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 October 2017 £67.9m acquisition of RT Warren increased the portfolio value by around a third to c £270m. The acquisition was conservatively funded, with £70m (gross) of new equity and an 81% increase in the share count, significantly increasing the market capitalisation and setting the scene for the move to the Main Market of the LSE. With regional commercial property markets remaining firm and rents generally benefiting from a positive demand–supply balance, Palace has significant asset management and further acquisition opportunities to pursue, supported by a robust balance sheet position (LTV 31%).
Our estimates may prove conservative; they allow nothing for the accretive acquisitions that management seeks or asset management gains from RT Warren and other projects due to the difficulty in credibly forecasting these. Our FY18 forecast is for now unchanged, pending details of the expected earnings beat. Although a recent significant letting of refurbished space took contracted rent roll to £18.1m, letting of refurbished space in Leeds and Manchester is taking longer than we had assumed and is unlikely to materially benefit FY19. We have trimmed FY19 net rental income by c 4% and adjusted EPS from 20.6p to 18.7p.
Without building in any potential upside from accretive acquisitions or asset management of the recently acquired RT Warren assets, the shares offer an attractive prospective yield of 5.6% and a 14% discount to FY18e NAV per share.