collaboration with our
consultants Fuse Design and
our principal contractor Caddick
Construction, The Hudson Rocket
came in 8th place (out of 37) and
scooped best and most innovative
design trophy.
H
U
D
S
O
N
Q
U
A
R
T
E
R
–
Y
O
R
K
OUR WORKFORCE
We recognise the importance of each
and every employee and seek to be
an ethical and progressive employer.
This means encouraging a culture of
openness, collaboration and continuous
professional development and rewarding
the effectiveness and loyalty of our
employees.
We provide fair salaries with a competitive
benefits package and all employees
participate in the Company’s Long-
Term Incentive Plan. A thorough annual
appraisal process is conducted, and
we regularly invest in employees’
development needs allowing them to
reach their full potential.
Bi-weekly whole team meetings are held
along with a specific annual strategy
session which feeds directly into the
materials prepared for the Board’s annual
strategy day.
OUR APPROACH
TO CORPORATE
RESPONSIBILITY
At Palace Capital, we believe in
conducting our business activities
ethically and responsibly. With
£278m invested in commercial
property across the UK, our
shareholders depend on us to
protect their assets in a safe,
secure and responsible manner.
Our approach to Corporate Social
Responsibility (CSR) seeks to reduce the
negative impacts our operations may
have on the environment and society as a
whole. The current pace of technological,
social and environmental change means
we must continuously adapt to ensure we
are meeting the needs of our tenants, our
employees, the communities within which
we invest, and those we work with on a
day-to-day basis.
COMMUNITY
ENGAGEMENT
For the year ended 31 March 2020,
our charitable donations reached over
£19,335. A large benefactor of our
philanthropic activity was Variety, the
Children’s Charity, focusing on improving
the lives of sick, disabled or disadvantaged
young people.
It has been an honour to engage with
the York community in many ways
including sponsoring the annual ice trail,
donating theatre tickets to hundreds
of disadvantaged children at the
Rose Theatre pop-up production and
most notably, making the most of the
Company’s valued collaboration with Fuse
Design and Caddick Construction who
joined forces to create our sponsored
go-kart in York’s annual Micklegate go-kart
run which also raised money for Variety.
TENANT SURVEY
During 2019, we undertook a satisfaction
survey of our 200+ occupiers, receiving
responses from 26%. We asked occupiers
to rate their overall satisfaction with
Palace Capital as a landlord, as well as
a range of other aspects, including: the
overall management of their building, their
facilities and whether the building met
their overall needs and expectations.
The survey captured both quantitative
and qualitative feedback and provided
very useful insights into our performance
as a landlord and areas for further action.
Following the survey, we have taken steps
to reinforce our key value of working
closely with tenants and our managing
agents.
27192 Palace Capital AR2020.indd 46-47
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
47
14-Jul-20 6:15:06 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSSTRATEGIC REPORT
CORPORATE SOCIAL RESPONSIBILITY
CASE STUDY
Back in September 2019, six
Palace Capital employees
tested their mettle against
other property industry
professionals when they met
in Dorking on a drizzly day,
to participate in the Paragon
Mudathon and raise money for
Land Aid, which combats youth
homelessness.
Over the 5km cross-country run,
interspersed with a multitude of
challenging, mostly watery obstacles,
the team stuck together and crossed
the finish line in a respectable 2
hours 7 minutes, in varying states of
exhaustion!
It was quite extreme as far as team
building exercises go but encouraging
each other throughout certainly
served to strengthen our working
relationships!
CASE STUDY
Following an asset-level
environmental risk assessment
at Sol, Northampton, we have
confirmed that appropriate
controls and procedures
are in place for managing
environmental risks and
associated incident reporting:
• This site is low risk of flooding for
rivers and groundwater.
• Smart meters are installed.
• Photocells are installed in public
areas improving energy efficiency.
• Recycling protocols are in place,
including cardboard balers which
help improve waste management.
A number of pollution prevention
recommendations are being
incorporated and we have tightened
To ensure the Board has a comprehensive
understanding of the views of the
workforce, a Workforce Advisory Panel
was established during the year. This
forum provides employees with an
opportunity to discuss and debate matters
across the business. Feedback from the
panel is provided directly to the Board of
Directors. During the year the Workforce
Advisory Panel met twice, and the
following key themes were considered:
• Communications – employees sought
a greater understanding of current
performance and strategy. Time is now
specifically allocated for such updates.
• Benefits – both the Company’s pension
offering and maternity/paternity
practices have been discussed and
debated at Board level.
• HR policies regarding the carrying over
of holiday, flexible start and end times
and dress code were reviewed and
updated.
• There has been an increased focus
on team social events and employee
charitable activities – employees
are encouraged to engage with
fundraisers that are important to them.
CULTURE AND
DIVERSITY
We ensure the values and behaviours
within the business underpin a culture
that is aligned to the Group’s strategy and
that policies and training are in place to
support this.
As our employees are at the heart of
delivering our strategy it is vital that they
are empowered to take responsibility
for their contribution to the business. To
ensure this was clear, we refreshed our
values during the year, setting out how
we work and the principles we expect
everyone in our business to follow. These
values create the framework for building
on our positive culture of inclusivity and
working together.
Ambitious Astute Active
Underpinning these values is our profound
family ethos which permeates through
our employment policies, our approach to
health and well-being and the manner in
up our maintenance regimes.
which we support our employees.
–
L
I
V
E
R
P
O
O
L
O
N
E
D
E
R
B
Y
S
Q
U
A
R
E
We continue to promote inclusivity and
will ensure that no person is discriminated
against on grounds of religion, race,
gender, pregnancy, marital status, age,
sexual orientation, or any other attribute
which does not speak to such person’s
ability to perform. We believe a diverse
workforce is key to maximising business
effectiveness and with this in mind we aim
to select, recruit, develop and promote the
very best people.
IMPROVING THE
ENVIRONMENTAL
PERFORMANCE OF
ASSETS
Through effective asset management,
we are seeking to reduce our energy and
resource consumption and minimise the
impact our assets have on the natural
environment.
While diversity is much wider than gender
balance, this area continues to be a key
area of focus and we have made good
progress within our small team:
Male
Female
Total
Board of
Directors
Senior
Managers
Other
employees
Employees
(Total)
6
1
4
11
2
1
3
6
8
2
7
17
For further information on the Board’s
approach to diversity, please refer to page
63 in the Nominations Committee report.
We recognize that in order to meet our
tenants’ needs and be a responsible
landlord our strategy must address the
accelerating industry and global challenges
in the built environment. Not only will this
future-proof our business and ensure we
are resilient, but it will also bring greater
consistency and efficiency across our
portfolio management.
During the year we have expanded
our data collection methods in relation
to resource consumption and waste
management. While we will not see the
output of these processes until future
years, we have achieved some particular
successes on our larger assets.
CLIMATE CHANGE
As the first major economy to legislate
for net zero emissions by 2050, the UK’s
commitment to climate change is clear.
48
27192 Palace Capital AR2020.indd 48-49
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
CASE STUDY
At One Derby Square we have
taken a range of actions to
improve the efficiency of the
building:
• Electricity supplies are 100%
renewable energy, obtained from a
combination of wind, solar panels,
biomass, and biogas.
• Water tanks on the roof have reduced
the water held on-site.
• Robust recycling policies are in place
and we encourage all our occupiers to
recycle, including the retail occupiers
who are responsible for their own
waste.
• Further operational and energy
efficiency initiatives planned for 2020.
The UK commercial property sector has a
responsibility to reduce the environmental
impact of its buildings and we are
committed to the progressive reduction of
our carbon footprint.
At the very minimum we undertake flood
risk assessments when acquiring assets
and we have begun working with our
sustainability consultants to develop a
rigorous set of environmental standards
against which new acquisitions can be
assessed.
Our active asset management approach
means that we are constantly assessing
our portfolio and earmarking assets for
refurbishment and renewal, utilising the
latest technology and environmentally
efficient products so that our properties
are equipped to meet minimum energy
efficiency standards. We continue to review
the EPC risk associated with new purchases
and implement improvement plans for any
asset with an “E” rating or below. Over
the next year we will continue to put in
place further internal processes to ensure
environmental considerations are factored
into our portfolio management initiatives.
The Strategic Report has been approved by
the Board and signed on its behalf by:
NEIL SINCLAIR
Chief Executive
49
14-Jul-20 6:15:08 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSSTRATEGIC REPORT
Governance
Board of Directors
Chairman’s Governance Overview
Nominations Committee Report
CSR Committee Report
Audit and Risk Committee Report
Directors’ Remuneration Report
Remuneration At A Glance
Our Remuneration Policy
Annual Remuneration Report
Directors’ Report and Additional
Disclosures
Statement of Directors’
Responsibilities
Independent Auditor’s Report
52
54
62
64
66
69
71
72
75
81
83
84
We recognise that the success
of our business depends
on us maintaining a strong
governance framework that
supports effective strategic
and operational decision
making and risk management.
TRANSPARENCY
AN ETHICAL BUSINESS
The Board is committed to maintaining
We promote a culture with strong ethical
an open dialogue with Shareholders
values ensuring that all employees and
and engaging with both existing and
everyone associated with the Group is
potential investors on Company strategy,
aware of their responsibility to act lawfully
management, remuneration and
and with the highest standards of business
governance.
integrity.
50
27192 Palace Capital AR2020.indd 50-51
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
F
R
A
S
E
R
H
O
U
S
E
–
S
T
A
I
N
E
S
51
14-Jul-20 6:15:09 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSGOVERNANCE
BOARD OF DIRECTORS
COMMITTEE MEMBERSHIP
Audit and Risk Committee
Remuneration Committee
Nomination Committee
CSR Committee
EXECUTIVE
DIRECTORS
NON-EXECUTIVE
DIRECTORS
NEIL SINCLAIR
FRICS
CHIEF EXECUTIVE
STEPHEN SILVESTER
FCA
FINANCE DIRECTOR
RICHARD STARR
MRICS
EXECUTIVE DIRECTOR
STANLEY DAVIS
NON-EXECUTIVE
CHAIRMAN
Committee membership
Committee membership
Date of appointment
Date of appointment
Date of appointment
Date of appointment
Co-founded the Group in 2010
Joined the Group in 2015
Joined the Group in 2013
Co-founded the Group in 2010
Expertise
Expertise
Expertise
Expertise
Neil has over 50 years’
experience in the property
sector. He was a founder of
Sinclair Goldsmith Chartered
Surveyors, which was admitted
to the Official List in 1987 and
subsequently merged with
Conrad Ritblat in 1993, when
he became Executive Deputy
Chairman. Neil was appointed
Non-Executive Chairman
of Baker Lorenz surveyors
in 1999, which was sold to
Hercules Property Services
plc in 2001. He was appointed
a Non-Executive Director of
Tops Estates plc, a fully listed
company, in 2003 and remained
so until it was sold to Land
Securities plc in 2005.
Overall responsibility for
implementing the Group’s
strategy and day-to-day
operations.
External appointments
• Variety the Children’s
Charity
• London Active
Management
Stephen is a Chartered
Accountant and brings 15
years’ experience in Finance
including ten working in real
estate. He first worked at
Menzies before moving to
Australia where he was a senior
accountant at PKF and Group
Financial Controller at St Hilliers
Pty. Back in the UK, he served
as Group Financial Controller at
NewRiver REIT.
Stephen’s experience
encompasses many areas of
property finance including
capital raising (debt and equity
markets), hedging, securing
credit facilities (investment and
development finance) as well
as listed corporate experience
including investor relations,
REIT compliance and corporate
transactions.
Responsible for the
implementation of the Group’s
financial strategy and all
aspects of accounting and
taxation.
External appointments
• None
Richard has extensive
experience of sourcing
and managing commercial
investments throughout the UK.
After qualifying as a Chartered
Surveyor in 2000, he gained
his experience working as a
fundamental team member of
four Central London property
firms including the corporate
real estate division of what is
now CBRE Global Investors. In
2011 he established his own
boutique property consultancy,
successfully negotiating sales
and acquisitions on behalf of a
wide variety of institutional and
private clients before joining
the Board of Palace Capital in
October 2013, when the Signal
portfolio was acquired.
Responsible for the asset
management and operational
strategy for the Group’s
properties.
External appointments
• Acorn2Oak Property
Advisors Limited
Stanley is a successful serial
entrepreneur who has been
involved in financial services
and property businesses since
1977.
Stanley’s founding company
was company registration
agent Stanley Davis Company
Services Limited, which he sold
in 1988. In 1990 he became
Chief Executive of a small
share registration company,
which became known as IRG
plc, and acquired several
businesses including Barclays
Bank Registrars and was sold
for a substantial sum to The
Capita Group plc. Until very
recently, Stanley was Chairman
of Stanley Davis Group Limited
specialising in company
formations, property and
company searches.
External appointments
• University Jewish
Chaplaincy
52
ANTHONY DOVE
INDEPENDENT
NON-EXECUTIVE
DIRECTOR
KIM TAYLOR-SMITH
INDEPENDENT
NON-EXECUTIVE
DIRECTOR
MICKOLA WILSON
INDEPENDENT
NON-EXECUTIVE
DIRECTOR
PAULA DILLON
INDEPENDENT
NON-EXECUTIVE
DIRECTOR
Committee membership
Committee membership
Committee membership
Committee membership
Date of appointment
Date of appointment
Date of appointment
All from 26 March 2020
Date of appointment
Joined the Group in 2011
Joined the Group in 2014
Joined the Group in 2019
Joined 1 March 2020
Expertise
Expertise
Expertise
Expertise
Anthony has over 30 years’
experience in the corporate
sector. He was a partner at the
international law firm Simmons
& Simmons from 1977 until
1999. In 1998 he joined the
board of Tops Estates plc,
a fully listed company, and
remained so until 2005 when
the company was acquired
by Land Securities plc. From
2004 to 2013, as a Managing
Director of Locate Continental
Properties Kft, a private
Hungarian company, Anthony
undertook several property
renovations in Budapest for
investment purposes and was
a trustee of the Gynaecology
Cancer Research Fund from
Kim, a Chartered Accountant,
brings to Palace Capital
over 30 years’ experience
as a company director for a
range of businesses. He has
a background in property
management, investment and
development. He was Finance
Director and latterly Chief
Executive of Birkby plc, a
manager of serviced workspace
(IMEX) and indoor markets
(Inshops). Between 1983 and
1999 Kim continued as Chief
Executive of the enlarged
Group after the agreed
takeover by Mentmore plc,
at that time Europe’s leading
records management and
self-storage company where he
2002 to 2009.
remained until 2001.
External appointments
External appointments
Mickola is a Chartered
Surveyor and has over 30 years’
experience in the real estate
market, providing consultancy,
research and investment
management advice to the
property fund management
industry. She was the CEO of
the listed property company,
Teesland Plc, and
was Non-Executive Chair
of Cushman & Wakefield
Investors, the investment
management arm of Cushman
& Wakefield. She currently
advises a number of overseas
investors on their investment
strategy and is responsible for
their compliance and regulatory
administration.
External appointments
• Seven Dials Fund
• None
• Deputy Leader Kensington
Management
& Chelsea Borough Council
• Government Property
• Bowlhead Properties Group
Agency
• Ambassador for Women
in Property
Paula is a qualified lawyer
who specialised in the real
estate sector for more than 30
years. During this time, Paula
worked on some of the largest
developments in the north of
England. Paula recently retired
from Womble Bond Dickinson
LLP, which she joined in 2013
and where she spearheaded
the growth of the firm’s Leeds
office. Paula served on the US/
UK board of Womble Bond
Dickinson LLP and was the
board sponsor for Diversity and
Inclusion.
Paula currently serves as vice-
chair on the board of the West
and North Yorkshire Chamber of
Commerce.
External appointments
• West and North Yorkshire
Chamber of Commerce
• Leisure and Hotel
Investment Limited
27192 Palace Capital AR2020.indd 52-53
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
53
14-Jul-20 6:15:29 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSGOVERNANCE
CHAIRMAN’S GOVERNANCE OVERVIEW
Stanley Davis
CHAIRMAN
We have demonstrated resilience during a further
period of political uncertainty in the UK, with the
latter part of our financial year eclipsed by the
unsettling Covid-19 pandemic.
As a Board, we continue to strive for the highest standards of
corporate governance and aim to operate in the best interests
of our Shareholders and other stakeholders. During the year,
we have worked hard to ensure we are compliant with the UK
Corporate Governance Code following the introduction of the
Financial Reporting Council’s 2018 version of the code which
applies to accounting periods beginning on or after 1 January
2019 and therefore applied during the period under review.
The UK Corporate Governance Code may be found on the
website of the Financial Reporting Council, www.frc.org.uk.
G
E
R
R
A
R
D
S
C
R
O
S
S
W
E
S
T
M
I
N
S
T
E
R
H
O
U
S
E
–
The Board is pleased to
confirm that it considers
that the Company has
complied in full, throughout
the accounting period, with
the relevant provisions of the
UK Corporate Governance
Code, other than the
provisions relating to the
tenure and independence
of myself as Chairman.
This is expanded upon
further in the Nominations
Committee Report.
STRATEGY
At the Board’s annual strategy day, we
reiterated our strategic areas of focus.
These are set out on pages 16 and
17, and are underpinned by our core
objective of creating value by growing
The Board works in an open and
transparent manner with constructive
discussion and challenge. This open
and inclusive culture, combined with
sound corporate governance, permeates
throughout the organisation and is an
essential part of the delivery of our
OUTLOOK
As a Board, we responded quickly to the
Covid-19 pandemic. We recognised the
need to work with our tenants, particularly
the smaller and independent brands where
the impact of Covid-19 could be profound.
our income whilst implementing a capital
strategy.
expenditure programme.
This has positioned us well during
these uncertain times and, although the
investment in our existing portfolio may
not be realised in the financial year, we
believe this strategy is in the best interests
of our Shareholders over the longer term.
We set out our intention to convert to
a UK REIT in last year’s Annual Report.
Following our successful conversion on
1 August 2019, we have benefited from
BOARD EVALUATION
As set out in last year’s report, and in
accordance with best practice, the Board
We took steps to further control our costs
and preserve our cash in anticipation of
heightening levels of macroeconomic
uncertaInty.
participated in an externally facilitated
We are aware that the effects of Covid-19
evaluation during the year. Being our first
will continue well into the next financial
such exercise, we found the process very
year and the Board will continue to take
insightful. Overall, it demonstrated that
a proactive approach in our response.
we have come a long way in a short time,
We are confident that the business has
having only joined the Main Market in
the resilience required to overcome any
March 2018.
potential downturn.
a reduction in our tax liability for the year.
The results from the evaluation were
On a final note, Anthony Dove will stand
This will have a further positive impact in
next year’s results when we will have been
in the regime for a full year.
As a UK REIT, we are part of an established
tax exempt regime which should enhance
returns for the majority of Shareholders.
Over the longer term we expect our status
as a REIT to be positive for both liquidity
and share price.
BOARD COMPOSITION
Following the appointment of Mickola
positive and shows that the Board and its
down from the Board at the conclusion
Committees continue to be effective. For
of the Company’s 2020 AGM, having
more information please refer to page 61
served for nine years. On behalf of all my
where the full output is reported.
colleagues, I would like to thank Anthony
for his many years of service to Palace
Capital since its inception and his invaluable
contribution towards its growth over the
past nine years.
CORPORATE SOCIAL
RESPONSIBILITY
With the new Code further emphasising
the importance of positive relationships
between companies, Shareholders and
stakeholders, and the need to have a
clear purpose and strategy that is aligned
with a healthy corporate culture, the
Wilson in February 2019, we were very
Board constituted a new Corporate Social
pleased that Paula Dillon agreed to join the
Responsibility Committee to oversee our
Board as Non-Executive Director in March
work in these areas. The CSR Committee
2020. Paula brings significant experience
has overall responsibility for the
from her distinguished legal career and we
formulation and discharge of the Group’s
look forward to working with her in the
corporate and social responsibilities, and
years to come.
We keep the composition of the Board
ensures that our social, environmental and
economic activities are aligned.
under continuous review, and succession
As part of our employee engagement
planning remains high on the Nominations
initiatives, we put in place a Workforce
Committee’s agenda. I am satisfied
that we have a strong Board with the
Advisory Panel, which helps identify issues
relating to the capacity, wellbeing and the
appropriate balance of skills, experience
engagement of employees and allows the
and independence to add value to Board
Board to develop appropriate strategies
decision making and debate.
for reward, recognition and development
of a diverse workforce.
STANLEY DAVIS
Chairman
6 July 2020
We have worked
hard to ensure we
are compliant with
the UK Corporate
Governance Code.
55
14-Jul-20 6:15:34 PM
54
27192 Palace Capital AR2020.indd 54-55
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSGOVERNANCE
CORPORATE GOVERNANCE STATEMENT
GOVERNANCE FRAMEWORK
BOARD COMMITTEES
The Board has delegated authority to the following Committees and there are written terms of reference for each, outlining its authority
and duties, which may be found on the Company’s website, www.palacecapitalplc.com.
THE BOARD
Chairman: Stanley Davis
Comprises: Three Executive and five Non-Executive Directors (including the Chairman)
Role: Responsible to the Shareholders for the long-term strategy, control and leadership of the Group
BOARD COMMITTEES
Audit and Risk Committee
(Four members)
Remuneration Committee
(Four members)
Nominations Committee
(Four members)
Corporate Social
Responsibility Committee
(Six members)
Chair:
Kim Taylor-Smith
Chair:
Anthony Dove
Chair:
Mickola Wilson
Chair:
Mickola Wilson
Comprises additionally:
Three independent
Comprises additionally:
Three independent
Comprises additionally:
Three independent
Comprises additionally:
Two Independent
Non-Executive Directors
Non-Executive Directors
Non-Executive Directors
Non-Executive Directors,
the Finance Director, the
Property Director and the
Group Financial Controller
Roles:
Roles:
Roles:
Roles:
• Financial reporting
• Remuneration policy
• Recommends Board
• Stakeholder
• Monitors risk
• Sets Directors’
appointments
engagement
management and
internal control
remuneration packages
• Succession planning
• Monitors social and
and incentives
• Board composition skills
environmental impacts
• Monitors external
• Approves bonus and
and diversity of Board
and initiatives
auditors
LTIP targets
members
• Performance evaluation
56
KEY RESPONSIBILITIES
CHAIRMAN
• Leads the Board ensuring it operates
effectively and in accordance with
good governance.
• Sets Board agendas and oversees
the conduct at Board meetings,
ensuring all the Directors are properly
briefed and are able to take a full and
constructive part in Board discussions.
• Responsible for evaluating the
performance of the Board and of the
Executive Management and of the
other Non-Executive Directors.
• Supports the CEO on the day-to-day
management of the business and is
actively involved in all key strategic
decisions taken by the Group.
CHIEF EXECUTIVE
There is a clear division of responsibilities
between the roles of the Chairman and of
the Chief Executive:
• Oversees the day-to-day running of
the Group’s business including the
development and implementation of
the Board’s agreed strategy.
BOARD COMPOSITION
• Communicates and provides feedback
to the Board on the Group’s culture
and the operation of policies and
processes, ensuring these are
consistent with the expected values
and behaviours.
• Leads the Executive Team and
evaluates the performance of
Executive Management.
• Leads engagement with investors and
SENIOR INDEPENDENT
DIRECTOR
• Provides a sounding board for
the Chairman and serves as an
intermediary for the other Directors.
• Available to discuss concerns with
Shareholders that cannot be resolved
through the normal channels of
communication with the Chairman or
public relations and other external
the Chief Executive.
communications.
COMPANY SECRETARY
•
Provides advice and assistance to
the Board, the Chairman and other
Directors.
•
•
•
Supports the Chairman with the
development of agendas for Board
meetings and provision of information
to the Board.
Advises and keeps the Board up
to date with the latest corporate
governance developments.
Responsible for the induction of new
Directors and considering training and
development needs in conjunction
with the Chairman and the Senior
Independent Director.
• Responsible for leading the
annual appraisal of the Chairman’s
performance.
NON-EXECUTIVE DIRECTORS
• Bring an external perspective,
independent judgement and objectivity
to the Board’s deliberations and
decision making.
• Scrutinise and hold to account the
performance of management and
individual Executive Directors against
agreed performance objectives.
• Have a prime role in appointing and
removing Executive Directors.
GENDER DIVERSITY
INDEPENDENCE
BOARD TENURE
2
6
3
1
2
2
l Male
l Female
l Non-Independent Executive Directors
l Non-Independent Chairman
l Independent Non-Executive Directors
l Under 2 years
l 3 to 6 years
l Over 7 years
4
4
27192 Palace Capital AR2020.indd 56-57
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
57
14-Jul-20 6:15:35 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSGOVERNANCE
CORPORATE GOVERNANCE STATEMENT
BOARD AND COMMITTEE ATTENDANCE
During the year, the Board consisted of a
group of individuals dominates the Board’s
effectively. The Directors’ interests in the
Non-Executive Chairman, Chief Executive,
decision making. Mickola Wilson was
shares of the Company are set out on
Group Finance Director, Executive Property
appointed the Senior Independent Director
page 78. The Board met eight times during
Director and four further Non-Executive
during the year in preparation of Anthony
the financial year for meetings with fixed
Directors. One of the Non-Executive
Dove’s retirement from the Board. As set
dates, and a further four meetings were
Directors, Paula Dillon, was appointed to
out in last year’s report Anthony Dove will
convened to deal with matters requiring
the Board on 1 March 2020.
not stand for re-election at the AGM in
approvals. The Board has a schedule of
August 2020 following a total of nine years’
matters reserved for its decision which
The Non-Executive Directors are
considered to be independent and
service with the Group.
free from any relationship that could
The profiles of the Board members appear
affect the exercise of their independent
on pages 52 and 53 of this Report. They
judgement. It is felt that their knowledge
demonstrate a complementary diversity
and understanding are fundamental to
of skills, backgrounds and experience,
the Board’s deliberations. No individual or
which enables the Group to be managed
includes material capital commitments,
business acquisitions and disposals and
Board appointments. Directors are given
appropriate information for each Board
meeting, including reports on the current
financial and trading position.
Stanley Davis
Neil Sinclair
Richard Starr
Stephen Silvester
Anthony Dove
Kim Taylor-Smith
Mickola Wilson
Paula Dillon*
*Appointed 1 March 2020
Board
Audit and
Risk
Remuneration
Nominations
Corporate Social
Responsibility
7
8
8
8
8
8
8
1
–
–
–
–
3
3
3
1
–
–
–
–
7
7
7
1
–
–
–
–
3
3
3
–
–
–
1
1
–
–
1
–
ASSESSMENT AND
MONITORING OF
CULTURE
The Board has overall responsibility for
establishing the Company’s purpose and
strategy and satisfying itself that these
and the Company’s culture are aligned.
During the year, the Board considered the
values, beliefs, policies and practices that
characterise the Group’s culture. In doing
so, it reviewed reports from management
and the output of the Workforce Advisory
Panel. It monitored adherence to Group
policies and compliance with the corporate
governance requirements of a Main
Market Listed company.
The Board remains focused on enabling
an inclusive and supportive culture. At the
heart of this is the need for Directors and
employees alike to work together and feel
are encouraged. The Board in particular
that they are contributing to the overall
receives regular briefings on a range of
success of the business. This is achieved in
strategically important matters to ensure
many ways and during the year a greater
they are informed of developments in
emphasis was placed on understanding
these areas.
the skills, strengths and competences that
each individual brings to the team.
A structured and tailored induction
programme is prepared for new Directors.
The Executive Management Team drives
This is designed to enhance Directors’
the embedding of the desired culture
throughout the organisation and ensuring
knowledge and understanding of the
Group’s business, operations and
that the expected values and beliefs are
regulatory environment. Materials will
sufficiently understood.
INDUCTION, TRAINING
AND DEVELOPMENT
A central part of our culture is to
support the continuing development
of all employees and Directors. Formal
training is arranged and seminars and
conferences relevant to individual roles
cover, among other matters, current
strategic priorities, meeting packs and
minutes from recent Board meetings,
a history of the Group, and all relevant
policies, procedures and other governance
material.
All Directors have access to the Company
Secretary in relation to the discharge of
their duties.
58
BOARD ACTIVITIES
STRATEGIC AIMS
1 Grow our regional portfolio
2 Generate attractive total returns
3 Manage our assets effectively
4 Be a responsible company
KEY PRIORITIES
FOR 2019/20
KEY ACTIVITIES AND
DISCUSSIONS IN 2019/20
LINK TO
STRATEGY
• Promote the long-term
• Held detailed strategy sessions throughout
sustainable success of the
Company.
the year to set and further develop future
strategy.
1
0
STRATEGY
AND
GOVERNANCE
• Generate value for Shareholders.
• Contribute to wider society.
• Ensure the Board and
its Committees have the
appropriate combination
of skills, experience and
knowledge.
• Monitored the performance of the portfolio
and individual asset valuations.
• Reviewed and approved half-yearly and
annual results, viability statement and going
concern matters.
• Considered and reviewed the Board’s
composition, diversity and succession plans.
• Reviewed its Committees’ structure,
membership and terms of reference.
• Participated in an externally facilitated Board
evaluation and effectiveness review.
• Reviewed the Group’s risk register and the
effectiveness of the systems of internal
control and risk management.
• Appointed and inducted a new Non-
Executive Director.
• Established a Corporate Social Responsibility
Committee.
• Approved the budget for 2019/20.
• Set financial targets and messaging around
market guidance.
• Monitored trading performance conditions.
• Monitored major capital expenditure
•
projects.
Increased and extended the revolving credit
facility with NatWest.
• Monitored rent collection and quarterly debt
compliance, particularly following the onset
of Covid-19.
• Broad programme of investor relations
throughout the year.
• Received regular updates from management
on engagement with Shareholders, tenants
and employees.
• Approved the Company’s dividend policy.
• Held an Annual General Meeting providing
Shareholders with an opportunity to question
the Board.
• Formulated a Workforce Advisory Panel
responsible for employee engagement.
• Approved the Group’s general response to
support our tenants following the Covid-19
outbreak.
1
2
3
4
2
3
1
2
4
59
14-Jul-20 6:15:35 PM
2
0
FINANCIAL
• Competent and prudent
financial management.
Integrity of the financial
statements.
•
3
0
STAKEHOLDERS
• Understand the views of and
meet its responsibilities to
Shareholders and stakeholders.
• Ensure workforce policies and
practices are consistent with the
Company’s values.
27192 Palace Capital AR2020.indd 58-59
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSGOVERNANCE CORPORATE GOVERNANCE STATEMENT
engagement can be found on page 46,
The Executive Directors are generally
and Board proceedings are conducted in
all available to speak to Shareholders to
such a manner so as to ensure due regard
discuss any issues that they may have.
HOW STAKEHOLDER
INTERESTS HAVE
BEEN CONSIDERED
IN BOARD DECISION
MAKING (SECTION 172
STATEMENT)
The Board is committed to engaging
proactively and constructively with our
stakeholders and devotes sufficient
time and effort to consider the interests
of all stakeholders impacted by our
activities. An overview of our stakeholder
is given to all the Group’s stakeholders.
The following summary demonstrates
how this was achieved during the period
ending 31 March 2020. Further details can
be found throughout this Annual Report
as set out in the table at the bottom of
this page.
APPROACH TO
INVESTOR RELATIONS
The Board recognises the importance of
maintaining a strong relationship with
the Company’s Shareholders. During the
year ended 31 March 2020, a detailed
programme of Shareholder engagement
was undertaken:
• Regular trading updates and
announcements to the market
regarding performance.
• Following the announcement of the
proposals relating to the Company’s
Company’s full year and half year
defined contribution pension scheme,
results, a series of presentations were
and the maternity and paternity offering
held in London and the regions.
provided to employees. These matters
Feedback is provided via the Company’s
joint brokers, who ensure the Board is
aware of and have a clear understanding
of the views of major Shareholders and the
capital markets.
will be an area of focus for the Board
during the next financial year. The Board
and Remuneration Committee are kept
informed of matters related to employee
remuneration.
Shareholders are also able to attend the
Company’s AGM where they are able to
question Directors and vote on matters
put to the meeting.
ENGAGEMENT WITH
THE WORKFORCE
In accordance with the UK Code, a
OUR TENANTS’
INTERESTS
Our tenant diversification is high, which
means the Board must consider a range of
different interests in its decision-making
process. It receives regular reports from
the Executive Property Director and will
pay particularly close attention to the
interests of tenants as part of approving
capital expenditure projects.
As a result of the close relationship our
Workforce Advisory Panel was established
asset managers have with tenants, the
to ensure the Board understands the views
Board is able to obtain regular feedback
of employees. All employees are invited
on business performance and general
to participate in formal workshops with
tenant satisfaction. Following the Covid-19
agendas specifically formulated to cover
outbreak, the Board approved the overall
matters that affect the whole workforce.
approach of working with tenants,
particularly small and independent
brands who needed support through the
challenging period.
To encourage an open forum for
discussion, members of the Executive
team do not attend and are formally
debriefed on discussions and
developments following each workshop.
The output of each meeting is then
reported directly to the Board with
decisions taken as appropriate. During the
year, the Board discussed and debated
Section 172
Page
Disclosure
The Long Term IFC*
Purpose and values
Pages 14–15
Business model
Section 172
Community and
Environment
Page
Page 47
Page 49
Disclosure
Community engagement
Improving the environmental
performance of our assets
Pages 16–17
Strategic priorities
Page 29
Dividend policy
Page 49
Climate change
IFC*
Purpose and values
Employees
IFC*
Purpose and values
Business Conduct
Page 68
Whistleblowing
Page 47
Page 48
Our workforce
Culture and diversity
Page 68
Internal controls
Pages 16–17
Strategic priorities
Pages 16–17
Strategic priorities
Shareholders
Page 29
Dividend policy
Pages 30–35
Property review
Page 40–45
Risk management
Business
Relationships
*Inside Front Cover
60
BOARD PERFORMANCE EVALUATION
PROCESS
An external evaluation of the Board was undertaken during the year. Facilitated by the ICSA Board Evaluation service, the process ran
between November 2019 and January 2020. The objective of the evaluation was to obtain an independent view of the performance
of the Board as a whole and its main Committees and identify actions and areas for development in order to enhance the Board’s
effectiveness.
The ICSA Board Evaluation service has no other connection with Group.
The process was led by the Chairman, supported by the Company Secretary and overseen by the Nominations Committee.
STAGE
1
0
Following a selection process, the ICSA
STAGE
2
0
The Evaluator conducted a face-to-face
STAGE
3
0
A report was compiled based on the
Board Evaluation service was appointed
interview with each individual Director
findings from the interviews. This was
to undertake the evaluation. The Chair of
covering the following key themes:
initially shared with the Chairman
the Nominations Committee and Company
Secretary met with the evaluator to set
the context for the evaluation and to tailor
the evaluation content to the specific
circumstances of Palace Capital.
1. Board responsibilities
2.
Oversight
3. Board meetings
4. Support for the Board
5. Board composition
6. Working together
and Company Secretary before being
presented to the Board. Following Board
discussion and debate, a range of actions
were agreed. An action plan has been
prepared and progress will be monitored
by the Nominations Committee during the
7. Outcome and achievements
next financial year.
Key findings from the 2019/20 Board evaluation
Key actions planned
The Board has a clear understanding of its role, with great
• Review the organisation and structure of the annual
clarity regarding the Group’s purpose and values. The balance
Strategy Day and regular Board Agendas to ensure
of operational and strategic discussions at Board level could
strategic output is optimised.
be enhanced further by reviewing the structure and time
available at Board meetings. Board Committees operate well,
with sufficient information flows and external advice is available
when it is needed.
The Board’s oversight role and ability to assess the system of
• Develop the process for assessing individual performance
internal control is considered to be very good. Greater visibility
and receive more presentations from those in the senior
of the senior management team below the executive team
management team.
would be welcomed and in the absence of a formal internal
audit function there is a need to ensure sufficiently robust
discussions continue to take place regarding the company’s risk
management and internal control systems.
• Consider whether any improvement can be made to the
process for reviewing the effectiveness of the Company’s
risk management and internal control system.
The Company’s operations are considered to be in step with
• Consider how feedback from broker, market expectations
the set strategy, which is being correctly executed. Progress
and peer group analysis can be further improved.
in meeting strategic objectives is monitored well through
regular reporting to the Board. Board composition is regularly
reviewed, and succession planning remains a key area of focus.
The Board as a whole is cohesive and new Directors continue to
build relationships which further improves the Board dynamic.
• Nominations Committee to maintain attention on
succession planning.
27192 Palace Capital AR2020.indd 60-61
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
61
14-Jul-20 6:15:35 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSGOVERNANCE NOMINATIONS COMMITTEE REPORT
Mickola Wilson
CHAIR OF
NOMINATIONS COMMITTEE
MEMBERS
• Mickola Wilson (Chair)
• Kim Taylor-Smith
• Anthony Dove
• Paula Dillon (joined 26
2019/20 KEY
ACHIEVEMENTS
• Recruitment
• Succession planning
• Board evaluation
March 2020)
• Diversity
MEETINGS HELD: 5
AREAS OF FOCUS IN
2020/21
• Onboarding new
Non-Executive Director
• Succession planning
COMMITTEE MEMBERSHIP AND
MEETINGS
In accordance with the UK Code, at least a majority of members
of the Committee are Independent Non-Executive Directors.
The Non-Executive Chairman and Chief Executive may attend
Committee meetings by invitation. The Committee is supported by
the Company Secretary.
The Committee met three times during the year (details of
attendance are set out on page 58). There were also a number
of informal meetings, conference calls and general discussions
between Committee members regarding the appointment of a
new Non-Executive Director.
COMMITTEE ROLE AND
EFFECTIVENESS
The Committee’s terms of reference set out its role and the
authority delegated to it by the Board. The primary responsibilities
of the Committee are to:
• Lead the process for appointments to the Board, ensuring a
formal, rigorous and transparent procedure
• Assist the Board in ensuring its composition is regularly
reviewed and refreshed
• Ensure plans are in place for orderly succession to positions on
the Board and senior management
The performance of the Committee was reviewed as part of the
Board’s annual evaluation, which concluded that the Committee is
effective and provides a positive contribution to the composition of
the Board. The process by which appointments are made is robust
and succession planning continues to be a key area of focus.
The Nominations Committee (the
“Committee”) keeps the structure and
composition of the Board under regular review
to ensure it has the right balance of skills,
knowledge, experience and diversity to carry
out its duties and provide effective leadership.
During the year the Committee continued to focus on
wider succession planning for the Group and oversaw
the appointment of Paula Dillon, who joined the Board
on 1 March 2020. Paula’s appointment as independent
Non-Executive Director followed a formal, rigorous and
transparent procedure led by the Chairman and I. As
noted in last year’s Annual Report, Anthony Dove will
stand down from the Board at the conclusion of the
Company’s 2020 AGM, having served for nine years. In
accordance with the provisions of the UK Code, Paula’s
appointment will ensure that at least half the board is
independent following Anthony’s departure. I was also
pleased to accept the position of Senior Independent
Director in March 2020 and will become Chair of the
Remuneration Committee when Anthony stands down in
the summer.
Diversity has been a key consideration throughout the
year, not only in relation to new appointments to the
Board, but also in relation to the wider workforce. It is
pleasing to see that our female representation across
the workforce has increased to 35%, up from 25% in the
prior year.
The Committee also oversaw the externally facilitated
Board evaluation process ensuring that a clear action plan
was put in place.
62
BOARD COMPOSITION
In preparation of the departure of Anthony
Dove, the Committee kept the balance
of skills, experience, independence and
knowledge under review and made a
recommendation to the Board to appoint a
new Non-Executive Director.
The Committee evaluated the skills and
experience necessary to complement the
existing members of the Board. In particular
it was noted that a further legal and/or a
professional services background would be
desirable with experience in real estate and
the regional economies within which the
Group operates.
Appointment of Paula Dillon
The Committee appointed recruitment
consultants, Warren Partners, which has
no other connection with the Company,
to undertake the task of finding the
right candidate. A range of potential
Non-Executive Director candidates were
presented, from which a shortlist of six
were subsequently interviewed. The
Committee were delighted with the level of
interest and the quality of the candidates
put forward. Following further meetings
and in consideration of the skills required
and Paula’s extensive legal experience, the
Committee agreed to recommend Paula’s
appointment. Paula joined the Board on
1 March 2020.
Skills and background
Paula is a qualified lawyer who specialised
in the real estate sector for more than
30 years. During this time, Paula worked
on some of the largest developments
in the north of England. Paula recently
retired from Womble Bond Dickinson LLP,
which she joined in 2013 and where she
spearheaded the growth of the firm’s Leeds
office. Paula served on the US/UK board of
Womble Bond Dickinson LLP and was the
board sponsor for diversity and inclusion.
Chairman of the Board
Stanley Davis was appointed to the Board
in 2010 when he and Neil Sinclair acquired
Board control of the Company, which at
the time was quoted on the AIM market. In
view of his shareholding in the Company,
he was not considered to be independent
at that time. Stanley’s shareholding
is now 3.63% and, although he is still
not considered to be independent, his
contribution to the strategic direction of
the business is invaluable.
Following developments in corporate
governance it is not considered best
practice for the Chairman to remain in
post beyond nine years from the date
of their first appointment. However, the
Board strongly believes that retaining
Stanley’s knowledge and expertise will be
in the best interests of Shareholders and
the Board wishes to retain his services
notwithstanding his tenure. This will allow
for the orderly facilitation of effective
succession planning and the development
of an experienced and diverse Board to
take the Company forward in future years.
Stanley continues to demonstrate strong
independence in the manner in which
he discharges his responsibilities and
Shareholders should be reassured that the
Board proactively ensures the separation
of responsibilities between the role of the
Chairman and Chief Executive.
SUCCESSION PLANNING
Succession planning has continued to be
a key area of focus during the year, both
in respect of the Board and wider talent
development to support the Company’s
long-term plans. The Committee has
focused on potential skill shortages, putting
in place specific training initiatives and will
ensure a formal, rigorous and transparent
procedure is followed for any new
appointments.
Outside of her extensive legal career,
Paula served on the board of Opera North
between 2009 and 2017 before stepping
down to become the first female President
of the Leeds Chamber of Commerce in
2017. Paula currently serves as vice-chair on
the board of the West and North Yorkshire
Chamber of Commerce.
In addition to longer-term succession
planning, the Committee reviewed
contingency plans and the Group’s ability
to respond to sudden and unexpected loss
or non-availability of key Directors. These
plans ensure that individuals are identified
who can quickly assume key roles and
provide effective support.
While appointments will always be made
on merit, the Company is committed to
considering all aspects of diversity, and will
promote diversity of gender, social and
ethnic backgrounds, and cognitive and
personal strengths when recruiting at any
level.
When making appointments to the Board,
the Committee will only engage executive
search firms who have signed up to the
voluntary Code of Conduct on gender
diversity. It will ensure that candidate lists
are compiled by drawing from a broad and
diverse range of individuals and consider
candidates against objective criteria with
regard to the benefits of all aspects of
diversity.
Further information on our approach to
diversity can be found on page 49 in the
CSR report.
INDEPENDENCE AND
RE-ELECTION
Any Director appointed during the year
is required to retire and seek election by
Shareholders at the next Annual General
Meeting following their appointment.
Accordingly, Paula Dillon will retire and
offer herself for election to the Board at
the AGM in August 2020.
At the 2019 AGM all Directors stood for
re-election for the first time. In previous
versions of the UK Code this provision
had only applied to larger companies.
In accordance with best practice, all
Directors will stand for re-election again
at the 2020 AGM, except Anthony Dove
who is retiring from the Board following
conclusion of the AGM.
The Committee, on behalf of the Board,
is satisfied that all Board members
put forward for re-election have, and
commit, the time required to discharge
their roles effectively. Further, the Board
has the appropriate balance of skills,
experience, independence and knowledge
and shareholders should support the
re-election of all Directors.
External appointments:
West and North Yorkshire Chamber of
Commerce
DIVERSITY
The Board recognises the benefits of
diversity in its broadest sense, both in the
boardroom and throughout the business.
MICKOLA WILSON
Chair of Nominations Committee
6 July 2020
27192 Palace Capital AR2020.indd 62-63
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
63
14-Jul-20 6:15:38 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSGOVERNANCE This is the third year that Palace Capital has been required to disclose CO2 emissions.
Scope 2 emissions have decreased during the year by 33%. This is a result of reduced
energy consumption as well as a reduction in the Government’s GHG conversion factors.
GHG emissions1
Emissions type (kg of CO2 equivalents)
Scope 1 (direct)2
Scope 2 (indirect)3
TOTAL
Carbon intensity4 (kg of CO2 per m² area)
Scope 1
Scope 2
TOTAL
2020
20195
N/A
1,789
1,789
N/A
1.01
1.01
N/A
2,671
2,671
N/A
1.50
1.50
N/A
Total energy use (kWh of electricity, gas and biomass use)
6,999
1 Emissions from properties leased to tenants are not included with the above figures as they are out of
scope from the GHG protocol’s operational approach.
2 The Group does not directly combust fuels or own Company vehicles.
3
Indirect (Scope 2) GHG emissions from supplied electricity are based on actual and estimated energy
consumption values.
4
Intensity based on a total of 1,777 m² in one leased office.
5 The Company’s emissions for the year to March 2019 have been restated due to Q4 2018/19 data not being
available at the time of reporting; this final period of data is estimated in every Annual Report.
CSR COMMITTEE REPORT
Mickola Wilson
CHAIR OF
CSR COMMITTEE
AREAS OF FOCUS IN
2020/21
• Review environmental
performance following
improvements to data
collection
• Engage with professional
advisers to develop a set
of targets and initiatives
• Consider joining the
Global Real Estate
Sustainability Benchmark
MEMBERS
• Mickola Wilson (Chair)
• Kim Taylor-Smith
• Stephen Silvester
• Richard Starr
• Matthew Simpson
• Paula Dillon (joined 26
March 2020)
MEETINGS HELD: 1
2019/20 KEY
ACHIEVEMENTS
• Reviewed regulatory
requirements
• Considered CSR risks
• Agreed priority actions
COMMITTEE ROLE
The Committee’s terms of reference set out its role and
the authority delegated to it by the Board. The primary
responsibilities of the Committee are to:
During the year, the Board constituted a
Corporate Social Responsibility Committee to
oversee the formulation and discharge of the
Group’s corporate and social responsibilities
and ensure its social, environmental and
economic activities are aligned.
The Committee met once during the year and at this
meeting it reviewed the Group’s corporate and social
obligations, the initiatives the business is currently
undertaking, and the material risks it faces. A clear set
of actions has been agreed and the Committee will
• Define the Group’s corporate and social obligations,
review progress against these in the next financial year.
agree a strategy for discharging these and oversee the
For more information on the Group’s activities in this
area, please see the Corporate Social Responsibility
section in the Strategic Report.
COMMITTEE MEMBERSHIP
AND MEETINGS
The Committee is made up of Mickola Wilson (Non-
Executive Director), Kim Taylor-Smith (Non-Executive
Director), Stephen Silvester (Executive Director), Richard
Starr (Executive Director) and Matthew Simpson (Group
Financial Controller). Paula Dillon joined the Committee
on 26 March 2020 and will chair the Committee going
forward.
64
implementation of such strategy.
• Ensure there is a recognition of the impact of the Group’s
activities on all stakeholders, monitor the engagement
with each stakeholder group and support the Board in its
understanding of the interests of key stakeholders.
•
In conjunction with management, the Board and other
Committees, identify the material social and environmental
risks and ensure that appropriate measures are taken to
mitigate any such risks.
LOOKING AHEAD
The Committee will continue to review the way in which the
business is conducted and seek to ensure this is done in a
socially responsible manner. It will do this by setting targets
and objectives against which performance can be measured.
One such measure is the Group’s greenhouse gas emissions,
and in line with the Companies Act 2006, we have set out our
greenhouse gas emissions report on the next page.
GREENHOUSE GAS
EMISSIONS
Our GHG calculation and reporting
process follows the Greenhouse Gas
Protocol (“operational approach”) and
the DEFRA Environmental Reporting
Guidelines (2013). The boundary for
reporting includes emissions from sources
under our control, grouped under: Scope 1
(direct) GHG emissions from owned assets;
and Scope 2 (indirect) GHG emissions
from supplied electricity to leased office
space. Emissions from sources such as
Company vehicles, production processes
and combustion sources are minimal and
therefore not deemed to be material. As a
result, these emissions are not included in
reported totals.
We have a limited amount of energy
use within our control. In order to have
a meaningful impact on greenhouse
gas emissions we must ensure we are
also engaging with our tenants and
encouraging them to consider their own
energy consumption. This will be a priority
in the next financial year.
M
I
L
T
O
N
K
E
Y
N
E
S
I
M
D
S
U
M
M
E
R
B
O
U
L
E
V
A
R
D
–
27192 Palace Capital AR2020.indd 64-65
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
65
14-Jul-20 6:15:45 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSGOVERNANCE
AUDIT AND RISK COMMITTEE REPORT
Kim Taylor-Smith
CHAIR OF
AUDIT AND RISK COMMITTEE
MEMBERS
• Kim Taylor-Smith (Chair)
•
Anthony Dove
• Mickola Wilson
•
Paula Dillon (joined 26 March 2020)
MEETINGS HELD: 3
2019/20 KEY ACHIEVEMENTS
• Reviewed and approved the annual and half yearly
financial statements
• Ensured that the Annual Report was fair, balanced
and understandable
• Scrutinised margins and property valuations
ensuring sufficient management controls and that
these support the financial reporting
• Full and mid-year risk reviews
• Considered the appointment of the external
Auditor, their reports to the Committee and their
independence
• Reviewed and approved its terms of reference,
independence and financial literacy
AREAS OF FOCUS IN 2020/21
• Maintain oversight of IT strategy and cyber security
matters
• Monitor and review the implementation of a new
property management system
• Ensure the smooth transition to a new audit partner
The Committee is an important element of the
Group’s governance structure and provides a key
oversight and assurance role. It has supported
the Board through its monitoring of the integrity
of financial reporting and the robustness of the
Group’s risk management and internal control
framework. It has worked closely with the external
auditors, reviewing key accounting judgements and
policies, and ensuring an effective external audit
process.
COMMITTEE MEMBERSHIP AND
MEETINGS
In accordance with the UK Code, all members of the Committee
are Independent Non-Executive Directors. The Non-Executive
Chairman, Chief Executive and Group Finance Director may
attend Committee meetings by invitation. The Committee is
supported by the Company Secretary.
The Committee is satisfied that Kim Taylor-Smith, a Chartered
Accountant, brings recent and relevant financial experience,
as required by the UK Corporate Governance Code, having
held the position of Finance Director of a number of Stock
Exchange listed companies. The Committee considers that all
members have the necessary competence relevant to the sector
in which the Company operates. Biographies of the Committee
members can be found on pages 52 and 53.
66
The Committee met three times during
relating to the financial statements. This
In doing so, it has reviewed management’s
the year (details of attendance are set out
includes the suitability of accounting
risk assessment and associated provisions
on page 58).
policies and the appropriateness of
and deems these to be appropriate.
COMMITTEE ROLE AND
EFFECTIVENESS
The Committee’s terms of reference set
out its role and the authority delegated
to it by the Board. Its primary role is to
managements judgements and estimates.
Share-based payments
The Group’s accounting policies can be
Share option values are estimated by
found in the notes to the consolidated
external valuers through the use of option
financial statements and further
valuation models. Judgement is exercised
information on the significant issues
in assessing the number of options
considered by the Committee are set
that will vest in order to calculate the
assist the Board in fulfilling its oversight
out below.
share-based payment charge.
responsibilities by reviewing and
monitoring:
• The integrity of the financial and
narrative statements and other
financial information provided to
Shareholders.
• The Company’s system of internal
controls and risk management.
• The external audit process and
relations with Auditors.
• The process for compliance with
Property valuation
In connection with the approval of
The valuation opinion on the Group’s
the financial statements the Executive
properties by independent external
Directors confirm to the Committee
valuers is one of the most critical elements
that they are not aware of any material
of the annual and half year financial results.
misstatements in the Annual Report. The
Committee is satisfied that the financial
The Committee reviews the valuations and
statements in respect of both the amounts
the underlying assumptions and judgments
reported and the disclosure have been
applied by management and the valuers,
thoroughly considered.
Cushman & Wakefield. The Committee
receives information on the valuation
Going concern
laws, regulations and ethical codes of
process and reviews updates from
The Committee reviewed whether it
practice.
The performance of the Committee was
reviewed as part of the Board’s annual
evaluation, which concluded that the
Committee carries out its role thoroughly
and adds value to the Groups control
systems.
FINANCIAL REPORTING
AND SIGNIFICANT
MATTERS
As part of its role the Committee has
considered a number of significant issues
management in relation to current market
was appropriate to adopt the going
trends and key valuation movements
concern basis in the preparation of the
compared to previous periods. The
financial statements. In considering this
Committee provides robust challenge and
the Committee reviewed the 12-month
satisfies itself that sufficient oversight and
forecasts, availability of bank facilities
controls are in place and that the financial
and the headroom under the financial
reporting is supported.
Recoverability of receivables
covenants in our debt arrangements. The
NatWest facility was refinanced during the
year providing additional capacity. With
The impact of Covid-19 on some tenants
this knowledge and following the review
has been significant and this has led to a
the Committee recommended to the
higher arrears position at the year end.
Board that it was appropriate to adopt a
The Committee has considered the ability
going concern basis.
of the Group to recover these amounts.
READ MORE ABOUT THE GOING
CONCERN ON PAGES 40 AND 41
F
A
R
E
H
A
M
A
D
M
I
R
A
L
H
O
U
S
E
–
27192 Palace Capital AR2020.indd 66-67
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
67
14-Jul-20 6:15:51 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSGOVERNANCE
AUDIT AND RISK COMMITTEE REPORT
DIRECTORS’ REMUNERATION REPORT
Viability statement
The Committee reviewed the viability
statement and the period for which the
Board should assess the prospects of
the Group. Following the review the
Committee concluded that a three-year
period was appropriate. Further details are
provided on page 42.
The Committee has assessed BDO’s
evaluation of the potential impact on the
performance, independence, objectivity
Group’s strategic objectives. The Directors
and fees. In making its assessment, the
are satisfied that the current controls are
Committee considered the qualifications,
effective with regard to the size of the
expertise and resources of the audit
Group.
partner and team as well as the quality
and timeliness of the delivery of the audit
The internal controls are designed
and the provision of non-audit related
to ensure the reliability of financial
services. The Committee members made
information for both internal and external
Fair, balanced and understandable
their assessment based on feedback from
purposes. However, they can only provide
At the request of the Board, the
Committee has considered whether
the Annual Report is fair, balanced
and understandable and provided the
information necessary for Shareholders
to assess the Company’s position,
performance, business model and strategy.
In forming its opinion, the Committee
considered whether the Annual Report:
• provided a comprehensive review and
included all relevant transactions and
balances;
management and their own interaction
reasonable, but not absolute assurance
with the audit team.
against material misstatement or loss.
The Committee is conscious of the
need to ensure that the independence
and objectivity of BDO LLP is not
compromised. In the year ended 31
March 2020, the only non-audit services
provided to the Group related to the
independent review of the half-year
results. The Committee will keep under
review the provision of audit and non-audit
assignments and will only authorise non-
audit services on the basis that they are
INTERNAL AUDIT
Given the size of the Group, in the opinion
of the Committee, there is currently no
need for an internal audit function. The
work of the external Auditor provides
an element of comfort that controls
are operating as intended and the
management team regularly review the
operation of the Group’s policies and
procedures.
• was consistent throughout with a
permissible under regulations relating to a
mix of statutory and alternative
Public Interest Entity.
AUDIT FEES
Fees payable to the Group’s Auditors for
The Committee is mindful of the need
to ensure a sufficiently robust evaluation
of the Company’s risk management and
internal control systems is undertaken.
In the absence of a dedicated internal
performance measures;
• had been written in straightforward
language without unnecessary
repetition with appropriate use of
diagrams and charts; and
audit and non-audit services are set out in
audit function it will keep under review
note 3 on page 104. Total fees related to
the arrangements for achieving internal
• had sufficient emphasis on both the
non-audit services represented 5.7% of the
assurance and continuously strive to
positive and negative issues faced by
total fees for audit services (2019: 7.14%).
improve this.
the Group.
Following review the Committee
confirmed it is satisfied that, taken as
a whole, the Annual Integrated Report
and Accounts is fair, balanced and
understandable.
EXTERNAL AUDITOR
BDO LLP was first appointed as external
Auditor in respect of the year ended 31
March 2015. There are no current plans
to carry out a re-tender exercise, but in
accordance with the EU Audit Regulation
and Directive, the Group will be required
to put the external audit contract out to
tender by 2024. The lead audit partner,
Richard Levy, has held the position for
five years and will rotate off the account
following the completion of the audit in
relation to the financial year ending 31
March 2020.
68
RISK MANAGEMENT
AND INTERNAL
CONTROLS
The Board is responsible for the Group’s
risk management and internal control
systems. To support the Board, the
Committee will oversee and at least
annually review the effectiveness of
the Group’s internal controls and risk
management systems, and will review and
approve the related statements in the
Annual Report.
During the year the Committee received
updates from management and the
WHISTLEBLOWING
PROCEDURES
The Audit and Risk Committee reviews
arrangements whereby employees may
in confidence raise concerns, which are
detailed in the Company’s Employee
Handbook. During the year no concerns
were raised.
KIM TAYLOR-SMITH
Chair of Audit and Risk Committee
external Auditor regarding the operation
6 July 2020
of key controls. As part of their review the
Committee also considered the process
of risk identification, mitigation and
Anthony Dove
CHAIR OF
REMUNERATION COMMITTEE
MEMBERS
• Anthony Dove (Chair)
• Kim Taylor-Smith
• Mickola Wilson
• Paula Dillon
(joined 26 March 2020)
MEETINGS HELD: 7
2019/20 KEY ACHIEVEMENTS
• Responded to the 2018 UK Corporate Governance Code
• Reviewed performance outcomes
• Agreed new Non-Executive Director fee
AREAS OF FOCUS IN 2020/21
• Grant 2020 LTIP
• Remuneration policy review
The Committee’s primary objective is to ensure
that the Group’s remuneration policies and
practices support the successful delivery of the
long-term strategy. This report sets out how the
Committee has fulfilled its objective and details the
remuneration outcomes for the Executive Directors.
COMMITTEE MEMBERSHIP AND
MEETINGS
In accordance with the UK Code, all members of the
Committee are Independent Non-Executive Directors. The
Non-Executive Chairman and Chief Executive may attend
Committee meetings by invitation. The Committee is supported
by the Company Secretary.
The Committee met seven times during the year (details of
attendance are set out on page 58).
ADVISERS
The Company has been advised by
MM&K during the year ended 31 March
2020. MM&K Limited were paid £6,120
(2018: £8,900) and do not have any other
connection with the Company.
27192 Palace Capital AR2020.indd 68-69
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
69
14-Jul-20 6:15:59 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSGOVERNANCE DIRECTORS’ REMUNERATION REPORT
REMUNERATION AT A GLANCE
REMUNERATION
POLICY
When setting the remuneration policy for
the Executive Directors, the Committee
considers the need to attract, retain and
motivate Executive Directors and senior
management, whilst ensuring the overall
approach to remuneration is aligned with
the interests of Shareholders.
The current remuneration framework
was adopted at the Company’s 2018
AGM following its move to the Main
Market. While the Remuneration Policy
is not being put to the vote this year, in
accordance with the 2018 UK Corporate
Governance Code we have introduced
formal guidance in relation to Directors’
minimum shareholding requirements and
post-employment requirements. Further
details can be found on page 73.
The Remuneration Committee keeps up
to date with developments in Executive
pay and will monitor and review how
practice and investor expectations evolve
throughout the year, ahead of the Policy
being put to a binding Shareholder vote
in 2021.
2020 ANNUAL BONUS
Financial and operational targets are set
LTIP VESTING
The LTIP awards which were made in July
BOARD CHANGES
Paula Dillon was appointed as a Non-
2016 became exercisable on 4 July 2019.
Executive Director on 1 March 2020 and
The performance conditions related 50%
the fee agreed in line with other Non-
to Total Shareholder Return and 50% to
Executive Directors was £40,000.
Net Asset Growth versus a selected peer
group. As a result of the performance
during a three-year period, 50% of the
award was achieved. Full details can be
found on page 78.
2019 LTIP GRANT
On 25 June 2019 awards were granted
On a final note, this will be my last year
on the Board, having joined the team in
July 2011. It has been a pleasure to work
alongside Stanley and Neil for the past
nine years and I wish the Board every
success in the future. I will not be standing
for re-election at the AGM in August and
Mickola Wilson will assume the position
to the Executive Directors over 245,531
of Chair of the Remuneration Committee
shares. The awards are subject to the
following my departure.
achievement of performance criteria,
which are linked to the Group’s overall
strategy, with 50% based on Total
Shareholder Return and 50% based on the
growth in the portfolio value using Total
Property Return (“TPR”) (as calculated by
MSCI), when measured against the TPR
of the MSCI IPD Index over a three-year
performance period.
ACTION TAKEN
IN RESPONSE TO
COVID-19
In response to the Covid-19 outbreak, the
Committee considered the approach to
ANTHONY DOVE
Chair of Remuneration Committee
6 July 2020
each year for the annual bonus scheme.
Executive pay, particularly in light of the
Notwithstanding the challenging macro-
Board’s decision to cancel the quarterly
environment, the business has performed
dividend which was due to be paid to
well during the year ended 31 March
Shareholders in April 2020. The following
2020, and this resulted in 69.25% of the
decisions were taken:
maximum potential target being achieved.
However, in light of the reduction to
Shareholder dividends in the year and
the prevailing market conditions, the
Executive Directors agreed with the
• The salary reviews effective 1 April
2020 were agreed in principle
although the implementation of these
was delayed while we reviewed our
rent collection position and cash
Remuneration Committee to reduce the
flow forecasts.
level of bonus achieved by 10%. As such,
the Directors will receive a bonus of 62%
of salary for the year.
• Owing to the uncertainty surrounding
the pandemic, the Committee has
delayed setting the targets for the
Directors’ annual bonus for the year
ending 31 March 2021. We have
expanded upon this further in the
Directors’ Remuneration Report.
• The Committee also expects to defer
the grant of 2020 LTIPs until later in
the year.
70
SALARY
BENEFITS
PENSION
ANNUAL
BONUS
LTIP
TOTAL
REMUNERATION
FIXED PAY
PERFORMANCE
RELATED PAY
PERFORMANCE-RELATED PAY FRAMEWORK (2019 AWARDS)
25%
Budgeted Profit
%
RES 3 5
A
H
S
C
A
S
H
6
5
%
ANNUAL
BONUS
UP TO 100% OF
ANNUAL SALARY
50%
Total Property Return compared
to TPR of the MSCI IPD Index
LTIP
MAXIMUM AWARD OF
100% OF SALARY
25%
Strategic Targets
50%
Total Property Return
compared to TPR of the
MSCI IPD Index
50%
Total Shareholder
Return (TSR)
ADJUSTED
PBT
£10.9m
Including Priory House
surrender premium
TPR EXCESS
PERFORMANCE
OVER TPR MSCI
IPD INDEX
1.53%
TOTAL
SHAREHOLDER
RETURN
STRATEGIC
TARGETS
See page 76 for full
details
-30.9%
27192 Palace Capital AR2020.indd 70-71
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
71
14-Jul-20 6:15:59 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSGOVERNANCE
OUR REMUNERATION POLICY
In this section we provide a summary of the key elements of the Remuneration Policy for Executive Directors
that was approved by Shareholders at the 2018 AGM held on 25 July 2018. Full details of the Remuneration
Policy may be found on pages 46–48 of the 2018 Annual Report and Accounts.
Operation
Maximum potential value
Operation in the year
ended 31 March 2020
Element
Salary
SHAREHOLDING REQUIREMENTS
The Chief Executive is expected to build up and retain a minimum shareholding of 200% of basic salary. The other Executive Directors
are expected to build up and retain a minimum shareholding of 100% of basic salary.
The shareholding will be built up over time, with a requirement to retain 25% of any shares vesting under the Deferred Bonus Plan or the
Long-Term Incentive Plan (after tax/NI has been settled) until the guideline is met.
Salaries are reviewed annually with effect from
There is no prescribed maximum.
Increases in line with
POST-EMPLOYMENT REQUIREMENTS
1 April each year.
Salary levels take account of the following:
• Role, performance and experience.
• Business performance.
• Salary levels at similar companies.
• Salary increases across the Group.
Annual bonus
The bonus is paid as to 65% in cash and 35% by
100% of salary.
way of an option over shares. The Committee
has discretion for 100% to be paid in cash.
The ability to exercise the option is deferred
for a year and there is a period of a further year
during which the options may be exercised.
Dividend equivalents accrue on the deferred
shares.
Malus and clawback provisions apply to all
elements of the bonus.
RPI for Neil Sinclair
and Richard Starr,
with Stephen Silvester
receiving an additional
increase to maintain
his salary as compared
with peer group
companies.
For 2019/20 the
performance targets
were 50% Total
Property Return (TPR)
measured as compared
with an MSCI IPD
Index, 25% Profit and
25% Strategic Targets.
LTIP
Annual awards vest after three years subject to
Maximum value of 100% of salary.
The 2016 LTIP vested in
performance conditions.
Vested shares are subject to a further two-year
holding period.
Dividend equivalents accrue from the grant
date to the end of the holding period.
Malus and clawback provisions apply to LTIPs.
the year at 50% of the
maximum.
2019 LTIPs were
granted for 100% of
salary.
Pension
Directors below retirement age participate in a
5% of salary for the Executive
5% of salary
defined contribution pension scheme.
Directors below retirement age.
Other benefits
Travel or car allowance
The travel allowances are fixed in
No change
the Executive Directors’ service
contracts.
Any shares that are still subject to the holding period as defined in the respective award will need to be retained, and in all other regards
the Executive will be encouraged to engage with the Company regarding the timing of any sales for a period of two years following the
termination of their employment to ensure an orderly market is preserved. The Committee may, in exceptional circumstances, exercise
its discretion to adjust the holding requirement.
SERVICE CONTRACTS AND PAYMENTS FOR LOSS OF OFFICE
The Committee’s policy on service contracts for Executive Directors is that they should provide for termination of employment by giving
12 months’ notice.
Name
Date of appointment
Original contract date Current contract date Notice period
Termination arrangements
Neil Sinclair
30 July 2010
8 September 2011
15 February 2018
12 months
An immediate payment
of 50% of salary followed
by monthly payments
after six months in the
event that alternative
employment has not
been secured.
Stephen Silvester
1 July 2015
2 April 2015
15 February 2018
12 months
An immediate payment
of 50% of salary followed
by monthly payments
after six months in the
event that alternative
employment has not
been secured.
Richard Starr
21 October 2013
24 September
20 February 2018
12 months
An immediate payment
2013
of 50% of salary followed
by monthly payments
after six months in the
event that alternative
employment has not
been secured.
Private medical cover
Private medical cover is at a level
No change
CHAIRMAN AND NON-EXECUTIVE DIRECTORS
which the Committee determines
is fair and reasonable.
The Non-Executive Directors are engaged for fixed terms. The effective dates of the letters of appointment for the current Non-
Executive Directors are as follows:
Life assurance
Life assurance is fixed at £1.5m
No change
for the Executive Directors below
retirement age.
Critical illness cover
The critical health insurance benefit
No change
for the two Executive Directors
below retirement age provides
£500,000 in the event policy cover
terms are met.
Name
Stanley Davis
Anthony Dove
Kim Taylor-Smith
Mickola Wilson
Paula Dillon
Date of letter for current appointment
Date term due to expire
17 May 2019
16 November 2017
15 November 2017
14 January 2019
30 January 2020
30 June 2022
22 August 2020
5 October 2020
31 January 2022
28 February 2023
EXTERNAL APPOINTMENTS
Executive and Non-Executive Directors are permitted to accept external appointments with the prior approval of the Board, where there
is no adverse impact on their role with the Group. Any fees arising from such roles may be retained by the Director.
72
27192 Palace Capital AR2020.indd 72-73
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
73
14-Jul-20 6:16:00 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSGOVERNANCE OUR REMUNERATION POLICY
ANNUAL REMUNERATION REPORT
ILLUSTRATION OF APPLICATION OF REMUNERATION POLICY
In our Remuneration Policy we set out a number of scenarios for potential remuneration to be earned by our Executive Directors based
on various performance assumptions.
Neil Sinclair
1,100
1,000
Richard Starr
0
0
0
£
'
900
800
700
600
500
400
300
200
100
0
151.5
303.0
317.8
60.6
151.5
317.8
317.8
317.8
Minimum
On-target
Maximum
1,100
1,000
900
800
700
0
0
0
£
'
600
500
400
300
200
100
0
114.8
229.5
229.5
45.9
114.8
245.8
245.8
245.8
Executive Directors
Neil Sinclair
Stephen Silvester
Richard Starr
Salary
Benefits1
2020
2019
2020
2019
2020
2019
295,000
285,000
210,000
180,000
211,8502
204,2502
16,192
14,800
8,905
9,591
8,461
9,382
Bonus
cash
Bonus
deferred
into shares
Long-Term
Incentive
Plan
118,885
64,015
104,314
74,100
84,630
46,800
89,869
55,900
39,900
45,570
25,200
48,391
30,100
65,632
42,579
26,664
58,956
18,460
1
The figure includes the value of health insurance and a cash alternative to Company cars or payment of certain travel costs.
2 Mr Starr participates in a salary sacrifice scheme reducing his salary and increasing his pension.
Minimum
On-target
Maximum
Non-Executive Directors
This report was prepared by the Remuneration Committee and approved by the Board for the financial year ended 31 March 2020.
DIRECTORS’ TOTAL REMUNERATION (AUDITED)
The table below sets out the total remuneration receivable by each of the Directors who held office during the year to 31 March 2020,
with a comparison to the previous financial year.
■ Fixed ■ Annual bonus ■ LTIP ■ LTIP with 50% share price growth
■ Fixed ■ Annual bonus ■ LTIP ■ LTIP with 50% share price growth
Stephen Silvester
1,100
1,000
900
800
700
0
0
0
£
'
600
500
400
300
200
100
0
111.3
222.5
222.5
44.5
111.3
The illustrations do not take into account share price appreciation
or dividends.
The minimum reflects salary, pension and benefits which are based
on the remuneration as at 1 April 2020.
The on-target includes the remuneration above plus bonus pay-out
of 50% of salary and LTIP threshold vesting at 20% of maximum
award.
The maximum reflects fixed remuneration, plus full payout of all
incentives. It assumes a maximum bonus of 100% of salary and
100% vesting of annual LTIP award.
The graphs also show what would happen should Palace Capital’s
233.6
233.6
233.6
share price increase by 50%, increasing the value of LTIP awards.
Other than illustrating 50% share price growth, share price
Minimum
On-target
Maximum
movement and dividend accrual are excluded.
■ Fixed ■ Annual bonus ■ LTIP ■ LTIP with 50% share price growth
STATEMENT OF CONSIDERATION
OF EMPLOYMENT CONDITIONS
ELSEWHERE IN THE COMPANY
Remuneration throughout the Group is considered when setting
the directors’ remuneration policy. Benefits for employees are
similar to those provided to the Executive Directors. Individual
salaries, awards of bonuses and LTIPs will vary according to the
employees’ level of responsibility.
STATEMENT OF CONSIDERATION OF
SHAREHOLDER VIEWS
The Committee takes into account the published remuneration
guidelines and specific views of Shareholders and proxy voting
agencies when considering the operation of the Remuneration
Policy. Where appropriate, the Committee will consult with
the Company’s larger Shareholders regarding changes to the
operation of the Policy. The Committee will consider specific
concerns or matters raised at any time by Shareholders.
Stanley Davis
Anthony Dove
Kim Taylor-Smith
Mickola Wilson
Paula Dillon
*Joined the Board 1 March 2020
ANNUAL BONUS
The Group’s remuneration policy for the
year ended 31 March 2020 caps bonus
payments to the Executive Directors
at 100% of salary. In determining the
bonuses, the Executive Directors are
measured against specific criteria. Bonuses
are awarded depending on whether
performance achieves the relevant target
criterion.
properties as at 1 April 2019 based on
the Directors’ bonus was appropriate.
the Cushman & Wakefield valuations as at
Consequently, the formula outcome of
that date. MSCI measured the increase in
69.25% was reduced by 10% (7.25% on
value as at 30 September 2019 and again
an absolute basis) resulting in 62% of the
on 31 March 2020 using the Cushman &
award being settled.
Wakefield valuations as at those dates and
then compared them with the MSCI IPD
index. The Company’s properties showed
an increase as at 31 March 2020 on a total
return basis of 1.08% when compared with
the MSCI IPD Index, which showed a total
The Palace Capital Deferred Bonus
Plan provides that 35% of any bonuses
awarded are deferred for a year and
shares to the value of the deferred bonus
amount allocated. The Executives will have
a further year from the vesting date to
exercise their options. In respect of the
year ended 31 March 2020, 35% will be
deferred in accordance with the terms of
For the year ended 31 March 2020 the
return of -0.45%. The total return achieved
specific criteria comprised Total Property
by the Company therefore exceeded the
Return compared to the MSCI IPD Index,
benchmark index by 1.53%.
Budgeted Profit and Strategic Targets
linked to key deliverables for the year.
The assessment of actual performance
achieved is set out below.
Based on the performance criteria, the
the Plan.
Executive Directors achieved 69.25%
of the maximum award. However, the
Committee was mindful of the reduction
For purposes of determining the Total
to Shareholder dividends following the
Property Return portion, MSCI, the
onset of the Covid-19 pandemic and the
global provider of market indexes, was
continuing macro-economic uncertainty.
provided with the values of the Company’s
It was concluded that a reduction to
Pension
Total
–
–
10,500
9,000
23,839
22,984
Fees to
31 March
2020
50,000
45,000
45,000
45,000
3,333*
598,406
479,432
402,184
297,255
441,366
341,076
Fees to
31 March
2019
54,167
45,000
45,000
7,500
–
74
27192 Palace Capital AR2020.indd 74-75
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
75
14-Jul-20 6:16:01 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSGOVERNANCE ANNUAL REMUNERATION REPORT
ANNUAL BONUS TARGETS FOR YEAR ENDED 31 MARCH 2020
AND OUTCOMES
OUTSTANDING SCHEME INTERESTS
The executive directors have the following outstanding awards under the Long-term Incentive Plan:
Measure
Weighting
Target
Achievement
Increase in Total Property Return50%
Increase in TPR between 1–3% above MSCI Index
1.53%
Profit
Strategic
Targets
EPRA
Occupancy
25%
6.25%
Adjusted PBT between £10.0m–£10.5m
Above 90% (excluding development assets)
£10.85m
91%
Profit on disposal 6.25%
Profits on disposal net of costs to exceed £0.5m
Hudson Quarter
residential sales
6.25%
Exchange contracts for the sale of 20 residential
units
Lettings at Sol,
Northampton
6.25%
Vacant space below 50%
100%
£(0.3)m
28
46.6%
Total
Reduction
Net total
Awarded
(% of
maximum)
25.5%
25%
6.25%
0%
6.25%
6.25%
69.25%
-7.25%1
62.00%
1
This represents a reduction of 10.5% of the formulaic outcome.
LONG-TERM INCENTIVE PLAN
Executives have been able to participate in the Group’s LTIP. The scheme is designed to encourage the matching of interests between
management and Shareholders. Further details are provided in note 22 of the Group financial statements.
Neil Sinclair
Stephen Silvester
Richard Starr
At 31 March
2019
Granted
75,949
72,754
80,282
30,854
42,710
50,704
42,722
54,492
60,563
–
–
–
99,494
–
–
–
70,826
–
–
–
75,211
Vested and
exercised
37,975
–
–
–
Lapsed
37,974
–
–
–
15,427
15,427
–
–
–
–
–
–
21,361
21,361
–
–
–
–
–
–
As at
31 March
2020
Share price at
date of award
Grant date
Vesting date
–
72,754
80,282
99,494
–
42,710
50,704
70,826
–
54,492
60,563
75,211
£3.16
04/07/2016
04/07/2019
£3.39
01/11/2017
01/11/2020
£3.55
13/07/2018
13/07/2021
£2.96
25/06/2019
25/06/2022
£3.16
04/07/2016
04/07/2019
£3.39
01/11/2017
01/11/2020
£3.55
13/07/2018
13/07/2021
£2.96
25/06/2019
25/06/2022
£3.16
04/07/2016
04/07/2019
£3.39
01/11/2017
01/11/2020
£3.55
13/07/2018
13/07/2021
£2.96
25/06/2019
25/06/2022
Awards granted from 2018 onwards are subject to a two-year holding period following vesting.
DEFERRED BONUS PLAN
The Palace Capital Deferred Bonus Plan provides that 35% of any bonuses awarded may be deferred for a year and options over shares
to the value of the deferred bonus amount allocated. The Executive Directors will have a further year from the vesting date to exercise
On 4 July 2019, 50% of the awards granted under the 2016 LTIP became exercisable following satisfaction of the performance conditions
their options.
over a three-year period as follows:
Measure
Performance condition
Threshold
Maximum
Actual
Weighting
Awarded
(% of
maximum)
Total Shareholder
Return
NAV Growth
Annualised and Total TSR over the
performance period. 33.3% vests
for achieving threshold performance
increasing on a straight-line basis to full
vesting.
EPRA net asset value per share growth
over the performance period when
compared to the NAV growth of a
group of comparable companies.
20% vests for achieving threshold
performance increasing on a straight-
line to full vesting.
Annualised
TSR 8%
Annualised
TSR 13%
Annualised
1.13%
50%
0%
Total TSR
26%
Median
Total TSR
44.3%
Upper
Quartile
Total TSR
3.43%
Upper
Quartile
50%
50%
SCHEME INTERESTS AWARDED DURING THE YEAR
The following awards under the Long-Term Incentive Plan were granted to the Executive Directors on 25 June 2019:
Neil Sinclair
Stephen Silvester
Richard Starr
Number of
shares
% of salary
Face value
of award*
Performance
period end
Threshold
vesting
99,494
70,826
75,211
100
100
100
295,000 24 June 2022
210,000 24 June 2022
223,000 24 June 2022
20%
20%
20%
* Face value calculated based on the mid-market closing average price for the five days ended on 21 June 2019 of 296.5 pence.
The awards are subject to the achievement of performance criteria over a three-year period based on Total Shareholder Return (50%)
and the growth in the portfolio value using Total Property Return compared against the MSCI IPD Index (50%).
76
The Deferred Bonus Plan awards do not have any performance criteria attached to them.
In respect of the year ended 31 March 2019, 35% of the bonuses due to the Executive Directors were deferred and the details of the
outstanding awards are as follows:
Neil Sinclair
At 31 March
2019
26,694
Stephen Silvester
16,859
Richard Starr
20,137
1
Dividend equivalents
Granted
1,7221
13,457
1,0871
8,499
1,2991
10,152
Vested and
exercised
28,416
–
17,946
–
21,436
–
As at
31 March
2020
Share price at
date of award
Lapsed
–
–
–
–
–
–
–
13,457
–
8,499
–
10,152
£3.55
£2.97
£3.55
£2.97
£3.55
£2.97
Grant date
Vesting date
13/07/18
13/07/19
24/06/19
24/06/20
13/07/18
13/07/19
24/06/19
24/06/20
13/07/18
13/07/19
24/06/19
24/06/20
TOTAL PENSION
ENTITLEMENTS
The Company makes pension contributions
PAYMENTS TO PAST
DIRECTORS
There were no payments to past Directors
PAYMENTS FOR LOSS
OF OFFICE
There were no payments for loss of office
into a defined contribution scheme on
in the year ended 31 March 2020.
in the year ended 31 March 2020.
behalf of Directors below retirement
age. For the year ending 31 March 2020,
contributions were paid at a rate of 5% of
basic salary.
27192 Palace Capital AR2020.indd 76-77
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
77
14-Jul-20 6:16:01 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSGOVERNANCE ANNUAL REMUNERATION REPORT
STATEMENT OF DIRECTORS’ SHAREHOLDING AND SHARE INTERESTS
Directors’ interests in the shares of the Company, including family interests, were as follows:
Stanley Davis
Neil Sinclair
Stephen Silvester
Richard Starr
Anthony Dove
Kim Taylor-Smith
Mickola Wilson
Paula Dillon
Ordinary shares
of 10p each
31 March 2020
1,665,287
253,066
29,915
194,014
91,000
10,000
10,000
–
Ordinary shares
of 10p each
31 March 2019
Outstanding Ordinary share
options of 10p each
31 March 2020
Outstanding Ordinary share
options of 10p each
31 March 2019
1,665,287
229,279
12,184
149,921
91,000
10,000
–
–
–
265,987
172,739
200,418
–
–
–
–
–
255,679
141,127
177,914
–
–
–
–
REVIEW OF PAST PERFORMANCE
The following graph shows the Group’s Total Shareholder Return (TSR) for the period to 31 March 2020 as compared with the FTSE All
Share Index. The Committee has chosen the FTSE All Share Index as the Company’s shares are a constituent of this index and it will
provide a baseline for future years. Total Shareholder Return measures share price growth with dividends deemed to be reinvested on
the ex-dividend date.
600p
400p
200p
0
31/03/2013
31/03/2014
31/03/2015
31/03/2016
31/03/2017
31/03/2018
31/03/2019
31/03/2020
Palace Capital PLC
FTSE All Share Index
PERCENTAGE CHANGES IN CHIEF EXECUTIVE’S REMUNERATION
The percentage change in the Chief Executive’s remuneration from the previous year compared with the average change in
remuneration for all other employees is as follows:
Chief Executive
Other employees (excl. Chief Executive)
Salary Taxable benefit
Annual bonus
3.5%
10.3%
9.4%
–7.3%
60.4%
56.3%
HISTORICAL CHIEF EXECUTIVE’S REMUNERATION
Year to 31 March
Total remuneration
£’000
Annual bonus (as a % of the
maximum payout)
LTIP vesting (as a % of the
maximum possible)
2020
2019
2018
2017
2016
2015
2014*
598,406
479,432
683,379
412,975
362,629
262,007
125,467
62
40
95
63
**
**
**
50.00
32.75
16.66
–
–
–
–
* Fourteen month period ended 31 March 2014
** No policy for annual bonuses in place
RELATIVE IMPORTANCE OF SPEND ON PAY
The table below shows the expenditure and percentage change in employee remuneration as compared with dividends paid to
Shareholders (see note 4 to the financial statements):
Employee costs
Dividends
2020
£’000
2019
£’000
2,593,000
2,202,000
8,742,646
8,718,896
% change
17.8%
0.3%
IMPLEMENTATION OF REMUNERATION POLICY IN 2020/21
In respect of the year ending 31 March 2021, the Committee intends to implement the Executive and Non-Executive Director
remuneration policies as follows:
SALARY
Executive Directors
Executive Director salaries for the period commencing 1 April 2020 were increased in line with RPI, except Stephen Silvester who will
receive an additional increase to maintain his salary as compared with peer group companies.
The average salary increase across the workforce from 1 April 2020 was 6% of salary.
Neil Sinclair
Stephen Silvester
Richard Starr
Non-Executive Directors
Salary
303,000
222,500
229,500
Change
2.7%
5.6%
2.7%
Anthony Dove will not be standing for re-election at the AGM on 7 August 2020. Mickola Wilson, if re-elected at the AGM, will become
Chair of the Remuneration Committee from that date and will receive an additional fee of £5,000 for this role. Paula Dillon will assume
the position of Chair of the Corporate Social Responsibility Committee and will receive an additional fee of £5,000 for this role.
Non-Executive Director fees for the year ending 31 March 2021 will be as follows:
Stanley Davis
Anthony Dove
Kim Taylor-Smith
Mickola Wilson
Paula Dillon
Role
Non-Executive Chairman
Non-Executive Director
• Chair of Remuneration Committee to 7 August 2020
• Senior Independent Director to 31 March 2020
Non-Executive Director
• Chair of Audit and Risk Committee
Non-Executive Director
• Chair of Remuneration Committee from 7 August 2020
• Chair of the Nominations Committee
• Senior Independent Director from 1 April 2020
Non-Executive Director
• Chair of CSR Committee from 1 April 2020
1
45,000 prorated to 7 August 2020
78
27192 Palace Capital AR2020.indd 78-79
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
2021 fee
50,000
15,9041
45,000
Change
–
–
–
48,233
7.18%
45,000
12.5%
79
14-Jul-20 6:16:02 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSGOVERNANCE
DIRECTORS’ REPORT
AND ADDITIONAL DISCLOSURES
The Directors present their Annual Report
August 2020 to the Shareholders on the
In accordance with the Articles of
and the audited consolidated financial
register on 24 July 2020 (2019: 19 October
Association, Paula Dillon who was
statements of Palace Capital plc for the
2018 4.75p; 28 December 2018 4.75p;
appointed during the year, retires at the
year ended 31 March 2020.
13 April 2019 4.75p and 31 July 2019
forthcoming Annual General Meeting and
ANNUAL REMUNERATION REPORT
PENSION AND
BENEFITS
The Company will make pension
contributions into a defined contribution
scheme on behalf of Directors at a rate
of 5% of basic salary, and will continue to
make provision for other health benefits
ANNUAL BONUS
Due to the ongoing Covid-19 pandemic,
the Committee has not set performance
targets for the period ending 31 March
2021.
These will be set as soon as reasonably
practicable and will be disclosed in full in
and cash alternatives as set out in the
next year’s report.
Remuneration Policy.
In accordance with the existing policy, the
maximum bonus opportunity will be 100%
of salary and the Committee will review
the measures and weightings considering
updated forecasts, and will ensure targets
are aligned to the business strategy and
are sufficiently stretching.
LONG-TERM INCENTIVE
PLAN
Awards under the Long-Term Incentive
Plan are typically made following the
publication of the Company’s full year
results, unless the Company is in a closed
period. As a result of the ongoing Covid-19
pandemic, the Committee expects to defer
the grant of the 2020 LTIP until later in the
year.
STATEMENT OF VOTING AT ANNUAL GENERAL MEETING
The table below sets out the results of the voting in respect of the Directors’ Remuneration Report at the 2019 AGM and Remuneration
Policy at the 2018 AGM.
Remuneration Report
Remuneration Policy
Percentage of votes cast
Number of votes cast
For and
discretion
89.67%
99.47%
Against
For and
discretion
Against
Withheld*
10.31%
31,768,016
3,653,080
0.53%
32,300,663
173,706
5,222
13,570
STATUTORY
INFORMATION
CONTAINED
ELSEWHERE IN THE
ANNUAL REPORT
Information required to be part of this
Directors’ Report can be found elsewhere
in the Annual Report and is incorporated
into this report by reference, as indicated
in the relevant section.
In accordance with the UK Financial
Conduct Authority’s Listing Rules
LR 9.8.4c, the information to be
included within the Annual Report,
where applicable, is set out in the
Directors’ Report.
STRATEGIC REPORT
The principal activity of the Group is
* A vote withheld is not a vote in law and is not included in the calculation of the number or the percentage of votes For or Against the resolution
property investment, predominately in key
forthcoming Annual General Meeting.
APPROVAL
This report and policy were approved by the Board of Directors on 6 July 2020 and signed on its behalf by:
Anthony Dove
Chair of the Remuneration Committee
80
regional towns and cities within the UK. A
review of the Group’s business strategy,
operations, future prospects and key
performance indicators are included in the
Strategic Report on pages 6 to 49, and is
incorporated by reference.
GOVERNANCE
The Governance Report (pages 52 to 80
of this Annual Report and Accounts 2020)
is incorporated by reference into this
Directors’ Report.
RESULTS AND
DIVIDENDS
The results for the year are set out in
the financial statements. The Company
paid interim dividends of 4.75p per
Ordinary share on 18 October 2019 and
5 December 2019. In response to the
Covid-19 pandemic, the interim dividend
that was due to be paid on 9 April 2020,
was cancelled. The Directors recommend
the payment of a final dividend in respect
of the year ending 31 March 2020 of
2.5p per Ordinary share to be paid on 14
4.75p).
SHARE CAPITAL
The present capital structure of the
Company is set out in note 21 to the
financial statements.
PURCHASE OF OWN
SHARES BY THE
COMPANY
At the Annual General Meeting of the
being eligible offers herself for election.
All of the other Directors offer themselves
for re-election, except Anthony Dove,
who will retire from the Board following
the conclusion of the AGM. The Directors’
service contract terms are set out in the
Annual Remuneration Report on page 73.
POST BALANCE SHEET
EVENTS
Details of post balance sheet events are
provided in note 25 on page 124 of the
Company, held on 12 July 2019, authority
financial statements.
was granted to the Directors to purchase,
in the market, the Company’s own shares,
up to the limit of 10% of the issued share
capital. The authority was expressed to
run until the conclusion of the next Annual
FUTURE
DEVELOPMENTS
Details of future developments are
General Meeting of the Company. No
provided in the Strategic Report on
share purchases were made pursuant to
pages 16 and 17.
this authority during the year. Renewal
of this authority will be proposed at the
DIRECTORS
The Directors’ powers, including the
GOING CONCERN
The Directors confirm they have a
reasonable expectation that the Company
and the Group have adequate resources
to continue in operation for at least 12
rules relating to the appointment and
months from the date of approval of the
replacement of Directors, are conferred
financial statements.
on them by UK legislation and by the
Company’s Articles of Association.
Changes to the Articles of Association
are only permitted in accordance with
legislation and must be approved by a
special resolution of Shareholders.
Details of the Directors of the Company
who served during the year ended
31 March 2020 and up to the date of
the financial statements, are set out on
pages 52 and 53, and their interests in the
Ordinary share capital of the Company
and details of options granted under
the Group’s share schemes are set out
in the Annual Remuneration Report on
pages 69 to 80. No member of the Board
had a material interest in any contract of
significance with the Company, or any
of its subsidiaries, at any time during
the year.
SUBSTANTIAL
SHAREHOLDINGS
As at 3 July 2020, being the latest
practicable date before the issue of
these financial statements, the Company
had been notified of the following
shareholdings, which constitute 3%
or more of the total issued shares of
the Company.
Ordinary 10p
shares No.
Shareholding
%
AXA
Investment
Managers
Miton Group
plc
3,542,633
3,397,806
JO Hambro
3,356,810
Allianz
2,342,973
Stanley Davis
1,665,287
7.73
7.41
7.32
5.08
3.63
81
27192 Palace Capital AR2020.indd 80-81
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
14-Jul-20 6:16:02 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSGOVERNANCE DIRECTORS’ REPORT
AND ADDITIONAL DISCLOSURES
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
DIRECTORS’
INDEMNITIES AND
DIRECTORS’ AND
OFFICERS’ LIABILITY
INSURANCE
The Company’s agreement to indemnify
each Director against any liability incurred
in the course of their office to the extent
permitted by law remains in force. The
Group maintains Directors’ and Officers’
Liability Insurance.
FINANCIAL RISK
MANAGEMENT
The Group is exposed to market risk
(including interest rate risk and real estate
market risk), credit risk and liquidity
risk. The Group’s senior management
oversee the management of these risks,
and the Board of Directors has overall
responsibility for the determination of
the Group’s risk management objectives
and policies, and it sets policies that
seek to reduce risk as far as possible
AUTHORISATION
OF CONFLICTS OF
INTEREST
Under the Articles of Association of the
DISCLOSURE OF
INFORMATION TO THE
AUDITOR
The Directors who held office at the date
Company and in accordance with the
of approval of this Directors’ Report
provisions of the Companies Act 2006,
confirm that, so far as they are each aware,
a Director must avoid a situation where
there is no relevant Audit information of
they have, or can have, a direct or indirect
which the Company’s Auditor is unaware;
interest that conflicts, or possibly may
and each Director has taken all the
conflict with the Company’s interests.
steps that they ought to have taken as a
However, the Directors may authorise
Director to make themselves aware of any
conflicts and potential conflicts, as they
relevant audit information and to establish
deem appropriate. As a safeguard, only
that the Company’s Auditor is aware of
Directors who have no interest in the
that information.
matter being considered will be able
to make the relevant decision, and the
Directors will be able to impose limits or
conditions when giving authorisation if
they think this is appropriate. During the
financial year ended 31 March 2020, the
Directors have authorised no such conflicts
or potential conflicts.
CHANGE OF CONTROL
The Group has in place a number
The Directors are responsible
for preparing the Annual Report
and the Group and parent
Company financial statements in
accordance with applicable law
and regulations.
Company law requires the Directors to
prepare Group and parent Company
financial statements for each financial
year. Under that law, the Directors have
prepared the Group financial statements
in accordance with International Financial
Reporting Standards (IFRSs) as adopted by
the European Union, and have elected to
prepare the Company financial statements
in accordance with United Kingdom
Generally Accepted Accounting Practice
(United Kingdom Accounting Standards
and applicable law).
Under company law the Directors must not
approve the financial statements unless
they are satisfied that they give a true
and fair view of the state of affairs of the
Group and parent Company and of the
• under applicable law and regulations,
the Directors are also responsible
for preparing a Strategic Report,
Directors’ Report, Directors’
Remuneration Report and Corporate
Governance Statement that complies
with that law and those regulations.
The Directors are responsible for
DIRECTORS’
RESPONSIBILITIES
STATEMENT
We confirm to the best of our knowledge:
•
the financial statements have
been prepared in accordance with
International Financial Reporting
keeping adequate accounting records
Standards (IFRS) as adopted by The
that are sufficient to show and explain
European Union and Article 4 of the IAS
the Parent Company’s transactions and
regulation, and give a true and fair view
disclose with reasonable accuracy at any
of the assets, liabilities, financial position
time the financial position of the Parent
and profit or loss of the Company
Company and enable them to ensure
and the undertakings included in the
that the financial statements comply
consolidation as a whole;
with the requirements of the Companies
Act 2006 and, as regards the Group
Financial Statements, Article 4 of the IAS
Regulations.
They are also responsible for safeguarding
the assets of the Group and hence for
taking reasonable steps for the prevention
and detection of fraud and other
irregularities.
AUDITOR
The Auditor, BDO LLP, has indicated
their willingness to continue in office.
The Board, on the advice of the Audit
and Risk Committee, recommends
their re-appointment at the Annual
General Meeting.
2020 ANNUAL
GENERAL MEETING
The 2020 AGM will be held remotely on
7 August 2020 at 10.00 a.m. The
resolutions are set out in the Notice of
Meeting, together with explanatory notes.
This report was approved by the Board
and signed on its behalf.
Nicola Grinham
Company Secretary
Palace Capital plc Incorporated, registered
and domiciled in England and Wales
number 5332938 4th Floor, 25 Bury Street
London SW1Y 6AL
6 July 2020
without unduly affecting the Group’s
of agreements with its lending banks,
competitiveness and flexibility. Further
which contain certain termination rights
details regarding these policies are set
that would have an effect on a change
out in note 26 and the Risk Management
of control. In addition, the Group’s share
section of the Annual Report and
schemes contain provisions that, in the
event of a change of control, would
result in outstanding options and awards
becoming exercisable, subject to the rules
of the relevant schemes. The Directors
service contracts contain a provision for
the payment of compensation for loss
of office or employment that occurs
directly as a result of a takeover bid.
GREENHOUSE GAS
EMISSIONS
The Group’s GHG emission report can
be found in the Governance section on
page 65.
Accounts.
82
profit or loss of the Group for the period.
The Directors are responsible for
In preparing each of the Group and
ensuring the Annual Report and the
parent Company financial statements the
financial statements are made available
on a website. Financial statements are
published on the Company’s website in
accordance with legislation in the United
Kingdom governing the preparation and
dissemination of financial statements,
which may vary from legislation in other
jurisdictions. The maintenance and
integrity of the Company’s website is
the responsibility of the Directors. The
Directors’ responsibility also extends
to the ongoing integrity of the financial
statements contained therein.
Directors are required to:
•
select suitable accounting policies and
then apply them consistently;
• make judgements and estimates that
are reasonable and prudent;
•
for the Group financial statements,
state whether they have been
prepared in accordance with IFRSs
as adopted by the European Union,
subject to any material departures
disclosed and explained in the financial
statements;
•
for the parent Company financial
statements, state whether they have
been prepared in accordance with
UK GAAP, subject to any material
departure disclosed and explained
in the parent company financial
statements;
• prepare the financial statements on
the going concern basis unless it is
inappropriate to presume that the
Group and the parent Company will
continue in business; and
•
the Strategic Report includes a fair
review of the development and
performance of the business and the
financial position of the Company
and the undertakings included in the
consolidation as a whole, together
with a description of the principal risks
and uncertainties that they face; and
•
the Annual Report and Accounts,
taken as a whole, is fair, balanced
and understandable and provides the
information necessary for Shareholders
to assess the Company’s performance,
business model and strategy.
On behalf of the Board
NICOLA GRINHAM
Company Secretary
6 July 2020
83
14-Jul-20 6:16:02 PM
27192 Palace Capital AR2020.indd 82-83
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSGOVERNANCE INDEPENDENT AUDITOR’S REPORT
to the members of Palace Capital plc
OPINION
We have audited the financial statements
BASIS FOR OPINION
We conducted our audit in accordance
of Palace Capital plc (the ‘Parent
with International Standards on Auditing
Company’) and its subsidiaries (the
(UK) (ISAs (UK)) and applicable law. Our
‘Group’) for the year ended 31 March
responsibilities under those standards
2020 which comprise the Consolidated
are further described in the Auditor’s
Statement of Comprehensive Income,
responsibilities for the audit of the
the Consolidated Statement of Financial
financial statements section of our report.
Position, the Consolidated Statement
We are independent of the Group and the
continue to do so over a period of at
least twelve months from the date of
approval of the financial statements;
• whether the Directors’ statement
relating to going concern required
under the Listing Rules in accordance
with Listing Rule 9.8.6R(3) is materially
inconsistent with our knowledge
obtained in the audit; or
of Changes in Equity, the Consolidated
Parent Company in accordance with the
•
the Directors’ explanation set out on
page 42 in the annual report as to how
they have assessed the prospects of
the Group, over what period they have
done so and why they consider that
period to be appropriate, and their
statement as to whether they have a
reasonable expectation that the Group
will be able to continue in operation
and meet its liabilities as they fall due
over the period of their assessment,
including any related disclosures
drawing attention to any necessary
qualifications or assumptions.
EMPHASIS OF
MATTER: PROPERTY
VALUATIONS
We draw attention to the disclosures
made in the Properties Estimates note on
page 102. As described in the note, due
to the impact of the Novel Coronavirus
outbreak, the valuers have attached less
weight to previous market evidence
for comparison purposes and property
valuations are therefore reported on the
basis of ‘material valuation uncertainty’
per VGA 10 of the RICS Valuation – Global
Standards. Consequently, less certainty
should be attached to the valuation of the
Investment Properties than would normally
be the case. Our opinion is not modified in
respect of this matter.
Statement of Cash Flows, the Company
ethical requirements that are relevant to
Statement of Financial Position, the
our audit of the financial statements in the
Company Statement of Changes in Equity
UK, including the FRC’s Ethical Standard
and the notes to the consolidated and
as applied to listed public interest entities,
company financial statements, including a
and we have fulfilled our other ethical
summary of significant accounting policies.
responsibilities in accordance with these
The financial reporting framework that
requirements. We believe that the audit
has been applied in the preparation of the
evidence we have obtained is sufficient
Group financial statements is applicable
and appropriate to provide a basis for our
law and International Financial Reporting
opinion.
Standards (IFRSs) as adopted by the
European Union. The financial reporting
framework that has been applied in
preparing the Parent Company financial
statements is applicable law and United
Kingdom Accounting Standards (United
Kingdom Generally Accepted Accounting
Practice).
In our opinion:
•
the financial statements give a true
and fair view of the state of the
Group’s and of the Parent Company’s
affairs as at 31 March 2020 and of the
CONCLUSIONS
RELATING TO
PRINCIPAL RISKS,
GOING CONCERN AND
VIABILITY STATEMENT
We have nothing to report in respect of
the following information in the annual
report, in relation to which the ISAs (UK)
require us to report to you whether we
have anything material to add or draw
attention to:
Group’s loss for the year then ended;
•
the Directors’ confirmation set out on
•
the Group financial statements have
been properly prepared in accordance
with IFRSs as adopted by the
European Union;
•
the Parent Company financial
statements have been properly
prepared in accordance with United
Kingdom Accounting Standards; and
•
the financial statements have been
prepared in accordance with the
requirements of the Companies Act
2006; and, as regards the Group
financial statements, Article 4 of the
IAS Regulation.
page 40 in the annual report that they
have carried out a robust assessment
of the Group’s emerging and principal
risks and the disclosures in the annual
report that describe the principal risks
and the procedures in place to identify
emerging risks and explain how they
are being managed or mitigated;
•
the Directors’ statement set out on
page 81 in the financial statements
about whether the Directors
considered it appropriate to adopt
the going concern basis of accounting
in preparing the financial statements
and the Directors’ identification of any
material uncertainties to the Group
and the Parent Company’s ability to
84
KEY AUDIT MATTERS
Key audit matters are those matters that,
in our professional judgment, were of most
significance in our audit of the financial
statements of the current period and
include the most significant assessed risks
of material misstatement (whether or not
our audit of the financial statements as a
due to fraud) that we identified including
whole, and in forming our opinion thereon,
those which had the greatest effect on:
and we do not provide a separate opinion
the overall audit strategy, the allocation of
on these matters.
resources in the audit; and directing the
efforts of the engagement team. These
matters were addressed in the context of
Key audit matter
Valuation of property portfolio
Refer to accounting policies on investment properties on page 99 and
trading properties on page 100.
Refer to note 9 in relation to the property portfolio.
The valuation of property portfolio requires significant judgement and
estimates by the Directors and the independent external valuer and is
therefore considered a significant risk due to the subjective nature of
certain assumptions inherent in each valuation.
The Group’s property portfolio includes:
•
•
•
Standing investment properties: these are completed properties
that are currently let. They are valued using the income capitalisation
method.
Investment properties under construction: these are properties being
developed. Such assets have a different risk and investment profile
to standing assets. They are valued using the residual method (ie by
estimating the fair value of the completed asset less estimated costs
to completion and an appropriate developer’s margin).
Trading properties: these are properties being developed with the
view to sell. They are measured at the lower of the cost and estimated
net realisable value.
The valuation of each property requires consideration of the individual
nature of the asset, its location, cash flows and comparable market
transactions. The valuation of the investment properties under
construction also requires the forecasting of gross development value
with deductions for projected costs to complete and an appropriate
developer’s margin.
Any input inaccuracies or unreasonable bases used in the valuation
judgements (such as in respect of estimated rental value and net yield
applied and estimated costs to complete for assets under construction)
could result in a material misstatement of the Consolidated Statement
of Comprehensive Income or the Consolidated Statement of Financial
Position.
There is also a risk that management may influence the significant
judgements and estimates in respect of property valuations in order to
achieve property valuation and other performance targets to meet market
expectations or bonus and LTIP targets.
How the scope of our audit addressed the key audit matter
Experience of external valuer and relevance of its work
We obtained the valuation report prepared by the independent external
valuer and discussed the basis of the valuations with them, confirming that
the approach was consistent with the requirements of accounting standards.
We assessed the competency, independence and objectivity of the valuer
which included making enquiries regarding interests and relationships that
may create a threat to the valuer’s objectivity.
We obtained a copy of the instructions provided to the valuer and reviewed
for any limitations in scope or for evidence of Management bias.
Data provided to the valuer
We checked that the underlying data provided to the valuer by
Management was consistent with the data provided to us for our audit
work. This data included inputs such as current rent and lease terms, which
we agreed to executed lease agreements as part of our audit work.
Assumptions and estimates used by the valuer
We used our knowledge and experience to evaluate and challenge the
valuation assumptions, methodologies and the unobservable inputs used in
the valuation of the properties. This included establishing our own range of
expectations for the valuation of all of the properties based on externally
available metrics, comparable organisations and wider economic and
commercial factors.
We assessed the valuation of the properties against our own expectations
and met with the valuer via video-conference to challenge those valuations
which fell outside of our range of expectations. We also challenged the
valuer regarding their views on the expected impact of COVID-19 on the
valuation of these assets.
For properties under construction, we assessed the gross development
values and developers’ margin based on market data. We also verified the
forecast cost to complete included in the valuations to third party cost to
complete information.
Key observation:
Our testing indicated that the estimates and assumptions used in the
property valuations were appropriate in the context of the Group’s property
portfolio. The emphasis of matter paragraph above draws attention to the
material valuation uncertainty highlighted by the valuer in relation to the
property valuations.
27192 Palace Capital AR2020.indd 84-85
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
85
14-Jul-20 6:16:02 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSGOVERNANCE INDEPENDENT AUDITOR’S REPORT
to the members of Palace Capital plc
Key audit matter
How the scope of our audit addressed the key audit matter
Revenue recognition – rental income
Refer to accounting policy on revenue on page 97.
Refer to note 1 in relation to Revenue.
The Group has several property managers and multiple tenants across its
property portfolio. Rental income revenue recognition has a significant
impact on the allocation of resources and directing the efforts of the audit
team.
Rental income is recognised on a straight line basis over the lease term for
the Group’s properties based upon rental agreements that are in place.
Management judgement is required to determine the term over which
incentives should be recognised.
There is a risk that rental income is not supported by underlying tenancy
agreements or is inappropriately recognised.
Going concern and loan covenants
Refer to accounting policy on going concern accounting policy on page 96.
Management have prepared the viability statement for the period of 3
years from the reporting date, refer to page 42.
As set out in the accounting policy on going concern, management have
carried out a detailed assessment of the Group’s ability to continue as a
going concern, including considering a number of scenarios and stress
testing incorporating potential adverse effects of COVID-19.
There are a number of loans across the Group that have financial
covenants. A breach of covenant on any of the loans, either during the
year or In the future, could also impact the Group’s ability to operate as
a going concern. The risk is increased by the impact of COVID-19 on the
business and industry.
We obtained the tenancy schedule and Management’s analysis of revenue
recognised for each tenant and the reconciliation of this analysis to the
financial statements and performed the following:
• We analysed the current year tenancy schedule compared to prior year
to highlight changes in the year.
• We analysed the amount of rent recognised in respect of each tenant
in the financial statements and compared this to our expectations for
the year based on the prior year tenancy schedule. This highlighted
changes which were investigated and agreed to the underlying lease
documentation and rent review memoranda.
• We checked the integrity of the formulae used in Managements
reconciliation to the financial statements.
• We reviewed the list of rent concessions agreed with tenants around
year end as a result of COVID-19 and confirmed that no agreements
had been finalised prior to the year-end.
We obtained management’s schedule of lease incentive adjustments,
including rent free periods, and, for a sample, we recalculated the
adjustment and agreed the inputs to the underlying lease documentation.
We considered the completeness of the schedule based on information
included in the tenancy schedule and the underlying lease information
obtained.
We obtained a breakdown of other revenue recognised in the year including
surrender premiums and car park income and for a sample of transactions
we agreed the revenue recognised to supporting documentation and bank
statements to confirm existence and accuracy.
Key observations:
We did not identify any indicators to suggest that rental income has been
recognised inappropriately.
We have examined the forecasting and viability model provided by
Management. We tested the integrity of the model by checking the
formulas, the arithmetic accuracy and any hard coding. We have also
assessed the appropriateness of assumptions made within this model and
challenged the term used by the Directors for the long term viability.
In particular, but not limited to, we have considered the ability of the Group
to continue to meet its obligations as well as the risk of covenant breach
on any of the loans across the Group and the impact on the Group if it was
unable to cure a covenant breach and had to relinquish control of one or
more of its property assets.
We analysed the stress testing and sensitivities in the model. We checked
the financial covenants and the headroom on these covenants when key
inputs were stressed.
We have considered the impact COVID-19 has had on the Group’s tenants.
We obtained details of ongoing negotiations between the Group and
tenants that had not paid their March quarters rent and considered the risk
around remaining un-negotiated amounts.
We have considered the risk around non collection of future rental income
from tenants that have been impacted by COVID-19 and assessed the
impact this may have on the Group’s future cash flows.
We made enquiries of management and those charged with governance
as to any future events or conditions, outside of those associated with
the pandemic, that may affect the Group’s ability to continue as a going
concern.
Key observations:
Our key observations are set out in the conclusions related to principal risks,
going concern and viability section of our audit report.
OUR APPLICATION OF
MATERIALITY
We apply the concept of materiality both
£500,000 (2019: £348,000), which was
set at 5% (2019: 5%) of EPRA earnings.
EPRA earnings excludes the impact of the
net surplus on revaluation of investment
in planning and performing our audit, and
properties, equity investments and interest
in evaluating the effect of misstatements
on the audit and in forming our audit
rate derivatives, realised gains and losses
on disposal of investment properties and
opinion. Materiality is assessed on both
related tax movements.
quantitative and qualitative grounds.
Financial
statement
materiality
Specific
materiality
– EPRA
earnings
Materiality
£3,000,000
£500,000
£2,250,000
£375,000
Performance
materiality
Reporting
threshold
We determined that the same measure as
the Group was appropriate for the Parent
Company, and the materiality and specific
materiality applied were £1,515,000 (2019:
£1,356,000) and £478,800 (2019: £330,600)
respectively. Component materiality has
been set on the same basis as for the
Group.
REPORTING THRESHOLD
An amount below which identified
misstatements are considered as being
clearly trivial.
We agreed with the Audit Committee
that we would report all individual audit
differences in excess of £60,000 (2019:
£62,000) to the Audit Committee and
any other differences that, in our view,
warranted reporting on qualitative
grounds. We have also agreed to report
differences impacting EPRA earnings in
excess of £10,000 (2019: £7,000).
We determined that the same the same
measure as the Group was appropriate
for the Parent Company and the reporting
threshold applied for overall materiality
£60,000
£10,000
PERFORMANCE MATERIALITY
MATERIALITY
We consider materiality to be the
magnitude by which misstatements,
individually or in the aggregate, could
reasonably be expected to influence the
economic decisions of the users of the
financial statements.
We determined materiality for the Group
financial statements as a whole to be
£3,000,000 (2019: £3,100,000) which was
set at 1% of Group total assets (2019: 1%).
This provides a basis for determining the
nature and extent of our risk assessment
procedures, identifying and assessing
the risk of material misstatement and
determining the nature and extent of
further audit procedures.
We determined that Group total assets
would be the most appropriate basis
for determining overall materiality as
we consider it to be one of the principal
considerations for members of the Parent
Company in assessing the financial
performance of the Group.
We determined that for other account
balances, classes of transactions and
disclosures not related to investment
properties a misstatement of less than
materiality for the financial statements
as a whole could influence the economic
decisions of users. We determined that
materiality for these areas should be
The application of materiality at the
and specific materiality were £30,300
individual account or balance level is set at
(2019: £27,120) and £9,600 (2019: £6,600)
an amount to reduce to an appropriately
respectively.
low level the probability that the
aggregate of uncorrected and undetected
misstatements exceeds materiality.
In determining this in both the current and
prior year, we based our assessment on
a level of 75% (2019: 75%) of materiality,
namely £2,250,000 (2019: £2,325,500).
In setting the level of performance
materiality we considered a number of
factors including the expected total value
of known and likely misstatements (based
on past experience and other factors) and
management’s attitude towards proposed
adjustments. We have used a similar
basis for specific materiality impacting
AN OVERVIEW OF THE
SCOPE OF OUR AUDIT
We designed our audit by determining
materiality and assessing the risks of
material misstatements in the financial
statements. In particular, we looked at
where the Directors make subjective
judgements. We also addressed the
risk of management override of internal
controls, including assessing whether there
was evidence of bias by the Directors
that represented a risk of material
misstatement due to fraud.
EPRA earnings, namely £375,000 (2019:
The Group operates solely in the United
£261,000).
We determined that the same measure
as the Group was appropriate for the
Parent Company, and the performance
materiality and specific performance
materiality applied were £1,136,000 (2019:
£1,017,000) and £359,000 (2019: £248,000)
respectively. Component performance
materiality has been set on the same basis
as for the Group.
Kingdom and operates through one
segment, investment property. The
Group audit team performed all the
work necessary to issue the Group and
Parent Company audit opinions, including
undertaking all of the audit work on
the key risks of material misstatement.
This included a full scope audit of all
subsidiaries in the group.
86
27192 Palace Capital AR2020.indd 86-87
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
87
14-Jul-20 6:16:03 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSGOVERNANCE INDEPENDENT AUDITOR’S REPORT
to the members of Palace Capital plc
We undertook audit procedures to
respond to the risk of non-compliance
with laws and regulations, focussing on
those that could give rise to a material
misstatement in the Group and Parent
Company financial statements, including,
but not limited to, the Companies Act
2006, the UK Listing Rules, the REIT
regime requirements and legislation
relevant to the rental of properties.
We made enquiries of management to
obtain further understanding of risks
of non-compliance. We used a BDO tax
specialist to consider compliance with
the REIT regime requirements. There are
inherent limitations in the audit procedures
described above and the further removed
non-compliance with laws and regulations
is from the events and transactions
reflected in the financial statements,
the less likely we would become aware
of it. We designed audit procedures to
respond to the risk, recognising that
the risk of not detecting a material
misstatement due to fraud is higher than
the risk of not detecting one resulting
from error, as fraud may involve deliberate
concealment by, for example, forgery,
misrepresentations or through collusion.
OTHER INFORMATION
The Directors are responsible for the
other information. The other information
comprises the information set out in
the Annual Report and Accounts, other
than the financial statements and our
auditor’s report thereon. Our opinion on
the financial statements does not cover
the other information and, except to
the extent otherwise explicitly stated
in our report, we do not express any
form of assurance conclusion thereon. In
connection with our audit of the financial
statements, our responsibility is to read
the other information and, in doing so,
consider whether the other information is
materially inconsistent with the financial
statements or our knowledge obtained
in the audit or otherwise appears to be
materially misstated. If we identify such
material inconsistencies or apparent
material misstatements, we are required
to determine whether there is a material
misstatement in the financial statements
or a material misstatement of the other
information. If, based on the work we
have performed, we conclude that there
is a material misstatement of the other
information, we are required to report
We addressed the risk of management
that fact.
override of internal controls, by
undertaking procedures to review
We have nothing to report in this regard.
• Audit committee reporting set out
on pages 66 to 68 – the section
describing the work of the audit
committee does not appropriately
address matters communicated by us
to the audit committee; or
• Directors’ statement of compliance
with the UK Corporate Governance
Code set out on page 54 – the parts
of the Directors’ statement required
under the Listing Rules relating to
the Company’s compliance with the
UK Corporate Governance Code
containing provisions specified for
review by the auditor in accordance
with Listing Rule 9.8.10R(2) do not
properly disclose a departure from a
relevant provision of the UK Corporate
Governance Code.
OPINIONS ON OTHER
MATTERS PRESCRIBED
BY THE COMPANIES
ACT 2006
In our opinion, the part of the Directors’
remuneration report to be audited has
been properly prepared in accordance
with the Companies Act 2006.
In our opinion, based on the work
undertaken in the course of the audit:
journal entries processed during and
In this context, we also have nothing to
•
the information given in the strategic
subsequent to the year end and evaluate
report in regard to our responsibility to
report and the Directors’ report for the
whether there was evidence of bias
specifically address the following items
financial year for which the financial
that represented a risk of material
in the other information and to report as
statements are prepared is consistent
misstatement due to fraud. We identified
uncorrected material misstatements of the
with the financial statements and;
the valuation of the property portfolio as
other information where we conclude that
a key audit matter related to the potential
those items meet the following conditions:
risk of fraud. Further details of our
response to this fraud risk are given in the
key audit matter section above.
• Fair, balanced and understandable
set out on page 83 – the statement
given by the Directors that they
We consider that the audit procedures
consider the annual report and
we planned and performed in accordance
financial statements taken as a whole is
with ISAs (UK) have provided us with
fair, balanced and understandable and
reasonable assurance that irregularities,
provides the information necessary
including fraud, would have been detected
for shareholders to assess the Group’s
to the extent that they could have resulted
position, performance, business model
in material misstatements in the financial
and strategy, is materially inconsistent
statements. Our audit was not designed
with our knowledge obtained in the
to identify misstatements or other
audit; or
irregularities that would not be considered
to be material to the financial statements.
•
the strategic report and the Directors’
reports have been prepared in
accordance with applicable legal
requirements.
MATTERS ON WHICH
WE ARE REQUIRED
TO REPORT BY
EXCEPTION
In the light of the knowledge and
understanding of the Group and the
Parent Company and its environment
obtained in the course of the audit,
we have not identified material
misstatements in the strategic report or
the Directors’ report.
88
We have nothing to report in respect of
the following matters in relation to which
the Companies Act 2006 requires us to
report to you if, in our opinion:
• adequate accounting records have not
been kept by the Parent Company, or
returns adequate for our audit have
not been received from branches not
visited by us; or
•
the Parent Company financial
statements and the part of the
Directors’ remuneration report to be
audited are not in agreement with the
accounting records and returns; or
•
certain disclosures of Directors’
remuneration specified by law are not
made; or
• we have not received all the
AUDITOR’S
RESPONSIBILITIES
FOR THE AUDIT
OF THE FINANCIAL
STATEMENTS
Our objectives are to obtain reasonable
assurance about whether the financial
statements as a whole are free from
material misstatement, whether due to
fraud or error, and to issue an auditor’s
report that includes our opinion.
Reasonable assurance is a high level
of assurance, but is not a guarantee
The non-audit services prohibited by the
FRC’s Ethical Standard were not provided
to the Group or the Parent Company and
we remain independent of the Group and
the Parent Company in conducting our
audit.
Our audit opinion is consistent with the
additional report to the audit committee.
USE OF OUR REPORT
This report is made solely to the Parent
Company’s members, as a body, in
accordance with Chapter 3 of Part 16 of
the Companies Act 2006. Our audit work
that an audit conducted in accordance
has been undertaken so that we might
with ISAs (UK) will always detect a
material misstatement when it exists.
Misstatements can arise from fraud or
state to the Parent Company’s members
those matters we are required to state
to them in an auditor’s report and for
no other purpose. To the fullest extent
information and explanations we
error and are considered material if,
require for our audit.
individually or in the aggregate, they could
permitted by law, we do not accept or
RESPONSIBILITIES OF
DIRECTORS
As explained more fully in the Directors’
responsibilities statement set out on page
83, the Directors are responsible for the
preparation of the financial statements and
for being satisfied that they give a true
and fair view, and for such internal control
as the Directors determine is necessary
to enable the preparation of financial
statements that are free from material
misstatement, whether due to fraud or
error.
In preparing the financial statements, the
Directors are responsible for assessing the
Group’s and the Parent Company’s ability
to continue as a going concern, disclosing,
as applicable, matters related to going
concern and using the going concern basis
of accounting unless the Directors either
intend to liquidate the Group or the Parent
Company or to cease operations, or have
no realistic alternative but to do so.
reasonably be expected to influence the
assume responsibility to anyone other
economic decisions of users taken on the
than the Parent Company and the Parent
Company’s members as a body, for our
audit work, for this report, or for the
opinions we have formed.
RICHARD LEVY
(Senior Statutory Auditor)
For and on behalf of BDO LLP,
Statutory Auditor
London
United Kingdom
6 July 2020
BDO LLP is a limited liability partnership
registered in England and Wales (with
registered number OC305127).
basis of these financial statements.
A further description of our responsibilities
for the audit of the financial statements
is located on the Financial Reporting
Council’s website at:
www.frc.org.uk/auditorsresponsibilities.
This description forms part of our auditor’s
report.
OTHER MATTERS
WHICH WE ARE
REQUIRED TO
ADDRESS
Following the recommendation of the
audit committee, we were appointed
by the Board of Directors on 1 April
2015 to audit the financial statements
for the year ending 31 March 2015 and
subsequent financial periods. In respect
of the year ended 31 March 2020 we were
reappointed by the members on 12 July
2019. The period of total uninterrupted
engagement is 6 years, covering the years
ending 31 March 2015 to 31 March 2020.
27192 Palace Capital AR2020.indd 88-89
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
89
14-Jul-20 6:16:03 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSGOVERNANCE Financials
Consolidated Statement of
Comprehensive Income
Consolidated Statement of
Financial Position
Consolidated Statement of
Changes in Equity
Consolidated Statement of
Cash Flows
Notes to the Consolidated
Financial Statements
Company Statement of
Financial Position
Company Statement of
Changes in Equity
Notes to the Company
Financial Statements
Officers and advisers
Glossary
92
93
94
95
96
128
129
130
136
137
We acquire regional
properties and unlock
value to create
sustainable assets
through our
proactive management
approach to property
investment.
90
27192 Palace Capital AR2020.indd 90-91
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
T
H
E
F
O
R
U
M
–
E
X
E
T
E
R
91
14-Jul-20 6:16:07 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSFINANCIALS
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH 2020
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 MARCH 2020
Rental and other income
Property operating expenses
Net rental income
Dividend income from listed equity investments
Administrative expenses
Note
1
3b
2020
£’000
21,147
(2,392)
18,755
105
2019
£’000
18,750
(2,318)
16,432
43
Non-current assets
Investment properties
Listed equity investments at fair value
Right of use asset
3c
(4,284)
(4,122)
Property, plant and equipment
Operating profit before gains and losses on property assets, listed equity investments
and cost of acquisitions
14,576
12,353
Profit on disposal of investment properties
Loss on revaluation of investment property portfolio
Impairment of trading properties
Loss on disposal of assets held for sale
Impairment on assets held for sale
Loss on revaluation of listed equity investments
Operating (loss)/profit
Finance income
Finance expense
Debt termination costs
Changes in fair value of interest rate derivatives
(Loss)/profit before taxation
Taxation
(Loss)/profit after taxation for the year and total comprehensive income attributable
to owners of the Parent
Earnings per ordinary share
Basic
Diluted
138
(17,154)
(763)
(269)
–
(425)
(3,897)
18
218
(382)
–
(579)
(291)
(214)
11,105
20
(3,845)
(3,763)
(501)
(846)
(9,071)
3,632
–
(929)
6,433
(1,263)
(5,439)
5,170
(11.8p)
(11.8p)
11.3p
11.3p
9
10
9
11
2
5
6
6
All activities derive from continuing operations of the Group. The notes form an integral part of these financial statements.
Current assets
Assets held for sale
Trading property
Trade and other receivables
Cash and cash equivalents
Total assets
Current liabilities
Trade and other payables
Borrowings
Lease liabilities for right of use asset
Creditors: amounts falling due within one year
Net current assets
Non-current liabilities
Borrowings
Deferred tax liability
Lease liabilities for investment properties
Lease liabilities for right of use asset
Derivative financial instruments
Net assets
Equity
Called up share capital
Share premium account
Treasury shares
Merger reserve
Capital redemption reserve
Retained earnings
Equity – attributable to the owners of the Parent
Basic NAV per ordinary share
Diluted NAV per ordinary share
Note
2020
£’000
2019
£’000
9
11
12
12
9
10
13
14
15
17
20
17
5
20
20
16
248,699
258,331
2,540
2,636
313
101
–
97
251,653
261,064
–
27,557
9,323
14,919
51,799
11,756
14,367
6,243
22,890
55,256
303,452
316,320
(14,053)
(10,001)
(1,836)
(164)
(5,999)
–
(16,053)
(16,000)
35,746
39,256
(117,520)
(112,017)
(228)
(1,806)
(154)
(1,343)
(5,580)
(1,585)
–
(815)
166,348
180,323
21
4,639
4,639
125,019
125,019
(1,349)
(1,771)
3,503
340
3,503
340
34,196
48,593
166,348
180,323
7
7
361p
361p
393p
392p
These financial statements were approved by the Board of Directors and authorised for issue on 6 July 2020 and are signed on its
behalf by:
STEPHEN SILVESTER
NEIL SINCLAIR
Finance Director
Chief Executive
92
27192 Palace Capital AR2020.indd 92-93
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
93
14-Jul-20 6:16:08 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSFINANCIALS
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 MARCH 2020
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 MARCH 2020
Share
Capital
£’000
Share
Premium
£’000
Note
Treasury
Share
Reserve
£’000
Other
Reserves
£’000
Retained
Earnings
£’000
Total
Equity
£’000
At 31 March 2018
4,639
125,036
(2,011)
3,843
51,792
183,299
Total comprehensive income for the year
Transactions with Equity Holders:
Cost of issue of new shares
Share-based payments
Exercise of share options
Issue of deferred bonus share options
Dividends paid
At 31 March 2019
Total comprehensive income for the year
Transactions with Equity Holders:
Share-based payments
Exercise of share options
Issue of deferred bonus share options
Dividends paid
At 31 March 2020
–
–
–
–
–
–
–
(17)
–
–
–
–
–
–
–
240
–
–
–
–
–
–
–
–
5,170
5,170
–
332
(240)
257
(17)
332
–
257
(8,718)
(8,718)
4,639
125,019
(1,771)
3,843
48,593
180,323
–
–
–
–
–
–
–
–
–
–
–
–
422
–
–
–
–
–
–
–
(5,439)
(5,439)
130
(422)
77
130
–
77
(8,743)
(8,743)
4,639
125,019
(1,349)
3,843
34,196
166,348
22
22
8
22
22
8
The share capital represents the nominal value of the issued share capital of Palace Capital plc.
Share premium represents the excess over nominal value of the fair value consideration received for equity shares net of expenses of the
share issue.
Treasury shares represents the consideration paid for shares bought back from the market. Other reserves comprise the merger reserve
and the capital redemption reserve.
The merger reserve represents the excess over nominal value of the fair value consideration for the acquisition of subsidiaries satisfied
by the issue of shares in accordance with S612 of the Companies Act 2006.
The capital redemption reserve represents the nominal value of cancelled preference share capital redeemed.
94
Operating activities
(Loss)/profit before taxation
Finance income
Finance expense
Changes in fair value of interest rate derivatives
Loss on revaluation of investment property portfolio
Impairment on assets held for sale
Profit on disposal of investment properties
Loss on disposal of assets held for sale
Impairment of trading properties
Loss on revaluation of listed equity investments
Debt termination costs
Depreciation of tangible fixed assets
Amortisation of right of use asset
Share-based payments
Increase in receivables
Increase/(decrease) in payables
Net cash generated from operations
Interest received
Interest and other finance charges paid
Corporation tax paid in respect of operating activities
Net cash flows from operating activities
Investing activities
Purchase of investment property and acquisition costs capitalised
Capital expenditure on refurbishment of investment property
Capital expenditure on developments
Capital expenditure on trading property
Proceeds from disposal of investment property
Proceeds from assets held for sale
Amounts transferred from restricted cash deposits
Purchase of non-current asset – equity investment
Dividends from listed equity investments
Purchase of property, plant and equipment
Net cash flow used in investing activities
Financing activities
Bank loans repaid
Proceeds from new bank loans
Loan issue costs paid
Costs from issue of Ordinary Share capital
Dividends paid
Net cash flow from financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at the end of the year
Note
2
9
9
9
10
11
12
12
22
9
9
9
9
14
11
12
19
19
19
8
14
2020
£’000
(9,071)
(18)
3,845
846
17,154
–
(138)
269
763
425
501
32
148
130
(481)
1,341
15,746
18
(3,680)
(2,173)
9,911
2019
£’000
6,433
(20)
3,763
929
382
291
(218)
579
–
214
–
31
–
332
(734)
(105)
11,877
20
(3,405)
(1,639)
6,853
–
(15,505)
(5,667)
(3,925)
(13,915)
2,708
11,487
(525)
(329)
105
(36)
(2,453)
(1,923)
(535)
2,078
9,082
553
(2,850)
43
(7)
(10,097)
(11,517)
(18,325)
19,736
(978)
–
(8,743)
(8,310)
(8,496)
22,395
13,899
(8,037)
25,991
(145)
(17)
(8,718)
9,074
4,410
17,985
22,395
95
27192 Palace Capital AR2020.indd 94-95
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
14-Jul-20 6:16:09 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSFINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF ACCOUNTING
The consolidated financial statements of the Group comprise the results of Palace Capital plc (“the Company”) and its subsidiary
undertakings.
The Company is quoted on the Main Market of the London Stock Exchange and is domiciled and registered in England and Wales and
incorporated under the Companies Act. The address of its registered office is 4th Floor, 25 Bury Street, St James’s, London, United
Kingdom, SW1Y 6AL.
BASIS OF PREPARATION
SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements incorporate the financial statements of Palace Capital plc and its subsidiaries as at the year end date.
Subsidiaries are all entities (including special purpose entities) over which the Company has control. The Company controls an entity
when the following three elements are present: power to direct the activities of the entity, exposure to variable returns from the entity
and the ability of the Company to use its power to affect those variable returns. Where necessary, adjustments have been made to the
financial statements of subsidiaries and associates to bring the accounting policies used and accounting periods into line with those of
the Group. Intra-group balances and any unrealised gains and losses arising from intra-group transactions are eliminated in preparing the
The Group financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and
Consolidated Financial Statements.
interpretations adopted by the European Union and as applied in accordance with the provisions of the Companies Act 2006.
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
The results of subsidiaries acquired during the year are included from the effective date of acquisition, being the date on which the
Group obtains control until the date that control ceases.
The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred and the equity
interests issued by the Group. This fair value includes any contingent consideration. Acquisition related costs are expensed as incurred.
investment properties, committed capital and other expenditure and dividend distributions.
If the consideration is less than the fair value of the assets and liabilities acquired, the difference is recognised directly in the Statement
The Group’s business activities, together with the factors likely to affect its future development, performance and position are set out
of Comprehensive Income.
in the Strategic Report. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in
Where an acquired subsidiary does not meet the definition of a business, it is accounted for as an asset acquisition rather than a business
these financial statements. In addition, note 26 to the financial statements includes the Group’s objectives, policies and processes for
combination. A business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of
managing its capital, its financial risk management objectives, details of its financial instruments and its exposures to credit risk and
providing goods or services to customers, generating investment income (such as dividends or interest) or generating other income from
liquidity risk.
As at 31 March 2020 the Group had £14.9m of cash and cash equivalents, of which £13.9m was unrestricted cash, a low gearing level
of 38% and a fair value property portfolio of £277.8m. The directors have reviewed the forecasts for the Group taking into account the
impact of Covid-19 on trading over the twelve 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 effects of the
pandemic. See Going Concern and Viability on pages 40 to 42 for further details.
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
financial statements.
NEW STANDARDS ADOPTED DURING THE YEAR
The following new standards are effective and have been adopted for the year ended 31 March 2020.
STANDARDS IN ISSUE AND EFFECTIVE FROM 1 JANUARY 2019
IFRS 16 Leases (Effective 1 January 2019)
IFRS 16 provides a single lessee accounting model, requiring the recognition of assets and liabilities for all leases, together with options
to exclude leases where the lease term is 12 months or less, or where the underlying asset is of low value. The Group adopted IFRS 16
on 1 April 2019, using the modified retrospective approach under which comparatives are not restated.
In applying IFRS 16 for the first time, the Group has used the following practical expedients, for transition only, permitted by the
standard:
• Excluding initial direct costs for the measurement of the right of use asset at the date of initial application.
The Group has leased its head office at 25 Bury Street, London, SW1Y 6AL, which has been accounted for in accordance with IFRS
16 since 1 April 2019. As a result, the Group has recognised a lease liability, which was initially measured at the present value of the
remaining lease payments, discounted using the Group’s incremental borrowing rate as of 1 April 2019. The Group’s incremental
borrowing rate is the rate at which a similar borrowing could be obtained from an independent creditor under comparable terms and
conditions. The weighted-average rate applied was 3.2%.
A right of use asset has also been recognised on the balance sheet and measured at an amount equal to the lease liability, adjusted by
the amount of any prepaid or accrued lease payments.
ordinary activities.
REVENUE
Revenue is primarily derived from property income and represents the value of accrued charges under operating leases for rental of the
Group’s investment properties. Revenue is measured at the fair value of the consideration received. All income is derived in the United
Kingdom.
Rental income from investment properties leased out under operating leases is recognised in the Statement of Comprehensive Income
on a straight-line basis over the term of the lease. Contingent rent reviews are recognised when such reviews have been agreed with
tenants. Lease incentives and guaranteed rent review amounts are recognised as an integral part of the net consideration for use of the
property and amortised on a straight-line basis over the term of lease. Judgement is exercised when determining the term over which
the lease incentives should be recognised.
Amounts received from tenants to terminate leases or to compensate for dilapidations are recognised in the Group Statement of
Comprehensive Income when the right to receive them arises.
Insurance commissions are recognised as performance obligations are fulfilled in terms of the individual performance obligations within
the contract with the insurance provider. Revenue is determined by the transaction price in the contract and is measured at the fair value
of the consideration received. Revenue is recognised once the underlying contract between insured and insurer has been signed.
Revenue from the disposal of investment properties is recognised when significant risks and rewards attached to the property
have transferred from the Group. This will ordinarily occur on completion of contracts. Such transactions are recognised when any
conditions are satisfied. The profit or loss on disposal of investment property is recognised separately in the Consolidated Statement
of Comprehensive Income and is the difference between the net sales proceeds and the opening fair value asset plus any capital
expenditure during the period to disposal.
Revenue from the sale of trading properties is recognised when significant risks and rewards attached to the trading property have
transferred from the Group, which is usually on completion of contracts and transfer of property title.
Dividend income comprises dividends from the Group’s listed equity investments and is recognised when the shareholder’s right to receive
payment is established. Revenue is measured at the fair value of the consideration received. All income is derived in the United Kingdom.
Surrender premium income are payments received from tenants to surrender their lease obligations and are recognised immediately in
the Group’s Consolidated Statement of Comprehensive Income.
96
27192 Palace Capital AR2020.indd 96-97
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
97
14-Jul-20 6:16:10 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSFINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
DEFERRED INCOME
CASH AND CASH EQUIVALENTS
Where invoices to customers have been raised which relate to a period after the Group year end, being 31 March 2020, the Group will
Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original
recognise deferred income for the difference between revenue recognised and amounts billed for that contract.
BORROWING COSTS
maturities of three months or less.
FINANCIAL LIABILITIES
Bank borrowings are initially recognised at fair value net of any transaction costs directly attributable to the issue of the instrument.
The Group classifies its financial liabilities into one of two categories, depending on the purpose for which the liability was acquired. The
After initial recognition, loans and borrowings are subsequently measured at amortised cost using the effective interest method.
Group’s accounting policy for each category is as follows:
Amortised cost is calculated by taking into account any issue costs, and any discount or premium on settlement. Gains and losses are
recognised in profit or loss in the Consolidated Statement of Comprehensive Income when the liabilities are derecognised, as well as
through the amortisation process.
Fair value through profit or loss
This category comprises out-of-the-money derivatives (see “Financial assets” for in-the-money derivatives where the time value offsets
the negative intrinsic value). They are carried in the Consolidated Statement of Financial Position at fair value with changes in fair value
Borrowing costs directly attributable to development properties are capitalised and not recognised in profit or loss in the Consolidated
recognised in the Consolidated Statement of Comprehensive Income.
Statement of Comprehensive Income. The capitalisation of borrowing costs is suspended if there are prolonged periods when
development activity is interrupted. Interest is also capitalised on the purchase cost of a site of property acquired specifically for
redevelopment, but only where activities necessary to prepare the asset for redevelopment are in progress.
When the Group refinances a loan facility, the Group considers whether the new terms are substantially different from a quantitative
and a qualitative perspective. From a quantitative perspective, the terms are substantially different if the discounted present value of
Amortised cost
Trade payables and accruals are initially measured at fair value and are subsequently measured at amortised cost, using the effective
interest rate method.
OTHER FINANCIAL LIABILITIES
the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective interest
Bank borrowings are initially recognised at fair value net of any transaction costs directly attributable to the issue of the instrument. Such
rate, is at least 10 per cent different from the discounted present value of the remaining cash flows of the original financial liability.
interest bearing liabilities are subsequently measured at amortised cost using the effective interest rate method, which ensures that any
Modifications that would be considered substantial from a qualitative perspective are those that result in a significant value transfer and/
interest expense over the period to repayment is at a constant rate on the balance of the liability carried in the Consolidated Statement
or a new underwriting/pricing assessment of the financial instrument.
If it is deemed to be a modification of terms, this is accounted for as an extinguishment, and any costs or fees incurred are recognised as
part of the gain or loss on the extinguishment. If the modification is not accounted for as an extinguishment, any costs or fees incurred
adjust the carrying amount of the liability and are amortised over the remaining term of the modified liability.
FINANCIAL ASSETS
The Group classifies its financial assets into one of the categories discussed below, depending on the purpose for which the asset was
acquired. The Group’s accounting policy for each category is as follows:
Fair value through profit or loss
This category comprises in-the-money derivatives (see “Financial liabilities” section for out-of-the-money derivatives classified as
liabilities). They are carried in the Consolidated Statement of Financial Position at fair value with changes in fair value recognised in the
Consolidated Statement of Comprehensive Income in the finance income or expense line.
Amortised cost
Impairment provisions for current and non-current trade receivables are recognised based on the simplified approach within IFRS 9
using a provision matrix in the determination of the lifetime expected credit losses. During this process the probability of the non-
payment of the trade receivables is assessed. This probability is then multiplied by the amount of the expected loss arising from default
to determine the lifetime expected credit loss for the trade receivables. For trade receivables, which are reported net, such provisions
are recorded in a separate provision account with the loss being recognised within cost of sales in the Consolidated Statement of
Comprehensive Income. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written
off against the associated provision.
The Group’s financial assets measured at amortised cost comprise trade and other receivables and cash and cash equivalents in the
Consolidated Statement of Financial Position.
LISTED EQUITY INVESTMENTS
Listed equity investments are classified at fair value through profit and loss. Listed equity investments are subsequently measured using
level 1 inputs, the quoted market price, and all fair value gains or losses in respect of those assets are recognised in profit or loss in the
Consolidated Statement of Comprehensive Income.
Fair value hierarchy
• Level 1: Quoted (unadjusted) market prices in active markets for identical assets or liabilities.
of Financial Position. For the purposes of each financial liability, interest expense includes initial transaction costs and any premium
payable on redemption, as well as any interest or coupon payment while the liability is outstanding.
CONTRIBUTIONS TO PENSION SCHEMES
The Company operates a defined contribution pension scheme. The pension costs charged against profits are the contributions payable
to the scheme in respect of the accounting period.
INVESTMENT PROPERTIES
Investment properties are those properties that are held either to earn rental income or for capital appreciation or both.
Investment properties are measured initially at cost including transaction costs and thereafter are stated at fair value, which reflects
market conditions at the balance sheet date. Surpluses and deficits arising from changes in the fair value of investment properties are
recognised in the Consolidated Statement of Comprehensive Income in the year in which they arise.
Investment properties are stated at fair value as determined by the independent external valuers. The fair value of the Group’s property
portfolio is based upon independent 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 arm’s length transaction at the
date of valuation, in accordance with Global Valuation Standards. In determining the fair value of investment properties, the independent
valuers make use of historical and current market data as well as existing lease agreements.
The Group recognises investment property as an asset when it is probable that the economic benefits that are associated with the
investment property will flow to the Group and it can measure the cost of the investment reliably. This is usually the date of completion
of acquisition or construction.
Investment properties cease to be recognised on completion of the disposal or when the property is withdrawn permanently from use
and no future economic benefit is expected from disposal.
The Group evaluates all its investment property costs at the time they are incurred. These costs include costs incurred initially to acquire
an investment property and costs incurred subsequently to add to, replace part of, or service a property. Any costs deemed as repairs
and maintenance or any costs associated with the day-to-day running of the property are recognised in the Consolidated Statement of
Comprehensive Income as they are incurred.
Investment properties under construction are initially recognised at cost (including any associated costs), which reflects the Group’s
investment in the assets. The Group undertakes certain works including demolition, remediation and other site preparatory works to
bring a site to the condition ready for construction of an asset. Subsequently, the assets are remeasured to fair value at each reporting
• Level 2: Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly
date. The fair value of investment properties under construction is estimated as the fair value of the completed asset less any costs still
observable.
payable in order to complete, and an appropriate developer’s margin.
• Level 3: Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. For
assets and liabilities that are recognised in the financial statements on a recurring basis, the Group determines whether transfers
have occurred between levels in the hierarchy by reassessing categorisation at the end of each reporting period.
98
27192 Palace Capital AR2020.indd 98-99
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
99
14-Jul-20 6:16:10 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSFINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ASSETS HELD FOR SALE
Assets are classified as held for sale when:
• They are available for immediate sale;
• Management are committed to a plan to sell;
LEASE LIABILITIES FOR RIGHT OF USE ASSETS
Lease obligations relating to right of use assets are measured at the present value of the contractual payments due to the lessor over
the lease term, discounted at the Group’s incremental borrowing rate. Variable lease payments are only included in the measurement
of the lease liability if they depend on an index or rate. In such cases, the initial measurement of the lease liability assumes the variable
element will remain unchanged throughout the lease term. Other variable lease payments are expensed in the period to which they
•
It is unlikely that significant changes to the plan will be made or that the plan will be withdrawn;
relate.
• An active programme to locate a buyer has been initiated;
• The asset is being marketed at a reasonable price in relation to its fair value; and
• A sale is expected to complete within 12 months from the date of classification.
On initial recognition, the carrying value of the lease liability also includes:
• amounts expected to be payable under any residual value guarantee;
•
the exercise price of any purchase option granted in favour of the Group if it is reasonable certain to assess that option;
Investment properties classified as held for sale are measured at fair value in accordance with the measurement criteria of IAS 40.
• any penalties payable for terminating the lease, if the term of the lease has been estimated on the basis of termination option being
Assets held for sale are derecognised when significant risks and rewards attached to the asset have transferred from the Group which is
on completion of contracts or when there are changes to a plan of sales.
TRANSFERS BETWEEN INVESTMENT PROPERTIES AND TRADING PROPERTIES
When the Group begins to redevelop an existing investment property for continued future use as an investment property, the property
continues to be held as an investment property. When the Group begins to redevelop an existing investment property with a view to
sell, the property is transferred to trading properties and held as a current asset. The property is remeasured to fair value as at the date
of the transfer with any gain or loss being taken to the Consolidated Statement of Comprehensive Income. The remeasured amount
becomes the deemed initial cost of the trading property.
TRADING PROPERTIES
Trading property is being developed for sale or being held for sale after development is complete, and is carried at the lower of cost
and net realisable value. Trading properties are derecognised on completion of sales contracts. Costs includes direct expenditure and
capitalised interest. Cost of sales, including costs associated with off-plan residential sales, are expensed to the Consolidated Statement
of Comprehensive Income as incurred.
RIGHT OF USE ASSET
Right of use assets are initially measured at the amount of the lease liability, reduced for any lease incentives received, and increased for:
lease payments made at or before commencement of the lease;
initial direct costs incurred; and
•
•
•
exercised.
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION
Property, plant and equipment is stated at cost, net of depreciation and any provision for impairment. Depreciation is calculated to write
down the cost less estimated residual value of all tangible fixed assets by equal annual instalments over their expected useful economic
lives. The rates generally applicable are:
Fixtures, fittings and equipment
25% – 33% straight-line
CURRENT TAXATION
Current tax assets and liabilities for the period not under UK REIT regulations are measured at the amount expected to be recovered
from or paid to the tax authorities. The tax rates and the tax laws used to compute the amount are those that are enacted or
substantively enacted, by the balance sheet date.
DEFERRED TAXATION
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities
in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the
balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred
tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary
differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the
initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit
nor the accounting profit.
the amount of any provision recognised where the Group is contractually required to dismantle, remove or restore the leased asset.
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
Subsequent to initial measurement lease liabilities increase as a result of interest charged at a constant rate on the balance outstanding
respect of property rental income and capital gains relating to its property rental business. Consequently a £3,700,000 credit on the
and are reduced for lease payments made. Right of use assets are amortised on a straight-line basis over the remaining term of the
profit and loss account and debit to the balance sheet has been recognised for the reversal of deferred tax provided for capital gains
lease or over the remaining economic life of the asset if, rarely, this is judged to be shorter than the lease term. Lease liabilities are
tax due to revaluation of investment properties to fair value and the capital allowances that have been claimed on improvements to
remeasured when there is a change in future lease payments arising from a change in an index or rate or when there is a change in the
investment properties.
assessment of the term of any lease.
The rate of amortisation generally applicable is:
Right of use asset
33% straight-line
LEASE LIABILITIES FOR INVESTMENT PROPERTIES
Lease obligations include lease obligations relating to investment properties and lease obligations relating to right of use assets.
Lease obligations relating to investment properties are capitalised at the lease’s commencement and are measured at the present value
of the remaining lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant
rate on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in liabilities. The
finance charges are charged to the Consolidated Statement of Comprehensive Income over the lease period so as to produce a constant
periodic rate of interest on the remaining balance of the liability for each period. Investment properties classified as held under lease
liabilities are subsequently carried at their fair value.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised.
Deferred tax is charged or credited in profit or loss, except when it relates to items charged or credited directly to other comprehensive
income, in which case the deferred tax is also dealt with in other comprehensive income.
The Government announced in the summer 2015 Budget the reduction in the corporation tax rate from 20% main rate in the tax year
2016 to 19% with effect from 1 April 2017.
DIVIDENDS TO EQUITY HOLDERS OF THE PARENT
Interim ordinary dividends are recognised when paid and final ordinary dividends are recognised as a liability in the period in which they
are approved by the shareholders.
100
27192 Palace Capital AR2020.indd 100-101
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
101
14-Jul-20 6:16:10 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSFINANCIALS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SHARE-BASED PAYMENTS
Expected credit loss model
The fair value of the share options are determined at the grant date and are expensed on a straight-line basis over the vesting period.
Non-market vesting conditions are taken into account by adjusting the number of equity instruments expected to vest at each reporting
date so that ultimately the cumulative amount recognised over the vesting period is based on the number of options that eventually
vest. Non-vesting conditions and market vesting conditions are factored into the fair values of the options granted. As long as all other
vesting conditions are satisfied, a charge is made irrespective of whether the market vesting conditions are satisfied. The cumulative
expense is not adjusted for failure to achieve a market vesting condition or where a non-vesting condition is not satisfied.
COMMITMENTS AND CONTINGENCIES
Commitments and contingent liabilities are disclosed in the financial statements. They are disclosed unless the possibility of an outflow
of resources embodying economic benefits is remote. A contingent asset is not recognised in the financial statements but disclosed
when an inflow of economic benefits is probable. A contingent asset is recognised when the realisation of the income is virtually certain.
EQUITY
The share capital represents the nominal value of the issued share capital of Palace Capital plc.
Share premium represents the excess over nominal value of the fair value consideration received for equity shares net of expenses of the
share issue.
The merger reserve represents the excess over nominal value of the fair value consideration for the acquisition of subsidiaries satisfied
by the issue of shares in accordance with S612 of the Companies Act 2006.
Treasury share reserve represents the consideration paid for shares bought back from the market.
The capital redemption reserve represents the nominal value of cancelled preference share capital redeemed.
CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION AND UNCERTAINTY
The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates. Information about such judgements and estimation is contained in the
accounting policies or the notes to the accounts, and the key areas are summarised below.
Estimates
Properties
The key source of estimation uncertainty rests in the values of property assets, which significantly affects the value of investment
properties in the Consolidated Statement of Financial Position. The investment property portfolio and assets held for sale are carried
at fair value, which requires a number of judgements and estimates in assessing the Group’s assets relative to market transactions. The
approach to this valuation and the amounts affected are set out in the accounting policies and note 9.
Trading properties are held at the lower of cost and net realisable value. Net realisable value is the value of an asset that can be realised
upon the sale of the asset, less a reasonable estimate of the costs associated with the eventual sale or disposal of the asset.
The Group has valued the investment properties at fair value. To the extent that any future valuation affects the fair value of the
investment properties and assets held for sale, this will impact on the Group’s results in the period in which this determination is made.
Due to Covid-19, March 2020 valuations have been issued by Cushman & Wakefield subject to a material uncertainty disclosure as
follows:
The outbreak of the Novel Coronavirus (Covid-19), declared by the World Health Organisation as a “Global Pandemic” on 11
March 2020, has impacted global financial markets. Travel restrictions have been implemented by many countries. Market activity is
being impacted in many sectors. As at the valuation date, we consider that we can attach less weight to previous market evidence
for comparison purposes to inform opinions of value. Indeed, the current response to Covid-19 means that we are faced with an
unprecedented set of circumstances on which to base a judgement. Our valuations are therefore reported on the basis of “material
valuation uncertainty” as per VPS 3 and VPGA 10 of the RICS Red Book Global. Consequently, less certainty – and a higher degree of
caution – should be attached to our valuation than would normally be the case. Given the unknown future impact that Covid-19 might
have on the real estate market, we recommend that you keep the valuation of these Properties under frequent review.
The Group applies the IFRS 9 simplified approach to measuring expected credit losses using a lifetime expected credit loss provision
for trade receivables and contract assets. The expected loss rates are based on the Group’s historical credit losses experienced over
the three-year period prior to the period end. The historical loss rates are then adjusted for current and forward-looking information on
macroeconomic factors affecting the Group’s tenants. In times of heightened uncertainty these estimations become more difficult.
The severity of the economic impact of Covid-19 has raised a significant challenge in identifying relevant forward looking information.
However, the Group has made estimates based on reasonable and supportable information that is available at the reporting date.
ESTIMATES AND JUDGEMENTS
Share-based payments
Equity-settled share awards are recognised as an expense based on their fair value at date of grant. The fair value of equity-settled
share options is estimated through the use of option valuation models, which require inputs such as the risk-free interest rate, expected
dividends, expected volatility and the expected option life, and is expensed over the vesting period. Some of the inputs used are not
market observable and are based on estimates derived from available data. The models utilised are intended to value options traded
in active markets. The share options issued by the Group, however, have a number of features that make them incomparable to such
traded options. The variables used to measure the fair value of share-based payments could have a significant impact on that valuation,
and the determination of these variables requires a significant amount of professional judgement. A minor change in a variable which
requires professional judgement, such as volatility or expected life of an instrument, could have a quantitatively material impact on the
fair value of the share-based payments granted, and therefore will also result in the recognition of a higher or lower expense in the
Consolidated Statement of Comprehensive Income.
Judgement is also exercised in assessing the number of options subject to non-market vesting conditions that will vest.
1. RENTAL AND OTHER INCOME
The chief operating decision maker (“CODM”) takes the form of the three Executive Directors (the Group’s Executive Committee). The
Group’s Executive Committee are of the opinion that the principal activity of the Group is to invest in commercial real estate in the UK.
Operating segments are identified on the basis of internal financial reports about components of the Group that are regularly reviewed
by the CODM.
The internal financial reports received by the Group’s Executive Committee contain financial information at a Group level as a whole
and there are no reconciling items between the results contained in these reports and the amounts reported in the financial statements.
Additionally, information is provided to the Group’s Executive Committee showing gross property income and property valuation by
individual property. Therefore, each individual property is considered to be a separate operating segment in that its performance is
monitored individually.
The Group’s property portfolio includes investment properties located throughout England, predominantly regional investments outside
London and comprises a diverse portfolio of commercial buildings. The Directors consider that these properties have similar economic
characteristics. Therefore, these individual properties have been aggregated into a single operating segment. In the view of the
Directors, there is one reportable segment.
All of the Group’s properties are based in the UK. No geographical grouping is contained in any of the internal financial reports provided
to the Group’s Executive Committee and, therefore, no geographical segmental analysis is required.
Revenue – type
Rents received from investment properties
Dilapidations and other property related income
Priory House surrender premium
Insurance commission
Total Revenue
No single tenant accounts for more than 10% of the Group’s total rents received from investment properties.
2020
£’000
17,717
439
2,850
141
2019
£’000
17,960
589
–
201
21,147
18,750
103
14-Jul-20 6:16:11 PM
102
27192 Palace Capital AR2020.indd 102-103
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSFINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. INTEREST PAYABLE AND SIMILAR CHARGES
Interest on bank loans
Loan arrangement fees
Interest on lease liabilities
Other finance charges
2020
£’000
3,351
358
123
13
2019
£’000
3,291
364
108
–
3. PROFIT FOR THE YEAR CONTINUED
D) EPRA COST RATIOS ARE CALCULATED AS FOLLOWS:
Gross property income
Administrative expenses
Property operating expenses
3,845
3,763
EPRA costs (including property operating expenses)
EPRA Cost Ratio (including property operating expenses)
3. PROFIT FOR THE YEAR
A) THE GROUP’S PROFIT FOR THE YEAR IS STATED AFTER CHARGING THE FOLLOWING:
2020
£’000
Depreciation of tangible fixed assets and amortisation of right of use assets:
Auditor’s remuneration:
Fees payable to the Auditor for the audit of the Group’s annual accounts
Fees payable to the Auditor for the audit of the subsidiaries’ annual accounts
Additional fees payable to the Auditor in respect of the 2018 audit
Fees payable to the Auditor and its related entities for other services:
Audit related assurance services
Tax services
B) THE GROUP’S PROPERTY OPERATING EXPENSES COMPRISE THE FOLLOWING:
Void, investment and development property costs
Legal, lettings and consultancy costs
C) THE GROUP’S ADMINISTRATIVE EXPENSES COMPRISE THE FOLLOWING:
Staff costs
Other overheads
Accounting and audit fees
Stock Exchange costs
PR and marketing costs
Consultancy and recruitment fees
Amortisation of right of use asset
Legal and professional fees
Rent, rates and other office costs
Share-based payments
Depreciation of tangible fixed assets
Property management fees
104
180
124
26
–
9
–
159
2020
£’000
2,218
174
2,392
2020
£’000
2,593
273
267
207
193
164
148
143
134
130
32
–
4,284
4,122
Less property operating expenses
EPRA costs (excluding property operating expenses)
EPRA Cost Ratio (excluding property operating expenses)
4. EMPLOYEES AND DIRECTORS’ REMUNERATION
Staff costs during the period were as follows:
Non-Executive Directors’ fees
Wages and salaries
Pensions
Social security costs
Share-based payments
The average number of employees of the Group and the Company during the period was:
Directors
Senior management and other employees
Key management are the Group’s Directors. Remuneration in respect of key management was as follows:
Emoluments for qualifying services
Social security costs
Pension
Share-based payments
2019
£’000
31
109
25
20
8
3
165
2019
£’000
1,844
474
2,318
2019
£’000
2,202
264
225
176
169
213
–
143
363
332
31
4
27192 Palace Capital AR2020.indd 104-105
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
2020
£’000
21,147
4,284
2,392
6,676
31.6%
(2,392)
4,284
20.3%
2020
£’000
188
2,054
91
260
2,593
130
2,723
2019
£’000
18,750
4,122
2,318
6,440
34.3%
(2,318)
4,122
22.0%
2019
£’000
152
1,696
98
256
2,202
332
2,534
2020
Number
2019
Number
8
9
17
2020
£’000
1,423
196
34
1,653
100
1,753
7
9
16
2019
£’000
1,127
156
33
1,316
291
1,607
105
14-Jul-20 6:16:11 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSFINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5. TAXATION
Current income tax charge
Capital gains charge in period
Tax (over)/underprovided in prior year
Deferred tax
Tax charge
(Loss)/profit on ordinary activities before tax
Based on profit for the period: Theoretical Tax at 19% (2019: 19%)
Effect of:
Utilisation of tax losses not previously recognised in deferred tax
Net expenses not deductible for tax purposes
Chargeable gain in excess of/(lower than) profit or loss on investment property
Tax (over)/underprovided in prior years
Movement on sale and revaluation not recognised through deferred tax
Deferred tax released to profit and loss on REIT conversion
REIT exempt income
Non-taxable items
Tax (credit)/charge for the period
2020
£’000
198
1,744
(222)
(5,352)
(3,632)
2020
£’000
(9,071)
(1,724)
–
28
197
(222)
(371)
(3,699)
(993)
3,152
(3,632)
2019
£’000
1,008
1,194
12
(951)
1,263
2019
£’000
6,433
1,222
(5)
75
(126)
12
85
–
–
–
1,263
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
Deferred taxes relate to the following:
Deferred tax liability – brought forward
Deferred tax release to profit and loss on REIT conversion
Deferred tax liability on accredited capital allowances
Deferred tax on fair value of investment property
Deferred tax liability – carried forward
Accelerated capital allowances
Investment property unrealised valuation gains
Deferred tax liability – carried forward
2020
£’000
(5,580)
3,699
–
1,653
(228)
2020
£’000
–
(228)
(228)
2019
£’000
(6,531)
–
(647)
1,598
(5,580)
2019
£’000
(3,241)
(2,339)
(5,580)
Capital allowances have been claimed on improvements to investment properties amounting to £Nil (2019: £19,065,000). A deferred tax
liability amounting to £Nil (2019: £3,241,000) has been recognised in the financial statements, although the Directors do not expect that
the capital allowances will reverse when the properties are disposed of as a result of section 198 elections being agreed with purchasers.
106
5. TAXATION CONTINUED
A deferred tax liability on the revaluation of investment properties to fair value has been provided totalling £228,000 (2019: £2,339,000)
as once the availability of capital losses, indexation allowances and the 1982 valuations for certain properties have been taken into
account, it is anticipated that capital gains tax would be payable if the properties were disposed of at their fair value. The deferred tax
liability relates to investment properties transferred into trading stock, prior to the Group becoming a REIT. As at 31 March 2020 the
Group had approximately £6,848,000 (2019: £6,328,000) of realised capital losses to carry forward. There has been no deferred tax asset
recognised as the Directors do not consider it probable that future taxable profits will be available to utilise these losses.
Finance Act 2015 sets the main rate of UK corporation tax at 20% with effect on 1 April 2015. The enactment of Finance (No. 2) Act 2015
and Finance Act 2016 reduces the main rate of corporation tax to 19% from April 2017. The deferred tax liability has been calculated on
the basis of 19% due to the expectation that all properties are retained through April 2021.
6. EARNINGS PER SHARE
BASIC EARNINGS PER SHARE
Basic earnings per share and diluted earnings per share have been calculated on profit after tax attributable to ordinary shareholders
for the year (as shown on the Consolidated Statement of Comprehensive Income) and for the earnings per share, the weighted average
number of ordinary shares in issue during the period (see table below) and for diluted weighted average number of ordinary shares in
issue during the year (see table below).
(Loss)/profit after tax attributable to ordinary shareholders for the year
Weighted average number of shares for basic earnings per share
Dilutive effect of share options
Weighted average number of shares for diluted earnings per share
2020
£’000
(5,439)
2019
£’000
5,170
2020
No. of shares
2019
No. of shares
45,988,353
45,834,436
–
63,690
45,988,353
45,898,126
(11.8p)
(11.8p)
11.3p
11.3p
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 reporting framework the latest update of which was issued in November
2019. The Group reports a number of these measures (detailed in the glossary of terms) 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 EPS AND EPRA DILUTED EPS
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 close-out 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. There are 32,108 options that are exercisable but these are not included
in the earnings as these would be anti-dilutive.
ADJUSTED PROFIT BEFORE TAX AND ADJUSTED EPS
The Group 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. This includes share-based payments being a
non-cash expense. The corporation tax charge (excluding deferred tax movements, being a non-cash expense) is deducted in order to
calculate the adjusted earnings per share.
respect of property rental income and capital gains relating to its property rental business. Consequently a £3,727,000 credit on the
Earnings per ordinary share
profit and loss account and debit to the balance sheet has been recognised for the reversal of deferred tax provided for capital gains
tax due to revaluation of investment properties to fair value and the capital allowances that have been claimed on improvements to
investment properties. UK corporation tax was payable for the first four months of the period up to 31 July 2019 before entry to the
REIT “regime”. Taxable profits from 1 August 2019 are not subject to UK corporation tax.
Basic
Diluted
KEY PERFORMANCE MEASURES
27192 Palace Capital AR2020.indd 106-107
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
107
14-Jul-20 6:16:12 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSFINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
6. EARNINGS PER SHARE CONTINUED
The EPRA and adjusted earnings per share for the period are calculated based upon the following information:
(Loss)/profit for the year
Adjustments:
Loss on revaluation of investment property portfolio
Impairment on assets held for sale
Write-down of trading stock
Profit on disposal of investment properties
Loss on disposal of assets held for sale
Loss on revaluation of listed equity investments
Debt termination costs
Fair value loss on derivatives
Deferred tax relating to EPRA adjustments and capital gain charged
EPRA earnings for the year
Share-based payments
Priory House surrender premium
Adjusted profit after tax for the year
Tax excluding deferred tax on EPRA adjustments and capital gain charged
Adjusted profit before tax for the year
EPRA and adjusted earnings per ordinary share
EPRA Basic
EPRA Diluted
Adjusted EPS
2020
£’000
(5,439)
17,154
–
763
(138)
269
425
501
846
(3,608)
10,773
130
(2,850)
8,053
(25)
8,028
23.4p
23.4p
17.5p
2019
£’000
5,170
382
291
–
(218)
579
214
–
929
243
7,590
332
–
7,922
1,020
8,942
16.6p
16.5p
17.3p
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 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:
Net assets at the end of the year
Diluted net assets at end of the year
Include fair value adjustment of trading properties
Exclude fair value of derivatives
Exclude deferred tax on latent capital gains and capital allowances
EPRA NAV
Include fair value of derivatives
Include deferred tax on latent capital gains and capital allowances
EPRA NNNAV
108
2020
£’000
166,348
166,348
–
1,343
228
2019
£’000
180,323
180,323
250
815
5,580
167,919
186,968
(1,343)
(228)
(815)
(5,580)
166,348
180,573
7. NET ASSET VALUE PER SHARE CONTINUED
Number of ordinary shares issued at the end of the year (excluding treasury shares)
Dilutive effect of share options
Number of ordinary shares issued for diluted and EPRA net assets per share
Net assets per ordinary share
2020
No of shares
2019
No of shares
46,036,508
45,883,249
32,108
63,690
46,068,616
45,946,939
Basic
Diluted
EPRA NAV
EPRA NNNAV
8. DIVIDENDS
2020
Interim dividend
Interim dividend
2019
Final dividend
Interim dividend
Interim dividend
Interim dividend
2018
Final dividend
Interim dividend
Payment date
27 December 2019
18 October 2019
13 July 2019
12 April 2019
28 December 2018
19 October 2018
31 July 2018
13 April 2018
Dividend
per share
4.75
4.75
9.50
4.75
44.75
4.75
4.75
19.00
4.75
4.75
9.50
Dividends reported in the Group Statement of Changes in Equity
PROPOSED DIVIDENDS
August 2020 final dividend in respect of year end 31 March 2020: 2.5p (2019 final dividend: 4.75p)
April 2020 interim dividend in respect of year end 31 March 2020: 0.00p (2019 interim dividend: 4.75p)
361p
361p
364p
361p
2020
£’000
2,189
2,189
4,378
2,183
2,182
–
–
4,365
–
–
–
8,743
2020
£’000
1,152
–
1,152
393p
392p
407p
393p
2019
£’000
–
–
–
–
–
2,182
2,182
4,364
2,177
2,177
4,354
8,718
2019
£’000
2,182
2,182
4,364
Proposed dividends on ordinary shares are subject to approval at the Annual General Meeting and are not recognised as a liability as at
31 March 2020.
27192 Palace Capital AR2020.indd 108-109
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
109
14-Jul-20 6:16:13 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSFINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
9. PROPERTY PORTFOLIO
At 1 April 2018
Additions – refurbishments
Additions – new properties
Capital expenditure on assets under construction
Transfer to trading property
Loss on revaluation of investment properties
Disposals
At 1 April 2019
Additions – refurbishments
Capital expenditure on assets under construction
Loss on revaluation of investment properties
Disposals
At 31 March 2020
Freehold
investment
properties
£’000
Leasehold
investment
properties
£’000
Total
investment
properties
£’000
232,742
21,121
253,863
2,521
15,505
2,014
(13,509)
(122)
(1,860)
179
–
–
–
(260)
–
2,700
15,505
2,014
(13,509)
(382)
(1,860)
237,291
21,040
258,331
5,495
3,936
(13,756)
(2,570)
661
–
6,156
3,936
(3,398)
(17,154)
–
(2,570)
230,396
18,303
248,699
Standing
investment
properties
£’000
Investment
properties
under
construction
£’000
Total
investment
properties
£’000
Trading
properties
£’000
Assets held
for sale
£’000
Total
property
portfolio
£’000
At 1 April 2018
Additions – refurbishments
Additions – new properties
Transfer to investment property under
construction
Capital expenditure on developments
Transfer to trading property
Additions – trading property
Loss/(gain) on revaluation of properties
Loss on revaluation of assets held for sale
Disposals
At 1 April 2019
Additions – refurbishments
Capital expenditure on developments
Additions – trading property
Loss on revaluation of properties
Disposals
At 31 March 2020
253,863
2,700
15,505
(3,810)
1,772
(13,509)
–
(452)
–
(1,860)
254,209
6,156
–
–
(16,868)
(2,570)
–
–
–
3,810
242
–
–
70
–
–
253,863
2,700
15,505
–
2,014
–
–
–
–
–
(13,509)
13,509
–
(382)
–
(1,860)
858
–
–
–
4,122
258,331
14,367
–
3,936
–
6,156
3,936
–
–
–
13,953
(286)
(17,154)
(763)
21,708
275,571
–
–
–
–
–
–
–
(291)
(9,661)
11,756
–
–
–
–
2,700
15,505
–
2,014
–
858
(382)
(291)
(11,521)
284,454
6,156
3,936
13,953
(17,917)
(14,326)
–
(2,570)
–
(11,756)
240,927
7,772
248,699
27,557
–
276,256
9. PROPERTY PORTFOLIO CONTINUED
In addition to the loss on revaluation of investment properties included in the table above, realised gains of £138,000 (2019: £218,000)
relating to investment properties disposed of during the year were recognised in profit or loss.
The Group is developing a large mixed-use scheme at Hudson Quarter, York. Part of the approved scheme consists of commercial
units which the Group holds for leasing. As a result, the commercial element of the scheme is classified as investment properties under
construction.
For investment properties under construction, £474,558 (2019: £Nil) of borrowing costs have been capitalised in the year.
A reconciliation of the valuations carried out by the independent valuers to the carrying values shown in the Statement of Financial
Position was as follows:
Cushman & Wakefield LLP (property portfolio)
Assets held for sale
Fair value of property portfolio
Adjustment in respect of minimum payment under head leases
Less assets held for sale
Less trading properties at lower of cost and net realisable value
Less lease incentive balance included in accrued income
Less rent top-up adjustment
Less fair value uplift on trading properties
Carrying value of investment properties
2020
£’000
2019
£’000
277,770
274,560
–
11,756
277,770
286,316
1,806
–
(27,557)
(3,320)
–
–
1,600
(11,756)
(14,367)
(2,752)
(460)
(250)
248,699
258,331
The valuations of all investment property held by the Group is classified as Level 3 in the IFRS 13 fair value hierarchy as they are based
on unobservable inputs. There have been no transfers between levels of the fair value hierarchy during the year.
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 judgement and market observations. Each
property is considered a separate asset, based on its unique nature, characteristics and the risks of the property.
Due to Covid-19, March 2020 valuations have been issued by Cushman & Wakefield subject to a material uncertainty disclosure as stated
on page 102, critical accounting judgements and key sources of estimation and uncertainty.
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;
The property portfolio (other than assets held for sale) has been independently valued at fair value. The valuations have been prepared
• An appropriate yield; and
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.
• 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 investment portfolio has been derived from capitalising the future estimated net income receipts at capitalisation rates
reflected by recent arm’s length sales transactions.
110
27192 Palace Capital AR2020.indd 110-111
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
111
14-Jul-20 6:16:13 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSFINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
9. PROPERTY PORTFOLIO CONTINUED
Significant unobservable inputs
9. PROPERTY PORTFOLIO CONTINUED
UNOBSERVABLE INPUT: NET INITIAL YIELD
31 March 2020
Office
Industrial
Leisure
Other
Total
Fair value of property portfolio
£128,495,000 £38,805,000 £37,850,000 £72,620,000 £277,770,000
Area (sq ft)
778,218
409,593
306,970
196,309
1,691,090
Gross Estimated Rental Value
£11,480,070
£2,795,890
£3,295,049
£3,047,761 £20,618,770
Net Initial Yield
Minimum
Maximum
Weighted average
Reversionary Yield
Minimum
Maximum
Weighted average
Equivalent Yield
Minimum
Maximum
Weighted average
(4.6%)
9.4%
5.4%
4.7%
13.8%
8.1%
4.1%
11.4%
7.7%
1.3%
8.3%
5.8%
5.6%
8.1%
5.0%
5.4%
7.8%
6.5%
6.8%
8.7%
7.7%
7.2%
7.9%
7.5%
7.8%
8.7%
8.6%
(0.5%)
30.7%
6.6%
4.5%
34.5%
5.5%
4.3%
14.2%
3.3%
(4.6%)
30.7%
6.0%
4.5%
34.5%
6.6%
4.1%
14.2%
7.1%
Negative net initial yields arise where properties are vacant or partially vacant and void costs exceed rental income.
31 March 2019
Office
Industrial
Leisure
Significant unobservable inputs
Total
Other
Fair value of property portfolio
£135,455,000
£37,395,000
£41,380,000
£60,330,000 £274,560,000
Area (sq ft)
794,726
409,593
247,470
205,649
1,657,438
Gross Estimated Rental Value
£12,094,259
£2,891,320
£3,341,944
£3,145,621
£21,473,144
Net Initial Yield
Minimum
Maximum
Weighted average
Reversionary Yield
Minimum
Maximum
Weighted average
Equivalent Yield
Minimum
Maximum
Weighted average
(4.6%)
14.6%
5.4%
4.7%
14.6%
8.0%
4.1%
10.2%
7.5%
4.2%
8.5%
5.7%
5.5%
8.7%
6.6%
5.4%
8.1%
6.3%
6.2%
6.9%
6.5%
7.1%
7.6%
7.3%
7.5%
8.3%
7.8%
(7.3%)
25.0%
6.0%
4.5%
28.1%
5.3%
5.0%
13.2%
7.1%
(7.3%)
25.0%
5.7%
4.5%
28.1%
7.0%
4.1%
13.2%
6.8%
The net initial yield is defined as the initial gross income as a percentage of the market value (or purchase price as appropriate) plus
standard costs of purchase.
SENSITIVITIES OF MEASUREMENT OF SIGNIFICANT UNOBSERVABLE INPUTS
As set out within significant accounting estimates and judgements above, the Group’s property Portfolio Valuation is open to
judgements inherently subjective by nature.
Unobservable input
Gross Estimated Rental Value
Net Initial Yield
Reversionary Yield
Equivalent Yield
(Decrease)/increase in the fair value of investment
properties as at 31 March 2020
(Decrease)/increase in the fair value of investment
properties as at 31 March 2019
Impact on fair value measurement of
significant increase in input
Impact on fair value measurement of
significant decrease in input
Increase
Decrease
Decrease
Decrease
Decrease
Increase
Increase
Increase
-5% in passing
rent (£m)
+5% in passing
rent (£m)
+0.25% in net
initial yield (£m)
-0.25% in net
initial yield (£m)
(13.36)
(12.95)
13.36
12.95
(12.21)
(10.16)
8.48
12.63
VALUATION TECHNIQUE: PROPERTIES UNDER CONSTRUCTION
Development assets are valued using the gross development value of the asset less any costs still payable in order to complete, and an
appropriate developer’s margin.
10. TRADING PROPERTY
At 1 April 2018
Transfer from standing investment properties
Costs capitalised
At 1 April 2019
Costs capitalised
Impairment of trading properties
At 31 March 2020
Total
£’000
–
13,509
858
14,367
13,953
(763)
27,557
The Group is developing a large mixed-use scheme at Hudson Quarter, York. Part of the approved scheme consists of residential units
which the Group holds for sale. As a result, the residential element of the scheme is classified as trading property.
11. LISTED EQUITY INVESTMENTS
The following descriptions and definitions relate to valuation techniques and key unobservable inputs made in determining fair values:
MARKET COMPARABLE METHOD
Under the market comparable method (or market comparable approach), a property’s fair value is estimated based on comparable
transactions in the market.
UNOBSERVABLE INPUT: ESTIMATED RENTAL VALUE
At 1 April 2018
Additions
Loss on revaluation of equity investment shown in Consolidated Statement of Comprehensive Income
At 1 April 2019
Additions
The rent at which space could be let in the market conditions prevailing at the date of valuation (range: £47,900–£1,901,463 per annum).
Loss on revaluation of equity investment shown in Consolidated Statement of Comprehensive Income
Rental values are dependent on a number of variables in relation to the Group’s property. These include: size, location, tenant, covenant
At 31 March 2020
strength and terms of the lease.
112
During the year the Group purchased listed equity investments to the value of £329,000. The investment has subsequently been
revalued using level 1 inputs, the quoted market price.
Total
£’000
–
2,850
(214)
2,636
329
(425)
2,540
113
27192 Palace Capital AR2020.indd 112-113
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
14-Jul-20 6:16:14 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSFINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
12. PROPERTY, PLANT AND EQUIPMENT
At 1 April 2018
Additions
At 1 April 2019
Additions
At 31 March 2020
Depreciation
At 1 April 2018
Provided during the year
At 1 April 2019
Provided during the year
At 31 March 2020
Net book value at 31 March 2020
Net book value at 31 March 2019
13. TRADE AND OTHER RECEIVABLES
Current
Gross amounts receivable from tenants
Less: expected credit loss provision
Net amount receivable from tenants
Other taxes
Other debtors
Accrued income
Prepayments
IT, fixtures
and fittings
£’000
Head office
lease
£’000
215
7
222
36
258
94
31
125
32
157
101
97
2020
£’000
2,963
(391)
2,572
625
2,378
3,320
428
9,323
–
–
–
461
461
–
–
–
148
148
313
–
2019
£’000
2,006
(71)
1,935
177
604
2,752
775
6,243
Accrued income amounting to £3,320,000 (2019: £2,752,000) relates to rents recognised in advance of receipt as a result of spreading
the effect of rent free and reduced rent periods, capital contributions in lieu of rent free periods and contracted rent uplifts over the
expected terms of their respective leases.
The carrying value of trade and other receivables classified at amortised cost approximates fair value.
As at 31 March 2020 the lifetime expected credit loss provision for trade receivables and contract assets is as follows:
More than 30
days
past due
£’000
More than 60
days
past due
£’000
More than 90
days
past due
£’000
1%
43
1
100%
2
2
61%
267
162
Current
£’000
9%
2,651
226
Total
£’000
2,963
391
Expected loss rate
Gross carrying amount
Loss provision
114
13. TRADE AND OTHER RECEIVABLES CONTINUED
As at 31 March 2019 the lifetime expected credit loss provision for trade receivables and contract assets is as follows:
Current
£’000
0%
1,400
–
Expected loss rate
Gross carrying amount
Loss provision
Movement in the expected credit loss provision was as follows:
Brought forward
Receivable written off during the year as uncollectable
Provisions increased
More than 30
days
past due
£’000
More than 60
days
past due
£’000
More than 90
days
past due
£’000
1%
144
2
1%
26
–
16%
436
69
2020
£’000
71
(4)
324
391
Total
£’000
2,006
71
2019
£’000
163
(154)
62
71
14. CASH AND CASH EQUIVALENTS
All of the Group’s cash and cash equivalents at 31 March 2020 and 31 March 2019 are in sterling and held at floating interest rates.
Cash and cash equivalents – unrestricted
Restricted cash
2020
£’000
13,899
1,020
14,919
2019
£’000
22,395
495
22,890
The Directors consider that the carrying amount of cash and cash equivalents approximates to their fair value.
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.
15. TRADE AND OTHER PAYABLES
Trade payables
Corporation tax
Other taxes
Other payables
Deferred rental income
Accruals
2020
£’000
2,911
1,173
912
2,344
3,567
3,146
2019
£’000
1,229
1,626
914
503
3,457
2,272
14,053
10,001
The Directors consider that the carrying amount of trade and other payables measured at amortised cost approximates to their
fair value.
Included within other payables are deposits on pre sales of apartments at Hudson Quarter, York totalling £600k. These amounts will be
recognised as revenue when the development is completed and title is transferred to the buyer, which is expected to take place in early
2021.
27192 Palace Capital AR2020.indd 114-115
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
115
14-Jul-20 6:16:14 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSFINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
16. DERIVATIVES
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 is 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.
Further details on interest rate risks are included in note 26.
Notional
principal
Expiry
date
Contract rate
%
Valuation
rate %
34,847,900
25/01/2023
19,342,723
03/08/2022
1.3420
1.3730
0.3932
0.3751
54,190,623
2020
Fair value
£’000
(909)
(434)
(1,343)
2019
Fair value
£’000
(526)
(289)
(815)
Bank
Barclays Bank plc
Santander plc
17. BORROWINGS
Current liabilities
Bank loans
Non-current liabilities
Bank loans
Total borrowings
Non-current liabilities
Secured bank loans drawn
Unamortised lending costs
The maturity profile of the Group’s debt was as follows:
Within one year
From one to two years
From two to five years
After five years
116
17. BORROWINGS CONTINUED
FACILITY AND ARRANGEMENT FEES
As at 31 March 2020
Secured Borrowings
Santander Bank plc
Lloyds Bank plc
National Westminster Bank plc
Barclays
Barclays
Scottish Widows
As at 31 March 2019
Secured Borrowings
Santander Bank plc
Lloyds Bank plc
Lloyds Bank plc
National Westminster Bank plc
Barclays
Scottish Widows
All in cost Maturity date
3.68% August 2022
2.55% March 2023
2.70% August 2024
3.18%
June 2024
3.48% October 2021
2.90%
July 2026
Loan Balance
£’000
Unamortised
facility fees
£’000
Facility drawn
£’000
25,563
6,748
28,225
40,611
4,649
13,560
(187)
(97)
(395)
(255)
(307)
(164)
25,750
6,845
28,620
40,866
4,956
13,724
119,356
(1,405)
120,761
All in cost
Maturity date
Loan Balance
£’000
Unamortised
facility fees
£’000
Facility drawn
£’000
3.74% August 2022
25,961
2.95%
May 2019
2.80% March 2023
3.35% March 2021
3.24% January 2023
2.90%
July 2026
3,562
6,715
29,204
38,589
13,985
(289)
(1)
(130)
(185)
(554)
(175)
26,250
3,563
6,845
29,389
39,143
14,160
118,016
(1,334)
119,350
Investment properties with a carrying value of £232,023,000 (2019: £236,592,000) and trading properties with a carrying value of
£27,557,000 (2019: £14,368,000) are subject to a first charge to secure the Group’s bank loans amounting to £120,761,000 (2019:
£119,350,000).
The Group has unused loan facilities amounting to £32,924,000 (2019: £26,500,000). A facility fee is changed on £11,380,000 of these
facilities 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 an Palace Capital (Properties) Limited as part of the NatWest loan. The £21,544,000 balance of the unused facilities
relates to the Barclays development loan. This facility is secured on the Hudson Quarter, York development held by Palace Capital
(Developments) Limited.
The Group constantly monitors its approach to managing interest rate risk. The Group has fixed £67,915,000 (2019: £69,226,000) of its
debt in order to provide surety of its interest cost and to mitigate interest rate risk. The remaining debt in place at year end is subject to
floating rate in order to take advantage of the historically low interest rate environment.
The Group has a loan with Scottish Widows for £13,724,000 (2019: £14,160,000) which is fully fixed at a rate of 2.9%.
The Group has a loan with Barclays Bank plc for £40,866,000 (2019: £39,143,000), of which £34,848,000 (2019: £35,348,000) is fixed
using an interest rate swap (see note 16). The floating rate portion of the loan is charged at three-month LIBOR plus 1.95%.
2020
£’000
2019
£’000
1,836
5,999
117,520
119,356
2020
£’000
112,017
118,016
2019
£’000
118,925
113,351
(1,405)
(1,334)
117,520
112,017
2020
£’000
1,836
6,792
100,589
11,544
2019
£’000
5,999
29,825
71,546
11,980
120,761
119,350
The Group has a loan with Santander plc for £25,750,000 (2019: £26,250,000), of which £19,343,000 (2019: £19,718,000) is fixed using an
interest rate swap (see note 16). The floating rate portion of the loan is charged at three-month LIBOR plus 2.5%.
The Group has a loan with Lloyds Bank plc for £6,845,000 (2019: £6,845,000) which is fully charged at floating rate of three-month LIBOR
plus 1.95%.
The Group has a loan with National Westminster Bank plc for £28,620,000 (2019: £29,389,000) which is fully charged at floating rate of
three-month LIBOR plus 2.1%.
The fair value of borrowings held at amortised cost at 31 March 2020 was £119,356,000 (2019: £118,016,000).
The Group has been in compliance with all financial covenants of the above facilities applicable throughout the year.
27192 Palace Capital AR2020.indd 116-117
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
117
14-Jul-20 6:16:15 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSFINANCIALS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
18. GEARING AND LOAN TO VALUE RATIO
The calculation of gearing is based on the following calculations of net assets and net debt:
20. LEASES
Operating lease receipts in respect of rents on investment properties are receivable as follows:
EPRA net asset value (note 7)
Borrowings (net of unamortised issue costs)
Lease liabilities for investment properties
Cash and cash equivalents
Net debt
NAV gearing
The calculation of bank loan to property value is calculated as follows:
Fair value of investment properties
Fair value of trading properties
Fair value per Cushmans valuation
Fair value of assets held for sale
Fair value of property portfolio
Borrowings
Cash at bank
Net bank borrowings
Loan to value ratio
2020
£’000
167,919
119,356
1,806
2019
£’000
186,968
118,016
1,585
(14,919)
(22,890)
106,243
63%
96,711
52%
2020
£’000
2019
£’000
250,213
259,943
27,557
14,617
277,770
274,560
–
277,770
120,761
11,756
286,316
119,350
(14,919)
(22,890)
105,842
38%
96,460
34%
Within one year
From one to two years
From two to three years
From three to four years
From four to five years
From five to 25 years
2020
£’000
16,794
15,239
14,079
12,102
10,317
53,108
2019
£’000
16,118
14,803
12,890
11,872
10,277
59,685
121,639
125,645
The following table reconciles the minimum lease commitments payable disclosed in the 31 March 2019 financial statements to the
amount of lease liabilities recognised on 1 April 2019:
Minimum operating lease commitment as at 31 March 2019
Less: effect of discounting using the incremental borrowing rate as at date of initial application
Lease liability for right of use asset as at 1 April 2019
Lease liabilities are classified as follows:
Lease liabilities for investment properties
Lease liabilities for right of use asset
19. RECONCILIATION OF LIABILITIES TO CASH FLOWS FROM
FINANCING ACTIVITIES
Lease obligations in respect of rents payable on leasehold properties were payable as follows:
Balance at 1 April 2018
Cash flows from financing activities:
Bank borrowings drawn
Bank borrowings repaid
Loan arrangement fees paid
Non-cash movements:
Amortisation of loan arrangement fees
Balance at 1 April 2019
Cash flows from financing activities:
Bank borrowings drawn
Bank borrowings repaid
Loan arrangement fees paid
Non-cash movements:
Amortisation of loan arrangement fees
Capitalised loan arrangement fees
Debt termination costs
Balance at 31 March 2020
118
Bank
borrowings
£’000
99,843
25,991
(8,037)
(145)
Total
£’000
99,843
25,991
(8,037)
(145)
364
364
118,016
118,016
19,736
19,736
(18,325)
(18,325)
(978)
(978)
358
48
501
358
48
501
119,356
119,356
Within one year
From one to two years
From two to five years
From five to 25 years
After 25 years
Lease
payments
£’000
107
108
323
1,600
9,307
11,445
Lease obligations in respect of rents payable on right of use assets were payable as follows:
Within one year
From one to two years
The net carrying amount of the leasehold properties is shown in note 9.
Lease
payments
£’000
172
156
328
Total
£’000
553
(92)
461
2019
£’000
1,585
–
1,585
2020
£’000
1,806
318
2,124
2020
Interest
£’000
(105)
(105)
(314)
(1,550)
(7,565)
(9,639)
2020
Interest
£’000
(8)
(2)
(10)
Present value
of lease
payments
£’000
2019
Present value
of lease
payments
£’000
2
3
9
50
1,742
1,806
2
2
8
56
1,517
1,585
Present value
of lease
payments
£’000
2019
Present value
of lease
payments
£’000
164
154
318
–
–
–
119
27192 Palace Capital AR2020.indd 118-119
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
14-Jul-20 6:16:15 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSFINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
20. LEASES CONTINUED
The Group has over 220 leases granted to its tenants. These vary depending on the individual tenant and the respective property and
demise and vary considerably from short-term leases of less than one year to longer-term leases of over ten years.
A number of these leases contain rent free periods. Standard lease provisions include service charge payments and recovery of other
direct costs. All investment properties in the Group’s portfolio generated rental income during both the current and prior periods, with
21. SHARE CAPITAL CONTINUED
SHARES HELD IN EMPLOYEE BENEFIT TRUST
Authorised, issued and fully paid share capital is as follows:
Brought forward
the exception of Hudson Quarter, York held in Palace Capital (Developments) Limited which commenced development in February 2018.
Transferred under scheme of arrangement
Direct operating costs of £Nil were incurred on the property.
21. SHARE CAPITAL
Authorised, issued and fully paid share capital is as follows:
46,388,515 ordinary shares of 10p each (2019: 46,388,515)
Reconciliation of movement in ordinary share capital
At start of year
Issued in the year
At end of year
Movement in ordinary authorised share capital
2020
£’000
4,639
4,639
2020
£’000
4,639
–
4,639
2019
£’000
4,639
4,639
2019
£’000
4,639
–
4,639
Price per
share pence
Number of
ordinary
shares issued
Total number
of shares
Shares exercised under deferred bonus share scheme
Shares exercised under employee LTIP scheme
At end of year
SHARE OPTIONS:
Reconciliation of movement in outstanding share options
At start of year
Issued in the year
Exercised in the year
Lapsed in the year
Deferred bonus share options issued
Deferred bonus share options exercised
At end of year
As at 31 March 2018, 31 March 2019 and 31 March 2020
–
–
46,388,515
As at 31 March 2020, the Company had the following outstanding unexpired options:
2020
No. of options
2019
No. of options
55,679
33,648
150,000
100,000
(67,798)
(85,461)
52,420
(38,586)
(39,383)
55,679
2020
No. of options
2019
No. of options
651,730
329,848
536,827
265,774
(85,461)
(39,383)
(90,204)
(138,856)
32,108
63,690
(67,798)
(36,322)
770,223
651,730
Number of
ordinary
shares issued
Total number
of shares
583,235
27 September 2018
14 January 2019
24 July 2019
24 July 2019
(38,586)
(39,383)
(67,798)
(85,461)
505,266
352,007
46,036,508
Movement in treasury shares
As at 31 March 2018
Shares issued under deferred bonus share scheme
Share options exercised under employee LTIP scheme
As at 31 March 2019
Shares issued under deferred bonus share scheme
Share options exercised under employee LTIP scheme
As at 31 March 2020
Total number of shares excluding the number held in treasury at 31 March 2020
YEAR ENDED 31 MARCH 2020
On 24 July 2019, 67,798 share options were exercised under the deferred bonus share scheme.
On 24 July 2019, 85,461 share options were exercised under the 2016 employee LTIP scheme.
YEAR ENDED 31 MARCH 2019
On 27 September 2018, 38,586 share options were exercised under the deferred bonus share scheme.
On 14 January 2019, 39,383 share options were exercised under the 2015 employee LTIP scheme.
Description of unexpired share options
Employee benefit plan (note 22)
Deferred bonus share scheme issued
Total
Exercisable
Not exercisable
2020
2019
No. of options
738,115
32,108
770,223
–
770,223
Weighted
average
option price
No. of options
Weighted
average
option price
0p
0p
0p
0p
0p
588,040
63,690
651,730
–
651,730
0p
0p
0p
0p
0p
The weighted average remaining contractual life of share options at 31 March 2020 is 1.5 years (2019: 1.4 years).
Issue costs amounting to £17,000 were incurred and were deducted from the share premium account relating to shares issued in the
prior year.
120
27192 Palace Capital AR2020.indd 120-121
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
121
14-Jul-20 6:16:16 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSFINANCIALS 13 July 2018
13 July 2018
13 July 2021
13 July 2021
The options are awarded to employees on achievements against targets on two separate measures over the three-year period. The
options are subject to a two-year holding period following vesting. Half the options will be awarded based on the first target and half
306p
25 September 2017
25 September 2018
based on the achievement of the second.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
22. SHARE-BASED PAYMENTS
EMPLOYEE BENEFIT PLAN
The following table illustrates the number and weighted average exercise prices of, and movements in, share options during the period:
Average
share price at
date of
exercise
309p
Grant
date
Vesting
date
Number of
options
Exercise
price
Outstanding at 31 March 2018
Exercised during the year (LTIP 2015)
Issued during the year (LTIP 2018)
Deferred bonus share options issued
Deferred bonus share options exercised
Lapsed during year (LTIP 2015)
Lapsed during year (LTIP 2017)
Lapsed during year (LTIP 2018)
Outstanding at 31 March 2019
Exercised during the year (LTIP 2016)
Issued during the year (LTIP 2019)
Deferred bonus share options issued
Deferred bonus share options exercised
Lapsed during year (LTIP 2016)
Lapsed during year (LTIP 2019)
Outstanding at 31 March 2020
LTIP 2017
536,827
(39,383)
265,774
63,690
(36,322)
(80,885)
(21,000)
(36,971)
651,730
(85,461)
329,848
32,108
(67,798)
(85,820)
(4,384)
770,223
0p
0p
0p
0p
0p
0p
0p
0p
0p
0p
0p
0p
0p
0p
0p
0p
276p
25 June 2019
25 June 2022
25 June 2019
25 June 2020
276p
13 July 2018
13 July 2019
The options are awarded to employees on achievements against targets on two separate measures over the three-year period. Half the
options will be awarded based on the first target and half based on the achievement of the second.
Net asset value per share (NAV) growth is based on the Company’s EPRA NAV value per share as at 31 March 2017. This target will
measure the annualised growth in NAV over the three-year period ending 31 March 2020, and comparing this with the annualised Net
Asset Value Growth of a group of comparable companies. The base NAV per share is £3.89.
Total shareholder return (TSR) measures the total shareholder return (price rise plus dividends) over the period from 1 November 2017 to
31 October 2020. The base price is £3.40 per share which was the market price at the grant date.
Vesting % NAV growth over the NAV performance period
Vesting %
Annualised TSR over the TSR performance
period
<8%
Equal to 8%
0
Below median
33.33
At median
Between 8% and 13%
33.33–100
Between median and upper quartile
Equal to 13%
LTIP 2018
100
Upper quartile and above
0
20
20–100
100
The options are awarded to employees on achievements against targets on two separate measures over the three-year period. The
options are subject to a two-year holding period following vesting. Half the options will be awarded based on the first target and half
based on the achievement of the second.
Total property return growth is based on the increase in the total property return of the Company compared with an increase in the
MSCI IPD UK Quarterly Index (PV growth) as at 31 March 2018. This target will measure the growth in total property return over the
three-year period ending 31 March 2021 (PV performance period), and comparing this with the total property return growth of the MSCI
IPD UK Quarterly Index.
Total shareholder return (TSR) measures the total shareholder return (price rise plus dividends) over the period from 13 July 2018 to
12 July 2021. The base price is £3.54 per share which was the market price at the grant date.
122
22. SHARE-BASED PAYMENTS CONTINUED
Annualised TSR over the TSR performance
period
Vesting % PV growth over the PV performance period
<8%
Equal to 8%
0
<1%
33.33
Equal to 1%
Between 8% and 13%
33.33–100
Equal to 2%
Equal to 13%
LTIP 2019
100
Equal to 3%
Vesting %
0
33.33
66.67
100
Total property return growth is based on the increase in the total property return of the Company compared with an increase in the
MSCI IPD UK Quarterly Index (PV growth) as at 31 March 2019. This target will measure the annualised growth in total property return
over the three-year period ending 31 March 2022 (PV performance period), and comparing this with the annualised total property return
growth of the MSCI IPD UK Quarterly Index.
Total shareholder return (TSR) measures the total shareholder return (price rise plus dividends) over the period from 25 June 2019 to
24 June 2022. The base price is £2.85 per share which was the market price at the grant date.
Annualised TSR over the TSR performance
period
Vesting % PV growth over the PV performance period
Vesting %
<5%
Equal to 5%
Between 5% and 9%
Equal to 9%
0
<0.5%
20
Equal to 0.5%
20–100
Between 0.5% and 2.5%
100
Equal to 2.5%
0
20
20–100
100
The fair value of grants was measured at the grant date using a Black−Scholes pricing model for the Portfolio Value (PV) tranche and
using a Monte Carlo pricing model for the TSR tranche, taking into account the terms and conditions upon which the instruments were
granted. The services received and a liability to pay for those services are recognised over the expected vesting period. The main
assumptions of both the Black−Scholes and Monte Carlo pricing models are as follows:
Grant date
Share price
Exercise price
Term
Expected volatility
Expected dividend yield
Risk free rate
Time to vest (years)
Expected forfeiture p.a.
Fair value per option
Monte Carlo
TSR
Tranche
Black-Scholes
PV
Tranche
25 June 2019 25 June 2019
£2.85
0p
5 years
21.77%
0.00%
0.53%
3.0
0%
£2.85
0p
5 years
21.77%
0.00%
0.53%
3.0
0%
£1.11
£2.85
123
14-Jul-20 6:16:16 PM
27192 Palace Capital AR2020.indd 122-123
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSFINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
22. SHARE-BASED PAYMENTS CONTINUED
The expense recognised for employee share-based payment received during the period is shown in the following table:
26. FINANCIAL RISK MANAGEMENT CONTINUED
To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, return capital to shareholders
LTIP 2015
LTIP 2016
LTIP 2017
LTIP 2018
LTIP 2019
Total expense arising from share-based payment transactions
2020
£’000
–
25
(48)
67
86
130
2019
£’000
46
171
67
48
–
332
23. RELATED PARTY TRANSACTIONS
Accounting services amounting to £2,783 (2019: £1,960) have been provided to the Group by Stanley Davis Group Limited, a company
where Stanley Davis is a Director and shareholder.
Charitable donations amounting to £19,335 (2019: £13,757) have been made by the Group to Variety, the Children’s Charity, a charity
where Neil Sinclair is a Trustee.
Dividend payments made to Directors amounted to £416,056 (2019: £404,734) during the year.
24. CAPITAL COMMITMENTS
The obligation for capital expenditure relating to the construction, development or enhancement of investment properties entered into
by the Group amounted to £19,234,661 (2019: £35,412,295).
25. POST BALANCE SHEET EVENTS
On 22 April 2020, the Group signed an amend and restate for the NatWest Bank facility. The amend and restate charged Bank House in
Leeds, providing an additional £5,000,000 to the revolving credit facility that can be drawn. The balance is treated as a floating rate loan
and is charged at three-month LIBOR plus 1.05%.
Post year end, two of the Groups facilities have breached ICR covenants as part of the quarterly April 2020 test due to the non-payment
of rent. Both banks have provided covenant waivers and the Group expects to return to compliance once tenants recommence rental
payments.
26. FINANCIAL RISK MANAGEMENT
The Group’s principal financial liabilities are loans and borrowings. The main purpose of the Group’s loans and borrowings is to finance
the acquisition and development of the Group’s property portfolio. The Group has rent and other receivables, trade and other payables
and cash and short-term deposits that arise directly from its operations.
The Group is exposed to market risk (including interest rate risk and real estate risk), credit risk and liquidity risk.
The Group’s senior management oversee the management of these risks, and the Board of Directors has overall responsibility for the
determination of the Group’s risk management objectives and policies and it sets policies that seek to reduce risk as far as possible
without unduly affecting the Group’s competitiveness and flexibility. Further details regarding these policies are set out below:
CAPITAL RISK MANAGEMENT
The Group considers its capital to comprise its share capital, share premium, other reserves and retained earnings which amounted to
£166,348,000 at 31 March 2020 (2019: £180,323,000). The Group’s capital management objectives are to safeguard the entity’s ability
to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders and to
provide an adequate return to shareholders by pricing its services commensurately with the level of risk.
Within the subsidiaries of the Group, the business has covenanted to maintain a specified leverage ratio and a net interest expense
coverage ratio, all the terms of which have been adhered to during the year.
or issue new shares.
MARKET RISK
Market risk arises from the Group’s use of interest bearing, and tradable instruments. It is the risk that the fair value or future cash flows
of a financial instrument will fluctuate because of changes in interest rates (interest rate risk) or other market factors.
INTEREST RATE RISK
The interest rate exposure profile of the Group’s financial assets and liabilities as at 31 March 2020 and 31 March 2019 were:
As at 31 March 2020
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Equity investments
Interest rate swaps
Bank borrowings
Lease liabilities
As at 31 March 2019
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Equity investments
Interest rate swaps
Bank borrowings
Lease liabilities
Nil rate assets
and liabilities
£’000
Floating rate
assets
£’000
Fixed rate
liability
£’000
Floating rate
liability
£’000
4,950
–
–
14,919
(8,400)
2,540
–
–
–
–
–
–
–
–
–
–
–
–
(1,343)
–
–
–
–
–
(67,915)
(51,441)
(119,356)
(2,124)
–
(2,124)
(910)
14,919
(71,382)
(51,441)
(108,814)
Nil rate assets
and liabilities
£’000
Floating rate
assets
£’000
Fixed rate
liability
£’000
Floating rate
liability
£’000
2,539
–
–
22,890
(4,004)
2,636
–
–
–
–
–
–
–
–
–
–
–
–
(815)
–
–
–
–
–
(69,226)
(48,790)
(118,016)
(1,585)
–
(1,585)
Total
£’000
4,950
14,919
(8,400)
2,540
(1,343)
Total
£’000
2,539
22,890
(4,004)
2,636
(815)
1,171
22,890
(71,626)
(48,790)
(96,355)
The Group’s interest rate risk arises from borrowings issued at floating interest rates. The Group’s interest rate risk is reviewed
throughout the year by the Directors. The Group manages its exposure to interest rate risk on borrowings through the use of interest
rate derivatives (see note 16). Interest rate swaps are used to mitigate the risk of an increase in interest rates but also to allow the Group
to benefit from a fall in interest rates. 57% of the Group’s interest rate exposure is fixed and the remainder held on a floating rate. The
Group has employed an external adviser when contracting hedging to advise on the structure of the hedging.
The Group is exposed to changes in interest rates as a result of the cash balances that it holds. The cash balances of the Group at the
year end were £14,919,000 (2019: £22,890,000). Interest receivable in the income statement would be affected by £149,000 (2019:
£229,000) by a one percentage point change in floating interest rates on a full year basis.
The Group has loans amounting to £51,441,000 (2019: £48,790,000) which have interest payable at rates linked to the three-month
LIBOR interest rates or bank base rates. A 1% increase in the LIBOR or base rate will have the effect of increasing interest payable by
£514,000 (2019: £488,000).
The Group has interest rate swaps with a nominal value of £54,190,623 (2019: £55,066,210). If the LIBOR or base rate was to increase
above the fixed contract rate then the Group will benefit from a fair value increase of the interest rate swap. If, however, the LIBOR or
The Group manages its capital structure, and makes adjustments to it, in the light of changes in economic conditions.
base rate was to decrease, then the Group would incur a decrease in the fair value of the interest rate swap.
124
27192 Palace Capital AR2020.indd 124-125
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
125
14-Jul-20 6:16:16 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSFINANCIALS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
26. FINANCIAL RISK MANAGEMENT CONTINUED
Change in interest rate
(Decrease)/increase in fair value of interest rates swaps as at 31 March 2020
(Decrease)/increase in fair value of interest rates swaps as at 31 March 2019
-1%
£’000
(1,418)
(1,947)
+1%
£’000
1,359
1,869
Upward movements in medium and long-term interest rates, associated with higher interest rate expectations, increase the value of
the Group’s interest rate swaps that provide protection against such moves. The converse is true for downward movements in the yield
curve.
The Group is therefore relatively sensitive to changes in interest rates. The Directors regularly review the Group’s position with regard to
interest rates in order to minimise its risk.
CREDIT RISK MANAGEMENT
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group.
The Group has its cash held on deposit with four large banks in the United Kingdom. At 31 March 2020 the cash balances of the Group
were £14,919,000 (2019: £22,890,000). The concentration of credit risk held with Barclays Bank plc, the largest of these banks, was
£10,552,000 (2019: £16,964,000). Credit risk on liquid funds is limited because the counterparty is a UK bank with a high credit rating
assigned by international credit rating agencies.
Credit risk also results from the possibility of a tenant in the Group’s property portfolio defaulting on a lease. The largest tenant by
contractual income amounts to 5.2% (2019: 5.2%) of the Group’s anticipated income. The Directors assess a tenant’s creditworthiness
prior to granting leases and employ professional firms of property management consultants to manage the portfolio to ensure that
tenants debts are collected promptly and the Directors in conjunction with the property managers take appropriate actions when
payment is not made on time.
The carrying amount of financial assets (excluding cash balances) recorded in the financial statements, net of any allowances for losses,
represents the Group’s maximum exposure to credit risk without taking account of the value of any collateral obtained. The carrying
amount of these assets at 31 March 2020 was £2,572,000 (2019: £1,935,000). The details of the provision for expected credit loss are
shown in note 13.
LIQUIDITY RISK MANAGEMENT
The Group’s policy is to hold cash and obtain loan facilities at a level sufficient to ensure that the Group has available funds to meet
its medium-term capital and funding obligations, including organic growth and acquisition activities, and to meet certain unforeseen
obligations and opportunities. The Group holds cash to enable the Group to manage its liquidity risk.
The Group monitors its risk to a shortage of funds using a monthly cash management process. This process considers the maturity of
both the Group’s financial investments and financial assets (e.g. accounts receivable, other financial assets) and projected cash flows
from operations.
The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of multiple sources of
funding including bank loans, term loans, loan notes, overdrafts and lease liabilities.
26. FINANCIAL RISK MANAGEMENT CONTINUED
The tables below summarise the maturity profile of the Group’s financial liabilities based on contractual undiscounted payments:
As at 31 March 2020
Interest bearing loans
Lease liabilities
Derivative financial instruments
Trade and other payables
As at 31 March 2019
Interest bearing loans
Lease liabilities
Derivative financial instruments
Trade and other payables
On demand
£’000
0–1 years
£’000
1–2 years
£’000
2–5 years
£’000
> 5 years
£’000
Total
£’000
–
–
–
8,400
8,400
6,062
107
–
–
10,264
107,093
108
–
–
323
1,343
–
12,973
10,907
–
–
136,392
11,445
1,343
8,400
6,169
10,372
108,759
23,880
157,580
On demand
£’000
0–1 years
£’000
1–2 years
£’000
2–5 years
£,000
> 5 years
£’000
Total
£’000
–
–
–
4,004
4,004
9,484
32,323
76,132
96
–
–
96
–
–
289
815
–
12,767
9,722
–
–
130,706
10,203
815
4,004
9,580
32,419
77,236
22,489
145,728
126
27192 Palace Capital AR2020.indd 126-127
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
127
14-Jul-20 6:16:17 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSFINANCIALS COMPANY STATEMENT OF FINANCIAL POSITION
AS AT 31 MARCH 2020
COMPANY STATEMENT OF CHANGES IN EQUITY
Non-current assets
Investments in subsidiaries
Loans to subsidiary undertakings
Listed equity investments
Property, plant and equipment
Current assets
Trade and other receivables
Cash at bank and in hand
Total assets
Current liabilities
Creditors: amounts falling due within one year
Net current assets
Net assets
Equity
Called up share capital
Share premium account
Treasury shares
Merger reserve
Capital redemption reserve
Retained earnings
Equity – attributable to the owners of the Parent
The Company’s loss after tax for the year was £4,342,000 (2019: £16,126,000 profit).
The Company has applied the S408 exemption for company accounts.
Note
2
2
3
4
5
6
2020
£’000
127,417
40
2,540
96
2019
£’000
77,671
53,823
2,636
92
130,093
134,222
23,643
4,887
28,530
22,042
12,176
34,218
158,623
168,440
(8,923)
19,607
(5,862)
28,356
149,700
162,578
7
4,639
4,639
125,019
125,019
(1,349)
(1,771)
3,503
340
3,503
340
17,548
30,848
149,700
162,578
At 1 April 2018
Total comprehensive income for the year
Transactions with Equity Holders
Costs of issue of new shares
Share-based payments
Exercise of share options
Issue of deferred bonus share options
Dividends
At 31 March 2019
Total comprehensive income for the year
Transactions with Equity Holders
Costs of issue of new shares
Share-based payments
Exercise of share options
Issue of deferred bonus share options
Dividends
At 31 March 2020
Share
Capital
£’000
4,639
Share
Premium
£’000
125,036
Treasury
shares
£’000
Other
Reserves
£’000
(2,011)
3,843
–
–
–
–
–
–
–
(17)
–
–
–
–
–
–
–
240
–
–
–
–
–
–
–
–
4,639
125,019
(1,771)
3,843
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
422
–
–
–
–
–
–
–
–
Retained
earnings
£’000
23,091
16,126
–
332
(240)
257
(8,718)
30,848
(4,342)
–
130
(422)
77
Total
equity
£’000
154,598
16,126
(17)
332
–
257
(8,718)
162,578
(4,342)
–
130
–
77
(8,743)
(8,743)
4,639
125,019
(1,349)
3,843
17,548
149,700
Share premium represents the excess over nominal value of the fair value consideration received for equity shares net of expenses of the
share issue.
Treasury shares represents the consideration paid for shares bought back from the market. Other reserves comprise the merger reserve
and the capital redemption reserve.
The merger reserve represents the excess over nominal value of the fair value consideration for the acquisition of subsidiaries satisfied
by the issue of shares in accordance with S612 of the Companies Act 2006.
The capital redemption reserve represents the value of preference shares capital redeemed.
The financial statements were approved by the Board of Directors and authorised for issue on 6 July 2020 and are signed on its
behalf by:
STEPHEN SILVESTER
NEIL SINCLAIR
Finance Director
Chief Executive
128
27192 Palace Capital AR2020.indd 128-129
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
129
14-Jul-20 6:16:17 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSFINANCIALS
NOTES TO THE COMPANY FINANCIAL STATEMENTS
ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Palace Capital plc is a company incorporated in England and Wales under the Companies Act. The address of the registered office is
Cash and cash equivalents comprise cash on hand and demand deposits, and other short-term highly liquid investments that are readily
given on the contents page and the nature of the Group’s operations and its principal activities are set out in the Strategic Report. The
convertible to a known amount of cash and are subject to an insignificant risk of changes in value.
financial statements of the Company have been prepared in accordance with FRS 102, the Financial Reporting Standard applicable in the
United Kingdom and the Republic of Ireland.
FINANCIAL LIABILITIES AND EQUITY
The preparation of financial statements in compliance with FRS 102 requires the use of certain critical accounting estimates. It also
requires Company’s management to exercise judgement in applying the Company’s accounting policies (as detailed below).
DIVIDENDS REVENUE
Financial liabilities and equity instruments issued by the Company are classified according to the substance of the contractual
arrangements entered into and the definitions of a financial liability and an equity instrument. An equity instrument is any contract
that evidences a residual interest in the assets of the Company after deducting all of its liabilities. The accounting policies adopted for
specific financial liabilities and equity instruments are set out below:
Revenue is recognised when the Company’s right to receive payment is established, which is generally when shareholders of the paying
TRADE PAYABLES
company approve the payment of the dividend.
VALUATION OF INVESTMENTS
Investments in subsidiaries are measured at cost less accumulated impairment. Where merger relief is applicable, the cost of the
investment in a subsidiary undertaking is measured at the nominal value of the shares issued together with the fair value of any
additional consideration paid.
LISTED EQUITY INVESTMENTS
Trade payables are initially measured at fair value and are subsequently measured at amortised cost, using the effective interest rate
method.
EQUITY INSTRUMENTS
Equity instruments issued by the Company are recorded at the fair value of proceeds received, net of direct issue costs.
PARENT COMPANY DISCLOSURE EXEMPTIONS
In preparing the separate financial statements of the Parent Company, advantage has been taken of the following disclosure exemptions
Listed equity investments been classified as being at fair value through profit and loss. Listed equity investments are subsequently
measured using level 1 inputs, the quoted market price, and all fair value gains or losses in respect of those assets are recognised in the
available in FRS 102:
profit and loss.
CURRENT TAXATION
Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to
the tax authorities. The tax rates and the tax laws used to compute the amount are those that are enacted or substantively enacted, by
the balance sheet date.
DEFERRED TAXATION
The tax expense represents the sum of the tax currently payable and deferred tax.
The tax currently payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income
statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items
that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or
substantively enacted by the balance sheet date.
• no cash flow statement has been presented for the Parent Company;
• disclosures in respect of the Parent Company’s financial instruments have not been presented as equivalent disclosures have been
provided in respect of the Group as a whole;
• disclosures in respect of the Parent Company’s share-based payment arrangements have not been presented as equivalent
disclosures have been provided in respect of the Group as a whole; and
• disclosure has been given for the aggregate remuneration of the key management personnel of the Parent Company as their
remuneration is included in the totals for the Group as a whole.
JUDGEMENTS IN APPLYING ACCOUNTING POLICIES AND KEY SOURCES OF ESTIMATION
UNCERTAINTY
Investments and loans to subsidiary undertakings (see note 3)
The most critical estimates, assumptions and judgements relate to the determination of carrying value of unlisted investments in the
Company’s subsidiary undertakings and the carrying value of the loans that the Company has made to them. The nature, facts and
Deferred tax balances are recognised in respect of timing differences that have originated but not reversed on the balance sheet date.
circumstance of the investment or loan are taken into account in assessing whether there are any indications of impairment.
Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the
extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilised.
Deferred tax balances are not recognised in respect of permanent differences between the fair value of assets acquired and the future
tax deductions available for them and the differences between the fair values of liabilities acquired and the amount that will be assessed
for tax.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer
probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised.
Deferred tax is charged or credited in profit or loss, except when it relates to items charged or credited directly to other comprehensive
income, in which case the deferred tax is also dealt with in other comprehensive income.
The Government announced in the summer 2015 Budget the reduction in the corporation tax rate from 20% main rate in the tax year
2016 to 19% with effect from 1 April 2017.
TRADE AND OTHER RECEIVABLES
Trade and other receivables and intercompany receivables are recognised and carried at the original transaction value. A provision for
impairment is established where there is objective evidence that the Company will not be able to collect all amounts due according to
the original terms of the receivables concerned.
130
27192 Palace Capital AR2020.indd 130-131
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
131
14-Jul-20 6:16:17 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSFINANCIALS NOTES TO THE COMPANY FINANCIAL STATEMENTS
1. PROFIT FOR THE FINANCIAL PERIOD
The Company has taken advantage of section 408 of the Companies Act 2006 and consequently a profit and loss account for the
Company alone has not been presented.
2. INVESTMENTS IN SUBSIDIARIES
Cost:
At 1 April 2018
Additions
Write-down of investments
At 1 April 2019
Additions − capitalisation of loans to subsidiaries
Additions − capitalisation of loan interest
At 31 March 2020
Provision for impairment:
At 1 April 2018
Provided during the year
At 1 April 2019
Provided during the year
At 31 March 2020
Net book value at 31 March 2020
Net book value at 31 March 2019
LOANS TO SUBSIDIARIES
Investments
in subsidiaries
£’000
Loans
to subsidiaries
£’000
127,861
3,743
(9,360)
122,244
61,370
–
183,614
1,530
43,043
44,573
11,624
56,197
26,569
27,254
–
53,823
(53,717)
(66)
40
–
–
–
–
–
Total
£’000
154,430
30,997
(9,360)
176,067
7,653
(66)
183,654
1,530
43,043
44,573
11,624
56,197
127,417
77,671
40
53,823
127,457
131,494
A loan amounting to £25,000 remains outstanding at 31 March 2020 (2019: £2,566,660) from Palace Capital (Northampton) Limited.
Interest on this loan is charged at a fixed rate of 5% per year. This loan is repayable on 14 June 2020. Prior to the year end a loan of
£4,511,438 was capitalised as an investment in the subsidiary.
A loan amounting to £Nil remains outstanding at 31 March 2020 (2019: £13,711,448) from Palace Capital (Properties) Limited. Interest on
this loan is charged at a fixed rate of 5% per year. This loan is repayable on 11 March 2021. Prior to the year end a loan of £15,842,510
was capitalised as an investment in the subsidiary.
A loan amounting to £Nil remains outstanding at 31 March 2020 (2019: £944,025) from Palace Capital (Halifax) Limited. Interest on this
loan is charged at a fixed rate of 5% per year. This loan is repayable on 11 March 2021. Prior to the year end a loan of £1,609,633 was
capitalised as an investment in the subsidiary.
A loan amounting to £15,000 remains outstanding at 31 March 2020 (2019: £3,067,963) from Palace Capital (Manchester) Limited.
Interest on this loan is charged at a fixed rate of 5% per year. This loan is repayable on 31 December 2020. Prior to the year end a loan
of £3,427,624 was capitalised as an investment in the subsidiary.
A loan amounting to £Nil remains outstanding at 31 March 2020 (2019: £4,328,294) from Palace Capital (Liverpool) Limited. Interest on
this loan is charged at a fixed rate of 5% per year. This loan is repayable on 7 March 2023. Prior to the year end a loan of £4,308,517 was
capitalised as an investment in the subsidiary.
A loan amounting to £Nil remains outstanding at 31 March 2020 (2019: £29,204,796) from Palace Capital (Signal) Limited. Interest on this
loan is charged at a fixed rate of 5% per year. This loan is repayable on 31 October 2023. Prior to the year end a loan of £24,017,272 was
capitalised as an investment in the subsidiary.
INVESTMENT IN SUBSIDIARIES
Year ended 31 March 2020
On 25 March 2020 the Company purchased an additional 7,652,636 ordinary £1 shares at par in Palace Capital (Leeds) Limited in order
to refinance the subsidiary.
132
On 26 March 2020 the Company purchased an additional 4,308,517 ordinary £1 shares at par in Palace Capital (Liverpool) Limited in
order to refinance the subsidiary.
On 26 March 2020 the Company purchased an additional 1,609,633 ordinary £1 shares at par in Palace Capital (Halifax) Limited in order
to refinance the subsidiary.
On 31 March 2020 the Company purchased an additional 4,511,348 ordinary £1 shares at par in Palace Capital (Northampton) Limited in
order to refinance the subsidiary.
On 31 March 2020 the Company purchased an additional 3,427,624 ordinary £1 shares at par in Palace Capital (Manchester) Limited in
order to refinance the subsidiary.
On 31 March 2020 the Company purchased an additional 15,842,510 ordinary £1 shares at par in Palace Capital (Properties) Limited in
order to refinance the subsidiary.
On 31 March 2020 the Company purchased an additional 24,017,272 ordinary £1 shares at par in Palace Capital (Signal) Limited in order
to refinance the subsidiary.
Year ended 31 March 2019
On 21 December 2018 the Company acquired One Derby Square, Liverpool. The Company issued 3,500,000 ordinary £1 share in Palace
Capital (Liverpool) Limited.
The Group comprises a number of companies; all subsidiaries included within these financial statements are noted below:
Subsidiary undertaking:
Palace Capital (Leeds) Limited
Palace Capital (Northampton) Limited
Palace Capital (Properties) Limited
Palace Capital (Developments) Limited
Palace Capital (Halifax) Limited
Palace Capital (Manchester) Limited
Palace Capital (Liverpool) Limited
Palace Capital (Signal) Limited
Quintain (Signal) Member B Limited*
Signal Property Investments LLP*
Signal Investments LLP*
Property Investment Holdings Limited
Palace Capital (Dartford) Limited
Palace Capital (Newcastle) Limited
R.T. Warren (Investments) Limited
Palace Capital (York) Limited
Associate Company:
HBP Services Limited*
Meadowcourt Management (Meadowhall) Limited*
Clubcourt Limited*
* Held indirectly
The results of the associates are immaterial to the Group.
Class of share held
%
shareholding
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Member
Member
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
21.4
30
40
Principal activity
Property Investments
Property Investments
Property Investments
Property Investments
Property Investments
Property Investments
Property Investments
Property Investments
Holding
Property Investments
Holding
Property Investments
Property Management
Property Investments
Property Investments
Property Management
Property Management
Property Management
Property Management
The registered addresses for the subsidiaries across the Group are consistent based on their country of incorporation and are as follows:
• UK entities: 4th Floor, 25 Bury Street, St James’s, London, SW1Y 6AL.
27192 Palace Capital AR2020.indd 132-133
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
133
14-Jul-20 6:16:17 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSFINANCIALS
NOTES TO THE COMPANY FINANCIAL STATEMENTS
3. LISTED EQUITY INVESTMENTS
6. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
At 1 April 2018
Additions
Loss on revaluation of listed equity investment shown in statement of comprehensive income
At 1 April 2019
Additions
Loss on revaluation of listed equity investment shown in statement of comprehensive income
At 31 March 2020
Total
£’000
–
2,850
(214)
2,636
329
(425)
2,540
Trade creditors
Amount owed to subsidiary undertaking
Corporation tax payable
Other taxes
Other creditors
Accruals and deferred income
2020
£’000
223
7,697
57
75
5
866
8,923
2019
£’000
57
5,104
–
55
–
646
5,862
A loan amounting to £43,012 remains outstanding at 31 March 2020 (2019: £1,538,132) to Palace Capital (Newcastle) Limited. No
interest is charged on this loan. This loan is repayable on demand.
A loan amounting to £3,317,480 remains outstanding at 31 March 2020 (2019: £Nil) to R.T. Warren Investments Limited. No interest is
charged on this loan. This loan is repayable on demand.
A loan amounting to £4,336,489 remains outstanding at 31 March 2020 (2019: £3,566,350) to Property Investment Holdings Limited. No
interest is charged on this loan. This loan is repayable on demand.
7. SHARE CAPITAL
The details of the Company’s share capital are provided in note 21 of the notes to the Consolidated Financial Statements.
8. LEASES
Operating lease payments in respect of rents on leasehold properties occupied by the Company are payable as follows:
Within one year
From one to two years
From two to five years
9. POST BALANCE SHEET EVENT
There are no post balance sheet events.
2020
£’000
178
178
19
375
2019
£’000
178
178
197
553
During the year the Company purchased listed equity investments to the value of £329,000. The investment has subsequently been
revalued using level 1 inputs, the quoted market price.
4. PROPERTY, PLANT AND EQUIPMENT
At 1 April 2018
Additions
At 1 April 2019
Additions
At 31 March 2020
Depreciation
At 1 April 2018
Provided during the period
At 1 April 2019
Provided during the period
At 31 March 2020
Net book value at 31 March 2020
Net book value at 31 March 2019
5. TRADE AND OTHER RECEIVABLES
Amounts owed by subsidiary undertakings
Trade debtors
Other debtors
Other taxes and social security
Accrued interest on amounts owed by subsidiary undertakings
Prepayments
IT, fixtures
and fittings
£’000
215
2
217
36
253
94
31
125
32
157
96
92
2019
£’000
14,250
720
48
34
6,882
108
2020
£’000
22,965
414
30
25
–
209
A loan amounting to £22,965,362 remains outstanding at 31 March 2020 (2019: £10,160,251) from Palace Capital (Developments)
Limited. No interest is charged on this loan. This loan is repayable on demand.
A loan amounting to £Nil remains outstanding at 31 March 2020 (2019: £4,090,165) from Palace Capital (Leeds) Limited. Interest on
this loan is charged at a fixed rate of 5% per year. This loan is repayable on 8 May 2019. Prior to the year end a loan of £7,652,636 was
capitalised as an investment in the subsidiary.
23,643
22,042
134
27192 Palace Capital AR2020.indd 134-135
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
135
14-Jul-20 6:16:17 PM
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSFINANCIALS
OFFICERS AND PROFESSIONAL ADVISERS
GLOSSARY
DIRECTORS
Stanley Davis
Chairman
Neil Sinclair
Chief Executive
Stephen Silvester Finance Director
Richard Starr
Executive Director
Anthony Dove
Non-Executive
Director
Kim Taylor-Smith Non-Executive
Director
SOLICITORS
Hamlins LLP
Roxburghe House
273–287 Regent Street
London
W1B 2AD
CMS Cameron McKenna
Nabarro Olswang LLP
1 South Quay
Mickola Wilson
Non-Executive
Victoria Quays
Director
Paula Dillon
Non-Executive
Sheffield
S2 5SY
Walker Morris LLP
33 Wellington Street
Leeds
LS1 4DL
INVESTOR & PUBLIC
RELATIONS
FTI Consulting
200 Aldersgate
Aldersgate Street
London
EC1A 4HD
BANKERS
Barclays Bank plc
69 Albion Street
Leeds
LS1 5AA
Lloyds Bank plc
25 Gresham Street
London
EC2V 7HN
National Westminster Bank plc
16 The Boulevard
Crawley
West Sussex
RH10 1XU
Santander UK plc
Bridle Road
Merseyside
L30 4GB
Director
SECRETARY
Nicola Grinham ACG
REGISTERED OFFICE
25 Bury Street
London
SW1Y 6AL
REGISTERED NUMBER
05332938 (England and Wales)
AUDITOR
BDO LLP
55 Baker Street
London
W1U 7EU
REGISTRAR
Link Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent
BR3 4TA
JOINT BROKER
Arden Partners plc
125 Old Broad Street
London
EC2N 1AR
JOINT BROKER
Numis Securities Limited
The London Stock Exchange Building
10 Paternoster Square
London
EC4M 7LT
136
Adjusted EPS: Is adjusted profit before
tax less corporation tax charge (excluding
deferred tax movements) divided by the
EPRA cost ratio (excluding direct vacancy
costs): Is the ratio calculated above, but
with direct vacancy costs removed from
Estimated rental value (ERV): Is the
external valuers’ opinion as to the
open market rent which, on the date of
average basic number of shares in the
the net overheads and operating expenses
valuation, could reasonably be expected
period.
balance.
Adjusted profit before tax: Is the
IFRS profit before taxation excluding
EPRA diluted EPS: Is EPRA earnings
divided by the average diluted number of
investment property revaluations, gains/
shares in the period.
losses on disposals, acquisition costs, fair
value movement in derivatives and share-
based payments and exceptional items.
Assets Under Management (AUM): Is a
measure of the total market value of all
properties owned and managed by the
Group.
Balance sheet gearing: Is the balance
sheet net debt divided by IFRS net assets.
Building Research Establishment
Environmental Assessment Methodology
(BREEAM) rating: A set of assessment
methods and tools designed to help
EPRA earnings: Is the IFRS profit after
taxation excluding investment property
revaluations and gains/losses on disposals
and changes in fair value of financial
derivatives.
EPRA EPS: Is EPRA earnings divided by
the average basic number of shares in the
period.
EPRA net assets (EPRA NAV): Are the
balance sheet net assets excluding the mark
to market on effective cash flow hedges and
related debt adjustments, deferred taxation
on revaluations and diluting for the effect
to be obtained on a new letting or rent
review of a property.
IAS/IFRS: Is the International Financial
Reporting Standards issued by the
International Accounting Standards Board
and adopted by the EU.
Interest cover ratio (ICR): Is the number
of times net interest payable is covered
by underlying profit before net interest
payable and taxation.
Investment Property Databank (IPD):
A wholly owned subsidiary of MSCI
producing an independent benchmark of
property returns and the Group’s portfolio
returns.
Key Performance Indicators (KPIs): Are
the most critical metrics that measure
construction professionals understand
of those shares potentially issuable under
the success of specific activities used to
topped up for contracted uplifts, where
asset management determinations and
and mitigate the environmental impacts of
employee share schemes.
the developments they design and build.
Performance is measured across a series of
ratings: Good, Very Good, Excellent and
Outstanding.
Core-plus: Is a property investment
management style which adopts a certain
risk appetite growth strategy. Core-
plus is typically associated with a low to
EPRA NAV per share: Is EPRA NAV
divided by the diluted number of shares at
the period end.
EPRA NNNAV: Is the EPRA NAV adjusted
to reflect the fair value of debt and
derivatives and to include deferred
taxation on revaluations.
moderate risk profile. Core-plus property
owners would have the ability to increase
EPRA occupancy rate: Is the ERV of
occupied space divided by ERV of the
cash flows through light refurbishment and
whole portfolio, excluding developments
asset management strategies. Core-plus
and residential property.
properties tend to be high-quality and
well-occupied.
Dividend cover: Is the Adjusted EPS
divided by dividend per share declared in
the period.
EPRA topped-up net initial yield: Is the
current annualised rent, net of costs,
these are not in lieu of rental growth,
expressed as a percentage of capital value.
EPRA: Is the European Public Real Estate
Association.
EPRA vacancy rate: Is the ERV of vacant
space divided by ERV of the whole
EPRA cost ratio (including direct vacancy
costs): Is a proportionally consolidated
measure of the ratio of net overheads and
operating expenses against gross rental
portfolio, excluding developments and
residential property.
Equivalent yield: Is the net weighted
average income return a property will
income (with both amounts excluding
produce based upon the timing of the
ground rents payable). Net overheads
income received. In accordance with
and operating expenses relate to all
usual practice, the equivalent yields (as
administrative and operating expenses,
determined by the external valuers)
net of any service fees, recharges or other
assume rent received annually in
income specifically intended to cover
arrears and on values before deducting
overhead and property expenses.
prospective purchaser’s costs.
meet business goals – measured against
a specific target or benchmark, adding
context to each activity being measured.
LIBOR: Is the London Interbank Offered
Rate, the interest rate charged by one
bank to another for lending money.
Like-for-like net rental income: Is
the change in net rental income on
properties owned throughout the current
and previous periods under review.
This growth rate includes revenue
recognition and lease accounting
adjustments but excludes properties
held for development in either period,
properties with guaranteed rent reviews,
surrender premiums.
Like-for-like valuation: Is the change in
the carrying value of properties owned
throughout the entire year.
This excludes properties acquired during
the year and disposed of during the year.
Loan to value (LTV): Is the ratio of
principal value of gross debt less cash,
short-term deposits and liquid investments
to the aggregate value of properties and
investments.
137
14-Jul-20 6:16:18 PM
27192 Palace Capital AR2020.indd 136-137
Job Number
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTSFINANCIALS
GLOSSARY
MSCI Inc. (MSCI IPD): Is a company that
produces independent benchmarks of
Portfolio Valuation: The value of the
Company’s property portfolio, including all
Total Accounting Return (TAR): Is the
increase or decrease in EPRA NAV per
property returns.
investment and trading properties as valued
share plus dividends paid, and this can be
The Group measures its performance
against both the Central London Offices
Index and the UK All Property Index.
Net asset value (NAV) per share: Is the
equity attributable to owners of the Group
divided by the number of ordinary shares
in issue at the period end.
Net equivalent yield (NEY): Is the
weighted average income return (after
adding notional purchaser’s costs) a
property will produce based upon
the timing of the income received. In
accordance with usual practice, the
equivalent yields (as determined by the
external valuers) assume rent is received
annually in arrears.
Net initial yield (NIY): Is the current
annualised rent, net of costs, expressed as
a percentage of capital value, after adding
notional purchaser’s costs.
Net Loan to Value (LTV): Is the ratio of
gross debt less cash, short-term deposits
by our independent valuers, Cushman &
expressed as a percentage of EPRA NAV
Wakefield, and assets held for sale.
per share at the beginning of the period.
Portfolio Value (PV): The value of the
investment properties within the Palace
Total Property Return (TPR): Total
property return is a performance measure
Capital property portfolio as measured
calculated by the MSCI IPD and defined in
by Cushman & Wakefield. It is referenced
the MSCI Global Methodology Standards
in relation the 2018 LTIP’s awarded to
for Real Estate Investment as “the
employees in 2018.
Property Income Distribution (PID): A
dividend received by a shareholder of the
principal company in respect of profits
percentage value change plus net income
accrual, relative to the capital employed.”
Total Shareholder Return (TSR): Is
calculated by the growth in capital from
and gains of the Property Rental Business
purchasing a share in the Company
of the UK resident members of the REIT
assuming that the dividends are reinvested
Group or in respect of the profits or gains
each time they are paid.
of a non-UK resident member of the REIT
Group.
Value added: Is a risk appetite growth
strategy. Typically associated with a
Real Estate Investment Trust (REIT): A
UK Real Estate Investment Trust must be
moderate to high risk profile. Value add
properties tend to have low cash flows
a company listed on a recognised stock
at acquisition but have the potential to
exchange with at least three-quarters
produce future cash flow uplifts once value
of its profits and assets derived from a
has been added. This could be by taking
qualifying property rental business. Income
on larger capital refurbishment projects
and capital gains from the property rental
to improve the layout and look of the
and liquid investments to the aggregate
business are exempt from tax but the
property to ensure rental increases and
value of properties and investments.
REIT is required to distribute at least 90%
capital value enhancement.
Net rental income: Is the rental income
receivable in the period after payment of
net property outgoings. Net rental income
of those profits to shareholders. Tax is
payable on profits from non-qualifying
activities of the residual business.
will differ from annualised net rents and
passing rent due to the effects of income
Special Purpose Vehicle (SPV): Is a
separate legal entity created by an
Weighted average debt maturity: Is
measured in years when each tranche of
Group debt is multiplied by the remaining
period to its maturity and the result is
divided by total Group debt in issue at the
from rent reviews, net property outgoings
organisation. The SPV is a distinct
period end.
and accounting adjustments for fixed and
company with its own assets and liabilities,
minimum contracted rent reviews and
as well as its own legal status. Usually,
they are created for a specific objective,
often which is to isolate financial risk. As
it is a separate legal entity, if the Parent
Company goes bankrupt, the special
purpose vehicle can carry its obligations.
Tenant (or lease) incentives: Are any
incentives offered to occupiers to enter
into a lease. Typically the incentive will
be an initial rent free period, or a cash
contribution to fit-out or similar costs.
Weighted average interest rate: Is the
loan interest per annum at the period end,
divided by total debt in issue at the period
end.
Weighted average unexpired lease
term (WAULT): Is the average lease term
remaining to first break, or expiry, across
the portfolio weighted by rental income.
This is also disclosed assuming all break
clauses are exercised at the earliest date,
as stated.
Under accounting rules the value of lease
incentives given to tenants is amortised
WiredScore: Wired Certification is a
commercial real estate rating system
through the Income Statement on a
that empowers landlords to understand,
straight-line basis to the lease expiry.
improve, and promote their buildings’
digital infrastructure. Connectivity is
measured across a series of ratings:
Platinum, Gold, Silver and Certified.
lease incentives.
Net reversionary yield (NRY): Is the
anticipated yield, which the initial yield will
rise to once the rent reaches the estimated
rental value.
Northern Powerhouse: Is a proposal
to boost economic growth in the North
of England by the 2010–15 coalition
Government and 2015–2017 Conservative
Government in the United Kingdom,
particularly in the “Core Cities” of
Manchester, Liverpool, Leeds, Sheffield,
Hull and Newcastle.
Passing rent: Is the gross rent, less any
ground rent payable under head leases.
Peer Group: Is 16 companies within the
listed real estate sector.
138
27192 Palace Capital AR2020.indd 138-3
00000
13 July 2020 12:21 pm
Proof 14
00000
13 July 2020 12:21 pm
Proof 14
14-Jul-20 6:16:18 PM
CONTACT
25 Bury Street, St James’s London, SW1Y 6AL
palacecapitalplc.com
T: +44 (0)20 3301 8330
E: info@palacecapitalplc.com
P
A
L
A
C
E
C
A
P
I
T
A
L
P
L
C
A
N
N
U
A
L
R
E
P
O
R
T
A
N
D
A
C
C
O
U
N
T
S
2
0
2
0
27192 Palace Capital AR2020.indd 3
00000
13 July 2020 12:21 pm
Proof 14
14-Jul-20 6:26:42 PM