Capital & Regional Plc (CAL) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to our half year results. My name is Lawrence Hutchings, I'm the Chief Executive. I'm joined today by Stuart Wetherly, our Finance Director. Firstly, an apology. It would have been great today to be meeting you all in person. Obviously, the current restrictions don't allow that to happen. So we're recording this presentation, but we will be doing live Q&A at the end of the presentation this morning. Turning to our executive summary. Clearly, we've had a significant impact on our business and on the sector from COVID. So a lot of our time and energy has been placed in navigating our way through the last 5 or 6 months. We appreciate that COVID is firstly, a humanitarian crisis; and secondly, an economic crisis. So our focus has been very much on supporting our teams, specifically our frontline staff, who have kept our -- all of our shopping centers open during the period and, of course, the local communities that we operate in. And as Stuart is going to talk about, we've done a significant amount to support those communities across various different areas. Talking about support. I'm pleased to say, and many of you will have seen in our press release this morning that Growthpoint, our 51% shareholder, has made a statement of support, that we have the support of our shareholders, our major shareholders, and we have the support of our lenders and other stakeholders, including our retailers. More on that later. Our focus, we believe, rightly, over the last 4 or 5 months has been to ensure the stability of the group. And by ensuring the stability of the group, we can maintain flexibility around our options to deal with both further impacts from COVID and secondly, the acceleration in structural change, which I will talk about more later. One thing of the many lessons that we've learned over the last 5 to 6 months is the importance of community shopping centers. And we believe they remain as relevant today as they were when we launched the strategy in December 2017. This gives us confidence in our business, confidence in our strategy and confidence in our team. Turning to the headline operational performance metrics. We have, standing here today, 96% of our stores are open and trading, which has been a phenomenal achievement by our teams. Our footfall is 7% ahead of the national index for August. It's tracking at about 3% growth per week, which we believe is very encouraging. And as of last week, we were 75% of the footfall from the same week last year, which is significant growth from where we were 6 weeks ago. We've implemented GBP 1.4 million in cost savings, a lot of that directed at service charge to support our retailer customers. Our occupancy has remained stable at 95%. And our leasing pipeline, a key indicator of future activity, we have 28 new leasing deals, which I'll talk more about later. I'd like to hand over to Stuart to take you through the financials.

Thank you, Lawrence, and good morning, everybody. Like all businesses, COVID-19 has had a pervasive impact on the results of the first 6 months of the year. Restrictions on trading, both for us and our retailer customers, have led to a significant reduction in income. This has flowed through to the bottom line, resulting in an adjusted profit of GBP 4.6 million for the period compared to GBP 14.8 million in 2019. COVID-19 has also had an impact on valuations, amplifying and accelerating existing pressures. While the London weighting of our portfolio has seen us fare better than some, overall, the 16% decline has led to a fall in EPRA net tangible assets to GBP 264 million and leverage increasing to 57%. To give you some more flavor around group adjusted profit. Net rental income of GBP 16.2 million has been impacted by 3 main factors. The provision for bad debt, CVAs and administrations, both of which I'll cover on subsequent slides, and car park and ancillary income. We took the decision, when lockdown started, to suspend tariffs from car parks, enabling our customers and key workers to park for free during lockdown. This, though, resulted in a GBP 2.5 million impact on income in the period. We also lost about GBP 0.5 million in ancillary income, being lower activity on short-term leases and promotional activity. We've reintroduced car park tariffs in mid-June. And car park usage has been running at around about 50% of the prior year, but improving week on week. Snozone made a strong start to the year, but the impact of COVID hit from early March, culminating in needing to close the operations on the 20th of March. We reopened in early August, but have reduced hours and capacity to maintain social distancing. And net group costs have reduced by GBP 0.1 million, equivalent to about a point -- a 5% saving, without offsetting inflationary pressures. Rent collection. We've collected 69% of the rent due in the year-to-date. Across Q2 and Q3 combined, that represents collection of 54%, an improvement of 14% since we updated the markets in early July. This reflects a big business-wide initiative, utilizing relationships at all levels of the company. There's only about 6% of our rent where we do not expect any recovery and have, therefore, provided in full. Over half of the amounts that are outstanding are due from large, well-capitalized household retailers. We're fully in agreement with the government code of conduct that says those who can pay should pay. That enables us to focus support on the retailers who need it the most, typically are smaller independent operators. Restructuring activity. We've been exposed to only 3 of the 9 CVAs that have occurred up to the end of August in 2020. If those proposals are approved, it will lead to an estimated loss of income of about GBP 0.6 million per annum, impacting 10 units across the portfolio, and this is equivalent to about 1% of passing rent. The impact of administrations and the full year impact of prior year CVAs has been about GBP 1 million of income in the first half of the year. In addition, we took a one-off write-off of GBP 1.4 million tenant incentives of retailers who've entered administration. Debenhams represents about GBP 0.8 million of the GBP 2.4 million total. As noted, COVID-19 has exacerbated industry-wide pressures on retail property valuations. This is driven almost entirely by sentiment, with no functioning investment market or comparable transactional evidence. The trend of London assets performing more robustly has continued, with our 3 London assets declining by 11.8% versus 21.4% for our other regional assets. This reflects superior operational performance, a better strategic fit, but particularly strong alternative use underpins, illustrated by Walthamstow Residential and Ilford Medical Centre, both of which Lawrence will touch on further in the presentation. During these difficult times, we have prioritized the preservation of cash, maintaining almost all the proceeds from the equity raise in December 2019, including the GBP 45 million that we had earmarked for the repayment of debt. When lockdown broke, we put those discussions on hold. And while it remains ultimately our intention to use this to reduce debt, we think, at this point in time, maintaining significant levels of central cash is vital in terms of the stability of the group, enabling us to continue with capital expenditure on key strategic and income-driving projects and providing contingency in the event of another lockdown or period of heightened trading disruption. We've been working closely with our lenders on our 4 nonrecourse asset-backed loan facilities to stabilize the position on each of the loans while minimizing the impact on central cash. On Luton, we're mindful that while the loan is not currently in default, the valuation is below the covenant levels. And we've been in detailed discussions, which are ongoing, with the lender about a series of amendments to stabilize the asset beyond the short term. On Hemel, we're working with the lender to reflect our evolving plans for the asset, with the cinema project currently on hold given the significant disruption, particularly to the leisure sector. On the Four Mall asset and Ilford loans, we've obtained waivers on the income covenants for the rest of 2020, and on the Four Mall asset loan, we're in discussions for longer-term covenant relaxation, although noting that the opportunity of crystallizing value from the Walthamstow Residential project will provide an option to delever that loan. And in terms of our preservation of cash, with that in mind, we have taken the decision to suspend the dividend until markets improve. We've had constructive dialogue with HMRC about the potential to extend our REIT deadline, or even if this is not extended, the tax that would crystallize at the end of the year would only be GBP 1.4 million. So finally, in summary, while COVID-19 has and continues to have a material impact on our business, we are in a robust position. We have the support of our key stakeholders, including the lenders of our long-term debt; we've maintained high cash reserves, providing stability and flexibility to the group; and we've demonstrated a strong operational resilience, which Lawrence will provide further details on now. Thank you.

Thank you, Stuart. I'd like to take the next few slides to walk you through our operational performance in more detail, starting with the number of stores we have open and trading today, which, as I mentioned earlier, is 96%. I'd like to first acknowledge that, that does not happen by accident. And it's a result of enormous team effort across all of our business, whether it's our central support offers or down in our shopping centers and, of course, the engagement with our retailers. But why do we think this is important and a lead metric? And the reason is threefold. Firstly, this is our customer proposition, the service we provide to our local communities. Secondly, it's the support we provide our retailer customers to assist them in remobilizing their business, and we're seeing great momentum in that. Many of them are reporting to us that sales are ahead of expectation. By assisting our retailers in generating sales and supporting their P&Ls, we improve our ability to collect rent. If we turn now to footfall. Once again, we're seeing very strong signs of the momentum that I was talking about earlier. We're seeing a recovery in footfall numbers. We're currently traveling at about 3% growth per week, about 75% last week of previous year's footfall, a significant rebound following the lifting of the government restrictions, and that's translating to about 3% growth per week. During August, we were 7% above the national index, and we believe that's directly related to the nature of our retail assets, community shopping centers that favor people who want to shop locally. We're definitely seeing a trend of more people working from home and shopping more locally during the week. The figure's just off the press. Last week, we were at 73% of the same week last year, which we think is an impressive performance. Turning to rent collection and arrears. Once again, this is a story of momentum and recovery. We've collected about 14% of rent since we last updated the market. And our Q3 collection is running at just over 60%, which we think is a great achievement. I mentioned earlier, we've refocused our leasing teams during the lockdown period with our operations team and our rent collection team, recovery teams to engage very deeply with our retailers. And we've provided support to our independent and smaller retailers, whilst taking a robust position with the retailers who we believe can afford to pay. Turning now to leasing. One of the concerns that we had going into lockdown was the status of the leasing transactions that we had already commenced. Would they proceed? Or would they be put on hold? I'm pleased to say that 2 of the important deals in the portfolio, the Matalan and the Pure Gym transactions into the former BHS space in Maidstone have both proceeded. We were able to continue our construction and lessors' works during the lockdown period in accordance with the government restrictions. And I'm pleased to say that Matalan took position a few weeks ago, and that Pure Gym will be taking position during the course of this month to fit the premises out. This gives us confidence in the community shopping centers and Maidstone, in particular. And also pleasingly, this is the last of the BHS stores that we needed to lease. You'll be aware that about 50% of the BHS space has been leased nationally. We're very pleased that we're approaching 100% with these transactions. The first half was really a story of 2 periods. Q1, where we benefit from enormous momentum coming through from a quiet Q4 last year due to the election and the uncertainty that created. Then we had the second quarter, which was really impacted by lockdown as retailers focused on protecting their existing businesses rather than engaging with us about new locations or reformatting existing locations. The net result was that we did 24 deals during the period, about GBP 1.5 million in income, with a positive leasing spread on new transactions of 9.5%. I'm deeply encouraged when I look at our leasing pipeline. We're seeing real engagement from retailers around our community shopping center locations. We have 28 new lettings in the pipeline, whether they're signed deals, solicitors-instructed or terms agreed. And the leasing spreads, I'm pleased to say, are consistent with what we saw in the first half, about 9.5%. We've got 13 renewals in the pipeline and in total, it's about GBP 1.8 million. This gives us confidence in our platform moving forward. So turning to the community strategy, and what have we learned over the last 6 months. One of our key lessons has been that merchandising and remerchandising is critical to the success of a community shopping center. We call them our merchandising pillars, and there's 6 of them. And that's really the core categories that we need to focus on to ensure success as a community shopping center venue. They are supermarkets, health care and pharmacy, food and beverage or grab-and-go, fresh food and independent grocery, services and general merchandise and what we call everyday apparel. And if we can get these core categories in place within our community shopping centers, that gives us a great platform for success. Excitingly, we have a workbook of future projects, which we believe, not just reflect the community strategy, but also reflect potential changes in customer behaviors and attitudes as a consequence of what we've been through. The first of those is in Walthamstow. As you will recall, last summer, the center was affected -- heavily affected by a fire. It destroyed the former 1980s food court that we had in the shopping center. And we had a decision to make, was to use the insurance to replace what was there or to take everything that we were learning and had learned about express food in community shopping centers. As you'd appreciate, it changed a lot in 20 years. And we saw an opportunity, and we've seized that opportunity, I'm pleased to say. We've not replaced the base building in the way that it was. We've created a new industrial-type structure. We're putting a food market into that area, like a food hall, with independent operators, and those independent operators will have 3 key areas of focus. One will be takeaway food, which we're seeing as a growth market in our shopping centers. As more people are working from home, the requirement for grab-and-go food has increased. We've certainly seen that. Secondly, it's food to eat in with tables and chairs. And thirdly, it is an opportunity for us to capitalize on the growth in food delivery services, for example, Deliveroo or Just Eat. We've had very strong engagement from operators around the food hall opportunity, both independent operators and also from food hall master operators who would look to take a lease over the entire space. Continuing with the theme of food. In Luton, we have, as we've announced previously, signed an agreement for lease with Lidl to take the ground floor of the former Marks & Spencer store. That new Lidl store will be directly adjacent to a fully refurbished Tesco supermarket. And we see an opportunity to create a series of fresh food kiosks sitting between the 2 supermarkets, offering specialty grocery items. We're progressing with that opportunity, we've got strong retailer demand, and we believe this is something we could roll out across our other centers, obviously tailored to the demographics and customer requirements in each of those locations. Health care is another key area of focus for our business, and I'm pleased to say that we've made excellent progress over the last 4 or 5 months with the NHS at Ilford and the flagship 20,000 square-foot medical facility. We all know that the NHS are very focused on lightening the load on the accident emergency facilities within major hospitals, and this is part of that strategy. This is a destination service within our shopping center. It doesn't need to occupy prime space. It has, we believe, enormous application across our entire portfolio, and I'm pleased to say that we're in discussions with 3 of our other centers for a similar facility. Turning to residential. Our flagship residential project in Walthamstow, where we have a planning consent for 500 apartments and 2 towers for build-to-sell, we announced earlier in the year that we were moving through a process to select a residential partner. I'm pleased to say that we have selected a preferred partner, we've agreed heads of terms with that partner, and we have, together, launched a planning application to convert the existing consent, from develop to sell, to develop to rent or PRS. We've launched that application, we've worked very closely with counsel and Transport for London over the last 5 or 6 months to bring that application forward. It's now with counsel. We're expecting determination in Q1 next year, which will trigger a capital payment of circa GBP 20 million back to the business. So summarizing our strategy. In 2017, we set out to what we call redefine or define the community shopping center. We've developed a deep understanding of the key success factors for a community shopping center. And we believe our asset class is far better known today than it was 3 years ago and understood we've done an enormous amount of work in repositioning our assets, whether that's through investment with our CapEx program and remerchandising, whether that's through general leasing activity or whether that's through operations, marketing or investments in capturing data or research across our portfolio, developing a deep understanding of how we need to position these assets into their local communities. Importantly, we continue to invest in our management platform. We've decentralized our business to aid decision-making, to make us more agile, and we continue to invest in further specialization back into our platform. And we believe, if we can continue to deliver on all of these, that we'll enhance stakeholder value over the medium to long term. So in summary, our central cash provides financial stability and flexibility to continue to invest in our assets. We believe we've delivered today a set of results which shows strong relative performance. We believe the community shopping center strategy remains relevant. We continue to focus on supporting our teams and the communities that we serve. We benefit from support from our major stakeholders, including shareholders and lenders. And we've made significant progress on our key initiatives. I'd like to thank you for your time and hand across to Q&A. Thank you.

[Operator Instructions] As there are no questions at this time, I would like to turn the call back to Lawrence Hutchings for any closing or additional remarks.

Good morning, everybody, and thank you for your time on our results. We've had some feedback that some members of the audience had trouble with audio feed. If that's the case, we'll be putting the entire presentation onto the website very soon this morning. You can access it from there. I think from Stuart and my perspective, we'd like to thank you all for joining us this morning. I'd like to just extend a further thank you. We know we've got quite a few of our stakeholders on the phone this morning, including our lenders, and Growthpoint, representatives of Growthpoint, on the call this morning. We'd like to thank you for your support. And I'd like to reinforce our support and thanks to our team for their incredible effort over the last 4 or 5 months during what has been an incredible journey and a challenging one, but we're pleased with where the business sits today, and we look forward to engaging with you further over the coming weeks. Thank you very much for your time. Thank you.