RNS announcement

Palace Capital plc

("Palace Capital" or the "Company")

PORTFOLIO UPDATE AND FINAL DIVIDEND FORECAST

The Board of Palace Capital plc, the property investment company that focuses on real estate outside London, today announces an update on its recent activity in its commercial property portfolio. The Board is also announcing an increase to the Company's proposed final dividend for the year ended 31 March 2016.

Portfolio update

Since the acquisition of the Signal Portfolio from Quintain Estates & Development PLC in 2013, the Company has followed a strategy of active asset management and the Board is pleased to report exciting progress on a number of the Company's projects.

1)            Hudson House, Toft Green, York

The property is extremely well located in the heart of York, adjacent to the main Railway Station from which there are fast non-stop services to London.  As already disclosed, the Company secured approval in February 2016 for a change of use of this 103,000 sq. ft. office building to residential use, under Permitted Development rights.  The proposed scheme would provide 139 apartments.

The Board is also pleased to advise that in April 2016, City of York Council resolved to grant consent for a planning permission to convert the building to 82 apartments and 37,000 sq. ft. of offices, subject to the completion of a Section 106 agreement, on which considerable progress has already been made.

The approval, coupled with recent sales of similar buildings in York, should result in a considerable increase in the 31 March 2016 valuation. The Board is continuing to evaluate options to maximise value on this strategic site.

2)            Sol Central, Northampton

Since the acquisition of this major 200,000 sq. ft. leisure scheme, in Summer 2015, the Company has been working with professional advisers to reconfigure the scheme and make this a vibrant leisure facility.  This is a well located property in Northampton's city centre, anchored by a 10 screen Vue cinema, an Ibis hotel, a gym and other leisure facilities, together with the benefit of a 375 space multi-storey car park.

Last year Palace Capital agreed a surrender of the vacant Gala Casino lease (which comprises circa 27,500 sq. ft.) for a total payment of £3.8m. This surrender releases the space to provide the required restaurants to complement the existing tenants. The Company has already completed a contract to strip out the former Gala premises in anticipation of agreeing new leases with prospective tenants.

Since the purchase the Company has eliminated any further payments for empty rates and as part of the transaction with Gala Casino, the Company was able to participate in a rates rebate which has resulted in a payment to Palace Capital of over £200,000.

At this time there is considerable development activity in Northampton, much of it within 15 minutes' walk of Sol Central.  A new County Council headquarters office building, which the Board understands will accommodate 2,000 people, is due to be completed later this year.  In addition, the new £330m University campus is also under construction.  These, together with other initiatives, can only have a positive effect on Sol Central and the Board is excited about the prospects for this asset.

3)            Broad Street Plaza, Halifax

This mixed use leisure scheme, completed in 2012, was acquired 2 months ago and the Company has adopted a new marketing strategy in order to promote brand awareness and increase footfall even more notwithstanding that there is only one vacant unit.

The Board views Broad Street Plaza as a long term hold with strong covenants on long leases and the WAULT is 14 years to break.  The Company intends to take advantage of historically low interest rates and has received indicative terms from a major insurance company to replace the existing short term facility with a new 10 year loan of £15.2m at a fixed interest rate of approximately 3.5% (including margin). This will provide Palace Capital with an initial 14.5% return on its equity investment, increasing to 16% when the fixed increases in rent take effect in July 2017. This, coupled with the fact that no capital allowances have been claimed historically, gives the Board confidence that Broad Street Plaza will provide a stellar return for the Company and its shareholders.

4)            Ovest House, West Street, Brighton

This is a retail and office building which was acquired in 2014 as part of the Property Investment Holdings portfolio acquisition. The upper floors comprising 7,200 sq. ft. were let at the low rents of £12/13 per square foot. Through a schedule of dilapidations and tenants' works, the premises are being refurbished as floors become vacant. Contracts have been signed with Quarto Publishing plc, an AIM listed company, to take leases on all four floors at a rental of £20 per square foot.

There is a shortage of office space in Brighton so the Board sees considerable potential in this asset.

5)            The Copperfield Centre, Dartford, Kent

This retail and residential scheme is in central Dartford, an area that is undergoing significant investment and improvement.  The Company is well advanced with the conversion of the vacant upper floor offices to 14 residential apartments. These works are due to be completed in August of this year and the Board has made the decision to take advantage of the growing rental sector and retain ownership of these apartments. The scheme is opposite the main shopping centre and only a short walk from the upgraded Dartford Railway Station which provides a direct service to central London. The Board expects strong demand for the rental of these apartments.

6)            Bank House, Leeds

This 90,000 sq. ft. building is a short distance from Leeds Railway Station in the heart of Leeds city centre.  Tenants include The Bank of England and Walker Morris, a major regional law firm. The Company has just settled a dilapidations claim with Axa who have recently vacated circa 13,300 sq. ft. and the Company is about to place a contract to refurbish this space.  Coupled with the adjoining vacant area of 3,400 sq. ft. Palace Capital will be able to offer one of the largest refurbished floor plates of 16,700 sq. ft. at a competitive rental in a growing city, which is experiencing a significant increase in demand for high quality office space.

Palace Capital has agreed to extend the lease with the Bank of England, who occupy 31,000 sq. ft. for an additional 3 years and the rent will more than double in 2020. The Board is very pleased with this purchase which was made in the last financial year.

7)            Other portfolio activity

As part of the Company's active asset management strategy it has recently concluded sales/lettings at:

a)            Meadowcourt, Sheffield

b)            Land at Island Farm Road, West Molesey, Surrey

c)            Albert Road North, Reigate, Surrey

d)            Point Four Industrial Estate, Avonmouth, Bristol

e)            1-11 Winchester Street, Salisbury

f)             56 Beam Street, Nantwich, Cheshire

g)            Unit 2, Clayton Industrial Estate, Burgess Hill

h)            Russell House, Moseley Road, Walton on Thames

i)             The Old House, Heath Road, Weybridge

j)             Stratton House, Cater Road, Bristol

These smaller deals have all helped to improve the quality of our property portfolio.  The leasing market remains buoyant in many of the regions in which the Company operates, however the management team continue to monitor tenants carefully to ensure voids are kept to a minimum. The Board has recently received a positive planning report for the demolition and redevelopment of one of its properties where the Company expects one its tenants to vacate later this year.

Our asset management team is continually assessing all the properties to enhance the rental income potential and subsequently grow the capital value of the assets. The Board is delighted with the progress that the Company is making as our active asset management strategy continues to deliver.

Portfolio summary

The Company's portfolio now has a contracted rent roll of £13.5 million and a net income of £11.8 million (after the deductions for head rent, service charge shortfall and empty rates). Empty rates borne by the Company at Hudson House would have been lower but for the fact that short term lettings were not possible pending a decision on the planning application.  As part of the audit for the year ended 31 March 2016 the Company has commissioned independent valuations of the portfolio and the updated values of the properties will be disclosed within the preliminary results announcement.  The Board anticipate that this independent valuation will show an overall uplift in the valuation of the Company's portfolio, partly as a result of the active asset management steps being undertaken.

Borrowings

The Company is building close relationships with major lending partners, who understand the quality of the assets.  Over £80.0 million of facilities are currently held with an average debt maturity of 3.9 years and an average cost of debt of 3.3% - one of the lowest in the sector. The Company is now able to take advantage of the recently agreed £30 million Revolving Credit Facility with NatWest Bank to make further opportunistic purchases.

Management team

Palace Capital is building the scale and depth of its management team to support the continued growth of the business with Matthew Simpson joining as Finance Manager last January and Andrew Thomas, currently with Orchard Street Fund Management, joining in June of this year to complement our acquisition/asset management team.

Final dividend forecast

Following the acquisition of Broad Street Plaza on 14 March 2016, we have seen a year in which the Company has acquired Bank House Leeds, Sol Central Northampton, 46-54 High Street Sutton, 249 Midsummer Boulevard Milton Keynes and Broad Street Plaza Halifax at a total cost of £66 million (excluding purchaser's costs) and ends the financial year with a broader portfolio of assets and better quality of tenants. The WAULT has risen from 4.5 years to 6.3 years. The Company ends its financial year with a portfolio of 55 properties in key strategic cities in the UK with greater reliability and visibility of rental streams.

The Board expects the Company's results for the year ended 31 March 2016 will be in line with market expectations.  As a result it is the intention of the Board to recommend a final dividend of 9 pence per share with the announcement of the final results for the year ended 31 March 2016.  It is anticipated that the final dividend will be paid on 29 July 2016 to shareholders on the register on 7 July 2016.

Notice of results

The Company intends to announce its preliminary results for the year ended 31 March 2016 on 6 June 2016.

Neil Sinclair, the Chief Executive of Palace Capital, commented

"I am delighted with the progress we are making.  Palace Capital is an exciting company with strategic assets in growth locations and we continue to identify off-market opportunities at sensible prices which will enable us to grow the Company and the NAV. 

"Our active management strategy is generating strong income returns enabling us to continue to reward shareholders with a progressive dividend. A final dividend of 9 pence per share will result in 16 pence per share for the full year, a 23% increase on last year. This, along with the capital growth being achieved, is demonstrating the successful execution of our Business Strategy and we continue to be positive on the opportunities to create value through commercial property investment outside London."

-ends-

Date: 10 May 2016

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)207 614 5917

Capital Access Group (Financial PR)

Simon Courtenay

Tel. 44 (0)20 3763 3400