Aim-listed Palace Capital (PCA) is diversifying and expanding its regional property portfolio through the £32m purchase of 17 properties in the South East. Palace’s strategy is to pick up regional and secondary property at a knock-down price and actively manage the portfolio to reduce vacancies and improve yields; this deal appears very much in this mould.
The 17 new properties are being acquired from an unlisted property investment company which has run into difficulties since entering into costly interest rate swap arrangements just before the financial crisis. The portfolio was independently valued at £59m in March 2007.
To pay for the acquisition, Palace has conditionally raised £20m in a placing priced at 310p – 7 per cent below the share price prior to the announcement and 13 per cent below the 31 March net asset value (NAV) of 356p. Net proceeds from the placing, factoring in acquisition costs, will be just £18.3m, which means the fund raising will significantly dilute NAV. However, management, which bagged £750,000 worth of placing shares, felt the deal was far too good to pass up and that the costs and time-scale associated with an open offer or a rights issue that would have allowed retail shareholders to participate “were not in the best interests of the company”.
It is disappointing that private investors will see NAV diluted (several transactions since the year-end muddy the waters as to exactly how much) but Palace’s track record suggests it should be able to create serious value from its new acquisition. All in all, this is an exciting development, tinged with some disappointments, and we remain buyers.