A high-yielding property stock at a deep discount

Palace Capital (PCA:258.5p), a high-yielding regional commercial property Reit, has been making eye-catching progress with its asset disposal and debt reduction programme.

Since the financial year-end, the group has sold a third of its property portfolio at a 6.9 per cent premium to carrying value, realising £66.9mn in proceeds and adding 10.2p per share to EPRA net asset value (NAV). It means that Palace’s cash reserves of £20.1mn match gross bank debt of £20.2mn, thus placing the board in a position of strength to make further disposals from a portfolio that has been conservatively valued at £129.8mn.

It should also lead to further valuation uplifts, a point made by analyst Andrew Saunders at brokerage Shore Capital who notes that “with the company appearing to be in the process of giving itself back to its shareholders, the process is likely to see some upward movement in net tangible assets as real-world disposals are secured above both previous book and current stock market implied valuations.”

The directors are also returning surplus cash to shareholders, having spent £6.3mn repurchasing 2.65mn shares at an average price of 238p since 31 March 2023. Shareholders approved an £11mn extension of the buyback programme at the recent annual meeting, allowing Palace to repurchase a further 10 per cent of the shares in issue. It makes sense to do so given that the share price is 16 per cent below spot EPRA NAV, so share buy-backs will be accretive to NAV per share and drive a narrowing of the share price discount. Indeed, this week’s buy-back of 0.75mn shares at 253p has lifted EPRA NAV per share by a further 1p to 307p. It’s a win-win situation for shareholders who also received a 15p-a-share payout in the last financial year, which underpins a 5.8 per cent dividend yield.

New letting positive for valuations

Since the 2023 financial year-end, the group has completed three new lettings, three lease renewals and two rent reviews across 45,000 sq ft of space, generating £0.5mn of additional annualised contracted rent. The lettings were agreed at 2 per cent ahead of estimated rental value (ERV), highlighting the strong reversionary potential within the portfolio. The rental uplifts are positive for valuations of a portfolio that boasted a 99 per cent rent collection rate in the latest quarter.

For instance, Orega, a serviced office workspace provider, has entered into a 15-year management agreement to take 22,500 sq ft of space at the group’s St James' Gate building in Newcastle. The letting increases occupancy at the 82,500 sq ft property from 64.8 per cent to 87.5 per cent and is the second major letting after Softcat (SCT), a £2.9bn market capitalisation IT services provider, leased space in December 2022.

Palace’s shares have generated a healthy 33 per cent total return (TR) since I initiated coverage (Alpha Research: ‘A Reit royal value play’, 11 March 2021), during which time the FTSE Small-Cap (ex-investment trusts) TR index has shed 2 per cent of its value and the FTSE Aim All-Share TR index has plunged 34 per cent. The shares are also well ahead of my last buy call (240p) at the annual results (‘Palace Capital's 20% discount will soon narrow’, 15 June 2023) and Palace has since paid the latest 3.75p-a-share quarterly dividend, too. Expect the outperformance to continue. Buy.