Palace Capital (LSE: PCA), the Main Market property investment company that owns a diversified portfolio of UK commercial real estate in carefully selected locations outside of London, announces an update from the Board on the strategic options it intends to pursue as part of its commitment to maximising value for shareholders and closing the current share price discount to NAV following the statement made in the Preliminary Results on 14 June 2022.

The outcome of the strategic review is as follows:

  • The Group intends to have a pure focus as an ESG driven, regional office market specialist where its expertise can be used to create value from offices with relatively low EPC ratings, such as D (brown offices) through refurbishment and other asset management initiatives, to deliver high EPC ratings such as B (green offices) whilst improving the carbon footprint of such buildings. It is considered that the Group can make far greater impact with its ESG strategy in relation to its current and future office portfolio than it can with its industrial portfolio. This strategy seeks to generate increased rental and capital values, reduce the risk of obsolescence from the existing portfolio, enhance the Group’s ESG credentials and further establish it as a specialist regional office player.
  • In order to execute and finance this strategy, it is proposed that the industrial portfolio, comprising seven assets, together with an additional property previously classified as a retail warehouse property, will be marketed for sale as a single portfolio. The independent valuation of these properties as at 31 March 2022 was c. £46.5 million.
  • As noted in the Preliminary Results for the year ended 31 March 2022, the Group has continued with its strategy of disposing of non-core investment properties with £4.5 million sold since that date. Further sales of such properties are expected to be made during the current financial year.
  • The proceeds of these sales will be re-invested into improving the existing regional office portfolio and also into new opportunities in the regional office market that offer ESG enhancing prospects that will generate rental and capital value growth. The approach to each opportunity, whether core or value add, will be based on disciplined capital allocation, which means that it will be considered against the relevant, targeted total return and risk profile for that category of opportunity.
  • If the Group does not find potential acquisitions that meet the criteria noted above, then it will consider returning excess capital to shareholders.
  • Going forward, the Group will also be operating with a lower Loan to Value (LTV) ratio than in previous years. It has determined that it will operate within a LTV limit of 35% and on a normalised basis within the 25%-35% range. The LTV as at 31 March 2022 was 28%.
  • Given the Company’s current LTV position, the Board is today announcing a share buyback programme of up to 5% of the Group’s issued share capital. The share buyback is due to commence today and will be financed by the cash generated from the sales of the residential apartments at York during the current financial year.
  • As the Group looks to re-position the portfolio, the dividend policy is that the current level of dividend is expected to be maintained and paid from adjusted profits including trading profits. If, on a short term basis, this cannot be achieved then as a minimum the dividend payment is expected to be set at the Property Income Distribution (PID) level.
  • The Board is also fully aware that, in common with many other smaller REITs, its cost base as a proportion of its rental income is relatively high as evidenced by the EPRA and TER cost ratios. Measures to address the level of property outgoings and administrative expenses are being considered and the Board will provide an update in due course on anticipated cost savings.
  • As previously announced, the Board recognises the trend towards consolidation in the real estate sector and this is an area that remains under constant review as part of the Board’s consideration of its strategic options.

Steven Owen, Interim Executive Chairman, commented: “This is a transformational strategy that builds on the strong platform we already have in place but will provide us with a clear focus and distinct differentiation. The Board believes this change in our strategy considerably enhances the investment case for the Group and is a key step in the Board’s commitment to maximising value for shareholders and closing the current share price discount to NAV.”