Palace Capital — Adjusting to COVID-19

Palace Capital (LSE: PCA)

Last close As at 17/07/2024

210.00

4.00 (1.94%)

Market capitalisation

GBP92m

More on this equity

Research: Real Estate

Palace Capital — Adjusting to COVID-19

Palace Capital (PCA) has provided an update on the impact of COVID-19 and its response to the crisis, including a focus on rent collections and maintaining a healthy liquidity position until the full impact becomes clearer. Payment of the previously declared Q320 DPS has been cancelled but progress continues at the flagship Hudson Quarter development, albeit at a slower pace.

Martyn King

Written by

Martyn King

Director, Financials

Real Estate

Palace Capital

Adjusting to COVID-19

COVID-19 and
dividend update

Real estate

8 April 2020

Price

185p

Market cap

£85m

Net debt (£m) at 30 September 2019

94.1

Net LTV at 30 September 2019

34.1%

Shares in issue

46.0m

Free float

95%

Code

PCA

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(38.9)

(45.3)

(37.5)

Rel (local)

(28.1)

(24.8)

(16.9)

52-week high/low

345p

171p

Business description

Palace Capital is a UK property investment company listed on the Main Market of the LSE. It is not sector-specific and looks for opportunities where it can enhance the long-term income and capital value through asset management and strategic capital development in locations outside London.

Next events

FY20 results

Expected June 2020

Analyst

Martyn King

+44 (0)20 3077 5745

Palace Capital is a research client of Edison Investment Research Limited

Palace Capital (PCA) has provided an update on the impact of COVID-19 and its response to the crisis, including a focus on rent collections and maintaining a healthy liquidity position until the full impact becomes clearer. Payment of the previously declared Q320 DPS has been cancelled but progress continues at the flagship Hudson Quarter development, albeit at a slower pace.

Year end

Net rental income (£m)

Adj. PBT*
(£m)

Adj. EPS*
(p)

EPRA NAV/
share (p)**

P/NAV
(x)

DPS
(p)

Yield
(%)

03/18

14.9

8.5

21.2

414

0.45

19.0

10.3

03/19

16.4

8.9

17.3

407

0.45

19.0

10.3

03/20e

18.3

8.0

16.7

391

0.47

14.3

7.7

Note: *Adjusted earnings – in addition to EPRA adjustments for revaluation gains, profits or losses on disposals of investment properties and surrender gains on early lease terminations, this adjusts for share-based payments and Main Market listing costs. **EPRA NAV is fully diluted.

Focus on rent collection and liquidity

PCA says that the FY20 underlying earnings, expected in June 2020, are currently expected to be broadly in line with previous expectations, but the independent external valuers will highlight the material uncertainty that exists across the entire sector as a result of COVID-19 impacts. In common with peers, PCA has seen a slowdown in rent collections, and has cancelled payment of the Q320 DPS to maintain liquidity and provide flexibility to negotiate constructively with the worst affected tenants, and deal with any loan covenant issues that may arise. Given management’s comments we have maintained our FY20 adjusted earnings forecast and have assumed a resumption of DPS payments in Q420. However, due to the uncertainty as to the extent and duration of the effects of the pandemic, we note the risk to our NAV forecast and have withdrawn our FY21 estimate.

Medium-term opportunities for optimising value

While market and economic conditions are currently highly uncertain, PCA has a range of opportunities to optimise both income and capital values in various market conditions over the medium term. The end-H120 estimated rental value (ERV) of the portfolio was 30% ahead of passing rent, while asset management plans for each property have identified a range of initiatives that can be phased in over time to provide counter-cyclical value-add opportunities. The early residential sales and pre-letting of commercial space at Hudson Quarter underline the attractiveness of this flagship scheme.

Valuation: Significant discount to NAV

Based on our assumed payment of a Q420 DPS of 4.75p, the shares yield c 8% and are trading at around 50% of the H120 reported EPRA NAV per share. A comparison with the wider sector is made difficult by the current market-wide uncertainties and the fact that not all companies have yet updated the market on their near-term position and response.

Additional details

Working with tenants to protect rental income

Across the main commercial property sectors, landlords are reporting a slowdown in rent collection as tenants strive to adjust to the impacts of COVID-19. Not surprisingly, collections from retail tenants are most affected at this stage, and to a lesser extent warehouse distribution and offices. PCA’s portfolio is regional (ie not central London) and is focused on office and industrial assets (62% by value at H120) with relatively low exposures to retail (9%) and retail warehouse (4%), with two large leisure assets (15%). PCA intends to support occupiers, especially smaller and independent businesses that may be less resilient, and has already received a variety of requests for rent deferrals, a move from quarterly to monthly prepayments, and rent waivers. Each is being reviewed on a case by case basis, taking account of the tenant business model and risk profile, as well as the availability of government aid.

Overall, as at close of business on 1 April 2020, and adjusted for agreed rent payment adjustments, PCA had received 70% of all rents due and expects this collection rate to increase further.

Continuing to progress Hudson Quarter

Within the constraints of government regulations, work is continuing at the company’s flagship Hudson Quarter development in York, although the January completion date may need to be extended. The development is well situated within the city walls and just a minute’s walk from the railway station and comprises three residential buildings and a commercial building.

As at 31 March 2020, sales contracts have been exchanged on 28 (£7.55m by value) of the 127 residential apartments and a further 17 (£4.7m by value) were under offer. Sales continued up to the end of March when the marketing suite was temporarily closed and only two cancellations of sales have been received in recent weeks. As recently announced, 4,500 sq ft of the commercial space, comprising 35,000 sq ft of grade A offices and 5,000 sq ft of other commercial space and car parking, has been pre-let to Knights solicitors on the ground floor of one of the residential blocks at a record rent for York of £25 per sq ft.

Financials and valuation

Balance sheet and liquidity

Palace has c £155m of borrowing facilities, well spread among a range of lenders with no maturities in the next two years and including a £26.5m development facility in respect of Hudson Quarter. At end-H120 gross outstanding debt was £108.1m (including unamortised debt facility fees) with undrawn debt facilities of £46.5m, comprising the development facility (nil drawn at H120) and a £20m revolving credit facility (RCF). Net LTV was c 34%.

Updating on the position at 31 March 2020, PCA reports healthy liquidity with cash of £14.7m and a further £5.0m that can be drawn down imminently from the RCF. Hudson Quarter development is now fully funded by the development facility and for the time being all other major capital expenditure has been put on hold. PCA believes that maintaining maximum liquidity at this time is a prudent approach, in order to comply with its lenders’ loan covenants. It says that interest cover tests ranging from 225% to 250% are of note and estimates that rental income would need to fall by more than 40% on average for these to require any form of curing and that lenders have provided assurance that they would stand by the company during this unprecedented time should this prove necessary.

Leaving FY20 underlying earnings unchanged

The main COVID-19 impacts began during March and PCA says that as a result underlying earnings for the year that ended 31 March 2020 (FY20) are currently expected to be broadly in line with previous expectations, although there is clearly more uncertainty about property valuations and NAV. We have maintained our FY20 underlying earnings forecast, set out in detail in our December 2019 update, while revising our DPS expectation.

For the time being we have assumed a resumption of quarterly DPS payments for Q420, but this depends very much on the duration and impact of the current situation. PCA says that a recommendation on the final dividend will be taken at the time of the announcement of the FY20 results, which is expected in early June 2020. PCA also says that until there is clarity on the full impact of the crisis it is not commenting on the outlook for the financial year just begun (FY21) and accordingly we have withdrawn our FY21 estimates.

Based on our assumed payment of a Q420 DPS of 4.75p, the shares yield c 8% and are trading at around 50% of the H120 reported EPRA NAV per share. A comparison with the wider sector is made difficult by the current market-wide uncertainties and the fact that not all companies have yet updated the market on their near-term position and response.

Exhibit 1: Financial summary

Year end 31 March (£000s)

2017

2018

2019

2020e

PROFIT & LOSS

Rental & other income

14,266

16,733

18,750

20,722

Non-recoverable property costs

(2,055)

(1,824)

(2,318)

(2,464)

Net rental income

12,211

14,909

16,432

18,258

Dividend income from listed equity investments

43

53

Administrative expenses before share based payments

(2,678)

(4,011)

(3,790)

(3,943)

Share-based payments

(237)

(174)

(332)

(250)

Operating Profit (before capital items)

9,296

10,724

12,353

14,118

Revaluation of investment properties

3,101

5,738

(382)

(5,552)

Gains/(losses) on disposals

3,191

274

(652)

(24)

Loss on revaluation of listed equity investments

(214)

101

Operating Profit

15,588

16,736

11,105

8,643

Net finance expense

(3,011)

(3,432)

(4,672)

(4,996)

Profit Before Tax

12,577

13,304

6,433

3,648

Taxation

(3,191)

(773)

(1,263)

3,729

Profit After Tax (FRS 3)

9,386

12,531

5,170

7,377

EPRA adjustments:

Revaluation of investment properties

(3,101)

(5,738)

382

5,857

Gains/(losses) on disposals

(3,191)

(274)

652

24

Deferred tax charge

2,200

(299)

243

0

Other adjustments

155

308

1,143

1,063

EPRA earnings

5,449

6,528

7,590

14,320

Adjusted for:

Non-recurring items

0

698

0

(2,850)

Share-based payments

237

174

332

250

Adjusted earnings

5,686

7,400

7,922

11,720

Company adjusted PBT

6,677

8,472

8,942

7,991

Average fully diluted number of shares outstanding (000s)

25,738

34,980

45,898

46,020

Basic EPS - FRS 3 (p)

36.5

35.8

11.3

14.8

Fully diluted EPRA EPS (p)

21.2

18.7

16.5

22.4

Fully diluted adjusted EPS (p)

22.2

21.2

17.3

16.7

Dividend per share declared (p)

18.5

19.0

19.0

14.3

EPRA dividend cover (x)

1.14

0.98

0.87

1.57

BALANCE SHEET

Fixed Assets

183,959

253,984

261,064

266,691

Investment properties

183,916

253,863

258,331

263,139

Goodwill

0

0

0

0

Other non-current assets

43

121

2,733

3,552

Current Assets

13,692

46,292

55,256

47,136

Trading properties

0

0

14,367

27,137

Assets held for sale

0

21,708

11,756

0

Cash

11,181

19,033

22,890

14,710

Other current assets

2,511

5,551

6,243

5,288

Current Liabilities

(8,197)

(11,520)

(16,000)

(9,158)

Creditors

(6,161)

(8,834)

(10,001)

(7,322)

Short term borrowings

(2,036)

(2,686)

(5,999)

(1,836)

Long-term liabilities

(79,895)

(105,457)

(119,997)

(126,005)

Long-term borrowings

(75,758)

(97,157)

(112,017)

(122,226)

Deferred tax

(2,187)

(6,531)

(5,580)

(204)

Other long-term liabilities

(1,950)

(1,769)

(2,400)

(3,575)

Net Assets

109,559

183,299

180,323

178,664

EPRA net assets

111,759

190,011

186,968

180,203

Basic NAV/share (p)

436

400

393

388

Diluted EPRA NAV/share (p)

443

414

407

391

CASH FLOW

Operating Cash Flow

10,294

9,899

11,920

12,551

Net Interest

(2,516)

(2,704)

(3,385)

(3,946)

Tax

(1,047)

(395)

(1,639)

(1,554)

Net cash from investing activities

(3,352)

(67,725)

(11,560)

(12,241)

Ordinary dividends paid

(4,617)

(6,744)

(8,718)

(8,737)

Debt drawn/(repaid)

6,467

8,151

17,954

5,754

Proceeds from shares issued

29

70,000

0

0

Other cash flow from financing activities

(2,897)

(3,434)

(162)

(627)

Net Cash Flow

2,361

7,048

4,410

(8,800)

Opening balance sheet cash

8,576

10,937

17,985

22,395

Restricted cash

244

1,048

495

1,115

Other items (including cash assumed on acquisition)

0

0

0

0

Closing balance sheet cash

11,181

19,033

22,890

14,710

Closing balance sheet debt

77,794

99,843

118,016

124,062

Unamortised debt costs

936

1,552

1,334

1,041

Closing net debt/(cash)

67,549

82,362

96,460

110,393

Net LTV (excl. restricted cash and adjusted for unamortised debt costs)

36.9%

29.8%

33.7%

37.8%

Source: Palace Capital accounts, Edison Investment Research

General disclaimer and copyright

This report has been commissioned by Palace Capital and prepared and issued by Edison, in consideration of a fee payable by Palace Capital. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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New Zealand

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United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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Frankfurt +49 (0)69 78 8076 960

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New York +1 646 653 7026

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Palace Capital and prepared and issued by Edison, in consideration of a fee payable by Palace Capital. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2020. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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