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

Good morning, everyone, and welcome to our 2022 interim results presentation. It's great to back in person and of course here at Numis and it's really good to see so many familiar faces and not to forget those on our webcast. Welcome, everyone. Turning to some introductions. I'm Lawrence Hutchings, Chief Executive, and I'm joined today by my copresenter, Stuart Wetherly, our Finance Director. We also have members of our team here and we -- and hopefully you'll get to meet them later. And we're all looking for to answering your questions, which will be at the end of the presentation. I'd like to take a minute to reflect on the past few years. It's been a challenging period for our sector and for our business. It's with the combination of personal humility and a hint of pride that we stand here today. These results demonstrate the resilience of our business and the hard work of our teams. And that provide us confidence to face whatever lies ahead. So let's reflect on what we've been doing over the recent past. It's been a busy and productive time for the business. Our refocus, restructure and recapitalization initiative late last year delivered balance sheet stability. Our valuations have also been stable over the past 12 months. And they are supported by external transactions and the sale of Blackburn above our book value. This combined with continued resilient operational performance is further evidence of the relevance of our consumer and retailer-focused offer and the demand that we're seeing for our community retail and services and instills a sense of confidence to continue investing in our proven community shopping center strategy, and to refocus our leading management platform post-COVID and the structural changes in our sector. We remain confident this refocus will deliver continued growth in income and value. Turning to the balance sheet, this has been an enormous area of our focus over the last 18 months, reducing our leverage from 72% at the half year last year to 40% today, and that's post over 50% reduction in our asset values. We've undertaken 7 complex transactions, covering loan restructuring and buying bad debt at a discount to noncore asset sales and raising a disciplined amount of equity. Combined, these transactions have reset our business. We're refocused and repositioned, ready for what tomorrow brings. In addition to the balance sheet, we've continued to focus on maintaining operating performance. Our footfall has outperformed the index. We're seeing a recovery towards the 2019 levels, with 29.1 million visits in the first half. Our vibrant community centers continue to attract retailers, as evidenced by the 55 new leases that we've signed in the first half above ARV and the previous passing rate. Importantly, rent collection has improved also to the pre-COVID levels at 97% and our occupancy has grown to 93.7%. All of this has led to an 87% increase in adjusted profit to GBP 5.8 million and a 16p increase in our NAV per share to 118p. A combination of the balance sheet reset and our ongoing operational performance provide confidence, confidence to our Board to declare our first dividend in 2.5 years. And it's important to highlight that paying this dividend still enables us to fully fund our CapEx program. It also protects our REIT status, and we've made decision to provide a scrip option. And I'm pleased to announce this morning that both Growthpoint and our directors have confirmed that they will be taking the scrip. This provides a sense of the operational strength of the company and the dividend is an example of that strength. I'd like to hand over to Stuart to provide more detail on our financial position.

Thank you, Lawrence, and good morning, everybody. Pleased to stand here and report we believe is a good set of results demonstrating the operational recovery of the business from COVID and the impact that the transactional activity undertaken over the last 12 months has had in stabilizing the company's balance sheet. As Lawrence has mentioned, it's been a very busy period. In May we completed a deal to buy the debt at Hemel Hempstead at a 51% discount to its face value. This resulted in GBP 12.3 million uplift to our NAV and secured the future of the asset within our group. Also in May we completed an amendment to our Ilford loan facility, linked to new leases for the medical center and TK Maxx. The amendment provides us with a package of covenant waivers and relaxations facilitating the investment of approximately GBP 10 million on these projects. In the same month, we also agreed to launch a process on Luton to dispose of all of the majority of our investment in that asset. Changes the statutory entities have resulted in us deconsolidating and that's resulted in an increase to our NAV of GBP 6.8 million. In July we completed on the sale of our Walthamstow residential opportunity receiving GBP 21.6 million from Long Harbour. And earlier this week we completed on the disposal of Blackburn at a premium to December valuation. Together these last 2 initiatives have lowered our group net LTV by approximately 900 basis points. Turning to the results of the period, NRI and our investment assets has improved to GBP 12.2 million from GBP 9.9 million in 2021. This is primarily a result of the improved occupancy and rent collection. The improvement in NRI has driven a similar increase in adjusted profit to GBP 5.8 million for the period. The IFRS profit of GBP 26.8 million includes this, alongside the uplifts from Hemel and Luton as well as a small revaluation gain. And the same reasons have driven increases in net asset value and EPRA NTA per share, the latter up 14% From December at 116p. As noted net debt and net LTV have both significantly improved as a result of the Blackburn and Walthamstow proceeds with the latter reducing to 40% from 72% 12 months ago. This leaves us with a debt portfolio with expected average maturity of 5.2 years at an average interest rates around 3.5% that is close to 100% fixed. Drilling down into adjusted profit. NRI as noted has benefited from the improvements in occupancy and rent collection. Interest payable has reduced by GBP 0.8 million. This reflects the impact of the mild debt restructuring in November as well as the paydown from Maidstone House office sale which we completed in January. Interest payable will further reduce over the second half of the year as the GBP 53 million of paydowns in respect of Walthamstow and Blackburn are applied. Snozone EBITDA was GBP 0.8 million in line with the prior year, but noting that 2021 benefited from a GBP 2.5 million COVID insurance payment. External management fees have increased and that is due to recognizing the Luton asset management fees as external following the deconsolidation. Fixed central overheads are marginally higher than H1 '21, are very in line with '21 on a pro rata basis for the full year. We expect these to reduce over future periods reflecting the lower number of assets under management with a target of achieving a 10% saving in 2023. We've made excellent progress working with our retailers to resolve debt arrears. Rent Collection for the year to date is 97% in line with where we were pre-pandemic, and it was pleasing that the rent moratorium ended without really any incident. We've also improved collections for the '21 financial year, which are 88% of the time of our results in March to just under 93% now. The progress made has enabled us to release around GBP 1 million of debt provisions that support the adjusted profit performance. It's important to note that this GBP 1 million release and the impact of the transactional activity means that there are elements of adjusted profit in the first half that will not be relevant on an ongoing basis. In total, there are about 1.5 million items of these with the loss of Blackburn income being the largest. Moving to valuations. We published the third set of valuations in the last 12 months. They've delivered results at a stable level following 4 years of declines. Investment Assets increased by 1.7%, driven primarily by the letting activity at Ilford, most notably the TK Maxx in NHS. The challenging macroeconomic environment places an even higher premium on continuing to demonstrate robust leasing and operational performance to maintain valuation stability. As Lawrence highlighted earlier, perhaps the most stark comparison in our results is the decrease in net LTV over the last 12 months. This slide just provides a detail of how we've got there across the 7 transactions that Lawrence noted. And the key drivers in '22 have been as noted Blackburn sale and Walthamstow proceeds. The actions undertaken have left us with a long-term secure debt position with expected average maturity of 5.2 years, average interest cost of around 3.5% that's 98% fixed. On the [indiscernible], the loan balance reduces to GBP 140 million post the receipts. This is paid down the entirety of the more expensive GBP 35 million tranche that was taken to support the November restructuring. On Ilford, the loan amendment we signed provides waivers through to January and then covenant relaxation runs for 18 months beyond that. And on Hemel Hempstead, we've drawn a new GBP 4 million facility with a subsidiary of our strategic residential partner FEC. This supported the purchase of the debt from the previous lender at a circa 50% discount. Importantly, on the offer amendment, we agreed an 18 month conditional extension option, which now means that we don't have any expected debt maturities until 2025. The improved operational performance, stable valuation position and the actions taken to significantly reduce debt levels, have given the Board the confidence to resume dividend payments. And we're pleased to propose an interim dividend of 2.5p per share, equating to around GBP 4.1 million. The dividend is healthily covered by earnings in the period and it's a level that substantially meets our minimum paid requirement, securing our ongoing REIT status. To mitigate the impact on cash and leverage we'll be offering a scrip option that as Lawrence has noted Growthpoint and the Board have indicated they will take up. And we expect the final dividend for the year, which be confirmed at the time by year-end results next March to be at a similar level. Thank you. And I'll now hand back to Lawrence to provide more color on operational performance and the wider business.

Thank you, Stuart. I'd like to take the next few slides to walk through the detail of our operating performance, to share with you some of the insights that we're seeing and hearing on the ground. And to provide an overview of the exciting initiatives that we have planned to continue the process of repositioning and remerchandising our assets. We're cognizant of the macroeconomic headwinds and the impact on the consumer. Our centers are well-positioned on a relative basis. Our low average rents and focus on value orientated, needs-based nondiscretionary retail and services continues to serve us well. In fact, we're seeing the strongest operational performance where we're most aligned to the community format. We see higher footfall, increased leasing demand and higher occupancy. Following our reset, we have the financial means and the expertise to accelerate our remerchandising, repositioning and rebranding to double down on our focus on our customer proposition and to deliver organic growth in income and value. We are increasingly aware speaking to retailers that the store plays a vital role in their distribution platforms, providing profitable higher margin transactions across the counter, the traditional role of the store. The store is also providing an important role in lowering the cost of last mile forward and reverse logistics for retailers and a new area customer acquisition. Retailers are telling us that the cost of customer acquisition in store is now for the first time cheaper than online. And all of this leads to footfall being a key measure. I'm pleased to report our footfall across our centers continues to recover towards the 2019 levels. We are still receiving consistent feedback that our guests are visiting more stores per visit. And retailers tell us that average transaction values remain at elevated levels. The center performances are varied on footfall where we have anchor stores offline like Guilford, for example or affectation from an imminent residential development like Walthamstow, we are seeing some impact. However, in a stable center like Wood Green, footfall has actually been up 4% on the 2019 numbers. In total 29.1 million people visited our centers in the first half. Rebuilding our occupancy is key to driving income and earnings growth and we're seeing a continued momentum in leasing. During the period we've signed 41 new leases and 14 lease renewals, 55 transactions in total. This covers GBP 2.4 million in rent. And importantly, the spreads remain positive 34% to the previous passing rent and 17.8% to the previous -- to the ARV. And this is comparable to what we're seeing in the first half last year. A combination of our affordable rents at GBP 12 to GBP 15 per square foot and retailers seeing strong relative sales volumes from nice centers provides our retailers with strong [ 4 wall ] or store level profitability. Our focus on value and nondiscretionary retailers is where we are seeing the most retailer demand and this is supporting our leasing progress. The chart on the right demonstrates our leasing momentum and the impact that is having in driving a recovery in our occupancy back towards the pre-COVID levels. Looking forward to the leasing pipeline, we have a further 65 deals where solicitors have been instructed representing GBP 3.2 million in headline rent. There are further 19 transactions where terms are agreed, representing GBP 1.2 million in headline rent. Encouragingly, 22% of the deals are to food and grocery operators. Leasing is also driving our remerchandising. This slide shows our progress since launch of the community strategy in December 2017 to today, and that progress is tangible. We're seeing growth in categories like food and grocery, health and beauty and services, the anchors of our community center strategy. We've seen likewise a 10% reduction in fashion or apparel and the impact is even more pronounced on the ground. These charts are based on income. Changes in actual store numbers are even more significant and more obvious when visiting any of our centers. Another benefit of leasing and remerchandising is greater income diversity by category and reducing our single point retailer exposure. Our largest retailer now is below 4.5% of our total income. Fashion representation of our top 10 has fallen by 10% and we've increased pharmacy exposure, which is a key community use. Excitingly soon the NHS will join our top 10 with the openings of both Wood Green and Ilford. So what does all this leasing activity look like on the ground? We continue to invest time, resource and energy with our retailers working on retailer presentation. Whether it's our design team working with independent retailers, supporting them with design input, or simply recommending a designer and reinforcing the importance of better store design, or encouraging a larger chain store to put their best foot forward in our center. As these photos demonstrate and they're just a small example of all the H1 openings. This approach is having a direct and positive impact on our customer proposition and customer experience. However, any mention of retailers necessitates us highlighting our own leisure and retail business Snozone. Nick and the team are doing a great job. I'm fond of joking that Nick is the only one in our building who complains when the rent goes up. We benefit from the retailer skills that the Snozone team bring to our business. And Snozone is seen a recovery in its operating performance. The EBITDA increased to 0.8%, up from last year and that year -- at that point, we're benefiting from an insurance payout. The Madrid -- the new slope at Madrid is now fully integrated and forward bookings for the key winter season provide further evidence of recovery. We continue to explore opportunities to expand Snozone and our leisure business on a capital-light basis. The reset that Stuart has spoken about on our balance sheet enables us to unlock funding for our repositioning and remerchandising CapEx to accelerate the delivery of our community strategy across our portfolio by reanchoring our centers, which drives footfall, leasing outcomes, occupancy and ultimately income. Food and beverage is a great example of how we are responding. In Walthamstow, 3 years ago, we had a major fire that destroyed 30% of the shopping center, including a 1980s food court located on the first floor. We had a decision to make in what were difficult times. Do we follow the insurers and replace what was there? Or did we pause for a moment and look to create something that spoke to our time and in this case, that would allow us to attract a food hall type operator that we are seeing in Central London. Our decision has been vindicated. We created an impressive contemporary 16,000 square foot space. And we went to market. We received 7 offers from food and beverage operators, and after a detailed process, we've selected local operator [ Create ], and they will run a modern style food hall with 8 operators and importantly, spaces for live events and community and the local community to use. It will open in Q3 next year. And over to Wood Green, we approved an express food format. This is smaller scale, 6 kiosk-style units on an underutilized bridge link. It's a great example of our high-impact short program, high yield on cost, CapEx program at work. It's 50% pre-let. We have demand for the remaining units. It will open in Q1 next year, and we're targeting a yield on cost of in excess of 10%. These food projects are redefining food service delivery in community shopping centers, and we have further initiatives in the design phase. Services is another area of demand and growth. Medical services destinations are generating footfall. They will embed us deeper in the communities that we serve, and we have a growing partnership with NHS. We're bringing health care into our accessible central locations. With Diagnostics at Wood Green, we announced Phase 1 5,000 square feet, which will open in Q3 of this year. It's the first diagnostics facility in a shopping center in the U.K. I'm pleased to announce today that we've agreed an expansion with the Whittington Trust of a further 8,000 square feet for the diagnostics facility and this is a major investment by the NHS. Over in Ilford, we're continuing to progress on our first primary health care facility, 20,000 square feet. We've exchanged an agreement for lease and we've now lodged a planning application with an anticipation to start on site in November of this year for Q2 '24 opening. We have further primary care and diagnostic facilities in advanced discussions across the portfolio. These major CapEx repositioning projects will drive footfall, leasing, occupancy, income and value growth. This schematic demonstrates the CapEx program over the next 18 months. These projects are fully funded, as Stuart mentioned, and the majority are either fully or majority preleased. In addition to food catering projects at Walthamstow, Wood Green and the medical services that I highlighted in Ilford, we have the TK Maxx relocation, which is part of a wider repositioning of the Ilford asset following the loan restructure. We also have kids play in leisure that we've agreed in the remaining floor of the former BHS store at Maidstone. Terms are agreed there. And importantly, our commitment to the next round of the ESG investment in support of our net carbon zero pathway. We remain committed and engaged to unlocking value through mixed-use densification and diversification of our real estate following our success at Walthamstow in unlocking the capital receipt with Long Harbour for the 495 PRS apartments that are about to start construction above the center. We sometimes overlook that we have further floor space consented at Walthamstow, 40,000 square feet of retail and a further 43 residential apartments above the new retail podium and of course, a new tube station issuance to the busy Victoria line directly inside our shopping center. We are progressing our plans for these future phases, and we're seeing strong retailer demand, particularly from supermarkets for the additional retail floor space. These projects are long-term by nature, highly specialized and capital intensive. And this is exactly what drove us to our strategic alliance with FEC. And I'm pleased to say that alliance is progressing well. We've appointed architects on 3 schemes. We've engaged with the councils, and we're adopting the same master plan approach that we have seen success with at Walthamstow. We look forward to updating you on our progress on these larger strategic initiatives at our full year results. Turning now to ESG. This is an integral part of our community center strategy. And once again, we've made significant progress over the first half. We've established our net carbon zero pathway. We've become signatures to the better building partnerships climate commitment. We've committed CapEx to further projects, and we've increased our focus and energy across all aspects of our business on this important agenda. We've seen significant energy savings 25% since 2019 and a 41% reduction in emissions. Our social commitment is ongoing. During the first half, we supported 239 charities, and that involves 700 voluntary hours. We're currently in dialogue with our council partners to see how we can provide further support to assist our communities with the current challenges they're facing. So let me bring this together. The reset of our balance sheet, combined with our operational resilience has provided the confidence to reinstate our dividend. We're looking forward as to how we're able to refocus our platform and our collective energy towards accelerating our community strategy and to unlock the organic growth in income and value that we believe is there. We remain aware of the macroeconomic pressures, and we'll continue to be prudent and disciplined and apply focus in our approach to running the business. I'd like to thank our teams for their commitment and achievement during the period, and I'd like to hand over now for questions. Thank you.

Miranda Cockburn from Panmure. Just a couple of questions. Firstly, do you have any near-term lease expiries that are of a concern to you at all coming up? Secondly was just overall on those refurbishment and CapEx projects, you mentioned 10% on one of them. But overall, what's the sort of average yield on costs you're expecting? And then the third bit was whether or not you could just give us a bit more of a feel on what you're seeing on the ground in terms of market conditions? Are you seeing any retailers backing out or delaying decisions at the moment?

Three quick questions. Stuart, and I'll pick those up. Perhaps on the lease expiries, the -- Stuart, nothing strikes me as major and imminent from a lease expiry standpoint. Miranda, we're in regular dialogue with all of our key retailers, but there's nothing that's I think, Stuart, meaningful from a P&L standpoint?

I think one of the things from our top 10 retailers is pretty well-diversified now. You've not got one that's dominating the tenant mix. So no, nothing. There's always a few coming up, but nothing that's a huge significance individually.

And in relation to yield on cost, we mentioned Wood Green, historically, Miranda, we've targeted 8% plus effectively. That's remained. We've probably edged up a little if we're frank. But we've continued to adopt a very prudent approach to how we assess. So effectively, if we're taking 4 shops out for example, and creating one large store, we're simply looking at the impact, the rent that the 4 shops generated versus the new rent over the cost gives us the yield on cost. We've not strayed into this halo impact there is a halo impact. We've seen it already, places like Walthamstow, with a little in the gym, for example, but we don't factor that into our calculations. So at those sorts of levels, 8% to 10%, we're comfortable. I'm not saying if it was 7.2%, we wouldn't do it, but that remains our target. And then what are we seeing on the ground from a leasing perspective? I think we're fortunate. The majority of our discussions are with value-orientated needs-based retailers. I've had catch-ups personally with both [ Little ] and [ Audi ] in the last number of weeks and both of them continue to want stores. I think that's been publicized pretty widely. We were [ Sports Direct ] the other day. They're very focused on their store network. I don't think at our sort of end of the market, we're seeing an enormous amount of weakness at this point. We are moving into September and October. By the time we get to October, leasing activity tends to start to slow down Miranda because retailers are then aware that they won't have the store open for Christmas. So peak period next couple of months for us from a leasing perspective is pretty important. I think we'll get a better gauge when people come back from holidays at the end of the month. But we're certainly not seeing an enormous tail off at this point or sort of people walking back or standing back from key deals.

Numis. Just to kind of maybe follow up on Miranda's question there. So you had 94% occupancy now. Just about does it feel like you're starting to get that kind of rental tension coming through, the leasing seems to be good? The occupancy is kind of getting towards that 95% and above. It's kind of a sentiment question more than anything, I guess.

Yes. And Stuart, James, our Investment Director, Ian who is our Commercial Director, and I talk about this all the time, [ Max ]. And where we have tension and we're able to push back, there is no doubt we see better leasing outcomes. I think there is a gap between what we're getting offered and what someone can afford to pay. And as I mentioned in the presentation, I think we're moving into the next phase of structural change within the retail industry. And that is a pivot at a summary level, that is a pivot back towards the importance of the store. So I think there is an ability to pay more, but you're 100% right. We need tension to unlock better leasing outcomes. And all the work that we're doing in rebuilding occupancy and the CapEx projects will assist in creating that tension. If we look across the portfolio, somewhere like Wood Green, we have a lot of attention, and we definitely see better outcomes. And somewhere like Hemel, for example, we have less tension achieving improved leasing outcomes is a little hard and we'll be very frank with you. So you're 100% right, Max. We're definitely -- where we can create attention, and we're seeing better outcomes.

The 0.05 as we've got 3, most of the weight is in the 3 London assets, 2 of those Walthamstow and Wood Green are essentially pretty much fully let. And Ilford is the one where we're very focused on the key projects, the NHS, TK Maxx relocation. So we really see a lot of confidence in what is the weight of the portfolio.

We've got some questions from the webcast here. The first one came in yesterday from Alan Murray at [ McQuillan Murray Realty ]. When does capital and regional anticipate resuming dividend payments? And what do you anticipate the first dividend will be once -- resilience?

So well, as discussed, so we're proposing an interim dividend of 2.5p, and that will be paid, I think, early October.

And then this one is from [ Umar Kaji ] at [ Allan Gray ]. What portion of the leases are the escalations linked to inflation? Do you see higher escalation terms being supported as CPI inflation ticks up?

We've definitely -- Stuart, I can answer this, I might kick off, Stuart. We are deliberately and have been for quite a while now for a number of years, moving away from market review across to some form of annual indexation. And we've been quite successful in doing that and also taking leases outside the 1954 Act. I think in terms of exact percentages, Stuart or maybe James might have a better hand or investment director. But I think was it 40% now around that number, 30%, 40%. I think around 30%. Around 30% of our leases are on some form of annual fixed increase. We have had a couple of people ask us, can we -- you've got an indexation, will that start to ratchet up as inflation increases. We haven't tested that as yet to be frank with you. The vast majority of them are not of the causes that we're agreeing are not straight inflation because either I've got a cap on a color or they're a fixed amount. But the view we've taken has been highly pragmatic, faced with an option of a 5-year fixed rent with some form of option in the future for a market increase based on a whole lot of factors that may be running in our favor against us in 5 years' time in a particular location or some type of fixed annual increase, even if that's 2% or 3% or 4%, we'll take the ladder over the former every day of the week. And real estate is meant to be a hedge against inflation over the medium to long term. So we're going to continue with that strategy. And as I say, we're not getting enormous amount of pushback from retailers. I think retailers appreciate the ability to plan where their occupancy costs are going over the term of the lease. So we're not getting a huge amount of pushback from retailers on the rent review structures.

And then just a follow-up from that, what portion of your leases are turnover-based rents?

So a tiny percentage. If -- just to clarify the question a little bit further. If the question is how much of our income is from turnover-based rents, Stuart, it's a tiny percentage of our income.