Palace Capital reported 1H’19 (six months to September 2018) results on 26 November, in line with expectations. We reduce our forward estimates due to disposal and minor trimming of some 2020 income. The strategy of being overweight offices (48% assets in offices in regional hub locations), well underweight retail continues to deliver, with total returns (5.3%) once again ahead of market benchmarks (of 3.3%). Palace Capital is an active manager: in the six months there were 22 lease events, 9% ahead of ERV (estimated rental value). Since period-end, further capital has been recycled out of assets purchased as part of the 2017 RT Warren acquisition, creating value going forward and capturing a modest value uplift.
Portfolio valuation rose 2.4% in the six months; EPRA NAV per share grew 1.4%. 30.3% LTV maintains ‘fire power’ for attractive investment opportunities being seen and the pending investment into the York development asset. This will deliver a useful income increase and should enhance NAV.
The company once again outpaced the MSCI IPD benchmark, at 3.3%. Strong income supports the dividend payout, the reversion within the current portfolio along with potential accretive acquisitions should take dividend per share cover back usefully above 100% in the medium term.
These are important elements of Palace Capital’s philosophy. Assets with strong long-term prospects are held, and reversionary yield stands at 7.6% compared to 5.8% NIY. Also, value-creating (large-scale York development) and occupier-focused enhancements crystallise higher rents and asset revaluation.
Cash from the assets, acquired with the RT Warren portfolio and always listed as “assets held for sale”, arrives at an opportune time. Divestment reduces income and recycling of the capital, at Palace Capital’s choice of asset and timing, will raise it again.
The short-term acquisition opportunities being offered to such an experienced team, amid the current political uncertainty, are good. Palace Capital has been holding back, optimising its upside, which could lead to minor erosion of operating profits given it has successfully exchanged on a meaningful disposal.