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Palace Capital^ (PCA, Hold at 228p) - Latest disposals generate further buy-back opportunities
Palace Capital plc
Palace Capital^ (PCA, Hold at 213p) - Latest disposals generate further buy-back opportunities
4 - 8 December 2023
PCA AHT DSCV GHH IOM IWG MOON OTB OMG SSPG VCT BCG PAG ZIG AJB BBY DARK SMDS FRAS FUTR YOU BKG DRKTY HRGLF
Palace Capital^ (PCA, Hold at 237p) - Disposals & buybacks enhancing NTA
PCA’s FY results showed EPRA NTA per share down -24.1% to 296p on the back of an -18.6% LFL decline in values, offset by +8p accretion from the buyback, taking Mar 23 LTV up to 31% (FY22: 28%). However, PCA recently announced it had sold all but one of its industrial properties to Clearbell Capital
Palace Capital^ (PCA, Hold at 237p) - Palace Capital^ (PCA, Hold at 237p)
In line with its strategy of focusing on maximising cash returns to shareholders whilst also remaining mindful of consolidation, PCA has exchanged contracts with a fund managed by Clearbell Capital for the £34.0m disposal of all but one of its industrial properties. The deal for six assets represen
Palace Capital has released interim results to the end of September reporting adjusted profit before tax of £3.5m (1HFY22 £4.0m) and adjusted EPS of 7.9p (1HFY22 8.7p), mainly reflecting rising financing costs. The dividend was maintained at the current quarterly run rate of 3.75p and net debt was held broadly flat. EPRA NTA per share fell 8.7% to 356p. The sale of the industrial portfolio remains paused but smaller commercial sales continue together with the sale of apartments at Hudson Quarter. Operationally, Palace Capital made steady progress however, rising financing costs are pressuring earnings while the current strategy is starting to nibble at revenue. We prune our earnings forecasts and reset our Target Price to 320p, based on a 10% discount to EPRA NTA.
Following the trading update on 12th October which had already indicated the move in underlying values, EPRA NTA fell -8.7% to 356p on the back of -6.5% LFL value decline. This was driven by yields moving out to 6.8% NIY (Mar-22: 5.6%), partially offset by the +3.6% ERV growth (offices +1.8%; indus
PCA's 1H23 trading update showed a solid operational performance with leases, rent reviews and renewals signed +12% ahead of Mar-22 ERV and +12% ahead of passing rent for reviews/renewals. At the same time the business has made strides into cost-cutting with 26% of its FY22 admin expenses trimmed (
Palace Capital has published its interim trading update to the end of September ahead of the results due on 24 November. Rent collection and occupancy remain high with multiple lease events ahead of ERV. Annualised cost savings of £1.2m have been achieved and the company was net cash positive prior to the impact of the £6m share buyback. Since YE22 four investment properties have been disposed of realising £4.8m, 25% ahead of book value, and apartment sales at Hudson Quarter continued to progress. While the industrial portfolio has been prepared for sale, the Board has decided to pause the timing of significant disposals, given current macro conditions, which are also expected to result in a decline in estimated property value at the interim stage, of under 7%. We maintain our Buy recommendation and 350p Target Price.
Palace Capital has announced that Richard Starr, Executive Property Director, is to step down from the Board with immediate effect and leave the company at the end of September. This continues a period of Board change which accelerated after the company revised its new strategy. The current strategy is essentially one of liquidation which may have the effect of putting the company into play, in our view. In revising its new strategy, Palace Capital noted that it was mindful of consolidation in the sector. Under the circumstances we continue to believe that Palace Capital should trade up towards its NAV of 390p, narrowing the discount to NAV, consistent with the Board's objective, and we reiterate our Buy recommendation and 350p Target Price.
Today's news and views, plus announcements from: FLTR, GSK, 888, PCA, IQG, & JSE.
Palace Capital plc IQGeo Group PLC
Further Strategic Update & Board Changes
Strategic update and share buyback programme
Further to its strategic review, Palace Capital intends to focus on becoming an ESG driven, regional office market specialist. To that end the company has announced a new £46.5m property disposal programme including its entire industrial property portfolio with the proceeds to be reinvested into the office sector. Palace Capital has also announced a buyback for up to 5% of its shares and continues to review its cost base. The outcome of the strategic review is to sharpen the focus on themes management have been discussing for some time backed by aggressive portfolio restructuring and return of capital to shareholders, demonstrating their commitment to close the share price discount to NAV. We reiterate our Buy recommendation and 350p Target Price.
FY22 results: Transformation largely complete; strategic review to follow
Palace Capital reported adjusted results ahead of our forecast and the FY22 final EPRA NAV was 5% higher than we expected at 390p prompting an increase in our Target Price to 350p. Steven Owen has been appointed Interim Executive Chairman. Management expects to complete the strategic review by the AGM in July. The portfolio transformation and robust financial performance delivered by Palace Capital during FY22 underpinned a 26% increase in dividend, saw LTV fall to 28% from 42% delivered a 14.8% total accounting return and left the company with £28m of cash putting it in an excellent position to execute on its strategy. While clarification of the strategy should provide additional impetus to close the valuation discount to NAV, we increase our Target Price to 350p from 335p, reflecting a 10% discount to the better than expected EPRS NAV and we reiterate our Buy recommendation.
The recent trading update from Palace Capital bears testament to the improving trading picture within the business, highlighting the benefits of its strategic repositioning and value-add opportunities. With forecasts moving up and the company set to position the portfolio further toward such value-add and development opportunities, we believe the share price should continue to build on recent gains and further close the sizeable gap to EPRA NAV. We reiterate our Buy recommendation.
Palace Capital (PCA) has issued a positive trading update ahead of the expected June publication of results for the year ending 31 March 2022 (FY22). It expects recurring earnings to exceed market expectations, underpinned by leasing and other asset management activity, as well as acquisitions, and will increase the Q422 DPS by 15%.
Today's news & views, plus announcements from PCA, INL, AVCT & ATM.
PCA INL AVCT ATM
PCA’s 2H22 trading update shows stronger than expected leasing performance as occupier confidence is restored, which combined with acquisitions made earlier this year and disposals being back end weighted, results in mgmt anticipating EPS to be “ahead of market expectations”. As such, we upgrade ou
Initial Trading Comment - 6 April
PCA TGL MOTR HFG EPWN BRSD
Palace Capital has published a very positive trading update for FY22 confirming excellent progress on the execution of the strategy. The company expects to beat market expectations and has pre-announced a 15.4% increase in the quarterly dividend to a minimum of 3.75p for the FY22 final, underscoring management's confidence in the performance of the business. Management is also considering a range of strategic options to unlock further value in the business. Given the guidance, we hike our forecasts and edge up our target price to 335p (from 330p). Palace Capital remains at a significant discount to EPRA NTA in a market where undervalued assets are attracting acquisition interest. While the shares show signs of responding there is more to go for, in our view, and we reiterate our Buy recommendation.
Palace Capital has completed the sale of a further property in its disposal programme taking total receipts to date to £31.5m, ahead of the £30m target, prior to the conclusion of the full programme. So far, the disposal programme has achieved a 20% premium to book value generating an ungeared 11% aggregated IRR. Palace Capital is trading at a near 30% discount to our target price despite delivering on all fronts and with acquisition activity in the REITs sector picking up the discount is excessive, in our view – Buy.
Palace Capital (PCA) has recently disclosed several positive developments covering the near completion of its non-core disposal programme, the commencement of capital redeployment into opportunities with more attractive return profiles and leasing progress at its attractive York development, completed earlier in FY22. A highly experienced new chairman has also been appointed.
Redeployment of capital
Palace Capital is a leading investor in regional commercial property with a portfolio primarily focused on offices and industrial assets. These have been outperforming sub-sectors, and look well placed to continue, as a result of higher levels of employment, population growth and major infrastructure investment and new development. The business model also has a strong emphasis on development and capital recycling to support the investment portfolio. With 42% upside to our fair-value assessment of 365p supported by an attractive, cash-covered dividend stream, the shares look good value and we initiate coverage with a BUY recommendation.
The 15 November interim results have led us to upgrade our profit and dividend forecasts modestly. Commercial property income is robust, and Hudson Quarter (HQ) residential profit margins are slightly ahead of expectations. The programme of the disposal of c.£30m-worth of properties that have achieved their asset management plans is progressing well. Disposals have all been ahead of book values, and cash raised is only modestly reducing rental income. HQ’s profitable sales also generate cash and potential for capital recycling, supporting dividend growth. We believe our maintained 18p dividend forecast for FY24 is the main value driver, but we are upgrading FY22 and FY23 forecasts.
Palace Capital’s (PCA) H122 results showed strong financial and operational improvement, including leasing progress, Hudson Quarter (HQ) apartment sales and strong rent collection. Q222 DPS was increased by 8.3% to 3.25p, the minimum that PCA expects going forward. We forecast strong returns from apartment sales gains, capital redeployment and reversionary income capture.
Emerging from a relatively resilient performance through the pandemic, 1H22 results marked a return to growth, and PCA has laid out a clear strategy to deliver returns while it continues to progress with monetising the remaining 55 apartments at Hudson Quarter. Stabilisation in values (particularly
Issuer Sponsored MUSICMAGPIE+ (MMAG, 164p House Stock) – Appointment of Chief Financial Officer. PREMIER FOODS+ (PFD, House Stock, 114p) - H1 FY22 - successfully navigating trading challenges, undervalued proprietary brands. VICTORIA OIL & GAS+ (VOG, 2.9p, House Stock) – La-108 well update. FTSE 100 INTERMEDIATE CAPITAL GROUP^ (ICP, Hold at 2347p) – Strong interims reflecting record fundraising momentum. FTSE 250 GENUIT^ (GEN, BUY, 637p) – Trading update – 4 months ending 31 Oct. THE RESTAURANT GROUP^ (RTN, Buy at 80p) – Continued strong momentum; upgrades for FY21. FTSE All share PALACE CAPITAL^ (PCA, CP* at 247p) – Interim results benefit from regional recovery.
PCA RTN GEN ICG VOG PFD 6R5
1H22 results: Progressing with a clear strategy
Palace Capital has reported a good set of interim results where many of the trends were known from the recent trading update. Improving rental income, rising dividend and asset sales for capital recycling represent attractive characteristics which are underpriced in the stock in our view. Buy
Palace Capital has released a good trading update of for the 6 months to 30 September. The Group has achieved good progress both across the portfolio and in sales achieved at Hudson Quarter. With cash reserves rising, the Group continues to look for value creative opportunities to recycle capital which should realise value for shareholders. Buy
Positive 1H22 trading update
Sale of Weybridge asset and Hudson Quarter update
March 2021 annual results were ahead of our expectations; notably, rent was £17.3m vs. our estimated £16.4m. FY20 rent stood at £18.3m, excluding a lease surrender premium, and there have been net disposals (modest in quantum and at premiums to book values) since FY20, further highlighting the good rental outcome. The dividend payout was 10.5p (vs. 10.0p estimated). While we are not raising our FY22 rent or profit estimates, we raise our FY22E dividend from 11.0p to 12.0p. New leases have been signed at above estimated rental (market) value (ERV) and the two leisure assets benefit both from long leases and from new leases signed on vacated space.
Palace Capital’s (PCA) FY21 results were robust, with a clear improvement in the second half. With a good level of rent collection continuing, Q421 DPS was increased by 20%, to a level that management hopes to at least maintain through FY22. Importantly, the flagship Hudson Quarter (HQ) development in York completed in April, on budget. We expect HQ to be a significant driver of forecast increasing returns and deleveraging.
Having delivered a resilient performance through FY21 in the face of the pandemic, we agree with mgmt that the group is on the cusp of a return to growth. PCA’s leisure assets have experienced a tough couple of years, but with 3 leases signed in FY21 and other live conversations, there are green sh
Forecast beating Final Results
FY21 results: Strategy paying off
December 2020 quarter rents showed 92% received; as of the 14 April trading update, 82% of the rents due end-March under the monthly payment plans had been received – a good initial profile. Hudson Quarter (HQ) sales are progressing well into a robust market, and the leisure assets have seen several new lettings. It is also encouraging to see ongoing small, non-core disposals at above book. In addition, cash and facility headroom are more than adequate, at £14.4m, and the company’s strategy and its execution remain attractive after the test of COVID-19. The largest segment is regional offices, and there is a positive upside opportunity here for 2021, we believe.
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.
Q4 Trading Update
2H21 Trading Statement: Robust performance
SDLT Extension should support further sales at HQ
Palace Capital reports a further positive rent collection update with 86% of Q1 2021 rents collected or expected. Excluding its two leisure assets, the main portfolio is performing well, which is testament to the group's hands on asset management and meaningful dialogue with tenants. The shares trade on a 44% discount to spot NTV, 12.5x FY21E normalised P/E and an attractive 5.3% dividend yield (1.5x covered).
Palace Capital’s (PCA) H121 performance was robust and ahead of our central expectations. We have slightly increased FY21 earnings forecasts and introduced FY22–23 estimates, with growth driven by Hudson Quarter completion, on track for March 2021. Significant additional reversionary potential and development/refurbishment represent significant value creation potential.
1H’21 results cover the depths of the initial market impact of COVID-19. We note the 4.7% fall in EPRA NTA and the effect of the dividend rebasing announced some months prior. There are no negative surprises. The focus on regional offices is a positive. There are other positives that we consider to be important, namely the ongoing contractual performance of the leisure asset tenants and lengthening of leases there, and the continuing encouraging residential sales (and small letting) at the mixed-use development of PCA’s newly created Hudson Quarter, York. Here, we see just one of PCA’s initiatives to unlock value and deliver attractive returns.
H1 Results: resilient performance
Palace Capital (PCA) reported FY20 adjusted PBT in line with expectations while COVID-19 contributed to end-year negative unrealised valuation movements. With robust rent collection to date, PCA has shown its confidence by re-instating DPS payments. While market conditions are challenging, PCA benefits from refurbished properties that are available to let and continued progress at Hudson Quarter where 25% of apartments have been pre-sold ahead of the expected March 2021 completion.
The healthy liquidity position of Palace Capital takes risks down to a modest level, as does the overweight to regional offices and minimal shops. The Hudson Quarter mixed-development site is selling well, and profitability remains at appraisal levels. Hudson Quarter is within the York city walls, has been selling well and is a material positive, set to generate approaching £70m cash for recycling investment. The current returns from this count for zero in reported numbers or forward estimates this year. Even after having devoted significant resource to this successful site, the income yield is above the market average, and with below-market risk.
Trading Well in Tough Market
Palace Capital (PCA) has provided an update on the impact of COVID-19 and its response to the crisis, including a focus on rent collections and maintaining a healthy liquidity position until the full impact becomes clearer. Payment of the previously declared Q320 DPS has been cancelled but progress continues at the flagship Hudson Quarter development, albeit at a slower pace.
FY20 results are due to be reported in June. PCA’s 2 April trading update stated FY20 results to be broadly in line with previous estimates. Loan-to-value (LTV) at 30 September 2019 stood at 34%; we expect this to increase to 37% as at March yearend, allowing for the drawdown at the York Hudson Quarter (HQ) development. With robust finances, PCA can weather COVID-related storms, including passing this quarter's dividend. A rent shortfall in FY21 looks likely. None of the diverse positive characteristics of the portfolio are negated. Indeed, we see scope for EPRA earnings to recover to the 19p per share historical dividend level once the HQ development has completed and funds have been redeployed into income-accretive acquisitions.
COVID-19 and dividend update
Pre-letting at Hudson Quarter sets record rent in York
Recent outperformance to continue as upside from Hudson Quarter, York starts to crystallises
Priory House disposed; empty rates & costs saved
During H120, Palace stepped up its refurbishment and development activity aimed at improving the quality of the portfolio and enhancing its income and valuation potential over the longer term. The flagship Hudson Quarter development is making good progress and the initial tranche of the apartments offered for sale in June has been well received. Although refurbishment and redevelopment activity is dampening current income, DPS is being maintained in anticipation of future income growth and represents an attractive yield.
1H’20 results were announced on 19 November. Seventeen lease events have been completed. Impressively, these were 25% above passing rent and 3% above ERV (i.e. previous estimated valuers’ levels). FY19 was struck 14% above passing rent. The total property return was 1.5%, outperforming the MSCI quarterly index. Early progress at the Hudson Quarter mixed-use development inside York city walls is slightly ahead of viability, with sales of 21 units in under 20 weeks (with seven additional under offer). This leads us to upgrade FY21E profits, NAV and cash significantly, but, with a view to the further delays to political certainty, we trim anticipated rental rises slightly.
Palace’s H1 20 interims reported net rental income of £7.9m (broadly flat y/y vs. our FY20e estimate of £15.2m; implied H1/H2 split of 52%/48%). Adj. PBT (excl. surrender premium, share-based payments and revaluation/impairments/other exceptionals) of £3.9m was down ~9% y/y due to lower management fees, higher property costs and admin expenses, but compares to our FY20e estimate of £7.8m (which we leave unchanged, implied H1/H2 split of 50%/50%). Adj. EPS of 8.5p was up 6.8% y/y due to favourable tax movements. The company has also declared an interim dividend of 9.5p (4.75 per quarter), in line with expectations. EPRA NAV fell to 391p from 407p (Mar 19) which we understand reflects a more conservative stance taken by the valuers on Palace’s refurbishment & development activity. Net debt as at Sept 19 amounted to £94m (34% LTV, unchanged since Mar 19). We make no significant changes to our core earnings, but adjust our CAPEX and EPRA NAV assumptions (detailed below). We lower our PT to 390p (from 415p) to reflect these changes, but maintain our Buy rec, seeing 37% upside at current levels.
Palace Capital has released an encouraging trading update in advance of its interim results (due 19th Nov) reporting 12 lease renewals and 5 rent reviews since March 19, that have in aggregate generated an additional ~£0.4m in passing rents (+26% uplift), negotiated at an average 3% above ERV. We leave our forecasts unchanged at this stage, but see today’s announcement as building on positive momentum across the group following recent newsflow highlighting a successful start to Hudson Quarter, new leases at Sol Northampton, and the approved conversion to a REIT structure. At an 29% discount to FY19 NAV (407p), yielding 6.6%, we see substantial upside at current levels, reiterating our Buy recommendation.
Palace Capital has signed a new £40m 5-year RCF with NatWest, replacing its existing £29.4m facility (Mar 21 maturity) with the same lender, initially lowering the group’s average cost of debt by 10bps to 3.2% (3.1% if fully drawn), and significantly extended the group’s average debt maturity from 3.6 years to 4.7 years. With our forecasted LTV still within the company’s targetted range of 30-40%, we believe Palace has sufficient financial flexibility to support its growth strategy. We post minimal changes to our numbers (outlined below), and retain our Buy recommendation.
Palace Capital has announced the letting of 23,500 sq ft of space at its Sol Northampton leisure centre, building on current momentum following the opening of its recently-let Soo Yoga unit in June this year. On the back of this, we estimate that the vacancy rate at Sol will reduce from c.24% to 10%, with scope to bring this down further given the family-focused offering that Sol Northampton now represents (with existing tenants including Vue Cinema, Accor Hotel, Fitness for Less, as well as Soo Yoga). We leave our forecasts unchanged and retain our Buy recommendation.
Palace Capital recently reported FY19 results and announced plans to convert to REIT status, approved by shareholders at the AGM. The results showed further growth in recurring earnings and positive like-for-like valuation growth but they also reflected the deferral of some letting activity to pursue refurbishment and redevelopment opportunities. Our revised forecasts now include the impact of the Hudson Quarter development in York, which we expect to be a key driver of returns over the next two years.
Palace Capital has released a positive statement in advance of its AGM later today, reporting a strong start to its upcoming Hudson Quarter development in York. With the project on track to complete in early 2021, we see significant scope for value-accretive growth in coming years which we now reflect through the introduction of FY22e forecasts showing material YoY adj. EPS growth of 21.2%, a dividend cover of 1.09x, EPRA NAV of 448p and LTV of 33%. At a 31% discount to FY19 NAV and 6.7% yield, we reiterate our Buy.
Palace Capital’s results (4 June) show 37 new leases were completed. Most importantly, these were 14% above ERV (i.e. the level which previous valuers had estimated). This is one of several factors underpinning significant medium-term expansion in capacity to pay growing dividends. Further, the REIT status enhances the capacity for investment and for dividend payment, through the elimination of corporation tax payable. Total property return was 7.1%, ahead of the MSCI UK Index figure of 4.6%. Like-for-like valuations edged ahead by 0.5%, compared with MSCI UK index capital growth at 0.1%. Cost of debt fell to a competitive 3.3%.
Palace’s FY19 earnings have come in marginally ahead of expectations, reporting net rental income of £16.4m (Arden: £15.9m, +3.3% var) and adj. PBT of £8.9m (Arden: £8.7m, +3.4% var). EPRA NAV was reported at 407p with the group recording a +0.5% LFL valuation increase. Net debt was £96.7m (34% LTV) vs. our estimates of £96m (33% LTV). Of note, the group has proposed a conversion to a REIT structure (subject to shareholder approval at the July AGM). This results in savings of 2.2p in annualised earnings, while also aligning the company’s structure with that of its peer group, potentially gaining interest from a wider investor base. We adjust our forecasts to reflect this (detailed in this note). At an 34% NAV discount and 7% yield, we see attraction relative to peers (trading at a c.10% disc, c.5.5% yield), particularly given a track record of sector-leading total returns. We reiterate our Buy and leave our 415p PT unchanged.
Palace Capital’s portfolio and trading update of 2 May showed underlying values up year- on-year. A lease event, resulting in a profit and cash upgrade, was announced on 7 May. This showed a cash premium being agreed to be paid by the tenant. The loan-to-value (LTV) stood at 33%. Palace Capital took the “strategic decision to hold back on letting some of our vacant space where we see the opportunity to drive value and income potential.” Construction has recently commenced for the Hudson Quarter, York, mixed residential-commercial development inside the city walls. This is one of several factors underpinning significant medium-term expansion in capacity to pay growing dividends
Palace Capital (PCA) has confirmed that FY19 independent property valuations are marginally up on the prior year, although adjusted earnings will be lower than previously expected. This is due to the deferral of some near-term lettings, as part of its asset management-driven total return strategy. Management has reiterated its commitment to the current level of dividends, expecting these and other asset management initiatives, including the flagship Hudson Quarter development in York, to deliver future income and capital growth.
Palace Capital has successfully negotiated a lease surrender at Priory House in Birmingham (63,000 sq ft), and will be receiving £2.85m in cash at the end of this month, officially ending the sublease (which was due to run to December 2027 at a rent of £322,000 p.a). We update our earnings forecasts (further detail later in this note) and highlight the dividend cover significantly improving to 1.08x in FY20E and 100bps reduction in our LTV in FY21E. Given the property has been unoccupied since 2012, we see this as providing the company with added flexibility to extract further value through potential redevelopment, refurbishment or the sale of the leasehold interest. We maintain our Buy recommendation and target price of 415p seeing good upside at current levels (32% NAV discount, 6.7% yield).
Palace Capital has released a trading update anticipating adjusted PBT to be “slightly below expectations” for FY19 leading us to rebase our earnings by 7%-12% for FY19-21E. We draw positives from the maintained dividend (19p, 6.3% yield) demonstrating the company’s confidence in delivering total returns from the valueaccretion potential arising within its strong development pipeline. With a stable balance sheet (33% LTV) and strong fundamentals underpinning the regional property market, we maintain our Buy recommendation and TP of 415p seeing upside at current levels (28% NAV discount).
Palace Capital is a real estate investor. It has recently commenced construction of its mixed residential and commercial development at Hudson Quarter, having secured a new £26.5m debt facility and fixed price contract. Supply in this location is tight and the projected gross development value of £65m would thus appear robust. The current site book value is £16.8m. The building contract is £35m (part of a total projected cost of £37m, pre-interest). We note that the full benefit of Hudson Quarter is derived during FY22, when Palace Capital will receive significant free cash. This is one of several factors underpinning significant medium-term expansion in capacity to pay growing dividends.
Key Points. Palace Capital has signed a £35m construction contract with a renowned contractor, Caddick Construction Ltd (part of Yorkshire-based Caddick Group) to undertake its development in Hudson Quarter, York. We see the appointment of a renowned operator as being the first step towards derisking the project, adding further momentum for the company following its £26.5m loan facility agreed last week. We reiterate the analysis from our last note showing the potential for c.£11m of development profits (adding c.24p to the NAV) and c.5p of additional earnings post FY21 (implied dividend cover of 1.2x), all upside to our current numbers, highlighting the positive returns to be made from Hudson Quarter. At a c.25% NAV discount and 6.1% yield, we reiterate our Buy rating. PT 415p.
Key Points. Palace Capital has signed a new £26.5m loan facility with Barclays Bank to part-finance the development of Hudson Quarter in York (total estimated CAPEX of c.£37m). The remainder will be funded by the group using existing cash reserves of £13.8m (Sept 18). We see this as being positive news for the company as it seeks to unlock the potential for NAV accretion in coming years. We present a scenario whereby the group could generate c.£11m in development profits by FY21- 22, adding c.24p to the NAV. We make a number of changes to our forecasts (trimming our DPS and increasing our CAPEX and net debt estimates), positioning these in line with the group’s plans for Hudson Quarter. We also publish numbers for FY21. We maintain our Buy recommendation and continue to see the shares as being undervalued at current levels (25% discount, 6.1% yield). PT 415p.
Palace Capital added a substantial mixed commercial property in Liverpool to its portfolio at the end of December. That put it ahead of our year-end portfolio growth target, and progressed a refocus on core activities and higher yield commercial property.
Following the agreed £18.2m sale of most of the non-core residential assets acquired with the RT Warren portfolio last year, Palace Capital (PCA) has acquired a quality, mostly office building, in the heart of Liverpool for c £14m. The transactions represent a significantly positive yield arbitrage, enhancing existing strong reversionary potential. Further opportunities reposition and grow the portfolio, including the Hudson Quarter development in York, and are positive indicators for future growth.
Palace Capital (PCA) has published its interim results for the six months to 30 September 2018 and has also exchanged contracts for the sale of 50 low-yielding, non-core residential units, acquired as part of last year’s RT Warren acquisition. After a year of significant developments at PCA, preparing the ground for the next stage of growth, H119 has been a period of consolidation, although the company has continued to deliver income and capital growth, generating a NAV total return of 4.0% in the period.
A steady first half demonstrates the resilience of PCA’s portfolio. Aside from small acquisitions/disposals, performance was driven by continuing asset management with contributions from new lettings, rent reviews and lease renewals.
Palace Capital reported 1H’19 (six months to September 2018) results on 26 November, in line with expectations. We reduce our forward estimates due to disposal and minor trimming of some 2020 income. The strategy of being overweight offices (48% assets in offices in regional hub locations), well underweight retail continues to deliver, with total returns (5.3%) once again ahead of market benchmarks (of 3.3%). Palace Capital is an active manager: in the six months there were 22 lease events, 9% ahead of ERV (estimated rental value). Since period-end, further capital has been recycled out of assets purchased as part of the 2017 RT Warren acquisition, creating value going forward and capturing a modest value uplift.
Palace’s interims show the RT Warren acquisition delivering scale, with gross rental income increasing by 29% YoY to £9.2m and adjusted PBT by 17.5% to £4.4m. EPRA NAV increased marginally from 415p (Mar 18) to 421p benefitting from a 1.7% LFL valuation gain, although we see this falling back to 415p by the year-end due to the crystallisation of latent deferred tax upon the sale of 50 residential assets for £18m announced last week. However, we see further upside from development projects such as Hudson Quarter (formerly known as Hudson House) which could add c.20p in the NAV over the coming years.
Palace’s shares have fallen by c.15% since the end of June and with the shares trading at a significant discount of c.27% to FY18 NAV (compared to a c.10% discount amongst a selected peer group), we view there to be considerable share price upside of 39%, alongside an additional benefit of a 6.4% FY19E dividend yield (next quarterly dividend of 4.75pps to be paid to all shareholders on the register as at 5 th October 2018). Recent investor feedback has indicated several factors which have contributed to recent share price weakness. As we seek to address these concerns, we also reiterate the underlying fundamentals supporting the investment case for Palace Capital. We believe that at current levels, the shares have largely priced in downside risks associated with Brexit, and should now be assessed more on fundamentals. Buy, Target Price 421p.
Palace Capital has announced that it has agreed a new 20 year lease with Aldi at its 16,500 sq ft property in Gosport, Hampshire, increasing the rental by 17.4% to £291k p.a. and extending the lease by an additional c.8 years to September 2038 (previously August 2030). The revised lease now includes a small amount of additional land for car parking, and is subject to a rent review to be undertaken every 5 years (based on RPI with a 1% collar and 2.75% cap, compounded annually).
Palace Capital (PCA) has almost doubled NAV since the initial investment in October 2013. Good income generation is evidenced by the EPRA EPS and the DPS track record, whilst undertaking incremental refurbishments and development. The investment portfolio is 90% occupied and generates strong cashflows: with a focus on regional city centres, offering occupiers value for money. Development opportunities are optimised. 6% of the portfolio value is in a recently demolished and cleared two-acre site in the heart of York, due to be redeveloped, which will generate a step rise in NAV and in group income, once completed end 2020.
The year ended 31 March 2018 was one of significant development and growth for Palace, including the £68m acquisition of RT Warren, its largest acquisition to date, a £70m capital raise, and a move to trading on the Main Market of the LSE. The shares will join the FTSE Small Cap Index and FTSE All Share Index on 18 June. The portfolio, enlarged by the RT Warren acquisition, offers significant asset management opportunities, while management seeks further accretive acquisitions, neither of which is reflected in our estimates. The shares offer an attractive yield and trade at a significant discount to NAV.
Palace Capital has reported a strong set of results for the year to March 2018, with net rental income increasing by 22% to £14.9m (Arden: £14.1m) and adjusted PBT, which excludes revaluation gains and one-off items, increasing by 27% to £8.5m (Arden: £8.3m). EPRA NAV decreased from 443p to 415p reflecting the dilution effects following the £70m fundraise in October 2017. However, from a proforma base of 389p post-fundraise, EPRA NAV increased by 7% to 415p (Arden: 395p) driven by revaluation gains of £5.7m (FY17: £3.1m) and 3.5% LFL growth in its portfolio. As a result, the company has declared a final dividend of 4.75p, increasing the total dividend for the year by 2.7% to 19.0p, maintaining its progressive dividend policy.
Better than forecast FY18 results reflect PCA’s focus on intensive asset management. That continues to drive underlying property returns (rent and asset values), while profitability is benefiting from recent debt refinance on better terms. The shares stand at a 14% discount to FY18 EPRA NAV/share of 415p and a 11% discount to basic NAV of 400p/share (12%). We forecast 417p by end FY19.
With its move to the Main Market of the LSE completed, Palace recently provided an update on trading for the year to March 2018, ahead of preliminary results on 11 June. Management expects to report adjusted earnings (excluding revaluation movements and other one-offs) ahead of market expectations. Looking forward, the portfolio, enlarged by the RT Warren acquisition, offers significant asset management opportunities, while management seeks further accretive acquisitions, neither of which is reflected in our estimates. The shares offer an attractive yield and trade at a significant discount to NAV.
The group’s portfolio and trading update confirmed that FY17/18 results will be slightly ahead of expectations. The statement illustrates how effectively intensive asset management continues to drive underlying rent and asset values, with margins also enhanced by recent debt refinance on improved terms.
Palace Capital’s trading update reports high levels of activity across the portfolio, reflecting the company’s active management strategy, with a number of property sales and progress on several refurbishment & redevelopment projects as detailed further below. The company has stated that adjusted PBT for FY18 is likely to be ahead of market expectations.
As the RT Warren acquisition was completed in October 2017, post the half year end, the interims were unaffected by PCA’s largest purchase to date. That deal will make a material difference to future results as it added c 34% to the value of the group portfolio, funded by a £70m placing at 340p/share. The interims did, however, provide further evidence of how intensive management is enhancing underlying portfolio performance. Lettings, lease renewals and reviews drove up net rent and capital values. The next 12 months is likely to be at least as active. Management is already getting to grips with what’s needed to bring what it regards as an undermanaged portfolio (RT Warren) up to speed. It has lined up the non-core residential assets for disposal, will continue to work new and existing assets and seek opportunities to invest spare cash.
Palace Capital’s interim results reflect a strong performance during the period with reported PBT up 25.6% at £4.9m (HY2017: £3.9m) largely driven by a £1.4m revaluation gain. Adjusted PBT (which excludes revaluation gains and profit/(loss) on disposal) increased by an impressive 22.5%. This translated into an Adjusted EPS of 12.8p, an increase of 18.5%. EPRA NAV increased to 451p (FY2017: 443p) as a result of Palace’s active asset management approach. We continue to support a Buy recommendation with a revised target price of 395p which represents our forecast FY2018 EPRA NAV – further upside scenarios are outlined below. Following a decision to move to quarterly dividends from 2018, shareholders on the register by 8th December 2017 will benefit from an annualised dividend yield of 7.0% thanks to an interim dividend of 9.5pps and three quarterly dividends of 4.75pps over the next 12 months.
Palace Capital has announced its interim results for the six months ended 30 September 2017. These show good progress in income, earnings, and NAV. The interim dividend had been previously announced, showing growth of 5.6% to 9.5p per share. The significant acquisition of the RT Warren portfolio and accompanying capital increase came after the period under review and is not reflected in the results. Our forecasts reflect the near-term dilution from the acquisition but not the upside from asset management, due to uncertainty as to the timing and impact. Despite that, Palace offers a highly attractive yield and discount to NAV, while the increased market capitalisation and intention to seek a Main Market listing are likely to broaden Palace’s appeal to a wider investor base.
PCA has completed the acquisition of RT Warren, its largest to date. The transaction will transform results this year, and have a full impact from FY19. We have updated our forecasts for the addition of the acquired £72m portfolio, and the dilutive impact of shares issued to finance the purchase. The £70m placing at 340p/share reduces projected NAV/share by c 13%, but dividends on the enlarged equity base should still be fully i.e. 1.1x covered (1.2x previously) by underlying EPS, based on estimates of initial net rent from the new assets.
Palace Capital shareholders have approved the significant acquisition of RT Warren, with a mixed use investment portfolio valued at £71.8m, and the issue of shares to fund it. Management has built a strong track record of value creation from previous acquisitions and expects its management of these newly acquired assets to yield similar results. That potential is not reflected in our revised estimates with the effect that earnings and NAV are diluted. Our dividend forecasts remain the same, and fully covered, such that Palace retains a highly attractive yield and discount to NAV. The increased market capitalisation and intention to seek a Main Market listing are likely to broaden Palace’s appeal to a wider investor base.
Following the completion of the Open Offer & General Meeting on 7th October 2017, Palace Capital has successfully raised £70m of new equity to fund the acquisition of R.T. Warren. R.T. Warren contains 21 commercial properties, comprised of 15 office buildings, 4 retail properties and 2 industrial holdings as well as 65 residential properties. The portfolio was valued by Cushman & Wakefield at £71.8m and Palace is paying £68m (£53.3m cash, £14.5m debt). Consistent with Palace’s strategy the properties are located outside London in high value areas such as York, Winchester, Southampton, Beaconsfield, Brighton, Gerrards Cross, Uxbridge and Thame. The acquisition completed on 9th October 2017.
York City Council has approved Palace’s planning application to demolish Hudson House and replace the existing office building with a mixed-use development comprising residential, office and commercial areas. While we have not changed our estimates, pending further information on the costs and timings of the project, the approval removes one risk associated with the asset and may have a positive effect on its next valuation.
Palace Capital has announced it has been granted planning consent subject to conditions by the City of York Council for the redevelopment of Hudson House. Management has not yet decided how to best take the project forward and is exploring all options which maximise shareholder value, with the least amount of risk. Suffice to say management is likely to extract the most value possible for investors. The carrying value of Hudson House is £14.9m and while it is still early days it seems likely that this will be revised upwards at the next revaluation date at the end of September. H1 results will be announced in November.
In the last four years, Palace has grown the value of its portfolio of regional property from £2m to over £200m, through a combination of astute acquisitions and an active management strategy that has delivered sector-leading growth in NAV/share of 103%. With recently completed and ongoing asset management initiatives at several of the group’s larger properties, we believe that there is significant scope to improve future income and capital values. Standing at a 14.2% discount to NAV/share and offering a 5% yield, the shares are attractively valued on an absolute and sector relative basis.
Palace Capital has completed the previously announced £20m acquisition via a corporate deal, more than replacing rental income from disposals made in FY17. The new assets are fully let at a higher yield than our previous estimates. This leads us to raise our forecasts slightly and provides scope for rental and valuation uplifts in future, in line with Palace’s strategy of providing capital growth as well as stable income.
At the time of portfolio update in May 2017, Palace Capital reported that it had agreed the corporate acquisition of a fully let office building for £20m. The company has now announced that it has completed the acquisition of SM Newcastle OB Ltd (“SM Newcastle”) for £20m.
FY16/17 results were better than forecast. Outperformance was driven by asset sales above book value, intensive asset management and stable underlying investment and occupational markets. These figures reiterate the defensive characteristics of a portfolio which is well-balanced geographically and by sector. The proposed 18.5p full year dividend is 1.2x covered by adjusted EPS.
Palace Capital has published strong FY17 results, with rental income of £14.3m feeding through to adjusted EPRA earnings of 22.2p per share (FY16: 18.9p). EPRA NAV of 443p per share was 3.5% ahead of our forecast (431p) and 7% higher than at 31 March 2016 (414p), driven by asset management initiatives, selective disposals at above book value and modest yield contraction. The regional occupier market is reported to be healthy and we continue to expect Palace’s geographic and sector focus, as well as the relatively high yields on the portfolio, to provide some protection from macroeconomic headwinds, including the effects of Brexit, when compared with property in London.
Palace Capital’s final results reflect continued high levels of activity across the portfolio, with a large number of property sales and progress on several refurbishment & redevelopment projects. Reported results demonstrate the benefits of this active management strategy, with adjusted PBT up 20% to £6.7m (Arden forecast £6.6m) and adjusted EPS up 17% to 22.2p. Reported PBT, including £3.2m of profits on property disposals and the £3.1m revaluation gain, was £12.6m (FY 2016: £11.8m). Despite the weaker market background, EPRA NAV/share increased by 7%, from 414p to 443p (436p including deferred tax). Given the progress during the year, the final dividend has been increased to 9.5p giving a total of 18.5p for the year, up 15.6% on the 16.0p for FY 2016.
Palace Capital’s update reports continued high levels of activity across the portfolio, reflecting the company’s active management strategy, with a large number of property sales and progress on several refurbishment & redevelopment projects. The company also reports that the year-end NAV/share is expected to be ahead of market expectations (Arden forecast 431p), which we believe reflects the progress made since the half year against an improving market background.
Palace Capital (Palace) has released a positive portfolio and trading update detailing disposals made in FY17, significant ongoing projects at ten properties and the possible acquisition of a fully let office building for c £20m, which would more than replace rents at properties sold in the year. These developments demonstrate Palace’s ability to add shareholder value through active management and to recycle capital efficiently. We have revised our estimates and note that management expects the March 2017 NAV to beat market expectations.
Hudson House, York is a 1960s office building of 103,000 sq ft, situated inside the city walls and a short walk from York Railway Station. It was acquired as part of the Sequel Portfolio in 2013 and since then Palace Capital has been working to enhance the value of the property with two planning approvals for conversion to residential/offices having already been obtained. At the 30 September 2016 the property was valued at £14.9m.
Palace continues to demonstrate its ability to grow NAV per share through its strategic recycling of assets. The disposal of a property in Maldon has realised value created through recent asset management initiatives. As with two other recent sales, this is in line with the company’s strategy to increase shareholder value through active management of the investment portfolio. We have adjusted our forecasts for the £1.56m gain in value and, although we have not assumed any additional acquisitions, would expect Palace to reinvest the proceeds in other regional property assets at attractive yields and with further scope for capital gains.
Yesterday, Palace Capital announced the sale of the ICS Buildings in Maldon, Essex, for £3.9m. The sale price is £1.56m above the last independent valuation of the property as at 30 September 2016, representing a 66% premium to book value.
Palace Capital (Palace) has announced the disposals of two properties: one in Leeds and one in Stockport. The rationale for each is clear and in line with the company’s strategy to deliver shareholder value through capital and income growth. The disposals, totalling £3.7m, will crystallise value from active asset management, free capital to be recycled, increase the portfolio’s average unexpired lease term to first break and reduce void costs. We have adjusted our forecasts accordingly and expect Palace will reinvest the proceeds in other regional property assets in due course.
The Copperfields, a small shopping centre in Dartford, Kent, with offices above, was acquired by Palace Capital from Quintain plc as part of the Sequel Portfolio acquisition in October 2013. Soon after the property was acquired, the tenant occupying circa 10,000 sq ft of office space served notice to vacate.
Interims overview. The results reflect the considerable changes in the portfolio over the last 18 months. Rental income increased 31% from £5.36m to £7.01m reflecting a full period contribution from Sol Central, Northampton and the acquisitions of 249 Midsummer Boulevard, Milton Keynes and Broad Street Plaza, Halifax, partly offset by reduced income from the existing portfolio due to property sales and lease expiries, in particular at Hudson House York, ahead of its potential redevelopment. Reported revenue of £7.08m was down from £8.36m, reflecting the £3m surrender premium on the Gala units at Sol Central, received in H1 last year.
Palace Capital seeks commercial real estate investments in towns and cities outside London that present the opportunity to grow rental income and capital value. It achieves this through active asset management to increase value, as evidenced by Hudson House in York where value has increased from £3.8m to £14.9m since acquisition in October 2013. EPRA NAV grew 1.2% in H117 to £107.6m and the shares trade at a considerable discount to the 419p NAV per share value.
Palace Capital, which focuses on the active management of real estate outside London has today provided an update on recent portfolio activity.
The company has announced that it has exchanged contracts for the purchase of the freehold of Boulton House, Chorlton Street, Manchester for a consideration of £10.95m, subject to a downward adjustment of up to £0.4m for rent guarantees and other costs. Completion is set for 30 September 2016. The acquisition is being funded by a new debt facility from one of Palace Capital’s existing lenders.
Looking at our FY 2017 forecasts, the acquisition of Broad Street Plaza will add significantly to the Group’s rent roll. In light of this, together with the financing costs assumed with the acquisition and with the additional costs of the new larger bank facility, we have increased our forecast adjusted PBT by £0.9m to £6.8m.
Palace Capital has announced that it has purchased 249 Midsummer Boulevard, Milton Keynes for a consideration of £7.2m, in an off market transaction. This office building was built in 1990 and comprises 49,000 sq ft of net lettable space and is situated on a large site a few minutes walk from Milton Keynes Central Station.
Interim results reflect a busy period for the company, with the completion of the £10m purchase of Bank House, Leeds, the £1.25m disposal at Burgess Hill, the £20.7m acquisition of the Sol Central leisure scheme in Northampton and the associated £20m equity placing, the £3.9m property purchase in Sutton and the surrender of the Gala lease for £3m.
In June 2015 Palace Capital acquired the Sol Centre for £20.7m, on an initial yield of 8.86%. The centre is anchored by a 10 screen Vue cinema and a 151 bed Ibis hotel and is let on long leases (WAULT of 13.5 years) to good covenants. However, 2 units on parts of the ground, mezzanine and first floors totalling 27,917 sq ft, originally let to Gala Casinos and another unit let to a pub operator are unoccupied and there are no restaurants at the centre, providing a major opportunity to revitalise the centre through the company’s active management strategy.
The company has announced its results for the year to 31 March 2015 together with the proposed acquisition of Sol Central, a mixed use leisure scheme in Northampton, for £20.7m and a £20m conditional share placing at 360p.
Palace Capital has exchanged contracts to buy Bank House in the centre of Leeds for a cash consideration of £10 million. The building comprises a net floor area of 88,000 sq ft. and is currently 90% let, producing a gross rental income of £910,310 per annum and a net income of circa £864,000 per annum. This represents a net yield of 8.1% after taking transaction costs into account.
The £39.25m purchase of the Sequel portfolio has been spectacularly successful, underlining the rationale of the company’s investment strategy and the ability of the company to identify undervalued secondary assets and improve their performance through active management. Whilst much remains to be done with Sequel, the recent £32m acquisition of PIH and £20m placing provide additional opportunities for value creation and leaves scope for further acquisitions. Combined with the high exposure to regional secondary property, which we believe is still in an early phase of its recovery, this creates a highly attractive investment case.
The acquisition of the Sequel properties has given Palace Capital critical mass and creates a combined portfolio with an income yield of over 11%, a return on equity of 14% and supporting a 5.2% dividend yield. There is significant scope to increase both income and asset values through more active management of the portfolio. With growing evidence of an improvement in both occupier and investment markets, we believe that the timing within the property cycle is favourable. In combination, these factors present an exciting investment opportunity.
