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Palace Capital

Hudson Quarter, York, development commences

21 Mar 2019 / Corporate research

Palace Capital is a real estate investor. It has recently commenced construction of its mixed residential and commercial development at Hudson Quarter, having secured a new £26.5m debt facility and fixed price contract. Supply in this location is tight and the projected gross development value of £65m would thus appear robust. The current site book value is £16.8m. The building contract is £35m (part of a total projected cost of £37m, pre-interest). We note that the full benefit of Hudson Quarter is derived during FY22, when Palace Capital will receive significant free cash. This is one of several factors underpinning significant medium-term expansion in capacity to pay growing dividends.

  • Palace Capital’s value optimisation has been made with care: Palace Capital acquired the development site inside York city walls some years ago as part of a broader portfolio. It has worked up the planning and has now secured finance and, on 11 February selected a (fixed price) building contractor, post site clearance.
  • Across-the-board, good progress: Results to end September saw total property return of 5.3%, outperforming the MSCI IPD Quarterly Benchmark of 3.3%. Progress in recycling capital is live: disposals of London residential purchased within a mixed portfolio; and December’s acquisition of central Liverpool offices.
  • Yield, location and active asset management: The yield on the assets is above market. Annualised contracted rental income is £17.4m pa, 6.2% of the book value of the real estate assets. 2H’19 gross rent income was £18.4m annualised. There is significant reversionary potential (ERV: £21.1m pa).
  • Risks: The normal risks of real estate apply. Weighted average length of unexpired lease to break is ca. 5.4 years. Generally, covenants are good. Retail exposure (bar Wickes and Booker) is minimal. Gearing at 30% LTV (loan-to-value) is conservative, and although expected to increase as the York development progresses, Management have previously stated an intention to keep below 40%.
  • Investment case: Running yield and upside potential in income and capital are attractive, as is sectoral (minimal retail bar Wickes and Booker) and geographic positioning. Although the dividend is uncovered, the York development site is well positioned for FY22 to deliver cash, capital- and income-uplift to more than cover a progressive dividend. We anticipate it will raise NAV by ca. 20p by FY22.
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