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.
H119 income grew strongly compared with H118, driven by the RT Warren acquisition, and capital values continued to increase during the period. EPRA NAV increased to 421p and including dividends (unchanged at 9.5p) the total return was 4.0%. Adjusted EPS (7.7p) and dividend cover (84%) were depressed by cash drag from the October 2017 capital raise, but dividend policy is unchanged, with PCA expecting income to grow as a result of asset management initiatives and accretive acquisitions. Reinvestment of the £18.2m proceeds from the residential asset disposal into higher-yielding commercial assets will enhance earnings. Estimated rental value (ERV) is £21.1m, more than 20% above passing rent of £17.4m. Despite letting successes, the latter is below the March level, with occupancy slightly lower at 88% (March: 90%). This drives the c 5% reduction in our forecast FY19 adjusted PBT, and our DPS is now held flat in line with guidance.
Palace is not a REIT and while it seeks to generate returns by growing recurring income, it also has a parallel focus on increasing capital values. It has built a strong track record of value creation over a number of years, primarily driven by corporate acquisitions, which additionally benefit from lower stamp duty and provide the potential to benefit from acquired tax losses and capital allowances. NAV total return in the five years from September 2013 (H114) to end-H119 is 126.1% or a compound 17.7% pa. Strong reversionary potential and a range of opportunities to further reposition and grow the portfolio are positive indicators for future returns.
With a yield of 6.5% and a c 30% discount to EPRA NAV, the PCA valuation is below the peer group (Exhibit 8) even before factoring in the significant potential embedded in the current portfolio, including the significant Hudson Quarter development in York.