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

Good morning, everybody, and welcome to our 2021 full year results presentation. I'd like to acknowledge our audiences here at Numis and on our webcast this morning. It's great to be with you in person after 2 years of doing these presentations down the line, on a camera from our offices. I'm joined this morning by our Group Finance Director, Stuart Wetherly. Today is a high-level overview. However, we have allowed enough time at the end for Q&A for those of you who want to go into more detail. The last 2 years have been challenging for our sector and for our business. Despite everything that's been thrown at us, it's comforting to see how resilient our community shopping centers and strategy have been. We believe the community strategy is as relevant today as it was in December 2017 when we launched, and this is evidenced by the momentum we're seeing across our business. Turning to the headlines. 47.7 million people visited our shopping centers last year. Our footfall was 5.7% ahead of the National Index. Our focus on nondiscretionary need space shopping was a direct contributor to this footfall outperformance. Our rent collection has continued to improve. We've collected 93% of a contracted rent for 2021. We're seeing further improvement this year, and we've collected 95% of contracted rent for the year-to-date. Our occupancy has also increased from 90% at the half year to 93% today. This is a product of all the leasing activity during the second half of last year. In total, for 2021, we completed 143 leasing transactions at an average premium to both the previous passing rent and to our ERVs, reinforcing the importance of our shopping centers, to our retailer customers. Further, for the year-to-date this year, we've signed or agreed terms with a -- on a further 48 leasing transactions in our leasing pipeline. Importantly, we're seeing valuations stabilize during the second half of last year, both Q3 and Q4. We've reached a point of stability where we can rebuild occupancy, income and value. We've started '22 in a strong position, and we're excited by the challenge ahead. This graph demonstrates the degree of disruption that we've seen in our business over the last 2 years. It's clear the most significant impacts took place in 2021, as highlighted by the blue line. The positive news is that footfall rebounded very quickly in April and grew throughout the summer and into the autumn. The rebound in '21 was more dramatic than we saw in 2020 following the lifting of restrictions and lockdown. Towards the year-end last year with the emergence of Omicron and the Plan B measures, footfall was impacted again. However, this year, we've seen a return to growth as restrictions have eased and people have become more confident. The other notable point from this graph is the gray bars, and they demonstrate the speed at which retailers mobilize to reopen their physical stores. And that mobilization was faster than it was in 2020, following the lifting of the restrictions. These factors reinforce the importance of physical retail and that physical retail remains relevant today. With a restriction-free year, we're expecting footfall to return towards pre-pandemic levels. Based on what we are seeing, the numbers and the messages back from our retailers, it's all indicating a recovery of our business for 2022. But let's see how this disruption from '21 plays into the numbers. Over to you, Stuart.

Thank you, Lawrence, and good morning, everybody. 2021 was a challenging but important year for C&R. Trading remains significantly impacted by restrictions that ran through most of 2021. But in the second half of the year, we were able to complete an equity raise and debt restructuring to stabilize the business and puts us in a materially better place than we were 6 months ago. Turning to the results for the year. The national lockdown meant that a majority of our retailers were unable to trade for the first quarter of the year and social distancing measures and ongoing consumer concerns impacted demand thereafter. This has resulted in NRI and adjusted profit falling to GBP 29 million and GBP 8.1 million, respectively. These are reductions against the 2020 comparatives that benefited from a GBP 4 million impact of a surrender premium in Luton. Net asset value increased by GBP 1.3 million, driven by the net results of the adjusted profit movement, the decline in valuations in H1, the impact of the GBP 30 million equity raise and the benefit of acquiring GBP 100 million of debt at a discount of GBP 19 million. For most of the same reasons, the IFRS loss for the year narrowed to GBP 26.4 million from GBP 41.3 million at the year-end -- sorry, the half year. The reduction in NAV and EPRA NTA per share reflect the impact of the new shares in issue from the equity raise. Group net debt has reduced significantly since we last reported as a result of several factors. the effective deconsolidation of Hemel Hempstead and Luton, the impact of the equity raise and debt restructuring and the realization of value through disposal of the Maidstone House office block that we completed in December. This is reflected in improvement in net LTV from 65% at December 2020 and 72% at 30th of June to 49% at this year-end. And the Walthamstow Residential receipt, which we expect to receive in Q2, will reduce this down further to around 46%. Mindful of having recently raised new equity and to help further reduce debt levels, we're not declaring a final dividend but plan to resume dividend payments with the announcement of our half year results in the summer. We reclassified our Luton and Hemel Hempstead centers as managed assets at the half year, reflecting the substance of our ongoing involvement. At the year-end, we have designated them as held-for-sale. This reflects the expectation that we will complete, in part or whole, some form of restructuring or exit of our equity position in the short to medium term. The classification of held-for-sale effectively ring-fences the assets within our results. The property values, debt and other assets and liabilities were excluded from our balance sheet metrics at the year-end and instead presented within the held-for-sale classification. From the new financial year, we will no longer include equity income from these assets within our adjusted profit. Our net liability on these ring-fenced SPVs is effectively capped at 0, but we will not write up NAV until a transaction crystallizes. Excluding the managed assets, we'd see our NAV rise by about 12p to 114p per share. Moving to a summary of adjusted profit for the year. NRI from our investment assets increased from GBP 20.2 million to GBP 21.5 million, primarily due to a lower bad debt charge following the progress we've made on rent collections. Along with the reduced interest cost following the mild debt restructuring, this has resulted in contribution from investment assets, increasing from GBP 8.8 million to GBP 10.7 million. Snozone recorded an EBITDA profit for the year of GBP 0.8 million. This benefited from a receipt of a GBP 2.5 million COVID insurance claim from a pandemic policy taken out in 2017. Encouragingly, the performance of Snozone in recent weeks has been trending around 2019 levels. Fixed central overhead reduced year-on-year by GBP 0.2 million, while the movement on variable remuneration rises from it being waived in 2020. Contribution from managed assets fell by GBP 6.2 million. This is due to the GBP 4 million benefit of the surrender premium mentioned in 2020, alongside the impact of Debenhams and M&S vacating at Luton and higher void at Hemel Hempstead. As noted in the new year, we will no longer include this contribution within our adjusted profit. Turning to rent collection. We made excellent progress working with our retailers to resolve debt arrears. Rent collection for 2021 is now at 93%, including about 4.5% of rent deferred in payment plans. Only 1.8% equivalent to less than GBP 1 million remains outstanding from 2021 and is fully provided for in the year-end numbers. Rent collection in Q1 2022 is also off to a strong start, running at 95%, the only nominal amounts written off or conceded today. We're very encouraged that in the vast majority of cases, retailers have been willing to engage, and we've been able to resolve these amicably without resorting to legal or arbitration processes. Moving to valuations. After several periods of declines, it's been very encouraging to see evidence of valuation stabilizing in the second half of the year. Having fallen 6.4% in the first half of the year, our investment assets increased 0.8% in H2. We anticipate yields to be broadly stable in 2022, meaning income movements are likely to be the primary driver of future movements. On group debt, Mall facilities has materially benefited from the restructuring completed in November. The facility is now consolidated with a single lender Nuveen into 2 tranches. The GBP 35 million advance to assist with the debt restructuring is without prepayment penalties to facilitate early redemption, and we've already paid down GBP 7.1 million post year-end from the Maidstone House proceeds and plan to reduce this further when the Walthamstow residential receipt comes in. As part of the restructuring, all default covenants on the Mall will waive for 2 years until November 2023, cash track covenants waived or modified until May 2023. On Ilford, with the existing waiver expiring next month, we are in process of finalizing a longer-term modification of the facility to provide a mix of covenant waivers and relaxation through to the end of next year. This will help facilitate the planned developments of the medical center project and the remerchandizing of Debenhams, which the group will help fund from its central cash reserves of more than GBP 30 million. As this slide shows, we made critical progress in the second half of the year, reducing the group's key net loan-to-value ratio from 72% to 49%. The key drivers were: firstly, reclassifying Hemel Hempstead and Luton to be managed assets, benefiting from them being in ring-fenced SVP structures with no recourse to the group. Secondly, the restructuring of the Mall debt. We acquired GBP 100 million of loan facility from NatWest for GBP 81 million. Given we funded part of this with a GBP 35 million loan from Nuveen, it means that the effective discount on the GBP 65 million bought back was 29%. We also raised GBP 30 million of new equity in line with the prevailing share price when we announced. Unrealized GBP 7.1 million from the Maidstone House Office sale. Overall, this has reduced net LTV to 49%. And as noted, the Walthamstow residential receipt, which we expect to receive in Q2, will reduce this by more than 200 basis points, down to a pro forma 46%. The improving liquidity in the shopping center market presents potential opportunities to make further progress this year. So in summary, 2021 was a tough but very important year for C&R. The actions taken in the second half of the year to restructure and recapitalize our largest and core loan facility has returned the business to a sound footing. This allied to improving momentum in operating metrics and signs of the investment markets starting to stabilize put us in a good place to start 2022 and to enable the group to capitalize on its strengths and expertise. Thank you. Now back to Lawrence to provide more color on operational performance and the wider business.

Thank you, Stuart. We would never have volunteered for the necessary restrictions that are imposed upon our operations over the last 2 years. It has, however, provided a unique insight into what life without physical retail really looks like. The response from our communities, our guests, our retailers, excuse me, reinforces the role of the physical store in modern society. It's evident that both online and physical retail is -- have important roles to play in the distribution of goods and services. Physical store representation, both by category and by geography, is important to retailers. Our leasing numbers and the demand we're seeing supports this view. Our community strategy is now proven. The focus on local shopping, non-discretionary merchandise, including grocery, personal and professional services, is more relevant today than it has been at any point over the structural change that's taken place over the past 5 to 7 years. Our centers play an ongoing and important role in the communities that we serve. We've made considerable progress in the active repositioning of our centers, but there is more work to do. We're going to touch over the next few slides on how we're delivering this important repositioning. And one of our competitive advantages is our best-in-class management platform, and we continue to invest in this area. Importantly, at the heart of all of this is placing our communities at the center of everything we do. That is paramount. Footfall remains an important measure. I mentioned earlier that when restrictions were lifted in April last year, the rebound was dramatic. In fact, it was sharper than following the restrictions in 2020. As infection rates increased, we followed the advice. Then as confidence returned, we saw footfall start to build again into the autumn. The feedback we're getting from the centers and from our retailers is that whilst footfall is still below the '19 levels, that average transaction values have increased. Guests are visiting more stores per visit and spending more in each store, so average transaction values have gone up. And retailer sales, which are widely reported, support this position. We've maintained a solid base of footfall throughout last year, averaging 75% of the 2019 base year numbers. Interestingly, this performance varies greatly from 98% of the '19 numbers in some centers, all the way back to 75%. There are specific factors at play, which influenced footfall at a center level. For example, some of our centers, which have a vacant former department store, which is awaiting remerchandising or repositioning into community uses. This has had an impact of up to 10% in footfall based on our research. However, even in those centers, we are seeing very similar trends in footfall. We expect further growth in footfall as we've seen during the first couple of months of this year, consistent with our -- with the trends we're seeing in rent collection and occupancy as this year moves on. Moving into leasing. We've had increased investment and focus on our leasing in systems, resources and our relationships. It's delivered high numbers of transactions and positive leasing spreads. In fact, 2021 was a record year, 143 leasing transactions, and this excludes temporary lets. It generated GBP 5.2 million of additional income. Our leasing spreads were up 5.2% on the previous passing rent and 15.6% to ERV. And this reinforces the affordability of our GBP 12 to GBP 15 average rents, which we've consistently said. Our weighted average lease terms are 6.5 years or 4.8 years to a break. And delving further into our occupancy and leasing pipeline on the following slide. We've seen continued rebound in occupancy from 90% at the half year results last year to 93% after we converted the deals that were in our H2 pipeline last year. Looking forward, as of today, we have GBP 3.1 million in income, representing 48 leasing transactions, where we're either terms agreed, solicits instructed or we've signed deals. Retailer demand is being driven by our key community uses, both independent and national -- larger national chains. We're seeing retailers reassert their physical presence, relocating their stores into our centers into better pitches or reformatting or reconfiguring existing stores. We've got continued momentum in leasing. And we have confidence in rebuilding our occupancy from the current 93% back towards the 97% pre-pandemic. However, it's not enough just to lease a lot of shops. We need to be leasing shops to the right retailers, and they are the retailers who support our community strategy and positioning. Our relentless focus on getting our customer proposition right continues. Over the last 4 years, we've achieved considerable progress in remerchandising our shopping centers, aligning our customer proposition with the community strategy, tailoring to the needs of the local community, all of which are unique. Fashion representation has fallen by circa 13% since 2017. Encouragingly, food and grocery representation is now 14% of our income, and our income has continued to diversify. Our top 10 retailers, for example, the key #1 and 2 categories are one of our key community center uses, which is pharmacy. Other retailers in our top 10 include resilient value apparel operators like H&M, Sports Direct and Primark. These are stable businesses. And they've continued to maintain their presence in our community centers throughout. Confirming our evolution of mixed-use, council offices and government employment offices make up our top 10. Let's look in more detail on the sources of leasing demand and what this remerchandising is looking like on the ground in our centers. Starting with Medical Services. You will have seen the announcement that we made in January about the NHS diagnostics facility in our Wood Green Shopping Center. This is the first diagnostic center within a shopping center in the U.K., 6,000 square feet. We have further discussions on foot with the NHS for similar facilities across our portfolio. At Ilford, we've made really good progress in the last 3 months on our NHS primary care facility. It's 20,000 square feet on the top floor of the center, providing an array of doctors and medical services. We're expecting the AFL to be signed in the next 4 to 6 weeks based on current progress. We're proud to be supporting the NHS, bringing medical services to our easily accessible local community centers. These facilities will drive traffic throughout our centers and further diversify our income. In addition, they create adjacent merchandising opportunities around health and personal care, and they're accretive of our GBP 12 to GBP 15 average rents. Turning now to Personal and Professional Services. Optical, hair, skin and nails are all growth categories. We're seeing a combination of national and independent operators in this area, and importantly, a depth of demand, which is creating competitive tension and resulting in improved commercial outcomes. The investments in our leasing team are enabling us to identify the leading independent or national operators within each of our trade areas. We're either supporting a relocation or establishing a newer startup business within our centers. We're proud of the work that we're doing, supporting small and independent retailers, and some are now growing into additional stores within our portfolio and beyond. Turning now to Food & Grocery. We're responding to the increased demand for local fresh and catered food solutions. In some cases, people from working from home or simply this shift to people wanting to cook from scratch in their own houses. Many are start-up and SME retailers and mostly from our local communities. They understand the needs of our trade area deeply. 15 of our 89 lettings completed last year were in Grab and Go food. Examples include Miss Millie's, Subway and Lola's Cupcakes. Jamaica Blue is another example, part of the successful Muffin Break chain that opened their first store with us in Ilford, and it's trading very well. In addition, independent local operators in categories such as sushi, deli, seafood and meat providors. In this regard, we're seeing demand for our new fresh food precinct in Luton, adjoining the recently opened little store, which is trading well. In Walthamstow, our food hall is progressing. We now have selected a preferred operator after receiving 5 bids for the opportunity. We have a pipeline of fresh and catered food leasing across the portfolio. Focusing on mixed use. We've made solid progress to identify and unlock value through mixed-use, and that initiative has been ongoing over the last 5 years. We'll talk more about Walthamstow in a moment. It's producing capital receipts for the business, which is assisting in further deleveraging. Our residential project in Walthamstow has received unfitted planning consent, clearing one of the major transaction conditions with our partners, Long Harbour. We're working hard on satisfying the remaining conditions and making excellent progress. We're on track based on current progress to deliver capital receipt during Q2 this year. And that will release GBP 20 million to the business, but importantly, create 500 new homes directly above our shopping center. In Maidstone, we announced in mid-January that we sold the office block to the local council at book value. It was an important transaction for the business, releasing GBP 7 million as a capital receipt, but also because we had an imminent lease expiry with a council who is a sole occupier of the building. This releases further equity to pay down debt. And then on our strategic alliance with FEC, we're focused on unlocking value both within our existing centers around residential development. Additionally, with FEC, we're looking at the potential to rightsize other retail assets, which have a mixed use capability and require an element of community retail. These potential acquisitions would be led by FEC in the first instance. Turning now to ESG. We're proud of the excellent work that we do supporting local communities. We know from all of our relationships that these activities are really important to those communities. And therefore, they are essential to our DNA as community shopping center owners and managers. We need to be responsible corporate citizens in these communities. Last year, we supported 167 charities and undertook 163 community events, totaling 3,500 voluntary hours. These are long-standing and ongoing commitments. Our workforce engagement and staff survey results place us in the top quartile. We all will have seen the acceleration in the environmental agenda following COP26, and we are committed to reaching net carbon zero. We've established a pathway with support from the Better Building partnership and the Green Building Council. And we're working closely with the award-winning JLL ESG team to assist us in accelerating our journey to Net Zero. We have more work to do in this area, and we look forward to updating you at our half year results. Turning now to Snozone, our leisure business. Nick and the team have done a phenomenal job. They've faced similar but greater restrictions than the shopping center business over the past 12 months. Despite the challenges, we've delivered an GBP 800,000 EBITDA. Snozone remains a multi-award-winning leisure business. The team have doubled down on their ESG commitment, reduced their energy consumption by 12% and impressively, their gas by 63% versus the 2019 base year. We continue to look for capital-light growth opportunities for this business similar to the Madrid acquisition. We're seeing positive signs of recovery this year in both the U.K. and the Madrid business as restrictions have lifted. So in summary, we see greater clarity, the sectoral structural changes that have been taking place over the last 5 to 7 years. The pandemic has driven a reset in goods and services distribution platforms. Physical retailing, however, remains important and cost-effective. Consumers are voting with their feet for well-positioned local community retail. Retailer demand is recovering, specifically in our core community categories, which is supported by our affordable GBP 12 to GBP 15 average rents. Our centers are essential parts of community infrastructure. This proves our strategy and our ongoing investment to reposition and remerchandise our assets. We're seeing a recovery in investment markets, increased transactions and investor focus. This is supporting relevant retail asset valuations, including our own. This has resulted in a stabilization of valuations for H2, handing control of the business back to management, allowing us to convert income from our leasing pipeline into value. Our disciplined refocus, restructure and recapitalization of the business in November '21 delivered us hard-fought balance sheet stability. Further deleveraging through capital receipts at Maidstone and Walthamstow residential reduced LTV to 46%, and we're exploring other opportunities. The increased sector specialization on the back of this reset benefits specialist owner manager platforms like ourselves, and our internalized management is well positioned to capture this increased momentum that we're seeing in consumer, retailer and the investment markets. This creates opportunity to rebuild our income and importantly, our value. And as I mentioned at the start of this presentation, we are genuinely excited about the challenge that lies ahead. A big thank you to our teams, our key stakeholders and our retailer customers for their hard work, commitment and support over the last 12 months. This concludes the formal part of the presentation. I'd like to move to Q&A, and we're starting with the live audience here at Numis. Thank you very much. Any questions?

Miranda Cockburn from Panmure. Can you just talk a little bit about projects for the next year, how much capital expenditure you're expecting and also, from the sort of bigger picture from the environmental perspective, what kind of money you think you're going to need to spend over the next few years?

Great questions. Maybe I'll kick off, Stuart and then on the CapEx, I'll start with that question. Thanks, Miranda. That's a very good question. The CapEx, Miranda, is largely focused around some of these key initiatives that we've mentioned in the presentation. So for example, the NHS primary care facility in Ilford. If we get that agreement for lease signed and as we mentioned on the current program, we would envisage that to be within the next 4 to 6 weeks. So that will start on site would not take place until later in the year. But that's a capital commitment in the vicinity, Stuart, of sort of GBP 7 million to GBP 8 million. So that's an example. We have a signed agreement for lease now with TK Maxx to relocate in Ilford into the middle level of the former Debenhams store. It's a CapEx commitment in the order of another GBP 3 million to GBP 4 million. So it's those type of projects. So in the case of TK Maxx, we've got a signed agreement for lease our intention is to proceed with that. The NHS, if we can get this agreement for lease sign, we will proceed with that. And then we have other projects, which are advancing. So for example, the Walthamstow Food Hall that I mentioned, we've selected a preferred operator. I think realistically, there's a couple of months work to convert that into a signed agreement. And then realistically, we're probably looking at a start late this year, early next year. So that's probably another GBP 2 million to GBP 3 million commitment. So it's those type of projects from a CapEx standpoint. And the good news is, as we've mentioned earlier, of our rents, we can generate a yield on cost of those projects. So it's not defensive CapEx. And they play an important role for the center. So as you'd appreciate we would expect the medical center at Ilford to have a halo impact across the entire shopping center. So hopefully, that answers the question in relation to the CapEx. It'll really be led by these major leasing initiatives and how the timing of those plays out in reality. Is that fair, Stuart?

Yes. No, I think so. And some of those will probably spread over the next couple of years rather than just land in 2022.

I think it's a very good point. I think medical centers like a 24-month program, Miranda, for example, at Ilford. And then the second part of the question is the ESG effectively upgrades to meet various obligations. That's very much unfolding at the moment. We're doing enormous amount of work across the centers to better understand what needs to be done. There's a variety of initiatives. So some of it is as simple as replacing plant. For example, plant and equipment. Other measures run a lot further than that. I think it's a bit early for us to be putting hard numbers to it. As you'd appreciate, each center varies quite considerably in terms of the maintenance of some of that plant, the age of some of that plant and equipment, for example. But we're -- I'm very happy with the amount of energy and focus that we're putting on to this agenda, especially over the last 6 months or so. And I think by the time we get to the half year, we'll be in a much stronger position to better outline what those costs are. I think the other thing to keep in mind is that some of these CapEx initiatives, for example, I've mentioned Ilford, and Walthamstow is another great example, there will be the opportunity for us to selectively start to address some of these ESG agenda items as part of these major initiatives. So if you look at the medical set of 20,000 square feet, for example, in Ilford, all of the plant associated with that will be new. So that's going to make an enormous difference, as you'd appreciate. For example, you got something like the food hall at Walthamstow, the opportunity there is to go a lot further because ESG agenda is not just about plant and equipment, as you would appreciate. So for example, what can we do on a much wider sphere around recycling there around transportation of goods and waste in and out of that facility, for example, around the use of disposables around what we do with food waste, for example. So that's all part of that dive that's unfolding with the preferred operator as we speak. Should we go to question -- sorry. Questions from the webcast, fantastic. Thanks.

Okay. The first one is from Sandile Magalula from [ Zimba ] Wealth, who asked, are you looking to resume dividends this year? How are you going to fund the dividends given the balance sheet position? And then is the management expecting strong cash generation from operations this first half? Or would this easily be funded by debt? I think, referring to the dividends there. And secondly, could you please take me through the lease expiries for FY '22? And how are you expecting rental revisions -- reversions to turn out given the strong leasing momentum?