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

Good morning, and welcome to our 2023 full year results presentation. I'm Lawrence Hutchings, Chief Executive, and I'm joined today by our Finance Director, Stuart Wetherly. It's great to see everybody here at Numis today, and a warm welcome to those who are joining us online. We have team members in the audience and back in our offices, and a huge thank you to them for all of their hard work in delivering the results that we're about to present. Our apologies for the delay in getting here today. We have new auditors. And as you'll be aware, there is increased focus on audit procedures for all companies from the regulator. Combined, this has meant finalizing our results has taken longer than we all expected. Stuart will expand and provide more detail later in his presentation. And the good news is we have a great set of results, as you will have seen. Before we delve into our performance, I'd like to take a few minutes to look at the retail market, which continues to inform our strategy. This is relevant given the sheer volume of structural change that we've seen in our sector. It's worth reminding ourselves that household consumption comprises 60% of the U.K. economy. U.K. retail sales were GBP 510 billion in 2023. It adds weight to the saying that we're a nation of consumers and shopkeepers. Interestingly, online sales in the U.K. have fallen for 23 of the past 25 months as we continue to see this return to the store that's being called the second wave of retail structural change. This is driven by consumer preferences and the high cost of the high cost of economics of the online channel. Today, store-based retailing represents 70% to 90% of retail sales in our core community center categories. The store has an important role in informing or supporting online sales. Research suggests up to 85% of all purchases involve a store in some way, shape or form. Turning to grocery, one of our community center anchors. This category represents the largest retail category in the U.K. at GBP 212 billion in spending in 2023, and 89% of those sales are undertaken in a store. Physical retailing is here to stay. And nowhere is the store more important than in our core community categories, including grocery, pharmacy, value retail and services. All of this shift in market dynamics is very important for our business. It's creating a supportive backdrop, which is driving leasing demand and enabling us to grow our income and, ultimately, value. Turning now to our business. 2023 has been another strong year. We completed an important transaction in the Gyle, and we've made significant progress against the business plan, but more on that later. Our valuations are stable, continuing a 2-year trend, and we've invested GBP 16 million in our accretive CapEx projects. These projects reposition our centers into the proven community center format, and they grow our income. We've made solid progress on our CapEx pipeline, which I'll present in our business update later in this presentation. Our operational metrics are up also: footfall, plus 1.5% on the full year; and in leasing, we completed 86 transactions with positive spreads to previous passing rent and ERV. Importantly, this momentum has continued into 2024. And all the activity has supported our valuations and driven a 5% increase in like-for-like NRI flowing through to increases in adjusted profit and dividend, which Stuart will detail in the next slides. I'd like to hand over to Stuart to take us through the detail of the financial results.

Thank you, Lawrence. Good morning, everybody. While somewhat later than planned, I'm pleased to stand here and report another strong set of results. Before I start though, I just wanted to give a little bit more background on the reason for the delay. This is Mazars first year, replacing our long-term auditors, Deloitte, after Deloitte were required to step down due to mandatory rotation rules. The combination of Mazars being new, their audit approach and a heightened regulatory focus meant Mazars needed to perform audit work directly on 3 of our third-party service providers. This covered the 2 companies that manage our car parks and the company that provides the accounting and management platform for Snozone. The work required direct engagement with each of the third-parties and was not envisaged in Mazars' original scope. The work concluded this month. As expected, no changes to numbers arose and Mazars have issued a clean audit opinion on the full financial statements. It should be published in our annual report later today. While it's taken longer than expected, we are pleased to have now got to this stage and to be able to be focused on a good set of results. As Lawrence has said, 2023 was a year of high activity, delivering strong results. At a headline level, we grew adjusted profit by 23% or 9.7% on a per share basis. Key drivers to this were a 5% like-for-like improvement in NRI, underpinned by market-leading rent collection of 99.2%; a 20% reduction in interest payable as a result of the GBP 60 million of loan repayments made in 2022; and a 64% increase in Snozone EBITDA. Profit for the period is GBP 3.7 million. The reduction from the prior year reflects the one-off gains in '22 from the Hemel debt buyback and deconsolidation of Luton. NAV has increased in absolute terms, though, reduced on a per share basis, reflecting the larger number of shares in issue following the equity raise to partly fund the Gyle acquisition. Group net LTV has increased by 300 basis points over the year. Around 100 basis points of this is due to funding just under GBP 5 million from central cash for the Gyle acquisition, with the balance a function of having invested cash into capital expenditure. While this is supported an increase in valuations, it's not been sufficient to maintain LTV. The improvement in adjusted profit is reflected in the final dividend of 2.95p per share, delivering an 8.6% increase in the total dividend versus 2022. Drilling down further into adjusted profit. Aside from rent collection, NRI has benefited from a general improvement in occupancy. The combination of this and the Gyle contribution has more than offset the loss of income from the sale of Blackburn in 2022. The impact of the Wilko administration has tempered our growth in the second half of the year. But as we've announced, we've struck a portfolio deal with B&M to take occupation in all 3 impacted units from next month. The proceeds of the Blackburn sale and the Walthamstow residential receipt in 2022 facilitated GBP 60 million of loan repayments during the year, and this is the key driver in reducing interest payable by GBP 1.9 million in 2023. Snozone has improved its EBITDA contribution to GBP 2.3 million. It benefited from its first peak Q1 trading season, unimpacted by COVID since 2019, and also includes GBP 0.6 million from Madrid, reflecting the progress made enhancing profitability since taking over operations in February '21. External management fees have fallen due to the sale of the Luton and Redditch assets during the year, with GBP 0.8 million of this balance no longer recurring. I'll cover costs on the following slide, but overall, the combination of the above has resulted in a 23% increase or, as I said, 9.7% on a per share basis, setting us well on the way to delivering the 20% increase in adjusted profit over the medium term that we set out a road map for 12 months ago. We've delivered a saving on central costs of 7% year-on-year. This reflects improvements, offsetting wage and cost inflation. This includes the enhanced use of technology and selective outsourcing of some back-office functions. Further initiatives already implemented have us on track to deliver a similar reduction in 2024. This continues progress over several years. Our total central costs in 2023 was 16.7% lower than 2016. This is despite cumulative inflation of more than 30% and the operational intensiveness of shopping centers having only increased over that time. The scalable nature of our platform is also evidenced by us having taken on the Gyle with negligible additional cost. We've seen valuations stabilize over the last 3 years across a period where there's been high volatility in other real estate sectors. Like-for-like movement over 2023 was an increase of 2.6%, and the asset management and leasing initiatives undertaken at Gyle since we took ownership has seen an uplift in value of 4% from our acquisition in September. We retain a long-term secure debt position with 98% fixed for the next 18 months and approximately 80% until at least January 2027. On Ilford, we've secured an extension of maturity to September '25 and agreed new additional extension options to provide potential term up to the end of '27. The existing interest rate swap on Ilford matured in March, and we've capped the all-in rate for the next 18 months at 5.5%. On Hemel Hempstead, to accommodate the replacement of the anchor Wilko unit with B&M, we agreed a waiver of all covenants until loan maturity in June '25 and an option to extend for up to a further 2 years. And to support the acquisition of Gyle, we agreed on a new 5-year GBP 16 million loan facility arranged by Morgan Stanley. The underlying profit improvement and balance sheet stability gave us the confidence to further increase the dividend. We are pleased to confirm the final dividend of 2.95p per share, delivering a total for the year of 5.7p, an 8.6% increase from 2022. In line with previous periods, to mitigate the impact on cash and leverage, we offered a scrip option, which Growthpoint has taken up. Dividend fulfills our minimum PID requirement for 2023, takes us a long way to doing the same for 2024. Dividend provides a strong yield for shareholders and is healthily covered by our adjusted profit. And with that, I'd like to hand back to Lawrence.

Thank you, Stuart. Turning now to our business update. Over the next few slides, we'll look in greater detail at our operational performance and provide a series of updates and insights into our progress across the breadth of our leading operating platform. Before I do that, a quick refresh on our strategy, which is driving everything we do. We've learned an enormous amount of our community shopping centers since we launched the strategy in December 2017. Globally, these centers have proven to be resilient and continue to be so. They are an essential part of community infrastructure. The key attributes that define success in community centers include: high-growth on semi-urban locations with strong local catchments, local dominance, accessibility by public and private transport modes, comprehensive guest services and central spaces or amenity. We're often the largest enclosed public space in the town center and, therefore, the focal point of these communities. The other key element is anchoring and merchandising, which we refer to as the core pillars: grocery; services, including the post office and NHS; health care and beauty, pharmacy, food catering, and value apparel. Our leasing focus and CapEx program are delivering this remerchandising and repositioning on the ground and further detail in the following slides. Our customer proposition needs to be tailored to the needs of these vibrant and diverse local communities. First and foremost in the minds of our communities is what do these centers offer? Do they have the stores and products or services that I need? This is our tenancy mix or retail offer. And these categories form these core pillars of our merchandising and leasing efforts. This is one of the most critical elements that determines a successful community center, in our experience. Our expanding presence in grocery and medical services are two great examples, alongside our health and beauty and value focus in general merchandise and apparel. We're fond of saying we represent all the things you need nearby. Food catering is an emerging category and a growth area for our business. More on that in a moment. Importantly, we're seeing retailer demand across all these categories and across our centers and the full spectrum of store formats. We've undertaken a considerable amount of remerchandising in our centers over the past 5 years, and we have more repositioning to do, which improves our centers and grows our income and, ultimately, our value. Another important part of our remerchandising is the strength and diversification this is bringing to our income statement. As we can see, pharmacy, value apparel and household goods, sporting goods, supermarkets, all feature strongly. And we welcome B&M to our top 10, following the leasing of the 3 former Wilko stores. Our ability to replace a top 10 retailer with an organization of B&M's stature is a testament to the quality of our centers and our management team. We're looking forward to a long, successful and expanding relationship with B&M, and we welcome them to the C&R portfolio. Driving footfall continues to be a key focus. Our remerchandising is having a positive impact, allowing us to increase total visits by 658,000 in 2023, reflecting a growth of 1.5% and further evidencing this return to the physical store. We continue to see a high frequency of visit, on average, 1.2 per week. And Ilford has been a standout, with footfall increasing by 8.3% as we see the benefits from the Elizabeth Line and our repositioning and leasing efforts, which I'll detail later in this presentation. Likewise, the Gyle has seen growth of 4.1%. And in the year-to-date, we've already recorded 10.1 million visits to our centers. And we're expecting a positive further impact from B&M when they open the 3 sites next month. Turning now to leasing. We've completed 45 new lettings and 41 leasing renewals in 2023, 86 transactions in total compared to 80 transactions in the previous year. We posted positive leasing spreads to both ERV and passing rent, so in aggregate, higher spreads and higher transaction volumes compared to 2022. We're also seeing improvements in our income profile as a consequence of this activity. Our term to expiry has increased to 5.1 years and 3.2 years to break. And I'm pleased to say that momentum is continuing into this year. Our team closed 21 year deals in the year-to-date and, once again, at premiums to ERV and previous passing rents. This includes the 3 B&M deals that I mentioned a moment ago and the expansion of our flagship in NHS diagnostics facility at Wood Green with the great team from the Whittington NHS Trust. We've exchanged a further 11 deals, representing GBP 618,000 in rent, and this progress demonstrates the continued leasing demand for our centers. Importantly, our forward leasing pipeline continues to be robust, with 26 deals in solicitors' hands representing GBP 902,000 in rent. In addition, our leasing team are working on further transactions where terms are already agreed. So all of this leasing activity this year leads to a total pipeline, including exchanged, lawyers instructed, and deals where terms are agreed, at 39 transactions and GBP 1.58 million in headline rent. I thought I'd take a moment to outline progress in our new acquisition, the Gyle shopping center. We concluded the deal in Q3 last year, together with an equity raise. Gyle is an established, successful, 400,000 square foot community shopping center in Edinburgh, anchored by Morrisons and a gold top, in M&S' words, Marks & Spencer supermarket. We paid GBP 40 million as an acquisition price, which reflected 13.5% net initial yield, rebasing to 12% after a series of lease renewals that we'd identified during our due diligence. It equated to an 80% reduction to peak value and GBP 100 a square foot in capital value, so a significant discount to the replacement cost. We secured GBP 16 million stapled debt on a 5-year facility, reflecting a 40% LTV and a total all-in cost of debt of 6.5%, capped with a 2.75% margin. We remain very confident in the Gyle, and this confidence is being driven by the excellent progress we're making against our underwriting business plan and the feedback that we've received from both the community and retailers. When we acquired the center, it had a 2-year WALT and 90% occupancy, so it's below our portfolio averages. This meant leasing was always going to be a significant area of focus. And we've made significant progress already, and more on that in the next slide. In addition to leasing, we have a range of further initiatives that we identified during the acquisition process to refresh the center and our customer proposition, driving footfall and retailer sales. These include the car park, we're installing EV charging and ANPR to better understand usage and future income opportunities. We've undertaken further research studies with CACI. We've appointed architects and interior designers, and we're working on plans to induce a gym and improve our food catering offer. We've really hit the ground running at Gyle. Delving further into the leasing, we completed 7 transactions totaling GBP 600,000 rent. We're ahead of plan, and we've leased or concluded lease renewals with TUI, Vodafone, Superdrug and Specsavers, all key community center users. We've got 9 pipeline deals, reflecting GBP 670,000 in rent. And we've got interest from both new brands and existing retailers who'd like to upsize their units. We can see on this slide 2 photos of stores that have opened recently, the new Waterstones store and a relocated and expanded Costa, both of which are trading well. Turning now to our CapEx repositioning program. We mentioned earlier that our CapEx master plans are aimed at repositioning our centers, driving occupancy and growing our income. We completed 3 major projects in 2023: the Phase 2 of the successful diagnostics center in Wood Green with the NHS where they've already seen 63,000 visits, and it's reducing waiting times for imaging diagnostics from 55 minutes in the Whittington hospital to 25 minutes in the Wood Green shopping center; elsewhere in Wood Green, we opened the first of our 2 new food catering concepts, The Bridge, it's open and trading very well; and in Walthamstow, our Crate food hall is trading, and we're making further refinements in operators and price points. These food category environments are showcasing our ability to innovate and informing us for future food catering concepts across the portfolio. In addition to the completed projects, we have a further 2 projects that are committed and on site: in Wood Green, a subdivision of a former large unit to create a gym and 2 express food operators; we've also, as part of this project, relocated the post office into a new dedicated store, fulfilling a desperately needed community service. Our immediate pipeline has 3 projects, including the Gyle refresh that I mentioned a moment ago, and 2 phases at Ilford where our major repositioning master plan is taking shape. More on that in the next slides. Then there is our longer-term CapEx pipeline where we continue to progress our master plans consistent with the community strategy. These projects are typically leasing led, pre-let, accretive to income, with short programs enabling us a high degree of control over delivery and timing. I'd like to turn to Ilford where we're on the cusp of a transformation to this center into our community center format. We're in the midst of an extensive 7-phase repositioning master plan. We've completed 4 phases, including the latest, which is reconnecting the lower level to the new Crossrail station or Elizabeth Line, which is seen in these images on this slide. As mentioned earlier, we're seeing our strongest footfall growth at Ilford, up 8%. And on this lower level, what we once called the Crossrail Mall is now Cranbrook Walk, traffic is up 30%. On Level 1, late last year, we relocated TK Maxx and expanded the store into a new 26,000 square foot format. After 10 years of successful trading down on the ground floor where Cranbrook Walk is today, I'm pleased to say the store looks great, it has an expanded range and it's trading up on its previous location. This is positively impacting sales of surrounding stores and generating leasing demand. And on the upper level, we've handed over a new 20,000 square foot primary care facility with the NHS. It will open next month in May. And it's a state-of-the-art primary care, adding vital capacity to the Northeast London NHS Trust. We have further pipeline phases at Ilford. We're under offer on a 12,000 square foot kids soft play facility, and we're exchanging terms on a 25,000 square feet supermarket for the lower level. All of this activity will fully reposition Ilford into a proven community center format, driving income and value. But importantly, our master plans are not just confined to improving retail mix. We continue to focus on capitalizing on our urban locations and mixed-use development opportunities across our portfolio, emulating our success at Wood Green a couple of years ago and now at Walthamstow. Long Harbour are our partners here, bringing forward the GBP 250 million development on top of our center, and they're making great progress towards a Q2 '25 completion. There are an additional 2 phases at Walthamstow that have planning consent and are not reflected in the current valuation. These include 50,000 square feet of retail where we have demand from supermarket operators and a further 43 apartments sitting on top of that retail podium. There is also a new Victoria Line station within our plans, which is subject to TFL funding approvals. And I'm pleased to say TFL and the council are making positive progress. Once the towers complete later next year, we'll be able to start work. We are continuing to explore and analyze further mixed-use development opportunities across our portfolio. But let's take a closer look at our PRS partner Long Harbour's progress with the Phase 1 towers at Walthamstow. [Presentation]

For all that's been written about turning retail into residential, there is so little delivery in the U.K. So this is a super impressive project from our perspective. And from the local community, we're providing 495 new homes, including, importantly, social rent homes as well. So turning now to Snozone. As Stuart mentioned earlier, the Snozone has made an important contribution to our group adjusted profit. Nick and the team continue to do a great job. Our total revenue was up 16% on the previous year with an EBITDA of GBP 2.3 million, which represents an impressive 64% increase on '22. In Madrid, the team are reducing costs and growing revenue consistent with our underwriting business plan, which has led to Madrid contributing GBP 600,000 of the Snozone EBITDA. It's worth reminding people that Snozone has no debt attributed to it. And importantly, from all of our perspectives, Snozone is making great progress on our ESG and net carbon zero commitments. We continue to explore further growth opportunities for Snozone on a capital-light basis. Turning now to ESG. We've continued the progress we made in the first half on environmental and social, which is a critical part of our community center strategy. Our Scope 2 electricity consumption is down an impressive 31% on 2019, while total energy consumption is down 38%. We continue our efforts to remove gas from our shopping centers, with gas consumption down 72%. And on our important social agenda, we've supported 140 charities this year, hosted 112 community events, and our teams in the centers have volunteered 464 hours. And we know there is always more to do. Before we move to Q&A, I'm keen to share with you a video that's been taken in the Gyle shopping center. We plan to hold a Capital Markets Day in the center soon. However, in the interim, this short video provides great insights on the quality of the center, the catchment and its trading performance. [Presentation]

In summary, we continue to focus on delivery of our proven community strategy to drive our income growth. We're well placed to capitalize on the structural changes in our industry, namely the return to the store and the maturing of online retail, together with the significant growth in value and discount retailing in the U.K. We couple this with our balance sheet stability, the investments we've been making in CapEx and our acquisition last year of Gyle shopping center. We will continue to refine and fine-tune our strategy, our platform and our customer proposition in line with the needs of our local communities. Combined, these factors enable us to accelerate our operational momentum and continue our earnings and dividend performance. I'd like to turn now to Q&A. Starting with those in the room first, please raise your hand if you've got a question, and then we'll go to our online audience. Thank you.

Miranda Cockburn from Berenberg. Just a couple of questions coming from your statement. There were two things I thought I'd like you to just expand upon a little bit more. One on the car parking, you mentioned the car parking income's down a little bit and you're looking at alternatives there and things that you can do. I wonder if you can expand upon that. And likewise, on the Department of Work and Pensions leaving 2 of their job centers, again, you say you've got more interest in those. Again, if you can just elaborate a little bit.

Yes. Great. Well, firstly, the car parking point, Miranda, we are seeing, as everyone who commutes or near London or lives in London, and this is part of our GLA strategy is to reduce car usage within London. So we've seen the expansion of the ULEZ, for example. Congestion zone has been here for a long time. We've seen the advent of local traffic zones, which is having the impact of reducing traffic speeds. So I live in Hackney, for example, the council is saying that traffic movement is 30% down in the borough. But more importantly, they've been building car-free buildings, residential buildings in the London boroughs for the last 10 or 11 years in London. So all of that is having an impact on car park usage. But we see that as an opportunity because the car parks owe us, on average, GBP 2.50 to GBP 3 a square foot. So there are ways we can repurpose parts of the car park, and we're actively involved in exploring that now. And if you take Walthamstow, for example, in the residential development, that did take some of the car parking out of the basement level. In relation to the DWP, well, firstly, the location in Ilford is currently subject to an offer from a kids play operator, which I mentioned in the presentation, so we're confident that we'll see a positive outcome there. Those discussions are very advanced. We've been exchanging offers and commercial terms with each other. I think we're now at a point where we're very close to being terms agreed on that. And then, secondly, at Walthamstow, where we have an offer as well for the whole of the DWP space. The DWP space in Walthamstow is a double-unit, so we've also got the option of splitting it back in two, Miranda. But once again, that evidences the leasing demand that we're seeing across the board for the centers.

It's Matt Saperia from Peel Hunt. Lawrence, you mentioned earlier on, you've done a lot of repositioning, but there's more to go. Could you sort of move to some numbers on how much more you think there is? I appreciate it's probably dynamic, but any ideas? And to that point, is it going to be piecemeal? Or are there any big leasing opportunities coming up that might help you to expedite that?

Yes. That's a really good question. As you appreciate, retailing is a very dynamic business. We've seen unprecedented change in the last 5 to 7 years with obviously the advent of online and now the return to the store. So remaining nimble and fleet of foot is really important from our perspective. But also equally important is having a mid- to longer-term view as to what the comprehensive repositioning of each of the centers is. And the way we approach that task is to say, if we waved a wand today, what is the sum total of all the changes we'd make with everything we know at this point in time. So that's what informs these center master plans. We break them into a series of phases. And then obviously, we approach them on the basis of do we have vacant position, do we have leasing demand, is it viable at this point in time, where do construction costs sit versus rent. We're targeting yields on cost, as we mentioned, that need to be accretive to our earnings. Otherwise, there's no point drawing the capital down to do the project. So this is a very dynamic process across the centers, as you would appreciate. There is more to do, but what I can also say is that, because of this master planning approach, we came out of the gates really strongly in 2022. So we went through a period during COVID where we sort of wound the CapEx program almost down to 0, as you'd appreciate. The balance sheet was under a lot of pressure at the time. We came in again very strongly. We've done a lot of the projects effectively. I think we've done a lot of heavy lifting. Ilford is perhaps one exception. We've got some more work to do there. So as we've mentioned, we've got the potential supermarket in the lower floor, Debenhams, where the kids play in the upper level. And then we've got the final plan for the mall that links the new Elizabeth Line station with the potential supermarket offer. So that is probably one of the centers where we've got a larger CapEx pipeline. But very hard to put numbers on because costs change all the time, but we'll never stop repositioning and fine-tuning the customer proposition for these centers. And I think that's 100% the right way to approach it.

Denese Newton from Stifel, just a follow-up actually to Matt's question about repositioning. So if we look at the sort of Slide 14, it's still sort of 27% value apparel. And historically, the thing you've repositioned yourself away from is the fast fashion segment of the market. Are we now at a point where those retailers that you are classifying as value apparel, you're more than happy to have them as that amount of tenant concentration? Or are you looking to reduce that exposure even more?