- European Public Real Estate Association (EPRA) net asset value (NAV) per share of 390p exceeds analyst estimates by 5 per cent
- Annual adjusted pre-tax profit of £7.8mn and EPRA earnings per share (EPS) of 16p
- Reported pre-tax profit of £24.6mn buoyed by gains on disposals (£5mn), portfolio valuation uplifts (£8.2mn) and trading profits (£3.8mn)
- Dividend per share hiked by 26 per cent to 13.25p and forecast to rise to 15p a share in 2022/23 financial year
Palace Capital (PCA:284p), a high-yielding regional commercial property Reit which has a portfolio bias towards regional offices, industrial warehouses and retail warehouses, has delivered 11 per cent higher EPRA net tangible assets of 390p per share and slashed its loan to value ratio by a third to 28 per cent in the 12 months to 31 March 2022. The annual dividend per share was hiked by 26 per cent to 13.25p a share, too.
Key to the balance sheet deleveraging has been a disposal strategy that realised £31.5mn of gross proceeds, well above target, and at a 19 per cent premium to March 2021 carrying values, highlighting hidden balance sheet value. The remaining investment portfolio of 35 properties is valued at £259mn on a net initial yield (NIY) of 5.6 per cent, but has a much higher reversionary yield of 7.5 per cent, highlighting potential for a sharp rise in contracted rental income as properties come up for rent review/lease expiry or are re-marketed after refurbishment.
The portfolio boasts high rent collection rates of 98 per cent and although there are voids – occupancy rates increased from 86.4 to 88.5 per cent – the vacant space has either recently been refurbished or has been earmarked for upgrade. Importantly, the properties are producing rental growth, an additional £1.9mn of net rental income was gained in the 12-month trading period mainly through asset management lease activity and acquisitions, after accounting for income lost through disposals and lease expiries.
Palace Capital has been benefiting from the buoyant residential housing market, too, completing the sale of 80 apartments at its Hudson Quarter development in York, realising £27.4mn in the financial year. Since the year-end, a further four flats have been sold and seven are under offer, leaving only 36 units to sell. The £31.5mn proceeds from the disposal of 14 commercial properties and the £27.4mn cash receipts from the Hudson Quarter helped slash group net debt from £118.9mn to £73.6mn, after taking account the £10.25mn purchase of a newly refurbished office building in Maidenhead. Acquired on a NIY of 6.83 per cent, the property “offers excellent potential for rental growth”.
The purchase is in line with the board’s new strategy to rebalance the portfolio so that core assets with rental and capital growth potential account for half the weighting, asset management properties around 40 per cent, and development assets a further 10 per cent. Once the remaining units at Hudson Quarter are sold, industrial and regional property will account for 70 per cent of the portfolio.
After 12 years of service, Neil Sinclair, chief executive and co-founder of Palace Capital, is stepping down from his role and chairman Steven Owen will take an executive role on an interim basis. Sinclair leaves the company in fine health, a factor that is not reflected in the 27 per cent share price discount to EPRA NAV. A progressive dividend policy that underpins a prospective dividend yield of 5.3 per cent is likely to become increasingly attractive to investors looking for an inflation hedge, too.
Palace Capital's shares have delivered a 35 per cent total return since I initiated coverage (Alpha Research: ‘A Reit royal value play’, 11 March 2021). Although the share price is unchanged since the pre-close trading update (‘Bargain Shares: A trio of value plays’, 7 April 2022), it has outperformed the FTSE Small-Cap index which has lost 6 per cent of its value in the past 10 weeks.
I expect the relative and absolute outperformance to continue and reiterate my 350p fair value target price. Buy.
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