Regional property
Annual Report and Accounts 2023
Our strategy
is to focus on
maximising
cash returns to
shareholders,
whilst continuing
to remain mindful
of consolidation
in the Real Estate
sector.
Contents
STRATEGIC REPORT
Interim Executive
Chairman’s statement
At a glance highlights
Repositioning our portfolio
Strategy in action
Active asset management
Top 10 properties by value
Business model
Our marketplace overview
Our sectors overview
Operational review
Chief Financial Officer’s report
Financial review
Key performance indicators
Risk management
Section 172 statement
ESG introduction
Working responsibly our ESG
environmental
TCFD being a responsible business
ESG improving the environmental
performance of our assets
02
04
05
06
08
11
12
14
15
16
17
18
22
24
30
33
34
35
37
38
40
41
42
43
GOVERNANCE
Corporate Governance Report
Governance Overview
Board of Directors
Executive Committee
Governance Framework
Board composition and division of
44
responsibilities
Board performance evaluation
45
Board activities and committee attendance 46
47
Nomination Committee report
Environmental Social and Governance
49
Committee report
51
Audit and Risk Committee report
54
Directors’ remuneration report
56
Remuneration policy
Annual remuneration report
60
Directors’ report and additional disclosures 68
Statement of Directors’ responsibilities
70
Independent Auditor’s report to the
members of Palace Capital plc
71
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
Officers and Professional Advisors
Glossary
80
81
82
83
84
114
115
116
122
123
0 1
Interim executive
Chairman’s statement
Focused on
maximising
cash
returns to
shareholders
Adjusted PBT
£7.6 million
Dividends paid or
declared of
15.0 pence
Introduction and update on
delivery of strategic objectives
I am pleased to present my Chairman’s
statement on the results for the year
ended 31 March 2023. This is my second
statement on the annual results as
Chairman of Palace Capital in what can
only be described as a volatile and difficult
year for the Company and for the property
and financial markets.
The past year has been transformational
both for the Company and for the
wider macroeconomic and geo-political
environment. The headwinds of the last
twelve months are well documented,
including the continued conflict in
Ukraine, the UK’s cost of living crisis, rising
interest rates and inflationary pressures.
Such uncertainty and volatility in the
economic environment has negatively
impacted the property market, particularly
with regard to the reduction in property
valuations due to the significant increases
in both short and long term interest rates.
In July 2022, it was announced by the
Company that the Board’s strategy was
to focus on maximising cash returns to
shareholders, whilst continuing to remain
mindful of consolidation in the Real Estate
sector. As part of its considerations, several
properties, including the industrial portfolio,
were prepared and readied for sale.
However, the ‘mini-budget’ in September
2022 significantly accelerated the
negative trends outlined above with the
result that in October 2022, the Company
announced that it had decided to
pause the timing of significant disposals
for the time being, although the sale
of small, individual assets which lent
themselves better to private buyers and
special purchasers, would continue.
Earlier this year it became evident that
property market sentiment and pricing
was significantly improving from the
position in the last quarter of 2022 and
the Company capitalised on this trend by
marketing for sale certain properties that
would enable it to continue to reduce its
debt and therefore remain focused on
maximising cash returns to shareholders.
On 5 May 2023 in its strategy and trading
update, the Company announced the
significant disposal of six industrial assets
for £34.0 million at a NIY of 6.2%, 3.0%
ahead of 31 March 2023 book value of
£33.0 million as well as the exchange of
contracts for the sale of an Aldi supermarket
in Gosport for £5.6 million at a NIY of 5.5%,
7.3% ahead of the 31 March 2023 valuation.
Disposal activity has continued and we
have recently exchanged contracts for
the sale of Millbarn Medical Centre at
Beaconsfield for £1.5 million, 87.5%
ahead of the March 2023 book value
of £0.8 million. The Company has also
exchanged contracts for the sale of
Princeton House, Farnborough for
£2.3 million, which is 31.7% ahead of the
31 March 2023 valuation. Both properties
are expected to complete in July.
The Company expects to announce
further investment property disposals in
a Trading Update to be released ahead
of the Company’s AGM on 26 July 2023
assuming that those sales currently under
offer are successfully executed.
Further progress was also achieved with
residential sales at Hudson Quarter, York
where a further 23 apartment sales were
completed for £10.1 million. A further
five apartment sales have completed for
£2.2 million since the year end leaving
18 units remaining.
Since the change of strategy announced on
19 July 2022, disposals (either completed
or exchanged) have generated proceeds
of £54.5 million, a 9% reduction over the
March 2022 valuation, which was the peak
of the current property cycle. If disposals are
compared with the relevant March valuation
prior to sale, the result is an increase of 5%
ahead of such valuation.
0 2
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 Operationally, the business remains
robust. The team has been proactive in
implementing asset management plans
to increase income, reduce void costs and
improve our ESG performance, including
EPCs, as set out in the Operating
Review. Rent collection remains high and
occupancy levels remain resilient.
In terms of managing our own costs, as
previously announced, measures to reduce
the level of administration expenses have
been implemented and are continuing.
Annualised cost savings are now over
£1.4 million. These cost savings represent
30% of FY22 administrative expenses and
19% of FY22 EPRA earnings.
During the financial year, the Company
announced two share buyback programmes
and purchased 2.6 million shares. The
accretion to 2023 EPRA NTA was 8.0 pence
per share. Since 1 April a further 0.5 million
shares have been purchased. The total cash
returned to shareholders from the buyback
programmes to date is £7.9 million.
Overview of results
The Group’s adjusted profit before tax
decreased slightly to £7.6 million (2022:
£7.8 million) principally due to higher
finance costs offset by an increase in net
rental income and a reduction in recurring
administration expenses. Trading profits
from the sale of residential units realised
£0.5 million (2022: £3.8 million) whilst profits
from investment property sales contributed
£0.8 million (2022: £4.9 million).
The deficit on the revaluation of the
portfolio for the year of £42.9 million was
due to softening yields across the whole
portfolio although disposals since 31
March 2023 have demonstrated that some
value has been recovered and realised.
Contractual payments to the former Chief
Executive and Executive Property Director
of £1.8 million, including associated costs,
have been treated as an exceptional item.
The aggregation of the profits and losses
described in the preceding paragraphs
account for the decrease in profit before tax
reported under IFRS to a loss for the year of
£35.8 million (2022: £24.6 million profit).
Principally as a result of the revaluation deficit
on the portfolio, offset by the 8 pence per
share share-buyback accretion, EPRA NTA
per share decreased by 24.1% to 296 pence
per share (2022: 390 pence per share).
The Group’s balance sheet has been
significantly strengthened following the
£37.5 million reduction in gross debt
during the year to £64.3 million. Cash
reserves were £5.5 million resulting in
net debt of £58.8 million. Post period
end and on completion of the disposal
of currently contracted sales proforma
gross and net debt are expected to be
c.£34 million and c.£20 million respectively
equating to a proforma LTV of c.13%.
Dividend
The Group paid or declared dividends of
15.0 pence per share (2022: 13.25 pence
per share) in relation to the year ended 31
March 2023, including a proposed final
fourth quarter dividend of 3.75 pence per
share. The total dividend of 15.0 pence
per share is covered 114% by adjusted
earnings per share. The final dividend of
3.75 pence per share will be paid, subject
to shareholder approval at the AGM
being held on 26 July 2023, on 4 August
2023 to shareholders on the register at
7 July 2023. The entire dividend will be
paid as a Property Income Distribution.
Environmental, Social and
Governance (“ESG”)
The Company remains committed to
responsible business and ESG matters,
which are at the forefront of stakeholders’
considerations. Further details on the
approach to responsible business can
be found in the ESG section and on
the website.
Board changes
On 14 June 2022, Neil Sinclair stepped
down as Chief Executive and I was
appointed Interim Executive Chairman.
As announced on 19 July 2022, in light of
the amended strategy, Paula Dillon, Kim
Taylor- Smith and Mickola Wilson stepped
down as Independent Non-Executive
Directors. Mark Davies was appointed
as an Independent Non-Executive
Director and in addition was appointed
Chair of the Audit and Risk Committee,
Remuneration Committee and Senior
Independent Director on 1 August 2022.
Richard Starr stepped down as Executive
Property Director on 12 August 2022.
Given its low leverage,
the Company remains
well placed regarding
strategic initiatives
including various options
for the return of capital
to shareholders”
Steven Owen
Outlook
The year ahead is likely to be further
affected by continuing macroeconomic
and geo-political uncertainty although the
inflation outlook in the UK is expected to
improve. The increases in interest rates
have adversely impacted the commercial
property market in relation to investment
activity resulting in a re-pricing of assets
as evidenced by recent transactions and
published valuations. Notwithstanding
this, the occupational market has
remained resilient as evidenced by the
increases over estimated rental values
obtained on lettings, lease renewals
and rent reviews together with a stable
occupancy rate and high rent collection
which demonstrates the resilience of the
portfolio.
As previously announced, the Board’s
strategy remains focused on maximising
cash returns to shareholders, whilst
continuing to remain mindful of
consolidation in the Real Estate sector. As
part of its considerations, certain properties
are either being marketed for sale or are
being prepared and readied for sale whilst
other properties are undergoing asset
management initiatives in order to prepare
them for sale at a future date. Given its
low leverage, the Company remains well
placed in terms of flexibility and optionality
regarding the timing of its disposal
programme and other strategic initiatives,
including various options for the return of
capital to shareholders.
It is expected that further progress will
be announced in a Trading Update to be
released on 26 July prior to the AGM.
Steven Owen
Interim Executive Chairman
0 3
STRATEGIC REPORT At a glance
highlights
£128.5m
Net asset value
£7.6m
Adjusted profit before tax
(11.6)%
Total property return
31%
LTV
£192.4m
Property portfolio (see note 9)
296p
EPRA net tangible assets
per share
£15.7m
Contractual rental income
87.7%
EPRA occupancy
4.8 years
Weighted average lease
length to break
0 4
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 Repositioning
our portfolio
Our portfolio at
31 March 2022
9.0%
3.8%
£259.0m
Portfolio value
37
Number of properties
C
Average EPC Rating
9.1%
14.3%
16.7%
47.1%
Offices
Industrial
Leisure
Residential
Retail
Retail Warehouse
Our portfolio at
31 March 2023
6.1%
3.7%
6.6%
£192.4m
Portfolio value
31
Number of properties
C
Average EPC Rating
15.2%
18.7%
49.7%
Offices
Industrial
Leisure
Residential
Retail
Retail Warehouse
0 5
STRATEGIC REPORT Strategy
in Action
Disposals Strategy
As part of the ongoing strategy to maximise cash returns to
shareholders, certain properties are either being marketed for
sale or are being prepared and readied for sale whilst other
properties are undergoing asset management initiatives in order
to prepare them for sale at a future date.
During the year, eight investment properties were sold for
£15.6 million at an average 8% ahead of the 31 March 2022
book value.
On 5 May 2023, the Company announced in a strategy and
trading update the significant disposal of six industrial assets
for £34.0 million at a NIY of 6.2%, 3.0% ahead of 31 March
2023 book value of £33.0 million. Five of the properties have
now completed and the sixth is expected to complete in early
July. The Company has also completed the sale of an Aldi
supermarket, in Gosport, for £5.6 million at a NIY of 5.5%, 7.3%
ahead of the 31 March 2023 valuation.
Since 5 May, the Company has exchanged contracts for the
sale of Millbarn Medical Centre at Beaconsfield for £1.5 million,
87.5% ahead of the March 2023 book value of £0.8 million.
The Company has also exchanged contracts for the sale of
Princeton House, Farnborough for £2.3 million, which is 31.7%
ahead of the 31 March 2023 valuation. Both properties are
expected to complete in July.
Warren House, Thame
The Company expects to announce further investment property
disposals in a Trading Update to be released ahead of the
Company’s AGM on 26 July assuming that those sales currently
under offer are successfully executed.
Further progress was also achieved with residential sales at
Hudson Quarter, York where a further 23 apartment sales were
completed for a total of £10.1 million. A further five apartment
sales have completed for £2.2 million since the year end leaving
18 units remaining.
Since the change of strategy announced on 19 July 2022,
disposals (either completed or exchanged) have generated
proceeds of £54.5 million, a 9% reduction over the March 2022
valuation which was the peak of the current property cycle. If
disposals are compared with the relevant March valuation prior to
sale, the result is an increase of 5% ahead of such valuation.
Office
Sale Price
£1.6m
Variance to March 2022 Book Value
+12%
Asset Management
Purchased in 2017 as part of the Warren
Acquisition. Prior to sale a new 10-year
term certain was achieved at a 21% uplift to
headline rent.
0 6
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 127 Above Bar St, Southampton
St Modwen Rd, Plymouth
Retail
Sale Price
£3.8m
Variance to March 2022 Book Value
+21%
Asset Management
Long leasehold interest purchased as part
of the Signal Portfolio in 2013, comprising a
multi-let retail and leisure scheme. The freehold
was acquired in 2021 for £2m (when the long
leasehold had c.14 years unexpired), allowing the
Group to benefit from significant marriage value
on disposal of the combined interest.
Industrial
Sale Price
£3.2m
Variance to March 2022 Book Value
-3%
Asset Management
Purchased as part of the PIH portfolio in 2014,
a single let industrial unit. SIG has been in
occupation since 2005 and the lease was
renewed for 10 years (5 year break) in July 2021,
achieving a 27% increase in headline rent.
0 7
STRATEGIC REPORT Active asset
management
The asset management team have
continued to work diligently with
existing and prospective occupiers and
our advisors to drive value through
leasing activity across the portfolio.
There have been 45 lease events completed totalling 228,000
sq ft of space, 11% above the 31 March 2022 ERV, generating
£1.1 million of additional annualised contracted rent, which
demonstrates the strong reversionary potential within the
portfolio. The 45 lease events can be analysed as:
• 14 new lettings, 14% above ERV generating £0.8 million of
additional annualised income,
• 15 lease renewals, 8% above ERV generating £0.1 million of
additional annualised income and
• 16 rent reviews, 12% above ERV generating £0.2 million of
additional annualised income.
In addition, void savings from new lettings was £0.3 million resulting
in a total of £1.4 million of annualised net rental income created.
This asset management activity has contributed to the Company
outperforming the MSCI UK Quarterly Property Index over FY23.
Portfolio asset management activity continues to improve the
EPC (Energy Performance Certificate) profile across the portfolio
- 96.2% of the portfolio is now rated A-D and 72.2% is rated A-C
(31 March 2022: 88.8% and 55.2% respectively).
New lettings in the year included:
• 15 year lease without break at Sol, Northampton let to Chi, an
aspirational F&B operator at £85,000pa (with turnover top up)
107% above the March 2022 ERV. The unit had been vacant
for over 5 years.
• 5 year lease on ground and lower ground at Regency House,
Winchester to Ward Williams Associates at £47,081pa, 15%
above the March 2022 ERV.
• 10 year lease at Verwood of two units at a rent of £68,600pa
equivalent to £8.75psf which set a new rental tone for the estate.
0 8
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 Admiral House & Nicholson Gate, Fareham | Office
Two adjoining office buildings, totalling 13,017 sq ft on a
total site area of 1.298 acres. The site has been granted
planning consent for the change of use to allow a new build
high quality 75 bed residential care home scheme, resulting
in a significant valuation increase.
Sandringham House, Harlow | Office
Exela Technologies’ lease of the whole building expires
in November 2027 with a lease break in November 2024
and after dialogue post year end the tenant has agreed to
remove the break, which increases term certain by 3 years.
Point Four Industrial Estate, Avonmouth | Industrial
The estate is now fully occupied following recent asset
management activity which has pushed the new rental tone
for the estate greater than £9psf. Garland Roofing leased
unit 5 (7,152 sq ft) at a rent of £9.02psf which is a 14%
premium to ERV. Value was also generated in the successful
uplift at the August 2022 rent review at unit 7b to £8.81psf,
which was a 46% premium to ERV.
25 & 27 Black Moor Road, Verwood | Industrial
Several asset management initiatives have completed at this
multi let industrial estate, including a lease renewal to the
key anchor tenant Global Filters a 10 year term (break at year
5) at a rent of £8.25psf which was 53% above the previous
passing rent.
0 9
STRATEGIC REPORT Active asset
management
22 Market Street, Maidenhead | Office
We have worked closely with the main office tenant
Techtronic Industries and post year end successfully removed
their break in August 2026 and extended their lease from
August 2031 to August 2034 at an annual rent of £718,474.
Maximising the term certain to over 11 years will be value
accretive.
High Street, Sutton | Office
Sutton Housing Partnership (who manage council housing
stock on behalf of Sutton Council) occupy all the office
accommodation and they renewed their lease for a term of
5 years with no break at a rent of £282,500pa which is in line
with ERV.
Sol, Northampton | Leisure
Providence Bay Restaurants Ltd (t/a Chi) acquired units 6a&b
(4,833 sq ft) for a term of 15 years at a base rent of £85,000
pa / £17.50 psf (with turnover top up) which was a 107%
premium to ERV. The scheme is now 98% occupied.
Imperial House, Leamington Spa | Office
The property is occupied by Ubisoft (9,985 sq ft) and Altair
Engineering (8,322 sq ft) who have both renewed their leases
for a further 5 years at £190,000pa (12% premium to ERV)
and £143,850pa (in line with ERV) respectively.
1 0
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 Top 10 properties
by value at 31st March 2023
Halifax
Area – 117,767 sq ft
Rental income: £2.0m p.a.
Broad Street Plaza is a dominant city
centre leisure scheme anchored by a
ten-screen Vue cinema, TGI Fridays,
Wetherspoons and PureGym.
Distance from train station:
12 min
0.5m
Northampton
Area – 186,552 sq ft
Rental income: £1.6m p.a.
Dominant city centre leisure scheme
incorporating a Vue cinema, Ibis hotel,
Gravity Fitness and Chi
Distance from train station:
0.2m
4 min
Manchester
Area – 76,420 sq ft
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.
Distance from train station:
0.3m
7 min
Maidenhead
Area – 21,852 sq ft
Rental income (post rent free period):
£0.8m p.a.
Fully let, three storey office building
with EPC rating of B. Includes two
small retail units on the ground floor.
Distance from train station:
0.4m
4 min
Avonmouth
Area – 81,154 sq ft
Rental income: £0.6m p.a.
Multi-let industrial estate. Two vacant
units were let post year end bringing
occupancy to 100%.
Distance from train station:
1.1m
5 min
Newcastle upon Tyne
Area – 99,125 sq ft
Rental income: £1.2m p.a.
Multi-let office block in the city centre
with existing tenants including UBS,
Somerset Bridge and The National
Lottery.
Distance from train station:
0.3m
6 min
York
Area – 38,796 sq ft
Rental income: £0.7m p.a.
Hudson Quarter is a residential and
office development within York’s city
walls comprising 127 apartments
and grade A office space. The office
development is 82% let, with tenants
including Arcadis, GRJ and JM Finn.
Distance from train station:
0.1m
2 min
Liverpool
Area – 70,161 sq ft
Rental income: £1.1m p.a.
City centre office and retail property
with tenants including Tesco, Pret,
Medicash and Exchange Chambers.
99% occupied and let.
Distance from train station:
11 min
0.5m
Milton Keynes
Area – 52,819 sq ft
Rental income: £0.8m p.a.
Three buildings are let to Rockwell and
BMI at low passing rents with potential
for rental growth.
Distance from train station:
2.9m
8 min
Coventry
Area – 77,750 sq ft
Rental income: £0.4m p.a.
Single let industrial unit and
ancillary parking
Distance from train station:
2.4m
7 min
1 1
STRATEGIC REPORT Business
model
Key Resources:
What we do:
Value created:
S e e p a g e 8
t o re a d m o re o n
A c t i ve a s s e t m a n a g e m e n t
n t
e m e
g
ctive Asset M a n a
A
T
i
m
e
l
y
A
s
s
e
t
R
e
alisation
Our people
• Property and financial expertise
• Smaller Board and new Executive
Committee constituted in the year
• Values of being: active, astute and
ambitious
• A culture of demonstrable commitment,
resilience and strong team ethos supports
the delivery of the strategy
Our portfolio
• Resilient rent collection and returns
• Value-added assets with future growth
potential
• Potential development or refurbishment
optionality for the longer term
Our funding
• Strong balance sheet with reduced levels
of debt following bank debt repayments
and appropriate LTV debt level
• Core portfolio cash generation supporting
dividend
• Lease lengths in excess of bank
maturity dates
• Strong relationships with core UK
clearing banks
1 2
E
n
g
a
g
e
E n hance
Investors
Strong asset management and disposals enable debt
repayment and return cash to shareholders via share buyback
of £6.7m and dividends of 15p per share.
13.2%
% dividend
increase
8p
accretion per share
from buyback
Tenants
• Ongoing engagement with tenants
• We create space for modern requirements
• We aim to ensure our refurbishments are
environmentally efficient
99%
Rent collection
141
Tenants
Our people
• Fair reward for company and individual successes
• Annual bonus and competitive overall remuneration packages
• Diverse backgrounds, age and experience
• Three directors and eight other members of staff of whom
seven are men (including senior managers) and one woman
10%
Average employee
pension contribution
100%
Full time employees
receiving a bonus
The environment
Continuous focus on upgrading our portfolio and working
with tenants to protect the immediate and wider environment
96%
4%
EPC of A–D in
EPC of E and F
EPC of G in
portfolio
in portfolio
0%
portfolio
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023
Key Resources:
What we do:
Value created:
Our people
• Property and financial expertise
• Smaller Board and new Executive
Committee constituted in the year
• Values of being: active, astute and
ambitious
• A culture of demonstrable commitment,
resilience and strong team ethos supports
the delivery of the strategy
Our portfolio
• Resilient rent collection and returns
• Value-added assets with future growth
potential
• Potential development or refurbishment
optionality for the longer term
Our funding
• Strong balance sheet with reduced levels
of debt following bank debt repayments
and appropriate LTV debt level
• Core portfolio cash generation supporting
• Lease lengths in excess of bank
• Strong relationships with core UK
dividend
maturity dates
clearing banks
n t
e m e
g
ctive Asset M a n a
A
T
i
m
e
l
y
A
s
s
e
t
R
e
alisation
E
n
g
a
g
e
E n hance
S e e p a g e 6
t o re a d m o re o n
T i m e l y a s s e t re a l i s a t i o n
Investors
Strong asset management and disposals enable debt
repayment and return cash to shareholders via share buyback
of £6.7m and dividends of 15p per share.
13.2%
% dividend
increase
8p
accretion per share
from buyback
Tenants
• Ongoing engagement with tenants
• We create space for modern requirements
• We aim to ensure our refurbishments are
environmentally efficient
99%
Rent collection
141
Tenants
Our people
• Fair reward for company and individual successes
• Annual bonus and competitive overall remuneration packages
• Diverse backgrounds, age and experience
• Three directors and eight other members of staff of whom
seven are men (including senior managers) and one woman
10%
Average employee
pension contribution
100%
Full time employees
receiving a bonus
The environment
Continuous focus on upgrading our portfolio and working
with tenants to protect the immediate and wider environment
96%
EPC of A–D in
portfolio
4%
EPC of E and F
in portfolio
0%
EPC of G in
portfolio
1 3
STRATEGIC REPORT
Our marketplace
Overview
The regions and our properties
We are a London Stock Exchange Premium listed REIT with
our properties located in English regional towns and cities with
strong local and national infrastructure. Our diversified portfolio
consists of income producing assets including offices, industrial,
leisure, retail and retail warehouse properties, and residential
apartments in York.
Our aim is to actively manage the portfolio and improve returns
through strategic asset management including lease re-gears,
new lettings and refurbishments whilst timing disposals in line
with business plans to maximise returns to shareholders.
We pride ourselves on the strength of the relationships we have
developed with our tenants, and we actively work with them to
improve their physical environments.
Market conditions and the inflationary
environment
There has been uncertainty across our markets across the last
twelve months predominantly down to the impact of central
banks raising interest rates to combat inflation which has led to
the highest borrowing costs since 2008. This has led to a decline
in transaction volumes with buyer sentiment negatively affected
and this has impacted property valuations across all commercial
sectors with industrial and offices particularly affected.
There have been signs in early 2023 that sentiment is returning
to the investment market, especially in the industrial sector,
where there remains a significant lack of supply and positive
rental growth prospects. This has been evident in the successful
disposals the Group has completed from which significant
proceeds have been allocated towards debt payment.
The war in Ukraine has been at the centre of increasing geo-
political tensions which has caused volatility in commodity
prices resulting in a significant increase in energy & food prices
and construction costs with supply chain issues a main reason
behind the rapid rise in inflation. Inflation has caused a reduction
in discretionary spend as people cope with higher utility and
increased grocery bills, which is impacting the leisure sector.
We are mindful that this affects both landlords and tenants
directly and we have continued to work closely with our tenants
to navigate through the uncertain economic environment.
ESG
Globally, the real estate sector is a major contributor to GHG
emissions, and ESG remains key to responsible strategies.
Premiums are being achieved in the investment market
for buildings with strong ESG credentials and increasingly
both landlords and occupiers are demanding good energy
performance and targeting lower emissions whilst creating
adaptable and sustainable built environments to satisfy their
ESG requirements.
We have been focusing on improving the energy performance
of our portfolio working alongside our tenants and have seen
significant improvement in EPC grades. We are also mindful of
opportunities across the portfolio to enhance amenities and the
physical environment for our tenants with an understanding that
these initiatives are necessary to maintain and improve portfolio
performance.
1 4
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 Our sectors
Overview as at 31 March 2023
Offices
Leisure
The office sector continues to see a flight to quality as occupiers
navigate the complexities of hybrid working models. Since the
pandemic, we are seeing employees return to the office and
it is expected that this trend will continue, albeit it is widely
recognised that the sector has undergone a structural change in
regards to hybrid working.
We are also seeing an increasing emphasis from occupiers on
creating attractive working environments to draw people into
their place of work and help retain talent. This has resulted in a
trend of occupiers being willing to pay substantial premium rents
for best in class space. There is a general shortage of Grade A
supply and a limited development pipeline in most regional City
centres, which we believe will be only exacerbated by the rise in
construction costs and debt financing.
Our office holdings make up 49.7% of the portfolio at 31 March
2023 and are located in well connected City and town centre
locations.
High inflation and the cost of living crisis has reduced
discretionary spend, disproportionately affecting the sector and
investor sentiment.
Despite this, trading at both cinemas in the portfolio has
improved and a significant restaurant letting was completed
at Sol, Northampton. Our leisure assets make up 15.2% of the
portfolio as at 31 March 2023.
Retail
Inflation, interest rates and the economic backdrop have led to
a near all time low in consumer confidence on the High Street.
Investor demand remains focused on prime pitches in core
trading locations, with particular sensitivity to rents that have
not been rebased. Retail makes up 6.1% of the portfolio at
31 March 2023 across three assets where we have continued
to maintain high occupation levels.
Industrial
Retail Warehousing
The industrial sector has seen a rebalancing from the record
capital growth of the last few years. Inflation and increased
business rates from April 2023 have also contributed to a
steadying of the occupational market. Despite this, rental growth
is still being registered in regional markets, particular for small
and medium size units.
Our industrial holdings made up 18.7% of the portfolio as at 31
March 2023. Despite the fall in capital values across the industrial
sector, occupational demand continues to be resilient, as
demonstrated by significant rental reversions being achieved at
Point Four, Avonmouth & Black Moor Road, Verwood.
We believe that retail warehousing values have fallen from the
peak of Q1 2022. Despite this, the occupier market particularly
has been resilient and vacancy rates are substantially lower than
in-town and high street retail. This has led to upward pressure on
rents in good locations. The investment market has also become
more active in 2023 with a number of institutional investors
focusing on the asset class.
Our holding, representing 3.7% of the portfolio as at 31 March
2023, are fully let to robust, well performing tenants and are in
desirable South East locations.
1 5
STRATEGIC REPORT Operational
review
£1.1 million of additional
annualised rent in the year
Summary of the year
Operationally, the business remains robust. The team has been
proactive in implementing asset management plans to increase
income, reduce void costs and improve our ESG performance,
including EPCs. Rent collection remains strong and occupancy
levels remain resilient.
Total rent collection for the 12 months to 31 March 2023
was 99% (2022: 98%). During the year ended 31 March 2023,
the Company disposed of eight investment properties for
£15.6 million, 8% ahead of the 31 March 2022 book value.
Apartment sales at Hudson Quarter, York have continued since
1 April 2023, with a further five apartment sales having completed
to the value of £2.2 million. There are 18 units remaining.
Asset Management
There have been 45 lease events completed totalling 228,000
sq ft of space, 11% above the 31 March 2022 ERV, generating
£1.1 million of additional annualised contracted rent, which
demonstrates the strong reversionary potential within the
portfolio. The 45 lease events can be analysed as:
• 14 new lettings, 14% above ERV generating £0.8 million of
additional annualised income,
• 15 lease renewals, 8% above ERV generating £0.1 million of
additional annualised income,
• 16 rent reviews, 12% above ERV generating £0.2m of
additional annualised income.
In addition, void savings from new lettings was £0.3 million resulting
in a total of £1.4 million of annualised net rental income created.
This asset management activity has contributed to the Company
outperforming the MSCI UK Quarterly Property Index over FY23.
Portfolio asset management activity continues to improve the
EPC (Energy Performance Certificate) profile across the portfolio
- 96.2% of the portfolio is now rated A-D and 72.2% is rated A-C
(31 March 2022: 88.8% and 55.2% respectively).
New lettings in the year included:
• 15 year lease without break at Sol, Northampton let to Chi,
an aspirational F&B operator at £85,000pa (with turnover
top up) 107% above the March 2022 ERV. The unit had been
vacant for over 5 years.
• 5 year lease on ground and lower ground at Regency House,
Winchester to Ward Williams Associates at £47,081pa,
15% above the March 2022 ERV.
• 10 year lease at Verwood of two units at a rent of £68,600pa
equivalent to £8.75psf which set a new rental tone for the estate.
• Three lettings at Museum Street, York for a combined rent
of £97,900pa at an average WAULT to break of 4 years at an
average premium to March 2022 ERV of 17%.
Notable lease renewals during the year were at:
• Maidenhead, where the WAULT was extended from 3.5 years
to 11.5 years.
• Exeter, 10 years at £124,572pa, 8% above ERV.
• Sutton, 5 years at £282,500pa, in line with the ERV.
• Verwood, to the key anchor tenant Global Filters for a 10 year
term at £130,290pa, 53% above the previous passing rent.
• Leamington Spa, Imperial House where both tenants Ubisoft
and Altair Engineering renewed their leases for a further
5 years at £333,850 pa, an average of 6% above ERV.
These successful asset management initiatives are part of the
process of creating value and preparing assets for sale, the timing
of which is within the control of the Company.
Portfolio overview
Following the recent disposal programme of carefully selected
assets, as at 31 March 2023 the portfolio comprised 31 buildings
(2022: 37) with 141 occupiers (2022: 164), of higher quality with
improved EPC ratings and occupancy levels.
Our diversified portfolio has had a focus on the office and
industrial sectors, which made up 68% of the total holdings as at
31 March 2023. The remainder comprised leisure at 15%, retail
and retail warehousing at 11% and residential at 6% (HQ York).
CBRE independently valued the portfolio as at 31 March 2023
at £192.4 million, resulting in a deficit of 18.6% on a like-for-like
basis compared with the valuation at 31 March 2022. The best
performing sector was retail warehouse, increasing 5.8%. The
largest declines were leisure at 20.9% and offices at 20.4%. The
industrial assets were down 17.5% and retail declined 16.4%. This
compares to declines in the market as provided by the MSCI UK
Quarterly index of -15.4% for offices, with industrial asset declines
of -23.2% and retail of -12.7%.
Portfolio value
Net initial yield
Reversionary yield
Contractual rental income
Estimated rental value
WAULT to break
EPRA vacancy rate
FY23
£192.4m
7.4%
9.6%
£15.7m
£18.8m
4.8 years
12.3%
FY22
£259.0m
5.6%
7.5%
£16.7m
£19.4m
4.7 years
11.5%
1 6
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 Chief Financial Officer’s
Report
Disposal strategy
Financial Overview
As part of the ongoing strategy to maximise cash returns to
shareholders, certain properties are either being marketed for
sale or are being prepared and readied for sale whilst other
properties are undergoing asset management initiatives in order
to prepare them for sale at a future date.
During the year, eight investment properties were sold for
£15.6 million at an average 8% ahead of March 2022 book value.
The Group’s adjusted profit before tax decreased by 2.6% to
£7.6 million (2022: £7.8 million), and EPRA NTA per share by
24.1% to 296 pence (2022: 390 pence). Against a backdrop
of economic uncertainty, the Group continued to deliver at an
operational level, by significantly reducing gross debt in a rising
interest rate environment and making substantial progress in
reducing administration costs, with £1.4 million of annualised
cost savings made in the year.
The decrease in adjusted profit before tax to £7.6 million is
principally due to the increase in interest rate costs and the
loss of income through disposals in the year. However, this was
largely offset by asset management letting activity increasing
net rental income and a reduction in administration costs. In line
with the strategy of returning capital to shareholders, the Group
has increased the dividend paid or declared by 13.2% in the
period to 15.0 pence per share (2022: 13.25 pence per share) and
bought £6.7 million shares back in the year as part of the share
buyback programme. The share buyback programme contributed
0.6 pence per share to adjusted earnings per share, which
increased to 17.1p (2022: 16.9p) whilst also increasing EPRA NTA
by 8.0 pence per share.
The £0.8 million (2022: £5.0 million) profit on disposal of eight
investment properties, the £0.5 million realised profit on the
sale of 23 residential units at Hudson Quarter and the fair value
commercial property valuation deficit of £42.9 million (2022:
£8.2 million surplus), contributed to the IFRS loss before tax of
£35.8 million (2022: £24.6 million profit).
The fair value property revaluation deficit was largely as a result
of the upward yield pressure driven by macroeconomic factors
rather than underlying property performance as evidenced by a
robust letting performance in the year, where asset management
initiatives continue to drive rental growth above estimated rental
values (ERV), contributing, amongst other factors, to an increase
in adjusted earnings per share to 17.1p. The asset management
performance in the year contributed to the Group outperforming
the MSCI benchmark on a total property return basis, with the
income outperformance being 3.1%. The Company MSCI total
return for the year was -11.6% compared with -12.6% for the
MSCI benchmark.
On 5 May 2023, the Company announced in a strategy and
trading update the significant disposal of six industrial assets
for £34.0 million at a NIY of 6.2%, 3.0% ahead of 31 March
2023 book value of £33.0 million. Five of the properties have
now completed and the sixth is expected to complete in early
July. The Company has also completed the sale of an Aldi
supermarket, in Gosport, for £5.6 million at a NIY of 5.5%, 7.3%
ahead of the 31 March 2023 valuation.
The Company has, since 5 May, exchanged contracts for the
sale of Millbarn Medical Centre at Beaconsfield for £1.5 million,
87.5% ahead of the March 2023 book value of £0.8 million. The
Company has also exchanged contracts for the sale of Princeton
House, Farnborough for £2.3 million, which is 31.7% ahead of
the 31 March 2023 valuation. Both properties are expected to
complete in July.
Apartment sales at Hudson Quarter, York continued to progress,
despite the uncertain economic backdrop. During the year ended
31 March 2023 the Company completed on 23 apartments
for a total of £10.1 million, bringing the total residential and
investment property sales for the year to £25.7 million.
Post 31 March 2023, total residential and investment sales
exchanged or completed currently stand at £45.6 million and
as a result, since the change of strategy announced on 19 July
2022, disposals (either completed or exchanged) have generated
proceeds of £54.5 million, a 9% reduction over the March 2022
valuation (which was the peak of the current property cycle) or 5%
ahead when compared with the relevant March valuation prior
to sale.
ESG
In line with stakeholder requirements, buildings and occupiers
increasingly need to improve their ESG impact. This includes
fulfilling sustainable criteria in line with the Paris Accord net
zero targets.
Central to this is the continuous improvement of our EPC ratings.
The minimum rating within our portfolio as at 31 March 2023 is F
at Bank House, Leeds. It is encouraging that 96.2% of our EPC’s
are rated A – D (2022: 88.8%).
ESG is embedded in our business and decision making. Our
asset management initiatives and capital expenditure take into
consideration the ESG benefits of improving buildings and we
work with tenants to help them where possible reduce their utility
costs, while improving the overall environmental impacts of our
buildings and their use. Renewable electricity is used in 99% of
landlord controlled properties.
1 7
STRATEGIC REPORT Financial
review
Gross debt reduced by £37.5 million and annualised
cost savings of £1.4 million were made in the year
Financial highlights
Income growth
IFRS (loss)/profit before tax
Adjusted profit before tax
EPRA earnings
Basic EPS
EPRA EPS
Adjusted EPS
Dividend per share paid or declared
Capital growth
Portfolio like-for-like value
Net Asset Value
Basic NAV per share
EPRA NTA per share
Total accounting return
Total property return
Total shareholder return
The summary of the Group financial results are as follows:
Income statement summary
Income Statement
Gross property income (excluding Expected Credit Loss provision)
Property operating expenses
Expected Credit Loss provision
Net rental income
Recurring administration expenditure
Finance costs
Adjusted profit before tax
Tax
Adjusted profit after tax
Hudson Quarter development loan interest
Payments to former Directors (including associated costs)
Share based payments
EPRA earnings
(Loss)/gain on revaluations
Trading profit
Profit on disposal of investment properties
Other income statement movements
IFRS earnings
1 8
2023
2022
(£35.8m)
£7.6m
£5.7m
(80.2p)
12.7p
17.1p
15.00p
(18.6%)
£128.5m
294p
296p
(20.4%)
(11.6%)
(15.9%)
£24.6m
£7.8m
£7.4m
53.1p
16.0p
16.9p
13.25p
3.9%
£177.2m
383p
390p
14.8%
12.5%
21.1%
31 March
2023
£m
31 March
2022
£m
17.9
(2.6)
0.3
15.6
(4.1)
(3.9)
7.6
0.1
7.7
-
(1.8)
(0.2)
5.7
(42.9)
0.5
0.8
0.2
17.4
(2.6)
0.4
15.2
(4.4)
(3.0)
7.8
(0.1)
7.7
(0.2)
-
(0.1)
7.4
8.2
3.8
5.0
0.1
(35.7)
24.5
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 Net rental income in the year increased marginally to £15.6 million (2022: £15.2 million). Despite the loss of income from disposals
since 31 March 2022 of £1.4 million net rental income increased as a result of successful asset management initiatives. Property
operating expenses remained stable at £2.6 million (2022: £2.6 million).
The Group has implemented measures to reduce its cost base, with annualised cost savings of £1.4 million being made in the year.
These cost savings reflect changes in the board composition and a combination of other cost reduction measures, including the
relocation of the head office in December 2022. The cost savings of £1.4 million represent 30% of FY22 administration expenses and
19% of FY22 EPRA earnings. Due to the timing of the savings and various contract notices, the subsequent impact of these costs was
only reflected in the latter months of FY23. This is reflected in the recurring administration costs reducing by £0.3 million to £4.1 million
(2022: £4.4 million) in the period.
Non-recurring administration expenses in the period include £1.8 million of payments, including associated costs, paid to the former
Chief Executive and Executive Property Director, who stepped down in the period, under the terms of their service contracts and the
Company’s remuneration policy.
Finance costs increased by £0.9 million to £3.9 million (2022: £3.0 million) in the year, as a result of our swaps maturing and the Bank of
England increasing interest rates in response to rising inflation.
In accordance with IFRS 9, in relation to the expected credit loss, we have assessed the risk of recoverability of our rental arrears. We
reversed £0.3 million of rental arrears from trade receivables to the income statement in the financial period. This included a reversal
of the £0.1 million bad debt provision made at 30 September 2022, as rent collection remained strong at 99% throughout the year as
tenant financial covenant health remained robust through the economic uncertainty.
Total demanded
Total collected
Outstanding
Current collection rates
Quarter
starting
Mar 22
£m
Quarter
starting
Jun 22
£m
Quarter
starting
Sep 22
£m
Quarter
starting
Dec 22
£m
Year ended
31 Mar 23
£m
4.0
4.0
-
99%
4.1
4.0
0.1
99%
4.1
4.1
-
99%
4.0
4.0
-
99%
16.2
16.1
0.1
99%
The March 2023 quarter rent collection rates remain robust at 99%, displaying a continuation of the strong rent collection seen
throughout the year.
Shareholder value
EPRA Net Tangible Assets(“NTA”) decreased by 94 pence per
share or 24.1% to 296 pence (2022: 390 pence) during the year.
This was largely due to the revaluation deficit of £42.9 million or
96.4 pence per share, or an 18.6% reduction in the portfolio on a
like-for-like basis.
Other movements to note include the buyback of shares of
£6.7 million, increasing EPRA NTA by 8.0 pence per share, the
profit on disposal of assets and Hudson Quarter (HQ) trading
profit of £1.3 million, contributing 2.9 pence per share. These
were offset by the fair value, downward adjustment of trading
properties (HQ York residential) of £2.5 million, or 5.5 pence per
share and the payments including associated costs to former
Directors of £1.8 million reducing EPRA NTA by 4.1 pence per
share. Conversely, net adjusted earnings, after dividends paid,
increased EPRA NTA by a further 2.6 pence per share. Other
movements contributed to a further reduction of 1.5 pence
per share.
£37.5 million
reduction in gross debt
15.0 pence
dividends paid or declared
in the year
£1.4 million
annualised cost
savings introduced
1 9
STRATEGIC REPORT Financial
review (continued)
EPRA Net tangible asset bridging chart
EPRA NTA per share movements in the year
17.1p
1.8p
1.1p
8.0p
(96.4p)
425p
400p
375p
350p
325p
300p
390.0p
275p
250p
225p
200p
(14.5p)
(5.5p)
(4.1p)
(1.5)
296.0p
EPRA NTA
at 31 March
2022
Share
buybacks
Adjusted
profit
before tax
Sale of
investment
properties
HQ
trading
profit
Property
portfolio
revaluation loss
Cash
dividends
paid
Fair value adj.
of trading
properties*
Payments to
former Directors
(inc.associated
costs)
Other
movements**
EPRA NTA
at 31 March
2023
*
HQ York residential development is carried in the books at lower of cost and net realisable value (NRV) and as the NRV was higher
than the cost at 31 March 2022, EPRA NTA adjusts for the variance
** Other movements includes movement in treasury shares, cost of derivatives, debt termination costs, non-recurring loan interest,
disposal of listed equity investments and the effect of increased number of shares in the year
EPRA NTA Movement
EPRA NTA at 31 March 2022
Deferred Bonus Plan award
Share buyback
EPRA NTA after buyback
Adjusted earnings
Disposal of assets
Hudson Quarter trading profit
Property portfolio revaluation deficit excl. Bank House
Bank House revaluation deficit
Cash dividends paid
Fair value adj. of trading properties
Payments to former Directors including associated costs
Other movements
EPRA NTA at 31 March 2023
2 0
No. of shares
(diluted)
Pence
per share
£m
180.6
46,325,236
390.0p
0
(6.7)
11,609
(2,608,633)
173.9
43,728,212
7.6
0.8
0.5
(35.5)
(7.4)
(6.5)
(2.5)
(1.8)
0.2
0
8.0p
398.0p
17.1p
1.8p
1.1p
(79.7p)
(16.7p)
(14.5p)
(5.5p)
(4.1p)
(1.5p)
129.3
43,728,212
296.0p
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 The average cost of debt in the year increased to 5.8% (2022:
3.2%) as a result of interest rate increases in the year. Despite the
Group’s two interest rate swaps maturing in the year, the Group
has prioritised debt repayment to minimise the exposure and
impact of interest rate increases to the Group. At 31 March 2023,
the Group held £8.6 million of fixed debt (2022: £61.4 million),
which was 13% of overall debt (2022: 60%), as shown in the
table below:
Debt
Barclays
NatWest
Santander
Lloyds
Scottish Widows
Debt Metrics
Fixed
£m
Floating
£m
Total drawn
£m
Years to
maturity
-
-
-
-
8.6
8.6
19.4
17.7
11.8
6.8
-
55.7
19.4
17.7
11.8
6.8
8.6
64.3
1.2
1.4
4.2
0.9
3.3
2.0
31 March
2023
31%
£64.3m
£8.6m
5.8%
2.0yrs
46%
31 March
2022
28%
£101.8m
£61.4m
3.2%
1.9yrs
41%
Net loan to value ratio
Debt drawn
Total fixed debt
Average cost of debt
Average debt maturity (yrs)
NAV gearing
Matthew Simpson
Chief Financial Officer
14 June 2023
Financing
Given the economic uncertainty during the year, which has
seen rising inflation and multiple increases in interest rates by
the Bank of England, the Group has prioritised the efficient use
of its capital and maintained an appropriate capital structure.
The Group has significantly reduced its drawn debt in the
year by 36.8% to £64.3 million (2022: £101.8 million). The
debt repayments in the year have given the Group increased
headroom on its bank covenants. The Group remained compliant
on all covenants on its bank facilities in the year, despite the
increase in interest rates. Interest rate cover (“ICR”) ratios were
renegotiated on two facilities in the year, providing further
headroom on the bank covenants in light of rising interest rates.
At 31 March 2023, the Group’s cash and cash equivalents were
£5.5 million (2022: £28.1 million). As at 12 June 2023, the cash
balance was £9.6 million. The disposal proceeds from investment
properties and Hudson Quarter residential sales continue to
enhance cash reserves and gives the Company flexibility and
optionality on how to deploy its capital.
Net debt at 31 March 2023 reduced by 20.1% to £58.8 million
(2022: £73.6 million). The loan to value (LTV) ratio remained
conservative at 31% (2022: 28%), despite the £42.9 million
revaluation deficit on investment properties and the £6.7m share
buyback programme in the year.
Since 31 March 2023, the Company has exchanged or completed
on nine investment property disposals and five Hudson Quarter
residential sales, with a further £24.9 million of gross bank debt
being repaid. This includes the full repayment of the Lloyd’s
facility which was due to mature within 12 months in March 2024.
This has reduced our gross debt to £39.4 million as at 12 June
2023 and our net debt to £29.8 million. The combination of the
disposals and £1.2 million share buyback since 31 March 2023
has resulted in proforma LTV based on the valuation at 31 March
2023 reducing to 18.7% at 12 June 2023. On completion of the
disposal of currently contracted sales proforma gross and net
debt is expected to reduce further to c.£34 million and c.£20
million equating to proforma LTV of c13%.
Movement in gross debt during the year:
Drawn debt at 31 March 2022
Repayment of debt from disposals
Amortisation of loans
Drawn debt at 31 March 2023
Repayment of debt from disposals
Amortisation of loans
Drawn debt at 12 June 2023
2023
£m
101.8
(35.8)
(1.7)
64.3
(24.5)
(0.4)
39.4
2 1
STRATEGIC REPORT Key
performance
indicators
We measure our
performance using
KPIs linked to our
strategic priorities.
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 taking
into account the updated
strategy. Accordingly, Gross
Debt, LTV of Group Debt
and Return of Capital replace
dividend cover and cost of debt
as being more appropriate KPIs.
Strategic aims
1 Maximise value from
portfolio generate attractive
total returns
2 Manage our
assets effectively
3 Be a responsible
company
Remuneration aims
1 Fixed remuneration
2 Short term variable
remuneration
2 2
Adjusted Profit
Before Tax
Rationale
Adjusted profit before tax strips out fair
value movements and one-off costs, to
get recurring income from the underlying
performance of the property portfolio.
Performance
Adjusted PBT decreased marginally in the
year, due to increased interest costs and
income lost to disposals. However, this was
partially offset by the increased net rental
income from asset management activity and
administration costs savings.
Adjusted Earnings
per share
Rationale
Adjusted earnings per share is a key
measure of the Company’s operational
performance as it excludes all fair value
movements and one-off items not relevant
to the underlying net income performance
of the portfolio.
Performance
Adjusted earnings per share increased in
the year, as a result of the accretive share
buyback in the year and strong net income
performance, despite higher interest costs
and loss of income from disposals.
EPRA vacancy rate %
Return of Capital
LTV of Group debt
Maintain strong occupier contentment
Our strategic objective is to maximise
The Company seeks to maintain an
Rationale
Rationale
Rationale
and retention.
returns and return capital to shareholders.
appropriate level of gearing to enhance
This measures the dividends paid and the
shareholder returns limit its exposure to
buyback amount in the year.
balance sheet risk.
Performance
Performance
Performance
Remained stable at 12.3% at the year end.
Dividends increased 13.2% in the year to
Disposals of assets and debt repayment,
15.0p and bought £6.7m of shares back
have maintained a conservative LTV at 31%,
under the share buyback programme
despite the revaluation deficit.
Performance over the last 3 years
Performance over the last 3 years
Performance over the last 3 years
Performance over the last 3 years
Performance over the last 3 years
8
7
6
5
4
3
2
1
0
7.5m
7.8m
7.6m
18
15
12
9
6
3
0
16.4p
16.9p
17.1p
13.6%
12.3%
11.5%
2021 2022 2023
2021 2022 2023
2021 2022 2023
2021 2022 2023
15
12
9
6
3
0
6.5m
(div)
6.7m
(buyback)
5.4m
3.5m
2021 2022 2023
42%
31%
28%
50
40
30
20
10
0
Link to strategy 1 2
Link to strategy 1 2
Link to strategy 1 2 3
Link to strategy 1 2
Link to strategy 1 2
Link to remuneration 1 2
Link to remuneration 1
Link to remuneration 1
Link to remuneration 1
Link to remuneration 1
Total shareholder
return
Rationale
Actual market-based returns achieved
by an investor.
Performance
The share price decreased by 21.2% in the
year, whilst an increase in the dividend gave
a TSR of -13%. It remains a key objective
to reduce discount between NAV and
share price.
Gross Debt
Total property return
Average EPC rating
Rationale
The Board seek to maintain an appropriate
level of debt in order to enhance
shareholder returns. It is mindful of rising
interest rates and the impact this can have
on the value creation for shareholders.
Performance
The Company has repaid £37.5m of debt
in the year, reducing the overall drawn debt
by 36.8%.
Performance over the last 3 years
Performance over the last 3 years
Performance over the last 3 years
Performance over the last 3 years
40
35
30
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
-35
38.5%
21.1%
(15.9)%
128.3m
101.8m
64.3m
140
120
100
80
60
40
20
0
2021 2022 2023
2021 2022 2023
Link to strategy 1 2
Link to strategy 1 2
Link to strategy 1 2 3
Link to strategy 1 2 3
Link to remuneration 2
Link to remuneration 1
Link to remuneration 2
Link to remuneration 2
15
12
9
6
3
0
15
12
9
6
3
0
-3
-6
-9
-12
(TPR)
Rationale
E-G
Rationale
Our objective is to outperform our peer
group on a total return basis. This is the
industry benchmark across the UK.
We want to either refurbish or sell under
performing assets based on our criteria.
Performance
Performance
The revaluation deficit has been partially
Through disposals, capex and re-
offset by a strong income return, resulting
assessments, E,F and G ratings have
in a -11.6% TPR, outperforming the MSCI
significantly reduced
benchmark of -12.6%.
12.5%
1.0%
(11.6)%
2021 2022 2023
30
25
20
15
10
5
0
24.3%
11.2%
3.8%
2021
2022 2023
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023
Before Tax
Rationale
per share
Rationale
of the portfolio.
Performance
Adjusted profit before tax strips out fair
value movements and one-off costs, to
Adjusted earnings per share is a key
measure of the Company’s operational
get recurring income from the underlying
performance as it excludes all fair value
performance of the property portfolio.
movements and one-off items not relevant
to the underlying net income performance
Performance
Adjusted PBT decreased marginally in the
Adjusted earnings per share increased in
year, due to increased interest costs and
the year, as a result of the accretive share
income lost to disposals. However, this was
buyback in the year and strong net income
partially offset by the increased net rental
performance, despite higher interest costs
income from asset management activity and
and loss of income from disposals.
administration costs savings.
7.5m
7.8m
7.6m
16.4p
16.9p
17.1p
2021 2022 2023
2021 2022 2023
Total shareholder
Gross Debt
return
Rationale
by an investor.
Actual market-based returns achieved
The Board seek to maintain an appropriate
Rationale
level of debt in order to enhance
shareholder returns. It is mindful of rising
interest rates and the impact this can have
on the value creation for shareholders.
Performance
Performance
The share price decreased by 21.2% in the
The Company has repaid £37.5m of debt
year, whilst an increase in the dividend gave
in the year, reducing the overall drawn debt
a TSR of -13%. It remains a key objective
by 36.8%.
to reduce discount between NAV and
share price.
38.5%
21.1%
(15.9)%
128.3m
101.8m
64.3m
2021 2022 2023
2021 2022 2023
18
15
12
9
6
3
0
140
120
100
80
60
40
20
0
8
7
6
5
4
3
2
1
0
40
35
30
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
-35
Adjusted Profit
Adjusted Earnings
EPRA vacancy rate %
Return of Capital
LTV of Group debt
Rationale
Maintain strong occupier contentment
and retention.
Rationale
Our strategic objective is to maximise
returns and return capital to shareholders.
This measures the dividends paid and the
buyback amount in the year.
Rationale
The Company seeks to maintain an
appropriate level of gearing to enhance
shareholder returns limit its exposure to
balance sheet risk.
Performance
Remained stable at 12.3% at the year end.
Performance
Dividends increased 13.2% in the year to
15.0p and bought £6.7m of shares back
under the share buyback programme
Performance
Disposals of assets and debt repayment,
have maintained a conservative LTV at 31%,
despite the revaluation deficit.
Performance over the last 3 years
Performance over the last 3 years
Performance over the last 3 years
Performance over the last 3 years
Performance over the last 3 years
15
12
9
6
3
0
13.6%
12.3%
11.5%
2021 2022 2023
15
12
9
6
3
0
6.5m
(div)
6.7m
(buyback)
5.4m
3.5m
2021 2022 2023
50
40
30
20
10
0
42%
31%
28%
2021 2022 2023
Link to strategy 1 2
Link to strategy 1 2
Link to strategy 1 2 3
Link to strategy 1 2
Link to strategy 1 2
Link to remuneration 1 2
Link to remuneration 1
Link to remuneration 1
Link to remuneration 1
Link to remuneration 1
Total property return
(TPR)
Rationale
Our objective is to outperform our peer
group on a total return basis. This is the
industry benchmark across the UK.
Average EPC rating
E-G
Rationale
We want to either refurbish or sell under
performing assets based on our criteria.
Performance
The revaluation deficit has been partially
offset by a strong income return, resulting
in a -11.6% TPR, outperforming the MSCI
benchmark of -12.6%.
Performance
Through disposals, capex and re-
assessments, E,F and G ratings have
significantly reduced
Performance over the last 3 years
Performance over the last 3 years
Performance over the last 3 years
Performance over the last 3 years
15
12
9
6
3
0
-3
-6
-9
-12
12.5%
1.0%
(11.6)%
2021 2022 2023
30
25
20
15
10
5
0
24.3%
11.2%
3.8%
2021
2022 2023
Link to strategy 1 2
Link to strategy 1 2
Link to strategy 1 2 3
Link to strategy 1 2 3
Link to remuneration 2
Link to remuneration 1
Link to remuneration 2
Link to remuneration 2
2 3
STRATEGIC REPORT
Risk
management
Risk framework
Going concern assessment
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 and uncertainties.
Risk management is an inherent part of the Board’s decision
making process. This is then embedded into the business and its
systems and processes. The Board reviews its overall risk appetite
and regularly considers, via the Audit and Risk Committee,
the principal risks facing the company, managements plans
for mitigating these and emerging risks. The Committee also
considers, at least annually, the effectiveness of the Company’s
system of risk management and internal control. Further
information on the work of the Committee in this area is available
in the Audit and Risk Committee report on page 51.
Our approach to risk identification and our open and supportive
culture means that asset managers and key individuals in the finance
team are able to report directly and at an early stage on issues,
allowing management to take appropriate mitigating action.
Emerging risks
If economic and geo-political stability remains uncertain or
worsens, this could have an impact on the commercial property
market with reduced valuations and rental income. Further cost
of living issues may negatively impact consumer sentiment and
inflation could reduce spending further while direct and indirect
costs to the Group may increase further which may not be fully
recoverable. A prolonged bout, new variants of COVID-19 or
further pandemics may lead to further interruption of large parts
of the economy for a significant period.
Introduction
In accordance with the 2018 UK Corporate Governance Code (the
Code), the Directors have assessed the Group’s position over the:
• Short-term (over the next 12 months to June 2024 as
required by the ‘Going concern’ provision) and;
• Medium-term (a three year period to June 2026 as required
by the ‘Viability statement’ provision)
Going concern
The Directors regularly assess the Group’s ability to continue as a
going concern. The Strategic report sets out in detail the Group’s
financial position, cash flows, liquidity position, borrowing
facilities and the factors which will affect future performance. In
assessing the going concern, the Directors considered:
• The Group’s current financial position including cash, drawn
debt, and LTV
• The Group’s 12 month ‘base case scenario’ forecast to June
2024, which is management’s best estimate of market and
business changes, taking into account:
– Disposal of investment properties
–
Residential sales
– Higher levels of inflation and rising interest rates
– Ability to satisfy bank covenants
– Committed capital expenditure
–
Rent collection
• Downside scenario and stress testing on the 12 month base
case scenario forecast to June 2024
The Group is in a strong financial position. At 31 March 2023, the
Group had £5.5 million of cash and cash equivalents. The fair value
of our property portfolio at 31 March 2023 was £192.4 million with
h
g
H
i
n
o
i
t
a
g
i
t
i
m
r
e
t
f
a
d
o
o
h
i
l
e
k
i
L
i
m
u
d
e
M
1
2
7
8
4
3
10
5
11
6
12
9
w
o
L
Low
2 4
Medium
High
Potential impact after mitigation
Risks
1 Market Cycle
2 Economic and
Political
3 Capital Structure
4 Liquidity
5 Portfolio Strategy
6 Asset Management
7 Valuation
8 Tenant Demand /
Default
9 Business Continuity
/ Cyber
10 People
11 Climate Change
12 Regulatory and tax
Score
Yearly
Movement
15
15
11
12
10
8
15
11
4
12
10
6
➞
➞
➞
➞
➞
➞
➞
➞
➞
➞
➞
➞
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023
net assets of £128.5 million. During the year, the Group repaid
£37.5 million of debt, funded by investment property and Hudson
Quarter sales, with drawn debt at 31 March 2023 of £64.3 million
(31 March 2022: £101.8 million). The Group has conservative gearing
with LTV remaining stable at 31% (31 March 2022: 28%). During the
year, the Group collected 99% of all rents and complied with all ICR
and LTV bank covenants, despite SONIA interest rates rising from
0.75% at 31 March 2022 to 4.25% at 31 March 2023. The Group
increased its quarterly dividends in the year by 13.2% to 15.0 pence
per share, fully covered from rental income. There was one bank
facility which was due to expire within a year of 31 March 2023 which
was repaid on 31 May 2023. There is one bank facility which is due
to expire at the end of June 2024, the Group currently has sufficient
cash reserves to repay the majority of this facility if required. In
addition to the strong financial position of the Group at 31 March
2023, the Group continued to strengthen its balance sheet post year
end, with nine investment properties sold for £43.4 million and five
Hudson Quarter residential units sold for £2.2 million. As at 12 June
2023 the Group had, cash of £9.6 million and gross debt and LTV of
£39.4 million and 18.7% respectively.
The Directors conducted a detailed 12 month base case scenario
forecast to June 2024, making various assumptions over asset
sales, rising inflation and interest rates, letting assumptions, rent
collection and committed capital expenditure. The forecasts
indicated that the Group:
Viability
In accordance with provision 31 of the UK Corporate Governance
Code and taking into consideration the current economic uncertainty,
the Directors have assessed the prospects of the Group and future
viability over a three-year period to June 2026, being longer than the
12 months required by the “Going Concern” provision.
The Board’s assessment of the Group’s viability for the next three
years has been made with reference to:
• The impact of the current economic uncertainties and
resulting impact on the Group and our tenants’ ability to
operate and meet their rental obligations.
• The key principal risks of the business and its risk appetite.
• The Group’s long-term strategy.
• The impact on business operations, mainly rent collection,
rising interest rates and progress on residential sales at
Hudson Quarter, in the event of a downturn in the economy.
• The Group’s current position and its ability to meet future
financial obligations to remain covenant compliant.
Review period
The Board considers a period of three years to be appropriate
over which to assess the long-term viability of the Company for
the following reasons:
• Has strong sustainable cash flows and would be able to meet
its liabilities as they fall due over the next 12 months and;
• The Group’s working capital model, detailed budgets and
cash flows consist of a rolling three-year forecast.
• Will comply with all ICR and LTV bank covenants
•
It reflects the Group’s asset management business plans.
In addition to the detailed 12 month base case scenario forecast
to June 2024, the Directors have considered a downside scenario
in assessing the Group’s ability to continue as a going concern.
Sensitivity analysis and reverse stress testing were undertaken to
assess the impact on the business and in particular the
bank covenants.
The downside scenario assumptions used in the assessment included:
• 15% reduction in all property bank valuations
• 15% reduction in rent collection from the two leisure assets
• Significant rise in SONIA interest rates of 1.5% to 6.0%
Even on the downside scenario described above, the Group will
still be able to meet its liabilities as they fall due over the next
12 months and will still be compliant on all ICR and LTV bank
covenants. The stress testing on ICR and LTV bank covenants
indicated that even if SONIA interest rates would reach 6.0% and
bank valuations fell by 15%, the Group would still be compliant on
all ICR and LTV bank covenants.
Going concern statement
Based on the analysis undertaken on the base case and downside
scenario’s, and the subsequent sensitivity analysis and stress
testing, the Group has sufficient liquidity to meet its ongoing
liabilities that fall due over the assessment period. Given the
market information available, the Directors are not aware of
any material uncertainty that exists that may cast doubt upon
the Group’s ability to continue as a going concern. As a result,
the Directors consider it appropriate to continue to prepare the
financial statements on a going concern basis.
• The Group’s weighted average debt maturity at 31 March
2023 was 2.0 years.
• The Group’s WAULT to break at 31 March 2023 was 4.8 years.
Assessment
The Directors conducted a detailed 3-Year viability assessment
which included a base case scenario forecast to June 2026,
making various assumptions over asset sales, rising inflation and
interest rates, letting assumptions, rent collection and committed
capital expenditure.
In addition to the base case scenario, the Directors have undertaken
a robust scenario assessment of the risks which could threaten the
3-year viability or the operational existence of the Group. As part of
the reasonable downside modelling, the Directors have stress-tested
working capital model and cash flows using the same assumptions as
stated above in the Going Concern assessment.
Based on the analysis undertaken on the base case and downside
scenario’s, and having assessed the current position of the Group,
its prospects and principal risks, the Board 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.
Confirmation of viability
Having assessed the current position of the Group, its prospects
and principal risks and taking into consideration the assumptions
stated above, the Board 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.
2 5
STRATEGIC REPORT 04
Liquidity
Risk description
Portfolio risks
05
Portfolio strategy
Risk description
06
Asset management
Risk description
Increasing costs of borrowing and
An inappropriate investment strategy
Failure to implement asset business
increasing interest rates could affect
that is not aligned to overall corporate
plans and elevated risks associated with
the Group’s ability to borrow or reduce
purpose objectives, economic
major development or refurbishment
its ability to repay its debts. Increasing
conditions, or tenant demand may result
could lead to longer void periods,
inflation is causing interest rates to
in lower investment returns
higher arrears and impact overall
investment performance, adversely
impacting returns and cashflows.
Undrawn bank facilities are in place to
The Board regularly reviews the Group’s
The process for reviewing asset
ensure sufficient funds are available
investment strategy and asset allocation
business plans is embedded in the
to cover potential liabilities arising
to ensure this is aligned to the overall
annual budgeting process. The Group’s
against projected cashflows. The Board
corporate strategy.
increase, which can reduce the cash
position of the Company and its ability
to fund working capital. It can have
a material impact on profitability and
dividend cover.
Mitigation
reviews financial forecasts on a regular
basis, including sensitivity against
financial covenants. The Audit and Risk
Committee considers the going concern
status of the Group biannually. The
Board considers the allocation of its
capital in granular detail to ensure the
most efficient use. Sales of assets can be
used to repay debt, fund working capital
requirements or return to shareholders.
Capital Risk Management Policy limits
development expenditure to <25%
of Gross Asset Value and the core
portfolio generates sustainable cash
flows. Our experienced management
team and use of advisors and property
managers supports the execution of
asset management strategies. Our
active management approach and new
investment system improves security of
income and limits exposure to voids.
Risk
management (continued)
Strategic risks
01
Market cycle
Risk description
Failure to react appropriately to
changing market conditions and adapt
our corporate strategy could negatively
impact shareholder returns. A downturn
in the market could reduce the appetite
in the investment market, leading to
lower valuations and affecting our
disposal strategy and ability to return
capital to shareholders.
02
Economic and political
Risk description
Uncertainty in the UK economic
landscape, global supply chain issues,
inflation and interest rates, cost of
energy crisis brings risks to the property
market, supply chains and to occupiers’
businesses. This can significantly impact
market sentiment and our ability to
extract value from our properties resulting
in lower shareholder returns, reduced
liquidity and increased occupier failure
Financial risks
03
Capital structure
Risk description
An inappropriate level of gearing or
failure to comply with debt covenants
or manage re-financing events could
put pressure on cash resources and lead
to a funding shortfall for operational
activities.
Mitigation
Mitigation
Mitigation
Mitigation
Mitigation
The Board monitors market indicators
and reviews the Group’s strategy
and business objectives on a regular
basis. It will tailor the delivery of the
Company’s strategy in light of current
and forecast market conditions.
Disposal of other assets will continue
if the market conditions allow for value
to be achieved, whilst active asset
management of the assets will continue
to support in delivering returns to
shareholders. Third party agent’s advice
is taken on all disposals. The Executive
Committee regularly reviews market
conditions.
The Board monitors the political and
economic conditions and emerging
policy and any uncertainty when
setting strategy. Sensitivity modelling
is undertaken against a downturn in
economic outlook to test the robustness
of our financial position and have
regard to economic and property
industry research when making
significant decisions.
The Board regularly reviews its capital
risk management policy, gearing
strategy and debt maturity profile. The
Group’s LTV is a maximum of 35%, and
capital has been used to repay debt
to reduce exposure to interest rate
volatility and ensure debt compliance.
Management maintains a close
relationship with key lenders.
Current position
Current position
Current position
Current position
Current position
Current position
The Board is monitoring and considering
the longer term impacts of the cycle
including the potential future of the
office and the effects of the enhanced
ESG requirements.
Our plans reflect current trading
conditions and future economic
headwinds facing the country which can
impact on bank debt covenants and
costs. We use consultants and experts
so we can anticipate key planning and
development policies and consider how
these may impact our activities.
The Group’s weighted average debt
maturity is currently c2.0 years. The
Group’s LTV limit is 35%. We continue to
monitor whether the use of derivatives
to mitigate against interest rate rises are
appropriate.
The Company has repaid
£37.5 million of bank debt
No single asset comprises more than
Our refurbishment pipeline is
15% compared to the overall portfolio’s
continuously assessed to ensure
in the year to 31 March 2023.
value. The Company is selectively
the right projects are being brought
marketing certain assets for sale, as
forward at appropriate times ensuring
the market stabilisation and recovery
exposure at any one time is limited.
continues. Asset management initiatives
The Executive Committee is reviewing
utilised to maximise value. Appraisals
the Group’s Health and Safety systems
for improving properties e.g. via
and processes to ensure appropriate
refurbishment are ongoing for
oversight of assets.
certain assets.
Likelihood after mitigation
Score 1 (low) - 10 (high)
Likelihood after mitigation
Score 1 (low) - 10 (high)
Likelihood after mitigation
Score 1 (low) - 10 (high)
Likelihood after mitigation
Score 1 (low) - 10 (high)
Likelihood after mitigation
Score 1 (low) - 10 (high)
Likelihood after mitigation
Score 1 (low) - 10 (high)
7
Impact after mitigation
Score 1 (low) - 10 (high)
8
Overall Risk Rating
Score 1 (low) - 20 (high)
15
8
Impact after mitigation
Score 1 (low) - 10 (high)
7
Overall Risk Rating
Score 1 (low) - 20 (high)
15
5
Impact after mitigation
Score 1 (low) - 10 (high)
6
Overall Risk Rating
Score 1 (low) - 20 (high)
11
Impact after mitigation
Score 1 (low) - 10 (high)
Impact after mitigation
Score 1 (low) - 10 (high)
Impact after mitigation
Score 1 (low) - 10 (high)
Overall Risk Rating
Score 1 (low) - 20 (high)
Overall Risk Rating
Score 1 (low) - 20 (high)
Overall Risk Rating
Score 1 (low) - 20 (high)
4
6
10
5
7
12
4
4
8
2 6
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 Strategic risks
01
Market cycle
Risk description
Financial risks
03
02
Economic and political
Capital structure
Risk description
Risk description
Failure to react appropriately to
Uncertainty in the UK economic
An inappropriate level of gearing or
changing market conditions and adapt
landscape, global supply chain issues,
failure to comply with debt covenants
our corporate strategy could negatively
inflation and interest rates, cost of
or manage re-financing events could
impact shareholder returns. A downturn
energy crisis brings risks to the property
put pressure on cash resources and lead
in the market could reduce the appetite
market, supply chains and to occupiers’
to a funding shortfall for operational
in the investment market, leading to
businesses. This can significantly impact
activities.
lower valuations and affecting our
market sentiment and our ability to
disposal strategy and ability to return
extract value from our properties resulting
capital to shareholders.
in lower shareholder returns, reduced
liquidity and increased occupier failure
The Board monitors market indicators
The Board monitors the political and
The Board regularly reviews its capital
and reviews the Group’s strategy
economic conditions and emerging
risk management policy, gearing
and business objectives on a regular
policy and any uncertainty when
strategy and debt maturity profile. The
basis. It will tailor the delivery of the
setting strategy. Sensitivity modelling
Group’s LTV is a maximum of 35%, and
Company’s strategy in light of current
is undertaken against a downturn in
capital has been used to repay debt
and forecast market conditions.
economic outlook to test the robustness
to reduce exposure to interest rate
Disposal of other assets will continue
of our financial position and have
volatility and ensure debt compliance.
if the market conditions allow for value
regard to economic and property
Management maintains a close
to be achieved, whilst active asset
industry research when making
relationship with key lenders.
management of the assets will continue
significant decisions.
to support in delivering returns to
shareholders. Third party agent’s advice
is taken on all disposals. The Executive
Committee regularly reviews market
conditions.
Current position
Portfolio risks
05
Portfolio strategy
Risk description
An inappropriate investment strategy
that is not aligned to overall corporate
purpose objectives, economic
conditions, or tenant demand may result
in lower investment returns
06
Asset management
Risk description
Failure to implement asset business
plans and elevated risks associated with
major development or refurbishment
could lead to longer void periods,
higher arrears and impact overall
investment performance, adversely
impacting returns and cashflows.
04
Liquidity
Risk description
Increasing costs of borrowing and
increasing interest rates could affect
the Group’s ability to borrow or reduce
its ability to repay its debts. Increasing
inflation is causing interest rates to
increase, which can reduce the cash
position of the Company and its ability
to fund working capital. It can have
a material impact on profitability and
dividend cover.
Mitigation
Mitigation
Mitigation
Mitigation
Mitigation
Mitigation
The Board regularly reviews the Group’s
investment strategy and asset allocation
to ensure this is aligned to the overall
corporate strategy.
Undrawn bank facilities are in place to
ensure sufficient funds are available
to cover potential liabilities arising
against projected cashflows. The Board
reviews financial forecasts on a regular
basis, including sensitivity against
financial covenants. The Audit and Risk
Committee considers the going concern
status of the Group biannually. The
Board considers the allocation of its
capital in granular detail to ensure the
most efficient use. Sales of assets can be
used to repay debt, fund working capital
requirements or return to shareholders.
The process for reviewing asset
business plans is embedded in the
annual budgeting process. The Group’s
Capital Risk Management Policy limits
development expenditure to <25%
of Gross Asset Value and the core
portfolio generates sustainable cash
flows. Our experienced management
team and use of advisors and property
managers supports the execution of
asset management strategies. Our
active management approach and new
investment system improves security of
income and limits exposure to voids.
Current position
Current position
Current position
Current position
Current position
The Board is monitoring and considering
Our plans reflect current trading
The Group’s weighted average debt
the longer term impacts of the cycle
conditions and future economic
maturity is currently c2.0 years. The
including the potential future of the
headwinds facing the country which can
Group’s LTV limit is 35%. We continue to
office and the effects of the enhanced
impact on bank debt covenants and
monitor whether the use of derivatives
ESG requirements.
costs. We use consultants and experts
to mitigate against interest rate rises are
The Company has repaid
£37.5 million of bank debt
in the year to 31 March 2023.
so we can anticipate key planning and
appropriate.
development policies and consider how
these may impact our activities.
No single asset comprises more than
15% compared to the overall portfolio’s
value. The Company is selectively
marketing certain assets for sale, as
the market stabilisation and recovery
continues. Asset management initiatives
utilised to maximise value. Appraisals
for improving properties e.g. via
refurbishment are ongoing for
certain assets.
Our refurbishment pipeline is
continuously assessed to ensure
the right projects are being brought
forward at appropriate times ensuring
exposure at any one time is limited.
The Executive Committee is reviewing
the Group’s Health and Safety systems
and processes to ensure appropriate
oversight of assets.
Likelihood after mitigation
Score 1 (low) - 10 (high)
Likelihood after mitigation
Score 1 (low) - 10 (high)
Likelihood after mitigation
Score 1 (low) - 10 (high)
Likelihood after mitigation
Score 1 (low) - 10 (high)
Likelihood after mitigation
Score 1 (low) - 10 (high)
Likelihood after mitigation
Score 1 (low) - 10 (high)
Impact after mitigation
Score 1 (low) - 10 (high)
Impact after mitigation
Score 1 (low) - 10 (high)
Impact after mitigation
Score 1 (low) - 10 (high)
Overall Risk Rating
Score 1 (low) - 20 (high)
Overall Risk Rating
Score 1 (low) - 20 (high)
Overall Risk Rating
Score 1 (low) - 20 (high)
5
6
11
8
7
15
7
8
15
5
Impact after mitigation
Score 1 (low) - 10 (high)
7
Overall Risk Rating
Score 1 (low) - 20 (high)
12
4
Impact after mitigation
Score 1 (low) - 10 (high)
6
Overall Risk Rating
Score 1 (low) - 20 (high)
10
4
Impact after mitigation
Score 1 (low) - 10 (high)
4
Overall Risk Rating
Score 1 (low) - 20 (high)
8
2 7
STRATEGIC REPORT Risk
management (continued)
Portfolio risks
07
Valuation
08
Tenant demand and default
Operational risks
09
Business continuity and
cyber security
Risk description
Risk description
Risk description
Decreasing capital and rental values
could impact the Group’s portfolio
valuation leading to lower returns.
Higher cost of debt can lead to property
yields to be pushed out and valuations
to fall as a result. Increasing gilt yields,
can leave property investment less
attractive unless the desired return can
be achieved.
Failure to adapt to changing occupier
demands and/or poor tenant covenants
may result in us losing significant
tenants, which could materially impact
income, capital values and profit. Rising
inflation, interest rates and living costs
could impact tenant businesses, such as
the leisure industry, as demand falls for
discretionary spending.
Business disruption as a result of
physical damage to buildings,
Government policy and measures
implemented in response to pandemics,
cyber attacks or other operational or
IT failures or unforeseen events may
impact income and profits.
Mitigation
Mitigation
Mitigation
Independent valuations are undertaken
for all assets at the half year and
year end. These are reviewed by
management and the Board. Members
of the Audit and Risk Committee meet
with the valuers at least once a year to
discuss valuations and the valuation
process. Management actively review
leases, tenant covenant and asset
management initiatives to grow capital
and rental values.
Our governance structure and internal
control systems ensure sufficient
Board oversight, with delegated
responsibilities, segregation of duties
and clear authorisation processes. A
comprehensive programme of insurance
is in place which covers buildings, loss of
rent, cyber risks, Directors’ and Officers
liability and public liability. Antivirus
software and firewalls protect IT systems
and data is regularly backed up.
The Board regularly reviews the
portfolio’s overall tenant profile
and sector diversification. Tenant
diversification is high with no tenant
making up more than 10% of total rental
income. Management maintain close
relationships with tenants understanding
their needs and supporting them
throughout their business cycle.
Managing agents support rent collection
and collection of arrears on a regular
basis. Tenant due diligence and credit
checks are undertaken on an ongoing
basis to review covenant strength of
existing and prospective tenants. The
finance and property teams monitor all
current tenant covenants and all future
new tenants. All arrears are monitored
on an ongoing basis.
Current position
Current position
Current position
Valuations of the portfolio reflect the
commercial property market in general.
The team continue to work to mitigate
against falls in value through active
asset management including ESG
improvements.
Rent collection rates remain robust at
99%. The team are closely monitoring
tenant covenants in high risk sectors,
ensuring we are aware of any tenant
distress which can impact the rental
collection.
The Board continues to review the
internal control environment and ensure
good governance practices are adopted
throughout the business. Cyber security
arrangements have been kept under
regular review to ensure we are deploying
the most up to date technologies.
Likelihood after mitigation
Score 1 (low) - 10 (high)
Likelihood after mitigation
Score 1 (low) - 10 (high)
Likelihood after mitigation
Score 1 (low) - 10 (high)
7
Impact after mitigation
Score 1 (low) - 10 (high)
8
Overall Risk Rating
Score 1 (low) - 20 (high)
15
4
Impact after mitigation
Score 1 (low) - 10 (high)
7
Overall Risk Rating
Score 1 (low) - 20 (high)
11
2
Impact after mitigation
Score 1 (low) - 10 (high)
2
Overall Risk Rating
Score 1 (low) - 20 (high)
4
2 8
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 10
People
Environmental, social and governance risks
11
Climate change
12
Regulatory and tax
Risk description
Risk description
Risk description
An inability to attract or retain staff with
the right skills and experience or failure to
implement appropriate succession plans
may result in significant underperformance
or impact the overall effectiveness of our
operations. Health and Safety of staff and
others including tenants both physically and
mentally and providing a safe and healthy
environment in our properties is of utmost
importance. Failure to do so could lead
to staff and tenant ill health, litigation and
regulatory issues, negative media and market
sentiment against the Company.
Failure to anticipate and prepare for
transition and physical risks associated
with climate change including
increasing policy and compliance risks
associated with existing and emerging
environmental legislation could lead to
increased costs and the Group’s assets
becoming obsolete or unable to attract
occupiers.
Non-compliance with the legal and
regulatory requirements of a public
real estate company, including
the REIT regime could result in
convictions or fines and negatively
impact reputation.
Mitigation
Mitigation
Mitigation
We engage with staff regularly and encourage
a positive working environment. We maintain
an attractive reward and benefits package
and undertake regular performance reviews
for each employee. The Workforce Advisory
Panel provides a forum that allows direct
feedback to the Board on employee related
matters. Insurance cover is in place for
Directors. Health and Safety is undertaken
both internally and via the tenants and a key
issue for our property managers.
The Group’s ESG Committee
oversees the execution of ESG
related matters and ensures these are
integrated into our business model
and corporate strategy. Climate
related risks are considered as part of
our overall corporate risk assessment
and ongoing environmental
management of our buildings.
The Company employs experienced
staff and external advisers to
provide guidance on key regulatory,
accounting and tax issues.
Compliance with the REIT regime
is regularly monitored by the Board
and the Executive team consider the
impact on the regime as part of their
decision making.
Current position
Current position
Current position
A competitive employment market and
inflationary pressures are driving increased pay
and benefits to ensure attraction and retention
of individuals with the skills, knowledge and
experience required to implement the strategy.
The Group’s headcount is stable with sufficient
cover if any key personnel are unavailable.
Employee engagement is high with regular
meetings between employees and the Directors
ensuring that the Board understands the views
of the whole workforce.
There has been an increased focus
on environmental management and
management have focused on asset
management initiatives to increase
the EPC ratings of our assets,
increasing the marketability of the
assets in a cost effective way.
Emerging corporate governance
and audit reforms, require additional
processes and procedures to be put
in place and additional reporting on
the company’s resilience. The Board
is overseeing these changes.
Likelihood after mitigation
Score 1 (low) - 10 (high)
Likelihood after mitigation
Score 1 (low) - 10 (high)
Likelihood after mitigation
Score 1 (low) - 10 (high)
5
Impact after mitigation
Score 1 (low) - 10 (high)
7
Overall Risk Rating
Score 1 (low) - 20 (high)
12
5
Impact after mitigation
Score 1 (low) - 10 (high)
5
Overall Risk Rating
Score 1 (low) - 20 (high)
10
4
Impact after mitigation
Score 1 (low) - 10 (high)
2
Overall Risk Rating
Score 1 (low) - 20 (high)
6
2 9
STRATEGIC REPORT Section 172
statement
Stakeholder
Investors
Why we engage
How we engage and our actions
Key interests
How we have considered stakeholders in the year
Our investors rely on us
to allocate their capital
appropriately to deliver
attractive returns and
return cash.
Tenants
Our business is focused on
our tenants as customers
and responding to how their
needs are changing.
• The Chairman and Senior Independent Director have held
Our investors are looking for financial performance that
The Board and Committees have taken the views of investors
regular meetings with key investors during the course of the year
generates a return on their investment incorporating both
into account regularly including the repayment of debt and share
• We have an established investor relations programme with
bi-annual presentations
• Shareholders, focused on retail investors, are able to attend the
Company’s AGM where they can question Directors and vote on
matters put to the meeting
• Regular trading updates and announcements to the market
regarding performance
• Continuous monitoring of holdings with regular Shareholder
analysis and review
• We commenced the share buyback programme and paid
quarterly dividends in the year to Shareholders
We have a proactive approach to asset management and we engage
with our tenants in a variety of ways:
• On-site review meetings
• Dedicated building managers and asset managers
• Visiting assets and listening to concerns
• Periodic tenant surveys which cover general satisfaction, and
opinions on how we can improve our assets
dividends and capital growth and maximising cash returns.
buybacks.
Our tenants want fit-for-purpose spaces in which they can
We have considered the needs of our existing and future
succeed at a fair price.
tenants during Board deliberations, for example in relation to
capital expenditure on environmental improvements. The Board
conducted site visits in the year and met tenants and agents to
understand their needs.
We have moved into more appropriate office space with
Employees regularly feature in Board discussions and were a
improved access for people commuting, improved infrastructure
key consideration in relation to the risk management process
and better facilities but at significantly less cost to the Company.
including the need to retain and motivate employees.
these with good communication and liaison is key.
team overseeing the day to day activities and performance of
our key agents is an important consideration of how the Group
does business and is therefore a key issue for the Board. The
Group uses consultants where external expertise is cost effective.
Employees
Our employees are key to
implementing the Group’s
strategy in a way that reflects
and promotes positive values
and culture.
• Regular and frequent internal communications
• New Executive Committee for which team members attend for
relevant sections
• Meetings with Directors, both formally and informally.
• Social events to which all employees are invited
Suppliers, agents
and consultants
We rely on a number of
key partnerships to support
our asset management and
delivery of our strategy.
Communities and the
environment
We are mindful of the impact
our operations have on
local communities and the
environment.
Lenders
Our debt providers supply us
with finance for our business
purposes including previous
acquisitions, developments
and refurbishments.
3 0
We actively engage with our suppliers and work closely with them:
Understanding of objectives and working together to achieve
The use of the asset management model with a small internal
• Weekly meetings 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
We actively support community events and seek to have a positive
impact on local areas:
We aim to provide our communities with attractive, safe and
Communities and the environment are a key element of the
environmentally friendly spaces, which enhance the local area.
values of the Group and the Board understands the need to
• Creating employment opportunities
• Enhancing the built environment
• Our contractors participate in schemes such as the Considerate
Constructors Scheme and we consider certifications such as
BREEAM to minimise the impact on our neighbours and
the environment
• We actively engage regularly through quarterly meetings with
Our lenders wish to see a return on the money lent to the Group. We have agreed repayments on the facilities, thereby reducing
our banks
• We consistently have met our covenant and repayment
obligations with all our lenders
• We have strong long standing relationships with our key banks
• Have drawn down periodically on the RCF to assist short
term borrowings
foster these and other stakeholders.
the net debt of the Group significantly as inflation and the cost
has risen whilst still having the availability of the revolving credit
facility should we occasionally need to utilise it.
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 to allocate their capital
appropriately to deliver
attractive returns and
return cash.
regular meetings with key investors during the course of the year
• We have an established investor relations programme with
bi-annual presentations
• Shareholders, focused on retail investors, are able to attend the
Company’s AGM where they can question Directors and vote on
matters put to the meeting
• Regular trading updates and announcements to the market
• Continuous monitoring of holdings with regular Shareholder
regarding performance
analysis and review
• We commenced the share buyback programme and paid
quarterly dividends in the year to Shareholders
our tenants as customers
with our tenants in a variety of ways:
and responding to how their
needs are changing.
• On-site review meetings
• Dedicated building managers and asset managers
• Visiting assets and listening to concerns
• Periodic tenant surveys which cover general satisfaction, and
opinions on how we can improve our assets
implementing the Group’s
strategy in a way that reflects
and promotes positive values
and culture.
• New Executive Committee for which team members attend for
relevant sections
• Meetings with Directors, both formally and informally.
• Social events to which all employees are invited
We rely on a number of
We actively engage with our suppliers and work closely with them:
key partnerships to support
our asset management and
delivery of our strategy.
by telephone and email
• Formal review meetings
• Weekly meetings with our managing agents and regular contact
• Monthly meetings with our external project managers
• Sharing insights and initiatives
• Ensuring payments are made within agreed terms
Suppliers, agents
and consultants
Communities and the
environment
We are mindful of the impact
We actively support community events and seek to have a positive
our operations have on
impact on local areas:
local communities and the
environment.
• Creating employment opportunities
• Enhancing the built environment
• Our contractors participate in schemes such as the Considerate
Constructors Scheme and we consider certifications such as
BREEAM to minimise the impact on our neighbours and
the environment
Lenders
Our debt providers supply us
• We actively engage regularly through quarterly meetings with
with finance for our business
our banks
purposes including previous
acquisitions, developments
and refurbishments.
• We consistently have met our covenant and repayment
obligations with all our lenders
• We have strong long standing relationships with our key banks
• Have drawn down periodically on the RCF to assist short
term borrowings
Stakeholder
Investors
Our investors rely on us
• The Chairman and Senior Independent Director have held
Why we engage
How we engage and our actions
Key interests
How we have considered stakeholders in the year
Our investors are looking for financial performance that
generates a return on their investment incorporating both
dividends and capital growth and maximising cash returns.
The Board and Committees have taken the views of investors
into account regularly including the repayment of debt and share
buybacks.
Tenants
Our business is focused on
We have a proactive approach to asset management and we engage
Our tenants want fit-for-purpose spaces in which they can
succeed at a fair price.
We have considered the needs of our existing and future
tenants during Board deliberations, for example in relation to
capital expenditure on environmental improvements. The Board
conducted site visits in the year and met tenants and agents to
understand their needs.
Employees
Our employees are key to
• Regular and frequent internal communications
We have moved into more appropriate office space with
improved access for people commuting, improved infrastructure
and better facilities but at significantly less cost to the Company.
Employees regularly feature in Board discussions and were a
key consideration in relation to the risk management process
including the need to retain and motivate employees.
Understanding of objectives and working together to achieve
these with good communication and liaison is key.
The use of the asset management model with a small internal
team overseeing the day to day activities and performance of
our key agents is an important consideration of how the Group
does business and is therefore a key issue for the Board. The
Group uses consultants where external expertise is cost effective.
We aim to provide our communities with attractive, safe and
environmentally friendly spaces, which enhance the local area.
Communities and the environment are a key element of the
values of the Group and the Board understands the need to
foster these and other stakeholders.
Our lenders wish to see a return on the money lent to the Group. We have agreed repayments on the facilities, thereby reducing
the net debt of the Group significantly as inflation and the cost
has risen whilst still having the availability of the revolving credit
facility should we occasionally need to utilise it.
3 1
STRATEGIC REPORT Section 172
statement (continued)
How stakeholder interests have been considered
within key strategic decisions
Stakeholder considerations - shareholders
The Board has considered shareholder views through various
meetings held during the course of the year, including in the lead
up to and post the AGM held on 29 July 2022.
Shareholders provided significant feedback to the Chairman
regarding the proposed strategy update dated 4 July 2022. In
that update, the Board undertook to reposition the Company
as an ESG driven regional office market specialist, reinvesting
proceeds from the sale of the industrial portfolio into improving
the existing regional office portfolio and also into new
opportunities in the regional office market.
In light of shareholder feedback following that update, the
Company announced on 19 July that such a strategy needed
amending. The Board announced that it would focus on
maximising cash returns to shareholders, whilst continuing to
remain mindful of consolidation in the Real Estate sector as part
of its considerations.
The Board also announced that it would continue its strategy of
disposing of other non-core investments and seek to complete
the remaining sales of the residential apartments at York. Funds
from these disposals will be aggregated with those from the sale
of the industrial portfolio and distributed to shareholders.
In light of the amended strategy, Mickola Wilson (Senior
Independent Director), Kim Taylor-Smith (Non-Executive
Director), and Paula Dillon (Non-Executive Director) considered
that it was the right time to step down from the Board and
did not offer themselves for re-election at the Annual General
Meeting on 29 July 2022.
The Company received significant votes against various resolutions
at the AGM relating to the prior strategy including the re-election
of Mr Richard Starr, formerly the Executive Property Director. Mr
Starr stepped down from the Board on 12 August 2022.
The Board has subsequently pursued the strategy to dispose
of non-core assets which appealed to special purchasers whilst
pausing in October 2022 the sale of the Industrial Portfolio until
the time was right as the market for these assets during the
year became significantly more volatile as certain funds became
forced sellers due to their clients withdrawing funds. We were not
in the same position so we did not need to sell the assets and
did not do so.
The sale of the smaller assets, together with the continued sale
of residential units at Hudson Quarter which were unencumbered
following the repayment of the development loan with Lloyds
Bank in the year, meant that the Company could repay debt and
return cash to shareholders via share buybacks and dividends.
These were two key strategic initiatives that the top shareholders
had been very clear in articulating to the Board, which was
listened to and actioned.
The Board was mindful of the possible effect on the workforce
following the amended strategy and was pleased that the key
personnel were retained. In addition, corporate governance
was enhanced through the establishment of a new Executive
Committee, details of which are provided in the Corporate
Governance Report.
Outcome and action
The results of these discussions and in particular the views of the top
shareholders led to the amended strategy and new course for the
Company to repay expensive debt and return cash to shareholders
via sales of assets plus continued focus on cost reductions and
proactive asset management of the Company’s assets.
3 2
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 ESG
Introduction
Environmental, Social
and Governance
We remain committed to ensuring that our properties are managed responsibly;
that our environmental impacts are minimised and our tenants enjoy spaces
which are healthy, safe and fit for purpose.
We actively collaborate with our tenants and business partners
and ESG considerations remain a key consideration in our asset
management initiatives. In 2020, we developed a corporate ESG
strategy to mitigate the risks and explore the opportunities in
terms of the impacts of our business on the environment, our
communities, our tenants and our people. The main pillars are:
Environmental
•
Improving the portfolio – by understanding better the
environmental performance of our assets, we are actively
seeking to reduce energy use and greenhouse gas
emissions and improve energy efficiency. We will look at
ensuring that assets are compliant.
Social
• Fostering a culture of inclusivity and consideration of
stakeholders’ interests particularly employees – by promoting
collaboration and input across all levels of the business and
engaging more closely with our stakeholders.
Governance
• Being a responsible business – by ensuring ethical business
practices and sound risk management are embedded in
decision making processes;
In relation to the pathway to net zero, while further work is
required, we believe this will be achievable for our assets in line
with statutory requirements by 2050. We have considered the
pathway and believe that our buildings and the way that they
have been improved and can be further improved in the future
means that we can be comfortable with our assessment. We do
not believe it prudent, in light of our strategy, to commit to a
date earlier than this since we are progressing the sales of certain
assets which the new owners will then evaluate together with
their own portfolios for their pathway to net zero.
You can read more about the decisions and actions of the ESG
Committee on pages 49 and 50. You can read more about
how climate considerations have been integrated into our risk
management framework on page 24, while you can learn more
about our approach to climate resilience and associated targets
in the section overleaf and within the ESG Committee Report.
As a commercial property landlord, we have a duty to consider
the impact our assets have on the environment. During the year
we have made positive progress in assessing, understanding
and managing the environmental performance of our portfolio.
We have continued focusing on data collection so that we
understand our usage under scope 1,2, and 3 and the ways
in which we can work with tenants to improve our overall
environmental impact.
Key to this in our industry and sectors across the UK, is our EPC
ratings. We now have no G or H EPC rated buildings and are
looking at moving towards at least a C or B rating across our
entire portfolio by the end of 2024.
3 3
STRATEGIC REPORT Working Responsibly
Our ESG Environmental
Greenhouse gas emissions
Climate Related Financial Disclosures (TCFD)
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
landlord-controlled electricity supplies and scope 3 (indirect)
GHG emissions from our tenants.
Following the change in data collection provision to Compare
Your Footprint, we now recognise, in line with the guidance, that
as a landlord, the bulk of our reporting is now under Scope 3 in
line with the GHG Protocol’s Scope 3 category 13: Downstream
Leased Assets. Accordingly, we have reported prior year in the
same categories as this year for comparison.
We are pleased to have reduced our direct emissions from our
own office usage. Scope 1 was higher for the prior year as a
result of the change in office with reduced consumption and
flexible office use at Fora Victoria, and the methodology for data
collection from our own landlord.
The Company does not own any vehicles and emissions from
sources such as production processes and combustion sources
are minimal, therefore not deemed material. As a result, these
emissions are not included in reported totals. In addition, the
Company introduced a new electric vehicle plan for employees.
We have a limited amount of energy use within our control.
To have a meaningful impact on greenhouse gas emissions we
must ensure we engage with our tenants and encouraging them
to minimise their own energy consumption. This continues to be a
priority and the Company continues to collect and report its broader
Scope 3 emissions as the Group looks to gain greater visibility of its
total carbon footprint. We have seen a marked improvement in data
collection from our agents and tenants and we are grateful to them
for the provision of data. However, certain leases remain under the
control of tenants for energy use and control of data collection so
we continue to work with tenants to improve this.
As a result of better data collection, total emissions have
increased during the year as the UK came out of the pandemic
and people returned to their workplaces. Energy usage reduced,
partly due to the increased cost of energy in the UK. We will work
with our tenants on the strategy for overall carbon reduction as
we continue to make a significant positive impact on reducing
energy usage, as demonstrated in the year.
GHG emissions
Emissions type (tonnes of CO2
equivalents)
Scope 1 * estimate
Scope 2
Scope 3
Total
Average GHG Intensity
(tCO2e/sqft2)
Scope 1,2 and 3 combined
Total energy use (kWh)
Scopes 1,2,3
2023
2022
1
2
879
882
16
14
742
772
0.001
0.0008
8,771,692
9,829,473
We published our findings from our consideration of the
Taskforce for Climate-related Financial Disclosures (TCFD)
methodology in our previous year’s report, where we considered
the associated physical and transition risks with a 2 degrees
warming scenario, referencing the models mapped out by the
Bank of England and the IMF’s World Economic Outlook.
Physical climate risks were considered as those which arise from
both gradual changes in climatic conditions and extreme weather
events that can result in asset damage, resource depletion, and
disruption. Transition risks occur in the process of moving to a
low-carbon economy. These include government policy changes,
reputational impacts, as well as shifts in market preferences,
norms, and technology.
The Company is implementing a targeted upgrade and retrofit
programme, to meet more stringent building performance and
carbon emissions requirements: for example, to meet existing
Government minimum energy efficiency regulations (MEES), and in
anticipation of a further ratcheting up of regulatory requirements for
energy performance certificate (EPC) ratings by 2030. The Company
reviews this over the short, medium and long term for lettings and
sales. We have risk assessed the portfolio based on building energy
intensity, location, tenant composition, the potential direct and
indirect impacts on revenue and operating and capital costs.
Climate-related risks have been integrated within the company’s
Principal Risks (see pages 26 to 29) and are regularly considered
by the Audit and Risk Committee and the Board, including
a confirmation annually on Principal Risks and movements in
the likelihood and impact of such risks. Climate and energy
performance have been fully integrated into both investment
and asset management decision-making process. For example,
we have identified opportunities for the Company to enhance
its EPC and environmental performance its assets across our
sectors (see page 15) leading to higher ERVs and capital growth
compared to less well performing assets. Under a 2°C scenario,
the company’s strategy is considered resilient, bearing in mind
the physical locations of its assets and the actions it is taking
to manage transition risks. The Company will adapt its strategy
accordingly to take into account the opportunities and risks
from either market or regulatory impacts such as for example,
accelerated programmes for EPC capital expenditure.
The Board consider climate-related issues when reviewing and
guiding strategy, major plans of action, risk management policies,
annual budgets, and business plans. These cover the short term
- being under 2 years, medium term, being 2-5 years and longer
term, being over 5 years. These are considered in overseeing major
capital expenditure, and sales of assets, in line with the strategy. See
pages 26 to 29 for our Principal Risks and how the Board considers
risks and opportunities relating to Climate Change.
Net Zero Strategy
We are now gaining fuller visibility of our carbon footprint and
are developing a realistic baseline on which to establish our net
zero thinking. In light of our revised business strategy, we are
focused on achieving improvements in our portfolio to ensure
that the portfolio is in a good position to be net zero by 2050,
in line with the UK Government’s ambition.
3 4
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 TCFD
Being a responsible business
Overview
Compliance with the TCFD framework
Risk management
In this section, we have provided an overview of our progress
and priorities against the requirements of Listing Rule 9.8.6R.
We have prepared our disclosures to be consistent with the
TCFD recommendations and recommended disclosures, which
also reflects the Annex to the Recommendations of the TCFD
section C (Guidance for all sectors). We will look to enhance our
ESG and TCFD reporting for future years, including reviewing
Recommendations of the TCFD (supplementary guidance for
non-financial sectors) and such recommendations that align
with developing Shareholder and stakeholder requirements and
feedback.
We have complied with the TCFD recommendations and
recommended disclosures, although we recognise that further
development is required in relation to the targets used by
the Company in line with our strategy and risk management
processes in addition to our focus on EPC improvements. We
are however, satisfied that appropriate consideration is given in
our current plans and risk management systems and processes
to take into account the potential financial impacts of climate
change on our business.
Governance
The Board assumes overall responsibility and accountability
for the management of climate-related risks and opportunities.
The remit of the ESG Board Committee is to oversee the
Company’s response to the evolving environmental, health and
safety, corporate social responsibility, corporate governance,
sustainability, and other public policy matters relevant to
the Company. It oversees the Group’s corporate and social
responsibilities and ensures its ESG activities are aligned.
The Executive Committee reviews environmental performance
including EPCs at its meetings and the outputs are included in
the Property Board reports for each Board meeting.
The ESG Board Committee supports the Audit & Risk Committee
which oversees the Group’s risk management framework,
evaluating its principal and emerging risks, setting the risk
appetite, and assisting the Executive Management team with
developing and implementing the operational plans required to
strategically manage those risks.
The Audit and Risk Committee makes recommendations to the
Board on the principal risks of relevance to the business. Climate-
related issues are initially considered by the ESG Committee in
terms of potential for contribution to these principal risks. The
Executive committee has ongoing weekly meetings at which ESG
matters are considered.
The issues considered include both the risk of physical disruption
to the business from climate change such as risks to our
properties from flooding, high winds and storms, transport and
occupational issues, and the risks and opportunities as the UK
economy transitions to significantly lower carbon emissions such
as greater use of electricity rather than gas for heating.
The Company’s financial planning and strategy would evolve
to take into account such risks and opportunities to adapt to
the revised landscape for example if greater capital expenditure
is required to bring our assets to higher environmental
performance.
Metrics and targets
Palace Capital started measuring its greenhouse gas emissions
(GHG) in 2020. These GHG emissions cover Scope 1 direct
emissions from the usage of fuel in its operations and indirect
Scope 2 emissions from electricity consumption on site. We have
utilised Compare Your Footprint for data analysis including the
redefinition of our tenants usage to Scope 3. This includes for
example aspects such as purchased goods & services (water);
fuel & energy related activities; business travel; employee
commuting; teleworking; and downstream leased assets.
3 5
STRATEGIC REPORT TCFD
Being a responsible business (continued)
We continue to focus on data collection as a property landlord, particularly from our agents on behalf of our tenants, so that we
understand our existing usage under scopes 1, 2 and 3. We are developing our response to the risks and opportunities arising in this
area including our carbon footprint and that of our assets and tenants so we can work together to continuously improve. Failure to
adapt would negatively impact financial performance as tenants look to well performing assets in respect of environmental matters.
Disclosure
Commentary
Describe the Board’s oversight of
climate-related risks and opportunities
Palace Capital established a Corporate Social Responsibility Committee in 2019 which
was reconstituted as the ESG Committee in 2020, in recognition of the increasing
importance of ESG to us, its stakeholders and broader society.
The Board, supported by input from the ESG Committee, assumes overall responsibility
and accountability for the management of climate-related risks and opportunities.
A TCFD Working Committee was established in 2021 and its progress and findings
have been reported into the ESG Committee.
Describe the management’s
role in assessing and managing
climate-related risks and opportunities
Management has undertaken a review of the company’s Enterprise Risk Management
approach and climate-related issues have been integrated into the core risk management
process as a principal risk. The Executive Committee meets weekly and includes climate issues
in discussions and consideration for escalating as appropriate under Delegations of Authority.
Describe the climate-related risks and
opportunities the organisation has
identified over the short, medium,
and long term
The short-term (0-2 years) and medium-term (2-5 years) risks identified include
increased utility costs; unattractiveness of buildings to potential occupiers due to poor
carbon performance; and increased regulatory and policy measures. Long-term (over 5
years) risk includes raised temperatures and impacts on the UK from decarbonising.
The most significant financial impacts have been considered as part of the Risk
Management process to be included within the Company’s internal valuations of
assets. Sentiment on assets may be negatively impacted by decarbonisation of the
economy over the longer term.
The opportunities identified include: greater collaboration with tenants to improve
environmental performance; improved commercial opportunities of owning assets which
are energy efficient; and the attractiveness of assets to tenants and potential purchasers.
Climate-related risks have been integrated within the company’s Principal Risks.
Climate and energy performance have been fully integrated into both investment and
asset management decision-making process.
The average life-cycle of Palace Capital’s assets within its ownership is short (0-2 years)
to medium term (2-5 years) and the assets are exclusively located across the UK in
well-connected regional transport hubs.
The company is continually reviewing its exposure to climate-related risks. Under
a 2°C scenario, the company’s strategy is considered resilient, bearing in mind the
physical locations of its assets and the actions it is taking to manage transition risks.
Describe the impact of climate-related
risks and opportunities the organisation’s
businesses, strategy and financial
planning
Describe the resilience of the
organisation’s strategy, taking
into consideration different
climate-related scenarios, including
a 2°C or lower scenario
Describe the organisation’s processes for
identifying and assessing and managing
climate-related risks
The Executive Committee reviews issues weekly, particularly in relation to progress
on EPC ratings and escalates to the ESG Committee or Board as appropriate. Further
information is contained in the ESG Committee report on pages 49 to 50.
Describe the organisation’s processes for
managing climate-related risks
Palace Capital considers and assesses climate-related risks and opportunities through
the Executive Committee, ESG Committee and the Board.
Disclose the metrics used by the
organisation to assess climate-related
risks and opportunities in line with its
strategy and risk management processes
GHG emissions and energy consumption, are disclosed in the Annual Report including
Scope 1 & 2 and are aligned to the Greenhouse Gas Protocol Corporate Standard and
DEFRA Environmental Reporting Guidelines.
We have redesignated Scope 3 to align with reporting requirements and are satisfied
that we have improved data collection and analysis
Describe Scope 1, Scope 2 and if
appropriate, Scope 3 greenhouse gas
(GHG) emissions, and the related risk
GHG emissions are disclosed in the Annual Report throughout this section and are
aligned to the Greenhouse Gas Protocol Corporate Standard.
We continue to work with tenants and agents on our reporting. The related potential
risks can be viewed in the Risk Management section on pages 24 to 29.
Describe the targets used by the
organisation to manage climate-related
risks and opportunities and performance
against targets
We have collected Scope 3 emissions utilising Compare Your Footprint and are in a
better position to understand the data and take action as a consequence. We have not
set specific targets to date except in relation to compliance with MEES requirements
and improvement of the portfolio’s EPCs as demonstrated in the year (see page 17).
3 6
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 ESG
Improving the environmental
performance of our assets
We continue to focus on data collection so that we understand
our existing usage under scope 1,2 and 3. We are gaining a
better understanding of our carbon footprint and that of our
assets and tenants so we can work together to improve.
During the year, we have made good progress in embedding
environmental considerations in all aspects of asset management
and across our wider business model. Key to this is our EPC
ratings. We have removed all G rated EPCs and significantly
reduced E and F ratings, moving the portfolio towards MEES
compliance. We have been making the ongoing improvements
to properties within our portfolio.
We have:
•
Incorporated energy efficiency measures into our major
building refurbishments
• Progressed our EPC management programme
•
Introduced guidance for our asset managers to ensure ESG
considerations are incorporated in our asset level business plans
100%
landlord controlled electricity
from renewable sources
96.2%.
Properties in the portfolio with an
EPC rating of A-D
Current EPC/MEES requirements & compliance
Since 1 April 2020, landlords can no longer let or continue to
let properties covered by the MEES Regulations if they have an
EPC rating below ‘E’. From 1 April 2023, this has been extended
to include existing leases, making it unlawful for a landlord to
continue to let commercial property rated F or less.
In the 2021 Annual Report, a stated priority was to remove the
7.45% of ‘F’ & ‘G’ certifications.
Through proactive review and asset disposals, all G certifications
have been removed from the portfolio and ‘F’ certifications
reduced to 1.5% (one asset with Listed Building Consent). During
2021/22, twenty five EPC’s were improved and the number of
EPC’s rated A-D increased from 88.8% to 96.2%.
Our current EPC split is approximately:
EPC certification
%
A
B
C
D
E
F
G
2.3%
28.6%
41.3%
24.0%
2.3%
1.5%
0.0%
3 7
STRATEGIC REPORT Corporate Governance Report
Letter from
the Chairman
Dear Shareholder,
This Report describes
how we have applied the
Principles and complied
with the Provisions
of the UK Corporate
Governance Code 2018.
Where we were not
compliant, we provide
an explanation under the
‘comply or explain’ basis
of reporting.
Since I became Chairman in January
2022, the Company has gone through
considerable change in our governance
structure which could only occur with
shareholder engagement and support.
I would like to thank shareholders for this.
In particular, it is worth noting that the
Board of Directors was completely
refreshed in less than a year, which I
believe is unprecedented for a listed
company outside of a takeover situation.
We have listened to shareholders,
particularly around last year’s Annual
General Meeting and we are now right
sized for the Company’s strategy.
The first significant event in the year
was that on 14 June 2022, Neil Sinclair,
formerly Chief Executive, stepped down
from the Board. Mr Sinclair had co-
founded the Company and had been with
the Company for 12 years.
Following feedback to me from our major
shareholders on the Company’s strategy,
the Company announced in July 2022 that
the Company would sell assets and return
cash to shareholders, while being mindful
of consolidation in the Real Estate sector.
We also paused the sale of our Industrial
Portfolio until the timing was right.
The Non-executive Directors each
determined on 18 July 2022 in light of
the amended strategy that it was the right
time to leave the Company and stood
down from the Board. This was prior to
the AGM and their re-election was not
voted on.
At the AGM held on 29 July 2022 there
were a significant number of votes cast
against several resolutions reflecting the
sentiment of the major shareholders at
that time. I engaged significantly with
these shareholders to understand the
reasons for their voting, which were largely
a consequence of the previous Board’s
strategy and governance of the Company.
Mr Richard Starr, Executive Property
Director, stood for re-election as a
Director at the AGM. Mr Starr received
over 44% of the votes cast against his re-
election. Mr Starr decided it was the right
time to leave the Board and stood down
as a Director on 12 August 2022. His
duties were assumed by Daniel Davies,
Head of Asset Management and Thomas
Hood, Head of Investment, who both
report to me.
3 8
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 Non-compliance with the Provisions of
the Code. As outlined in this report,
the Company did not comply with the
following provisions:
9: in relation to the combined role I have
undertaken as Interim Executive Chairman
17: as I am not deemed independent, the
Nomination Committee is not constituted
with a majority of independent directors
20: open advertising / search consultants
were not used for the appointment of
the Senior Independent Director due to
time constraints following the stepping
down of the Non-Executive Directors in
July 2022
24 and 32: as the Audit and Risk
Committee and Remuneration Committee
consist of the Senior Independent
Director and myself, as I am not
considered independent
Steven Owen
Interim Executive Chairman
Mr Mark Davies was appointed by the
Board on 1 August 2022 to fill the vacancy
as an Independent Non-executive Director.
The Board from that time then consisted
of myself as Interim Executive Chairman,
Matthew Simpson, CFO and Mark Davies,
Senior Independent Director and Chair
of the Audit & Risk and Remuneration
Committees.
The Board considers that this is a more
appropriate sized Board for the Company
to fulfil its role including overseeing the
updated strategy.
In addition to the changes to the Board
governance structure, I introduced a
new Executive Committee consisting of
myself as Chair, Matthew Simpson, Daniel
Davies, Thomas Hood, Phil Higgins,
Company Secretary, and Andrew Wolfe,
Financial Controller. Other staff members
attend by invitation.
The Executive Committee meets weekly
to assist the Board with significant
decisions and to oversee the operational
implementation of the strategy, financial
reporting, ESG, HR and corporate
governance matters.
Under this revised governance framework,
I believe the Board and its Committees
contain an appropriate combination of
skills, experience and knowledge to be
effective at fulfilling our responsibilities to
shareholders and other stakeholders. Or
governance structure enables the updated
strategy to be implemented effectively, as
described in the following pages.
Further information on the work of
the Committees can be found in this
report. Information on the Remuneration
Committee is contained in the Report on
pages 54 to 67.
The Nomination Committee report is
on pages 47 to 48. The Audit and Risk
Committee work in the year is considered
at pages 51 to 53.
ESG remains a key part of doing business
as a commercial property company and
the ESG Committee report is on page
49 to 50.
Finally, I would like to thank our
shareholders for their feedback and
support for new management and to thank
our team for the hard work they have put
in to implement the updated strategy.
The Board adopted a new Matters
Reserved and Delegations of Authority
Policy and process, delegating
appropriate levels of authority to
management while retaining key strategic
matters for the Board’s approval.
We continue our active engagement with
shareholders who are invited to attend
our AGM in person this year which will
be at the offices of CMS, Cannon Place
78 Cannon Street, London EC4N 6AF on
26 July 2023 at 10.00 am.
3 9
GOVERNANCE Governance
overview
Statement by the Directors on compliance with the UK Corporate Governance Code
The UK Corporate Governance Code 2018 (the Code) applied to the Group for the financial year ended 31 March 2023. The Board
considers that it applied the Principles of the Code but that certain Provisions were not complied with due to the Board’s new
governance structure which it believes is appropriate for the size of the Company and its strategy. The explanations for such non-
compliance, in line with the ‘comply or explain’ basis of reporting, are provided in the following pages and are summarised in the
Interim Executive Chairman’s introduction to the Governance report.
The Code is publicly available at www.frc.org.uk.
Applying the principles of the code
Section of the code
How we have applied the Principles
Board leadership and
Company purpose
The Board is responsible for leading the
business in a way which promotes the long-
term sustainable success of the Company,
generating value for Shareholders and
contributing to wider society.
Division of responsibilities
The Board includes an appropriate
combination of executive and independent
Non-Executive Directors. The chair leads
the Board and is responsible for its overall
effectiveness in directing the company.
• The Board establishes the Company’s purpose, values and strategy and reviews
these regularly
• The Board assesses and monitors culture
• There is a regular programme of meetings for the Board and its Committees
• A formal schedule of matters is reserved for Board approval and regularly reviewed
• The Board has oversight of stakeholder engagement
• We have a right sized Board for the Company including an appropriate mix
of Executive and Non-Executive directors, noting that the Interim Executive
Chairman (IEC), has, since 14 June 2022, combined certain aspects of the Chief
Executive and Chair’s role. The Company recognises that it was therefore not
compliant with the Code
• The IEC leads the Board and Chairs the Executive Committee and the CFO is an
Executive Director with executive finance and corporate responsibilities
• The Senior Independent Director Chairs both the Remuneration and the Audit
& Risk Committees and engages with shareholders independently of the IEC
and CFO
• The IEC and Independent Non-Executive Director provide constructive
challenge, strategic guidance, offer specialist advice and hold executive
management to account
Composition, succession
and evaluation
The Nomination Committee ensures Board
appointments are subject to a formal,
rigorous and transparent process
• All Directors submit themselves at each AGM for election or re-election to
the Board
• The Nomination Committee leads the process for appointments, based on merit,
and succession plans for the Board and Senior Management
• There is an annual evaluation of the performance of the Board and Committees
Audit, risk and internal control
The Audit & Risk Committee monitors the
integrity of the Financial Statements and
oversees the risk management process and
internal control environment.
• We have two Non-executive Directors, both chartered accountants, on the Audit
& Risk Committee providing appropriate experience and expertise. As Mr Owen,
IEC, is a member of the Committee, the Company recognises that the Committee
is not constituted with only independent Non-Executive Directors and that the
Company was therefore not compliant with the Code. Mr Owen was considered
independent on appointment as Chairman
• The Audit & Risk Committee supports the Board and advises on whether the
Annual Report and Accounts is fair, balanced and understandable
• There is regular robust assessment of the Company’s emerging and principal risks
• There are clear policies and processes to ensure the independence and
effectiveness of the external audit and whether an internal audit is required
Remuneration
Our remuneration policies and practices are
designed to support the business strategy
and promote the success of the Company.
• The Remuneration Committee determines the policy and implementation
of the Chief Financial Officer, Senior Executives and oversees wider
employee remuneration
• The Remuneration Committee appointed Korn Ferry as new remuneration advisors
during the year to assist the Committee
4 0
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 Board of
Directors
A N R
E
E
Chair
A N R
E
Steven Owen
Interim Executive Chairman
Matthew Simpson
Chief Financial Officer
Mark Davies
Senior Independent Director
Date of appointment
Date of appointment
Date of appointment
Appointed Chairman 1 January 2022
and Interim Executive Chairman on 14
June 2022
Appointed as Chief Financial Officer in
November 2021
Joined the Group on 1 August 2022 as
Independent Non-executive Director
Expertise
Expertise
Expertise
Steven is the Non-Executive Chairman
of FTSE 250 property investment group
Primary Health Properties plc (“PHP”)
having been appointed Chairman in
April 2018. He was appointed to the PHP
Board as an independent Non-Executive
Director in January 2014 becoming
chairman of the Audit Committee
and Senior Independent Director in
April 2014. Steven has overseen PHP’s
significant corporate activity in the period
including its merger with MedicX Fund
Limited in 2019 and the internalisation
of its management structure in January
2021 with both transactions creating
significant shareholder value. Steven
began his earlier career with KPMG before
moving into property with Brixton plc
where he became Finance Director and
subsequently Deputy Chief Executive.
Matthew is a Chartered Certified
Accountant and has been with the
Company since 2016. Previously holding
the position of Head of Finance and
Operations, Matthew was appointed
as Finance Director Designate on
13 August 2021.
Prior to joining the Company, Matthew
held various finance roles, including
at CIT Group Partners LLP and
PricewaterhouseCoopers.
Responsible for the implementation
of the Group’s financial strategy,
investor relations, debt financing
arrangements and all aspects of
accounting and taxation.
Mark is a highly experienced FTSE250
executive, with extensive experience
as Chairman, CEO and CFO in listed
companies and private equity. He was a
Co-founder Director of New River REIT plc
and helped take the Company from IPO
to the FTSE250 in seven years. He was
CFO of New River for over twelve years
and, working alongside his role as CFO,
was also CEO/Chairman of Hawthorn
Leisure Limited for five years. Mark
stood down from the Board of New River
following the announcement of the sale
of Hawthorn in July 2021 but remained as
CEO of Hawthorn until its successful sale
to Admiral Taverns in August 2021.
Mark is chair of both the Audit & Risk and
the Remuneration Committees and is the
Senior Independent Director.
External appointments
Chairman of PHP
External appointments
None
External appointments
None
Board composition
Neil Sinclair stepped down as Chief Executive with effect from 14 June 2022
Mickola Wilson, Paula Dillon and Kim Taylor-Smith stepped down as Independent Non-Executive Directors on 18 July 2022
Mark Davies was appointed as Senior Independent Director on 1 August 2022
Richard Starr stepped down from the Board as Executive Property Director on 12 August 2022
Committee
membership
A Audit and
Risk Committee
N Nomination
Committee
R Remuneration
Committee
E
ESG
Committee
4 1
GOVERNANCE Executive
Committee
Steven Owen
Interim Executive Chairman
Matthew Simpson
Chief Financial Officer
Daniel Davies
Head of Asset Management
Date of appointment
Joined the Group on 1 January 2022
Date of appointment
Appointed as Chief Financial Officer in
November 2021
Date of appointment
Joined the Group in January 2018
Expertise
See Board profile.
Expertise
See Board profile.
Expertise
Daniel is a Chartered Surveyor with over
20 years of real estate experience and
joined Palace Capital in 2018. Daniel brings
extensive experience of asset management
having spent 12 years at Telereal Trillium,
one of the UK’s largest private property
companies.. Prior to this position, he spent
four years at Nelson Bakewell, where his
role included investment, agency and
management.
Tom Hood
Head of Investment
Andrew Wolfe
Financial Controller
Phil Higgins
Company Secretary
Date of appointment
Joined the Group in September 2019
Date of appointment
Joined the Group in June 2018
Date of appointment
Phil was appointed Company Secretary in
December 2021
Expertise
Expertise
Expertise
Tom joined Palace Capital in September
2019 from Mansford LLP where he was a
Director in the Asset Management and
Investment Team, responsible for the full life
cycle across a diversified UK portfolio. He
held previous roles at GVA and BNP Paribas
in their Central London Investment Teams.
Tom is a Chartered Surveyor with an
MSc in Real Estate from The University
of Reading and an LLB from Durham
University. He also holds the CFA UK IMC.
Andrew Wolfe is a Chartered
Accountant having spent 3 years at
PricewaterhouseCoopers in the Financial
Services sector, having an array of
investment banking and private equity
clients, most notably Barclays Investment
Bank. Andrew was also selected to spend
6 months in Stockholm, working at SEB
bank, one of the biggest investment
banks in Scandinavia and also spent 2
years at EasyHotel, a listed property
company.
Phil was previously acting Company
Secretary at Kier Group plc and has
significant experience in the listed property
sector having been Deputy Company
Secretary at Land Securities Group plc and
intu properties plc. Phil has wide ranging
senior level experience in FTSE100 and
FTSE250 companies and professional
services firms during his 25 years as a
governance professional. He holds an LLM
in Commercial Law and is a Fellow of the
Corporate Governance Institute.
P
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E
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A
P
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T
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P
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N
U
A
L
R
E
P
O
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T
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D
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2
0
2
3
4 2
Governance
framework
Board and committees
Board of Directors as at 31 March 2023
Interim Executive Chairman (IEC): Steven Owen
One Executive Director and two Non-Executive Directors (including the IEC)
Summary of its role under the UK Corporate Governance Code:
“Collectively responsible for devising the purpose, vision and long-term strategy and overseeing its implementation in order to
promote the long term sustainable success of the company, generating value for
shareholders and contributing to wider society.”
Board committees
Audit & Risk
Committee
Remuneration
Committee
Nomination
Committee
ESG Committee
Chair:
Mark Davies
Chair:
Mark Davies
Chair:
Steven Owen
Chair:
Matthew Simpson
Comprises:
Comprises:
Comprises:
Comprises:
Two Non-Executive
Directors
Two Non-Executive
Directors
Two Non-Executive
Directors
Summary of Role:
• Monitor and
oversee financial
reporting
• Monitor risk
management and
internal controls
• Oversee external
auditors and the
audit process
Summary of Role:
Summary of Role:
• Set Remuneration
policy and oversee
its implementation
• Review Directors’
remuneration
packages and
incentives
• Approve incentives,
bonus and salaries
• Recommend Board
appointments
• Succession planning
• Board composition
skills and diversity
• Board performance
evaluation
Executive Director and
Two Non-Executive
Directors
Summary of Role:
• Develop the
strategy for ESG
matters
• Oversee ESG
implementation
• Stakeholder
engagement
4 3
GOVERNANCE Board composition and division
of responsibilities
Key responsibilities
Roles
Responsibilities
Interim Executive Chairman
• Leads the Board and Chairs the Executive Committee
• Sets the Board and Executive Committee agenda and meeting schedule
• Oversees the culture of the Board including diversity of opinion, ensures 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, Executive management
and of the other Non-Executive Director
• Engages with advisors and meets with shareholders to understand their concerns
and views and consider implications for the strategy of the Company
• Has a prime role in appointing and removing Directors
• Line management of Head of Asset Management and Head of Investment
Senior Independent Director
• Provides a sounding board for the Interim Executive Chairman and serves as an
intermediary for the Executive Director
• Available to discuss concerns with Shareholders that cannot be resolved through
the normal channels of communication with the Interim Executive Chairman
• Responsible for reviewing the Interim Executive Chairman’s performance
• Brings a wide perspective and experience to provide independent judgement and
objectivity to the Board’s deliberations and decision making
• Scrutinises and holds to account the performance of management
Board composition at 31 March 2023
Gender diversity
Male
Female
3
Independence
Independent
Interim Executive Chairman (independent on
appointment)
Executive Director (CFO)
1
1
1
4 4
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 Board performance
evaluation
Board performance evaluation
During the year, the Board conducted an internal evaluation of
its performance. The last external evaluation was conducted by
ICSA Board Evaluation Services in 2019.
This year’s review process was led by the Interim Executive
Chairman with support from the Company Secretary.
As part of the review, the Board
•
•
•
reviewed the results of the board performance evaluation
process that relate to the composition of the board, its
diversity and how effectively the members of the board work
together to achieve objectives;
reviewed the results of the performance evaluation of the
Committees; and
reviewed the time required from Non-Executive Directors,
including the Interim Executive Chairman and Senior
Independent Director.
Process
The evaluation was conducted in March 2023 via a questionnaire
sent to each Board member to obtain their feedback. This
covered:
• Board responsibilities
• Oversight
• Board meetings
• Support for the Board
• Board composition and size
• Working together
• Outcomes and achievements
The process included a review of the effectiveness of the
Remuneration, Nomination and Audit & Risk Committees.
A report was compiled based on the findings. This was
considered in April 2023.
The Board was considered to be of the right size for the
Company. This reflected the updated strategy adopted in the
year and the requirements of the business. The Board was
thought to have the appropriate mix of skills and experience to
execute the strategy in line with shareholder expectations, taking
into account in particular shareholder concerns on the Company’s
previous strategy and costs.
Decision making
It was felt that the Board was more efficient and that decision
making was quicker and generally more agile. A number of
additional Board and Committee meetings were held during the
year to consider issues outside the scheduled annual meeting
schedule and the Interim Executive Chairman and Senior
Independent Director made themselves available for such meetings.
In the year, the Board was more involved in overseeing the
implementation of the strategy. The new Executive Committee
was helpful to support the Interim Executive Chairman for the
provision of operational information and the day to day running
of the business.
It was considered that employees and shareholders understood
and supported the new Board structure and the roles and
responsibilities, though this had been an area of development in the
year as employees became used to the new governance structure.
Communication
Employees have now got a better understanding of the
differences between an Executive Committee and the Board and
the relevant information requirements of each. Board papers
are considered to be of good standard with more signposting
on the key issues via Executive Summaries being encouraged.
Communication was considered to have improved both from
and to employees as Board members encouraged an open
culture. This has included informal events where staff could
discuss matters with the Interim Executive Chairman and Senior
Independent Director personally.
Administration
The Board and Committee agendas’ focus was appropriate for
the Company being focused on the key issues. Papers provided
the right information for the Board and Committees to consider
and make appropriate decisions, including those matters
reserved for the Board and escalated from management and the
Executive Committee. Papers were now provided up to a week in
advance of meetings via a secure Board portal.
Looking forwards
The Board agreed that it should continue to monitor shareholder
views while implementing the articulated strategy.
4 5
GOVERNANCE Board activities and
Committee attendance
The Board has a culture of diligent preparation for meetings,
whether virtual or in person, constructive discussion on matters and
appropriate challenge. The Non-Executive Directors are considered
to be independent and free from any relationship that could affect
the exercise of their independent judgement. It is felt that their
knowledge and understanding are fundamental to the Board’s
deliberations. The Board is led by the Interim Executive Chairman.
The profiles of the Board members can be found on pages 41 of
this Report. They demonstrate a complementary diversity of skills,
backgrounds and experience, which enables the Group to be
led effectively.
The Directors’ interests in the shares of the Company are set out
on page 63. The Board met four times during the financial year
in accordance with its usual meeting programme. A significant
number of further meetings were convened to deal with specific
strategic and corporate matters.
The Board has a schedule of matters reserved for its approval
which includes material capital commitments, acquisitions and
disposals and Board appointments. This was reviewed in the year
and updated for best practice matters, in line with the Code.
Directors are given information for each Board meeting, including
reports on the current financial and operational performance and
the papers are considered carefully. In the year, suggestions for
development of papers were incorporated, including the use of
a new Board portal for improved access and communication.
Board1
Audit and Risk
Remuneration
Nomination
ESG
Steven Owen (Chairman)
Mark Davies
Matthew Simpson
Neil Sinclair2
Richard Starr4
Kim Taylor-Smith3
Mickola Wilson3
Paula Dillon3
4/4
3/3
4/4
0/1
1/1
1/1
1/1
1/1
2/2
2/2
–
-
-
1/1
1/1
1/1
3/3
2/2
–
-
-
1/1
1/1
1/1
1/1
1/1
–
-
-
-
-
-
1/1
-
1/1
-
1/1
1/1
1/1
1/1
1
In addition to scheduled meetings noted above, the Board and Remuneration Committee held ad hoc meetings virtually and in person during the year
to discuss specific strategic and operational and leaving arrangements for the Executive Directors who stepped down in the year
2 Stepped down from the Board 14 June 2022
3 Stepped down from the Board 18 July 2022
4 Stepped down from the Board 12 August 2022
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.
The management team drives the embedding of the desired culture and ensures that the expected values and beliefs are sufficiently
understood and upheld. During the year, the Board, in its considerations, took into account the views of the workforce via the
Workforce Advisory Panel and held regular discussions and updates on the strategy via the Executive Committee. In addition, the
Board keeps the values, beliefs, policies and practices that encapsulate the Group’s culture under review. It assessed reports from
management and the output of the Workforce Advisory Panel. It monitored adherence to Group policies and compliance with the
internal corporate governance requirements of the Company and under the Code and regulatory requirements.
For further information regarding the Company’s approach to investing in and rewarding its workforce, please see page 59.
4 6
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 Nomination Committee
report
Members
• Steven Owen (Chair)
• Mark Davies
Total meetings held:
One
Steven Owen
Chair of Nomination Committee
Key actions
• Considering Board and Executive Committee composition
Areas of focus
Succession plans
• Considering terms of reference
• Board Evaluation
Director training and development
Dear Shareholder,
In accordance with the Code, at least a majority of members of
the Committee should be Independent Non-Executive Directors.
While I was independent on appointment, from August 2022 we
have not been compliant with this aspect of the Code.
On 18 July the three independent Non-Executive Directors
stepped down from the Board and on 1 August 2022, Mark
Davies was appointed as an Independent Non-Executive Director
and joined the Committee. Since that date, the Committee
has therefore consisted of myself as Chair and Mark Davies as
independent Non-Executive Director member. The CFO may
attend Committee meetings by invitation.
Board changes
Chief Executive
In line with the Committee’s terms of reference, the Committee
considered and agreed with Neil Sinclair that he would step
down from the Board in the summer of 2022. We agreed that
it was appropriate in these circumstances that Steven Owen,
then Chairman, would become Interim Executive Chairman. The
changes took effect on 14 June 2022.
Non-Executive Directors
On 18 July 2022, Paula Dillon, Kim Taylor-Smith and Mickola
Wilson, Independent Non-Executive Directors, stepped down
from the Board.
The Committee met formally once during the year (details of
attendance are set out on page 46) .
On 1 August 2022, Mark Davies was appointed as Senior
Independent Director.
The Nomination Committee leads the process for appointments
to the Board and overseas the plans for orderly succession to
both the Board and senior management positions.
Executive Property Director
On 12 August 2022, following the AGM on 29 July 2022, Richard
Starr, Executive Property Director, stepped down from the Board.
The Committee has kept 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.
4 7
GOVERNANCE Nomination Committee
report (continued)
Evaluation
AGM
In accordance with the Code, each of the Directors will submit
themselves for election or re-election at the 2023 AGM. The
Committee, on behalf of the Board, is satisfied that all Board
members put forward for election or re-election have, and continue
to commit the time required to discharge their roles effectively.
The Committee believes that, despite non-compliance with the
Code, the Board has the appropriate balance of skills, experience,
independence and knowledge to oversee the particular strategy
of the Company and Shareholders are requested to support the
resolutions proposed by the Board.
Steven Owen
Chair of Nomination Committee
14 June 2023
A formal and rigorous internal evaluation of the Board’s
performance was carried out , the process and findings of which
are set out on page 45. The Committee oversaw the evaluation
process ensuring that a clear action plan was put in place.
The Committee is satisfied that the Board has a strong group
of people from different backgrounds and experience which
provides for effective decision making.
Diversity
The Committee is very conscious that the current Board
consists of three men, albeit of different ages, experience and
backgrounds. The Committee considers that the Board has the
right mix for the Company at present due to its strategy and the
need for extensive property and listed company experience but
commits to taking into account diversity in its broadest sense for
any future appointments.
Such considerations would also apply for changes to the
Executive Committee, being senior management, noting that
the appointments to the Committee in the year were made from
existing staff. These people, albeit all men, were considered
appropriate to be members of the Committee based on their
experience, expertise and suitability for the role and I believe
that the Committee is working well in delivering the strategy in
operational and financial terms. It was not appropriate for the
Company’s strategy to recruit new members of staff as existing
staff members had shown the capability and desire to take on
these roles.
As Interim Executive chairman, I lead the Executive Committee
and am very keen to involve the wider employee group to add
their voice to discussions and considerations of their areas of
responsibility.
4 8
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 Environmental Social and Governance Committee
report
Members
• Matthew Simpson (Chair)
• Steven Owen
• Mark Davies
Total meetings held:
One
Matthew Simpson
Chair of ESG Committee
Key actions
• Oversaw the overall governance of ESG matters
• Reviewed the development of EPC improvements and net
zero pathway
• Oversaw implementation of new third party web based data
collection platform to improve efficiency of data collection
and interpretation
• Oversaw specialist advice on ESG matters
Areas of focus
The remit of the Environmental, Social and Governance (‘ESG’)
Committee is to oversee the Company’s response to the evolving
environmental, health and safety, corporate social responsibility,
corporate governance, sustainability, and other public policy matters
relevant to the Company.
Dear Shareholder,
The Committee met formally once during the year with
discussions at an operational level taking place regularly at
Executive Committee meetings. The ESG Committee agenda
includes updates from management in relation to the progress
against the Board’s ESG strategy and its three fundamental
objectives, which are to:
•
Improve the portfolio’s EPC ratings
• Foster a culture of inclusivity and consideration of
stakeholders’ interests
• Be a responsible business
The following pages set out the key responsibilities and activities
of the Committee in its oversight role. For more information on
the Group’s activities in this area, please see the Strategic Report.
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:
• Define the Group’s corporate and social obligations,
agree a strategy for discharging these and oversee the
implementation of such strategy
• Ensure there is 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 such risks
4 9
GOVERNANCE Environmental Social and Governance Committee
report (continued)
Strategy and linkage to ESG
Palace Capital has made good progress during the year including
improved EPC ratings and a better understanding of its carbon
footprint and scope 1, 2 and 3 reporting. Environmental factors
are a key part of our asset management planning as described
earlier in the Strategic Report.
ESG strategy
A key aspect of the ESG strategy is centred on the environmental
performance of the Group’s assets and improving the portfolio in
a cost effective manner to adapt to changing occupier demands.
The Principal Risk Register (see pages 26 to 29) includes such
risks. The Committee believes that management have made
good progress in the year to embed ESG considerations into
the business.
The Committee has reviewed the processes for collecting data
in relation to the environmental performance of the Group’s
assets, which have been enhanced further during the year and
embedded in the Company’s processes including through
the use of a new platform for the recording and calculation of
data called ‘Compare Your Footprint’. This allows our assets’
managing agents to input the data directly and enhances the
efficiency of our data collection and interpretation going forwards
so we may take action as appropriate.
We have considered the pathway to net zero as part of the
Company’s asset plans. We consider the appropriate timeframe
for our assets, taking into consideration our strategy, to be in line
with the legislation which is therefore 2050.
Matthew Simpson
Chair of ESG Committee
14 June 2023
5 0
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 Audit and Risk Committee
report
Members
• Mark Davies (Chair)
• Steven Owen
Total meetings held:
Three
Mark Davies
Chair of Audit and Risk Committee
Areas of focus
The Committee will continue to meet with the valuers to further
review their independent valuations for the full year and half year
The Committee will review the possible capital costs of ESG
matters and the Company’s provision of these
Overall, we are pleased with the Company’s robust reporting
processes and its approach to considering and mitigating its
Principal Risks, as described more fully on pages 26 to 29.
Composition
Due to the size of the Board, the Committee is not constituted
in accordance with the Code as the Interim Executive Chairman
is a member of the Committee. The Code requirement is that all
members are Independent Non-Executive Directors. The CFO
regularly attends Committee meetings by invitation. The Committee
is satisfied that its composition is appropriate, that I bring recent
and relevant financial experience as a Chartered Accountant and
many years as a FTSE250 Director, and considers that all members
have the necessary competence relevant to the sector in which
the Company operates, as required by the Code, since the Interim
Executive Chairman and I have many year’s experience in the real
estate sector.
Key actions
• Reviewed and approved the annual and half-yearly
financial statements
• Ensured that the Annual Report was fair, balanced and
understandable
• Scrutinised potential transactions and property valuations
• Full and mid-year risk reviews
• Considered the appointment of the external Auditor, their
reports to the Committee and their independence
Dear Shareholder,
The Committee assists the Board in its oversight and assurance
roles, ensuring that the annual report and accounts are fair
balanced and understandable and provides the information
necessary for shareholders to assess the Company’s position,
performance, business model and strategy.
The Committee has supported the Board by monitoring the
integrity of the Company’s financial and narrative reporting and
the robustness of the Group’s risk management and internal
control framework, taking into account that the Company does
not have an internal audit function. Due to the size and relative
lack of complexity of the business, the Committee recommended
to the Board that no internal audit function was required.
We have however, worked closely with the external auditors,
reviewing key accounting judgements and policies, and ensuring
an effective external audit process. I am pleased to report that
no material uncertainty disclosure has been included in the
valuations issued by the independent valuer of our properties,
CBRE in April 2023.
5 1
GOVERNANCE Audit and Risk Committee
report (continued)
Financial reporting and significant matters
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, in line with the Company’s internal
forecasting horizon. Further details are provided on page 25.
Fair, balanced and understandable
The Committee has considered whether the Annual Report is
fair, balanced and understandable and provides the information
necessary for Shareholders to assess the Company’s position and
performance. In forming its opinion, the Committee considered
whether the Annual Report provided a comprehensive review
of matters in the year, both positive and negative, included
all relevant financial transactions and balances, was consistent
throughout and had been written in straightforward language
without unnecessary repetition. The Committee was satisfied
that, taken as a whole, the Annual Report is fair, balanced and
understandable.
As part of its role, the Committee has considered a number
of significant issues relating to the financial statements.
This includes the suitability of accounting policies and the
appropriateness of management’s judgements and estimates.
The Group’s accounting policies can be found in the notes to the
consolidated financial statements and further information on the
significant issues considered by the Committee is set out below.
Property valuations
The valuation of the Group’s properties and the determination
of their fair value is one of the most critical elements of the
annual and half-year financial results. The Committee reviews
the valuations and the underlying assumptions and judgements
applied by management and CBRE. The Committee receives
information on the valuation process and reviews updates
from management in relation to current market trends and
key valuation movements compared to previous periods. The
Committee provides robust challenge and satisfies itself that
sufficient oversight and controls are in place and that the financial
reporting is supported.
Going concern
The 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
Group’s 12-month cashflow 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 the going concern basis of preparation.
Internal Control Framework
Governance
Framework
Strategic
Framework
Risk
Management
Framework
Assurance
Framework
5 2
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 External auditor
Internal audit
Given the size of the Group, in the opinion of the Committee,
there is currently no requirement 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.
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. It is intended that the process will be reviewed again
in the upcoming year to ensure it remains effective.
Mark Davies
Chair of Audit and Risk Committee
14 June 2023
BDO LLP was first appointed as external Auditor in respect of
the year ended 31 March 2015. In accordance with the EU Audit
Regulation and Directive, the Group will be required to put the
external audit contract out to tender in 2024.
The Committee has assessed BDO’s performance, independence,
objectivity and fees, as well as the effectiveness of the audit
process. In making its assessment, the Committee considered the
qualifications, expertise and resources, the quality and timeliness
of the delivery of the audit and the provision of non-audit related
services. The Committee made their assessment based on
feedback from management, their own interaction with the audit
team and assurances provided by the Auditor in relation to their
independence.
In the year ended 31 March 2023 the only non-audit services
provided to the Group related to the independent review of the
half-year results.
The Committee will only authorise non-audit services on the
basis that they are permissible under regulations relating to a
Public Interest Entity and the Company has a formal non-audit
services Policy.
Audit fees
Fees payable to the Group’s Auditors for audit and non-audit
services are set out in note 3 on page 91 and 92. Total fees
related to non-audit services represented less than 5% of the
total fees for audit services (2022: 5.6%).
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
oversees and at least annually reviews the effectiveness of
the Group’s internal controls and risk management systems
and reviews / approves the related statements in the Annual
Report. During the year the Committee received updates from
management and the external Auditor regarding the operation
of key controls. As part of their review the Committee also
considered the process of risk identification, mitigation and
evaluation of the potential impact on the Group’s strategic
objectives. The Directors are satisfied that the current controls
are effective with regard to the size of the Group.
The internal controls are designed to ensure the reliability of
financial information for both internal and external purposes.
However, they can only provide reasonable, but not absolute
assurance against material misstatement or loss.
5 3
GOVERNANCE Directors’ remuneration
report
Members
• Mark Davies (Chair)
• Steven Owen
Total meetings held:
Three
Mark Davies
Chair of the Remuneration Committee
Key actions
• Reviewed the Remuneration Policy and proposals for a
new Realisation Plan to be put to shareholders at the 2023
AGM to motivate and retain management to implement the
updated strategy and deliver alignment with shareholders
• Considered the leaving arrangements for the former Chief
Executive and Executive Property Director
• Reviewed Executive Director and Senior Management
Remuneration including for promotions in the year for certain
executives below Board level
• Determined that no awards would be made in FY23 under
the Long Term Incentive Plan
• Appointed Korn Ferry as advisors
• Reviewed wider workforce remuneration arrangements
including overall levels of salary, bonus, pensions
and benefits
• Engaged with Shareholders on remuneration including
possible changes to the Remuneration Policy and new
Realisation Plan
• Engaged with the workforce on how executive remuneration
aligns with wider company pay policy
Dear Shareholder,
The Committee’s primary objective is to ensure that the Group’s
remuneration policies and practices that apply to Board members
and Senior Executives support the successful delivery of the
strategy. This report provides details of how the Committee has
taken action in the year to achieve this.
Committee membership and meetings
Following the changes in the Board in July 2022, the Committee
consisted of myself an Independent Non-Executive Director, as
Chair, and the Interim Executive Chairman. Although we were
not compliant with the Code, (which requires that members of
the Committee are Independent Non-Executive Directors), we
believe that the Committee has sufficient independence and
experience to oversee executive management remuneration.
In relation to the meetings held, and actions taken, it is worth
noting that Steven Owen’s remuneration as Interim Executive
Chairman was decided by the Board and he was not involved
in the discussions relating to the fees for his services. The Chief
Financial Officer may attend Committee meetings by invitation but
is not involved in deliberations relating to his own remuneration.
The Committee appointed Korn Ferry as independent advisors in
the year, who are invited to attend meetings.
The Committee met three times during the year (details of
attendance are set out on page 46). In addition, ad hoc meetings
were held to consider the leaving arrangements of the Executive
Directors who stepped down in the year.
5 4
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 Advisors
The Committee was previously advised by MM&K who did not
provide services in FY23 and therefore did not receive a fee. Korn
Ferry were appointed as advisors to the Committee during the
year ended 31 March 2023 and were paid £22,210 (2022: nil) for
advice including a new Remuneration Policy and Realisation Plan.
Korn Ferry are also remuneration advisors to the Remuneration
Committee of PHP where the Interim Executive Chairman was
Chairman in the year. Mr Owen retired from the Remuneration
Committee of PHP on 31 December 2022. Otherwise, Korn Ferry
do not have any other connection with the Company or Directors
personally. The Committee is satisfied that the advice is objective
and independent and thanks Korn Ferry for their assistance.
Remuneration policy
When setting the remuneration policy, the Committee considers
the need to attract, retain and motivate whilst ensuring the
overall approach to remuneration supports the Group’s strategy
and is aligned with the interests of Shareholders.
The Directors’ Remuneration Policy was last approved at the
Company’s AGM held in July 2021 and a summary of the policy
can be found on pages to 56 to 58. Remuneration arrangements
in the year were made under the existing Policy.
As announced in July 2022, the strategy of the Company has
changed significantly since the Policy was introduced and is
focussed on returning cash to Shareholders, while being mindful
of consolidation in the sector. Accordingly, the Committee has
undertaken a review, in consultation with large Shareholders, of
the Policy and is actively considering a revised Remuneration
Policy to be put to Shareholders for approval at the 2023 AGM
to reflect the new strategy. This includes proposing a new
incentive plan – a ‘Realisation Plan’ which would, if approved
by Shareholders, replace the Long Term Incentive Plan and
reward management for implementing the return of cash to
Shareholders and value creation. In return for awards under the
Realisation Plan, it is anticipated that the maximum amount of
annual bonus for staff will be reduced by 50% and there will be
no future LTIP awards. The adoption of the Realisation Plan would
require an amendment to the Policy, so this would also be put
to Shareholders.
Performance outcomes for FY23
The 12 months to 31 March 2023 were challenging with a difficult
economic backdrop. Despite this, the Group achieved 99% rent
collection, a resilient adjusted profit before tax, ahead of budget,
as well as reducing our net debt levels and returning cash to
shareholders via the share buyback.
In light of the uncertainty that has existed in the year, the
Committee delayed setting the targets for Mr Simpson’s annual
bonus for the year ended 31 March 2023. After reviewing the
financial and corporate performance for the year, a total of 34%
of the maximum potential target was achieved by Mr Simpson. In
line with the updated strategy, the Committee determined that
the bonus would be fully paid in cash.
The Long Term Incentive awards that were granted in 2019
had a normal vesting date of 23 June 2022. The performance
conditions were not met and the awards lapsed. Full details can
be found on page 61.
The Committee determined to delay the grant of awards under
the Long Term Incentive Plan, following the adoption of the
updated strategy by the Company announced in July 2022 and
no awards were made under the Plan in FY23.
Implementation in FY24
Subject to Shareholder approval of the Realisation Plan and new
Remuneration Policy, the existing Remuneration Policy will remain
in effect. Due to the updated strategy, no awards under the
Long-Term Incentive Plan will be made in FY24.
The salary increase for the Chief Financial Officer is 2.9% for
the period commencing 1 April 2023, in accordance with the
Remuneration Policy. This is below the average salary increase for
the workforce. Details are provided on page 66. In accordance
with the existing Remuneration Policy, the maximum bonus
opportunity for the CFO will not be more than 100% of salary. It
is anticipated that, if the Realisation Plan is approved, then the
maximum potential under a revised Remuneration Policy will be
50% of salary. The Committee ensures that individual metrics are
aligned to the business strategy and are sufficiently stretching.
Concluding remarks
The remuneration arrangements provide alignment with
shareholders through the use of financial and operational
objectives. The framework applies in a very similar way across
the workforce in terms of types of benefits and variable pay
and reflects their importance to the Company and valued
contribution. Accordingly it is anticipated that all employees will
be eligible to participate in the proposed Realisation Plan.
The Committee will take into consideration a range of
stakeholders’ interests especially those of our Shareholders
when making remuneration decisions. Accordingly, on behalf
of the Committee, I would like to thank Shareholders for their
engagement and continued support.
Mark Davies
Chair of Remuneration Committee
14 June 2023
5 5
GOVERNANCE Remuneration
policy
This policy report summarises the Directors’ Remuneration Policy applicable to
the Executive Director and the Non-Executive Directors, details of which were
contained in that year’s Annual Report and approved at the Company’s AGM
on 29 July 2021. That Policy is effective for a period of up to three years. It is
anticipated that a new Policy will be put to shareholders for approval at the 2023
AGM and details will be provided in the Notice of AGM. Until a new Policy is
approved, the existing Policy will remain in effect.
Executive Director policy table
Element and link with strategy Operation and maximum potential value
Performance framework
Salary
Fixed amount at a level
appropriate to the skills and
experience needed to fulfil
the role.
Salaries are reviewed annually with effect from 1 April each year. Any
increases are made having regard to inflation, personal performance,
and the need to retain and motivate. A review of the salaries in the
Company’s peer group in conjunction with the Group’s remuneration
advisors may be undertaken to ensure comparable salaries are
being paid.
Salary is not linked to
specific financial or
non-financial
performance measures.
Annual bonus
To incentivise performance
which is measured against
targets set at the beginning of
the financial year. Paying part of
the bonus in shares aligns the
interests of the directors with
those of shareholders.
The Remuneration Committee seeks to ensure that salaries are set
at levels that are reasonable with an emphasis on total remuneration
being achieved from performance-based rewards.
The Committee does not specify a maximum salary or maximum
salary increase.
Performance targets are usually set by the Remuneration Committee
at the beginning of each financial year. At the end of the financial
year the Committee reviews performance against the targets and
also takes in to account the overall financial performance and
future prospects.
Performance is assessed
against a range of
financial, non-financial
and strategic targets
which vary each year.
The maximum bonus opportunity is capped at 100% of salary. The
bonus is paid as to 65% in cash and 35% by way of an option over
shares pursuant to the Deferred Bonus Plan. The ability to exercise
the option granted under the Deferred Bonus Plan is deferred for a
year and there is a period of a further year during which the options
may be exercised. The Committee has discretion for 100% to be paid
in cash.
The Committee may, in exceptional circumstances, use its discretion
to amend the bonus outcome if it believes that it does not properly
reflect overall underlying business performance, an individual’s
contribution or some other factor.
Malus and clawback provisions apply to all elements of the bonus.
5 6
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 Element and link with strategy Operation and maximum potential value
Performance framework
LTIP
To incentivise and reward
performance over the long term,
aligning Directors’ interests with
those of Shareholders.
Pension
As part of the overall package
the Executive Director is
provided with retirement benefits
Other Benefits
As part of their overall package
the Executive Director is
provided with a competitive
level of benefits that encourage
well-being and engagement
Awards are proposed to be granted in the form of nil cost options
and will be subject to challenging performance conditions in line with
business KPIs, measured over a three-year period.
Award levels are capped at a maximum value of 100% of salary. At
the end of the three-year performance period a review is undertaken
and a comparison made with the performance targets which will
determine the percentage of the award that will vest.
Vested shares are subject to a further two-year holding period.
The Committee may, in exceptional circumstances, use its discretion
to adjust the level of vesting of LTIP awards if it believes it does
not properly reflect overall underlying business performance,
shareholders’ experience, an individual’s contribution or any
combination thereof.
Performance measures
are aligned to the
key objectives of the
Company and the
creation of shareholder
value.
The Committee reviews
the measures, their
relative weightings
and targets prior to
each award and makes
changes as is deemed
appropriate.
Malus and clawback provisions apply to LTIPs.
The Executive Director receives a contribution in line with the rate
applying to the majority of the workforce of 5% of salary paid into a
pension scheme.
None
Travel or car allowance – Travel allowances are fixed in the
Executive Director’s service contract.
None
Private medical cover - Private medical cover is at a level which
the Committee determines is fair and reasonable.
Life assurance - Life assurance is fixed at £1.5m for the
Executive Director.
Critical illness cover - The critical health insurance benefit provides
£500,000 in the event policy cover terms are met.
Shareholding
Requirements
The Executive Director is expected to build up and retain a minimum
shareholding of 100% of basic salary.
None
Encourages long-term
commitment and alignment with
shareholder interests.
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.
Post-employment requirements - 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.
5 7
GOVERNANCE Remuneration
policy (continued)
Dividend equivalents for share-based awards
How the committee will use its discretion
Awards granted under the Deferred Bonus Plan and Long
Term Incentive Plan incorporate the right to receive amounts
equivalent to any dividends or shareholder distributions which
would have been paid between the date of grant and the date
of the delivery of shares in respect of which an option has been
exercised.
Malus and clawback
Where an option has been granted based on any incorrect
information including, without limitation, a material misstatement
in any published results of the Group, the number of shares
subject to the option shall be reduced or eliminated. In the event
that an option has already been exercised the Remuneration
Committee may decide that the recipient should make a
repayment of some or all of the benefit received. Malus and
clawback also applies to the cash element of the bonus and in
the circumstances described above a repayment of some or all of
the cash may be required.
Non-Executive Directors and Chairman policy table
The Committee may amend or substitute any performance
condition(s) if one or more events occur which cause it to
determine that an amended or substituted performance
condition would be more appropriate, provided that any such
amended or substituted performance condition would not be
materially less difficult to satisfy than the original condition. The
Committee may adjust the calculation of performance targets
and vesting outcomes (for instance for material acquisitions,
disposals or investments and events not foreseen at the time
the targets were set) to ensure they remain a fair reflection of
performance over the relevant period. The Committee also
retains discretion to make downward or upward adjustments
resulting from the application of the performance measures if it
considers that the outcomes are not a fair and accurate reflection
of business performance. In the event that the Committee was
to make an adjustment of this sort, a full explanation would be
provided in the next Remuneration Report.
Element and link with strategy Operation and maximum potential value
Performance framework
Fees
To provide competitive fees to
attract the right Non-Executives.
Fees are normally reviewed every two years following the advice of
the Company’s remuneration advisors.
Not applicable.
Additional fees are payable for the chairing of Board Committees.
No maximum is specified.
Approach to recruitment remuneration
The Company’s principle is that the remuneration of any new
recruit to the Board will be assessed in line with the same
principles as for the Executive Director, as set out in the
Policy Table.
The Committee is mindful that it wishes to avoid paying more
than it considers necessary to secure a preferred candidate with
the appropriate experience needed for a particular role.
In setting the remuneration for new recruits, the Committee will
have regard to guidelines and shareholder sentiment regarding
one-off or enhanced short-term or long-term incentive payments
as well as giving consideration for the appropriateness of any
performance measures associated with an award.
Where an existing employee is promoted to the Board, the
policy would apply from the date of appointment to the Board
and there would be no retrospective application of the policy
in relation to subsisting incentive awards or remuneration
arrangements. Accordingly, the existing remuneration package
would be honoured and form part of the ongoing remuneration
of the person concerned. These would be disclosed to
shareholders in the Remuneration Committee report for the
relevant financial year.
New Non-Executive Directors will be appointed through letters
of appointment and fees set at a competitive market level and
in line with the other existing Non-Executive Director. Letters of
appointment are normally for an initial term of three years.
5 8
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 Service contracts and policy on 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.
Element
Salary
Annual Bonus
Deferred Bonus Plan
LTIP
Operation
Service contracts may be terminated immediately by making a payment in lieu of notice. An
immediate payment of 50% of salary will be made followed by monthly payments after six months
in the event that alternative employment has not been secured.
In the event of termination for a reason other than resignation or gross misconduct for
material performance or conduct concerns, a Director may be eligible, at the discretion of the
Remuneration Committee to receive an award based on the achievement of the performance
targets. If the Director has not been employed throughout the year a reduced pro-rata amount
may be paid in specific circumstances or at the discretion of the Remuneration Committee.
In relation to Deferred Bonus awards, individuals would be defined as good or bad leavers,
with good leavers being those leaving under pre-determined circumstances such as retirement,
redundancy, ill-health, death or disability (proved to the satisfaction of the Committee), or those
deemed by the Committee in its absolute discretion to be good leavers given the circumstances
surrounding termination. All other leavers would be bad leavers.
If an individual is categorised as a good leaver the award will vest on the normal vesting date
unless the Committee determines the award should vest following cessation of employment or
a change of control. If an individual is considered by the Committee to be a bad leaver, their
awards will lapse in full.
Individuals would be defined as good or bad leavers, with good leavers being those leaving under
pre-determined circumstances such as retirement, redundancy, ill-health, death or disability (proved
to the satisfaction of the Board), or those deemed by the Committee in its absolute discretion to
be good leavers given the circumstances surrounding termination. All other leavers would be bad
leavers. If an individual is categorised as a good leaver then, other than in exceptional circumstances,
the award will vest on the normal vesting date reflecting the extent to which performance targets
have been met and the number of shares would normally be pro rated to reflect the reduced service
period. The post vesting holding period would also apply, other than in exceptional circumstances. If
an individual is determined to be a bad leaver, their awards will lapse in full.
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 Director, except that
the pension available for employees is higher than that for the
Executive Director. Individual salaries and awards of bonuses 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.
Decision making process for determination,
review and implementation of directors’
remuneration policy
The Committee keeps the operation of the policy under regular
review to ensure it continues to operate as intended and support
the Group’s strategy over the longer term. The Committee will
review the structure and quantum and consider the UK Corporate
Governance Code 2018, market practice, institutional investor and
investor representative body views generally as well as those of
its own shareholders. The Committee will also have regard to the
remuneration arrangements, policies and practices of the wider
workforce. If changes are required, the Committee Chair engages
with the Company’s largest Shareholders to ensure their feedback
is taken into consideration when finalising any Policy changes.
The Committee manages conflicts of interest by ensuring that
the relevant member of management or the Committee are not
present when their own remuneration is determined or discussed.
The Committee will receive input from the Chief Financial Officer
on remuneration related matters. The Company Secretary acts
as Secretary to the Committee. The Committee is satisfied
that the advice received by Korn Ferry in relation to executive
remuneration matters is objective and independent.
5 9
GOVERNANCE Annual remuneration
report
This report was prepared by the Remuneration Committee and approved by the
Board for the financial year ended 31 March 2023
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 2023,
with a comparison to the previous financial year.
Executive
Directors
Neil Sinclair2
Richard Starr3
Year
2023
2022
2023
Salary
£
Taxable
benefits
£
65,980
2,467
303,000
87,957
229,500
Matthew Simpson1 2023 238,000
2022
61,973
2022
Stephen Silvester4 2023
2022
176,425
2023 391,937
Total
–
Bonus
Cash
£
–
98,475
59,500
74,588
80,800
52,000
–
17,773
3,258
8,525
9,150
3,628
–
1,747
14,875
–
140,300
Long
term
incentive
plan
£
–
118,402
–
89,314
–
–
–
74,775
–
Bonus
Shares
£
–
53,025
–
40,163
–
28,000
–
–
–
2022
770,898
31,673
225,063
121,188
282,491
Pension
£
–
–
4,398
11,475
11,900
Total
fixed pay
£
68,447
320,773
95,613
249,500
259,050
Total
variable
pay
£
–
269,902
59,500
204,065
80,800
Total pay
£
68,447
590,675
155,113
453,565
339,850
3,122
68,723
80,000
148,723
–
6,490
16,298
21,087
–
–
–
184,662
423,110
74,775
140,300
259,437
563,410
823,658
628,741
1,452,400
1 Matthew Simpson was appointed Chief Financial Officer on 11 November 2021.
2 Neil Sinclair stepped down from the Board on 14 June 2022. After leaving, Mr Sinclair was paid £374,758 in lieu of notice period, £639,780 as
compensation for loss of office and the payment of his legal fees. Bonus shares awarded in the prior year were settled in cash.
3 Richard Starr stepped down from the Board on 12 August 2022. After leaving Mr Starr received £299,350 in lieu of notice period, £11,900 representing
his pension, £80,000 as compensation for loss of office and the payment of his legal fees. He received salary and benefits from 12 August 2022 until
30 September 2022 as an employee to assist with the handover of responsibilities.
4 Stephen Silvester left the Board as Chief Financial Officer on 29 October 2021.
Non-Executive Directors
Steven Owen1
Mark Davies2
Kim Taylor-Smith4
Mickola Wilson4
Paula Dillon4
Stanley Davis3
Total
Fees to 31
March 2023
£
Fees to 31
March 2022
£
221,500
40,000
13,327
13,327
11,846
–
300,000
27,500
–
45,000
45,000
40,000
37,500
195,000
1 Steven Owen was appointed Chairman on 1 January 2022 on a fee of £110,000 and became Interim Executive Chairman on 14 June 2022 at an increased
fee of £130,000 per annum plus additional fees of £10,000 per month for the extra responsibilities time commitment of the role
2 Mark Davies was appointed as Senior Independent Director on 1 August 2022
3 Stanley Davis retired as Chairman on 31 December 2021
4 Kim Taylor-Smith, Paula Dillon and Mickola Wilson stepped down from the Board on 18 July 2022
6 0
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 Annual bonus
The Group’s remuneration policy for the year ended 31 March 2023 caps bonus payments to the Executive Director at 100% of salary.
Bonuses are awarded depending on whether Company and individual performance achieve the relevant criteria, as determined by the
Committee at its discretion.
For the year ended 31 March 2023, the Chief Financial Officer was evaluated on the financial performance of the Company including on
its Key Performance Indicators. These included debt reduction and reductions in annualised administration costs of £1.4 million. In terms
of individual performance the Committee took into account the Chief Financial Officer’s corporate leadership and management of the
finance function in addition to the engagement with banks and Shareholders to reduce debt and negotiate covenants where applicable.
Based on the performance criteria, the Executive Director achieved 34% of the maximum award.
At the discretion of the Company, in light of the updated strategy, the Committee determined to pay the FY23 bonus to the Chief
Financial Officer wholly in cash.
Long-Term Incentive Plan
Executives have historically been able to participate in the Group’s Long Term Incentive Plan. The LTIP awards that were granted in
June 2019 had a normal vesting date on 23 June 2022. The performance criteria over a three-year period was not achieved so all
options lapsed. Performance was measured against total shareholder return and return of the property portfolio as calculated by IPD
measured over a three-year period.
Outstanding scheme interests
The Executive Director has the following outstanding awards under the Long-term Incentive Plan.
At
31 March
2023 Granted
Vested and
exercised
Matthew Simpson
Total
–
–
30,223
64,856
95,079
–
–
–
–
–
Lapsed
17,875
–
–
As at
31 March
2022
Share price
at date
of award
Grant date Vesting date
17,875
30,223
64,856
112,954
£2.96
£1.90
£2.47
25/06/2019
25/06/2022
14/10/2020
14/10/2023
16/11/2021
16/11/2024
Awards granted from 2018 onwards are subject to a two-year holding period following vesting. Mr Simpson’s LTIP awards prior to
joining the Board were based on 50% of salary. The awards made in 2019 to Mr Simpson and other LTIP recipients did not vest in line
with the performance conditions attached to them.
Awards under the LTIP made in 2020 and 2021 are subject to the Performance Conditions of those awards being:
Vesting of 50% of the Award will be determined by the Total Shareholder Return (“TSR”) of the Company over the Performance Period
beginning on 14 October 2020 and ending on 13 October 2023;
Vesting of the remaining 50% of the Award will be determined by the growth in the Portfolio Value (“PV”) of the Company over the
Performance Period beginning on 31 March 2020 and ending on 31 March 2023, using the Total Property Return (“TPR”) as calculated
by MSCI for the Group as compared with the TPR for the MSCI IPD Index (the “Comparator”) over the same period.
Vesting of Shares awarded under the 2021 LTIP is subject to Total Shareholder Return (“TSR”) and Total Property Return (“TPR”)
as calculated by MSCI measured over a three-year period. The TSR aspect of the award will be subject to a downward adjustment
according to the Company’s share price discount to Net Asset Value at the time of vesting.
Further details of the LTIP awards and performance criteria are contained in the 2021 and 2022 Annual Reports.
In line with the strategy announced in July 2022, no awards of LTIPs were made in FY23.
6 1
GOVERNANCE Annual remuneration
report (continued)
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 plus dividends accruing at the discretion of the Remuneration Committee.
The Executive Director will have a further year from the vesting date to exercise their options. The Deferred Bonus Plan awards do not
have any performance criteria attached to them. In respect of the year ended 31 March 2023, 35% of the bonuses due to the Executive
Director was deferred and the details of the outstanding awards are as follows:
At
31 March
2023
9,831
Granted
9,831
Vested and
exercised
-
Lapsed
–
As at
31 March
2022
Share price
at date
of award Grant date
Vesting
date
–
£2.85
18/08/2022
18/08/2023
Matthew Simpson
Total pension entitlements
The Company makes pension contributions into a defined contribution scheme on behalf of the Director. For the year ending 31 March
2023, in line with the Remuneration Policy, contributions were paid at a rate of 5% of basic salary.
Payments to past directors
Payments to past Directors in the year ended 31 March 2023 are as disclosed below for Mr Sinclair and Mr Starr. In relation to Mr Kim
Taylor-Smith, Ms Paula Dillon and Mrs Mickola Wilson who stepped down in the year, payments those are disclosed in the table for
payments made in the year.
Payments for loss of office
Mr Sinclair stepped down as Chief Executive on 14 June 2022. He received the following in line with his service agreement: he
received a payment in lieu of his 12 month notice period, contractual benefits and holiday that would have accrued during the notice
period together with a payment of accrued but outstanding holiday, together representing an aggregate amount of £374,758.
Mr Sinclair received an annual bonus for the year to 31 March 2022 of £151,500, fully settled in cash (without an award under the
Deferred Bonus Plan). As compensation for loss of employment and office and in settlement of all potential claims arising out of his
departure, he received a payment of £639,780. The Company also agreed to pay his reasonable legal fees in relation to his termination
arrangements. Mr Sinclair has awards outstanding, subject to performance and malus and clawback provisions under the LTIP Rules of:
2021 LTIP - 23,645; and awards under the 2020 LTIP of 88,577 shares.
Mr Starr stepped down as Executive Property Director on 12 August 2022. He received the following in line with his contract: Mr
Starr continued to be employed and received his normal salary and benefits until 30 September 2022. In accordance with his service
agreement, Richard received a payment in lieu of his 12 month notice period, contractual benefits and holiday that would have accrued
during the notice period together with a payment of accrued but outstanding holiday to the termination date, together representing
an aggregate amount of £299,350, which was paid in two tranches with the first tranche paid shortly after 30 September 2022 and
the second tranche paid in March 2023. In accordance with his service agreement, the Company made a payment in the aggregate
amount of £11,900 in lieu of the Company pension contributions Richard would have received during the notice period into Richard’s
pension. Richard received a pro-rated annual bonus for the year to 31 March 2023 of £59,500, fully settled in cash (without an award
under the Deferred Bonus Plan). As compensation for loss of employment and office and in settlement of all potential claims arising
out of his departure, he received a payment of £80,000. The Company also agreed to pay his reasonable legal fees in relation to his
termination arrangements. Mr Starr has awards outstanding, subject to performance and malus and clawback provisions under the LTIP
Rules of: 2021 LTIP - 27,077 shares; and awards under the 2020 LTIP of 78,989 shares.
In line with the Remuneration Policy, shares awarded under a share plan may be subject to a holding period of two years after receipt
and Directors are to engage with the Company regarding disposals of shares to maintain an orderly market.
6 2
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 Statement of directors’ shareholding and share interests
Directors’ interests in the shares of the Company, including family interests, were as follows. Directors are encouraged to acquire shares
in the Company up to 100% of salary over time. Shares vesting under share plans may be required by the Remuneration Committee to
be retained for this purpose.
Steven Owen
Matthew Simpson
Mark Davies
Neil Sinclair*
Richard Starr*
Kim Taylor-Smith*
Mickola Wilson*
Paula Dillon*
Ordinary shares of
10p each
31 March 2023*
Ordinary shares of
10p each
31 March 2022
Outstanding Ordinary
share options of 10p
each 31 March 2023*
Outstanding Ordinary
share options of 10p
each 31 March 2022
-
15,531
-
306,425
232,831
10,000
10,000
10,000
–
7,060
-
306,425
232,831
10,000
10,000
10,000
-
104,910
-
112,222
106,066
-
-
-
–
112,954
–
396,334
300,045
-
-
-
* As at date of stepping down.
As at 12 June 2023 there were no changes in Directors’ shareholdings
Review of past performance
The following graph shows the Group’s Total Shareholder Return (TSR) for the ten year period to 31 March 2023 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.
Total Shareholder Return measures share price growth with dividends deemed to be reinvested on the ex-dividend date.
500p
400p
300p
200p
100p
0
31/03/13
31/03/14
31/03/15
31/03/16
31/03/17
31/03/18
31/03/19
31/03/20
31/03/21
31/03/22
31/03/23
Palace Capital PLC
FTSE All Share Index
6 3
GOVERNANCE Annual remuneration
report (continued)
Percentage changes in Chief Executive’s remuneration
The percentage change in the previous Chief Executive’s remuneration received from the previous year (2022) compared with the
average change in remuneration for all other employees is as follows:
Chief Executive
Other employees (excl. Chief Executive and other directors)
Historical Chief Executive’s remuneration
Year to 31 March
2023
2022
2021
2020
2019
2018
2017
2016
2015
20141
1 Fourteen month period ended 31 March 2014
2 No policy for annual bonuses in place
Relative importance of spend on pay
Salary
(79)%
16%
Taxable
benefit
(79)%
0%
Annual
bonus
-
79%
Total
remuneration
£
Annual bonus
(as a % of
the maximum
payout)
LTIP vesting
(as a % of
the maximum
possible)
68,447
590,675
424,996
598,406
479,432
683,379
412,975
362,629
262,007
125,467
-
50
35.2
62
40
95
63
2
2
2
-
50.00
–
50.00
32.75
16.66
–
–
–
–
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
Share buybacks
2023
£
2,536,630
6,542,274
6,697,892
2022
£
%
change
2,895,000
5,426,862
-
(12)%
21%
-
6 4
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 Percentage change in Directors’ Remuneration in the year
Neil Sinclair3
Richard Starr3
Matthew Simpson1
Steven Owen2
Kim Taylor-Smith
Mickola Wilson
Paula Dillon
Total Directors change (%)
Average change for employees (%)
Percentage change in Directors Remuneration in FY22
Neil Sinclair
Richard Starr
Matthew Simpson1
Steven Owen2
Kim Taylor-Smith
Mickola Wilson
Paula Dillon
Total Directors change (%)
Average change for employees (%)
Percentage change in Directors Remuneration in FY21
Neil Sinclair
Stephen Silvester
Richard Starr
Stanley Davis
Kim Taylor-Smith
Mickola Wilson
Paula Dillon
Total Directors change (%)
Average change for employees (%)
Salary / fee
Benefits
Bonus
(79)%
(48)%
49%
18%
(70)%
(70)%
(70)%
(37)%
16%
(79)%
(50)%
0%
N/A
N/A
N/A
N/A
(52)%
0%
N/A
(48)%
1%
N/A
N/A
N/A
N/A
(28)%
79%
Salary / fee
Benefits
Bonus
0%
0%
0%
0%
0%
0%
0%
0%
4%
16%
12%
N/A
N/A
N/A
N/A
N/A
15%
0%
42%
42%
N/A
N/A
N/A
N/A
N/A
42%
40%
Salary / fee
Benefits
Bonus
3%
6%
3%
0%
0%
0%
0%
4%
10%
(5)%
(77)%
(10)%
N/A
N/A
N/A
N/A
26%
N/A
(42)%
(40)%
(42)%
N/A
N/A
N/A
N/A
41%
9%
1 Matthew Simpson was appointed CFO on 11 November 2021. The % increase in the table above compares the full FY23 salary v salary paid for part of
the year in the prior year.
2 Steven Owen was appointed Chairman on 1 January 2022 and the comparison is against base fees.
3 Mr Sinclair and Mr Starr stepped down in the year. The % decrease compares the amount received in FY23 v full year salary received FY22.
6 5
GOVERNANCE Annual remuneration
report (continued)
Service contracts and letters of appointment
The Committee’s policy on service contracts for Executive Directors is that they should provide for termination of employment by
giving no more than 12 months’ notice.
Name
Date of
appointment
Original
contract date
Current
contract date
Notice
period
Termination arrangements
Matthew Simpson 11 November 2021 18 January 2016
11 November 2021 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.
Chairman and Non-Executive Directors
The Non-Executive Directors are engaged for fixed terms, typically three years, which may be extended for subsequent periods. The
effective dates of the letters of appointment for the current Non-Executive Directors are as follows:
Name
Steven Owen
Mark Davies
Date of letter
for current
appointment
1 January 2022
1 August 2022
Date term due
to expire
31 December 2024
31 July 2025
Implementation of remuneration policy in 2023/24
In respect of the year ending 31 March 2024, the Committee intends to implement the Executive and Non-Executive Director
remuneration policy, subject to the consultation on the Realisation Plan and Remuneration Policy which the Company is consulting
on with major shareholders. Such plan would be subject to shareholder vote and details will be included in the Notice of AGM. It is
proposed that Mr Owen undertake the role of Executive Chairman (currently Interim Executive Chairman) and that he then becomes
an Executive Director, with a service agreement with the Company. Mr Owen is currently a Non-Executive Director under a Letter
of Appointment. The Board will consider the terms of such appointment and this is subject to the proposed amendments to the
Remuneration Policy an Realisation Plan to be put to shareholders at the 2023 AGM.
Salary
Executive Directors
The average salary increase across the workforce (excluding the Chief Financial Officer) from 1 April 2023 was 9%.
Matthew Simpson
Non-Executive Directors
Salary
£245,000
Change
2.9%
Non-Executive Director fees for the year are as follows noting that Mr Owen has been paid an additional £10,000 per month from June
2022 to reflect his additional responsibilities and time commitment as Interim Executive Chairman. This will be reviewed for FY24 after
the AGM being held in July 2023, when it is currently proposed that, subject to the Remuneration Policy proposals being approved by
Shareholders, Mr Owen becomes Executive Chairman and will become an Executive Director. The Board determined to increase the
fee for Mr Davies by £10,000 to reflect his additional time commitment
Name
Role
Steven Owen
Interim Executive Chairman
2024 fee
£133,800
Change
2.9%
6 6
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 Name
Role
Mark Davies
Non-Executive Director
2024 fee
Change
£70,000
17%
• Chair of Audit and Risk Committee
• Chair of Remuneration Committee
• Senior Independent Director
Pension and benefits
The current Remuneration Policy provides that the Company will make pension contributions into a defined contribution scheme on
behalf of Directors at a rate of 5% of basic salary, and provision is made for other health benefits and cash alternatives as set out in the
Remuneration Policy.
Annual bonus
Under the existing Remuneration Policy, the 2024 bonus is capped at 100% of salary. This level is under review by the Committee
and may reduce should shareholders approve the Realisation Plan. Performance metrics for a bonus are determined by the
Remuneration Committee.
Long-term incentive plan
No awards will be made under the Long-Term Incentive Plan.
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 2022 AGM. The Committee
noted the significant number of votes against the Resolution and has engaged extensively with major shareholders subsequently
regarding the strategy and more recently in relation to proposed changes to the Remuneration Policy and a possible Realisation Plan.
Remuneration Report
62.52
37.48
20,680,734
12,400,313
162,034
1 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
Percentage of votes cast
Number of votes cast
For and
discretion
Against
For and
discretion
Against
Withheld1
Approval
This report was approved by the Board of Directors on 14 June 2023 and signed on its behalf by:
Mark Davies
Chair of Remuneration Committee
6 7
GOVERNANCE Directors’ report and
additional disclosures
The Directors present their report and the audited consolidated financial
statements of Palace Capital plc for the year ended 31 March 2023.
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 on
the following pages:
• Strategic report pages 1 to 37
• Financial Review pages 17 to 21
• Risk Management pages 24 to 29
• Going Concern & Viability page 24 and 25
• Section 172 Statement pages 30 to 32
• Remuneration Report pages 54 to 67
• Financial instruments page 103
• Related party transactions page 110
Results and dividends
The results for the year are set out in the financial statements.
The Company paid interim dividends of 3.75p per Ordinary share
in October 2022, December 2022 and April 2023. The Directors
recommend the payment of a final dividend in respect of the
year ended 31 March 2023 of 3.75p per Ordinary share to be
paid on 4 August 2023 to the Shareholders on the register on
7 July 2023.
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 Company, held on 29 July
2022, authority 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 General Meeting of the Company.
813,633 share purchases were made pursuant to this authority
during the year ended 31 March 2023. Renewal of this authority
will be proposed at the forthcoming Annual General Meeting.
Directors
The Directors’ powers, including the rules relating to the
appointment and replacement of Directors, are conferred
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 2023 and up to the date of the financial
statements, are set out on page 41, 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 page 63. The interests of
the Directors in the shares in the Company have not changed
since the end of the financial year to 12 June 2023, the latest
practicable date. 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.
In accordance with the UK Code, all Directors offer themselves
for re-election at the AGM on 26 July 2023. The Directors’ service
contract terms are set out in the Annual Remuneration Report on
page 66.
Political donations
During the year, no donations were made to political parties and
none are proposed for the current year.
Post balance sheet events
Details of post balance sheet events are provided in note 25 on
page 110 of the financial statements.
Future developments
Details of future developments are provided in the Strategic
Report on page 6.
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 months from the date of
approval of the financial statements.
6 8
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 Substantial shareholdings
Authorisation of conflicts of interest
The table below is provided by our brokers under the requests
made to shareholders under section 793 of the Companies Act
2006 and information provided to the Company. As such this
information is regarded by the Company as providing an up to
date representation of our major shareholders’ interests.
As at 12 June 2023
shares No. Shareholding
Ordinary
10p
4,833,375
3,700,000
11.02%
8.44%
Under the Articles of Association of the Company and in accordance
with the provisions of the Companies Act 2006, a Director must
avoid a situation where they have, or can have, a direct or indirect
interest that conflicts, or possibly may conflict with the Company’s
interests. However, the Directors may authorise conflicts and
potential conflicts, as they deem appropriate. As a safeguard, only
Directors who have no interest in the 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.
3,528,860
2,851,506
2,802,000
2,344,153
1,900,830
1,706,760
1,665,287
1,630,985
Ordinary
10p
8.1%
6.5%
6.39%
5.34%
4.33%
3.92%
3.8%
3.74%
Change of control
The Group has in place a number of agreements with its
lending banks, which contain certain termination rights that
would have an effect on a change of control. In addition, the
Group’s share 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.
4,833,375
11.02%
Greenhouse gas emissions
3,700,000
8.44%
The Group’s GHG emission report can be found on page 34.
Peter Gyllenhammar AB
Winton Capital Management Ltd
JO Hambro Capital
Management Ltd
Premier Fund Managers Limited
Harwood Capital LLP
Mr Mark Harrison
M&G Investment Management
Hargreaves Lansdown Stockbrokers
Davis S H Esq
Charles Stanley & Co
As at 31 March 2023
shares No. Shareholding
Peter Gyllenhammar AB
Winton Capital
Management Limited
JO Hambro Capital
Management Ltd
Premier Fund Managers Limited
Harwood Capital LLP
Mr Mark Harrison
M&G Investment Management
Hargreaves Lansdown Stockbrokers
Davis S H Esq
Charles Stanley & Co
3,599,549
2,851,506
2,802,000
2,344,153
1,900,830
1,726,870
1,665,287
1,660,510
8.21%
6.5%
6.39%
5.34%
4.33%
3.94%
3.8%
3.79%
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 without unduly affecting the Group’s competitiveness
and flexibility. Further details regarding these policies are set
out in note 26 and the Risk Management section of the Annual
Report and Accounts.
Auditor
The Directors who held office at the date of approval of this
Directors’ Report confirm that, so far as they are each aware, there
is no relevant Audit information of which the Company’s Auditor
is unaware; and each Director has taken all the steps that they
ought to have taken as a Director to make themselves aware of
any relevant audit information and to establish that the Company’s
Auditor is aware of that information. 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.
2023 Annual General Meeting (AGM)
The 2023 AGM will be held on 26 July 2023 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.
Phil Higgins
Company Secretary
Palace Capital plc. Incorporated, registered and domiciled in
England and Wales company number 5332938
Fora Victoria, 6-8 Greencoat Place, London SW1P 1PL
6 9
GOVERNANCE Statement of
Directors’ responsibilities
The Directors are responsible for preparing the Annual Report and the Group and
Company financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare Group and
Company financial statements for each financial year. Under that
law, the Directors have prepared the Group financial statements
in accordance with UK adopted international accounting
standards (‘IFRS-UK’) and applicable law, 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).
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.
The Directors are responsible for ensuring the Annual Report
and 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’ responsibilities statement
The Directors confirm to the best of their knowledge:
• The financial statements have been prepared in accordance
with the applicable set of accounting standards, give a true
and fair view of the assets, liabilities, financial position and
profit and loss of the Group and Company;
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 Group’s and
Company’s performance, business model and strategy.
On behalf of the Board
Phil Higgins
Company Secretary
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 the Company
and of the profit or loss of the Group and the Company for the
period. In preparing each of the Group and Company financial
statements the Directors are required to:
•
confirm that the financial statements have been prepared in
accordance with the applicable set of accounting standards,
give a true and fair view of the assets, liabilities, financial
position and profit or loss of the Group and the Company;
•
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 international accounting
standards in conformity with the requirements of the
Companies Act 2006, IFRS-UK and applicable law, subject
to any material departures disclosed and explained in the
financial statements;
for the 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
• 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 keeping adequate accounting
records that are sufficient to show and explain the Company’s
transactions and disclose with reasonable accuracy at any time
the financial position of the Company and enable them to ensure
that the financial statements comply with the requirements of the
Companies Act 2006.
7 0
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 Independent Auditor’s report
to the members of Palace Capital plc
Opinion on the financial statements
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
2023 and of the Group’s loss for the year then ended;
the Group financial statements have been properly prepared in accordance with UK adopted international accounting standards;
the Parent Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted
Accounting Practice; and
•
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
We have audited the financial statements of Palace Capital plc (the ‘Parent Company’) and its subsidiaries (the ‘Group’) for the
year ended 31 March 2023 which comprise the Consolidated Statement of Comprehensive Income, the Consolidated Statement
of Financial Position, the Consolidated Statement of Changes in Equity, the Consolidated Statement of Cash Flows, the Company
Statement of Financial Position, the Company Statement of Changes in Equity and notes to the financial statements, including a
summary of significant accounting policies.
The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and
UK adopted international accounting standards. The financial reporting framework that has been applied in the preparation of the
Parent Company financial statements is applicable law and United Kingdom Accounting Standards, including Financial Reporting
Standard 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland (United Kingdom Generally Accepted
Accounting Practice).
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities
under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our
report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our audit
opinion is consistent with the additional report to the Audit and Risk Committee.
Independence
Following the recommendation of the Audit and Risk Committee, we were appointed by the Board of Directors on 1 April 2015 to
audit the financial statements for the year ended 31 March 2015 and subsequent financial periods. The period of total uninterrupted
engagement including retenders and reappointments is nine years, covering the years ended 31 March 2015 to 31 March 2023. We
remain independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit
of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have
fulfilled our other ethical responsibilities in accordance with these requirements. The non-audit services prohibited by that standard
were not provided to the Group or the Parent Company.
Conclusions relating to going concern
In auditing the financial statements, we have concluded that the Directors’ use of the going concern basis of accounting in the
preparation of the financial statements is appropriate. Our evaluation of the Directors’ assessment of the Group and the Parent
Company’s ability to adopt the going concern basis of accounting included:
• Obtaining Directors’ going concern assessment and supporting projection model. We tested the integrity of the assessment by
reviewing its arithmetic accuracy and testing the formulas within the projection model and held corroborative inquiries with Directors.
• Challenging the appropriateness of assumptions made within this model by comparing forecast results to our expectations based
on our knowledge of the business, most recent performance and current economic factors.
• Considering the appropriateness of the sensitivities applied in the model through assessing the impact of ‘stress tests’ scenarios
such as rent reductions as well as fall in investment property values. This included considering the impact of these to loan
covenants or cash flow deficits and determining the likelihood of those scenarios occurring.
• Where bank loans mature in the 12 month period from the date of our audit report, we have discussed with Directors their plans to
repay or refinance the debt and corroborated these to repayments or agreements that were reached subsequent to the year end
to corroborate that the assumptions made by the Directors are appropriate.
• Reviewing the disclosures to check that they are in line with the detailed assessment undertaken by the Board, including that it is
accurate and complete.
• Enquiring of Directors and those charged with governance as to any future events or conditions that may affect the Group’s ability
to continue as a going concern.
7 1
GOVERNANCE Independent Auditor’s report
to the members of Palace Capital plc (continued)
• Validated the cash inflows from the disposals of a number of investment properties which took place during the year and post year
end by agreeing to the supporting sales agreement, completion report and bank statement.
• We assessed the intercompany debtors in the parent company’s balance sheet for recoverability by reviewing the financial position
of each subsidiary. We also assessed the parent company’s ability to pay the intercompany creditors by reviewing its liquidity as at
the year end.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that,
individually or collectively, may cast significant doubt on the Group and the Parent Company’s ability to continue as a going concern
for a period of at least twelve months from when the financial statements are authorised for issue.
In relation to the Parent Company’s reporting on how it has applied the UK Corporate Governance Code, we have nothing material to
add or draw attention to in relation to the Directors’ statement in the financial statements about whether the Directors considered it
appropriate to adopt the going concern basis of accounting.
Our responsibilities and the responsibilities of the Directors with respect to going concern are described in the relevant sections of
this report.
Overview
Coverage
100% (2022: 100%) of Group revenue
100% (2022: 100%) of Group investment property
100% (2022: 100%) of Group trading properties
99.9% (2022: 99.9%) of Group total assets
99.9% (2022: 99.9%) of Group profit before tax
Key audit matters
2023
2022
KAM 1
Revenue recognition- accuracy and existence
of rental income and residential sales
Revenue recognition- accuracy and existence
of rental income and residential sales
KAM 2
Valuation of investment and trading properties Valuation of investment and trading properties
KAM 3
-*
Going concern and loan covenants
Materiality
Group financial statements as a whole
£2.01m (2022: £2.89m), which was set at 1% (2022: 1%) of Group total assets.
* Going concern and loan covenants was not considered to be a key audit matter due to the change in the Group’s strategy which resulted in significant
cash inflows from the disposal of investment properties.
7 2
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 An overview of the scope of our audit
Our Group audit was scoped by obtaining an understanding of the Group and its environment, including the Group’s system of internal
control, and assessing the risks of material misstatement in the financial statements. We also addressed the risk of Directors override of
internal controls, including assessing whether there was evidence of bias by the Directors that may have represented a risk of material
misstatement.
The Group operates in one segment, investment property, structured through a number of subsidiary entities and therefore we treated
the Group as one significant component. The Group audit engagement team performed all the work necessary to issue the Group and
Parent Company audit opinion, including undertaking all of the audit work on the risks of material misstatement identified in the key
audit matters section below.
Climate change
Our work on the assessment of potential impacts on climate-related risks on the Group’s operations and financial statements included:
• Enquiries and challenge of Directors to understand the actions they have taken to identify climate-related risks and their potential
impacts on the financial statements and adequately disclose climate-related risks within the annual report;
• Our own qualitative risk assessment taking into consideration the sector in which the Group operates and how climate change
affects this particular sector; and
• Review of the minutes of Board and the Audit and Risk Committee meeting and other papers related to climate change and
performed a risk assessment as to how the impact of the Group’s commitment as set out in the Strategic Report may affect the
financial statements and our audit.
We challenged the extent to which climate-related considerations, including the expected cash flows from the initiatives and
commitments have been reflected, where appropriate, in the Directors’ going concern assessment and viability assessment.
We also assessed the consistency of Directors’ disclosures included as Statutory Other Information with the financial statements and
with our knowledge obtained from the audit.
Based on our risk assessment procedures, we did not identify there to be any Key Audit Matters materially impacted by climate-related
risks and related commitments.
Key audit matters
Key audit matters are those matters that, in our professional judgement, 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 due to fraud)
that we identified, including those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit,
and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements
as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
7 3
GOVERNANCE Independent Auditor’s report
to the members of Palace Capital plc (continued)
Key audit matter
How the scope of our audit addressed the key audit matter
Revenue
recognition –
accuracy and
existence of
rental income
and residential
sales
Refer to
accounting
policy on
revenue on
page 84.
Refer to note
1 in relation to
Revenue.
The Group has several property
managers and multiple tenants
across its properties. 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.
Directors judgement is required to
determine the term over which lease
incentives should be recognised.
There is a risk that the revenue
recognised as rental income is not
supported by underlying tenancy
agreements or is inappropriately
recognised.
We consider this to be a Key Audit
Matter (‘KAM’) based on factors
including the fact that there are
approximately 250 leases and a
large number of lease incentives.
There is also a presumed fraud risk as
manipulating lease terms will impacts
on the revenue recorded. This exists
for existing and new leases.
A risk also exists that the disposals
of Hudson Quarter units are not
correctly accounted for and not
recorded within the correct period.
We obtained the tenancy schedule and Directors’ analysis of revenue
recognised for each tenant and the reconciliation of this analysis to the
financial statements and performed the following:
• We checked the integrity of the formulae used to calculate the expected
revenue based on the tenancy schedule;
• We analysed the current year tenancy schedule compared to prior year to
highlight changes in the year to check that no income has been omitted
from being recognised in the financial statements;
• We analysed the amount of rental income recognised in the financial
statements in respect of each tenant and compared this to our
expectations for the year based on the prior year tenancy schedule to
determine the accuracy. This highlighted changes to existing tenant
agreements and also any new agreements entered into during the current
year. The changes, including those relating to new tenant agreements,
were investigated and agreed to the underlying lease documentation and
rent review memoranda;
• We inspected any tenancies with break clauses for the past 6 months and
checked whether any tenants have exercised this clause. We corroborated
this to supporting documentations such as correspondence from the
tenant confirming whether they are going to exercise the break or not;
• We obtained Directors’ 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 traced a sample of lease receipts for a period for each tenant selected
to Directors agent statements and bank statements to test the existence
and accuracy of the revenue recognised;
• We obtained a breakdown of other revenue recognised in the year
including service charge and car park income. For a sample of
these transactions we agreed the revenue recognised to supporting
documentation to confirm its existence and accuracy; and
• With regards to service charge income, we have verified the split of
revenue and cost of sales in the current year by tracing a sample of
revenue back to supporting documentation to confirm existence and
accuracy of amounts recognised as revenue.
We performed the following audit procedures with regards to the revenue
from trading properties:
• For each sale, we agreed the revenue recognised to completion
statements and cash receipts;
• We considered the accounting for these sales and checked whether sales
were recorded accurately and within the correct accounting period;
• We reviewed the accounting policy for open market residential sales and
confirmed that the policy is in accordance with UK adopted international
accounting standards; and
• We agree that the gross profit recognised on the open market sales is
consistent with the allocation of the inventory value being held in respect
of each unit.
Key observations:
Based on the audit procedures performed, we did not identify any matters to
suggest that the accuracy and existence of revenue from rental income and
sale of trading properties was inappropriate.
7 4
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 Key audit matter
How the scope of our audit addressed the key audit matter
Valuation of
investment
and trading
properties
Refer to
accounting
policies on
investment
properties
and trading
properties on
page 87.
Refer to note
9 in relation to
the property
portfolio
and note 10
as regards
the trading
properties.
The Group has opted to carry its
investment properties at fair value
rather than cost while the trading
properties (the Hudson Quarter
residential units) which are classified
as inventory, are carried at the lower
of cost and 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.
Determination of the fair value
of investment properties, and
the assessment of whether
trading properties are impaired,
is considered a significant audit
risk due to the subjective nature
of assumptions inherent in each
valuation. Thus, fraud risk could
arise given the level of subjectivity.
The Group engages independent
external experts, CBRE to value
these properties at each reporting
period. The valuation uses a cash
flow methodology with key inputs
including detailed data on the
underlying assets and the market
environment for each asset.
The valuation models applied are
complex and require consideration
of the existing market conditions
including yields and estimates
regarding current and future
rental income, occupancy and
property costs.
There is a risk that the observable
inputs to the valuation are not
complete or accurate. Furthermore,
these inputs could be subject to
manipulation by Directors giving rise
to fraud risk.
For these reasons, the valuation of
investment and trading properties
was considered to be a key audit
matter.
We obtained the valuation report prepared by Directors’ 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 had a discussion with the external valuer to understand the assumptions
and methodologies used in valuing these properties. We have also
corroborated these assumptions to market evidence. We also checked how
rent concessions impacted the valuation assumptions.
We challenged the valuation assumptions, methodologies and the
unobservable inputs used by establishing our own range of expectations for
the changes in valuation of investment property based on externally available
metrics, comparable organisations and wider economic and commercial
factors. We considered whether the overall movement in the investment
property valuation indicates potential Directors bias to either overstate or
understate the valuation. We also compared the values of properties from
prior year. We obtained an explanation from CBRE to understand the reason
behind material movements and corroborated their explanation to supporting
documentations.
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 Directors bias.
We considered whether the sales during the year and those that have been
agreed or are being negotiated after the year end support or contradict the
valuations being reported for those properties.
We also checked the ownership of each properties to the title deeds and
checked for any new charges against these properties.
We checked whether the trading property is measured at the lower of cost
and net realisable value by agreeing net realisable value to prices achieved for
current unit sales as the development has been concluded.
Review of key inputs to the valuation schedule
We agreed the key observable valuation inputs used by the external
valuer back to source documentation, which includes title deeds and lease
agreements that are tested as part of our revenue audit procedures.
We agreed the capital expenditure to Directors forecasts and enquired as to
whether there are any further capital plans for assets.
We compared the purchaser costs to generally accepted market percentages.
We compared the Estimated Rental Value (‘ERV’) on void units with similar
other units as well as assumptions as regards the time to occupancy with the
valuer and compared the ERV to the income as per the tenancy schedule.
Key observations:
The results of our audit procedures indicated that the estimates and
assumptions used in the property valuations were appropriate and therefore,
the investment and trading properties are appropriately valued.
7 5
GOVERNANCE Independent Auditor’s report
to the members of Palace Capital plc (continued)
Our application of materiality
We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. We
consider materiality to be the magnitude by which misstatements, including omissions, could influence the economic decisions of
reasonable users that are taken on the basis of the financial statements.
In order to reduce to an appropriately low level the probability that any misstatements exceed materiality, we use a lower materiality
level, performance materiality, to determine the extent of testing needed. Importantly, misstatements below these levels will
not necessarily be evaluated as immaterial as we also take account of the nature of identified misstatements, and the particular
circumstances of their occurrence, when evaluating their effect on the financial statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole and performance materiality
as follows:
Materiality
Basis for determining materiality
Rationale for the
benchmark applied
Group financial statements
Parent company financial statements
Group financial statements
Parent company financial statements
2023
£m
2.01
2022
£m
2.89
2023
£m
1.34
2022
£m
1.66
Materiality for the Group and Parent Company’s financial statement was set at 1% (2022:
1%) of total assets.
We determined that total assets would be the most appropriate basis for determining
overall materiality as we consider it to be one of the principal considerations for the users
of the financial statements in assessing the financial performance of the Group and the
Parent Company.
Performance materiality
1.51
2.16
1.01
1.05
Basis for determining performance
materiality
On the basis of our risk assessment, together with our assessment of the Group and Parent
Company’s overall control environment, our judgement was that overall performance
materiality for the Group and Parent Company should be 75% (2022: 75%) of materiality,
which reflects our assessment of the risk associated with the audit due to the limited
number of audit adjustments identified in previous audits.
Specific materiality
We also determined that for particular classes of transactions, balances or disclosures, a misstatement of less than materiality for the
financial statements as a whole, specific materiality, could influence the economic decisions of users. In this context, we applied a
specific materiality of £280,000 (2022: £590,000) to those items which may affect profit before tax, including revenue, cost of sales,
administrative expenses, finance cost and finance income, and taxation. The specific materiality represents 5% (2022: 5%) of profit
before tax before revaluation of investments and gains on investment property sales (EPRA earnings) (2022: adjusted EPRA earnings).
We further applied a performance materiality level of 75% (2022: 75%) of specific materiality to ensure that the risk of errors exceeding
specific materiality was appropriately mitigated.
Reporting threshold
We agreed with the Audit and Risk Committee that we would report to them all individual audit differences in excess of £100,000 (2022:
£55,000). We also agreed to report differences below this threshold that, in our view, warranted reporting on qualitative grounds.
7 6
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 Other information
The Directors are responsible for the other information. The other information comprises the information included 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. 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 course of 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 this gives rise to a material misstatement in the financial statements themselves. If, based on the work we have performed, we
conclude that there is a material misstatement of this other information, we are required to report that fact.
We have nothing to report in this regard.
Corporate governance statement
The Listing Rules require us to review the Directors’ statement in relation to going concern, longer-term viability and that part of the
Corporate Governance Statement relating to the parent company’s compliance with the provisions of the UK Corporate Governance
Code specified for our review.
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate
Governance Statement is materially consistent with the financial statements or our knowledge obtained during the audit.
Going concern and
longer-term viability
• The Directors’ statement with regards to the appropriateness of adopting the going
concern basis of accounting and any material uncertainties identified set out on pages
24 to 25; and
• The Directors’ explanation as to their assessment of the Group’s prospects, the period
this assessment covers and why the period is appropriate set out on page 25.
Other Code provisions
• Directors’ statement on fair, balanced and understandable set out on page 52;
• Board’s confirmation that it has carried out a robust assessment of the emerging and
principal risks set out on page 24;
• The section of the annual report that describes the review of effectiveness of risk
Directors and internal control systems set out on page 24; and
• The section describing the work of the Audit and Risk Committee set out on pages
51 to 53.
7 7
GOVERNANCE Independent Auditor’s report
to the members of Palace Capital plc (continued)
Other Companies Act 2006 reporting
Based on the responsibilities described below and our work performed during the course of the audit, we are required by the
Companies Act 2006 and ISAs (UK) to report on certain opinions and matters as described below.
Strategic report and
Directors’ report
In our opinion, based on the work undertaken in the course of the audit:
•
the information given in the Strategic report and the Directors’ report for the financial
year for which the financial statements are prepared is consistent with the financial
statements; and
•
the Strategic report and the Directors’ report have been prepared in accordance with
applicable legal requirements.
In the light of the knowledge and understanding of the Group and 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.
Directors’ remuneration
In our opinion, the part of the Directors’ remuneration report to be audited has been
properly prepared in accordance with the Companies Act 2006.
Matters on which we are required to
report by exception
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 information and explanations we require for our audit.
Responsibilities of Directors
As explained more fully in the Statement of Directors’ Responsibilities statement, 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.
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 that an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
Extent to which the audit was capable of detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our
responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our
procedures are capable of detecting irregularities, including fraud is detailed below:
7 8
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 Non-compliance with laws and regulations
We gained an understanding of the legal and regulatory framework applicable to the Group and the industry in which it operates, and
considered the risk of acts by the Group that were contrary to applicable laws and regulations, including fraud. We performed our own
checks of compliance with relevant requirements including, but not limited to, the applicable accounting framework, the Companies
Act 2006, the UK Listing Rules, the REIT tax regime requirements and legislation relevant to the rental of properties. We considered
compliance by the Group by obtaining their papers on compliance, in addition to performing our own review.
Our tests included agreeing the financial statement disclosures to underlying supporting documentation where relevant, review of
Board and Committee meeting minutes, and enquiries with Directors , the Directors, and the Audit and Risk Committee as to their
identification of any non-compliance with laws and regulations and fraud.
Fraud
We considered the potential for material misstatement in the financial statements, including those arising from fraud, and believed the
areas in which fraud could occur were, Directors override of controls, revenue recognition, accounting for lease incentives and inputs
on the investment property valuation.
We addressed the risk of Directors override of controls by testing a sample of journals processed during and subsequent to the year by
tracing these back to supporting documentation and evaluating whether there was evidence of bias by the Directors that represented
a risk of material misstatement due to fraud.
Procedures to address the fraud risk on revenue recognition, accounting for lease incentives and inputs on the investment property
valuation are discussed within the KAM section above.
We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members who were
all deemed to have appropriate competence and capabilities and remained alert to any indications of fraud or non-compliance with
laws and regulations throughout the audit.
Our audit procedures were designed to respond to risks of material misstatement in the financial statements, 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. There are inherent limitations in the
audit procedures performed 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 are to become aware of it.
A further description of our responsibilities is available on the Financial Reporting Council’s website at: www.frc.org.uk/auditorsresponsibilities.
This description forms part of our auditor’s report.
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 has been undertaken so that we might 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 permitted by law, we do not accept or assume
responsibility to anyone other 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.
Charles Ellis
Senior Statutory Auditor
For and on behalf of BDO LLP, Statutory Auditor
London, United Kingdom
14 June 2023
BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).
7 9
GOVERNANCE Consolidated Statement of Comprehensive Income
for the year ended 31 March 2023
Revenue
Cost of sales
Movement in expected credit loss
Net property income
Dividend income from listed equity investments
Administrative expenses
Operating profit before gains and losses on property assets and listed equity
investments
Profit on disposal of investment properties
(Loss)/gain on revaluation of investment property portfolio
Loss on disposal 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 (loss)/income
attributable to owners of the Parent
Earnings per ordinary share
Basic
Diluted
Note
1
3b
13
3c
9
2
5
6
6
2023
£’000
32,973
(17,147)
327
16,153
–
(6,094)
10,059
819
(42,900)
–
(32,022)
26
(3,970)
(15)
210
(35,771)
67
2022
£’000
49,064
(30,408)
360
19,016
64
(4,623)
14,457
4,946
8,222
(80)
27,545
–
(3,196)
(63)
329
24,615
(67)
(35,704)
24,548
(80.2p)
(80.2p)
53.1p
53.0p
All activities derive from continuing operations of the Group. The notes form an integral part of these financial statements.
8 0
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 Consolidated Statement of Financial Position
as at 31 March 2023
Non-current assets
Investment properties
Right of use asset
Property, plant and equipment
Current assets
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
Derivative financial instruments
Creditors: amounts falling due within one year
Net current assets
Non-current liabilities
Borrowings
Deferred tax liability
Lease liabilities for investment properties
Net assets
Equity
Called up share capital
Treasury shares
Merger reserve
Capital redemption reserve
Capital reduction reserve
Retained earnings
Equity – attributable to the owners of the Parent
Basic NAV per ordinary share
Diluted NAV per ordinary share
Note
9
12
12
10
13
14
15
17
20
16
17
5
20
21
7
7
2023
£’000
176,504
132
23
176,659
11,055
8,550
5,509
25,114
201,773
(8,339)
(8,545)
(132)
–
(17,016)
8,098
(55,129)
(76)
(1,077)
128,475
4,639
(7,343)
3,503
340
118,477
8,859
128,475
294p
294p
2022
£’000
232,717
17
45
232,779
20,287
7,412
28,143
55,842
288,621
(8,912)
(32,749)
–
(47)
(41,708)
14,134
(68,488)
(143)
(1,078)
177,204
4,639
(717)
3,503
340
125,019
44,420
177,204
383p
383p
These financial statements were approved by the Board of Directors and authorised for issue on 14 June 2023 and are signed on its
behalf by:
Matthew Simpson
Chief Financial Officer
8 1
FINANCIALS Consolidated Statement of Changes in Equity
for the year ended 31 March 2023
At 31 March 2021
Total comprehensive income for the year
Share-based payments
Exercise of share options
Issue of deferred bonus share options
Dividends paid
At 31 March 2022
Total comprehensive loss for the year
Share-based payments
Exercise of share options
Issue of deferred bonus share options
Dividends paid
Share buyback
At 31 March 2023
Share
Capital
£’000
Treasury
Share
Reserve
£’000
Other
Reserves
£’000
Capital
Reduction
Reserve
£’000
Retained
Earnings
£’000
Note
22
8
22
8
4,639
–
–
–
–
–
4,639
–
–
–
–
–
–
4,639
(1,288)
–
–
571
–
–
(717)
–
–
71
–
–
(6,697)
(7,343)
3,843
–
–
–
–
–
3,843
–
–
–
–
–
–
3,843
125,019
–
–
–
–
–
125,019
–
–
–
–
(6,542)
–
118,477
25,618
24,548
162
(571)
90
(5,427)
44,420
(35,704)
177
(71)
37
–
–
8,859
Total
Equity
£’000
157,831
24,548
162
–
90
(5,427)
177,204
(35,704)
177
–
37
(6,542)
(6,697)
128,475
The share capital represents the nominal value of the issued share capital of Palace Capital plc.
Treasury shares represents the consideration paid for shares bought back from the open 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.
The capital reduction reserve represents distributable profits generated as a result of the share premium reduction.
8 2
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023
Consolidated Statement of Cash Flows
as at 31 March 2023
Operating activities
(Loss)/profit before taxation
Finance income
Finance expense
Changes in fair value of interest rate derivatives
Loss/(gain) on revaluation of investment property portfolio
Profit on disposal of investment properties
Loss on disposal of listed equity investments
Debt termination costs
Depreciation of tangible fixed assets
Amortisation of right of use asset
Share-based payments
(Increase)/decrease in receivables
Decrease in payables
Decrease in trading property
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 properties
Capital expenditure on refurbishment of investment property
Proceeds from disposal of investment property
Disposal of non-current asset – equity investment
Dividends from listed equity investments
Purchase of property, plant and equipment
Net cash flow generated from investing activities
Financing activities
Bank loans repaid
Proceeds from new bank loans
Loan issue costs paid
Dividends paid
Share buyback
Net cash flow used in 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
12
12
22
12
19
19
19
8
14
2023
£’000
(35,771)
(26)
3,970
(210)
42,900
(819)
–
15
30
82
177
(1,140)
(415)
9,233
18,026
26
(3,427)
(171)
14,454
–
(1,371)
15,410
–
–
(8)
14,031
(37,419)
–
(461)
(6,542)
(6,697)
(51,119)
(22,634)
28,143
5,509
2022
£’000
24,615
–
3,196
(329)
(8,222)
(4,946)
80
63
48
148
162
2,289
(2,929)
21,972
36,147
–
(3,417)
(48)
32,682
(9,870)
(6,519)
31,221
3,169
64
(22)
18,043
(38,033)
11,472
(11)
(5,427)
–
(31,999)
18,726
9,417
28,143
8 3
FINANCIALS 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 Fora Victoria, 6-8 Greencoat Place, London, SW1P 1PL.
Basis of preparation
The Group financial statements have been prepared in accordance with UK-adopted International Accounting Standards, (the
‘applicable framework’), and have been prepared in accordance with the provisions of the Companies Act 2006 (the ‘applicable legal
requirements’). The Group financial statements have been prepared under the historical cost convention as modified by the revaluation
of investment properties and financial assets held at fair value.
Going concern
The Directors have made an assessment of the Group’s ability to continue as a going concern which included the current economic
headwinds created by rising inflation and rising interest rates, coupled with the Group’s cash resources, borrowing facilities, rental
income, disposals of investment properties, committed capital and other expenditure and dividend distributions.
The Group’s business activities, together with the factors likely to affect its future 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 these 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 2023 the Group had £5.5m of unrestricted cash and cash equivalents, a conservative loan to value of 31% and a
property portfolio with a fair value of £192.4m. The Directors have reviewed the forecasts for the Group taking into account the impact
of rising inflation and rising interest on trading over the 12 months from the date of signing this annual report. The forecasts have been
assessed against a possible downside scenario incorporating lower levels of income and increased interest rates. See Going Concern
and Viability Statement on pages 24 to 25 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
New standards effective for the year ended 31 March 2023 did not have a material impact on the financial statements and were
not adopted.
New standards issued but not yet effective
There are no other standards that are not yet effective that would be expected to have a material impact on the Group in the current or
future reporting periods and on the foreseeable future transactions.
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 Consolidated Financial Statements.
8 4
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 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.
If the consideration is less than the fair value of the assets and liabilities acquired, the difference is recognised directly in the Statement
of Comprehensive Income.
Where an acquired subsidiary does not meet the definition of a business, it is accounted for as an asset acquisition rather than a
business combination. A business is an integrated set of activities and assets that is capable of being conducted and managed for the
purpose of providing goods or services to customers, generating investment income (such as dividends or interest) or generating other
income from 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, rent concessions 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. 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.
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 sale of trading properties is recognised when control of the trading property, along with the significant risks and
rewards, have transferred from the Group, which is usually on completion of contracts and transfer of property title.
Service charge income relates to expenditure that is directly recoverable from tenants. Service charge income is recognised as revenue
in the period to which it relates as required by IFRS 15 Revenue from Contracts with Customers. 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.
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 contract, with such transactions being recognised when this condition is 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.
Deferred income
Where invoices to customers have been raised which relate to a period after the Group year end, being 31 March 2023, the Group will
recognise deferred income for the difference between revenue recognised and amounts billed for that contract.
Cost of sales
Cost of sales includes direct expenditure relating to the construction of the trading properties, capitalised interest, and selling costs
incurred as a result of residential sales. Selling costs includes agent and legal fees. Cost of sales is expensed to the income statement
and is recognised on completion of each residential unit. The cost for each unit is calculated using the ratio of the unit selling price,
over the total forecasted sales proceeds of all residential units. This ratio is then applied to the total forecasted development cost to
get the cost of sale per unit.
Service charges and other such receipts arising from expenses recharged to tenants are as stated in note 3b. Notwithstanding that the
funds are held on behalf of the occupiers, the ultimate risk for paying and recovering these costs rests with the Group.
8 5
FINANCIALS Notes to the Consolidated Financial Statements
continued
Borrowing costs
Bank borrowings are initially recognised at fair value net of any transaction costs directly attributable to the issue of the instrument.
After initial recognition, loans and borrowings are subsequently measured at amortised cost using the effective interest method.
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.
Borrowing costs directly attributable to development properties are capitalised and not recognised in profit or loss in the Consolidated
Statement of Comprehensive Income. The capitalisation of borrowing costs is suspended if there are prolonged periods when
development activity is interrupted and cease at the completion of the development. 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.
Interest associated with trading properties is capitalised from the start of the development work until the date of practical completion.
The rate used is the rate on specific associated borrowings. Interest is then expensed through the income statement post completion
of the development.
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 the cash flows under the new terms, including any fees paid net of any fees received and discounted using the original effective
interest rate, is at least 10 per cent different from the discounted present value of the remaining cash flows of the original financial
liability. Modifications that would be considered substantial from a qualitative perspective are those that result in a significant value
transfer and/or a new underwriting/pricing assessment of the financial instrument.
If it is deemed to be a substantial 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.
Where the modification is not considered to be substantial, the loan continues to be measured at amortised cost using the original
effective interest rate. Where the modification is substantial, the new effective interest rate is used.
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.
• Level 2: Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly
observable.
• 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.
8 6
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 Cash and cash equivalents
Cash and cash equivalents includes cash in hand, deposits held at call with banks, and other short-term highly liquid investments with
original maturities of three months or less.
Financial liabilities
The Group classifies its financial liabilities into one of two categories, depending on the purpose for which the liability was acquired.
The Group’s accounting policy for each category is as follows:
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
recognised in the Consolidated Statement of Comprehensive Income.
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
Bank borrowings are initially recognised at fair value net of any transaction costs directly attributable to the issue of the instrument.
Such interest-bearing liabilities are subsequently measured at amortised cost using the effective interest rate method, which ensures
that any interest expense over the period to repayment is at a constant rate on the balance of the liability carried in the Consolidated
Statement 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 completion of construction if the development is a mixed-use scheme.
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
date. The fair value of investment properties under construction is estimated as the fair value of the completed asset less any costs
still payable in order to complete, and an appropriate developer’s margin. Consideration is also give to recent market transactions and
offers received for properties.
Trading properties
Trading property is developed for sale or 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 include 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.
8 7
FINANCIALS Notes to the Consolidated Financial Statements
continued
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
the amount of any provision recognised where the Group is contractually required to dismantle, remove or restore the leased asset.
Subsequent to initial measurement, lease liabilities increase as a result of interest charged at a constant rate on the balance
outstanding and are reduced for lease payments made. Right of use assets are amortised on a straight-line basis over the remaining
term of the 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 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 assessment of the term of any lease.
The rate of amortisation for right of use assets is over the period of the lease.
Lease liabilities
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.
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
relate.
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; and
• any penalties payable for terminating the lease, if the term of the lease has been estimated on the basis of termination option,
being 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.
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 a proposal in March 2021 for an increase in the corporation tax rate from 19% main rate in the tax year
2021 to 25% with effect from 1 April 2023. This was enacted by the Finance Bill 2021 on 10 June 2021.
8 8
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 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.
Share-based payments
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.
Treasury share reserve represents the consideration paid for shares bought back from the open market.
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.
The capital reduction reserve represents distributable profits generated as a result of the share premium reduction.
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
Property Valuation
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 is carried at fair value, which requires
a number of 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.
Expected credit loss model
The Group applies the IFRS 9 simplified approach to the expected credit loss model, using 12 months of historic rental payment
information for tenants, and adjusting risk profile rates based on forward-looking information. We remain cautious as rising inflation
and interest rates continue to create economic uncertainty.
During the year, the Group collected 99% of all rents, and collected a large amount of historic arrears where payment plans were
agreed with tenants. This has resulted in the ECL provisions calculated at 31 March 2023 being lower than in previous periods (refer to
note 13).
In arriving at our estimates, we have considered the tenants at higher risk, particularly in the leisure and retail sectors, those in
administration or CVA, and those tenants who have been impacted financially who are not necessarily in high-risk sectors.
8 9
FINANCIALS Notes to the Consolidated Financial Statements
continued
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 (see note 22 on page 108 for further details). 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 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 Directors have considered the requirements of IFRS 8 as to aggregation of operating segments into reporting segments. All of
the Group’s revenue is generated from investment and trading properties located outside of London. The properties are managed as
a single portfolio by an asset management team whose responsibilities are not segregated by location or type but are managed on an
asset-by-asset basis.
The route to market is determined by reference to the current economic circumstances that fluctuate through the life cycle of the
portfolio. The Group holds a diversified portfolio across different sectors including office, industrial, retail, leisure, retail warehouse and
residential. The Group does from time to time engage in development projects. The Directors view the Group’s development activities
as an integral part of the life cycle of each of its assets rather than a separate business or division.
The Directors therefore consider that the individual properties have similar economic characteristics and therefore have been
aggregated into a single reportable segment under the provision of IFRS 8.
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
Gross rental income
Dilapidations and other property related income
Insurance commission
Gross property income
Service charge income
Trading property income
Total revenue
2023
£’000
17,425
401
68
17,894
4,974
10,105
32,973
2022
£’000
16,670
732
92
17,494
4,155
27,415
49,064
No single tenant accounts for more than 10% of the Group’s total rents received from investment properties. Similarly, there was no
individual or corporate that accounts for more than 10% of the trading property income.
9 0
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 2. Interest payable and similar charges
Interest on bank loans
Amortisation of loan arrangement fees
Other finance charges
3. Profit for the year
a) The Group’s profit for the year is stated after charging the following:
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 2022 audit
Fees payable to the Auditor and its related entities for other services:
Audit related assurance services in respect of the interim results
b) The Group’s cost of sales comprise the following:
Void, investment and development property costs
Legal, lettings and consultancy costs
Property operating expenses
Service charge expenses
Trading property cost of sales
c) The Group’s administrative expenses comprise the following:
Recurring staff costs
Payments to former Directors (including associated costs)
Other overheads
Accounting and audit fees
Stock Exchange costs
Share-based payments
PR and marketing costs
Legal and professional fees (excluding costs associated with payments to former Directors)
Amortisation of right of use asset
ESG Costs
Depreciation of tangible fixed assets
Details and nature of payments to former Directors can be found on page 62 of the Remuneration Report.
Other overheads consist of rents, rates, service charge, consultancy, recruitment and other office costs.
2023
£’000
3,643
317
10
3,970
2023
£’000
112
195
36
15
11
257
2023
£’000
2,076
502
2,578
4,974
9,595
17,147
2023
£’000
2,560
1,835
624
318
207
177
108
82
82
71
30
2022
£’000
2,748
305
143
3,196
2022
£’000
196
165
29
–
11
205
2022
£’000
2,310
328
2,638
4,155
23,615
30,408
2022
£’000
2,895
–
595
269
235
162
150
62
148
59
48
6,094
4,623
9 1
FINANCIALS Notes to the Consolidated Financial Statements
continued
3. Profit for the year continued
d) EPRA cost ratios are calculated as follows:
Gross property income
Administrative expenses
Property operating expenses
Movement in expected credit loss
EPRA costs (including property operating expenses)
EPRA cost ratio (including property operating expenses)
Less property operating expenses
EPRA costs (excluding property operating expenses)
EPRA cost ratio (excluding property operating expenses)
Total expense ratio
4. Employees and directors’ remuneration
Staff costs during the period were as follows:
Non-Executive Directors’ fees
Wages and salaries
Pensions
Social security costs
Payments to former Directors (incl. NI and pension contributions)
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
Payments to former Directors (incl. NI and pension contributions)
Share-based payments
One Director accrues benefits under the Group’s defined benefit pension scheme.
9 2
2023
£’000
17,894
6,094
2,578
(327)
8,345
46.6%
(2,578)
5,767
32.2%
3.0%
2023
£’000
300
1,828
147
262
1,677
4,214
177
4,391
2022
£’000
17,494
4,623
2,638
(360)
6,901
39.4%
(2,638)
4,263
24.4%
1.6%
2022
£’000
195
2,357
116
227
–
2,895
162
3,057
2023
Number
2022
Number
3
8
11
2023
£’000
711
117
35
1,677
2,540
32
2,572
7
9
16
2022
£’000
1,423
185
25
–
1,633
116
1,749
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 5. Taxation
Current income tax charge
Deferred tax
Tax (credit)/charge
(Loss)/profit on ordinary activities before tax
Based on (loss)/profit for the period: Theoretical Tax at 19% (2022: 19%)
Effect of:
Net expenses not deductible for tax purposes
Deferred tax released to profit and loss on Hudson Quarter residential sales
Residual losses not recognised for deferred tax
Gain on appropriation for Hudson Quarter
REIT exempt income
Non-taxable items
Tax (credit)/charge for the period
2023
£’000
–
(67)
(67)
2023
£’000
(35,771)
(6,797)
41
(67)
–
–
(1,775)
8,531
(67)
2022
£’000
152
(85)
67
2022
£’000
24,615
4,677
51
(85)
(345)
119
(1,985)
(2,365)
67
Non taxable items include fair value movements of the property portfolio, profit on disposals, share based payments and other
expenditure not subject to tax.
As a UK REIT, the income profits of the Group’s UK property rental business are exempt from corporation tax, as are any gains it makes
from the disposal of its properties, provided they are not held for trading. The Group is otherwise subject to UK corporation tax at the
prevailing rate.
Deferred taxes relate to the following:
Deferred tax liability – brought forward
Tax rate increase from 19% to 25%
Overprovided in prior year
Deferred tax release on sale of trading property
Deferred tax liability – carried forward
Investment property unrealised valuation gains
Deferred tax liability – carried forward
2023
£’000
(143)
–
(21)
88
(76)
2023
£’000
(76)
(76)
2022
£’000
(228)
(34)
–
119
(143)
2022
£’000
(143)
(143)
The deferred tax liability of £76,000 (2022: £143,000) relates to investment properties transferred into trading stock, prior to the Group
becoming a REIT. As at 31 March 2022 the Group had approximately £5,915,000 (2022: £5,915,000) 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 2021 sets the main rate of UK corporation tax at 19%, with an increase in the main rate to 25% with effect from 1
April 2023. The deferred tax liability relates to trading properties and has been calculated on the basis of 25%.
9 3
FINANCIALS Notes to the Consolidated Financial Statements
continued
6. Earnings per share
Basic earnings per share
Basic earnings per share and diluted earnings per share have been calculated on loss 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
Earnings per ordinary share
Basic
Diluted
2023
£’000
(35,704)
2022
£’000
24,548
2023
No. of shares
2022
No. of shares
44,525,518
–
44,525,518
46,257,514
36,766
46,294,280
(80.2p)
(80.2p)
53.1p
53.0p
Key Performance Measures
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 and one-off finance termination costs. 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.
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, as well as payments to former Directors, which is a one-off exceptional item. The corporation tax charge (excluding
deferred tax movements, being a non-cash expense) is deducted in order to calculate the adjusted earnings per share, if the charge is
in relation to recurring earnings.
9 4
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 6. Earnings per share continued
The EPRA and adjusted earnings per share for the period are calculated based upon the following information:
(Loss)/profit after tax for the year
Adjustments:
Loss/(gain) on revaluation of investment property portfolio
Profit on disposal of investment properties
Trading profit
Loss on disposal of listed equity investments
Debt termination costs
Fair value gain on derivatives
EPRA earnings for the year
Payments to former Directors (including associated costs)
Share-based payments
Hudson Quarter development loan interest
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
7. Net asset value per share
2023
£’000
(35,704)
42,900
(819)
(510)
–
15
(210)
5,672
1,835
177
–
7,684
(67)
7,617
12.7p
12.7p
17.1p
2022
£’000
24,548
(8,222)
(4,946)
(3,800)
80
63
(329)
7,394
–
162
189
7,745
67
7,812
16.0p
16.0p
16.9p
The Group has adopted the EPRA NAV measures which came into effect for accounting periods starting 1 January 2020. EPRA issued
best practice recommendations (BPR) for financial guidelines on its definitions of NAV measures. The NAV measures as outlined in the
BPR are EPRA net tangible assets (NTA), EPRA net reinvestment value (NRV) and EPRA net disposal value (NDV).
The Group considered EPRA Net Tangible Assets (NTA) to be the most relevant NAV measure for the Group and we are now reporting
this as our primary NAV measure, replacing our previously reported EPRA NAV and EPRA NNNAV per share metrics. EPRA NTA
excludes the intangible assets and the cumulative fair value adjustments for debt-related derivatives which are unlikely to be realised.
As at 31 March 2023
Net assets attributable to Shareholders
Include:
Fair value adjustment of trading properties
Real estate transfer tax
Fair value of fixed interest rate debt
Exclude:
Deferred tax on latent capital gains and capital allowances
EPRA NAV
Number of ordinary shares issued for diluted and EPRA net assets per share
EPRA NAV per share
The adjustments made to get to the EPRA NAV measures above are as follows:
EPRA NTA
£’000
128,475
EPRA NRV
£’000
128,475
ERPA NDV
£’000
128,475
730
–
–
730
11,922
–
730
–
863
76
129,281
43,728,212
296p
76
141,203
43,728,212
323p
–
130,068
43,728,212
297p
• Fair value adjustment of trading properties: Difference between development property held on the balance sheet at cost and fair
value of that development property.
• Real estate transfer tax: Gross value of property portfolio as provided in the Valuation Certificate (i.e. the value prior to any
deduction of purchasers’ costs).
9 5
FINANCIALS Notes to the Consolidated Financial Statements
continued
7. Net asset value per share continued
• Fair value of fixed interest rate debt: Difference between any financial liability and asset held on the balance sheet of the Group
and the fair value of that financial liability or asset.
• Fair value of derivatives: Exclude fair value financial instruments that are used for hedging purposes where the company has the
intention of keeping the hedge position until the end of the contractual duration.
• Deferred tax on latent capital gains and capital allowances: Exclude the deferred tax as per IFRS balance sheet in respect of the
difference between the fair value and the tax book value of investment property, development property held for investment,
intangible assets, or other non-current investments as this would only become payable if the assets were sold.
As at 31 March 2022
Net assets attributable to Shareholders
Include:
Fair value adjustment of trading properties
Real estate transfer tax
Fair value of fixed interest rate debt
Exclude:
Fair value of derivatives value
Deferred tax on latent capital gains and capital allowances
EPRA NAV
Number of ordinary shares issued for diluted and EPRA net assets per share
EPRA NAV per share
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
Basic
Diluted
EPRA NTA
8. Dividends
2023
Interim dividend
Interim dividend
2022
Final dividend
Interim dividend
Interim dividend
Interim dividend
2021
Final dividend
Interim dividend
Payment date
13 January 2023
14 October 2022
05 August 2022
14 April 2022
31 December 2021
15 October 2021
05 August 2021
09 April 2021
Dividends reported in the Group Statement of Changes in Equity
9 6
EPRA NTA
£’000
EPRA NRV
£’000
EPRA NDV
£’000
177,204
177,204
177,204
3,188
–
–
3,188
17,049
–
3,188
–
413
47
143
180,582
46,325,236
390p
47
143
197,631
46,325,236
427p
–
–
180,805
46,325,236
390p
2023
No of shares
2022
No of shares
43,718,381
9,831
43,728,212
46,288,470
36,766
46,325,236
294p
294p
296p
2023
£’000
1,651
1,651
3,302
1,736
1,504
–
–
3,240
–
–
–
6,542
383p
383p
390p
2022
£’000
–
–
–
–
–
1,504
1,389
2,893
1,382
1,152
2,534
5,427
Dividend
per share
3.75
3.75
7.50
3.75
3.25
3.25
3.00
13.25
3.00
2.50
5.50
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 8. Dividends continued
Proposed Dividends
August 2023 final dividend in respect of year end 31 March 2023: 3.75p (2022 final dividend: 3.75p)
April 2023 interim dividend in respect of year end 31 March 2023: 3.25p (2022 interim dividend: 3.25p)
2023
£’000
1,621
1,645
3,266
2022
£’000
1,736
1,504
3,240
Proposed final dividends on ordinary shares are subject to approval at the Annual General Meeting and are not recognised as a liability
as at 31 March 2023.
9. Property portfolio
At 1 April 2021
Additions – refurbishments
Additions - new properties
Gain on revaluation of investment properties
Disposals
At 31 March 2022
Additions – refurbishments
Loss on revaluation of investment properties
Disposals
At 31 March 2023
Freehold
investment
properties
£’000
Leasehold
investment
properties
£’000
Total
investment
properties
£’000
219,141
2,351
10,022
6,886
(22,290)
216,110
1,026
(38,663)
(14,495)
163,978
16,713
2,543
–
1,336
(3,985)
16,607
156
(4,237)
–
12,526
235,854
4,894
10,022
8,222
(26,275)
232,717
1,182
(42,900)
(14,495)
176,504
Total
property
portfolio
£’000
278,573
4,894
10,022
1,182
–
8,222
(49,889)
253,004
1,182
363
(42,900)
(24,090)
187,559
At 1 April 2021
Additions – refurbishments
Additions - new properties
Additions – trading property
Transfer from investment property under construction
Gain on revaluation of properties
Disposals
At 31 March 2022
Additions – refurbishments
Additions – trading property
Loss on revaluation of properties
Disposals
At 31 March 2023
Standing
investment
properties
£’000
Investment
properties
under
construction
£’000
Total
investment
properties
£’000
Trading
properties
£’000
223,904
4,894
10,022
–
11,950
8,222
(26,275)
232,717
1,182
–
(42,900)
(14,495)
176,504
11,950
–
–
–
(11,950)
–
–
–
–
–
–
–
–
235,854
4,894
10,022
–
–
8,222
(26,275)
232,717
1,182
–
(42,900)
(14,495)
176,504
42,719
–
–
1,182
–
–
(23,614)
20,287
–
363
–
(9,595)
11,055
The property portfolio has been independently valued at fair value. The valuations have been prepared in accordance with the
RICS Valuation – Global Standards July 2017 (“the Red Book”) and incorporate the recommendations of the International Valuation
Standards and the RICS valuation – Professional Standards UK January 2014 (Revised April 2015) which are consistent with the
principles set out in IFRS 13. At 31 March 2023, the Group’s freehold and leasehold investment properties were externally valued by
CBRE for the first time, a Royal Institution of Chartered Surveyors (“RICS”) registered independent valuer.
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.
In addition to the loss on revaluation of investment properties included in the table above, realised gains of £819,000 (2022:
£4,946,000) relating to investment properties disposed of during the year were recognised in profit or loss.
9 7
FINANCIALS Notes to the Consolidated Financial Statements
continued
9. Property portfolio continued
The Group has developed a large mixed-use scheme at Hudson Quarter, York. Part of the approved scheme consists of commercial
units which the Group holds for leasing. During the development the commercial element of the scheme was classified as investment
properties under construction. As a result of achieving practical completion in April 2021, the commercial element of the scheme is
now classified as investment properties.
For investment properties under construction and trading properties, no borrowing costs have been capitalised in the year (2022:
£51,674).
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:
CBRE (property portfolio) (Cushman & Wakefield LLP 2022)
Adjustment in respect of minimum payment under head leases
Less trading properties at lower of cost and net realisable value
Less lease incentive balance included in accrued income
Less fair value uplift on trading properties
Carrying value of investment properties
2023
£’000
192,355
1,077
(11,055)
(5,143)
(730)
176,504
2022
£’000
259,040
1,078
(20,287)
(3,926)
(3,188)
232,717
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.
The Head of Investment, 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 & Risk Committee, which considers it as part of its
overall responsibilities.
The assumptions made in the valuation of the Group’s investment properties are:
• The amount and timing of future income streams;
• Anticipated maintenance costs and other landlord’s liabilities;
• An appropriate yield; and
• For investment properties under construction: gross development value, estimated cost to complete and an appropriate
developer’s margin.
Valuation technique – standing investment properties
The valuations reflect the tenancy data supplied by the Group along with associated revenue costs and capital expenditure. The fair
value of the investment portfolio has been derived from capitalising the future estimated net income receipts at capitalisation rates
reflected by recent arm’s length sales transactions.
9 8
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 9. Property portfolio continued
31 March 2023
Fair value of property portfolio
Area (sq ft)
Gross Estimated Rental Value
Net Initial Yield
Minimum
Maximum
Weighted average
Reversionary Yield
Minimum
Maximum
Weighted average
Equivalent Yield
Minimum
Maximum
Weighted average
Office
Industrial
Significant unobservable inputs
Leisure
Other
Total
95,615,000
622,905
11,050,952
35,855,000
339,470
2,820,749
29,290,000
304,319
3,324,009
31,595,000 192,355,000
1,351,545
18,752,113
84,851
1,556,403
0.3%
24.4%
6.6%
6.9%
26.2%
10.8%
6.8%
9.9%
9.4%
3.7%
8.1%
6.3%
6.6%
8.4%
7.4%
6.3%
7.1%
6.6%
10.5%
12.3%
11.5%
8.7%
12.0%
10.5%
10.0%
10.6%
10.3%
5.3%
9.9%
7.2%
5.3%
10.0%
7.2%
6.0%
9.8%
7.4%
0.3%
24.4%
7.4%
5.3%
26.2%
9.6%
6.0%
10.6%
9.0%
The “other” sector includes Residential, Retail and Retail Warehousing sectors.
31 March 2022
Fair value of property portfolio
Area (sq ft)
Gross Estimated Rental Value
Net Initial Yield
Minimum
Maximum
Weighted average
Reversionary Yield
Minimum
Maximum
Weighted average
Equivalent Yield
Minimum
Maximum
Weighted average
Office
Industrial
Significant unobservable inputs
Leisure
Other
Total
£122,125,000
633,591
£10,952,762
£43,345,000
345,586
£2,608,500
£36,990,000
303,993
£3,270,645
£56,580,000 £259,040,000
1,452,932
£19,418,183
169,762
£2,586,276
(5.1%)
9.6%
4.7%
4.5%
11.3%
8.0%
4.5%
8.8%
7.6%
3.5%
5.6%
4.5%
4.6%
6.3%
5.5%
4.5%
5.9%
5.4%
7.8%
9.2%
8.4%
7.3%
9.1%
8.2%
8.4%
9.8%
9.6%
3.5%
11.1%
7.2%
3.4%
10.4%
7.2%
3.4%
9.9%
7.2%
(5.1%)
11.1%
5.6%
3.4%
11.3%
7.5%
3.4%
9.9%
7.4%
Negative net initial yields arise where properties are vacant or partially vacant and void costs exceed rental income.
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
The rent at which space could be let in the market conditions prevailing at the date of valuation (range: £81,443–£1,971,755 per
annum).
Rental values are dependent on a number of variables in relation to the Group’s property. These include: size, location, tenant,
covenant strength and terms of the lease.
9 9
FINANCIALS Notes to the Consolidated Financial Statements
continued
9. Property portfolio continued
Unobservable input: net initial yield
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
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
(Decrease)/increase in the fair value of investment
properties as at 31 March 2023
(Decrease)/increase in the fair value of investment
properties as at 31 March 2022
(9.63)
(10.76)
9.63
10.76
(6.14)
(9.74)
6.92
12.36
-5% in passing
rent (£m)
+5% in passing
rent (£m)
+0.25% in net
initial yield (£m)
-0.25% in net
initial yield (£m)
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 2021
Costs capitalised
Disposal of trading properties
At 1 April 2022
Additions
Disposal of trading properties
At 31 March 2023
Total
£’000
42,719
1,182
(23,614)
20,287
363
(9,595)
11,055
The Group developed a large mixed-use scheme at Hudson Quarter, York. Part of the approved scheme consists of residential units
which the Group is in the process of selling. As a result, the residential element of the scheme is classified as trading property.
11. Listed equity investments
At 1 April 2021
Disposal of equity investment
At 31 March 2022 and 31 March 2023
1 0 0
Total
£’000
3,249
(3,249)
–
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 12. Property, plant and equipment
At 1 April 2021
Additions
At 1 April 2022
Additions
At 31 March 2023
Depreciation
At 1 April 2021
Provided during the year
At 1 April 2022
Provided during the year
At 31 March 2023
Net book value at 31 March 2023
Net book value at 31 March 2022
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
Right of
use asset
£’000
274
22
296
8
304
203
48
251
30
281
23
45
2023
£’000
2,550
(653)
1,897
97
993
5,143
420
8,550
461
–
461
197
658
296
148
444
82
526
132
17
2022
£’000
2,624
(980)
1,644
156
1,022
3,926
664
7,412
Accrued income amounting to £5,143,000 (2021: £3,926,000) 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 2023 the lifetime expected credit loss provision for trade receivables and contract assets is as follows:
Expected loss rate
Gross carrying amount
Loss provision
More than
30 days
past due
£’000
More than
60 days
past due
£’000
More than
90 days
past due
£’000
3%
39
1
4%
32
1
92%
669
618
Current
£’000
2%
1,810
33
Total
£’000
2,550
653
Changes to credit risk management
Impairment calculations have been carried out on trade receivables using the IFRS 9 simplified approach, using 12 months of historic
rental payment information, and adjusting risk profiles based on forward-looking information. In addition, the Group has reviewed its
register of tenants at higher risk, particularly in the leisure and retail sectors, those in administration or CVA and the top 50 tenants by
size with the remaining tenants considered on a sector by sector basis.
1 0 1
FINANCIALS Notes to the Consolidated Financial Statements
continued
13. Trade and other receivables continued
Concentration of credit risk
The credit risk in respect of trade receivables is not concentrated as the Group operates in many different sectors and locations around
the UK, and has a wide range of tenants from a broad spectrum of business sectors. The Group predominantly operates in the office
and industrial sectors. 69% of the ECL provision relates to tenants in the leisure sector.
How forward looking information was incorporated
In calculating the ECL provision, the Group used forward looking information when assessing the risk profiles of each tenant, most
notably around the assessment over the likelihood of tenants having the ability to pay rent as demanded, as well as the likelihood of
rent deferrals and rent frees being offered to tenants.
Key sources of estimation uncertainty
The Group’s risk profile rates form a key part when calculating the ECL provision. Default rates were applied to each tenant based on
the ageing of the outstanding receivable. Tenants were classified as either low (default range of 0.5% - 8%), medium (default range of
20% - 50%), high (default range of 65% - 80%), or extremely high risk (set default range of 100%), with default rates applied to each risk
profile. These rates have been calculated by using historic and forward-looking information and is inherently subjective.
A sensitivity analysis performed to determine the impact on the Group Statement of Comprehensive Income from a 10% increase in
each of the risk profile rates would result in a decrease in profit by £207,769.
The Group does not hold any material collateral as security.
As at 31 March 2022 the lifetime expected credit loss provision for trade receivables and contract assets is as follows:
Expected loss rate
Gross carrying amount
Loss provision
Current
£’000
7%
1,668
124
Movement in the expected credit loss provision was as follows:
Brought forward
Receivables written off during the year as uncollectable
Provisions released
Provisions increased
More than
30 days
past due
£’000
More than
60 days
past due
£’000
More than
90 days
past due
£’000
82%
12
10
0%
–
–
90%
944
846
2023
£’000
980
(50)
(305)
28
653
Total
£’000
2,624
980
2022
£’000
1,340
(158)
(276)
74
980
14. Cash and cash equivalents
All of the Group’s cash and cash equivalents at 31 March 2023 and 31 March 2022 are in sterling and held at floating interest rates.
Cash and cash equivalents
The Directors consider that the carrying amount of cash and cash equivalents approximates to their fair value.
2023
£’000
5,509
2022
£’000
28,143
1 0 2
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 15. Trade and other payables
Trade payables
Other taxes
Other payables
Deferred rental income
Accruals
2023
£’000
508
646
1,484
3,359
2,342
8,339
2022
£’000
604
1,167
1,136
3,368
2,637
8,912
The deferred rental income in the year ended 31 March 2022 of £3,368,000 was recognised as income in the year to 31 March 2023.
The Directors consider that the carrying amount of trade and other payables measured at amortised cost approximates to their
fair value.
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 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.
At 31 March 2023, the Group has no derivative financial instruments as they matured within the financial year.
Further details on interest rate risks are included in note 26.
Bank
Barclays Bank plc
Santander plc
17. Borrowings
Current liabilities
Bank loans
Unamortised lending costs
Non-current liabilities
Bank loans
Unamortised lending costs
Total borrowings
Bank loans
Unamortised lending costs
Notional
principal
Expiry
date
Contract
rate %
Valuation
rate %
–
–
–
–
–
1.3420
1.3730
–
–
2023
Fair value
£’000
2022
Fair value
£’000
–
–
–
3
(50)
(47)
2023
£’000
8,563
(18)
8,545
55,770
(641)
55,129
64,333
(659)
63,674
2022
£’000
32,813
(64)
32,749
68,940
(452)
68,488
101,753
(516)
101,237
1 0 3
FINANCIALS Notes to the Consolidated Financial Statements
continued
17. Borrowings continued
The maturity profile of the Group’s debt was as follows:
Within one year
From one to two years
From two to five years
Facility and arrangement fees
As at 31 March 2023
2023
£’000
8,563
37,027
18,743
64,333
2022
£’000
32,813
1,218
67,722
101,753
Secured Borrowings
Santander Bank plc
Lloyds Bank plc
National Westminster Bank plc
Barclays
Scottish Widows
All in cost Maturity date
May 2027
6.38%
6.13% March 2024
6.28% August 2024
June 2024
6.13%
July 2026
2.90%
As at 31 March 2022
Secured Borrowings
All in cost Maturity date
Santander Bank plc
Lloyds Bank plc
National Westminster Bank plc
Barclays
Scottish Widows
3.71% August 2022
2.64%
March 2023
2.79% August 2024
June 2024
3.41%
July 2026
2.90%
Total
Facility
£’000
11,750
6,845
37,724
19,385
8,629
84,333
Total
Facility
£’000
24,750
6,845
40,000
29,168
8,947
109,710
Unused
loan
facilities
£’000
–
–
(20,000)
–
–
(20,000)
Unused
loan
facilities
£’000
–
–
(7,957)
–
–
(7,957)
Facility
drawn
£’000
11,750
6,845
17,724
19,385
8,629
64,333
Unamortised
facility fees
£’000
(337)
(18)
(171)
(62)
(71)
(659)
Facility
drawn
£’000
Unamortised
facility fees
£’000
24,750
6,845
32,043
29,168
8,947
101,753
(29)
(35)
(230)
(128)
(94)
(516)
Loan
Balance
£’000
11,413
6,827
17,553
19,323
8,558
63,674
Loan
Balance
£’000
24,721
6,810
31,813
29,040
8,853
101,237
Investment properties with a carrying value of £162,420,000 (2022: £218,780,000) are subject to a first charge to secure the
Group’s bank loans amounting to £64,333,000 (2022: £101,753,000). Trading properties with a carrying value of £11,055,000 (2022:
£20,286,000) are no longer subject to a first charge to secure the Group’s bank loans following the repayment of the Barclays loan in
November 2021.
The Group has unused loan facilities amounting to £20,000,000 (2022: £7,957,000). A facility fee is charged on this balance at a rate of
1.05% p.a. and is payable quarterly. This facility is secured on the investment properties held by Property Investment Holdings Limited,
Palace Capital (Properties) Limited and Palace Capital (Leeds) Limited as part of the NatWest loan.
The Group constantly monitors its approach to managing interest rate risk. The Group has fixed £8,629,000 (2022: £61,386,000) of its
debt in order to provide surety of its interest cost and to mitigate interest rate risk.
The Group has a loan with Scottish Widows for £8,629,000 (2022: £8,947,000) which is fully fixed at a rate of 2.9%.
The Group has a loan with Barclays Bank plc for £19,385,000 (2022: £29,168,000), of which £Nil (2022: £33,848,000) is fixed using an
interest rate swap (see note 16). The floating rate portion of the loan is charged at a margin of 1.95% plus SONIA.
The Group has a loan with Santander plc for £11,750,000 (2022: £24,750,000), of which £Nil (2022: £18,592,000) is fixed using an
interest rate swap (see note 16). The floating rate portion of the loan is charged at a margin of 2.2% plus SONIA.
The Group has a loan with Lloyds Bank plc for £6,845,000 (2022: £6,845,000) which is fully charged at a floating rate margin of 1.95%
plus SONIA.
The Group has a loan with National Westminster Bank plc for £17,724,000 (2022: £32,043,000) which is fully charged at a floating rate
margin of 2.1% plus SONIA.
1 0 4
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 17. Borrowings continued
The fair value of borrowings held at amortised cost at 31 March 2023 was £64,537,000 (2022: £101,650,000). The difference in the fair
value and carrying value of borrowings reflects the valuation of the fixed rate debt being higher than its carrying value. This is a level 2
fair value valuation of the fixed rate debt and was determined by an independent third party. The valuation is based on a net present
value of the difference between the contracted rate and the valuation rate when applied to the projected balances for the period from
the reporting date to the contracted expiry date.
The Group’s bank loans are subject to various covenants including Loan to Value, Interest Cover, Debt Service Cover and debt Yield
requirements. During the year, the Group met all of its covenants.
18. Gearing and loan to value ratio
The calculation of gearing is based on the following calculations of net assets and net debt:
EPRA net asset value (note 7)
Borrowings (net of unamortised issue costs)
Lease liabilities for investment properties
Cash and cash equivalents
Net gearing
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 of property portfolio
Borrowings
Cash at bank
Net debt
Loan to value ratio
19. Reconciliation of liabilities to cash flows from financing activities
Balance at 1 April 2021
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
Balance at 1 April 2022
Cash flows from financing activities:
Bank borrowings repaid
Loan arrangement fees paid
Non-cash movements:
Amortisation of loan arrangement fees
Balance at 31 March 2023
2023
£’000
129,281
63,674
1,077
(5,509)
59,242
46%
2023
£’000
180,570
11,785
192,355
64,333
(5,509)
58,824
31%
2022
£’000
180,582
101,237
1,078
(28,143)
74,172
41%
2022
£’000
235,565
23,475
259,040
101,753
(28,143)
73,610
28%
Bank
borrowings
£’000
127,285
11,472
(38,033)
(11)
305
219
101,237
(37,419)
(461)
317
63,674
1 0 5
FINANCIALS Notes to the Consolidated Financial Statements
continued
20. Leases
Operating lease receipts in respect of rents on investment properties are receivable as follows:
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
Lease liabilities are classified as follows:
Lease liabilities for investment properties
Lease liabilities for right of use asset
2023
£’000
15,524
13,277
13,046
12,030
8,742
42,755
105,374
2023
£’000
1,077
132
1,209
2022
£’000
15,765
15,109
13,000
12,357
10,787
49,821
116,839
2022
£’000
1,078
–
1,078
Lease obligations in respect of rents payable on leasehold properties were payable as follows:
Within one year
From one to two years
From two to five years
From five to 25 years
After 25 years
Lease
payments
£’000
54
54
162
595
5,244
6,109
2023
Present value
of lease
payments
£’000
2022
Present value
of lease
payments
£’000
–
–
1
4
1,072
1,077
–
–
–
8
1,070
1,078
Interest
£’000
(54)
(54)
(161)
(591)
(4,172)
(5,032)
Lease obligations in respect of rents payable on right of use assets were payable as follows:
Within one year
Lease
payments
£’000
134
2023
Present value
of lease
payments
£’000
2022
Present value
of lease
payments
£’000
Interest
£’000
(2)
132
–
The net carrying amount of the leasehold properties is shown in note 9.
The Group has over 160 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 10 years.
A number of these leases contain rent free periods. Standard lease provisions include service charge payments and recovery of other
direct costs.
1 0 6
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 21. Share capital
Authorised, issued and fully paid share capital is as follows:
46,388,515 ordinary shares of 10p each (2022: 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
As at 31 March 2021, 31 March 2022 and 31 March 2023
Movement in treasury shares
As at 31 March 2022
Shares transferred to EBT
Share buyback
Share buyback
Share buyback
As at 31 March 2023
Total number of shares excluding the number held in treasury at 31 March 2023
Year ended 31 March 2023
On 31 May 2022, 40,000 shares were transferred into the employee benefit trust.
2023
£’000
4,639
4,639
2023
£’000
4,639
–
4,639
2022
£’000
4,639
4,639
2022
£’000
4,639
–
4,639
Price per
share pence
Number of
ordinary
shares issued
Total number
of shares
–
–
46,388,515
Number of
ordinary
shares issued
Total number
of shares
99,587
31 May 2022
11 July 2022
20 March 2023
29 March 2023
(40,000)
2,300,000
171,000
137,633
2,668,220
43,720,295
On 11 July 2022, 2,300,000 shares were purchased by the Group from the open market and transferred into treasury reserves.
On 20 March 2023, 171,000 shares were purchased by the Group from the open market and transferred into treasury reserves.
On 29 March 2023, 137,633 shares were purchased by the Group from the open market and transferred into treasury reserves.
Prior year figures included shares and transfers in the employee benefit trust.
Shares held in Employee Benefit Trust
Authorised, issued and fully paid share capital is as follows:
Brought forward
Transferred under scheme of arrangement
Shares exercised under deferred bonus share scheme
Shares exercised under employee LTIP scheme
Shares purchased by EBT
At end of year
2023
No. of
options
458
40,000
(38,544)
–
–
1,914
2022
No. of
options
19,238
200,000
(90,049)
(134,814)
6,083
458
1 0 7
FINANCIALS Notes to the Consolidated Financial Statements
continued
21. Share capital continued
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
Prior period accrued dividends on vested options
Deferred bonus share options issued
Deferred bonus share options exercised
At end of year
2023
No. of
options
1,078,826
–
–
(544,727)
32,491
9,831
(38,544)
537,877
2022
No. of
options
1,193,984
402,717
(134,814)
(329,778)
–
36,766
(90,049)
1,078,826
As at 31 March 2023, the Company had the following outstanding unexpired options:
Description of unexpired share options
Employee benefit plan
Deferred bonus share scheme issued
Total (note 22)
Exercisable
Not exercisable
2023
2022
No. of
options
528,046
9,831
537,877
–
537,877
Weighted
average
option price
0p
0p
0p
0p
0p
No. of
options
1,042,060
36,766
1,078,826
–
1,078,826
Weighted
average
option price
0p
0p
0p
0p
0p
The weighted average remaining contractual life of share options at 31 March 2023 is 1.0 years (2022: 1.7 years).
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:
Number of
options
Exercise
price
Average share
price at
date of
exercise
Grant
date
Vesting
date
Outstanding at 31 March 2021
Exercised during the year (LTIP 2018)
Issued during the year (LTIP 2021)
Deferred bonus share options issued
Deferred bonus share options exercised
Lapsed during year (LTIP 2018)
Lapsed during year (LTIP 2019)
Lapsed during year (LTIP 2020)
Outstanding at 31 March 2022
Deferred bonus share options issued
Deferred bonus options exercised
Prior period accrued dividends on
vested options
Lapsed during year (LTIP 2019)
Lapsed during year (LTIP 2020)
Lapsed during year (LTIP 2021)
Outstanding at 31 March 2023
1,193,984
(134,814)
402,717
36,766
(90,049)
(114,405)
(70,826)
(144,547)
1,078,826
9,831
(38,544)
32,491
(241,147)
(124,123)
(179,457)
537,877
0p
0p
0p
0p
0p
0p
0p
0p
0p
0p
0p
0p
0p
0p
0p
0p
254p
247p
253p
254p
13 July 2018
16 November 2021
15 June 2021
14 July 2020
13 July 2021
16 November 2024
15 June 2022
14 July 2021
285p
263p
18 August 2022
15 June 2021
18 August 2023
15 June 2022
1 0 8
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 22. Share-based payments continued
LTIP 2020
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 2020. This target will measure the annualised growth in total property return
over the three-year period ending 31 March 2023 (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 14 October 2020
to 13 October 2023. The base price is £1.88 per share which was the market price at the grant date.
Annualised TSR over the
TSR performance period
<5%
Equal to 5%
Between 5% and 9%
Equal to 9%
Vesting %
PV growth over the PV performance period
Vesting %
0
20
20–100
100
<0.5%
Equal to 0.5%
Between 0.5% and 2.5%
Equal to 2.5%
0
20
20–100
100
LTIP 2021
The options are awarded to employees on achievements against targets on two separate measures over the three-year period. For
directors, 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 calculated as Total Property Return of the Company over the Performance Period beginning on
31 March 2021 and ending on 31 March 2024, using the Total Property Return (“TPR”) as calculated by MSCI for the Group as
compared with the TPR for the MSCI IPD Index (the “Comparator”) over the same period. The TPR for the Group and the Comparator
will be its percentage increase over the three-year Performance Period.
Total Shareholder return (TSR) measures the total Shareholder return (price rise plus dividends) over the period from 16
November 2021 to 15 November 2024. The percentage of the TSR metric will be adjusted downwards according to the Company’s
share price discount to net asset value at the time of vesting. Share Price Discount will be calculated with reference to the closing share
price on 15 November 2024 and EPRA Net Tangible Assets as at 30 September 2024. The base price is £2.44 per share which was the
market price at the grant date.
Annualised TSR over the
TSR performance period
<5%
Equal to 5%
Between 5% and 9%
Equal to 9%
Vesting %
0
20
20–100
100
TPR equivalent total
over the performance period
Vesting %
<0.5%
Equal to 0.5%
Between 0.5% and 2.5%
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 TPR 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:
1 0 9
FINANCIALS Notes to the Consolidated Financial Statements
continued
22. Share-based payments continued
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
16 November 2021
£2.44
0p
5 years
38.03%
0.00%
0.59%
3.0
0%
£1.28
16 November 2021
£2.44
0p
5 years
38.03%
0.00%
0.59%
3.0
0%
£2.44
The expense recognised for employee share-based payment received during the period is shown in the following table:
LTIP 2018
LTIP 2019
LTIP 2020
LTIP 2021
Total expense arising from share-based payment transactions
23. Related party transactions
2023
£’000
–
15
87
75
177
2022
£’000
42
9
72
39
162
Charitable donations amounting to £6,000 (2022: £Nil) 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 £27,598 (2022: £262,265) during the year. See note 4 on page 92 for further
details of key management remuneration.
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 £456,901 (2022: £395,952).
25. Post balance sheet events
On 4 May 2023, the Group exchanged on the disposal of Courtauld House, Coventry, for a total consideration of £7.4m. The property
is charged against the loan facility with Barclays Bank plc and as a result, £3.5m of the total consideration will be used to repay the loan
facility. Completion of the sale is due to take place no earlier than 5 July 2023.
On 9 May 2023 the Group exchanged on the disposal of Millbarn Medical Centre, Beaconsfield, for a total consideration of £1.5m.
The property is charged against the loan facility with Barclays Bank plc and as a result, £0.5m of the total consideration will be used to
repay the loan facility. Completion of the sale is due to take place by 7 July 2023.
On 23 May 2023, the Group exchanged on the disposal of Princeton House, Farnborough, for a total consideration of £2.3m. The
property is charged against the loan facility with NatWest plc and as a result, £0.9m of the total consideration will be used to repay the
loan facility. Completion of the sale is due to take place by 31 July 2023.
On 26 May 2023, the Group completed the disposal of five industrial assets, for a total consideration of £26.6m. The properties
disposed of were Point Four Industrial Estate, Avonmouth, Clayton Industrial Estate, Burgess Hill, Saxon House, Kettering, Bone Lane,
Newbury and Black Moor Road, Verwood. The properties were charged against the loan facilities with NatWest plc and Barclays Bank
plc. £9.8m of the total consideration was used to repay the loan facility with NatWest plc and £4.1m was used to repay the loan facility
with Barclays Bank plc on 30 May 2023.
1 1 0
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 25. Post balance sheet events continued
On 31 May 2023, the Group repaid the £6.8m loan facility with Lloyds Bank plc in full.
On 1 June 2023, the Group completed the disposal of Aldi, Gosport, for a total consideration of £5.6m. The property was charged
against the loan facility with Barclays Bank plc and as a result, £3.7m of the total consideration was used to repay the loan facility on 2
June 2023.
Post year end, the Group purchased 505,000 ordinary shares from the open market for a total consideration of £1.2m. These shares
have been transferred to treasury following the purchases.
Post year end, the Group completed on a further five residential unit sales at Hudson Quarter for a total consideration of £2.2m.
26. Financial risk management
The Group’s principal financial liabilities are loans. 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:
The Group manages its capital structure, and makes adjustments to it, in the light of changes in economic conditions.
To maintain or adjust the capital structure, the Group may adjust the dividend payment to Shareholders, return capital to Shareholders
or issue new shares.
Capital risk management
The Group considers its capital to comprise its share capital, share premium, other reserves and retained earnings which amounted to
£128,475,000 at 31 March 2023 (2022: £177,204,000). 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.
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 2023 and 31 March 2022 were:
As at 31 March 2023
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Bank borrowings
Lease liabilities
Nil rate
assets and
liabilities
£’000
2,890
–
(4,334)
–
–
(1,444)
Floating
rate assets
£’000
Fixed rate
liability
£’000
Floating rate
liability
£’000
–
5,509
–
–
–
5,509
–
–
–
(8,558)
(1,209)
(9,767)
–
–
–
(55,116)
–
(55,116)
Total
£’000
2,890
5,509
(4,334)
(63,674)
(1,209)
(60,818)
1 1 1
FINANCIALS Notes to the Consolidated Financial Statements
continued
26. Financial risk management continued
As at 31 March 2022
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Interest rate swaps
Bank borrowings
Lease liabilities
Nil rate
assets and
liabilities
£’000
2,666
–
(4,377)
–
–
–
(1,711)
Floating
rate assets
£’000
Fixed rate
liability
£’000
Floating rate
liability
£’000
–
28,143
–
–
–
–
28,143
–
–
–
(47)
(61,386)
(1,078)
(62,511)
–
–
–
–
(39,851)
–
(39,851)
Total
£’000
2,666
28,143
(4,377)
(47)
(101,237)
(1,078)
(75,930)
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 Board monitor the appropriate use of interest rate swaps to align with strategy and the level
of drawn debt, to mitigate the risk of an increase in interest rates but also to allow the Group to benefit from a fall in interest rates.
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. 13% 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 £5,509,000 (2022: £28,143,000). Interest receivable in the income statement would be affected by £55,000
(2022: 281,000) by a one percentage point change in floating interest rates on a full year basis.
The Group has loans amounting to £55,116,000 (2022: £39,851,000) which have interest payable at rates linked to the SONIA interest
rates or bank base rates. A 1% increase in the SONIA or base rate will have the effect of increasing interest payable by £551,000 (2022:
£399,000).
The Group has interest rate swaps with a nominal value of £Nil (2022: £52,939,449).
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 2023 the cash balances of the Group
were £5,509,000 (2022: £28,143,000). The concentration of credit risk held with Barclays Bank plc, the largest of these banks, was
£2,997,000 (2022: £20,281,000).
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 6.0% (2022: 5.7%) 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 2023 was £2,890,000 (2022: £2,666,000). The details of the provision for expected credit loss are
shown in note 13.
1 1 2
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 26. Financial risk management continued
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. 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 working capital model. 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.
The tables below summarise the maturity profile of the Group’s financial liabilities based on contractual undiscounted payments:
As at 31 March 2023
Interest bearing loans
Lease liabilities
Trade and other payables
As at 31 March 2022
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
–
–
4,334
4,334
12,161
54
–
12,215
38,606
54
–
38,660
19,598
162
–
19,760
–
5,839
–
5,839
On demand
£’000
0–1 years
£’000
1–2 years
£’000
2–5 years
£,000
> 5 years
£’000
–
–
–
4,377
4,377
35,044
54
–
–
35,098
3,409
54
(3)
–
3,460
70,257
162
50
–
70,469
–
5,894
–
–
5,894
Total
£’000
70,365
6,109
4,334
80,808
Total
£’000
108,710
6,164
47
4,377
119,298
1 1 3
FINANCIALS Company Statement of Financial Position
as at 31 March 2023
Fixed assets
Investments in subsidiaries
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
Total assets less current liabilities
Equity
Called up share capital
Treasury shares
Merger reserve
Capital redemption reserve
Capital reduction reserve
Accumulated losses/retained earnings
Equity – attributable to the owners of the Parent
Note
2
4
5
6
7
2023
£’000
104,730
22
104,752
30,155
1,049
31,204
135,956
2022
£’000
122,864
43
122,907
42,576
479
43,055
165,962
(33,660)
(2,456)
(28,953)
14,102
102,296
137,009
4,639
(7,343)
3,503
340
118,477
(17,320)
102,296
4,639
(717)
3,503
340
125,019
4,225
137,009
The Company’s loss after tax for the year was £21,688,000 (2022: £1,706,000).
The financial statements were approved by the Board of Directors and authorised for issue on 14 June 2023 and are signed on its
behalf by:
Matthew Simpson
Chief Financial Officer
1 1 4
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 Company Statement of Changes in Equity
as at 31 March 2023
At 31 March 2021
Total comprehensive loss for the year
Transactions with Equity Holders
Share-based payments
Exercise of share options
Issue of deferred bonus share options
Dividends
At 31 March 2022
Total comprehensive loss for the year
Transactions with Equity Holders
Share-based payments
Exercise of share options
Issue of deferred bonus share options
Dividends
Share buyback
At 31 March 2023
Share
Capital
£’000
4,639
–
Treasury
Share
Reserve
£’000
(1,288)
–
–
–
–
–
4,639
–
–
–
–
–
–
4,639
–
571
–
–
(717)
–
–
71
–
–
(6,697)
(7,343)
Other
Reserves
£’000
3,843
–
–
–
–
–
3,843
–
–
–
–
–
–
3,843
Capital
Reduction
Reserve
£’000
125,019
–
Retained
Earnings
£’000
11,677
(1,706)
–
–
–
–
125,019
–
–
–
–
(6,542)
–
118,477
162
(571)
90
(5,427)
4,225
(21,688)
177
(71)
37
–
–
(17,320)
Total
Equity
£’000
143,890
(1,706)
162
–
90
(5,427)
137,009
(21,688)
177
–
37
(6,542)
(6,697)
102,296
Treasury shares represents the consideration paid for shares bought back from the open 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.
The capital reduction reserve represents distributable profits generated as a result of the share premium reduction.
1 1 5
FINANCIALS Notes to the Company Financial Statements
Accounting policies
Palace Capital plc is a company incorporated in England and Wales under the Companies Act. The address of the registered office is
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
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.
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). The
Statement of Financial Position heading relating to the Company’s investments and property, plant and equipment is in accordance
with the balance sheet formats of the Companies Act 2006. Assets are classified in accordance with the definitions of fixed and current
assets in the Companies Act instead of the presentation requirements of IAS 1 Presentation of Financial Statements.
Dividends revenue
Revenue is recognised when the Company’s right to receive payment is established, which is generally when Shareholders of the
paying 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
Listed equity investments have 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 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.
Deferred tax balances are recognised in respect of timing differences that have originated but not reversed on the balance sheet date.
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 a proposal in March 2021 for an increase in the corporation tax rate from 19% main rate in the tax year
2021 to 25% with effect from 1 April 2023. This was enacted by the Finance Act 2021 on 10 June 2021.
1 1 6
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 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.
Cash and cash equivalents
Cash and cash equivalents comprise cash on hand and demand deposits, and other short-term highly liquid investments that are
readily convertible to a known amount of cash and are subject to an insignificant risk of changes in value.
Financial liabilities and equity
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:
Trade payables
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 available in FRS 102:
• 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
circumstance of the investment or loan are taken into account in assessing whether there are any indications of impairment.
Provisions provided in the year reflect the reduction in net asset value of subsidiaries for the year ended 31 March 2023. Write-down of
investments reflect the winding up of subsidiaries within the year.
1 1 7
FINANCIALS Notes to the Company Financial Statements
continued
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 2021
Write-down of investments
At 1 April 2022
Write-down of investments
At 31 March 2023
Provision for impairment:
At 1 April 2021
Provided during the year
At 1 April 2022
Provided during the year
At 31 March 2023
Net book value at 31 March 2023
Net book value at 31 March 2022
Investments
in subsidiaries
£’000
Loans
to subsidiaries
£’000
183,614
(2,658)
180,956
–
180,956
58,047
45
58,092
18,134
76,226
104,730
122,864
–
–
–
–
–
–
–
–
–
–
–
–
Total
£’000
183,614
(2,658)
180,956
–
180,956
58,047
45
58,092
18,134
76,226
104,730
122,864
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
Property Investment Holdings Limited
Palace Capital (Dartford) Limited
Palace Capital (Newcastle) Limited
Palace Capital (York) Limited
Associate Company:
HBP Services Limited*
Clubcourt Limited*
* Held indirectly
Class of share held
%
shareholding
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
100
100
100
100
100
100
100
100
100
100
100
100
21.4
40
Principal activity
Property Investments
Property Investments
Property Investments
Property Investments
Property Investments
Property Investments
Property Investments
Property Investments
Property Investments
Property Management
Property Investments
Property Management
Property Management
Property Management
The results of the associates are immaterial to the Group.
The registered addresses for the subsidiaries across the Group are consistent based on their country of incorporation and are as
follows:
UK entities: Fora Victoria, 6-8 Greencoat Place, London, SW1P 1PL
1 1 8
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023
3. Listed equity investments
At 31 March 2021
Disposal of listed equity investment
At 31 March 2022 and 31 March 2023
4. Property, plant and equipment
At 31 March 2021
Additions
At 31 March 2022
Additions
At 31 March 2023
Depreciation
At 31 March 2021
Provided during the period
At 31 March 2022
Provided during the period
At 31 March 2023
Net book value at 31 March 2023
Net book value at 31 March 2022
Total
£’000
3,249
(3,249)
–
IT, fixtures
and
fittings £’000
269
22
291
8
299
201
47
248
29
277
22
43
1 1 9
FINANCIALS Notes to the Company Financial Statements
continued
5. Trade and other receivables
Amounts owed by subsidiary undertakings
Trade debtors
Other debtors
Accrued interest on amounts owed by subsidiary undertakings
Prepayments
2023
£’000
28,034
1,703
47
309
62
30,155
2022
£’000
36,374
5,607
44
309
242
42,576
Trade debtors represent amounts owed from subsidiary undertakings in relation to management charges.
All amounts that fall due for repayment within one year and are presented within current assets as required by the Companies Act.
The amounts owed by subsidiary undertakings are repayable on demand with no fixed repayment date, although it is noted that
a significant proportion of the amounts may not be sought for repayment within one year depending on activity in the subsidiary
undertakings.
A loan amounting to £14,023,501 remains outstanding at 31 March 2023 (2022: £28,888,501) from Palace Capital (Developments)
Limited. No interest is charged on this loan. This loan is repayable on demand.
A loan amounting to £153,534 remains outstanding at 31 March 2023 (2022: £519,534) from Palace Capital (Leeds) Limited. No
interest is charged on this loan. This loan is repayable on demand.
A loan amounting to £1,079,417 remains outstanding at 31 March 2023 (2022: £2,781,417) from Palace Capital (Halifax) Limited. No
interest is charged on this loan. This loan is repayable on demand.
A loan amounting to £1,645,430 remains outstanding at 31 March 2023 (2022: £4,034,646) from Palace Capital (Properties) Limited.
No interest is charged on this loan. This loan is repayable on demand.
A loan amounting to £4,945,582 remains outstanding at 31 March 2023 (2022: £150,000) from Palace Capital (Northampton) Limited.
No interest is charged on this loan. This loan is repayable on demand.
A loan amounting to £3,084,996 remains outstanding at 31 March 2023 (2022: £Nil) from Palace Capital (Manchester) Limited. No
interest is charged on this loan. This loan is repayable on demand.
A loan amounting to £3,101,452 remains outstanding at 31 March 2023 (2022: £Nil) from Palace Capital (Newcastle) Limited. No
interest is charged on this loan. This loan is repayable on demand.
6. Creditors: amounts falling due within one year
Trade creditors
Amount owed to subsidiary undertaking
Other taxes
Other creditors
Accruals and deferred income
2023
£’000
124
32,143
268
15
1,110
33,660
2022
£’000
168
27,528
278
5
974
28,953
A loan amounting to £19,264,032 remains outstanding at 31 March 2023 (2022 £10,113,143) to Palace Capital (Signal) Limited. No
interest is charged on this loan. This loan is repayable on demand.
A loan amounting to £10,612,686 remains outstanding at 31 March 2023 (2022: £16,314,718) to Property Investment Holdings Limited.
No interest is charged on this loan. This loan is repayable on demand.
A loan amounting to £2,146,000 remains outstanding at 31 March 2023 (2022: £1,100,000) to Palace Capital (Liverpool) Limited. No
interest is charged on this loan. This loan is repayable on demand.
A loan amounting to £120,000 remains outstanding at 31 March 2023 (2022: £Nil) to Palace Capital (York) Limited. No interest is
charged on this loan. This loan is repayable on demand.
1 2 0
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 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
9. Post balance sheet events
2023
£’000
134
134
2022
£’000
19
19
Post year end, the Company purchased 505,000 ordinary shares from the open market for a total consideration of £1.2m. These shares
have been transferred to treasury following the purchases.
1 2 1
FINANCIALS Officers and Professional Advisors
continued
Directors
Steven Owen
Interim Executive
Chairman
Matthew Simpson Chief Financial Officer
Mark Davies
Non-Executive
Director
Secretary
Phil Higgins
Registered office
Fora Victoria
6-8 Greencoat Place
London
SW1P 1PL
Registered number
05332938 (England and Wales)
Auditor
BDO LLP
55 Baker Street
London
W1U 7EU
Registrar
Link Group
10th Floor
Central Square
29 Wellington Street
Leeds
LS1 4DL
Joint broker
Numis Securities Limited
45 Gresham Street
London
EC2V 7BF
Solicitors
Hamlins LLP
1 Kingsway
London
WC2B 6AN
CMS Cameron McKenna
Nabarro Olswang LLP
1 South Quay
Victoria Quays
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
1 2 2
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023
Glossary
Adjusted EPS: Is adjusted profit before tax less corporation tax
charge on recurring earnings (excluding deferred tax movements)
divided by the average basic number of shares in the period.
EPRA net tangible assets (EPRA NTA): Is the NAV adjusted
to reflect the fair value of trading properties and to exclude
deferred taxation and derivatives.
Adjusted profit before tax: Is the IFRS profit before taxation
excluding investment property revaluations, gains/losses on
disposals, acquisition costs, fair value movement in derivatives,
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 construction professionals understand
and mitigate the environmental impacts of the developments
they design and build. Performance is measured across a series
of ratings: Good, Very Good, Excellent and Outstanding.
Dividend cover: Is the Adjusted profit before tax plus trading
profit divided by dividends paid in the period, expressed as a
percentage.
Employee Benefit Trust (EBT): Employee Benefits Trust,
administrator for the Company share plans.
Expected credit loss (ECL): In accordance with IFRS 9, the risk
of recoverability of our rental arrears are assessed. This is done
using a probability weighted estimate of credit losses, being the
difference between the cash flows that are due in accordance
with the contract and the cash flows that the Group expects to
receive. This replaced the previous bad debt provision.
EPRA: Is the European Public Real Estate Association.
EPRA cost ratio (including direct vacancy costs): Is a
proportionally consolidated measure of the ratio of net
overheads and operating expenses against gross rental income
(with both amounts excluding ground rents payable). Net
overheads and operating expenses relate to all administrative
and operating expenses, net of any service fees, recharges
or other income specifically intended to cover overhead and
property expenses.
EPRA cost ratio (excluding direct vacancy costs): Is the ratio
calculated above, but with direct vacancy costs removed from the
net overheads and operating expenses balance.
EPRA diluted EPS: Is EPRA earnings divided by the average
diluted number of shares in the period.
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
according to the definitions of the various NAV measures defined
in the EPRA Best Practice Recommendations that came into
effect for accounting periods starting 1 January 2020.
EPRA NTA per share: Is EPRA NTA divided by the diluted
number of shares at the period end.
EPRA occupancy rate: Is the ERV of occupied space divided
by ERV of the whole portfolio, excluding developments and
residential property.
EPRA topped-up net initial yield: Is the current annualised
rent, net of costs, topped up for contracted uplifts, where these
are not in lieu of rental growth, expressed as a percentage of
capital value.
EPRA vacancy rate: Is the ERV of vacant space divided by ERV
of the whole portfolio, excluding developments and residential
property.
Equivalent yield: Is the net weighted average return 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 received
annually in arrears.
Estimated rental value (ERV): Is the external valuers’ opinion as
to the open market rent which, on the date of valuation, could
reasonably be expected 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 UK.
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 the success of specific activities used to
meet business goals – measured against a specific target or
benchmark, adding context to each activity being measured.
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, asset management determinations and
surrender premiums.
Like-for-like valuation: Is the change in the fair value of
properties owned throughout the entire year.
This excludes properties acquired during the year and disposed
of during the year but includes capital expenditure spent on the
properties.
Loan to value (LTV): Is the ratio of principal value of gross debt
less cash, short-term deposits and liquid investments to the
aggregate fair value of properties and investments.
1 2 3
FINANCIALS 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. Under accounting rules the value of lease incentives given
to tenants is amortised through the Income Statement on a
straight-line basis to the lease expiry.
Total Accounting Return (TAR): Is the increase or decrease in
EPRA NAV per share plus dividends paid in the year, and this
can be expressed as a percentage of EPRA NAV per share at the
beginning of the period.
Total Expense Ratio: Is calculated as total administrative costs
for the year divided by the total asset value in the year.
Total Property Return (TPR): Total property return is a
performance measure calculated by the MSCI IPD and defined
in the MSCI Global Methodology Standards for Real Estate
Investment as “the percentage value change plus net income
accrual, relative to the capital employed”.
Total Shareholder Return (TSR): Is calculated as the movement
in the share price for the period plus dividends paid in the year,
divided by opening share price.
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 period end.
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.
WiredScore: Wired Certification is a commercial real estate
rating system that empowers landlords to understand, improve,
and promote their buildings’ digital infrastructure. Connectivity
is measured across a series of ratings: Platinum, Gold, Silver
and Certified.
Glossary
MSCI Inc. (MSCI IPD): Is a company that produces independent
benchmarks of property returns. 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 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 rental income: Is the rental income receivable in the period
after payment of net property outgoings. Net rental income
will differ from annualised net rents and passing rent due to the
effects of income from rent reviews, net property outgoings and
accounting adjustments for fixed and minimum contracted rent
reviews and 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.
Passing rent: Is the gross rent, less any ground rent payable
under head leases.
Peer Group: A selection of small/medium sized property
companies within the listed real estate sector with a diversified
portfolio.
Portfolio Valuation: The value of the Company’s property
portfolio, including all investment and trading properties as
valued by our independent valuers, CBRE.
Property Income Distribution (PID): A dividend received by
a Shareholder of the principal company in respect of profits
and gains of the Property Rental Business of the UK resident
members of the REIT Group or in respect of the profits or gains
of a non-UK resident member of the REIT Group.
Property Portfolio: The total fair value of all investment
properties and trading properties as determined by the third
party valuer, CBRE.
Real Estate Investment Trust (REIT): A UK Real Estate
Investment Trust must be a company listed on a recognised stock
exchange with at least three-quarters of its profits and assets
derived from a qualifying property rental business. Income and
capital gains from the property rental business are exempt from
tax but the REIT is required to distribute at least 90% of those
profits to Shareholders. Tax is payable on profits from non-
qualifying activities of the residual business.
SONIA: Is the Sterling Overnight Index Average, the interest rate
charged by one bank to another for lending money.
Special Purpose Vehicle (SPV): Is a separate legal entity created
by an organisation. The SPV is a distinct company with its own
assets and liabilities, 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.
1 2 4
PALACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2023 The production of this report supports the work of the Woodland Trust, the
UK’s leading woodland conservation charity. Each tree planted will grow
into a vital carbon store, helping to reduce environmental impact as well as
creating natural havens for wildlife and people.
CONTACT
Fora Victoria,
6-8 Greencoat Place,
London SW1P 1PL
palacecapitalplc.com
E: info@palacecapitalplc.com
Newcastle
York
Leeds
Halifax
Manchester
Liverpool
Leamington Spa
Northampton
Milton Keynes
Beaconsfield
Maidenhead
Newbury
Winchester
Farnborough
Salisbury
Fareham
Southampton
Gosport
Dartford
Sutton
East Grinstead
Burgess Hill
Brighton
Exeter