Posted on 02 May 2017

Portfolio and Trading Update


The information contained within this announcement is deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 ("MAR").

Palace Capital plc

("Palace Capital" or the "Company")

PORTFOLIO AND TRADING UPDATE

The Board of Palace Capital, the property investment company that focuses on real estate outsideLondon, today announces an update on the recent activity in its commercial property portfolio following the Company’s interim results published on 21 November 2016.

Highlights

 

  • Net asset value at year end expected to be ahead of market expectations;
  • Significant progress and success within the development of the on-going portfolio, including application for planning permission at Hudson House, York to include 127 apartments;
  • Palace Capital’s active asset management has produced c. £12.6 million of disposal proceeds above an aggregated book value of £9.2 million, in the year to 31 March 2017;
  • Trading for the year ended 31 March 2017 in line with expectations, before profits realised on property disposals;
  • Materially strengthened cash position, improving ability to benefit from market opportunities;
  • Continued strategy of growth through active and efficient asset management approach;
  • Terms agreed for the corporate acquisition of a significant fully let office building for circa £20 million.

 

Introduction

Palace Capital has continued to implement its strategy of growth through an active asset management approach. A number of properties with limited or no growth potential have been sold either at or significantly above book value. As a number of these properties carried no debt charge, the Company’s cash position and capacity to invest further has been strengthened as a result of these sales.

Early indications are that the Company’s net asset value as at 31 March 2017 will be ahead of market expectations. Significant property review The Company is pleased to report meaningful progress on a number of projects which are detailed below.

1) HUDSON HOUSE, TOFT GREEN, YORK

This 103,000 sq ft office building on a 2-acre site is located within the ancient City Wall and one minute’s walk from York Railway Station. York is regarded as a prime location as there is a 110-minute non-stop train service to London and 145 minutes to Edinburgh.

Palace Capital already has two planning consents for Hudson House; one for a change of use and conversion to 139 apartments and the other for conversion to 82 apartments and 37,000 sq ft of offices. However, the Board considers that optimum value can be generated from this site by redevelopment. Thus, after extensive consultation with City of York Council and local interest groups, a planning application was submitted in March 2017 for 127 apartments, 34,000 sq ft of office space, 5,000 sq ft of other commercial space plus car parking. A decision is anticipated in the summer of this year.

The Board considers that the Northern region is fast becoming one of the best performing residential property markets due to the increasing demand for a limited supply of property. Local agents advise that they are clearly experiencing a shift in trend from country to town/city centre living. The “flight to the city” trend is attracting country and suburban dwellers as well as new buyers. This is happening in both York and Harrogate, with the success of “The Residence” in York which is sold out and “The Old Police Station” in Harrogate & St Leonard’s Place in York which have nearly sold out.

In addition, City of York Council and Network Rail are moving forward with “York Central”, the proposed redevelopment of surplus railway land at York Station. The Company is well placed to take advantage of the potential growth in York and its immediate environs.

2) SOL CENTRAL, MAREFAIR, NORTHAMPTON

There is continuing development activity in Northampton most of which is taking place within the town centre and close to Sol Central. The new County Council headquarters office building known as 1 Angel Square is nearing completion and is in the process of internal fitting out. This will accommodate up to 2,000 people. In addition, the new £335 million Northampton University campus is due to be completed in the summer of 2018. The Company understands that Northampton University has 14,000 students at the present time.

Due to the leisure market slowing somewhat since last summer, the Company is deferring its major reconfiguration but is going ahead with installing a new roof and implementing a major lighting scheme for this building.

The Company has received an additional £90,000 from its hotel tenant under the provision in the lease agreement whereby the landlord receives a percentage of gross turnover above a certain figure, so the rent received from Accor this year is circa £600,000, which is a 17.7% increase on the passing rent. This property is providing the Company with a very satisfactory return.

The Company has also engaged a major firm of parking consultants to consider whether it is capable of increasing revenue from the car park. The consultants have monitored the car park for several months and have made recommendations. As a result, there is potential for a major increase in revenue in the second half of the current financial year.

3) BROAD STREET PLAZA, HALIFAX

There are only two small units unlet in this 113,000 sq ft 5-year-old leisure complex. The Company has a rental guarantee on one unit until March 2018 and has completed the installation of a new shopfront which should help attract new tenants.

There are fixed rental increases of £154,000 per annum by August of this year from Vue, Apcoa, JD Wetherspoon, TGI Friday’s & Pure Gym which will take the rental income to £1.93 million per annum.

Taking into account that interest is only being paid at the rate of 2.9% on the fixed loan from Scottish Widows, this will provide the Company with a return of 16.5% on the initial equity investment made in March 2016.

Palace Capital is an active manager not a passive owner. The Company has commissioned a marketing company to further increase footfall at the complex, adopting a strategy that has been web driven as well as a campaign with a local radio station. Early results are most encouraging. One restaurant group has advised that it has seen a significant increase in trade and that it is pleased with the marketing activity undertaken on the Plaza. The Company will report more fully when its Annual Results are announced.

4) THE COPPERFIELD CENTRE, DARTFORD

The Company completed the £2.25 million conversion of the vacant first floor offices into 13 self-contained flats last December and this was successfully let for 10 years to Dartford Council at a rental of £146,500 per annum (inclusive of service charge) with 2.5% annual rental uplifts. Together with the retail units, this property is now generating recurring income in excess of £320,000 per annum and has demonstrated management’s ability to identify and deliver income growth.

5) SOLARIS HOUSE, PITFIELDS, MILTON KEYNES

The refurbishment of this 14,500 sq ft office building was completed earlier this year. It is now being offered for letting with an encouraging number of viewings to date.

6) 249, MIDSUMMER BOULEVARD, MILTON KEYNES

Just over 5,300 sq ft will become available this July in this 50,000 sq ft office building situated only 3 minutes’ walk from Milton Keynes Railway Station. Rental values have moved ahead since the property was acquired in March of last year so the Company is taking the opportunity to refurbish the common parts and the pending vacant office floor. The Company continues to be very positive about Milton Keynes, which is one of the fastest growing cities in the UK.

7) BOULTON HOUSE, CHORLTON STREET, MANCHESTER

The refurbishment of the 18,000 sq ft of vacant office space was completed earlier this year and the Company plans to do some limited works to the façade within the course of the next few months.

This 77,000 sq ft property, situated within close proximity of Manchester Piccadilly Station, is located in an area due for major regeneration and the new HS2 station. It is currently let at modest rents and the Company is seeing a number of inspections from prospective tenants at considerably higher quoting rentals.

The Directors of Palace Capital are very pleased with this purchase, completed in August 2016, and recognise the potential for considerable growth in the medium term.

8) BANK HOUSE, KING STREET, LEEDS.

The refurbishment of the 13,300 sq ft office space, formerly occupied by AXA, was completed earlier this year. Coupled with the adjoining vacant space, the Company is seeking to let 16,700 sq ft on a single floor at a rental considerably lower than that required for a new building.

There have been several inspections with some preliminary interest shown already and Palace Capital sees considerable medium term growth on this 88,000 sq ft building situated near Leeds Railway Station.

9) OVEST HOUSE, WEST STREET, BRIGHTON

The letting of the final office floor to Quarto Publishing plc was completed in February 2017, so the building is now fully let. Brighton has just been named by Property Week as the city with the hottest office property market. The Company agreed £20.00 per sq ft in February 2016 for the whole building and lettings have taken place recently in other parts of the city at higher rentals. Palace Capital acquired this property through the Property Investment Holdings Ltd acquisition in 2014 and the Company considers this as an excellent long term investment.

10) BRIDGE HOUSE, 41-45, HIGH STREET, WEYBRIDGE

This 12,000 sq ft, 3 storey, property comprises three shops and two floors of offices where the latest lease expires in April 2020. Planning consultants have been instructed to advise as to what development/refurbishment opportunity might be available in this prosperous town in Surrey, about 28 miles from London.

Completed property sales

The Company takes the view that it is important to recycle its capital, particularly with properties where it sees limited opportunity for growth. Palace Capital has sold the following properties in the last financial year for a total consideration of £12.6 million, of which £7.6 million was not subject to a charge, thereby increasing the Company’s cash balances:

1) Units B & G, Argent Court, Tolworth

2) Former Portmeirion Property, Victoria Road, Stoke-on-Trent

3) 4 Hall Road, Maldon

4) 5, Hall Road, Maldon

5) ICS Buildings, Maldon

6) Unit C, Meadowcourt III, Sheffield

7) Warwick House, Wade Lane, Leeds

8) Allen House, Ashton Road, Stockport

9) Land at Island Farm Road, West Molesey

10) Freehold Land, West Molesey

11) 1-7, High Street, Nantwich

12) 7 Earle Street, Crewe

13) 23-25, Market Street, Crewe

Other portfolio activity

The Company has completed or has in hand renewals of leases, rent reviews and lettings at:

a) Russell House, Molesey Road, Walton-on-Thames

b) Point 4 Trading Estate, Avonmouth

c) Saxon House, Henson Way, Kettering

d) 2-5, Devonshire Row Mews, London W1

e) Princeton House, Victoria Road, Farnborough

f) Priory House, Gooch Street North Birmingham

g) Car Park, Foleshill Enterprise Park, Coventry

h) Imperial House, Holly Walk, Leamington Spa

i) Bridgwater House, Edleston Road, Crewe

j) 127 Above Bar Street, Southampton

k) The Forum, Barnfield Road, Exeter

Portfolio summary and prospective acquisition

The Company now has a reduced contractual rent roll of £12.8 million per annum and a net rental income of £10.9 million per annum (after the deduction for head rent, service charge shortfall and empty rates). It continues to mitigate its rates liabilities, particularly at Hudson House, so that revenue leakage is kept to a minimum.

In addition, although the recent successful sales have reduced rentals this has boosted the cash balances and capacity for acquisitions. Consequently, the Company has been seeking alternative income producing properties that fit its criteria, but the Board is mindful of the need to satisfy Palace Capital’s strict criteria for suitability.

The Company has just agreed terms for the corporate acquisition of a significant fully let office building for circa £20 million. If successfully concluded, it will considerably enhance rental income and more than replace the lost income from disposals.

Borrowings

The Company has close relationships with its lenders who understand its outlook, strategy and approach. Over £78 million of debt facilities have been drawn, giving a loan to value ratio of 39% net of cash based on 30 September 2016 values. The average debt maturity is 4.6 years at an average cost of 2.9%, which the Company considers to be one of the lowest in the sector.

Independent valuation

The Board has commissioned independent valuations of the portfolio and the updated values of the properties will be disclosed within the Company’s Annual Results announcement in early June. The Board anticipates that this will show significant progress as a result of the Company’s active property management strategy.

Notice of results

The Company intends to announce its final results for the year ended 31 March 2017 on Tuesday, 6 June 2017.

Neil Sinclair, the Chief Executive of Palace Capital, commented: “We are making excellent progress. We believe we are one of the most exciting companies in the sector with strategic assets in growth locations having taken early advantage of the regional upturn.

“Our active management strategy, coupled with securing attractive off market corporate opportunities, has enabled us to grow both the NAV and the dividend. We continue to be very positive about the opportunities available to us outside London.”

Date: 02 May 2017