Palace Capital – looking for a steady gain in value

When looking at property companies it is not so much about profits and earnings but instead it is the growth of the portfolio and its potential – and there’s bags of that at Palace Capital, writes Mark Watson-Mitchell. 

Being involved in the property sector is never a brief episode in life. It takes time for values to become evident, whether it is from initial purchase to planning to the building up of a development – it is such a lengthy process.

So, if you are wanting a quick whizz bang profit, then look elsewhere.

However, if you are prepared to take a long-term view on your investment, then getting into the property sector can be for longer-term winners.

I have always been very keen on the property sector and today I am suggesting that investors take a look and even maybe a position in a small property group that has potential – Palace Capital (LON:PCA).

The company owns a diversified portfolio across the country. Its policy is to seek out properties in locations outside of London, where through asset management and strategic capital development it can enhance the long-term income and capital value.

Admittedly that is the classic drive for any property company and its management.

However, Chartered Surveyor and CEO Neil Sinclair and Chairman Stanley Davis are well worth following. They took control of a little AIM insurance services company ten years ago valued at below £150,000 and have quietly been building up their property group since then.

In August it switched its status into being a real estate investment trust (REIT) and now this £143m market capitalised company is on a clear growth path.

Today it has a £276m diversified portfolio of UK regional commercial property. Its investment strategy is to focus upon towns and cities outside of London that are characterised by thriving local economies and strengthening fundamentals.

Sinclair has already declared that he wants to build up the group to a £500m portfolio.

That portfolio consists of 32 office, 13 industrial, 2 leisure, 11 retail and 2 retail warehouse properties across the country, from Newcastle upon Tyne spread down to Plymouth.

The net asset value of those 60 commercial properties is £179m. They enjoy an 84% occupancy and generate a contractual rental income of £17.9m. On a weighted basis the average is 5.3 years of unexpired lease terms.

The company operates on a very conservative 30% loan to value basis, but I do expect that to creep up towards 40% as the portfolio growth continues.

The net asset value is 391p per share.

Over the last four years the property portfolio has grown from £103m to £276m, while net assets have improved from £80m to £179m, and recurring earnings almost doubled from £4.8m in 2015 to £8.5m in 2018.

For the current year to end-March 2020 net rental income could come out at £18m, and adjusted pre-tax profits of £8m should be worth about 16.5p per share, while the company will continue its 19p per share dividend policy.

When looking at property companies it is not so much about profits and earnings but instead it is the growth of the portfolio and its potential.

Palace Capital will certainly show value expansion over the next few years.

The shares have risen from 265p in early October to the current 324p – even so I set an end-2020 target price of 365p.