Palace Capital : Full Year Report

PAL ACE CAPITAL PLC

Interim executive

Chairman's statement

Focused on maximising cash returns to shareholders

ANNUAL REPORT AND ACCOUNTS 2023

Adjusted PBT

£7.6 million

Dividends paid or declared of

15.0 pence

Introduction and update on delivery of strategic objectives

I am pleased to present my Chairman's statement on the results for the year ended 31 March 2023. This is my second statement on the annual results as Chairman of Palace Capital in what can only be described as a volatile and difficult year for the Company and for the property and financial markets.

The past year has been transformational both for the Company and for the wider macroeconomic and geo-political environment. The headwinds of the last twelve months are well documented, including the continued conflict in Ukraine, the UK's cost of living crisis, rising interest rates and inflationary pressures. Such uncertainty and volatility in the economic environment has negatively impacted the property market, particularly with regard to the reduction in property valuations due to the significant increases in both short and long term interest rates.

In July 2022, it was announced by the Company that the Board's strategy was to focus on maximising cash returns to shareholders, whilst continuing to remain mindful of consolidation in the Real Estate sector. As part of its considerations, several properties, including the industrial portfolio, were prepared and readied for sale.

However, the 'mini-budget' in September 2022 significantly accelerated the negative trends outlined above with the result that in October 2022, the Company announced that it had decided to pause the timing of significant disposals for the time being, although the sale

of small, individual assets which lent themselves better to private buyers and special purchasers, would continue. Earlier this year it became evident that property market sentiment and pricing was significantly improving from the position in the last quarter of 2022 and the Company capitalised on this trend by marketing for sale certain properties that would enable it to continue to reduce its debt and therefore remain focused on maximising cash returns to shareholders.

On 5 May 2023 in its strategy and trading update, the Company announced the significant disposal of six industrial assets for £34.0 million at a NIY of 6.2%, 3.0% ahead of 31 March 2023 book value of £33.0 million as well as the exchange of contracts for the sale of an Aldi supermarket in Gosport for £5.6 million at a NIY of 5.5%, 7.3% ahead of the 31 March 2023 valuation.

Disposal activity has continued and we have recently exchanged contracts for the sale of Millbarn Medical Centre at Beaconsfield for £1.5 million, 87.5% ahead of the March 2023 book value of £0.8 million. The Company has also exchanged contracts for the sale of Princeton House, Farnborough for £2.3 million, which is 31.7% ahead of the 31 March 2023 valuation. Both properties are expected to complete in July.

The Company expects to announce further investment property disposals in a Trading Update to be released ahead of the Company's AGM on 26 July 2023 assuming that those sales currently under offer are successfully executed.

Further progress was also achieved with residential sales at Hudson Quarter, York where a further 23 apartment sales were completed for £10.1 million. A further five apartment sales have completed for £2.2 million since the year end leaving 18 units remaining.

Since the change of strategy announced on 19 July 2022, disposals (either completed or exchanged) have generated proceeds of £54.5 million, a 9% reduction over the March 2022 valuation, which was the peak of the current property cycle. If disposals are compared with the relevant March valuation prior to sale, the result is an increase of 5% ahead of such valuation.

Operationally, the business remains robust. The team has been proactive in implementing asset management plans to increase income, reduce void costs and improve our ESG performance, including EPCs, as set out in the Operating Review. Rent collection remains high and occupancy levels remain resilient.

In terms of managing our own costs, as previously announced, measures to reduce the level of administration expenses have been implemented and are continuing. Annualised cost savings are now over £1.4 million. These cost savings represent 30% of FY22 administrative expenses and 19% of FY22 EPRA earnings.

During the financial year, the Company announced two share buyback programmes and purchased 2.6 million shares. The accretion to 2023 EPRA NTA was 8.0 pence per share. Since 1 April a further 0.5 million shares have been purchased. The total cash returned to shareholders from the buyback programmes to date is £7.9 million.

Overview of results

The Group's adjusted profit before tax decreased slightly to £7.6 million (2022: £7.8 million) principally due to higher finance costs offset by an increase in net rental income and a reduction in recurring administration expenses. Trading profits from the sale of residential units realised £0.5 million (2022: £3.8 million) whilst profits from investment property sales contributed £0.8 million (2022: £4.9 million).

The deficit on the revaluation of the portfolio for the year of £42.9 million was due to softening yields across the whole portfolio although disposals since 31 March 2023 have demonstrated that some value has been recovered and realised.

Contractual payments to the former Chief Executive and Executive Property Director of £1.8 million, including associated costs, have been treated as an exceptional item.

The aggregation of the profits and losses described in the preceding paragraphs account for the decrease in profit before tax reported under IFRS to a loss for the year of £35.8 million (2022: £24.6 million profit).

Principally as a result of the revaluation deficit on the portfolio, offset by the 8 pence per share share-buyback accretion, EPRA NTA per share decreased by 24.1% to 296 pence per share (2022: 390 pence per share).

The Group's balance sheet has been significantly strengthened following the £37.5 million reduction in gross debt during the year to £64.3 million. Cash reserves were £5.5 million resulting in net debt of £58.8 million. Post period end and on completion of the disposal of currently contracted sales proforma gross and net debt are expected to be c.£34 million and c.£20 million respectively equating to a proforma LTV of c.13%.

Dividend

The Group paid or declared dividends of

1. pence per share (2022: 13.25 pence per share) in relation to the year ended 31 March 2023, including a proposed final fourth quarter dividend of 3.75 pence per share. The total dividend of 15.0 pence per share is covered 114% by adjusted earnings per share. The final dividend of

1. pence per share will be paid, subject to shareholder approval at the AGM being held on 26 July 2023, on 4 August 2023 to shareholders on the register at
   7 July 2023. The entire dividend will be paid as a Property Income Distribution.

Environmental, Social and Governance ("ESG")

The Company remains committed to responsible business and ESG matters, which are at the forefront of stakeholders' considerations. Further details on the approach to responsible business can be found in the ESG section and on

the website.

Board changes

On 14 June 2022, Neil Sinclair stepped down as Chief Executive and I was appointed Interim Executive Chairman. As announced on 19 July 2022, in light of the amended strategy, Paula Dillon, Kim Taylor- Smith and Mickola Wilson stepped down as Independent Non-Executive Directors. Mark Davies was appointed as an Independent Non-Executive Director and in addition was appointed Chair of the Audit and Risk Committee, Remuneration Committee and Senior Independent Director on 1 August 2022. Richard Starr stepped down as Executive Property Director on 12 August 2022.

Given its low leverage, the Company remains well placed regarding strategic initiatives including various options for the return of capital to shareholders"

Steven Owen

Outlook

The year ahead is likely to be further affected by continuing macroeconomic and geo-political uncertainty although the inflation outlook in the UK is expected to improve. The increases in interest rates have adversely impacted the commercial property market in relation to investment activity resulting in a re-pricing of assets as evidenced by recent transactions and published valuations. Notwithstanding this, the occupational market has remained resilient as evidenced by the increases over estimated rental values obtained on lettings, lease renewals and rent reviews together with a stable occupancy rate and high rent collection which demonstrates the resilience of the portfolio.

As previously announced, the Board's strategy remains focused on maximising cash returns to shareholders, whilst continuing to remain mindful of consolidation in the Real Estate sector. As part of its considerations, certain properties are either being marketed for sale or are being prepared and readied for sale whilst other properties are undergoing asset management initiatives in order to prepare them for sale at a future date. Given its low leverage, the Company remains well placed in terms of flexibility and optionality regarding the timing of its disposal programme and other strategic initiatives, including various options for the return of capital to shareholders.

It is expected that further progress will be announced in a Trading Update to be released on 26 July prior to the AGM.

Steven Owen

Interim Executive Chairman

STRATEGIC REPORT