Palace Capital plc
("Palace Capital" or the "Company")
Proposed Acquisition, Placing of New Ordinary Shares,
publication of Admission Document and Notice of General Meeting
The Board of Palace Capital is pleased to announce the proposed acquisition of the Sequel Portfolio from Quintain Estates & Development PLC (the "Acquisition") and the £23.5 million placing of new ordinary shares (the "Placing").
· The Sequel Portfolio consists of 24 mixed use commercial properties in England and Wales.
· Total consideration of £39.25 million¹ being financed by the placing of New Ordinary Shares to raise £23.5 million (before expenses) and a £20.0 million debt facility from Nationwide.
· The Directors and Proposed Director are committing to subscribe for, in aggregate, circa £3 million of Placing Shares in the Placing.
· Current net rent receivable from the Sequel Portfolio is circa £5.2 million, which based on the consideration payable, equates to a yield of approximately 13.2 per cent.
· The individual properties in Sequel Portfolio have been valued by Cushman & Wakefield at an aggregate sum of £44.2 million and at £39.7 million on a portfolio basis.
· The Acquisition constitutes a reverse takeover under the AIM Rules and is conditional upon, inter alia, approval from Shareholders. An admission document containing details of the Acquisition, the Placing, certain other proposals and a notice of General Meeting (the "Admission Document") will be posted to Palace Capital Shareholders today and available to view on the Company's website www.palacecapitalplc.com shortly.
· Management team strengthened with the proposed appointment of Richard Starr as Executive Director.
Neil Sinclair, CEO of Palace Capital, commented "We are delighted with the support that we have received from both new and existing Shareholders. This portfolio gives us an excellent platform to deliver substantial returns for Shareholders. The team has plans for how we intend to manage all the properties in the portfolio, from which we expect to derive significant value. This marks a major step for Palace Capital, which we plan to be the first of a series. I believe we can grow the scale of the Company significantly and I am very optimistic about the future."
¹ subject to adjustment in accordance with the Acquisition Agreement
For further information contact:
Palace Capital Plc
Stanley Davis, Non-executive Chairman
Neil Sinclair, Managing Director
Tel. +44 (0)20 7722 7603
Allenby Capital Limited (Nominated Adviser and Joint Broker)
Nick Naylor, Chief Executive
Tel. +44 (0) 20 3328 5656
Arden Partners plc (Lead Broker and Bookrunner)
Tel. +44 207 614 5917
Broker Profile (Financial PR)
Tel. +44(0) 20 7448 3244
Expected timetable of principal events
Admission Document published
2 October 2013
Latest time and date for receipt of completed Forms of Proxy
10.00 a.m. on 16 October 2013
10.00 a.m. on 18 October 2013
Reorganisation Record Date
5.30 p.m. on 18 October 2013
Completion of the Acquisition
21 October 2013
Admission of Enlarged Share Capital to AIM
8.00 a.m. on 21 October 2013
CREST accounts credited with Placing Shares
21 October 2013
Certificates for Consolidated Ordinary Shares and New Ordinary Shares despatched (where applicable)
by week commencing 28 October 2013
Extracts from the Admission Document, providing details of the proposed Acquisition are set out below. The same definitions apply throughout this announcement as are applied in the Admission Document.
The Board of Palace Capital announces today that the Company has conditionally agreed to acquire QuintainSignal Member A, the 98.5 per cent.owner of the Sequel Portfolio, a portfolio of 24 mixed use commercial property assets in England and Wales (including the GelderdPoint Acquisition), for an aggregateconsideration of £39.05 million(subject to adjustment in accordance with the Acquisition Agreement) from Quintain Estates and Development plc ("Quintain"). Palace Capital has also separately agreed with the shareholders of Buckingham, the entity that owns the remaining1.5 per cent. of the Sequel Portfolio, to conditionally acquire that interest in the SequelPortfolio for £200,000. Following the completion of the Acquisition Agreements, which are conditional on, inter alia, Admission, the Companywill own 100 per cent. of the Sequel Portfolio for a total consideration of £39.25 million.
Based upon information supplied by Quintain, the current net rent receivable from the SequelPortfolio is circa £5.2 million.Based upon the consideration of £39.25 million, this equates to a yield of approximately 13.2 per cent. As described within the Admission Document, the individual properties in Sequel Portfolio have been valued by Cushman & Wakefield at an aggregate sum of £44.2 million and at £39.7 million on a portfolio basis.
The cash requiredfor the Acquisition is to be financedby the Placing and also an amendment to an existingfacility with Nationwide, resulting in £20 million of debt financefor the Target Group,further details of which are set out below.Further detailsof the Acquisition Agreements are set out within the Admission Document. Detailedinformation on the Sequel Portfolioand a valuation of the portfolio is included in the Admission Document.
The Company is proposing to raise up to £23.5 million (approximately £21.4 million net of expenses) by the issue of 11,750,000 new Ordinary Shares through the Placing at 200p per Placing Share. The Placing Shares will represent approximately 94.4 per cent. of the Enlarged Share Capital. As part of the Proposals, the Board intends to consolidate the Company's Existing Ordinary Shares. The basis of this consolidation and reorganisation is that the Existing Ordinary Shares (31,593,733) will be replaced by 315,937 Ordinary Shares before the issue of the New Ordinary Shares. As at 30 August 2013, the Business Day before the Existing Ordinary Shares were suspended from trading on AIM, the closing mid-market price of an Existing Ordinary Share was 2.125p (equivalent to 212.5p post the Reorganisation). At the Placing Price, the Enlarged Group will be valued at approximately £24.9 million on Admission.
The Company has arranged £20.0 million of secured debt financing for a periodof three years through the amendmentand restatement of the existingbank facility between Nationwide and Signal Property Investments LLP. Further detailsof the Facility are set out in the Admission Document.
In view of the size of the Acquisition relativeto the Company, it will constitute a reversetakeover of Palace Capital under the AIM Rules for Companiesand therefore requiresthe prior approvalof Shareholders which is beingsought at the GeneralMeeting, noticeof which is set out at the end of the Admission Document. Application will be made for the Consolidated Ordinary Shares to be re-admitted and the New OrdinaryShares to be admitted to tradingon AIM, subjectto the passing of the Resolutions. Admission is expected to take place on 21 October 2013.
On 4 October 2011, the Company completedthe acquisition of Hockenhull Estates via a reversetakeover on AIM. Followingthis acquisition, the Company'sportfolio consistedof nine freehold commercial properties all of which are located in Crewe and Nantwich,Cheshire. As at 31 January 2013,this portfolio was valued in the Group's balance sheet at £2.015 million,with net rentalreceivable of approximately £200,000 per annum. Followingcompletion of the acquisition of the Hockenhull portfolio, it has remained the Company'sintention to focus on the UK secondaryproperty market outside of London, both through its current investment portfolio and by continuing to pursue additional acquisition opportunities in the UK real estate sector.
The Directorsbelieve that the disparity betweenthe yields on primeLondon property compared to regional and secondaryproperty offersgood opportunities for investors. The Directorsbelieve that, together with evidence of improvingeconomic data from the UK economyin general, this supports their view that this is an opportune time to buy such property. The Board also believesthat there is scope to acquireproperty-holding companies ratherthan the propertyassets themselves, thus creatinga saving in stamp duty land tax. In addition, by acquiringcompanies that may have existingdebt, there may be opportunities for the Company to re-finance transactions with incumbent lenders, as is being demonstrated by the entryinto the Facilitywith Nationwide in orderto part finance the Acquisition.
The businesses and properties that the Board has targetedexhibit some or all of the followingcharacteristics:
· good cash flow;
· opportunities to increase rental income through more active property management;
· locatedoutside of London; and
· properties that are preferably freehold or long leasehold.
Since the acquisition of Hockenhull Estates, the Directors have continued to seek a significant high yielding commercial property portfolio in order to grow the size of the Company. The Board has lookedat a number of opportunities, but, in its view, most of them did not provide a sufficient returnwhich it could recommendto Shareholders. The Directors believethat the sentiment towardssecondary high yielding commercial property, in general, in recent monthshas become more positive, as demonstrated by a number of recent deals in the sector.Against that background, the Directors are pleasedto announce the proposedacquisition of Quintain SignalMember A, as they believethat the Sequel Portfolio fits neatly into the Board's investment criteria,it is being purchasedat a reasonable price and that thereis significant potential for the creationof additional shareholder value.
The Board intendsinitially to focus the resources of the Enlarged Group on improving the returns from the Sequel Portfolio and Hockenhull Estates and will continueto pursue additional acquisition opportunities within the UK real estate sector. Further, the Board believesthat the Company has the expertise to manage portfolios ownedor controlled by other parties. Following the Acquisition, part of the Company's strategywill include seekingand evaluating such opportunities which would be based on a fee plus participation in any increase in value created by the Company.
The Company's management have spent considerable time meeting owners and agents, particularly outside London, and this resulted initially in the acquisition of Cheshirebased Hockenhull Estates.A number of leases in this investment have been extended,vacant property let and rentsincreased, therebyachieving a greater return from this acquisition. As sentiment improvesand demand from investorsincreases the Directors believethat there is further growth still to come from this portfolio.
The Board believes that the Sequel Portfolio needs to increase rental income by active management of the portfolio. By filling voids this will increaserents and reduce irrecoverable expenditure such as empty rates and service charge/insurance premium shortfall.The Directors also believethat there are certain opportunities to secure planning permission where there is development potential.
The Enlarged Group will, where appropriate, dispose of a selectednumber of properties withinthe Sequel Portfoliowhere there are significant outgoings such as empty rates, servicecharge and insurance premiumshortfall.
The Company has today entered into the Acquisition Agreement to acquireQuintain SignalMember A (the 98.5 per cent. owner of the SequelPortfolio) and the GelderdPoint Agreement, subject to Admissionand certain other conditions. The aggregate consideration payable is £39.05 million (subjectto adjustment in accordancewith the terms of the Acquisition Agreement), of which £750,000 is to be paid under the GelderdPoint Agreement. The remainder is to be satisfied by the paymentof £1 by the Company to the Vendorwith a payment in respectof the excess of the net asset value of Quintain Signal Member A which will be calculated based on the balancesheet of QuintainSignal Member A as at the date of completion of the Acquisition. In addition, the Company has agreed to repay, or procure repayment of all of the indebtedness owed by Signal PropertyInvestments LLP to the Lender through a loan to be made by the Company to Signal Property Investments LLP (which will be funded out of the proceeds of the Placing) other than the balance of £20 millionwhich will remainoutstanding under the terms of the Facility.
Further, pursuantto the Acquisition, the Vendor has agreedto subscribe £550,000 for the Subscription Shares at the Placing Price and that it will not trade in the Subscription Shares for a period of twelvemonths following Admission. The Vendor has also agreed to waive the outstanding intra-group indebtedness owed to it by members of the TargetGroup immediately prior to completion of the Acquisition, to the extentpossible to resultin Quintain Signal MemberA achieving a target net asset value on completion of the Acquisition.
The Company has also agreed to make the Buckingham Acquisition. The consideration for the Buckingham Acquisition is £200,000 in cash. In addition,Buckingham has agreedto subscribe for the BuckinghamShares and to assign to the Company the benefit of approximately £220,000 of indebtedness owed to it by Signal Property Investments LLP. Buckingham has agreed that it will not trade in the BuckinghamShares for a period of twelve months following Admission.
Completion of the Acquisition is conditional, inter alia, on (i) the passing of the Resolutions, and (ii)Admission. Further detailsof the Acquisition Agreements are set out in the Admission Document.
The Company is raising £23.5 million(approximately £21.4 millionnet of expenses) by the conditional placingof 11,750,000 new Ordinary Shares pursuantto the Placing at the Placing Price. The Placing Shares will representapproximately 94.4 per cent. of the EnlargedShare Capital on Admission.
The Placing, which is not underwritten or guaranteed, is conditional, inter alia, upon the passingof the Resolutions and Admission. Furtherdetails of the PlacingAgreement are set out in the Admission Document.
Stanley Davis, Neil Sinclair and Anthony Dove, being the Directors, have agreed to subscribe for £2,602,500, £250,000 and £80,000 of Placing Shares in the Placingat 200 pence per share respectively. In addition,Richard Starr, Proposed Director,has agreed to subscribe for £100,000of Placing Shares in the Placing at the Placing Price.
The subscriptions for Placing Shares by the Directors and the Proposed Director detailed above are considered to be related party transactions under the AIM Rules. Allenby Capital, the Company's nominated adviser, considers that the subscriptions for Placing Shares by the Directors and the Proposed Director are fair and reasonable insofar as Shareholders are concerned.
Immediately following Admission, the Board (including the Proposed Director) and their immediatefamilies are expectedto hold in aggregateapproximately 1,649,411 Ordinary Shares amounting to approximately 13.3 per cent. of the Enlarged Share Capital.
The Directorshad considered whetherthe Company would be able to extend the ability to subscribefor the Placing Shares to all existing Shareholders but, having discussed this with its professional advisers, decided that the expenseof doing so could not be justifiedand would not be in the best interestsof the Company.
As a consequence of the Acquisition constituting a reversetakeover, the Company is requiredto apply for re-admission to AIM as the EnlargedGroup. Therefore, application will be made for the Consolidated Ordinary Shares to be re-admitted and the New Ordinary Shares to be admitted to trading on AIM. It is expected that Admission will becomeeffective and that dealingsin the Enlarged Share Capitalwill commence on AIM at 8.00 a.m. on 21 October 2013.The New Ordinary Shares will rank paripassu including all rights to receivedividends made, paid or declared hereafter in all respects with the Consolidated Ordinary Shares.
In order to part finance the Acquisition, the Companyhas agreed that Signal PropertyInvestments LLP will amend and restate its current loan facility with Nationwide BuildingSociety and reducethe level of indebtedness to £20 million on the terms of the Facility.
The Facility is a three year £20 million term loan facility under which Signal Property Investments LLP agrees to pay interestat a rate of 3.75 per cent. over 3 month LIBOR (which is currently 0.5 per cent.) plus Nationwide's cost of compliance with the Bank of England or FCA requirements (which is likelyto be circa 0.0101 per cent. but is subjectto change in line with FCA requirements). Therefore, based on currentrates of interest, the current aggregate rate of interestpayable under the Facilityis approximately 4.26 per cent.
The Facilityprovides for interestonly payments to be made on a quarterly basis. A final capital paymentis to be made by Signal PropertyInvestments LLP at the end of the three year periodfrom the date of drawdown or on a refinancing of the Facilityor a disposal of the Sequel Portfolio, whichever is the sooner.
If a disposal of a propertyis made during the term of the Facility, Signal Property Investments LLP is requiredto prepay part of the Facility.The amount to be prepaid is 100 per cent. of the sale proceedsif the total loan to aggregatemarket value ratio (the ''ratio'') is 45 per cent. or more immediately prior to such disposal,75 per cent. of the sale proceeds if the ratio is less than 45 per cent. but more than 40 per cent. and to prepay 50 per cent. of the sale proceeds if the ratio is less than 40 per cent.
Signal Property Investments LLP is also requiredto operate a number of bank accountswith Nationwide. One such account is a Deposit Accountinto which £1,000,000 is to be placed and held until such time, but within 12 months of drawdown,as the loan to value of the Sequel Portfoliois 45 per cent. or less, as a result of propertysales.
The Facilityalso provides for certaincovenants to be tested quarterlyand to prevail duringthe term of the Facility.These relate to (i) loan to value (to not exceed 55 per cent.)and (ii) interestcover (to be not less than 200 per cent.).
Furtherdetails of the Facility are set out within the Admission Document.
The Companywas originally admittedto trading on AIM in March 2005 underits former name Libra Retailplc.
On 6 July 2010, Neil Sinclair,London Active Management Ltd (a company controlled by Neil and Pamela Sinclair), StanleyDavis, Pamela Sinclair(wife of Neil Sinclair)and Andrew Perloff (collectively the ''Purchasers'') entered into a conditional agreement to acquire a 29.9 per cent. stake in the ordinary share capital of the Company from existing shareholders. Subsequently, on 30 July 2010, Neil Sinclairand Stanley Davis were appointed as directorsof the Company and the then existingdirectors of the Company resigned immediately from the board.
On 4 October 2011, the Companycompleted the acquisition of Hockenhull Estates for a consideration of approximately £1.82 million, fundedvia a £1.2m loan from Close Property Finance,a mezzanine loan from StanleyDavis and a placing of Ordinary Shares. The acquisition constituted a reversetakeover and resultedin the successful implementation of the Company'sinvestment strategy in accordance with Rule 15 of the AIM Rules for Companies.
Following the acquisition of Hockenhull Estates, the Companyowned the freeholdinterest in nine commercial properties located in Crewe and Nantwich,Cheshire, which are let under fourteenindividual leases. The Company's property portfolio had an aggregate valueas at 31 January 2013 of £2.015 million.
INFORMATION ON THE SEQUEL PORTFOLIO
The Sequel Portfolio(including Gelderd Point) comprises 24 properties, all of which other than GelderdPoint are income producing. The Directors have been informedthat there has not been any significant change with regardto the tenants in the Sequel Portfolio since 31 March 2013 save for Plot 24, Blackwater Way, Aldershot which has recentlybeen let and is referred to below. The incomeand irrecoverable expenditure position for the year end31 March 2013 and the Directors' current pro forma estimate is as follows:
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Gross Rental and Other Income
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Net Rental Income
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The SequelPortfolio (including the property at Gelderd Road, Leeds) has, under its ownership by Quintain,been managed using agents and it is anticipated that this will continue in the near term following Completion. The high level of irrecoverable costs includesvoid rates, uncollected insurance and service chargesand it is in this area the Companywill focus initially. Since the date of the last accounts, a new lease has been entered into at Blackwater Way, Aldershot for £181,475 per annum.
As set out in the Admission Document, a valuation of the Sequel Portfolio has been carriedout by Cushman & Wakefield which ascribes an aggregate value of £44.2 million.
As is standardpractice, Cushman& Wakefield have valued each propertywithin the portfolioas a stand-alone asset on the basis of market value. The reported market value of£44.2 million in the ValuationReport is an aggregate of the individual valuations. In the event of a transaction involvingthe acquisition or sale of the entire portfolio, given the nature of some of the assets within the portfolio, a discountwould be expected from the sum of the parts valuationof circa 10 per cent.,giving a value of £39.7million.
Further details on the properties in the Sequel Portfolio are set out in the Valuation Report, included in the Admission Document.
Richard obtained a degreein Surveying and ValuationDevelopment beforequalifying as a Chartered Surveyorand becoming a member of the RICS in 2000. He has workedas a senior team member of three established Central London firms of commercial property surveyors including Millar Kitching and CBGA and in the CorporateReal Estate division of what is now CBRE GlobalInvestors, before settingup his own propertyconsultancy in 2011. He has extensiveexperience of sourcing commercial investments throughout the UK.
Richard Starr is a director of Acorn2Oak Property Advisors Ltd and has not been a director or partner of any other company or partnership within the last five years. There are no other disclosures required to be made in respect of him pursuant to of Schedule 2, paragraph (g) of the AIM Rules for Companies.
It is the Board'sintention to appoint a fully independent non-executive director, preferably with financial and quoted company experience, in the near term following Admission. This will bring the number of independent Non-executive Directors to two, which is considered appropriate for a companyof this size.
CURRENT TRADING AND PROSPECTS
Your attention is drawn to the interim results for the six months ended 31 July 2013 which have been released today.
Since 01 August 2013 the nine properties in Hockenhull Estates have remained fully let and income producing. These properties, which were bought in October 2011, are in the county of Cheshire which the Directors consider to be one of the more prosperous areas in the North of England. The Directors have confidence in the positive outlook for Hockenhull Estates and believe there are opportunities for further growth in value and income which could be generated from these properties.
Since 01 April 2013, considerable effort has been made to effect lettings of the vacant space in the Sequel Portfolio. This is important as not only does it increase portfolio revenue but it also reduces the irrecoverable expenditure such as empty rates, service charge and insurance shortfall.
In June 2013, a letting was concluded of Plot 24, Blackwater Way Aldershot, a 26,000 sq. ft. industrial property, to BHW Automotive Ltd, which signed a new lease for a term of ten years with a right to break after five years at an initial rental of £181,475 per annum, with a rent free period until March 2014.
Following completion of the Acquisition, it is the Directors' intention to continue to reduce the void space in order to increase income and reduce irrecoverable expenditure.
The Directors believe that the acquisition of the Sequel Portfolio for £39.25 million represents an attractive proposition for investors. The current net yield at the acquisition cost will be in excess of 13% and although central overheads and management fees are likely to increase costs by £625,000, the net income generated will be significant and allow the commencement of dividend payments. The management team expect to focus on those properties with voids or short- term renewals to maximise income and, as importantly, reduce the level of void or 'empty rates'. Some properties will be disposed of, where advantageous prices can be achieved and in other cases the development potential will be explored. Over the next three years the Directors expect to reduce the level of borrowings significantly so that the residual portfolio can be refinanced on improved terms, depending on progress on any further acquisitions made in the period.
ACCOUNTING YEAR END
It is intended, following completion of the Acquisition, to change the Company's year end to 31 March in order to align it with the current year end of Quintain Signal Member A, the owner of the majority of the Sequel Portfolio, which will constitute the vast majority of the Enlarged Group's assets and revenue immediately following completion of the Acquisition. Therefore the Directors expect that the next results to be announced will be in respect of the 14 month period ending 31 March 2014 which the Board expects will be announced by 30 June 2014.
It is the Directors' intention to commence the payments of dividends following completion of the Acquisition given the returns that are anticipated. Although it will only be part of the Group for a short period in the current financial year, the Directors would expect in its first full financial year, to pay a dividend of approximately 12 pence per Ordinary Share which represents a yield of 6 per cent. at the Placing Price.
It is intended that a first dividend of 4 pence per Ordinary Share will be paid in respect of the period from completion of the Acquisition to 31 March 2014, reflecting the period of ownership. This dividend is expected to be paid in July 2014. Thereafter, dividends are expected to be paid in equal proportions in December (in respect of interim dividends) and July (in respect of final dividends). The Board expects to pursue a progressive dividend policy over time, driven primarily by enhancements made to the returns from the Sequel Portfolio and any future material acquisitions.
It is proposed,in order to increase the Company'sshare price to a level that is more attractiveto investors, to undertakethe Reorganisation. Pursuant to the Reorganisation and upon the Reorganisation Record Date, each 100 of the Existing Ordinary Sharesare to be consolidated and dividedinto 1 Ordinary Share of 10 pence and 1 Deferred Share of 90 pence having the rights and beingsubject to the respective restrictions set out in the New Articles which, it is proposed,will be adopted pursuantto the Resolutions. The DeferredShares will carry negligible value and will not be admitted to trading. Fractionalentitlements to Consolidated Ordinary Shareswill not be issued but will be consolidated and sold for thebenefit of the Company.
The Resolution to carry out the Reorganisation is to be put to Shareholders at the General Meetingconvened by the notice at the end of this document.
Following the Reorganisation, share certificates in respect of Existing Ordinary Shares will no longer be valid. New share certificates for Ordinary Shares will be issued following the Reorganisation representing the Consolidated Ordinary Shares and any other New Ordinary Shares issued pursuantto the Placing, the Subscription and Buckingham Subscription, or in the case of uncertificated holders, Euroclearwill be instructed to credit CREST participants' accounts with New OrdinaryShares. No certificates will be issued in respectof the Deferred Shares.
In respectof the 2010 Convertible Loan Notes, the 2011 Convertible Loan Notes and the Share Options,the respective conversion, exercise and/or subscription rights will adjusted accordingly.
A notice convening a general meeting of the Company, to be held at 10.00 a.m. on 18 October2013 at Hamlins LLP, Roxburghe House, 273/287 Regent Street, London W1B 2AD, is set out at the end of the Admission Document. At that meeting a resolution will be proposed in order to obtainShareholder approvalfor the Acquisition. In addition,resolutions will be proposedat the General Meeting granting powers of allotmentand disapplying of pre-emption rightsin respect of the Placing.
The Company has receivedirrevocable undertakings from the Directorsand Barrie Tankel, Nigel Lindsay-Fynn, AndrewPerloff and Harold Perloffto vote in favour of the Resolutions in respectof, in aggregate, 22,729,792 Existing Ordinary Shares representing approximately 71.9 per cent. of the ExistingOrdinary Shares. Furtherdetails of these irrevocable undertakings are set out in the Admission Document.