Bearing this in mind, Aim-traded property investment company Palace Capital (PCA:385p) has just announced the £20m acquisition of a portfolio of properties in Newcastle-upon-Tyne comprising a 274-bedroom Jury’s Inn Hotel; a 85,000 sq multi-let office block whose tenants include UBS, Serco and the National Lottery Charities Board; a small retail element and the freehold of 145 apartments. The properties’ total net income of £1.76m equates to an attractive initial net yield of 8.6 per cent, which is way above the company’s cost of capital. Indeed, after accounting for interest costs on a £11.5m loan to part-fund the acquisition, it should generate a net contribution of £1.4m a year to Palace Capital’s profits, representing a 16.5 per cent return on equity.
It also means that the company has more than replaced the income lost on the 13 properties worth £12.6m it sold last financial year, which is why analyst Tim Dainton at brokerage Arden Partners expects EPS of 20.3p in the 12 months to the end of March 2018 to ramp up to 25.6p the following year, thus supporting expectations of the payout per share rising by 0.5p each year to 19p and 19.5p, respectively. On this basis, the shares offer an attractive prospective dividend yield of 5 per cent and are rated on 14 per cent below the company’s last reported net asset value (NAV), or a 10 percentage point deeper discount than the listed regional property sector average, according to analysts Julian Roberts and Martyn King at Edison Investment Research.
That’s a modest rating for a company that has doubled its NAV per share since 2013, and one that has modest levels of balance sheet gearing and the scope to enhance the portfolio value in the near term. For example, the company has submitted a planning application to convert Hudson House scheme in York, a 103,000 sq ft office block located close to the city’s railway station, into 127 apartments, 34,000 sq ft of offices, 5,000 sq ft commercial space and car parking. The sales market in the York and Harrogate area remains buoyant as buyers move from the outskirts to the town centres, thus offering potential for a significant uplift on the £15m value of the site when the planning decision is made in the autumn.
So, having initiated coverage on the shares last autumn at 335p (‘A royal investment’, 17 Oct 2016), and last advised running profits at 380p (‘Running property gains’, 19 Jun 2017), I am tweaking my target price up from 400p to 415p in light of the acquisition made, and analysts’ earnings upgrades. Buy.