Final Results for the year ended 31 March 2020

RNS Number : 1883S

Palace Capital PLC

07 July 2020

 

7 July 2020

PALACE CAPITAL PLC

("Palace Capital" or the "Company")

Final Results for the year ended 31 March 2020

CAPITAL EXPENDITURE STRATEGY AND LETTING ACTIVITY UNDERPIN POSITIVE PERFORMANCE DESPITE COVID-19 HEADWINDS

Palace Capital (LSE: PCA), the UK REIT that has a UK regional commercial real estate portfolio with a bias towards the office and industrial sectors in carefully selected locations outside of London, announces its first set of annual results since converting to a REIT in August 2019.

Financial Highlights

Focus on regional office and industrial sectors driving continued total property return outperformance

· Total property return of 1.1%, outperforming the MSCI UK Quarterly Benchmark of -0.5% and marking three successive years of outperformance

· Final dividend proposed of 2.5p per share, following prudent cancellation of Q3 interim dividend to preserve the Group's cash resources in response to Covid-19, taking the total dividends for the year to 12.0p per share

· EPRA earnings increased to £10.8 million (March 2019: £7.6 million), reflecting underlying strength of investment portfolio and including one-off surrender premium of £2.9 million

· 41% uplift in EPRA EPS to 23.4p (March 2019: 16.6p), reflecting 195% cover of 12.0p dividends for the full year; adjusted EPS of 17.5p (March 2019: 17.3p), reflecting 146% cover of total dividends payable for the year

· EPRA NAV per share 364p (March 2019: 407p) and IFRS net assets of £166.3 million (March 2019: £180.3 million) with reductions due to asset revaluations following the pandemic and strategic capital expenditure on development and refurbishments

· Portfolio valuation of £277.8 million (March 2019: 286.3 million), down 5.7% on a like-for-like basis reflecting the impact of Covid-19 on independent valuations, resulting in inclusion of 'material uncertainty' clause

· Stable balance sheet with cash and debt facilities totalling £153.7million; £120.8 million of debt drawn at year end with a further £32.9 million available and undrawn

· Revolving credit facility with NatWest increased to £40.0 million in August 2019 and extended for a further five years at a lower margin, providing additional flexibility

· LTV of 38% (March 2019: 34%) and weighted average interest rate reduced from 3.3% to 3.1%

Operational Highlights

Active asset management delivering long term portfolio enhancement

· Hudson Quarter on track for completion in March 2021 and the remaining expenditure is fully funded by Barclays, with over 25% of 127 apartments already sold as at 30 June 2020.

· Planning consent secured for 28 apartments and 4,000 sq ft of retail space at 45 High Street, Weybridge, Surrey in one of the UK's most affluent areas

· £17.3 million of disposals during the period, including remaining non-core residential units from Warren Portfolio and the lease surrender at Priory House, Birmingham for £2.9 million, being the remaining rent due under the lease, with vacant costs reduced through the sale of the short leasehold interest

· 18 lease renewals and seven rent reviews completed at an average of 4% above ERV and a 25% uplift on previous passing rents, creating £0.6 million of additional annual rental income

· 22 new leases providing £1.2 million of additional annual income, including 23,500 sq ft at Sol, the leisure scheme in Northampton, to Gravity Fitness for a minimum term of 10 years at a 20% premium to ERV

· WAULT increased to 4.8 years to break and 6.5 years to expiry (31 March 2019: 4.5 years to break) as a result of lease renewals and new lettings

· Overall EPRA occupancy increased to 87.3% (2019: 86.9%), with majority of remaining vacancy having been recently refurbished or identified for strategic refurbishment or redevelopment

Covid-19 Update

· 93% of March quarter rents collected to date, this includes 91% cash collected, 2% on payment plans and the remaining 7% outstanding at 6 July 2020

· 84% of June quarter rents collected to date, this includes 64% cash collected, 20% on payment plans and the remaining 16% outstanding at 6 July 2020

· All debt covenants are expected to be compliant in July

· Hudson Quarter York construction site remained open throughout lockdown with strict social distancing measures in place for site staff and the marketing suite has reopened

· All assets in the portfolio have reopened and are fully compliant with Government guidelines

Neil Sinclair, Chief Executive of Palace Capital said:

"During the year we strategically increased our development & refurbishment activity to create an even stronger portfolio that can meet the demand we are seeing outside of London for well located, fit for purpose property, which will also deliver higher quality income and capital growth. We believe our commitment to a total return strategy focused on the regions will deliver outperformance and enhance shareholder value over the long-term. Our strength in the regional office and industrial sectors, taking advantage of the structural dynamics across the economy whilst limiting our exposure to the retail and leisure sectors, has enabled us to beat the MSCI benchmark on both a one and three year basis.

"We have now exchanged contracts on 32 apartments at Hudson Quarter York, with a further 5 under offer. Covid-19 has slightly slowed our progress, pushing out practical completion by approximately two months, however activity is picking up again at the marketing suite and online interest is encouraging. We remain positive about our ability to grow income and ultimately pay a sustainable level of dividends to our shareholders, despite the current political and economic uncertainty."

Stanley Davis, Chairman of Palace Capital said:

"Our total return strategy at Palace Capital is supported by a balanced portfolio, both in terms income-producing assets and opportunities for capital growth through refurbishment and redevelopments. While the significant capital expenditure we have deployed across a number of different properties has not yet fully resulted in a corresponding uplift in property valuations, due to the natural time lag between completing capital works and letting the refurbished & redeveloped space, I firmly believe this investment will support our future growth. In the six and a half years since listing in October 2013 we have produced a total accounting return of 112.6%, outperforming most of the peer group.

"We continue to abide by a disciplined acquisition policy, and we believe there will be opportunities to deploy capital in the latter part of the year. Palace Capital is well positioned for the future, with a defensive core-income portfolio let on low, sustainable rents and with a number of value enhancing refurbishment and redevelopment opportunities."

For further information please contact:

 PALACE CAPITAL PLC

Neil Sinclair, Chief Executive / Stephen Silvester, Finance Director
Tel. [phone]

 Broker

Numis Securities

Heraclis Economides / George Fry

Tel: [phone]

 Broker

Arden Partners plc

Corporate Finance: Paul Shackleton / Ciaran Walsh

Corporate Broking: James Reed-Daunter

Tel: [phone]

 Financial PR 

FTI Consulting

Claire Turvey / Methuselah Tanyanyiwa

Tel: [phone]

[e-mail]

About Palace Capital plc

Palace Capital plc (LSE: PCA) is a UK REIT that has a £277.8 million diversified portfolio of UK regional commercial property. The Company maintains a disciplined investment strategy focused on towns and cities outside of London that are characterised by thriving local economies and strengthening fundamentals. Within those locations the highly experienced management team select assets that provide opportunities to drive both capital value and long-term rental income through tailored active asset management programmes ultimately delivering attractive shareholder returns.

www.palacecapitalplc.com

The Annual Reports and Accounts together with the Notice convening the 2020 Annual General Meeting will be posted to Shareholders on 15 July 2020.

chief executive's review

I did not expect to be reporting to you during an unprecedented lockdown, a pandemic and a severe jolt to our economy.

Remote working has enabled us to conduct our business successfully during this period, with our first task being to conduct an extensive stress test on our Company, taking into account the sudden deterioration of the UK economy. Our Board was very satisfied with the outcome, the details of which can be found in our viability statement. Over the past year, we continued to execute our strategy aimed at growing our income, and as part of that we have been pushing ahead with our refurbishment and redevelopment programme, including our flagship development, Hudson Quarter in York.

As expected, our capital expenditure on these value enhancing projects, together with the impact of Covid-19 in the last month of our financial year, has had an effect on the value of our portfolio. In recognition of the uncertainty created by the pandemic, most real estate companies have been subject to a material uncertainty clause from independent valuers.

Our EPRA earnings for the year were £10.8 million resulting in EPRA earnings per share of 23.4p (2019: 16.6p). However, as a result of the reduction in the value of our properties for the reasons outlined, we are reporting a statutory loss before tax of £9.1million.

We continue to be an exciting and ambitious property investment company with a quality portfolio that has been carefully selected. Our active asset management strategy aims to maximise the potential of those assets and across 47 new lettings, rent reviews and lease renewals over the course of the year we have increased our contractual rental income by £1.8m per annum.

STRATEGY

Our focus since we were founded ten years ago has been on value creation through targeting regional assets and creating increased value through refurbishment and redevelopment, underpinned by the positive fundamentals in those locations in which we have chosen to invest. This strategic capital expenditure is not necessarily reflected in increased values until the properties are completed and let or sold.  The effect of Covid-19 in the final month of our financial year has not been helpful. However, notwithstanding current market conditions, we firmly believe that this strategy of selected, value enhancing capital deployment is the right policy which will benefit shareholders over the medium to long term, particularly when we turn the corner and the economy begins to recover.

Offices make up nearly 50% of our portfolio. The regions have been starved of supply of good quality office space with limited construction and the amount of office space lost to Permitted Development without being replaced, particularly in cities such as Liverpool, Southampton, Winchester and Brighton. This supply pipeline is unlikely to be replenished any time soon and we believe that we will continue to see underlying growth in our portfolio.

REGIONAL FOCUS

Through careful stock selection we have acquired city centre office buildings in Liverpool, Manchester, Leeds and Newcastle, adding to that a 35,000 sq ft office building as part of the Hudson Quarter development only one minute's walk from York Station. All of these properties fall within the domain of the Northern Powerhouse, which we firmly believe in, and following the election of a Conservative Government with a significant majority we expect to be a beneficiary of the Prime Minister's "levelling up agenda". This is intended to boost the regions, particularly the Midlands and the North where we are very well represented.

The authorisation for the construction of HS2 is just the beginning and we expect to see further backing for Northern Powerhouse rail infrastructure in the near future, with the first stage being a high-speed connection between Leeds and Manchester. In due course the government's intention is to connect Hull, Leeds, Manchester, Sheffield, Liverpool and Newcastle.

Graduate retention is rising in the core regional cities with Manchester at over 50%, Birmingham at just under 50% and Newcastle at over 35%. This is encouraging for companies seeking to relocate to the regions as it gives them the confidence that they can secure the appropriate talent, which was not the case even ten years ago.

One of the nasty effects of Covid-19 is unemployment and we are confident that the Government will provide every possible incentive to regenerate hard-hit areas, particularly in the Midlands and the North. We are well placed to play our part in supporting the growth of the regional economy.

2020 HIGHLIGHTS

As stated earlier, we have had a very active year. We sold the 34 remaining residential properties in the Warren portfolio for £11.7 million, bringing the total to 63 non-core properties disposed in all since the Warren portfolio was acquired. We have retained two for strategic reasons because they adjoin one of our commercial properties.

The construction of our flagship project at Hudson Quarter, York where we are building 127 apartments and 39,500 sq ft of offices has only been slightly impacted by Covid-19. We are working with a strong and highly reputable Yorkshire contractor who has long-standing relationships with its subcontractors, and this has proved particularly helpful in ensuring that work has continued throughout the lockdown period (in adherence with government guidelines) and delays have been minimised. The project is due for completion in March 2021.

Although the marketing suite was closed during the lockdown interest in the apartments continued to be robust through our website and social media, and the suite has now reopened. As at 30 June 2020 we had exchanged contracts on 32 apartments to the value of £8.5 million, while five apartments are currently under offer to the value of £1.6 million.

Victoria, one of the four buildings at Hudson Quarter, has a commercial use at ground floor level and in February we pre-let 4,500 sq ft to Knights, the quoted law firm, at a record rent for York of £25 psf per annum.

VALUATIONS

Our independent valuations show a decrease of 5.7%, compared to the like-for-like values as at 31 March 2019. This takes into account the reduction due to Covid-19; our capital expenditure strategy, where value impacts are yet to materialise; and a small like-for-like decline. We have also taken the decision to develop some of our properties and this includes tactically securing vacant possession, which could be followed by demolition or short-term letting. This can naturally have a short-term negative effect on values, but these are ultimately enhanced in the medium to long term when the new or refurbished buildings are completed and let or sold. We believe we will see the positive effect of this at Hudson Quarter and at other properties as our capital deployment begins to bear fruit.

Our EPRA Net Asset Value per share on 31 March 2020 was 364p which is 10.5% below that as of 31 March 2019. This is largely due to the impact of Covid-19 on the year end valuations.

PORTFOLIO

Our portfolio is now valued at £277.8 million with a contracted rental income of £17.6 million per annum. Our net rental income after surrender premiums and the deduction of property operating expenses is £18.8 million for the year ended 31 March 2020. This value includes Hudson Quarter, York which is currently under construction and due for completion in March 2021.

One of the advantages of the regions is that rents are relatively modest compared to London, while the cost of living is lower, and the quality of life considered high. We believe that companies will now examine whether they need to lease expensive offices, or as much office space, in and around London. Prior to Covid-19, several companies had already relocated out of London including Talk Talk (Salford), Burberry (Leeds), Channel 4 (Leeds) and Hiscox (York).

We currently have office space available in Milton Keynes and Leeds. In the current climate our view is that companies and the public sector will be very cost conscious, therefore we are reasonably confident that a sizeable proportion of our office vacancy will be let during this financial year.

We have two leisure assets at Northampton and Halifax which make up 13.7% of our portfolio and, in line with experiences across the sector, these have been particularly challenging. However, most of our properties are let to solid covenants, some of whom have recently carried out successful equity raises on the London Stock Exchange. We expect to collect any outstanding rental arrears from these tenants when the legislation protecting them expires.

At Sol Northampton during the lockdown period, we agreed with Accor, the largest hotel company in France, a five-year lease extension from 2027 to 2032 in return for a six-month rent-free period from March 2020. In view of the fact that the lease yields £0.5 million per annum plus a share of turnover we consider this to be a very satisfactory outcome.

Our exposure to retail is limited but our two retail warehouses are let to Booker (a subsidiary of Tesco), Wickes (part of Travis Perkins) and Pets at Home, while our only supermarket is let to Aldi on a long lease.  Our retail shops, of which there are few, are generally let at very modest levels.

We are not looking in the next month or two to increase the size of our portfolio until we see where the economy may be heading. Our focus will be on actively asset managing our portfolio and particularly on rent collection, making sure that we maintain maximum liquidity.

In addition to our cash balances, we have six uncharged properties with a total value of £18.2 million and a 5.6% shareholding in a listed company valued at £2.5 million at the year end. Most of these uncharged properties are earmarked for sale but only at a time of our choosing.

ASSET MANAGEMENT

We continue to make good progress with our properties in Milton Keynes, Weybridge, Leeds, Newcastle, Northampton and Leamington Spa which have been identified for refurbishment or redevelopment, although against the current backdrop we have taken the prudent decision to defer all non-essential capital expenditure for this year.

Notwithstanding this, we own a prime site in Weybridge, Surrey with planning consent for 28 apartments and a small amount of retail. Weybridge has always been a very buoyant area, even in difficult times, and we are now carrying out a review of the scheme in light of current market conditions. This is one of our uncharged assets so this could either be sold or alternatively developed, which we would only proceed with when we consider it the appropriate time. These economic conditions will mean that a number of potentially competing schemes will not go ahead. However, with a recovery in the residential market expected in 2022, it may be in our interest to commence the development in our next financial year, if the viability can provide an acceptable return.

We have plans to develop or refurbish our city centre properties in Leeds and Milton Keynes but even if satisfactory planning consents are secured, these projects will not commence until 2024 at the earliest. Based on my many years of experience throughout cycles, development can provide very lucrative returns if the timing coincides with a growing economic upturn. We will keep shareholders updated on these initiatives.

LISTED INVESTMENT

We currently hold 1,592,500 ordinary shares representing a 5.6% stake in Circle Property Plc, an AIM listed property investment company. This company is not dissimilar to ours but is considerably smaller and we continue to keep our shareholding under review.

INVESTMENT STRATEGY

As indicated, we have grown our portfolio based on very careful stock selection criteria. Besides our core office holdings in the Midlands and the North, we also have office buildings in Southampton, Winchester, Staines, Exeter, and Farnborough with industrial holdings in Bristol, Burgess Hill, Verwood, Coventry, Kettering, and Newbury. Office and industrial assets make up 60.3% of our portfolio.

In the period leading up to the General Election, with the uncertain backdrop caused by Brexit, there were very few investment opportunities for us to seriously consider which met our strict value criteria and which we could recommend to shareholders. We have a strong commitment to our policy of not investing where we believe properties are overpriced, based on our many years of experience and in depth knowledge of the UK's regional markets, and this approach holds us in very good stead.

We will continue to focus on the office and industrial sectors. Our 39,500 sq ft office development in York will be retained within our portfolio as York has a very low vacancy rate and is the fastest connection to the North from London, being only 1 hour and 50 minutes by train. This building will have a WiredScore certificate "Platinum" making it one of the best in the country for connectivity. 

The team at Palace Capital is highly experienced and has a deep network of contacts across the property and financial worlds, exposing us to both real estate and corporate opportunities. Most of our acquisitions since inception in 2010 have been corporate and we view this as a cost-effective way of accessing property portfolios, so remain alive to any opportunities that may arise in the second half of the year.

DIVIDEND POLICY

We maintain a progressive dividend policy, however following the outbreak of the pandemic we proactively reviewed this in order to preserve maximum liquidity in the Group. Taking a prudent approach in view of the uncertainty, on 2 April 2020 we announced our decision to cancel the third quarter dividend.

Parliament has since passed the Corporate Insolvency and Governance Act 2020, and this prevents commercial landlords serving statutory demands or winding up orders on tenants who do not meet their contractual obligations. We are very proud of our good relationships with our occupiers, but unfortunately a few have taken the opportunity this legislation provides to avoid paying any rent and service charge, or to discount any need to engage with us to find a mutually satisfactory conclusion. This legislation has now been extended until 30 September 2020. As with other commercial property owners, it is restricting our ability to recover rents from occupiers who are adopting a "will not pay" policy, rather than a "can pay" policy. Fortunately, the effect of this is relatively limited and we hope that the recently published Covid-19 Code of Practice for commercial real estate relationships will have a positive influence in these minority cases.

Having carefully considered our liquidity position and our positive rent collection record over the past quarter, we are proposing a final dividend of 2.5p, bringing the total annual dividend to 12p. This will be fully covered by earnings. We have conducted a very comprehensive review as to the likely outcome for the year ending 31 March 2021. Taking an ultra-conservative approach, we would expect the final dividend to be the minimum level of dividend to be paid each quarter for the year ending 31 March 2021.

We have a superb team at Palace Capital and an experienced Board with a wide range of expertise. I have worked through several downturns and pandemics and I am in no doubt that we will weather the storm and emerge fitter and stronger than ever. I am particularly grateful to our hard-working team and our long-standing shareholders who have been incredibly supportive.

Neil Sinclair

Chief Executive

6 July 2020

property review

This year has been challenging on many levels. The political deadlock since the referendum to leave the EU, ensured there was a continuous cloud hanging over the real estate sector for much of the financial year. The final quarter saw the "Boris bounce" following a significant Conservative majority in the general election, with a positive message for balancing the regions with London. However, by the end of March the Covid-19 pandemic had struck and this led to a decline in values across the sector, including our own portfolio, as material uncertainty clauses came into effect due to the lack of comparable and reliable market evidence.

Our holdings are predominantly in the office sector, in which we own 28 buildings, and we have ten industrial assets. Both of these subsectors have performed well over the last couple of years and we expect continued growth in the coming year. We own two leisure assets and 8.6% of the portfolio is held in the retail sector, with two development assets making up the remainder of the value.

Sector Split

Offices	46.3%
Industrial	14.0%
Leisure	13.7%
Development	13.6%
Retail	8.6%
Retail Warehouses	3.8%

Cushman & Wakefield independently valued the portfolio as at 31 March 2020 at £277.8 million, which is a decrease of 5.7% on a like-for-like basis compared to the previous year for reasons already outlined. 

Despite the challenges, our active asset management strategy has delivered positive results. In total we completed 47 lease events which added £1.8 million to our annual contracted rent roll and achieved £267,732 per annum above the independent ERV. New lettings secured at a 9% premium to ERV increased income by £1.2m per annum; an additional £248,193 per annum was generated from lease renewals, which is a 21% increase in annual rent (6% above ERV); and we secured a 30% increase in annual rent from open market rent reviews, or an additional £283,113 per annum (2% above ERV).

Alongside this, we continued to improve our buildings through refurbishment and development. We spent a total of £24.0 million, of which £17.9 million was on our Hudson Quarter development in York, where we also secured a pre-let of 4,500 sq ft of office space for a 10 year term at a record rent of £25 psf, a significant milestone for this development and the York office market. Other buildings to benefit from capital expenditure during the year included those in Newcastle and Winchester. We also have plans to further invest in our properties in Kettering, Manchester and Avonmouth.

Acquisitions

The financial year was challenging on many fronts. The delay to leaving the EU, exacerbated by the political impasse, meant that while opportunities did present themselves, pricing meant our returns requirement would not be met, so our existing portfolio was strategically prioritised for equity deployment.

Disposals

We are continuously looking to recycle assets that no longer meet our returns requirement.

We completed the sale of 34 residential assets acquired from the RT Warren purchase in October 2017 for a consideration of £11.7 million. We achieved 97% of book value from these assets, which was higher than originally anticipated from a portfolio sale.

Disposals of commercial properties totalled £5.6 million, reflecting a 19.0% premium to book value, in Weybridge, Southampton and Birmingham. The latter was sold at 25% above book value.

Top 10 occupiers

We value our customer relationships and the property team inspect our buildings as regularly as possible, engaging with occupiers to understand their business needs. This ensures that our strategies for each property are current and flexible enough to be adapted to changing occupier demands.

Occupier	Annual Rent
Vue	£913,104
Rockwell Automation	£543,617
Accor Hotels	£510,000
National Lottery	£444,413
Brose	£431,500
Eldon	£408,978
Wickes	£401,405
Blake Morgan	£360,000
Exela	£355,363
Apcoa	£345,000

Offices

The Government has announced a levelling of investment away from a historical bias towards southern England. However, the emergence of Covid-19 has raised questions on how quickly this will be implemented. We remain confident that our holdings are well placed to benefit from this investment as and when it occurs. A topic of debate in recent months has been whether working habits have been changed sufficiently by lockdown to affect demand for office space long term. While we believe there will inevitably be more desire to work from home where appropriate, we expect the office market to remain resilient, as it has in comparable moments over cycles. The key component will remain location, followed by connectivity and a continued emphasis on sustainability.

The flexible model will evolve further as businesses adapt and are not tied into specific buildings. This can benefit landlords' ability to capture increasing rental values on a regular basis.

We currently hold 46.3% of our portfolio in the office sector. We are looking at how we can maximise returns from our holdings, having invested £2.6 million in refurbishing our properties in Newcastle, Manchester and Leeds, and adapt our space to meet shifting demands and changing structural trends. We are working with Backbone Connect, an IT services specialist, to ensure our significant holdings meet the expectations of existing tenants and attract new ones to the vacant space.

industrial

Demand has continued to be driven by retailers needing "last mile" distribution space to meet increased customer demand from e-commerce. Warehousing and distribution in locations with good transport links should see continued rental growth.

Having accelerated existing structural trends, including the shift towards online, the Covid-19 pandemic has highlighted the importance of warehouse space.

The industrial sector is an attractive proposition, but growing demand has left it challenging to find opportunities to invest at acceptable levels. This is unlikely to change in the forthcoming year, however we will continue to seek opportunities to increase our 14.0% holding.

leisure

The leisure sector as a whole has struggled, although we have not been as adversely affected as some. There has been a continued shift towards operators meeting customer demand for "experiences", which we have built into our asset management strategies, however the emergence of Covid-19 has forced widespread temporary closures. We continue to communicate regularly with our tenants which is especially critical in this difficult time. The planned reopening of leisure and hospitality venues from 4 July should provide a positive stimulus at our two leisure schemes.

Assets in the leisure sector make up 13.7% of our portfolio and we have continued to devise marketing campaigns to attract new tenants. As a result, we secured a key anchor tenant at Sol, Northampton in Gravity Fitness, for a minimum term of 10 years at a 20% premium to ERV. Post the financial year we have successfully extended the lease to Accor so that it now expires in 2032.

RETAIL AND RETAIL WAREHOUSE

As is well reported, the retail market continues to be challenging. Traditional retailers are struggling to compete with online operators, who have less fixed costs, and changing consumer habits towards online shopping have been accelerated by the government lockdown. The Covid-19 pandemic has decimated trading due to the enforced social distancing measures. Businesses that innovate and reposition will remain competitive.

The Company has a limited exposure to the retail market with only 10% of our portfolio represented in this sector. Our tenants include Tesco and Aldi, as well as Wickes and Pets at Home which benefit from strong financial balance sheets. We will continue to have an open dialogue with our tenants and support their ability to trade where we can.

SUSTAINABILITY

We have increased our focus on the sustainability of our portfolio with a view to improving the environmental performance of individual assets on an annual basis. The specific areas we are looking at are EPC rating, energy supply and use, waste collection and water consumption.

Outlook

As this report is being prepared, our team are working from home, leisure schemes have closed their doors and high street shops have only just reopened having been closed for three months. This has meant the occupational and investment market has effectively closed down, preventing us from letting our vacant space or investing our capital into new opportunities. The critical factor for the forthcoming year is to continue efforts to maximise our income and work with our tenants to help them operate and grow their businesses as best they can. We work closely with our managing agents CBRE, JLL, Knight Frank and Savills to ensure efficient rent collection. We have looked at the impact on our rental income and capital expenditure programme and continue to focus on the aspects of our business that we can control. Due to our responsive asset management team, we are well positioned operationally and financially to respond quickly once the ongoing pandemic passes, which inevitably it will.

Richard Starr

Executive Property Director

6 July 2020

financial review

Along with the rest of the UK business community, Palace Capital has faced a challenging year with a backdrop of ongoing political and economic instability. However, the financial performance for the financial year was solid, generating recurring earnings of £8.0 million.

We have maintained a conservative capital structure and utilised our working capital to support a highly active year of refurbishment and redevelopment. The Group did make a loss before tax of £9.1 million though this was largely due to the £17.9 million decline in the value of our assets that resulted from the latest independent valuations from Cushman & Wakefield which offset the recurring earnings.

Other than the reduction in property values, the emergence of the Covid-19 pandemic and the resulting lockdown had a limited impact on the financial performance for the year ended 31 March 2020. However, it has had a significant impact on business operations post year end, with rent collection challenges and debt covenants, particularly interest cover ratios (ICR) under pressure as a result.

Rent collection and working capital have become our priorities post year end in order to manage the Group through this economic crisis. Consequently, the April 2020 quarterly dividend was cancelled in order to preserve cash, along with freezing all significant discretionary capital expenditure until we have greater clarity on the future.

Rent collection in the March 2020 and June 2020 quarters is somewhat impacted due to the moratorium on lease forfeiture and Government legislation in force until 30 September 2020. This has given tenants (even those well capitalised with a strong credit-rating) a "carte blanche" not to pay rent in order to manage their working capital. Hence landlords, ourselves included, have been left without a portion of the usual quarterly income with which to pay out dividends. Consequently, the Bank of England has firmly requested UK lenders waive covenant breaches at this unprecedented time in order to support borrowers while this moratorium is in force.

All that being said, we are well positioned with a conservative capital base and sufficient cash available to continue to grow the business and deliver on its objective to drive income and capital growth and outperform the MSCI benchmark on a Total Property Return basis. We have received covenant waivers on two of our facilities for the April quarterly test and all our lenders have either provided or offered to provide covenant waivers during these unprecedented times, if required.

As a result of our robust rent collection at both the March quarter (93% collected to date, including 91% cash collected and 2%  on payment plans) and June quarter (84% to date, including 64% cash collected and 20% on payment plans) we have proposed a final dividend of 2.5p to be approved at the Annual General Meeting and have set out an expected minimum quarterly dividend level for the next financial year. As the economy recovers, we expect normal trading to resume and our rent collection to return to normal levels which will give us far better visibility as the year progresses.

HEADLINE FY20 RESULTS

Despite the impact of Covid-19 at the back end of the financial year, the Group continues to outperform the MSCI benchmark on a Total Property Return basis, generating 1.1% for the year, versus the benchmark performance of -0.5%. This was made up of income return of 7.5% for the year and capital return of -6.0%. Despite this strong performance on a relative basis, it has nonetheless resulted in an overall IFRS loss after tax of £5.4 million (2019: £5.2 million profit) and a reduction in the Group net asset value to £166.3 million (2019: £180.3 million) as at 31 March 2020.

EPRA earnings is the industry measure of underlying profit excluding revaluation gains, profits on disposals and exceptional items. EPRA earnings for the year ended 31 March 2020 increased by 41.9% to £10.8 million compared to £7.6 million last year, reflecting the increased earnings from the portfolio and specifically including £2.9 million for a surrender premium received from the tenant at the Priory House, Birmingham property which we subsequently sold.

The Group also report an adjusted profit before tax in order to track recurring earnings and to form a basis for calculating dividend cover. This totalled £8.0 million for the year (2019: £8.9 million), down 10.2%, albeit adjusted earnings per share increased to 17.5p from 17.3p as a result of a lower tax bill from REIT conversion.

On the capital side, we have experienced a 7.7% reduction in our IFRS net asset value to £166.3 million (2019: £180.3 million), a reduction in net asset value per share from 393p in 2019 to 361p and this translates into EPRA net asset value per share of 364p, down from 407p in 2019. The 43p decrease, together with the total dividends of 12.0p paid during the year, represents a -7.5% total accounting return overall. The reduction in net asset value in the year is reflective of the write down in property valuations based on Cushman's assessment of the market as a result of Covid-19 impacting the economy in an unprecedented way. There is also a timing issue, given that £24.0 million of capital expenditure across the portfolio, including the major investment into our flagship development scheme at Hudson Quarter in York, has been incurred and until the newly developed space has been let, the valuation cannot fully account for any uplift.

We have undertaken significant capital expenditure in the year, and we expect to benefit from future rental and capital growth subsequent to re-letting vacant, refurbished space. Our approach to recycling capital out of lower-performing assets and sectors continued as we sold the final 34 residential assets which were acquired as part of the R.T. Warren portfolio in 2017. This completed the sale of the residential portfolio, releasing surplus funds into working capital to support our capital expenditure strategy.

FINANCIAL HIGHLIGHTS

	2020	2019	2018
Income growth
IFRS (loss)/profit after tax	(£5.4m)	£5.2m	£12.5m
Adjusted profit before tax	£8.0m	£8.9m	£8.5m
EPRA earnings	£10.8m	£7.6m	£6.5m
Basic EPS	(11.8p)	11.3p	35.9p
EPRA EPS	23.4p	16.6p	18.7p
Adjusted EPS	17.5p	17.3p	21.2p
Dividend per share	12.0p	19.0p	19.0p
Dividend cover	1.5×	0.9×	1.1×
Capital growth
Portfolio like-for-like value	-5.7%	+0.5%	+3.5%
Net Asset Value	£166.3m	£180.3m	£183.3m
Basic NAV per share	361p	393p	400p
EPRA NAV per share	364p	407p	415p
Total accounting return	-7.5%	2.6%	-2.0%
Total shareholder return	-30.9%	-6.0%	-1.4%
Debt finance
Debt balance	£120.8m	£119.4m	£101.4m
Average cost of debt	3.1%	3.3%	3.4%
Average debt maturity	3.9yrs	3.6yrs	4.7yrs
Loan to Value Ratio	38%	34%	30%
NAV gearing	63%	52%	43%

KEY PERFORMANCE MEASURES

The Group's financial statements are prepared under IFRS which incorporates non-realised fair value measures and nonrecurring items. Alternative Performance Measures ("APMs"), being financial measures which are not specified under IFRS, are also used by the Directors to assess the Group's performance included in the highlights for the year and throughout this document. These include a number of European Public Real Estate Association (EPRA) measures, prepared in accordance with the EPRA Best Practice Recommendations (BPR) framework, and Group adjusted measures. Further details are given in notes 6 and 7 to the financial statements. We report a number of these measures (detailed in the glossary of terms) because the Directors consider them to improve the transparency and relevance of our published results as well as the comparability with other listed European real estate companies.

RECURRING EARNINGS

Gross income totalled £21.1 million in the year ended 31 March 2020 (2019: £18.8 million) maintained by a steady portfolio and supported by the significant £2.9 million surrender premium received from a departing tenant at Priory House, Birmingham as part of their lease surrender. Net rental income similarly increased to £18.8 million (2019: £16.4 million).

Administrative expenses increased to £4.3 million (2019: £4.1 million) largely due to amortisation of a right of use asset and including one-off costs associated with converting to a REIT on 1 August 2019 and recruitment fees in relation to the appointment of an additional Non‑Executive Director in early 2020.

The employee numbers were fairly stable throughout the year and, including the Board, totalled 17 people at the balance sheet date, compared to 16 in the prior year. Finance costs remained stable at £3.8 million (2019: £3.8 million). There was £0.5 million of debt termination costs as a result of a refinancing which has had a positive impact by contributing to a reduction in the average cost of debt to 3.1% (2019: 3.3%) leveraging our larger diversified portfolio and established banking relationships for an improvement to lender terms.

Looking forward, the business is capable of scalability with the team and systems in place to support significant growth of the portfolio.

The Group has a gross rent roll of £17.6 million per annum as at 31 March 2020 with a reversion to £20.6 million per annum as well as holding cash to support working capital, fund further acquisitions and continue to reinvest in the portfolio to generate further growth.

Income statement as follows

	FY20 (£'m)	FY19 (£'m)
INCOME STATEMENT
Adjusted profit after tax	8.0	7.9
Surrender premium & fair value of options	2.8	(0.3)
EPRA earnings	10.8	7.6
Revaluation losses	(17.9)	(0.7)
Equity investment revaluation losses	(0.4)	(0.2)
Losses on disposals	(0.2)	(0.4)
Hedging and derivative losses	(0.9)	(1.0)
Debt termination costs	(0.5)	-
Deferred tax REIT adjustment	3.7	(0.2)
IFRS (loss)/profit for the year	(5.4)	5.1

VALUATION LOSSES & PROFITS ON DISPOSAL

The movement in the values of our investment properties can make a significant impact on profit before tax, even though they are not cash-based or realised. They are determined by independent valuers' assessment of what a willing purchaser would pay for the property on the basis of an arm's length transaction. At this reporting date, Cushman & Wakefield carried out the portfolio-wide valuation exercise and included a "material uncertainty" clause in their report to acknowledge the difficulty of valuing in a market impacted by Covid-19 and with limited transactional evidence. Like-for-like valuations at year-end were consequently down 5.7%. This resulted in a £17.9 million downward revaluation through the income statement.

We have progressed extremely well with our flagship development at Hudson Quarter, York, where we have seen 28 flats exchanged as at the year end and secured a ten-year lease on 4,500 sq ft at a record rent for York of £25 psf on one of the commercial units. With completion expected in March 2021, this will have a significant impact on income and capital for the business.

DIVIDENDS

In light of the Covid-19 outbreak, the Board has given careful consideration to our obligations to all our stakeholders. Therefore, the Board is recommending a final quarterly dividend of 2.5p per share to be paid 14 August 2020 to shareholders registered at the close of business on 23 July 2020. The Group announced on 2 April that it would cancel the payment of the April 2020 quarterly dividend, as the Covid-19 pandemic began to impact on the global economy. The Group made this prudent decision to ensure maximum liquidity at such an unprecedented time. The full year dividend, when taking account of the quarterly dividends paid in October and December 2019, will total 12.0p, representing a 6.7% yield on the share price at 31 March 2020.

Dividends record as follows

	FY16	FY17	FY18	FY19	FY20
DIVIDENDS
Adjusted EPS	18.9p	22.2p	21.2p	17.3p	17.5p
DPS	16.0p	18.5p	19.0p	19.0p	12.0p
Dividend cover	1.2×	1.2×	1.1×	0.9×	1.5×

neT ASSETS

At 31 March 2020, our net assets totalled £166.3 million, equating to a basic net asset per share of 361p, a decrease of 32p since 31 March 2019. The decrease in our net assets was driven largely by the decrease in value of our investment properties and also the £0.4 million mark-to-market reduction in the value of the equity investment we hold, priced at 31 March 2020 subsequent to the stock market fall as a result of the Covid-19 economic lockdown and the £0.3 million loss on disposal of the remaining residential assets held for sale, in addition to the one-off debt termination costs of £0.5 million.

We calculate an EPRA NAV consistent with standard practice in the property industry to adjust for any dilution of outstanding share options and fair value adjustments of financial instruments and deferred tax which totalled 364p at 31 March 2020, down from 407p at 31 March 2019.

DEBT FINANCING

The Group maintained its conservative capital structure ending the year with a loan to value (LTV) of 38% net of cash (2019: 34%). This increased over the year in line with expectations as the Group commenced monthly drawdowns of the development facility for Hudson Quarter, York.

We refinanced two debt facilities during the year resulting in an improved debt profile, lowering our overall total cost of debt to 3.1% (2019: 3.3%). We have increased the revolving credit facility with NatWest from £30.0 million to £40.0 million and extended it to August 2024, reducing the margin to 2.1% from 2.5%. We charged additional security to access a further £3.5 million on the Barclays investment facility due to expire in August 2023 and extended this to June 2024 at the same margin of 1.95% over three-month LIBOR. This has provided additional capacity to support our capital expenditure strategy.

We began our monthly drawdown on the Barclays development facility for the Hudson Quarter, York, development in January 2020. We have completed our equity investment into the project, and we will now fund this project solely from the debt facility through to completion in early 2021. Finally, we repaid the remaining £3.5 million on one of our two Lloyds facilities in May 2019 from our cash reserves as the maturity date approached.

The Group debt facilities at year end total £120.8m with a further £32.9 million undrawn. We continue to monitor swap rates and as at year end held £67.9 million of fixed or hedged debt which was approximately 56% of overall debt drawn. The average debt maturity on the investment facilities has increased to 3.9 years and there is no investment facility that is due for repayment within the next two years.

debt

	Fixed	Floating	Total drawn	Years to maturity
Barclays	34.9	6.0	40.9	4.2
NatWest	-	28.6	28.6	4.4
Santander	19.3	6.5	25.8	2.3
Lloyds	-	6.8	6.8	2.9
Scottish Widows	13.7	-	13.7	6.3
Barclays development	-	5.0	5.0	1.5
	67.9	52.9	120.8	3.9

NET DEBT & GEARING

Each debt facility is secured at a Special Purpose Vehicle (SPV) level and we assess the gearing mainly through interest cover ratios (ICR) and loan to value ratios (LTV). In normal market conditions we gear our assets within a range of 40% to 60% LTV. At a Group level we measure both the debt to net asset value ratio (NAV gearing) and loan to value net of cash. NAV gearing at 31 March 2020 was 63% and the LTV ratio was 38% at 31 March 2020. The Group remains conservatively geared and at year end had £14.9 million of cash and £32.9 million of unutilised facilities available, along with £18.2 million of properties uncharged to lenders.

Post year end, two of our facilities have breached ICR covenants as part of the quarterly April test due to the non-payment of rent specifically at our two leisure assets. Both banks have provided covenant waivers and we expect to return to compliance once the leisure schemes reopen and the tenants recommence rental payments.

REiT CONVERSION AND TAXATION

The Group converted to a UK REIT on 1 August 2019. As a consequence, our UK tax liability has reduced as the majority of the Group's activities falls within the REIT exemption. The Group has a tax credit for the year ended 31 March 2020 of £3.6 million. The bulk of this was in relation to the deferred tax credit of £5.6 million as part of the REIT conversion, which was offset by a corporation tax charge for the year of £2.0 million. If the Group had not converted to a REIT, an additional £0.7 million corporation tax liability would have been recognised in the financial statements for the year.

OUTLOOK

The Group has performed well from a financial perspective against a challenging political and economic environment, made more difficult with the emergence of Covid-19. We have continued to outperform the UK MSCI IPD index benchmark while remaining financially robust with conservative gearing at 38%, cash reserves of £14.9 million and the ability to draw down further on our revolving credit facility with NatWest. This provides the Group with capacity to support our working capital requirements and invest in our excellent regional assets, to continue to grow income and capital values. We have proposed a final dividend of 2.5p and we expect to maintain this as the minimum level of quarterly dividend going forwards. We look forward to continued progress on our flagship development at Hudson Quarter in York, where we expect to deliver an excellent sustainable mixed-use scheme which will benefit the local economy of York, come completion in 2021.

Stephen Silvester

Finance Director

6 July 2020

risk management

Risk framework

The Board has overall responsibility for ensuring that an effective system of risk management and internal control exists within the business and confirms that it has undertaken a robust assessment of the Group's emerging and principal risks.

Risk management is an inherent part of the Executive team's day-to-day decision making, as they work hard to deliver the Company's strategy. The amount of risk taken is assessed in light of our strengths, the external environment, our financial position and where we are in the property cycle. Our risk appetite will vary over time but as a business with a small number of employees and a relatively flat management structure, we are able to assess and respond quickly to new and emerging risks.

Our top down, bottom up approach to risk identification means that asset managers and key individuals in the finance team are able to report directly and at an early stage, allowing management to take appropriate mitigating action. The Executive team maintain a formal register of current and emerging risks and this is reviewed by the Audit and Risk Committee twice a year.

The Audit and Risk Committee will support the Board in determining the principal risks facing the business and reviewing, at least annually, the effectiveness of the Company's system of risk management and internal control.

COVID-19

A number of risks are heightened during the current period of disruption caused by Covid-19 and we have seen an impact across all aspects of the business. As uncertainty increased, we paid particularly close attention to our tenant exposure and the macroeconomic environment.

While the full effects are yet to be seen, there is no doubt that the ramifications will be far-reaching. We expect all sectors of the commercial property market to be impacted, not only affecting our business, but those of our tenants and suppliers.

Our team mobilised quickly to respond to the various risks and challenges that presented themselves following the outbreak. The Board has met and continues to meet fortnightly to review the businesses response and take any decisions that are required. For further detail regarding the impact on the business and the mitigating action that has been taken please refer to the eight Principal Risks set out on the following pages.

Emerging risks

While the UK's exit from the European Union is somewhat overshadowed by the ongoing pandemic, the Board continues to consider how supply and demand and consumer confidence may be affected once the UK leaves the EU.

Cyber risks and the potential impact on operations are increasing for all businesses and are further heightened as working from home becomes vital in the fight against Covid-19. We have taken steps to increase our security measures during the year and continue to review ways in which we can further mitigate the risk to our network and data.

In addition, climate change is a global issue which presents both risks and opportunities to the commercial real estate market, with the potential to adversely impact the macroeconomic environment as well as our own operations and those of our supply chain.

GOING CONCERN STATEMENT

The Directors have made an assessment of the Group's ability to continue as a going concern which includes the current uncertainties created by Covid-19, coupled with the Group's cash resources, borrowing facilities, rental income, acquisition and disposals of investment properties, committed capital expenditure and dividend distributions.

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the financial statements. In addition, note 26 to the financial statements includes the Group's objectives, policies and processes for managing its capital, its financial risk management objectives, details of its financial instruments and its exposures to credit risk and liquidity risk.

As at 31 March 2020 the Group had £14.9m of cash and cash equivalents, of which £13.9m was unrestricted cash, a low gearing level of 38% and a fair value property portfolio of £277.8m. The Directors have reviewed the forecasts for the Group taking into account the impact of Covid-19 on trading over the twelve months from the date of signing this annual report. The forecasts have been assessed against a range of possible downside outcomes incorporating significantly lower levels of income in line with the possible effects of the pandemic. 

The key assumptions used in the review are summarised below:

· The Group rental income receipts were modelled for each tenant on an individual basis

· Existing loan facilities remain available, but no new financing is arranged; and

· Free cash is utilised to repay debt/cure bank facilities covenants.

DEBT COVENANTS

Although there has been significant headroom on the majority of covenants within the year ended 31 March 2020, the impact of Covid-19 and the resultant lock-down post year-end has resulted in a number of tenants withholding rental payments and, in particular ,at the two leisure schemes in Halifax and Northampton. As a result, two of the facilities, Scottish Widows and Santander, did not meet their ICR covenant tests at the April 2020 test dates. On request the banks provided covenant waivers for both the April and July covenant test dates. In addition, during the year £0.8m cash was placed in a lock-up account on behalf of Scottish Widows in order to satisfy the LTV covenant resulting from a reduction in the property valuation prepared on behalf of the bank in August 2019. All other facilities remain within covenants.

As part of the going concern assessment, and taking the above into consideration, the Directors reviewed a number of scenarios which included extreme downside sensitivities and reverse stress tests in relation to rental cash collection assuming no property acquisitions, no further capital expenditure beyond that committed and no dividends.

STRESS TESTS

The debt covenants were reverse stress-tested to validate resilience to property valuation declines and rental income declines as well as increases in future interest costs. It assessed the limits at which key financial covenants and ratios would be breached. To supplement the scenario planning, constructive discussions were held with all the Group's lenders around the ability to waive or change the respective covenants, if required. All lenders have indicated they will be willing to provide covenant waivers for the June and September quarters in the event of a breach. This was further underpinned by the Bank of England's financial services regulatory and supervisory body, the Prudential Regulation Authority ("PRA") providing guidance to its regulated members on 26 March 2020. The Group has organised its debt at a loan security sub pool / single purpose vehicle ("SPV") level so in the unlikely event of a covenant breach that led to a lender requesting early repayment of the loan, the facility is non-recourse and does not affect the financing and cash flow for the rest of the Group.

DOWNSIDE SCENARIO

The downside scenario considered the impact on the working capital model, including the loss of 50% of all rental income over a 12-month period, taking into consideration no property acquisitions, only committed capital expenditure and no dividend payments. In this scenario the business would be loss-making and therefore it would be unlikely to be required to pay out any dividends under the REIT regime. A 50% reduction in rental income would result in a breach of the financing cost ratio requirement of 1.25x under the REIT regime. However, there would be no adverse implication in terms of going concern from exiting the REIT regime, albeit the payment of corporation tax would commence when the business returned to profitability.

More critical would be the covenant breaches with the debt lenders. The main covenants on the Group's loans are the interest cover ratio ("ICR"), debt service cover ("DSC") and loan to value ("LTV") ratios.  Our reverse stress tests indicate that, depending on the particular loan security sub pool, income would need to fall by between 7% and 62% and values by between 6% and 26% before key ICR, DSC and LTV covenants were breached. Mitigating the various covenant requirements would, in the first instance, involve requests for covenant waivers.

If the property values fell by approximately 20%, a £9.2m repayment of debt would be required to cure loan breaches under the existing debt facilities and future covenants, which could be satisfied with existing working capital. However, in the downside scenario allowing for loss of 50% of all rental income over the going concern period, assuming the lenders require debt covenant cures, the business would need to reduce loan balances by up to £38m in order to bring down interest costs in line with ICR and DSC requirements. This is above and beyond current cash balances available.  The Group would therefore look to access additional cash through liquidating various assets within the balance sheet not secured to lenders. 

As noted above, the ICR covenants for the two loan facilities relating to the two leisure schemes had to be waived by the lenders at the April testing date. Whilst we forecast that these covenants will be met at the July testing date and future periods, in the worst case scenario that the covenants are not met, and the Group is unable to agree a suitable cure right position with the lenders, this could result in early repayment of the debt forcing the sale of some or all of the assets charged to these loans which include two office assets in addition to the two leisure assets. On aggregate they are currently valued at £73.8 million compared to the drawn debt balances of £39.2 million so the disposal of all the assets would most likely lead to surplus cash available to the Group once debt has been repaid. However, in a downside scenario and assuming it would not be possible to sell the assets and the banks took control of the assets, the Group's net assets would be reduced by £34.6 million, loss of annual net income would total £4.9 million and reduction in annual finance costs would total £1.3 million.

CONCLUSION

Subject to these downside scenarios, the results of the sensitivity analysis and stress testing demonstrates that the Group has sufficient liquidity to meet its on-going liabilities and committed capital expenditure as they fall due over the period of assessment. Given the amount of unrestricted cash currently held by the Group, the limited level of committed capital expenditure in the forthcoming 12 months, and reasonable downside sensitivities, the Directors are satisfied that the Group has adequate resources to continue in operational existence, for a period of at least 12 months from the date that these Financial Statements were approved.

Should the impacts of the pandemic on trading conditions be more prolonged or severe than currently forecast by the Directors, the Going Concern statement would be dependent on the Group's ability to take further actions. Detailed consideration was given to the availability and likely effectiveness of mitigating actions that could be taken, including future cash conservation strategies and discussions with lenders regarding the terms of the loan agreements, being mindful of recent PRA guidance to lenders.

Furthermore, the Directors are not aware of any material uncertainties that may cast significant doubt upon the Group's ability to continue as a going concern. Based on these considerations, together with available market information and the Directors' knowledge and experience of the Company's property portfolio and markets, the Directors have adopted the going concern basis in preparing the accounts.

The Audit and Risk Committee reviewed whether it was appropriate to adopt the going concern basis in the preparation of the financial statements. In considering this the Committee reviewed the 12-month forecasts, availability of bank facilities and the headroom under the financial covenants in our debt arrangements. With this knowledge and following the review the Committee recommended to the Board that it was appropriate to adopt a going concern basis.

VIABILITY STATEMENT

In accordance with provision 31 of the UK Corporate Governance Code, and taking into consideration Covid-19, the Directors have assessed the prospects of the Group and future viability over a three-year period from the year end, being longer than the 12 months required by the 'Going Concern' provision. The Board conducted the review with regard to the Group's long-term strategy, principal risks and risk appetite, current position, asset performance and future plans, and determined that three years to 31 March 2023 is the maximum timescale over which the performance of the Group can be forecast with any material degree of accuracy, and so is an appropriate period over which to consider the Group's viability.

A range of downside sensitivity analyses were stress tested to form part of the review, with material inputs filtered to consider differing economic backdrops, and how such challenges would be met. Achievement of the one-year forecast has a greater level of certainty and is used to set near-term targets across the Group. Achievement of the subsequent forecasted years is less certain than the one year. The Board's forecast, though provides a longer-term outlook against which strategic decisions can be made.

ASSESSMENT OF REVIEW PERIOD

The viability review was conducted over a three-year period of assessment, which the Board considered appropriate for the following reasons:

· The Group's working capital model, detailed budgets and cash flows consist of a rolling three-year forecast.

· It reflects the short cycle nature of the Group's developments and asset management initiatives.

· Office refurbishments completed to date have taken less than 12 months and the major redevelopment at Hudson Quarter in York is expected to take no longer than 24 months from commencement to practical completion.

· The Group's weighted average debt maturity at 31 March 2020 was 3.9 years.

· The Group's WAULT at 31 March 2020 was 4.8 years.

Three years is considered to be the optimum balance between long term property investment and the inability to accurately forecast ahead given the cyclical nature of property investment.

ASSESSMENT OF PROSPECTS

The financial planning process considers the Group's profitability, capital values, cash flows, dividend cover, banking covenants including but not exclusively LTV and ICR tests, and other key financial metrics over the three-year period. The metrics were subject to a sensitivity analysis, in which a number of the main underlying assumptions are flexed and reverse stress-tested to consider a range of alternative macro-environments and portfolio compositions. In addition, the review was updated to consider the impact of Covid-19 using a severe but plausible downside scenario.

STRESS TESTS & DOWNSIDE

The debt covenants were reverse stress-tested beyond the 12 month going concern period to allow for changes to banking covenants over the three-year viability period to validate resilience to property valuation declines and rental income declines as well as increases in future interest costs. As noted above, the ICR covenants have come under pressure at the April 2020 test dates due to the impact of lockdown on tenants who have withheld rent. However, we expect to be compliant with all ICR covenants at the July 2020 test dates across all the debt facilities. Longer term, in the event of an economic downturn there is a greater risk that LTV covenants would come under pressure during the viability period. We have considered the fall in property values which could be sustained without an impact on banking covenants. In the event of covenant breaches, the Group would in the first instance apply cure rights and the Group would therefore look to access additional cash through liquidating various assets not secured by lenders. In the worst case scenario that covenants are not met, the Group is unable to agree a suitable cure right position with a lender, and the assets cannot be sold to repay the debt, then the properties effectively become the property of the bank. However, all debt is secured at an SPV level and is non-recourse to Palace Capital plc which would enable the Group to continue operating, albeit in a reduced form.

In the period of the viability assessment and on the assumption the current economic turbulence resulting from the impact of Covid-19 will be ameliorated by the UK Government actions and normalise within one year and taking into account lender support and mitigating management actions, the Company would have adequate resources to continue its operations and in the downside scenario, any debt covenant curing could be resolved with a combination of disposals in order to release sufficient cash to pay down debt.

Furthermore, the Board, in conjunction with the Audit and Risk Committee, carried out a robust assessment of the principal risks and uncertainties facing the Group, including those that would threaten its business model, strategy, future performance, solvency or liquidity over the three-year period. The risk review process provided the Board with assurance that the mitigations and management systems are operating as intended. The Board believes that the Group is well positioned to manage its principal risks and uncertainties successfully, taking into account the current COVID-19 risk, and the economic and political environment.

The Board's expectation is further underpinned by the regular briefings provided by the Executive team. These briefings consider updated rent collections, tenant negotiations, debt covenant status, market conditions, opportunities, the ability to raise third-party funds and deploy these promptly, and changes in the regulatory landscape, and the current political and economic risks and uncertainties. These risks, and other potential risks which may arise, continue to be closely monitored by the Board.

Confirmation of Viability

The Board confirms that it has a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the next three years, taking account of the Group's current position, the principal risks as set out on the following pages and on the assumption the current economic turbulence resulting from the impact of Covid-19 will be ameliorated by the UK Government actions and normalise within one year.

01 Development

Risk description

Overexposure to development could put pressure on cash flow and debt finance and must be managed in the context of the REIT regime.

Delays with construction, increased costs, adverse planning judgements and failure of a major contractor may all impact our underlying income.

As a result of Covid-19 there may be implications if access to labour is limited and the availability of raw materials continue to be affected. Over the longer term, profitability of schemes may be impaired as macroeconomic circumstances worsen.

Mitigation

•   The Group's Capital Risk Management Policy limits development expenditure to <25% of Gross Asset Value.

• Core portfolio generates sustainable cash flows.

• Developments are modelled and financed appropriately to minimise risk and maximise return.

• A competitive tender process is undertaken, and Contractors are assessed for financial stability.

• Project managers are utilised to closely monitor the design, construction and delivery of projects.

• Professional teams engaged to develop sales strategies.

Progress 2019/2020

•   £34m construction contract in respect of Hudson Quarter is underway and part funded by £26.5m Barclays Development facility.

• Principal Contractor appointed with proven track record and strong safety credentials.

• Development pipeline continuously assessed.

02 Tenant

Risk description

Exposure to tenant administration and poor tenant covenants could result in lower income, liability for voids and management time spent chasing arrears. The ongoing Covid-19 pandemic is likely to result in an increase in business failures.

Changing tenant demand in relation to new technologies, energy efficiency and new trends and practices.

Mitigation

•   Our strategy to invest across different sectors reduces our exposure to an individual sector or tenant.

• We maintain close relationships with our tenants, understanding their needs and supporting them throughout their business cycle.

• Management meet with managing agents to review rent collection and arrears on a regular basis.

• We actively manage our properties to improve security of income and limit exposure to voids.

Progress 2019/2020

•   Total number of leases across portfolio: 220, making up contractual rent roll of £17.6m.

• Loss of income from tenant administrations and CVAs in the year totalled £67.4k, which is 0.4% of portfolio contractual income.

• Portfolio weighted average lease length is 4.8 years, providing reasonable longevity of income.

• Occupancy across the portfolio is 87%.

• Corporate Social Responsibility committee established to ensure sufficient Board oversight of stakeholder interests.

• In light of the Covid-19 pandemic we have undertaken a risk review of each one of our tenants. We are regularly communicating with each of our tenants and continue to work with them through this difficult time.

03 Financing and Cash Flow

Risk description

Breach of debt covenants could trigger loan defaults and repayment of facilities putting pressure on surplus cash resources. Bank of England monetary policy may result in interest rate rises and increased cost of borrowing. Financial regulatory changes under Basel III may increase the cost to borrowers.

As the full impact of Covid-19 materialises we could see cash flows impacted where tenants request payment holidays or are unable to pay rent.

Mitigation

•   The Group actively engages in close relationships with its key lenders, ensuring transparency when it comes to monitoring the properties secured by debt.

• Assets are purchased that generate surplus cash and significant headroom on ICR and LTV Loan Covenants.

• Gearing is maintained at a conservative level and hedging utilised to reduce exposure to interest rate volatility.

• We maintain significant cash balances and where necessary we will defer capital expenditure projects.

Progress 2019/2020

•   Amendment and extension to NatWest RCF providing additional financial support and longevity at lower margin.

• The Group's weighted average debt maturity is currently 3.9 years.

• The Group's net LTV is conservative at 38%.

• 56% of drawn debt at year end is hedged, limiting the Group's exposure to increases in Bank of England base rate and LIBOR.

• We continue to stress test our budgets and cash flows and have updated our scenario modelling in light of the current Covid-19 pandemic.

04 Economic and Political

Risk description

Uncertainty from Covid-19 and other world events (including Brexit) could impact economic growth, weakening demand of our tenants and the profitability of their businesses. Decisions made by Government and local councils can have a significant impact on our ability to extract value from our properties.

MITIGATION

•   Monitoring of economic and property industry research by Executive team and review at Board meetings, adjusting strategy accordingly.

• Our activities are focused solely on the UK regions with no foreign exchange exposure.

• We undertake sensitivity modelling against a downturn in economic outlook to test the robustness of our financial position.

• Use of consultants and experts when considering planning and development work.

• Review tenant profile and sector diversification.

Progress 2019/2020

•   The full impact of the ongoing Covid-19 pandemic is yet to be seen. Where we can, we have updated our budget in respect of the next financial year and continue to closely monitor the situation.

• Concerns remain as to whether there will be an orderly Brexit and the climate of uncertainty continues to impact decision making.

• Government support for regional development initiatives bodes well for the markets in which we operate.

05 Accounting, tax, legal and regulatory

Risk description

Non-compliance as a result of changes to accounting standards, and the legal and regulatory requirements for a public real estate company.

Non-compliance with REIT regime leading to loss of REIT status or other changes to the Company's tax status and/or incorrect application of new tax rules.

Mitigation

•   Advisers including Solicitors and Brokers are engaged on key regulatory, accounting and tax issues.

• Engagement with The British Property Federation on regulatory changes that impact the real estate industry.

• REIT regime compliance is regularly monitored by the Board and the Executive team will consider the impact of the regime as part of their decision making.

Progress 2019/2020

•   Greater level of scrutiny from the Board covering corporate governance and the FRCs reporting requirements.

• Business forecasts and strategy allow for changes to corporation tax rates and interest deductibility rules.

• Following conversion to a REIT on 1 August 2019 the Company has complied with the REIT regime.

06 Operational

Risk description

Business disruption as a result of physical damage to buildings, IT systems failure, cybercrime, extreme weather occurrences, or other environmental events, including those arising from climate change.

Without adequate systems and controls our exposure to operational risk and business disruption is increased.

Mitigation

•   Our buildings are covered by comprehensive buildings and loss of rent insurance.

• Antivirus software and firewalls protect IT systems and data is regularly backed up. Cyber insurance is in place.

• Tight-knit team with systems in place to ensure Executive team have shared responsibility across all major decisions.

• Segregation of duties applied to payments processing and bank authorisations.

• Climate related risks are considered as part of our ongoing environmental management. For example, flood risk assessments are considered as part of our acquisition strategy and compliance with Minimum Energy Efficiency Standards is regularly monitored.

Progress 2019/2020

•   Continued to keep under review the internal control environment and ensure good governance practices are adopted throughout the business.

• Reviewed our cyber security arrangements to ensure we are deploying the most up-to-date technologies.

• Increased our focus on environmental management, which forms a key part of the work of the Corporate Social Responsibility Committee.

07 people

Risk description

The Group's strategy and core business operations are led by a small number of individuals.

An inability to attract or retain staff and Directors, suppliers and/or managing agents with the right skills and experience may result in significant underperformance or impact the overall effectiveness of our operations.

Mitigation

•   Key man insurance cover in place for Executive Directors.

• Succession planning is a regular agenda item for the Nominations Committee.

• We engage with staff regularly and encourage a positive working environment.

• We maintain an attractive reward and benefits package and undertake regular performance reviews.

• General policy of retaining incumbent managing agents on new property acquisitions to avoid awkward transitions and potential loss of income.

Progress 2019/2020

•   The number of staff remains at 12 and provides cover across the team reducing exposure should any of the key personnel be unavailable.

• Formed the Workforce Advisory Panel to further enhance employee engagement and ensure the Board understands the views of the whole workforce.

08 portfolio

Risk description

Decrease in portfolio valuation, volatile rental values and general underperformance of assets through inappropriate investment strategies and failure to implement asset business plans will adversely impact profitability and net assets.

Mitigation

•   Diversification of portfolio minimising exposure to any one geographic location or sector with no exposure to London.

• All investment decisions require Board approval.

• Experienced management team with vast experience, networks and use of advisers to support the assessment of investment opportunities.

• Asset managers report regularly to the Executive management team on their progress implementing their business plans.

• Independent valuations are undertaken for all assets at the year end and half year end.

• Property returns are benchmarked against MSCI IPD UK Quarterly Index and performance against the benchmark is reviewed formally at the half year and year end.

Progress 2019/2020

•   We have a balanced portfolio across a range of geographical areas outside of London.

• No single asset comprises more than 10% of the portfolio's value.

• The portfolio's valuation is slightly down taking into consideration capital expenditure and the impact of Covid-19.

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The Directors are responsible for preparing the Annual Report and the Group and parent Company financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare Group and parent Company financial statements for each financial year. Under that law, the Directors have prepared the Group financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union, and have elected to prepare the Company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law).

Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and parent Company and of the profit or loss of the Group for the period. In preparing each of the Group and parent Company financial statements the Directors are required to:

•   select suitable accounting policies and then apply them consistently;

• make judgements and estimates that are reasonable and prudent;

• for the Group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the European Union, subject to any material departures disclosed and explained in the financial statements;

• for the parent Company financial statements, state whether they have been prepared in accordance with UK GAAP, subject to any material departure disclosed and explained in the parent company financial statements;

• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the parent Company will continue in business; and

• 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 Parent Company's transactions and disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that the financial statements comply with the requirements of the Companies Act 2006 and, as regards the Group Financial Statements, Article 4 of the IAS Regulations.

They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

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

We confirm to the best of our knowledge:

•   the financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by The European Union and Article 4 of the IAS regulation, and give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation as a whole;

• the Strategic Report includes a fair review of the development and performance of the business and the financial position of the Company and the undertakings included in the consolidation as a whole, together with a description of the principal risks and uncertainties that they face; and

• the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for Shareholders to assess the Company's performance, business model and strategy.

On behalf of the Board

Nicola Grinham

Company Secretary

6 July 2020

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the year ended 31 March 2020

	Note	2020 £'000	2019 £'000
Rental and other income	1	21,147	18,750
Property operating expenses	3b	(2,392)	(2,318)
Net rental income		18,755	16,432
Dividend income from listed equity investments		105	43
Administrative expenses	3c	(4,284)	(4,122)
Operating profit before gains and losses on property assets, listed equity investments and cost of acquisitions		14,576	12,353
Profit on disposal of investment properties		138	218
Loss on revaluation of investment property portfolio	9	(17,154)	(382)
Impairment of trading properties	10	(763)	-
Loss on disposal of assets held for sale		(269)	(579)
Impairment on assets held for sale	9	-	(291)
Loss on revaluation of listed equity investments	11	(425)	(214)
Operating (loss)/profit		(3,897)	11,105
Finance income		18	20
Finance expense	2	(3,845)	(3,763)
Debt termination costs		(501)	-
Changes in fair value of interest rate derivatives		(846)	(929)
(Loss)/profit before taxation		(9,071)	6,433
Taxation	5	3,632	(1,263)
(Loss)/profit after taxation for the year and total comprehensive income attributable to owners of the Parent		(5,439)	5,170
Earnings per ordinary share
Basic	6	(11.8p)	11.3p
Diluted	6	(11.8p)	11.3p

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 2020

	Note	2020 £'000	2019 £'000
Non-current assets
Investment properties	9	248,699	258,331
Listed equity investments at fair value	11	2,540	2,636
Right of use asset	12	313	-
Property, plant and equipment	12	101	97
		251,653	261,064
Current assets
Assets held for sale	9	-	11,756
Trading property	10	27,557	14,367
Trade and other receivables	13	9,323	6,243
Cash and cash equivalents	14	14,919	22,890
		51,799	55,256
Total assets		303,452	316,320
Current liabilities
Trade and other payables	15	(14,053)	(10,001)
Borrowings	17	(1,836)	(5,999)
Lease liabilities for right of use asset	20	(164)	-
Creditors: amounts falling due within one year		(16,053)	(16,000)
Net current assets		35,746	39,256
Non-current liabilities
Borrowings	17	(117,520)	(112,017)
Deferred tax liability	5	(228)	(5,580)
Lease liabilities for investment properties	20	(1,806)	(1,585)
Lease liabilities for right of use asset	20	(154)	-
Derivative financial instruments	16	(1,343)	(815)
Net assets		166,348	180,323
Equity
Called up share capital	21	4,639	4,639
Share premium account		125,019	125,019
Treasury shares		(1,349)	(1,771)
Merger reserve		3,503	3,503
Capital redemption reserve		340	340
Retained earnings		34,196	48,593
Equity - attributable to the owners of the Parent		166,348	180,323
Basic NAV per ordinary share	7	361p	393p
Diluted NAV per ordinary share	7	361p	392p

These financial statements were approved by the Board of Directors and authorised for issue on 6   July 2020 and are signed on its behalf by:

Stephen Silvester   Neil Sinclair

Finance Director  Chief Executive

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the year ended 31 March 2020

	Note	Share Capital £'000	Share Premium £'000	Treasury Share Reserve £'000	Other Reserves £'000	Retained Earnings £'000	Total Equity £'000
At 31 March 2018		4,639	125,036	(2,011)	3,843	51,792	183,299
Total comprehensive income for the year		-	-	-	-	5,170	5,170
Transactions with Equity Holders:
Cost of issue of new shares		-	(17)	-	-	-	(17)
Share-based payments	22	-	-	-	-	332	332
Exercise of share options	22	-	-	240	-	(240)	-
Issue of deferred bonus share options		-	-	-	-	257	257
Dividends paid	8	-	-	-	-	(8,718)	(8,718)
At 31 March 2019		4,639	125,019	(1,771)	3,843	48,593	180,323
Total comprehensive income for the year		-	-	-	-	(5,439)	(5,439)
Transactions with Equity Holders:
Share-based payments	22	-	-	-	-	130	130
Exercise of share options	22	-	-	422	-	(422)	-
Issue of deferred bonus share options		-	-	-	-	77	77
Dividends paid	8	-	-	-	-	(8,743)	(8,743)
At 31 March 2020		4,639	125,019	(1,349)	3,843	34,196	166,348

The share capital represents the nominal value of the issued share capital of Palace Capital plc.

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

Treasury shares represents the consideration paid for shares bought back from the market. Other reserves comprise the merger reserve and the capital redemption reserve.

The merger reserve represents the excess over nominal value of the fair value consideration for the acquisition of subsidiaries satisfied by the issue of shares in accordance with S612 of the Companies Act 2006.

The capital redemption reserve represents the nominal value of cancelled preference share capital redeemed.

CONSOLIDATED STATEMENT OF CASH FLOWS

For the year ended 31 March 2020

	Note	2020 £'000	2019 £'000
Operating activities
(Loss)/profit before taxation		(9,071)	6,433
Finance income		(18)	(20)
Finance expense	2	3,845	3,763
Changes in fair value of interest rate derivatives		846	929
Loss on revaluation of investment property portfolio	9	17,154	382
Impairment on assets held for sale	9	-	291
Profit on disposal of investment properties	9	(138)	(218)
Loss on disposal of assets held for sale		269	579
Impairment of trading properties	10	763	-
Loss on revaluation of listed equity investments	11	425	214
Debt termination costs		501	-
Depreciation of tangible fixed assets	12	32	31
Amortisation of right of use asset	12	148	-
Share-based payments	22	130	332
Increase in receivables		(481)	(734)
Increase/(decrease) in payables		1,341	(105)
Net cash generated from operations		15,746	11,877
Interest received		18	20
Interest and other finance charges paid		(3,680)	(3,405)
Corporation tax paid in respect of operating activities		(2,173)	(1,639)
Net cash flows from operating activities		9,911	6,853
Investing activities
Purchase of investment property and acquisition costs capitalised	9	-	(15,505)
Capital expenditure on refurbishment of investment property	9	(5,667)	(2,453)
Capital expenditure on developments	9	(3,925)	(1,923)
Capital expenditure on trading property	9	(13,915)	(535)
Proceeds from disposal of investment property		2,708	2,078
Proceeds from assets held for sale		11,487	9,082
Amounts transferred from restricted cash deposits	14	(525)	553
Purchase of non-current asset - equity investment	11	(329)	(2,850)
Dividends from listed equity investments		105	43
Purchase of property, plant and equipment	12	(36)	(7)
Net cash flow used in investing activities		(10,097)	(11,517)
Financing activities
Bank loans repaid	19	(18,325)	(8,037)
Proceeds from new bank loans	19	19,736	25,991
Loan issue costs paid	19	(978)	(145)
Costs from issue of Ordinary Share capital		-	(17)
Dividends paid	8	(8,743)	(8,718)
Net cash flow from financing activities		(8,310)	9,074
Net (decrease)/increase in cash and cash equivalents		(8,496)	4,410
Cash and cash equivalents at beginning of the year		22,395	17,985
Cash and cash equivalents at the end of the year	14	13,899	22,395

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

BASIS OF ACCOUNTING

The consolidated financial statements of the Group comprise the results of Palace Capital plc ("the Company") and its subsidiary undertakings.

The Company is quoted on the Main Market of the London Stock Exchange and is domiciled and registered in England and Wales and incorporated under the Companies Act. The address of its registered office is 4th Floor, 25 Bury Street, St James's, London, United Kingdom, SW1Y 6AL.

BASIS OF PREPARATION

The financial information contained in this results announcement has been prepared on the basis of the accounting policies set out in the financial statements for the year ended 31 March 2019 except for the adoption of IFRS 16 during the year ended 31 March 2020 which has not had a material impact on the results.  Whilst the financial information included in this announcement has been computed in accordance with the recognition and measurement requirements of IFRS, as adopted by the European Union, this announcement does not itself contain sufficient disclosures to comply with IFRS. 

The financial information does not constitute the Group's financial statements for the years ended 31 March 2020 or 31 March 2019 but is derived from those financial statements.  Financial statements for the year ended 31 March 2019 have been delivered to the Registrar of Companies and those for the year ended 31 March 2020 will be delivered following the Company's Annual General Meeting.  The auditors' reports on both the 31 March 2020 and 31 March 2019 financial statements were unqualified and did not contain statements under section 498 (2) or (3) of the Companies Act 2006. The report for the year ended 31 March 2020 did include an emphasis of matter paragraph, drawing attention to the material valuation uncertainty statement made by the valuers which is disclosed in the Properties Estimates note. The opinion was not modified in respect of this matter.

GOING CONCERN

The Directors have made an assessment of the Group's ability to continue as a going concern which included the current uncertainties created by Covid-19, coupled with the Group's cash resources, borrowing facilities, rental income, acquisitions and disposals of investment properties, committed capital and other expenditure and dividend distributions.

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in 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 2020 the Group had £14.9m of cash and cash equivalents, of which £13.9m was unrestricted cash, a low gearing level of 38% and a fair value property portfolio of £277.8m. The directors have reviewed the forecasts for the Group taking into account the impact of Covid-19 on trading over the twelve months from the date of signing this annual report. The forecasts have been assessed against a range of possible downside outcomes incorporating significantly lower levels of income in line with the possible effects of the pandemic. See Going Concern and Viability on pages 41-42 for further details. 

The Directors have a reasonable expectation that the Group have adequate resources to continue in operation for at least 12 months from the date of approval of the financial statements. Accordingly, they continue to adopt the going concern basis in preparing the financial statements.

NEW STANDARDS ADOPTED DURING THE YEAR

The following new standards are effective and have been adopted for the year ended 31 March 2020.

Standards in issue and effective from 1 January 2019

IFRS 16 Leases (Effective 1 January 2019)

IFRS 16 provides a single lessee accounting model, requiring the recognition of assets and liabilities for all leases, together with options to exclude leases where the lease term is 12 months or less, or where the underlying asset is of low value. The Group adopted IFRS 16 on 1 April 2019, using the modified retrospective approach under which comparatives are not restated.

In applying IFRS 16 for the first time, the Group has used the following practical expedients, for transition only, permitted by the standard:

• Excluding initial direct costs for the measurement of the right of use asset at the date of initial application.

The Group has leased its head office at 25 Bury Street, London, SW1Y 6AL, which has been accounted for in accordance with IFRS 16 since 1 April 2019. As a result, the Group has recognised a lease liability, which was initially measured at the present value of the remaining lease payments, discounted using the Group's incremental borrowing rate as of 1 April 2019. The Group's incremental borrowing rate is the rate at which a similar borrowing could be obtained from an independent creditor under comparable terms and conditions. The weighted-average rate applied was 3.2%.

A right of use asset has also been recognised on the balance sheet and measured at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments.

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.

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 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.

Amounts received from tenants to terminate leases or to compensate for dilapidations are recognised in the Group Statement of Comprehensive Income when the right to receive them arises.

Insurance commissions are recognised as performance obligations are fulfilled in terms of the individual performance obligations within the contract with the insurance provider. Revenue is determined by the transaction price in the contract and is measured at the fair value of the consideration received. Revenue is recognised once the underlying contract between insured and insurer has been signed.

Revenue from the disposal of investment properties is recognised when significant risks and rewards attached to the property have transferred from the Group. This will ordinarily occur on completion of contracts. Such transactions are recognised when any conditions are satisfied. The profit or loss on disposal of investment property is recognised separately in the Consolidated Statement of Comprehensive Income and is the difference between the net sales proceeds and the opening fair value asset plus any capital expenditure during the period to disposal.

Revenue from the sale of trading properties is recognised when significant risks and rewards attached to the trading property have transferred from the Group, which is usually on completion of contracts and transfer of property title.

Dividend income comprises dividends from the Group's listed equity investments and is recognised when the shareholder's right to receive payment is established. Revenue is measured at the fair value of the consideration received. All income is derived in the United Kingdom.

Surrender premium income are payments received from tenants to surrender their lease obligations and are recognised immediately in the Group's Consolidated Statement of Comprehensive Income.

Deferred income

Where invoices to customers have been raised which relate to a period after the Group year end, being 31 March 2020, the Group will recognise deferred income for the difference between revenue recognised and amounts billed for that contract.

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. Interest is also capitalised on the purchase cost of a site of property acquired specifically for redevelopment, but only where activities necessary to prepare the asset for redevelopment are in progress.

When the Group refinances a loan facility, the Group considers whether the new terms are substantially different from a quantitative and a qualitative perspective. From a quantitative perspective, the terms are substantially different if the discounted present value of 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 modification of terms, this is accounted for as an extinguishment, and any costs or fees incurred are recognised as part of the gain or loss on the extinguishment. If the modification is not accounted for as an extinguishment, any costs or fees incurred adjust the carrying amount of the liability and are amortised over the remaining term of the modified liability.

FINANCIAL ASSETS

The Group classifies its financial assets into one of the categories discussed below, depending on the purpose for which the asset was acquired. The Group's accounting policy for each category is as follows:

Fair value through profit or loss

This category comprises in-the-money derivatives (see "Financial liabilities" section for out-of-the-money derivatives classified as liabilities). They are carried in the Consolidated Statement of Financial Position at fair value with changes in fair value recognised in the Consolidated Statement of Comprehensive Income in the finance income or expense line.

Amortised cost

Impairment provisions for current and non-current trade receivables are recognised based on the simplified approach within IFRS 9 using a provision matrix in the determination of the lifetime expected credit losses. During this process the probability of the non-payment of the trade receivables is assessed. This probability is then multiplied by the amount of the expected loss arising from default to determine the lifetime expected credit loss for the trade receivables. For trade receivables, which are reported net, such provisions are recorded in a separate provision account with the loss being recognised within cost of sales in the Consolidated Statement of Comprehensive Income. On confirmation that the trade receivable will not be collectable, the gross carrying value of the asset is written off against the associated provision.

The Group's financial assets measured at amortised cost comprise trade and other receivables and cash and cash equivalents in the Consolidated Statement of Financial Position.

LISTED EQUITY INVESTMENTS

Listed equity investments are classified at fair value through profit and loss. Listed equity investments are subsequently measured using level 1 inputs, the quoted market price, and all fair value gains or losses in respect of those assets are recognised in profit or loss in the Consolidated Statement of Comprehensive Income.

Fair value hierarchy

• Level 1: Quoted (unadjusted) market prices in active markets for identical assets or liabilities.

• 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.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents includes cash in hand, deposits held at call with banks, 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 construction.

Investment properties cease to be recognised on completion of the disposal or when the property is withdrawn permanently from use and no future economic benefit is expected from disposal.

The Group evaluates all its investment property costs at the time they are incurred. These costs include costs incurred initially to acquire an investment property and costs incurred subsequently to add to, replace part of, or service a property. Any costs deemed as repairs and maintenance or any costs associated with the day-to-day running of the property are recognised in the Consolidated Statement of Comprehensive Income as they are incurred.

Investment properties under construction are initially recognised at cost (including any associated costs), which reflects the Group's investment in the assets. The Group undertakes certain works including demolition, remediation and other site preparatory works to bring a site to the condition ready for construction of an asset. Subsequently, the assets are remeasured to fair value at each reporting 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.

ASSETS HELD FOR SALE

Assets are classified as held for sale when:

• They are available for immediate sale;

• Management are committed to a plan to sell;

• It is unlikely that significant changes to the plan will be made or that the plan will be withdrawn;

• An active programme to locate a buyer has been initiated;

• The asset is being marketed at a reasonable price in relation to its fair value; and

• A sale is expected to complete within 12 months from the date of classification.

Investment properties classified as held for sale are measured at fair value in accordance with the measurement criteria of IAS 40.

Assets held for sale are derecognised when significant risks and rewards attached to the asset have transferred from the Group which is on completion of contracts or when there are changes to a plan of sales.

TRANSFERS BETWEEN INVESTMENT PROPERTIES AND TRADING PROPERTIES

When the Group begins to redevelop an existing investment property for continued future use as an investment property, the property continues to be held as an investment property. When the Group begins to redevelop an existing investment property with a view to sell, the property is transferred to trading properties and held as a current asset. The property is remeasured to fair value as at the date of the transfer with any gain or loss being taken to the Consolidated Statement of Comprehensive Income. The remeasured amount becomes the deemed initial cost of the trading property.

TRADING PROPERTIES

Trading property is being developed for sale or being held for sale after development is complete, and is carried at the lower of cost and net realisable value. Trading properties are derecognised on completion of sales contracts. Costs includes direct expenditure and capitalised interest. Cost of sales, including costs associated with off-plan residential sales, are expensed to the Consolidated Statement of Comprehensive Income as incurred.

RIGHT OF USE ASSET

Right of use assets are initially measured at the amount of the lease liability, reduced for any lease incentives received, and increased for:

• lease payments made at or before commencement of the lease;

• initial direct costs incurred; and

• 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 generally applicable is:

Right of use asset  33% straight-line

LEASE liabilities for investment properties

Lease obligations include lease obligations relating to investment properties and lease obligations relating to right of use assets.

Lease obligations relating to investment properties are capitalised at the lease's commencement and are measured at the present value of the remaining lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in liabilities. The finance charges are charged to the Consolidated Statement of Comprehensive Income over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Investment properties classified as held under lease liabilities are subsequently carried at their fair value.

LEASE liabilities for right of use assets

Lease obligations relating to right of use assets are measured at the present value of the contractual payments due to the lessor over the lease term, discounted at the Group's incremental borrowing rate. Variable lease payments are only included in the measurement of the lease liability if they depend on an index or rate. In such cases, the initial measurement of the lease liability assumes the variable element will remain unchanged throughout the lease term. Other variable lease payments are expensed in the period to which they 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;

• 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.

As a result of the Company's conversion to a REIT on 1 August 2019, the Group is no longer required to pay UK corporation tax in respect of property rental income and capital gains relating to its property rental business. Consequently a £3,700,000 credit on the profit and loss account and debit to the balance sheet has been recognised for the reversal of deferred tax provided for capital gains tax due to revaluation of investment properties to fair value and the capital allowances that have been claimed on improvements to investment properties.

Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Deferred tax is charged or credited in profit or loss, except when it relates to items charged or credited directly to other comprehensive income, in which case the deferred tax is also dealt with in other comprehensive income.

The Government announced in the summer 2015 Budget the reduction in the corporation tax rate from 20% main rate in the tax year 2016 to 19% with effect from 1 April 2017.

DIVIDENDS TO EQUITY HOLDERS OF THE PARENT

Interim ordinary dividends are recognised when paid and final ordinary dividends are recognised as a liability in the period in which they are approved by the shareholders.

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.

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

The merger reserve represents the excess over nominal value of the fair value consideration for the acquisition of subsidiaries satisfied by the issue of shares in accordance with S612 of the Companies Act 2006.

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

The capital redemption reserve represents the nominal value of cancelled preference share capital redeemed.

CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION AND UNCERTAINTY

The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Information about such judgements and estimation is contained in the accounting policies or the notes to the accounts, and the key areas are summarised below.

Estimates

Properties

The key source of estimation uncertainty rests in the values of property assets, which significantly affects the value of investment properties in the Consolidated Statement of Financial Position. The investment property portfolio and assets held for sale are carried at fair value, which requires a number of judgements and estimates in assessing the Group's assets relative to market transactions. The approach to this valuation and the amounts affected are set out in the accounting policies and note 9.

Trading properties are held at the lower of cost and net realisable value. Net realisable value is the value of an asset that can be realised upon the sale of the asset, less a reasonable estimate of the costs associated with the eventual sale or disposal of the asset.

The Group has valued the investment properties at fair value. To the extent that any future valuation affects the fair value of the investment properties and assets held for sale, this will impact on the Group's results in the period in which this determination is made.

Due to Covid-19, March 2020 valuations have been issued by Cushman & Wakefield subject to a material uncertainty disclosure as follows:

The outbreak of the Novel Coronavirus (Covid-19), declared by the World Health Organisation as a "Global Pandemic" on 11 March 2020, has impacted global financial markets. Travel restrictions have been implemented by many countries. Market activity is being impacted in many sectors. As at the valuation date, we consider that we can attach less weight to previous market evidence for comparison purposes to inform opinions of value. Indeed, the current response to Covid-19 means that we are faced with an unprecedented set of circumstances on which to base a judgement. Our valuations are therefore reported on the basis of "material valuation uncertainty" as per VPS 3 and VPGA 10 of the RICS Red Book Global. Consequently, less certainty - and a higher degree of caution - should be attached to our valuation than would normally be the case. Given the unknown future impact that Covid-19 might have on the real estate market, we recommend that you keep the valuation of these Properties under frequent review.

Expected credit loss model

The Group applies the IFRS 9 simplified approach to measuring expected credit losses using a lifetime expected credit loss provision for trade receivables and contract assets. The expected loss rates are based on the Group's historical credit losses experienced over the three-year period prior to the period end. The historical loss rates are then adjusted for current and forward-looking information on macroeconomic factors affecting the Group's tenants. In times of heightened uncertainty these estimations become more difficult.

The severity of the economic impact of Covid-19 has raised a significant challenge in identifying relevant forward looking information. However, the Group has made estimates based on reasonable and supportable information that is available at the reporting date.

Estimates and Judgements

Share-based payments

Equity-settled share awards are recognised as an expense based on their fair value at date of grant. The fair value of equity-settled share options is estimated through the use of option valuation models, which require inputs such as the risk-free interest rate, expected dividends, expected volatility and the expected option life, and is expensed over the vesting period. Some of the inputs used are not market observable and are based on estimates derived from available data. The models utilised are intended to value options traded in active markets. The share options issued by the Group, however, have a number of features that make them incomparable to such traded options. The variables used to measure the fair value of share-based payments could have a significant impact on that valuation, and the determination of these variables requires a significant amount of professional judgement. A minor change in a variable which requires professional judgement, such as volatility or expected life of an instrument, could have a quantitatively material impact on the fair value of the share-based payments granted, and therefore will also result in the recognition of a higher or lower expense in the Consolidated Statement of Comprehensive Income.

Judgement is also exercised in assessing the number of options subject to non-market vesting conditions that will vest.

1. RENTAL AND OTHER INCOME

The chief operating decision maker ("CODM") takes the form of the three Executive Directors (the Group's Executive Committee). The Group's Executive Committee are of the opinion that the principal activity of the Group is to invest in commercial real estate in the UK.

Operating segments are identified on the basis of internal financial reports about components of the Group that are regularly reviewed by the CODM.

The internal financial reports received by the Group's Executive Committee contain financial information at a Group level as a whole and there are no reconciling items between the results contained in these reports and the amounts reported in the financial statements. Additionally, information is provided to the Group's Executive Committee showing gross property income and property valuation by individual property. Therefore, each individual property is considered to be a separate operating segment in that its performance is monitored individually.

The Group's property portfolio includes investment properties located throughout England, predominantly regional investments outside London and comprises a diverse portfolio of commercial buildings. The Directors consider that these properties have similar economic characteristics. Therefore, these individual properties have been aggregated into a single operating segment. In the view of the Directors, there is one reportable segment.

All of the Group's properties are based in the UK. No geographical grouping is contained in any of the internal financial reports provided to the Group's Executive Committee and, therefore, no geographical segmental analysis is required.

Revenue - type	2020 £'000	2019 £'000
Rents received from investment properties	17,717	17,960
Dilapidations and other property related income	439	589
Priory House surrender premium	2,850	-
Insurance commission	141	201
Total Revenue	21,147	18,750

No single tenant accounts for more than 10% of the Group's total rents received from investment properties.

2. INTEREST PAYABLE AND SIMILAR CHARGES

	2020 £'000	2019 £'000
Interest on bank loans	3,351	3,291
Loan arrangement fees	358	364
Interest on lease liabilities	123	108
Other finance charges	13	-
	3,845	3,763

3. PROFIT FOR THE YEAR

a) The Group's profit for the year is stated after charging the following:

	2020 £'000	2019 £'000
Depreciation of tangible fixed assets and amortisation of right of use assets:	180	31
Auditor's remuneration:
Fees payable to the Auditor for the audit of the Group's annual accounts	124	109
Fees payable to the Auditor for the audit of the subsidiaries' annual accounts	26	25
Additional fees payable to the Auditor in respect of the 2018 audit	-	20
Fees payable to the Auditor and its related entities for other services:
Audit related assurance services	9	8
Tax services	-	3
	159	165

b) The Group's property operating expenses comprise the following:

	2020 £'000	2019 £'000
Void, investment and development property costs	2,218	1,844
Legal, lettings and consultancy costs	174	474
	2,392	2,318

c) The Group's administrative expenses comprise the following:

	2020 £'000	2019 £'000
Staff costs	2,593	2,202
Other overheads	273	264
Accounting and audit fees	267	225
Stock Exchange costs	207	176
PR and marketing costs	193	169
Consultancy and recruitment fees	164	213
Amortisation of right of use asset	148	-
Legal and professional fees	143	143
Rent, rates and other office costs	134	363
Share-based payments	130	332
Depreciation of tangible fixed assets	32	31
Property management fees	-	4
	4,284	4,122

d) EPRA cost ratios are calculated as follows:

	2020 £'000	2019 £'000
Gross property income	21,147	18,750
Administrative expenses	4,284	4,122
Property operating expenses	2,392	2,318
EPRA costs (including property operating expenses)	6,676	6,440
EPRA Cost Ratio (including property operating expenses)	31.6%	34.3%
Less property operating expenses	(2,392)	(2,318)
EPRA costs (excluding property operating expenses)	4,284	4,122
EPRA Cost Ratio (excluding property operating expenses)	20.3%	22.0%

4. EMPLOYEES AND DIRECTORS' REMUNERATION

Staff costs during the period were as follows:

	2020 £'000	2019 £'000
Non-Executive Directors' fees	188	152
Wages and salaries	2,054	1,696
Pensions	91	98
Social security costs	260	256
	2,593	2,202
Share-based payments	130	332
	2,723	2,534

The average number of employees of the Group and the Company during the period was:

	2020 Number	2019 Number
Directors	8	7
Senior management and other employees	9	9
	17	16

Key management are the Group's Directors. Remuneration in respect of key management was as follows:

	2020 £'000	2019 £'000
Emoluments for qualifying services	1,423	1,127
Social security costs	196	156
Pension	34	33
	1,653	1,316
Share-based payments	100	291
	1,753	1,607

5. TAXATION

	2020 £'000	2019 £'000
Current income tax charge	198	1,008
Capital gains charge in period	1,744	1,194
Tax (over)/underprovided in prior year	(222)	12
Deferred tax	(5,352)	(951)
Tax charge	(3,632)	1,263

	2020 £'000	2019 £'000
(Loss)/profit on ordinary activities before tax	(9,071)	6,433
Based on profit for the period: Theoretical Tax at 19% (2019: 19%)	(1,724)	1,222
Effect of:
Utilisation of tax losses not previously recognised in deferred tax	-	(5)
Net expenses not deductible for tax purposes	28	75
Chargeable gain in excess of/(lower than) profit or loss on investment property	197	(126)
Tax (over)/underprovided in prior years	(222)	12
Movement on sale and revaluation not recognised through deferred tax	(371)	85
Deferred tax released to profit and loss on REIT conversion	(3,699)	-
REIT exempt income	(993)	-
Non-taxable items	3,152	-
Tax (credit)/charge for the period	(3,632)	1,263

As a result of the Company's conversion to a REIT on 1 August 2019, the Group is no longer required to pay UK corporation tax in respect of property rental income and capital gains relating to its property rental business. Consequently a £3,727,000 credit on the profit and loss account and debit to the balance sheet has been recognised for the reversal of deferred tax provided for capital gains tax due to revaluation of investment properties to fair value and the capital allowances that have been claimed on improvements to investment properties. UK corporation tax was payable for the first four months of the period up to 31 July 2019 before entry to the REIT "regime". Taxable profits from 1 August 2019 are not subject to UK corporation tax.

Deferred taxes relate to the following:

	2020 £'000	2019 £'000
Deferred tax liability - brought forward	(5,580)	(6,531)
Deferred tax release to profit and loss on REIT conversion	3,699	-
Deferred tax liability on accredited capital allowances	-	(647)
Deferred tax on fair value of investment property	1,653	1,598
Deferred tax liability - carried forward	(228)	(5,580)

	2020 £'000	2019 £'000
Accelerated capital allowances	-	(3,241)
Investment property unrealised valuation gains	(228)	(2,339)
Deferred tax liability - carried forward	(228)	(5,580)

Capital allowances have been claimed on improvements to investment properties amounting to £Nil (2019: £19,065,000). A deferred tax liability amounting to £Nil (2019: £3,241,000) has been recognised in the financial statements, although the Directors do not expect that the capital allowances will reverse when the properties are disposed of as a result of section 198 elections being agreed with purchasers.

A deferred tax liability on the revaluation of investment properties to fair value has been provided totalling £228,000 (2019: £2,339,000) as once the availability of capital losses, indexation allowances and the 1982 valuations for certain properties have been taken into account, it is anticipated that capital gains tax would be payable if the properties were disposed of at their fair value. The deferred tax liability relates to investment properties transferred into trading stock, prior to the Group becoming a REIT. As at 31 March 2020 the Group had approximately £6,848,000 (2019: £6,328,000) of realised capital losses to carry forward. There has been no deferred tax asset recognised as the Directors do not consider it probable that future taxable profits will be available to utilise these losses.

Finance Act 2015 sets the main rate of UK corporation tax at 20% with effect on 1 April 2015. The enactment of Finance (No. 2) Act 2015 and Finance Act 2016 reduces the main rate of corporation tax to 19% from April 2017. The deferred tax liability has been calculated on the basis of 19% due to the expectation that all properties are retained through April 2021.

6. EARNINGS PER SHARE

Basic earnings per share

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

	2020 £'000	2019 £'000
(Loss)/profit after tax attributable to ordinary shareholders for the year	(5,439)	5,170

	2020 No. of shares	2019 No. of shares
Weighted average number of shares for basic earnings per share	45,988,353	45,834,436
Dilutive effect of share options	-	63,690
Weighted average number of shares for diluted earnings per share	45,988,353	45,898,126
Earnings per ordinary share
Basic	(11.8p)	11.3p
Diluted	(11.8p)	11.3p

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, associated close-out costs, one-off finance termination costs, share-based payments and other one-off exceptional items. EPRA earnings is calculated on the basis of the basic number of shares in line with IFRS earnings as the dividends to which they give rise accrue to current shareholders. The EPRA diluted earnings per share also takes into account the dilution of share options and warrants if exercised. There are 32,108 options that are exercisable but these are not included in the earnings as these would be anti-dilutive.

Adjusted profit before tax and Adjusted EPS

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

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

	2020 £'000	2019 £'000
(Loss)/profit for the year	(5,439)	5,170
Adjustments:
Loss on revaluation of investment property portfolio	17,154	382
Impairment on assets held for sale	-	291
Write-down of trading stock	763	-
Profit on disposal of investment properties	(138)	(218)
Loss on disposal of assets held for sale	269	579
Loss on revaluation of listed equity investments	425	214
Debt termination costs	501	-
Fair value loss on derivatives	846	929
Deferred tax relating to EPRA adjustments and capital gain charged	(3,608)	243
EPRA earnings for the year	10,773	7,590
Share-based payments	130	332
Priory House surrender premium	(2,850)	-
Adjusted profit after tax for the year	8,053	7,922
Tax excluding deferred tax on EPRA adjustments and capital gain charged	(25)	1,020
Adjusted profit before tax for the year	8,028	8,942
EPRA and adjusted earnings per ordinary share
EPRA Basic	23.4p	16.6p
EPRA Diluted	23.4p	16.5p
Adjusted EPS	17.5p	17.3p

7. NET ASSET VALUE PER SHARE

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

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

Net asset value is calculated using the following information:

	2020 £'000	2019 £'000
Net assets at the end of the year	166,348	180,323
Diluted net assets at end of the year	166,348	180,323
Include fair value adjustment of trading properties	-	250
Exclude fair value of derivatives	1,343	815
Exclude deferred tax on latent capital gains and capital allowances	228	5,580
EPRA NAV	167,919	186,968
Include fair value of derivatives	(1,343)	(815)
Include deferred tax on latent capital gains and capital allowances	(228)	(5,580)
EPRA NNNAV	166,348	180,573

	2020 No of shares	2019 No of shares
Number of ordinary shares issued at the end of the year (excluding treasury shares)	46,036,508	45,883,249
Dilutive effect of share options	32,108	63,690
Number of ordinary shares issued for diluted and EPRA net assets per share	46,068,616	45,946,939
Net assets per ordinary share
Basic	361p	393p
Diluted	361p	392p
EPRA NAV	364p	407p
EPRA NNNAV	361p	393p

8. DIVIDENDS

	Payment date	Dividend per share	2020 £'000	2019 £'000
2020
Interim dividend	27 December 2019	4.75	2,189	-
Interim dividend	18 October 2019	4.75	2,189	-
		9.50	4,378	-
2019
Final dividend	13 July 2019	4.75	2,183	-
Interim dividend	12 April 2019	4.75	2,182	-
Interim dividend	28 December 2018	4.75	-	2,182
Interim dividend	19 October 2018	4.75	-	2,182
		19.00	4,365	4,364
2018
Final dividend	31 July 2018	4.75	-	2,177
Interim dividend	13 April 2018	4.75	-	2,177
		9.50	-	4,354
Dividends reported in the Group Statement of Changes in Equity			8,743	8,718

Proposed Dividends

	2020 £'000	2019 £'000
August 2020 final dividend in respect of year end 31 March 2020: 2.5p (2019 final dividend: 4.75p)	1,152	2,182
April 2020 interim dividend in respect of year end 31 March 2020: 0.00p (2019 interim dividend: 4.75p)	-	2,182
	1,152	4,364

Proposed dividends on ordinary shares are subject to approval at the Annual General Meeting and are not recognised as a liability as at 31 March 2020.

9. PROPERTY PORTFOLIO

	Freehold investment properties £'000	Leasehold investment properties £'000	Total investment properties £'000
At 1 April 2018	232,742	21,121	253,863
Additions - refurbishments	2,521	179	2,700
Additions - new properties	15,505	-	15,505
Capital expenditure on assets under construction	2,014	-	2,014
Transfer to trading property	(13,509)	-	(13,509)
Loss on revaluation of investment properties	(122)	(260)	(382)
Disposals	(1,860)	-	(1,860)
At 1 April 2019	237,291	21,040	258,331
Additions - refurbishments	5,495	661	6,156
Capital expenditure on assets under construction	3,936	-	3,936
Loss on revaluation of investment properties	(13,756)	(3,398)	(17,154)
Disposals	(2,570)	-	(2,570)
At 31 March 2020	230,396	18,303	248,699

	Standing investment properties £'000	Investment properties under construction £'000	Total investment properties £'000	Trading properties £'000	Assets held for sale £'000	Total property portfolio £'000
At 1 April 2018	253,863	-	253,863	-	21,708	275,571
Additions - refurbishments	2,700	-	2,700	-	-	2,700
Additions - new properties	15,505	-	15,505	-	-	15,505
Transfer to investment property under construction	(3,810)	3,810	-	-	-	-
Capital expenditure on developments	1,772	242	2,014	-	-	2,014
Transfer to trading property	(13,509)	-	(13,509)	13,509	-	-
Additions - trading property	-	-	-	858	-	858
Loss/(gain) on revaluation of properties	(452)	70	(382)	-	-	(382)
Loss on revaluation of assets held for sale	-	-	-	-	(291)	(291)
Disposals	(1,860)	-	(1,860)	-	(9,661)	(11,521)
At 1 April 2019	254,209	4,122	258,331	14,367	11,756	284,454
Additions - refurbishments	6,156	-	6,156	-	-	6,156
Capital expenditure on developments	-	3,936	3,936	-	-	3,936
Additions - trading property	-	-	-	13,953	-	13,953
Loss on revaluation of properties	(16,868)	(286)	(17,154)	(763)	-	(17,917)
Disposals	(2,570)	-	(2,570)	-	(11,756)	(14,326)
At 31 March 2020	240,927	7,772	248,699	27,557	-	276,256

The property portfolio (other than assets held for sale) 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.

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 £138,000 (2019: £218,000) relating to investment properties disposed of during the year were recognised in profit or loss.

The Group is developing a large mixed-use scheme at Hudson Quarter, York. Part of the approved scheme consists of commercial units which the Group holds for leasing. As a result, the commercial element of the scheme is classified as investment properties under construction.

For investment properties under construction, £474,558 (2019: £Nil) of borrowing costs have been capitalised in the year.

A reconciliation of the valuations carried out by the independent valuers to the carrying values shown in the Statement of Financial Position was as follows:

	2020 £'000	2019 £'000
Cushman & Wakefield LLP (property portfolio)	277,770	274,560
Assets held for sale	-	11,756
Fair value of property portfolio	277,770	286,316
Adjustment in respect of minimum payment under head leases	1,806	1,600
Less assets held for sale	-	(11,756)
Less trading properties at lower of cost and net realisable value	(27,557)	(14,367)
Less lease incentive balance included in accrued income	(3,320)	(2,752)
Less rent top-up adjustment	-	(460)
Less fair value uplift on trading properties	-	(250)
Carrying value of investment properties	248,699	258,331

The valuations of all investment property held by the Group is classified as Level 3 in the IFRS 13 fair value hierarchy as they are based on unobservable inputs. There have been no transfers between levels of the fair value hierarchy during the year.

Valuation process - investment properties

The valuation reports produced by the independent valuers are based on information provided by the Group such as current rents, terms and conditions of lease agreements, service charges and capital expenditure. This information is derived from the Group's financial and property management systems and is subject to the Group's overall control environment.

In addition, the valuation reports are based on assumptions and valuation models used by the independent valuers. The assumptions are typically market related, such as yields and discount rates, and are based on their professional judgement and market observations. Each property is considered a separate asset, based on its unique nature, characteristics and the risks of the property.

Due to Covid-19, March 2020 valuations have been issued by Cushman & Wakefield subject to a material uncertainty disclosure as stated on page 104, critical accounting judgements and key sources of estimation and uncertainty.

The Executive Director responsible for the valuation process verifies all major inputs to the external valuation reports, assesses the individual property valuation changes from the prior year valuation report and holds discussions with the independent valuers. When this process is complete, the valuation report is recommended to the Audit Committee, which considers it as part of its overall responsibilities.

The key assumptions made in the valuation of the Group's investment properties are:

• The amount and timing of future income streams;

• Anticipated maintenance costs and other landlord's liabilities;

• 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.

31 March 2020	Office	Industrial	Significant unobservable inputs
			Leisure	Other	Total
Fair value of property portfolio	£128,495,000	£38,805,000	£37,850,000	£72,620,000	£277,770,000
Area (sq ft)	778,218	409,593	306,970	196,309	1,691,090
Gross Estimated Rental Value	£11,480,070	£2,795,890	£3,295,049	£3,047,761	£20,618,770
Net Initial Yield
Minimum	(4.6%)	1.3%	6.8%	(0.5%)	(4.6%)
Maximum	9.4%	8.3%	8.7%	30.7%	30.7%
Weighted average	5.4%	5.8%	7.7%	6.6%	6.0%
Reversionary Yield
Minimum	4.7%	5.6%	7.2%	4.5%	4.5%
Maximum	13.8%	8.1%	7.9%	34.5%	34.5%
Weighted average	8.1%	5.0%	7.5%	5.5%	6.6%
Equivalent Yield
Minimum	4.1%	5.4%	7.8%	4.3%	4.1%
Maximum	11.4%	7.8%	8.7%	14.2%	14.2%
Weighted average	7.7%	6.5%	8.6%	3.3%	7.1%

Negative net initial yields arise where properties are vacant or partially vacant and void costs exceed rental income.

31 March 2019			Significant unobservable inputs
	Office	Industrial	Leisure	Other	Total
Fair value of property portfolio	£135,455,000	£37,395,000	£41,380,000	£60,330,000	£274,560,000
Area (sq ft)	794,726	409,593	247,470	205,649	1,657,438
Gross Estimated Rental Value	£12,094,259	£2,891,320	£3,341,944	£3,145,621	£21,473,144
Net Initial Yield
Minimum	(4.6%)	4.2%	6.2%	(7.3%)	(7.3%)
Maximum	14.6%	8.5%	6.9%	25.0%	25.0%
Weighted average	5.4%	5.7%	6.5%	6.0%	5.7%
Reversionary Yield
Minimum	4.7%	5.5%	7.1%	4.5%	4.5%
Maximum	14.6%	8.7%	7.6%	28.1%	28.1%
Weighted average	8.0%	6.6%	7.3%	5.3%	7.0%
Equivalent Yield
Minimum	4.1%	5.4%	7.5%	5.0%	4.1%
Maximum	10.2%	8.1%	8.3%	13.2%	13.2%
Weighted average	7.5%	6.3%	7.8%	7.1%	6.8%

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: £47,900-£1,901,463 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.

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	Impact on fair value measurement of significant increase in input	Impact on fair value measurement of significant decrease in input
Gross Estimated Rental Value	Increase	Decrease
Net Initial Yield	Decrease	Increase
Reversionary Yield	Decrease	Increase
Equivalent Yield	Decrease	Increase

	-5% in passing rent (£m)	+5% in passing rent (£m)	+0.25% in net initial yield (£m)	-0.25% in net initial yield (£m)
(Decrease)/increase in the fair value of investment properties as at 31 March 2020	(13.36)	13.36	(12.21)	8.48
(Decrease)/increase in the fair value of investment properties as at 31 March 2019	(12.95)	12.95	(10.16)	12.63

Valuation technique: properties under construction

Development assets are valued using the gross development value of the asset less any costs still payable in order to complete, and an appropriate developer's margin.

10. TRADING PROPERTY

	Total £'000
At 1 April 2018	-
Transfer from standing investment properties	13,509
Costs capitalised	858
At 1 April 2019	14,367
Costs capitalised	13,953
Impairment of trading properties	(763)
At 31 March 2020	27,557

The Group is developing a large mixed-use scheme at Hudson Quarter, York. Part of the approved scheme consists of residential units which the Group holds for sale. As a result, the residential element of the scheme is classified as trading property.

11. LISTED EQUITY INVESTMENTS

	Total £'000
At 1 April 2018	-
Additions	2,850
Loss on revaluation of equity investment shown in Consolidated Statement of Comprehensive Income	(214)
At 1 April 2019	2,636
Additions	329
Loss on revaluation of equity investment shown in Consolidated Statement of Comprehensive Income	(425)
At 31 March 2020	2,540

During the year the Group purchased listed equity investments to the value of £329,000. The investment has subsequently been revalued using level 1 inputs, the quoted market price.

12. PROPERTY, PLANT AND EQUIPMENT

	IT, fixtures and fittings £'000	Head office lease £'000
At 1 April 2018	215	-
Additions	7	-
At 1 April 2019	222	-
Additions	36	461
At 31 March 2020	258	461
Depreciation
At 1 April 2018	94	-
Provided during the year	31	-
At 1 April 2019	125	-
Provided during the year	32	148
At 31 March 2020	157	148
Net book value at 31 March 2020	101	313
Net book value at 31 March 2019	97	-

13. TRADE AND OTHER RECEIVABLES

	2020 £'000	2019 £'000
Current
Gross amounts receivable from tenants	2,963	2,006
Less: expected credit loss provision	(391)	(71)
Net amount receivable from tenants	2,572	1,935
Other taxes	625	177
Other debtors	2,378	604
Accrued income	3,320	2,752
Prepayments	428	775
	9,323	6,243

Accrued income amounting to £3,320,000 (2019: £2,752,000) relates to rents recognised in advance of receipt as a result of spreading the effect of rent free and reduced rent periods, capital contributions in lieu of rent free periods and contracted rent uplifts over the expected terms of their respective leases.

The carrying value of trade and other receivables classified at amortised cost approximates fair value.

As at 31 March 2020 the lifetime expected credit loss provision for trade receivables and contract assets is as follows:

	Current £'000	More than 30 days past due £'000	More than 60 days past due £'000	More than 90 days past due £'000	Total £'000
Expected loss rate	9%	1%	100%	61%
Gross carrying amount	2,651	43	2	267	2,963
Loss provision	226	1	2	162	391

As at 31 March 2019 the lifetime expected credit loss provision for trade receivables and contract assets is as follows:

	Current £'000	More than 30 days past due £'000	More than 60 days past due £'000	More than 90 days past due £'000	Total £'000
Expected loss rate	0%	1%	1%	16%
Gross carrying amount	1,400	144	26	436	2,006
Loss provision	-	2	-	69	71

Movement in the expected credit loss provision was as follows:

	2020 £'000	2019 £'000
Brought forward	71	163
Receivable written off during the year as uncollectable	(4)	(154)
Provisions increased	324	62
	391	71

14. CASH AND CASH EQUIVALENTS

All of the Group's cash and cash equivalents at 31 March 2020 and 31 March 2019 are in sterling and held at floating interest rates.

	2020 £'000	2019 £'000
Cash and cash equivalents - unrestricted	13,899	22,395
Restricted cash	1,020	495
	14,919	22,890

The Directors consider that the carrying amount of cash and cash equivalents approximates to their fair value.

Restricted cash is cash where there is a legal restriction to specify its type of use. This is typically where the Group has agreed to deposit cash with a lender with regards to top-ups received from vendors on completion funds, to be realised over time consistent with the loss of income on vacant units, and where the Group has agreed to deposit cash with a lender to provide additional security over loan facilities.

15. TRADE AND OTHER PAYABLES

	2020 £'000	2019 £'000
Trade payables	2,911	1,229
Corporation tax	1,173	1,626
Other taxes	912	914
Other payables	2,344	503
Deferred rental income	3,567	3,457
Accruals	3,146	2,272
	14,053	10,001

The Directors consider that the carrying amount of trade and other payables measured at amortised cost approximates to their fair value.

Included within other payables are deposits on pre sales of apartments at Hudson Quarter, York totalling £600k. These amounts will be recognised as revenue when the development is completed and title is transferred to the buyer, which is expected to take place in early 2021.

16. DERIVATIVES

The Group adopts a policy of entering into derivative financial instruments with banks to provide an economic hedge to its interest rate risks and ensure its exposure to interest rate fluctuations is mitigated.

The contract rate is the fixed rate the Group is paying for its interest rate swaps.

The valuation rate is the variable LIBOR and bank base rate the banks are paying for the interest rate swaps. Details of the interest rate swaps the Group has entered can be found in the table below.

The valuations of all derivatives held by the Group are classified as Level 2 in the IFRS 13 fair value hierarchy as they are based on observable inputs. There have been no transfers between levels of the fair value hierarchy during the year.

Further details on interest rate risks are included in note 26.

Bank	Notional principal	Expiry date	Contract rate %	Valuation rate %	2020 Fair value £'000	2019 Fair value £'000
Barclays Bank plc	34,847,900	25/01/2023	1.3420	0.3932	(909)	(526)
Santander plc	19,342,723	03/08/2022	1.3730	0.3751	(434)	(289)
	54,190,623				(1,343)	(815)

17. BORROWINGS

	2020 £'000	2019 £'000
Current liabilities
Bank loans	1,836	5,999
Non-current liabilities
Bank loans	117,520	112,017
Total borrowings	119,356	118,016

	2020 £'000	2019 £'000
Non-current liabilities
Secured bank loans drawn	118,925	113,351
Unamortised lending costs	(1,405)	(1,334)
	117,520	112,017

The maturity profile of the Group's debt was as follows:

	2020 £'000	2019 £'000
Within one year	1,836	5,999
From one to two years	6,792	29,825
From two to five years	100,589	71,546
After five years	11,544	11,980
	120,761	119,350

Facility and arrangement fees

As at 31 March 2020

Secured Borrowings	All in cost	Maturity date	Loan Balance £'000	Unamortised facility fees £'000	Facility drawn £'000
Santander Bank plc	3.68%	August 2022	25,563	(187)	25,750
Lloyds Bank plc	2.55%	March 2023	6,748	(97)	6,845
National Westminster Bank plc	2.70%	August 2024	28,225	(395)	28,620
Barclays	3.18%	June 2024	40,611	(255)	40,866
Barclays	3.48%	October 2021	4,649	(307)	4,956
Scottish Widows	2.90%	July 2026	13,560	(164)	13,724
			119,356	(1,405)	120,761

As at 31 March 2019

Secured Borrowings	All in cost	Maturity date	Loan Balance £'000	Unamortised facility fees £'000	Facility drawn £'000
Santander Bank plc	3.74%	August 2022	25,961	(289)	26,250
Lloyds Bank plc	2.95%	May 2019	3,562	(1)	3,563
Lloyds Bank plc	2.80%	March 2023	6,715	(130)	6,845
National Westminster Bank plc	3.35%	March 2021	29,204	(185)	29,389
Barclays	3.24%	January 2023	38,589	(554)	39,143
Scottish Widows	2.90%	July 2026	13,985	(175)	14,160
			118,016	(1,334)	119,350

Investment properties with a carrying value of £232,023,000 (2019: £236,592,000) and trading properties with a carrying value of £27,557,000 (2019: £14,368,000) are subject to a first charge to secure the Group's bank loans amounting to £120,761,000 (2019: £119,350,000).

The Group has unused loan facilities amounting to £32,924,000 (2019: £26,500,000). A facility fee is changed on £11,380,000 of these facilities at a rate of 1.05% p.a. and is payable quarterly. This facility is secured on the investment properties held by Property Investment Holdings Limited an Palace Capital (Properties) Limited as part of the NatWest loan. The £21,544,000 balance of the unused facilities relates to the Barclays development loan. This facility is secured on the Hudson Quarter, York development held by Palace Capital (Developments) Limited.

The Group constantly monitors its approach to managing interest rate risk. The Group has fixed £67,915,000 (2019: £69,226,000) of its debt in order to provide surety of its interest cost and to mitigate interest rate risk. The remaining debt in place at year end is subject to floating rate in order to take advantage of the historically low interest rate environment.

The Group has a loan with Scottish Widows for £13,724,000 (2019: £14,160,000) which is fully fixed at a rate of 2.9%.

The Group has a loan with Barclays Bank plc for £40,866,000 (2019: £39,143,000), of which £34,848,000 (2019: £35,348,000) is fixed using an interest rate swap (see note 16). The floating rate portion of the loan is charged at three-month LIBOR plus 1.95%.

The Group has a loan with Santander plc for £25,750,000 (2019: £26,250,000), of which £19,343,000 (2019: £19,718,000) is fixed using an interest rate swap (see note 16). The floating rate portion of the loan is charged at three-month LIBOR plus 2.5%.

The Group has a loan with Lloyds Bank plc for £6,845,000 (2019: £6,845,000) which is fully charged at floating rate of three-month LIBOR plus 1.95%.

The Group has a loan with National Westminster Bank plc for £28,620,000 (2019: £29,389,000) which is fully charged at floating rate of three-month LIBOR plus 2.1%.

The fair value of borrowings held at amortised cost at 31 March 2020 was £119,356,000 (2019: £118,016,000).

The Group has been in compliance with all financial covenants of the above facilities applicable throughout the year.

18. GEARING AND LOAN TO VALUE RATIO

The calculation of gearing is based on the following calculations of net assets and net debt:

	2020 £'000	2019 £'000
EPRA net asset value (note 7)	167,919	186,968
Borrowings (net of unamortised issue costs)	119,356	118,016
Lease liabilities for investment properties	1,806	1,585
Cash and cash equivalents	(14,919)	(22,890)
Net debt	106,243	96,711
NAV gearing	63%	52%

The calculation of bank loan to property value is calculated as follows:

	2020 £'000	2019 £'000
Fair value of investment properties	250,213	259,943
Fair value of trading properties	27,557	14,617
Fair value per Cushmans valuation	277,770	274,560
Fair value of assets held for sale	-	11,756
Fair value of property portfolio	277,770	286,316
Borrowings	120,761	119,350
Cash at bank	(14,919)	(22,890)
Net bank borrowings	105,842	96,460
Loan to value ratio	38%	34%

19. RECONCILIATION OF LIABILITIES TO CASH FLOWS FROM FINANCING ACTIVITIES

	Bank borrowings £'000	Total £'000
Balance at 1 April 2018	99,843	99,843
Cash flows from financing activities:
Bank borrowings drawn	25,991	25,991
Bank borrowings repaid	(8,037)	(8,037)
Loan arrangement fees paid	(145)	(145)
Non-cash movements:
Amortisation of loan arrangement fees	364	364
Balance at 1 April 2019	118,016	118,016
Cash flows from financing activities:
Bank borrowings drawn	19,736	19,736
Bank borrowings repaid	(18,325)	(18,325)
Loan arrangement fees paid	(978)	(978)
Non-cash movements:
Amortisation of loan arrangement fees	358	358
Capitalised loan arrangement fees	48	48
Debt termination costs	501	501
Balance at 31 March 2020	119,356	119,356

20. LEASES

Operating lease receipts in respect of rents on investment properties are receivable as follows:

	2020 £'000	2019 £'000
Within one year	16,794	16,118
From one to two years	15,239	14,803
From two to three years	14,079	12,890
From three to four years	12,102	11,872
From four to five years	10,317	10,277
From five to 25 years	53,108	59,685
	121,639	125,645

The following table reconciles the minimum lease commitments payable disclosed in the 31 March 2019 financial statements to the amount of lease liabilities recognised on 1 April 2019:

	Total £'000
Minimum operating lease commitment as at 31 March 2019	553
Less: effect of discounting using the incremental borrowing rate as at date of initial application	(92)
Lease liability for right of use asset as at 1 April 2019	461

Lease liabilities are classified as follows:

	2020 £'000	2019 £'000
Lease liabilities for investment properties	1,806	1,585
Lease liabilities for right of use asset	318	-
	2,124	1,585

Lease obligations in respect of rents payable on leasehold properties were payable as follows:

	2020			2019 Present value of lease payments £'000
	Lease payments £'000	Interest £'000	Present value of lease payments £'000
Within one year	107	(105)	2	2
From one to two years	108	(105)	3	2
From two to five years	323	(314)	9	8
From five to 25 years	1,600	(1,550)	50	56
After 25 years	9,307	(7,565)	1,742	1,517
	11,445	(9,639)	1,806	1,585

Lease obligations in respect of rents payable on right of use assets were payable as follows:

	2020			2019 Present value of lease payments £'000
	Lease payments £'000	Interest £'000	Present value of lease payments £'000
Within one year	172	(8)	164	-
From one to two years	156	(2)	154	-
	328	(10)	318	-

The net carrying amount of the leasehold properties is shown in note 9.

The Group has over 220 leases granted to its tenants. These vary depending on the individual tenant and the respective property and demise and vary considerably from short-term leases of less than one year to longer-term leases of over ten years.

A number of these leases contain rent free periods. Standard lease provisions include service charge payments and recovery of other direct costs. All investment properties in the Group's portfolio generated rental income during both the current and prior periods, with the exception of Hudson Quarter, York held in Palace Capital (Developments) Limited which commenced development in February 2018. Direct operating costs of £Nil were incurred on the property.

21. SHARE CAPITAL

Authorised, issued and fully paid share capital is as follows:	2020 £'000	2019 £'000
46,388,515 ordinary shares of 10p each (2019: 46,388,515)	4,639	4,639
	4,639	4,639

Reconciliation of movement in ordinary share capital	2020 £'000	2019 £'000
At start of year	4,639	4,639
Issued in the year	-	-
At end of year	4,639	4,639

Movement in ordinary authorised share capital			Number of ordinary shares issued	Total number of shares
As at 31 March 2018, 31 March 2019 and 31 March 2020			-	46,388,515

Movement in treasury shares		Number of ordinary shares issued	Total number of shares
As at 31 March 2018			583,235
Shares issued under deferred bonus share scheme	27 September 2018	(38,586)
Share options exercised under employee LTIP scheme	14 January 2019	(39,383)
As at 31 March 2019			505,266
Shares issued under deferred bonus share scheme	24 July 2019	(67,798)
Share options exercised under employee LTIP scheme	24 July 2019	(85,461)
As at 31 March 2020			352,007
Total number of shares excluding the number held in treasury at 31 March 2020			46,036,508

Year ended 31 March 2020

On 24 July 2019, 67,798 share options were exercised under the deferred bonus share scheme.

On 24 July 2019, 85,461 share options were exercised under the 2016 employee LTIP scheme.

Year ended 31 March 2019

On 27 September 2018, 38,586 share options were exercised under the deferred bonus share scheme.

On 14 January 2019, 39,383 share options were exercised under the 2015 employee LTIP scheme.

Issue costs amounting to £17,000 were incurred and were deducted from the share premium account relating to shares issued in the prior year.

Shares held in Employee Benefit Trust

Authorised, issued and fully paid share capital is as follows:	2020 No. of options	2019 No. of options
Brought forward	55,679	33,648
Transferred under scheme of arrangement	150,000	100,000
Shares exercised under deferred bonus share scheme	(67,798)	(38,586)
Shares exercised under employee LTIP scheme	(85,461)	(39,383)
At end of year	52,420	55,679

Share options:

Reconciliation of movement in outstanding share options	2020 No. of options	2019 No. of options
At start of year	651,730	536,827
Issued in the year	329,848	265,774
Exercised in the year	(85,461)	(39,383)
Lapsed in the year	(90,204)	(138,856)
Deferred bonus share options issued	32,108	63,690
Deferred bonus share options exercised	(67,798)	(36,322)
At end of year	770,223	651,730

As at 31 March 2020, the Company had the following outstanding unexpired options:

Description of unexpired share options	2020		2019
	No. of options	Weighted average option price	No. of options	Weighted average option price
Employee benefit plan (note 22)	738,115	0p	588,040	0p
Deferred bonus share scheme issued	32,108	0p	63,690	0p
Total	770,223	0p	651,730	0p
Exercisable	-	0p	-	0p
Not exercisable	770,223	0p	651,730	0p

The weighted average remaining contractual life of share options at 31 March 2020 is 1.5 years (2019: 1.4 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 2018	536,827	0p
Exercised during the year (LTIP 2015)	(39,383)	0p	309p
Issued during the year (LTIP 2018)	265,774	0p		13 July 2018	13 July 2021
Deferred bonus share options issued	63,690	0p		13 July 2018	13 July 2021
Deferred bonus share options exercised	(36,322)	0p	306p	25 September 2017	25 September 2018
Lapsed during year (LTIP 2015)	(80,885)	0p
Lapsed during year (LTIP 2017)	(21,000)	0p
Lapsed during year (LTIP 2018)	(36,971)	0p
Outstanding at 31 March 2019	651,730	0p
Exercised during the year (LTIP 2016)	(85,461)	0p	276p
Issued during the year (LTIP 2019)	329,848	0p		25 June 2019	25 June 2022
Deferred bonus share options issued	32,108	0p		25 June 2019	25 June 2020
Deferred bonus share options exercised	(67,798)	0p	276p	13 July 2018	13 July 2019
Lapsed during year (LTIP 2016)	(85,820)	0p
Lapsed during year (LTIP 2019)	(4,384)	0p
Outstanding at 31 March 2020	770,223	0p

LTIP 2017

The options are awarded to employees on achievements against targets on two separate measures over the three-year period. Half the options will be awarded based on the first target and half based on the achievement of the second.

Net asset value per share (NAV) growth is based on the Company's EPRA NAV value per share as at 31 March 2017. This target will measure the annualised growth in NAV over the three-year period ending 31 March 2020, and comparing this with the annualised Net Asset Value Growth of a group of comparable companies. The base NAV per share is £3.89.

Total shareholder return (TSR) measures the total shareholder return (price rise plus dividends) over the period from 1 November 2017 to 31 October 2020. The base price is £3.40 per share which was the market price at the grant date.

Annualised TSR over the TSR performance period	Vesting %	NAV growth over the NAV performance period	Vesting %
<8%	0	Below median	0
Equal to 8%	33.33	At median	20
Between 8% and 13%	33.33 - 100	Between median and upper quartile	20-100
Equal to 13%	100	Upper quartile and above	100

LTIP 2018

The options are awarded to employees on achievements against targets on two separate measures over the three-year period. The options are subject to a two-year holding period following vesting. Half the options will be awarded based on the first target and half based on the achievement of the second.

Total property return growth is based on the increase in the total property return of the Company compared with an increase in the MSCI IPD UK Quarterly Index (PV growth) as at 31 March 2018. This target will measure the growth in total property return over the three-year period ending 31 March 2021 (PV performance period), and comparing this with the total property return growth of the MSCI IPD UK Quarterly Index.

Total shareholder return (TSR) measures the total shareholder return (price rise plus dividends) over the period from 13 July 2018 to 12 July 2021. The base price is £3.54 per share which was the market price at the grant date.

Annualised TSR over the TSR performance period	Vesting %	PV growth over the PV performance period	Vesting %
<8%	0	<1%	0
Equal to 8%	33.33	Equal to 1%	33.33
Between 8% and 13%	33.33 - 100	Equal to 2%	66.67
Equal to 13%	100	Equal to 3%	100

LTIP 2019

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 2019. This target will measure the annualised growth in total property return over the three-year period ending 31 March 2022 (PV performance period), and comparing this with the annualised total property return growth of the MSCI IPD UK Quarterly Index.

Total shareholder return (TSR) measures the total shareholder return (price rise plus dividends) over the period from 25 June 2019 to 24 June 2022. The base price is £2.85 per share which was the market price at the grant date.

Annualised TSR over the TSR performance period	Vesting %	PV growth over the PV performance period	Vesting %
<5%	0	<0.5%	0
Equal to 5%	20	Equal to 0.5%	20
Between 5% and 9%	20-100	Between 0.5% and 2.5%	20-100
Equal to 9%	100	Equal to 2.5%	100

The fair value of grants was measured at the grant date using a Black − Scholes pricing model for the Portfolio Value (PV) tranche and using a Monte Carlo pricing model for the TSR tranche, taking into account the terms and conditions upon which the instruments were granted. The services received and a liability to pay for those services are recognised over the expected vesting period. The main assumptions of both the Black − Scholes and Monte Carlo pricing models are as follows:

	Monte Carlo TSR Tranche	Black-Scholes PV Tranche
Grant date	25 June 2019	25 June 2019
Share price	£2.85	£2.85
Exercise price	0p	0p
Term	5 years	5 years
Expected volatility	21.77%	21.77%
Expected dividend yield	0.00%	0.00%
Risk free rate	0.53%	0.53%
Time to vest (years)	3.0	3.0
Expected forfeiture p.a.	0%	0%
Fair value per option	£1.11	£2.85

The expense recognised for employee share-based payment received during the period is shown in the following table:

	2020 £'000	2019 £'000
LTIP 2015	-	46
LTIP 2016	25	171
LTIP 2017	(48)	67
LTIP 2018	67	48
LTIP 2019	86	-
Total expense arising from share-based payment transactions	130	332

23. RELATED PARTY TRANSACTIONS

Accounting services amounting to £2,783 (2019: £1,960) have been provided to the Group by Stanley Davis Group Limited, a company where Stanley Davis is a Director and shareholder.

Charitable donations amounting to £19,335 (2019: £13,757) have been made by the Group to Variety, the Children's Charity, a charity where Neil Sinclair is a Trustee.

Dividend payments made to Directors amounted to £416,056 (2019: £404,734) during the year.

24. CAPITAL COMMITMENTS

The obligation for capital expenditure relating to the construction, development or enhancement of investment properties entered into by the Group amounted to £19,234,661 (2019: £35,412,295).

25. POST BALANCE SHEET EVENTS

On 22 April 2020, the Group signed an amend and restate for the NatWest Bank facility. The amend and restate charged Bank House in Leeds, providing an additional £5,000,000 to the revolving credit facility that can be drawn. The balance is treated as a floating rate loan and is charged at three-month LIBOR plus 1.05%.

Post year end, two of the Groups facilities have breached ICR covenants as part of the quarterly April 2020 test due to the non-payment of rent. Both banks have provided covenant waivers and the Group expects to return to compliance once tenants recommence rental payments.

26. FINANCIAL RISK MANAGEMENT

The Group's principal financial liabilities are loans and borrowings. The main purpose of the Group's loans and borrowings is to finance the acquisition and development of the Group's property portfolio. The Group has rent and other receivables, trade and other payables and cash and short-term deposits that arise directly from its operations.

The Group is exposed to market risk (including interest rate risk and real estate risk), credit risk and liquidity risk.

The Group's senior management oversee the management of these risks, and the Board of Directors has overall responsibility for the determination of the Group's risk management objectives and policies and it sets policies that seek to reduce risk as far as possible without unduly affecting the Group's competitiveness and flexibility. Further details regarding these policies are set out below:

Capital risk management

The Group considers its capital to comprise its share capital, share premium, other reserves and retained earnings which amounted to £166,348,000 at 31 March 2020 (2019: £180,323,000). The Group's capital management objectives are to safeguard the entity's ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders and to provide an adequate return to shareholders by pricing its services commensurately with the level of risk.

Within the subsidiaries of the Group, the business has covenanted to maintain a specified leverage ratio and a net interest expense coverage ratio, all the terms of which have been adhered to during the year.

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.

Market risk

Market risk arises from the Group's use of interest bearing, and tradable instruments. It is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in interest rates (interest rate risk) or other market factors.

Interest rate risk

The interest rate exposure profile of the Group's financial assets and liabilities as at 31 March 2020 and 31 March 2019 were:

	Nil rate assets and liabilities £'000	Floating rate assets £'000	Fixed rate liability £'000	Floating rate liability £'000	Total £'000
As at 31 March 2020
Trade and other receivables	4,950	-	-	-	4,950
Cash and cash equivalents	-	14,919	-	-	14,919
Trade and other payables	(8,400)	-	-	-	(8,400)
Equity investments	2,540	-	-	-	2,540
Interest rate swaps	-	-	(1,343)	-	(1,343)
Bank borrowings	-	-	(67,915)	(51,441)	(119,356)
Lease liabilities	-	-	(2,124)	-	(2,124)
	(910)	14,919	(71,382)	(51,441)	(108,814)

	Nil rate assets and liabilities £'000	Floating rate assets £'000	Fixed rate liability £'000	Floating rate liability £'000	Total £'000
As at 31 March 2019
Trade and other receivables	2,539	-	-	-	2,539
Cash and cash equivalents	-	22,890	-	-	22,890
Trade and other payables	(4,004)	-	-	-	(4,004)
Equity investments	2,636	-	-	-	2,636
Interest rate swaps	-	-	(815)	-	(815)
Bank borrowings	-	-	(69,226)	(48,790)	(118,016)
Lease liabilities	-	-	(1,585)	-	(1,585)
	1,171	22,890	(71,626)	(48,790)	(96,355)

The Group's interest rate risk arises from borrowings issued at floating interest rates. The Group's interest rate risk is reviewed throughout the year by the Directors. The Group manages its exposure to interest rate risk on borrowings through the use of interest rate derivatives (see note 16). Interest rate swaps are used to mitigate the risk of an increase in interest rates but also to allow the Group to benefit from a fall in interest rates. 57% of the Group's interest rate exposure is fixed and the remainder held on a floating rate. The Group has employed an external adviser when contracting hedging to advise on the structure of the hedging.

The Group is exposed to changes in interest rates as a result of the cash balances that it holds. The cash balances of the Group at the year end were £14,919,000 (2019: £22,890,000). Interest receivable in the income statement would be affected by £149,000 (2019: £229,000) by a one percentage point change in floating interest rates on a full year basis.

The Group has loans amounting to £51,441,000 (2019: £48,790,000) which have interest payable at rates linked to the three-month LIBOR interest rates or bank base rates. A 1% increase in the LIBOR or base rate will have the effect of increasing interest payable by £514,000 (2019: £488,000).

The Group has interest rate swaps with a nominal value of £54,190,623 (2019: £55,066,210). If the LIBOR or base rate was to increase above the fixed contract rate then the Group will benefit from a fair value increase of the interest rate swap. If, however, the LIBOR or base rate was to decrease, then the Group would incur a decrease in the fair value of the interest rate swap.

Change in interest rate	-1% £'000	+1% £'000
(Decrease)/increase in fair value of interest rates swaps as at 31 March 2020	(1,418)	1,359
(Decrease)/increase in fair value of interest rates swaps as at 31 March 2019	(1,947)	1,869

Upward movements in medium and long-term interest rates, associated with higher interest rate expectations, increase the value of the Group's interest rate swaps that provide protection against such moves. The converse is true for downward movements in the yield curve.

The Group is therefore relatively sensitive to changes in interest rates. The Directors regularly review the Group's position with regard to interest rates in order to minimise its risk.

Credit risk management

Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group.

The Group has its cash held on deposit with four large banks in the United Kingdom. At 31 March 2020 the cash balances of the Group were £14,919,000 (2019: £22,890,000). The concentration of credit risk held with Barclays Bank plc, the largest of these banks, was £10,552,000 (2019: £16,964,000). Credit risk on liquid funds is limited because the counterparty is a UK bank with a high credit rating assigned by international credit rating agencies.

Credit risk also results from the possibility of a tenant in the Group's property portfolio defaulting on a lease. The largest tenant by contractual income amounts to 5.2% (2019: 5.2%) of the Group's anticipated income. The Directors assess a tenant's creditworthiness prior to granting leases and employ professional firms of property management consultants to manage the portfolio to ensure that tenants debts are collected promptly and the Directors in conjunction with the property managers take appropriate actions when payment is not made on time.

The carrying amount of financial assets (excluding cash balances) recorded in the financial statements, net of any allowances for losses, represents the Group's maximum exposure to credit risk without taking account of the value of any collateral obtained. The carrying amount of these assets at 31 March 2020 was £2,572,000 (2019: £1,935,000). The details of the provision for expected credit loss are shown in note 13.

Liquidity risk management

The Group's policy is to hold cash and obtain loan facilities at a level sufficient to ensure that the Group has available funds to meet its medium-term capital and funding obligations, including organic growth and acquisition activities, and to meet certain unforeseen obligations and opportunities. The Group holds cash to enable the Group to manage its liquidity risk.

The Group monitors its risk to a shortage of funds using a monthly cash management process. This process considers the maturity of both the Group's financial investments and financial assets (e.g. accounts receivable, other financial assets) and projected cash flows from operations.

The Group's objective is to maintain a balance between continuity of funding and flexibility through the use of multiple sources of funding including bank loans, term loans, loan notes, overdrafts and lease liabilities.

The tables below summarise the maturity profile of the Group's financial liabilities based on contractual undiscounted payments:

	On demand £'000	0-1 years £'000	1-2 years £'000	2-5 years £'000	> 5 years £'000	Total £'000
As at 31 March 2020
Interest bearing loans	-	6,062	10,264	107,093	12,973	136,392
Lease liabilities	-	107	108	323	10,907	11,445
Derivative financial instruments	-	-	-	1,343	-	1,343
Trade and other payables	8,400	-	-	-	-	8,400
	8,400	6,169	10,372	108,759	23,880	157,580

	On demand £'000	0-1 years £'000	1-2 years £'000	2-5 years £,000	> 5 years £'000	Total £'000
As at 31 March 2019
Interest bearing loans	-	9,484	32,323	76,132	12,767	130,706
Lease liabilities	-	96	96	289	9,722	10,203
Derivative financial instruments	-	-	-	815	-	815
Trade and other payables	4,004	-	-	-	-	4,004
	4,004	9,580	32,419	77,236	22,489	145,728

COMPANY STATEMENT OF FINANCIAL POSITION

As at 31 March 2020

	Note	2020 £'000	2019 £'000
Non-current assets
Investments in subsidiaries	2	127,417	77,671
Loans to subsidiary undertakings	2	40	53,823
Listed equity investments	3	2,540	2,636
Property, plant and equipment	4	96	92
		130,093	134,222
Current assets
Trade and other receivables	5	23,643	22,042
Cash at bank and in hand		4,887	12,176
		28,530	34,218
Total assets		158,623	168,440
Current liabilities
Creditors: amounts falling due within one year	6	(8,923)	(5,862)
Net current assets		19,607	28,356
Net assets		149,700	162,578
Equity
Called up share capital	7	4,639	4,639
Share premium account		125,019	125,019
Treasury shares		(1,349)	(1,771)
Merger reserve		3,503	3,503
Capital redemption reserve		340	340
Retained earnings		17,548	30,848
Equity - attributable to the owners of the Parent		149,700	162,578

The Company's loss after tax for the year was £4,342,000 (2019: £16,126,000 profit).

The Company has applied the S408 exemption for company accounts.

The financial statements were approved by the Board of Directors and authorised for issue on 6 July 2020 and are signed on its behalf by:

Stephen Silvester  Neil Sinclair

Finance Director  Chief Executive

Company Statement of Changes in Equity

	Share Capital £'000	Share Premium £'000	Treasury shares £'000	Other Reserves £'000	Retained earnings £'000	Total equity £'000
At 1 April 2018	4,639	125,036	(2,011)	3,843	23,091	154,598
Total comprehensive income for the year	-	-	-	-	16,126	16,126
Transactions with Equity Holders
Costs of issue of new shares	-	(17)	-	-	-	(17)
Share-based payments	-	-	-	-	332	332
Exercise of share options	-	-	240	-	(240)	-
Issue of deferred bonus share options	-	-	-	-	257	257
Dividends	-	-	-	-	(8,718)	(8,718)
At 31 March 2019	4,639	125,019	(1,771)	3,843	30,848	162,578
Total comprehensive income for the year	-	-	-	-	(4,342)	(4,342)
Transactions with Equity Holders
Costs of issue of new shares	-	-	-	-	-	-
Share-based payments	-	-	-	-	130	130
Exercise of share options	-	-	422	-	(422)	-
Issue of deferred bonus share options	-	-	-	-	77	77
Dividends	-	-	-	-	(8,743)	(8,743)
At 31 March 2020	4,639	125,019	(1,349)	3,843	17,548	149,700

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

Treasury shares represents the consideration paid for shares bought back from the market. Other reserves comprise the merger reserve and the capital redemption reserve.

The merger reserve represents the excess over nominal value of the fair value consideration for the acquisition of subsidiaries satisfied by the issue of shares in accordance with S612 of the Companies Act 2006.

The capital redemption reserve represents the value of preference shares capital redeemed.

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).

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 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 in the summer 2015 Budget the reduction in the corporation tax rate from 20% main rate in the tax year 2016 to 19% with effect from 1 April 2017.

TRADE AND OTHER RECEIVABLES

Trade and other receivables and intercompany receivables are recognised and carried at the original transaction value. A provision for impairment is established where there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of the receivables concerned.

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.

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:	Investments in subsidiaries £'000	Loans to subsidiaries £'000	Total £'000
At 1 April 2018	127,861	26,569	154,430
Additions	3,743	27,254	30,997
Write-down of investments	(9,360)	-	(9,360)
At 1 April 2019	122,244	53,823	176,067
Additions − capitalisation of loans to subsidiaries	61,370	(53,717)	7,653
Additions − capitalisation of loan interest	-	(66)	(66)
At 31 March 2020	183,614	40	183,654
Provision for impairment:
At 1 April 2018	1,530	-	1,530
Provided during the year	43,043	-	43,043
At 1 April 2019	44,573	-	44,573
Provided during the year	11,624	-	11,624
At 31 March 2020	56,197	-	56,197
Net book value at 31 March 2020	127,417	40	127,457
Net book value at 31 March 2019	77,671	53,823	131,494

Loans to Subsidiaries

A loan amounting to £25,000 remains outstanding at 31 March 2020 (2019: £2,566,660) from Palace Capital (Northampton) Limited. Interest on this loan is charged at a fixed rate of 5% per year. This loan is repayable on 14 June 2020. Prior to the year end a loan of £4,511,438 was capitalised as an investment in the subsidiary.

A loan amounting to £Nil remains outstanding at 31 March 2020 (2019: £13,711,448) from Palace Capital (Properties) Limited. Interest on this loan is charged at a fixed rate of 5% per year. This loan is repayable on 11 March 2021. Prior to the year end a loan of £15,842,510 was capitalised as an investment in the subsidiary.

A loan amounting to £Nil remains outstanding at 31 March 2020 (2019: £944,025) from Palace Capital (Halifax) Limited. Interest on this loan is charged at a fixed rate of 5% per year. This loan is repayable on 11 March 2021. Prior to the year end a loan of £1,609,633 was capitalised as an investment in the subsidiary.

A loan amounting to £15,000 remains outstanding at 31 March 2020 (2019: £3,067,963) from Palace Capital (Manchester) Limited. Interest on this loan is charged at a fixed rate of 5% per year. This loan is repayable on 31 December 2020. Prior to the year end a loan of £3,427,624 was capitalised as an investment in the subsidiary.

A loan amounting to £Nil remains outstanding at 31 March 2020 (2019: £4,328,294) from Palace Capital (Liverpool) Limited. Interest on this loan is charged at a fixed rate of 5% per year. This loan is repayable on 7 March 2023. Prior to the year end a loan of £4,308,517 was capitalised as an investment in the subsidiary.

A loan amounting to £Nil remains outstanding at 31 March 2020 (2019: £29,204,796) from Palace Capital (Signal) Limited. Interest on this loan is charged at a fixed rate of 5% per year. This loan is repayable on 31 October 2023. Prior to the year end a loan of £24,017,272 was capitalised as an investment in the subsidiary.

Investment in Subsidiaries

Year ended 31 March 2020

On 25 March 2020 the Company purchased an additional 7,652,636 ordinary £1 shares at par in Palace Capital (Leeds) Limited in order to refinance the subsidiary.

On 26 March 2020 the Company purchased an additional 4,308,517 ordinary £1 shares at par in Palace Capital (Liverpool) Limited in order to refinance the subsidiary.

On 26 March 2020 the Company purchased an additional 1,609,633 ordinary £1 shares at par in Palace Capital (Halifax) Limited in order to refinance the subsidiary.

On 31 March 2020 the Company purchased an additional 4,511,348 ordinary £1 shares at par in Palace Capital (Northampton) Limited in order to refinance the subsidiary.

On 31 March 2020 the Company purchased an additional 3,427,624 ordinary £1 shares at par in Palace Capital (Manchester) Limited in order to refinance the subsidiary.

On 31 March 2020 the Company purchased an additional 15,842,510 ordinary £1 shares at par in Palace Capital (Properties) Limited in order to refinance the subsidiary.

On 31 March 2020 the Company purchased an additional 24,017,272 ordinary £1 shares at par in Palace Capital (Signal) Limited in order to refinance the subsidiary.

Year ended 31 March 2019

On 21 December 2018 the Company acquired One Derby Square, Liverpool. The Company issued 3,500,000 ordinary £1 share in Palace Capital (Liverpool) Limited.

The Group comprises a number of companies; all subsidiaries included within these financial statements are noted below:

Subsidiary undertaking:	Class of share held	% shareholding	Principal activity
Palace Capital (Leeds) Limited	Ordinary	100	Property Investments
Palace Capital (Northampton) Limited	Ordinary	100	Property Investments
Palace Capital (Properties) Limited	Ordinary	100	Property Investments
Palace Capital (Developments) Limited	Ordinary	100	Property Investments
Palace Capital (Halifax) Limited	Ordinary	100	Property Investments
Palace Capital (Manchester) Limited	Ordinary	100	Property Investments
Palace Capital (Liverpool) Limited	Ordinary	100	Property Investments
Palace Capital (Signal) Limited	Ordinary	100	Property Investments
Quintain (Signal) Member B Limited*	Ordinary	100	Holding
Signal Property Investments LLP*	Member	100	Property Investments
Signal Investments LLP*	Member	100	Holding
Property Investment Holdings Limited	Ordinary	100	Property Investments
Palace Capital (Dartford) Limited	Ordinary	100	Property Management
Palace Capital (Newcastle) Limited	Ordinary	100	Property Investments
R.T. Warren (Investments) Limited	Ordinary	100	Property Investments
Palace Capital (York) Limited	Ordinary	100	Property Management
Associate Company:
HBP Services Limited*	Ordinary	21.4	Property Management
Meadowcourt Management (Meadowhall) Limited*	Ordinary	30	Property Management
Clubcourt Limited*	Ordinary	40	Property Management

*   Held indirectly

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: 4th Floor, 25 Bury Street, St James's, London, SW1Y 6AL.

3. LISTED EQUITY INVESTMENTS

	Total £'000
At 1 April 2018	-
Additions	2,850
Loss on revaluation of listed equity investment shown in statement of comprehensive income	(214)
At 1 April 2019	2,636
Additions	329
Loss on revaluation of listed equity investment shown in statement of comprehensive income	(425)
At 31 March 2020	2,540

During the year the Company purchased listed equity investments to the value of £329,000. The investment has subsequently been revalued using level 1 inputs, the quoted market price.

4. PROPERTY, PLANT AND EQUIPMENT

	IT, fixtures and fittings £'000
At 1 April 2018	215
Additions	2
At 1 April 2019	217
Additions	36
At 31 March 2020	253
Depreciation
At 1 April 2018	94
Provided during the period	31
At 1 April 2019	125
Provided during the period	32
At 31 March 2020	157
Net book value at 31 March 2020	96
Net book value at 31 March 2019	92

5. TRADE AND OTHER RECEIVABLES

	2020 £'000	2019 £'000
Amounts owed by subsidiary undertakings	22,965	14,250
Trade debtors	414	720
Other debtors	30	48
Other taxes and social security	25	34
Accrued interest on amounts owed by subsidiary undertakings	-	6,882
Prepayments	209	108
	23,643	22,042

A loan amounting to £22,965,362 remains outstanding at 31 March 2020 (2019: £10,160,251) from Palace Capital (Developments) Limited. No interest is charged on this loan. This loan is repayable on demand.

A loan amounting to £Nil remains outstanding at 31 March 2020 (2019: £4,090,165) from Palace Capital (Leeds) Limited. Interest on this loan is charged at a fixed rate of 5% per year. This loan is repayable on 8 May 2019. Prior to the year end a loan of £7,652,636 was capitalised as an investment in the subsidiary.

6. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR

	2020 £'000	2019 £'000
Trade creditors	223	57
Amount owed to subsidiary undertaking	7,697	5,104
Corporation tax payable	57	-
Other taxes	75	55
Other creditors	5	-
Accruals and deferred income	866	646
	8,923	5,862

A loan amounting to £43,012 remains outstanding at 31 March 2020 (2019: £1,538,132) to Palace Capital (Newcastle) Limited. No interest is charged on this loan. This loan is repayable on demand.

A loan amounting to £3,317,480 remains outstanding at 31 March 2020 (2019: £Nil) to R.T. Warren Investments Limited. No interest is charged on this loan. This loan is repayable on demand.

A loan amounting to £4,336,489 remains outstanding at 31 March 2020 (2019: £3,566,350) to Property Investment Holdings Limited. No interest is charged on this loan. This loan is repayable on demand.

7. SHARE CAPITAL

The details of the Company's share capital are provided in note 21 of the notes to the Consolidated Financial Statements.

8. LEASES

Operating lease payments in respect of rents on leasehold properties occupied by the Company are payable as follows:

	2020 £'000	2019 £'000
Within one year	178	178
From one to two years	178	178
From two to five years	19	197
	375	553

9. POST BALANCE SHEET EVENT

There are no post balance sheet events.

Glossary

Adjusted EPS: Is adjusted profit before tax less corporation tax charge (excluding deferred tax movements) divided by the average basic number of shares in the period.

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 and share-based payments and exceptional items.

Assets Under Management (AUM): Is a measure of the total market value of all properties owned and managed by the Group.

Balance sheet gearing: Is the balance sheet net debt divided by IFRS net assets.

Building Research Establishment Environmental Assessment Methodology (BREEAM) rating: A set of assessment methods and tools designed to help 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.

Core-plus: Is a property investment management style which adopts a certain risk appetite growth strategy. Core-plus is typically associated with a low to moderate risk profile. Core-plus property owners would have the ability to increase cash flows through light refurbishment and asset management strategies. Core-plus properties tend to be high-quality and well-occupied.

Dividend cover: Is the Adjusted EPS divided by dividend per share declared in the period.

EPRA: 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 excluding the mark to market on effective cash flow hedges and related debt adjustments, deferred taxation on revaluations and diluting for the effect of those shares potentially issuable under employee share schemes.

EPRA NAV per share: Is EPRA NAV divided by the diluted number of shares at the period end.

EPRA NNNAV: Is the EPRA NAV adjusted to reflect the fair value of debt and derivatives and to include deferred taxation on revaluations.

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 income 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 and on values before deducting prospective purchaser's costs.

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 EU.

Interest cover ratio (ICR): Is the number of times net interest payable is covered by underlying profit before net interest payable and taxation.

Investment Property Databank (IPD): A wholly owned subsidiary of MSCI producing an independent benchmark of property returns and the Group's portfolio returns.

Key Performance Indicators (KPIs): Are the most critical metrics that measure the success of specific activities used to meet business goals - measured against a specific target or benchmark, adding context to each activity being measured.

LIBOR: Is the London Interbank Offered Rate, the interest rate charged by one bank to another for lending money.

Like-for-like net rental income: Is the change in net rental income on properties owned throughout the current and previous periods under review. This growth rate includes revenue recognition and lease accounting adjustments but excludes properties held for development in either period, properties with guaranteed rent reviews, asset management determinations and surrender premiums.

Like-for-like valuation: Is the change in the carrying value of properties owned throughout the entire year.

This excludes properties acquired during the year and disposed of during the year.

Loan to value (LTV): Is the ratio of principal value of gross debt less cash, short-term deposits and liquid investments to the aggregate value of properties and investments.

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 equivalent yield (NEY): Is the weighted average income return (after adding notional purchaser's costs) a property will produce based upon the timing of the income received. In accordance with usual practice, the equivalent yields (as determined by the external valuers) assume rent is received annually in arrears.

Net initial yield (NIY): Is the current annualised rent, net of costs, expressed as a percentage of capital value, after adding notional purchaser's costs.

Net Loan to Value (LTV): Is the ratio of gross debt less cash, short-term deposits and liquid investments to the aggregate value of properties and investments.

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.

Northern Powerhouse: Is a proposal to boost economic growth in the North of England by the 2010-15 coalition Government and 2015-2017 Conservative Government in the United Kingdom, particularly in the "Core Cities" of Manchester, Liverpool, Leeds, Sheffield, Hull and Newcastle.

Passing rent: Is the gross rent, less any ground rent payable under head leases.

Peer Group: Is 16 companies within the listed real estate sector.

Portfolio Valuation: The value of the Company's property portfolio, including all investment and trading properties as valued by our independent valuers, Cushman & Wakefield, and assets held for sale.

Portfolio Value (PV): The value of the investment properties within the Palace Capital property portfolio as measured by Cushman & Wakefield. It is referenced in relation the 2018 LTIP's awarded to employees in 2018.

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.

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.

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.

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, and this can be expressed as a percentage of EPRA NAV per share at the beginning of the period.

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 by the growth in capital from purchasing a share in the Company assuming that the dividends are reinvested each time they are paid.

Value added: Is a risk appetite growth strategy. Typically associated with a moderate to high risk profile. Value add properties tend to have low cash flows at acquisition but have the potential to produce future cash flow uplifts once value has been added. This could be by taking on larger capital refurbishment projects to improve the layout and look of the property  to ensure rental increases and capital value enhancement.

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.

 

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