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.
PCA has acquired the freehold of recently refurbished One Derby Square in Liverpool for £13.98m (before costs), reflecting a 6.75% net initial yield. The acquisition is in line with PCA’s strategy to focus on city centre locations in university towns and regional cities with a positive supply-demand position. The property is 96% occupied with strong tenants including Pret a Manger, Tesco, Medicash, Reed Specialist Recruitment and Brook Street. PCA sees significant further opportunity for active management to enhance the future capital value. We expect it to utilise its revolving credit facility to bridge the short gap between this acquisition and completion of the residential sale, and although we have not at this stage changed our estimates, set out in our last note, the acquisition represents a faster pace of reinvestment than we had allowed for. If nothing else changes, this should be a slight benefit to FY19/20 earnings, although the lower yield on investment than we had assumed would have a slight negative impact on FY21e. With a dividend yield of c 6% and a more than c 20% discount to EPRA NAV, the PCA valuation does not appear to be factoring in the strong reversionary potential embedded in the current portfolio and asset management opportunities, including the significant Hudson Quarter development in York, none of which is included in our base case forecasts.