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Reit time to back a value property play

A regional commercial property Reit is making disposals, slashed borrowings and raised the dividend, but is trading on an unwarranted ratings discount to peers
Reit time to back a value property play
  • 29 lease events add £0.6m to annual rent roll
  • £12m of £30m planned non-core disposals completed or exchanged
  • Sales at Hudson Quarter development in York flying
  • Net debt set to be cut in half by March 2022 year-end

Palace Capital  (PCA:248p), a regional commercial property Reit, has announced a robust pre-close trading update ahead of half-year results on Tuesday, 16 November 2021.

A portfolio bias towards regional offices (41 per cent portfolio weighting with no London exposure), industrial warehouses (14.4 per cent) and retail warehouses (3.3 per cent) explains why rent collection rates are so impressive even during the Covid-19 pandemic. Indeed, having collected 97 per cent of rents in the June quarter, less than 8 per cent is outstanding in the current quarter. Moreover, 29 new lettings, lease renewals and rent reviews have added £0.6m to the group’s annual rent roll since 31 March 2021, hence why the board felt confident enough to raise the dividend by 20 per cent to 3p a share earlier this year.

The disposal programme remains on track. Palace is aiming to sell £30m of non-core properties in the 12 months to 31 March 2021 and has so far exchanged or completed combined sales of £12m. Sales at the Hudson Quarter residential development in York are flying, too. Having completed the 127-flat development in April 2021, 61 units have now been sold for £19.2m, including 28 units worth £9.9m since the annual results in June. Furthermore, another eight flats are under offer, which will bring in £3m of proceeds and completely pay off the outstanding balance on the group’s £26.5m development facility with Barclays. In addition, lease terms have been agreed for the top two floors of the standalone office building, HQ at Hudson House, which means that 41 per cent of the 39,000 square foot grade A office space is now let.

Palace has also realised £3.2m recently for its 5.58 per cent stake in Circle Property (CRC), another regional property player I am keen on, as part of the board’s strategy to recycle capital into higher-growth opportunities. Specifically, these are selected regional office and industrial assets. Taking all the completed and planned disposals into account, house broker Arden Partners expects net debt to be slashed by more than half from £120m to £57m by the March 2021 year-end, implying a modest loan-to-value of 25 per cent.

The broker also expects European Public Real Estate Association (EPRA) net tangible asset value per share to rise from 350p to 365p, and pencils in an annual dividend of 12p a share. On this basis, the shares are rated on a 32 per cent discount to forward NAV, and offer a 4.8 per cent prospective dividend yield. By comparison, Liberum Capital’s peer group of 19 UK commercial property companies trade on an average discount of 4.2 per cent to NAV and offer a lower dividend yield of 4.6 per cent.

Palace Capital’s shares have produced a 16 per cent total return since I initiated coverage at 218p (Alpha Research: ‘A Reit royal value play’, 11 March 2021), and briefly touched my 280p target after my last article (‘Targeting an under-rated Reit value play, 10 June 2021). The subsequent profit taking appears to have run its course and I expect the forthcoming results to be well received. Buy.


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