Palace Capital : Full Year Report 2024 2024

Annual Report and Accounts 2024

Delivering on our strategy for shareholders

Contents

Strategic report

Financial highlights	01
Executive Chairman's Statement	02
Operational Review	04
Our strategy and business model	08
Financial review	10
Key performance indicators	14
Risk management	16
Section 172 statement	22
Environmental, Social and Governance	24

Governance

Letter from Chairman	28
Applying the Principles of the Code	30
Board of Directors	31
Executive Committee	32
Governance Framework	33
Board Composition and Division of
Responsibilities	34
Board Performance Review	36
Nomination Committee Report	38
ESG Committee Report	39
Audit and Risk Committee Report	40
Directors' Remuneration Report	42
Our Remuneration Policy	44
Annual Remuneration Report	48
Directors' Report and Additional
Disclosures	53
Statement of Directors' Responsibilities	55
Independent Auditor's Report	56

Financial Statements

Consolidated Statement
of Comprehensive Income	62
Consolidated Statement
of Financial Position	63
Consolidated Statement
of Changes in Equity	64
Consolidated Statement
of Cash Flows	65
Notes to the Consolidated
Financial Statement	66
Company Statement
of Financial Position	93
Company Statement
of Changes in Equity	94
Notes to the Company
Financial Statements	95
Officers and Professional Advisors	100
Glossary	101

Welcome to

Palace Capital

Our strategy

is to focus on maximising cash returns to shareholders, whilst continuing to remain mindful of consolidation in the Real Estate sector.

Visit our website at

www . palacecapitalplc . com

For reports and presentations, go to www . palacecapitalplc . com/investors/ reports - and - presentations/

Financial highlights

£97.8m	£5.4m	13.7%
Net asset value	Adjusted profit before tax	Total Shareholder return
£11.5m	£88.7m	262p
Net cash	Property portfolio	EPRA net tangible
	(see note 9)	assets per share
£8.0m	82.0%	5.4 years
Contractual rental income	EPRA occupancy	Weighted average
		lease length to break
15.0p	£8.3m	2.9%
Dividend per share	Total gross debt	Average cost of debt
(£9.3m)	(23.7p)	13.8p
IFRS loss before tax	Basic EPS	Adjusted EPS

Executive Chairman's statement

PAL ACE CAPITAL PLC

Steven Owen

Executive Chairman

Update on delivery of strategic objectives

ANNUAL REPORT AND ACCOUNTS 2024

Adjusted PBT

£5.4 million

Return of capital

£15.2m

Update on delivery of strategic objectives

Notwithstanding challenging property and financial markets, the past year was again transformational for the Group as it continued to successfully deliver on its disposal and debt reduction strategy resulting in a significantly de-leveraged balance sheet which has put the Company into a substantial net cash position. Since 1 April 2023 to date the Company has exchanged or completed on the sale

of 24 investment properties for £112.9 million and exchanged or completed on £4.4 million of sales of unencumbered residential units at Hudson Quarter, York. During FY24 the Company completed the sale of 21 investment properties for £93.7 million which is 4.4% ahead of the 31 March 2023 valuation and completed £3.2 million in sales of seven residential units at Hudson Quarter, York, 5.3% ahead of the 31 March 2023 valuation.

During FY24, the Company proactively reduced gross debt by £56.0 million to £8.3 million and the significant de- leveraging of the balance sheet resulted in a net cash position of £11.5 million as at the year end which has increased to £19.7 million as at 5 June. Proforma cash reserves, assuming that all exchanged properties complete, are currently £30.1 million.

Since July 2022, cash returned to shareholders from share buyback programmes totals £21.9 million of which £15.2 million was returned during FY24. As part of its strategy of returning cash to Shareholders, following the announcement of these results today, the Company will be consulting with major Shareholders regarding

the terms of a tender offer to return capital of approximately £22 million to Shareholders. It is expected that a further announcement will be made later this month of a tender offer via a circular to shareholders. Subject to shareholder approval at a specially convened General Meeting the Company expects to complete the tender offer during July 2024.

As mentioned above, disposal activity has continued since the year end and we have exchanged contracts or completed the sales of three investment properties totalling £18.5 million, and also conditionally exchanged on an office

unit at St James' Gate, Newcastle for £0.7 million. These sales were on aggregate 1.5% ahead of the 31 March 2024

book value.

Total investment properties sold since the change of strategy in July 2022 amount to £124.0 million or £135.9 million including residential apartments.

Assuming that the properties currently under offer are sold, the Company will have six investment properties remaining, each of which have their own asset management initiatives that are required to be completed in order to be ready for sale. Additionally, conditions in the investment market for certain types of assets, particularly leisure assets, are such that, in the Board's view, the sale of these assets should be deferred until market demand and pricing improve, particularly given the high income yield and long unexpired lease terms. Market conditions are continually assessed in order to determine the optimum time to sell a property assuming all appropriate asset management initiatives have been completed in relation to such properties. Further commentary on each of the six investment properties can be found in the Operational Review.

Operationally, the business remains robust. The team has been proactive in implementing asset management plans to increase income, reduce void costs and improve our ESG performance, including

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EPCs, as set out in the Operational Review. Rent collection remains high and current occupancy levels resilient.

Palace Capital continues to reduce its level of administrative expenses in line with its strategy, with measures implemented in the financial year saving £0.9 million. This includes reducing headcount and relocating its head office to a smaller office in Victoria, London in December 2023. Annual occupancy costs of the Company's premises are £0.25 million lower than those of its former offices in Bury Street, SW1.

Annualised cost savings are now over £2.3 million compared to 2022. These cost savings represent 51% of FY22 administrative expenses and 31% of FY22 EPRA earnings. We now have a Board of two members and an executive team of six including myself focused on executing the strategy.

Overview of results

The Group's adjusted profit before tax decreased to £5.4 million (2023: £7.6 million) as a result of income lost through disposals. Investment property sales during the year period realised a profit of £2.3 million (2023: £0.8 million) whilst trading profits from the sale of residential units contributed £0.2 million (2023: £0.5 million).

The deficit on the revaluation of the portfolio for the year of £15.4 million was due principally to softening yields across the whole portfolio but particularly during the second half of the financial year in relation to the two leisure assets which accounted for approximately half of the deficit. An analysis of the valuation deficit is provided in the Operating Review.

We are well placed regarding the timing of the disposal programme and other strategic initiatives, including the tender offer and the share buyback programme."

Steven Owen

Contractual payments to the former Chief Financial Officer and staff of £0.6 million, including associated costs, have been treated as an exceptional item.

A provision of £0.6 million in relation to the Short Term Incentive Plan ("STIP"), which was introduced during FY24, has been made although no payment will be due until the Completion Date has been determined in accordance with the rules of the STIP.

Together with other items totalling £0.6 million, the aggregation of the profits and losses described in the preceding paragraphs account for the IFRS loss before tax for the year of £9.3 million (2023: £35.8 million loss).

Principally as a result of the revaluation deficit on the portfolio equivalent to 39 pence per share, offset by the 8 pence per share share-buyback accretion, EPRA NTA per share decreased by 11.5% to 262 pence per share (2023: 296 pence per share).

As noted above, the Group's balance sheet has been significantly strengthened following the £56.0 million reduction

in gross debt during the year and the Company being in a net cash position at the year end of £11.5 million (2023: net debt £58.8 million, LTV 31%).

Board changes and Director Remuneration

I was appointed as Executive Chairman from the AGM held on 26 July 2023, having previously been (Non-executive) Interim Executive Chairman. Due to the reduced size of the Company and repayment of bank debt, Matthew Simpson stepped down from the Board as Chief Financial Officer on 14 November 2023. Contractual payments to the former Chief Financial Officer of £0.4 million, including associated costs, have been treated as an exceptional item. Details are provided in the Directors' Remuneration Report in the Annual Report.

The performance of the STIP approved by shareholders at the 2023 AGM and predicated on the successful disposal of assets in a timely manner is explained in the Directors' Remuneration Report. Payments, in cash, were made under the Rules of the STIP to good leavers and these have been accounted for in the period.

Dividend

The Group paid or declared dividends of 15.0 pence per share in relation to the year ended 31 March 2024 (2023: 15 pence per share), including a proposed final fourth quarter dividend of 3.75 pence per share. The fourth quarter final dividend of 3.75 pence per share will be paid, subject to shareholder approval at the AGM being held on 24 July 2024, on 23 August 2024 to Shareholders on the register at 26 July 2024. The ex dividend date will be 25 July 2024. Of this, 1.35 pence per ordinary share will be paid as a Property Income Distribution ('PID') and

2.40 pence per ordinary share will be paid as a Non-Property Income Distribution, ('Non-PID').

Outlook

Commercial property and financial markets remain challenging but there are indications that UK interest rates will reduce over the next year following the sharp fall in inflation over recent months. Until interest rates reduce and confidence returns to some sectors of real estate markets it is unlikely that there will be

a material upward re-pricing of assets. Given the reduction in property values seen since the peak of the last cycle in the Spring of 2022 it is considered that valuations may be close to the bottom of this current cycle.

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

Given its strong cash position, the Company remains well placed in terms of flexibility and optionality regarding the timing of its disposal programme and other strategic initiatives, including the tender offer referred to above.

Steven Owen

Executive Chairman

5 June 2024

STRATEGIC REPORT

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Operational Review

PAL ACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2024

Daniel Davies

Head of Asset Management

£1.3m of annualised net rental income created

Summary of the year

The business continues to perform well operationally. The team has been proactive in implementing asset management plans to increase income, reduce void costs and improve our ESG performance, including EPCs. Rent collection remains strong and occupancy levels remain resilient. Total rent collection for the 12 months to 31 March 2024 was 98% (2023: 99%).

During the year ended 31 March 2024, the Company disposed of 21 investment properties for £93.7 million, 4.4% ahead of the 31 March 2023 book value. Seven apartments at Hudson Quarter, York were sold during the year for £3.2 million leaving 13 units remaining at the year end.

Asset management

During FY24 there were 23 lease events completed totalling 162,000 sq ft of space, 5% above the 31 March 2023 ERV ('FY23 ERV'), generating £0.9 million of additional annualised income, principally from eight new lettings at 5% above ERV, generating £0.8 million of additional annualised income.

In addition, void savings from new lettings was £0.4 million, resulting in a total of £1.3 million of annualised net rental income created.

Portfolio asset management activity and disposals continue to improve the EPC profile across the portfolio: 100% are now rated A-D and 81.0% are rated A-C (2023: 96.2% and 72.2% respectively).

New lettings in the year included:

• 2 St James' Gate, Newcastle, where Orega, a premium, flexible, serviced office workspace provider, entered into a 15 year management agreement to take the second and third floors totalling 22,500 sq ft of the seven storey, 82,500 sq ft building. Following a comprehensive refurbishment the operation opened in January 2024, providing c.400 workstations. This letting significantly increased the occupancy at the property and, together with the letting to Softcat plc in December 2022, were the first two major lettings

Thomas Hood

Head of Investment

at St James' Gate since the property was acquired in 2017.

• Broad Street Plaza, Halifax, where Calderdale and Huddersfield NHS Foundation Trust entered into a new 15 year lease and took an additional 6,000 sq ft unit increasing their occupation to over 27,000 sq ft. The rent of £0.4 million per annum on the combined space is over £14 psf and is 41% higher than the March 2023 ERV. The NHS now accounts for 19% of the net income from the property.
• Boulton House, Manchester and King's Park House, Southampton where three lettings totalling £0.2 million rent per annum were achieved at an average premium to the FY23 ERV of 4%.

Other initiatives during FY24 included the following:

• East Grinstead - new 15 year reversionary lease at Unit A (21,500 sq ft) from August 2027 to Wickes Group plc at a rent of £0.4 million per annum, in line with FY23 ERV.
• Salisbury - new 10 year reversionary lease from September 2025 to Booker Limited at a rent of £0.25 million per annum, which was 22% above the FY23 ERV.

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2 St James' Gate, Newcastle

• HQ York - GRJ occupy the 4th and 5th floors at rent of £0.32 million per annum expiring November 2031 with a tenant break in December 2027. We successfully removed the tenant's break in December 2027, thereby increasing the building's WAULT from 4.9 to 6.5 years.

Since the year end, a key letting has been achieved at Imperial Court, Leamington Spa (20,419 sq ft) where we have completed a 10 year lease with a mutual break in year five to Lighthouse Games Ltd at a rent of £0.38 million per annum, which is in line with the ERV.

Other initiatives since the year end include the agreement in principle with Vue Cinemas at Sol, Northampton to regear their lease which would bring their total term to 20 years expiring in 2044, with a material increase in rent and five yearly upward only rent reviews linked to RPI with a cap and collar structure.

In return the Company will make a significant capital contribution towards the comprehensive refurbishment of the cinema, including recliner seating upgrade, associated auditoria decorative works and foyer refurbishment.

These asset management initiatives are part of the process of creating value and preparing assets for sale, the timing of which is firmly within the control of the Company.

Portfolio overview

As at 31 March 2024 the portfolio comprised 12 properties (2023: 31) comprising 62% office, 24% leisure, 4% retail and 10% residential.

CBRE independently valued the portfolio as at 31 March 2024 at £88.7 million, resulting in a deficit of 15.5% on a like- for-like basis compared with the valuation as at 31 March 2023. The largest declines were the two leisure assets at 27.2% and offices at 12.5%.

The seven office assets fell 12.5%, which was driven predominantly by a significant softening of yields to reflect the deterioration in the regional office investment market. The largest falls were at Hudson Quarter, York (24.0%), Exeter (19.4%) and Milton Keynes (15.5%) whereas gains were achieved at Leamington Spa (+5.6%), Harlow (+4.9%) and Fareham (+4.5%) as a result of asset management initiatives. The ERVs on individual office properties remained broadly flat with the exception of Milton Keynes where there was an increase of 22.5% which resulted in an overall increase of 3.0% across the office portfolio.

The two leisure assets declined by

27.2% overall reflecting the severely weakened leisure investment market. Sol, Northampton fell 37.5% in value and Broad Street Plaza, Halifax fell 18.1%. The blended leisure NIY and Equivalent yields

both increased by c.250 bps to 13.4% and 12.8% respectively. Leisure ERVs increased by 1.3%.

The value of the one retail property was virtually unchanged and residential declined 2.2%.

	FY24	FY23
Portfolio value	£88.7m	£192.4m
Net initial yield	8.0%	7.4%
Reversionary yield	13.0%	9.6%
Contractual rental
income	£8.0m	£15.7m
Estimated rental
value	£10.6m	£18.8m
WAULT to break	5.4 years	4.8 years
EPRA vacancy rate	18.0%	12.3%

STRATEGIC REPORT

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Operational Review continued

Disposal and asset management strategy post FY24

Since 31 March 2024 we have exchanged or completed on the sale of the following three investment properties for £18.5 million, 0.1% ahead of the 31 March 2024 book value:

• Boulton House, Manchester for £8.8 million, completion due late July 2024
• Kiln Farm, Milton Keynes for £6.4 million
• Sandringham House, Harlow for £3.3 million

We have also conditionally exchanged on a self-contained office unit at 3B St James' Gate, Newcastle to an owner occupier for £0.7 million, 69% above the value as at

31 March 2024 and are under offer to sell Copperfields, Dartford in an off-market transaction, and Admiral House and Nicholson Gate, Fareham.

The portfolio as at 5 June 2024 consists of nine properties being eight investment

properties and one residential property in York.

Apartment sales at Hudson Quarter, York have continued post 31 March 2024, with a further two apartment sales having exchanged to the value of £1.2 million. There are 13 units remaining and two units under offer. Sales of these will continue, subject to market conditions which have materially improved since the start of 2024.

PAL ACE CAPITAL PLC ANNUAL REPORT AND ACCOUNTS 2024

Remaining properties:

The strategy for the remaining six investment properties, which had a value of £54.4 million as at 31 March 2024, assuming the completion of the sale of those properties currently exchanged and that the agreed sales of Dartford and Fareham complete is as follows:

HQ, York (Commercial)

We are under offer on the lower ground vacant office suite (3,660 sq ft) and, assuming the lease is completed, the property will be 90% occupied with only half a floor (2,932 sq ft) remaining available. We have also removed significant lease breaks on the 4th and 5th floors thus extending the WAULT from 4.9 to 6.5 years. HQ York is an institutional grade property and subject to market conditions and the level of interest rates, it is expected that it will be marketed in Autumn 2024.

Imperial Court and House, Leamington Spa

This property is now fully let following the recent letting of Imperial Court to Lighthouse Games. Other asset management activities are under way in order to achieve a vacant possession block date in five years' time which will provide an opportunity for a potential redevelopment of the entire site.

It is expected that this property will be marketed in Autumn 2024.

The Forum, Exeter

We are actively exploring the principle of a change of use for this 1970s office building to one that we believe will realise more value on sale. As part of this strategy, we are looking to achieve a vacant possession block date within the next three years and are in the process of preparing a pre-application submission to Exeter City Council.

If these initiatives are successful, we will then market the property for sale which is likely to be in Q4 2024/Q1 2025 subject to market conditions.

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Broad Street Plaza, Halifax

The investment market for leisure assets is currently difficult with debt finance being hard to obtain for such assets, notwithstanding the diversity and longevity of income from some of these assets, including Halifax. The lack of liquidity in this sector means that valuations can be volatile. The current income yield on a geared basis for Halifax is 35% and the WAULT to expiry is 14.8 years (9.6 years to break).

There are also various ongoing asset management initiatives that are targeted to be completed prior to sale but the key determinant in terms of timing for disposal is an improvement in debt markets and market sentiment for leisure assets.

Sol, Northampton

As noted above, the agreement to regear the Vue lease is transformational for this property and extends the WAULT to 13.4 years on expiry and 13.1 years to break. There are also other negotiations with both existing and prospective tenants for repositioning some of the units with the potential to improve and diversify the overall leisure offering at the property which will contribute towards it being an in-town destination centre.

On the investment side, as is the case with Halifax, the leisure market is weak with

a limited pool of buyers and therefore, the focus is on the asset management activity to drive value and the timing for the disposal of Sol will depend on an improvement in debt and property markets.

St James' Gate, Newcastle

Active asset management initiatives are underway and further lettings of the vacant space are required in order to increase the occupancy from its current level of 77% and extend the WAULT prior to the asset being ready for sale. Additionally, a track record of occupancy and operating income under the management with Orega needs

to be established before a sale can be contemplated as to sell otherwise will not, in our view, realise full value. The lettings to Softcat plc and Orega demonstrate the potential of this property.

STRATEGIC REPORT

Post 31 March 2024, total residential and investment sales under offer, exchanged or completed currently stand at £20.4 million and as a result, since the change of strategy announcement on 19 July 2022, investment property disposals (either completed or exchanged) have generated proceeds of £124.0 million at a 17.0% reduction to the March 2022 valuation (which was the peak of the current property cycle) or 3.7% ahead when compared with the relevant March valuation prior to sale.

Daniel Davies	Thomas Hood
Head of Asset Management	Head of Investment
5 June 2024

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Our strategy and business model

Key Resources:

Our people

	•	Property and financial	•	A culture of
		expertise		demonstrable
	•	Small Board and		commitment, resilience
		and strong team
		Executive Committee
PAL			working supports the
•	Values of being: active,
	delivery of the strategy
ACE CAPITAL PLC ANNUAL REPORT		astute and ambitious
Our portfolio
AND
•	Resilient rent collection	•	Potential development
ACCOUNTS
	with future growth		the longer term /
		and returns		or refurbishment
	• Value-added assets		optionality for
2024		potential		new owners

Our funding

• Strong balance sheet	• Portfolio cash
with minimal levels of	generation supporting
debt following bank	dividend
debt repayments.

Our Strategy:

Maximising shareholder returns

We actively asset manage and then sell assets at the right time to return cash to shareholders via share buybacks or other methods such as tender offers.

See pages 6 & 7 to read more on Active asset management

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