Helical plc (HLCL) Earnings Call Transcript & Summary

Good morning, everyone. Gerald Kaye speaking, and welcome to the webcast presentation of Helical's half year results to 30 September 2020. I was very much hoping that we would be able to present to you in person. Whilst this looked like a strong possibility in September, sadly, that is not the case. Let me run through the agenda for today. I will explain the highlights from the results, then talk about what is going on in the market and outline our strategy going forward. Tim will run you through the numbers, after which Matthew will update you on the portfolio and expand on the strategy. After a summary from myself, we will be pleased to answer any questions that you may have. We report a small loss, but that is not surprising, as we've all been battling strong headwinds since March. Our NTA is down 3.6% from the 524p as at 31 March to 505p now. This is due to a valuation and sale loss of GBP 4.5 million, which reflects tenant failure rather than any reduction in ERV or outward yield movement. Our net rental income is GBP 11.9 million, down 8.7%, reflecting portfolio sales. We are proposing an interim dividend per share of 2.7p, which is the same as last half year. You will be familiar with this slide. In the months since 31 March, we have let a further floor of 55 Bartholomew and half a floor at Trinity. This is symptomatic of the general lack of activity in letting markets, which I will explain in more detail shortly. Kaleidoscope is under offer and a further 24,300 square feet is also under offer at Trinity. This chart shows our current passing rent of GBP 30.9 million, with a further GBP 5.8 million of contracted rent, of which GBP 3.3 million is added this year. When we let the remaining available space, which is mainly Kaleidoscope and Trinity, there is over GBP 10 million of additional rent. The final position is a total rent roll of GBP 59.3 million. The total ERV in Manchester, excluding Trinity, is GBP 7.6 million. So that will now go as a result of the portfolio sale, which we announced last Friday. Since COVID struck, rent collection has become a key metric that we monitor. To be clear, we report against our total rent rather than a lesser number after concessions are excluded. In March, we collected just under 95%. For June, we have collected 91.7%, with a further 3.7% under discussion. And for the latest quarter, September, we have collected 86.8%, and we anticipate a total collection between 91% and 94% by the end of December. To preempt any questions re The Bower, all the office tenants paid the September rent in full. Finablr were due to start paying rent in October following the expiry of their rent-free period. Payment is under discussion, in red on the pie chart. And we await to see what happens to the company now that their guarantor is in administration. Let me remind you that we have a new Grade A portfolio, with virtually all of our space newly built or fully refurbished in the last 5 years. In a market where there is a flight to quality, occupiers are seeking the best-presented buildings with good amenities, particularly ample bike parking and showers. As Matthew will explain shortly, we seek to achieve the highest environmental standards with our buildings. This slide is useful to show the longer-dated nature of our income. The main lease event this year is Senator exercising their break on the ground and first floor at 25 Charterhouse Square. They have now completed their reinstatement works, and we will launch this space early next year. Here, we illustrate the potential upside that remains within our existing portfolio as we develop out 33 Charterhouse Street, let up the remaining space and capture reversions through new lettings and rent reviews. There is at least GBP 67 million of potential upside to be achieved over the next few years. 6 months ago, I said the reports of the death of the office were greatly exaggerated. The working-from-home experiment started in March. Some of us have got back to the office in the summer, but others have been marooned at home throughout. Whilst the debate continues, a few things have become clear. WFH is boring and lonely. There is no divide between home and work life and mental health issues have emerged. The ergonomics for many are substandard. Productivity of those working from home is reducing rapidly as the teamwork and knowledge established in the office environment dissipates. WFH ignores onboarding for new staff. And vitally, it makes it very difficult for the younger and less experienced to learn their business, as their only exposure to the more experienced is via the odd Zoom call. Working from the office enables face-to-face communication and collaborations. The shortcomings of Zoom become ever clearer as one re-experiences real face-to-face meetings. The office allows the less experienced to soak up knowledge and to build relationships internally and externally as well as to establish that vital ingredient of trust. The office provides a better working environment and is an important element of social life for many. How will the office change going forward? And how much of this change has been accelerated as a result of the pandemic? Density will reduce. The graph from CBRE puts this into perspective. To return to the density levels only 5 years ago would require 20 million square feet of additional space. Post-COVID workers will want more space so density will reduce and desks will be spread out. Workers must want to be in the office rather than need to be in the office. Wellness and amenity will be vital. That means more bicycle spaces, more showers, more lockers. Air quality will be all-important. I expect this will be measured and observable by workers. Spaces in which to collaborate and relax would increase. And whilst I suspect Zoom is here to stay, that also means the need for more private spaces to enable people to participate in these calls as an open-plan office is not ideal for those around the Zoomer. Buildings will be smart. We will have an app for all the occupants of our new development at 33 Charterhouse Street to provide them with an innovative technological experience. We have some more detail on this on Page 44 in the Appendix. We will all work towards net zero-carbon offices, and we need to achieve a single definition of what this actually means and how it can be accurately measured. How will the office work? To my mind, the whole point of the office is that as many people as possible are there together. And this is defeated if half the office are always WFH. Will there be core hours when everyone is encouraged to be in the office, giving flexibility for those that want to start early and leave early and start later and finish later? This will also help spread out the commute. There has been much written about the hub-and-spoke approach, where employees will set up small offices around the M25 for their employees to go to rather than the HQ in the center of London. I cannot see this being practical. It will add considerable cost to the business and defeats entirely the purpose of getting everyone together. Let me give you our views on the London office market. The prime end of the investment market is strongly underpinned by interest rates close to 0. Yields are unchanged from the start of the year, and CBRE are reporting circa GBP 38 billion targeting the market. What will be interesting to watch is the older buildings with up to 5 years before the leases run out. It is highly likely tenants will want to vacate these worn-out buildings, leaving the landlord faced with considerable CapEx to fully refurbish and renew the building before re-letting. Our view is that these buildings are currently overpriced, and we are beginning to detect buyer reluctance, which will lead to reduced pricing to reflect the risks involved. There is still good demand below GBP 100 million for development and refurbishment opportunities when they are properly priced, unlike the shorter-term investments I've just mentioned. Whereas there was only around GBP 1 billion of stock on the market in June, there is now around GBP 6 billion, of which GBP 3 billion is under offer. Will there be the same mad flurry of activity towards Christmas, similar to last year? The letting market is weak in comparison to the investment market. This is not surprising, bearing in mind lockdowns and Central London having been deserted for much of the year. Occupiers are delaying decisions whilst they work out a post-COVID regime. Also, in an uncertain market, landlords will allow their tenants to renew for a short period. So I think what we are seeing is a postponement of demand rather than a cancellation. We can, therefore, anticipate a stronger letting market when the economic recovery is underway. Whilst the vacancy rate is increasing rapidly, much of this space is poor quality, second hand and with smaller floor plates. This is all made -- this is also made up of gray space that may well be reoccupied by the tenant as confidence reemerges. Particularly with occupiers wanting the best for their staff, there will be a flight to quality, and the rental differential between the best and the rest will widen considerably. So please let me finish by summarizing our strategy. First, may I stress the quality of our platform. We have a highly experienced team, which has established an enviable track record in London over the last 25 years. Since March 2016, we have disposed of over GBP 1 billion of real estate. That's our share. And the gross value of the 1.2 million square feet development program, which we have delivered since then, is also over GBP 1 billion. In the process, we have reduced our LTV from over 55% 4 years ago to 22% today. As we continue to show, we've sales at or above book value. Our Grade A portfolio I described earlier is liquid. We will recycle some assets and the sale of the Manchester portfolio gives us considerable additional cash resources. The market is entering a period of dislocation, and we believe the timing will be right to begin to redeploy our firepower. We seek to acquire new opportunities, whether they be new developments or refurbishments of older buildings. The advantages of these are both speed to market and an improved carbon footprint. We will also look at income-producing assets, which we can reposition. We will maintain discipline in what we buy in terms of location, and our assets must be a premium product, reflecting fully how occupiers' requirements are shifting with the best amenity, public realm and be sustainable. Thank you, and I will now hand over to Tim.

Thank you, Gerald, and good morning, everyone. Gerald took you through some of our key performance metrics and the results highlights of his presentation, and I want to go through the major components of some of these. In particular, our EPRA earnings, our EPRA NAV movement, now on a net tangible assets basis, and our borrowings. I also want to look at our historic earnings per share and our dividend. Before I do that, let's look at a few of the metrics on Slide 15. Our total property return, which reflects, in monetary terms, the performance of the portfolio, has fallen from GBP 28.6 million last year to GBP 6.9 million this year. We'll go through this on the next slide. Our total accounting return on an IFRS basis was negative 2%, and on EPRA net tangible assets was negative 5%. Earnings per share fell as a consequence of a reduction in net rental income and the lack of development profits this half year compared to last. Despite this, we've declared an unchanged half year dividend of 2.7p, and I'll discuss this later in the presentation. Moving to the balance sheet and adopting the new EPRA measure, our NTA fell by 3.6% to 505p. On the old measure, our NAV per share fell by 2.2% to 500p. 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 16 looks at our earnings, where we see the makeup of the EPRA loss of GBP 1.2 million and our pretax loss of GBP 12.7 million. As noted in the announcement, net rental income has fallen by 8.7%, reflecting rent concessions granted to a small number of tenants, largely F&B, and the reversal of income previously recognized under IFRS in respect of our letting to Finablr at The Bower. We made a development loss of GBP 0.5 million at Barts Square, selling some of the last remaining units in Phase 1 at a loss once sales and marketing costs have been taken into account. This loss compares to GBP 5.7 million of development profits last year when we recognized profits on the letting of One Bartholomew. Our recurring administration costs were down 10% compared to the corresponding period last year, with a much-reduced provision for performance-related awards. And although finance costs were 13% lower than last year, net finance costs were marginally higher than last year, which included GBP 1.3 million of finance income absent this year. Overall, on an EPRA basis, there were losses of GBP 1.2 million or 1p per share compared to EPRA earnings of GBP 6.5 million or 5.4p last year. Our portfolio fell in value by GBP 4.5 million or 0.5%. And with a charge from the valuation of our financial instruments of GBP 5.3 million as medium- and long-term interest rates continue to fall, we made a net loss before tax of GBP 12.7 million. Turning to Slide 17. This is the first period for which we are reporting under the new EPRA measures. And in common with most other companies, we've adopted the net tangible assets per share measure to replace the net asset value per share used in previous periods. The major new factor for us in calculating this figure is that we need to make an assumption with regard to the likelihood that tax liabilities will crystallize. For REITS, this is not relevant as they do not pay tax on their income and capital gains. But for us, this is a reminder that as a non-REIT, we pay tax on both. Turning to the detail of Slide 17. Our loss per share of 1p and investment losses of 3.8p both reduced our EPRA NTA. The payment of our final dividend from last year of 6p and the recognition of tax liabilities now likely to be crystallized under this new measure reduced our NTA per share to 505p. This compares to the NAV on the old EPRA basis of 500p. I now want to look at our LTV and gearing on Slide 18. As a reminder, Helical has used gearing to accentuate its performance, increasing and decreasing at different points of the cycle. The graph on Page 18 shows the 10-year history of our net debt levels and the impact on portfolio value and shareholders' funds over the course of this cycle. At 30th of September 2020, we had an LTV of 32.2% and a balance sheet gearing level of 51%, both marginally above our March year-end figures. However, as noted in the results, subsequent to the half year-end, we've sold 3 of our properties in Manchester. And if this transaction had completed on the 30th of September, our portfolio value would have been GBP 805 million, and our LTV would have been 22.4%, the lowest period-end LTV for at least 30 years. Turning to Slide 19 and looking at our debt profile. We increased our bank facilities to provide finance for 33 Charterhouse Street, with our 50% share of its GBP 140 million development facility. This facility was undrawn at 30th of September and will fund all future development costs. At 30th of September, we had GBP 251 million of unused bank facilities and GBP 71 million of cash balances. The sale of our assets in Manchester for a net GBP 115 million will increase this firepower. The average interest rate at the year-end was 3.5%, unchanged from the year-end, with a marginal rate of interest on additional borrowings under the RCF at 1.6%. All our borrowings are at fixed rates or are protected with interest rate hedging agreements. The average maturity of our borrowings, fully utilized and on the exercise of options to extend, reduced slightly to 5.1 years. Now I want to turn to our earnings and dividend. Slide 20 shows the recent history of our EPRA earnings and dividends. EPRA stripped out any capital profits from its earnings calculation, and so we've seen great fluctuations during this period, with huge earnings in those years when we benefited from overages from our joint venture development schemes and losses when investment assets have been sold without compensating earnings from other sources. During this period, we've maintained a progressive and consistent growth in our total dividends, resetting earlier this year to reflect concerns over the coronavirus pandemic. And whilst earnings may fluctuate and leaving dividends uncovered in many years, we've consistently recycled equity from our investment portfolio as properties reach their maximum potential. And to the extent dividends have not been fully covered by earnings, realized capital profits have provided the balance. For this half year, we've announced an unchanged interim dividend of 2.7p per share. Finally, a summary of our financial position on Slide 21. We've performed well since the end of the last financial year, with a very high rent collection, reduced costs and a robust portfolio evaluation. We've recycled equity from 90 Bartholomew Close and the recent sale of 3 Manchester assets and, in fact, have done so regularly over the last 10 years, generating over GBP 200 million of realized gains. With an LTV at an historic low of 22% and cash and bank facilities at around GBP 438 million, we've considerable firepower to replenish our development pipeline and continue the growth of this company. And with that, I'll hand you over to Matthew.

Thank you, Tim, and good morning, everyone. This first slide is well-known to you. Our core assets are very much city and Tech Belt focused, with key presence at Old Street, Farringdon and Whitechapel. In Farringdon, we're continuing to see dynamic change, and this will be further enhanced when Crossrail finally arrives, and with the evolution of the Smithfield Market buildings as they are put to alternative uses, adding to the vibrancy of this characterful area. At 33 Charterhouse Street, construction work on our 205,000-square foot office building began in February and has continued despite lockdown, with completion anticipated in September 2022. We are 50-50 JV partners with AshbyCapital on this transaction. And following the signing of the development loan with Alliance in July of this year, all future development costs are being covered by this facility. The building is held on a 150-year new lease from the City of London, with a 6.35% ground rent and has an expected GDV of approximately GBP 300 million once let up. Turning to Kaleidoscope. As has been reported in the press, the building, in its entirety, is currently under offer from a leasing perspective. But due to the terms of exclusivity, I'm afraid I'm unable to say any more. Within the cost information schedule highlighted, the CapEx to come mainly relates to our anticipated profit share payment due to TFL. Moving on to disposals. At the start of the period, we completed on the sale of 90 Bartholomew Close, whilst in lockdown, at a price reflecting 3.92% and GBP 1,594 per square foot to La Francaise Real Estate Partners. With regard to the residential sales at Barts Square, I can report that in Phase I, during the period, we completed on the sale of 2 apartments, which had previously exchanged. And a further 3 units have sold since the first of April, leaving just 1 apartment available. In Phase II, during the period, we completed on the sale of 20 apartments, which had previously exchanged and a further 7 units have sold since the first of April. We now have 33 apartments remaining to sell, of which 3 have been placed under offer since the period end. The average sale price per square foot that has been achieved is GBP 1,754. On Thursday of last week, we exchanged on the sale of 3 of our 4 Manchester assets to Pictet Alternative Advisors for a gross sales price of GBP 119 million, reflecting a blended net initial yield of 5.2% and a capital value of GBP 329 per square foot. Net proceeds following the deductions of rental guarantees, et cetera, were at a marginal premium to our March and September 2020 book values. We have set out here the sale metrics individually based upon the purchases' ascribed values. We have seen substantial capital returns with Tootal and Dale, which were purchased in 2014 and '15, respectively, and a small loss on Fourways, where the price prescribed perhaps didn't reflect our view on the value still to come following the extensive works carried out. The scale and mix of the portfolio were well received by the market, and we were pleased with the outcome. At Trinity, we're making progress on the leasing now after a slow start. The ground, third, fourth and fifth floors are now spoken for, and we have a plug-and-play offering available on the second floor, which you can see pictured here. We have the mezzanine, first and top 2 floors to go beyond that. We are maintaining the target ERVs and lease terms as per the business plan, and we will look to sell this once let up. Following the strategic sale of the Manchester assets, we are looking to deploy capital into new opportunities in the Central London market. As Gerald has mentioned, we are seeing tenants buying time in making decisions through short-term lease extensions, a constrained supply of new space and a flight to quality. With the demand being built up over this period for the best space, which offers employee well-being, innovative technology solutions and sustainable buildings, we feel there will be a window to deliver our product and capitalize on this opportunity. We are actively focused on opportunities to redevelop, refurbish and reposition assets, and we will structure our transactions accordingly to maximize our returns. We are clear that our track record, credibility and our extensive network of contacts will play a significant part in securing our future pipeline. Sustainability is absolutely at the forefront of our thinking and how we approach what we do. We launched our sustainability vision and strategy document built for the future in June, and we are soon to launch our designing for net-zero guidance, which sets out the principle of a carbon champion being appointed as part of our own design team, to ensure our aspirations and targets are met. We have improved our scoring within EPRA Sustainability Best Practice and GRESB, and all our latest projects have achieved a BREEAM excellent rating. In August, we were delighted to announce that 33 Charterhouse Street became the U.K.'s first BREEAM 2018 New Construction "Outstanding" rating at the design stage. We are very aware we need to play our part in driving change in the way buildings are built, managed and operated. With that, I will hand back to Gerald for a final summary.

Thank you, Matthew. I will conclude with the milestones this year, which I set out in June. Kaleidoscope is under offer, and we have let space at Trinity with more under offer. Since 1st of April, we've sold 10 residential units at Barts Square, 34 remain, of which 3 are under offer. Our September rent collection is 86.8%, and we hope to be over 91% collected by the end of the quarter. We assess new opportunities, and we will continue recycling our assets, as shown by the sale of 90 Bartholomew Close and the Manchester portfolio. Unashamedly, I repeat my summary from June. We have a Grade A portfolio. We seek to protect our value as we navigate the downturn and to grow the business in a period of dislocation when opportunities arise by way of redeveloping, refurbishing and repositioning, either with our own resources or working with partners. Thank you all very much for listening, and we would be pleased to answer any questions you may have.

[Operator Instructions]

James, I can't let you get away without any questions. A quick one from me. Thinking about the opportunities that you're exploring, I guess recent developments have been very concentrated in that particular part of London. Are you casting your net a little wider when you're looking for the next opportunities, either on your balance sheet or in conjunction with other parties?

Matt, yes, look, we're concentrating on Central London, and we will be opportunity-led within that area. So we're not necessarily going to stick to sort of Farringdon-Old Street area. And indeed, we're looking at a number of different opportunities across Central London at the moment.

Thank you. Our next question comes from Mike Prew of Jefferies.

[indiscernible] your peers in the sector, albeit REITs, they've broken out unusual statistics in their recent trading comments and results. Set out a percentage of their portfolio over a certain number of stories high, and the inference being that tall buildings are problematic buildings because of access and old-fashioned lift calls and, obviously, very difficult to configure. So first question is, I mean, have you any guidance on whether you think tall buildings are at risk? What percentage of your portfolio or buildings would you -- well, of yours, would fall to that category? And it sounds like you're preempting distress or forecasting to stress at the short lease end of the market for some refurbishment opportunities. Are those correct assumptions?

Mike, the first question, the height of our buildings, I think the tallest building we have is the tower at Old Street, which is 17 floors. The rest of the buildings are probably 6, 7, 8 stories at most. To be honest, I'm not sure I would pay too much credence to that because, I think, if people have had to go on the train or the underground or the bus, they're going to be in pretty close proximity to other people. And if they bicycled in, which some might do because -- and they don't then suffer going on public transport, they're probably fit enough to walk up the stairs.

Yes. And is the stress in the market -- are you anticipating the stress for buying opportunities, to mobilize the available capital on the balance sheet side? How are you clearly building up?

And sorry, Mike, the -- I mean, one is only in the lift for 30 seconds. So it's not -- I really don't think it's an issue. I think we'd -- rather than distress, we see dislocation in the market. And as I indicated, we think that the -- there are a number of older buildings with shorter leases on the market, and we believe they -- some of them represent good opportunities for us to refurbish and turn back into Grade A buildings. So we'll see what the market brings, but we're definitely seeing a flight to quality from the tenants. So, say, some of those older buildings are going to be obsolete without considerable CapEx bringing them up to the required standard.

Three questions from Robbie Duncan. The first question, are you able to give any color around the potential terms of the under offer at Kaleidoscope? And has there been any change in expectations since the March year-end? Secondly, can you explain why the NTA fell more than the EPRA NAV? And thirdly, you clearly have substantial firepower. Are there any potential near-term opportunities that are currently being appraised?