These are exciting times for the Company – it owns a high-quality property portfolio with significant development and income generation potential.
Highlights
General
1) Move up to the Main Market of the London Stock Exchange, from AIM, on 28 March 2018.
2) The acquisition of RT Warren (Investments) Ltd (“RT Warren”) in October 2017 at below the independent valuation is already bearing fruit. The acquisition comprised 21 commercial buildings and 65 residential units.
3) Strong cash position is allowing the Company to pursue several potential acquisitions to boost its rental income.
Recent portfolio activity
4) Ongoing discussions to sell 60 of the RT Warren residential units with 3 residential units already sold at 14% above book value (2 units will be retained by the Company for strategic reasons).
5) Acquisition of Nicholson Gate Fareham, a 5,500 sq ft office building with vacant possession for £750,000 adjoining Admiral House, High Street, Fareham (part of the RT Warren portfolio). Collectively these two properties stand in approximately 1.3 acres and, based on planning advice, have the medium-term potential for development.
6) Solaris House, Milton Keynes let to Monier Redland for 10 years at headline rent of £240,000 per annum exclusive (£16.55 per sq ft), indicating the potential for rental increase at the forthcoming reviews on the Company's adjoining office buildings in December 2018 where £10.55 per sq ft is currently being paid.
7) Demolition underway at Hudson House, York which should result in a saving of £750,000 per annum from February 2018 in respect of rates and service charge shortfall.
Financial
8) Adjusted profit before tax, allowing for the major acquisition and fundraise, likely to be ahead of market expectations (before profits on disposals and any revaluation gains).
9) 3 properties at Exeter, Coventry and West Molesey sold for total proceeds of £4,762,000, which was above book value and continues the Company's policy of actively recycling its capital.
10) Refinancing of Nationwide and Barclays facilities with a new 5-year £40 million facility with Barclays signed in January 2018.
11) Santander and Barclays facilities hedged in March 2018 – interest on 70% of the Company's debt is now fixed and the average cost of debt for the Group as at 31 March 2018 was 3.4%.
12) Commencement of quarterly dividend payments from April 2018.
Overview
Palace Capital continues to implement its brand of active asset management to grow both its rental income and net asset value per share. Two senior asset managers have recently been appointed to join the Company's management team.
During the period three properties, which were either vacant or had limited or no growth potential, have been sold above book value.
Significant property developments
Portfolio financials
Taking into account the recent letting at Milton Keynes, the Company now has a contracted rent roll of £18.1 million per annum and an effective net rental income of £16.88 million per annum after the deduction of £1.22 million per annum in respect of empty rates, service charge shortfalls and head rents.
The recent refinancing with Barclays, the existing cash balances and the recent sales gives the Company considerable firepower to make significant acquisitions and to boost its returns. Palace Capital is presently looking at several propositions, but the Board is very conscious of its strict policy criteria for acquisition suitability; stock selection and price remain of paramount importance to the Company.
Borrowings
The Company has close relationships with its lenders which comprise Barclays, NatWest, Santander & Lloyds who have all indicated an appetite to increase lending to the Group where appropriate.
The Company has debt facilities of £115 million of which £101 million had been drawn as at 31 March 2018 giving a loan to value ratio net of cash of 31% based on 30 September 2017 values. The average debt maturity is 4.7 years at an average interest cost of 3.4% of which 70% is hedged.
Property review
The Company can report substantial progress on several of its properties:
1) HUDSON HOUSE, TOFT GREEN, YORK
Demolition has commenced at this 2-acre site located within the ancient City Wall and one minute's walk from York Railway Station. York has recently been voted by the Sunday Times as the Best Place to Live 2018 and is regarded as a prime location, there being a 110 minutes non-stop train service to London and 145 minutes to Edinburgh.
The Company had previously indicated that it was in discussion with a potential joint venture partner. However, the Board have taken the decision that it is in the Company's interest to proceed alone with this exciting development which has planning consent for 127 apartments, 35,000 sq ft offices, 5,000 sq ft of commercial and car parking.
The Company has been encouraged by the prices secured for recent developments and refurbishments in York and considers that this development will attract strong demand. Leading agents have been appointed for both the commercial and residential elements and discussions have commenced with potential lenders to finance the construction. As the existing property is not charged the Company only expects to commit a limited amount of its cash during the construction phase which was expected to start in November 2018 but is now expected to start in early 2019.
The Northern Region and York/Harrogate are fast becoming one of the best performing residential property markets as the North/South divide continues to narrow. As mentioned in an earlier update there is an increasing shift from country to town/city centre living. The “flight to the city” continues to attract country and suburban dwellers as well as new buyers. “The Residence” in York is sold out whilst “St Leonard's Place”, also in York, has 41 units sold of the 42 available. The “Old Police Station” in Harrogate is sold out. Finally, the Company also understands that the first 10 units launched recently at “The Stonebow” in York's city centre have been sold prior to the completion of the refurbishment.
The Company has been aware of recent Grade A office requirements for York but due to the lack of development the companies concerned have relocated elsewhere. Hiscox UK are an exception as they acquired and built a 68,000 sq ft office building for their own occupation. Strong interest in the office element of the Hudson House development is expected.
City of York Council and Network Rail are positive about moving forward with York Central the 72-hectare site surrounding York Station. It is intended to create a new urban quarter potentially delivering 2,500 homes and up to 1.3 million sq ft of commercial space. It is led by a partnership between Network Rail, City of York Council, Homes and Communities Agency and the National Railway Museum.
2) SOL CENTRAL, MAREFAIR, NORTHAMPTON
As highlighted in the national press the casual dining sector has been going through challenging times. This period has been used to carry out improvements to the property, including repairing the external lighting and a new roof. New agents have been appointed to market the vacant space but in the meantime the Company is seeking to increase income from the car park following the appointment of external managers. In addition, Palace Capital is receiving an additional £100,000 from Accor Hotels from turnover rent. The Ibis Hotel is trading well so pending new lettings we are achieving a satisfactory return.
1 Angel Square, which is the County Council's Headquarters housing over 3,000 people and situated only 5 minutes' walk away, is now operational whilst the new £335m Northampton University campus for 14,000 students, situated only 10 minutes' walk away, is due to be completed within the next 2 months.
3) BROAD STREET PLAZA, HALIFAX
One of the smaller restaurant tenants in this scheme has gone into liquidation and Prezzo, who recently announced a Company Voluntary Arrangement, is also a tenant. However, The Piece Hall in Halifax, which was built as a cloth hall for handloom weavers to sell the woollen cloth “pieces”, has recently undergone a £20 million renovation. This has resulted in over 1 million visitors to Halifax since August 2017. The town will be the starting point for the major “Tour de Yorkshire” cycle race and the Company will be undertaking continuing marketing initiatives to boost footfall and to let the vacant space on which new agents have been appointed.
4) ST JAMES GATE, NEWCASTLE-UPON-TYNE
The Company is planning an upgrade to this property to enhance the visual impact. Plans are being discussed with advisers but in the meantime Serco, whose lease was expiring at the end of May, have now extended their lease to 31 May 2019. They will be paying an increased rental of £221,882 per annum from 1 June 2018, an increase of 10% on the current rent.
5) SOLARIS HOUSE, PITFIELDS, MILTON KEYNES
The Company recently announced that they had let this 14,500 sq ft refurbished office building to Monier Redland part of the BMI Group for a term of 10 years without a break with provision for rent review at the end of the 5th year at a headline rental of £240,000 per annum (£16.55 per sq ft) although in lieu of rent free £120,000 per annum is payable until August 2021. The adjoining office buildings comprising 38,300 sq ft are let until December 2026 at £398,196 per annum (10.40 per sq ft) and a rent review is due this December.
6) 249 MIDSUMMER BOULEVARD, MILTON KEYNES
The Company has carried out some refurbishment works to this property including 5,300 sq ft on the second floor which became vacant and a further 8,600 sq ft which will become vacant this month. When this property was bought in December 2015 no rental exceeded £14.90 per sq ft whilst most leases were in the range of £12.50 – £13.50 per sq ft. Since the turn of the year the office market in Milton Keynes has picked up considerably and agents advise that the Company is likely to achieve in excess of £18 per sq ft which demonstrates its growth potential since purchase.
7) BRIDGE HOUSE, 41-45 HIGH STREET, WEYBRIDGE
This is a 3 storey 12,000 sq ft property comprising shops on the ground floor and two floors of offices plus car parking. The property will become vacant in early 2019 and the Company has instructed a professional team with a view to submitting a planning application to redevelop the site either for commercial or residential purposes.
8) PRIORY HOUSE, GOOCH STREET NORTH, BIRMINGHAM
This 60,000 sq ft office building is currently let to Forensic Science Ltd until December 2027 with provision for rent review in December 2021. The rent payable was £260,000 per annum but this has now increased to £322,000 per annum exclusive payable from December 2016 following a rent review.
9) BOLTON HOUSE, CHORLTON STREET, MANCHESTER
When this property was acquired in June 2016 the rents passing were in the range of £12-£13 per sq ft. After a limited refurbishment the Company announced a letting of 5,500 sq ft last August at the rate of £17.25 per sq ft.
Completed property sales
The Company continues to actively recycle its capital. It had sold most of its surplus properties in the previous financial years but a further three, of which two were vacant, have been sold in the last financial year for the total sum of £4,762,000. These were:
a) BPC Building, Exeter;
b) Whittle House, Coventry; and
c) 138 Molesey Road, West Molesey.
Notice of results
The Company intends to announce its results for the year ended 31 March 2018 on Monday, 11 June 2018.
Neil Sinclair, the Chief Executive of Palace Capital commented:
“I am delighted with our progress since December of last year. In acquiring RT Warren, we have bought the best portfolio we have seen in over two years and I expect us to make a very strong return from it, as we have from the Sequel and PIH portfolios.
Our potential development in York with its strong residential market is provoking strong interest. This, together with our active management strategy on other properties pursued by our excellent team, means we are very well placed to serve our shareholders well in the future.
I continue to be positive not only about securing the right opportunities outside London but also our prospects for the existing portfolio.”
Date: 24 April 2018