Palace Capital (PCA:240p), a high-yielding regional commercial property Reit, continues to make impressive progress with its asset disposal and debt reduction programme.
In the 12 months to 31 March 2023, the group sold £10.1mn of unencumbered flats at its Hudson Quarter residential development in York, as well as eight investment properties for £15.6mn, or 8 per cent ahead of their March 2022 book value. Since the financial year-end, Palace has sold or exchanged contracts on a further £45.6mn-worth of properties at an average 6 per cent premium to their March 2023 book value.
They include the £1.5mn sale of a medical centre in Beaconsfield at 87 per cent above book value, and the £2.3mn sale of a job centre in Farnborough for 31.7 per cent above carrying value. The post-period-end sales have added 6p a share to European Public Real Estate Association (EPRA) net tangible asset value (NTAV) of 294p.
Priced for a profitable outcome
- 18.6 per cent like-for-like property valuation decline
- Post-period-end disposals at premium to book value
- Forecast 13 per cent net loan to value by July 2023
- Annual payout per share raised 13 per cent to 15p
- Dividend yield of 6.2 per cent
- 20 per cent discount to spot NAV
The recent spate of asset sales at prices significantly higher than carrying value indicates that the 18.6 per cent like-for-like decline in portfolio valuations in the 2022-23 financial year has been far too aggressive. Valuers embedded a net initial yield (NIY) of 7.4 per cent in their valuations, or 1.8 percentage points higher than in the previous financial year, on a portfolio with a massive reversionary yield of 9.6 per cent. It led to a 24 per cent markdown in the group’s NTAV per share to 294p, below the 333p forecast of analyst Andrew Saunders at brokerage Shore Capital. Saunders “sees upward movement in NTAV as real-world disposals are secured above both previous book and current stock market implied-valuations”. I agree.
De-risked balance sheet
Moreover, the group balance sheet has been massively de-risked with the directors guiding investors to expect net debt of £20mn on 31 July 2023, down from £64.3mn (March 2023) and £101.8mn (March 2022), after factoring in cash spent on ongoing share buybacks. It implies a net loan-to-value ratio of only 13 per cent on a property portfolio conservatively valued at £149.3mn.
Effectively, the difference between the property valuation and net debt is spot NTAV of £129.3mn (300p) as receivable and payables balances of around £8.5mn net each other off. The point is that if the ongoing disposal programme continues to achieve significant premiums to book value, which is not an unrealistic possibility given that Palace is not a forced seller, it will be highly accretive to NTAV per share and act as a share price driver.
In the meantime, the annual payout of 15p a share underpins a 6.2 per cent dividend yield and the board is continuing with a NAV-per-share-accretive share buyback programme to enhance shareholder value. The portfolio has 99 per cent rent collection rates and is 88 per cent occupied, so there is a solid income stream to support the £6.5mn cost of the annual dividend.
So, having suggested buying the shares, at 217p, ahead of the results (‘This high-yield reit is slashing its debt’, 9 May 2023), I feel there is scope for the 20 per cent share price discount to spot NTAV to narrow further. It’s worth noting that the directors plan to release another trading update on 26 July prior to the annual meeting and “expect to announce further progress [on the asset disposal programme].” Buy.
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