Palace Capital PLC – Final Results

Palace Capital plc

(“Palace Capital” or the “Company”)

The Regional Property Investment Company

 

ANNUAL RESULTS FOR THE YEAR ENDED 31 MARCH 2018

 

Palace Capital, the property investment company that focuses on commercial property outside London, is pleased to announce its annual results for the year ended 31 March 2018.

 

TRANSFORMATIONAL YEAR ON ALL FRONTS:

 

LARGEST ACQUISITION TO DATE

 

MOVE TO THE MAIN MARKET OF THE LONDON STOCK EXCHANGE

 

LARGEST CAPITAL RAISE TO DATE

 

REGIONAL FOCUS CONTINUES TO GENERATE INCOME AND CAPITAL GROWTH

 

 

STANLEY DAVIS, CHAIRMAN OF PALACE CAPITAL, COMMENTED:

“This financial year was a momentous period for Palace Capital. We acquired the RT Warren portfolio, our largest purchase to date. The company secured £70m of additional equity capital from a range of existing and new shareholders. Significantly, Palace Capital moved to the Main Market of the London Stock Exchange, reflecting the growing scale of our business.

The management team has worked diligently to produce an excellent performance; both from a financial and operational perspective. I am very pleased to report that we have made considerable progress against all of our goals and I am confident that Palace Capital will continue to generate value for shareholders in the future.”

 

FINANCIAL HIGHLIGHTS

·      IFRS profit before tax: increased by 6% to £13.3m (31 March 2017: £12.6m) reflecting a combination of recurring earnings, revaluation gains and profit on disposals

·      Adjusted profit before tax: increased by 27% to £8.5m (31 March 2017: £6.7m)

·      Net rental income: increased by 22% to £14.9m (31 March 2017: £12.2m)

·      Portfolio valuation at 31 March 2018*: increased by 51% to £276.7m (31 March 2017: £183.2m) reflecting +3.5% like-for-like growth in the existing portfolio and net acquisitions including the £68m transformational acquisition of the RT Warren Portfolio

·      IFRS Net Asset Value: increased by 67% to £183.3m (31 March 2017: £109.6m) reflecting £70m equity raised in the year

·      EPRA NAV per share: decreased by 6% to 415p at 31 March 2018 (31 March 2017: 443p) due to the one-off dilution from the £70m equity raise at 340p. From a proforma base of 389p post fundraise, EPRA NAV per share subsequently increased by 7% at 31 March 2018

·      Basic EPS: decreased marginally to 35.9p (31 March 2017: 36.6p)

·      Adjusted EPS: decreased marginally to 21.2p (31 March 2017: 22.2p)

·      Final dividend: 4.75p proposed, making a total for the year of 19.0p, a 3% increase (31 March 2017: 18.5p) and 1.1x covered by adjusted earnings

 

* Includes investment properties and assets held for sale.

The Group financial statements are prepared in accordance with IFRS. Alternative performance measures are not specified under IFRS but are widely used by the property sector as they highlight the underlying recurring performance of the Group's property rental business and are based on EPRA Best Practice Recommendations (BPR) reporting framework. Further details and reconciliations between EPRA measures, company adjusted measures and IFRS equivalents can be found in Notes 8 and 9 in the financial statements.

 

OPERATIONAL HIGHLIGHTS

·      £70m new equity to fund RT Warren portfolio purchase

·      £67m new debt facilities to support acquisitions

·      £88m of acquisitions

·      £9m of disposals to recycle capital

 

MAIN MARKET MOVE COMPLETED IN MARCH 2018

·      There was strong support from investors to commence the move to the Main Market following the Placing in October 2017

·      The management team successfully completed the transition within six months of the Placing

·      Will join the FTSE Small Cap Index and FTSE All Share Index on 18 June 2018.

 

NEIL SINCLAIR, CHIEF EXECUTIVE OF PALACE CAPITAL, COMMENTED:

“Since our re-admission to the London Stock Exchange in October 2013, Palace Capital has grown strongly and consistently. We have developed a portfolio now worth over £275m and generated almost 120% total return. Our results today demonstrate considerable progress. Importantly, I believe that they highlight the scope for additional value creation. Our regionally-focused, active asset management strategy is well proven. The acquisition of the Warren portfolio highlighted how Palace Capital can identify value where others might not. Our successful fund raising demonstrated that investors agree and prompted our move to the Main Market of the London Stock Exchange. We are now of a size where further value-creating opportunities present themselves regularly.

“While Palace Capital has accomplished a lot in a short period of time, there remains much more to do. I am confident that our management team will continue to drive the business forward successfully, albeit with a cautious approach, committed to the creation of value for all our shareholders.”

 

FOR FURTHER INFORMATION PLEASE CONTACT:

 

PALACE CAPITAL PLC

Neil Sinclair, Chief Executive             
Stephen Silvester, Finance Director
Tel. +44 (0)20 3301 8331

Broker

Arden Partners plc
Chris Hardie / Ciaran Walsh

Tel. +44 (0)207 614 5917

Joint Broker

Allenby Capital Limited
Nick Naylor / James Reeve

Tel. +44 (0)20 3328 5656

 Investor & Public Relations

Capital Access Group
Scott Fulton

Tel: +44 (0) 203 763 3405

About Palace Capital plc (www.palacecapitalplc.com)

PALACE CAPITAL IS A PROPERTY INVESTMENT COMPANY WITH A PREMIUM LISTING ON THE MAIN MARKET OF THE LONDON STOCK EXCHANGE (STOCK CODE: PCA). THE COMPANY OWNS A DIVERSIFIED PORTFOLIO ACROSS THE UK AND HAS BUILT A REPUTATION FOR BEING ENTREPRENEURIAL AND OPPORTUNISTIC. PALACE CAPITAL ACQUIRES PROPERTIES WHERE IT CAN ENHANCE THE LONG-TERM INCOME AND CAPITAL VALUE THROUGH ASSET MANAGEMENT AND STRATEGIC CAPITAL DEVELOPMENT IN LOCATIONS OUTSIDE LONDON.

 

 

Chief Executive's Review

THE RESULTS SHOW AN IFRS PROFIT BEFORE TAX OF £13.3M AND A NET ASSET VALUE OF £183.3M

I am delighted to report the Company's results for the year ended 31 March 2018 which shows an IFRS profit before tax of £13.3m and a net asset value of £183.3m.

In our Portfolio & Trading update announced on 24 April 2018, I stated that these were exciting times for our Company. Our very selective stock selection, together with taking advantage of opportunistic, mainly corporate purchases, means that we have assembled a high-quality property portfolio. The growth in income from these is already being experienced in our independent valuations. Additionally, several of our properties in city centres have significant development and refurbishment potential.

We continue to focus our strategy on growing both income and capital value. We have had a terrific year and as a result of this we are proposing a final dividend of 4.75p per share payable on 31st July 2018 to those shareholders on the register as at 6th July 2018 which, if approved, takes total dividends for the year to 19p.

It is important to us that we maintain our progressive dividend policy which we first set out in our Re-Admission Document in October 2013 which stated that we would pay a dividend of 12p for the year ended 31 March 2015.

Our EPRA Net Asset Value (NAV) per share for the year ended 31 March 2017 was 443p but this was diluted to 389p by the £70m fundraise last October which enabled us to acquire RT Warren (Investments) Ltd (Warren) which had a portfolio of 21 commercial buildings and 65 residential properties. We deliberated on this very carefully and concluded this was the best portfolio we had seen in over two years. It is already proving to be an excellent acquisition as we are identifying plenty of opportunities to apply our brand of active asset management and grow income.

Our EPRA Net Asset Value per share at 31 March 2018 is 415p so we are already making significant progress. We believe that the acquisition of the Warren portfolio will be both earnings and NAV enhancing. We have no regrets regarding the short-term dilution as we consider it will be hugely beneficial in the medium term. Our first significant acquisition was the Sequel portfolio acquired in October 2013 when on Re-Admission our reported NAV was 218p. We have made tremendous progress notwithstanding the short-term dilution.

Following the acquisition of the Warren portfolio and the St James Complex in Newcastle, the carrying value of the Company's portfolio is now at £276.7m (including assets held for sale) compared to £183.2m the twelve months previous. This takes into account the relevant acquisitions and the disposals we have made during the financial year.

Our contracted rent roll as at 31 March 2018 was £17.9m per annum with a net income of £16.8m per annum after allowing for head rents, service charge shortfall and empty rates. We expect this to increase during the year as we use our available cash and the cash resulting from further property sales.

It is our policy that we keep gearing at a conservative level. Our bank borrowings are £82.4m net of cash, representing a net loan to value (LTV) of 30% (31 March 2017: £67.5m and 37% respectively).

The highlight of the year is that we joined the Main Market of the London Stock Exchange at the end of March 2018 and will enter the FTSE Small Cap Index and FTSE All Share Index on 18 June 2018. We believe this will increase the liquidity and make our stock more attractive to investors.

We are making excellent progress on our existing portfolio. This is due not only to investing in the right towns and cities such as Manchester, Newcastle, Leeds, York, Southampton, Brighton, Winchester, Salisbury, Northampton and Milton Keynes but also in the right places in those cities and towns. An update on our portfolio is contained in the Property Review.

However, I do need to refer to our proposed development currently known as Hudson House, Toft Green, York. I did originally mention that we were considering a joint venture partner for the development but it became increasingly clear that it would be much more in our interest to carry out the scheme ourselves. We have planning permission to erect 127 apartments, 34,000 sq ft of of offices, 5,000 sq ft of other commercial plus car parking on this 2-acre site close to York railway station. We have a first-class professional team including a highly experienced project manager and with York being voted by The Sunday Times as the Best Place to Live 2018 and as we expect a strong demand for the properties, we are excited at the prospects here. We are in the early stages of discussions with lenders to finance the construction costs having regard to the fact that the property is not charged and currently valued at £16.0m. Demolition is ongoing, and this will lead to a saving of £0.75m per annum in empty rates and running costs.

We also believe that it is in our interests to develop or refurbish our properties ourselves once we secure satisfactory planning permission. We are working closely with our advisers to achieve this objective and we will announce our progress on these as and when the situation arises. A case in point is Solaris House, Milton Keynes, a 14,500 sq ft office building which became vacant in 2016. We took the decision to carry out the refurbishment as we believed we could let it at a rent well in excess of the rent being paid on the two adjoining office buildings comprising 38,000 sq ft, let to Rockwell Automation which we own, and where a rent review is due in December of this year.  We announced the letting to Monier Redland last April at a headline rental of £240,000 per annum which is £16.55 per sq ft and £6.00 per sq ft more than is being paid by Rockwell. This is a further example of our active asset management which is being applied right across the board, such as at Sandringham House, Harlow, where we announced a significant letting last month.

Both transactions took place after the year end, so they are not reflected in the year end property valuations.

Recycling our capital is a priority, particularly those properties that have no prospect for growth, are empty or are not core to our business. The latter is the case in respect of the houses that were acquired as part of the Warren Portfolio. Agents have been instructed to sell 60 houses and once achieved we will reinvest the funds in suitable commercial opportunities. We had planned to sell the portfolio by June 2018 and discussions are ongoing with a particular party but as we had already sold three properties at above book value we are also examining selling packages of properties over a longer period. The properties are not charged so we are under no pressure.

Government policy continues to encourage investment in the regions. At the moment buying opportunities are somewhat limited as the prices that we are being asked to pay are generally too high to provide a satisfactory return for shareholders. In my experience, part of the discipline is to know when to walk away but I am confident that with our network of contacts, particularly in the regions, we will achieve our objective of securing off-market opportunities on terms acceptable to us.

Although we are based in London, my colleagues and I regularly travel up and down the country not only to review our existing portfolio or potential new acquisitions but also to meet regional wealth managers and brokers as well as to make presentations to potential retail investors. We have done the latter for nearly three years as we make every effort to create interest in our story. We value all our shareholders both large and small.

I am very grateful for the support of our shareholders. With a management team that is second to none, I am very confident about our prospects. We have opportunistically assembled a very high-quality portfolio and it is my job to make sure that the investment community are aware of the quality of the portfolio and the potential for growth in both income and NAV.

Neil Sinclair

Chief Executive

Property Review

We have continued to grow our portfolio with £88m of acquisitions which included the significant corporate acquisitions of the Warren portfolio and St James Gate in Newcastle. These purchases reflect our strategy of acquiring assets in locations which we consider have sustainable rental growth prospects.

Generally, we buy properties with potential for improvement either through refurbishment or development.  During the financial year, we completed three office refurbishment projects in Milton Keynes, Leeds and Manchester and we are embarking on a very exciting mixed use development in York.

We have our portfolio independently valued every six months and as at 31st March 2018 we owned property valued at £276.7 million, a like for like increase of 3.5% over the year and a revaluation gain of £5.7m for the year.

The portfolio still has many investments which we consider have yet to achieve their potential, mainly as they are let and income producing.  We regularly highlight our recurring income which is reflected by a Weighted Average Unexpired Lease Term (WAULT) of 5.3 years to break. This enables us to prepare a strategy for each asset well in advance and adapt as situations evolve.

STATISTICS

60 commercial properties (2017: 44) comprising 1.8m sq ft (2017: 1.6m) – this excludes the residential properties from the Warren portfolio.

303 commercial tenants (2017: 165) providing a contractual rent roll of £17.9m p.a. (2017: £12.7m p.a.)

MARKET COMMENTARY

Media reporting on UK economics point unreservedly towards uncertainty.  However, how one views the year ahead will be dependent upon whether you are a 'glass half full' or a 'glass half empty' person.  The latter view is supported by negative views on Brexit and sluggish GDP growth which puts a squeeze on consumer incomes.  The former positive approach, and one which the Board hold, is that the UK has a robust labour market, is seeing rapid growth in technology and rising export demand for manufacturers which outweighs the glass half empty protagonists.  Regeneration and reinvention through public and private investment is delivering results, with new spaces being created. New investment is forthcoming for UK wide infrastructure projects.

ACQUISITIONS

The Warren portfolio, valued at £71.8m, completed in October 2017 and has all the hallmarks of being a portfolio of properties with long term rental and capital growth opportunities. As highlighted in our Portfolio & Trading Update announced in April 2018, this was the best portfolio we had seen for over two years.

We see significant rental growth in locations where Permitted Development has reduced available commercial space.  As rental values grow, this is likely to encourage speculative development but we are well placed to benefit in the meantime.  This is evident at Regency House in Winchester and Lendal/Museum Street in York. The upper parts of both properties are vacant and in need of significant refurbishment to be let. The immediate solution would be to convert to residential (Winchester already has planning permission).  However, we would have to sell the flats losing potential income, and we can achieve better returns with less capital expenditure if we maintain the commercial use.  This is because rental values have grown through a lack of supply.

Since purchase, we have let London Court, a vacant office building in Southampton city centre, for ten years at a headline rent of £150,000 per annum and renewed leases in Beaconsfield, Verwood and Banbury.

We consider ourselves strategically opportunistic.  Post the year end, in Fareham, we have bought an office building and large car park adjacent to Admiral House (which we own) as we concluded that the combined ownerships are worth more than the sum of the parts. 

The Warren portfolio included 65 residential properties, predominantly houses, in Hayes.  All apart from two are let and income producing.  However, this is not our speciality sector or our core business so we consider the returns for shareholders will be significantly increased if invested in the commercial sector.  We have instructed agents to sell these holdings, apart from two which sit alongside a commercial holding. Three others were sold at 14% above book value in February 2018.

St James Gate, Newcastle – In August 2017, we acquired for £20m, 100% of the share capital of a company owning a significant freehold site minutes from Newcastle railway station and in an improving location.

Comprising 82,500 sq. ft. of offices and 16,500 sq. ft. of retail space, this fully let property produces £1.76 million per annum.  We have extended the lease to Serco until June 2019 and are finalising plans to improve the ground floor reception and external landscaping.  This will increase its attraction as a destination compared to new developments in the city so we either retain our existing tenants or attract others if necessary.

SECTOR FOCUS

Offices

The property market in 2017 exudes a positive tone. “Occupier demand for office space defied wavering confidence, with take-up reaching a 15 year high supported by headcount growth, business restructuring and new market entrants.” (Knight Frank 2018 Regional Office Review). With almost half our portfolio in the office sector, the changing demands of occupiers is a key driver to our performance. The economic uncertainty has forced many tenants to actively consider and commit to locations that present a property and operational cost advantage. Therefore, we actively seek to refurbish vacant space to compete with the best quality space available but at rents which are slightly discounted. 

The vibrancy, cohesion and relative affordability of regional cities is increasingly appealing to young professionals. Different lifestyle choices are creating a supply of regional talent that occupiers are recognising. The delivery of brand new office space has remained relatively subdued, exacerbating the shortages of modern office stock in many of the largest cities and leading to stronger prospects for rental growth.  As supply tightens, we are seeing regional companies broadening their areas of search which is likely to increase the level of competition between regional centres. Economic conditions mean cost sensitivity may be a priority but occupiers increasingly accept that low cost, low quality real estate options are actually a false economy as they create expensive staff churn.

48.5% of our portfolio is in this sector and accounts for £8.0m p.a. in rent from 110 tenants in 32 buildings.  The key assets are:

Bank House, Leeds – This multi-let office property, acquired in April 2015 for £10m is extremely well located, moments from the railway station.  Comprising 88,000 sq ft, it is let to The Bank of England until July 2023 and Walker Morris until December 2019.  We have completed the refurbishment of the vacant 1st floor and are marketing at a 30% discount to current Grade A rental levels with interest coming from companies seeking flexible terms.  As at 31 March 2018 the independent valuation was £10.9m, a 2.1% increase over the year.

Boulton House, Manchester – A multi let office building within close proximity to Manchester Piccadilly Station and the proposed HS2 interchange was purchased for £10.45m in August 2016.  It comprises 75,300 sq ft and at the time of purchase the average rent in the building was £12.50 per sq ft.  We have refurbished the vacant space as well as the ground floor reception area at a cost of £800,000.  During the year 6,400 sq ft has been let at a rental value of £17.50 per sq ft.  Following the year end, a further 2,120 sq ft has also been let at £18.95 per sq ft and negotiations continue with existing tenants who have forthcoming lease renewals.  As at 31st March 2018 this property was independently valued at £14.3m, an increase of 18% over the year.

249 Midsummer Boulevard, Milton Keynes – A multi let office building within walking distance of the railway station.  Purchased in February 2016 for £7.2m, the property comprises 46,000 sq ft let to DHL, Crawfords and others.  The average rental at the time of purchase was £12 per sq ft. The leases on the 2nd floor have expired and since the tenants' vacated we have taken the opportunity to refurbish this space and upgrade the ground floor reception area and common parts at a cost of £450,000. Milton Keynes remains one of the fastest growing cities in the UK which is reflected by steady rental growth and our quoting rental is now at £18.50 per sq ft. The valuation as at 31 March 2018 was £8.0m, an increase of 7.74% over the year.

Solaris House, Kiln Farm, Milton Keynes – Having obtained vacant possession of this property in March 2016, dilapidations were settled and re-invested in a refurbishment to the same specification of the adjacent office buildings that we own & let to Rockwell Automation.  Following the end of the financial year, we have announced a letting of the entire 14,500 sq ft to Monier Redland at a headline rent of £16.50 per sq ft.  We expect a significant increase at the forthcoming rent review of the Rockwell properties in December 2018. 

Leisure / Retail

Consumer spending has slowed and reflects the tough times for retailers and leisure operators. New developments are being proposed and are attracting new leisure concepts and integrating retail to provide an 'experience'. Uncertainty around EU citizens' rights to remain post March 2019 poses challenges to the hospitality sector.

15% of our portfolio is in this sector which accounts for £3.4m per annum in rent from 22 tenants in 2 buildings.  The key assets are:

Sol Central, Northampton – In May 2015, we acquired the company owning a prominent city centre leisure scheme for £20.7m.  Comprising a 10 screen cinema, casino, 151 room hotel, gym and 375 space car park, this 200,000 sq ft development has not been trading at its optimum level for a number of years.  The scheme requires investment to adapt to the changing demands of customers to attract new tenants and we have recently appointed new letting and managing agents. The occupational market has been widely reported as being slow so before we commit significant funds, new tenants need to be signed up.  However, in the meantime repairs to the external lighting and roof costing in the region of £1.0m have completed utilising the surrender premium of £4.0m from Gala.  We have instructed a specialist to run the car park which has improved the availability of spaces and increased income.  As at 31 March 2018 the independent valuation was £18.88m, an increase of 1.34% over the year.

Broad Street Plaza, Halifax – This significant leisure scheme was acquired through a corporate purchase in March 2016 for £24.18m.  We increased returns during the financial year as 40% of the leases benefited from rent reviews.  Unfortunately, two tenants entered administration during the year which has reduced the end of year valuation by 4.6%.  We have appointed new letting agents to market the vacant space and are pleased that our remaining tenants trade well which together with the opening of the Piece Hall helped to attract over one million visitors to Halifax since its opening in August 2017.

Industrial

The star industry performer in terms of overall returns during 2017 and currently the investment of choice over other sectors.  The loss of land to alternate uses compounded with the need for space to support the functions of a city remains high, which is likely to lead to multi storey logistic development.

13.2% of our portfolio is in this sector which accounts for £2.3m per annum in rent from 44 tenants in 13 buildings. The key assets are:

Point 4 Industrial Estate, Bristol – this multi-let estate comprises 81,000 sq ft in 10 units all of which are now let.  Two lettings were completed as well as a lease renewal which have set a new rental tone in excess of £6 per sq ft.  This is an increase of 20% during the financial year.  The recent valuation of £7.05 million was an increase of 8.46% on the year.

Black Moor Road, Verwood – Purchased as part of the Warren portfolio in October 2017, the multi let estate totals 65,000 sq ft.  Two units have become vacant since purchase and require significant refurbishment.  Post the year end, a lease has been renewed at a 20% increase to the passing rent and there are three further units due for rent reviews, or lease renewals, this year.  The valuation of £6.86 million reflects an increase of 12.46% since its purchase in October 2017.

TECHNOLOGY

Online sales will continue to grow and increase its share in the UK to c 19% at the end of 2018. (CBRE Real Estate Market Outlook 2018). The shift from physical to online will have profound implications for how retailers use physical space to showcase their brand.  As this evolves, it is harder to assess rental levels of high street retail units. In August 2017, the Government announced 'truck platooning' to provide relief to drivers from necessary rules regarding driver hours, so expect to see the “last mile” delivery become less strategic as vehicle technology moves towards automation.

SALES

We continue to recycle our capital where we consider that our holdings have reached their potential or they are not core assets.  During the year, ten properties were sold for £9.0m, releasing funds from low growth assets. The key sale was the former Polestar building adjoining the Marsh Barton Industrial Estate in Exeter.  Our tenant entered administration and the building required considerable capital expenditure.  We had already considered that the letting in May 2016 was unlikely to be a long term solution so we had commissioned various reports on the site's long term viability.  Following this process and by the time it became vacant, we had decided that the capital expenditure required was not in shareholders' interest and a sale process commenced.  Travis Perkins plc acquired the site for their own occupation for £3.28 million in December 2017, a 10% premium to September 2017 valuation. 

MANAGING AGENTS

We are delighted to have appointed Savills in January 2018 to manage a significant number of our assets as part of our rationalisation. They have replaced four different companies which will increase the level of service we can give to our tenants.

ENVIRONMENTAL

As a landlord of second hand commercial property, our active asset management approach means that we are constantly assessing our portfolio and earmarking assets for refurbishment and renewal, utilising the latest technology and environmentally efficient products to equip our properties for 21st Century occupation.

MINIMUM ENERGY EFFICIENCY STANDARDS (MEES)

As of April 2018, it is unlawful for commercial and residential landlords of properties with an Energy Performance Certificate (EPC) rating of less than “E” to grant new leases or renew tenant leases (except for some exemptions). Landlords will need to carry out works to improve the energy performance of their buildings to achieve the minimum standards or face civil penalties.

We have undertaken a full review of our portfolio and are delighted to say that a few minor works are required at this stage to comply with the proposed new guidelines.  We have a specialist consultant advising us to ensure that none of our holdings are affected.

Richard Starr MRICS

Executive Director – Head of Property

 

Financial Review

OUR FULL YEAR DIVIDEND IS UP 2.7% TO 19 PENCE PER SHARE

FINANCIAL HIGHLIGHTS

	2018	2017	2016
INCOME GROWTH
IFRS profit before tax	£13.3m	£12.6m	£11.8m
Adjusted profit before tax	£8.5m	£6.7m	£5.6m
EPRA earnings (excluding one-off surrender premiums)	£6.5m	£5.4m	£4.5m
Basic EPS	35.9p	36.6p	43.9p
EPRA EPS	18.7p	21.2p	31.3p
Adjusted EPS	21.2p	22.2p	18.9p
Dividend per share	19.0p	18.5p	16.0p
Dividend cover	1.1x	1.2x	1.2x
CAPITAL GROWTH
Portfolio like for like value	+3.5%	+4.5%	+8.0%
Net Asset Value	£183.3m	£109.6m	£106.8m
Basic NAV per share	400p	436p	414p
EPRA NAV per share	415p	443p	414p
Accounting return	-2%	11.4%	8.1%
Total shareholder return	-1.4%	7.4%	-2.3%
DEBT FINANCE
Debt balance	£101.4m	£78.7m	£72.7m
Average cost of debt	3.4%	2.9%	3.1%
Average debt maturity	4.7yrs	4.6 yrs	3.9 yrs
Net Loan to Value Ratio	30%	37%	37%
NAV gearing	43%	61%	61%

 

KEY PERFORMANCE MEASURES

The Group's 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 included in the Highlights for the year and throughout this document. These include a number of European Public Real Estate Association ('EPRA') measures, prepared in accordance with the EPRA Best Practice Recommendations (BPR) reporting framework, and company adjusted measures. Further details are given in notes 8 and 9 of the financial statements. We report a number of these measures (detailed in the glossary of terms) because Management considers them to improve the transparency and relevance of our published results as well as the comparability with other listed European real estate companies.

OVERVIEW AND HEADLINE RESULTS

This review summarises the financial performance for the year and provides a number of key metrics illustrating that the Company continues to deliver on its objective to drive income and capital growth and generate attractive, sector-leading returns for our investors.

The year ended 31 March 2018 was a transformational year for the Group which included our largest equity raise to date of £70.0m in October 2017 and this supported the largest acquisition to date – the Warren portfolio valued at £71.8m. As a result, the shareholder base has increased to 45.8m shares. However, as the shares were issued at 340 pence per share, this had a one-off dilutionary impact on EPS and NAV per share which are covered below.

The year ended with a much anticipated move from the AIM to a Premium Listing on the Main Market of the London Stock Exchange which will attract a larger range of investors to support the continuing growth of the business. The associated one-off costs have been included in the income statement for the current year.

This year we delivered an IFRS profit before tax of £13.3m, which reflects a basic earnings per share of 35.9p. EPRA earnings is the industry measure of underlying profit stripping out revaluation gains, profits on disposals and one-off costs. EPRA earnings for the year ended 31 March 2018 increased by 20.3% to £6.5m compared to £5.4m last year.

Management also report an adjusted profit before tax in order to track recurring earnings and to form a basis for the progressive dividend. This totalled £8.5m for the year ended 31 March 2018 (2017: £6.7m), up 27%, however, as a result of the increased shareholder base adjusted earnings per share reduced to 21.2p from 22.2p. The Board announced in October 2017 that it would be moving to a quarterly dividend policy in 2018 and the Q3 quarterly payment was made to investors in April 2018. The proposed final dividend of 4.75p will be payable in July 2018 which ensures a total dividend for the year of 19.0p (up 2.7%), covered by adjusted earnings 1.1x.

On the capital side, net asset value has grown to £183.3m up 67% from the previous year-end of £109.6m and this translates into EPRA net asset value per share of 415p, down 6% from 443p having regard to the dilution. This 28p decrease, together with the total dividends of 19p paid during the year, overall represents a -2% total accounting return.

RECURRING EARNINGS

Rental income totalled £16.7m in the year ended 31 March 2018 (2017: £14.3m) driven by the improving portfolio, with fully annualised income from the acquisitions in the prior year and also benefiting from the acquisition of the Warren portfolio and the office and retail buildings in Newcastle during the year. Net rental income similarly was up to £14.9m (2017: £12.2m) and this included £0.6m of non-recoverable costs in the current year from properties held for development which should reduce as projects progress.

Administrative expenses increased to £4.2m (2017: £2.9m). This included £0.7m one-off exceptional costs incurred as a result of moving from the AIM to the Main Market. The team, including the Board, totalled fourteen at the balance sheet date, up from eleven the prior year.

Finance costs increased to £3.4m from £3.0m as a result of increasing the debt book to support the larger asset base and £0.1m termination costs as a result of refinancing during the year. Despite increasing the base costs of the business, adjusted profit before tax grew 27% to £8.5m from £6.7m reflecting the increasing profitability of the business as a result of both scale and income-enhancing acquisitions.

Looking forward, the business is now capable of scalability, with the team and systems in place to support significant growth in the portfolio. The Group has a gross rent roll of £17.9m per annum as at 31 March 2018 and this is set to increase further once surplus funds are deployed.

VALUATION GAINS & PROFITS ON DISPOSAL

The movement in the values of our investment properties can make a significant impact on profit before tax and is determined by independent valuers' assessment of what a willing purchaser would pay for the property on the basis of an arms' length transaction. We have been extremely pleased with how our properties have performed as a result of our regional strategy. This year £5.7m of gains were achieved, with property values on a like for like basis up 3.5%.

In addition, we have continued to recycle capital out of vacant properties with limited growth prospects into income generating properties core to the business strategy. Ten properties were sold in the year for a total consideration of £9.0m, resulting in profits on disposal of £0.3m. The combination of revaluation gains and profits on disposal have a significant impact on the underlying value of the business, reflecting 13p uplift in net asset value per share. One of the key advantages of the Company's relatively small size compared to its peer group is its ability to 'shift the dial' and grow the underlying value of the business on a per share basis.

The combination of careful stock selection, buying at the right price and the impact of our asset management and capex initiatives, particularly at our strategic properties such as Hudson House, York, where we have commenced demolition as a result of obtaining planning consent to redevelop the property, are having a significant income and capital impact on the business.

DEBT

	Fixed £m	Floating £m	Undrawn £m	Total Drawn £m	Years to maturity £m
Barclays	35.8	4.2	(4.2)	35.8	4.8
NatWest	0	30.4	(10)	20.4	2.9
Santander	20	6.8	0	26.8	4.3
Lloyds	0	3.8	0	3.8	1.1
Scottish Widows	14.6	0	0	14.6	8.3
	70.4	45.2	(14.2)	101.4	4.7

 

EPS

Basic earnings per share (EPS) was 35.9p compared to 36.6p last year. We also report on EPRA earnings per share, which removes unrealised capital profits and one-off items such as profits on disposal and costs on acquisition. This reduced to 18.7p from 21.2p last year. Finally, we also report an adjusted earnings per share to provide a basis for dividend cover and this was 21.2p for the year down marginally from 22.2p.

DIVIDENDS

The Board is recommending a final quarterly dividend of 4.75p per share to be paid on 31 July 2018 to shareholders registered at the close of business on 6 July 2018. Taken with the total interim dividends of 14.25p, our full year dividend will be up 2.7% to 19.0p. The Company is very well placed to provide our shareholders with an increased dividend payment due to the growth in the portfolio and the core assets producing sustainable, long-term income. However, we continue to reinvest surplus funds into our strategic assets to provide investors with a two-pronged return through both income and capital growth.

NET ASSETS

At 31 March 2018, our net assets were £183.3m, equating to basic net asset per share of 400p a decrease of 36p since 31 March 2017. The increase in our net assets was driven largely by the £70.0m equity raise and the increased value of our investment properties, profits on disposal of investment properties and surplus profits after dividends paid. We calculate an EPRA NAV consistent with standard practice in the property industry to adjust for any dilution of outstanding share options and fair value adjustments of financial instruments and deferred tax which we believe better reflects the underlying net assets attributable to shareholders. Our EPRA NAV was 415p at 31 March 2018, down from 443p at 31 March 2017, however up 7% from 389p pro-forma post the fundraise.

DEBT FINANCING

During the year our debt profile improved as we refinanced two facilities and repaid one other. In August 2017, we refinanced the £15.6m Santander facility to incorporate a charge over the St James' Gate, Newcastle acquisition and extended the facility to £27.0m for a further five years at a margin of 2.5% over three month LIBOR.

The Barclays facility of £14.5m inherited as part of the Warren acquisition in October 2017 was subsequently refinanced in January 2018 along with the remaining £12.7m Nationwide facility and replaced with a new £40.0m 5 year facility with Barclays at a margin of 1.95% over three month LIBOR.

As is the normal course of business for a property company, the Group evaluates its debt position and exposure to interest rate rises on an ongoing basis. Earlier this year there was a growing belief in the market that the Bank of England could raise interest rates later this year. The Board took the decision to enter into hedging facilities with both Barclays and Santander in order to lock-in fixed rates across the majority of its debt. As a result, the average cost of debt has increased in the short-term to 3.4% and the fixed position of the Group's total debt facilities totals 70% of drawn facilities as at 31 March 2018.

The Group debt facilities total £115.5m, with £101.4m drawn at the year-end. Our lenders include the majority of the UK clearing banks and the Group's all in average cost of debt is 3.4%. The average debt maturity is 4.7 years which gives us security over income streams net of interest costs for a number of years before the need to refinance.

NET DEBT AND GEARING

Each debt facility is secured at an SPV level and we assess the gearing mainly through interest cover ratios (ICR) and loan to value ratios (LTV). In normal market conditions we gear our assets within a range of 40-60% LTV. At a group level we measure both the debt to net asset value ratio (NAV gearing) and loan to value net of cash. NAV gearing at 31 March 2018 was 43% and the net LTV ratio was 30% at 31 March 2018 down from 37% at the last financial year-end. The Group remains conservatively geared and at year-end had £19.0m of cash and £14.2m of unutilised facilities available, along with over £40.0m of properties uncharged.

TAXATION

The Group has a tax charge of £0.8m for the year ended 31 March 2018. This includes a corporation tax charge of £1.1m to reflect the tax payable on profit in the year and a deferred tax reduction of £0.3m to reflect capital allowances claimed in excess of depreciation and losses utilised in the year. The effective tax rate for the year for tax payable on IFRS profit remains low at 5.8% due largely to utilisation of brought forward losses, capital allowances and non-realisation of property revaluation gains.

OUTLOOK

From a financial point of view, the Company has had a transformational year, growing the capital base through the £70.0m equity raise in October 2017 and entering into new debt facilities totalling £67.0m. This helped fund the two acquisitions in the year totalling £88m and increases the future capacity of the Group to make further acquisitions. These will help generate additional income and capital profits as we continue to pay out an attractive dividend yield in line with our progressive dividend policy and manage our assets in order to maximise total returns for our investors.  In addition, we have commenced demolition of Hudson House, York in order to prepare the site for the planned development which will eliminate £0.75m of non-recoverable holding costs per annum.

“We are well positioned to continue to grow the business on the basis of both income and capital growth, rewarding our shareholders with sector-leading returns.”

 

Stephen Silvester ACA

Finance Director

 

 

 

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.

The Board continually assesses the key risks to the business to ensure exposure is mitigated and provide greater security to investors on the future income and capital return.

 

RESPONSIBILITIES OF THE RISK COMMITTEE

The Executive Team is responsible for risk management on a day-to-day basis. The current principal risks facing the Company are described in the table below.

Risk	Mitigation	Progress 2017/18	Rating
Development Over exposure to development could put pressure on cash flow and debt finance.	·  Core portfolio generates sustainable cash flows. ·  Conservative gearing used to take advantage of the gap between property yields and cost of borrowing. ·  Clear strategy on each property to create and deliver value. ·  All developments require Board approval based on merits of strategy for assets. ·  Developments are modelled and financed appropriately to minimise risk and maximise return.	·  The Group's Capital Risk Management Policy limits development expenditure to <25% of Gross Asset Value ·  Limited capital expenditure during the current year across a range of properties totalling £2.7m. ·  Planning approval granted at Hudson House, York in August 2017 to build 127 apartments, 5,000 sq ft of commercial space and 34,000 sq ft Grade A offices. Demolition commenced in February 2018. ·  Hudson House Development planned to commence in 2019 which will include commitment to a full design and build contract.	Medium Risk Rating High Risk Impact
Financing & Cash flow Breach of debt covenants could trigger loan defaults and repayment of facilities putting pressure on surplus cash resources. Bank of England monetary policy may result in interest rate rises and increased cost of borrowing. Financial regulatory changes under Basel III may increase the cost to borrowers.	·  The Group actively engages in close relationships with its key lenders, ensuring transparency when it comes to monitoring the properties secured by debt. ·  Assets are purchased that generate surplus cash and significant headroom on ICR & LTV Loan Covenants. ·  Gearing is maintained at a conservative level and hedging utilised to reduce exposure to interest rate volatility.	·  The Group's average debt maturity of debt has improved to 4.7years providing longevity and financial support to maintain the current portfolio ·  The Group's net LTV is conservative at 30% and ICR over 4.5 times. ·  70% of drawn debt at year-end is fixed, limiting the Group's exposure to increases in Bank of England base rate & LIBOR.	Low Risk Rating High Risk Impact
Tenant Exposure to tenant administration and poor tenant covenants could result in lower income.	·  Our strategy to invest across different sectors reduces our exposure to an individual sector or tenant. ·  We maintain close relationships with our tenants and support them throughout their business cycle. ·  Management meet with managing agents to review rent collection and arrears on a regular basis. ·  We actively manage our properties to improve security of income and limit exposure to voids. ·  Tenant diversification is high with no tenant making up more than 7% of total rental income.	·  Total number of leases across portfolio: 303 making up contractual rent roll of £17.9m ·  Loss of income from tenant administrations and CVAs in the year totalled £0.1m, which is c1% of portfolio contractual income ·  Portfolio weighted average lease length is 5.3 years providing reasonable longevity of income ·  Occupancy across the portfolio has decreased slightly to 90% – reassuringly at the Group's target of 90%	Low Risk Rating Low Risk Impact
Economic and Political Uncertainty from Brexit and world events could impact our tenants and the profitability of their businesses. Decisions made by Government and Local Councils can have a significant impact on our ability to extract value from our properties.	·  Monitoring of economic and property industry research by executive team and review at Board Meetings. ·  Use of consultants and experts when considering planning and development work. ·  Review tenant profile and sector diversification. ·  Member of various Bodies including British Property Federation (BPF) in order to monitor the impact of all relevant current issues.	·  Russian politics continue to destabilise the region, along with the risk of a U.S. trade war with its trade partners. Despite this, they appear to have little impact on the day to day activities of our tenants and their businesses. ·  Progress towards an orderly Brexit is reducing the risk of a cliff-edge for the UK economy and improving forecast conditions for the UK economy. ·  Government support for regional development initiatives bodes well for the markets in which we operate.	High Risk Rating High Risk Impact
Accounting, tax, legal and regulatory Non-compliance as a result of changes to accounting standards, regulatory requirements for a public real estate company and incorrect application of new tax rules.	·  Key advisors including Auditors, Solicitors and Brokers are engaged on key regulatory, accounting and tax issues. ·  Engagement with BPF on regulatory changes that impact the real estate industry.	·  This being the first year for the Group on the Main Market means a greater level of scrutiny required by the Board covering corporate governance and requirements for reporting to the Financial Reporting Council (FRC). ·  Business forecasts and strategy allows for changes to corporation tax rates and interest deductibility rules. ·  Legislation has now been passed and the rules took effect from 1 April 2017 for corporate interest restriction. ·  Due to the Group interest payable in the year totalling above the de minimis it has elected for public infrastructure exemption.	Low Risk Rating Low Risk Impact
Operational Business disruption. Without adequate systems and controls, our exposure to operational risk and business disruption is increased.	·  Insurance cover for loss of rent up to three years. ·  Tight-knit team with systems in place to ensure Executive Team have shared responsibility across all major decisions. ·  General policy of retaining incumbent managing agents on new property acquisitions to avoid awkward transitions and potential loss of income. ·  Segregation of duties applied to payments processing and bank authorisations.	·  Board review of Financial Position and Prospects Procedures carried out in February 2018 as part of move to the Main Market ensuring plans in place to deal with disruption risk. ·  Recruitment in the year brings the number of team members up to fourteen at year end and provides cover across the team reducing exposure should any of the key personnel be unavailable. ·  Key man insurance cover in place for Executive Directors ·  Energy Performance Certificate (EPC) assessments carried out on all assets at acquisition to ensure all assets are in required condition for letting within the new EPC rules.	Low Risk Rating Low Risk Impact

 

Consolidated Statement of Comprehensive Income

FOR THE YEAR ENDED 31 MARCH 2018

 

	Note	2018 £'000	2017 £'000
Rental and other income	1	16,733	14,266
Property operating expenses	5b	(1,824)	(2,055)
Net property income		14,909	12,211
Administrative expenses	5c	(4,185)	(2,915)
Operating profit before gains and losses on property assets and cost of acquisitions		10,724	9,296
Profit on disposal of investment properties		274	3,191
Gains on revaluation of investment property portfolios	11	5,738	3,101
Operating profit		16,736	15,588
Finance income	3	10	3
Finance expense	4	(3,442)	(3,014)
Profit before taxation		13,304	12,577
Taxation	7	(773)	(3,191)
Profit after taxation for the year and total comprehensive income attributable to owners of the parent		12,531	9,386
EARNINGS PER ORDINARY SHARE
Basic	8	35.9p	36.6p
Diluted		35.8p	36.5p

 

All activities derive from continuing operations of the Group. The Notes form an integral part of these financial statements.

 

Consolidated Statement of Financial Position

AS AT 31 MARCH 2018

	Note	2018 £'000	2017 £'000
Non-current assets
Investment properties	11	253,863	183,916
Property, plant and equipment	12	121	43
		253,984	183,959
Current assets
Assets held for sale	11	21,708	–
Trade and other receivables	13	5,551	2,511
Cash at bank and in hand	14	19,033	11,181
		46,292	13,692
Total assets		300,276	197,651
Current liabilities
Trade and other payables	15	(8,834)	(6,161)
Borrowings	17	(2,686)	(2,036)
Creditors: amounts falling due within one year		(11,520)	(8,197)
Net current assets		34,772	5,495
Non-current liabilities
Borrowings	17	(97,157)	(75,758)
Deferred tax liability	7	(6,531)	(2,187)
Obligations under finance leases	20	(1,588)	(1,950)
Derivative Financial Instruments	16	(181)	–
Net assets		183,299	109,559
Equity
Called up share capital	21	4,639	2,580
Share premium account		125,036	59,444
Treasury shares		(2,011)	(2,250)
Merger reserve		3,503	3,503
Capital redemption reserve		340	340
Retained earnings		51,792	45,942
Equity – attributable to the owners of the parent		183,299	109,559
Basic NAV per ordinary share	9	400p	436p
Diluted NAV per ordinary share		400p	434p

 

These financial statements were approved by the Board of Directors and authorised for issue on 8 June 2018 and are signed on its behalf by:

 

Stephen Silvester                               Neil Sinclair

Finance Director                                  Chief Executive

 

Consolidated Statement of Changes in Equity

FOR THE YEAR ENDED 31 MARCH 2018

 

	Notes	Share Capital £'000	Share Premium £'000	Treasury Share Reserve £'000	Other  Reserves £'000	Retained Earnings £'000	Total Equity £'000
At 31 March 2016		2,862	59,408	–	3,568	40,977	106,815
Total comprehensive income for the year		–	–	–	–	9,386	9,386
Transactions with Equity Holders
Redemption of shares		–	–	(2,357)	–	–	(2,357)
Gross proceeds of issue from new shares	21	2	36	107	–	–	145
Redemption of deferred shares		(284)	–	–	275	–	(9)
Share-based payments	22	–	–	–	–	237	237
Exercise of share options	21	–	–	–	–	(41)	(41)
Dividends paid	10	–	–	–	–	(4,617)	(4,617)
At 31 March 2017		2,580	59,444	(2,250)	3,843	45,942	109,559
Total comprehensive income for the year		–	–	–	–	12,531	12,531
Transactions with Equity Holders
Gross proceeds of issue from new shares	21	2,059	67,941	–	–	–	70,000
Costs of issue of new shares	21	–	(2,349)	–	–	–	(2,349)
Share based payments	22	–	–	–	–	174	174
Exercise of share options	21	–	–	239	–	(239)	–
Issue of deferred bonus share options	21	–	–	–	–	128	128
Dividends paid	10	–	–	–	–	(6,744)	(6,744)
At 31 March 2018		4,639	125,036	(2,011)	3,843	51,792	183,299

 

For the purpose of preparing the consolidated financial statement of the Group, the share capital represents the nominal value of the issued share capital of Palace Capital plc.

Share premium represents the excess over nominal value of the fair value consideration received for equity shares net of expenses of the share issue.

Treasury shares represents the consideration paid for shares bought back from the market.

Other reserves comprises 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.

 

 

Consolidated Statement of Cash Flows

FOR THE YEAR ENDED 31 MARCH 2018

 

	Note	2018 £'000	2017 £'000
Operating activities
Net cash generated in operations	2	9,899	10,294
Interest received		10	–
Interest and other finance charges paid		(2,714)	(2,516)
Corporation tax paid in respect of operating activities		(395)	(1,047)
Net cash flows from operating activities		6,800	6,731
Investing activities
Purchase of investment property and acquisition costs capitalised	11	(72,808)	(10,950)
Capital expenditure on refurbishment of investment property	11	(2,754)	(4,579)
Proceeds from disposal of investment property		8,765	12,447
Amounts transferred into restricted cash deposits		(805)	(244)
Purchase of property, plant and equipment	12	(123)	(26)
Net cash flow (used in)/from investing activities		(67,725)	(3,352)
Financing activities
Bank loans repaid		(45,242)	(19,346)
Proceeds from new bank loans		53,393	25,813
Loan issue costs paid		(1,085)	(606)
Proceeds from issue of Ordinary Share capital		70,000	29
Costs from issue of Ordinary Share capital		(2,349)	–
Dividends paid	10	(6,744)	(4,617)
Purchase of treasury shares		–	(2,250)
Payment of share options exercised		–	(41)
Net cash flow from financing activities		67,973	(1,018)
Net increase in cash and cash equivalents		7,048	2,361
Cash and cash equivalents at beginning of the year		10,937	8,576
Cash and cash equivalents at the end of the year	14	17,985	10,937

 

. EARNINGS PER SHARE

Basic earnings per share

Basic earnings per share and Diluted earnings per share have been calculated on profit after tax attributable to ordinary shareholders for the year (as shown on the Consolidated Statement of Comprehensive Income) and for the Earnings per share, the weighted average number of ordinary shares in issue during the period (see below table) and for Diluted weighted average number of ordinary shares in issue during the year (see below table).

	2018 £'000	2017 £'000
Profit after tax attributable to ordinary shareholders for the year	12,531	9,386

 

	2018 No of shares	2017 No of shares
Weighted average number of shares for basic earnings per share	34,943,855	25,650,141
Dilutive effect of share options	36,322	87,584
Weighted average number of shares for diluted earnings per share	34,980,177	25,737,725
Earnings per ordinary share;
Basic	35.9p	36.6p
Diluted	35.8p	36.5p

 

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 (BPR) reporting framework the latest update
of which was issued in November 2016. We report a number of these measures (detailed in the glossary of terms) because Management considers them to improve the transparency and relevance of our published results as well as the comparability
with other listed European real estate companies.

EPRA EPS and EPRA Diluted EPS

EPRA Earnings is a measure of operational performance and represents the net income generated from the operational activities. It is intended to provide an indicator of the underlying income performance generated from the leasing and management of the property portfolio. EPRA earnings are calculated taking the profit after tax excluding investment property revaluations and gains and losses on disposals, changes in fair value of financial instruments, associated close-out costs, one-off finance termination costs, share-based payments and other one-off exceptional items. EPRA earnings is calculated on the basis of the basic number of shares in line with IFRS earnings as the dividends to which they give rise accrue to current shareholders. The EPRA diluted earnings per share also takes into account the dilution of share options and warrants if exercised.

Adjusted profit before tax and Adjusted EPS

Palace Capital also reports an adjusted earnings measure which is based on recurring earnings before tax and the basic number of shares. This is the basis on which the directors consider dividend cover. This takes EPRA earnings as the starting point and then adds back tax and any other fair value movements or one-off items that were included in EPRA earnings. For Palace Capital this includes share-based payments being a non-cash expense and also one-off surrender premiums received. The corporation tax charge (excluding deferred tax movements, being a non-cash expense) is deducted in order to calculate the adjusted earnings per share.

The EPRA and adjusted earnings per share for the period are calculated based upon the following information:

	2018 £'000	2017 £'000
Profit for the year	12,531	9,386
Adjustments:
Gains on revaluation of investment property portfolio	(5,738)	(3,101)
Profit on disposal of investment properties	(274)	(3,191)
Debt termination costs	127	155
Fair value loss on derivatives	181	–
Deferred tax relating to EPRA adjustments and capital gain charged	(299)	2,200
EPRA earnings for the year	6,528	5,449
Share based payments	174	237
Costs in respect of move to Main Market	698	–
Adjusted profit after tax for the year	7,400	5,686
Tax excluding deferred tax on EPRA adjustments and capital gain charged	1,071	991
Adjusted profit before tax for the year	8,471	6,677
EPRA AND ADJUSTED EARNINGS PER ORDINARY SHARE;
EPRA Basic	18.7p	21.2p
EPRA Diluted	18.7p	21.2p
Adjusted EPS	21.2p	22.2p

 

 

9. NET ASSETS VALUE PER SHARE

EPRA NAV calculation makes adjustments to IFRS NAV to provide stakeholders with the most relevant information on the fair value of the assets and liabilities within a true real estate investment company with a long-term investment strategy. EPRA NAV is adjusted to take effect of the exercise options, convertibles and other equity interests and excludes the fair value of financial instruments and deferred tax on latent gains. EPRA NNNAV measure is to report net asset value including fair values of financial instruments and deferred tax on latent gains.

The diluted net assets and the number of diluted ordinary issued shares at the end of the period assumes that all the outstanding options that are exercisable at the period end are exercised at the option price.

Net asset value is calculated using the following information:

	2018 £'000	2017 £'000
Net assets at the end of the year	183,299	109,559
Diluted net assets at end of the year	183,299	109,559
Exclude fair value of financial instruments	181	–
Exclude deferred tax on latent capital gains & capital allowances	6,531	2,200
EPRA NAV	190,011	111,759
Include fair value of financial instruments	(181)	–
Include deferred tax on latent capital gains & capital allowances	(6,531)	(2,200)
EPRA NNNAV	183,299	109,559

 

	2018 No of shares	2017 No of shares
Number of ordinary shares issued at the end of the year (excluding treasury shares)	45,805,280	25,150,692
Dilutive effect of share options	36,322	87,584
Number of ordinary shares issued for diluted and EPRA net assets per share	45,841,602	25,238,276
Net assets per ordinary share
Basic	400p	436p
Diluted	400p	434p
EPRA NAV	415p	443p
EPRA NNNAV	400p	434p

 

 

10. DIVIDENDS

	Payment date	Dividend per share	2018 £'000	2017  £'000
2018
Final dividend	31 July 2018	4.75	–	–
Interim dividend	13 April 2018	4.75	–	–
Interim dividend	29 December 2017	9.50	4,355	–
Distribution of current year profit		19.00	4,355	–
2017
Final dividend	28 July 2017	9.50	2,389	–
Interim dividend	30 December 2016	9.00	–	2,309
Distribution of current year profit		18.50	2,389	2,309
2016
Final dividend	29 July 2016	9.00	–	2,308
Interim dividend	30 December 2015	7.00	–	–
Distribution of prior year profit		16.00	–	2,308
Dividends reported in the Group Statement of Changes in Equity			6,744	4,617

 

Proposed Dividends

	2018 £'000	2017  £'000
July 2018 final dividend: 4.75p (2017 final dividend: 9.50p)	2,177	2,389
April 2018 interim dividend: 4.75p (2017 final dividend: n/a)	2,177	–
	4,354	2,389

 

Proposed dividends on ordinary shares are subject to approval at the Annual General Meeting and are not recognised as a liability as at 31 March 2018.

 

11. INVESTMENT PROPERTIES

	Freehold Investment properties £'000	Leasehold Investment properties £'000	Total £'000
At 1 April 2016	149,423	25,119	174,542
Additions – refurbishment	4,505	74	4,579
Additions – new properties	10,950	–	10,950
Gains on revaluation of investment properties	3,090	11	3,101
Disposals	(7,740)	(1,516)	(9,256)
At 1 April 2017	160,228	23,688	183,916
Additions – refurbishments	2,681	73	2,754
Additions – new properties	92,014	–	92,014
Transfer to assets held for sale	(21,708)	–	(21,708)
Gains on revaluation of investment properties	4,888	850	5,738
Disposals	(5,361)	(3,490)	(8,851)
At 31 March 2018	232,742	21,121	253,863

 

The Group made two corporate acquisitions in the year:

SM Newcastle OB Limited

The acquisition of SM Newcastle OB Limited was made on 7 August 2017. The Directors have taken the view that this acquisition had the attributes of an asset purchase rather than a business combination and therefore the value of the asset at the acquisition date amounting to £20.0m has been added to the additions within investment properties, net of rent top-ups of £1.2m, together with the acquisition costs amounting to £371,000.

R.T Warren (Investments) Limited

The acquisition of R.T Warren (Investments) Limited was made on 9 October 2017. The Directors have taken the view that this acquisition had the attributes of an asset purchase rather than a business combination and therefore the value of the asset at the acquisition date amounting to £71.8m has been added to the additions within investment properties together with the acquisition costs amounting to £1.5m.

Investment properties are stated at fair value as determined by independent valuers who make use of historical and current market data as well as existing lease agreements. 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 arms-length transaction at the date of valuation, in accordance with International Financial Reporting Standard 13. The fair value of each of the properties has been assessed by the independent valuers.

As a result of the level of judgement used in arriving at the market valuations, the amounts which may ultimately be realised in respect of any given property may differ from the valuations shown in the Statement of Financial Position.

In addition to the gain on revaluation of investment properties included in the table above, realised gains of £274,000 (2017: £3,191,000) relating to investment properties disposed of during the year were recognised in profit or loss.