Palace Capital — Hudson Quarter completion

Palace Capital (LSE: PCA)

Last close As at 22/02/2024

210.00

4.00 (1.94%)

Market capitalisation

GBP92m

More on this equity

Research: Real Estate

Palace Capital — Hudson Quarter completion

Ahead of results for the year ended 31 March 2021 (FY21), due in June, Palace Capital (PCA) issued a trading update on continuing robust rent collection, further disposals of non-core assets, and perhaps most important of all, the completion of the flagship Hudson Quarter (HQ) development in York, on budget, later this month. We expect HQ to be a significant driver of returns and deleveraging over the next two years.

Martyn King

Written by

Martyn King

Director, Financials

Real Estate

Palace Capital

Hudson Quarter completion

Trading update

Real estate

20 April 2021

Price

235p

Market cap

£108m

Net debt (£m) at 31 March 2021

117.9

Edison est. net LTV at 31 March 2021

41.9%

Shares in issue

46.1m

Free float

95%

Code

PCA

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

2.2

22.2

16.9

Rel (local)

(2.2)

16.0

(6.7)

52-week high/low

239p

171p

Business description

Palace Capital is a UK property investment company listed on the Main Market of the LSE. It is not sector-specific and looks for opportunities where it can enhance the long-term income and capital value through asset management and strategic capital development in locations outside London.

Next events

FY21 results

Expected June 2021

Analyst

Martyn King

+44 (0)20 3077 5745

Palace Capital is a research client of Edison Investment Research Limited

Ahead of results for the year ended 31 March 2021 (FY21), due in June, Palace Capital (PCA) issued a trading update on continuing robust rent collection, further disposals of non-core assets, and perhaps most important of all, the completion of the flagship Hudson Quarter (HQ) development in York, on budget, later this month. We expect HQ to be a significant driver of returns and deleveraging over the next two years.

Year end

Net rental income (£m)

Adj PBT*
(£m)

Adj EPS*
(p)

EPRA NTA/
share (p)**

DPS
(p)

P/NTA
(x)

Yield
(%)

03/20

18.8

8.0

17.5

364

12.0

0.64

5.1

03/21e

14.5

6.7

14.5

341

10.0

0.69

4.3

03/22e

14.3

6.6

14.3

359

12.0

0.65

5.1

03/23e

15.0

7.1

15.5

368

14.0

0.64

6.0

Note: *Adjusted for revaluation gains and non-recurring items. **EPRA NTA is fully diluted.

HQ to drive returns and de-gearing

We forecast development gains of c 20p per share and recurring income of c £0.9m over the next two years as the HQ residential apartments are sold and the commercial space let. Despite the marketing suite being closed for much of the past year by lockdowns, contracts have been exchanged on 40 (of a total 127) apartments for an aggregate value of £10.8m with six further apartments under offer (£1.8m value). PCA now expects at least half of the remaining apartments to be sold by end-FY22, generating sufficient cash to repay the development funding in full by the end of calendar 2021. Given supply constraints in the local market, PCA expects the high-quality commercial space to be let or under offer by end-FY22. Completion of HQ represents a significant de-risking and an opportunity to de-gear. We an estimate peak year-end LTV of just over 40% at FY21, falling to c 30% as apartment sales complete, and assuming no reinvestment.

Adjusting future year forecasts for more cautious outlook

PCA collected 94% of rents for the year ended 31 March 2021 and at the date of the announcement, 82% of the March quarter rents had been collected (69% in cash, 3% lease amendments and 10% agreed payment plans and monthly collection); PCA expects this to increase to more than 90%. Our previously above-consensus forecasts are adjusted to take account of recent disposals (for which we assume no reinvestment) and a more cautious view on the pace at which strong reversionary potential can be captured over the next two years. FY21 earnings are unchanged but we have deferred an increase in quarterly DPS to FY22. We expect a slower rate of earnings growth in FY22 and FY23 but continuing DPS growth, fully covered by earnings and growth in EPRA NTA, driven by HQ.

Valuation: Attractive yield and wide discount to NAV

The PCA valuation remains undemanding set against the value embedded in the portfolio (see below). Our FY22e DPS forecast represents a well-covered dividend yield of 5.1%, while the shares continue to trade at a significant discount of c 30% to EPRA NTA.

Regional investor targeting total returns

In this note we provide an update on our November Outlook note and revisions to our forecasts ahead of PCA’s release of results for the year to 31 March 2021 (FY21) that we expect in June. PCA is an internally managed UK real estate investment trust (REIT), focused on commercial properties in major cities and university towns in the UK, outside London. It has an entrepreneurial approach to investment and unlike many REITs operates a total return model. Since IPO in 2013 it has built a proven track record of acquiring properties where it can extract value by enhancing sustainable recurring income and generating capital growth through refurbishment and development opportunities. This strategy aims to provide attractive income returns, as well as exposure to capital growth from the repositioning of value-add properties. PCA is sector-agnostic over the medium term, adapting to shifting market opportunities, but is currently focused on regional office and industrial assets, 43% and 14% of portfolio value respectively at end-H121. We expect this focus to further increase through the company’s capital recycling plans. Although rent collection has remained strong, the market conditions created by the pandemic over the past year have limited the opportunity to deliver value creation by slowing letting activity and weakening capital values across much of the UK commercial property market. Nevertheless, the existing portfolio contains strong reversionary potential and offers significant refurbishment and development opportunities as and when conditions improve. Meanwhile, we expect completion of the flagship HQ development in York to materially drive returns in the next two years.

Flagship Hudson Quarter development approaches completion

The HQ development in York promises to be a significant driver of returns for PCA over the next two years. Despite pandemic-driven delays of around three months in total it is due to complete by the end of April 2021, on budget.

HQ occupies a two-acre site in York, within the city walls and just a minute’s walk from York railway station, which is 105 minutes (non-stop) by rail from London. The scheme comprises three residential buildings and a commercial building. The 127 flats (c 95,000 sq ft of living space) are being sold and the commercial element, comprising 39,500 sq ft of grade A offices will be retained for income. The underlying market conditions in York remain favourable for both the residential and commercial assets.

Although the marketing suite has been closed for much of the past year by the lockdowns, it has now re-opened. Contracts have been exchanged on 40 of the 127 apartments, up from 36 in November 2020 and 28 in March 2020, with a value of £10.77m. An additional six apartments are under offer with a total consideration of £1.75m. At £550 per sq ft, PCA expects the gross sales value of the residential assets to be c £52m. Most of the apartments sold to date have been studios and one-bedroom apartments rather than the higher value, larger apartments and hence the average sales value has been below the overall expected value. The scheme is of high quality and PCA is encouraged by a significant increase in enquiries and reservations since the government published its roadmap out of lockdown on 23 February. It expects at least half of the remaining 81 apartments to be sold by the end of FY22, taking total sales proceeds (including the existing apartments where contracts have been exchanged) to at least £20m. Including existing financial resources, PCA expects to repay the c £26m Barclays development facility, utilised to part-fund the entire project, in full by the end of calendar 2021.

The pandemic has also slowed pre-letting activity for the 35,000 sq ft of self-contained commercial space at HQ. However, given the quality of the space (grade-A standard) and supply constraints in the local market PCA expects it to be let or under offer by the end of FY22. As has been previously reported, in February, 4,500 sq ft of office space, on the ground floor of one of the residential buildings was pre-let to Knights, a quoted law firm, at a record rent for York of £25 per sq ft.

HQ is one of many opportunities embedded in the portfolio

HQ provides a significant upside opportunity for PCA. It is a large project for PCA, with a gross development value that represents c two-thirds of market capitalisation. Completion on budget represents a significant de-risking, as does the opportunity to de-gear as the residential assets are sold. In terms of income and capital returns, HQ completion provides the potential to crystalise sales profits on the residential apartments, recognise development gains on the commercial space and recurring income as it is let. For HQ, our forecasts include c £10m of development/disposal gains over FY22 and FY23, more than 20p per share, and for the commercial space to add c £0.9m to rental income on an annualised basis once fully let. We expect gearing (LTV) to peak at a little over 40% in FY21, ahead of HQ completion, falling to around 30% as the residential apartment sales are completed in full (c £50m net proceeds).

Individually on a smaller scale than HQ there is a broad range of additional opportunities embedded within the PCA portfolio.

The H121 externally estimated rental value (ERV) of the portfolio, excluding the c £0.9m of additional rent uplift that management expects from the completion and letting of HQ, was £3.3m or 20% ahead of the contracted gross income. Although both ERV and contracted rents will have shifted during H221 with disposals, leasing events and market rental changes, the scale of the potential is clear. Void reduction represents the largest share of this (£3.1m at end-H121), including vacant properties, in many cases recently refurbished, that are immediately available to let as well as properties where vacant possession has been strategically obtained with a view to refurbishment or development activity. Some of these could meanwhile be offered on short lets. Several additional medium-term refurbishment and development opportunities for which detailed asset management plans have been identified, potentially providing counter-cyclical opportunities to add value to the portfolio should market-wide rents and capital returns stall.

Continuing asset management

The pandemic has slowed leasing activity across much of the portfolio, not least because of the difficulty in viewing properties but also because many potential tenants have been unwilling to commit to long-term plans until uncertainty has eased. Encouragingly, four lettings have recently been agreed at the company’s two leisure assets in Northampton and Halifax in addition to an office property in Leeds. Unsurprisingly the leisure assets were badly affected by the lockdown and in H121 PCA focused on securing longer-term occupancy and protecting valuation, in some cases by providing immediate pandemic support to the tenants through rental concessions in return for lease extensions and lease break removal. As the lockdown is eased PCA continues to anticipate a recovery in investment market activity in the sector which it hopes will provide an opportunity to recycle capital towards the office and industrial sectors that form the core of its portfolio.

Further non-core disposals identified

Since the end of H121 PCA has reported on the disposed of four properties as part of its ongoing disposal programme, focused on non-core properties, largely where it has completed the business plan for the asset or where the risk-return balance favours disposal, in some cases generating an immediate saving on property operating costs. With the interim results in November PCA reported the sale of two non-core office assets for a combined c £2.7m, an average c 23% above the H121 book value. Meadow Court, a partially let office in Sheffield, was sold for £1.25m, 30% above book value, and the vacant Hyde Abbey House, in Winchester, with its historic Georgian façade was sold for £1.46m, 17% above book value with planning consent for a change of use to residential. PCA has also disclosed the sale of two further asset during H221 (Harbour Court in Portsmouth and 124–126 Upper Bar Street in Southampton), also at an undisclosed premium to book value, for a combined £2.45m. At least another 15 properties with an aggregate value more than £30m have been identified for disposal during the current year. The properties that have been sold or may be sold are relatively small. The average lot size of the four properties sold in H221 was £1.3m and the average lot size of the additional properties identified for sale is c £2m. Across the entire portfolio, with a H121 value of £281.6m the average lot size of the 52 properties owned at the time was c £5.4m. Having grown the portfolio primarily through portfolio acquisition, non-core disposals have been a regular feature, enabling capital deployment to be optimised and supporting operational efficiency.

Forecast revisions

Our previously above consensus forecasts are adjusted to take account of recent disposals (for which we do not assume reinvestment) and build in a more cautious view on reversionary capture going forward. Although we have not specifically included the further disposals planned by the company, we would expect the proceeds of these to be substantially recycled to maintain the income base as well as providing new asset management opportunities. However, there may well be a timing gap between sales and purchases, and this contributes to the more cautious view. Our FY21 forecasts are unchanged other than to defer any increase in the quarterly rate of DPS until FY22. However, our FY22 forecasts are lower and the impact builds in FY23 with a material reduction in the rate of earnings growth compared with that previously forecast.

Despite a consistent rent collection performance we have therefore deferred any increase in the level of quarterly DPS until FY22.

Exhibit 1: Forecast revisions

Net rental income (£m)

Adjusted PBT (3m)

Adjusted EPS (p)

EPRA NTA (p)

DPS (p)

Old

New

Change (%)

Old

New

Change (%)

Old

New

Change (%)

Old

New

Change (%)

Old

New

Change (%)

03/21e

14.5

14.5

0.0

6.7

6.7

0.0

14.5

14.5

0.0

341

341

0.0

12.0

10.0

(16.7)

03/22e

14.9

14.3

(4.1)

6.9

6.6

(4.6)

14.9

14.3

(4.6)

364

359

(1.4)

12.0

12.0

0.0

03/23e

16.6

15.0

(9.6)

8.4

7.1

(15.2)

18.2

15.5

(15.2)

378

368

(2.5)

16.0

14.0

(12.5)

Source: Edison Investment Research

The changes to our adjusted profit before tax (adjusted PBT) are driven by lower net rental income, partly offset by lower net finance expense (lower debt). We estimate that recent disposals reduce gross contracted rent roll (£16.9m at end-H121) by c £0.4m. Including this, our forecasts are based on expected gross contracted rent roll of £16.3m (previously £16.7m) at end-FY21, £15.9m at end-FY22 (previously £16.8m, both before any impact from the HQ commercial assets), and £17.3m at end-FY23 (previously £17.3m, both including c £0.9m from HQ).

In line with company guidance, we have extended the sales period for the HQ residential apartments to the end of calendar 2022, having previously assumed this would be completed by 31 March 2022 (end-FY22). In our forecasts this is primarily a cash flow item although by tying development gains on the apartments to completed sales it has the effect of deferring c £3.0m of gains from FY22e to FY23e. Other than the HQ development gains (now c £7m in FY22 and c £3m in FY23) we continue to allow for additional negative revaluation effects in H221 of c £4.5m (c 1.9% of the end-H121 value of the completed portfolio or c 1.5% adjusting for assumed capex). For FY22 and FY23 we assume no change in values, adjusted for capex. Each 1% increase/decrease in the value of the overall portfolio (including HQ) is equivalent to an increase/decrease in FY21e EPRA net tangible assets per share (NTA) of c 6p.

Valuation

Since its first major post-IPO transaction in H214 until end-H121 PCA’s total return strategy has generated cumulative EPRA NAV total returns of 106.1% or a compound annual average return of 10.9%. This is a good level of return despite the negative impacts of COVID-19 on late FY20 and H121 property valuations. Our forecasts indicate a negative (4.4%) total return for FY21 but positive returns in FY22 (8.6%) and FY23 (6.1%), driven by development gains/residential disposal profits on the completion of HQ) and increased rental income through reversionary capture.

Exhibit 2: NAV total return history

H214

FY15

FY16

FY17

FY18

FY19

FY20

H121

Cumulative return H214–H121

Opening EPRA NTA per share (p)*

218

341

388

414

443

414

407

364

218

Closing EPRA NTA per share (p)*

341

388

414

443

414

407

364

347

347

DPS paid (p)

2.5

8.50

14.00

18.00

19.00

19.00

19.00

2.5

103

Income return (%)

1.1%

2.5%

3.6%

4.3%

4.3%

4.6%

4.7%

0.7%

47.0%

Capital return (%)

56.6%

13.5%

6.9%

6.9%

-6.4%

-1.8%

-10.4%

-4.8%

59.1%

NAV total return (%)

57.8%

16.0%

10.5%

11.2%

-2.1%

2.8%

-5.8%

-4.1%

106.1%

Ave, annual compound return

10.9%

Source: Palace Capital data, Edison Investment Research. *FY20 and H121 are EPRA net tangible assets per share and previous years reflect the broadly equivalent EPRA net asset value per share.

Based on the current rate of quarterly DPS (an annualised 10p per share) the yield is 4.3% and based on our forecast FY22 DPS of 12p per share the prospective yield is 5.1%. We forecast DPS to continue to be fully covered by adjusted earnings. Meanwhile, the shares trade at a significant discount of c 30% to both H121 EPRA NTA per share of 347p and our forecast end-FY21 diluted EPRA NTA per share of 341p.

In Exhibit 3 we show a summary performance and valuation comparison of Palace and a peer group of UK commercial real estate investment companies with a strong regional focus. PCA’s current annualised DPS of 10p, fully covered by adjusted earnings, represents a yield of 4.3% which represents an attractive income return within PCA’s total return strategy. In combination with the more than 30% discount to NAV and strong reversionary potential within the portfolio there appears to be significant unrecognised value in the shares. HQ completion is a potential trigger for a re-rating by significantly reducing development risk, which we expect to be followed by financial de-leveraging as the residential assets are sold, recognition of development/sale profits and enhancement of long-term income.

Exhibit 3: Peer group performance and valuation comparison

Price (p)

Market cap. (£m)

P/NTA/NAV* (x)

Trailing Yield (%)**

Share price performance

1 month

3 months

12 months

From 12M high

Circle Property

205

59

0.72

2.2

15%

15%

12%

-6%

Custodian

97

408

1.01

5.1

10%

9%

3%

-1%

Picton

91

496

0.95

3.0

4%

11%

29%

-1%

Real Estate Investors

38

68

0.69

7.9

13%

7%

-11%

-13%

Regional REIT

84

364

0.82

7.6

10%

9%

12%

-4%

Schroder REIT

41

211

0.69

3.9

2%

3%

2%

-4%

UK Commercial Property REIT

76

988

0.91

2.4

4%

15%

16%

-3%

BMO Commercial Property Trust

78

620

0.66

2.3

9%

-2%

13%

-10%

BMO Real Estate Investments

80

192

0.81

4.5

9%

24%

57%

-2%

Average

0.81

4.3

8%

10%

15%

-5%

Palace Capital

235

108

0.68

4.3

2%

18%

16%

-2%

UK property sector index

1,721

6%

8%

20%

0%

UK equity market index

3,997

4%

5%

25%

-1%

Source: Company data, Refinitiv. Note: Prices as at 20 April 2021. *Based on last reported EPRA NAV per share. **Based on trailing 12-month DPS declared.

Exhibit 4: Financial summary

Year end 31 March (£m)

2017

2018

2019

2020

2021e

2022e

2023e

PROFIT & LOSS

Rental & other income

14.3

16.7

18.8

21.1

16.7

16.5

17.1

Non-recoverable property costs

(2.1)

(1.8)

(2.3)

(2.4)

(2.2)

(2.2)

(2.1)

Net rental income

12.2

14.9

16.4

18.8

14.5

14.3

15.0

Dividend income from listed equity investments

0.0

0.1

0.0

0.0

0.0

Administrative expenses before share based payments

(2.7)

(4.0)

(3.8)

(4.2)

(4.2)

(4.3)

(4.4)

Share-based payments

(0.2)

(0.2)

(0.3)

(0.1)

(0.3)

(0.3)

(0.3)

Operating Profit (before capital items)

9.3

10.7

12.4

14.6

10.0

9.7

10.3

Unrealised gains/(losses) on properties

3.1

5.7

(0.7)

(17.9)

(14.5)

7.0

3.0

Realised gains/(losses) on properties

3.2

0.3

(0.4)

(0.1)

0.9

0.0

0.0

Loss on revaluation of listed equity investments

(0.2)

(0.4)

(0.2)

0.0

0.0

Operating Profit

15.6

16.7

11.1

(3.9)

(3.8)

16.7

13.3

Net finance expense

(3.0)

(3.4)

(4.7)

(5.2)

(4.0)

(3.5)

(3.5)

Profit Before Tax

12.6

13.3

6.4

(9.1)

(7.8)

13.3

9.8

Taxation

(3.2)

(0.8)

(1.3)

3.6

0.0

0.0

0.0

Profit After Tax (FRS 3)

9.4

12.5

5.2

(5.4)

(7.8)

13.3

9.8

EPRA adjustments:

Unrealised gains/(losses) on properties

(3.1)

(5.7)

0.7

17.9

14.5

(7.0)

(3.0)

Realised gains/(losses) on properties

(3.2)

(0.3)

0.4

0.1

(0.9)

0.0

0.0

Deferred tax charge

2.2

(0.3)

0.2

0.0

0.0

0.0

0.0

Other adjustments

0.2

0.3

1.1

(1.8)

0.6

0.0

0.0

EPRA earnings

5.4

6.5

7.6

10.8

6.4

6.3

6.8

Non-recurring items

0.0

0.7

0.0

(2.9)

0.0

0.0

0.0

Share-based payments

0.2

0.2

0.3

0.1

0.3

0.3

0.3

Adjusted earnings

5.7

7.4

7.9

8.1

6.7

6.6

7.1

Tax adjustments

1.0

1.1

1.0

(0.0)

0.0

0.0

0.0

Company adjusted PBT

6.7

8.5

8.9

8.0

6.7

6.6

7.1

Average fully diluted number of shares outstanding (m)

25.7

35.0

45.9

46.0

46.1

46.1

46.1

Basic EPS - FRS 3 (p)

36.5

35.8

11.3

(11.8)

(16.9)

28.8

21.3

Fully diluted EPRA EPS (p)

21.2

18.7

16.5

23.4

13.8

13.6

14.8

Fully diluted adjusted EPS (p)

22.2

21.2

17.3

17.5

14.5

14.3

15.5

Dividend per share declared (p)

18.5

19.0

19.0

12.0

10.0

12.0

14.0

Dividend cover by adjusted earnings (x)

1.20

1.11

1.10

1.10

1.45

1.19

1.10

BALANCE SHEET

Fixed Assets

184.0

254.0

261.1

251.7

237.0

243.5

248.5

Investment properties

183.9

253.9

258.3

248.7

234.3

240.8

245.8

Other non-current assets

0.0

0.1

2.7

3.0

2.7

2.7

2.7

Current Assets

13.7

46.3

55.3

51.8

61.9

38.7

37.3

Trading properties

0.0

0.0

14.4

27.6

44.9

22.0

1.0

Assets held for sale

0.0

21.7

11.8

0.0

0.0

0.0

0.0

Cash

11.2

19.0

22.9

14.9

6.9

6.7

26.3

Other current assets

2.5

5.6

6.2

9.3

10.0

10.0

10.0

Current Liabilities

(8.2)

(11.5)

(16.0)

(16.1)

(17.7)

(13.7)

(12.8)

Creditors

(6.2)

(8.8)

(10.0)

(14.1)

(15.7)

(11.7)

(10.7)

Short term borrowings

(2.0)

(2.7)

(6.0)

(1.8)

(1.8)

(1.8)

(1.8)

Long Term Liabilities

(79.9)

(105.5)

(120.0)

(121.1)

(128.1)

(104.5)

(104.9)

Long term borrowings

(75.8)

(97.2)

(112.0)

(117.5)

(124.4)

(100.9)

(101.3)

Deferred tax

(2.2)

(6.5)

(5.6)

(.2)

(.2)

(.2)

(.2)

Other long-term liabilities

(2.0)

(1.8)

(2.4)

(3.3)

(3.4)

(3.4)

(3.4)

Net Assets

109.6

183.3

180.3

166.3

155.5

164.0

168.1

EPRA net assets

111.8

190.0

187.0

167.9

157.3

165.7

169.9

Basic NAV/share (p)

436

400

393

361

338

356

365

Diluted EPRA NAV/share (p)

443

414

407

364

341

359

368

CASH FLOW

Operating Cash Flow

10.3

9.9

11.9

15.7

11.9

6.0

9.7

Net Interest

(2.5)

(2.7)

(3.4)

(3.7)

(3.5)

(3.0)

(3.0)

Tax

(1.0)

(0.4)

(1.6)

(2.2)

(1.1)

0.0

0.0

Net cash from investing activities

(3.4)

(67.7)

(11.5)

(10.1)

(15.7)

23.4

19.0

Ordinary dividends paid

(4.6)

(6.7)

(8.7)

(8.7)

(3.5)

(5.1)

(6.0)

Debt drawn/(repaid)

6.5

8.2

18.0

1.4

6.5

(24.0)

0.0

Proceeds from shares issued (net)

0.0

67.7

(0.0)

0.0

0.0

0.0

0.0

Other cash flow from financing activities

(2.9)

(1.1)

(0.1)

(1.0)

0.0

0.0

0.0

Net Cash Flow

2.4

7.0

4.4

(8.5)

(5.3)

(2.7)

19.6

Opening cash

8.6

10.9

18.0

22.4

13.9

8.6

5.9

Closing cash

10.9

18.0

22.4

13.9

8.6

5.9

25.5

Restricted cash

0.2

1.0

0.5

1.0

0.8

0.8

0.8

Closing balance sheet cash

11.2

19.0

22.9

14.9

9.4

6.7

26.4

Closing balance sheet debt

(77.8)

(99.8)

(118.0)

(119.4)

(126.3)

(102.7)

(103.1)

Unamortised debt costs

(0.9)

(1.6)

(1.3)

(1.4)

(1.0)

(0.5)

(0.1)

Closing net (debt)/cash

(67.5)

(82.4)

(96.5)

(105.8)

(117.9)

(96.5)

(76.9)

Net LTV (exc restricted cash & adjusted for unamortised debt costs)

36.9%

29.8%

33.7%

38.1%

41.9%

36.5%

30.9%

Source: Company data, Edison Investment Research

General disclaimer and copyright

This report has been commissioned by Palace Capital and prepared and issued by Edison, in consideration of a fee payable by Palace Capital. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Palace Capital and prepared and issued by Edison, in consideration of a fee payable by Palace Capital. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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