Palace Capital : Full Year Report

Annual Report and Accounts 2022

Regional property experts

STRATEGIC REPORT

Year In Numbers	IFC
Chairman's Statement	02
Leading with our purpose	04
Looking forward	06
How We Work	08
Our Portfolio	09
Investment Case	10
Business Model	12
Strategy	14
Key Performance Indicators	16
Our Marketplace	18
Our Sectors	19
Operational Review	20
Strategy In Action - Disposal Completion	24
Strategy In Action - Asset Management	26
Top 10 Properties by Location	28
Top 10 Properties by Value	29
Strategy In Action - Strengthening the
Balance Sheet	31
Financial Review	32
Risk Management	36
Section 172 Statement	44
ESG Introduction	46
Working Responsibly - Our ESG Strategy	48
Our ESG - Environmental	49
TCFD - Being a responsible business	50
ESG - Improving the environmental
performance of our assets	54
ESG - Case studies	55
ESG - Future-proofing the portfolio	56
ESG - Social	58
GOVERNANCE
Corporate Governance Report	64
Governance overview	66
Board of Directors	68
Governance Framework	70
Board Composition and
Division of Responsibilities	71
Board Activities	72
Board activities and Committee attendance	74
Board performance evaluation	75
Nominations Committee Report	76
Environmental Social and Governance
Committee Report	79
Audit and Risk Committee Report	81
Directors' Remuneration Report	85
Remuneration at a glance	88
Remuneration policy	89
Annual Remuneration Report	93
Directors' Report and additional disclosures	100
Statement of Directors' Responsibilities	102
Independent Auditor's Report to the
members of Palace Capital plc	103
FINANCIALS
Consolidated Statement
of Comprehensive Income	114
Consolidated Statement
of Financial Position	115
Consolidated Statement
of Changes in Equity	116
Consolidated Statement
of Cash Flows	117
Notes to the Consolidated
Financial Statement	118
Company Statement
of Financial Position	149
Company Statement
of Changes in Equity	150
Notes to the Company
Financial Statements	151
Officers and Professional Advisors	156
Glossary	157

Our Performance: Summary

YEAR IN NUMBERS

Adjusted Profit Before Tax	IFRS Profit/(Loss) Before Tax
2022			2022
£7.8m			£24.6m
2021
£7.5m		2021			£(5.5)m

Total Property Return	EPRA NTA per Share
								2022
2022		12.5%				390p
								2021
2021				1.0%						350p
Total Accounting Return	Total Shareholder Return
2022							2022
		14.8%		21.1%
								2021
2021			(1.2)%				38.5%
Loan to Value	Dividends paid or declared
2022						2022
	28%					13.25p
2021						2021
	42%			10.50p

OPERATIONAL HIGHLIGHTS

• Disposal strategy ahead of target with £31.5m of gross proceeds achieved which is 19% above March 2021 book value, 12% ahead of purchase prices and capital expenditure, delivering an ungeared IRR of 11%
• 55 lease events completed in the period totalling 319,000 sq ft at an average of 11% premium to ERV
• An additional £1.9m of annualised net rental income gained in the year through asset management lease activity, acquisitions, and reduction in non-recoverable property costs. This takes into account income lost through disposals, lease expiries and lease breaks
• Portfolio repositioning in the year has led to a higher quality portfolio consisting of 37 properties, improved EPC ratings (which support future rental uplifts), higher occupancy and weighting of core assets
• 98% rent collection for the 12 months to 31 March 2022
• Overall EPRA occupancy of 88.5% (2021: 86.4%), with majority of remaining vacancy having been recently refurbished or identified for strategic refurbishment or redevelopment
• WAULT of 4.7 years to break, 6.5 years to expiry, reflecting flexible lease terms
• Increased prioritisation of ESG initiatives and incorporated energy efficiency measures into our capital expenditure projects

VISIT OUR WEBSITE AT

WWW. PAL ACECAPITALPLC . COM

FOR REPORTS AND PRESENTATIONS, GO TO

1. PAL ACECAPITALPLC . COM/ INVESTORS/ REPORTS -AND - PRESENTATIONS/

FRONT COVER: HUDSON QUARTER, YORK

Welcome to

Palace Capital

We are regional property experts with

a diversified portfolio of UK commercial real estate

REPORT STRATEGIC

2022 SUMMARY

Our year in numbers and operational highlights summarise a strong performance for the Group in the year. We saw the gradual easing of lockdown restrictions in the UK and were well placed to take advantage of this. We maintained our close relationship with our tenants to maximise rent collection and completed our York development. Our asset management strategy focused

on maximising the full potential of our properties, including letting activity and consideration of the development and refurbishment pipeline.

We are well placed to continue to perform well, as we focus on our diversified portfolio in good locations and our commitment to sustainable buildings which have strong ESG credentials, or viable for improvement to create long term sustainable value.

PORTFOLIO

We aim to provide a balanced portfolio of well located properties comprising:

• c.50% core assets with medium or long term leases with high occupancy and strong income profiles located where we see rental and capital value growth;
• c.40% value add /asset management assets where we reinvest surplus capital to adapt our properties to occupier demands; and
• c.10% development assets where we identify potential to undertake or divest at the right time for others to complete.

Total portfolio value as at 31 March 2022

£259m

Number of assets

37

Contracted rent

£15.9m

Total occupancy

88.5%

WAULT

4.7Y

SECTOR SPLIT
9.0% 3.8%		OFFICES
		INDUSTRIAL
9.1%		LEISURE
	DEVELOPMENT
		RETAIL
	47.1%	RETAIL WAREHOUSES
14.3%
16.7%

22 Market Street, Maidenhead

01

2022 ACCOUNTS AND REPORT ANNUAL PLC CAPITAL ACE PAL

Chairman's Statement

"Palace Capital has performed resiliently whilst adapting quickly to ensure business continuity is maintained in this challenging environment".

Steven Owen

A resilient

market

with Steven

Owen

I am pleased to present my first Chairman's Statement on the results for the year ended 31 March 2022, following my appointment to the Board on 1 January this year.

INTRODUCTION

Despite the uncertainty and volatility in the economic environment over the last two years, the Group has performed strongly with many of the key metrics showing a marked improvement in these results. The UK's success in rolling out its Covid-19 vaccination programme and thereby providing protection for the public has translated into improved confidence, which in turn has had a positive impact on the portfolio. This has been evidenced by strong letting activity and rental collections returning to their pre-pandemic levels, as people learn to live with the virus, get back to their offices and enjoy leisure activities once again. Furthermore, with a portfolio comprising assets in town and cities across the regions, the Group is well placed to capitalise on the Government's Levelling Up agenda.

The Group has navigated the unprecedented challenges that faced the economy and its business with the support of its tenants, banks and its employees. On behalf of the Board, I would like to thank all of them and other stakeholders for their support during the last year.

OVERVIEW OF RESULTS

The Group has delivered a robust set of results over the last year driven by a combination of active operational and financial activity, property revaluation gains and profits arising from the disposal strategy resulting in a total accounting return of 14.8% (2021: minus 1.2%).

The Group's adjusted profit before tax increased marginally to £7.8m notwithstanding the dilution to earnings caused by property sales totalling £31.5m which realised a profit of £5.0m. Trading profits from the sale of residential units realised £3.8m.

The Group's portfolio has demonstrated resilience throughout the past year and combined with asset management activity and yield compression, generated a revaluation surplus of £8.2m, equivalent to 17.7 pence per share.

The aggregation of the profits described in the preceding paragraphs account for the significant increase in profit before tax reported under IFRS of £24.6m (2021: £5.5m loss).

02

"The Group has delivered a positive set of results over the last year driven by a combination of

active operational and financial activity, property revaluation gains and profits arising from the disposal strategy resulting in a total accounting return of 14.8%."

Principally as a result of the revaluation surplus and profits arising from the disposal strategy, EPRA NTA per share increased by 11.4% to 390 pence per share (2021: 350 pence per share).

The Group's balance sheet has been significantly strengthened following the disposal of properties and the revaluation surplus resulting in a loan to value ratio of 28% (2021: 42%). As at 31 March 2022 the Group had cash and cash equivalents of £28.1m and as at 10 June it was £22.7m, excluding the £5.0m available to immediately draw from the NatWest revolving credit facility, which was repaid post year end.

DIVIDEND

The Group increased its paid or declared dividends by 26.2% to 13.25 pence per share (2021: 10.50 pence per share) in relation to the year ended 31 March 2022, including a proposed final fourth quarter dividend of 3.75 pence per share. The total dividend of 13.25 pence per share is covered 128% by Adjusted earnings per share.

TOTAL SHAREHOLDER RETURNS

The Company's share price increased from 236 pence per share on 31 March 2021 to 274p on 31 March 2022 which together with dividends distributed produced

a Total Shareholder Return of 21.1% (2021: 38.5%).

ENVIRONMENTAL, SOCIAL AND GOVERNANCE ("ESG")

The Company is committed to responsible business and ESG matters, which are at the forefront of the Board's considerations. Further details on the approach to responsible business can be found in the Annual Report and on the website.

BOARD CHANGES

Neil Sinclair, Chief Executive and Co- founder, stepped down from the Board with effect from 14 June 2022. Neil considered this to be the right time to step down following the strong trading update announced on 6 April 2022 and the material increase in NAV and dividend. Neil, with Stanley Davis and Andrew Perloff, co-founded the Company and was instrumental in growing the business through a combination of corporate

and property transactions including moving from AIM to the Main Market and conversion to a REIT. The Board would like to thank him for his dedication, commitment and contribution to Palace Capital since 2010. The Board and staff of Palace Capital wish him well.

I, currently Non-Executive Chairman, will assume the role of Interim Executive Chairman with effect from 14 June 2022.

In December 2021, it was announced that Stanley Davis, Chairman and Co-founder of the Group in 2010, would retire from the Board on 31 December 2021. The Board would also like to thank Stanley for his considerable service to the Company.

OUTLOOK

The year ahead is likely to be further affected by continuing macroeconomic and geo-political uncertainty, particularly arising from the continuing war in Ukraine. The inflationary headwinds and the consequential impact on consumer and investor confidence are likely to constrain UK economic growth in the short term. The consequential risks to real estate owners of such factors are understood and the Board will continue to monitor the situation regarding any impact on its business.

The Board announced in the Trading Update on 6 April that, in consultation with shareholders, it was considering a range of strategic options to unlock further value in the business. We expect to update the market on the strategic options that we will pursue before the Annual General Meeting in July 2022. The Board remains committed to maximising value for shareholders and closing the current share price discount to NAV.

Steven Owen

C H A I R M A N

REPORT STRATEGIC

03