Palace Capital : Half Year Report

24 November 2022

Palace Capital plc

("Palace Capital" or the "Company")

Interim Results for the six months ended 30 September 2022

CONTINUED DELIVERY OF STRATEGIC OBJECTIVES

Palace Capital (LSE: PCA), the Main Market listed property company, announces its unaudited results for the six months ended 30 September 2022.

Steven Owen, Interim Executive Chairman commented:

"At an operational level, the Company continues to make steady progress with its asset management activities, as well as reducing its level of gross debt and its cost base.

"In our October trading update we announced that we have decided to pause the timing of material property disposals for the time being due to significant volatility and uncertainty and this remains the case. However, we are continuing to successfully sell small, individual assets which lend themselves better to private buyers and special purchasers, the proceeds of which have been used to further reduce gross debt from that reported at the half year end.

"Although we are hopeful of stability returning, the commercial property market continues to be adversely affected both in terms of investment activity and in the downward re-pricing of assets as evidenced by recently reported results and indices. During this challenging period our priority remains to actively manage the portfolio and further reduce gross debt through selective sales of smaller properties. Our relatively low gearing gives the Company flexibility to determine when the appropriate time is to resume significant disposals. This is a matter that is kept under constant review as the Board strives to maximise cash returns to shareholders whilst remaining mindful of consolidation in the Real Estate sector."

Income Statement metrics	Six months to	Six months to
	30 Sept 2022	30 Sept 2021
Adjusted profit before tax	£3.5m	£4.0m
Adjusted earnings per share	7.9p	8.7p
IFRS (loss)/profit before tax	(£12.4m)	£8.0m
Basic earnings per share	(27.4p)	17.4p
Dividends
Total dividend paid per share	7.0p	5.5p
Balance Sheet and operational metrics	30 Sept 2022	31 March 2022
EPRA NTA per share	356p	390p
Net asset value	£155.7m	£177.2m
Like-for-like portfolio valuation	(6.5%)	3.9%
(decrease)/increase

EPRA occupancy rate	88.9%	88.5%
Debt
Loan to value	32%	28%
Total drawn debt	£88.7m	£101.8m
Average cost of debt	3.9%	3.2%
Average debt maturity	2.8 years	1.9 years

Financial highlights

• Adjusted profit before tax of £3.5 million (September 2021: £4.0 million) reflecting higher borrowing costs
• IFRS loss before tax for the period of £12.4 million (September 2021 £8.0 million profit) primarily due to the valuation deficit of £15.6 million
• Adjusted EPS of 7.9 pence (September 2021: 8.7 pence)
• Dividends paid up 27.3% to 7.0 pence per share (September 2021: 5.5p)
• Completed a £6.0 million share buyback programme in July 2022, a 7.0 pence per share accretion to EPRA NTA
• EPRA NTA per share of 356 pence reduced by 8.7% (March 2022: 390 pence) and IFRS net
  assets of £155.7 million (March 2022: £177.2 million) reflecting an outward yield shift. Excluding Bank House, Leeds, EPRA NTA per share reduced by 6.1%
• Investment property portfolio valuation reduced by 6.5% on a like-for-like basis under the inaugural valuation undertaken by CBRE or 4.6% excluding the deficit of £5.0 million on Bank House, Leeds
• Portfolio ERV growth over the half year was 3.6% on a like-for-like basis, 7.1% for the industrial portfolio
• LTV of 32% (March 2022: 28%)
• Gross debt reduced by 12.9% in the period to £88.7 million (March 2022: £101.8 million). Gross debt reduced by a further £5.4 million post period-end to £83.3 million.
• The weighted average maturity of debt facilities is 2.8 years with the earliest facility not due to expire until March 2024
• Annualised administration cost savings of over £1.2 million following the Board changes and the relocation of the Company's head office, together with other, continuing cost reduction measures. The annualised cost savings of £1.2 million represent 26% of FY22 administration expenses and 16% of FY22 EPRA earnings

Operational highlights

• During the first half, the Company disposed of four investment properties for £4.8 million, 25% ahead of the 31 March 2022 book value
• Since the half year end a further two investment properties have been sold for £4.1 million bringing the total sold year to date to £8.9 million, 22% ahead of the 31 March 2022 book value
• Apartment sales at Hudson Quarter, York have continued to progress, despite the uncertain economic backdrop. A further 13 apartments have been sold since 31 March 2022 for a total of £5.7 million, with aggregate proceeds of the 93 units sold totalling £33.1 million.
  Additionally, 10 units are under offer to the value of £4.4 million, leaving 24 units remaining. During the first half 9 apartments were sold for £3.9 million.
• WAULT for the portfolio has remained resilient at 4.8 years (March 2022 4.7 years)
• An additional £0.9 million of annualised net rental income was created during the half year through leasing and review activity and the associated reduction in non-recoverable property costs which was, on average 12%, ahead of the 31 March 2022 ERVs. Annualised net rental

income lost from lease expiries and breaks totalled £0.4 million resulting in a net additional annualised increase of £0.5 million from active asset management activity. Net rental income lost from disposals totalled £0.3 million per annum resulting in a net gain in annualised net rental income of £0.2 million

• Rent collection for the first half of the financial year was 99% (31 March 2022: 98%)
• EPRA occupancy remains stable at 88.9% (31 March 2022: 88.5%)

Audio Webcast

The Company will hold an audio webcast for analysts and investors at 9.00 am today which will be available via the link below. An on demand recording will also be available from this link following the meeting and via the Company's website www.palacecapitalplc.com.

https://pcawebcast

Palace Capital plc

Steven Owen, Interim Executive Chairman / Matthew Simpson, Chief Financial Officer Tel. [phone]

Financial PR

FTI Consulting

Dido Laurimore / Giles Barrie Tel: [phone] [e-mail]

Cautionary Statement

This announcement does not constitute an offer of securities by the Company. Nothing in this announcement is intended to be, or intended to be construed as, a profit forecast or a guide as to the performance, financial or otherwise, of the Company or the Group whether in the current or any future financial year. This announcement may include statements that are, or may be deemed to be, ''forward- looking statements''. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms ''believes'', ''estimates'', ''anticipates'', ''expects'', ''intends'', ''plans'', ''target'', ''aim'', ''may'', ''will'', ''would'', ''could'' or ''should'' or, in each case, their negative or other variations or comparable terminology. They may appear in a number of places throughout this announcement and include statements regarding the intentions, beliefs or current expectations of the directors, the Company or the Group concerning, amongst other things, the operating results, financial condition, prospects, growth, strategies and dividend policy of the Group or the industry in which it operates. By their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future and may be beyond the Company's ability to control or predict. Forward-looking statements are not guarantees of future performance. The Group's actual operating results, financial condition, dividend policy or the development of the industry in which it operates may differ materially from the impression created by the forward-looking statements contained in this announcement. In addition, even if the operating results, financial condition and dividend policy of the Group, or the development of the industry in which it operates, are consistent with the forward-looking statements contained in this announcement, those results or developments may not be indicative of results or developments in subsequent periods. Important factors that could cause these differences include, but are not limited to, general economic and business conditions, industry trends, competition, changes in government and other regulation,

changes in political and economic stability and changes in business strategy or development plans and other risks.

Other than in accordance with its legal or regulatory obligations, the Company does not accept any obligation to update or revise publicly any forward-looking statement, whether as a result of new information, future events or otherwise.

INTERIM EXECUTIVE CHAIRMAN'S STATEMENT

Update on delivery of strategic objectives

At our Full Year results, announced in June, it was noted that the year ahead was likely to be further affected by continuing macroeconomic and geo-political uncertainty, particularly arising from the continuing conflict in Ukraine. These were expected to contribute to growing inflationary headwinds which would impact on consumer and investor confidence, with interest rates likely to constrain UK economic growth in the short term. This has been borne out by recent monetary and fiscal tightening, with the UK economy likely to suffer a recession in the short term.

On 19 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. Other properties are undergoing asset management initiatives in order to prepare them for sale at a future date when market conditions are more favourable.

However, since the 'mini-budget' in September, the negative trends outlined above accelerated significantly, translating into higher borrowing costs, the impact of which has adversely impacted property valuations, with the industrial sector being particularly affected.

The Board therefore took the decision to pause the timing of significant property disposals for the time being because of this volatility but said that it would continue to sell small, individual assets which lend themselves better to private buyers and special purchasers. The Company has relatively low leverage and therefore has the flexibility to do this and to react promptly when the market stabilises.

To this end, since the half year end, the Company has sold £4.1 million of investment properties, bringing the total sold year to date to £8.9 million at 22% above the 31 March 2022 valuation. Since the half year end, the Company also sold £1.8 million of residential apartments at Hudson Quarter, York, bringing the total sold year to date to £5.7 million.

Operationally, the business remains robust. The Asset Management team has been proactive in implementing asset management plans to increase income and reduce void costs with lettings, renewals and rent reviews on average 12% ahead of the 31 March 2022 estimated rental values. During the first half year 23 lease events comprising seven new lettings, six lease renewals and ten rent reviews were completed across 113,600 sq ft of space providing £0.7 million of additional income. Including the associated reduction in non-recoverable property costs of £0.2 million an additional £0.9 million of net rental income was created during the first half.

The team has focused on minimising costs to our tenants. Rents and service charges for properties in the portfolio remain competitive and are considered by management to represent an affordable solution to existing and prospective tenants facing the current and predicted economic headwinds. Our passing rents per square foot for the portfolio sectors show levels of c. £17.10 psf, £7.10 psf and £17.90 psf for offices, industrial and leisure respectively. We have a good mix of assets ranging from Grade A offices to more affordable industrial, leisure and retail units in good locations for people to access for their business requirements.

In terms of managing our own costs, as previously announced, measures to reduce the level of administrative expenses have been implemented and are continuing. It is estimated that annualised cost savings are over £1.2 million which include the Company relocating its head office on 1 December

2022 from St James's, London to Victoria, London. The half year results include an exceptional charge of £1.1 million (excluding taxes and costs) relating to contractual payments to the former Chief Executive and Executive Property Director.

The new, smaller Board consisting of Mark Davies, Matthew Simpson and myself, which is more appropriate for the size of the Company, has operated effectively and closely in dealing with the challenges the Company has faced since August 2022. The Board is supported by an Executive Committee of six key personnel including the Heads of Asset Management and Investment.

During the period, the Company announced a share buyback programme of up to 5% of its issued share capital which was completed within a week of announcement through the purchase of 2.3 million shares at a price of 260 pence per share. The accretion to EPRA NTA was 7.0 pence per share.

As part of our financial management, we have also been active in allocating surplus capital to reduce our gross debt by repaying higher interest loans and thereby reducing debt servicing costs and improving covenant headroom.

Overview of results

The Group's adjusted profit before tax reduced to £3.5 million (September 2021: £4.0 million) principally due to higher borrowing costs compared with the previous half year period. Investment property sales during the half year period totalled £4.8 million which realised a profit of £0.9 million (September 2021: £0.4 million). Trading profits from the sale of residential units realised a profit of £0.1 million (September 2021: £2.8 million).

The whole portfolio was independently valued by CBRE, the Company's new valuers, as at 30 September 2022, at £235.6 million, a reduction of 6.5% on a like-for-like basis. The valuation deficit of £15.6 million equates to 35.4 pence per share. Of this, £5.0 million related to Bank House, Leeds. Excluding this one asset, the portfolio valuation reduction on a like-for-like basis was 4.6%.

Bank House, Leeds, is an 89,000 sq ft Grade II listed building in Leeds city centre. It is currently fully let. In the Trading Update on 12 October 2022, we advised that:

• on 5 October 2022, planning permission was granted for a three storey extension and extensive external alterations and remediation
• a design review process would be undertaken including a value engineering exercise with advisers in order to assess its viability
• if in the event the value engineering exercise concluded that the scheme is not viable then the carrying value of the property would be reduced to take account of remediation costs
• the Company would also be assessing all of its options in relation to the property.

The Company has now conducted detailed viability analyses of the proposed scheme for which planning permission was sought and has determined that such a scheme is not currently financially viable. Accordingly, the Company is now analysing options for the refurbishment and remediation of the existing building, alongside environmental improvements. The listing of the building is also being reviewed to establish whether, in the circumstances, there is a case to de-list the building, as part of the process to maximise its value for sale in due course. CBRE valued Bank House, Leeds as at 30 September 2022 at £5.3 million which reflects the cost of remediation to the exterior cladding.

The investment portfolio (excluding residential properties held as trading properties) was valued at £216.9 million and a net initial yield (NIY) of 6.8%. Within the investment portfolio the office, industrial and leisure assets, which comprise 89% of the portfolio, were valued at NIYs of 6.6%, 5.7% and 8.7% respectively.

The ERVs used by the valuers were, on the whole portfolio, 3.6% higher on a like-for-like basis than as at 31 March 2022. Within the portfolio the ERV growth for offices, industrial and leisure assets was 1.8%, 7.1% and 6.9% respectively.

Principally, as a result of the revaluation loss on investment properties, EPRA NTA per share fell by 34 pence to 356 pence per share as at 30 September 2022 (March 2022: 390 pence per share).