Reit time to support a valuable property game
- 29 rental events add £ 0.6million to annual rent
- £ 12million of planned non-core disposals of £ 30million completed or exchanged
- Sales at Hudson Quarter development in York in flight
- Net debt is expected to be halved by the end of 2022
Capital Palace (PCA: 248p), a regional commercial real estate company, announced a strong update ahead of market close ahead of half-year results on Tuesday, November 16, 2021.
A portfolio bias towards regional offices (41 percent portfolio weight with no exposure to London), industrial warehouses (14.4%) and retail warehouses (3.3%) explains why collection rates rents are so impressive even during the Covid-19 pandemic. Indeed, after receiving 97 percent of rents in the June quarter, less than 8 percent are unpaid in the current quarter. Additionally, 29 new rentals, lease renewals and rent reviews have added £ 0.6million to the group’s annual rent since March 31, 2021, which is why the board has felt confident enough to increase the 20% dividend to 3p per share earlier this year.
The elimination program remains on track. Palace aims to sell £ 30million of non-core properties in the 12 months leading up to March 31, 2021 and has so far traded or made combined sales of £ 12million. Sales of the Hudson Quarter residential development in York are also soaring. After completing the development of 127 apartments in April 2021, 61 units have now been sold for £ 19.2million, including 28 units worth £ 9.9million since June’s annual results. In addition, eight more apartments are on offer which will bring in £ 3million and fully repay the outstanding balance of the group’s £ 26.5million development facility with Barclays. In addition, lease terms have been agreed for the top two floors of the freestanding office building, the head office at Hudson House, meaning that 41% of the 39,000 square feet of Class A office space is now rented.
Palace also recently made £ 3.2million for its 5.58% stake in Circle property (CRC), another regional real estate player that I hold dear, as part of the board’s strategy to recycle capital into higher growth opportunities. More specifically, these are regional offices and selected industrial assets. Taking into account all completed and planned divestitures, real estate broker Arden Partners expects net debt to be cut by more than half, from £ 120million to £ 57million by the end of March 2021, which implies a modest loan-to-value ratio of 25%. .
The broker also expects the net tangible assets per share of the European Public Real Estate Association (EPRA) to drop from 350p to 365p, and expects an annual dividend of 12p per share. On this basis, the shares are rated at a 32 percent discount to the forward net asset value and offer a potential dividend yield of 4.8 percent. By comparison, Liberum Capital’s peer group of 19 UK commercial property companies trades at an average discount of 4.2 percent to net asset value and offers a 4.6 percent lower dividend yield.
Palace Capital shares have produced a total return of 16% since I launched the hedge at 218p (Alpha Research: “A Reit royal value play”, March 11, 2021), and briefly hit my 280p target after my last post (‘Targeting an Underrated Reit Value Game, June 10, 2021). The profit taking that followed appears to have run its course and I expect the next results to be welcomed. To buy.
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