Investing in a company that specialises in commercial property outside London represented one of the more risky investment options a couple of years ago, but things have changed as the economic prosperity generated in the south-east of England has started to percolate out into the regions. This is where Palace Capital (PCA) is operating, and shares trade at a noteworthy discount to forecast net asset value (NAV) despite impressive progress to date.
- Shares at discount to book value
- Attractive yield
- Improving regional property market
- Success at buying undervalued assets
- Shares thinly traded
- Portfolio 10 per cent vacant
Adjusted pre-tax profits rose more than threefold in the year to March 2015, and shareholders were rewarded with a near-trebling in the dividend payout. Meanwhile, NAV grew by 11 per cent.
The business model centres on buying distressed assets at knockdown prices, with a view to generating both capital value and stronger rental income through refurbishment and re-letting. The key here is to identify opportunities in the right location that offer the most potential. Chief executive Neil Sinclair has been operating in the property sector for nearly 50 years, so he knows a thing or two about this game.
Through a blend of issuing new shares, borrowing and using existing cash resources, the group has increased the value of its property portfolio from £59m to £103m in a year, and acquisitions since the March year-end have boosted this further still. Despite the buying spree, Palace's year-end loan-to-value ratio remained an acceptable 35 per cent.
Typical of the investments made is Property Investment Holdings (PIH), bought in August last year. PIH was a heavily indebted company with 17 commercial properties valued at the time at £32m. The acquisition cost £3.6m, paid in new ordinary shares, and Palace also had to pay off £28m of bank loans and interest rate swaps. Gross income at the time was £2.5m, although this is expected to increase as the portfolio is more actively marketed.
More recently, Palace bought Bank House in Leeds for £10m. The property is situated just two minutes from the railway station and tenants include the likes of the Bank of England and Axa. There is also 10 per cent of vacant space that will be let. Since then, Palace has bought Sol Central, a 190,000 sq ft mixed-use leisure destination in Northampton for £1 and repayment of £17.3m of debt and £3.4m of shareholder loans. This was financed through a five-year facility at 2.25 per cent above Libor, and the property generates income equivalent to a net initial yield of 8.86 per cent. Once again, this demonstrates the group's ability to acquire properties with potential at knockdown prices.
Overall, the portfolio at the March year-end comprised 50 properties with a total floor space of 1.5m square feet. And while nearly 10 per cent of this is vacant and doesn't generate any income, ultimately there is significant scope to boost rental income by letting out this space.
PALACE CAPITAL (PCA) | ||||
---|---|---|---|---|
ORD PRICE: | 370p | MARKET VALUE: | £95m | |
TOUCH: | 365-375p | 12-MONTH HIGH: | 398p | LOW: 302p |
FORWARD DIVIDEND YIELD: | 3.8% | TRADING PROPERTIES: | nil | |
DISCOUNT TO FORWARD NAV: | 14% | |||
INVESTMENT PROPERTIES: | £103m | NET DEBT: | 31% |
Year to 31 Mar | Net asset value (p) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
---|---|---|---|---|
2014 | 357 | 1.7 | 27.8 | 4.5 |
2015 | 396 | 4.1 | 26.9 | 13 |
2016* | 406 | 6.6 | 22.0 | 14 |
2017* | 431 | 7.0 | 22.3 | 14 |
% change | +6 | +6 | +1 | - |
Normal market size: 1,000 Market makers: 4 Beta: 0.13 *Allenby forecasts, adjusted PTP and EPS figures. |