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

Good morning, and welcome to our 2024 half year results presentation. It's great to see so many familiar faces here at [ DB ] Numis and of course, on our webcast this morning. I'm Lawrence Hutchings, Chief Executive, and I'm joined today by my co-presenter, Stuart Wetherly, our Finance Director. May I start by acknowledging the recent announcements concerning the company. I'm sure you'll understand that we are bound by the takeover code, therefore, legally unable to share any details. For information on the recent public statements, please refer to the Investors section on our website. As many of you are aware, I'm moving on after 7 years here at Capital & Regional. Despite the distractions of the recent corporate activity and my impending departure, I remain 100% committed to driving this business. As this set of results demonstrates, it is very much business as usual. Let's turn to the H1 headlines. It's been a busy and successful first half despite the occasional crosswind. I'd like to acknowledge the strength and commitment our teams have shown in delivering these really strong results today, 48 leases signed in the period, which is an increase in both deal count and total rent secured versus the first half last year. These leasing transactions were all concluded at premiums to ERV and the previous passing rent. This drove our occupancy up to 93.9% from 93.4% in December, but more on our leasing efforts later. Our rent collection is at a record high since I arrived in June '17 at 99.2%, demonstrating the vibrancy and profitability of our locations for our retailers. Together, this drove an increase in our adjusted profit from GBP 7 million to GBP 8.2 million, feeding through to a first half dividend of 2.85p, which is an increase of 3.6% on the first half last year. Importantly, our NAV was flat at GBP 203.9 million. Our valuations have been stable now for 3 years. I'd like to pass over to Stuart to take us through the financials in more detail. Thanks, Stuart.

Thank you, Lawrence, and good morning, everybody. As Lawrence has said, we've made a good start to 2024. The successful integration of our Gyle acquisition has seen us grow NRI and adjusted profit, both by 17.1%. Rent collection remains best in class with H1 at 99.2%. Snozone has had a record H1, delivering revenue growth in both the U.K. and Madrid. All of this has given us the confidence to increase the dividend to 2.85p per share. It's also been a period of balance sheet stability. NAV has increased by GBP 1.9 million with a small reduction on a per share basis, reflecting the shares issued for the recent June scrip dividend. Group net LTV has improved to 43%, reflecting both property valuations and cash being marginally higher than in December. And our debt cost remains fixed at a competitive 4.25% with an average of 3.6 years to maturity. Drilling down into adjusted profit. Overall, we've seen an increase of 17.1%, albeit this reflects a 12.1% reduction on a per share basis. There are a few ups and downs as illustrated on this bridge. We made a strong start to our ownership of Gyle, with it contributing GBP 2.1 million to adjusted profit. NRI has otherwise fallen by GBP 0.7 million. This primarily reflects a combination of increased void costs and the impact of the Wilko administration. We have successfully replaced the 3 Wilko units with B&M, however they opened at the end of May. Interest has increased as a result of the repricing at Ilford debt following the end of the previous interest rate swap in March. External management fees have fallen as previously flagged due to the sales of Redditch and Luton during 2023. Snozone has had a great first half of the year, registering an EBITDA of GBP 1.9 million, 19% up on 2023. This reflects revenue growth at both U.K. and Madrid, offsetting inflationary wage and utility pressures and total costs are marginally down. This plays the scalability of the platform, noting that we've been able to take on Gyle with effectively no additional cost. Valuations have been stable since June 2021, a 3-year period where there's been a lot of volatility in other real estate sectors. Movement in the first half of the year was an increase of 0.6%. And the asset management and leasing initiatives undertaken at Gyle since we took ownership just under a year ago has already delivered an uplift in value of 5%. We retain a long-term secured debt position, 98% fixed until September next year and circa 80% until at least January 27. On Ilford, we extended the facility until September 25, with further conditional options agreed out to the end of '27. The existing interest rate swap on Ilford matured in March. We've capped the all-in rate at 5.5% until September next year. On Hemel Hempstead, we have a waiver of all covenants until maturity in July next year and an option to extend for a further 2 years. Our operational momentum and balance sheet stability has given us the confidence to again increase the dividend. We're pleased to confirm an interim dividend of 2.85p per share, a 3.6% increase from 2023. Reflecting the corporate position, we do not, on this occasion, plan to offer a Scrip option. We'll pay the dividend 100% PID to expect to cover our minimum PID threshold for 2023, a year ahead of the requirement. The dividend provides a strong yield for shareholders and is healthily covered 1.3x by our adjusted profit. Overall, I'm pleased to report a good start to 2024 with a successful integration of Gyle, a strong performance from Snozone and improved leasing momentum. With that, back to Lawrence to give you more color on operations.

Thank you, Stuart. When we set the community strategy in 2017, we did so in full light of the structural changes that were evident in the retail sector. These include the impact of digital disruption or online shopping, the increased importance of community and localism, otherwise known as the 15-minute neighborhood and the rise of the value retail segment. The community strategy stands the test of time and is as relevant today as it always has been. We've learned a lot in the past 7 years about the core attributes of a successful community center. At the heart of all real estate location and our growing trade areas and transport connectivity, layered on to this, our tenancy mix, customer services and our proven ability to tailor our proposition into these diverse communities to maximize retailer footfall, sales and our income. Central is our customer proposition or merchandising, and we call these the core pillars: our grocery, services, health and beauty, food catering and value apparel offers. And there is a direct correlation between our customer proposition and our leasing and income growth objectives and outcomes. I'm pleased to say that we continue to make significant progress remerchandising our centers into the community center model. As this graphic demonstrates, we have seen considerable growth in our key anchor categories, including grocery, health and beauty, services and food category, whilst continuing to reduce our fashion exposure in favor of value apparel and sports, which resonates the strongest with our core guest profiles. Value retailing is underrepresented in the U.K. compared to other European markets. And based on research from PwC, it is one of the highest growth categories in the U.K. in terms of floor space take-up. The value of nondiscretionary sectors also have amongst the lowest levels of online penetration. In short, the majority of consumers prefer the convenience of store-based retailing and retailers prefer the increased profitability of stores over the online channel. We're continuing to see increased use of our stores for omnichannel retail and an increasing role in recruiting new customers where the store has a lower average cost of customer acquisition. The store has a critical role in the future of retailing. The transformation in our merchandising in line with the community strategy has another key benefit. The increased diversification and strengthening of our retailer roster or top 10 retailers. We're proud to welcome B&M to our top 10, but more on B&M in a moment. These retailers are robust, established stable household names who, in many cases, are growing and importantly, opening new stores. Turning now to Leasing, which is the lifeblood of our business. It's delivering the repositioning of our centers into the community model and driving our income growth. We completed 48 transactions totaling GBP 2.2 million in the first half compared to GBP 42 million and GBP 1.5 million in the same period last year. It's great to see stronger volumes of leasing, both in transaction numbers and values. The spreads were also positive, plus 8.8% on passing rent and 14.1% ERV. We are very comfortable with our 4.8-year WALE, which provides us the scope to continue our active approach to management in further repositioning and remerchandising our centers, which in turn enables us to grow our rent. Whilst leasing is vital, we are conscious of the need to ensure the right quality of presentation. Our internal projects and design team works very closely with our retailers to encourage creativity and the highest standard of presentation and design. Here are some examples of this approach at work and how you can see how this contributes to transforming our customer proposition. We have national brands, including Holland & Barrett, Starbucks, Wingstop and Wendy's or our local independent retailers where we work very closely with them through the design, planning and fit out process and then post opening to maximize their trading performance. Turning to B&M. The recent deal is a great example of our leasing capability at work. We leveraged our assets and relationships to replace a top 10 retailer in record time. After a competitive process led by our leasing team, we use the demand for Wood Green to secure offers on all ex Wilko units. This was over 94,000 square feet of retailers -- sorry, of retail floor space and 3 stores, GBP 500,000 in rent and importantly, mitigating GBP 900,000 in service charge and business rate liabilities. The stores are open, we're pleased to say and are trading very well. And we're actively exploring opportunities for more B&M stores in our portfolio on the back of this success. Pleasingly, our leasing momentum has continued post our half year close on 30 June. We've exchanged an additional 12 deals, totaling 774,000 in headline rent. And there are further 19 transactions in solicitors' hands, representing an additional GBP 1.48 million in headline rent. Pleasingly, our leasing pipeline is dominated by our community center retailers where store or physical footprints remain vital. Turning now to Gyle. This is the acquisition we made this time last year. We continue to make great progress against our underwriting asset plan. Leasing was always a central pillar and improving our occupancy and undertaking some key lease renewals. Pleased to say we're ahead of plan. We've undertaken 5 new leasing transactions over H1 with GBP 320,000 pounds of rent. We have a further 10 leasing deals since this in hand, representing just under GBP 1 million in income. And we're seeing strong interest from retailers for both national chains and catering formats. This includes NHS, Claire's, Bank of Scotland and Specsavers, where we've concluded deals. The other area of focus is investing in our customer proposition. We've undertaken a major reservicing of the car park, which was in a poor state of repair and the subject of a considerable number of complaints from customers and retailers. We've installed ANPR cameras to better understand and improve car park usage, and we've agreed terms with a major recharging facility addressing the feedback from our guests and our anchor retailers. We're progressing on the Refresh of the center, where we've now agreed the design and have detailed costings ready for tender. And we're exploring with our design team options to increase food catering in line with the demand we've identified from both operators and our guests. The considered deployment of CapEx to grow income and reposition our centers continues. In H1, we've completed 3 significant projects, including the 20,000 square foot NHS primary care facility in Ilford. The NHS have opened Phase 1 in April with further phases to follow. The Cranbrook Walk Precinct also in Ilford, which comprises 10 temporary kiosks and common area seating. This is a prestage to a longer-term solution once the supermarket anchor for this level is signed, more on that in a moment. And in Wood Green, we subdivided the former WH Smith store into 3 new units; for Pure Gym, Wendy's and Wingstop. We're pleased to report the Cranbrook Walk and our 3 new Wood Green stores are trading ahead of expectation. Turning to the next phase of our CapEx projects. We're busy progressing 3 initiatives. In Ilford, we're close to exchanging agreements for lease on the next 2 phases of our comprehensive 7-phase repositioning master plan. Phase 3, the new full-line 29,000 square foot supermarket will anchor the lower level and replace part of the former Debenhams store. This will support our leasing of the new mall, linking the car park and the Elizabeth line station, following the successful relocation expansion of the TK Maxx store. We're in Solicitors' Hands with the supermarket and advancing design and construction contracts for lessors works. Moving to Phase 4. On the top floor, we're working to exchange contracts with a local Kids Play operator. We're in Solicitors' Hands, 15,000 square feet of soft play, responding to the need we've identified in that market and the larger families common in the Redditch community. In Wood Green, we are progressing with the breakup of the former new look to create a 15,000 square foot store for a leading European mother and baby chain. These projects will further reposition our centers into the community model, increase income and drive better leasing outcomes in surrounding stores. We look forward to updating you as these projects progress. So much has been written about retail to residential conversion. However, the U.K. shopping center market is littered with planning consents for high-density residential projects that may never be built for a variety of reasons. The complexities and dynamics are considerable, rising construction costs, increased carrying costs or interest rates and downward pressure on values have all played their part. I am very proud of what we've achieved in Walthamstow, where we will deliver with our partner Long Harbour in March next year, 495 build-to-rent apartments in 2 towers, which are nearing completion, as you can see in these photos. This is Phase 1. In addition, we'll recover 8 stores, which were needed for construction, and we already have offers on the two of those. The center and our retailers will benefit from having in excess of 1,000 new residents on the roof, and we provide much needed homes for London, including affordable rent for the local community. And we are looking forward to the center coming back in full working order as the construction completes. There are 2 further phases, including 42 apartments and 50,000 square feet of retail. We already have retailer demand from supermarkets and large format value retailers. Importantly, the future phases are consented, and we control the land through the regearing of our head lease with the council. And it's great to see that council and TFL are progressing the funding for the new Victoria Line Station entrance, which will sit within our center and further boost footfall, sales and rent. Turning to Snozone. The team continued to deliver ahead of plan in both the U.K. and Madrid. The first quarter, one of the busiest of the year was ahead of last year, and Q2 also outperformed our plan, leading to a 9% increase in revenue, an 11% increase in EBITDA. Nick and the team are doing a great job improving customer experience, driving revenue and actively managing costs. It's pleasing this is being achieved whilst reducing our carbon footprint with both energy and water usage down. Snozone did some amazing work supporting and promoting snow sports and charities with charities and local schools. And we continue to actively explore opportunities to grow Snozone and our leisure business and leverage the expertise of our team. Speaking of ESG, it's a pleasure to lead a business that takes its responsibilities to the environment and the communities we serve so seriously. Our Scope 1 energy and Scope 2 natural gas consumption numbers continue to improve. Our commitment to social is intrinsic in our community strategy. We continue to support a wide range of charities, 116 during the first half with 125 events, 400 volunteering hours and over GBP 175,000 invested in supporting our community, local community charities. Pleasingly, our approach to health and safety has been recognized with our 12th consecutive RoSPA Award, the Royal Society for the Prevention of Accidents. Bringing it all together, we have stabilized the business after 5 years of headwinds and challenges. Importantly, after 10 years of digital disruption, we're witnessing a return to physical retailing in what many are calling the second wave of structural change in our sector, the return to the physical store. Our balance sheet and income statement are in the strongest position since 2017, and our centers have been transformed, especially our London estate. In addition, we're excited by the progress we are making at our new acquisition, Gyle. The implementation of our community strategy has given clarity to the purpose of our business. Ultimately, it comes down to how we serve these important and diverse communities. We are proud of the work we're doing by providing better services and facilities, creating opportunities for local entrepreneurs to establish their businesses and thrive by creating jobs for local people and working with our council partners and charities to make people's lives that little bit easier. These are at the heart of our strategy that what drives us and now why I'm confident that we will continue to deliver. A big thank you to our team for all their hard work in delivering these results. Thank you. Now to our questions. We'll start with the audience, and then we'll move across to the webcast, if it's okay. Is anyone in -- Miranda?

Miranda Cockburn, Berenberg. Just a couple of minor questions. Firstly, just ERV growth. You obviously have got some good lettings there ahead of ERV. Was that actually any ERV growth reported in the half year?

It's probably an opportunity to introduce James Ryman, who is our Investment Director to the audience. I think many of you know James. But James, the growth in H1?

Yes. No, we have seen ERV growth come through. So a number of those transactions, particularly CapEx plans that are coming through moving rents forward. They've been pushed through into cash flows coming forward. So I think generally that has come through in stable and building.

And then just a couple of other ones. Hemel Hempstead seemed to do very well this year or this half year. Just in terms of that like-for-like uplift, was there any particular reason behind that?

James, again, but I think most of that reflects the B&M lending, James?