Helical plc (HLCL) Earnings Call Transcript & Summary

Good morning, everyone. Gerald Kaye speaking, and welcome to the webcast presentation of Helical's year results to 31 March 2020. Sadly, because of the pandemic, all of you are joining us virtually today, and we are unable to meet even a few of you in person. Today's agenda will see me run through your -- through the results highlights. I will then talk about the current environment, together with our thoughts on the way forward. Tim will take you through the numbers in detail, and Matthew will update you on the portfolio. I will then summarize, after which, we will be very happy to answer any questions you may have. Despite the recent uncertainty, we are pleased to be presenting a strong set of results for the 12 months to 31 March 2020. Our profit before tax is GBP 43 million, which is marginally down on last year. However, we are reporting a 6% increase in our EPRA NAV per share, moving up from 482p to 511p. This was due to a gain on valuation and sale of GBP 45.5 million. An analysis of this valuation gain shows that 50% of that gain was attributable to achieving higher ERVs, with the overall impact for new lettings adding a further 20%. A detailed breakdown of the portfolio metrics is provided in the appendix. In February, when we were preparing for the valuation process, we were looking at evidence showing that the yields on several properties within the portfolio might be moving in by 25 basis points. However, the impact of COVID-19 meant that the outcome was for our yields to remain pretty static over the last year, and the yield shift has only added 7%. The sale of 90 Bartholomew Close, at a yield of 3.92%, and capital value of GBP 1,594 per square foot in April, more than supports our valuations, although, I would add that this yield is significantly lower than those applied to the rest of the portfolio. Our net rental income is GBP 28.5 million, and the total accounting return is 7.7%. We are proposing a final dividend per share of 6p. This is a 20% reduction on last year's final dividend, and overall, a 13.9% reduction. Tim will explain that shortly, along with our loan to value of 31.4%. I am pleased that our portfolio showed an MSCI return of 9.6%. This is considerably ahead of the Central London universe of 4.5% and the upper quartile of 6.2%, and it reflects the quality of Helical's Central London portfolio. Overall, we are in the second percentile of the MSCI All Properties Universe. As you can see, our 3-year performance is also strong. The copper bars on this slide show what was let at 31st March 2019. Despite the political headwinds that existed, we have had another good year, with the blue bars illustrating the space we have let in the last 12 months, being all the remaining space at The Tower, One Bartholomew and 90 Bartholomew Close. The only significant completed vacancy is at Kaleidoscope and at Trinity in Manchester. This slide shows our current passing rent of GBP 27.4 million, with a further GBP 10.2 million of contracted rent coming through mainly this year. In addition, when we let the available space, we will generate a further GBP 10.2 million of rent. The end position is a total rent roll of GBP 59.1 million. The good results I have just run through relate to a period I will call BC, before coronavirus. We are now DC, or during coronavirus, and there are encouraging signs that, hopefully AC, will not be too far away. In July 2016, we set a strategy to focus the portfolio entirely upon high-quality Grade A offices in London and Manchester. And by May 2018, we had reduced the portfolio down from 76 assets to 15. We now have 12 assets: 8 in London, being 85% of the gross value; and 4 in Manchester, 15% of value. Also, over the last 2 years, we have completed 800,000 square feet of development, being the final parts of a large program, which is now fully let, apart from Kaleidoscope and Trinity. So if I might call that stage 1 of our strategy, stage 2 is to acquire new schemes and to grow the business. Following the December general election, the New Year started with a strong sense of confidence across the business community. And with this backdrop, we were applying much focus to potential new acquisitions to add to 33 Charterhouse Street, which we acquired in May 2019. Frustratingly, our plans have been curtailed by COVID-19 and the forced shutdown of considerable parts of the economy. So how do we navigate through this crisis? And how are we placed in its aftermath to continue with stage 2 of our strategy? Let me tell you about our rent collection. To date, we have collected 92.4% of the March rents, and a further 3.1% is being paid on a monthly basis. So by June quarter day, we expect to be 95.5% collected. Now as at the March quarter day, we had 113 tenants, of which, 98 were due to pay rent. The others were still on rent-free. Of these, 58, representing 82.6% of total rent demanded, have paid their rent in full, including all our top 10 tenants, which, of course, includes WeWork, whose rent commenced in August 2019. I would also stress that food and beverage and retail is only 2.6% of our rent roll. As we approached the June quarter day, we have already engaged with our tenants and have made it clear that if any are suffering hardship directly as a result of COVID-19, then they should speak to us early to explain their financial situation and why they may want to alter their payment arrangements. We make the point that we are all in this together, and we want those that can pay to pay as that increases the opportunity for us to help those that are in genuine difficulty. Going forward, I would highlight 2 aspects that illustrate the strength of our portfolio. First, in London, all our buildings, apart from the small one in Chiswick, have been fully refurbished or redeveloped in the last 5 years. And in Manchester, we have redone the majority of the common parts and have now refurbished 65% of the office space, with the remainder to be refurbished when we have lease breaks to enable the opportunity. Our portfolio is new Grade A. We think this is important as occupiers after COVID-19 will be even more discerning as the quality of the office buildings they will occupy. Second, our lease expiry schedule shows only a limited number of lease breaks or expiries over the next 2 years. So barring tenant failure, much of our income will be secure. And we believe that the combination of the quality of our buildings and the high standards achieved by our building management will persuade as many occupiers as possible to renew or continue their lease. I would add that our mantra is that if there was a prize awarded to the best-managed building in both London and Manchester, our 12 buildings should all be equal first. The next 2 slides show the potential upside that remains within our existing portfolio as we let up the remaining space and capture reversions through new lettings and rent reviews. There is GBP 60 million of potential upside in London and GBP 15 million in Manchester. Let me move on to the future of the office. As Mark Twain said, "reports of my death are greatly exaggerated." Towards the end of March, we were all forced to work from home. We, along with many other businesses, have made it happen as a short-term solution in extremis. Several prominent business leaders have questioned why their organizations need so much office space on the assumption many can work from home on a continuous basis. Office occupancy costs are between 7% to 9% of operating costs. So will a saving here be significant if it has an adverse impact on the profitability of a business? What will be the effect on the health and mental well-being of staff working from home? What will be the impact on productivity, collegiate behavior, training and motivation from not being in the office? And how do you create business relationships if you rely solely on Zoom calls? I would ask how businesses have succeeded whilst working from home. Judging from the numbers furloughed, I would suggest rather worse than many admit and a sign that little new business is being progressed. I would suggest most of the time has been spent dealing with business BC. The sun has been shining, and everyone has been cocooned in the comfort of their own intimate surroundings. Undoubtedly, more will work from home some of the time. We should also expect to see office occupancy densities reduce as workers are provided with more personal space, and hot desking is also expected to fall out of favor. There will be a drive towards newer, better-quality offices with enhanced fresh air volumes and top-quality general amenities. I expect occupiers will also want greater flexibility for which our Plug & Play model is ideally suited. Yes, we are in a recession, as GDP fell 2% in the first quarter, and it will certainly have fallen by more than that in this current quarter. However, what does that mean for our market? And where do rents and yields head? Clearly, we do not know, but what might we expect? The previous big downturns in the early 1990s and the 2008 GFC were caused by massive financial stress and part of that had played out in over-exuberance in the property markets with above-average levels of new build supply. This downturn is caused by governments around the world turning off their economies, and this is being accompanied by massive monetary and fiscal stimulus in the hope of a V-shaped recovery. That might appear optimistic today, but we are in uncharted territory. However, if one were highlighting the reasons why our assets are more protected, I would point to the fact there is not an oversupply of new space. Taking the CBRE stats at 30 April, Central London availability was 13.95 million square feet, a vacancy rate of 6.1%, of which, only 28% was new completed or due to be completed in the next 12 months. Of the 12.56 million square feet under construction, 60% is pre-let or under offer. Projects would have been delayed between 3 and 6 months by the lockdown, which will further push out supply. As I explained earlier, we anticipate ongoing demand for the Grade A space. But will rents fall? Where the differential certainly will widen is with poor-quality, secondhand space. With interest rates coming down and many companies spread across multiple sectors not paying dividends, will property yields go the other way? I would expect the attractions of a well-let Grade A property in a global city, such as London, to remain. Where pricing is more likely to adjust is for those riskier and poorer-quality assets, which, of course, are just the sort of opportunities we are seeking so that we can apply our experience to unlock their potential. Thank you, and I will now hand over to Tim.

Thank you, Gerald, and good morning, everyone. Gerald has just taken you through our key performance metrics in his presentation. And I want to go through the major components of some of these, in particular, our earnings, our NAV movement and our borrowings, including our loan covenants position. I also want to look at our historic earnings and our dividend. Before I do that, let's look at a few of the metrics on Slide 16. Our total property return, which reflects in monetary terms the performance of the portfolio, is up 3.1% compared to last year. The largest contribution to this, again, came from revaluation gains on the investment portfolio, and this year, a strong contribution from development fees and profit shares. In MSCI terms, this translated into the total property return of 9.6% referred to on Page 5 of the presentation. Our total accounting return on an IFRS basis was 7.7%, and on an EPRA basis, 9.3%. Earnings per share show an improved position, going from negative 8.4p to a positive 7.6p. However, despite this, we are recommending a reduced final dividend, and I'll discuss that further in a few minutes. Moving to the balance sheet. Our EPRA net asset value per share increased by 6% to 511p. And you'll all be aware that EPRA brought in new measures for NAV, and the most appropriate one for Helical, the net tangible assets measure increased by 6.1% to 524p. Most of the other metrics on this slide will be covered in the rest of this presentation. So let's move from the highlights and look at some of the detail. Slide 17 looks at our earnings, where we see the makeup of our EPRA profit of GBP 9.1 million and our IFRS pretax profit of GBP 43 million. Net rents increased by 13%, as we started to see the benefit of the lettings over the last 12 months, with a major contributor to this increase being The Tower at Old Street, which became fully let during the year. As noted in our announcement, the office lettings in London were 5% above March '19 ERVs, and in Manchester, 2.9% above ERVs. We made development profits of GBP 8.1 million at One Bartholomew, where we completed the letting of that pre-sell scheme; and generated development management fees of GBP 2.1 million at Barts Square and at One Creechurch, where we exited the scheme by selling our interest to our joint venture partner. Although we took a hit of around GBP 1.5 million against the carrying value of the remaining Phase 1 apartments at Barts Square, we were able to write back provisions made in previous years against our retirement villages and at Drury Lane, leaving net provisions of GBP 0.3 million, an improved position since the half year. While total administration costs remained steady, at just over GBP 17 million, net finance costs reduced significantly, from GBP 17 million to just under GBP 13 million, reflecting the repayment of the GBP 100 million convertible bond last June. Overall, on an EPRA basis, we had profits of GBP 9.1 million, a good improvement on last year's EPRA loss of GBP 10 million. In addition to the EPRA earnings, there were revaluation gains of GBP 45.5 million, driven by a 5.9% valuation increase on a like-for-like basis. These gains were partially offset by a GBP 7.2 million charge from the valuation of our interest rate swaps, reflecting the very low level of interest rates at the end of March. Overall, these results showed net profit before tax of GBP 43 million. Turning to the movement in EPRA net asset value per share on Slide 18. Our earnings of 7.6p and investment gains of 37.8p took our EPRA net asset value per share over 527p, with tax and payment of dividends in the year reducing this to 511p at the year-end. I now want to look at our LTV and gearing on Slide 19. As a reminder, Helical has used gearing to accentuate performance, and the graph on Page 19 shows the history of our net debt levels and the impact on portfolio value and shareholders' funds over the course of this development cycle. At 31st of March 2020, we had an LTV of 31.4% and a balance sheet gearing level of 49.9%. In fact, if the sale of 90 Barts Close, which we announced on the 17th of April, had occurred before our year-end, our LTV would have been just below 30%, the lowest level since 2007. Going forward, I would expect this ratio to remain between 30% and 40% for the foreseeable future. Turning to Slide 20. The repayment of the GBP 100 million convertible bond in June last year and the additional borrowings on the investment portfolio increased total borrowings to GBP 387 million. Our unused facilities increased by GBP 20 million, with this extra capacity coming from the expanded and extended GBP 400 million RCF signed in July last year. The average interest rate at the year-end was 3.5%, down from 4% a year ago, and the marginal rate of interest on additional borrowings under the RCF is 2.2%. We have hedging on all of our borrowings, which have an average maturity of 5.4 years, up from 3.6 years last year. You will see from the bar chart of debt maturity that the only debt due to be repaid in the next few years is that at Barts Square where, in fact, GBP 22 million of the GBP 33 million outstanding in March has already been repaid through the sale of 90 Barts Close and from the completion of sales of residential apartments. Now I've moved the usual pages on net cash flow movements and the impact on our forecast CapEx program to the appendix, and we'll be happy to respond to any request for further details on these or any other financial schedules after the presentation. But I now want to turn to the income covenants in our loan agreements. Slide 21 notes our compliance with our March loan covenant, where there was significant headroom above all our income covenants. As Gerald mentioned earlier, we've collected 92% of our March rents, with 3% being paid on payment plans. Our good record of rent collection and the security provided by rent deposits and bank guarantees is supportive of the view that we should satisfy our covenants going forward. Further, our banks are being supportive, as they are keen to ensure that we're able to assist our tenants where they need it. And where we've asked them for covenant waivers on a purely precautionary basis, we've received them. I now want to turn to our dividend. Slide 22 shows our recent history of EPRA earnings, dividends, net rental income and rental reversion. You will see that from a high of 17.1p in 2016, we had 3 years of 0 or negative earnings as we rebuilt our income line following the sale of our retail and industrial portfolios. So given that we've had a better year with positive earnings of 7.6p, why have we reduced the final dividend by 20%? Well, we're a business that delivers shareholder value primarily from the development and letting of high-quality office space. But we also feel it's important to support property returns with a dividend paid from sustainable earnings. And we've been working towards this over the last few years, letting the space created from our development pipeline. However, we are currently operating in a more uncertain world. And despite the success of the collection of the March quarter's rent, it is too early to be confident of this being repeated in June. In addition, if there's one identifiable financial impact on Helical of the COVID-19 crisis, it is that our 2 schemes at Kaleidoscope in Farringdon and Trinity in Manchester, accounting for almost GBP 9 million or 15% of the portfolio's ERV, remain vacant. This latter point means that our earnings in the current year will be down compared to where we expect it to be. So we've taken action elsewhere to reduce outgoings and preserve the group's cash resources. And on balance, and it is a balanced judgment, we believe the prudent decision is to bring our total dividend down to around where it was a few years ago and to a level where it is almost 90% covered by last year's earnings. This provides us with the opportunity to grow future dividends linked to sustainable earnings over the medium term. Finally, in summary, on Slide 23, as just mentioned, our March rent collection was excellent, and we are working with tenants to help them through the next few months. We are targeting a completed let and fully stabilized investment portfolio of GBP 1 billion to GBP 1.1 billion, with current contracted rents of GBP 37 million growing to GBP 47 million on the letting of our vacant space and then on to GBP 59 million on the completion and letting of 33 Charterhouse Street and the capture of reversionary rents. At this point, assuming no movement in market rents or yields and satisfactory recovery from the current crisis, we'd be operating at an LTV level in the early 30s, with a significantly enhanced earnings profile. Further growth will then come from new projects. And with a robust balance sheet, GBP 196 million of unused bank facilities and GBP 83 million of cash and good relationships with a variety of potential joint venture partners, we have the firepower to take advantage of opportunities that may arise in the future. And with that, I'll hand you over to Matthew.

Thank you, Tim, and good morning, everyone. I'm going to cover some of the portfolio highlights of the year, with detail on the individual properties being provided in the appendices within the presentation document. As Gerald mentioned, we have a portfolio of 12 assets, 8 in London and 4 in Manchester, with our London focus being on multi-let offices within the Farringdon and City Tech Belt area. We have The Bower at Old Street comprising 3 distinct buildings; a cluster of 4 in Farringdon; and our revitalized Victorian warehouse, The Loom, in Whitechapel. Focusing on Farringdon for the moment. This aerial shot highlights the concentration of our assets around what is a fast-evolving and dynamic area with our recently completed development, Kaleidoscope, at one end of the Farringdon Crossrail station platform and our latest scheme, 33 Charterhouse Street, under construction at the other. The Museum of London, relocating to the general and poultry market buildings, which are being reimagined by Architects Stanton Williams, will be a cornerstone of the Culture Mile initiative. The proposed repurposing of Smithfield meat market will add to this vision of creating a world-leading contemporary arts and cultural hub. The arrival of Crossrail and the delivery of the city of London's ambition for a destination of culture and creativity, which will see significant new urban realm initiatives will, we believe, drive occupier interest and further investment into the area. 33 Charterhouse Street is our latest office development project, and this was acquired in a 50-50 joint venture with AshbyCapital. Since acquisition, we have obtained planning permission for alterations, which will allow us to relocate plant into the basement, add an additional floor of office space, and remove an unnecessary atrium, increasing the net floor space by over 13,000 square feet. Work has commenced on site, and we aim to deliver the completed building in the summer of 2022. With an expected GDV in excess of GBP 300 million once successfully let, we would envisage our share of the profit to be in excess of GBP 25 million. Having delivered our Kaleidoscope office development on time and on budget above a live Crossrail project, we were disappointed not to be able to proceed with our building launch due to the COVID crisis. We are, however, extremely pleased with the quality of the product which provides interesting light-filled space, with an extensive roof terrace offering spectacular views. Prior to the lockdown, we were in detailed discussions with several parties. Naturally since then, progress has slowed, and some of that interest is currently on hold but we're expecting interest to increase as the work -- as the return to work gains momentum. We remain one of the very few brand-new office buildings able to offer this size of floor plate in a sought-after connected location. Moving on to sales. At the beginning of this year, we sold our multi-let office campus in Chiswick to a private U.K. investment manager, ahead of book value, reflecting a net initial yield of 4.8%. This was followed in April with the sale of 90 Bartholomew Close, one of the few sales occurring during the height of the COVID crisis, where our joint venture with Baupost achieved a net initial yield of 3.92% in selling to La Francaise Real Estate Partners International. We feel this highlights the ongoing attraction of prime Central London commercial real estate. At Barts Square, we have sold 21 residential units in the year, taking the number of units sold to 192. The delivery of the final-phase units has continued throughout the lockdown period, and we've been able to complete those sales, despite the constraints. Marketing has also continued throughout using virtual viewings, both in the U.K. and in Asia. And as of the 18th of May, we've been able to offer physical viewings. We have a good variety of available units and a diverse purchaser spectrum, so we are confident looking forward. In Manchester, where we have about 15% of our assets by value, we have a resilient income stream, with our let buildings, Broadhurst and Lee and 35 Dale Street. Reversionary rents can be captured with ongoing asset management initiatives, with limited CapEx required. Having largely completed all our planned refurbishment works across the Manchester portfolio, our focus will be on letting the remaining space of Fourways and of course, Trinity, where we have several tenant discussions ongoing. We will continue to take advantage of our clustered assets, moving occupiers around the portfolio, as their spatial and business needs demand and offer Plug & Play options as required. We are very keen to add to our development pipeline in both London and Manchester. We would expect to see opportunities emerge, both on and off market, given that some property owners will experience financial stress as a result of the current climate. Given the constrained supply of quality new office space, we would hope to deliver new schemes into the market, either directly or in joint venture with our trusted partners. I will now hand back to Gerald for a summary.

Thank you, Matthew. A year ago, I identified some key milestones we wanted to achieve. These things can come back to haunt you, and we have not been helped by the political chaos raining much of the last year and lockdown for the last 2 months. But I can report 100% letting at The Tower and One Bartholomew, successful asset recycling and an exciting scheme at 33 Charterhouse Street to get our teeth into. We need to let Kaleidoscope and Trinity, sell the remaining residential parts, manage our rent roll and make acquisitions to feed our pipeline. I will look forward to reporting further progress when we see you in November. We have a Grade A portfolio. We seek to protect our value as we navigate the downturn and grow the business by way of repositioning, refurbishing and redeveloping when opportunities arise, either with our own resources or working with partners. Thank you very much, and we would now be pleased to answer any questions you may have.

[Operator Instructions] We will now take the first question from Matthew Saperia from Peel Hunt.

Two questions, if I may. First one, about 33 Charterhouse. I was wondering where you are in terms of the construction contracts and whether you think the current pandemic is likely to have any impact on the costing of building new buildings. And the second question, I noted, Gerald, you mentioned that WeWork paid their rents up on The Bower on time and in full. And I know that, that isn't the case elsewhere. I was just wondering what conversations you had with them and why you think they've chosen to pay their rent there where they haven't on other buildings.

Thank you, Matt. First of all, on Charterhouse Street, we're in the demolition phase at the moment. We're demolishing the ground floor and the basement slabs. Keltbray, who were carrying out that work, did stop for 2 weeks during the pandemic whilst the construction industry protocols were put in place. And when they were fully in place and fully endorsed by the government, they went back to site, and they're currently proceeding very well with their work. They will then put in the basin slab and build the concrete frame from which the steel will be hung. So we anticipate the building being completed sort of late summer 2022. As to your question on building costs, it goes in different ways, doesn't it? Because building costs could go up because we see some inflation. But is the cost of labor going to come down? What will happen with Brexit? Will there be tariffs? Will there not be tariffs? We are prepared for a range of possibilities, but we are working very hard with our QS and with Mace, who are -- who will be our appointed contractor. And your second question, your assumption that WeWork have paid the rent is correct. And that is the -- any conversations we've had with them have been positive.

There are no further phone questions. [Operator Instructions].

Just received an e-mail question. Can you comment on what has happened to the potential occupier demand for Kaleidoscope versus pre-COVID? And have you seen any notable changes to the type of tenants, for example, by business segment? Finally, are you seeking a single-tenant or multiple tenants now more likely?

Matthew, would you like to pick that one up?

Certainly. I mean we completed the building literally just prior to Christmas. And a lot of the public realm works are ongoing at the moment. And just prior to the lockdown, we had some pretty good and well-advanced discussions going on with one party for half of the building. And we also had 3 or 4 other parties circling for the whole. Since lockdown, the party looking at half the building has -- their interest has disappeared because of the nature of the business that they are in. However, the 3 or 4 other parties are still there and looking to proceed once everyone is sort of back to work, and they're in a position to take things forward. I don't think the nature of the occupiers has -- the occupier interest has changed. It's still fairly varied from consultancy businesses to fintech. It is varied, but I don't see the nature changing post COVID necessarily. But I do suspect it will take a few weeks, months before people are able to focus on new acquisitions, I think. But it's encouraging to see new inquiries emerge on a recent letting call, and viewings are beginning to take place with the right protocols in place.

Okay. Thank you, Matthew. No more questions? So thank you very much, everyone, and we look forward to seeing you later in the year. Thank you. Goodbye.