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 sale of the long leasehold at Warwick House in Leeds for £2.15m is well above the carrying value of £1.4m, representing a 54% gain before expenses. The tenant, Interserve, pays rent of £196.3k a year, or £172.5k after ground rent due to the freeholder, Leeds City Council, and has an option to break the lease in August 2017. Palace has been able to reduce the risk of vacancy and make a disposal well above the price paid when the property was bought from Quintain in 2013 as part of the Sequel portfolio. The uplift to the carrying value is significant and shows Palace’s ability to generate capital value growth through active asset management.
Allen House in Stockport was also bought as part of the Sequel portfolio and has been vacant since the occupier surrendered the lease in September 2015. The price of the sale (£1.55m) is slightly above the most recent valuation, but perhaps more significantly, it removes the c £185k of annual vacancy costs associated with the building. Palace has previously stated it intended to sell the property and the effect of the sale was included in our earlier forecast assumptions. The disposal frees capital for reinvestment, as does Warwick House, and is another example of the effective implementation of Palace’s strategy.
Palace’s c 18% discount to our FY17 EPRA NAV forecast seems high compared with a basket of regional property investor peers, which trade at c 98% of EPRA NAV on average. As the announcements demonstrate, Palace can deliver capital value growth as well as pay a dividend yield of c 5%, comparable to REIT peers, underpinned by stable income from its portfolio. As Palace extends its track record, its investor audience is likely to broaden and the discount may narrow.