RNS announcement

Palace Capital Plc

("Palace Capital", the "Company" or the "Group")

 

Interim results for the 6 months ended 30 September 2015

 

Palace Capital, the property investment company that focuses on commercial property outside London, is pleased to announce its half yearly results for the six months to 30 September 2015.

 

Highlights

 

Corporate Highlights

·      £20m equity raised and deployed in the period

·      Portfolio valuation at 30 September 2015: £140.4 million (31 March 2015: £103.0 million)

·      EPRA* NAV per share: 404p at 30 September 2015 (HY 2014: 371p) having regard to 10p dilutive effect of equity raise

·      EPRA* earnings: £5.1 million (HY 2014: £1.8 million)

·      EPRA* EPS: 22p (HY 2014: 13p)

·      Interim dividend of 7p proposed (HY 2014: 6p), fully covered by earnings

 

Operational Highlights

·      Three acquisitions:

o   Sol Central, Northampton for £20.7 million, supported by £20 million equity fundraise

o   Bank House, King Street, Leeds for £10.0 million funded from cash

o   46-54 High Street, Sutton for £3.9 million, funded from cash

·       Two sales, both well above book value:

o   Unit 1, Clayton Manor, Burgess Hill for £1.25 million

o   54 Albert Road North, Reigate for £0.45 million

·       Appointment of Stephen Silvester to the Board as Finance Director

 

Asset Management Highlights

·      Planning application submitted to City of York Council for 82 apartments and 37,000 sq ft of offices at Hudson House, York

·      Secured the surrender of a lease held by Gala Casinos at Sol Central, Northampton for £3.0 million plus £0.8m dilapidations

·      Unit 3, Clayton Manor, Burgess Hill let for 15 years to Polar Audio at £120,000 pa initial rent

·      Extension of lease with the Bank of England at Bank House, King Street, Leeds until 2023

·      Work has started on office-to-residential conversion of 14 apartments at The Copperfields, Dartford, Kent

·      Post period end: Stratton House, Bristol - new 15-year lease with Wincanton Holdings at a headline rent of £190,000 pa

 

Financial Highlights

·      Gross debt: £51.1 million (31 March 2015: £36.2 million)

·      Loan to value net of cash: 23% (31 March 2015: 23%)

·      Weighted average cost of debt: 3.1% (31 March 2015: 3.9%)

·      £20 million loan facility with Nationwide Building Society secured on the Sequel portfolio, renegotiated for 5 years at a reduced margin of 2.45% compared to 3.75%

 

* EPRA is the European Public Real Estate Association

 

Date: 30 November 2015

 

For further information contact:

 

Palace Capital plc

Neil Sinclair, Chief Executive

Stephen Silvester, Finance Director

Tel. 44 (0)20 3301 8331

 

Allenby Capital Limited (Nominated Adviser and Joint Broker)

Nick Naylor / James Reeve

Tel. 44 (0)20 3328 5656

 

Arden Partners plc (Joint Broker)

Chris Hardie / Ciaran Walsh

Tel. 44 (0)20 7614 5917

 

Capital Access Group (Financial PR)

Simon Courtenay / Harry Rippon

Tel. 44 (0)20 3763 3400

 

 

 

CHAIRMAN'S STATEMENT FOR THE SIX MONTHS ENDED 30 SEPTEMBER 2015

 

I am very pleased to report our interim results for the six months ended 30 September 2015, which show that the Company has made a profit before tax of £7.6m.  The Company has significantly grown the scale of its real estate portfolio, both through recent acquisitions and upward revaluations. As at 30 September 2015, the portfolio was valued at £140.4m and our annual gross rent roll now stands at £11.6m.

 

Overview

 

We are continuing to make very good progress.  The Board is seeking to increase shareholder value by continuing to build the scale of the Company.  Our strategy is to grow by making selective acquisitions (of both portfolios and individual properties) and to actively manage our existing portfolio, which now comprises 50 properties. Our focus on growing recurring rental income continues to have a positive impact on the valuation of our properties.

 

We have the ability to take advantage of many opportunities, but only if the terms satisfy our strict valuation criteria.  To proceed with any acquisition, we have to be confident that we can add value through our style of active property management.  Our executive management team is constantly travelling around the country assessing potential opportunities, meeting property owners and reviewing properties at first hand.  We decided not to move forward with a number of the opportunities that have been offered to us during the last six months, as most of them are either in locations that we do not consider desirable or they do not offer us a sufficient return.

 

Against the backdrop of a real estate market where there is increased competition for acquisitions, we are taking full advantage of our team's experience to make sure that we can move quickly and have the resources available when an appropriate opportunity presents itself.  We continue to be very selective.  Given our in-depth experience of the real estate market, we remain convinced that this policy will hold us in good stead in the months ahead.  Despite our strict criteria for acquisitions, we remain very much in the market and we will continue to vigorously pursue opportunities that match our criteria.

 

We made three acquisitions in the six months ended 30 September 2015 with the result that our portfolio is now valued at £140.4m.  With a modest level of gearing our EPRA (European Public Real Estate Association) NAV per share has increased to 404p per share (basic NAV per share is now at 407p, however EPRA NAV takes into account the dilution of outstanding share options). Our EPRA NAV at 31 March 2015 was 393p, however we raised £20m of equity in May 2015 at 360p and this diluted the EPRA NAV in May 2015 to 383p per share. EPRA NAV has therefore increased 5% since the equity raise (21p).

 

During the half year the Company pursued its active but prudent acquisition strategy. We completed three transactions: (i) Bank House, King Street, Leeds - an 88,000 sq ft building very close to Leeds Railway Station for £10m; (ii) Sol Central, Northampton - a large 200,000 sq ft mixed use leisure scheme built in 2002 for £20.7m; and (iii) 46-54 High Street, Sutton - a 21,200 sq ft retail and office building for £3.95m.

 

We are also recycling our capital. In June 2015, we sold Unit 1, Clayton Manor, Burgess Hill for £1.25m and in April of this year we sold 54 Albert Road North, Reigate for £0.45m, both at well above book value.  We review our portfolio constantly to make sure that each property continues to match our criteria of adding value through active management to enhance the income potential and capital value.

 

Strategic Development

 

Palace has grown from £100,000 to c.£100 million market value in the last 5 years, and we intend to continue our policy of looking for portfolios especially where these have not been exposed to public marketing. We continue to look for opportunities to grow the Company while being keenly aware of the need to maximise value from our existing assets.

 

In due course it would be Palace's intention to join the Official List of the London Stock Exchange at such time as would lead to our inclusion in the All Share Index. To this end we have strengthened our Board with the appointment of a Finance Director and selective further recruitment will be made to establish a platform to support future growth. The Board has also taken the opportunity to review the remuneration structure to reflect the fact that the Company is no longer in a start-up phase and to align the longer-term rewards for key employees to the interests of shareholders. In common with listed company practice, our revised remuneration structure will be explained to shareholders in our next report and accounts. The remuneration structure has been established by the remuneration committee following advice received from remuneration consultants and consultation with our major shareholders. There are cost implications but the Board is clear that this is a key part of the retention and recruitment of high calibre individuals which is the bedrock of Palace Capital.

 

Portfolio activity

 

Our strategy remains one where we undertake the active management of our current portfolio and this is beginning to pay dividends in respect of capital growth and increased rental income. We have made good progress at a number of properties in our portfolio.

 

·      Ovest House, West Street, Brighton: The directors consider that this shop and office building is in a prime location. We are taking possession of most of the office space which will be refurbished. There is a shortage of office space in this expanding city so we are confident of increasing the income considerably.

 

·      Unit 3, Clayton Manor, Burgess Hill: Our previous tenant, Body Shop, vacated this 15,500 sq ft warehouse/office unit last December. We settled a Schedule of Dilapidations and refurbished the property, which was subsequently let to Polar Audio in August 2015.

 

·      The Copperfields, Dartford, Kent: We secured prior planning approval to convert 10,000 sq ft of vacant offices into 14 apartments. Work has started on site and these should be completed in the Spring of 2016.

 

·      Bank House, King Street, Leeds: Soon after we completed this acquisition we negotiated an extension of lease until 2023 with the Bank of England, who occupy circa 30,000 sq ft. They will pay no less than £232,000 per annum in 2020. They are currently paying £105,000 per annum, exclusive.

 

·      ICS Building and adjoining properties, Hall Road, Maldon, Essex: This is a large site where our principal tenant holds a lease until March 2017. We have instructed a professional team to pursue our development options upon lease expiry.

 

·      Unit 2, Kiln Farm, Milton Keynes: The tenant has served notice to vacate this 14,500 sq ft office unit in March 2016. We completed and let the refurbished Units 3 & 4 at the same location last December and it is our intention to carry out a similar exercise on Unit 2.

 

·      Sol Central, Northampton: We negotiated a very satisfactory surrender of the existing lease with Gala Casinos for the sum of £3.0m and in addition we also received £800,000 in lieu of dilapidations. We have seen preliminary proposals to reconfigure this space and to provide new restaurant units in the Gala premises. First indications are very encouraging.

 

·      124-126, Above Bar Street, Southampton: We have had positive discussions with the City of Southampton regarding redevelopment of this site, which are being progressed by our professional team.

 

·      Victoria Road, Stoke-on-Trent: This 40,000 sq ft warehouse was vacated in late September and a satisfactory dilapidation settlement of £250,000 was reached with the outgoing tenant. The property is on the market to let and we have serious interest from potential tenants to occupy the property.

 

·      Hudson House, Toft Green, York: We secured prior approval in December 2014 to change the use of this 103,000 sq ft building from office to residential use comprising 115 apartments. The Government has now renewed this legislation and, subject to planning consent for alterations, we have until December 2017 to complete such a scheme. We also have a planning application currently with City of York Council for 82 apartments and 37,000 sq ft of offices which is under consideration at the present time.

 

·      Since the end of the half year we have concluded a lease surrender from Computershare at our 50,000 sq ft warehouse unit at Stratton House, Cater Road, Bristol and granted a new 15 year lease with a break at the tenth year at a headline rental of £190,000 per annum to Wincanton Holdings, now part of Restore plc.

 

Within our portfolio of assets we have identified certain key properties which we believe have substantial longer-term development or asset management value. Partly this is a function of their size but is also specific to location and opportunity. At the current time Bank House in Leeds, Hudson House in York and Sol Central in Northampton fall within this category.

 

In certain instances we may take decisions to further our interests which will have a short-term impact on our rental income. For instance, at York our plans for conversion of Hudson House led us to grant short tenancies which have now expired. The total rental and void rates cost of this has to be weighed against the potential value of this site and makes this a short term price worth paying. A similar decision on seeking a letting at Bank House, Leeds now arises as AXA have vacated 13,275 square feet and where we see important long term value creation. At Sol we accepted the surrender of the Gala lease resulting in a substantial profit as a first step in a reconfiguration and revitalisation of this important leisure asset.

 

Lending facilities

 

We have recently refinanced our £20m facility with Nationwide Building Society which was originally secured on the Sequel portfolio purchased from Quintain in 2013. We now have a new £20m facility for five years at a reduced margin of 2.45% as compared to 3.75%. In addition seven of our properties, which were previously part of the Sequel portfolio, have now been removed from Nationwide's security and are unencumbered.

 

We now have a very conservative borrowing level of £51.1m.  This represents a loan to value net of cash of 23% set against the current property valuations. All the properties in the portfolio, other than the former Hockenhull retail portfolio in Cheshire, have been valued by Cushman & Wakefield. The Directors' valuation of the Hockenhull retail portfolio at 30 September 2015 was unchanged at £2.26m.

 

Dividend

 

We intend to pay an interim dividend of 7p on 30 December 2015 to shareholders on the register at 4 December 2015.  As we continue to grow the Company's rental income stream, the Board intends to continue to pursue a progressive dividend policy as the business develops.

 

Strengthening the Board

 

I am delighted that Stephen Silvester joined the board as Finance Director during the period.  He has already made a significant contribution to the management of the Company.  Part of his role is to assess the options available to the Company to create the right financing platform going forwards.  The team remains tightly knit and together has created a very solid platform from which we can expand the scale of the Company. 

 

Outlook

 

I am very pleased with the exciting progress that Palace Capital is making.  The Company has made really good headway over the past three years.  The team has completed a number of excellently timed acquisitions and is working hard on enhancing the value of all our assets via a comprehensive programme of active management. 

 

We remain very grateful for the strong support shown by our shareholders and the Board is confident that our management team has the experience to continue to deliver further portfolio initiatives.  Our ambition in the near term is to build critical mass and continue to grow our portfolio of commercial properties located outside London. The Company is extremely well placed and I look to the future with continued confidence.

 

Stanley Davis

Chairman

30 November 2015.