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

Good morning, everybody, and welcome to our 2021 half year results presentation. Sadly, we're not presenting live today. However, we will be taking Q&A live straight after this recorded presentation, which we're looking forward to. I'm joined today by my co-presenter, Stuart Wetherly, our Finance Director. And we also welcome David Hunter, our Chairman, who is in the audience, as are members of our Board. And to our widest centers and support office team who've joined us today, welcome. The team has worked incredibly hard and diligently over the last 18 months to deliver strong operational performance, which is the backbone of our business. I am very proud of the determination and sacrifices they have made during the first half of the year. We are continuing to manage the business in a prudent and disciplined way. Turning to the headlines. I'm pleased to report our occupancy remains resilient at 90%. Rent collection has increased considerably from our reported full year results in March to 83% for 2021 against our full contractually billed amount. If we include deferrals and payment plans, we move up to 86%. And further, adding the recoveries, we have line of sight too, this increases to 90%. This trend reinforces the importance of our centers and locations to our retailer customers. 18.3 million people have visited our shopping centers in the first half, tracking above the national index. We've signed 54 leases at a premium to ERV and passing rent. And there are further 45 leases in the pipeline. I'll provide more detail about leasing -- the leasing market later in this presentation. We consider these to be solid operational metrics, and this is the key reason we continue to benefit from high levels of stakeholder support. Before I provide more detail on our operational performance, I'd like to hand over to Stuart to go through the financial details. Thank you, Stuart.

Thank you, Lawrence, and good morning, everybody. Our focus over the last 6 months has been on navigating what continues to be a very challenging business environment. We are pleased to work through this, thanks to the support of our shareholders, lenders and staff and stand here today cautiously optimistic that the worst of the operational disruption is behind us. Turning to the results for the 6 months to 30th of June. The national lockdown meant that a majority of our retailers were unable to trade for more than half the period and social distancing measures and ongoing consumer concerns impacted demand thereafter. This has resulted in NRI and adjusted profit falling to GBP 13.4 million and GBP 2.3 million, respectively. In light of the continuing level of uncertainty and conscious of our gearing levels, we are not declaring a dividend and plan to maintain this position until such uncertainty is resolved. Property valuations have fallen by GBP 42.4 million or 7.5% on a like-for-like basis, excluding the disposal of a parade of units at Hemel Hempstead. This has resulted in a reduction in NAV to 113p per share. The statutory loss for the period was GBP 41.3 million driven primarily by the valuation decline. The loss has also been impacted by GBP 3.7 million provision for tax in lieu of meeting the minimum PID requirement for the 2019-2020 financial years. We had expected to benefit from a relief applied when there is a legal impediment that precludes paying a dividend. However, having had several rounds of discussion with HMRC, they've ruled the provision will not apply to us. This is due to the presence of Jersey companies in our REIT group and the rules at this point in time only technically relating to U.K. entities. We've made a change in this reporting period to split out our shopping centers into investment assets and managed assets. The split classifies our 4 asset-backed loan facilities which are all nonrecourse in separate ring-fenced SPV structures without any cross-default provisions. Investment assets represents the centers in The Mall loan facility, namely Blackburn, Maidstone, Walthamstow and Wood Green alongside Ilford. These being the loan facilities where we retain net equity. Managed assets consist of Hemel Hempstead and Luton, being the loan facilities where the current property valuations are lower than the outstanding debt. We, therefore, no longer have any net equity and the substance of our involvement is effectively as a manager. Moving to a summary of adjusted profit for the period. NRI from our investment assets increased from GBP 9.7 million to GBP 9.9 million. This has resulted in a marginally improved contribution of GBP 4.4 million. Contribution from managed assets has fallen by GBP 2.1 million. This is due primarily to the impact of Debenhams and M&S vacating at Luton and higher void Hemel Hempstead. This follows our decision to withdraw from proceeding with the potential cinema development. Contribution from managed assets will improve on a relative basis in the second half of the year with the opening at Luton of Lidl and VFM Furniture from the former M&S and Debenhams units, respectively. In total, contribution from shopping centers was GBP 4.8 million. This is significantly down on the equivalent for 2019 due to lower car park income, higher bad debt charge and the cumulative impact of CVAs and administrations. Snozone was unable to trade in the U.K. until the 12th of April and was impacted by social distancing restrictions thereafter, which reduced slope capacity. Results have benefited from the receipt of a GBP 2.5 million COVID insurance claim from the pandemic policy precedently taken out in 2017. A recent revenue performance of the U.K. operations is encouragingly trading back towards 2019 levels. The increase in net group costs largely reflects one-off reductions in 2020 related to a temporary board pay reduction and no payment of bonuses. There is also a repositioning of costs from NRI as a result of more leasing activity being undertaken in-house with less reliance on external agencies. We've made good progress working with our retailers to resolve debt arrears. Rent collection for the 2021 year-to-date is currently at 83% of the amounts originally billed, improving to 86% if you add rent deferred as part of agreed payment plans. This is an improvement of 13% since we updated the market at the end of June. Rent collection for the 2020 financial year has also now improved to 88% from 80% when we reported results in March. We've been encouraged that in the vast majority of cases, retailers are willing to engage and are seeking to agree amicable resolutions without the need for resorting to further legal process or arbitration. Moving to valuations. Sentiment has again been the major driver of declines as there remains a low level of transactional evidence. Our investment assets fared relatively better than the portfolio as a whole and other market benchmarks. This is reflective of the relative resilience of the community offering and the London weighting of the investment portfolio. The approximate halving in the rate of decline and recent improvements in sentiment provides some cause for optimism that the market may be beginning to stabilize. Moving on to group debt. We have continued to prioritize the preservation of cash through this disruptive trading period and have maintained over GBP 55 million at the center equivalent to approximately 1 year's contracted rent. We've been working closely with our lenders to agree the most appropriate way forward on a facility-by-facility basis. On The Mall facility, we have further extended a waiver of all covenants until the interest payment date at the end of January 2022. This provides time to seek to conclude the detailed discussions with the 2 lenders regarding a long-term solution for this facility. On Ilford, we have secured a waiver of the covenants until the end of April 2022, linked to the new job center letting in part of the former Debenhams unit. We have also agreed outline terms on a longer-term modification of the facility to accommodate the planned medical center project and the reletting of the rest of the Debenhams unit, which if they proceed, the group will partially fund from central cash. On Hemel Hempstead, we completed the sale of the Edmonds Parade block in June, realizing proceeds of GBP 4.5 million, the majority of which we used to reduce the loan balance. We've been notified by the lender that they are in the final stages of selling the loan as part of a portfolio of other unrelated debt facilities. Financial covenants on the loan facility are currently deferred until the October IPD. We are due to meet with the prospective new lenders shortly to discuss whether it's in the group's interest to retain an ongoing involvement in the asset. On the Luton loan facility, we've agreed terms on a further extension to the waiver until the January 2022 IPD. We have also advanced discussions about a longer-term arrangement involving resetting the covenants and asset management agreement in return for instituting a mechanism to apply surplus cash generated for the gradual reduction of the loan balance. Overall, net LTV has increased to 72% or 61% excluding managed assets. In summary, while COVID-19 has again had a pervasive impact on results for the period, we remain in a stable position. This is by virtue of the structure of the group and our loan facilities, our strong central cash reserves, the support of our key stakeholders, including the lenders of our long-term debt, and our operational resilience. With the recent momentum in operations and signs of the investment market perhaps beginning to stabilize, this gives us a solid base to begin determining the best approach for addressing debt levels and shaping the group's future to capitalize on its strength and expertise. Thank you. I will now hand back to Lawrence to give you more color on the wider business.

Thank you, Stuart. I would like to take a few minutes to walk through our operational performance in more depth. This performance underpins our confidence in the community strategy. We are confident in our assets in today's environment. As a reminder, we launched the community strategy in December '17 in full sight at the time of the structural changes taking place in our industry. Like everybody, we could not have foreseen COVID or the acceleration in structural change the pandemic has created. Nevertheless, we remain confident that the community strategy is the right one. We have learned that we need to be proactive and continue to reposition and remerchandise our centers to remain relevant to our communities over the medium to longer term and that management matters. Our integrated multidisciplinary platform continues to deliver sector-leading results and is critical to asset level performance. We need to be customer-centric. In a competitive environment, being successful at local level is all about our communities and placing them at the heart of everything we do. We are seeing a reactivation of our high streets and shopping centers post the COVID lockdowns. This is demonstrated by CACI's activity tracker data to the left of this slide. As you can see, the yellow line represents the entire U.K., which has benefited because this index includes data on things like seaside venues, leisure and outlet malls. Focusing on the 2 blue lines, we can see from the teal blue line at the top, representing local shopping centers, that they've recovered very well when compared to city and regional centers represented by the dark blue line. The shift to local is clear as people have discovered or in some cases, rediscovered shopping for goods and services within their communities. Moving to the right-hand side and our own footfall performance. In April, when stores reopened, we saw a strong rebound as we did last year when lockdown ended. Subsequent to this initial reopening and in response to people's caution from the rising infection rate in our communities, we witnessed a slight reduction in footfall. We are pleased to say that this appears to have stabilized. And feedback from our teams and retailers is that average transaction values remain higher, guests are typically visiting more stores per visit, producing higher average sales than the footfall numbers would suggest. Retailers are reporting sales approaching and in some cases, exceeding the sales numbers seen in 2019 as supported by national retail sales data and listed retailers reported sales for the period. In our minds, the key to driving footfall and a wider recovery is our customer or community proposition. Our ability to evolve that offer and to accelerate remerchandising from discretionary to nondiscretionary retail and services. I'm pleased to say we've made more progress over the reporting period. 71% of our centers now have grocery representation, and there are further discussions on foot. This number grows if we include grocery provision in the immediate vicinity of our centers like Ilford, where Lidl adjoins our main entrance or Walthamstow and Blackburn where supermarkets are located within a few minutes walking distance of our center. Pharmacy is now our largest income segment, with the 2 market leaders in first and second spot of our top occupiers list. And we further reduced our exposure to discretionary categories, including fashion, which is down by circa 7%. We have achieved this by increasing our exposure to new retail and services, which is also further diversifying our income. Examples of these include job centers, medical, gyms, professional suites, dark and gray kitchens through our partnership with REEF, new food halls and fresh food markets. And of course, our successful family zones. Our leasing performance is a key focus for our business, facilitating this remerchandising and repositioning and ensuring our centers are vibrant trading places. But they are tailored into their local communities whilst driving income of our affordable GBP 12 per square foot average rents. It's great to see that we've had a strong first half to the 30th of June 2021, with 54 transactions in total, equating to GBP 1.4 million and an increase of 36% to the previous passing rent and 19.3% to ERV. Turning to our leasing pipeline. From the 30th of June onwards, we have seen positive momentum in both retailer demand and leasing transaction volumes as we continue to benefit from the increased certainty that reopening in April has created. We have signed a further 38 leases and have another 7 where lawyers are instructed, and our team have additional deals in the pipeline. In total, 45 deals are either signed or lawyers-instructed amounting to a further GBP 1.9 million in headline rent. Our continued leasing performance will assist us in rebuilding occupancy from the current 90% back to 93% when we include the immediate pipeline and beyond assuming the further leasing transactions, which are in advanced discussions. Let's delve into leasing in more depth to provide some color on the trends we are seeing in the occupational markets and some of the drivers behind our leasing outperformance. We are seeing a continuation of the polarization that we spoke about at our full year results in March, principally between large-format, anchor and marquee retailers, and the independent start-up and smaller format stores and kiosks. We were seeing a focus specifically around personal services and grab-and-go food. We have spoken previously about the need to tailor our offer to the local communities that we serve and to finding the right balance between national brands and local independent retailers who have a deep understanding of their community, which is a key to our success. There are some examples of these local and independent retailers in smaller format stores and kiosks on the right. I'm sure you will agree that from a presentational standpoint, they look superb. And the feedback is they are trading very well. We believe in growing the next generation of retailers and are proud of the support and guidance we are able to provide through our investments in presentation, in-store design through to business planning and retailing skills. The commercial terms are attractive also, especially against our average GBP 12 per square foot in-place rents. Working with these retailers is encouraging us to think and operate differently. We're investing in our leasing capability and bringing different skill sets into our business to assist. Many of our new team members don't have real estate backgrounds. And they are actively out on the ground in our local trade areas, sourcing retailers that fit with our research and data-driven knowledge of these local communities. It is exciting to be playing an important role facilitating and supporting these new retail and service entrepreneurs. I'm pleased to say that we're making very good progress with our marquee, large format and new anchor retailers. These retailers support our community strategy. They generate footfall and frequency of visit, driving retailer sales and thus enabling us to achieve better leasing outcomes across the center. For example, in Ilford, where we are remerchandising the former Debenhams store. We've already leased 20,000 square feet at the upper level to the Department of Work and Pensions for the Job Center Plus format, following on from our success with our format at Walthamstow. In addition, we have agreed deals with the DWP in Blackburn and soon Wood Green. On the middle level, we've agreed terms with TK Maxx to relocate thus enabling us to remerchandise their current space, which is directly adjacent to the new Crossrail station and is well suited to be converted back into a mall, connecting the lower level or ground floor where we're advancing discussions with grocery operators. Elsewhere in the center, we continue to progress on plans for a modern flagship health care facility with the NHS, comprising 20,000 square feet on the top floor. And in Walthamstow, we've received 2 proposals from potential food market operators for the new food hall in the former food court that we've completely rebuilt after the fire. Turning to residential and mixed use. We've seen further progress on Walthamstow since our last update. We've received validation of our planning from the GLA, and we are now negotiating Section 106 agreement with the council, which will trigger our formal planning consent. Just to remind everybody, this is a twin-tower 538 residential unit development for PRS. It includes 47,000 square feet of new commercial space and importantly, an entrance in the shopping center down to the existing Victoria Line Station below. Planning consent is a key milestone and will allow us to unlock a GBP 20 million capital receipt from our residential partner, Long Harbour, in the early part of 2022. As much as we have learned over the last 4 years on residential projects, we have come to understand that large-scale urban developments with the many infrastructure interfaces they have is a very complex, specialized and resource-intensive business. This has encouraged us over the past 4 years to engage in detailed discussions with a variety of residential developers, owners and managers as potential partners. And this is how the Long Harbour relationship came about. Out of these discussions has formed a new partnership with the Far East Consortium, who have extensive operations here in the U.K. as well as across Asia and Australia. FEC have the requisite skills and resources to unlock value in our portfolio and the skills of our respective organizations are highly complementary. Our focus on creating places with the infrastructure that supports making communities desirable places to live, work, dine and shop combined with FEC's experience and resources is a powerful combination. We are excited to announce the partnership working together to unlock plans for mixed-use projects that create additional capital value for both our portfolio and adjoining real estate, focusing initially on our London estate. In addition, we'll be working with the FEC team to look at retail opportunities within their existing development pipeline; and lastly, to investigate investment and development opportunities on new acquisitions, that may involve the repurposing of part or all of the existing shopping centers for mixed-use development in greater London and other major U.K. cities. Nick and the team have done a great job at Snozone. Having been closed for their peak trading quarter and reopening in mid-April, then subject to further restrictions due to social distancing, they continue to demonstrate discipline in operating the business. In light of the challenges, revenue in recent weeks has been close to 2019 levels and EBIT is up due to diligent cost management by the team. I'm also pleased to report that the additional slope we took on in Madrid, which is an established business is performing well and in line with the business plan. We remain focused on growth opportunities for Snozone on a similar basis to Madrid, where we are managers of existing facilities, leveraging our sector-leading experience and award-winning management. Turning to ESG. We've doubled down on our efforts on this important issue. We've significantly reduced power and electricity consumption and remain on track to deliver against the targets in the Paris accord or better. We've got to 0% of our waste going back into landfill, and we've saved a significant amount of water through active and careful management. In Luton alone, our water saving over the last year is the equivalent of 23 Olympic size swimming pools. In addition to the environmental, we've developed community wheels of support for all of our shopping centers. We literally undertake hundreds of community events across our portfolio every year, supporting many good causes, including the ones mentioned on this slide. We believe our strategy continues to serve us well and supports our robust operational performance. We've continued to make significant progress on the initiatives around repositioning and remerchandising our shopping centers. We've invested in our leading management platform and remain community focused and customer centric. There is no doubt COVID has accelerated long-term structural changes in physical retailing. However, physical retailing remains important and relevant as evidenced by our footfall, rent collection, leasing and occupancy statistics. The community center strategy and the focus on nondiscretionary items is proven. Our centers form essential parts of community infrastructure at the heart of these 15-minute neighborhoods. The increased specialization and operational intensity around retail assets benefits our strong internalized management platform. However, we acknowledge the continuing pressure on our balance sheet and discussions are ongoing in relation to a long-term solution. Importantly, our key stakeholders remain supportive. I am very proud of our team's efforts especially considering the continuing structural and COVID-related headwinds. I particularly want to acknowledge the rigor and focus that everybody here at Capital & Regional brings to the business and as you have heard from Stuart, the disciplined approach we're applying to our financials. Thank you very much for your time this morning.