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.
The acquired portfolio consists of mixed commercial properties, mostly located in the Home Counties that surround London, and 65 residential properties that are predominantly located around the London Borough of Hillingdon. It has been valued, on an open market and fair value basis, by Cushman & Wakefield at £71.8m with current annual gross income of c £3.7m, of which c 80% relates to the commercial assets. Management expects to grow the commercial rents over time through more active management, while the residential assets are likely to be disposed of, subject to price, freeing up capital for recycling into higher yielding commercial property assets, which remain the focus.
The acquisition was settled for £53.3m in cash with £14.5m of debt assumed. It has been funded by the issue of £70m of new equity, before costs, at a price of 340p per share. The amount raised reduces net LTV below 35% and provides PCA with sufficient headroom should the existing RT Warren banking facility be repaid at expiry at the end of January 2018. The asset management upside from the acquired assets, including capital recycling, is not reflected in our revised forecasts, or the potential for further acquisitions given the increased balance sheet flexibility. Without building this in, our pre-acquisition adjusted EPRA EPS is diluted by 25% and EPRA NAV by 14%.
Palace emerges from the acquisition and placing with an 11% discount to the endFY18e EPRA NAV and fully covered 5.5% prospective yield. As we show on page 6, this is attractive in a sector context and does not obviously reflect anticipation of upside from the acquired assets or ongoing portfolio initiatives.