Capital & Counties Properties PLC

LSE:CAPC

Earnings Call Transcript 2022-Q4

[Ian Hawksworth, executive]

Well, good morning. Thank you very much for joining us today for what our CAPCO's final results primarily today is a '22 annual results presentation, but it's going to be in 2 parts. I'm going to just start with an overview, and then I'll provide a brief update on Shaftesbury Capital. You'll appreciate that we have a live prospectus. We're still in an offer period, and we've been subject to the CMA review process for which we received clearance last week. We're therefore somewhat restricted in what we're able to say about Shaftesbury Capital and the transaction to what's already in the public domain. The court meeting for the Shaftesbury scheme of arrangement is actually scheduled for tomorrow. And we're looking forward to completion and the merger on Monday, March 6. Just a little bit about the West End. London is a leading global city, continues to attract talent and investment from all over the world. At the heart of the capital is the West End. It's a world-class high footfall retail, hospitality and leisure destination and it's home to an unrivalled concentration of entertainment and cultural attractions. Covent Garden and the West End have demonstrated remarkable resilience and a strong recovery post-pandemic in footfall and in trading conditions. The return of international visitors is contributing to strong trading performance. We'll say things like the addition of the Elizabeth Line very much improved accessibility into the West End for millions of visitors. I think you'll see from the results that there's a positive momentum at Covent Garden with strong demand, high occupancy and rent collections back to pre-pandemic levels. The active approach that we've taken has generated rental growth across all uses. Customer sales are tracking about 7.5% ahead of 2019, although rents are still 19% below their previous levels. Pleased to say that the positive leasing pipeline that was captured last year has continued into 2023. There's been strong operational performance in 2022. Total property valuation remained broadly unchanged at GBP 1.8 billion. Covent Garden generated a 6% ERV improvement, although valuations were flat in the year due to an outward shift in yields in the second half. Total property return was 2.8%. NTA decreased to GBP 182 per share, and this reflected the shaft-free share price at the year-end. A 23% growth in underlying net rental income resulted in underlying earnings of 2.2p per share, and the directors declared an enhanced dividend of 2.5p per share, which takes account of the Shaftesbury dividend income, which we received in February. You'll appreciate that we have a strong balance sheet, low-gearing with high access to liquidity. Very pleased in the year that we've made good progress on some of our sustainability targets, particularly becoming net zero carbon by 2030. During the year, we joined the UN race to zero, and we're recognized as a climate leader in the financial time survey, which we're very pleased about. We continue to improve energy efficiency and therefore, EPC ratings across the properties through incremental refurbishment activities. We do participate in a number of sustainability indices, and we continue to focus on investing in high-quality public realm, improving air quality, mainly in the Covent Garden area and also supporting the community in which we invest in Covent Garden. Yes, overall, it's been a very busy year, and I'm very pleased with the performance on a number of levels, but it wouldn't have happened without the really hard work of our team. They've been incredibly professional, credibly committed throughout the year. And we really like to share appreciation to them. But it's genuinely contributed to the strong performance on the ground at Covent Garden and in other aspects of the business. So, on that note, I'd just like to go the wrong way, I hand over to Situl for the financial review.

[Situl Jobanputra, executive]

Thank you, Ian. Good morning, everyone. I'll take you through the financial highlights for 2022, starting with the income statement. Underlying net rental income has increased significantly to GBP 57.2 million, driven by leasing activity and an improved trading backdrop for our customers. This includes a reversal in expected credit loss compared with a charge in 2021. Rent collection was 99% for the year. Prior year numbers have been adjusted following the IFRIC agenda decision released in October '22. In particular, certain rent concessions granted during the pandemic and now treated as forgiveness under IFRS 9 rather than lease modifications under IFRS 16. The lower balance of tenant lease incentives should result in reduced noncash charges in future years. This is expected to benefit net rental income on an accounting basis by approximately GBP 2.5 million in 2023. As you'd expect, there has been significant upward pressure on admin costs. This includes the impact of more normalized levels of activity and increased people costs, primarily the variable component, including share option charges. In addition, GBP 14.6 million of nonunderlying costs have been incurred in connection with the merger. There was a significant fall in finance costs in the second half, driven by debt repayments during the year. Finance income of GBP 2.6 million was generated on cash deposits and interest rate collars. Together with higher dividend income, these factors contributed to an increase in underlying earnings to GBP 18.6 million. The second interim dividend of 1.7p, which includes the Shaftesbury dividend received post year-end brings the total for the year to 2.5p per share. This chart illustrates the opportunity to capture additional cash income of GBP 19 million, which is the current gap between gross income on the left and the ERV on the right. Gross income increased by 8% during the year, reflecting strong leasing activity ahead of ERV. Rental growth has accelerated to 6%, taking ERV to GBP 81 million, which is well below pre-pandemic levels. Turning to the balance sheet. The valuation of Covent Garden was broadly unchanged overall with rental growth being balanced against the widening of the cap rate by 19 basis points. The Shaftesbury reinvestment reflects a share price of 368 p, representing the single largest area of movements over the year. Net debt of GBP 622 million resulted in overall leverage of 28% and loan to value at Covent Garden was 21%. At the year-end, EPRA net assets were up 182p per share. Most of the year-on-year movement in NTA per share is accounted for by the 28p contribution from the Shaftesbury investment. This reflects the movement in the share price rather than underlying asset values. On completion of the merger, taking into account the consolidation of Shaftesbury and other adjustments, the pro forma NTA of Shaftesbury Capital is 192p per share.This chart summarizes the main movements in cash over the year. The combined effect of operating items, dividends and CapEx was broadly neutral. The reduction in cash to GBP 123 million is largely a function of debt repayments and nonunderlying expenses, including the make-whole cost on the private placements. The group had access to GBP 423 million of liquidity. We have maintained significant financial flexibility throughout the period with low leverage and access to ample liquidity. Activity in 2022 included extension of the RCF by a year to September 25, prepayments of GBP 200 million of debt and arrangement with the standby loan facility in connection with the merger. Through a combination of all drawn debt being fixed, our cash deposits and hedging arrangements, finance costs are currently well protected against movements in interest rates. So, to summarize, with positive momentum in operating metrics and through our asset management initiatives, rental income is well positioned for growth. We will continue to focus on capital management and cost efficiency. Together, these levers will enable growth in underlying earnings and progression in dividend distribution over time. We will maintain a strong balance sheet, positioning the group to act on growth and investment opportunities. And with that, I will hand over to Michelle.

[Michelle McGrath, executive]

Thank you, Situl, and good morning, everyone. There's been strong momentum across the Covent Garden portfolio. Rents have grown during the year with good leasing activity across all uses, and ERVs are up 6%. Occupational demand has been strong with 71 leasing transactions, securing GBP 10 million of income, 13% ahead of December 21 ERV and well in excess of previous passing rents, a 25 basis point outward yield movement to 4.07% in the second half resulted in an unchanged valuation for the year. Gross income increased by 8% to GBP 62 million. We continue to operate with tight vacancy, actively managing our portfolio, resulting in 14 new brands introduced to the estate. Our hospitality and retail customers had a successful Christmas, and we had a positive start to the year. Like-for-like sales for 2022 were 7.5% ahead of 2019 levels, demonstrating the value of optimizing category selection and customer mix. ERVs have grown across the portfolio with rental growth having gained momentum since last year. Total ERVs remain 19% below pre-pandemic levels with significant opportunity to recapture and grow beyond this. CAPCO's retail and F&B strategy is to attract highly productive brands and concepts relevant to the consumer in targeted categories. As seen on this slide, retail leasing activity was spread across our streets, and we also generated 8% ERV growth in the F&B portfolio, reflecting the strength of demand and trading performance in our restaurants. There is a range of price points, which enables us to attract brands at different stages in their life cycle, ensuring our mix is varied and relevant. Our office portfolio is seeing excellent demand, and we're pleased to have set new rental tones from recent refurbishments and the [ resi ] portfolio is fully occupied. Demand continues to polarize towards the best locations, as seen by the strength of activity this year, 14 new brands have signed and 16 new openings have taken place. The data and insights we continue to build from our customers provides us with a rounded view and informs our leasing and investment decisions. Our targeted categories of luxury, premium and jewelry are amongst the best performing from a customer sales perspective. The proven success of premium retail concepts has generated demand with openings from [ Cuter ] and Tag as well as recent signings from Gard Perrigo, [ Mestica ] and Hublot. Our F&B offer continues to flourish with Gaucho recently signing on James Street and the experimental group opening their new concept stereo on the Piazza, enhancing the nighttime economy of the district. There's a flurry of upcoming openings, including [ Majeure ], Creed, Hocker and [ Uniqlo ] will open their flagship store in the spring. We're working through a good pipeline from a range of occupiers with a further GBP 3 million currently under negotiation. These are tracking ahead of ERV, and we're confident we'll convert this into cash income in the coming months. We continue to focus on creating a destination that thrives and how different uses, brands and location work together to create an attractive environment. Our dynamic approach to leasing and brand selection focuses on the creation of brand value, understanding consumer behavior and trends and crucially how these interplay with experience, culture and heritage all within a sustainable vision for our estate. Brands trade off each other's success, and we continue to create a world-class customer lineup to maximize our customers' share of wallet. We believe these skills and priorities create enduring destinations, which the occupier of the future, places value on over the long term. We've invested in our portfolio through creative asset management initiatives to unlock value whilst improving our buildings and enhancing their environmental performance. Having commenced the refurbishment of 35 King Street and 56 Henry Street last year, both schemes are now complete. They are fully occupied ahead of schedule and have set a new rental tone of GBP 100 for the office portfolio. We're now on site with a number of capital initiatives, including schemes on Maiden Lane and Bedford Street, a flagship F&B townhouse on King Street and an office refurbishment on Long Acre. Combined, these represent approximately GBP 25 million of CapEx over the next 18 to 24 months. Properties remain tightly held in the district. However, we take an active approach to investing in our existing buildings, and we're pleased to have acquired the remaining 5% interest in the roll-up per House Arcade at a cost of GBP 12.9 million. This transaction consolidates our ownership and includes the final units in the arcade not currently in our portfolio. In summary, we're pleased with the momentum across the business. We're well set for the year ahead with strong demand and good pipeline of deals, targeted investment activity and holistic management of our estate to grow income and ERVs and create value, and we very much look forward to touring the state with you over the coming months. I'll now hand you back to Ian.

[Ian Hawksworth, executive]

Thank you. So, the second part of the presentation. As you've heard really from what we said so far, there really is strong operational momentum at Covent Garden, and that will be carried forward as we look ahead to completing the merger of CAPCO and Shaftesbury to create the leading Central London mixed-use [ lease ]. The West End has clearly demonstrated its resilience and enduring appeal at the center of one of the world's greatest cities. And the merger brings together some fabulous properties, highly complementary properties to create an impossible to replicate portfolio in some of the most iconic destinations across London's West End. We're primarily focused around the Covent Garden area, the Carnaby Soho area and Chinatown. You can see on this slide some of the metrics that are available in the public disclosures that we've made so far. GBP 4.9 billion of property, comprising 2.9 million square feet of lettable space across 670 predominantly freehold buildings with 2,000 individual units. Portfolio is well balanced. It's split broadly, equally between retail, hospitality and the upper floors offer quality office accommodation and residential uses. It provides a diversified customer mix and income stream with a broad range of unit sizes and rental tones. We feel that appeals to a wide range of occupiers. Priority for us is to deliver on the commitments set out in the prospectus and in combining both companies' strengths and cultures and values, we're intending to take a best of both approach. Both companies' employees have a shared passion for the West End, and they are very much key to our future success. There's a wonderful opportunity here to blend the best of both teams and with greater scale, provide enhanced opportunities for individuals. We're aiming to provide an inclusive and innovative and entrepreneurial culture in which people can thrive and develop. And this will be a very important focus of the combined management team from Monday. The combination will generate both near-term and longer-term benefits, including greater efficiencies and synergies and a stronger operational platform of scale. [ Shaft B ] Capital will be financially strong with modest leverage and significant revenue growth potential, as is shown here by the difference between annualized gross income of GBP 178 million and the ERV of GBP 227 million, which in itself is actually well below the pre-pandemic level. So, the combination provides greater opportunity to create value through enhanced adjacencies by creating better linkages between the individual properties and ownerships, such as the combined Covent Garden portfolio. And we'll maintain a dynamic approach to leasing, targeting complementary high-performing brands and differentiated experiences to ensure that these locations evolve over time. The combination will enable us to leverage insights from our rich data to inform investment and leasing decisions through broader and deeper knowledge. And we'll also implement a holistic marketing strategy and take advantage of some of those cross-locational marketing opportunities. There's a shared commitment here to deliver positive environmental and social outcomes through the long-term responsible stewardship of these wonderful places. And through a collaborative approach, we support the communities in which we work and ensure that we continue to build close relationships with our occupiers. We're confident about the long-term prospects of the West End and are focused on generating sustained growth in income and dividends whilst managing debt and cost appropriately. Shaftesbury Capital really is a rare opportunity to invest in an exceptional portfolio of scale in the listed real estate sector, and we very much look forward to providing more detail in the coming months with a series of analysts, investor events that will go on throughout the year. So, that concludes the formal presentation. We'll now open to your questions. Please, can I remind you the restrictions that we're operating under that I mentioned at the start of the presentation, we'll do our best to answer all your questions. For those of you that are on the telephone, please let the operator know that you wish to ask a question, and we'll come to you. So, with that, perhaps we can invite a question from your end. There's a mic.

[Unknown Analyst]

Good morning and big congratulations on the merger. I know it must be good to have that approved now. Just a couple of questions for me. So, [ Samit from colitis ]. On Slide #11, I think it is which has got the NTA movement. Just mechanically, what happens to the [ Shaftsbury ]? At the moment, you've got this big 28p downward movement because of the share price. Mechanically, what happens on the 6th of March, even though you're obviously not going to report on the 6th of March? And the impact it might have on the NTA, please?

[Ian Hawksworth, executive]

You're right, the bulk of the movement in the NTA year-on-year was driven by the decline in Shaftsebury share price at $65, I think, at the end of '21, 368 at the end of '22. So, that's 28 of the 31p decline in NAV. So, that's about last year. Looking ahead, we've included a pro forma NTA of $1.92 per share. And that's really a function of all the transaction adjustments, primarily the consolidation of the Shaftsebury assets valuation and transaction costs and other adjustments. So, you're right. In a sense, it's a bit of a temporary effect, and then you then recognize the investment valuation. That NTA movement and that particular component that is indicative of the share price movement rather than movements in underlying asset values.

[Unknown Analyst]

Great. And just in terms of the ERV and obviously, it's below the pre-pandemic level. We've obviously had a whole lot of inflation in the period. If you look at the share prices of the luxury retailers, they've really gone quite high. How do you feel about where your ERVs are and what the opportunity might be going forward, please?

[Ian Hawksworth, executive]

Well, I said in the presentation, the momentum is there. So, the valuation ERV, which is provided by the third party in terms of what they think the market value is for the portfolio was 6% up in the year. The actual transaction levels that Michelle's team has achieved some great brands actually. That's 13% above the start of the year. That demonstrates to us that there's significant momentum there. And that's been carried forward into the new year as well. So, yes we have to keep doing these good deals and putting on -- Making sure that Covent Garden is a great place for people to come. But I think that momentum is genuine. And I think it's reinforced by international tourism coming back. That is very clear to us, as you walk around the estate during half-term, for instance, it was very busy. So, so far, so good, I think.

[Unknown Analyst]

I'll jump it's [ Maximo ]. Yes, maybe just to kind of follow up on that ERV question. In terms of when you speak to the buyers, how aware are they of that 20% odd gap between where you were in 2019 and where we are today? Is it something that they think about? Or is that just kind of anchoring to the past when you just kind of move on, that's not where we are now? That's the first question, just how aware are they of that? And then secondly, I appreciate you might not be able to answer this, but if you can, you said on the combined entity, you're talking about having modest leverage. I think on pro forma, you say you're at 31% there on a combined basis. Should we infer from that, that that's where you feel quite comfortable with the combined leverage of the business? Is the valuer aware of that 20% gap that's there. Are they conscious that that's where ERVs were?

[Michelle McGrath, executive]

Yes. I mean they're very aware of it. They have been valuing the portfolio. So, you're absolutely right. They are aware. I think what they're encouraged by is that all the movements they've made in the valuation are very much underpinned by the asset management activity that's been undertaken during this period, and they'll continue with that approach as we go through the valuation cycles.

[Ian Hawksworth, executive]

The second part was about leverage. These are issues for the new Board after Monday. I mean, going into the merger, we're very happy with the condition of our own balance sheet, and we think the transfer capital will be very strong with access to capital enhanced through the scale of the combined organization. But I don't know whether you want to add to that system.

[Situl Jobanputra, executive]

No, I think that's right. And the values that we've each had in terms of managing our capital structure, I think we would expect to be consistent, i.e., relatively low leverage, high liquidity, diversification of maturity profile and sources and also having regard to all those other metrics such as interest cover, EBITDA multiples, quantum of debt, all of those things. I think that will be part of the consideration for the new board.

[Matthew Saperia, analyst]

It's Matt Super from Peel Hunt. I think Knight Frank said recently about the impending change in business rates and the impact that's going to have on West End occupies. Do you have a view on the impact it's going to have on your customers with regards to their occupancy costs?

[Ian Hawksworth, executive]

Well, everything helps, isn't it? But maybe you'd like to comment on the detail for us.

[Michelle McGrath, executive]

Yes, of course. Look, anything that anything that ultimately reduces the occupancy cost for our tenants is a positive thing. I think it's good news for London, and it's good news, especially for the West End. Just to give you a bit of a sense, when we've looked at it for our portfolio, the reduction is anywhere between 15% and 20% in business rates bills. But in certain streets, certain units, it's more than that. And I think the move is very much welcomed by the retail F&B community. The other thing I would add is that what was previously expected to be downward tapering will now be a bullet reduction. So, again, very positive for the West End.

[Operator]

[Operator Instructions].

[Ian Hawksworth, executive]

Okay. It doesn't seem anybody on the lines. Any more questions in the room? Okay. Well, look, thank you very much for coming and joining us. Very much looking forward to Monday and to seeing you as we progress during the course of the year. So, thanks for your attendance. Appreciate it.