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Palace Capital

Portfolio and trading update

16 May 2019 / Corporate research

Palace Capital’s portfolio and trading update of 2 May showed underlying values up year- on-year. A lease event, resulting in a profit and cash upgrade, was announced on 7 May. This showed a cash premium being agreed to be paid by the tenant. The loan-to-value (LTV) stood at 33%. Palace Capital 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.” Construction has recently commenced for the Hudson Quarter, York, mixed residential-commercial development inside the city walls. This is one of several factors underpinning significant medium-term expansion in capacity to pay growing dividends.

  • Update from 2 May: “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.”
  • Minor estimate changes: We reduce FY19E revenue and profit by £0.5m, as Palace Capital points to increased opportunities for lease renewals into FY20. As to FY20E, we raise our revenue and profit figures by £2.3m as a result of the tenant-requested lease surrender at the Birmingham office, net of costs.
  • Location and active asset management: Many of the top 10 assets (by value and rental income) are along the M62 corridor. A recent (5 April) Property Week survey placed 10 of the top 20 UK non-London office “hotspots” in that M62 corridor. “Northern Powerhouse” commercial real estate opportunities grow.
  • A track record of outperformance: In each of the past five years, Palace Capital’s accounting return has been in the first or second quartile vs. our small basket of six most comparable regional UK REITs. (Note that, in FY18, this excluded the distorting effect of equity.) Since 2013, NAV has more than doubled.
  • Risks: The normal risks of real estate apply. The 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 33% LTV, is conservative and, although expected to increase as the York development progresses, management has previously stated an intention to keep it below 40%.
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