Palace Capital Plc - Portfolio and Trading Update

Portfolio highlights

·     Disposal of 50 residential units (part of the Warren Portfolio) for £18.2 million to Barnet Council which completed yesterday (1 May 2019).

·     Acquisition of 1 Derby Square, Liverpool in December for £14.0 million producing £1.0 million in annual income with considerable reversionary potential.

·     37 leases and rent reviews completed in the year-ended 31 March 2019 at an average 14% ahead of Estimated Rental Value ("ERV") generating £3.4 million rent per annum, reflecting an uplift on previous passing rents of £0.8 million.

·     Building contract signed and £26.5 million facility secured with Barclays Bank for the Hudson Quarter development in York, on very competitive terms.

·     Resolution to grant planning consent from Elmbridge Borough Council for the development of three retail units and 28 apartments at 41- 45 High Street, Weybridge, Surrey.

Financial highlights

·     Strong cash position along with unutilised debt facilities to fund the Company's refurbishment and development projects as well as capacity for future acquisitions.

·     Group remains conservatively geared at 33% net Loan to Value (LTV).

·     First full year on the Main Market of the London Stock Exchange.

Neil Sinclair, Chief Executive of Palace Capital, commented:

"Palace Capital is making substantial progress across the portfolio, notwithstanding the uncertain environment. During the year we took the strategic decision to hold back on letting some of our vacant space where we see the opportunity to drive value and income potential through refurbishment or redevelopment. While this means that our adjusted profits are likely to be slightly below expectations for the financial year ended 31 March 2019, it will enable us to further improve our portfolio of high quality, income producing properties that are let to first class tenants. We also have an exciting development in York, with its buoyant local economy, and a strong development pipeline of investment opportunities in core city centre locations."

"We remain conservatively geared and, with strong cash balances, are in an excellent position to take advantage of opportunities that meet with our investment criteria. This provides the Board with the confidence to recommend that the current level of dividend payments is maintained. We continue to be very positive about our prospects as we look to create value for shareholders and generate attractive total returns."

Portfolio activity

Disposals and acquisitions

55 non-core assets sold in the year for £21.8 million and an acquisition in December 2018 of 1 Derby Square, Liverpool for £14.0 million producing £1.0 million in annual income with considerable reversionary potential.

50 houses originally acquired as part of the Warren Portfolio were sold to Barnet Council for £18.2 million.  Post the year end two more residential properties have been sold for £0.8 million and, overall, the Company has achieved 98% of book value on these disposals to date, well ahead of the business plan on acquisition. The Company has a further 8 residential properties remaining in its portfolio that are on track for disposal within the next few months.

During the period, three non-core assets in Weybridge, Banbury and Crewe were also sold for combined proceeds of £3.6 million as the Company continues to recycle capital into higher yielding opportunities.

Developments

At the Hudson Quarter development in York, demolition has been completed and the contractor is on site. A ground-breaking event took place last month where the Archbishop of York, John Sentamu, officiated the commencement of building works on site. The scheme will be formally launched on 20 June 2019, when the first batch of apartments will be offered for sale with strong interest already received at this early stage.

The Company continues to benefit from operating in this buoyant location. This is borne out in the Nationwide House Price Index for Q1-2019 where the annual change in house prices is up 2% for Yorkshire & Humberside, but down almost 4% for London. Outside the portfolio, progress continues on the proposed development at York Railway Station known as York Central which is being undertaken close to Hudson Quarter and which will be complementary to it. Outline planning consent was granted in March for up to 2,500 homes and 932,000 sq ft of offices.

The Company has also secured a resolution to grant planning consent for the development of three retail units and 28 apartments, subject to a Section 106 agreement, in High Street, Weybridge, Surrey. The Company is in active discussion with the Council with a view to securing a formal planning approval in Q3 of this year.

Leasing

In the year-ended 31 March 2019, 37 leases and rent reviews have been completed at an average 14% ahead of ERV, generating £3.4 million rent p.a. an uplift on the previous passing rent of £0.8 million.

Stand out transactions include the 15-year lease at Sol Northampton with Soo Yoga Group at a headline rent of £85,000 per annum, with RPI-linked uplifts and a minimum uplift at first review to £100,000 per annum. 

The Hotel Ibis at Sol Northampton is trading extremely well and, for the third year running, has delivered a turnover rent in excess of £100,000 in addition to the passing rent of £510,000 per annum. This represents a significant improvement from the date of acquisition in June 2015 when no turnover rent was being received.

A lease renewal has also been concluded at Courtauld House, Coventry with Brose Ltd, a supplier to the automotive industry, at a rental of £431,500 per annum reflecting a 33% uplift on the previous rent of £325,000 per annum, effective from 30 June 2019.

Financials

The Company's valuers have confirmed that there is a marginal increase in the underlying valuations of the investment portfolio at year-end compared to the prior year.

At 31 March 2019, the Company had a gross passing rent of £17.7 million per annum (excluding the residential portfolio held for sale) and, after deduction of non-recoverable property costs of £1.9 million, the net effective rental income was £15.8 million per annum.

The ERV of the Portfolio is £21.5 million per annum, excluding what is currently under development, so there remains considerable reversionary growth and latent value to be captured.

The sale of the majority of the Warren Residential Portfolio plus other sales in the period has boosted the Company's cash balances considerably. Subsequently, the Group remains conservatively geared at 33% net Loan to Value (LTV). The Company thus has the financial firepower to take advantage of significant acquisition opportunities that meet its investment criteria.