- Sold or exchanged contracts on £15.2mn of properties
- Apartments worth £1.2mn under offer
- Several other investment properties under offer
- Net debt only 2.5 per cent of property portfolio valuation
Palace Capital (PCA:224p), a high-yielding regional commercial property real estate investment trust (Reit), is progressing its asset disposal and debt reduction programme and could announce details of a capital return to shareholders within the next few months. This is not priced into the share price.
Since the company released interim results in mid-November 2023, Palace Capital has exchanged contracts or completed the sale of three investment properties for £15.2mn, a slight discount to their March 2023 book value. Several other investment properties are under offer, too, as are two apartments (for a total of £1.4mn) at the company’s flagship Hudson Quarter development in York, leaving 14 units there to sell.
The proceeds from the disposals enabled the board to fully repay the company’s floating rate £5.6mn loan with Barclays, which carried an interest rate of 7.1 per cent. The only remaining debt is a low-cost debt facility with Scottish Widows. It has a fixed interest rate of 2.9 per cent until maturity in July 2026, and is secured against only one of the company’s assets. Palace Capital’s cash reserves of £5.6mn earn an income above the borrowing cost on the loan so it makes sense to leave the facility open for now.
Moreover, current net debt of £2.7mn equates to only 2.5 per cent of the £108mn portfolio valuation and this will turn into a hefty cash position when the aforementioned property disposals complete. Palace Capital has a market capitalisation of £84.1mn (224p), which means that the equity is priced on a 24 per cent discount to net asset value (NAV) of £110mn (293p).
Bearing this in mind, the board is considering using a tender offer to return capital to shareholders. It's the most likely mechanism. That's because if a tender price is pitched in line with NAV per share, it will deliver an immediate 30 per cent return on the proportion of your holdings being tendered. Alternatively, if the tender price is pitched between the current share price and NAV per share it will deliver both a capital gain on your tendered shares and boost NAV per share on the retained holding.
Furthermore, analyst Andrew Saunders at brokerage Shore Capital points out that “the process [of giving itself back to its shareholders] is likely to see some upward movement in net tangible asset (NTA) as real-world disposals are secured above the current stock-market-implied-valuations along with the benefits of further [NAV per share accretive] buy-backs.” The shares also offer an attractive quarterly dividend of 3.75p, which underpins a 6.7 per cent dividend yield.
The 24 per cent share price discount to NAV is certainly worth taking advantage of ahead of the next trading update, which is likely to include details of the capital return to shareholders. Buy.
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