Palace Capital (LON:PCA) 1H’20 results were announced on 19 November. Seventeen lease events have been completed. Impressively, these were 25% above passing rent and 3% above ERV (i.e. previous estimated valuers’ levels). FY19 was struck 14% above passing rent. The total property return was 1.5%, outperforming the MSCI quarterly index. Early progress at the Hudson Quarter mixed-use development inside York city walls is slightly ahead of viability, with sales of 21 units in under 20 weeks (with seven additional under offer). This leads us to upgrade FY21E profits, NAV and cash significantly, but, with a view to the further delays to political certainty, we trim anticipated rental rises slightly.
- 1H’20 results: These were in line with strong expectations. Macro-politics lead us to trim FY20E PBT by 3%. Regional offices, Palace Capital’s largest sector, is resilient. Apartment sales in the mixed-use development, Hudson Quarter, York, saw strong performance. We have brought forward profit estimates into FY21.
- Results and prospects: The Chairman stated, “We are well ahead of our business plan at Hudson Quarter. With letting activity brisk on our other refurbishments, we are most encouraged despite the current political uncertainty.” We therefore upgrade FY21E reported PBT to £20.25m, including Hudson Quarter profits.
- Cash paid by a tenant for an early lease surrender is a further positive: A lease event saw FY20 profit and cash upgraded. The tenant paid a £2.85m cash premium. The most recent valuation of these assets, notably, was only £2.2m. Economic value has been created. A sale of the remaining interest has now been agreed.
- A track record of outperformance: In the past three years, Palace Capital has beaten the benchmark each year. This is notwithstanding the cost of holding a development site generating no accounting returns yet. Development returns are not guaranteed but, over two years’ timing, add more than 5% to NAV.
- Risks: The normal risks of real estate apply. The weighted average length of unexpired lease to break is 5.2 (4.5 in 1H’19) years. Covenants are resilient. Retail exposure (bar Wickes and Booker) is minimal. Gearing, at 34% (34% 1H’19) LTV, is conservative and, although it is rising, as the York development progresses, management has previously stated an intention to keep it below 40%.
