On Thursday 9th July 2020, Hardman & Co held our first virtual Investor Forum as an online webinar for investors.
The event, normally taking place as a physical evening presentation in central London, has adapted with the changing times to great effect. Benefiting from both a wider geographical reach and logistical ease for attendees, our highly engaged audience more than doubled in size from previous forums.
Palace Capital was one of four companies presenting over the webinar, with a management presentation followed by a lively Q&A session featuring questions from both investors and Hardman analysts.
Here, we transcribe that Q&A (edited for concision) and below that, we offer some further insight following the Forum session.
The first company presenting is Palace Capital. We are fortunate to have with us today Neil Sinclair, the CEO, and Steven Sylvester, the Finance Director. Palace Capital are experts in regional property investment, and they aim to unlock value through better asset management to deliver attractive total returns to shareholders. Last week, I watched an interview that Neil gave to Sky TV just days before the general election last December, where he pointed out just how different conditions are in the North of England compared with London and the South, and we’ve obviously, since the general election, seen a re-balancing of government policy, or only the very beginning of that towards the red wall Labour seats. Palace Capital is very directly exposed to that. Earlier this week, the company announced a really pleasing set of final results.
I’ve got a number of questions about specific locations, so I’m going to try, in the interests of time, to roll this into one basic question. There are three assets that have come up for discussion. One is the residential-led development in Weybridge, the next one is Manchester, and then also we’ve had a question about what happened in Sheffield. So, I’m going to start with Sheffield, and then go backwards.
Can you tell us more about the Sheffield disposal? What was the thought process behind the sale, and how did the proceeds compare with book value?
Right – so I’ll answer the third part first. That property was part of a portfolio that we bought off Quintain seven years ago, and, you know, when you buy 24 properties, there are always a few, which we call dogs, that you get lumbered with – you know this is part of buying a company, and these were a group of little office buildings near the Meadow Hall shopping centre. It was never going to go anywhere, it’s never shown any growth and, slowly but surely, we’ve sold off the buildings over the years, but we still had quite a bit left over and, last Friday, we sold it for £1.25m to somebody who actually agreed the deal on Monday and signed on Friday. The book value was £960k; he offered £1.25m. We wanted a little bit more – we said, “well, we’ll take that but he’s got to sign by Friday”, and he did – and the good thing about that is that it was not charged, so we get all the money, and we lose very limited income, and most of it was vacant, so that’s one of the things we sold.
The other two we asked about was Weybridge. For Weybridge, we’ve got consent for 28 apartments. What we’ve done there is ask Saville’s, our agents on that, to give us a revised assessment as to the market post-COVID-19. They’ve initially told us that the marketing in Weybridge, because it’s a very prosperous town, is still very strong, so we’re looking at that, and we we will make a decision, probably in September, as to whether we sell the site, or whether we do it ourselves. We don’t owe any money in it, and it’s uncharged, so all we’ve got to do is the construction.
If Manchester’s such a strong location, why do you not have higher rents per square foot?
So it’s a good question – Manchester is a very strong location, but this building is a 70s building, and it’s not 20 years-old – when we bought it, we were getting £12 to £13 per foot. We took it as an opportunity for two reasons: it’s got very good site coverage, and the building, at 75,000 feet, is not big enough for the site, frankly; it’s got potential for at least 150,000 square feet on the site. We’ve refurbished it the best we can, and that type of space gets up to about £18 to £19, which is what we’re getting. But the fact is that, when we bought it, the rents were £12 to £13 – so we’ve actually seen a 50% growth in rent, and we’ve also seen a 50% growth in value.
What has happened to your shareholder register while the stock has dropped during COVID-19? Have you seen much movement in the register, or is it basically a liquidity-driven fall?
I think liquidity is part of it, but the whole question with the shareholder register is that you have the shareholders listed on our website. However, that’s not the true situation, because they are the shareholdings as they’ve been disclosed to us, and, as you know, if they don’t disclose them to us, we can’t technically say what they’ve got. But a number of our shareholders have increased their holdings: Axa at over 10%, and you probably saw last Friday that Allianz increased its holding to over 5%. Both Unicorn and Henderson’s have increased their holdings, so most of our shareholders, during this time, have actually topped up their holdings, because they see the shares as good value.
The next question is on LTV, so I’m going to combine two questions: you don’t seem to have much headroom on LTV, so i) how did you get around this, and ii) what happens if values fall (the LTV will obviously rise)?. How did you address that whole equation?
Good question. The LTV is certainly a covenant with the banks. I could have touched on this earlier, actually –as a result of the challenges with rent collection, banks generally have a cover test called interest cover ratio. Those tests have been under pressure at this time. I think the reality is that, if there is a downturn in the economy, LTVs are then under more pressure, and we were always taking a view of keeping LTV at a conservative level. It is around 38% as we speak, and if values were to fall, then clearly LTV would increase. With York coming to completion next year, we’ve got a big chunk of cash coming in the door. There are also some disposals, and we’ve got a disposal strategy whereby we’re recycling some capital out of assets where we’ve maximised values – so it is absolutely important to monitor this. We’ve got LTV covenants across our various facilities, and we do have headroom, but it’s always worth being very cautious when it comes to how far you gear your properties.
I think we should say that, if Hudson Quarter goes according to how we see it going at the moment, then we see the LTV dropping into the low 30s.
So what percentage of the asking price are you getting on the apartment sales in Hudson Quarter?
The next question relates to retail park footfall. What are your general comments as to what you’re seeing, and how quickly do you think things might recover, in terms of footfall?
Well, in retail, we are seeing a slow recovery, but we’re not a company that ideally invests in retail. We’ve acquired retail through the portfolio acquisitions we’ve made when retail has been part of what we bought. Now, the good thing is that, for example, we’ve only got two retail warehouses, but we’ve got Booker as one tenant, which is Tesco, and the other ones are Wickes and Pets at Home, so they’ve all been open all the time. Wickes in East Grinstead is one of their best-performing ones, according to Travis Perkins, so, in consequence, we’re quite happy with those, and they’ve had reasonable footfall – even during the lockdown. But in terms of retail itself, we have very limited retail. We’ve got a supermarket let to Aldi, and that, of course, has been open ever since the lockdown, and the rest is all small shops, so we don’t really focus in that particular sector, and even our rental collection figures on the retail side are really good at the moment.
Thank you very much. I’ve got more than one question left, but, in the interests of time, I’m going to ask you this final question: are the directors topping up at these lower levels of stock price, or not?
Very good question – that is definitely under review.
Thank you very much