Investor Forum July 2020: A strong hand, attractively priced

Palace Capital’s healthy liquidity position takes risks down to a modest level, as does its overweight position to regional offices and the broader asset-class balance. The risk on the Hudson Quarter development site is also low and places Palace Capital among the sector’s robust segments. Hudson Quarter, within the York city walls, has been selling well. This provides upside – with risks tightly controlled and manageable – to NAV from developments and medium-term asset management plans. Pre and post COVID-19, the income yield is above the market average, and with below-market risk.

• Strategy: Palace Capital REIT invests in and also, in a measured way, develops commercial real estate. While its mandate is not sector-specific, it does exclude central London locations, and ca.48% of assets are offices. It also has exposure to industrial and is well underweight in retail, with no shopping centres.
• Four pillars: Palace Capital has four strategic benefits: i) strong sectoral and regional exposure; ii) development opportunities to optimise income and capital values; iii) a strong balance sheet, strengthening further via development sales; and iv) evident medium-term, value-creating opportunities.
• Valuation: This is a strongly positioned regional REIT. The regional peer group tends not to undertake development, which we see as an upside for the company, but the market does not price as such. Price to historical NAV for Palace Capital is 31ppts below the (unweighted) average for the regional REIT universe.
• Risks: LTV is set for ca.40% at the peak of the apartment and office development project within the York city walls. The latter can be retained or sold, thereby ensuring enhanced income, as well as reduced debt. Current markets are uncertain, and Palace Capital has not commented on calendar 2020.
• Investment summary: A comparison with the sector is straightforward. The sectoral and regional exposures point to outperformance in capital values, rental change and total returns. While markets all present challenges and reduced clarity, this positioning and the embedded value-adding, specific future events are major positives. In current markets, short-term NAV prospects are volatile.