RNS announcement

 19 November 2019

PALACE CAPITAL PLC

("Palace Capital" or the "Company")

Interim Results for the 6 months ended 30 September 2019

CAPITAL EXPENDITURE STRATEGY AND INCREASED LETTING ACTIVITY UNDERPIN CONTINUED POSITIVE PERFORMANCE

Palace Capital (LSE: PCA), the UK REIT that has a diversified portfolio of UK regional commercial real estate in carefully selected locations outside of London, is pleased to announce its unaudited results for the six months ended 30 September 2019.

HIGHLIGHTS

Continued total property return outperformance

·    Total property return of 1.5% over the period, outperforming the MSCI UK  Quarterly Benchmark of 0.8% and marking three successive years of outperformance

·  EPRA earnings increased to £6.7 million (September 2018: £3.5 million) reflecting underlying strength of investment portfolio

·    EPRA EPS of 14.5p, 153% cover of 9.5p dividend for the six-month period

·    Q2 dividend of 4.75p declared and payable in December 2019

·    IFRS net assets of £178.7 million maintained (March 2019: £180.3 million)

·    EPRA NAV per share 391p reduced by 3.9% (March 2019: 407p)

·    Conservative gearing maintained at 34% LTV and weighted average interest rate reduced from 3.3% to 3.2%

·    WAULT increased to 5.2 years to break and 6.6 years to expiry (31 March 2019: 4.5 years to break) as a result of lease renewals and new lettings

·    Converted to REIT status with effect from 1 August 2019

·    Increased revolving credit facility with NatWest to £40 million and extended for a further five years at a lower margin

Active asset management delivering long term portfolio enhancement

·    Hudson Quarter flagship development scheme in York, which includes 127 apartments with over 20% already sold or under offer, on track for completion in January 2021

·   Planning consent secured for 28 apartments and 4,000 sq ft of retail space at 45 High Street, Weybridge, Surrey in one of the UK's most affluent areas

·   £13.2 million of disposals during the period, including remaining non-core residential units from Warren Portfolio

·  Overall EPRA occupancy at 84% reducing temporarily as we continue to focus on strategic refurbishment or redevelopment delivering long term benefits

Positive leasing momentum driving income

·    12 lease renewals and five rent reviews completed at an average 3% above ERV and a 25% uplift on previous passing rents, creating £0.4 million additional annual rental income

·    Nine new leases provided an additional £0.5 million of annual income, including:

o 23,500 sq ft at Sol, Northampton to Gravity Fitness for a minimum term of 10 years at a 17% premium to ERV

o 14,665 sq ft of space let at Boulton House, Manchester, bringing the asset to 82% occupancy with 13,170 sq ft remaining to be let

·    Lease surrender with Forensic Science Service at Priory House, Birmingham secured £2.85 million, being all the remaining rent due under the lease, and discussions underway to dispose of remaining short leasehold interest

·    Adjoining site to the 28,000 sq ft holding at 24 Blackwater Way, Aldershot acquired for £0.2 million and a new 10-year lease agreed with BHW Automotive Limited for the entire property at a rent of £227,000 per annum exclusive, an increase of £10,000 per annum. The lease benefits from a fixed increase after five years to £250,254 per annum and the latest valuation of the property shows a 51% capital value uplift as a result

*Dividend cover is calculated on the adjusted earnings per share which is a recurring earnings basis and specifically excludes the one-off significant surrender premium of £2.85m received in the current period.

Neil Sinclair, Chief Executive of Palace Capital said:

"During the period we have stepped up our development activity, a strategy we believe is best placed to increase shareholder value in the long term by creating an even stronger portfolio that can meet the demand we are seeing outside of London for well located, fit for purpose property that delivers higher quality income and capital growth. Our commitment to a total return strategy is now starting to pay off, both in terms of income and capital growth, and should enable us to maintain our positive performance.

"At the end of June, we placed 20 apartments at Hudson Quarter, York, on the market and demand has been such that we have now sold 21 with a further 7 under offer. We are well ahead of our business plan at Hudson Quarter and with letting activity brisk on our other refurbishments, we are most encouraged despite the current political uncertainty."

Stanley Davis, Chairman of Palace Capital said:

"Our strategy at Palace Capital is delivering growth, both in terms of income and long-term capital value, and I am very pleased that we have now outperformed the MSCI IPD Quarterly Benchmark for three consecutive years. While the significant capital expenditure we have deployed across a number of different properties has not yet fully resulted in a corresponding uplift in property valuations due to the time lag between completing capital works and letting the refurbished space, and therefore has had a slight impact on our NAV, I firmly believe this investment will support our future growth. In the six years since our re-admission in October 2013 we have produced a total accounting return of 123%, outperforming almost the entire peer group.

"We continue to abide by a disciplined acquisition policy and, having not assessed a suitable opportunity in the period that meets our strict criteria, we believe that the best use of capital to deliver value for our shareholders in the current market is to unlock the growth potential in our existing portfolio. The Board is confident Palace Capital is well positioned for the future, with a strong core income profile and a number of value-enhancing refurbishment and redevelopment opportunities."

For further information please contact:

PALACE CAPITAL PLC

Neil Sinclair, Chief Executive 
Stephen Silvester, Finance Director
Tel. 44 (0)20 3301 8331

Broker

Numis Securities

Heraclis Economides / Oliver Hardy

Tel: 44 (0)20 7260 1000

Broker

Arden Partners plc

Corporate Finance: Paul Shackleton / Ciaran Walsh / Daniel Gee-Summons

Corporate Broking: James Reed-Daunter

Tel: 44 (0)207 614 5900

Financial PR 

FTI Consulting

Claire Turvey / Methuselah Tanyanyiwa

Tel: 44 (0)20 3727 1000

palacecapital@fticonsulting.com

About Palace Capital plc (www.palacecapitalplc.com)

Palace Capital plc (LSE: PCA) is a UK REIT that has a £275.8 million diversified portfolio of UK regional commercial property. The Company maintains a disciplined investment strategy focused on towns and cities outside of London that are characterised by thriving local economies and strengthening fundamentals. Within those locations the highly experienced management team select assets that provide opportunities to drive both capital value and long-term rental income through tailored active asset management programmes ultimately delivering attractive shareholder returns.

www.palacecapitalplc.com

CHAIRMAN'S STATEMENT:

I am pleased to report our interim results for the six months ended 30 September 2019. Overall, we have had an encouraging start to the year as we continue to work hard to ensure our strategic aims are met and that we are delivering value to our Shareholders despite the ongoing political and economic uncertainty in the UK.

PERFORMANCE:

Our total property return is 1.5% and the Group made a profit after tax of £2.6 million in the period with an EPS of 5.6p per share. EPRA earnings totalled £6.7 million, translating to an EPRA EPS of 14.5p per share and providing over 150% cover for dividends in the period of 9.5p per share. An alternative measure of recurring earnings is our adjusted earnings of £3.9 million, which excludes the £2.85 million in cash received from the surrender of the lease at Priory House, Birmingham, and totalled 8.5p per share for the six months to 30 September 2019 (September 2018: 8.0p per share).

Following shareholder support for our conversion to a UK REIT on 1 August, we are already experiencing tax savings and we expect these to continue to flow through for the remainder of this financial year.

In the first half of the year, our style of active management continued to deliver improvements through our highly skilled and experienced team, resulting in a number of successful lettings, renewals and rent reviews. As a result of this we generate the necessary income which allows us to maintain our dividend, while growing the net assets of the Company.

In line with our strategy, we have tactically reserved space for refurbishment or redevelopment. This means that portfolio occupancy has fallen to 84% whilst we await appropriate planning consent for certain redevelopments, and in some instances, we have let space on a short-term basis. This normally means lower rentals than conventional leases, but we believe the long-term benefits will justify this approach in the current investment market. A case in point is the Hudson Quarter development in York, where we are now starting to reap the benefits as planned.

As at 30 September 2019, our portfolio was independently valued by Cushman and Wakefield at £275.8 million with an annual contracted rent roll of £16.3 million and a net income after property costs of £14.8 million per annum.

Our EPRA NAV has decreased by 3.9% to 391p per share (March 2019: 407p) as we continue to invest in our portfolio and dispose of non-core assets. However, we have maintained net assets which have only slightly reduced to £178.7 million as compared to £180.3 million in March 2019, a reduction of less than 1%.

Recurring income growth is a continuing focus but increasing our capital values is also a priority. For the six months to 30 September 2019 there was a 32% uplift in rental income, including the surrender premium net of irrecoverable costs, which totalled £10.7 million (up from £8.1 million for the six months to 30 September 2018). Our contractual passing rental income totalled £16.3 million per annum compared to an ERV of £21.2 million per annum and it is this growth-gap that we are targeting in order to further increase our income and improve dividend cover.

Our second quarterly dividend of 4.75p will be payable on 27 December 2019 to shareholders on the register as at 6 December 2019 and this will take us to 9.5p for the six-month period. The dividend will include a Property Income Distribution (PID) in light of the minimum REIT distribution requirements.

While our ability to cover our dividend has been limited by the fact that we have not made a significant earnings enhancing acquisition since 1 Derby Square, Liverpool in December 2018, we remain committed to our investment criteria.  While we are constantly looking at possible acquisitions, my colleagues and I believe that in the current market, investing in our core portfolio is the correct strategy for our shareholders and we intend to maintain this approach for the foreseeable future.

I stated last year that we are somewhat different from our peer group. Firstly, the majority of our acquisitions have been of corporate entities; we have saved in excess of £10.0 million in SDLT (Stamp Duty Land Tax) since re-admission and have inherited tax losses and unclaimed capital allowances. Secondly, we are a total return property company and consequently we are prepared to redevelop or refurbish our assets in order to create additional value. We believe this approach will outperform a pure income policy over time.

In any event the real estate investment market has been particularly subdued, and leading agents are reporting much lower volumes of transactions from their capital market divisions. This is likely to continue whilst there is political uncertainty in the UK. In the meantime, this is impacting our share price which does not fully reflect the underlying net asset value of the Company. However, we have maintained our performance and we are well positioned to unlock further value from within the portfolio. 

Overall, we have a strong and well-located core portfolio with sustainable income from high quality tenants, as well as significant reversionary potential to grow rental income by over 30% together with the added value of a pipeline of development and refurbishment projects.

We therefore approach the second half of the year with confidence.

MARKET BACKDROP:

The UK regional office market remains robust, particularly in those locations where we have significant holdings.

In Manchester, according to Savills Research published in September, the total office take up for the six months to 30 June was 806,024 sq ft, which is 7% ahead of the same period last year and 32% ahead of the five-year average. Alongside this significant rise in demand, office availability has fallen to its lowest level ever.

Savills research in August also showed that Leeds, where we own a 90,000 sq ft building at Bank House, King Street, saw record take up in the first half of the year. 436,312 sq ft of office space was leased, 41% ahead of the same period last year, including major lettings of 71,000 sq ft at Central Square and 135,000 sq ft at 4 Wellington Place.

Finally, there is ever increasing activity in Liverpool. We have highlighted that we are seeing a broader trend of occupiers relocating from out of town properties into city centres, which are often more accessible for employees and provide them with a more vibrant surrounding as work and leisure time becomes increasingly blended. Sony recently announced that it is moving from the Wavertree Technology Park on the city outskirts and taking 65,000 sq ft at the former Liverpool Echo building in the city centre. In addition, BT, which has a requirement for 100,000 sq ft, has shortlisted three city centre locations and is expected to make a decision by the end of this year.

Since 2014, Liverpool has lost over 1 million sq ft of office space which has been converted to either residential or student accommodation; this trend has been felt across the UK and we have focused in the regions on those cities which have a limited and dwindling office supply. With political parties stating that they intend to commit investment towards connectivity and a better regional transport infrastructure, we are well placed to take advantage of this policy.

Regional office returns have exceeded those generated by London every year since 2016. In addition, regional offices (48% of the Company's portfolio) provide the strongest, risk adjusted sector in the UK and remain a key sector that we are focused on. In contrast, the retail sector continues to contract but our conservative strategy means we have a very limited exposure and the assets that we do hold are primarily let to tenants with quality covenants.

PORTFOLIO ACTIVITY:

Hudson Quarter, Toft Green, York

Construction commenced on this two-acre site in February 2019 and it remains on time and on budget. Progress on the residential sales is well ahead of expectations and soft marketing has now commenced to let the office space. Our drawdown with Barclays commences next month, so all costs to date, including demolition, have been met from our own resources. Given the backdrop of political uncertainty, we are delighted with progress to date.

Sol, Northampton

We have faced challenges in the leisure sector which are well known, particularly since we accepted the surrender of the Gala Casino lease for £4 million in 2015. However, our asset management strategy is now delivering positive results; not only did we let 12,000 sq ft to Soo Yoga earlier this year, but we have also let 23,500 sq ft to Gravity Fitness for a minimum term of 10 years at 17% above the ERV with additional rent achievable based on turnover targets. The scheme is now 89% let and strong interest is being shown in the remaining 21,000 sq ft.

Boulton House, Chorlton Street, Manchester

We acquired this 75,000 sq ft office building in Manchester city centre for £10.6 million just before the Referendum result in June 2016, when most of our competitors withdrew from the market. The property is now valued at £15.2 million, after a circa £800,000 refurbishment, and we are achieving close to £19.00 per sq ft, a significant increase from the rents of £12.50-£13.50 per sq ft at the point of purchase.

41-45, High Street, Weybridge, Surrey

Planning consent was secured in July 2019 for 4,000 sq ft of retail space and 28 apartments on this prime site, which is immediately opposite a Waitrose supermarket. We have commenced stripping out the existing building to mitigate the rates liability and the professional team are now being engaged with a view to us commencing the scheme late next year.

2-3 St James' Gate, Newcastle-upon-Tyne

We have committed circa £2.5 million to refurbish two vacant floors, the entrance hall and other areas in order to give the building a more prominent identity. There is an underlying shortage of Grade A space in Newcastle and we believe that this property has excellent growth prospects, both in terms of income and capital value in light of the rents being achieved on similar buildings in the area.

249 Midsummer Boulevard, Milton Keynes

We are currently evaluating a major development of this site and we intend to make appointments to move forward with a planning application in the near future. We have already received a preliminary report indicating that the site is capable of a scheme with a floor area of more than double the existing property.  In the meantime, it will be our intention to limit our outgoings by letting the vacant space on a relatively short-term basis. An economic report called 'UK Powerhouse', published by the leading law firm Irwin Mitchell and the Centre for Economic Research in July of this year, reveals that Milton Keynes will be the fastest growing city at the start of 2021. This was affirmed by national commercial consultancy Lambert Smith Hampton in research released in February of this year.

Imperial Court & Imperial House, Leamington Spa

These two adjacent office buildings totalling 40,000 sq ft stand on a 1.5-acre town centre site and currently produce £600,000 per annum on leases expiring in 2022. This is a high value location and we will shortly start assessing future redevelopment options.

Lendal, Museum Street, York

This retail and office building was part of the Warren Portfolio acquired in 2017. There is a critical shortage of office space in York, so we took the decision to refurbish 5,600 sq ft of offices on the upper floors.  We have let one floor at a headline rental of £22.50 per sq ft which is the highest achieved within York.  We have agreed terms to let the majority of the remaining space.

Regency House, High Street, Winchester

This office building is also part of the Warren Portfolio. Part was let on acquisition, but we have refurbished 4,500 sq ft, most of which is now under offer at rents in excess of what we might have expected at the point of purchase.

BALANCE SHEET:

Despite a challenging economic backdrop, we are well capitalised and continue to remain conservatively geared at 34% net of cash. At the half year we had borrowings of £106.9 million, of which 63% is hedged. We pride ourselves on having a productive working relationship with our lenders, as demonstrated by our increased £40 million NatWest Revolving Credit Facility, which was secured in August of this year for a further term of five years at a lower margin. The contribution from our lenders is key to maintaining an efficient capital structure and enhancing the performance of our business.

CONCLUSION AND OUTLOOK:

These results are being announced in the middle of a General Election campaign. All parties are encouraging economic development in the UK's regions and with our assets being well-positioned in the right locations, we are well placed to take advantage of this. Our core income producing properties, together with our development and refurbishment pipeline and the ongoing progress at Hudson Quarter, means that we can expect to generate significant value for shareholders over the long term.

We have holdings in towns and cities that are affected by a lack of development and the loss of office use to residential, and this supply / demand pressure is leading to increasing rental values.

Property is a medium to long term investment and I remain confident that we are well positioned to continue to grow the value of our portfolio for our investors. Although I have been in business a long time, I believe the best years for Palace Capital are yet to come in what continues to be an exciting journey.

Statement of principal risks and uncertainties

Whilst we consider there has been no material changes to the Group's principal risks, as set out on pages 40-41 of the Annual Report and Accounts for the year ended 31 March 2019, several risks associated with the commercial property market in general are elevated as a result of the continuing political uncertainty surrounding the UK's departure from the EU and the General Election.

The Board continues to monitor external events and is taking appropriate action to prepare for any short-term risks that could arise whilst this period of uncertainty continues. Our business is resilient, and we are able to respond quickly, positioning us well for the longer term.

Statement of directors' responsibilities 

The directors' confirm that the condensed set of consolidated financial statements have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and that the interim management report includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:

•    an indication of important events that have occurred during the first six months and their impact on the condensed interim financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

•    material related-party transactions in the first six months and any material changes in the related-party transactions described in the last annual report.

The directors of Palace Capital plc are listed on the Company website https://www.palacecapitalplc.com/ 

By order of the Board

Stanley Davis, Chairman

18 November 2019  

Palace Capital plc

Condensed consolidated statement of comprehensive income

For the six months ended 30 September 2019

The accompanying notes form an integral part of these condensed consolidated interim financial statements.