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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Hello, everyone, and welcome to the Capco Interim Results Presentation. My name is Victoria, and I will be connecting your call today. [Operator Instructions]
I'll now pass over to your host, Ian Hawksworth, to begin. Please go ahead.
Good morning. Welcome to Capco's Interim Results Presentation. This is the agenda. I'll start with an introduction and provide an update on the proposed merger with Shaftesbury. Situl will present the financial review, and Michelle will update on Covent Garden. I'll then finish with a summary and outlook followed by questions.
Capco is a Central London REIT with a portfolio of unique investments valued at GBP 2.4 billion. Our strategy focuses on value creation opportunities to generate long-term returns and investing in prime Central London real estate. Our principal asset is the landmark Covent Garden Estate, representing over 3/4 of our total portfolio. Capco has a 25% interest in Shaftesbury PLC, which is the owner of a mixed-use portfolio of over 600 buildings, many of which were adjacent to Covent Garden.
As you know, we recently announced a recommended all-share merger of Capco and Shaftesbury plc to create Shaftesbury Capital PLC. We're delighted that shareholders have recognized the benefits of the merger by approving the transaction at the general meeting held on the 29th of July. We look forward to completion by the end of this year following completion of the CMA process. The merger of Shaftesbury and Capco unite 2 complementary real estate portfolios under single ownership to create a GBP 5 billion portfolio, comprising 2.9 million square feet of [indiscernible] space across 670 predominantly freehold building with 2,000 individual units. The combined group will offer more diverse portfolio at scale with greater efficiency.
We'll take the best of both companies, utilizing our combined skills, experience, relationships and networks to deliver an even stronger operational platform. We look ahead with confidence and aim to build on the legacy of our 2 companies as we create a leading Central London REIT and seek to deliver sustained growth in income and a progressive dividend policy.
The West End has bounced back remarkably with a sustained recovery since summer 2021, leading to a consistent improvement in footfall and spend as well as reduced vacancy levels. Covent Garden has had a very active first half. Footfall continues to improve, and we've seen the return of international visitors over recent months. Customer sales in [ our figures ] are ahead of 2019. There is high occupancy across the estate, excellent levels of leasing activity, and rent collections are normalizing. We recorded strong demand across all users with leasing transactions for the first half, 9% ahead of December '21 ERV, resulting in a 5% valuation uplift. The Elizabeth Line is now open and further enhances access to the West End.
Turning to results. We're very pleased with activity and performance across the estate which has generated considerable operational momentum. The Covent Garden valuation increased by 5% like-for-like to GBP 1.8 billion primarily as a result of ERV growth. Overall total property value increased by 4.5% over the period to GBP 1.9 million. The Covent Garden valuation has contributed 9p growth to group NTA. However, this has been offset by a reduction in our investment in Shaftesbury, resulting in EPRA NTA of 209p per share. We continue to maintain a strong balance sheet with low gearing and high liquidity. Underlying earnings are 0.5p per share, and the interim dividend of the period is 0.8p per share.
We continue to implement our environmental and sustainability agenda and are pleased with progress. Capco has been recognized as a Climate Leader in the 2022 Financial Times survey and has joined the UN Race to Zero. We remain focused on responsible stewardship, investing in high-quality realm -- public realm, improving air quality in the area and providing support for the wider Covent Garden community.
I'll now hand over to Situl for the financial review.
Thank you, Ian. Good morning, everyone. I'll take you through the financial summary, starting with the income statement and then moving on to the balance sheet and our cash and debt positions. As you can see, underlying net rental income was GBP 28 million, up significantly against the first half of last year. This is reflective of the recovery in trading conditions, including the continued normalization of income collection. Over 95% of rent has been collected for the first half, and that trend has continued into Q3. This also includes a GBP 1.7 billion write-back of the bad debt provision due to collection of historic arrears.
Other income relates to the receipt of the full year dividend from Shaftesbury in February, a further distribution of GBP 4.7 million, was received in July and well together with any further dividend income in the second half being included in full year earnings. The increase in underlying administration costs is reflective of upward pressures highlighted earlier in the year across a number of areas, including higher payroll and share option costs.
Net finance costs have been reduced to GBP 14.3 million driven by lower gross debt following repayments of GBP 200 million during the first half. These movements, taken together, resulted in underlying earnings of GBP 4.3 million before the dividend income received from our investment in Shaftesbury post period end. We are pleased to announce a dividend of 0.8p per share to be paid as a PID, reflecting improving cash earnings and in line with the level indicated at the time of the merger announcement.
This chart shows the transition from gross of GBP 58.6 million to ERV of GBP 79.2 million on the right, highlighting the potential for revenue growth over time. There have been a number of movements in income with strong levels of leasing activity offset by some properties moving into refurbishment. In addition, certain units were vacated and are now under offer, which has contributed to the ERV uplift of 4% during the period. New leasing activity is reflected in the rent free and stepped rent bar. A significant proportion of the amount here will move into gross income later in the year. The contracted and under offer position was GBP 72.6 million, and EPRA vacancy remained low at 2%.
Moving on to the balance sheet. The total market value of property assets increased by 4% to GBP 1.9 billion. The like-for-like movement at Covent Garden was 5% with the majority of this being due to rental growth. The equivalent yield moved in slightly to 3.82%. The valuation of Lillie Square decreased by 2% to GBP 84 million. The Shaftesbury shares are held at the 30th of June share price of 522p. This compares with a year-end share price of 615p and Shaftesbury pre-March NTA of 679p per share. Net debt was stable at GBP 605 million with group leverage at 25%, whilst Covent Garden loan-to-value has been maintained at a low level of 20%. EPRA net assets were GBP 1.8 billion or 209p per share.
The principal areas of cash movements relate to the operating cash inflow of GBP 7 million for the period, equivalent to the amount of the interim dividend of 0.8p per share and the debt repayment of GBP 200 million. Group cash was GBP 139 million. And together with the ongoing RCF, there is access to liquidity of GBP 439 million.
We have a strong capital and liquidity position and a modest level of capital commitments. Overall group leverage and the loan-to-value position at Covent Garden have been maintained at low levels. The cash interest cost of debt has been reduced and currently comprises the following key elements: the Covent Garden private placement notes of 2.8%, the exchangeable bonds at 2% and commitment fees on undrawn facilities.
In relation for the proposed merger with Shaftesbury, we have put into place a standby loan facility in order to fund any redemptions of the secured mortgage bonds. We will continue to target a resilient and flexible balance sheet with appropriate covenant headroom, diversity of sources and maturity of debt and access to significant liquidity.
So to summarize, we will focus on revenue growth and conversion of that to distributable income in line with our progressive dividend policy. And we will maintain a strong balance sheet and disciplined approach to capital management.
I will now hand over to Michelle.
Thanks, Situl, and good morning, everyone. Covent Garden has had a very active first half. Footfall continues to improve as we welcome back overseas visitors and customer sales are ahead of 2019. Operational demand has been strong with possible leases, resulting in 25 leasing transactions securing GBP 3.9 million of income, 9% ahead of December '21 ERV. Net rental income increased by 14% like-for-like, and ERVs are up 4% to GBP 79.2 million. There was a 5% valuation loss in the first half driven by ERV growth and 6 basis points per year contraction. Vacancy is low at 2%, and we had 11 new store openings since the beginning of the year.
The financial [indiscernible] environment and our [indiscernible] team is performing very well, supporting Covent Garden's position as London's leading outdoor dining destination. We continue to engage directly with the consumer and on early adopters of digital, our investments in these channels is proving fruitful. We have commenced a number of targeted capital initiatives, which will improve value and enhance environmental performance.
This slide demonstrates the retail-only rental values across the estate. We have a plan to each of our buildings and the broader curation strategy for every street. We believe that James Street, King Street and Royal Opera House Arcade have the ability to attract high-quality premium brands, which has been the focus for these areas. There are 6 other streets as well as the Market Building, which enable us to deliver our strategy of issuing a broad range of brands and high-quality food and beverage, which when combined with these, allow our customers to shop and dine at every level with a richness of choice.
Growth for the first half of the year has been predominantly driven by retail leasing activity on King Street, the Market Building and James Street, and almost 5% ERV growth in the F&B portfolio, reflecting the strength of trading performance in our restaurants.
There is continued leasing momentum across Covent Garden. Since inception, Capco has [ issued ] over 250 new retail and hospitality concept, refreshing the customer lineup, which as you can see, gets better and better. Demand continues to polarize towards the best locations as seen by the activity in the first half of the year, and we are pleased to have secured demand in target categories, including sustainable, luxury and digitally native to name a few.
Luxury brand, Tudor, will open in the Royal Opera House Arcade, joining watch brand, TAG, on James Street. Parfums de Marly, [indiscernible] has agreed terms and will open in the coming months alongside WatchHouse Coffee, adding to the vibrant mix at Covent Garden. 11 new brands have recently opened, including Rails, The Chestnut Bakery, Empresa, e&e Jewelry and Sacred Gold. Sustainable and digital brand, Reformation, has now opened its London flagship -- refurbishment to enable the combination of [indiscernible] and 2 Long Acre units, the unit closed new flagship continues to progress well. There is a good pipeline of leasing activity with a further GBP 3 million currently under negotiation, and we are confident we will convert this over the coming months.
We've always seen the value of understanding our customer and the expectations of our business. Having been early adopter of digital marketing and generating high-quality content, we are pleased with the strong levels of engagement and sustained growth in our channels as well as the interest in conversion from our website. This allows us to speak directly to our consumers among [indiscernible] key trends, which gives us confidence that our strategy is relevant to our target market.
Alongside footfall and the data we capture around sales, which represents over 80% of our customers, this will help provide a rounded picture to inform our asset plan. Strategic public [indiscernible] that are creating value from our assets as well as better connect the consumer with our estate. This increased schemes such as al fresco dining and pedestrianization as well as tangible sustainability improvements, all of which are enforcing pillars to creating a world-class estate capable of attracting the most exciting brands and concepts and engaging with contemporary consumers.
We continue to invest in Covent Garden. We have now commenced a number of targeted cash initiatives, including F&B scheme for Maiden Lane and Bedford Street, a flagship as a retail house on King Street has an offer to refurbish in Long Acre. Combined, these represent about 50,000 square feet and approximately GBP 25 million to GBP 30 million of CapEx over the next 18 to 24 months. These incremental investments will unlock value whilst enhancing the environmental performance of our buildings. And we expect to achieve a minimum of EPC rating of B on all of these initiatives.
In addition, the recent office refurbishment in the 35 King Street and 5-6 Henrietta Street have now completed with a number of [indiscernible], reaching a new office rental term of GBP 95 per square foot. With respect to acquisitions, we are tracking the investor market closely, where a number of opportunities are currently under review, and where appropriate we will look to acquire.
In summary, we are pleased with the momentum across the portfolio. We're confident in the holistic approach to asset management, including leasing, investment, target public marketing as well as keeping close to our customers to deliver rental and income growth and maximize Covent Garden potential for all our stakeholders.
I will now hand you back to Ian. Thank you.
Looking ahead, there is strong operational momentum at Covent Garden with demand across all uses. Customer sales in aggregate are ahead of 2019 levels and footfall continues to improve from adding confidence in our leasing strategy for further rental growth.
Central London is not completely insulated from the prevailing macroeconomic and political headwinds. However, the West End and our portfolio of remarkable properties have demonstrated strong resilience. We're delighted that shareholders have recognized the benefits of the merger with Shaftesbury and approved the transaction last week.
We're looking forward to bringing our 2 companies together to form Shaftesbury Capital once the CMA process completes. The merger of Capco and Shaftesbury is a compelling strategic fit creating an almost irreplaceable portfolio of properties in the West End. Combination will generate both short- and long-term benefits, including greater efficiencies and synergies, a more diverse portfolio with a stronger operational platform, a considerable scale and bringing together ownership of management across adjacent portfolios to unlock opportunities.
There is significant revenue growth potential to be captured over time through the difference between annualized growth income to ERV. Shaftesbury Capital will be financially strong with a flexible capital structure, significant liquidity and will benefit from enhanced access to capital. We look ahead with confidence as we aim to create a leading Central London REIT and deliver cost savings, sustained growth in earnings and progressive dividends whilst implementing a holistic environmental approach as custodians of these remarkable parts of London.
That concludes the formal presentation. We'll now take questions from analysts. Please let the operator know if you'd like to ask a question.
[Operator Instructions] Our first question comes from Osmaan Malik at UBS.
I guess the question is just around tenants. I guess you're seeing very limited signs of recession, but I guess broadly, there are a lot of people struggling right now. So I'm just wondering, to what extent are your tenants able to pass through this inflation? Are they -- how are they doing? Do you have any on the watch list? Are the margins being squeezed because, I guess, you're saying that you're slightly ahead of sales of 2019, yet there's been quite a lot of inflation since then. So just a bit more color on how your tenants are performing, please.
Os, it's Ian here. Things on the ground are positive at Covent Garden. As you can see from the statement, we've had a very active period of leasing, with those transactions ahead of ERV and also ahead of passing rent. So it's a positive environment on the estate. And if you -- I'm sure a number of you have been down over the summer months, but it's been very, very busy. I think moreover, the pipeline is also strong. I mean we don't have a lot of vacancy. We only have about 2% vacancy at the moment. But there are a number of transactions in negotiation at the moment, and they're showing a similar sort of pattern as we've seen in the first half. So we're, obviously, aware of what's going on in the macroeconomic environment. But at the moment, on the ground at Covent Garden, it's positive.
Very good. And then you mentioned around tourists returning and increasing number, but could you give us a sense of where do you think we are, I guess, relative to 2019 levels? Where are tourist numbers right now?
Yes, I think we'll be able to give a better update after the summer. I mean we don't keep track of every customer that walks through the estate, but footfall is positive. If we look at our websites and our various social media outlets, which are very busy at the moment, you can get an understanding of the -- where some of the international visitors are coming from. And it's a similar sort of pattern that we saw pre-COVID really and that you've got quite a lot of European visitors, North American visitors and those from sort of the Middle East. So it's quite positive. But I'd say we're still quite a long way below where we would have been pre-COVID. So as that begins to further recover, it will add to the domestic footfall, which has been very strong now for the last 12 months.
Great. Great. I'm not sure there's room for them, to be honest. On acquisitions, I think I'm right in thinking -- in saying that you didn't make acquisitions during this period. Is it because you were very much fixated on Shaftesbury or is it more that there wasn't much coming up at a competitive price? Could you give us a bit of color on acquisitions, please?
We're tracking quite a lot of things, I would say. I think you can see from the performance of the portfolio over the last 6 months that we've been focused on the performance of the portfolio. So we've had a very strong period of activity, both in terms of leasing and promotional activities on the estate, which has sort of differentiated Covent Garden from other destinations in the West End. But in terms of the actual investment market, it's very busy in and around Covent Garden.
The type of assets that we look at are relatively small in terms of lot size. They tend to be freeholds. A lot of them tend to be owned by private investors. So those that have come to market, we have looked at, we've -- there's been 1 or 2 transactions immediately adjacent to the estate which we have felt didn't meet our return criteria as an office property, sold on Bedford Street recently, which was what I would say is a strong price. And there was some certain leaseback activity in 1 or 2 of the hospitality areas adjacent to gain a very strong pricing.
So it's a very active market. Where things do come up, there's real competition both from domestic and international investors. But hopefully, there will be an opportunity for us to deploy capital in some of the core investments that we've been tracking over the years. So it's a very busy market, but we are able to acquire real estate if it meets our return criteria.
[Operator Instructions]
We have a follow-up question from Osmaan Malik.
Firstly, just to comment, if no one's asking questions, it could be because it was a little difficult to access the telephone line. I had to try a couple of times before my line was picked up. So I'm not sure if other people have had that issue.
As I still got the follow-up, just one more question that I just want to clear up. Am I right in thinking for the costs involved with this potential merger, is the only thing that's being reflected in the set of results the GBP 9 million in the admin expense? Or are there other provisions that have been put through and have possibly reduce the NTA?
Os, it's Situl. You're right that the cost in relation to the transaction which have been reflected in the first half results is exactly the GBP 9 million. And you're aware that the balance of costs were set out in some detail in the transaction documents and the prospectus and seen document and the circular. And the vast majority of those will be conditional on successful completion, so they will be back-end costs. But you're right, it's the GBP 9 million of nonunderlying costs in the first half.
Our next question comes from Max Nimmo at Numis.
Can you hear me now?
Yes, we can hear you now.
Just -- I guess, a follow-up question from Os is just in terms of the tourists that we're starting to see come to London and how that's translating into these customer sales. Clearly, obviously, seeing less kind of high-spending Asian tourists but perhaps, as you say, due to dollar strength a bit more on the North American. How is that feeding into the different types of customer sales? In terms of luxury doing, you would expect maybe a little bit worse but some perhaps other areas doing a bit better, .I'm just wondering if you've got a bit more color on that, that would be great.
Yes, of course. Max, it's Michelle here. You're right. We we've always taken a more of a category selection approach to the way we think about the retail leasing strategy. And some of the categories that I've mentioned, things like luxury that you've highlighted, differentiated F&B, sustainable digital, that's really where, I mean, we've done, we've had a lot of activity in the first half of the year. If we just stand back from that for a moment and look at how the sales are performing, we're very confident that we've selected the right categories because the sales that are coming out in particular from those categories, some of which you've mentioned, are actually very, very strong. So we're pleased with that performance. And when you look at that relative to 2019 levels in aggregate there, they're well ahead of 2019.
In terms of the specifics as to how it breaks down between international and domestic spend, I couldn't tell you that right now, but it's certainly noticeable. Simply walking around the estate, I'd be delighted to take you around any time. You can just start to see tourism building alongside the domestic and London interest that we have from existing consumers.
Yes, Max, just to also add to that, I mean the premium sectors are outperforming. So I think you suggested that high end is sort of not doing as well. It's actually outperforming and overindexing against all other categories at the moment there.
[Operator Instructions]
At this time, there are no further questions. I'd now like to pass back over to Ian for any final remarks.
Thanks very much for -- thanks for joining us this morning. If you didn't manage to ask a question for whatever reason, please do give us a call. Looking forward to updating you further over the course of the next few months regarding the transaction, and we'd be -- regarding the merger, and we're delighted to show you around the estate standing point for the summer.
Pleased to say that it is busy out there. But thank you very much for your attendance today and look forward to seeing you in due course, if we don't see you in the next few weeks. And please have a great summer, and we'll see you in the autumn.
Thank you very much for joining us this morning. Thank you.